CredTrans Reviewer

I.
LOAN (1933-1961) respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS
and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the
A. NATURE supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs
in delay, if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him.9 Only when a party has performed his part of the contract can he demand that
1. Definitions and Kinds (Art. 1933)
the other party also fulfills his own obligation and if the latter fails, default sets in.
Article 1933. By the contract of loan, one of the parties delivers to another, either ii. Naguiat v. CA
something not consumable so that the latter may use the same for a certain time and
The mere issuance of the checks did not result in the perfection of the contract of loan. For the Civil
return it, in which case the contract is called a commodatum; or money or other
Code provides that the delivery of bills of exchange and mercantile documents such as checks shall
consumable thing, upon the condition that the same amount of the same kind and quality
produce the effect of payment only when they have been cashed.20 It is only after the checks have
shall be paid, in which case the contract is simply called a loan or mutuum. produced the effect of payment that the contract of loan may be deemed perfected. Art. 1934 of the
Commodatum is essentially gratuitous. Civil Code provides:
Simple loan may be gratuitous or with a stipulation to pay interest. "An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object
ownership passes to the borrower. (1740a) of the contract."
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of
*Bailor/Lender – the person who delivers money or goods, consumable or non-consumable, to the object of the contract.21 In this case, the objects of the contract are the loan proceeds which
another Queaño would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed
*Bailee/Borrower – receives something not consumable so that he may use the same for a certain the checks were encashed or deposited, Naguiat would have certainly presented the corresponding
time with the obligation to return the same, or he receives money or consumable so that he may documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat
consume it with the obligation to pay the same amount of the same kind and quality presented no such proof, it follows that the checks were not encashed or credited to Queaño’s account.
2. Characteristics (Arts. 1933-1934) iii. DBP v. COA
In a loan transaction or mutuum, the borrower or debtor acquires ownership of the amount
Article 1933. By the contract of loan, one of the parties delivers to another, either borrowed.58 As the owner, the debtor is then free to dispose of or to utilize the sum he loaned,59
something not consumable so that the latter may use the same for a certain time and subject to the condition that he should later return the amount with the stipulated interest to the
return it, in which case the contract is called a commodatum; or money or other creditor.
B. COMMODATUM
shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Obligations of the Bailee:
Simple loan may be gratuitous or with a stipulation to pay interest.
1. to exercise due diligence while in possession of the thing loaned
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, 2. to pay ordinary expenses for the use and preservation of the thing loaned
ownership passes to the borrower. (1740a) 3. to be responsible for the loss of the thing
4. to be liable for any loss or injury caused because of the bailee’s fault or negligence
Article 1934. An accepted promise to deliver something by way of commodatum or 5. to return the thing upon expiration of the term of the contract
simple loan is binding upon parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the contract. (n) 1. Nature – Definition and Characteristics (Arts. 1933, 1935, 1936, 1938 and 1940)
i. BPI Investment v. CA Article 1933. By the contract of loan, one of the parties delivers to another, either
A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery return it, in which case the contract is called a commodatum; or money or other
of the object of the contract.
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the shall be paid, in which case the contract is simply called a loan or mutuum.
other, was perfected only on September 13, 1982, the date of the second release of the loan. Following Commodatum is essentially gratuitous.
the intentions of the parties on the commencement of the monthly amortization, as found by the Court Simple loan may be gratuitous or with a stipulation to pay interest.
of Appeals, private respondents’ obligation to pay commenced only on October 13, 1982, a month In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
after the perfection of the contract.
ownership passes to the borrower. (1740a)
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration for that of the other.8 As averred by private
Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its Private respondents were able to prove that their predecessors' house was borrowed by petitioner
fruits; if any compensation is to be paid by him who acquires the use, the contract ceases Vicar after the church and the convent were destroyed. They never asked for the return of the house,
but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee.
to be a commodatum.
The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee held in trust the property subject matter of
Article 1936. Consumable goods may be the subject of commodatum if the purpose of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation
the contract is not the consumption of the object, as when it is merely for exhibition. purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of
ordinary acquisitive prescription because of the absence of just title.
Article 1938. The bailor in commodatum need not be the owner of the thing loaned.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
* the real right that is transferred is merely possession and not ownership, hence all that is under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in
necessary for the bailor is to have: (1) the right to possess and use the thing; and (2) the commodatum; and that the adverse claim and repudiation of trust came only in 1951.
right to transfer such right to use and possess
iii. Pajuyo v. CA
Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned
is valid. We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
POINT OF DISTINCTION AND

In a contract of commodatum, one of the parties delivers to another something not consumable so
COMMODATUM USUFRUCT that the latter may use the same for a certain time and return it.63 An essential feature of
SIMILARITIES
– without stipulation, bailee – included commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
RIGHT TO ENJOY THE FRUITS
cannot enjoy the fruits belonging to another is for a certain period.64 Thus, the bailor cannot demand the return of the thing
– right of the bailee is personal – usufructury may convey his loaned until after expiration of the period stipulated, or after accomplishment of the use for which the
and cannot be transferred right to usufruct by way of commodatum is constituted.65 If the bailor should have urgent need of the thing, he may demand its
TRANSFERABILITY
mortgage or may alienate or
return for temporary use.66 If the use of the thing is merely tolerated by the bailor, he can demand
transfer his right as such
– third persons cannot be – the usufructury can allow third
the return of the thing at will, in which case the contractual relation is called a precarium.67 Under
USE BY THIRD PERSONS the Civil Code, precarium is a kind of commodatum.68
allowed to use persons to use the thing
RIGHT OF RETENTION – no right of retention – right of retention
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
i. Producer’s Bank of the Philippines v. CA gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain
the property in good condition. The imposition of this obligation makes the Kasunduan a contract
No error was committed by the Court of Appeals when it ruled that the transaction between private different from a commodatum.
respondent and Doronilla was a commodatum and not a mutuum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans in this wise: Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra
By the contract of loan, one of the parties delivers to another, either something not consumable so as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor.
that the latter may use the same for a certain time and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition that the same amount of 2. Expenses (Arts. 1941, 1943, 1949, 1950, 1952)
the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Simple loan may be gratuitous or with a stipulation to pay interest. Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership preservation of the thing loaned.
passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such Article 1943. The bailee does not answer for the deterioration of the thing loaned due
as money, the contract would be a mutuum. However, there are some instances where a commodatum only to the use thereof and without his fault.
may have for its object a consumable thing. Article 1936 of the Civil Code provides:
Article 1949. The bailor shall refund the extraordinary expenses during the contract for
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
the preservation of the thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so urgent that the
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the reply to the notification cannot be awaited without danger.
parties is to lend consumable goods and to have the very same goods returned at the end of the period If the extraordinary expenses arise on the occasion of the actual use of the thing by the
agreed upon, the loan is a commodatum and not a mutuum. bailee, even though he acted without fault, they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to the contrary.
ii. Catholic Vicar Apostolic of the Mountain Province v. CA
Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses (1) If neither the duration of the contract nor the use to which the thing loaned should
other than those referred to in articles 1941 and 1949, he is not entitled to be devoted, has been stipulated; or
reimbursement. (2) If the use of the thing is merely tolerated by the owner. (1750a)
Article 1952. The bailor cannot exempt himself from the payment of expenses or Article 1948. The bailor may demand the immediate return of the thing if the bailee
damages by abandoning the thing to the bailee. commits any act of ingratitude specified in article 765.
ORDINARY EXPENSES EXTRAORDINARY EXPENSES Article 765. The donation may also be revoked at the instance of the donor, by reason of ingratitude
– expenses that are not routine or regular in the following cases:
– use or for the preservation of the thing
expenses (1) If the donee should commit some offense against the person, the honor or the property of the
– those that cannot be foreseen at the donor, or of his wife or children under his parental authority;
– can be a routine or regular expense (2) If the donee imputes to the donor any criminal offense, or any act involving moral turpitude,
constitution of the commodatum
TYPE OF EXPENSES WHO IS LIABLE even though he should prove it, unless the crime or the act has been committed against the donee
– Ordinary Expenses for the Use and himself, his wife or children under his authority;
– Bailee-Borrower (3) If he unduly refuses him support when the donee is legally or morally bound to give support to
Preservation of the Thing Loaned
– Bailor-Lender the donor.
– Note: Bailee may pay with prior notice to
– Extraordinary Expenses for Preservation
the Bailor and subject to the 5. Liability of Two or More Bailees (Art. 1945)
reimbursement of the latter
– Extraordinary Expenses arising on the Article 1945. When there are two or more bailees to whom a thing is loaned in the same
occasion of the actual use of the thing by – Equally by the Bailor and Bailee contract, they are liable solidarily.
the Bailee (even without the Bailee’s fault)
6. Bailee’s Right to Retain the Thing (Arts. 1944, 1951)

3. Bailee’s Liability for Loss of the Thing Due to Fortuitous Event (Art. 1942)
Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor
Article 1942. The bailee is liable for the loss of the thing, even if it should be through a
owes him something, even though it may be by reason of expenses. However, the bailee
fortuitous event:
has a right of retention for damages mentioned in article 1951.
(1) If he devotes the thing to any purpose different from that for which it has been
loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the
use for which the commodatum has been constituted; bailee of the same, shall be liable to the latter for the damages which he may suffer by
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a reason thereof.
stipulation exempting the bailee from responsibility in case of a fortuitous event;
C. MUTUUM
(4) If he lends or leases the thing to a third person, who is not a member of his
household;
1. Definition (Arts. 1933, 1953, 1955, 1249, 1250, RA 3765)
(5) If, being able to save either the thing borrowed or his own thing, he chose to save
the latter.
Article 1933. By the contract of loan, one of the parties delivers to another, either
4. Time of Return of the Thing to the Bailor (Arts. 1946-1948, 765)
return it, in which case the contract is called a commodatum; or money or other
ARTICLE 1946. The bailor cannot demand the return of the thing loaned till after the
shall be paid, in which case the contract is simply called a loan or mutuum.
expiration of the period stipulated, or after the accomplishment of the use for which the
commodatum has been constituted. However, if in the meantime, he should have urgent
need of the thing, he may demand its return or temporary use.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
In case of temporary use by the bailor, the contract of commodatum is suspended while
ownership passes to the borrower. (1740a)
the thing is in the possession of the bailor. (1749a)
Article 1953. A person who receives a loan of money or any other fungible thing acquires
Article 1947. The bailor may demand the thing at will, and the contractual relation is
the ownership thereof, and is bound to pay to the creditor an equal amount of the same
called a precarium, in the following cases:
kind and quality.
Article 1955. The obligation of a person who borrows money shall be governed by the contract is called a commodatum; or money or other consumable thing, upon the condition that the
provisions of articles 1249 and 1250 of this Code. same amount of the same kind and quality shall he paid in which case the contract is simply called a
loan or mutuum.
If what was loaned is a fungible thing other than money, the debtor owes another thing
"Commodatum is essentially gratuitous.
of the same kind, quantity and quality, even if it should change in value. In case it is
"Simple loan may be gratuitous or with a stipulation to pay interest.
impossible to deliver the same kind, its value at the time of the perfection of the loan "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership
shall be paid. passes to the borrower.
Article 1249. The payment of debts in money shall be made in the currency stipulated, "Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the
and if it is not possible to deliver such currency, then in the currency which is legal tender ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."
in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
documents shall produce the effect of payment only when they have been cashed, or to commodatum the borrower acquires ownership of the money, goods or personal property borrowed
Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act
when through the fault of the creditor they have been impaired.
will not be considered misappropriation thereof'
In the meantime, the action derived from the original obligation shall be held in the
abeyance.
2. Characteristics (Arts. 1953, 1955)
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated

Article 1953. A person who receives a loan of money or any other fungible thing acquires
should supervene, the value of the currency at the time of the establishment of the
the ownership thereof, and is bound to pay to the creditor an equal amount of the same
obligation shall be the basis of payment, unless there is an agreement to the contrary.
kind and quality.
i. Guingona v. City Fiscal of Manila

Article 1955. The obligation of a person who borrows money shall be governed by the
provisions of articles 1249 and 1250 of this Code.
It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or
If what was loaned is a fungible thing other than money, the debtor owes another thing
mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that: of the same kind, quantity and quality, even if it should change in value. In case it is
Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be impossible to deliver the same kind, its value at the time of the perfection of the loan
governed by the provisions concerning simple loan. shall be paid.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said: i. BPI Family Bank v. Franco
It should be noted that fixed, savings, and current deposits of money in banks and similar institutions
are hat true deposits. are considered simple loans and, as such, are not preferred credits. There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on
102 [1980]) that: simple loan or mutuum.36 As there is a debtor-creditor relationship between a bank and its depositor,
Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled with a
All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be corresponding obligation to pay him an equal amount on demand.37 Although BPI-FB owns the
covered by the law on loans. Current and saving deposits, are loans to a bank because it can use the deposits in Franco’s accounts, it cannot prevent him from demanding payment of BPI-FB’s obligation
same. by drawing checks against his current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current account, he had every right as
Hence, the relationship between the private respondent and the Nation Savings and Loan Association creditor to expect that those checks would be honored by BPI-FB as debtor.
is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted
to the Bank upon the perfection of the contract and it can make use of the amount deposited for its ii. Liwanag v. CA
banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has
the obligation to return the amount deposited, it has, however, no obligation to return or deliver the Neither can the transaction be considered a loan, since in a contract of loan once the money is received
same money that was deposited. by the debtor, ownership over the same is transferred. 8 Being the owner, the borrower can dispose
of it for whatever purpose he may deem proper.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
In the instant petition, however, it is evident that Liwanag could not dispose of the money as she
"Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not pleased because it was only delivered to her for a single purpose, namely, for the purchase of
consumable so that the latter may use the same for a certain time- and return it, in which case the cigarettes, and if this was not possible then to return the money to Rosales. Since in this case there
was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315, of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent
par. l(b) of the Revised Penal Code. per annum.
* municipal corporations does NOT enjoy immunity from liability for interest when assessed as
3. Difference from Commodatum damages for the non-payment of a debt, to the same extent as the national government.
COMMODATUM SIMPLE LOAN Article 1958. In the determination of the interest, if it is payable in kind, its value shall
– purpose is the use of the thing be appraised at the current price of the products or goods at the time and place of
– purpose is for the borrower to consume
– Note: use of the fruits is not included payment.
what was borrowed
unless provided
– Real Contract: perfected upon delivery 4,1. Kinds of Interest (Distinguished According to Base of Computation)
– Movable and Immovable Things may be
– Involves Movables
borrowed
▪ Simple (Art. 1959)
– Essentially Gratuitous – May be Gratuitous or Onerous
– Object is generally non-consumable
– Exception: if consumable object is merely – Object is money or other fungible things Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid
for exhibition shall not earn interest. However, the contracting parties may by stipulation capitalize the
– Bailor/Lender retains ownership of the – Bailee/Borrower becomes the owner of the interest due and unpaid, which as added principal, shall earn new interest.
thing delivered thing delivered
– The bailee/borrower becomes the owner; When Accrued Interest Earns Interest:
– Obligation to return the very same thing
hence, there is no obligation to return the 1) if there is agreement to this effect
loaned
very same thing loaned 2) if there is a judicial demand
– Death of the lender or the borrower
– Death of the lender does not extinguish
extinguishes Commodatum because it is • Compound (Arts. 1959, 2212)
the loan
purely PERSONAL in character
– The bailor bears the loss of the thing due – The bailee-borrower bears the loss of the
*Compound Interest – interest on accrued interest
to fortuitous event thing delivered
* the agreement on compound interest must be expressly made
– The bailor/lender need not be the owner of – The lender must be the owner or at least
the thing loaned capable of transferring ownership
Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid
4. Interest (Arts. 1956, 1958) shall not earn interest. However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new interest.
Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
[MONETARY INTEREST] Article 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
Requisites of Monetary Interest:
1. payment of interest is agreed upon 4,1. Kinds of Interest (Distinguished According to Purpose)
2. stipulation to pay interest must be in writing
3. rate must not be against the law i. Odiamar v. Valencia
MONETARY INTERESTS COMPENSATORY INTERESTS At the outset, the Court notes that there are two (2) types of interest, namely, monetary interest and
– money – damages compensatory interest. Monetary interest is the compensation fixed by the parties for the use or
forbearance of money. On the other hand, compensatory interest is that imposed by law or by the
How Interest Arises: only be a virtue of contract or by virtue of damages for delay or failure to pay courts as penalty or indemnity for damages. In other words, the right to recover interest arises only
principal on which interest is demanded either by virtue of a contract (monetary interest) or as damages for the delay or failure to pay the
principal loan on which the interest is demanded (compensatory interest).7
When Interest Earns Interest: interest due shall earn interest from the time it is judicially
demanded, although the obligation may be silent upon this point Anent monetary interest, it is an elementary rule that no interest shall be due unless it has been
expressly stipulated in writing.8 In this case, no monetary interest may be imposed on the loan
* in contracts for the payment of a sum of money, the measure of damages for delay is limited to the obligation, considering that there was no written agreement expressly providing for such.
interest provided for by law
* Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs This notwithstanding, such loan obligation may still be subjected to compensatory interest, following
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment the guidelines laid down in Nacar v. Gallery Frames, as follows:
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Accordingly, the legal rate of interest on the outstanding obligation of P43,492.15 as of June 28, 1990,
Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest as the CA found, should be as follows: (a) from the time of demand on October 13, 1994 until June
when applicable. 30, 2013, the legal rate of interest was 12% per annum conformably with Eastern Shipping lines; and
(b) following Nacar, from July 1, 2013 until full payment, the legal interest is 6% per annum.
With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows: • Monetary/Regular (Art. 1956)
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
▪ FORM
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
i. Eusebio-Calderon v. People
Civil Code.
The civil liability of petitioner includes only the principal amount of the loan. With respect to the interest
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
checks she issued, the same are void. There was no written proof of the payable interest except for
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
the verbal agreement that the loan shall earn 5% interest per month. Under Article 1956 of the Civil
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
Code, an agreement as to payment of interest must be in writing, otherwise it cannot be valid.
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably However, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209
established at the time the demand is made, the interest shall begin to run only from the date the of the Civil Code.18 It is elementary that in the absence of a stipulation as to interest, the loan due
judgment of the court is made (at which time the quantification of damages may be deemed to have will now earn interest at the legal rate of 12% per annum.19 In the case of Eastern Shipping Lines,
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, Inc. v. Court of Appeals,20 we established the guidelines particularly for the award of interest in the
be on the amount finally adjudged. concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof as
follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent
to a forbearance of credit.12 (Emphases and underscoring supplied)
Civil Code. (Emphasis supplied)
Applying the foregoing parameters to this case, petitioner's loan obligation to respondent shall be
subjected to compensatory interest at the legal rate of twelve percent (12%) per annum from the date
ii. Sps. Barrera v. Sps. Lorenzo
of judicial demand, i.e., August 20, 2003,13 until June 30, 2013, and thereafter at the legal rate of
six percent (6%) per annum from July 1, 2013 until finality of this ruling. Moreover, all monetary
awards14 due to respondent shall earn legal interest of six percent (6%) per annum from finality of Records show that upon maturity of the loan on August 14, 1991, petitioners failed to pay their entire
this ruling until fully paid. obligation. Instead of exercising their right to have the mortgage foreclosed, respondents allowed
petitioners to pay the loan on a monthly installment basis until December, 1993. It bears emphasis
that there is no written agreement between the parties that the loan will continue to bear 5% monthly
ii. Pen v. Julian
interest beyond the agreed three-month period.
Interest that is the compensation fixed by the parties for the use or forbearance of money is referred
Article 1956 of the Civil Code mandates that" (n)o interest shall be due unless it has been expressly
to as monetary interest.1âwphi1 On the other hand, interest that may be imposed by law or by the
stipulated in writing." Applying this provision, the trial court correctly held that the monthly interest
courts as penalty or indemnity for damages is called compensatory interest. In other words, the right
of 5% corresponds only to the three-month period of the loan, or from May 14, 1991 to August 14,
to recover interest arises only either by vi11ue of a contract or as damages for delay or failure to pay
1991, as agreed upon by the parties in writing. Thereafter, the interest rate for the loan is 12% per
the principal loan on which the interest is demanded.
annum. In Eastern Shipping Lines, Inc. v. Court of Appeals, 19 this Court laid down the following
doctrine:
The CA correctly deleted the monetary interest from the judgment. Pursuant to Article 1956 of the
"When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
Civil Code, no interest shall be due unless it has been expressly stipulated in writing. In order for
monetary interest to be imposed, therefore, two requirements must be present, specifically: (a) that
there has been an express stipulation for the payment of interest; and (b) that the agreement for the
payment of interest has been reduced in writing.21 Considering that the promissory notes contained
no stipulation on the payment of monetary interest, monetary interest cannot be validly imposed.
Civil Code." (Emphasis supplied)
▪ EXTENT OF ACCRUAL
i. Frias v. San Diego-Sison 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
The agreement that the amount given shall bear compounded bank interest for the last six months Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
only, i.e., referring to the second six-month period, does not mean that interest will no longer be the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
charged after the second six-month period since such stipulation was made on the logical and i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
reasonable expectation that such amount would be paid within the date stipulated. Considering that Civil Code.43 (Emphasis supplied, citations omitted)
petitioner failed to pay the amount given which under the Memorandum of Agreement shall be
considered as a loan, the monetary interest for the last six months continued to accrue until actual Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple
payment of the loaned amount. loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At
present, this is 6% per annum, subject to Nacar’s qualification on prospective application.
The payment of regular interest constitutes the price or cost of the use of money and thus, until the
principal sum due is returned to the creditor, regular interest continues to accrue since the debtor The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
continues to use such principal amount.28 It has been held that for a debtor to continue in possession assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
of the principal of the loan and to continue to use the same after maturity of the loan without payment deprivation of property, repulsive to the common sense of man. It has no support in law, in principles
of the monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of justice, or in the human conscience nor is there any reason whatsoever which may justify such
of the creditor. imposition as righteous and as one that may be sustained within the sphere of public or private morals.
▪ RATE The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and
the law."
i. Sps. Abella v. Sps. Abella
Types:
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation – Simple
is one of simple loan or mutuum: – Compounded (Art. 1959)
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid
consumable so that the latter may use the same for a certain time and return it, in which case the shall not earn interest. However, the contracting parties may by stipulation capitalize the
contract is called a commodatum; or money or other consumable thing, upon the condition that the interest due and unpaid, which as added principal, shall earn new interest.
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.
• Compensatory Interest (Arts. 1169, 2209, and 1226)
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership Article 1169. Those obliged to deliver or to do something incur in delay from the time
passes to the borrower. the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership However, the demand by the creditor shall not be necessary in order that delay may
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. exist:
(1) When the obligation or the law expressly so declare; or
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has (2) When from the nature and the circumstances of the obligation it appears that the
been expressly stipulated in writing." designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
The controversy, however, stems from the acknowledgment receipt’s failure to state the exact rate of
(3) When demand would be useless, as when the obligor has rendered it beyond his
interest.
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate.
not ready to comply in a proper manner with what is incumbent upon him. From the
In Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the Civil Code
and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money, moment one of the parties fulfills his obligation, delay by the other begins.
according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum." Article 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines shall be the payment of the interest agreed upon, and in the absence of stipulation, the
are accordingly modified to embody BSP-MB Circular No. 799, as follows: legal interest, which is six per cent per annum.
Article 1226. In obligations with a penal clause, the penalty shall substitute the consequences; the second part is the computation of the awards or monetary consequences of the
indemnity for damages and the payment of interests in case of noncompliance, if there is illegal dismissal, computed as of the time of the labor arbiter's original decision.
no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation. Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
The penalty may be enforced only when it is demandable in accordance with the
interest, to wit:
provisions of this Code. II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
i. Republic v. Unimex Micro-Electronics 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
Interest may be paid only either as compensation for the use of money (monetary interest)24 or as Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
damages (compensatory interest).25 We quote in agreement the CTA’s disquisition in its decision the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
dated September 19, 2002: i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Interest may be paid either as compensation for the use of money (monetary interest) referred to Civil Code.
in Article 1956 of the New Civil Code or as damages (compensatory interest) under Article 2209 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
above cited. As clearly provided in [Article 2209], interest is demandable if: a) there is monetary the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
obligation and b) debtor incurs delay. annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
Therefore, the government was never a debtor to the petitioner in order that [Article] 2209 could established with reasonable certainty, the interest shall begin to run from the time the claim is made
apply. Nor was it in default for there was no monetary obligation to pay in the first place. There is judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
default when after demand is made either judicially or extrajudicially. In other words, for interest to established at the time the demand is made, the interest shall begin to run only from the date the
be demandable under Article 2209, there should be a monetary obligation and the debtor was in judgment of the court is made (at which time the quantification of damages may be deemed to have
default… been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
In the instant case, [petitioner] was never under monetary obligation to [respondent], no demand can
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
be made either judicially or extrajudicially. Parallel thereto, there could be no default.
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.33
More importantly, interest is not chargeable against petitioner except when it has expressly stipulated
to pay it or when interest is allowed by the legislature or in eminent domain cases where damages
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
sustained by the owner take the form of interest at the legal rate.27 Consequently, the CA’s imposition
796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982
of the 12% p.a. legal interest upon the finality of the decision of this case until the value of the goods
and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
is fully paid (as forbearance of credit) is likewise bereft of any legal anchor.
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
• Rates of Legal Interest (Arts. 2009, 2210, 2211, 2213) governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Article 2009. As to matters not provided for in this Code, judicial sequestration shall be Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
governed by the Rules of Court. rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall
be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Article 2210. Interest may, in the discretion of the court, be allowed upon damages Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
awarded for breach of contract. Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Article 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court. Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits
Article 2213. Interest cannot be recovered upon unliquidated claims or damages, except and the rate allowed in judgments shall no longer be twelve percent (12%) per annum before its
when the demand can be established with reasonable certainty. amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July
1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and
i. Nacar v. Gallery Frames not retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only
until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary ii. Sps. Abella v. Sps. Abella
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed their Complaint. This
is one of simple loan or mutuum: is consistent with Article 2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not obligation may be silent upon this point.
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially
same amount of the same kind and quality shall be paid, in which case the contract is simply called a demanded."
loan or mutuum.
Commodatum is essentially gratuitous. iii. Pan Pacific Contractors, Inc. v. Equitable PCI Bank
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest
passes to the borrower.
shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest
is allowed only if:
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership (1) there was an express stipulation for the payment of interest; and
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of monetary interest.33
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has
been expressly stipulated in writing." We agree with petitioners’ interpretation that in case of default, the consent of the respondent is not
needed in order to impose interest at the current bank lending rate.
The controversy, however, stems from the acknowledgment receipt’s failure to state the exact rate of
interest. Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a sum of money is the payment of penalty
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a
In Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the Civil Code particular rate of penalty interest, payment of additional interest at a rate equal to the regular
and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money, monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by
according to the Civil Code, the interest due should be that stipulated in writing, and in the absence the contracting parties, then the damages payable will consist of payment of legal interest which is
thereof, the rate shall be 12% per annum." 6%, or in the case of loans or forbearances of money, 12% per annum.34 It is only when the parties
to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines will apply the 12% interest per annum on a loan or forbearance of money.
are accordingly modified to embody BSP-MB Circular No. 799, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or The written agreement entered into between petitioners and respondent provides for an interest at
forbearance of money, the interest due should be that which may have been stipulated in writing. the current bank lending rate in case of delay in payment and the promissory note charged an interest
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In of 18%.
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the • Types According to the Source of the Obligation to Pay Interest:
Civil Code.43 (Emphasis supplied, citations omitted)
– Stipulated (Art. 2209)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple – Article 2209. If the obligation consists in the payment of a sum of money, and
loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At
the debtor incurs in delay, the indemnity for damages, there being no stipulation
present, this is 6% per annum, subject to Nacar’s qualification on prospective application.
to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no support in law, in principles – Legal (Arts. 2209, 2212)
of justice, or in the human conscience nor is there any reason whatsoever which may justify such – Article 2209. If the obligation consists in the payment of a sum of money, and
imposition as righteous and as one that may be sustained within the sphere of public or private morals. the debtor incurs in delay, the indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest agreed upon, and in the
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and absence of stipulation, the legal interest, which is six per cent per annum.
the law." – Article 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding
conventional interest—if any is due from respondents—shall itself earn legal interest from the time
4.2. Escalation and De-Escalation Clauses
i. PNB v. CA Courts have the authority to strike down or to modify provisions in promissory notes that grant the
lenders unrestrained power to increase interest rates, penalties and other charges at the latter's sole
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% discretion and without giving prior notice to and securing the consent of the borrowers. This unilateral
and then to 48%. This Court declared the increases unilaterally imposed by PNB to be in violation of authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of
the principle of mutuality as embodied in Art. 1308 of the Civil Code borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it or unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would other charges not revealed in disclosure statements issued by banks, even if stipulated in the
completely take away from private respondents the right to assent to an important modification in promissory notes, cannot be given effect under the Truth in Lending Act.
their agreement, and would negate the element of mutuality in contracts.
The "unilateral determination and imposition"[23] of increased rates is "violative of the principle of
mutuality of contracts ordained in Article 1308[24] of the Civil Code."[25] One-sided impositions do not
ii. Almeda v. CA
have the force of law between the parties, because such impositions are not based on the parties'
essential equality.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by increasing the interest rates on the loan without Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money
the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil on long-term contracts,[27] giving respondent an unbridled right to adjust the interest independently
Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly and upwardly would completely take away from petitioners the "right to assent to an important
stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision modification in their agreement"[28] and would also negate the element of mutuality in their contracts.
of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% The clause cited earlier made the fulfillment of the contracts "dependent exclusively upon the
interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such uncontrolled will"[29] of respondent and was therefore void. Besides, the pro forma promissory notes
escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement. have the character of a contract d'adhésion,[30] "where the parties do not bargain on equal footing,
the weaker party's [the debtor's] participation being reduced to the alternative 'to take it or leave
it.'"[31]
PNB's successive increases of the interest rate on the private respondent's loan, over the latter's
protest, were arbitrary as they violated an express provision of the Credit Agreement "While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No.
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 905,[33] nothing in the said Circular grants lenders carte blanche authority to raise interest rates to
24% per annum, hence, he is not bound to pay a higher rate than that. levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." [34] In fact,
we have declared nearly ten years ago that neither this Circular nor PD 1684, which further amended
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the the Usury Law, "authorized either party to unilaterally raise the interest rate without the other's
bank, or any lending institution for that matter, to progressively increase interest rates on borrowings consent."[35]
to an extent which would have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene Rates found to be iniquitous or unconscionable are void, as if it there were no express contract
public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still thereon.[41] Above all, it is undoubtedly against public policy to charge excessively for the use of
subject to laws and provisions governing agreements between parties, which agreements — while they money.[42]
may be the law between the contracting parties — implicitly incorporate provisions of existing law.
Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in v. Equitable PCI Bank v. NG Sheung Ngor
the said circular could possibly be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right to
assets. adjust the interest independently and upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement" is void. Clauses of that nature violate the principle of
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely mutuality of contracts.66 Article 130867 of the Civil Code holds that a contract must bind both
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not contracting parties; its validity or compliance cannot be left to the will of one of them. 68
only the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are For this reason, we have consistently held that a valid escalation clause provides:
anchored. 1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and
iii. Consolidated Bank and Trust Corporation v. CA 2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is
reduced by law or by the Monetary Board (de-escalation clause).
While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks
to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing 4.3. Unconscionable Rates and the Usury Law and its Present Status (Art. 1957)
market conditions, there should always be a reference rate upon which to peg such variable interest
rates.
Article 1957. Contracts and stipulations, under any cloak or device whatever, intended
to circumvent the laws against usury shall be void. The borrower may recover in
iv. New Sampaguita Builders Construction Co. v. Sps. Dee
accordance with the laws on usury.
*BSP Circular 905 has repealed the Usury Law; there is no more maximum rate of interest. significantly reduced. The residual value shall in no instance be less than five per cent (5%) of the
lessor's acquisition cost of the leased asset.
i. Vitug v. Abuda
The basic purpose of a financial leasing transaction is to enable the prospective buyer of equipment,
Parties who have validly executed a contract and have availed themselves of its benefits may not, to who is unable to pay for such equipment in cash in one lump sum, to lease such equipment in the
escape their contractual obligations, invoke irregularities in its execution to seek its invalidation. meantime for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost
(including the expenses and a margin of profit for the financial lessor) with the expectation that at the
Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5% end of the lease period, the buyer/financial lessee will be able to pay any remaining balance of the
to 10% per month on petitioner's loan. Petitioner obtained the loan out of extreme necessity. As purchase price. 12 Generally speaking, a financing company is not a buyer or seller of goods; it is not
pointed out by respondent, the property would have been earlier foreclosed by the National Housing a trading company. Neither is it an ordinary leasing company; it does not make its profit by buying
Authority if not for the loan. Moreover, it would be unjust to impose a heavier burden upon petitioner, equipment and repeatedly leasing out such equipment to different users thereof. But a financial lease
who would already be losing his and his family's home. Respondent would not be unjustly deprived if must be preceded by a purchase and sale contract covering the equipment which becomes the subject
the interest rate is reduced. After all, respondent still has the right to foreclose the property. Thus, we matter of the financial lease.
affirm the Court of Appeals Decision to reduce the interest rate to 1% per month or 12% per annum.
II. DEPOSIT (1962-2009)
ii. Security Bank and Trust Company v. RTC
A. NATURE
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends
upon the sole will of the debtor. In the present case, the mutual agreement, the absence of which 1. Definition (Art. 1962)
petitioner bank relies upon to support its non-liability for the increased construction cost, is in effect
a condition dependent on petitioner bank's sole will, since private respondent would naturally and
Article 1962. A deposit is constituted from the moment a person receives a thing
logically give consent to such an agreement which would allow him recovery of the increased cost.
belonging to another, with the obligation of safely keeping it and of returning the same.
Further, it cannot be denied that petitioner bank derived benefits when private respondent completed If the safekeeping of the thing delivered is not the principal purpose of the contract, there
the construction even at an increased cost. is no deposit but some other contract.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual
*Depositor – the person who delivers the goods to the depositary
construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of
*Depositary – person who receives the goods with the obligation to safely keep the goods and to
private respondent. Such unjust enrichment, as previously discussed, is not allowed by law.
return the same to the depositor
D. CREDIT ACCOMMODATIONS: Other Forms of Mutuum (Section X320.1 of the Manual of *depositor need not be the owner of the thing; it is enough that they can transfer material
Regulations for Banks; RA 8484; Arts. 567-572 of the Code of Commerce; RA 5980, custody of the thing
Financing Company Act) *Escrow Agreements – written instrument which by its terms imports a legal obligation and which
is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept
by the depository until the performance of a condition or the happening of a certain event, and then
i. Beltran v. PAIC Finance Corporation
to be delivered over to the grantee, promisee, or obligee
two (2) types of leases. The first type, denominated an "operating lease", is defined as
i. US v. Igpuara
. . . a contract under which the asset is not wholly amortized during the primary period of the lease,
and where the lessor does not rely solely on the rentals during the primary period for his profits, but
looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re- It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the
lease of the returned asset at the end of the primary lease period. defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing
lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody
or safe-keeping.
The second type of recognized lease is designated as a "finance lease" and defined in the Revenue
Regulations in the following manner:
The defendant has shown no authorization whatsoever or the consent of the depositary for using or
. . . "Finance lease," or "Full payout lease" is a contract involving payment over an obligatory
disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the
period (also called primary or basic period) of specified rental amount for the use of a lessor's property,
depositor to convert the deposit into a loan, commission, or other contract.
sufficient in total to amortize the capital outlay of lessor and to provide for the lessor's borrowing costs
and profits. The obligatory period refers to the primary or basic non-cancellable period of the lease
which in no case shall be less than 730 days. The lessee, not the lessor, exercises the choice of the Failure to claim at once or delay for sometime in demanding restitution of the things deposited, which
asset and is normally responsible for maintenance, insurance and such other expenses pertinent to was immediately due, does not imply such permission to use the thing deposited as would convert the
the use, preservation and operation of the asset. Finance leases may be extended, after the expiration deposit into a loan.
of the primary period, by non-cancellable secondary or subsequent periods with the rentals
Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall 1) If Gratuitous Deposit – Death of the
be responsible for all damages that may accrue and shall respond to the depositor for the legal depositor or the depositary extinguishes the
Death of the lender or the borrower
interest on the amount. deposit
extinguishes commodatum because it is purely
2) If for Compensation – Death of the
personal in character
depositor or the depositary does not
In this connection it was held that failure to return the thing deposited was not sufficient, but that it extinguish the deposit
was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to Generally, the depositor bears the loss of the Generally, the bailor bears the loss of the thing
his own or another's benefit. He was accused or refusing to restore, and it was held that the code does thing due to fortuitous event due to fortuitous event
not penalize refusal to restore but denial of having received. The depositor need not be the owner of the thing
The bailor/lender need not be the owner of the
deposited. However, the depositary cannot be the
thing loaned
owner of the thing deposited
In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as Generally, the lender must wait for the
they were, he turned over to the owner;" and there being no proof of the appropriation, the agent expiration of the period agreed upon or the
The depositor can demand the return of the thing
could not be found guilty of the crime of estafa. accomplishment of the use for which the
at any time
commodatum has been constituted before he
can demand the return of the thing loaned
2. Characteristics (Arts. 1965, 1966, 1978, 1980)
1. It is a real contract: perfected by delivery
2. Mutuum
2. It is a principal contract
3. It is reciprocal
4. Its purpose is safekeeping VOLUNTARY DEPOSIT MUTUUM
5. It involves temporary custody of the depositary as there is an obligation to return Purpose is the consumption of the
Purpose is safekeeping
subject matter
6. It involves temporary custody of corporeal personal property
Real Contract
1) Extrajudicial Deposit – Movables Only
Only Money and Other Fungible Thing
Article 1965. A deposit is a gratuitous contract, except when there is an agreement to 2) Judicial Deposit – Movable and Immovable
the contrary, or unless the depositary is engaged in the business of storing goods. May be Gratuitous or Onerous Gratuitous or Onerous (if with interest)
Consumable or Non-Consumable although for
safekeeping only
Article 1966. Only movable things may be the object of a deposit. Depositor retains ownership of the thing delivered The ownership of transferred to the borrower
Depositary must return the same thing The thing loaned need not be returned
3) If Gratuitous Deposit – Death of the
Article 1978. When the depositary has permission to use the thing deposited, the depositor or the depositary extinguishes the
contract loses the concept of a deposit and becomes a loan or commodatum, except deposit
Death does not extinguish the loan
where safekeeping is still the principal purpose of the contract. 4) If for Compensation – Death of the depositor
or the depositary does not extinguish the
The permission shall not be presumed, and its existence must be proved.
deposit
Generally, the depositor bears the loss of the thing
Article 1980. Fixed, savings, and current deposits of money in banks and similar due to fortuitous event
institutions shall be governed by the provisions concerning simple loan. The depositor need not be the owner of the thing
Lender must be the owner or at least capable
deposited. However, the depositary cannot be the
of transferring ownership
owner of the thing deposited
B. DIFFERENCE FROM OTHER CONTRACTS The depositor can demand the return of the thing The lender must wait until the expiration of the
at any time period granted to the debtor
1. Commodatum
i. Compania Agricola de Ultramar v. Nepomuceno
VOLUNTARY DEPOSIT COMMODATUM

Purpose is safekeeping Purpose is the transfer/use of the thing For this reason it must be understood that the debtors were lawfully authorized to make use of the
Real Contract Real Contract amount deposited, which they have done, as subsequently shown when asking for an extension of the
1) Extrajudicial Deposit – Movables Only Movable and Immovable Things may be time for the return thereof, inasmuch as, acknowledging that they have subjected the lender, their
2) Judicial Deposit – Movable and Immovable borrowed creditor, to losses and damages for not complying with what had been stipulated, and being conscious
Essentially Gratuitous that they had used, for their own profit and gain, the money that they received apparently as a deposit,
May be Gratuitous or Onerous NOTE: If onerous or compensation is they engaged to pay interest to the creditor from the date named until the time when the refund
paid, then the contract may be lease should be made. Such conduct on the part of the debtors is unquestionable evidence that the
Object is generally non-consumable transaction entered in to between the interested parties was not a deposit, but a real contract of loan.
Consumable or Non-Consumable although for
EXCEPTION: If the purpose if not consumption
safekeeping only
but for exhibition
Article 1767 of the Civil Code provides that —
Bailor/Lender retains ownership of the thing
Depositor retains ownership of the thing delivered "The depository cannot make use of the thing deposited without the express permission of the
delivered
Depositary must return the same thing There is an obligation to return the same thing depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that — of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as
"When the depository has permission to make use of the thing deposited, the contract loses the they may deem convenient, provided they are not contrary to law, morals, good customs, public order
character of a deposit and becomes a loan or bailment." or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case
"The permission not be presumed, and its existence must be proven." at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if,
in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor
The first difference which he points out consists in the fact that in an irregular deposit the only benefit of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required,
is that which accrues to the depositor, while in a loan the essential cause for the transaction is the that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary
necessity of the borrower. In an irregular deposit, the depositor can demand the return of the article from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay
at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until would be void for being contrary to law and public policy. In the instant case, petitioner maintains that
the time for payment conditions 13 and 14 of the questioned contract of lease of the safety deposit box are void as they are
contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed,
said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section
3. Lease
72(a) of the General Banking Act.
VOLUNTARY DEPOSIT LEASE

Purpose is safekeeping Cause is the enjoyment and/or use of the thing ii. Sia v. CA
Real Contract Lease is Consensual – perfected by mere consent
3) Extrajudicial Deposit – Movables Only
4) Extrajudicial Deposit – Movable and Immovable
Movable and Immovable things may be leased It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box
May be Gratuitous or Onerous Onerous in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case.
Consumable or Non-Consumable although for safekeeping In short, in all other situations, it would seem that SBTC is not bound to exercise diligence of any kind
The object is generally non-consumable
only
at all.
Depositor retains ownership of the thing delivered The lessor retains ownership of the thing delivered
Depositary must return the same thing There is an obligation to return the same thing
5) If Gratuitous Deposit – Death of the depositor or the SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petition and
depositary extinguishes the deposit Death of the lessor or the lessee does not
6) If for Compensation – Death of the depositor or the extinguish the lease have been summarized in this ponencia. SBTC's negligence aggravated the injury or damage to the
depositary does not extinguish the deposit stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters
Generally, the depositor bears the loss of the thing due to The lessor bears the loss of the thing due to fortuitous inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost
fortuitous event event. The lease is extinguished.
no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps,
The depositor need not be the owner of the thing
deposited. However, the depositary cannot be the owner of The lessor need not be the owner of the thing loaned thus saving the same from further deterioration and loss. In this respect, it failed to exercise the
the thing deposited reasonable care and prudence expected of a good father of a family, thereby becoming a party to the
Generally, the lessor must wait for the expiration of
The depositor can demand the return of the thing at any aggravation of the injury or loss.
the period agreed upon before demanding the return
time
of the thing
C. KINDS (Art. 1964)
i. CA Agro Industrial Development Corp. v CA
Article 1964. A deposit may be constituted judicially or extrajudicially.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not
an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully
1. Judicial (Arts. 2005-2009) – results when the Court orders the attachment or seizure of
subscribe to its view that the same is a contract of deposit that is to be strictly governed by the
property
provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind of deposit.
PURPOSE: court supervision; preserve item pending court litigation
It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint renters
Article 2005. A judicial deposit or sequestration takes place when an attachment or
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is seizure of property in litigation is ordered.
clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act 23 pertinently provides: Article 2006. Movable as well as immovable property may be the object of
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions sequestration. (1786)
other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the Article 2007. The depositary of property or objects sequestrated cannot be relieved of
safeguarding of such effects. his responsibility until the controversy which gave rise thereto has come to an end, unless
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section the court so orders.
as depositories or as agents. . . . 24 (emphasis supplied)
Article 2008. The depositary of property sequestrated is bound to comply, with respect
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
to the same, with all the obligations of a good father of a family.
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out
of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306
Article 2009. As to matters not provided for in this Code, judicial sequestration shall be Article 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit
governed by the Rules of Court. the thing with a third person. If deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person who is manifestly careless or
2. Extrajudicial (Art. 1967) – perfected without court intervention or approval
unfit. The depositary is responsible for the negligence of his employees. (n)
Article 1967. An extrajudicial deposit is either voluntary or necessary. – Liability for a Fortuitous Event (Art. 1979)
a. Voluntary (Art. 1968) – result of voluntary agreement (e.g. Escrow Agreement)

Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
• Incapacitated Parties (Arts. 1970, 1971, 1986) (3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to
Article 1970. If a person having capacity to contract accepts a deposit made by one who use the same.
is incapacitated, the former shall be subject to all the obligations of a depositary, and
may be compelled to return the thing by the guardian, or administrator, of the person – Changing the Way of the Deposit (Art. 1974)
who made the deposit, or by the latter himself if he should acquire capacity. (1764)
Article 1974. The depositary may change the way of the deposit if under the
Article 1971. If the deposit has been made by a capacitated person with another who is circumstances he may reasonably presume that the depositor would consent to the
not, the depositor shall only have an action to recover the thing deposited while it is still change if he knew of the facts of the situation. However, before the depositary may make
in the possession of the depositary, or to compel the latter to pay him the amount by such change, he shall notify the depositor thereof and wait for his decision, unless delay
which he may have enriched or benefited himself with the thing or its price. However, if would cause danger. (n)
a third person who acquired the thing acted in bad faith, the depositor may bring an
– Return of the Thing Deposited (Arts. 1983, 1984, 1985, 1987, 1988, 1989)
action against him for its recovery. (1765a)
Article 1983. The thing deposited shall be returned with all its products, accessories and
Article 1986. If the depositor should lose his capacity to contract after having made the
accessions.
deposit, the thing cannot be returned except to the persons who may have the
Should the deposit consist of money, the provisions relative to agents in article 1896 shall
administration of his property and rights. (1773)
be applied to the depositary. (1770)
• Obligations of the Depositary
– to safekeep the property of the depositor Article 1984. The depositary cannot demand that the depositor prove his ownership of
– to be liable for the loss of the thing through his fault or negligence the thing deposited.
– not to deposit the thing with a third person (unless allowed by stipulation) Nevertheless, should he discover that the thing has been stolen and who its true owner
– not to change the way of deposit
is, he must advise the latter of the deposit.
– not to make use of the thing deposited without the express permission of the
If the owner, in spite of such information, does not claim it within the period of one month,
depositor
– to be liable for the loss of the thing through a fortuitous event in certain cases the depositary shall be relieved of all responsibility by returning the thing deposited to
– for a depositary holding certificates, bonds, securities or instruments which earn the depositor.
interest, the depositary is obliged to: (1) collect the latter when it becomes due; If the depositary has reasonable grounds to believe that the thing has not been lawfully
and (2) take such steps as may be necessary in order that the securities may acquired by the depositor, the former may return the same. (1771a)
preserve their value and the rights corresponding to them according to law
*it is also not a requirement of the contract of deposit that the depositor is the owner of the
thing
• GENERAL Obligations
*a person who is not the owner but has legal custody of the thing can deposit the same
– Level of Diligence (Art. 1972)
Article 1972. The depositary is obliged to keep the thing safely and to return it, when Article 1985. When there are two or more depositors, if they are not solidary, and the
required, to the depositor, or to his heirs and successors, or to the person who may have thing admits of division, each one cannot demand more than his share.
been designated in the contract. His responsibility, with regard to the safekeeping and When there is solidarity or the thing does not admit of division, the provisions of articles
the loss of the thing, shall be governed by the provisions of Title I of this Book. 1212 and 1214 shall govern. However, if there is a stipulation that the thing should be
If the deposit is gratuitous, this fact shall be taken into account in determining the degree returned to one of the depositors, the depositary shall return it only to the person
of care that the depositary must observe. (1766a) designated. (1772a)
– Rules on Deposit with a Third Person (Art. 1973)

Article 1987. If at the time the deposit was made a place was designated for the return When the seal or lock is broken, with or without the depositary's fault, he shall keep the
of the thing, the depositary must take the thing deposited to such place; but the expenses secret of the deposit. (1769a)
for transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made where the thing deposited Article 1982. When it becomes necessary to open a locked box or receptacle, the
may be, even if it should not be the same place where the deposit was made, provided depositary is presumed authorized to do so, if the key has been delivered to him; or when
that there was no malice on the part of the depositary. (1774) the instructions of the depositor as regards the deposit cannot be executed without
opening the box or receptacle.
Article 1988. The thing deposited must be returned to the depositor upon demand, even
though a specified period or time for such return may have been fixed. b. Instances when Depositary May not Return the thing Deposited Despite Demand (Arts.
This provision shall not apply when the thing is judicially attached while in the depositary's 1984, 1988, 1994)
possession, or should he have been notified of the opposition of a third person to the
return or the removal of the thing deposited. In these cases, the depositary must Article 1984. The depositary cannot demand that the depositor prove his ownership of
immediately inform the depositor of the attachment or opposition. (1775) the thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its true owner
Article 1989. Unless the deposit is for a valuable consideration, the depositary who may is, he must advise the latter of the deposit.
have justifiable reasons for not keeping the thing deposited may, even before the time If the owner, in spite of such information, does not claim it within the period of one month,
designated, return it to the depositor; and if the latter should refuse to receive it, the the depositary shall be relieved of all responsibility by returning the thing deposited to
depositary may secure its consignation from the court. (1776a) the depositor.
If the depositary has reasonable grounds to believe that the thing has not been lawfully
a. SPECIFIC Obligations for Certain Kinds of Deposits (Arts. 1975, 1976, 1977, 1981, 1982) acquired by the depositor, the former may return the same.
Article 1988. The thing deposited must be returned to the depositor upon demand, even
Article 1975. The depositary holding certificates, bonds, securities or instruments which though a specified period or time for such return may have been fixed.
earn interest shall be bound to collect the latter when it becomes due, and to take such This provision shall not apply when the thing is judicially attached while in the depositary's
steps as may be necessary in order that the securities may preserve their value and the possession, or should he have been notified of the opposition of a third person to the
rights corresponding to them according to law. return or the removal of the thing deposited. In these cases, the depositary must
The above provision shall not apply to contracts for the rent of safety deposit boxes. (n) immediately inform the depositor of the attachment or opposition. (1775)
Article 1976. Unless there is a stipulation to the contrary, the depositary may commingle Article 1994. The depositary may retain the thing in pledge until the full payment of
grain or other articles of the same kind and quality, in which case the various depositors what may be due him by reason of the deposit. (1780)
shall own or have a proportionate interest in the mass. (n)
c. Instances Where Depositary may Return the Thing Deposited Prematurely (Arts. 1984,
1989)
Article 1977. The depositary cannot make use of the thing deposited without the express
permission of the depositor. Article 1984. The depositary cannot demand that the depositor prove his ownership of
Otherwise, he shall be liable for damages. the thing deposited.
However, when the preservation of the thing deposited requires its use, it must be used Nevertheless, should he discover that the thing has been stolen and who its true owner
but only for that purpose. (1767a) is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the period of one month,
Article 1981. When the thing deposited is delivered closed and sealed, the depositary the depositary shall be relieved of all responsibility by returning the thing deposited to
must return it in the same condition, and he shall be liable for damages should the seal the depositor.
or lock be broken through his fault. If the depositary has reasonable grounds to believe that the thing has not been lawfully
Fault on the part of the depositary is presumed, unless there is proof to the contrary. acquired by the depositor, the former may return the same. (1771a)
As regards the value of the thing deposited, the statement of the depositor shall be
accepted, when the forcible opening is imputable to the depositary, should there be no Article 1989. Unless the deposit is for a valuable consideration, the depositary who may
proof to the contrary. However, the courts may pass upon the credibility of the depositor have justifiable reasons for not keeping the thing deposited may, even before the time
with respect to the value claimed by him. designated, return it to the depositor; and if the latter should refuse to receive it, the
depositary may secure its consignation from the court. (1776a)
d. Obligations of the Depositor (Arts. 1991-1994) Article 1997. The deposit referred to in No. 1 of the preceding article shall be governed
– to pay the consideration if the deposit is not gratuitous by the provisions of the law establishing it, and in case of its deficiency, by the rules on
– if the deposit is gratuitous, to reimburse the depositary for the expenses he may have
voluntary deposit.
incurred for the preservation of the thing deposited
The deposit mentioned in No. 2 of the preceding article shall be regulated by the
– to reimburse the depositary for any loss arising from the character of the thing
deposited, unless at the time of the constitution of the deposit, the former was not provisions concerning voluntary deposit and by article 2168. (1782)
aware of, or was not expected to know the dangerous character of the thing, or unless
he notified the depositary of the same, or the latter was aware of it without advice h. Deposit of Effects in Hotels/Inns (Arts. 1998-2004)
from the depositor
Article 1998. The deposit of effects made by travellers in hotels or inns shall also be
Article 1991. The depositor's heir who in good faith may have sold the thing which he regarded as necessary. The keepers of hotels or inns shall be responsible for them as
did not know was deposited, shall only be bound to return the price he may have received depositaries, provided that notice was given to them, or to their employees, of the effects
or to assign his right of action against the buyer in case the price has not been paid him. brought by the guests and that, on the part of the latter, they take the precautions which
said hotel-keepers or their substitutes advised relative to the care and vigilance of their
Article 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the
effects. (1783)
depositary for the expenses he may have incurred for the preservation of the thing
deposited. (1779a)
Article 1999. The hotel-keeper is liable for the vehicles, animals and articles which have
Article 1993. The depositor shall reimburse the depositary for any loss arising from the been introduced or placed in the annexes of the hotel. (n)
character of the thing deposited, unless at the time of the constitution of the deposit the
former was not aware of, or was not expected to know the dangerous character of the Article 2000. The responsibility referred to in the two preceding articles shall include the
thing, or unless he notified the depositary of the same, or the latter was aware of it loss of, or injury to the personal property of the guests caused by the servants or
without advice from the depositor. (n) employees of the keepers of hotels or inns as well as strangers; but not that which may
proceed from any force majeure. The fact that travellers are constrained to rely on the
Article 1994. The depositary may retain the thing in pledge until the full payment of
vigilance of the keeper of the hotels or inns shall be considered in determining the degree
what may be due him by reason of the deposit. (1780)
of care required of him. (1784a)
e. Extinguishment of Deposit (Art. 1995)
Article 2001. The act of a thief or robber, who has entered the hotel is not deemed force
Article 1995. A deposit its extinguished:
majeure, unless it is done with the use of arms or through an irresistible force. (n)
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the depositor or the
depositary. Article 2002. The hotel-keeper is not liable for compensation if the loss is due to the
- upon the return of the thing acts of the guest, his family, servants or visitors, or if the loss arises from the character
of the things brought into the hotel. (n)
b. Necessary – made in compliance with a legal obligation
Article 2003. The hotel-keeper cannot free himself from responsibility by posting notices
f. Types (Arts. 1996, 1754) to the effect that he is not liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the responsibility of the former as set
Article 1996. A deposit is necessary: forth in articles 1998 to 2001 is suppressed or diminished shall be void. (n)
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm, flood, Article 2004. The hotel-keeper has a right to retain the things brought into the hotel by
pillage, shipwreck, or other similar events. (1781a) the guest, as a security for credits on account of lodging, and supplies usually furnished
to hotel guests. (n)
Article 1754. The provisions of articles 1733 to 1753 shall apply to the passenger's
baggage which is not in his personal custody or in that of his employee. As to other
i. Triple-V Food Services, Inc. v. Filipino Merchants Insurance Co., Inc
baggage, the rules in articles 1998 and 2000 to 2003 concerning the responsibility of
hotel-keepers shall be applicable.
When De Asis entrusted the car in question to petitioners valet attendant while eating at
petitioner's Kamayan Restaurant, the former expected the car's safe return at the end of her meal.
g. Governing Rules (Art. 1997) Thus, petitioner was constituted as a depositary of the same car. Petitioner cannot evade liability by
arguing that neither a contract of deposit nor that of insurance, guaranty or surety for the loss of the Article 2053. A guaranty may also be given as security for future debts, the amount of
car was constituted. which is not yet known; there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured. (1825a)
In a contract of deposit, a person receives an object belonging to another with the obligation of safely
keeping it and returning the same.[3]cralaw A deposit may be constituted even without any Article 2054. A guarantor may bind himself for less, but not for more than the principal
consideration. It is not necessary that the depositary receives a fee before it becomes obligated to
debtor, both as regards the amount and the onerous nature of the conditions.
keep the item entrusted for safekeeping and to return it later to the depositor.
Should he have bound himself for more, his obligations shall be reduced to the limits of
that of the debtor. (1826)
The parking claim stub embodying the terms and conditions of the parking, including that of relieving
petitioner from any loss or damage to the car, is essentially a contract of adhesion, drafted and
prepared as it is by the petitioner alone with no participation whatsoever on the part of the customers, Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter
like De Asis, who merely adheres to the printed stipulations therein appearing. While contracts of has exhausted all the property of the debtor, and has resorted to all the legal remedies
adhesion are not void in themselves, yet this Court will not hesitate to rule out blind adherence thereto against the debtor. (1830a)
if they prove to be one-sided under the attendant facts and circumstances.
Article 2063. A compromise between the creditor and the principal debtor benefits the
III. GUARANTY AND SURETY (2047-2084) guarantor but does not prejudice him. That which is entered into between the guarantor
and the creditor benefits but does not prejudice the principal debtor. (1835a)
A. NATURE AND EXTENT OF GUARANTY
Article 2065. Should there be several guarantors of only one debtor and for the same
1. Definition (Art. 2047)
debt, the obligation to answer for the same is divided among all. The creditor cannot
claim from the guarantors except the shares which they are respectively bound to pay,
Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor
unless solidarity has been expressly stipulated.
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
The benefit of division against the co-guarantors ceases in the same cases and for the
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
same reasons as the benefit of excussion against the principal debtor. (1837)
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. (1822a)
Article 2076. The obligation of the guarantor is extinguished at the same time as that
of the debtor, and for the same causes as all other obligations. (1847)
2. Characteristics (Arts. 2048, 2052, 2053, 2054, 2058, 2063, 2065, 2076)
– Gratuitous
– Accessory: cannot exist without a principal obligation (so if the principal obligation is void, it is i. Severino and Vergara v. Severino
also void)
– Subsidiary: guarantor will pay only if the principal debtor cannot pay and has no properties to A guarantor or surety is bound by the same consideration that makes the contract effective between
answer for the obligation the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a
– Reciprocal lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas
– Express: a guaranty is not presumed; it must be express and cannot extend to more than what Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate
is stipulated consideration to support the promise on the part of Guillermo Severino to pay the sum of money
– Covered by Statutes of Fraud: since it is a promise for a debt, hence, it must be in writing stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as
guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part
of the benefit, if such there be, accruing to his principal. But the true consideration of this contract
Article 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)
was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it
is immaterial that no benefit may have accrued either to the principal or his guarantor.
*the cause of the contract is the same cause which supports the obligation as to the principal debtor
*it is not necessary to prove any consideration as between the guarantor or surety and the creditor;
ii. Garcia v. CA
the consideration which supports the obligation as to the principal debtor is a sufficient consideration
to support the obligation of a guarantor or surety
Suretyship is a contractual relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another, known as the principal. The
Article 2052. A guaranty cannot exist without a valid obligation. surety’s obligation is not an original and direct one for the performance of his own act, but merely
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
or an unenforceable contract. It may also guarantee a natural obligation. (1824a) contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary and absolute; 1 in other words, he is
directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty
of another although he possesses no direct or personal interest over the obligations nor does he receive Accordingly, the nature of FINMAN's obligation under the suretyship agreement makes it privy to the
any benefit therefrom. proceedings against its principal, Pan Pacific. FINMAN is bound by a judgment against its principal
eventhough it was not a party to the proceedings, for a surety is considered in law as being the same
The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
direct consideration received by the surety either from the principal obligor or from the creditor. liabilities are interwoven as to be inseparable
iii. Aglibot v. Santia ii. Government of the Philippines v. Tizon
Under the above provision, concerning a guaranty agreement, which is a promise to answer for the However, although the defendants bound themselves in solidum, the liability of the Surety under its
debt or default of another,17 the law clearly requires that it, or some note or memorandum thereof, be bond would arise only if its co-defendant, the principal obligor, should fail to comply with the contract.
in writing. Otherwise, it would be unenforceable unless ratified,18 although under Article 135819 of the To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is
Civil Code, a contract of guaranty does not have to appear in a public document. 20 Contracts are "consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the
generally obligatory in whatever form they may have been entered into, provided all the essential Surety "is considered in law as being the same party as the debtor in relation to whatever is adjudged,
requisites for their validity are present, and the Statute of Frauds simply provides the method by which touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven
the contracts enumerated in Article 1403(2) may be proved, but it does not declare them invalid just and dependent as to be inseparable." Changing the expression, if the defendants are held liable, their
because they are not reduced to writing. Thus, the form required under the Statute is for convenience liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that
or evidentiary purposes only.21 it does not incur liability unless and until the principal debtor is held liable.
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but iii. Inciong v. CA
must be express, and cannot extend to more than what is stipulated therein. For as pointed out by
Santia, Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a board It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not
resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue her as a guarantor. A solidary or joint and several obligation is one in which each debtor is liable for the
personal checks in behalf of the company to guarantee the payment of its debt to Santia. entire obligation, and each creditor is entitled to demand the whole obligation.
3. Guranty v. Surety; Solidary Obligor v. Surety While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
GUARANTY SURETY A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
– insurer of the solvency of the debtor – insurer of the debt itself paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
– only binds himself if the principal cannot or – undertakes to pay if the principal does not
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
unable to pay pay
the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary
– collateral undertaking – charged as an original promissor
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV
– entitled to excussion – not entitled to excussion
of the Civil Code. 18
– release of the solidary debtors does not
– release of the debtor, releases guarantor
release others remaining
Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
*Suretyship – a contractual relation resulting from an agreement whereby one person, the surety,
obligation.
engages to be answerable to a third person for the debt, default, or miscarriage of another known as
the principal
iv. Escano v. Ortigas
Nature of Surety’s Undertaking:
• Liability is Limited by Terms of Contract – a contract of surety is not presumed; it cannot Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
extend to more than what is stipulated. The extent of the surety’s liability is determined only by solidarily bound by way of an ancillary obligation of segregate identity from the obligation between
the clause of the contract of suretyship as well as the conditions stated in the bond the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as
• Liability arises only if Principal Debtor is held Liable the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding
• Surety is Not Entitled to Exhaustion – a surety assumes solidary liability for the fulfillment against the principal debtor for the same obligation.41 At the same time, there is also a legal tie created
of the principal obligation as an original promissor and debtor from the beginning between the surety and the principal debtor to which the creditor is not privy or party to. The moment
• Undertaking is to Creditor, not to Debtor – the principal cannot claim that there has been a the surety fully answers to the creditor for the obligation created by the principal debtor, such
breach of the surety’s obligation to him under the suretyship contract when the surety fails or obligation is extinguished.42 At the same time, the surety may seek reimbursement from the principal
refuses to pay the debt for the principal’s account; such failure or refusal does not have the debtor for the amount paid, for the surety does in fact "become subrogated to all the rights and
effect of relieving the principal of his obligation to pay the premium on the bond furnished by remedies of the creditor."43
the surety in consideration of the premium
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected
i. Finman General Assurance Corp. v. NLRC the payment to the creditor "may claim from his co-debtors only the share which corresponds to each,
with the interest for the payment already made." Such solidary debtor will not be able to recover from Whoever pays for another may demand from the debtor what he has paid, except that if
the co-debtors the full amount already paid to the creditor, because the right to recovery extends only he paid without the knowledge or against the will of the debtor, he can recover only
to the proportional share of the other co-debtors, and not as to the particular proportional share of
insofar as the payment has been beneficial to the debtor. (1158a)
the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to Article 1237. Whoever pays on behalf of the debtor without the knowledge or against
full reimbursement falls within the other rights, actions and benefits which pertain to the surety by the will of the latter, cannot compel the creditor to subrogate him in his rights, such as
reason of the subsidiary obligation assumed by the surety. those arising from a mortgage, guaranty, or penalty. (1159a)
4. Types of Guaranty e. EXTENT (Art. 2055) – determined by the language of the guaranty or suretyship’s contract itself
a. Conventional: created by agreement of the parties – Definite: secures the principal obligation only
b. Legal: imposed by law (e.g. usufruct) – Indefinite or Simple: secures not only the principal obligation but also all its accessories,
c. Judicial: constituted by the court (e.g. surety bond) including the judicial costs
d. Gratuitous: where no valuable consideration is paid to the guarantor
e. Definite: secures the principal obligation only
Article 2055. A guaranty is not presumed; it must be express and cannot extend to more
f. Indefinite or Simple: secures the principal obligation but also all its accessories, including
than what is stipulated therein.
the judicial costs
g. Discrete: secures a specific transaction If it be simple or indefinite, it shall compromise not only the principal obligation, but also
h. Continuing: secures not only a specific transaction but a flow of transactions or future all its accessories, including the judicial costs, provided with respect to the latter, that the
advancement guarantor shall only be liable for those costs incurred after he has been judicially required
to pay. (1827a)
a. As to ORIGIN
– Conventional: created by agreement of the parties f. INDCLUDED DEBTS (Art. 2053)
– Legal: imposed by law
– Judicial: constituted by the court
Article 2053. A guaranty may also be given as security for future debts, the amount of
b. Type of CONSIDERATION
which is not yet known; there can be no claim against the guarantor until the debt is
– Gratuitous: guarantor does not receive any price or remuneration for acting as such liquidated. A conditional obligation may also be secured. (1825a)
– Onerous: guarantor receives valuable consideration for his guaranty
*Continuing Guaranty or Suretyship – one which is not limited to a single transaction but which
*the guaranty or suretyship may be gratuitous or onerous; they may secure the principal contemplates a future course of dealings, covering a series of transactions generally for an indefinite
obligation without receiving any value for such purpose time or until revoked
*the consideration in guaranty is the same consideration in the principal contract *future debts, even if the amount is not yet known, may be guaranteed but there can be no claim
*it is not necessary to prove any consideration as between the sureties (or the guarantors) and against the guarantor until the amount of the debt is ascertained or fixed and demandable
the creditor *Future Debts – debts existing at the time of the constitution of the guaranty but the amount thereof
is unknown and not to debts not yet incurred and existing at that time
c. BENEFICIARY
– Single: constituted solely to guarantee or secure performance by the debtor of the principal i. Dino v. CA
obligation
– Double or Sub-guaranty: constituted to secure the fulfillment by the guarantor of a prior Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may
guaranty not known at the time the guaranty is executed. 8 This is the basis for contracts denominated as
continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single
d. PRESENCE OF DEBTOR’S CONSENT transaction, but which contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and contemplates
Acceptance of Guaranty by Creditor and Notice thereof to Guarantor:
a succession of liabilities, for which, as they accrue, the guarantor becomes liable.9 Otherwise stated,
a continuing guaranty is one which covers all transactions, including those arising in the future, which
Article 2050. If a guaranty is entered into without the knowledge or consent, or against are within the description or contemplation of the contract, of guaranty, until the expiration or
the will of the principal debtor, the provisions of articles 1236 and 1237 shall apply. (n) termination thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the principal debtor to be used from time to time
Article 1236. The creditor is not bound to accept payment or performance by a third either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly
reserved. Hence, where the contract of guaranty states that the same is to secure advances to be
person who has no interest in the fulfillment of the obligation, unless there is a stipulation
made "from time to time" the guaranty will be construed to be a continuing one. 11
to the contrary.
ii. Fortune Motors Corp. v. CA obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the
court of the place where this obligation is to be complied with. (1828a)
In Dino vs. Court of Appeals, 19 we again had occasion to discourse on continuing guaranty/suretyship
thus:
Article 2057. If the guarantor should be convicted in first instance of a crime involving
. . . A continuing guaranty is one which is not limited to a single transaction, but which contemplates
a future course of dealing, covering a series of transactions, generally for an indefinite time or until dishonesty or should become insolvent, the creditor may demand another who has all the
revoked. It is prospective in its operation and is generally intended to provide security with respect qualifications required in the preceding article. The case is excepted where the creditor
to future transactions within certain limits, and contemplates a succession of liabilities, for which, as has required and stipulated that a specified person should be the guarantor. (1829a)
they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the description or
i. Estate of Hemady v. Luzon Surety Co. Inc.
contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty
shall be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a Under our law, therefore, the general rule is that a party’s contractual rights and obligations are
certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the transmissible to the successors.
contract of guaranty states that the same is to secure advances to be made 'from time to time' the
guaranty will be construed to be a continuing one.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor
does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal
Under the surety undertakings however, the obligation of the sureties referred to absolutely,
inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it
unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment and
accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that
discharge of all obligations of Petitioner Fortune with respect to any and all contracts and other
the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors.
agreements with Respondent Filinvest in force at that time or thereafter made. There were to
This reimbursement is a payment of a sum of money, resulting from an obligation to give; and to the
qualifications, conditions or reservations stated therein as to the extent of the suretyship. The
Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by
Financing Agreement, on the other hand, merely detailed the obligations of Fortune to CARCO
some one else in his behalf, so long as the money was paid to it.
(succeeded by Filinvest as assignee). The allegation of novation by petitioners is, therefore, misplaced.
There is no incompatibility of obligations to speak of in the two contracts. They can stand together
without conflict. The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their must be expressly established, or at the very least, clearly inferable from the provisions of the contract
agreement or intention to novate their contract. Neither did the sureties object to the Financing itself, and the text of the agreements sued upon nowhere indicate that they are non-transferable.
Agreement nor try to avoid liability thereunder at the time of its execution.
Because under the law (Article 1311), a person who enters into a contract is deemed to have
5. How a Guaranty is Construed (Art. 2055)
contracted for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to
that effect; hence, his failure to do so is no sign that he intended his bargain to terminate upon his
Article 2055. A guaranty is not presumed; it must be express and cannot extend to more death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage
than what is stipulated therein. indicates nothing more than the company’s faith and confidence in the financial stability of the surety,
If it be simple or indefinite, it shall compromise not only the principal obligation, but also but not that his obligation was strictly personal.
all its accessories, including the judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he has been judicially required The third exception to the transmissibility of obligations under Article 1311 exists when they are "not
transmissible by operation of law". The provision makes reference to those cases where the law
to pay. (1827a)
expresses that the rights or obligations are extinguished by death, as is the case in legal support
(Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work
*Guaranty covered by the Statue of Frauds since it is a “special promise to answer for the debt, (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the
default or miscarriage of another” Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the
*Guaranty has to be strictly interpreted against the creditor and in favor of the guarantor guaranty is extinguished upon the death of the guarantor or the surety.
and is not to be extended beyond its terms or specified limits
*if there is any doubt on the terms and conditions of the guaranty or surety agreements, the doubts The lower court sought to infer such a limitation from Art. 2056, to the effect that "one who is obliged
should be resolved in favor of the guarantor or surety to furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees". It will be noted, however, that
6. Qualifications of a Guarantor (Arts. 2056, 2057) the law requires these qualities to be present only at the time of the perfection of the contract of
guaranty. It is self-evident that once the contract has become perfected and binding, the supervening
incapacity of the guarantor would not operate to exonerate him of the eventual liability he has
Article 2056. One who is obliged to furnish a guarantor shall present a person who contracted; and if that be true of his capacity to bind himself, it should also be true of his integrity,
possesses integrity, capacity to bind himself, and sufficient property to answer for the which is a quality mentioned in the article alongside the capacity.
From this article it should be immediately apparent that the supervening dishonesty of the guarantor (2) If he has bound himself solidarily with the debtor;
(that is to say, the disappearance of his integrity after he has become bound) does not terminate the (3) In case of insolvency of the debtor;
contract but merely entitles the creditor to demand a replacement of the guarantor. But the step
(4) When he has absconded, or cannot be sued within the Philippines unless he has left
remains optional in the creditor: it is his right, not his duty; he may waive it if he chooses, and hold
a manager or representative;
the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial
court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s (5) If it may be presumed that an execution on the property of the principal debtor
undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates would not result in the satisfaction of the obligation. (1831a)
upon his death. - where a pledge or mortgage has been given by him as a special security
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being 2. Procedure to Make Guarantor Liable (Art. 2062)
rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death Article 2062. In every action by the creditor, which must be against the principal debtor
to his heirs. alone, except in the cases mentioned in article 2059, the former shall ask the court to
notify the guarantor of the action. The guarantor may appear so that he may, if he so
7. Liability of the Conjugal Funds desire, set up such defenses as are granted him by law. The benefit of excussion
mentioned in article 2058 shall always be unimpaired, even if judgment should be
i. Security Bank and Trust Company v. Mar Tierra Corp. rendered against the principal debtor and the guarantor in case of appearance by the
latter. (1834a)
In other words, where the husband contracts an obligation on behalf of the family business, there is
a legal presumption that such obligation redounds to the benefit of the conjugal partnership. 11 On the *the creditor may hold the guarantor only after judgment has been obtained against the
other hand, if the money or services are given to another person or entity and the husband acted only principal debtor and the latter is unable to pay
as a surety or guarantor, the transaction cannot by itself be deemed an obligation for the benefit of
the conjugal partnership. It is for the benefit of the principal debtor and not for the surety or his 3. How Guarantor Uses Excussion (Arts. 2058, 2060, 2061)
family. No presumption is raised that, when a husband enters into a contract of surety or
accommodation agreement, it is for the benefit of the conjugal partnership. Proof must be presented
Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter
to establish the benefit redounding to the conjugal partnership. 13 In the absence of any showing of
benefit received by it, the conjugal partnership cannot be held liable on an indemnity agreement has exhausted all the property of the debtor, and has resorted to all the legal remedies
executed by the husband to accommodate a third party.14 against the debtor. (1830a)
The accessory contract (the indemnity agreement) under which individual respondent Martinez Article 2060. In order that the guarantor may make use of the benefit of exclusion, he
assumed the obligation of a surety for respondent corporation was similarly for the latter’s benefit. must set it up against the creditor upon the latter's demand for payment from him, and
Petitioner had the burden of proving that the conjugal partnership of the spouses Martinez benefited
point out to the creditor available property of the debtor within Philippine territory,
from the transaction. It failed to discharge that burden.
sufficient to cover the amount of the debt.
Hence, it limits the liability of the conjugal partnership only to debts and obligations contracted by the
husband for the benefit of the conjugal partnership. Article 2061. The guarantor having fulfilled all the conditions required in the preceding
article, the creditor who is negligent in exhausting the property pointed out shall suffer
B. EFFECT OF GUARANTY BETWEEN GUARANTOR AND CREDITOR the loss, to the extent of said property, for the insolvency of the debtor resulting from
such negligence. (1833a)
1. Excussion (Arts. 2058, 2059)
*it is not enough that the guarantor claims the benefit of excussion; he must also point out
Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter to the creditor available property (not in litigation or encumbered) of the debtor within the
Philippines
has exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor. (1830a)
i. Baylon v. CA
*it may not be a sufficient reason that the debtor appears insolvent, the law requires the
creditor to resort “to all legal remedies against the debtor” including the bringing of actions It is axiomatic that the liability of the guarantor is only subsidiary. 20 All the properties of the principal
for the rescission of fraudulent alienations of the property made by the debtor debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor
liable only after judgment has been obtained against the principal debtor and the latter is unable to
Article 2059. The excussion shall not take place: pay, "for obviously the 'exhaustion of the principal's property' — the benefit of which the guarantor
claims — cannot even begin to take place before judgment has been obtained."21
(1) If the guarantor has expressly renounced it;
Under the circumstances availing in the present case, we hold that it is premature for this Court to Exceptions to Right to Indemnity or Reimbursement:
even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the 1. where the guaranty is constituted without the knowledge or against the will of the principal
concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor
— that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless 2. payment by a third person who does not intend to be reimbursed by the debtor is deemed to be
to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly a donation
secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there 3. the right to demand reimbursement is subject to waiver
is nothing in the records to show that summons was served upon her. Thus, the trial court never even
acquired jurisdiction over the principal debtor. We hold that private respondent must first obtain a Article 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
judgment against the principal debtor before assuming to run after the alleged guarantor. which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor
4. Excussion in Sub-guaranty (Art. 2064) more than what he has really paid. (1839)
a. Effect of Payment by the Guarantor who Failed to Notify the Debtor (Arts. 2068, 2070)
*Sub-Guaranty – guaranty to secure the obligation of another guarantor
*Co-Guarantors – two or more persons will be guarantors for the same principal obligation Article 2068. If the guarantor should pay without notifying the debtor, the latter may
enforce against him all the defenses which he could have set up against the creditor at
Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both the time the payment was made. (1840)
with respect to the guarantor and to the principal debtor. (1836)
Article 2070. If the guarantor has paid without notifying the debtor, and the latter not
5. Compromises (Art. 2063) – contract whereby the parties, by making reciprocal concessions, being aware of the payment, repeats the payment, the former has no remedy whatever
avoid a litigation or put an end to one already commenced against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor
Article 2063. A compromise between the creditor and the principal debtor benefits the of the payment, and the creditor becomes insolvent, the debtor shall reimburse the
guarantor but does not prejudice him. That which is entered into between the guarantor guarantor for the amount paid. (1842a)
and the creditor benefits but does not prejudice the principal debtor. (1835a)
Effect of Repeat Payment by Debtor: being at fault for not advising the debtor, the guarantor must
bear the loss
6. Joint Guaranty (Art. 2065) EXCEPTIONS:
1. creditor becomes insolvent
Article 2065. Should there be several guarantors of only one debtor and for the same debt, the 2. guarantor was prevented by fortuitous event to advise the debtor of the payment
obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors 3. guaranty is gratuitous
except the shares which they are respectively bound to pay, unless solidarity has been expressly
stipulated. b. Effect of Payment before Designated Period (Art. 2069)
The benefit of division against the co-guarantors ceases in the same cases and for the same reasons
as the benefit of excussion against the principal debtor. (1837) Article 2069. If the debt was for a period and the guarantor paid it before it became
due, he cannot demand reimbursement of the debtor until the expiration of the period
C. EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR unless the payment has been ratified by the debtor.
*if the debtor’s obligation is with a period, it becomes demandable only when the day fixed
1. Indeminification (Arts. 2066-2067)
comes
Article 2066. The guarantor who pays for a debtor must be indemnified by the latter. c. Guarantor’s Claim Against a Third Party (Art. 2072)
The indemnity comprises:
Article 2072. If one, at the request of another, becomes a guarantor for the debt of a
(1) The total amount of the debt;
third person who is not present, the guarantor who satisfies the debt may sue either the
(2) The legal interests thereon from the time the payment was made known to the
person so requesting or the debtor for reimbursement. (n)
debtor, even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that 4. Subrogation (Arts. 2067, 1237, 2050) – transfers to the person subrogated, the credit with
payment had been demanded of him; all the rights thereto appertaining either against the debtor or against third persons
(4) Damages, if they are due. (1838a)
Article 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
*the guarantor has no right to demand reimbursement until he has actually paid the debt, unless by which the creditor had against the debtor.
the terms of the contract, he is given the right before making payment If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against Article 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he
the will of the latter, cannot compel the creditor to subrogate him in his rights, such as bound himself, is responsible to the co-guarantors in the same terms as the guarantor.
those arising from a mortgage, guaranty, or penalty. (1159a)
E. EXTINGUISHMENT OF GUARANTY (Arts. 2076-2080, 1672, 1261)
Article 2050. If a guaranty is entered into without the knowledge or consent, or against
the will of the principal debtor, the provisions of articles 1236 and 1237 shall apply. (n) Causes of Extinguishment of Guaranty:
1. Payment or Performance
2. Loss of the Thing Due
5. Guarantor’s Legal Remedies against Debtor Before Payment (Art. 2071)
3. Condonation or Remission of the Debt
4. Confusion or Merger of the Rights of the Creditor and Debtor
Article 2071. The guarantor, even before having paid, may proceed against the principal 5. Compensation
debtor: 6. Novation
(1) When he is sued for the payment; 7. Annulment
(2) In case of insolvency of the principal debtor; 8. Rescission
(3) When the debtor has bound himself to relieve him from the guaranty within a 9. Fulfillment of a Resolutory Condition
10. Prescription
specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period
Article 2076. The obligation of the guarantor is extinguished at the same time as that
for payment;
of the debtor, and for the same causes as all other obligations. (1847)
(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a
period longer than ten years; Article 2077. If the creditor voluntarily accepts immovable or other property in payment
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond; of the debt, even if he should afterwards lose the same through eviction, the guarantor
(7) If the principal debtor is in imminent danger of becoming insolvent. is released. `
In all these cases, the action of the guarantor is to obtain release from the guaranty, or
to demand a security that shall protect him from any proceedings by the creditor and Article 2078. A release made by the creditor in favor of one of the guarantors, without
from the danger of insolvency of the debtor. (1834a) the consent of the others, benefits all to the extent of the share of the guarantor to whom
it has been granted.
i. General Indemnity Co., Inc. v. Alvarez
Article 2079. An extension granted to the debtor by the creditor without the consent of
An action by the guarantor against the principal debtor for payment before the guarantor has paid the the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to
creditor, is premature. Under Art. 2071 of the new Civil Code, a guarantor who has not paid the demand payment after the debt has become due does not of itself constitute any
creditor can proceed against the principal debtor only for the purpose of obtaining release from the extension of time referred to herein.
guaranty or a security against an eventual insolvency of the debtor.
Article 2080. The guarantors, even though they be solidary, are released from their
The last paragraph of this same article, however, provides that in such instance, the only action the obligation whenever by some act of the creditor they cannot be subrogated to the rights,
guarantor can file against the debtor is "to obtain release from the guaranty, or to demand a security
mortgages, and preference of the latter. (1852)
that shall protect him from any proceeding by the creditor and from the danger of insolvency of the
debtor." An action by the guarantor against the principal debtor for payment, before the former has
paid the creditor, is premature. Article 2081. The guarantor may set up against the creditor all the defenses which
pertain to the principal debtor and are inherent in the debt; but not those that are
D. EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS (Arts. 2073, 2075)
personal to the debtor. (1853)
Article 2073. When there are two or more guarantors of the same debtor and for the Article 1672. In case of an implied new lease, the obligations contracted by a third
same debt, the one among them who has paid may demand of each of the others the person for the security of the principal contract shall cease with respect to the new lease.
share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, Article 1261. If, the consignation having been made, the creditor should authorize the
including the payer, in the same proportion. debtor to withdraw the same, he shall lose every preference which he may have over the
The provisions of this article shall not be applicable, unless the payment has been made thing. The co-debtors, guarantors and sureties shall be released. (1181a)
by virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)
*Any material alteration would constitute a novation or change of the principal contract consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there
which is consequently extinguished was such a waiver.
i. NASSCO v. Torrento iii. Inciong v. CA
"If a person binds himself solidarity with the principal debtor, . . . the contract is called suretyship" A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
(Art. 2047, C.C.) in which case the provisions of the Civil Code with respect to joint and solidary and each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the
obligations apply; and Article 1216 of the Civil Code provides that "the creditor may proceed against Civil Code states:
any of the solidary debtors or all of them simultaneously. . . ." It has been repeatedly held that By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
although as a rule sureties . . . are only subsidiarily liable for an obligation, nevertheless, if they bind principal debtor in case the latter should fail to do so.
themselves jointly and severally, or in solidum, with the principal debtor, the creditor may bring an If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
action against anyone of them, either alone or together with the principal debtor. Title I of this Book shall be observed. In such a case the contract is called a suretyship.
x x x In short, the supplemental agreement did not result in the principal debtor's assuming more While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
onerous conditions than those stipulated in the original contract, and for which the surety furnished different from that of a solidary debtor. Thus, Tolentino explains:
the bond. There was consequently, no material or essential alteration of the original contract which A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
could result in the release of the surety from the obligation under the said bond. paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
"for purposes of releasing a surety's obligation, there must be a material alteration of the contract in
the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary
connection with which the bond is given, a change which imposes some new obligation on the party
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV
promising or takes away some obligation already imposed, changing the legal effect of the original
of the Civil Code. 18
contract and not merely the form thereof . . .
There is a solidary liability only when the obligation expressly so states, when the law so provides or
ii. Security bank and Trust Co. v. Cuenca
when the nature of the obligation so requires. 19
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every
Because the promissory note involved in this case expressly states that the three signatories therein
doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
to obtain the consent of the surety to any material alteration in the principal loan agreement, or at
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained
collection. 21
in excess of the amount or beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto.
This is especially true where, as in this case, respondent was no longer the principal officer or major iv. Zobel Inc. v. CA
stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no
longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency
anew to the subsequent obligations. of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer
of the debt, and he obligates himself to pay if the principal does not pay. 10
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on every Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor
point."15 Indeed, the following requisites must be established: (1) there is a previous valid obligation; of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of
(2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
is a valid new contract.16 respondent spouses.
While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed ₱8 The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
million,22 the 1989 Agreement provided that the loan was ₱12.2 million. The periods for payment were Authorities recognize that the word "guarantee" is frequently employed in business transactions to
also different. describe not the security of the debt but an intention to be bound by a primary or independent
obligation. 11 As aptly observed by the trial court, the interpretation of a contract is not limited to the
Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated. It title alone but to the contents and intention of the parties.
is strictly construed against the creditor, every doubt being resolved against enlarging the liability of
the surety."31 Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any v. Carodan v. CA
doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity." 32 In We find that Rosalina is liable as an accommodation mortgagor.
the absence of an unequivocal provision that respondent waived his right to be notified of or to give
In Belo v. PNB,63 we had the occasion to declare: IV. REAL MORTGAGE (2085-2092)
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor
did not benefit from the same. The validity of an accommodation mo1igage is allowed under Article A. DEFINITION
2085 of the New Civil Code which provides that (t)hird persons who are not parties to the principal − contract by virtue of which the debtor delivers to the creditor or to a third person a movable or
obligation may secure the latter by pledging or mortgaging their own property. An accommodation document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal
mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be
designation as such. 64 returned with all its fruits and accessions
Apart from being an accommodation mortgagor, Rosalina is also a surety, defined under Article 2047 B. ESSENTIAL REQUISITES OF A REAL MORTGAGE (Art. 2085)
of the Civil Code in this wise:
Art. 2047. By guaranty a person, called a guarantor, binds himself to the creditor to fulfill the obligation Article 2085. The following requisites are essential to the contracts of pledge and
of the principal debtor in case the latter should fail to do so.
mortgage:
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship.
(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;
A contract of suretyship (second paragraph of Article 2047) has been juxtaposed against a contract of
guaranty (first paragraph of Article 2047) as follows:
(3) That the persons constituting the pledge or mortgage have the free disposal of their
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A property, and in the absence thereof, that they be legally authorized for the purpose.
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor Third persons who are not parties to the principal obligation may secure the latter by
shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, pledging or mortgaging their own property.
while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against
the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does 1. Acts as a Security of a Principal Obligation
not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for
a. Principal Obligations Secured (Arts. 2086, 2091)
the payment and is so responsible at once if the principal debtor makes default, while a guarantor
− contracts that are valid
contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
− voidable
− unenforceable
When Rosalina affixed her signature to the Real Estate Mortgage as mortgagor and to the Surety − natural obligations
Agreement as surety which covered the loan transaction represented by the Promissory Note, she − pure
thereby bound herself to be liable to China Bank in case the principal debtors, Barbara and Rebecca, − conditional
failed to pay. China Bank, on the other hand, had a right to proceed after either the principal debtors
or the surety when the debt became due.
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage.
The agreement expressly contains the following stipulation:
The Surety(ies) expressly waive all rights to demand for payment and notice of non-payment and Article 2052. A guaranty cannot exist without a valid obligation.
protest, and agree that the securities of every kind that are now and may hereafter be left with the Nevertheless, a guaranty may be constituted to guarantee the performance of a
Creditor its successors, indorsees or assigns as collateral to any evidence of debt or obligation, or voidable or an unenforceable contract. It may also guarantee a natural obligation.
upon which a lien may exist therefor, may be substituted, withdrawn or surrendered at any
time, and the time for the payment of such obligations extended, without notice to or consent by
Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be
the Surety(ies)
they pure or subject to a suspensive or resolutory condition. (1861)
She not only waived the rights to demand payment and to receive notice of nonpayment and protest,
b. How Security is Satisfied (Art. 2087)
but she also expressly agreed that the time for payment may be extended.
Article 2087. It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may be
alienated for the payment to the creditor.
c. Pactum Commissorium (Art. 2088): an agreement whereby the creditor automatically

becomes the owner of the things given by way of pledge/mortgage, or dispose of them in case of
non-payment, without the need of any foreclosure proceedings or public auction
Article 2088. The creditor cannot appropriate the things given by way of pledge or automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal
mortgage, or dispose of them. Any stipulation to the contrary is null and void. obligation within the stipulated period. 23
Requisites: 2. Mortgagor must be the Absolute Owner

1. there should be a property mortgaged/pledged by way of security for the payment of the
principal obligation i. Vda de Bautista v. Marcos
2. there should be a stipulation for automatic appropriation by the creditor of the thing given
as security in case of non-payment
As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of
the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the
* there can be no pactum commissorium if the contract is contract of sale; time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for
* neither a promise of the mortgagor debtor to transfer a property because there is no automatic that reason, encumber the same to the plaintiff-appellee. Nor could the subsequent acquisition by the
transfer; mortgagor of title over said land through the issuance of a free patent validate and legalize the deed of
* nor if the principal obligation is extinguished by dacion en pago, novation, or cession mortgage under the doctrine of estoppel (cf. Art. 1434, New Civil Code,1 since upon the issuance of said
patient, the land in question was thereby brought under the operation of the Public Land Law that
i. A. Francisco Realty and Development Corp. v. CA prohibits the taking of said land for the satisfaction of debts contracted prior to the expiration of five
years from the date of the issuance of the patent (sec. 118, C.A. No. 141). This prohibition should
Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of include not only debts contracted during the five-year period immediately preceding the issuance of the
respondent spouses to pay interest, ownership of the property would be automatically transferred to patent but also those contracted before such issuance, if the purpose and policy of the law, which is "to
petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance preserve and keep in the family of the homesteader that portion of public land which the State has
a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy gratuitously given to him”, is to be upheld.
Tong v. Court of Appeals,20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code: ii. State Investment House Inc. v. CA
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
dispose of the same. Any stipulation to the contrary is null and void. STATE's registered mortgage right over the property is inferior to that of respondents-spouses'
unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred for the
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there reason that if the original owner (SOLID, in this case) had parted with his ownership of the thing sold
should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the then he no longer had ownership and free disposal of that thing so as to be able to mortgage it
payment of the principal obligation; and (2) that there should be a stipulation for an automatic again.4 Registration of the mortgage is of no moment since it is understood to be without prejudice to
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the the better right of third parties.5
principal obligation within the stipulated period.21
Nevertheless, we have to deviate from the general rule because of the failure of the petitioner in this
The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A. case to take the necessary precautions to ascertain if there was any flaw in the title of the mortgage.
Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared The petitioner is an investment and financing corporation. We presume it is experienced in its business.
void, as prayed for by respondents in their counterclaim. Ascertainment of the status and condition of properties offerred to it as security for the loans it extends
must be a standard and indispensable part of its operations. Surely, it cannot simply rely on an
examination of a Torrens certificate to determine what the subject property looks like as its condition is
ii. Bustamante v. Rosel
not apparent in the document. The land might be in a depressed area. There might be squatters on it.
It might be easily inundated. It might be an interior lot, without convenient access. These and other
We rule that petitioner did not fail to pay the loan. similar factors determine the value of the property and so should be of practical concern to the petitioner.
The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle iii. Cruz v. Bancom Finance Corporation
the loan which respondents refused to accept, insisting that petitioner sell to them the collateral of the
loan.
An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported
buyer, not being the owner, cannot validly mortgage the subject property. Consequently, neither does
When respondents refused to accept payment, petitioner consigned the amount with the trial court. the buyer at the foreclosure sale acquire any title thereto.
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private
given as security for the loan. This is embraced in the concept of pactum commissorium, which is individuals, it is expected to exercise greater care and prudence in its dealings, including those involving
proscribed by law. 22 registered lands.35 A banking institution is expected to exercise due diligence before entering into a
mortgage contract.36 The ascertainment of the status or condition of a property offered to it as security
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by for a loan must be a standard and indispensable part of its operations.37
way of security for the payment of the principal obligation, and (2) there should be a stipulation for
On the question of who has a preferential right over the property, the long-standing rule, as provided offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the
by Article 208555 of the Civil Code,56 is that only the absolute owner of the property can constitute a valid acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors.
mortgage on it. In case of foreclosure, a sale would result in the transmission only of whatever rights
the seller had over of the thing sold.57 Section 122. Treasurer, Corporate Secretary, and Other Officers. - Within fifteen (15) days from the issuance of its
certificate or incorporation, the One Person Corporation shall appoint a treasurer, corporate secretary, and other officers
as it may deem necessary, and notify the Commission thereof within five (5) days from appointment.
iv. Aldover v. CA The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a bond to the Commission
in such a sum as may be required: Provided, That the said stockholder/treasurer shall undertake in writing to faithfully
It is true that the buyer in a foreclosure sale becomes the absolute owner of the property if it is not administer the One person Corporation's funds to be received as treasurer, and to disburse and invest the same according
redeemed within one year from registration of the sale and title is consolidated in his name. "As the to the articles of incorporation as approved by the Commission. The bond shall be renewed every two (2) years or as
confirmed owner, the purchaser’s right to possession becomes absolute. There is even no need for him often as may be required.
to post a bond, and it becomes the ministerial duty of the courts," upon application and proof of title, to
issue a Writ of Possession to place him in possession. 84 This rule is clear from the language of Section i. Vitug v. Abuda
33, Rule 39 of the Rules of Court. The same provision of the Rules, however, provides as an exception
that when a third party is actually holding the property adversely to the judgment debtor, the duty of
Petitioner's undisputed title to and ownership of the property is sufficient to give him free disposal of it.
the court to issue a Writ of Possession ceases to be ministerial. Thus:
As owner of the property, he has the right to enjoy all attributes of ownership including jus disponendi
SEC. 33. Deed and possession to be given at expiration of redemption period; by whom executed or
or the right to encumber, alienate, or dispose his property "without other limitations than those
given. – If no redemption be made within one (1) year from the date of the registration of the
established by law."56
certificate of sale, the purchaser is entitled to a conveyance and possession of the property; or, if so
redeemed whenever sixty (60) days have elapsed and no other redemption has been made, and notice These restrictions do not divest petitioner of his ownership rights. They are mere burdens or limitations
thereof given, and the time for redemption has expired, the last redemptioner is entitled to the on petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property. However, the
conveyance and possession; but in all cases the judgment obligor shall have the entire period of one disposition or encumbrance of his property is subject to the limitations and to the rights that may accrue
(1) year from the date of the registration of the sale to redeem the property. The deed shall be to the National Housing Authority. When annotated to the title, these restrictions serve as notice to the
executed by the officer making the sale or by his successor in office, and in the latter case shall have whole world that the National Housing Authority has claims over the property, which it may enforce
the same validity as though the officer making the sale had continued in office and executed it. against others.
Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to
and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the Even though petitioner's property has been constituted as a family home, it is not exempt from
time of the levy. The possession of the property shall be given to the purchaser or last redemptioner execution. Article 155 of the Family Code explicitly provides that debts secured by mortgages are
by the same officer unless a third party is actually holding the property adversely to the judgment exempted from the rule against execution, forced sale, or attachment of family home:
obligor. (Emphasis supplied) Art. 155. The family home shall be exempt from execution, forced sale or attachment except:
(3) For debts secured by mortgages on the premises before or after such constitution[.]cralawlawlibrary
However, "between an unrecorded sale of a prior date and a recorded mortgage of a later date the
former is preferred to the latter for the reason that if the original owner had parted with his ownership
Since petitioner's property was voluntarily used by him as security for a loan he obtained from
of the thing sold then he no longer had the ownership and free disposal of that thing so as to be able to
respondent, it may be subject to execution and attachment.
mortgage it again."90
C. CHARACTERISTICS OF A REAL MORTGAGE (Arts. 2085, 2089, 2090, 2094, 2125, 2126, 2129)
3. Mortgagor must have Free Disposal of Property (Arts. 96 & 124, Family Code; Art. 122,
Corporation Code; Bulk Sales Law)  REAL Contract – perfected by delivery of the thing
 ACCESSORY Contract
Art. 96. The administration and enjoyment of the community property shall belong to both spouses jointly. In case of
disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper remedy, which
Article 2085. The following requisites are essential to the contracts of pledge and
must be availed of within five years from the date of the contract implementing such decision.
In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the common mortgage:
properties, the other spouse may assume sole powers of administration. These powers do not include disposition or (1) That they be constituted to secure the fulfillment of a principal obligation;
encumbrance without authority of the court or the written consent of the other spouse. In the absence of such authority
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing
offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the mortgaged;
acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. (3) That the persons constituting the pledge or mortgage have the free disposal of their
(206a)
property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by
Art. 124. The administration and enjoyment of the conjugal partnership shall belong to both spouses jointly. In case of
disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper remedy, which pledging or mortgaging their own property.
must be availed of within five years from the date of the contract implementing such decision.
In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided
properties, the other spouse may assume sole powers of administration. These powers do not include disposition or
encumbrance without authority of the court or the written consent of the other spouse. In the absence of such authority among the successors in interest of the debtor or of the creditor.
or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. mortgage, to the prejudice of other heirs who have not been paid.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel
the mortgage, to the prejudice of the other heirs who have not been paid. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several
From these provisions is excepted the case in which, there being several things given in heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply
mortgage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage
as the portion of the debt for which each thing is specially answerable is satisfied. (1860) ii. PNB v. RBL Enterprises
Having released fifty percent of the loan proceeds on the basis of the signed loan and mortgage
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
contracts, petitioner can no longer require the borrowers to secure the lessor’s conformity to the
debtors are not solidarily liable. (n)
Mortgage Contract as a condition precedent to the release of the loan balance. The conformity of the
lessor was not necessary to protect the bank’s interest, because respondents were unquestionably the
Article 2094. All movables which are within commerce may be pledged, provided they are absolute owners of the mortgaged property. Furthermore, the registration of the mortgage created a
susceptible of possession. (1864) real right to the properties which, in subsequent transfers by the mortgagor, the transferees are legally
bound to respect.
Article 2125. In addition to the requisites stated in article 2085, it is indispensable, in
order that a mortgage may be validly constituted, that the document in which it appears iii. Belo v. CA
be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties. First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to
The persons in whose favor the law establishes a mortgage have no other right than to petitioners' failure to appeal the same after the trial court rendered its decision affirming
their validity. After the trial court rendered its decision granting petitioners their alternative
demand the execution and the recording of the document in which the mortgage is
cause of action, i.e., that they can redeem the subject property on the basis of the winning
formalized. (1875a) bid price of respondent PNB, petitioners did not anymore bother to appeal that decision on
their first cause of action. If they felt aggrieved by the trial court's decision upholding the
Article 2126. The mortgage directly and immediately subjects the property upon which it validity of the said two (2) documents, then they should have also partially appealed
is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly pursue
security it was constituted. a claim that was settled with finality due to their own shortcoming.
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did
Article 2129. The creditor may claim from a third person in possession of the mortgaged
not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of
property, the payment of the part of the credit secured by the property which said third
the New Civil Code which provides that "(t)hird persons who are not parties to the principal obligation
person possesses, in the terms and with the formalities which the law establishes. may secure the latter by pledging or mortgaging their own property." An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as
i. Central Bank v. CA such. It is not always necessary that the accommodation mortgagor be appraised beforehand of the
entire amount of the loan nor should it first be determined before the execution of the SPA for it has
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real been held that:
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% "(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of named as consideration in said contract do not limit the amount for which the mortgage may stand as
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the security if from the four corners of the instrument the intent to secure future and other indebtedness
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. can be gathered. A mortgage given to secure advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full amount of the
advancements are paid."22
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-
creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are
Article 2089 provides:
assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical
A pledge or mortgage is indivisible even though the debt may be divided among the successors in
to allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo.
interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate iv. United Overseas Bank v. Board of Commissioners-HLURB
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
We find the recent view espoused in Philippine National Bank to be in accord with law and equity. While (4) For debts due to laborers, mechanics, architects, builders, materialmen and others
a mortgage may be nullified if it was in violation of Section 18 of P.D. No. 957, such nullification applies who have rendered service or furnished material for the construction of the building.
only to the interest of the complaining buyer. It cannot extend to the entire mortgage. A buyer of a
(243a)
particular unit or lot has no standing to ask for the nullification of the entire mortgage.
Since EDUPLAN has an actionable interest only over Unit E, 10th Floor, Aurora Milestone Tower, it is but 2. As to CONSTITUTION
logical to conclude that it has no standing to seek for the complete nullification of the subject mortgage
and the HLURB was incorrect when it voided the whole mortgage between JOS Managing Builders and
Section 18. Mortgages. No mortgage on any unit or lot shall be made by the owner or developer
United Overseas Bank.
without prior written approval of the Authority. Such approval shall not be granted unless it is shown
D. PROMISE TO CONSTITUTE A MORTGAGE (Art. 2092) that the proceeds of the mortgage loan shall be used for the development of the condominium or
subdivision project and effective measures have been provided to ensure such utilization. The loan
value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any,
Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal shall be notified before the release of the loan. The buyer may, at his option, pay his installment for
action between the contracting parties, without prejudice to the criminal responsibility the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage
incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to
things which he knew were subject to some burden, or by misrepresenting himself to be obtain title over the lot or unit promptly after full payment thereto;
the owner of the same.
a. Equitable (Arts. 1602, 1603, 1605)
i. Laplana v. Gachitorena Chereau
ARTICLE 1602. The contract shall be presumed to be an equitable mortgage, in any of

It is true that a promise to constitute a mortgage gives rise only to a personal obligation between the
the following cases:
contracting parties (art. 1862, Civ. Code) and creates no real right in the property, but the agreement
(1) When the price of a sale with right to repurchase is unusually inadequate;
to constitute the mortgage is lawful and such stipulation can be enforced by the creditor, being in no
wise inconsistent with the right to recover the indebtedness. But a court of equity never requires an (2) When the vendor remains in possession as lessee or otherwise;
unnecessary thing and in this case all of the rights if the creditor will be adequately protected by declaring (3) When upon or after the expiration of the right to repurchase another instrument
that the indebtedness recognized by Mariano Garchitorena in the document of July 2, 1921, constitutes extending the period of redemption or granting a new period is executed;
a lien in the nature of a mortgage upon the Hacienda Salvacion, it appearing that the registration of the (4) When the purchaser retains for himself a part of the purchase price;
whole has been effected. It is a maxim of jurisprudence that "equity regards that as done which ought (5) When the vendor binds himself to pay the taxes on the thing sold;
to be done," and in obedience to this precept, as between the parties to this record, the property must
(6) In any other case where it may be fairly inferred that the real intention of the parties
be considered to be subject to the same lien as if the mortgage which had been agreed to be made had
is that the transaction shall secure the payment of a debt or the performance of any
been actually executed. (1 Pom., Eq. Jur., secs. 363-377.) It is our opinion, therefore that there is merit
in the plaintiff's appeal, though the remedy to be conceded is not precisely the compelling of the other obligation.
defendants to execute the mortgage a declaration of the existence of the lien being sufficient. In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to the
E. TYPES usury laws. (n)
1. As to OBJECT (Art. 2124, Art. 155(3), Family Code) Article 1603. In case of doubt, a contract purporting to be a sale with right to repurchase
shall be construed as an equitable mortgage. (n)
Article 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables; Article 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may
(2) Alienable real rights in accordance with the laws, imposed upon immovables. ask for the reformation of the instrument. (n)
Nevertheless, movables may be the object of a chattel mortgage. (1874a)
3. Status of Mortgage Executed Prior to Perfection of Principal Obligation
Art. 155. The family home shall be exempt from execution, forced sale or attachment
i. Central Bank v. CA
except:
(1) For nonpayment of taxes;
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then
(2) For debts incurred prior to the constitution of the family home; in existence, as there was no debt yet because Island Savings Bank had not made any release on the
(3) For debts secured by mortgages on the premises before or after such loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any
constitution; and consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs.
C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration
is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created
as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on then only be interpreted to mean that the petitioner had no design of including the penalty in the
Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes amount secured.
unenforceable to the extent of such failure. Where the indebtedness actually owing to the holder of the
mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than
iii. Prudential Bank v. Adviar
the actual sum due.
Thus, when the mortgagor takes another loan for which another security was given it could not be
4. Extent of Mortgage (Art. 2127) inferred that such loan was made in reliance solely on the original security with the "dragnet clause,"
but rather, on the new security given. This is the "reliance on the security test."
Article 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes Hence, based on the "reliance on the security test," the California court in the cited case made an
due, and to the amount of the indemnity granted or owing to the proprietor from the inquiry whether the second loan was made in reliance on the original security containing a "dragnet
insurers of the property mortgaged, or in virtue of expropriation for public use, with the clause." Accordingly, finding a different security was taken for the second loan no intent that the
declarations, amplifications and limitations established by law, whether the estate parties relied on the security of the first loan could be inferred, so it was held. The rationale involved,
the court said, was that the "dragnet clause" in the first security instrument constituted a continuing
remains in the possession of the mortgagor, or it passes into the hands of a third person.
offer by the borrower to secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the offer. 47
i. Sps. Paderes v. CA
If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement
The provision of Article 44839 of the Civil Code, cited by petitioners, which pertain to those who, in
secured by separate securities, then the same should have been indicated in the mortgage contract.
good faith, mistakenly build, plant or sow on the land of another, has no application to the case at
Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party
bar.
who caused the ambiguity which could have avoided it by the exercise of a little more care. 54 To be
more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations
Here, the record clearly shows that petitioners purchased their respective houses from MICC, as must be read against the party who drafted it,55 which is the petitioner in this case.
evidenced by the Addendum to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale
dated January 9, 1984.
iv. Castro v. CA
Being improvements on the subject properties constructed by mortgagor MICC, there is no question This article extends the effects of the real estate mortgage to accessions and accessories found on the
that they were also covered by MICC’s real estate mortgage following the terms of its contract with hypothecated property when the secured obligation becomes due. The law is predicated on an
Banco Filipino and Article 2127 of the Civil Code: assumption that the ownership of such accessions and accessories also belongs to the mortgagor as
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, the owner of the principal. 10 The provision 11 has thus been seen by the Court, in a long line of cases
and the rents or income not yet received when the obligation becomes due, and to the amount of beginning in 1909 with Bischoff vs. Pomar, 12 to mean that all improvements subsequently introduced
the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in or owned by the mortgagor on the encumbered property are deemed to form part of the mortgage.
virtue of expropriation for public use, with the declarations, amplifications and limitations established That the improvements are to be considered so incorporated only if so owned by the mortgagor is a
by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands rule that can hardly be debated since a contract of security, whether, real or personal, needs as an
of a third person. (Underscoring supplied). indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or
ii. Philippine Bank of Communications v. CA mortgaged. 13 The rationale should be clear enough — in the event of default on the secured obligation,
the foreclosure sale of the property would naturally be the next step that can expectedly follow. A sale
would result in the transmission of title to the buyer which is feasible only if the seller can be in a
A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no
position to convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant
mention of penalty charges.24 Construing this silence strictly against the petitioner, it can fairly be
case, that a foreclosure would be ineffective unless the mortgagor has title to the property to be
concluded that the petitioner did not intend to include the penalties on the promissory notes in the
foreclosed. 14
secured amount. This explains the finding by the trial court, as affirmed by the Court of Appeals, that
"penalties and charges are not due for want of stipulation in the mortgage contract." 25 v. PNB v. Sps. Maranon
A mortgage and a note secured by it are deemed parts of one transaction and are construed Rent is a civil fruit31 that belongs to the owner of the property32 producing it by right of
together,30 thus, an ambiguity is created when the notes provide for the payment of a penalty but the accession33.34 The rightful recipient of the disputed rent in this case should thus be the owner of the
mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty subject lot at the time the rent accrued. It is beyond question that Spouses Marañon never lost
was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no ownership over the subject lot. This is the precise consequence of the final and executory judgment
less than seventeen conditions in fine print; it included provisions for interest and attorney's fees in Civil Case No. 7213 rendered by the RTC on June 3, 2006 whereby the title to the subject lot was
similar to those in the promissory notes; and it even provided for the payment of taxes and insurance reconveyed to them and the cloud thereon consisting of Emilie’s fraudulently obtained title was
charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor removed. Ideally, the present dispute can be simply resolved on the basis of such pronouncement.
even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can However, the application of related legal principles ought to be clarified in order to settle the
intervening right of PNB as a mortgagee in good faith.
Rent, as an accessory follow the principal.37 In fact, when the principal property is mortgaged, the ... in the absence of express statutory provisions, a mortgage creditor may institute against the
mortgage shall include all natural or civil fruits and improvements found thereon when the secured mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. In other
obligation becomes due as provided in Article 2127 of the Civil Code, viz: words, he may pursue either of the two remedies, but not both. By such election, his cause of action
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, can by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to
and the rents or income not yet received when the obligation becomes due, and to the amount of bring a personal action will leave open to him all the properties of the debtor for attachment and
the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in execution, even including the mortgaged property itself. And, if he waives such personal action and
virtue of expropriation for public use, with the declarations, amplifications and limitations established pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give
by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands him the right to sue for a deficiency judgment, in which case, all the properties of the defendant, other
of a third person. than the mortgaged property, are again open to him for the satisfaction of the deficiency. In either
case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the
vi. Asiatrust Development Bank v. Tuble
pursuit of one or the other remedy are purely accidental and are all under his right of election. ...
This Court has recognized that, through a dragnet clause, a real estate mortgage contract may
exceptionally secure future loans or advancements.31 But an obligation is not secured by a mortgage, Thus, where a debt is secured by a mortgage and there is a default in payment on the part of the
unless, that mortgage comes fairly within the terms of the mortgage contract. 32 mortgagor, the mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The
mortgagee may:
1) foreclosure the mortgage; or
Here, after reviewing the entire deed, this Court finds that there is no specific mention of interest to 2) file an ordinary action to collect the debt.
be added in case of either default or redemption. The Real Estate Mortgage Contract itself is silent on
the computation of the redemption price. Although it refers to the Promissory Notes as constitutive of
Tuble’s secured obligations, the said contract does not state that the interest to be charged in case of When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the
redemption should be what is specified in the Promissory Notes. sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction
of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee
has the right to claim for the deficiency resulting from the price obtained in the sale of the real property
F. RIGHTS OF THE PARTIES (Arts. 2128-2129) at public auction and the outstanding obligation at the time of the foreclosure proceedings (Soriano v.
Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco Nacional v.
Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole Barreto, 53 Phil. 101).lâwphî1.ñèt
or in part, with the formalities required by law. (1878)
On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his
Article 2129. The creditor may claim from a third person in possession of the mortgaged mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action
to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by
property, the payment of the part of the credit secured by the property which said third
execution. He can even levy execution on the same mortgaged property, but he will not have priority
person possesses, in the terms and with the formalities which the law establishes. over the latter and there may be other creditors who have better lien on the properties of the mortgagor.
i. Litonjua v. L & R Corporation In the present case, however, We shall not follow this rule to the letter but declare that it is the collection
suit which was waived and/or abandoned. This ruling is more in harmony with the principles underlying
All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, our judicial system. It is of no moment that the collection suit was filed ahead, what is determinative is
the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R the fact that the foreclosure proceedings ended even before the decision in the collection suit was
Corporation's prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem rendered. As a matter of fact, CALTEX informed the trial court that it had already consolidated its
and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one- ownership over the property, in its reply to the opposition of Manzana to the motion for execution
year period should have been accepted as valid by the L & R Corporation. However, while the sale is, pending appeal filed by it.
indeed, valid, the same is rescissible because it ignored L & R Corporation's right of first refusal.
ii. Bank of America v. America Realty Corp.

1. FORECLOSURE OF REAL MORTGAGE
Certainly, this Court finds petitioner's arguments untenable and upholds the jurisprudence laid down in
a. Judicial Foreclosure Bachrach 15 and similar cases adjudicated thereafter, thus:
In the absence of express statutory provisions, a mortgage creditor may institute against the mortgage
• Nature – quasi in rem debtor either a personal action or debt or a real action to foreclose the mortgage. In other words, he
may he may pursue either of the two remedies, but not both. By such election, his cause of action can
by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to bring
i. Caltex Phils. v. IAC
a personal action will leave open to him all the properties of the debtor for attachment and execution,
even including the mortgaged property itself. And, if he waives such personal action and pursues his
Of importance is the doctrine laid down by this court in the leading case of Bachrach Motor, Inc. v.
remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right
Icarangal et al., 68 Phil. 287, which was applied by the respondent Court in resolving the case, where
to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the
We ruled that;
mortgaged property, are again open to him for the satisfaction of the deficiency. In either case, his
remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be
one or the other remedy are purely accidental and are all under his right of election. On the other hand, registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said
certificate of title.
a rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously
If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure
or successively another action against the mortgaged property, would result not only in multiplicity of sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall
suits so offensive to justice (Soriano vs. Enriques, 24 Phil. 584) and obnoxious to law and equity (Osorio be cancelled and a new one issued in the name of the purchaser. (n)
vs. San Agustin, 25 Phil., 404), but also in subjecting the defendant to the vexation of being sued in the
place of his residence or of the residence of the plaintiff, and then again in the place where the property
− Difference from Execution Sale under Rule 39, Rules of Court
lies.
Section 19. How property sold on execution; who may direct manner and order of sale. — All sales
For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of property under execution must be made at public auction, to the highest bidder, to start at the exact time
of the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the of fixed in the notice. After sufficient property has been sold to satisfy the execution, no more shall be sold and
the 1997 Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the any excess property or proceeds of the sale shall be promptly delivered to the judgment obligor or his
mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff authorized representative, unless otherwise directed by the judgment or order of the court. When the sale is
of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as of real property, consisting of several known lots, they must be sold separately; or, when a portion of such
amended by Act No. 4118. real property is claimed by a third person, he may require it to be sold separately. When the sale is of personal
property capable of manual delivery, it must be sold within view of those attending the same and in such
parcels as are likely to bring the highest price. The judgment obligor, if present at the sale, may direct the
Contrary to petitioner's arguments, we therefore reiterate the rule, for clarity and emphasis, that the order in which property, real or personal shall be sold, when such property consists of several known lots or
mere act of filing of an ordinary action for collection operates as a waiver of the mortgage-creditor's parcels which can be sold to advantage separately. Neither the officer conducting the execution sale, nor his
remedy to foreclose the mortgage. By the mere filing of the ordinary action for collection against the deputies, can become a purchaser, nor be interested directly or indirectly in any purchase at such sale. (21a)
principal debtors, the petitioner in the present case is deemed to have elected a remedy, as a result of
which a waiver of the other necessarily must arise. Corollarily, no final judgment in the collection suit is • When Right of Redemption Exists (Section 47, General Banking Law)
required for the rule on waiver to apply.
Section 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or
• Procedure (Rule 68, Rules of Court) extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to redeem the property by
Section 3. Sale of mortgaged property; effect. — When the defendant, after being directed to do so as provided in the
paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and
next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon
all the costs and expenses incurred by the bank or institution from the sale and custody of said property less
motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations
governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or
encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately
shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, after the date of the confirmation of the auction sale and administer the same in accordance with law. Any
subject to such rights of redemption as may be allowed by law. petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this
Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the
the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint
a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold
may secure a writ of possession, upon motion, from the court which ordered the foreclosure. pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register
Section 5. How sale to proceed in case the debt is not all due. — If the debt for which the mortgage or encumbrance of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners
was held is not all due as provided in the judgment as soon as a sufficient portion of the property has been sold to pay of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their
the total amount and the costs due, the sale shall terminate; and afterwards as often as more becomes due for principal redemption rights until their expiration. (78a)
or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold
in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire
debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where b. Extrajudicial Foreclosure (Act 3135, as amended; Section 47, General Banking Law)
such rebate is proper. (5a)
ACT NO. 3135 - AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
Section 6. Deficiency judgment. — If upon the sale of any real property as provided in the next preceding section ANNEXED TO REAL-ESTATE MORTGAGES
there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render
judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable Sec. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and
to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the in case the place within said province in which the sale is to be made is subject to stipulation, such sale shall
judgment; otherwise; the plaintiff shall be entitled to execution at such time as the balance remaining becomes due
be made in said place or in the municipal building of the municipality in which the property or part thereof is
under the terms of the original contract, which time shall be stated in the judgment. (6a)
situated.
Section 7. Registration. — A certified copy of the final order of the court confirming the sale shall be registered in the
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three
registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled,
and a new one issued in the name of the purchaser. public places of the municipality or city where the property is situated, and if such property is worth more
Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks
certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the in a newspaper of general circulation in the municipality or city.
Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, It is now a well-settled rule that personal notice to the mortgagor in extrajudicial foreclosure proceedings
the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person is not necessary. 10 Section 3 of Act No. 3135 governing extrajudicial foreclosure of real estate
having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, mortgages, as amended by Act No. 4118, requires only the posting of the notice of sale in three public
may redeem the same at any time within the term of one year from and after the date of the sale; and such places and the publication of that notice in a newspaper of general circulation. Hence, the lack of personal
redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and
notice to the mortgagors, herein petitioners, is not a ground to set aside the foreclosure sale.
sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions
of this Act.
Neither can the supposed failure of respondent bank to comply with the posting requirement as provided
Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days under the aforesaid Section 3, under the factual ambiance and circumstances which obtained in this
after the purchaser was given possession, petition that the sale be set aside and the writ of possession case, be considered a sufficient ground for annulling the aforementioned sale.
cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was
not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in Furthermore, unlike the situation in previous cases 13 where the foreclosure sales were annulled by
accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered reason of failure to comply with the notice requirement under Section 3 of Act No. 3135, as amended,
Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor
what is allegedly lacking here is the posting of the notice in three public places, and not the publication
of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal
thereof in a newspaper of general circulation.
from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-
six; but the order of possession shall continue in effect during the pendency of the appeal.
We take judicial notice of the fact that newspaper publications have more far-reaching effects than
Sec. 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall posting on bulletin boards in public places. There is a greater probability that an announcement or notice
be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case published in a newspaper of general circulation, which is distributed nationwide, shall have a readership
the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it of more people than that posted in a public bulletin board, no matter how strategic its location may be,
being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the which caters only to a limited few. Hence, the publication of the notice of sale in the newspaper of
interest of one per centum per month provided for in section four hundred and sixty-five of the Code of Civil general circulation alone is more than sufficient compliance with the notice-posting requirement of the
Procedure. law. By such publication, a reasonably wide publicity had been effected such that those interested might
attend the public sale, and the purpose of the law had been thereby subserved.
Section 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or
extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation
iii. Sps. Suico v. PNB
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and Rule 68, Section 4 of the Rules of Court provides:
all the costs and expenses incurred by the bank or institution from the sale and custody of said property less SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale of the
the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the
extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due,
after the date of the confirmation of the auction sale and administer the same in accordance with law. Any the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the
petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this court, or if there be no such encumbrancers or there be a balance or residue after payment to them,
provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the
then to the mortgagor or his duly authorized agent, or to the person entitled to it.
court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint
of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold
pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as follows:
provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register (a) first, pay the costs
of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners (b) secondly, pay off the mortgage debt
of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their (c) thirdly, pay the junior encumbrancers, if any in the order of priority
redemption rights until their expiration. (78a)
(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it. 29
i. San Jose v. CA
Given that the Statement of Account from PNB, being the only existing documentary evidence to support
its claim, shows that petitioners’ loan obligations to PNB as of 30 October 1992 amounted to
The notice of Sheriff's Sale, in this case, did not state the correct number of the transfer certificate of ₱6,409,814.92, and considering that the amount of PNB’s bid is ₱8,511,000.00, there is clearly an excess
title of the property to be sold. This is a substantial and fatal error which resulted in invalidating in the bid price which PNB must return, together with the interest computed in accordance with the
the entire Notice. That the correct technical description appeared on the Notice does not constitute guidelines laid down by the court in Eastern Shipping Lines v. Court of Appeals
substantial compliance with the statutory requirements. The purpose of the publication of the Notice of
Sheriff's Sale is to inform all interested parties of the date, time and place of the foreclosure sale of the
iv. PNB v. CA
real property subject thereof. Logically, this not only requires that the correct date, time and place of
the foreclosure sale appear in the notice but also that any and all interested parties be able to determine
that what is about to be sold at the foreclosure sale is the real property in which they have an interest. Third. Respondent spouses were benefited rather than harmed by the substantially lower reappraised
value of their properties. As held in Velasquez v. Coronel: 26
. . . However, while in ordinary sales for reasons of equity a transaction may be invalidated on the
ii. Olizon v. CA ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the
courts to interfere, such does not follow when the law gives to the owner the right to redeem, as when But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the
a sale is made at public auction, upon the theory that the lesser the price the easier it is for the owner mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, "when
to effect the redemption. And so it was aptly said; "When there is the right to redeem, inadequacy of confirmed by an order of the court. ... shall operate to divest the rights of all the parties to the action
price should not be material, because the judgment debtor may reacquire the property or also sell his and to vest their rights in the purchaser." There then exists only what is known as the equity of
right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain
at the auction sale." 27 ownership of the property by paying the secured debt within the 90-day period after the judgment
becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.
Indeed, as pointed out by petitioner bank, respondents had several options. They could have participated
in the public bidding or exercised their right of redemption or sold such right to redeem or simply settled This is the mortgagor's equity (not right) of redemption which, as above stated, may be exercised by
their debt. However, they did none of these things despite due notice to them. Respondents are thus to him even beyond the 90-day period "from the date of service of the order,' and even after the foreclosure
blame for their predicament. Their claim of financial distress is not an excuse to evade their clear sale itself, provided it be before the order of confirmation of the sale. 25 After such order of confirmation,
obligation to the bank. 28 no redemption can be effected any longer.
v. Development Bank of the Philippines v. Zaragoza vii. Sps. Landrito v. CA
Apart from this consideration, it must be noted that a foreclosure of mortgage means the termination of The rule has been, and still is, that in real estate mortgage, when the principal obligation is not paid
all rights of the mortgagor in the property covered by the mortgage. It denotes the procedure adopted when due, the mortgagee has the right to foreclose on the mortgage and to have the mortgaged property
by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. seized and sold with the view of applying the proceeds thereof to the payment of the obligation.4
In judicial foreclosures, the "foreclosure" is not complete until the Sheriff's Certificate is executed,
acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure It appears from the evidence on record that despite due notice and publication of the same in a
proceedings to the vendee. 3 It is only when the foreclosure proceedings are completed and the newspaper of general circulation (Exhs. "5", "5-A" and "5-B", pp. 53-55, Record), [petitioners] did not
mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the bother to attend the foreclosure sale nor raise any question regarding the propriety of the sale. It was
property. This principle is applicable to extrajudicial foreclosures. Consequently, in the case at bar, prior only on November 9, 1994, or more than one year from the registration of the Sheriff’s Certificate of
to the completion of the foreclosure, the mortgagor is, therefore, liable for the interest on the Sale, that [petitioners] filed the instant complaint. Clearly, [petitioners] had slept on their rights and are
mortgage. 4 therefore guilty of laches, which is defined as the failure or neglect for an unreasonable or explained
length of time to do that which, by exercising due diligence, could or should have been done earlier,
vi. Limpin v. IAC failure of which gives rise to the presumption that the person possessed of the right or privilege has
abandoned or has declined to assert the same. (Words in bracket added.)
The equity of redemption is, to be sure, different from and should not be confused with the right of
redemption. 19 In a long line of cases5 , this Court has consistently ruled that the one-year redemption period should be
counted not from the date of foreclosure sale, but from the time the certificate of sale is registered with
the Register of Deeds. Here, it is not disputed that the sheriff’s certificate of sale was registered on 29
The right of redemption in relation to a mortgage-understood in the sense of a prerogative to re-acquire
October 1993.
mortgaged property after registration of the foreclosure sale- exists only in the case of
the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except
only where the mortgagee is the Philippine National Bank or a bank or banking institution. From the foregoing, it is clear as day that even the complaint filed by the petitioners with the trial court
on 09 November 1994 was instituted beyond the 1-year redemption period. In fact, petitioners no less
acknowledged that their complaint for annulment of extrajudicial foreclosure and auction sale was filed
Where a mortgage is foreclosed extra-judicially, Act 3135 grants to the mortgagor the right of
about eleven (11) days after the redemption period had already expired on 29 October 19947 . They
redemption within one (1) year from the registration of the sheriffs certificate of foreclosure sale. 20
merely harp on the alleged increase in the redemption price of the mortgaged property as the reason
for their failure to redeem the same. However, and as already pointed out herein, they chose not, despite
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The notice, to appear during the foreclosure proceedings.
law 21 declares that a judicial foreclosure sale, "when confirmed by an order of the court, ... shall operate
to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to
viii. Rayo v. Metrobank
such rights of redemption as may be allowed by law. 22 Such rights exceptionally "allowed by law" (i.e.,
even after confirmation by an order of the court) are those granted by the charter of the Philippine
National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). 23 These laws confer Second, in the deed of assignment, petitioner also acknowledged that the subject real properties were
on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to already sold at various extrajudicial foreclosure sales and bought by Metrobank. Clearly, petitioner
redeem the property sold on foreclosure-after confirmation by the court of the foreclosure sale-which recognized the prior existing right of Metrobank as the mortgagee-purchaser over the subject real
right may be exercised within a period of one (1) year, counted from the date of registration of the properties.21 Actual knowledge of a prior mortgage with Metrobank is equivalent to notice of
certificate of sale in the Registry of Property. registration22 in accordance with Article 212523 of the Civil Code. Conformably with Articles 131224 and
212625 of the Civil Code, a real right or lien in favor of Metrobank had already been established,
subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s)
of the land might be.26 As petitioner is not a party whose interest is adverse to that of Louisville, there
was no bar to the issuance of a writ of possession to Metrobank. It does not matter that petitioner was the issuance of the writ, since the proceeding is ex parte. 43 The recourse is available even before the
not specifically named in the writ of possession nor notified of such proceedings.1avvphi1 expiration of the redemption period provided by law and the Rules of Court.44
ix. China Banking Corporation v. Sps. Ordinario The purchaser, who has a right to possession that extends after the expiration of the redemption
period,45 becomes the absolute owner of the property when no redemption is made. Hence, at any time
Under Section 16 of Rule 39, a third-party claimant or a stranger to the foreclosure suit, like respondents following the consolidation of ownership and the issuance of a new transfer certificate of title in the name
herein, can opt to file a remedy known as terceria against the sheriff or officer effecting the writ by of the purchaser, he or she is even more entitled to possession of the property. 46
serving on him an affidavit of his title and a copy thereof upon the judgment creditor. By the terceria,
the officer shall not be bound to keep the property and could be answerable for damages. A third-party A party may petition for the setting aside of a foreclosure sale and for the cancellation of a writ of
claimant may also resort to an independent "separate action," the object of which is the recovery of possession in the same proceedings where the writ of possession was requested. In petitioners’ case,
ownership or possession of the property seized by the sheriff, as well as damages arising from wrongful the filing of the Petition is no longer necessary because the pendency of Civil Case No. 01-6219 (which
seizure and detention of the property despite the third-party claim. If a "separate action" is the recourse, was consolidated with the present case) already challenged the foreclosure sale.
the third-party claimant must institute in a forum of competent jurisdiction an action, distinct and
separate from the action in which the judgment is being enforced, even before or without need of filing
2. EFFECT OF FORECLOSURE ON SECOND MORTGAGES
a claim in the court that issued the writ. Both remedies are cumulative and may be availed of
independently of or separately from the other. Availment of the terceria is not a condition sine qua
non to the institution of a "separate action."9 i. Tizon v. Valdez
From whatever angle the matter be viewed we can discover no sound reason for holding that either the
x. Roxas v. Buan
suing out of the attachment or the subsequent sale of the property under execution had the effect of
destroying the prior mortgage lien, that is, as between the parties to this lawsuit. What Valdez may have
In the extrajudicial foreclosure of real estate mortgages, possession of the property may be awarded to obtained by purchasing at the execution sale, and whether he obtained anything at all, is a different
the purchaser at the foreclosure sale during the pendency of the period of redemption under the terms question, and one that is really not necessary to be here decided. It is enough to say that the first
provided in Sec. 6 of Act 3135, as amended (An Act to Regulate the Sale of Property Under Special mortgage in favor of Valdez continues to subsist unaffected by what happened as a result of the civil
Powers Inserted In or Annexed to Real Estate Mortgages), or after the lapse of the redemption period, action. If anybody had been misled to his prejudice as a consequence of the course pursued by Valdez,
without need of a separate and independent action. this would have constituted a ground of estoppel; but nothing of the sort appears.
This rule is, however, not without exception. Under Sec. 35, Rule 39 of the Revised Rules of Court, which
We have before us then the simple situation of a first mortgagee in possession attacked by the second
was made applicable to the extrajudicial foreclosure of real estate mortgages by Sec. 6 Act No. 3135,
mortgagee after foreclosure of the second mortgage; and a little reflection will show, we think, that the
the possession of the mortgaged property may be awarded to a purchaser in extrajudicial foreclosures
second mortgagee cannot prevail. After a first mortgage is executed there remains in the mortgagor a
"unless a third party is actually holding the property adversely to the judgment debtor."
mere right of redemption, and only this right passes to the second mortgagee by virtue of the second
mortgage. As between the first and second mortgagees, therefore, the second mortgagee has at most
Thus, in the instant case, considering that the property had already been sold at public auction pursuant only the right to redeem, and even when the second mortgagee goes through the formality of an
to an extrajudicial foreclosure, the only interest that may be transferred by Valentin to Roxas is the right extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the first
to redeem it within the period prescribed by law. Roxas is therefore the successor-in-interest of Valentin, mortgagee.
to whom the latter had conveyed his interest in the property for the purpose of redemption.
The remedy of the plaintiff in this case must therefore be limited to the right to redeem by paying off
It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he the debt secured by the first mortgage. But the action is not directed to this end, and in the controversy
merely stepped into the shoes of Valentin, being the latter's successor-in-interest. over the title the purchaser at the foreclosure sale under the second mortgage must fail. Valdez, as first
mortgagee, even supposing that he acquired nothing by his purchase at his own execution sale, is yet
xi. Sps. Samson v. Rivera entitled to possession for the purpose at least of foreclosing his first mortgage (Bachrach Motor Co., vs.
Summers, 42 Phil., 3), the lien of which, as we have already demonstrated, still subsists; and since
Valdez is entitled to possession Tizon cannot maintain an action to recover the property.
Under Section 7 of Act 3135, the purchaser in a foreclosure sale may apply for a writ of possession
during the redemption period by filing for that purpose an ex parte motion under oath, in the
corresponding registration or cadastral proceeding in the case of a property with torrens title. Upon the G. CRIMINAL VIOLATIONS IN MORTGAGE (Art. 316(1)(2), RPC)
filing of such motion and the approval of the corresponding bond, the court is expressly directed to issue
the writ.39 Article 316. Other forms of swindling. - The penalty of arresto mayor in its minimum and medium
period and a fine of not less than the value of the damage caused and not more than three times such
This Court has consistently held that the duty of the trial court to grant a writ of possession is value, shall be imposed upon:
ministerial.40 Such writ issues as a matter of course upon the filing of the proper motion and the approval 1. Any person who, pretending to be owner of any real property, shall convey, sell,
of the corresponding bond. No discretion is left to the trial court. 41 Any question regarding the regularity encumber or mortgage the same.
and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a 2. Any person, who, knowing that real property is encumbered, shall dispose of the same,
subsequent proceeding as outlined in Section 8 of Act 3135. 42 Such question cannot be raised to oppose although such encumbrance be not recorded.
VI. ANTICHRESIS (2132-2139) Article 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. (n)
A. NATURE
Article 2136. The debtor cannot reacquire the enjoyment of the immovable without first
1. Definition having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by the
Article 2132. By the contract of antichresis the creditor acquires the right to receive the preceding article, may always compel the debtor to enter again upon the enjoyment of the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of the property, except when there is a stipulation to the contrary. (1883)
interest, if owing, and thereafter to the principal of his credit.
Article 2137. The creditor does not acquire the ownership of the real estate for non-
2. Characteristics
payment of the debt within the period agreed upon.
Every stipulation to the contrary shall be void. But the creditor may petition the court for
Article 2085. The following requisites are essential to the contracts of pledge and the payment of the debt or the sale of the real property. In this case, the Rules of Court on
mortgage: the foreclosure of mortgages shall apply. (1884a)
(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 C. OBLIGATIONS OF THE PARTIES
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their Article 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay
property, and in the absence thereof, that they be legally authorized for the purpose. the taxes and charges upon the estate.
Third persons who are not parties to the principal obligation may secure the latter by He is also bound to bear the expenses necessary for its preservation and repair.
pledging or mortgaging their own property. (1857) The sums spent for the purposes stated in this article shall be deducted from the fruits.
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided Article 2136. The debtor cannot reacquire the enjoyment of the immovable without first
among the successors in interest of the debtor or of the creditor. having totally paid what he owes the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate But the latter, in order to exempt himself from the obligations imposed upon him by the
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. preceding article, may always compel the debtor to enter again upon the enjoyment of the
Neither can the creditor's heir who received his share of the debt return the pledge or cancel property, except when there is a stipulation to the contrary. (1883)
the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage
as the portion of the debt for which each thing is specially answerable is satisfied. (1860)
Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be
they pure or subject to a suspensive or resolutory condition. (1861)
Article 2132. By the contract of antichresis the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter to the principal of his credit. (1881)
Article 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. (n)
B. RIGHTS OF THE CREDITOR
Article 2132. By the contract of antichresis the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter to the principal of his credit. (1881)

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I.

2. Characteristics (Arts. 1933-1934) iii. DBP v. COA

POINT OF DISTINCTION AND

6. Bailee’s Right to Retain the Thing (Arts. 1944, 1951)

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated

i. Guingona v. City Fiscal of Manila

– Stipulated (Art. 2209)

VOLUNTARY DEPOSIT COMMODATUM

VOLUNTARY DEPOSIT LEASE

Article 1964. A deposit may be constituted judicially or extrajudicially.

a. Voluntary (Art. 1968) – result of voluntary agreement (e.g. Escrow Agreement)

– Rules on Deposit with a Third Person (Art. 1973)

iii. Aglibot v. Santia ii. Government of the Philippines v. Tizon

i. NASSCO v. Torrento iii. Inciong v. CA

c. Pactum Commissorium (Art. 2088): an agreement whereby the creditor automatically

Requisites: 2. Mortgagor must be the Absolute Owner

ARTICLE 1602. The contract shall be presumed to be an equitable mortgage, in any of

ii. Bank of America v. America Realty Corp.

v. Development Bank of the Philippines v. Zaragoza vii. Sps. Landrito v. CA

B. RIGHTS OF THE CREDITOR

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