Credit Transactions STUDENT 2 Reviewer

8/13/2019 Credit Transactions STUDENT 2 Reviewer

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NOTES IN CREDIT TRANSACTIONSBY: RENE CALLANTA

I. GENERAL PROVISIONS

A. Definitions of Credit or Security Trnsctions.

Credit transactions include all transactions involving the purchase of loan of goods, services ormoney in the present with a promise to pay or deliver in the future.

> Without a promise to pay or deliver in the future, there can be no security transaction.

B. Prties to Bi!"ent.

1. Bailor (Comodatario# the giver, the party who delivers the possession or custody of the thingbailed.

2. Bailee (Comodante# the recipient; the party who receives the possession or custody of the thingthus delivered.

C. $inds of Bi!"ent Contrct.

1. Those for the sole benefit of the bailor.1.1 gratuitous deposit1.2 mandatum

2. Those for the sole benefit of the bailee2.1 commodatun

2.2 gratuitous mutuum

3. Those for the benefit of both parties3.1 deposit for the compensation;

involuntary deposit3.2 pledge3.3 bailments for hire

D. Lon in Gener!

D.1 Characteristics of the Contract

1. Real Contractbecause the delivery of the thing loaned is necessary for the perfection of thecontract !rticle 1"3#; see also !rticle 131$%; and

2. Unilateral Contract because once the sub&ect matter has been delivered, it creates obligations onthe part of only one of the parties, i. e. the borrower

D.2 Kinds of Loan

1. Commodatum where the bailor lender% delivers to the bailee borrower% a non'consumable thingso that the latter may use it for a certain time and return the identical thing; and

2. Mutuum where the bailor lender% delivers to the bailee borrower% money or other consumable

thing upon the condition that the latter shall pay same amount of the same (ind of )uality.

\D. 3 Distinctions between Commodatum and Mutuum

Co""odtu" %&ir"#

1. sub&ect matter is non'

'utuu" %(tn)#

1. sub&ect matter is money or


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consumable things

2. ownership retained by lender

3. essentially gratuitous

#. borrower must return thesame thing loaned

*. may involved real or personalproperty

$. loan for use or temporarypossession

+. right to demand the return ofthe thing loaned beforeepiration of term in case ofurgent need

-. loss is shouldered by bailorsince he is the owner

other consumable things

2. ownership transferred toborrower

3. may be gratuitous or onerous

#. borrower need only pay thesame amount of the same(ind and )uality

*. involves only personalproperty

$. loan for consumption

+. no right to demand returnbefore the lapse of the termagreed upon

-. borrower suffers the loss evenif the loss is caused eclusivelyby a fortuitous event

D.4 Distinction between Commodatum (Hiram) and Lease (Upa)

1. Commodatumis a real contract, whereas leaseis a cosensual contract.

2. he ob&ect of commodatum is a non'consumable nonfungible% thing, whereas the ob&ect of leasemay even be wor( or service.

3. Commodatum is essentially gratuitous, whereas lease is not gratuitous.

II. CO''ODAT('

A. C*rcteristics

1. Gratuitous, otherwise it is a lease !rticle 1"3*%

2. /urpose is thetemporar useof the thing loaned !rticle 1"3*%

3. 0ailees right to use is limited to the thin! loanedand not to its fruits !rticle 1"3*% unless there isstipulation to the contrary !rticle 1"#%

#. ub&ect matter is generallynon"consumablethings but may cover consumables if the purpose ofthe contract is for ehibition.

*. 0ailor need not to be the owner; it is sufficient that he haspossessor interestover sub&ect matter!rticle 1"3-%.

$. 4ommodatum ispurel personalin character hence death of either bailor or bailee etinguishes thecontract !rticle 1"3"%

+. General Rule# 0ailee can neither lend nor lease the ob&ect of the contract to a third person.

!ception5 6ember of bailees household

!ception to the e!ception5

a% contrary stipulationb% nature of thing forbids such use


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B. O+!i)tions of t*e Bi!ee

1. 0ailee is liable for ordinary epenses for the use and preservation of the thing loaned.

2. General Rule# 0ailee is not liable for loss or damage due to a fortuitous event because the

bailor retains ownership%

!ceptions" a% 0ailee devote thing to a different purpose

b% 0ailee (eeps thing longer than the period stipulated or after theaccomplishment of the use for which commodatum was constituted.

c% hing loaned was delivered with appraisal of its value unless there is epressstipulation to the contrary%

d% 0ailee lends thing to a third person not a member of his household

e% 0ailee, if being able to save either the thing borrowed or his own thing choseto save the latter

3. 0ailees are solidaril liablewhen the thing is loaned to two or more bailees in the same contract.

#ote"1. G.R.,0ailee is not liable for ordinary wear and tear due to use of the thing loaned.

E-cetions5 a.% 7f he is guilty of fault or negligence

b.% 7f he devotes thing to any purpose different from that for which it has beenloaned.

2. 0ailee cannot retain the thing loaned as security for claims he has against the bailor, even though byreason of etraordinary epenses.

C. O+!i)tions of Bi!or

1. o allow the bailee the use of the thing loaned for the duration of period stipulated or until theaccomplishment of the purpose for which commodatum was constituted.

!ceptions5 a. urgent need during which time thecommodatum is suspended.

b. precariumb.1 if duration of the contract has not been stipulatedb.2 if use or purpose of the thing has not been stipulatedb.3 if use of thing is merely tolerated by the bailor

2. o refund etraordinary epenses for the preservation of the thing loanedpro$idedbailor is notifiedbefore the epenses were incurred.

%&ception5 urgent need hence no notice is necessary.

3. o refund *8 of the etraordinary epenses arising from actual use of the thing loaned i.e.caused by fortuitous event%

%&ception5 contrary stipulation

#. o pay damages to bailee for (nown hidden flaws in the thing loaned.

#ote51. 0ailor has the right to demand return of the thing if bailee commits any act of ingratitude.

D. Recent /urisrudence on Co""odtu"


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Catholic 'icar (postolic of the Mountain )ro$ince $s. Court of (ppeals1$* 49! *1*%

/rivate respondents were able to prove that their predecessors house was borrowedby petitioner :icar after the church and the convent were destroyed. hey never as(ed for

the return of the house, but when they allowed its free use, they became bailors incommodatum and the petitioner the bailee. he bailees failure to return the sub&ect matterof commodatum to the bailor did not mean adverse possession on the part of the borrower.

he bailee held in trust the property sub&ect matter of commodatum. he adverse claim ofpetitioner came only in 1"*1 when it declared the lots for taation purposes. he action ofpetitioner :icar by such adverse claim could not ripen into title by way of ordinaryac)uisitive prescription because of the absence of &ust title.

III. SI'PLE LOAN OR '(T(('

A. Definition

Mutuum is a contract whereby one of the parties delivers to another party money or otherconsumable thing with the understanding that the same amount of the same (ind and )uality shall bepaid.

B. C*rcteristics

1. 0orrower ac)uires ownership of the thing and can therefore dispose of the thing borrowed. here isno criminal liability for failure to pay ones debt.

2. 7f the thing loaned is money, payment must be made in the currency which is legal tender in the/hilippines and in case of etraordinary deflation or inflation, the basis of payment shall be the value of thecurrency at the time of the creation of the obligation.

3. 7f fungible thing was loaned, the borrower is obliged to pay the lender another thing of the same(ind, )uality and )uantity.

C. Distinctions +et0een 'utuu" %(tn)# nd Lese %(#

1. 7n mutuum*the ob&ect is money or any consumable fungible% thing, whereas in lease*the ob&ectmay be any thing, whether movable or immovable, fungible or nonfungible.

2. 7n mutuum, the thing loaned becomes the property of the debtor, whereas in lease, the owner doesnot lose his right of ownership.

3. 7n mutuum*the relationship which is created is that of creditor and debtor, whereas in lease, therelationship that is created is that of landlord and tenant or lessor and lessee olentino vs. on


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tate +n$estment /ouse $s. Court of (ppeals 1"- 49! 3"%

he appropriate measure for damages in case of delay in discharging an obligationconsisting of the payment of a sum of money, is the payment of the penalty interest at therate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest,

then the payment of additional interest at a rate e)ual to the regular monetary interest, andif no regular interest had been agreed upon, then payment of legal interest.

Tio 0he Chio $s. Court of (ppeals22 49! 11"%

4ircular o. #1$ of the 4entral 0an( which too( effect on ?uly 2", 1"+# pursuant to/residential =ecree o. 11$ @sury Aaw% raised the legal rate of interest from si $8%percent to twelve 128% percent. he ad&usted rate mentioned in the circular refers only toloans or forbearances of money, goods or credits and court &udgments thereon but not tocourt &udgments for damages arising from in&ury to persons and loss of property which doesnot involve a loan.

7n the case of )hilippine Rabbit us ines* +nc. $s. Cru, .9. o. +11+, ?uly 2-, 1"-$,1#3 49! 1*-, the 4ourt declared that the legal rate of interest is si $8% percent perannum and not twelve 128% percent, where a &udgment award is based on an action fordamages for personal in&ury, not use or forbearance of money, goods or credit. 7n the samevein, the 4ourt held in G+ $s. Court of (ppeals, .9. o. *2#+-, Bctober 3, 1"-$, 1#*49! 311, that the rates under the @sury Aaw amended by /. =. 11$% are applicable only tointerest by way of compensation for the use or forbearance of money; interest by way ofdamages is governed by !rticle 22" of the 4ivil 4ode.

%astern hippin! ines* +nc. $s. C(23# 49! +-%

1. 7n a loan, the interest due should be that stipulated in writing and in the absence thereof,the rate shall be 128 per annum.

2. 7n case of other obligations, interest on the amount of damages may be imposed at thecourts discretion at the rate of $8 per annum.

3. When the money &udgment becomes final and eecutory, the rate of legal interest shall be128 per annum from such finality until its satisfaction, the interim period being ane)uivalent to a forbearance of credit.

G+ '. Court of (ppeals21- 49! 233%

4entral 0an( 4ircular o. #1$ applies only to interest on loans.

(. C. %nterprises* +nc. $s. Construction+ndustr (rbitration Commission C+(C5

2## 49! **%

a.% Bbligation not based on a loan or forbearance of money is not covered by 40 4ircular o.#1$.

b.% Aegal interest of 128 p. a. shall only be ad&udged in cases involving loan or forbearanceunder 40 4ircular o. #1$.

)6 $s. C(23$ 49! 2%

/residential =ecree o. 1$-# and 40 4ircular o. "* did not authori


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Rui $s. Caneba1"1 49! -$*%

Where the courts &udgment which did not provide for the payment of interest hasalready become final, no interest may be awarded.

an!rador $s. 'illarama1$- 49! 21*%

hat there is no longer any ceiling on interest or interest rates on loans iam a, $s.7lmpic a,mill Co., 12" 49! #3" C1"-#D% applies only where the parties openly andepressly agree on a specific rate of interest to accrue on the loan. Where the interest rateis not epressly stipulated, the loan shall earn 128 interest per annum.

+nsular an8 of (sia and (merica's. pouses alaar

1*" 49! 133%

7t is the rule that escalation clauses are valid stipulations in commercial contracts tomaintain fiscal stability and to retain the value of money on long term contracts. Eowever,the enforcement of such stipulations are sub&ect to certain conditions.

anco -ilipino $s. 6a$arro1*2 49! 3#$%

and )6 $s. +ntermediate (ppellate Court1-3 49! 133%

!n escalation clause can be valid only if it also includes a de'escalation clause or astipulation that the rate of interest agreed upon shall be reduced in the event that themaimum rate of interest is reduced by law or by 6onetary 0oard.

lorin $s. Court of (ppeals21- 49! #3$%

!n escalation clause must be bilateral hence it must provide for reduction or de'esclation of interest for said clause to be valid.

(lmeda $s. Court of (ppeals2*$ 49! 2"2%

The bindin! effect of an a!reement bet,een parties to a contract is premised ont,o settled principles5 %1#that any obligation arising from contract has the force of lawbetween the parties; and %2#that there must be mutuality between the parties based ontheir essential e)uality. !ny contract which appears to be heavily weighed in favor of one ofthe parties so as to lead to an unconscionable result is void. !ny stipulation regarding the

validity or compliance of the contract which is left solely to the will of one of the parties isli(ewise invalid.

6oreover, respondent ban(s reliance on 4. 0. 4ircular o. "*, eries of 1"-2 didnot authori


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)6 $s. Court of (ppeals2*- 49! *#"%

o begin with, /0s argument rests on a misapprehension of the import of the

appellate courts ruling. he 4ourt of !ppeals nullified the interest rate increases notbecause the promissory note did not comply with /.=. o. 1$-# by providing for a de'escalation, but because the absence of such provision made the clause so one'sided as toma(e it unreasonable.

hat ruling is correct. 7t is in line with our decision in anco -ilipino a$in!s 9Mort!a!e an8 $s. 6a$arro 1*2 49! 3#% that although /. =. o. 1$-# is not to beretroactively applied to loans granted before its effectivity there must nevertheless be a de'escalation clause to mitigate the one'sidedness of the escalation clause. 7ndeed because ofconcern for the une)ual status of borrowers vis'G'vis the ban(s, our cases after 0ancoHilipino have fashioned the rule that any increase in the rate of interest made pursuant to anescalation clause must be the result of agreement between the parties.

7n this case no attempt was made by /0 to secure the conformity of privaterespondents to the successive increases in the interest rate. /rivate respondents assent tothe increases can not be implied from their lac( of response to the letters sent by /0,informing them of the increases. Hor as stated in one case )6 $s. C(, 23- 49! 2%C1""#D%, no one receiving a proposal to change a contract is obliged to answer the proposal.

iam ao $s. 7lmpic a,mill12" 49! #3"%

@sury is now legally non'eistent. 7nterest can be charged as lender and borrowermay agree upon. he 9ules of 4ourt in regard to allegations of usury, being procedural innature, should be considered repealed with retroactive effect.

+ssue# 7f the debtor is sued by the creditor for the recovery of loan together with interest,does the failure of the creditor to file a reply denying under oath the defense or usuryamount to an admission thereofI

/eld# o. 7t is the failure of the creditor to deny under oath in his answer to a complaintfiled by the debtor against him for the recovery of usurious interest he has collected that iscontemplated by ection " of the @sury Aaw as an admission of usury.

7t does not apply to the present case where the creditor is the plaintiff see(ing therecovery of a loan together with interest and the debtor sets up the defense that thetransaction is usurious.

0orean (irlines $s. Court of (ppeals23# 49! +1+%

Aegal interest of $8 p.a. on the amount of damages in favor of a litigant shouldcommence from rendition of &udgment of the trial court instead of the date of filing of thecomplaint.

IV. DEPOSIT

A. Definition

!depositis constituted from the moment a person receives a thing belonging to another, with theobligation of safety (eeping it and of returning the same.

B. C*rcteristics

1. Real Contractbecause it is perfected by the delivery of the sub&ect matter.

2. 7f !ratuitous, it is unilateral because only the depository has an obligation. 7f onerous, it is bilateral.

3. /rincipal purpose of the contract of deposit is the safe8eepin!of the thing delivered.

#. 4ontract of deposit is generally gratuitous.


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!ception5 a% contrary stipulationb% depository is in the business of storinggoodsc% property saved from destruction during calamity without owners(nowledge; &ust compensation should be given the depository.

C. Distinctions +et0een Deosit nd 'utuu"

1. )rincipal )urpose

2. Return

3. 7b:ect

Deosit

afe(eeping or merecustody

=epositor can demandreturn at will

6ovable etra&udicial%and immovable property&udicial%

'utuu"

4onsumption of thesub&ect matter

Aender must wait forthe epiration of thestipulated period

6oney or fungiblething

D. Distinctions +et0een Deosit nd Co""odtu"

1. )rincipal )urpose

2. 6ature

Deosit

afe(eeping

6ay be gratuitous

Co""odtu"

ransfer of use

!lways gratuitous

E. $inds of Deosit

1. ?udicial

2. Ftra&udiciala. :oluntaryb. ecessary

3. Distinctions bet,een %&tra:udicial and ;udicial Deposits

1. he first is constituted by will of the contracting parties, while the second is constituted byvirtue of a court order.

2. 7n the first, the ob&ect must be movable property, whereas in the second, the ob&ect may be

either movable or immovable property.

3. he purpose of the first is the safe(eeping of the thing deposited, whereas the mainpurposes of the secondis to secure or protect the owners right.

#. he firstis, as a general rule, gratuitous, whereas the secondis always onerous.

*. 7n the first, the depository is obliged to return the thing deposited upon demand made bythe depositor, whereas the second*the thing shall be delivered only upon order of the court.

3. Vo!untry Deosit

1. =efined as one wherein the delivery is made by the will of the depositor.

2. !lthough generally the owner, the depositor need not be the owner of the thing deposited.

3. 6ay be oral or in writing.

G. O+!i)tions of t*e Deositry

1. =epositary is obliged to (eep the thing safely and to return it when re)uired, even though aspecified term may have been stipulated in the contract.


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2. =epositary is liable if the loss occurs through his fault or negligence. Aoss of thing while in thedepositarys possession raises a presumption of fault. 9e)uired degree of care is greater if the deposit isfor compensation than when it is gratuitous.

3. =epositary is not allowed to deposit the thing with a third person.

%&ception# contrary stipulation

#. Depositar is liable for the loss of the thin! deposited if##.1 he transfers the deposit with a third person without authority although there is no

negligence on his part and the third person;

#.2 he deposits the thing with a third person who is manifestly careless or unfit althoughauthori


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Note: Depositar is authoried to open the thin! deposited ,hich is closed and sealed ,hen thereis#

a% presumed authority (eys having been delivered to depositary%, orb% in case of necessity.

*. =epositary has the obligation to return not only the thing but also all its products, accessions andaccessories which are a conse)uence of ownership.

&. Persons to 0*o" Return of T*in) Deosited 'ust +e 'de

1. he depositary is obliged to return the thing deposited, when re)uired, to the depositor, to hisheirs and successors, or to the person who may have been designated in the contract !rticle1"+2%.

2. 7f the depositor was incapacitated at the time of ma(ing the deposit, the property must bereturned to his guardian or administrator or the person who made the deposit or to the depositorhimself should he ac)uire capacity !rticle 1"+%.

3. Fven if the depositor had capacity at the time of ma(ing the deposit but he subse)uently loses hiscapacity during the deposit, the thing must be returned to his legal representative !rticle 1"--%.

I. P!ce of Return of T*in) Deosited

1. at the place agreed upon by the parties, and

2. in the absence of stipulation, at the place where the thing deposited might be even if it should notbe the same place where the original deposit was made provided the transfer was accomplished withoutmalice on the part of the depositary.

Note: =epositor shoulders the epenses for transportation

/. Ti"e of Return of T*in) Deosited

Gener! Ru!e5 @pon demand or at will, whether or not a period has been stipulated.

E-cetions:a% thing is &udicially attached while in thedepositarys possession

b% depositary was notified of the opposition ofa third person to the return or the removalof the thing deposited !rticle 1"-$%

$. Ri)*t of Deositry to Return T*in) Deosited

1. if deposit is gratuitous; and2. &ustifiable reasons eist for its return

Note: Btherwise, depositary may avail of consignation therefore there is no right to return beforeepiration of the term designated if deposit is for valuable consideration !rticle 1"-"%.

L. A!tertion of Deositry4s &eir

1. 7f in good faith, heir may either return the price he received or assign his right of action against thebuyer in case the price has not been paid.

2. 7f in bad faith, heir is liable for damages and may be sued for estafa.

'. Re!tion +et0een Bn5 nd Deositor

=eposits of money in ban(s, whether fied, savings and current, are governed by the provisions onmutuum and the relation between a depositor and a ban( is that of a creditor and a debtor.


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errano $s. Central an8"$ 49! "$%

! ban(s failure to honor a deposit is failure to pay its obligation as debtor and not abreach of trust arising from a depositarys failure to return the sub&ect matter of the deposit.

Guin!ona $s. Cit -iscal of Manila12$ 49! *++%

While the ban( has the obligation to return the amount deposited, it has, however, noobligation to return or deliver the same money that was deposited.

7$erseas an8 of Manila $s. Court of (ppeals1+2 49! *21%

7t has been held that suspension of a ban( which had fallen into a Jdistressedfinancial situationK by order of the 4entral 0an( cannot ecuse it from its obligations todepositors who had nothing whatever to do with the 4entral 0an( actuations or the eventsleading to the ban(s distressed state.

+nte!rated Realt Corp. $s. )hil. 6ational an81+# 49! 2"*%

and-idelit a$in!s $s. Cenon

1-# 49! 1#1%

he obligation of a ban( to pay interest on a deposit ceases the moment theoperations the ban( is completely suspended by the 4entral 0an(. he deposit is notentitled to interest during the period the ban( is not allowed to operate.

N. O+!i)tions of Deositor

1. Ee is obliged to pay epenses for the preservation of the thing deposited, if deposit is gratuitous.

2. Ee is obliged to pay for losses incurred due to the character of the thing deposited.

!ceptions" a% unless depositor was not aware thereofb% depositor was not epected to (now the dangerous character of the thingc% unless he notified the depositary of the same; ord% depositary was aware of it without depositors advice !rticle 1""3%

Note: =epositary has the right to retain the thing deposited in pledge until full payment of what may bedue him by reason of the deposit !rticle 1""#%.

O. Necessry Deosit

1. 6ecessar deposit in compliance ,ith a le!al obli!ation

1.1 he &udicial deposit of a thing, the possession of which is being disputed in a litigation bytwo or more persons !rticle *3-%;

1.2 he deposit with a ban( or public institution of public bonds or instruments if creditpayable to order or bearer given in usufruct when the usufructuary does not give propersecurity for their conservation !rticle *-$%;

1.3 he deposit of a thing pledged when the creditor uses the same without the authorityof the owner or misuses it in any other way !rticle 21#%;

1.# hose re)uired in suits as provided in the 9ules of 4ourt; and

1.* hose constituted to guarantee contracts with the government. 7n this last case, thedeposit arises from an obligation of public or administrative character.

2. 6ecessar deposit made on the occasion of a calamit.

3. Deposit b tra$elers in hotels and inns


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3.1 hey have been previously informed about the effects brought by the guests; and

3.2 he latter have ta(en the precautions prescribed regarding their safe(eeping.

#ote"

1. /otel8eeper is liable re!ardless of the amount in the follo,in! cases5

a% he loss or in&ury is caused by his servants or employees as well as by strangersprovided that notice has been given and proper precautions ta(en. !rticle 1""-%; andb% he loss is cause by the act of a thief or robber done without the use of arms andirresistible force !rticle 21% for in this cause, the hotel(eeper is apparently negligent.

2. /otel8eeper is not liable in the follo,in! cases#

a% he loss or in&ury is caused by force ma&eure li(e flood, fire !rticle 2%, theft orrobbery by a stranger not by hotel(eepers servant or employee% with the use of arms orirresistible force !rticle 21%, etc., unless he is guilty of fault or negligence in failing toprovide against the loss or in&ury from said cause see !rticle 11+, 11+#%;

b% he loss is due to the acts of the guests, his family, servants or visitors !rticle 22%.

c% he loss arises from the character of the things brought into the hotel !rticle 22%.

3. tipulations on eemption or diminution of liability is void !rticle 23%.

#. Eotel(eeper has a right to retain the things of guests as security for unpaid lodgingepenses and supplies.

P. /udici! deosit or Se6uestrtion

1. Distinction bet,een ;udicial and %&tra:udicial Deposits

Cause

)urpose

ub:ect Matter

Remuneration

eneficiar

/udici!

by will or court

to secure the right of aparty to recover in caseof a favorable

&udgment

movable and immovable

property

onerous

person with favorable&udgment

E-tr7udici!

by will of the parties

custody andsafe(eeping of thething

only movable

property

generally gratuitous

depositor

V. G(ARANTY

A. Definition

Guarantis a contract whereby a person binds himself to the creditor to fulfill the obligationof the principal debtor in case the latter should fail to do so.

B. C*rcteristics

1. accessory2. subsidiary and conditional3. unilateral#. re)uires that the guarantor must be a person


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distinct from the debtor

C. Distinction +et0een Gurnty nd Suretys*i

1

2

3

Gurnty

uarantor is secondarilyliable.

uarantor binds himselfto pay only when theprincipal cannot pay.

uarantor is an insurer ofthe debtors solvency.

1

2

3

Suretys*i

urety is primarily liable and istherefore not entitled to theehaustion of the properties ofthe principal debtor

urety assumes liability as aregular party to theunderta(ing and underta(es topay if the principal does notpay.

urety is an insurer of the debt.

D. Recent /urisrudence on Suretys*i

+ncion!* ;r. $s. Court of (ppeals2*+ 49! *+-%

+ssue# /etitioner argues that the dismissal of the complaint against aybe, the principaldebtor, and against /antanosas, his co'member, constituted a release of his obligationespecially because the dismissal of the case against /antanosas was upon the motion ofprivate respondent itself, citing !rticle 2- as basis for his argument.

/eld5 ection #, 4hapter 3, itle 1, 0oo( 7: of the 4ivil 4ode states the law on &oint andseveral obligations. @nder !rticle 12"+ thereof, when there are two or more debtors in oneand the same obligation, the presumption is that the obligation is &oint so that each of thedebtors is liable only for a proportionate part of the debt. here is a solidary liability onlywhen the obligation epressly so states, when the law so provides or when the nature of theobligation so re)uires.

/etitioner signed the promissory note as a solidary co'ma(er and not as a guarantortherefore !rticle 2- is not applicable. 0ecause the promissory note involved in this caseepressly states that the three signatories therein are &ointly and severally liable, any one,some or all of them may be proceeded against for the entire obligation. he choice is left to

the solidary creditor to determine against whom he will enforce collection. 4onse)uently,the dismissal of the case against ?udge /antanosas may not be deemed as havingdischarged petitioner from liability as well. !s regards aybe, suffice it to say that the courtnever ac)uired &urisdiction over him. /etitioner, therefore, may only have recourse againsthis co'ma(ers, as provided by law.

)hilippine 6ational an8 $s. Court of (ppeals1"- 49! +$+%

! suretys liability to the creditor or promisee of the principal is said to be direct,primary and absolute. 7n other words, he is directly, primarily and e)ually bound with theprincipal as original promissor although he possesses no direct or personal interest over thelatters obligations nor does he receive any benefits therefrom.

)hilippine 6ational an8 $s. )ineda

1"+ 49! 1%

7f the principal debtor and the surety are held liable, their liability to pay the creditorwould be solidary but the nature of the suretys underta(ing is such that it does not incurliability unless and until the principal debtor is held liable.


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-inman General (ssurance Corp. $s. ali81-- 49! +#%

7n the absence of collusion, the surety is bound by a &udgment against the principaleven though he was not a party to the proceedings. he nature of its underta(ing ma(es itprivy to all proceedings against its principal.

E. Ru!es Go8ernin) t*e Nture nd E-tent of Gurnty

1. G.R.'uaranty is generally gratuitous!ception" contrary stipulation

Garcia* ;r. $s. Court of (ppeals1"1 49! #"3%

he peculiar nature of a guaranty or surety agreement is that it is regarded as validdespite the absence of any direct consideration received by the guarantor or surety eitherfrom the principal debtor or from the creditor. While a contract of guaranty or surety, li(eany other contract, must generally be supported by a sufficient consideration, suchconsideration need not pass directly to the guarantor or surety; a consideration moving tothe principal alone will suffice. he guarantor or surety, therefore, becomes liable for thedebt or duty of another although he possesses no direct or personal interest over theobligations nor does he receive any benefit therefrom.

2. uaranty is an accessory contract therefore there must be a valid principal obligation for guarantyto be valid. uarantor may secure the performance of voidable, unenforceable, natural, conditional, andfuture obligations !rticle 2*2%.

3. uarantors liability cannot eceed the principal obligation !rticle 2*#%.

#. uaranty cannot be presumed. 7f there is any doubt on the terms and conditions of the guaranty orsurety agreements, the doubt should be resolved in favor of the guarantor or surety /hilippine ational0an( vs. 4ourt of !ppeals, 1"- 49! +$+%. Eowever, the rule of strictissimi &uris commonly refers to anaccommodation surety and is not applied in case of compensated sureties.

*. he )ualifications of a guarantor are5

Ee possesses integrity;Ee has capacity to bind himself; andEe has sufficient property to answer for the obligation which he guarantees

$. Where the creditor has re)uired and stipulated that a specified person should be a guarantor, thesubstitution of guarantor may not be demanded !rticle 2*+% because in such a case the selection of theguarantor is a term of the agreement and as a party, the creditor, is therefore, bound thereby see !rticles11*", 13$%.3. Effects of Gurnty +et0een t*e

Gurntor nd t*e Creditor

1. G.R.'uarantor has the right to the benefit of ecussion or ehaustion of the debtors propertybefore he can be compelled to pay.

!ceptions"

a% if guarantor has epressly renounced ecussion

b% if guarantor has bound himself solidarily with the debtor suretyship%c% in case of debtors insolvencyd% when guarantor has absconded or cannot be sued within the /hilippines unless he left a

manager or representativee% if it may be presumed that an eecution on the debtors property will not satisfy the obligationf% if guarantor does not set up the benefit of ecussion and fails to point out to the creditor

available property of the debtor within the /hilippinesg% if he is a &udicial bondsman and sub'suretyh% where a pledge or mortgage has been given by the guarantor as a special security


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i% if guarantor fails to interpose it as a defense before &udgment is rendered against him aavedravs. /rice, $- /hil. $$"%

2. ! compromise between the creditor and the principal debtor benefits the guarantor but does notpre&udice him. ! compromise which is entered into between the guarantor and the creditor benefits butdoes not pre&udice the principal debtor !rticle 2$3%.

3. uarantor is li(ewise entitled to the benefit of division where there are several guarantors of onlyone debtor and for the same debt. uarantors liability is only &oint therefore, they are not liable beyondthe shares which they are respectively bound to pay !rticle 2$*%.

%&ceptions# a% solidarity 0% if any of the circumstances in !rticle 2*+ should ta(e place.


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G. Effects of Gurnty +et0een t*eDe+tor nd t*e Gurntor

1. uaranty is a contract of indemnity. he guarantor who pays for a debtor must be indemnified bythe latter. The indemnit comprises5

1.1 the total amount of the debt;1.2 the legal interest thereon from the time the payment was made (nown to the debtor, even thoughit did not earn interest for the creditor;

1.3 he epenses incurred by the guarantor after having notified the debtor that payment had beendemanded of him;

1.# =amages, if they are due !rticle 2$$%

%&ceptions#

a% Where the guaranty is constituted without the (nowledge or against the will of the principaldebtor, the guarantor can recover only insofar as the payment had been beneficial to thedebtor !rticle 2*%

b% /ayment by a third person who does not intend to be reimbursed by the debtor is deemed to bea donation, which, however, re)uires the debtors consent. 0ut the payment is in any case validas to the creditor who has accepted it !rticle 123-%

c% he right to demand reimbursement is sub&ect to waiver.

2. uarantor has the right of subrogation against the debtor to enable him to enforce the indemnitygranted in !rticle 2$$ and he cannot demand more than what he actually paid !rticle 2$+%.3. Guarantor has the ri!ht to proceed a!ainst the debtor e$en before pament in the follo,in!instances#

When he is sued for the payment;7n case of insolvency of the principal debtor;When the debtor has bound himself to relieve him from the guaranty within a specified period, and thisperiod has epired;When the debt has become demandable by reason of the epiration of the period for payment;!fter the lapse of ten years, when the principal obligation has no fied period for its maturity, unless it beof such nature that it cannot be etinguished ecept within a period longer than ten years;7f there are reasonable grounds to fear that the principal debtor intends to abscond;7f the principal debtor is in imminent danger of becoming insolvent !rticle 2+1%.

uarantor may either obtain release from the guaranty or demand a security that shall protect himfrom any proceedings by the creditor and from danger of debtors insolvency !rticle 2+1%.

&. Effects of Gurnty s Bet0een Co,)urntors

1. he obligation of several guarantors of the same debtor and for the same debt is &oint and each is

bound only to pay his proportionate share. herefore, one who has paid the entire debt may see(reimbursement from each of his co'guarantors the share which is proportionately owing him.

Re6uisites:a% payment must have been made by virtue of a &udicial demand orb% because the principal debtor is insolvent

I. E-tin)uis*"ent of Gurnty

1. ein! accessor and subsidiar* !uarant is terminated ,hen the principal obli!ation ise&tin!uished b#

a% payment or performance;

b% loss of the thing duec% condonation or remission of the debtd% confussion or merger of the rights of the creditor and debtore% compensationf% novation

uaranty may also be etinguished if the creditor has released the guarantor although the principalobligation remains !rticle 2+-% or in case of material alteration which imposes a new obligation or added


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burden on the party promising or which ta(es away some obligation already imposed, changing the legaleffect of the original contract and not merely the form thereof. 6(C7 $s. Torrento, 2 49! #2+ C1"$+D%.

2. 9elease of one guarantor by the creditor without the consent of the other guarantors benefits all tothe etent of the share of the guarantor released !rticle 2+-%.

3. !n etension of the term granted by the creditor to the debtor without guarantors consentetinguishes the guaranty !rticle 22"%.

#. he guarantor who pays is entitled to be subrogated to all the rights of the creditor !rticle 2$+%.7f there can be no subrogation because of the fault of the creditor, as when the creditor releases or fails toregister a mortgage, the guarantors are thereby released. he same rules applies even though theguarantors be solidarily !rticle 2-%.

/. Le)! nd /udici! Bonds

1. ! &udicial bondsman and the sub'surety are not entitled to the benefit of ecussion because theyare not mere guarantors, but sureties whose liability is primary and solidary.

VI. PLEDGE

A. Definition

)led!eis a contract by virtue of which the debtor delivers to the creditor or to a third person amovable !rticle 2"#% or document evidencing incorporeal rights !rticle 2"*% for the purpose ofsecuring the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled,the thing delivered shall be returned with all its fruits and accessions.

B. C*rcteristics

1. ! realcontractbecause it is perfected by the delivery of the thing pledged by the debtor who iscalled the pledgor to the creditor who is the pledge, or to a third person by common agreement;

2. !n accessor contractbecause it has no independent eistence of its own;

3. ! unilateral contractbecause it creates an obligation solely on the part of the creditor to return thething sub&ect thereof upon the fulfillment of the principal obligation;

#. ! subsidiarcontract because the obligation incurred does not arise until the fulfillment of theprincipal obligation to which it is secured.

C. Essenti! Re6uire"ents

1. he pledge is constituted to secure the fulfillment of a principal obligation.

2. he pledgor or mortgagor is the absolute owner of the thing pledged or mortgaged.

3. he persons constituting the pledge or mortgage have the free disposal of their property, and in theabsence thereof, that they be legally authori


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#. ! stipulation whereby the thing pledged or mortgaged or under antichresis !rticle 213+% shallautomatically become the property of the creditor in the event of non'payment of the debt within the termfied is (nown aspactum commisoriumorpacto commissoriowhich is forbidden by law and declared nulland void article 2--%E. Disctinctions +et0eenP!ed)e nd Re! 'Ort))e

P!ed)e Re! 'ort))e1.

2.

3.

6ovable property

=elivery of the ob&ectpledged to the pledgee or athird person

/ledge is not valid againstthird persons unless adescription of the thingpledged and the date of thepledge appear in a publicinstrument.

1.

2.

3.

7mmovable property

=elivery of the thing mortgagedis not necessary

6ortgage is not valid againstthird persons if not registered.

3. Pro8isions A!ic+!e on!y to P!ed)e

1. he pledgor retains his ownership of the thing pledged. Ee may, therefore, sell the same providedthe pledgee consents to the sale. !s soon as the pledgee gives his consent, the ownership of the thingpledged is transferred to the vendee sub&ect to the rights of the pledgee, namely, that the thing sold maybe alienated to satisfy the obligation !rticle 2112% and that the pledgee must continue in possessionduring the eistence of the pledge. !rticle 2"3, 2"-%.

2. he possession of the pledgee constitutes his security. Eence, the debtor cannot demand for itsreturn until the debt secured by it is paid. ee !rticle 21*? errano $s. Court of (ppeals*1"$ 49! 1+C1""1D% utthe right of retention is limited only to the fulfillment of the principal obligation for which thepledge was created. !rticle 2"-%.

3. /ledgee has the obligation to ta(e care of the thing pledged with the diligence of a good father ofthe family. Ee is entitled to reimbursement of the epenses incurred for its preservation and he is liablefor loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract.!rticles 11+#, 11+%.

#. /ledgee is not authori


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1. he sale of the thing pledged etinguishes the principal obligation whether the price of the sale ismore or less than the amount due.

a. +f the price of the sale is more than the amount due the creditor, the debtor is not entitled tothe ecess unless the contrary is provided;

b. 7n the same way, if the price of the sale is less, neither is the creditor entitled to recover thedeficiency. ! contrary stipulation is void !rticle 211*%.

VII. REAL 'ORTGAGE

A. Definition

Real Mort!a!eis a contract whereby the debtor secures to the creditor the fulfillment of a principalobligation, specially sub&ecting to such security immovable property or real rights over immovableproperty in case the principal obligation is not complied with at the time stipulated.

B. C*rcteristics

1. 7t is an accessory and subsidiary contract.

2. 7t is also unilateral because it creates only an obligation on the part of the creditor who must freethe property from the encumbrance once the obligation is fulfilled.

3. he mortgagor, as a general rule, retains possession of the property mortgaged as security for thepayment of the sum borrowed from the mortgagee, and pays the latter a certain percent thereof asinterest on his principal by way of compensation for his sacrifice in depriving himself of the use of saidmoney and the en&oyment of its fruits, in order to give them to the mortgagor.

#. he ob&ects of a real mortgage are immovable !rticle #1*% and alienable real rights imposed uponimmovables.

#ote" While a mortgage of land necessarily includes, in the absence of stipulation, theimprovements thereon, a building by itself may be mortgaged apart from the land on which it is built./ossessory rights over said property before title is vested on the grantee may be validly transferred orconveyed as in a deed of mortgage. prudential an8 $s. )anis* 1*3 49! 3" C1"$+D%; 6artales $s. G+,1*$ 49! 2* C1"-+D%.

*. 7n order that a mortgage may be validly constituted, it must appear in a public document dulyrecorded in the 9egistry of /roperty see Gaotian $s. Gaffud, 2# 49! +$ C1"$"D%

#ote" 7f the instrument of mortgage is not recorded, the mortgage is nevertheless bindingbetween the parties.

$. ! mortgage creates a real right see Tuaon $s. Grosco, * /hil. *"$ C1"*D%, a lien inseparable fromthe property mortgaged, which is enforceable against the whole world. @ntil discharged, it follows theproperty wherever it goes and subsists notwithstanding changes of ownership.#ote"

a.% 7f the mortgagor sells the mortgaged property, the property remains sub&ect to thefulfillment of the obligation secured by it. see onne$ie $s. Court of (ppeals, 12* 49! 122 C1"-3D% !llsubse)uent purchasers of the property must respect the mortgage, whether the transfer to them be withor without the consent of the mortgagee. ut the mortgage must be registered !rticle 212*% or, if notregistered, the buyer must (now of its eistence. see )hil. 6ational an8 9 Trust Corp. $s. Court of

(ppeals, 1"3 49! 1*- C1""1D% he mortgagor may not be the principal debtor !rticle 2-*, 2ndpar.%.

b.% he right or lien of an innocent mortgagee for value upon the mortgaged property must berespected and protected, even if the mortgagor obtained his title through fraud. he remedy of thepersons pre&udiced is to bring an action for damages against the person who caused the fraud and if thelatter is insolvent, an action against the reasurer of the /hilippines may be filed for the recovery ofdamages against the !ssurance Hund )hilippine 6ational an8 $s. Court of (ppeals*1-+ 49! +3* C1""D%

C. Effect of 'ort))e

1. he only right of a mortgagee in case of non'payment of a debt secured by real mortgage would beto foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtednessGuanon $s. (r!el*33 49! #+# C1"+D%


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2. he mortgagors default does not operate to vest in the mortgagee the ownership of the encumberedproperty. Eis failure to redeem the property does not automatically vest ownership of the property to themortgagee which would grant the latter the right to appropriate the property or dispose of it for such effectis against public policy as enunciated by !rticle 2--. Rees $s. ierra, "3 49! #+2 C1"+"D%.

(dla,an $s. Torres233 49! $#*%

0y mortgaging a piece of property, a debtor merely sub&ects it to a lien but ownershipthereof is not parted with.

D. E-tent of 'ort))e

General Rule: ! mortgage constituted on immovable property is not limited to the propertyitself but also etends to all its accessions, improvements, growing fruits and rents or income see !rticle212% as well as to the proceeds of insurance should the property be destroyed of the epropriation valueof the property should it be epropriated.

!ception" contrary stipulation

E. A!iention or Assi)n"ent of 'ort))e

1. aid assignment is valid and assignee may foreclose the mortgage in case of nonpayment of themortgage indebtedness. antia!o $s. )ioneer a$in!s and oan an8, 1*+ 49! 1 C1"--D%.

2. he fact that the mortgagor has transferred the mortgaged property to a third person does notrelieve him from his obligation to pay the debt to the mortgage creditor in the absence of novationMcCallou!h 9 Co. $s. ierra*#1 /hil. 1 C1"21D%.

3. he mortgage credit being a real right which follows the property, the creditor may demand fromany possessor the payment of the credit secured by said property. 7t is necessary, however, that priordemand for payment must have been made on the debtor and the latter failed to pay. an8 of the )hil.+sland $s. Concepcion 9 /i:os* +nc.**3 /hil. "$ C1"2"D%

#. !n assignee cannot ac)uire greater rights than those pertaining to an assignor 0oa $s. Court of(ppeals*21" 49! *#1%.3. Stiu!tion 3or+iddin) A!iention of 'ort))ed Proerty

1. uch a stipulation is void. /o,e$er, if the mortgagor alienates the property, the transferee isbound to respect the encumbrance because being a real right, the property remains sub&ect to thefulfillment of the obligation for whose guaranty it was constituted !rticle 212$%.

G. 3orec!osure of 'ort))es

1. ?udicial foreclosure governed by 9ule $- of the 9ules of 4ourt.

2. Ftra&udicial Horeclosure governed by !ct. o. 313* as amended, if and when the mortgagee isgiven a specific power or epress authority to do so.

a. /ublic auction must be conducted in the province where the property is situated.

b. /osting of notice of sale in at least 3 public places therein

c. /ublication in a newspaper of general circulation

d. /ersonal notice to mortgagor is not re)uired onne$ie $s. Court of (ppeals, 12* 49! 122

C1"-3D; G+ $s. Court of (ppeals* 1+ 49! *33 C1"-"D%.

e. =ebtor has the right to redeem the property sold within the term of one year from and afterthe date of the sale ection $%. he rec(oning date in case of registered land is from theregistration of the certificate of sale since it is only from such date that the sale ta(es effectas a conveyance. ;ose $s. lue, #2 49! 3*1, C1"+1D; Gorospe $s. antos, $" 49! 1"1C1"+$D; General $s. arrameda, $ 49! 1$2 C1"+$D. JFvery conveyance of lands ac)uiredunder the free patent or homestead provisions, when proper, shall be sub&ect to repurchaseby the applicant, his widow or legal heirs, within a period of five years from the date of the


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conveyance.K ection 11", 4.!. o. 1#1 C/ublic Aand AawD, as amended% or foreclosure saleTupas $s. Damasco, 132 49! *"3 C1"-#D%.

#ote" Cerna $s. C(22 49! *1+%5 he filing of a collection suit bars the foreclosure of mortgage.

&. Ri)*t of 'ort))ee to Reco8er Deficiency

1. 7f there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgageeis entitled to recover the deficiency. De$elopment an8 of the )hilippines $s. Miran!*$$ 49! 1#1C1"+*D. 7n:udicial foreclosure, the 9ules of 4ourt specifically gives the mortgagee the right to claim fordeficiency in case a deficiency eists ection $, 9ule +%. While !ct o. 313* governing e&tra:udicialforeclosuresof mortgage does not give a mortgagee the right to recover deficiency after the public auctionsale, neither does it epressly or impliedly prohibit such recovery.

#ote" his right to recover deficiency had been categorically resolved in tate +n$estment $s. Court of(ppeals21+ 49! 32 C1""3D%. Frgo, the mort!a!ee is entitled to reco$er the deficienc in case the saleproceeds are not sufficient to co$er the debt in e&tra:udicial foreclosures.

2. he action to recover a deficiency after foreclosures prescribes after ten 1% years from the timethe right of action accrues as provided in !rticle 11##2% of the 4ivil 4ode =evelopment 0an( of the/hilippines vs. omeldan, 11 49! 1+1 C1"-D.

I. 9i8er of Security +y Creditor

1. he mortgagee may waive the right to foreclose his mortgage and maintain a personal action forrecovery of the indebtedness. here is no statutory provision in our &urisdiction prohibiting a personalaction to recover a sum of money even though a mortgage has been given as security for the payment ofthe same. /i:os de +. de la Rama $s. a:o, #* /hil. +3 C1"2#>? olomon and achica $s. Dantes*$3 /hil.*22 C1"3+D%.

2. he mortgagee cannot have both remedies. Ee has only one cause of action, i. e., non'payment ofthe mortgage debt; hence, he cannot split up his cause of action by filing a complaint for payment of thedebt and another complaint for foreclosure. Calte& )hils. 's. +ntermediate (ppellate Court* 1+$ 94! +#1C1"-"D%.

/. $inds of Rede"tion

1. $uit% of redemptionor the right of the mortgagor to redeem the mortgaged property after hisdefault in the performance of the conditions of the mortgagee but before the sale of the mortgagedproperty or confirmation of the sale see Top"Rate +nternational er$ices* +nc. $s. +ntermediate (ppellateCourt, 1#2 94! #$+ C1"-$D%. he mortgagors e)uity of redemption is simply the right of the mortgagorto etinguish the mortgage and retain ownership of the property by paying the secured debt within the "'day period after the &udgment becomes final, in accordance with ection 2, 9ule $- of the 9ules of 4ourt oreven after the foreclosure sale but prior to its confirmation. impin $s. +ntermediate (ppellate Court, 1$$

49! -+ C1"--D%.

2. Ri&ht of redemptionor the right of the mortgagor to redeem the mortgaged property within acertain period1 yr% after it was sold for the satisfaction of the mortgaged debt.

$. Ri)*t of Rede"tion

1. 7n all cases of etra&udicial sale, the mortgagor may redeem the property at any time within theterm of one ear from and after the date of re!istration of the salesee ection $, !ct o. 313*; Rees $s.Tolentino#2 49! 3$* C1"+1D%.

2. 7n:udicial foreclosureof real estate mortgage, there is a right of redemption which he can eercise

at any time after service of &udgment of foreclosure and within the AB"da period and even thereafterprovided he does so before the foreclosure sale is confirmed by the court. (nderson $s. Rees, *# /hil"##%. 4onfirmation of the sale of mortgaged real property cuts off all the rights or interests of themortgagor and of the mortgage and persons holding under him, and with them the e)uity of redemption inthe property and vests them in the purchaser. 4onfirmation retroacts to the date of the sale. 7t is a finalorder, not interlocutory. 7campo $s. Domalanta, 2 94! 113$ C1"$+D; inalba!an %state* +nc. $s.Gatuslao, +$ /hil. 12- C1"#$D; 'illar $s. ;a$ier, "+ /hil $# C1"**D; onome $s. (mores, 13# 49! 3-C1"-*D.


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!ception" Eowever, if the property has been mortgaged in favor of the =0/ 4! #*"% /hilippineational 0an( 9! 13%, ban(s, ban(ing and credit institutions 9! 33+, or the eneral0an(ing !ct% or rural ban(s 9! 2$+%, redemption is allowed within one year from theregistration of the sale. Conales $s. )hil. 6ational an8* #- /hil. -2# C1"2$D%. heredemption must be made within one year after the sale if the mortgagee is a ban(, ban(ingor credit institution ection +-, 9. !. o. 33+; )iano $s. Caano!, supra%. @nder the 9evised

charter of the /0, the period is one year from the registration of the foreclosure sale.

L. Re6uisites for V!id Rede"tion

1. he redemption must be made within 12 months from the time of the registration of the sale.2. /ayment of the purchase price of the property plus 18 interest per month together with the taesthereon, if any, paid by the purchaser with the same rate of interest computed from the date ofregistration of the sale; and

3. Written notice of the redemption must be served on the officer who made the sale and a duplicatefiled with the proper 9egister of =eeds. Rosales $s. boa, 12 49! -$" C1"-3D%.

Ramire $s. Court of (ppeals21" 49! *"-%

!cceptance of redemption price after the epiration of the statutory period forredemption is deemed a waiver of the one'year period to redeem foreclosed property.

'. Recent /urisrudence on Re! 'ort))es

6oel $s. Court of (ppeals2# 49! +-%

7n the absence of proof of gross inade)uacy of the price, the fact that the sale wasmade with what might appear as an inade)uate consideration does not ma(e the contractone of mortgage.

Mercado $s. Court of (ppeals2# 49! $1$%

! co'owner does not lose his part ownership of a co'owned property where his shareis mortgaged by another co'owner without the formers (nowledge and consent.

Tarnate $s. Court of (ppeals2#1 49! 2*#%

7t is a settled rule that a mortgagee may recover any deficiency in the

mortgage account which is not reali


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e.% ! mortgage action prescribes after 1 years.

D) $s. Court of (ppeals2#" 49! 331%

he fact that the annulment of the sale will also result in the invalidity of themortgage does not have an effect on the validity and efficacy of the principal obligation, foreven an obligation that is unsupported by any security of the debtor may also be enforcedby means of an ordinary action. Where a mortgaged is not valid, as where it is eecuted byone who is not the owner of the property, or the consideration of the contract is simulated orfalse, the principal obligation which it guaranteed is not thereby rendered null and void.

hat obligation matures and becomes demandable in accordance with the stipulationspertaining to it.

Gabonsen! $s. Court of (ppeals2#$ 49! #+2%

he application for foreclosure of mortgage is premature where the debtors have notyet defaulted on the payment of either the principal or the interest on their loans.

(:a& Mar8etin! 9 De$elopmentCorporation 's. Court of (ppeals

2#- 49! 222%

!n action to foreclose a mortgage is usually limited to the amount mentioned in themortgage but where the intent of the contracting parties is manifest that the mortgagedproperty shall also answer for future loans or advancements then the same in not improperas it is valid and binding between the parties.

-ilin$est Credit Corporation's. Court of (ppeals

2#- 49! *#"%

a.% 7f the mortgagee cannot obtain possession of a mortgaged property for its sale onforeclosure, it must bring a civil action either to recover such possession as apreliminary step to the sale or to obtain &udicial foreclosure.

b.% 9eplevin is the appropriate action to recover possession preliminary to theetra&udicial foreclosure of a chattel mortgage.

)hilippine an8 of Communications's. Court of (ppeals

2*3 49! 2#1%

+ssue# he mortgage contract provides5

Jhis mortgage is given as security for the payment to the 6B9!FF on demand or atmaturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills ofechange, drafts, overdrafts and all other obligations of every (ind already incurred or whichhereafter may be incurred L.K

4an the ban( charge penalty based on said provisionI

&e!d:1. he obligation in this case was not a series of indeterminate sums incurred over aperiod of time, but two specific amounts procured in a single instance. hus, theinapplicability of the ruling in Aim ?ulian vs. Autero #" /hil. +3% which pertains only tomortgages securing future advancements. 7nstead, what applies here is the general rulethat Jan action to foreclose a mortgage must be limited to the amount mentioned in the

mortgage.K

2. he mortgage provision relied upon by the petitioner is (nown in !merican?urisprudence as a dra!netE clause*which is specifically phrased to subsume all debts ofpast or future origin. uch clauses are carefully scrutini


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JadhesionK thereto. 0eing a contract of adhesion, the mortgage is to be strictly construedagainst the petitioner, the party which prepared the agreement.

#. ! reading, not only of the earlier )uoted provision, but of the entire mortgagecontract yields no mention of penalty charges. 4onstruing this silence strictly against thepetitioner, it can fairly be concluded that the petitioner did not intend to include the

penalties on the promissory notes in the secured amount. his eplains the finding by thetrial court, as affirmed by the 4ourt of !ppeals, the Jpenalties and charges are not due forwant of stipulation in the mortgage contract.K

*. 7ndeed, a mortgage must sufficiently describe the debt sought to be secured, whichdescription must not be such as to mislead or deceive, and an obligation is not secured by amortgage unless it comes fairly within the terms of the mortgage. 7n this case, themortgage contract provides that it secures notes and other evidences of indebtedness.@nder the rule of e&usdem generis, where a description of things of a particular class or (indis Jaccompanied by words of a generic character, the generic words will usually be limited tothings of a (indred nature with those particularly enumeratedL.K ! penalty charge does notbelong to the species of obligations enumerated in the mortgage, hence, the said contractcannot be understood to secure the penalty.

$. ! mortgage and a note secured by it are deemed parts of one transaction and areconstrued together, thus, an ambiguity is created when the notes provide for the paymentof a penalty but the mortgage contract does not 4onstruing the ambiguity against thepetitioner, it follows that no penalty was intended to be covered by the mortgage.

D) $s. Court of (ppeals2*3 49! #1#%

+ssue# Whether the land in dispute could have been validly mortgaged while still thesub&ect of a Hree /atent !pplication with the government.

1. /etitioner ban( did not ac)uire valid title over the land in dispute because it waspublic land when mortgaged to the ban(. We cannot accept petitioners contention that thelot in dispute was no longer public land when mortgaged to it since the Blidiana spouses hadbeen in open, continuous, adverse and public possession thereof for more than thirty 3%years. 7n 'isaan Realt* +nc. $s. Meer-$ /hil. *1*%, we ruled that the approval of a salesapplication merely authori


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so as to be able to mortgage it again. 9egistration of the mortgage is of no moment since itis understood to be without pre&udice to the better right of third parties.

2. !s a !eneral rule, where there is nothing in the certificate of title to indicate anycloud or vice in the ownership of the property, or any encumbrance thereon, the purchaseris not re)uired to eplore further than what the orrens itle upon its face indicates in )uest

for any hidden defect or inchoate right that may subse)uently defeat his right thereto. hisrule, however, admits of an e&ceptionas where the purchaser or mortgagee has (nowledgeof a defect or lac( of title in his vendor, or that he was aware of sufficient facts to induce areasonably prudent man to in)uire into the status of the title of the property in litigation. 7nthis case, petitioner was well aware that it was dealing with BA7=, a business entityengaged in the business of selling subdivision lots. 7n fact, the B!!A! found that Jat thetime the lot was mortgaged, respondent tate 7nvestment Eouse, 7nc., now petitioner% hasbeen aware of the lots location and that said lot formed part of 4apital /ar(sNEomesubdivision. 7n unshine -inance and +n$estment Corp. $s. +ntermediate (ppellate Court23 49! 21%, the 4ourt, noting petitioner therein to be a financing corporation, deviatedfrom the general rule that a purchaser or mortgagee of a land is not re)uired to loo( furtherthan what appears on the face of the orrens itle.

3. he above'enunciated rule should apply in this case as petitioner admits of being afinancing institution. We ta(e &udicial notice of the uniform practice of financing institutionsto investigate, eamine and assess the real property offered as security for any loanapplication especially where, as in this case, the sub&ect property is a subdivision lot locatedat Pue


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1.

2.

3.

9efers to real property

/erfected by mere consent

4onsensual contract

1.

2.

3.

9efers to personal property

/erfected by delivery

9eal contract

D. Distinctions +et0een Antic*resis nd Re! 'ort))e

1.

2.

3.

#.

Antic*resis

/roperty is delivered to thecreditor

4reditor re)uires only the rightto receive the fruits of theproperty; hence it does notproduce a real right

4reditor, unless there isstipulation to the contrary, isobliged to pay the taes andcharges upon the estate!rticle 213*%

4reditor given possession ofthe property shall supply thefruits thereof to the paymentof interest, if owing, andthereafter to the principal ofthe credit

1.

2.

3.

#.

Re! 'ort))e

=ebtor usually retains thepossession of the property

4reditor does not have any rightto receive the fruits, butmortgage creates a real rightover the property which isenforceable against the wholeworld

4reditor has no such obligation

6ortgagee has no such obligation

E. O+!i)tions of Antic*retic Creditor

1. he creditor is obliged, unless there is a stipulation to the contrary, to pay the taes and chargesupon the estate. 7f he does not pay the taes, he is, by law !rticle 11+%, re)uired to pay indemnity fordamages to the debtor. )ando $s. Gimene, *# /hil. #*" C1"3D%.

2. !nother obligation of the creditor is to apply the fruits, after receiving them to the interest, if owing,and thereafter to the principal !rticle 2132% in accordance with the provisions of !rticle 2133 or 213-.Eence, the duty of the creditor to render an account of said fruits to the debtor and the correspondingright of the latter that the said fruits be applied to the debt. arretto $s. arretto*3+ /hil. 23# C1"1+>?Dia and Rubillos $s. De Mendeona* #- /hil. $$$ C1"2$D; Macapilac $s. Gutierre Recipe #3 /hil. ++C1"22D%.

3. Re"edy of Creditor in Cse of Defu!t

1. o bring an action for specific performance

2. o petition for the sale of the real property as in a foreclosure of mortgages under 9ule $- of the9ules of 4ourt. he parties, however, may agree on an etra&udicial foreclosure in the same manner asthey are allowed in contracts of mortgage and pledge see !rticle 13+; Ta$era $s. %l /o!ar -ilipino* +nc.$- /hil. +12 C1"3"D%.

I. C&ATTEL 'ORTGAGE

A. Definition

! chattel mortgage is

1. an accessory contract because it is for the purpose of securing the performance of a principalobligation;

2. a formal contract because for its validity, registration in the 4hattel 6ortgage 9egister isindispensable.


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3. a unilateral contract because it produces only obligations on the part of the creditor to free thething from the encumbrance upon fulfillment of the obligation.

-ilipinas Marble Corporation $s.+ntermediate (ppellate Court

1#2 49! 1-%

! mortgage is a mere accessory contract and thus, its validity would depend on thevalidity of the loan secured by it. We however, re&ect the petitioners argument that sincethe chattel mortgage involved was not registered, the same is null and void. !rticle 212* ofthe 4ivil 4ode clearly provides that the non'registration of the mortgage does not affect theimmediate parties. 7t states5

J(rticle 212. 7n addition to the re)uisites in !rticle 2-*, it is indispensable, in order that amortgage may be validly constituted that the document in which it appears be recorded inthe 9egistry of /roperty. +f the instrument is not recorded* the mort!a!e is ne$erthelessbindin! bet,een the parties.

he petitioner cannot invo(e the above provision to nullify the chattel mortgage iteecuted in favor of respondent =0/.

C. Distinction +et0een C*tte! 'ort))e nd P!ed)e

1

2

3

#

*

C*tte! 'ort))e

=elivery of personalproperty to the mortgageeis not necessary

9egistration in the 4hattel6ortgage 9egister isnecessary for its validity

/rocedure for sale of themortgaged property isfound in ection 1# of 9!1*-, as amended

7f property is foreclosed,the ecess over theamount due goes to thedebtor

7f property is foreclosed,creditor is entitled torecover the deficiency fromthe debtor%&ception5 if chattelmortgage is a security forthe purchase of personal

property in installments!rticle 1#-#%

1

2

3

#

*

P!ed)e

=elivery is necessary

9egistration in the9egistry of /roperty isnot necessary for itsvalidity

/rocedure for sale of pledgedthing is found in !rticle 2112of the 4ivil 4ode

7f property is sold, the debtoris not entitled to the ecess%&ceptions#

a.% contrarystipulation!rticle 212*%

b.% legal pledge!rticle 2121%

7f property is sold, creditor isnot entitled to recover thedeficiency notwithstandingany stipulation to thecontrary !rticle 211*%.

D. Offenses In8o!8in) C*tte! 'ort))e

1. Qnowingly removing any personal property mortgaged under the 4hattel 6ortgage Aaw toany province or city other than the one in which it was located at the time of the eecution of themortgage without the written consent of the mortgagee; and


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2. elling or pledging personal property already mortgaged, or any part thereof, under theterms of the 4hattel 6ortgage Aaw without the consent of the mortgagee written on the ban( of themortgage and duly recorded in the 4hattel 6ortgage 9egister !rticle 31", 9evised /enal 4ode%.#ote" he mortgagor is not relieved of criminal liability even if the mortgage indebtednessis thereafter paid in full U.. $s. 0ila8o, 32 /hil. $1 C1"1*D%, or the mortgagor'seller informed the

purchaser that the thing sold had been mortgaged. )eople $s. (l$ares, #* /hil. #+2 C1"23D%. Butthe sale is valid although no written consent was obtained from the mortgagee but the mortgagorlays himself open to criminal prosecution. er$ice,ide pecialists* +nc. $s. +ntermediate (ppellateCourt*1+# 49! - C1"-"D; D* ;r. $s. Court of (ppeals, 1"- 49! -2$ C1"-1D%.

E. Su+7ect 'tter of C*tte! 'ort))e

1. hares of stoc( in a corporation2. 7nterest in business3. 6achinery and house of mied materials treated by parties as personal property and

no innocent third person will be pre&udiced thereby Ma8ati easin! and -inanceCorporation $s.


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2. @nder ection * of the 4hattel 6ortgage Aaw, in describing what shall be deemed sufficientto constitute a good chattel mortgage, includes the re)uirement of an affidavit of good faithappended to the mortgage and recorded therewith. 0ut the absence of the affida$it $itiates amort!a!e onl as a!ainst third persons ,ithout notice li8e creditors and subse@uent encumbrances.Ailius vs. 6anila 9ailroad 4o., $2 /hil. * C1"3*D; /hil. 9efining 4o. vs. ?ar)ue, $1 /hil. 22" C1"3*D;

iberson vs. !. . ?urreidini 0ros., ## /hil. 21$ C1"22D%.

3. ! deed of chattel mortgage is void where it provides that the security stated therein Jis forthe payment of any and all obligations hereinbefore contracted and which may hereafter becontracted by the mortgagor in favor of the mortgageeK. ! mortgage that contains a stipulation inregard to future advances in the credit will ta(e effect only from the date the same are made andnot from the date of the mortgage. ;aca $s. Da$ao umber Co.* 113 49! 1+ C1"-2D%.

/. 3orec!osure of C*tte! 'ort))e

1. 'ublic ale if the mortgagor defaults in the payment of the secured debt or otherwisefails to comply with the conditions of the mortgage, the creditor has no right to appropriate tohimself the personal property !rticle 21#1, 2--% because he is permitted only to recover hiscredit from the proceeds of the sale of the property at public auction through a public officer in themanner prescribed in ection 1# of !ct o. 1*-. Mahone $s. Tuason, 3" /hil. "*1 C1"1"D%;%s!uerra $s. Court of (ppeals*1+3 49! 1 C1"-"D%.

2. 'riate ale if there is an epress stipulation in the contract.

%&ception5 fraud or duress

#ote"1. he mortgagee may, after thirty 3% days from the time of the condition bro(en, cause themortgaged property to be sold at public auction by a public officer ection 1#, !ct o. 1*-%

2. he 3'day period to foreclose a chattel mortgage is the minimum period after violation ofthe mortgage condition for the mortgage creditor with at least ten 1% days notice to themortgagor and posting of public notice of time, place and purpose of such sale, and is a period ofgrace for the mortgagor, to discharge the mortgage obligation. !fter the sale of the chattel atpublic auction, the right of redemption is no longer available to the mortgagor. Cabral $s.%$an!elista*2- 49! 1 C1"$"D%

$. Ri)*t of 'ort))ee to Reco8er Deficiency

1. he creditor may maintain an action for the deficiency although the 4hattel 6ortgage Aaw issilent on this point (blaa $s. +!nacio, unrep% 13 /hil. 11*1 C1"*-D; Garrido $s. Tuason, 2# 49!+2+ C1"$-D )hil. 6ational an8 $s. Manila +n$estment 9 Construction* +nc.* supra? an8 of the)hilippine +salnd $s. 7lutan!a umber Co., #+ /hil. 2 C1"2#D%. he action may be sought within ten1% years from the time the cause of action accrues.

2. 7f the chattel mortgage is constituted, whether by the debtor'vendee or a third person, assecurity for the purchase of personal property payable in installments, no deficiency &udgment canbe as(ed and any agreement to the contrary shall be void !rticle 1#-#%.

3. he chattel mortgagee is entitled to deficiency &udgment in an action for specificperformance !rticle 1#-# C1D% where the mortgaged property is subse)uently attached and sold.

he eecution sale in such case is not a foreclosure sale. +ndustrial -inance Corporation $s.Ramire, ++ 49! 1*2 C1"++D%.

. CONC(RRENCE AND PRE3ERENCE O3 CREDITS

A. Li+i!ity for O+!i)tions

he debtor is liable with all his property, present and future, for the fulfillment of hisobligations, sub&ect to the eemptions provided by law.

B. E-e"t Proerty

1. -amil home constituted &ointly by husband and wife or by unmarried head of a family!rticle 1*2, Hamily 4ode%.


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%&ceptions# a.% for non'payment of taes;b.% for debts incurred prior to the constitution of the family home;c.% for debts secured by mortgages on the premises before or after such

constitution; andd.% for debts due to laborers, mechanics, architects, builders, material

men and others who have rendered service or furnished material for

the construction of the building

2. 9ight to receive support as well as any money or property obtained as such support. !rticle 2*,Hamily 4ode%

3. ools and implements necessarily used by him in his trade or employment;

#. wo horses, or two cows, or two carabaos or other beasts of burden, such as the debtor may select,not eceeding one thousand pesos in value and necessarily used by him in his ordinary occupation;

*. Eis necessary clothing and that of all his family.

$. Eousehold furniture and utensils necessary for house(eeping and used for that purpose by thedebtor, such as the debtor may select, of a value not eceeding one thousand pesos;

+. /rovisions for individual or family use insufficient for three months;

-. he professional libraries of attorneys, &udges, physicians, pharmacists, dentist, engineers,surveyors, clergymen, teachers and other professionals, not eceeding three thousand pesos in value;

". Bne fishing boat and net, not eceeding the total value of one thousand pesos, the property of anyfisherman, by the lawful use of which he earns a livelihood;

1. o much of the earnings of the debtor for his personal services within the month preceding the levyas are necessary for the support of his family;

11. Aettered gravestones;

12. !ll moneys, benefits, privileges or annuities accruing or in any manner growing out of any lifeinsurance, if the annual premiums paid do not eceed five hundred pesos, and if they eceed the sum, ali(e eemption shall eist which shall bear the same proportion to the moneys, benefits privileges andannuities so accruing or growing out of such insurance that said five hundred pesos bears to the wholepremiums paid;

13. he right to receive legal support, or money or property obtained as such support, or any pensionor gratuity from the government;

1#. 4opyrights and other properties especially eempted by law ection 12, 9ule 3"%

1*. /roperty under legal custody and of the public dominion.

C. Preferred Credits 0it* Resect toSecific 'o8+!e Proerty

1. =uties, taes and fees due thereon to the state or any subdivision thereof;

2. 4laims arising from misappropriation, breach of trust, or malfeasance by public officials committedin the performance of their duties, on the movables, money or securities obtained by them;

3. 4laims for the unpaid price of movable sold, on said movables, so long as they are in thepossession of the debtor, up to the value of the same, and if the movable has been resold by the debtorand the price is still unpaid, the lien may be enforced on the price; this right is not lost by theimmobili


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$. 4laims for laborers wages, on the goods manufactured or the wor( done;

+. Hor epenses of salvage, upon the goods salvaged;

-. 4redits between the landlord and the tenant arising from the contract of tenancy on shares, on theshare of each in the fruits or harvest;

". 4redits for transportation, upon the goods carried, for the price of the contract and incidentalepenses, until their delivery and for thirty days thereafter;

1. 4redits for lodging and supplies usually furnished to travelers by hotel(eepers, on the movablesbelonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests;

11. 4redits for seeds and epenses for cultivation and harvest advanced to the debtor, upon the fruitsharvested;

12. 4redits for rent for one year, upon the personal property of the lessee eisting on the immovableleased on the fruits of the same, but not on money or instruments of credit;

13. 4laims in favor of the depositor if the depository has wrongfully sold the thing deposited, upon theprice of the sale.

7n the foregoing cases, if the movables to which the lien or preference attaches have beenwrongfully ta(en, the creditor may demand them from any possessor within thirty 3% days from theunlawful sei


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1. 4redits of insurers, upon the property insured, for the insurance premium for two years. ummar%" a.% taes

b.% vendors lienc.% contractors liend.% lien of materialmene.% mortgage

f.% epenses of preservationg.% recorded attachmentsh.% warranty in partitioni.% conditional donations

&.% premiums for 2 year insurers

#ote" he foregoing enumeration is not an order of preference Carried umber Co. $s. (CC-(*-349! #11 C1"+*D%.

E. Order of Preference 0it* Resect to Ot*er Proerties of t*e De+tor

1. /roper funeral epenses for the debtor, or children under his or her parental authority who have noproperty of their own, when approved by the court;

2. 4redits for services rendered the insolvent by employees, laborers, or household helpers for oneyear preceding the commencement of the proceedings in insolvency;

3. Fpenses during the last illness of the debtor or of his or her spouse and children under his or herparental authority, if they have no property of their own;

#. 4ompensation due to the laborers of their dependents under laws providing for indemnity fordamages in cases of labor accident or illness resulting from the nature of the employment;

*. 4redits and advancements made to the debtor for support of himself or herself, and family, duringthe last preceding insolvency;

$. upport during the insolvency proceedings, and for three months thereafter;

+. Hines and civil indemnification arising from a criminal offense;

-. Aegal epenses, and epenses incurred in the administration of the insolvents estate for thecommon interest of the creditors, when properly authori


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l% appearing in public instrument orfinal &udgment

#ote"1. 7n contrast with !rticles 22#1 and 22#2, !rticle 22## creates no liens on determinate property

which follow such property. What !rticle 22## creates are simply rights in favor or certain creditors tohave the cash and other assets of the insolvent applied in a certain se)uence or order of priority Republic$s. )eralta, 1* 49! 3+ C1"-+D%.

2. !rticle 22## relates to the property of the insolvent that is not burdened with the liens orencumbrances created or recogni


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2. 7f there are two or more credits with respect to the same specific movable property, they shall besatisfied pro'rata, after the payment of duties, taes, and fees due the tate or any subdivision thereof!rticle 22#+%.

3. hose credits which en&oy preference in relation to specific real property or real rights, eclude allothers to the etent of the value of the immovable or real right to which the preference refers !rticle -%.

#. 7f there are two or more credits with respect to the same specific real property or real rights, theyshall be satisfied pro rata, after the payment of the taes and assessments upon the immovable propertyor real right !rticle 22#"%.

*. he ecess, if any, after the payment of the credits which en&oy preference with respect to specificproperty, real or personal, shall be added to the free property which the debtor may have, for the paymentof the other credits !rticle 22*%.

$. hose credits which do not en&oy any preference with respect to specific property and those whichen&oy preference, as to the amount not paid, shall be satisfied according to the following rules5

a. 7n the order established in !rticle 22##;b. 4ommon credits referred to in !rticle 22#* shall en&oy no preference and shall be paid pro

rata regardless of dated !rticle 22*1%.

Credit Transactions STUDENT 2 Reviewer

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