Credit and Transpo Memory Aid

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San Beda College of Law182

M EMORY AID IN C IVIL LAW

CREDIT TRANSACTIONS

All transactions involving thepurchase or loan of goods, services,or money in the present with apromise to pay or deliver in thefuture

Contracts of securityTypes:1. Secured transactions or contracts of

real security - supported by acollateral or an encumbrance of property

2. Unsecured transactions or contractsof personal security - supported onlyby a promise or personalcommitment of another such as aguarantor or surety

SecuritySomething given,

deposited, or serving as a means toensure fulfilment or enforcement of an obligation or of protecting someinterest in property

Types of Securitya. personal when an individual

becomes surety or guarantor b. real or property when a

mortgage, pledge, antichresis,charge or lien or other deviceused to have property held, outof which the person to be madesecure can be compensated forloss

BailmentThe delivery of property

of one person to another in trust for

a specific purpose, with a contract,express or implied, that the trustshall be faithfully executed and theproperty returned or duly accountedfor when the special purpose isaccomplished or kept until the bailorclaims it.

Parties:1. bailor - the giver; one who delivers

property

2. bailee- the recipient; one whoreceives the custody or possession of the thing thus delivered

LOAN (Articles 1933 1961)

A contract wherein oneof the parties delivers to another,either something not consumable sothat the latter may use the same fora certain time and return it ormoney or other consumable thing,upon the condition that the sameamount of the same kind and qualityshall be paid. (Art 1933)

Characteristics:1. Real Contract delivery of the thing loaned is necessary for theperfection of the contractNOTE: An accepted promise to makea future loan is a consensualcontract, and therefore binding uponthe parties but it is only afterdelivery, will the real contract of loan arise. (Art 1934)

2. Unilateral Contract - once thesubject matter has been delivered,it creates obligations on the part of only one of the parties (i.e.borrower).

Kinds:1. Commodatum when the bailor(lender) delivers to the bailee(borrower) a non-consumable thingso that the latter may use it for acertain time and return the identicalthing.

Kinds of commodatum:a. Ordinary Commodatum use bythe borrower of the thing is for acertain period of time

b. Precarium - one whereby thebailor may demand the thingloaned at will and it exists in thefollowing cases:

i. neither the duration norpurpose of the contract isstipulated

C IVIL LAW COMMITTEE

CHAIRPERSON : Romuald Padilla

ASST .C HAIRPERSON : Vida Bocar, Joyce Vidad

EDP : Alnaiza Hassiman, Dorothy Gayon SUBJECT HEADS : Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma.RhodoraFerrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease),

John StephenQuiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), AnthonyPurganan(LTD),Ma. Ricasion Tugadi (Conflicts of Law)

CREDIT TRANSACTIONS


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ii. the use of the thing ismerely tolerated by theowner

2. Simple loan or mutuum where thelender delivers to the borrowermoney or other consumable thingupon the condition that the lattershall pay the same amount of thesame kind and quality.

Commodatum MutuumKey: COPS-LOTR

1. ObjectNon-consumable Consumable

2. CauseGratuitous May or may not be

gratuitous3. Purpose

Use or temporarypossession

Consumption

4. Subject Matter Real or personal

propertyOnly personalproperty

5. Ownership of the thingRetained by the

bailorPasses to the debtor

6. Thing to be returned Exact thing loaned Equal amount of the

same kind andquality

7. Who bears risk of lossBailor Debtor

8. When to returnIn case of urgentneed, even beforethe expiration of theterm

Only after theexpiration of theterm

Loan CreditDelivery by one party

and the receipt of other party of agiven sum of moneyor other consumablething upon anagreement, expressor implied, to repaythe same.

Ability of a person to

borrow money orthings by virtue of the trust orconfidence reposedby the lender that hewill pay what hepromised.

Loan Credit1. Interest taken at Interest is taken in

the expiration of thecredit

advance

2. Always on adouble name paper(two signaturesappear with bothparties held liablefor payment)

Always on a singlename paper ( i.e.promissory note withno indorse-mentother than themaker)

COMMODATUM (Articles 1935 1952)Nature:

1. PURPOSE: Bailee in commodatumacquires the temporary use of thething but not its fruits (unlessstipulated as an incidental part of the contract).(Art 1935)

Use must be temporary,otherwise the contract may be adeposit.

2. CAUSE: Essentially gratuitous; itceases to be a commodatum if anycompensation is to be paid by theborrower who acquires the use, insuch case there arises a leasecontract.

Similar to a donation in that itconfers a benefit to therecipient. The presumption is

that the bailor has loaned thething for having no needtherefor.

3. SUBJECT MATTER: Generally non-consumable whether real or personalbut if the consumable goods are notfor consumption as when they aremerely for exhibition, consumablegoods may be the subject of thecommodatum. (Art 1936)

4. Bailor need not be the owner of the

thing owned (Art. 1938) since by theloan, ownership does not pass to theborrower.

A mere lessee or usufructuarymay lend but the borrower orbailee himself may not lend norlease the thing loaned to him toa third person (Art 1932[2])

5. Purely Personal (Art 1939):







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Death of either party terminatesthe contract unless bystipulation, the commodatum istransmitted to the heirs of either

or both parties.Bailee can neither lend nor leasethe object of the contract to athird person.

NOTE:Use of the thing loanedmay extend to members of thebailees household except:

a. contrary stipulation;b. nature of the thing

forbids such use

Obligations of the Bailee: (Arts 1941 1945)

1. To pay for the ordinaryexpenses for the use andpreservation of the thing loaned.(Art 1941)2. To be liable for the loss of thething even if it should be through afortuitous event in the followingcases: ( KLAS D)

a. when he keeps it longerthan the period stipulated, orafter the accomplishment of itsuse b. when he lends or leasesit to third persons who are notmembers of his householdc. when the thing loanedhas been delivered withappraisal of its valued. when, being able tosave either of the thingborrowed or his own things, hechose to save the latter; ore. when the baileedevoted the thing for anypurpose different from that forwhich it has been loaned (Art1942)

3. To be liable for the deterioration of thing loaned (a) if expresslystipulated; (b) if guilty of fault ornegligence; or (c) if he devotes thething to any purpose different fromthat for which it has been loaned

4. To pay for extraordinary expensesarising from the actual use of thething by the bailee, which shall beborne equally by both the bailor and

the bailee, even though the baileeacted without fault, unless there is astipulation to the contrary (Art 1949par 2)

5. To return the thing loanedThe bailee has no right to retainthe thing loaned as security forclaims he has against the bailoreven for extraordinary expensesexcept for a claim for damagessuffered because of the flaws of the thing loaned.

NOTES:However, the bailees rightextends no further thanretention of the thing loaneduntil he is reimbursed forthe damages suffered byhim.He cannot lawfully sell thething to satisfy such damageswithout courts approval.In case there are two ormore bailees, theirobligation shall be solidary.

Obligations of the bailor (Art 1946 Art1952):

1. To respect the duration of theloan GENERAL RULE: Allow the baileethe use of the thing loaned for theduration of the period stipulated oruntil the accomplishment of thepurpose for which the commodatumwas instituted. EXCEPTIONS:

a. In case of urgent need inwhich case bailee may demandits return or temporary use;b. The bailor may demandimmediate return of the thing if the bailee commits any act of ingratitude specified in Art. 765 .

2. To refund to the baileeextraordinary expenses for thepreservation of the thing loaned,







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provided the bailee brings the sameto the knowledge of the bailorbefore incurring them, except whenthey are so urgent that the reply to

the notification cannot be awaitedwithout danger.

3. To be liable to the bailee fordamages for known hidden flaws.

Requisites:a. There is flaw or defect inthe thing loaned;b. The flaw or defect ishidden;c. The bailor is awarethereof;d. He does not advise thebailee of the same; ande. The bailee suffers damagesby reason of said flaw or defect

NOTES:If the above requisites concur,the bailee has the right of retention for damages.The bailor cannot exempt

himself from the payment of expenses or damages byabandoning the thing to thebailee.

SIMPLE LOAN OR MUTUUM (Art 1953 1961)

A contract whereby one partydelivers to another, money or otherconsumable thing with theunderstanding that the same amountof the same kind and quality shall bepaid. (Art. 1953)

NOTES:The mere issuance of the checksdoes not result in the perfection of the contract of loan. The Civil Codeprovides that the delivery of bills of exchange and mercantiledocuments, such as checks, shallproduce the effect of payment onlywhen they have been encashed(Gerales vs. CA 218 SCRA 638 ). It is

only after the checks have producedthe effect of payment that thecontract of loan may be deemedperfected.

The obligation is to pay and not toreturn because the consumption of the thing loaned is the distinguishingcharacter of the contract of mutuumfrom that of commodatum.No estafa is committed by a personwho refuses to pay his debt or deniesits existence.

Simple Loan/Mutuum Rent

1. Delivery of moneyor some consumablething with a promiseto pay an equivalentof the same kind andquality

Delivery of some non-consumable thing inorder that the othermay use it during acertain period andreturn it to theformer.

2. There is a transferof ownership of thething delivered

There is no transferof ownership of thething delivered

3. Relationshipbetween the partiesis that of obligor-obligee

Relationship is thatof a landlord andtenant

4. Creditor receivespayment for his loan

Owner of theproperty rentedreceivescompensation orprice either inmoney, provisions,chattels, or labor

from the occupantthereof in return forits use (Tolentino vsGonzales, 50 Phil 558

1927)

Loan Sale

1. Realcontract

Consensual contract

2. Ge Bilateral and







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nerallyunilateralbecauseonlyborrowerhasobligations

reciprocal

NOTE: If the property is sold, but thereal intent is only to give the object assecurity for a debt as when the priceis comparatively small there really is acontract of loan with an equitablemortgage.

Commodatum/Mutuum

Barter

1. Subject matter ismoney or fungiblethings

Subject matter isnon-fungible, (nonconsumable) things

2. In commodatum,the bailee is boundto return theidentical thingborrowed when thetime has expired orpurpose served

The thing withequivalent value isgiven in return forwhat has beenreceived

3. Mutuum may begratuitous andcommodatum isalways gratuitous

Onerous, actually amutual sale

Form of Payment (Art 1955):

1. If the thing loaned is money -payment must be made in thecurrency stipulated, if it is possible;otherwise it is payable in the

currency which is legal tender in thePhilippines and in case of extraordinary inflation or deflation,the basisi of payment shall be thevalue of the currency at the time of the creation of the obligation2. If what was loaned is a fungiblething other than money - theborrower is under obligation to paythe lender another thing of the samekind, quality and quantity. In case itis impossible to do so, the borrowershall pay its value at the time of the

perfection of the loan.

InterestThe compensation allowed by law orfixed by the parties for the loan orforbearance of money, goods orcreditsRequisites for Demandability: (ELI)1. must be e xpressly stipulated

Exceptions:a. indemnity for damagesb. interest accruing from

unpaid interest2. must be lawful3. must be in writing

Compound Interest GENERAL RULE: Unpaid interest shallnot earn interest. EXCEPTIONS:

1. when judicially demanded2. when there is an express

stipulation (must be in writing inview of Art. 1956)

Guidelines for the application of proper interest rates1. If there is stipulation: that rateshall be applied

2. The following are the rules of thumbfor the application/imposition of interest rates:

a) When an obligation,regardless of its source, i.e.,law, contracts, quasi-contracts,delicts or quasi-delicts is







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breached, the contravenor canbe held liable for damages.b) With regardparticularly to an award of

interest in the concept of actualand compensatory damages, therate of interest, as well as theaccrual thereof, is imposed, asfollows:i. When the obligation

breached consists of payment of a sum of money(loan or forbearance of money) , the interest shall bethat which is stipulated oragreed upon by the parties.In absence of an agreement,

the rate shall be the legalrate (i.e. 12% per annum)computed from default.NOTE: The interest due shallitself earn legal interestfrom the time it is judiciallydemanded

ii. In other cases, the rate of interest shall be six percent(6%) per annum.NOTE: No interest, however,shall be adjudged onunliquidated claims ordamages except when oruntil the demand can beestablished with reasonablecertainty. When the demandcannot be established, theinterest shall begin to runonly from the date of thejudgment of the court ismade.

iii. When the judgment of thecourt awarding a sum of money becomes final and executory , the rate of legalinterest, whether the casefalls under paragraph i or iiabove, shall be 12% perannum from such finalityuntil its satisfaction, thisinterim period being deemedto be by then an equivalentto a forbearance of credit.(Eastern Shipping Lines vs.CA, July 12, 1994 )

NOTES:Central Bank Circular No. 416 fixingthe rate of interest at 12% perannum deals with loans, forbearanceof any money, goods or credits andjudgments involving such loans, orforbearance in the absence of express agreement to such rateInterest as indemnity for damages ispayable only in case of default ornon-performance of the contract. Asthey are distinct claims, they may bedemanded separately. (SentinelInsurance Co., Inc. vs CA, 182 SCRA517)Central Bank Circular No. 905 (Dec.

10, 1982) removed the Usury Lawceiling on interest rates for securedand unsecured loans, regardless of maturity.

Validity of unconscionable interest ratein a loan

Supreme Court in Sps. Solangonvs. Jose Salazar, G.R. No. 125944, June29, 2001 , said that since the usury lawhad been repealed by CB Cir. No. 905there is no more maximum rate of interest and the rate will just depend on

the mutual agreement of the parties(citing Lim Law vs. Olympic Sawmill Co.,129 SCRA 439 ). But the Supreme Courtsaid that nothing in said circular grantslenders carta blanche authority to raiseinterest rates to level which will eitherenslave their borrowers or lead to ahemorrhaging of their assets (citing

Almeda vs. CA, 256 SCRS 292 ). In Medelvs. CA, 299 SCRA 481 , it was ruled thatwhile stipulated interest of 5.5% permonth on a loan is usurious pursuant toCB Circular No. 905, the same must beequitably reduced for being iniquitous,unconscionable and exorbitant. It iscontrary to morals, ( contra bonosmores ). It was reduced to 12% perannum in consonant with justice and fairplay.

DEPOSIT (Articles 1962 2009)

A contract constituted from themoment a person receives a thing







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belonging to another, with theobligation of safely keeping it and of returning the same.

Characteristics:1. Real Contract - contract isperfected by the delivery of thesubject matter.

2. Unilateral (gratutitous deposit) -only the depositary has anobligation.

3. Bilateral (onerous deposit) -gives rise to obligations on thepart of both the depositary anddepositor.

Deposit Mutuum1. Purpose

Principal purpose issafekeeping orcustody

Principal purpose isconsumption

2. When to ReturnDepositor candemand the return of the subject matter atwill

The lender must waituntil the expirationof the period grantedto the debtor

3. Subject Matter Subject matter maybe movable orimmovable property

Subject matter isonly money or otherfungible thing

4. RelationshipRelationship is thatof lender (creditor)and borrower(debtor).

Relationship is thatof depositor anddepositary.

5. CompensationThere can becompensation of credits.

NO compensation of things deposited witheach other (exceptby mutualagreement).

Deposit Commodatum

1. Purpose isSafekeeping

1. Purpose is thetransfer of the use

2. May be gratuitous 2. Essentially andalways gratuitous

3. Movable/corporealthings only in case of extrajudicial deposit

3. Both movable andimmovable may bethe object

Kinds of Deposit:

1. Judicial (Sequestration) takes placewhen an attachment or seizure of property in litigation is ordered.

2. Extra-judiciala. Voluntary one wherein thedelivery is made by the will of the depositor or by two or morepersons each of whom believeshimself entitled to the thingdeposited. (Arts 1968 1995)

b. Necessary one made incompliance with a legalobligation, or on the occasion of any calamity, or by travellers inhotels and inns (Arts 1996 -2004), or by travellers with

common carriers (Art 1734 1735).

NOTE: The chief differencebetween a voluntary deposit and anecessary deposit is that in theformer, the depositor has acomplete freedom in choosing thedepositary, whereas in the latter,there is lack of free choice in thedepositor.

Judicial Extra-judicial1. Creation

Will of the court Will of the partiesor contract

2. PurposeSecurity or to insurethe right of a partyto property or torecover in case of favorable judgment

Custody andsafekeeping

3. Subject Matter Movables orimmovables,but generallyimmovables

Movables only

4. CauseAlways onerous May be compen-

sated or not, butgenerally gratuitous

5. When must the thing be returned Upon order of thecourt or whenlitigation is ended

Upon demand of depositor

6. In whose behalf it is held







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Person who has aright

Depositor or thirdperson designated

GENERAL RULE:Contract of deposit is

gratuitous (Art 1965) EXCEPTIONS:

1. when there is contrarystipulation

2. depositary is engaged in businessof storing goods

3. property saved from destructionwithout knowledge of the owner

NOTES:Article 1966 does not embraceincorporeal property, such as rightsand actions, for it follows the personof the owner, wherever he goes.A contract for the rent of safety deposit boxes is not an ordinarycontract of lease of things but aspecial kind of deposit ; hence, it isnot to be strictly governed by theprovisions on deposit. The relationbetween a bank and its customer isthat of a bailor and bailee. (CA Agrovs CA, 219 SCRA 426)

Obligations of the Depositary (Art 1972

1991):1. To keep the thing safely (Art1972)

Exercise over the thingdeposited the same diligence ashe would exercise over hisproperty

2. To return the thing (Art 1972)Person to whom the thing mustbe returned:

a. Depositor, to his heirs andsuccessors, or the person whomay have been designated in thecontract

b. If the depositary is capacitated -he is subject to all theobligations of a depositarywhether or not the depositor iscapacitated. If the depositor isincapacitated, the depositarymust return the property to thelegal representative of theincapacitated or to the depositor

himself if he should acquirecapacity (Art 1970).

c. If the depositor is capacitatedand the depositary is

incapacitated - the latter doesnot incur the obligation of adepositary but he is liable:

i..to return the thingdeposited while still in hispossession;

ii.to pay the depositor theamount which he may havebenefited himself with thething or its price subject tothe right of any third personwho acquired the thing ingood faith (Art 1971)

Time of return:a . Upon demand even though aspecified period or time for suchreturn may have been fixedexcept when the thing isjudicially attached while in thedepositarys possession or shouldhe have been notified of theopposition of a third person tothe return or the removal of thething deposited. (Art 1998)b. If deposit gratuitous , thedepositary may return the thingdeposited notwithstanding that aperiod has been fixed for thedeposit if justifiable reasonsexists for its return.c. If the deposit is for avaluable consideration , thedepositary has no right to returnthe thing deposited before theexpiration of the timedesignated even if he shouldsuffer inconvenience as aconsequence.(Art 1989)

What to return: product,accessories, and accessions of the thing deposited (Art 1983)

3. Not to deposit the thing with athird person unless authorized byexpress stipulation (Art 1973)

The depositor is liable for theloss of the thing deposited underArticle 1973 if:







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a. hetransfers the deposit with a thirdperson without authorityalthough there is no negligence

on his part and the third person;b. hedeposits the thing with a thirdperson who is manifestly carelessor unfit although authorizedeven in the absence of negligence; orc. the thingis lost through the negligence of his employees whether the latterare manifestly careless or not.

4. If the thing deposited shouldearn interest (Art 1975):

a. to collect interest and thecapital itself as it fall dueb. to take steps to preserveits value and rightscorresponding to it

5.Not to commingle things depositedif so stipulated (Art 1976)6. Not to make use of the thingdeposited unless authorized (Art1977) GENERAL RULE: Deposit is forsafekeeping of the subject matterand not for use. The unauthorizeduse by the depositary would makehim liable for damages. EXCEPTIONS:1. When the preservation of the

thing deposited requires its use2. When authorized by the

depositor

NOTE: The permission to use is NOTpresumed except when such use isnecessary for the preservation of thething deposited.

Effect if permission to use is given(Art 1978):

1. If thing deposited isnon-consumable, the contractloses the character of a depositand acquires that of acommodatum despite the factthat the parties may havedenominated it as a deposit,unless safekeeping is still theprincipal purpose.

2. If thing deposited consists of money/consumable things, thecontract is converted into asimple loan or mutuum unless

safekeeping is still the principalpurpose in which case it is calledan irregular deposit. Example:bank deposits are irregular deposits in nature but governedby law on loans.

7. When the thing deposited isdelivered sealed and closed :

a. to return the thingdeposited in the same conditionb. to pay for damages shouldthe seal or lock be brokenthrough his fault, which is

presumed unless provedotherwisec. to keep the secret of thedeposit when the seal or lock isbroken with or without his fault(Art 1981)NOTE: The depositary isauthorized to open the thingdeposited which is closed andsealed when (Art 1982):

i. there is presumedauthority (i.e. when the keyhas been delivered to him orthe instructions of thedepositor cannot be donewithout opening it)ii. necessity

8. To change the way of thedeposit if under the circumstances,the depositary may reasonablypresume that the depositor wouldconsent to the change if he knew of the facts of the situation, provided,that the former notifies thedepositor thereof and wait for hisdecision, unless delay would causedanger9. To pay interest on sumsconverted to personal use if thedeposit consists of money (Art 1983)

10. To be liable for loss throughfortuitous event (SUDA): (Art 1979):

if stipulated b. if he uses the thingwithout the depositor'spermissionc. if he delays its return







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d. if he a llows others to useit, even though he himself mayhave been authorized to use thesame

NOTES:Fixed, savings, and current depositsof money in banks and similarinstitutions shall be governed by theprovisions concerning simple loan.(Art 1980)The general rule is that a bank cancompensate or set off the deposit inits hands for the payment of anyindebtedness to it on the part of thedepositor. In true deposit,compensation is not allowed.

Irregular deposit Mutuum

1. The consumablething deposited maybe demanded at willby the depositor

1. Lender is boundby the provisions of the contract andcannot demandrestitution until thetime for payment, asprovided in thecontract, has arisen

2. The only benefit is

that which accruesto the depositor

2. Essential cause for

the transaction is thenecessity of theborrower

3. The irregulardepositor has apreference overother creditors withrespect to the thingdeposited

3. Common creditorsenjoy no preferencein the distribution of the debtorsproperty

Rule when there are two or moredepositors (Art 1985):

1. If thing deposited is divisibleand depositors are not solidary :Each depositor can demand only hisproportionate share thereto.2. If obligation is solidary or if thing is not divisible : Rules on activesolidarity shall apply, i.e. each oneof the solidary depositors may dowhatever may be useful to theothers but not anything which maybe prejudicial to the latter, (Art.

1212) and the depositary may returnthe thing to anyone of the solidarydepositors unless a demand, judicialor extrajudicial, for its return has

been made by one of them in whichcase, delivery should be made to him(Art. 1214).3. Return to one of depositorsstipulated . The depositary is boundto return it only to the persondesignated although he has not madeany demand for its return.

NOTES:The depositary may retain the thingin pledge until full payment of whatmay be due him by reason of thedeposit (Art 1994).The depositors heir who in goodfaith may have sold the thing whichhe did not know was deposited, shallonly be bound to return the price hemay have received or to assign hisright of action against the buyer incase the price has not been paid him(Art 1991).

Obligations of the Depositor (Art 1992 1995):

1. To pay expenses for preservationa. If the deposit is gratuitous , thedepositor is obliged toreimburse the depositary forexpenses incurred for thepreservation of the thingdeposited (Art 1992)

b. If the deposit is for valuableconsideration , expenses forpreservation are borne by thedepositary unless there is acontrary stipulation

2. To pay loses incurred by the

depositary due to the character of the thing deposited

GENERAL RULE: The depositor shallreimburse the depositary for any lossarising from the character of the thingdeposited. EXCEPTIONS:

1. at the time of the deposit, thedepositor was not aware of thedangerous character of the thing







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a. Single - one constituted solely toguarantee or secureperformance by the debtor of the principal obligation.

b. Double or sub-guaranty - oneconstituted to secure thefulfilment by the guarantor of aprior guaranty.

5. As to Scope and Extenta. Definite - the guaranty is limited

to the principal obligation only,or to a specific portion thereof.

b. Indefinite or simple - one whichnot only includes the principalobligation but also all itsaccessories including judicialcosts

SURETYSHIP

A contract whereby a person (surety)binds himself solidarily with theprincipal debtorA relation which exists where oneperson (principal) has undertaken anobligation and another person(surety) is also under a direct andprimary obligation or other duty tothe obligee, who is entitled to butone performance, and as betweenthe two who are bound, the secondrather than the first should perform( Agro Conglomerates, Inc. vs. CA,348 SCRA 450 )

NOTES: The reference in Article 2047 tosolidary obligations does not meanthat suretyship is withdrawn fromthe applicable provisions governingguaranty. A surety is almost thesame as a solidary debtor, exceptthat he himself is a principal debtor.

In suretyship, there is but onecontract, and the surety is bound bythe same agreement which binds theprincipal. A surety is usually boundwith the principal by the sameinstrument, executed at the sametime and upon the sameconsideration ( Palmares vs CA, 288SCRA 422)It is not for the obligee to see to itthat the principal debtor pays the

debt or fulfill the contract, but forthe surety to see to it that theprincipal debtor pays or performs(Paramount Insurance Corp vs CA,

310 SCRA 377 )

Nature of Suretys undertaking:1. Liability is contractual and

accessory but directNOTE: He directly, primarily andequally binds himself with theprincipal as original promisor,although he possesses no direct orpersonal interest over the lattersobligation, nor does he receive anybenefits therefrom. (PNB vs CA, 198SCRA 767)

2. Liability limited by the terms of thecontract.NOTE: It cannot be extended byimplication beyond the terms of thecontract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principaldebtor is held liable.NOTES:

The creditor may sue separatelyor together the principal debtorand the surety. Where there areseveral sureties, the obligee mayproceed against any one of them.In the absence of collusion, thesurety is bound by a judgmentagainst the principal eventhough he was not a party to theproceedings. The nature of itsundertaking makes it privy to allproceedings against its principal(Finman General AssuranceCorp. vs. Salik, 188 SCRA 740 )

4. Surety is not entitled to the benefit

of exhaustionNOTE: He assumes a solidary liabilityfor the fulfilment of the principalobligation ( Towers Assurance Corpvs. Ororama Supermart, 80 SCRA262 ) as an original promissory anddebtor from the beginning.

5. Undertaking is to creditor and notto debtor.NOTE: The surety makes nocovenant or agreement with the







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notice of such acceptance bythe creditor is given to, oracquired by, the guarantor,or until he has notice or

knowledge that the creditorhas performed the conditionand intends to act upon theguaranty.But in any case, the creditoris not precluded fromwaiving the requirement of notice.

The consideration of theguaranty is the same as theconsideration of the principalobligation.

The creditor may proceedagainst the guarantor althoughhe has no right of action againstthe principal debtor.

7. Not presumed. It mustbe expressed and reduced in writing.NOTE: A power of attorney to loanmoney does not authorize the agentto make the principal liable as asurety for the payment of the debtof a third person. ( BPI vs. Coster, 47 Phil. 594 )8. Falls under the Statute

of Frauds since it is a specialpromise to answer for the debt,default or miscarriage of another.9. Strictly interpretedagainst the creditor and in favor of the guarantor/surety and is not to beextended beyond its terms orspecified limits. ( Magdalena Estates,Inc. vs Rodriguez, 18 SCRA 967 ) Therule of strictissimi juris commonlypertains to an accommodation suretybecause the latter acts withoutmotive of pecuniary gain and hence,should be protected against unjustpecuniary impoverishment byimposing on the principal, dutiesakin to those of a fiduciary.

NOTES: The rule will apply only after ithas been definitely ascertainedthat the contract is one of suretyship or guaranty. It cannotbe used as an aid in determining

whether a partys undertaking isthat of a surety or guarantor.(Palmares vs CA, 288 SCRA 292 )It does not apply in case of compensated sureties.

10. It is a contract whichrequires that the guarantor must bea person distinct form the debtorbecause a person cannot be the

personal guarantor of himself.NOTE: However, in a real guaranty,like pledge and mortgage, a personmay guarantee his own obligationwith his personal or real properties.

Guaranty Suretyship

1. Liability dependsupon an independentagreement to pay theobligation if primarydebtor fails to do so

1. Surety assumesliability as regularparty to theundertaking

2. Collateral under-taking

2. Surety is anoriginal promisor

3. Guarantor issecondarily liable

3. Surety isprimarily liable

4. Guarantor bindshimself to pay if the principalCANNOT PAY

4. Surety undertakesto pay if the principalDOES NOT PAY

5. Insurer of solvency of debtor

5. Insurer of thedebt

6. Guarantor canavail of the benefitof excussion anddivision in casecreditor proceedsagainst him

6. Surety cannotavail of the benefit of excussion and division

Indorsement Guaranty

1. Primarily of transfer

1. Contract of security

2. Unless the note ispromptly presentedfor payment atmaturity and duenotice of dishonorgiven to the indorserwithin a reasonabletime he will be

2. Failure in either orboth of theseparticulars does notgenerally work as anabsolute discharge of a guarantorsliability, but his isdischarged only to







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discharged abso-lutely from allliability thereon,whether he hassuffered any actualdamage or not

the extent of the losswhich he may havesuffered inconsequence thereof

3. Indorser does notwarrant the solvency.He is answerable on astrict compliancewith the law by theholder, whether thepromisor is solvent ornot

3. Guarantorwarrants the solvencyof the promisor

4. Indorser can besued as promisor

4. Guarantor cannot besued as promisor

Guaranty WarrantyA contract by which aperson is bound toanother for thefulfilment of apromise orengagement of athird party

An undertaking thatthe title, quality, orquantity of thesubject matter of thecontract is what ithas been representedto be, and relates tosome agreementmade ordinarily bythe party who makesthe warranty

NOTES:A guaranty is gratuitous, unless

there is a stipulation to the contrary.The cause of the contract is thesame cause which supports theobligation as to the principal debtor.

The peculiar nature of aguaranty or surety agreement is thatis is regarded as valid despite theabsence of any direct considerationreceived by the guarantor or suretyeither from the principal debtor orfrom the creditor; a considerationmoving to the principal alone willsuffice.

It is never necessary that theguarantor or surety should receiveany part or benefit, if such there be,accruing to the principal. (WillexPlastic Industries Corp. vs. CA, 256SCRA 478)

Double or sub-guaranty (Art 2051 2ndpar)

One constituted to guarantee the

obligation of a guarantor

Continuing guaranty (Art 2053)One which is not limited to a singletransaction but which contemplatesa future course of dealings, coveringa series of transactions generally foran indefinite time or until revoked.

NOTES: Prospective in operation ( Dio vsCA, 216 SCRA 9 )

Construed as continuing when by theterms thereof it is evident that theobject is to give a standing credit tothe principal debtor to be used fromtime to time either indefinitely oruntil a certain period, especially if the right to recall the guaranty isexpressly reserved ( Dio vs CA, 216SCRA 9 )Future debts may also refer todebts existing at the time of theconstitution of the guaranty but theamount thereof is unknown and notto debts not yet incurred andexisting at that time.Exception to the concept of continuing guaranty is chattelmortgage . A chattel mortgage canonly cover obligations existing at thetime the mortgage is constituted andnot those contracted subsequent tothe execution thereof (The BelgianCatholic Missionaries, Inc. vs.Magallanes Press, Inc., 49 Phil 647).An exception to this is in case of

stocks in department stores, drugstores, etc. (Torres vs. Limjap, 56Phil 141).

Extent of Guarantors liability: (Art2055)1. Where the guaranty definite : I t is

limited in whole or in part to theprincipal debt, to the exclusion of accessories.

2. Where guaranty indefinite or simple :It shall comprise not only the







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principal obligation, but also all itsaccessories, including the judicialcosts, provided with respect to thelatter, that the guarantor shall only

be liable for those costs incurredafter he has been judicially requiredto pay.

Qualifications of a guarantor: (Arts2056-2057)

1. possesses integrity2. capacity to bind himself 3. has sufficient property to answer

for the obligation which heguarantees

NOTES:

The qualifications need only bepresent at the time of the perfectionof the contract.The subsequent loss of the integrityor property or superveningincapacity of the guarantor wouldnot operate to exonerate theguarantor or the eventual liability hehas contracted, and the contract of guaranty continues.However, the creditor may demandanother guarantor with the proper

qualifications. But he may waive it if he chooses and hold the guarantor tohis bargain.

Benefit of Excussion (Art 2058)The right by which the guarantorcannot be compelled to pay thecreditor unless the latter hasexhausted all the properties of theprincipal debtor, and has resorted toall of the legal remedies against suchdebtor.

NOTE:Not applicable to a contract of suretyship (Arts 2047, par. 2;2059[2])Cannot even begin to take placebefore judgment has been obtainedagainst the debtor (Baylon vs CA,312 SCRA 502)

When Guarantor is not entitled to thebenefit of excussion: (PAIRS)

1. If it may be p resumed that anexecution on the property of the

principal debtor would not result inthe satisfaction of the obligationNot necessary that the debtor bejudicially declared insolvent orbankrupt

2. When he has absconded, orcannot be sued within thePhilippines unless he has left amanager or representative3. In case of insolvency of thedebtor

Must be actual4. If the guarantor has expresslyrenounced it5. If he has bound himself solidarilywith the debtor

Other grounds: (BIPS)6. If he is a judicial bondsman orsub-surety7. If he fails to interpose it as adefense before judgment is renderedagainst him8. If the guarantor does not set upthe benefit against the creditor upon

the latters demand for paymentfrom him, and point out to thecreditor available property to thedebtor within Philippine territory,sufficient to cover the amount of thedebt (Art 2060)

Demand can be made only afterjudgment on the debtDemand must be actual; joiningthe guarantor in the suit againstthe principal debtor is not thedemand intended by law

9. Where the pledge or mortgagehas been given by him as specialsecurity

Benefit of Division (Art 2065)Should there be several

guarantors of only one debtor andfor the same debt , the obligation toanswer for the same is dividedamong all.

Liability: Joint







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NOTES:The creditor can claim from theguarantors only the shares they arerespectively bound to pay exceptwhen solidarity is stipulated or if any of the circumstancesenumerated in Article 2059 should take place.The right of contribution of guarantors who pays requires thatthe payment must have been made(a) in virtue of a judicial demand, or(b) because the principal debtor isinsolvent (Art 2073). If any of the guarantors should be

insolvent, his share shall be borne bythe others including the payingguarantor in the same jointproportion following the rule insolidary obligations.The above rule shall not beapplicable unless the payment hasbeen made in virtue of a judicialdemand or unless the principaldebtor is insolvent.The right to contribution orreimbursement from his co-guarantors is acquired ipso jure byvirtue of said payment without theneed of obtaining from the creditorany prior cession of rights to suchguarantor.The co-guarantors may set upagainst the one who paid, the samedefenses which have pertained tothe principal debtor against thecreditor and which are not purelypersonal to the debtor. (Art 2074)

Procedure when creditor sues: (Art.

2062)The creditor must sue the principalalone; the guarantor cannot be suedwith his principal, much less aloneexcept in Art. 2059.

1. Notice to guarantor of the actionThe guarantor must be NOTIFIEDso that he may appear, if he sodesires, and set up defenses hemay want to offer.

If the guarantor appears, he isstill given the benefit of exhaustion even if judgmentshould be rendered against himand principal debtor. Hisvoluntary appearance does notconstitute a renunciation of hisright to excussion (see Art.2059(1)).Guarantor cannot set up thedefenses if he does not appearand it may no longer be possiblefor him to question the validityof the judgment renderedagainst the debtor.

2. A guarantor is entitled to be heardbefore and execution can be issuedagainst him where he is not a partyin the case involving his principal(procedural due process).

Guarantors Right of Indemnity orReimbursement (Art 2066) GENERAL RULE:Guaranty is a contractof indemnity . The guarantor who makespayment is entitled to be reimbursed bythe principal debtor.

NOTE: The indemnity consists of: (DIED)

1. Total amount of the d ebt noright to demand reimbursementuntil he has actually paid thedebt, unless by the terms of thecontract, he is given the rightbefore making payment. Hecannot collect more than whathe has paid.

2. Legal interest thereon from thetime the payment was madeknown (notice of payment ineffect a demand so that if thedebtor does not pay

immediately, he incurs in delay)to the debtor, even though it didnot earn interest for thecreditor. Guarantors right tolegal interest is granted by lawby virtue of the payment he hasmade.

3. E xpenses incurred by the guarantor after having notifiedthe debtor that payment hasbeen demanded of him by the







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creditor; only those expensesthat the guarantor has to satisfyin accordance with law as aconsequence of the guaranty

(Art. 2055) not those whichdepend upon his will or own actsor his fault for these are hisexclusive personal responsibilityand it is not just that they beshouldered by the debtor.

4. Damages if they are due inaccordancewith law. General rules ondamages apply.

EXCEPTIONS:1. Where the guaranty isconstituted without theknowledge or against the will of the principal debtor, theguarantor can recover onlyinsofar as the payment had beenbeneficial to the debtor (Art.2050).2. Payment by a thirdperson who does not intend tobe reimbursed by the debtor isdeemed to be a donation, which,however, requires the debtorsconsent. But the payment is inany case valid as to the creditorwho has accepted it (Art. 1238).3. Waiver of the right todemand reimbursement.

Guarantors right to Subrogation(ART.2067)

Subrogation transfers to the personsubrogated, the credit with all therights thereto appertaining eitheragainst the debtor or against thirdpersons, be they guarantors orpossessors of mortgages, subject tostipulation in conventionalsubrogation.

NOTE: This right of subrogation isnecessary to enable the guarantor toenforce the indemnity given in Art.2066.

It arises by operation of law uponpayment by the guarantor. It is notnecessary that the creditor cede to

the guarantor the formers rightsagainst the debtor.It is not a contractual right. Theright of guarantor who has paid adebt to subrogation does not standupon contract but upon theprinciples of natural justice.The guarantor is subrogated byvirtue of the payment to the rightsof the creditor, not those of thedebtor.

Guarantor cannot exercise theright of redemption of hisprincipal ( Urrutia & Co vsMorena and Reyes, 28 Phil 261 )

Effect of Payment by Guarantor1. Without notice to debtor: (Art2068)

The debtor may interposeagainst the guarantor thosedefenses which he could haveset up against the creditor at thetime the payment was made,e.g. the debtor can set upagainst the guarantor thedefense of previousextinguishment of the obligationby payment.

2. Before Maturity (Art 2069)Not entitled to reimbursementunless the payment was madewith the consent or has beenratified by the debtor

Effect of Repeat Payment by debtor:(Art 2070) GENERAL RULE:Before guarantor paysthe creditor, he must first notify thedebtor (Art. 2068). If he fails to give

such notice and the debtor repeatspayment, the guarantor can only collectfrom the creditor and guarantor has nocause of action against the debtor forthe return of the amount paid byguarantor even if the creditor shouldbecome insolvent.

EXCEPTION: The guarantor can stillclaim reimbursement from the debtor in







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A. Essential Requisites (SOD) (Art2085)

1. Secures the fulfillment of a principalobligation;

2. Pledgor, mortgagor, antichreticdebtor must be the absolute ownerof the thing pledged or mortgaged;and

The reason being that inanticipation of a possibleforeclosure sale in case of default which is still a sale, therule is that the seller must bethe owner of the thing sold(Cavite Development Bank vs.Lim, 324 SCRA 346)

3. Pledgor, mortgagor, antichreticdebtor must have free d isposal of their property, or be legallyauthorized for such purpose.

NOTES:Third persons can pledge ormortgage their own property tosecure the principal obligation.It is not necessarily void simplybecause the accommodation pledgoror mortgagor did not benefit fromthe same. So long as valid consent

was given, the fact that the loan wasgiven solely for the benefit of theprincipal debtor would not invalidatethe mortgage ( GSIS vs CA, 170 SCRA533 )The accommodation pledgor ormortgagor, without expresslyassuming personal liability for suchdebt, is not liable for the payment of any deficiency, should the propertynot be sufficient to cover the debt(Bank of America vs. AmericanRealty Corporation, 321 SCRA 659 ).The accommodation pledgor ormortgagor is not solidarily boundwith the principal obligor but hisliability extents only to the propertypledged or mortgaged. Should therebe any deficiency, the creditor hasrecourse on the principal debtor whoremains to be primarily bound.The law grants to theaccommodation pledgor or

mortgagor the same rights as aguarantor and he cannot beprejudiced by any waiver of defenseby the principal debtor.

B. Prohibition against PactumCommissorium (Art 2088; 2137)

Pactum CommissoriumStipulation whereby the thing

pledged or mortgaged , or underantichresis shall automaticallybecome the property of the creditorin the event of non-payment of thedebt within the term fixed.

Requisites:1. There should be a pledge, mortgage,

or antichresis of property by way of security for the payment of theprincipal obligation; and

2. There should be a stipulation for anautomatic appropriation by thecreditor of the property in event of nonpayment of the obligation withinthe stipulated period.

GENERAL RULE:Pactum Commissoriumis forbidden by law and is declared nulland void. EXCEPTION: The pledgee mayappropriate the thing pledged if afterthe first and second auctions, the thingis not sold. (Art 2112)

NOTE: The security contract remainsvalid; only the prohibited stipulation isvoid.

C. Capability to secure all kinds of obligations, i.e. pure or conditional (Art 2091)

D.Indivisibility (Art 2089) GENERAL RULE: A pledge, mortgage,

or antichresis is indivisible , even thoughthe debt may be divided among thesuccessors in interest of the debtor or of the creditor.

Their indivisibility is not affected bythe fact that the debtors are jointlyor not solidarily liable.

Consequences of indivisibility:







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1. Single thing Every portion of theproperty pledged or mortgaged isanswerable for the whole obligation

2. Several things All of the several

things pledged or mortgaged areliable for the totality of the debt3. Debtors heir/creditors heir -

Neither the debtors heir who haspaid part of the debt cannot ask forproportionate extinguishment, norcreditors heir who received hisshare of the debt return the pledgeor cancel the mortgage as long asthe debt is not completely satisfied.

EXCEPTIONS:1. Where each one of several things guarantees adeterminate portion of thecredit2. Where only a portion of the loan was released3. Where there was failureof consideration.4. Where there is nodebtor-creditor relationship

NOTES:The mere embodiment of a real

estate mortgage and a chattelmortgage in one document does nothave the effect of fusing bothsecurities into an indivisible whole.The mortgagee, therefore, maylegally foreclose the real estatemortgage extrajudicially and waivethe chattel mortgage foreclosure,and maintain instead a personalaction for the recovery of the unpaidbalance of the credit (Phil. Bank of Commerce vs. Macadaeg, 109 Phil981)

E. When the principal obligationbecomes due, the things in whichthe pledge, mortgage, or antichresis consists may bealienated for the payment to thecreditor. (Art. 2087)

NOTES:If the debtor fails to comply with theobligation at the time it falls due,

the creditor is merely entitled tomove for the sale of the thingpledged or mortgaged in order tocollect the amount of his claim from

the proceeds.If he wishes to secure a title to themortgaged property, he can buy it inthe foreclosure sale (Montevirgin vs.CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichreticdebtor retains ownership of thething given as a security

PLEDGE (Arts 2093 2123)

A contract wherein the debtordelivers to the creditor or to a thirdperson a movable or documentevidencing incorporeal rights for thepurpose of securing fulfilment of aprincipal obligation with theunderstanding that when theobligation is fulfilled, the thingdelivered shall be returned with allits fruits and accessions.

Special Requisites (in addition tothe common essential requisites) :

1. Possession of the thing pledgedmust be transferred to the creditoror a third person by agreement (Art2093);2. It can only cover movableproperty and incorporeal rightsevidenced by documents of title andthe instruments proving the rightpledged shall be delivered to thecreditor, and if negotiable must beendorsed (Art 2094); and3. The description of the thingpledged and the date must appear in

a public instrument to bind thirdpersons, but not for the validity of the contract (Art 2096).

Kinds:1. Conventional /Voluntary created by contract2. Legal created by operation of law (examples: Art. 546, 1731 and1914 NCC)







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NOTES:The provisions of possession, careand sale of the thing as well as onthe termination of the pledgegoverning conventional pledges areapplicable to pledges created byoperation of law (Art 2121)Unlike, however, in conventionalpledge where the debtor is notentitled to the excess unless it isotherwise agreed, in legal pledge,the remainder of the price of thesale after payment of the debt andexpenses, shall be delivered to thedebtor.In legal pledge, there is no definite

period for the payment of theprincipal obligation. The pledgeemust make a demand for thepayment of the amount due him;otherwise he cannot exercise theright of sale at public auction (Art2122)

Characteristics:1. Real

contract it is perfected by thedelivery of the thing pledged by thedebtor who is called the pledgor to

the creditor who is called the pledgee , or to a third person bycommon agreement;

2. Accessor y contract it has no independentexistence of its own;

3. Unilater al contract it creates an obligationsolely on the part of the creditor toreturn the thing subject thereof upon the fulfilment of the principalobligation; and

4. Subsidiar y contract the obligation incurreddoes not arise until the fulfilmentof the principal obligation which issecured.

Consideration in pledge:Insofar as the pledgor is concerned,the cause is the principal obligation.If the pledgor is not the debtor, thecause is the compensation stipulated

for the pledge or the mere liberalityof the pledgor.

Extent of pledge: Unless stipulated

otherwise, pledge extends to the fruits,interests or earnings of the thing.

Rights and Obligations of a PledgorRights Obligations

1. Todemandreturnin caseof reasonablegrounds tofeardestruction orimpairmentof thethingwithout thepledgeesfault,subject

to theduty of replacement(Art2107)

2. To bidand bepreferred atthepublicauction(Art

2113)3. Toalienate thethingpledgedprovided thepledgeeconsents to

1. To advise the pledgee o

f the f laws of

the thing (A







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thesale(Art2097)

4. To askthatthethingpledged bedeposited(Arts2104 &2106)

rt 2101)

2. Not to demand the return

of the thing u

ntilaf ter f ul

lpayment of the debt, including i

nterest due th

ereon and exp







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enses incurred f or its preservati

on (Art 2105)

Rights of the PledgeeKEY: D SBC BA2R2OPS21. Option to demand

replacement orimmediate payment of the debt in case of deception as tosubstance or quality (Art2109)

2. To sell at public auctionin case of reasonable

grounds to feardestruction orimpairment of the thingwithout his fault (Art

2108)3. To bring actionspertaining to the owner(Art 2103)

4. To choose which of several things pledgedshall be sold

5. To b id at the publicauction (Art 2113)

6. To appropriate the thingin case of failure of the2nd public auction (Art2112)

7. To apply said fruits,interests or earnings tothe interest, if any, thento the principal of thecredit (Art 2102)

8. To retain excess valuereceived in the publicsale (Art 2115)

9. To retain the thing untilafter full payment of thedebt (Art 2098)

10. To be reimbursed for theexpenses made for thepreservation of the thingpledged (Art 2099)

11. To object to thealienation of the thing

12. To possess the thing (Art2098)

13. To sell at public auctionin case of non-paymentof debt at maturity (Art2112)

To choose which of the several thingspledged shall be sold (Art 2119)

14. Option to demandreplacement orimmediate payment of the debt in case of deception as tosubstance or quality (Art2109)

15. To sell at public auctionin case of reasonablegrounds to feardestruction orimpairment of the thing







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4. Payment of the debt (Art 2105)5. Sale of thing pledged at public

auction (Art 2115)NOTE: The possession by the debtor or

owner of the thing pledged subsequentto the perfection of the pledge gives riseto a prima facie presumption that thething has been returned and, therefore,that the pledge has been extinguishedbut not the principal obligation itself.(Art 2110)

Requirements for sale of thing pledgedat public auction: (Art 2112)1. The debt is due and unpaid2. Sale must be at a public auction3. there must be notice to the pledgor

and owner, stating the amount due4. Sale must be with the intervention

of a notary public

Effect of sale of the thing pledged: (Art2115)1. The sale of the thing pledged shall

extinguish the principal obligation,whether or not the proceeds of thesale are equal to the amount of theprincipal obligation, interest andexpenses in a proper case

2. If the price of the sale is more thanthe amount due the creditor, thedebtor is not entitled to the excessunless the contrary is provided

3. If the price of the sale is less, thecreditor is not entitled to recoverthe deficiency even if there is astipulation to that effect

REAL ESTATE MORTGAGE(Articles 2124-2131)

A contract whereby thedebtor secures to the creditor thefulfilment of a principal obligation,specially subjecting to such securityimmovable property or real rightsover immovable property in case theprincipal obligation is not compliedwith at the time stipulated.

Characteristics of the contract:1. Real2. Accessor y

3. Subsidiary 4. Unilater al it creates only an obligation

on the part of the creditor whomust free the property from theencumbrance once theobligation is fulfilled.

NOTES:As an accessory contract, itsconsideration is that of the principalcontract from which it receives life.A mortgage does not involve atransfer, cession or conveyance of property but only constitutes a lienthereon. Until discharged, it followsthe property wherever it goes andsubsists notwithstanding changes of ownership.A mortgage gives the mortgagee noright or claim to the possession of the property, and therefore, a meremortgagee has no right to eject anoccupant of the property mortgagedunless the mortgage should containsome provision to that effect. The

only right of a mortgagee in case of non-payment of a debt secured bymortgage would be to foreclose themortgage and have the encumberedproperty sold to satisfy theoutstanding indebtedness. If thepossession is transferred to themortgagee, it must not expressly befor purpose of applying the fruits tothe interest then to the principal of the credit, for then it would be anantichresis.It is not an essential requisite thatthe principal of the mortgage creditbears interest, or that the interestas compensation for the use of theprincipal and enjoyment of its fruitsbe in the form of a certain percentthereof.

Special Requisites (in addition tothe common essential requisites) :1. It can cover only immovableproperty and alienable real rights







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imposed upon immovables (Art2124);2. It must appear in a publicinstrument (Art. 2125); and

3. Registration in the registry of property is necessary to bind thirdpersons, but not for the validity of the contract (Art 2125).

An order for foreclosure cannotbe refused on the ground thatthe mortgage had not beenregistered provided no innocentthird parties are involved.

NOTE: Where a mortgage is not valid orfalse, the principal obligation which itguarantees is not rendered null and void.What is lost only is the right to foreclosethe mortgage as a special remedy forsatisfying or settling the indebtednesswhich is the principal obligation but themortgage deed remains as evidence orproof of a personal obligation of thedebtor and the amount due to thecreditor may be enforced in an ordinarypersonal action.

Kinds:1. Voluntary agreed to by theparties or constituted by the will of the owner of the property on whichit is created2. Legal one required by law to beexecuted in favour of certain persons

The persons in whose favour thelaw establishes a mortgage haveno other right than to demandthe execution and the recordingof the document in which themortgage is formalized (Art 2125par 2)

3. Equitable one which, althoughlacking the formalities of a

mortgage, shows the intention of theparties to make the property asecurity for a debt

PLEDGE REAL MORTGAGE1. Constituted onmovables

1. Constituted onimmovables

2. Property isdelivered to pledgeeor by commonconsent to a thirdperson

2. Delivery is notnecessary

3. Not valid againstthird persons unless adescription of thething pledged anddate of pledgeappear in a publicinstrument

3. Not valid againstthird persons unlessregistered

Extent of Mortgage:Absent express stipulation to thecontrary, the mortgage includes theaccessions, improvements, growingfruits and income of the propertynot yet received when the obligationbecomes due and to the amount of the indemnity granted or owing tothe proprietor from the insurers of the property mortgaged, or in virtueof expropriation for public use (Art2127)

Object of Mortgage: Future property cannot be an objectof a contract of mortgage (Art2085[2]) However, a stipulationsubjecting to the mortgage lien,properties (improvements) which themortgagor may subsequently acquireinstall, or use in connection withreal property already mortgaged

belonging to the mortgagor is valid(Peoples Bank and Trust Co. vs.Dahican Lumber Co., 20 SCRA 84)

Special Rights:1. Mortgagor - To alienate the

mortgaged property but themortgage shall remain attached tothe property.

NOTE: A stipulation forbidding theowner from alienating the immovablemortgage shall be void (Art 2130) being

contrary to public policy inasmuch as thetransmission of property should not beunduly impeded.

2. Mortgagee - To claim from a 3 rd

person in possession of themortgaged property the payment of the part of the credit secured by thewhich said third person possesses(Art 2129)







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NOTE: It is necessary that prior demandfor payment must have been made onthe debtor and the latter failed to pay(BPI vs Concepcion & Hijos, Inc., 53 Phil

906 )

ForeclosureThe remedy available to themortgagee by which he subjects themortgaged property to thesatisfaction of the obligation tosecure that for which the mortgagewas given

NOTES:It denotes the procedure adopted bythe mortgagee to terminate therights of the mortgagor on theproperty and includes the sale itself (DBP vs Zaragoza, 84 SCRA 668 )Foreclosure is valid where the debtoris in default in the payment of hisobligation ( Gobonseng, Jr. vs CA,246 SCRA 472 )

Kinds:1. Judicial ordinary action forforeclosure under Rule 68 of theRules of Court

2. Extrajudicial when mortgageeis given a special power of attorneyto sell the mortgaged property bypublic auction, under Act No. 3135

Judicialforeclosure

Extrajudicialforeclosure

1. There is courtintervention

1. No courtintervention

2. Decisions areappealable

2. Not appealablebecause it isimmediatelyexecutory

3.Order of courtcuts off all rights of

the partiesimpleaded

3.Foreclosure doesnot cut off right of

all parties involved

4. There is equityof redemptionexcept on bankswhich provides fora right of redemption

4. There is right of redemption

5. Period of redemption startsfrom the finality of

5. Period to redeemstart from date of registration of

the judgment untilorder of confirmation

certificate of sale

6. No need for aspecial power of attorney in thecontract of mortgage

6. Special power of attorney in favor of mortgagee isneeded in thecontract

NOTES:A foreclosure sale retroacts to thedate of registration of the mortgageand that a person who takes amortgage in good faith and forvaluable consideration, the recordshowing clear title to the mortgagor,will be protected against equitable

claims on the title in favor of thirdpersons, of which he had no actualor constructive notice ( St. DominicCorporation vs. IAC 151 SCRA 577 ).Where there is a right to redeem,inadequacy of price is not materialbecause the judgment debtor mayreacquire the property or else sellhis right to redeem and thus recoverany loss he claims to have sufferedby reason of the price obtained atthe auction sale and consequentlynot sufficient to set aside the sale.Mere inadequacy of the priceobtained at the sheriffs sale will notbe sufficient to set aside the saleunless the price is so inadequate asto shock the conscience of thecourt taking into consideration thepeculiar circumstances attendantthereto. ( Sulit vs. CA, 268 SCRA 441)Should there remain a balance dueto the mortgagee after applying theproceeds of the sale, the mortgageeis entitled to recover the deficiency.This rule applies both to judicial andextra-judicial foreclosure realmortgage.The action to recover a deficiencyafter foreclosure prescribes after 10years from the time the right of action accrues (Arts 1142 & 1144).

Stipulation of upset price or tipo

It is a stipulation in a mortgage of real property of minimum price at







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which the property shall be sold, tobecome operative in the event of aforeclosure sale at public auction. Itis null and void for the property must

be sold to the highest bidder. Partiescannot, by agreement, contravenethe law and interfere with the lawfulprocedure of the courts (BPI vs Yulo,31 Phil 476)

Extrajudicial foreclosure real property(Act No. 3135)

The law covers only real estatemortgages. It is intended merely toregulate the extrajudicial sale of theproperty mortgaged if and when themortgagee is given a special powerof express authority to do so in thedeed itself or in a documentannexed thereto.The authority to sell is notextinguished by the death of themortgagor (or mortgagee) as it is anessential and inseparable part of abilateral agreement ( Perez vs PNB,17 SCRA 833 ).No sale can be legally made outsidethe province in which the propertysold is situated; and in case theplace within said province in whichthe sale is to be made is the subjectof stipulation, such sale shall bemade in the said place in themunicipal building of themunicipality in which the property orpart thereof is situated.

Procedure for extrajudicial foreclosureof both real estate mortgage under ActNo. 3135 and chattel mortgage underAct No. 1508 (A.M. No. 99-10-05-0,

January 15, 2000)

1. Filing of application before theExecutive Judge through the Clerk of Court2. Clerk of Court will examinewhether the requirement of the lawhave been complied with, that is,whether the notice of sale has beenposted for not less than 20 days in atleast three (3) public places of themunicipality or city where theproperty is situated, and if the sameis worth more than P400.00, that

such notice has been published oncea week for at least three (3)consecutive weeks in a newspaper of general circulation in the city of

municipality3. The certificate of sale must beapproved by the Executive Judge4. Where the application concernsextrajudicial foreclosure of realmortgages in different locationscovering one indebtedness, only onefiling fee corresponding to such debtshall be collected5. The Clerk of Court shall issuecertificate of payment indicating theamount of indebtedness, the filingfees collected, the mortgages sought

to be foreclosed, the description of the real estates and their respectivelocations6. The notice of sale shall bepublished in a newspaper of generalcirculation pursuant to Section 1, PDNo. 10797. The application of shall beraffled among all sheriffs8. After the redemption period hasexpired, the Clerk of Court shallarchive the records.9. No auction sale shall be heldunless there are at least two (2)participating bidders, otherwise thesale shall be postponed to anotherdate. If on the new date set forthfor the sale there shall not be atleast two bidders, the sale shall thenproceed. The names of the biddersshall be reported to the Sheriff of the Notary Public, who conductedthe sale to the Clerk of Court beforethe issuance of the certificate of sale.

NOTES:The Mortgagor and Mortgagee haveno right to waive the posting andpublication requirements under Act.No. 3135. Notices are given tosecure bidders and prevent asacrifice of the property. Clearly,the statutory requirements of posting and publication aremandated, not for the mortgagorsbenefit, but for the public or third







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persons. Failure to comply with thestatutory requirements as topublication of notice of auction saleconstitutes a jurisdictional defect

which invalidates the sale.Lack of republication of notice of foreclosure sale made subsequentlyafter the original date renders suchsale void (PNB vs. NepomucenoProductions Inc., G.R. No. 139479.December 27, 2002) .Sec 3 of Act 3135 does not requirepersonal or any particular notice onthe mortgagor much less on hissuccessors-in-interest where there isno contractual stipulation therefor.Hence, unless required in themortgage contract, the lack of suchnotice is not a ground to set aside aforeclosure sale.Neither does Sec 3 require posting of notice of sale on the mortgageproperty and the certificate of posting is not required, much lessconsidered indispensable, for thevalidity of a foreclosure sale.

Redemption

It is the transaction by which themortgagor reacquires or buys backthe property which may have passedunder the mortgage, or divests theproperty of the lien which themortgage may have created.

NOTES:A sale by the mortgagor to a thirdparty of the mortgaged propertyduring the period for redemptiontransfers only the right to redeemthe property and the right topossess, use and enjoy the sameduring said period.Where sale with assumption of mortgage not registered and madewithout the consent of themortgagee, the buyer, thereof, wasnot validly substituted as debtorand, hence, had no right to redeem(Bonnevie vs. CA, 125 SCRA 122 ).

Kinds:

1. Equity of Redemption right of mortgagor to redeem the mortgagedproperty after his default in theperformance of the conditions of the

mortgage within the 90-day periodfrom the date of the service of theorder of foreclosure or eventhereafter but before theconfirmation of the sale. Applies tojudicial foreclosure of real mortgageand chattel mortgage foreclosure.

NOTE: Redemption of the bankinginstitutions is allowed within one yearfrom confirmation of sale.

2. Right of Redemption right of

mortgagor to redeem the mortgagedproperty within one year from thedate of registration of the certificateof sale. Applies only to extrajudicialforeclosure of real mortgage.

NOTE: The right of redemption, as longas within the period prescribed, may beexercised irrespective of whether or notthe mortgagee has subsequentlyconveyed the property to some otherparty ( Sta. Ignacia Rural Bank, Inc. vs.CA, 230 SCRA 513 )

Period of Redemption1. Extra-judicial (Act #3135)

a. natural person one year fromregistration of the certificate of sale with Registry of Deeds

b. juridical person same rule asnatural person

c. juridical person (mortgagee isbank) - three months afterforeclosure or beforeregistration of certificate of foreclosure which ever is earlier(sec. 47, of General BankingLaw)

2. Judicial before confirmation of thesale by the court

NOTE: Allowing a redemption after thelapse of the statutory period, when thebuyer at the foreclosure sale does notobject but even consents to theredemption, will uphold the policy of thelaw which is to aid rather than defeat







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the right of redemption. There is nothingin the law which prevents a waiver of the statutory period for redemption(Ramirez vs CA, 219 SCRA 598).

Amount of the redemption price:1. Mortgagee is not a bank (Act No.

3135, in relation to Sec. 28, Rule 39of Rules of Cou

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