De LEON - Comments & Cases on Credit Transactions

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CREDIT TRANSACTIONS

INTRODUCTION

Meaning and scope of credit transactions. (1) Credit transactions include all transactions involving the purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future. (2) By the use of credit, more exchanges are possible, persons are able to enjoy a thing today but pay for it later, and through the banking system, actual money transfer is eliminated by can-cellation of debts and credits. (see Principles of Economics, 9th ed., by C.L. James, p. 130, Barnes & Noble College Outline Se-ries.) (3) Credit transactions are really contracts of security. They are of two types:

(a) Secured transactions or contracts of real security. — Those supported by a collateral or an encumbrance of property;1 and (b) Unsecured transactions or contracts of personal security. — Those the fulfi llment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety.

1The encumbrance is effected as follows: in pledge, by placing the movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an im-movable property with the obligation to apply such fruits to the payment of the interest and principal obligation. (Acme Shoe Rubber & Plastic Corp. vs. Court of Appeals, 260 SCRA 714 [1996].)

COMMENTS AND CASES ON CREDITTRANSACTIONS

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(4) Bailment contracts, together with the other related sub-jects such as usury (Act No. 2655, as amended [The Usury Law].), the contracts of guaranty and suretyship, mortgage, antichresis, and concurrence and preference of credits (Arts.* 2236-2251.), all make up the so-called “credit transactions.”

Meaning and kinds of security. The term security is something given, deposited, or serving as a means to ensure the fulfi llment or enforcement of an obligation or of protecting some interest in property. The security, as herein before intimated, may be personal security, as when an individual becomes a surety or a guarantor; or a property or real security, as when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss. Thus, a secured creditor is one who holds a security from his debtor for payment of the latter’s debts. (see Navoa vs. Court of Appeals, 251 SCRA 545 [1995].)

Meaning of bailment. The word “bailment” comes from the French word “bailler,” meaning “to deliver.” It may be defi ned as the delivery of property of one person to another in trust for a specifi c purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. (3 R.C.L. 73.)

Creation of bailment. In general, bailment may be said to be a contractual relation. To be legally enforceable, it must contain all the elements of a valid contract. (see Art. 1318.)

*Unless otherwise indicated, refers to article in the Civil Code.

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It does not necessarily mean that an agreement is always necessary to create bailment. It may be created by operation of law. (see Art. 1996; 8 Am. Jur. 2d 950.)

Parties in bailment. The parties to a bailment are the: (1) Bailor (Comodatario2). — the giver; the party who delivers the possession or custody of the thing bailed; and (2) Bailee (Comodante3). — the recipient; the party who receives the possession or custody of the thing thus delivered.

Kinds of contractual bailment. There are several kinds of bailment creating different rights and obligations on the part of the bailor and the bailee although the different kinds are of the same general character. In every bailment, there is an obligation on the part of the bailee to restore the subject of the bailment in the same or in altered form or to account therefor. (Ibid., 189.) The classifi cation is generally with reference to compensation under which bailments are divided into three heads, namely: (1) Those for the sole benefi t of the bailor; (2) Those for the sole benefi t of the bailee; and (3) Those for the benefi t of both parties. Under the fi rst kind belongs gratuitous deposit (Art. 1965.) and mandatum. The latter is a bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same; as simply to carry it, or keep it, or otherwise to do something with respect to it gratuitously. (see ibid., 910.) As regards the second group, we have commodatum and gratuitous simple loan or mutuum. (Art. 1933.)

2In Spanish law; commodans in Roman law.3In Spanish law; commodatarius in Roman law.

INTRODUCTION


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The third type includes deposit for a compensation (Art. 1965.), including involuntary deposit (see Arts. 1996[2], 1997, par. 2.), pledge (Arts. 2085, 2903.), and bailments for hire. The fi rst two kinds are the gratuitous bailments. In such bail-ments, there is really no consideration for they are considered more as a favor by one party to the party benefi ted; but the law imposes defi nite obligations upon both the bailor and the bailee. The third kind, usually results from bailments involving busi-ness transactions. These bailments are known as mutual-benefi t bailments.

Kinds of bailment for hire. Bailment for hire (locatio et conductio) arises when goods are left with the bailee for some use or service by him and is always for some compensation. This specie of bailment has been subdivided as follows: (1) Hire of things (locatio rei). — where goods are delivered for the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.); (2) Hire of service (locatio operis faciendi). — where goods are delivered for some work or labor upon it by the bailee (i.e., contract for a piece of work, Art. 1713.); (3) Hire for carriage of goods (locatio operis mercium vehendarum). — where goods are delivered either to a common carrier (Art. 1732.) or to a private person for the purpose of being carried from place to place (see 6 Am. Jur. 180-182.); and (4) Hire of custody (locatio custodiae). — where goods are delivered for storage. (Arts. 1507-1520; Act No. 2137 [The Warehouse Receipts Law].)

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ILOAN*

(Arts. 1933-1961.)

GENERAL PROVISIONS

ARTICLE 1933. By the contract of loan, one of the par-ties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commoda-tum; or money or other consumable thing, upon the con-dition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownerships of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)

Defi nition of contract of loan. The above provision defi nes two kinds of loan and gives their characteristics.

Governing law. Like any other contract, the contract of loan is governed by the rules as to the requisites and validity of contracts in general.

*Title XI, Book IV, Civil Code.

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Our law formerly made a distinction between civil loans governed by the old Civil Code and commercial loans regulated by the Code of Commerce. This distinction has been abolished (see Art. 2270[2].) and all loans are now primarily governed by the applicable articles (Arts. 1933-1961.) in Title XI, Book IV, subject to its transitional provisions. (Arts. 2252-2269.) Title V, Articles 311-314 of the Code of Commerce which are the provisions on commercial loans are repealed. Characteristics of the contract. The contract of loan is: (1) a real contract because the delivery of the thing loaned is necessary for the perfection of the contract (Art. 1934; see also Art. 1316.); and (2) a unilateral contract because once the subject matter has been delivered, it creates obligations on the part of only one of the parties, i.e., the borrower. Cause or consideration in a contract of loan. In a contract of loan, the cause is: (1) as to the borrower, the acquisition of the thing; and (2) as to the lender, the right to demand its return or its equivalent. Kinds of loan. There are two kinds of loan, namely: (1) Commodatum. — where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for a certain time and return the identical thing; and (2) Simple loan or mutuum. — where the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality. A thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature, like rice, gasoline, money, fruit, fi rewood, etc. (see Art. 418.)

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Commodatum and mutuum are Roman terms.

Loans distinguished from credit. The credit of an individual means his ability to borrow money or things by virtue of the confi dence or trust reposed by a lender that he will pay what he may promise within a specifi ed period. A loan (mutuum) means the delivery by one party (lender/creditor), and the receipt by the other party (borrower/debtor) who become the owner, of a given sum of money or other con-sumable thing upon an agreement, express or implied, to repay the same amount of the same kind and quality, with or without interest. The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fi xed in the “credit.” (People vs. Concepcion, 44 Phil. 126 [1922].)

Meaning of credit as opposed to debt. The term “credit,” in its usual meaning, is a sum credited on the books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment. It is the correlative to debt or indebtedness, and that which is due to any person as distinguished from that which he owes. (Republic vs. First National City Bank of New York, 3 SCRA 851 [1961].) It is a debt considered from the creditor’s standpoint. (Black’s Law Dictionary, 4th ed., p. 441.) It may consist of money, goods, or services.

Loan distinguished from discounting of paper. To discount a paper is a mode of loaning money, with these distinctions: (1) In a discount, interest is deducted in advance (see Sec. 5, The Usury Law, infra.), while in a loan, interest is usually taken at the expiration of a credit; and

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(2) A discount is always on a double-name paper,1 while a loan is generally, on a single-name paper.2 (People vs. Concepcion, 44 Phil. 126 [1922].) Thus, on a loan of P1,000.00 at 16% interest, the borrower would pay P1,160.00 at the end of the year. If the note is discounted, the interest is deducted from the principal in advance. The borrower would receive P840.00 but would pay back P1,000.00 at the end of the year. The P160.00 is called the discount and P840.00 is called the proceeds. Discounting is slightly more expensive for the borrower because interest is calculated on the amount loaned (P1,000.00) and not on the amount actually received. In general, discount and interest rates for similar loans are identical.3 (Principles of Economics, by C.J. James, supra, pp. 131-132.)

ILLUSTRATIVE CASE: Credit was extended by PNB to a partnership, the only security required consisted of demand notes which were paid, together with interest, on maturity. Facts: By telegrams and a letter of confi rmation to the manager of the branch of PNB (Philippine National Bank), C, President and member of the board of directors of PNB, authorized an extension of credit in favor of partnership X, of which the wife of C is a partner, in the amount of P300,000.00. The special authorization given was essential in view of prior memorandum order of C limiting the discretional power of the local manager to grant loans and discount negotiable documents to P5,000.00. Pursuant to the authorization by C, credit aggregating P300,000.00 was granted the fi rm, the only security required consisting of six (6) demand notes. The notes, together with

1One on which two signatures appear with both parties liable for payment. (Web-ster’s 3rd New Int. Dictionary)

2A promissory note with no indorsement other than the signature of the maker. (Ibid.)

3A provision for the payment of rentals in advance with the lessee getting a rebate or discount cannot be construed as a repayment of a loan because there is no grant or forbearance of money. The difference between a discount and a loan or forbearance is that the former does not have to be repaid, while the latter is subject to repayment. (Herrera vs. Petrophil Corporation, 146 SCRA 385 [1986].)

Art. 1933

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the interest, were taken up and paid about two (2) months later. Under the law (Sec. 35, Act No. 2747.), the PNB “shall not directly or indirectly grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks.” Issues: (1) Was the granting of a credit of P300,000.00 to partnership X a loan within the meaning of Section 35 or only a concession of credit? (2) Were the demand notes signed by the fi rm a loan or a discount? Held: (1) The concession of a credit necessarily involves the granting of “loans” up to the limit of the amount fi xed in the “credit.” (2) The demand notes signed by the fi rm were not discount papers but were mere evidences of indebtedness, because (a) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (b) they were single-name and not double-name paper. C violated the prohibition. (People vs. Concepcion, supra.)

Commodatum and mutuum (simple loan) distinguished. It is relatively simple to determine whether a given loan is commodatum or mutuum by bearing in mind the following principal points of distinction: (1) Commodatum ordinarily involves something not consum-able (see Art. 1936.), while in mutuum, the subject matter is mon-ey or other consumable thing; (2) In commodatum, ownership of the thing loaned is retained by the lender (Art. 1933.), while in mutuum, the ownership is transferred to the borrower; (3) Commodatum is essentially gratuitous (ibid.), while mutuum may be gratuitous or it may be onerous, that is, with stipulation to pay interest; (4) In commodatum, the borrower must return the same thing loaned (ibid.), while in mutuum, the borrower need only pay the same amount of the same kind and quality;



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(5) Commodatum may involve real or personal property (Art. 1937.), while mutuum refers only to personal property; (6) Commodatum is a loan for use or temporary possession (Art. 1935.), while mutuum is a loan for consumption; (7) In commodatum, the bailor may demand the return of the thing loaned before the expiration of the term in case of urgent need (Art. 1946), while in mutuum, the lender may not demand its return before the lapse of the term agreed upon; and (8) In commodatum, the loss of the subject matter is suffered by the bailor since he is the owner (Art. 1942; Art. 1174.), while in mutuum, the borrower suffers the loss even if caused exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay. It may also be said that while commodatum is purely personal in character (see Art. 1939.), mutuum is not so.

Kinds of commodatum. Commodatum is divided into: (1) ordinary commodatum (Art. 1933.); and (2) precarium. — one whereby the bailor may demand the thing loaned at will. (see Art. 1947.)

ART. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

Delivery essential to perfection of loan. The rule contained in the above article is a necessary consequence of the fact that commodatum and mutuum are real contracts which require the delivery of the subject matter thereof for their perfection.4

4Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not per-fected until the delivery of the object of the obligation. (n)

Art. 1934

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Delivery is necessary in view of the purpose of the contract which is to transfer either the use or ownership of the thing loaned.

Binding effect of accepted promise to lend. It does not mean that a promise to lend would be without effi cacy and judicial value. An accepted promise to make a future loan is a consensual contract5 and, therefore, binding upon the parties but it is only after delivery, will the real contract of loan arise. Thus: (1) Application for loan approved by corporation. — Where an application for a loan of money was approved by resolution of the corporation (lender) and the corresponding mortgage was executed and registered, there arises a perfected consensual contract of loan. While a perfect contract of loan can give rise to an action for damages, said contract does not constitute the real contract of loan. (Saura Import and Export Co., Inc. vs. Development Bank of the Phils., 44 SCRA 445 [1972]; see BPI Investment Corp. vs. Court of Appeals, 377 SCRA 117 [2002].) (2) Mortgage executed by virtue of loan granted. — Where the mortgage deed was executed for and on condition of the loan granted to the mortgagors, the fact that the latter did not collect from the mortgagee bank the consideration of the mortgage on the date it was executed but six (6) days later when the mortgagors and their co-maker signed the promissory note is immaterial. A contract of loan being consensual, it was perfected at the same time that the contract of mortgage was executed, the promissory note being only an evidence of an indebtedness and did not indicate lack of consideration of the mortgage at the time of its execution. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].)

5Art. 1315. Contracts are perfected by mere consent, and from that moment the par-ties are bound not only to the fulfi llment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)



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(3) Only partial amount released under a loan agreement secured by mortgage. — Where a bank and a borrower undertook reciprocal obligations by entering an P80,000.00 loan agreement on April 28, 1965 when the borrower executed a real estate mortgage, but the bank was able to release only P17,000.00, the bank was held in default for P63,000.00 to the borrower. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other, and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay. (see Art. 1169.) Here, the promise of the borrower to pay, and he signifi ed his willingness to pay when he executed the real estate mortgage, was the consideration for the obligation of the bank to furnish the P80,000.00 loan. And the mere fact of insolvency of a debtor (bank) is never an excuse for the non-fulfi llment of an obligation but instead it is taken as a breach of the contract by him. (Central Bank of the Phils. vs. Court of Appeals, 139 SCRA 46 [1985].)

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Art. 1934

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Chapter 1COMMODATUM

SECTION 1. — Nature of Commodatum

ART. 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensa-tion is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a)

Commodatum essentially gratuitous. Commodatum is essentially gratuitous. Hence, the contract ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the use. In such a case, there arises a lease contract. (see Arts. 1642, 1643, 1644.) If the consideration is the rendering of some service, an innominate contract will result.1

ILLUSTRATIVE CASE: Loan of a bull for breeding purposes was subject to payment of breeding fee by borrower who used the bull after the period stipulated until its death due to force majeure. Facts: B borrowed from L (Bureau of Animal Industry) three bulls for breeding purposes for a period of one year, later on renewed for another year as regards one bull. The loan was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. B kept and used the bull (the

1Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I [Obligations] and II [Contracts] of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place.

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loan of which was renewed) for four years after the period stipulated in the contract until it was killed during a Huk raid by stray bullets. B contends that the contract was commodatum, and that, for that reason, as L retained ownership or title to the bull, it should suffer the loss. Issue: As the death of the bull was due to force majeure, is B relieved from the duty of paying its value? Held: No. A contract of commodatum is essentially gratu-itous. If the breeding fee be considered compensation, then the contract would be a lease of the bull. Under Article 1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor in bad faith because she had continued possession of the bull after the expiration of the contract. And even if the contract be commodatum, still B is liable under Article 1942(2, 3). (Republic vs. Bagtas, 6 SCRA 262 [1962].)

Contract similar to donation. Commodatum is similar to a donation in that it confers a benefi t to the recipient. The presumption is that the bailor has loaned the thing for having no need therefor. (see Art. 1946, second sentence.)

Extent of bailee’s right of use. The right to use is limited to the thing loaned but not to its fruits unless there is a stipulation to the contrary. (Art. 1940.) As owner of the thing loaned (Art. 1933, last par.), the bailor is naturally entitled to its fruits.

Purpose of the contract. The purpose of the contract of commodatum must be the temporary use of the thing loaned. If the bailee is not entitled to the use of the thing, the contract may be a deposit (see Art. 1962.) not a commodatum. It is an essential feature of the contract of commodatum that the use of the property of another shall be “for a certain time.” (Art. 1933, par. 2.)

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ART. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the con-sumption of the object, as when it is merely for exhibition. (n) ART. 1937. Movable or immovable property may be the object of commodatum.

Subject matter of the contract. In commodatum, the subject matter is generally non-consum-able things,2 whether real or personal. This but conforms to re-ality, for the bailee cannot use and return something which is consumed when used. However, if the purpose of the contract is not the consumption of the object as when it is merely for exhibi-tion, consumable goods may be the subject of the commodatum as where, L lends to B an oversized bottle of wine to be used as a sample or for advertisement.3 If the intention of the parties is to have the consumable goods loaned returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. An example of commodatum involving real property is when a person allowed another to build a warehouse on the former’s land so that the latter may use the property for a certain period without any payment of rentals. If no time for use of the land is specifi ed, the contract would be that specie of commodatum called “precarium” expressly recognized in Article 1947. If rental is paid, the contract would be one of lease.4 (see Mina vs. Pascual, 25 Phil. 540 [1913].)

ART. 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

2Art. 418. Movable property is either consumable or non-consumable. To the fi rst class belong those movables which cannot be used in a manner appropriate to their na-ture without their being consumed; to the second class belong all the others.

3Art. 1645. Consumable goods cannot be the subject matter of a contract of lease, except when they are merely to be exhibited or when they are accessory to an industrial establishment.

4Art. 1643. In the lease of things, one of the parties binds himself to give another the enjoyment or use of a thing for a price certain, and for a period which may be defi nite or indefi nite. However, no lease for more than ninety-nine years shall be valid.

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Bailor need not be owner. In commodatum, the bailor need not be the owner of the thing loaned since by the loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing (see Arts. 1643, 1650.) or the usufructuary (one entitled to the use and the fruits of property belonging to another, see Art. 562.) may lend but the borrower or bailee himself may not lend nor lease the thing loaned to him to a third person. (Art. 1939[2].) It is suffi cient if the bailor has such possessory interest in the subject matter or right to its use which he may assert against the bailee and the third persons although not against the rightful owner. Thus, a lessee may sublet the thing leased, when there is no express prohibition in the contract of lease. (Art. 1650.) If the lessee, by a contract of sublease, may transfer to another the enjoyment of the thing leased for a consideration, there is no reason why he should be unable to cede gratuitously its use by way of commodatum. (Mercado vs. Aguilar, [C.A.] 45 O.G. Sup. 5, p. 118.)

ART. 1939. Commodatum is purely personal in charac-ter. Consequently:

(1) The death of either the bailor or the bailee extin-guishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee’s household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

Commodatum, purely personal in character. Unlike mutuum, commodatum is a purely personal contract, the lender having in view the character, credit, and conduct of the borrower. Hence, the death of either party terminates the contract unless by stipulation, the commodatum is transmitted to the heirs of either or both parties. Such stipulation is valid

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(see Art. 1306.) for paragraph 1 presupposes the absence of any contrary stipulation. If there are two or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contrary. Article 1939 constitutes an exception to the general rule that all rights acquired in virtue of an obligation are transmissible. (see Art. 1178.)

Right of bailee to lend thing loaned to third persons. Generally, the bailee can neither lend nor lease the object of the contract to a third person, in the absence of some understanding or agreement to that effect. However, the use of the thing loaned (e.g., television set) may extend to the members of the bailee’s household (who are not, therefore, considered third persons) except in two cases: (1) there is a stipulation to the contrary; and (2) the nature of the thing (e.g., dress) forbids such use.

ART. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

Contrary stipulation as to fruits. The bailee is entitled only to the use of the thing loaned and not to its fruits. The right to use a thing is distinct from the right to enjoy the fruits since, as a rule, the fruits pertain to the owner of the thing producing the fruits. (see Art. 441.) Thus, where an animal is the thing loaned, its young subsequently born is not included in the contract. However, the parties may stipulate that the bailee may also make use of the fruits of the thing. Such stipulation cannot be presumed. The enjoyment of the fruits must only be incidental to the use of the thing itself for if it is the main cause, the contract may be one of usufruct. (see Art. 562.)

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SECTION 2. — Obligations of the Bailee

ART. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a)

Liability for ordinary expenses. It is logical that the borrower should defray the expenses for the use and preservation of the thing loaned for after all, he acquires the use of the same, and he is supposed to return the identical thing. (Art. 1933.) As a rule, the borrower must take good care of the thing with the diligence of a good father of a family. (Art. 1163.) Thus, if B borrows the car of L, the former must pay for the gasoline, motor oil, washing, greasing and spraying, etc. B cannot demand reimbursement for the expenses. As to extraordinary expenses, Article 1949 governs.

ART. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commo-datum has been constituted;

(3) If the thing loaned has been delivered with apprais-al of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

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(4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745)

Liability for loss of thing loaned. The bailee must exercise proper diligence with regard to the care and preservation of the thing loaned (see Art. 1163.) for he must return the thing after its use. As a general rule, the bailee is not liable for loss or damage due to a fortuitous event. (see Art. 1174.) The reason is that the bailor retains the ownership of the thing loaned. Article 1942 specifi es the instances when the bailee is liable even for a loss due to a fortuitous event. It would seem that the purpose of the law is to punish the bailee for his improper acts although they may not be the proximate cause of the loss. The reason under No. 1 is that the bailee acts in bad faith (see Art. 1170.); under No. 2, he incurs in delay (see Art. 1169, par. 2[1].); under No. 3, the law presumes that the parties intended that the borrower shall be liable for the loss of the thing even if it is due to a fortuitous event for otherwise they would not have appraised the thing (see 11 Manresa 613; Republic vs. Bagtas, 6 SCRA 262 [1962], supra.); under No. 4, commodatum is purely personal (Art. 1939.); and under No. 5, the bailee shows his ingratitude after the thing is gratuitously loaned to him.

ART. 1943. The bailee does not answer for the deterio-ration of the thing loaned due only to the use thereof and without his fault. (1746)

Liability for deterioration of thing loaned. The parties to the contract know that the thing borrowed cannot be used without deterioration due to ordinary wear and tear. Hence, in the absence of agreement to the contrary, the depreciation caused by the reasonable and natural use of the thing is borne by the bailor.

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The bailee is liable if he is guilty of fault or negligence (see Art. 1170.) or if he devotes the thing to any purpose different from that for which it has been loaned. (Art. 1942[1].)

ART. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (1747a)

Obligation to return thing loaned. Except for a claim for damages suffered because of the fl aws of the thing loaned (Art. 1951.), the borrower has no right to retain the thing loaned as security for claims he has against the lender, even though they may be by reason of extraordinary expenses. (1) Ownership remains in bailor. — The borrower acquires only the use of the thing the ownership of which remains in the lender. It would be extremely harsh if the bailor, after benefi ting the bailee, and the use having been accomplished, should be deprived of its enjoyment on the excuse of the expenses more or less certain or just. (11 Manresa 617.) (2) Only temporary use given to bailee. — Furthermore, the bailee would be violating the bailor’s trust in him to return the thing as soon as the period stipulated expires or the purpose has been accomplished. Therefore, the law imposes upon him the obligation to return the same. (see Art. 1287.5)

Effect of retention or adverse claim by bailee. (1) The mere failure of the bailee to return the subject matter of commodatum to the bailor does not constitute adverse possession on the part of the bailee who holds the same in trust. (2) In a case, the bailee declared the lots in question in its name for taxation purposes. It was held that the action of the

5Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum.

Art. 1944

21

bailee by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.6 (Catholic Vicar Apostolic of the Mt. Province vs. Court of Appeals, 165 SCRA 515 [1988].)

Right of retention for damages. The exception in Article 1951 is of evident justice. Note, however, that the bailee’s right extends no further than to the retention of the thing loaned until he is reimbursed for the damages suffered by him. He cannot lawfully sell the thing to satisfy said damages. In case of pledge, the creditor has the right to retain the thing pledged until he shall have been fully paid. (Art. 2098.)

ART. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are li-able solidarily. (1748a)

Liability when there are two or more bailees. The reason for imposing solidary liability where there are two or more borrowers is to safeguard effectively the rights of the lender. (11 Manresa 617.) The law presumes that the bailor takes into account the personal integrity and responsibility of all the bailees and that, therefore, he would not have constituted the commodatum if there were only one bailee.

6Ordinary acquisitive prescription of real property requires possession of ten years in good faith and with just title while extraordinary acquisitive prescription requires pos-session for thirty years, without need of title or of good faith. (see Arts. 1117, 1134, 1137.) For purposes of prescription, there is just title when the adverse claimant came into pos-session of the property through one of the modes recognized by law for the acquisition of ownership or other real rights, but the grantor was not the owner or could not transmit any right. In the above case, the bailee had been in possession as owner for 11 years from the time it repudiated the trust when it applied for registration of the lots. Its possession was without just title and less than 30 years; hence, there was no possibility of acquisitive prescription.

Art. 1945 LOANCommodatum/Obligations of the Bailee


22

This is an exception by express provision of law to the general rule that the concurrence of two or more parties in the same obligation gives rise only to a joint obligation. (Arts. 1207, 1208.7)

— oOo —

7Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be pre-sumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits.

Art. 1945

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SECTION 3. — Obligations of the Bailor

ART. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipu-lated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the pos-session of the bailor. (1749a)

Obligation to respect duration of loan. The primary obligation of the bailor is to allow the bailee the use of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was constituted. The reason is that the bailor is bound by the terms of the contract of commodatum which is “for a certain time.” (see Arts. 1933, 1935.) However, if he should have an urgent need of the thing (e.g., he needs the car loaned by him to bring a sick member of his household to a hospital) or if the borrower commits an act of ingratitude (Art. 1948.), he may demand its return or temporary use. This right of the bailor is based on the fact that commodatum is essentially gratuitous. Under this article, the return may be only temporary or it may be permanent because the law uses “its return” (meaning permanent) or “temporary use.” In case of temporary use of the thing by the bailor, the rights and duties of the parties are likewise temporarily suspended. (Art. 1946, par. 2.)

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ART. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the follow-ing cases: (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipu-lated; or (2) If the use of the thing is merely tolerated by the owner. (1750a)

Precarium defi ned. Precarium is a kind of commodatum where the bailor may demand the thing at will. It has been defi ned as a “contract by which the owner of a thing, at the request of another person, gives the latter the thing for use as long as the owner shall please.” (Cyc. Law Dictionary; see Pajuyo vs. Court of Appeals, 430 SCRA 492 [2004].)

Cases when contract is precarium. In either of the two cases mentioned in Article 1947, it is presumed that use of the thing has been granted subject to revocation by the bailor at any time, whether or not the use for which the thing has been loaned has been accomplished. Hence, the name precarium. In the ordinary commodatum, the possession of the bailee is more secure for he has the right to retain the thing loaned until the expiration of the period agreed upon, or the accomplishment of the use for which the commodatum has been constituted. (Art. 1946, par. 2.) Note: The use of the word “owner” in Article 1947 is inaccurate. Article 1938 is very clear that the bailor need not be the owner of the thing loaned.

ILLUSTRATIVE CASE: Gratuitous use of furniture was subject to the condition that lessee would return them upon lessor’s demand but notwithstanding such demand, former continued to use furniture until expiration of lease.

Art. 1947

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Facts: A was a tenant of B with respect to a house. Upon the novation of the contract of lease, B gratuitously granted to A the use of the furniture described in the contract, subject to the condition that A would return them to B upon the latter’s demand. B later sold the property to C, and they notifi ed A of the conveyance, giving him 60 days to vacate the premises. Thereafter, B required A to return all the furniture transferred to him for his use. A wrote B reiterating that B may call for them in the house where they are found. Another letter was written to B informing her that A could not give up the 3 gas heaters and the 4 electric lamps because he would use them until the 15th of the month when the lease was due to expire. B refused to get the furniture in view of the fact that A had declined to make delivery of all of them. On the 15th of the month, A deposited all the furniture in a warehouse in the custody of the sheriff. Issues: (1) Has A complied with his obligation to return the furniture upon B’s demand? (2) Is B bound to bear the deposit fees thereof? (3) Is B entitled to the costs of litigation? Held: (1) No. The contract entered into between the parties is one of commodatum because under it, B gratuitously granted the use of the furniture to A reserving for himself the ownership thereof. By this contract, A bound himself to return the furniture to B upon demand. A did not comply with his obligation when he merely placed them at the disposal of B, retaining for his benefi t the 3 gas heaters. The obligation assumed by A to return the furniture means that he should return all of them to B at the latter’s residence or house. (2) No. As A had voluntarily undertaken to return all the furniture to B upon the latter’s demand, the court could not legally compel B to bear the expenses occasioned by the deposit. A, as bailee, was not entitled to place the furniture on deposit; nor was B under a duty to accept the offer because A wanted to retain the 3 gas heaters and the 4 electric lamps. (3) Yes. The costs in both instances should be borne by A because B is the prevailing party. A was the one who breached the contract of commodatum and without any reason he refused to return and deliver all the furniture upon demand. In these

Art. 1947 LOANCommodatum/Obligations of the Bailor


26

circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which B could not have otherwise defrayed. (Quintos and Ansaldo vs. Beck, 69 Phil. 108 [1939].)

ART. 1948. The bailor may demand the immediate return of the thing if the bailee commits any acts of ingratitude specifi ed in Article 765. (n)

Right of bailor to demand return of thing for acts of ingratitude. Based on Article 765 of the Civil Code, any of the following constitutes act of ingratitude: (1) If the bailee should commit some offenses against the person, the honor or the property of the bailor, or of his wife or children under his parental authority; (2) If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee himself, his wife or children under his authority; and (3) If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor. Article 765 is applicable because like a donation, commodatum is essentially gratuitous. (Art. 1933, par. 2.) The bailee who com-mits any of the acts of ingratitude makes himself unworthy of the trust reposed upon him by the bailor. Hence, the right given to the bailor to demand the immediate return of the thing. Under Article 1948, the contractual relation between the par-ties is that of the ordinary commodatum. In the case of precarium (Art. 1947.), the bailor can always demand the thing loaned at will.

ART. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notifi cation cannot be awaited without danger.

Arts. 1948-1949

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If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Obligation to refund extraordinary expenses. (1) Extraordinary expenses for the preservation of the thing loaned. — Such expenses shall be borne by the bailor (e.g., expenses for repairing borrowed house damaged by a typhoon). The reason is that it is the bailor who profi ts by said expenses. If they are incurred by the bailee, the bailor must refund them provided the bailee brings the same to the knowledge of the bailor before incurring them. As a rule, notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all. He should be given discretion as to what must be done with his property. An exception, of course, lies where they are so urgent that the reply to the notifi cation cannot be awaited without danger. The right of the bailee to reimbursement is subject to the provision of the second paragraph. (2) Extraordinary expenses arising from actual use of the thing loaned. — Such expenses (caused by fortuitous event) arising on the occasion of the actual use of the thing loaned (e.g., expenses for repairing a borrowed jeep damaged in a collision) shall be borne by the bailor and bailee alike on a 50-50 basis. “The foregoing is an equitable solution. The bailee pays one-half because of the benefi t derived from the use of the thing loaned to him and the bailor pays the other one-half because he is the owner and the thing will be returned to him.’’ (Report of the Code Commission, p. 151.) The parties, however, may, by stipulation, provide for a different apportionment of such expenses, or that they shall be borne by the bailee or bailor only.



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ART. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimburse-ment. (n)

No obligation to assume all other expenses. All expenses other than those referred to in Articles 1941 and 1949 “for the purpose of making use of the thing” (e.g., borrower buys extra tire to be used as a reserve on a trip) that is, not necessary for the use and preservation of the thing, must be shouldered by the borrower. This is only proper since he makes use of the thing. Expenses for ostentation are to be borne by the bailee because they are not necessary for the preservation of thing. Ordinary expenses incurred for the preservation of the thing are also for the account of the bailee. This can be inferred from the fi rst paragraph of Article 1949.

ART. 1951. The bailor, who, knowing the fl aws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Liability to pay damages for known hidden fl aws. The following are the requisites which must concur for the application of the above article: (1) There is fl aw or defect in the thing loaned; (2) The fl aw or defect is hidden; (3) The bailor is aware thereof; (4) He does not advise the bailee of the same; and (5) The bailee suffers damages by reason of said fl aw or defect. The bailor is made liable for his bad faith. The bailee is given the right of retention until he is paid damages. (Art. 1944.) The

Arts. 1950-1951

29

same responsibility of a bailor in commodatum is imposed on a pledgor. (Art. 2101.)

EXAMPLE: If L lends to B his car without informing the latter that its brake is not working properly, L will be liable in case B is injured by reason thereof. The liability imposed by law is a just sanction for the bad faith committed by L. Of course, if the defect is patent or could have been known to B after inspection or L was not aware of the defect, L is not liable. (see Art. 1944.) In the fi rst case, it is presumed that B will adopt the necessary precautions or is willing to take the risk incident to the use of the car. In the second case, L is not liable for the reason that commodatum is gratuitous.

Where fl aw unknown to bailor. Where the defect is not known to the bailor, he is not liable because commodatum is gratuitous. The rule is different in sale (see Art. 1547.) and lease (see Art. 1653.) for in these contracts, valuable consideration is received by the vendor (see Art. 1458.) and the lessor. (see Art. 1643.)

ART. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n)

No right of abandonment for expenses and damages. The reason for the above rule is that the expenses and/or damages may exceed the value of the thing loaned, and it would, therefore, be unfair to allow the bailor to just abandon the thing instead of paying for said expenses and/or damages.

— oOo —



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Chapter 2SIMPLE LOAN OR MUTUUM

ART. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

Simple loan or mutuum defi ned. Simple loan or mutuum is a contract whereby one of the parties delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid.1 (Art. 1933.) It involves the return of the equivalent only and not the identical thing because the borrower acquires ownership thereof. (see Art. 1978.) A loan of money, however, may be payable in kind. (see Art. 1958.)

Obligation of borrower is to pay. The law uses the word “pay” and not the word “return” because the consumption of the thing loaned is the distinguishing character of the contract of mutuum from that of commodatum.

1A money market transaction is in the nature of a simple loan or mutuum. (Citibank vs. Sabeniano, 504 SCRA 378 [2006].) A money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middleman or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. (Cebu International Finance Corp. vs. Court of Appeals, 316 SCRA 488 [1999]; Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].)

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This obligation “to pay” may include the accessory duty to pay interest. (see Article 1956.) The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan. A loan is thus a bilateral contract.

No criminal liability for failure to pay. In simple loan or mutuum, as contrasted to commodatum, the borrower acquires ownership of the money, goods, or personal property borrrowed. Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof. No estafa is committed by a person who refuses to pay his debt or denies its existence.

Simple loan distinguished from contract of rent. A contract of loan differs materially from a contract of rent or lease, as follows: (1) A contract of loan signifi es the delivery of money or some other consumable thing to another with a promise to repay an equivalent amount of the same kind and quality, but not a promise to return the same thing loaned which becomes the property of the obligor. The contract of rent is a contract by which one of the parties delivers to another some non-consumable thing in order that the latter may use it during a certain period and return it to the former. In a contract of rent, the owner or lessor of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract; (2) In a contract of loan, the relation between the parties is that of obligor and obligee, while in a contract of “rent,” the relation is that of landlord and tenant; and (3) In a contract of loan, the creditor receives “payment” for his loan, while in a contract of “rent,” the owner of the property rented receives “compensation” or “price” either in money,

Art. 1953 LOANSimple Loan or Mutuum


32

provisions, chattels, or labor from the occupant thereof in return for its use. (Tolentino vs. Gonzales, 50 Phil. 558 [1927].)

Simple loan distinguished from trust receipt. Under the Trusts Receipt Law (Pres. Decree No. 115.), trust receipt “shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of [the] Decree.’’ (Sec. 3[j], thereof.) It has also been defi ned as “a document in which is expressed a security transaction, whereunder the lender, having no prior title in the goods on which the lien is to be given, and not having possession which remains in the borrower, lends his money to the borrower on security of the goods, which the borrower is privileged to sell clear of the lien on agreement to pay all or part of the proceeds of the sale to the lender. (Black’s Law Dictionary [1968 ed.], p. 1683.) The danger in characterizing a simple loan as a trust receipt transaction was explained in a case to wit:

“The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confi dence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confi dence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in

Art. 1953

33

question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation.’’ (Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 114286, April 19, 2001, citing Colinares vs. Court of Appeals, 339 SCRA 609 [2000].)

In Colinares, the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. In Consolidated Bank, as in Colinares, the delivery to respondent corporation of the goods subject to the trust receipt occurred long before the trust receipt itself was executed. Furthermore, respondent was not an importer which acquired the banker fuel oil for re-sale; it needed the oil for its own operations at no time did title over the out pass to petitioner bank. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former.

Meaning of fungible things. Fungible things, are those which are usually dealt with by number, weight, or measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as the equivalent of any other unit or portion.



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For example, one cavan of “wagwag” rice of a particular quality is, to all intents and purposes, the same as any other portion of the same kind, quality, and quantity.

ILLUSTRATIVE CASE: Standing crops given as security for a loan of money were destroyed due to a fortuitous event. Facts: B received money as a loan with interest from L secured by a chattel mortgage on the standing crops on B’s land. The crops were destroyed due to a fortuitous event. Issue: Is the obligation of B to pay the loan extinguished? Held: No. The obligation of B is not to deliver a determinate thing, namely: the crops to be harvested on his land, but to pay a generic thing, the amount of money representing the loan with interest. (see Art. 1263.) The loss of the mortgaged crops did not extinguish his obligation to pay, because it could still be paid from other sources aside from the crops. The chattel mortgage simply stood as a security for the fulfi llment of his obligation. (Republic vs. Grijaldo, 15 SCRA 681 [1965].)

Distinction between fungible and consumable things. The new Civil Code classifi es movable property into con-sumable or non-consumable (Art. 418.2) thereby discarding the old classifi cation into fungible and non-fungible. (Art. 334, old Civil Code.) Article 1953 (also Art. 1427 on Natural Obligations, Art. 1464 on Sales, and Art. 1795 on Partnership.), however, still speaks of fungible things. This change of classifi cation seems to be in name only as the defi nition of fungible things as those which cannot be used without being consumed under the old Civil Code is precisely that of consumable things. (see Art. 418.) Nevertheless, whether a thing is consumable or not depends upon its nature and whether it is fungible or not depends upon the intention of the parties. Thus, while wine is consumable by its nature, it is non-fungible if the intention is merely for display or exhibition (see Art. 1936.) because the same wine must be returned.

2See Note 2, Chapter 1.

Art. 1953

35

ART. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a bar-ter. (n)

Mutuum and commodatum distinguished from barter. By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (Art. 1638.) (1) The distinction between mutuum and barter lies in the subject matter. In the former, it is money or any other fungible things; in the latter, non-fungible (non-consumable) things. (2) In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served. In barter, the equivalent thing is given in return for what has been received. (3) Mutuum may be gratuitous and commodatum is always gratuitous. (Art. 1933, pars. 2, 3.) Barter, on the other hand, is an onerous contract. It is really a mutual sale. (see Art. 1641.)

ART. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than mon-ey, the debtor owes another thing of the same kind, quan-tity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a)

Form of payment. The object of simple loan may be either money or consumable or fungible things. (1) Loan of money. — If the thing loaned is money, payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency

Arts. 1954-1955 LOANSimple Loan or Mutuum


36

which is legal tender in the Philippines (Art. 1249.3) and in case of extraordinary infl ation or defl ation, the basis of payment shall be the value of the currency at the time of the creation of the obligation. (Art. 1250.4) Presently, all notes and coins issued by the Bangko Sentral ng Pilipinas are legal tender in the Philippines for all debts, both public or private. A check is not a legal tender and, therefore, cannot constitute valid tender of payment.

EXAMPLE: D borrowed from C P5,000.00 payable after fi ve years. On the maturity of the obligation, the value of P5,000.00 dropped to P2,500 because of infl ation. In this case, the basis of payment shall be the equivalent value of the currency today fi ve years ago. Hence, D is liable to pay C P10,000.00 unless there is an agreement to the contrary.

(2) Loan of fungible thing. — If what was loaned is a fungible thing other than money, the borrower is under obligation to pay the lender another thing of the same kind, quality, and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan.

EXAMPLE: D borrowed from C two sacks of rice of a certain kind and quality. At the time the loan was perfected, the price of each sack was P400.00. D should return to C two sacks of rice of the same kind and quality although at the time of payment, the price had increased to P500.00. If on the due date of the obligation, the same kind of

3Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mer-cantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)

4Art. 1250. In case an extraordinary infl ation or defl ation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obliga-tion shall be the basis of payment, unless there is an agreement to the contrary.

Art. 1955

37

rice could not be delivered by D because it was not available for some reason, then D should pay C the sum of P800.00 instead, the value of the rice at the time of the perfection of the loan.

ART. 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

Requisites for recovery of interest. In order that interest may be chargeable, the following are the requisites: (1) The payment of interest must be expressly stipulated (Tan vs. Valdehueza, 66 SCRA 61 [1975]; Jardenil vs. Salas, 73 Phil. 636 [1942].) (2) The agreement must be in writing (Art. 1956.); and (3) The interest must be lawful. (see, however, note to Arts. 1957 and 1961.) In a case, the promissory note stipulated a late payment penalty of 2.5% monthly to be added to each unpaid installment until fully paid. Payment of interest was not expressly stipulated in the note. Held: It should be deemed included in such penalty. (Radiowealth Finance Company vs. Del Rosario, 335 SCRA 288 [2000].) Be that as it may, in the absence of stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. (infra.) In other words, interest may be paid either as compensation for the use of money (monetary interest) referred to in Article 1956 or imposed by law or by courts as penalty or indemnity for damages (compensatory interest) under Articles 2209 and 2212 for breach of contractual obligations. (Republic vs. Unimex, 518 SCRA 19 [2007]; Garcia vs. Thio, 518 SCRA 433 [2007]; Siga-an vs. Villanueva, 576 SCRA 696 [2009].) Unilateral impositions of interest do not suffi ce as proof an agreement to pay interest. (Phil. Phosphate Fertilizer Corp. vs. Kamalig Resources, Inc., 540 SCRA 139 [2007].)

Existence of stipulation to pay interest. (1) If a particular rate of interest has been expressly stipulated by the parties, that interest, not the legal rate of interest, shall be



38

applied. (Casa Filipina Development Corp. vs. Deputy Executive Secretary, 209 SCRA 399 [1992].) (2) If the exact rate of the interest is not mentioned, the legal rate of 12% shall be payable. (Security Bank & Trust Co. vs. RTC Makati, 263 SCRA 483 [1996]; Toung vs. Ganzon Olan, 568 SCRA 376 [2008]; see Sec. 1, Usury Law, infra.) (3) No increase in interest shall be due unless such increase has also been expressly stipulated. (see Phil. National Bank vs. Court of Appeals, 196 SCRA 536 [1991].) (4) Sales invoices or slips issued by a store to its customers, stating interests and attorney’s fees in the usual printed forms as terms and conditions, without the signature of the obligor, do not constitute the express stipulation required by Article 1956. Therefore, the obligor is not liable for the interest except only the legal interest (6%) under Article 2209 (infra.) on the amount due in case he incurs in delay. (see Royal Shirt Factory, Inc. vs. Co Bon Tic, 94 Phil. 994 [1954]; Uy Chao vs. Compania Maritima, 10 C.A. Rep. 294.) (5) It is only in contracts of loan, with or without security, that interest may be stipulated and demanded. (see Soncuya vs. Azarraga, 65 Phil. 635 [1938].) (6) The receipt by the creditor of interest payment up to a certain date on a loan that has already matured does not ipso facto result in the renewal or extension of maturity period of the loan up to said date. Whether or not a loan may be renewed does not solely depend on the debtor but more so on the discretion of the creditor. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].) (7) Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is, in effect, paying interest on the cash price, whether the fact and rate of such interest payment are disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment plan is not only lawful; it also refl ects a very widespread usage or custom in our present day commercial life. (Relucio vs. Bullante-Garfi n, 187 SCRA 405 [1990].)

Art. 1956

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Liability for interest even in the absence of stipulation. Article 1956 is subject to two exceptions: (1) Indemnity for damages. — The debtor in delay is liable to pay legal interest (6%/12%) as indemnity for damages even in the absence of stipulation for the payment of interest.5

(a) Under Article 2209,6 the appropriate measure for dam-ages in case of delay in discharging an obligation consisting of the payment of a sum or money,7 is the payment of the

5No interest is due where there was tender of payment prior to any demand to pay or perform an agreed act. A debtor cannot be considered in delay who offered check backed by suffi cient deposit or ready to pay cash if the creditor chose that means of pay-ment. (Francisco vs. Gregorio, 115 SCRA 394 [1982].)

6Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the con-trary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, an which is six per cent per annum. (1108)

7“1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal inter-est from the time it is judicially demanded. In the absence of stipulation, the rate of inter-est shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

“2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discre-tion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reason-able certainty, the interest shall begin to run from the time the claim is made judicially or extra judicially (Art. 1169, Civil Code.) but when such certainty cannot be so reasonably established at the time the demand is made, or where the pleadings of the plaintiff in the trial court did not spell out such amounts with certitude, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantifi cation of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount fi nally adjudged.

3. When the judgment of the court awarding a sum of money becomes fi nal and executory, the rate of legal interest, whether the case falls under paragraph 1 [loan or forbearance of money] or paragraph 2, above, shall be 12% per annum from such fi nality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.’’ (Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 [1994]; Atlantic Gulf & Pacifi c Company of Manila, Inc. vs. Court of Appeals, 249 SCRA 397 [1995]; Solid Homes, Inc. vs. Intermediate Appellate Court, 508 SCRA 165 [2006]; Cosme, Jr. vs. People, 508 SCRA 190 [2006].)

The legal interest shall begin to run on the date when the judgment is rendered and not when the complaint was fi led because the amount of the damages to which the plain-tiff may be entitled remains unliquidated and unknown, until it is defi nitely ascertained,



40

penalty interest at the rate 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 equal to the regular monetary interest, and if no regular interest had been agreed upon, then payment of legal interest which is 6% annually or, in the case of loans or forbearances of money, 12% per annum as provided for in Central Bank Circular No. 416, infra. (State Investment House, Inc. vs. Court of Appeals, 198 SCRA 390 [1991]; Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 [1994]; New Sampaguita Builders Construction, Inc. vs. Phils., 435 SCRA 565 [2004], citing De Leon, Comments and Cases on Credit Transactions [1995], p. 50.) The “obligation consisting of the payment of a sum of money’’ referred to in Article 2209 is not confi ned to a loan or forbearance of money. It has also been applied by the Supreme Court in cases involving default in the payment of price or consideration under a contract of sale and an action for damages for injury to persons and loss of property and an action for damages arising from unpaid insurance claims. (Castelo vs. Court of Appeals, 244 SCRA 180 [1995].) (b) Under the provisions of Article 2213, interest “cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty.’’ It is axiomatic that if the suit were for damages, unliquidated and not known until defi nitely assessed and determined by the courts, after proof, interest at rate of 6% per annum should be from the date the judgment of the court is made, i.e., at which time the qualifi cation of damages may be deemed to be reasonably ascertained. (Lim vs. Court of Appeals, 373 SCRA 394 [2002].)

by the court and only upon presentation of proof thereon. (Construction Dev. Corp. of the Phils. vs. Estrella, 501 SCRA 228 [2006].)

In Cristina Garments, Inc. vs. Court of Appeals (304 SCRA 356 [1999]), “because the amount due arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of 6% per annum should be applied. Furthermore, since the amount of the demand could be established with certainty when the complaint was fi led, the 6% interest should be computed from the fi ling of said complaint. But after the judg-ment becomes fi nal and executory until the obligation is satisfi ed, interest should be reck-oned at 12% per year.’’

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(c) Central Bank Circular No. 416 fi xing the legal rate of interest at 12% per annum, deals with 1) loans; 2) forbearance of any money, goods or credits; and 3) judgments involving such loans or forbearance, in the absence of express agreement as to such rate of interest. If the obligation arises from other sources (e.g., sale) or by way of damages arising from injury to persons and loss of property which does not involve a loan, what is applicable is the rate of 6% annually as provided in Article 2209 and not the rate of 12% per annum provided by Central Bank Circular No. 416. (see Pilipinas Bank vs. Court of Appeals, 225 SCRA 268 [1993]; Tio Khe Cheo vs. Court of Appeals, 202 SCRA 119 [1991]; see A.C. Enterprises, Inc. vs. Construction Industry Arbitration Commission, 244 SCRA 55 [1995]; Philippine National Bank vs. Court of Appeals, 263 SCRA 766 [1996]; Terminal Facilities and Services Corp. vs. Philippine Ports Authority, 378 SCRA 82 [2002].) (d) When the judgment of the court awarding a sum of money becomes fi nal and executory, the rate of legal interest, regardless of whether the obligation involves a loan or for-bearance of money shall be 12% per annum from such fi nal-ity until its satisfaction. This interim period being deemed to be by then an equivalent to a forbearance of credit. Pruden-tial Guarantee and Assurance, Inc. vs. Court of Appeals, 491 SCRA 411 [2006]; International Container Terminal Services, Inc. vs. FGU Insurance Corp., 556 SCRA 174 [2008].) (e) While the interest agreed upon forms part of the consideration of the contract itself, interest as indemnity for damages is payable only in case of default or non-perfor-mance of the contract. As they are distinct claims, they may be demanded separately. (see Sentinel Insurance Co., Inc. vs. Court of Appeals, 182 SCRA 517 [1990].) In the absence of stipulation, the rate of interest where the obligation constitutes a loan or forbearance of money shall be 12% per annum to be computed from date of default, i.e., from judicial or extrajudicial demand as provided in Article 1169 of the Civil Code.



42

(2) Interest accruing from unpaid interest. — Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point. (Art. 2212; see Sec. 5, Usury Law.) Both Article 2212 of the Civil Code and Section 5 of the Usury Law are applicable only where interest has been stipulated by the parties. Article 1212 contemplates the presence of stipulated or conventional interest which has accrued when demand was judicially made. In cases where no interest had been stipulated by the parties, no accrued conventional interest could further earn interest upon judicial demand. (Phil.-American Accident Insurance Co., Inc. vs. Flores, 97 SCRA 811 [1980]; David vs. Court of Appeals, 310 SCRA 710 [1999].) Where the court’s judgment which did not provide for the payment of interest has already become fi nal, no interest may be awarded. (Santuban vs. Fule, 133 SCRA 762 [1984]; Ruiz vs. Caneba, 191 SCRA 865 [1990]; Solidbank Corporation vs. Court of Appeals, 379 SCRA 159 [2002].) What remains is the ministerial execution of the judgment.

EXAMPLES: (1) Under a written contract of loan, D obliged himself to pay C the sum of P10,000.00 at 18% interest a year which is lawful. In this case, all the requirements to entitle B to recover interest are present. If D incurs in delay, he is liable to pay the interest agreed upon as damages and not for the use of the money. (2) If nothing was mentioned about the payment of interest, then no interest is due. If D incurs in delay, he is liable to pay interest at the legal rate which is 12% per annum from the date of delay. (3) Suppose in the fi rst example, D incurred in delay for one year. The indemnity for damages shall also be the stipulated interest of 18% so that D shall be liable to pay a total of P3,600.00: P1,800.00 as compensatory interest for the fi rst year and another P1,800.00, as indemnity for damages for the one year delay. (4) If the interest was judicially demanded 6 months after D incurred in delay, the interest due (P1,800 + P900 = P2,700.00)

Art. 1956

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shall earn legal interest (12%) from that time until payment is made. (Art. 2212.) Note: By virtue of Central Bank Circulars No. 416, dated July 29, 1974 and No. 905, dated December 10, 1982, the legal rate is increased from 6% to 12% per annum.

ILLUSTRATIVE CASE: Interest for 14 years was due on principal obligation when foreclosure was fi led. Facts: The remaining balance of D’s indebtedness to C is P576,573.90 with an agreed interest at the rate of 6% per annum from January 1, 1959. D defaulted. So, C fi led a suit for foreclosure of mortgage on December 12, 1962. Issue: How much interest is payable? Held: The interest at 6% per annum from January 1, 1959 to December 12, 1962 is P136,482.13. This is to be added to the principal amount, thus making a total of P713,056.03 which shall earn legal interest at 6% (now 12%) per annum from December 12, 1962 until fully paid. Such interest is not due by stipulation but by the mandate of the law, i.e., Article 2212. (Joven de Cortes vs. Venturanza, 79 SCRA 709 [1977].)

Liability for surcharges and penalties. Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: “ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case.’’ It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by lenders like banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another.



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Interest separate and distinct from surcharges and penalties. The essence or rationale for the payment of interest often re-ferred to as “cost of money,’’ is separate and distinct from that of surcharges and penalties. A penalty stipulation is not neces-sarily preclusive of interest, if there is an agreement to that ef-fect, the two being distinct concepts which may separately be demanded. What may justify a court in not allowing the credi-tor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify non-payment or reduction of interest. The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. (Rizal Commercial Banking Corporation vs. Court of Appeals, 289 SCRA 292 [1998]; Digutan vs. Court of Appeals, 376 SCRA 560 [2002].)

ART. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. (n)

Usurious contracts declared void. (1) Form of contract not conclusive. — The above provision is deemed necessary to defeat the cunning devices of usurers. (Report of the Code Commission, p. 152.) The form of the contract is not conclusive. Parol evidence is admissible to show that a written document though legal in form was in fact a cloak or device to cover usury if from a construction of the whole transaction it becomes apparent there exists a corrupt intention to violate the laws on usury. Cases illustrating the cunning devices of usurers are discussed subsequently under the Usury Law. It is evident that the Civil Code yields to the Usury Law when it comes to the question of how much of the loans and interests paid by the borrower may be recovered. (Briones vs. Cammayo, 41 SCRA 404 [1971].)

Art. 1957

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(2) Contract void only as to interest involved. — A usurious contract should not be considered void in its entirety but only as to the interest involved. (see Sec. 7, Usury Law, infra.) It is only the stipulation on usurious interest which should be treated as void so that the loan becomes without stipulation to pay interest. (Briones vs. Cammayo, supra.) In a simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt which is the cause of the contract (Art. 1350.) is not illegal. (Angel Jose Warehousing Co., Inc. vs. Chelda Enterprises, 41 SCRA 404 [1971]; Private Dev. Corp. of the Phils. vs. Intermediate Appellate Court, 213 SCRA 282 [1992].) The nullity of the stipulation on the usurious interest does not affect the lender’s right to receive back the principal amount of the loan. (3) Right of debtor. — With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily. (First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2001].) In a case, however, the Supreme Court affi rmed the judgment of the lower court ordering the debtor to pay the creditor the principal loaned plus interest thereon at the legal rate from the fi ling of the complaint. (Sanchez vs. Buenviaje, 126 SCRA 208 [1983].) Note: Interest rates are no longer subject to any ceiling. The rate will depend on the agreement of the parties. (see Note in II – The Usury Law.)

Instances of contracts disguised to cover usurious loans. The following may be mentioned: (1) Credit sale of property at exorbitant price to loan applicant. — When a credit sale of property is made to an applicant for a loan at an exorbitant price to be paid at a future day in order to enable the purchaser to sell it immediately for cash and thus obtain the money of which he is in need, and the purchaser’s obligation is for a greater sum than the fair value of the property sold and lawful interest. It is, however, necessary to show actual intent to



46

reserve usurious interest under the guise of excess of price (91 C.J.S. 592.); (2) Purchase of lender’s property at an exorbitant price to be taken from loan. — When the lender corruptly requires of the borrower as a condition for securing the loan, the purchase of the lender’s property at an exorbitant price to be taken out of the loan, or payable at a subsequent date and takes the borrower’s obligation for the sum loaned, or for both the loan and purchase price; or as a condition for extending time in which to pay a debt, the purchase of the lender’s property at an exorbitant price. In such case, the principal debt is the amount of the loan plus the fair value of the property at the time of the receipt by the buyer. All in excess of that sum is usury. But if the evidence does not disclose a guilty intent, such a contract will be upheld even though the collateral sale is made at a price higher than the market value of the property sold (Ibid.); (3) Price of sale with right to repurchase clearly inadequate. — When a vendor sells a property at a clearly inadequate price, reserving an option to repurchase at a price greater than the original price with lawful interest as such contract is in effect to be a mortgage to secure a usurious loan (Ibid.); (4) Pretended lease by borrower at usurious rental. — Where the borrower wishes to borrow money to enable him to purchase property and the lender furnishes the money taking title in himself, and puts the borrower in possession under a pretended lease at a usurious rental (Ibid., 598.); (5) Rent free by lender of borrower’s property in addition to interest on loans. — Where the lender, in addition to interest on the sum loaned, is to have the privilege of occupying rent-free, certain property of the borrower. Where other circumstances are present, showing that the purchase and lease are bona fi de and not colorable, the transaction will, of course, be perfectly valid (Ibid.); (6) Date for repayment of loan with interest ante-dates actual transaction. — Where an obligation for the repayment of money bearing interest from its date, ante-dates the actual transaction and receipt of the money loaned to hide a usurious contract.

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Where, however, the circumstances of the loan show good faith on the part of the contracting parties, as where the delay in the receipt of the money is unavoidably incident of the completion of the transaction or is due merely to the failure of the borrower to make earlier demand for it, the contract will not ordinarily be regarded as usurious, even though the actual result may be to give to the lender something more than the lawful rate of interest, if delay is not unreasonable (Ibid., 612; see Art. 1602.); and (7) Payment by borrower for lender’s services as additional com-pensation for loan. — An apparently lawful loan is usurious when it is intended that additional compensation for loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not, in fact, to be rendered. (First Metro Invest-ment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2000].)

ART. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of pay-ment. (n)

Determination of interest payable in kind. This article has the same purpose: to make usury harder to perpetrate. (Briones vs. Cammayo, 41 SCRA 404 [1971]; see Arts. 1602, last par., 2132, and 2133; Sec. 8, Usury Law, infra.)

EXAMPLE: B borrowed P1,000.00 from L payable in palay in one (1) year which shall be appraised at the current market price at the time and place of payment. When the contract was entered into, the price per cavan of palay was P500.00. On the due date of the loan, the price increased to P600.00. In this case, the value of the palay shall be appraised at P600.00 per cavan.



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ART. 1959. Without prejudice to the provisions of Ar-ticle 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capi-talize the interest due and unpaid, which as added princi-pal, shall earn new interest. (n)

When unpaid interest earns interest. As a general rule, accrued interest (interest due and unpaid) shall not earn interest except in two instances: (1) When judicially demanded as provided for in Article 2212 (supra.); and (2) When there is an express stipulation made by the parties to wit: that the interest due an unpaid shall be added to the principal obligation and the resulting total amount shall earn interest. (see Mambulao Lumber Co. vs. Phil. National Bank, 22 SCRA 359 [1968].) This practice is called compounding interest and it is allowed by the Usury Law if there is express stipulation. (Sec. 5, Ibid.) The parties may stipulate on the imposition of both interest and penalty in case of default on the part of the borrower. (Art. 1226.8) Under Article 1959, the compounding of not only of the monetary interest but also of the penalty charge, also called penalty or compensatory interest is allowed. Hence, the borrower may be held liable to pay the interest on the total amount of principal, the monetary interest and the penalty interest. (Tan vs. Court of Appeals, 367 SCRA 571 [2001].) In view of Article 1956, the stipulation as to compound interest must be in writing. (Nolan vs. Majinay, 12 Phil. 559 [1909].)

ART. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n)

8Art. 1226. In obligations with a penal clause, the penalty shall substitute the indem-nity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. x x x.

Arts. 1959-1960

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Recovery of unstipulated interest paid. This article simply means that if unstipulated interest (it is, therefore, not due) is paid by mistake, the debtor may recover as this would be a case of solutio indebiti or undue payment. (Art. 2154.9) But where the unstipulated interest, or interest stipulated, there being a stipulation but it is not in writing, is paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery as in the case of natural obligations. (Art. 1423.10)

ART. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n)

Usurious transactions governed by special laws. The Usury Law and other special laws apply only so far as they are not inconsistent with the Civil Code. However, according to Article 1175, “usurious transactions shall be governed by special laws.’’ These two provisions have given rise to the question: In case of confl ict, which would prevail, the Usury Law or the Civil Code? (see Sec. 6 of the Usury Law.) Note: Usury is now legally non-existent. The interest legally chargeable depends upon the agreement between the lender and the borrower. (Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984]; Joven vs. De Guzman, 193 SCRA 434 [1990]; Phil. National Bank vs. Encina, 544 SCRA 608 [2008].) Central Bank Circular No. 905 (Dec. 10, 1982, effective Jan. 1, 1983)

9Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

10Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfi llment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the fol-lowing articles. (Arts. 1424-1430.)



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removed the Usury Law ceiling on interest rates11 for secured and unsecured loans, regardless of maturity (Bautista vs. Pilar Development Authority, 312 SCRA 64 [1999].), rendering it legally ineffective. This Circular, however, is of doubtful validity. (see Note in II–Usury Law.) According to the Supreme Court, the Circular which took effect on January 1, 1983 “did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.’’ (First Metro Investment Corp. vs. Este Del Sol Mountain Reserves, Inc., 369 SCRA 99 [2001], citing Medel vs. Court of Appeals, 299 SCRA 481 [1998] and Security Bank & Trust Company vs. Regional Trial Court, 263 SCRA 483 [1996].) The parties are now free to stipulate the interest to be paid on monetary obligations, and absent any evidence of fraud, undue infl uence or any vice of consent exercised by one party against the other, the interest rate agreed upon is binding upon them. But “while the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrohaging of their assets.’’ When the agreed rate is found to be iniquitous and unconscionable, the courts may reduce the same as reason and equity demand. (Imperial vs. Juacian, 427 SCRA 517 [2004].) It has been held that an interest rate of 24% per annum agreed upon by the parties is not unconscionable or excessive. (Bacolor vs. Banco Filipino Savings & Mortgage Bank, 515 SCRA 79 [2007].) But an interest rate of 4% per month or 48% per annum is highly unconscionable and inordinate. (Bulos, Jr. vs. Yasuma, 527 SCRA 727 [2007]; see Svendsen vs. People, 546 SCRA 659 [2008].)

— oOo —

11Notwithstanding the suspension of the effectivity of the Usury Law, courts are em-powered to reduce the stipulated rate of interest, although it can no longer be considered “usurious,’’ if it is inequitous or unconscionable. (see Art. 1229.)

Art. 1961

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II THE USURY LAW

(Act No. 2655, as amended.)(Secs. 1-12.)

Rate of interest no longer subject to any ceiling prescribed under Usury Law. Under the authority granted to it by Sections 1-a, 4-a, and 4-b of the Usury Law, the Monetary Board of the Central Bank in Resolution No. 224 dated December 3, 1982, approved the following regulations, among others, governing interest rates on loans or forbearance of money, goods, or credit:

“General Provisions SECTION 1. The rate of interest including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods, or credit, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under the Usury Law, as amended. SEC. 2. The rate of interest for the loan or forbearance of any money, goods, or credit and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%) per annum. SEC. 3. Loans denominated or payable in a foreign cur-rency shall continue to be subject to Central Bank regulations on foreign borrowings.” (see C.B. Circular No. 905, Dec. 10, 1982.)

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52

With the promulgation of the circular, effective January 1, 1983, usury has become “legally inexistent” as the lender and the borrower can legally agree on any interest that may be charged on the loan. This circular was given retroactive effect. (Verdejo vs. Court of Appeals, 157 SCRA 743 [1988].) In the event, however, interest rate ceilings on loans are restored by the Monetary Board, the Usury Law would again apply. This possibility justifi es the continued inclusion of this topic in the book, assuming that the interest limits prescribed by the Usury Law and previous Central Bank circulars mentioned subsequently are still applicable. The Circular did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.

Legality of Central Bank Circular No. 905. Under Section 1-A (infra.) of the Usury Law, as amended by Presidential Decree No. 116 (further amended by Pres. Decree No. 858 and 1684.), the Monetary Board is “authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and to change such rate or rates whenever warranted by prevailing economic and social conditions.’’ C.B. Circular No. 905 is of doubtful legality because it appears to be in excess of the authority granted to the Monetary Board which is only to prescribe the ceilings of interest rates, and not to abolish or remove such ceilings.1

Usury defi ned. Usury may be defi ned as contracting for or receiving some-thing in excess of the amount allowed by law for the loan or for-

1Central Bank Circular No. 905 was issued by the Central Bank’s Monetary Board pursuant to P.D. No. 1684 empowering it to prescribe the maximum rates of interest for loans and certain forbearances. P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods, or credits. They do not authorize either party to unilaterally raise or lower the interest rate without the other’s consent. It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. (Phil. National Bank vs. Court of Appeals, 238 SCRA 20 [1994]; Security Bank & Trust Company vs. RTC of Maka-ti, 263 SCRA 483 [1996].)

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bearance of money, goods or chattels. (Tolentino vs. Gonzales, 50 Phil. 558 [1927].)

Usury, purely a statutory creation. The subject of usury is entirely one of statutory regulation and prohibition. In the absence of statute, any rate of interest may be charged. The restriction of the price to be paid for the use of money being purely statutory, usury is to be determined by statutory provisions applicable to the transaction, and the statute is the source of power of the court in dealing with the evil. (68 C.J.S. 569-570.)

Elements of usury. It may be stated generally that the elements of usury consist of the following: (1) a loan or forbearance; (2) an understanding between the parties that the loan shall or may be returned; (3) an unlawful intent to take more than the legal rate for the use of money or its equivalent; and (4) the taking or agreeing to take for the use of the loan of something in excess of what is allowed by law. To determine whether all these requisites are present, the court will disregard the form which the transaction may take and look only to its substance. (91 C.J.S. 583.)

When the Usury Law applies. Act No. 2566 is an act fi xing rates of interest upon loans and declaring the effect of receiving or taking usurious rates, and for other purposes. (Arevalo vs. Dimayuga, 49 Phil. 894.) The law (Sec. 1.) mentions two transactions, to wit: loan and forbearance of a debt. (1) A “loan,” within the purview of the Usury Law, would be the loan called “mutuum” we have just studied. (see Arts.

THE USURY LAW


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1953, 1958.) Commodatum is not included because it is essentially gratuitous. (2) The term “forbearance,’’ as used in the Usury Law, signi-fi es the contractual obligation of the creditor to forbear during a given period to require the debtor, payment of an existing debt then due and payable. Such forbearance or giving time for the payment of a debt is, in substance, a loan. (91 C.J.S. 598.) Where there is no loan or forbearance, there can be no usury. Thus, a provision for a discount with respect to rentals paid in advance would not contravene the Usury Law. The discount is, in effect, a reduction of the rentals. (Herrera vs. Petrophil Cor-poration, 146 SCRA 385 [1986].) A contract to pay compensation for the past use of money, although amounting to more than the lawful rate of interest for the period of the loan, is not usury, which relates to compensation for the future use of money. (91 C.J.S. 558.)

Purpose, theory, and nature of the Usury Law. (1) The Usury Law has been enacted for the protection of borrowers from the imposition of unscrupulous lenders who take undue advantage of the necessities of others. It is undoubtedly against public policy to charge excessive interest for the use of money. (see 91 C.J.S. 570; New Sampaguita Builders Construction, Inc. vs. PNB, 435 SCRA 565 [2004], citing De Leon Comments and Cases on Credit Transactions [1995], p. 87.) (2) It proceeds on the theory that a usurious loan is attribut-able to such inequality in the relation of the lender and borrower that the borrower’s necessities deprive him of freedom in con-tracting and place him at the mercy of the lender. In theory, the borrower is put by the law in the same category with persons under legal disability to contract, such as unemancipated minors and insane persons. (Ibid.) To attain this purpose, the law has imposed penalties as punishment on those who violate its provi-sions and fi xed rules prescribing the rates of interest for the loan or forbearance of money. (3) Statutes relating to usury may be either remedial or penal, or both remedial and penal, in their character, their construction

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being controlled by the nature of their provisions. (91 C.J.S. 569.) Our Usury Law is both remedial (see Secs. 6, 8 and 9.) and penal. (see Sec. 10.)

Historical background of the Usury Law. The taking of excessive interest for the loan of money has been regarded with abhorrence from the earliest times. If we look back upon history, we shall fi nd that there is scarcely any people, ancient or modern, that have not had usury laws. (1) Usury, as such unlawful profi ts were known, was pro-hibited by the ancient laws of the Chinese and Hindus, by the Mosaic Law of the Jews, by the Koran, by the Athenians and by the Romans, and has been frowned upon by distinguished pub-licists throughout all the ages. (2) During the Middle Ages, the people of England and especially the English Church, entertained the opinion then current in Europe that the taking of any interest for the loan of money was a detestable vice, hateful to man, and contrary to the laws of God. It is said that not only was the usurer liable during his life to the censurer of the church, but after his death, his chattels were forfeited to the king, and his lands escheated to the lord of the fee. Contracts for interest not exceeding 10% were expressly legalized by Act of Parliament in 1545, which act was repealed in 1555 but restored in 1570. Subsequent acts gradually reduced the rate of interest al-lowed until 1714 when the lawful rate was fi xed at 5% where it remained until 1854, when all restrictions on interest charges were removed. (3) The early American colonial usury acts were modeled after the English act, the rate of interest allowed being usually higher, however. These early enactments adopted the penalty for usury fi xed by the statute of the mother country, and made all usurious contracts wholly void. The tendency of subsequent statutes, however, has been steadily to mitigate the punishment infl icted on the usurer. (see C.J.S. 558-559.) (4) The illegality of usury is now wholly a creature of legis-lation. The Philippine statute on the subject is Act No. 2655 (as

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amended) which became effective May 1, 1916. It is a drastic law following in many respects the most advanced American legisla-tion. (U.S. vs. Tan Quingco Chua, 39 Phil. 552 [1919]; Tolentino vs. Gonzales, 50 Phil. 558 [1927].) Central Bank Circular No. 905 (supra.) which took effect on January 1, 1983 simply suspended the effectivity of the Usury Law. It did not repeal or in any way amend the Usury Law. Only a law can repeal another law. (First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2001].)

Construction of the law. (1) In general. — In the construction of usury statutes, it is the duty of the court to ascertain the intent and purpose of the legislature. The mischief to be stopped and the remedy therefor should be considered, and the statute so construed as to carry into effect the intention of the lawmaking body in removing the mischief and applying the remedy so far as it can be done consistently with the phraseology of the statute. The general intent must be kept in view in determining the scope and meaning of any part of the law and it must be held in mind that it was enacted for the protection of the borrower. (68 C.J.S. 572-573.) (2) Liberal or strict construction. — While laws enacted to guard against unreasonable rates of interest are favorably re-garded, and are liberally construed to accomplish their purpose, usury provisions which are penal in their nature are to be strictly construed. In other words, when operating on the contract or the security taken, the statute is not, strictly speaking, punitive in its character, and should be construed so as to repress the evil the legislature had in view in its enactment, but when the punish-ment of the person who has committed the usury is sought, then according to the benignant principle which pervades our crimi-nal jurisprudence, it should be construed in all cases of doubt and uncertainty in favor of the accused. In strict construction, any uncertainties are resolved in favor of him who is sought to be penalized. (Ibid., 573-574.) (3) Prospective or retrospective operation. — The general rule is that, unless there is a clear legislative intent to the contrary,

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usury statutes will be construed to be prospective only, and not retrospective. (Ibid., 576.)

(a) Contracts previously non-usurious. — If a contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation for this would be tantamount to the impairment of the obligation of the contract. Thus, contracts which were not usurious under the law in effect at the time they were made, or which, although usurious at the time of their inception, were by a later legislation rendered valid and non-usurious, cannot be rendered usurious by a subsequent change in the law. So, a claim of usury is not available where the contract was entered into before a usury law became effective. (68 C.J.S. 578.) It has been held that a person who collected usurious interest after the adoption of the Usury Law upon a contract made when there was no usury law in force could not be held responsible under the Usury Law. When a contract contains an obligation to pay interest upon the principal, the interest thereby becomes a part of the obligation of the contract. Laws adopted after the execution of a contract, changing or altering the rate of interest, cannot be made to apply to such contract without violating the provisions of the Constitution which prohibits the passage of a law “impairing the obligation of contracts.” (U.S. vs. Diaz, 42 Phil. 766 [1922]; 8 Cyc., 996.) (b) Contracts previously usurious. — However, usury stat-utes which do not impair the obligation of contracts by mak-ing contracts legal which were illegal at their inception may constitutionally be made retrospective. Thus, the right of a debtor under a usurious contract to refuse to pay interest or to recover usury has been held not to be a vested constitu-tional right secured against legislative innovation but that it constitutes a mere privilege within the legislative power to take away. Statutes which take away an existing defense of usury are generally held not to affect the obligation of the contract, but to pertain to the remedy only. The effect of such legislation is not to change the contract of the parties, but only to remove a bar to its enforcement, and where the legislature so

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intends, it will operate retrospectively. As a general rule, the legislature has the power to validate any or all parts of pre-existing usurious contracts. (see 91 C.J.S. 576-577; U.S. vs. Tan Quingco Chua, 39 Phil. 552 [1919].)

In a case, where the contract entered into before the effectivity of the Usury Law stipulated interest at a rate (60% per annum) contrary to the Usury Law, the borrower was held liable only for the legal rate (then 6% per annum) both for the period prior to and after the date the law became effective. The Supreme Court considered the contract of loan as one stipulating no interest. (Aguilar vs. Rubiato and Gonzales Villa, 40 Phil. 570 [1919].)

SECTION 1. The rate of interest for the loan or forbear-ance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in ac-cordance with the authority hereby granted. (as amended by Pres. Decree No. 116.)

SEC. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and to change such rate or rates whenever war-ranted by prevailing economic and social conditions; Pro-vided, That changes in such rate or rates may be effected gradually on scheduled dates announced in advance.2

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority such as consumer loans or renewals thereof as well as such loans made by pawnshops, fi nance companies and other similar credit institutions although the rates prescribed for these institutions need not neces-sarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit sub-stitutes, or loans of fi nancial intermediaries. (as amended by Pres. Decrees No. 116, 858, and 1684.)

2Reads: “Provided, that such changes shall not be made often than once every twelve months,’’ before amendment by Pres. Decree No. 1685.

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SEC. 2. No person or corporation shall directly or in-directly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fi nes and penalties, for the loan or renewal thereof or for-bearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly regis-tered, or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbear-ance is granted; Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specifi ed by the Monetary Board. (as amended by Pres. Decree No. 116.)

SEC. 3. No person or corporation shall directly or indi-rectly demand, take, receive or agree to charge in money or other property, real or personal, a higher rate or greater sum or value, for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two thereof, than fourteen per cen-tum or the maximum rate or rates prescribed by the Mon-etary Board and in force at the time the loan or forbearance is granted. (as amended by Pres. Decree No. 116.)

Interest defi ned. Interest is the compensation allowed by law or fi xed by the parties for the loan or forbearance of money, goods or credits.

ILLUSTRATIVE CASE: Loan in Japanese fi at currency to be repaid, without interest, in the same amount in Philippine currency after the war. Facts: D borrowed P4,000.00 in Japanese fi at currency from L, promising to repay “the same amount” or the same number of pesos “in Philippine currency” or “in currency prevailing after the war” without any interest, “one year after this date, October 5, 1944.”

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D contends that the transaction was immoral and against public order because taking advantage of his superior knowledge of war development, L imposed on him the onerous obligation and could now obtain P4,000.00 in return for an investment of P40.00, D’s estimate of the value of the Japanese money he borrowed. He further asserts that the contract was contrary to the Usury Law because he would be paying interest greatly in excess of the lawful rates. Issue: Is the contract legal and obligatory? Held: Yes. For the following reasons: First, D voluntarily signed the document without having been misled as to its con-tents and “insofar as knowledge of war events was concerned,” both parties were “on equal footing.” Second, the date of libera-tion was anybody’s guess. Third, there was the possibility that upon re-occupation, the Philippine Government would not in-validate the Japanese currency which after all had been forced upon the people in exchange for valuable goods and property. The odds were about even when the parties played their bar-gaining game. It is not immoral or against public order for a homeowner to recover P10,000.00 when his house was burned, because he invested only about P100.00 for the insurance policy. And when the holder of a sweepstakes ticket who paid only P4.00 luckily obtained the fi rst prize of P100,000.00 or over, the whole business is not immoral or against public order. D is not paying interest. Precisely, the contract says the money received “will not earn interest.” D and L both elected to subject their rights and obligations to contingency. The gain to L is not interest within the meaning of the Usury Law. Interest is some additional money to be paid in any event, which is not the case here because L might have gotten less if the Japanese occupation had extended to the end of 1945 or if the liberation forces had chosen to permit the circulation of the Japanese notes. (Roño vs. Gomez, 83 Phil. 890 [1949].)

Kinds of interest. They are the following: (1) Simple interest. — that which is paid for the principal at a certain rate fi xed or stipulated by the parties (see Art. 2209, Civil Code.);

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(2) Compound interest. — that which is imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole (principal and accrued interest) is treated as a new principal upon which the interest for the next period is calculated (Arts. 1959, 2212, ibid.); (3) Legal interest. — that which the law directs to be charged in the absence of any agreement as to the rate between the parties. (Art. 2209, ibid.) Thus, as provided in Section 1, the rate collectible is 6% per annum. The same rate is allowed in judgments when there is no express contract between the parties in anticipation of the same. The interest is computed from the time of the rendition of the trial court’s, not of the appellate court’s decision. (De Lima vs. Laguna Tayabas Co., 160 SCRA 70 [1988].) The rule has been laid down that the 6% interest imposed by a court should be computed from the date of the rendition of the judgment and not from the fi ling of the complaint because at the time of the fi ling of the complaints, the amount of damages to which the plaintiff may be entitled remains unliquidated and not known until it is defi nitely ascertained, assessed and determined by the court and only after the presentation of proof thereon. (Phil. Airlines, Inc. vs. Court of Appeals, 275 SCRA 621 [1997]; Korean Airlines vs. Court of Appeals, 234 SCRA 717 [1994]; Eastern Shipping Lines vs. Court of Appeals, 234 SCRA 78 [1994].) (4) Lawful interest. — that which the law allows or does not prohibit, that is, the rate of interest within the maximum pre-scribed by law (Secs. 2, 3.); and (5) Unlawful or usurious interest. — that which is paid or stipulated to be paid beyond the maximum fi xed by law. (Ibid.) Note: Under the authority granted to it by Section 1 of the Usury Law, the Monetary Board of the Central Bank in its Reso-lution dated July 29, 1974 has prescribed that the legal rate of interest for the loan or forbearance of any money, goods or cred-its and the rate allowed in judgments, in the absence of express contract as to such rate, shall be 12% per annum. (see C.B. Cir. No. 416 [1974].3)

3The circular should not be given retroactive application. (Viloria vs. Court of Ap-peals, 123 SCRA 259 [1983].)



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The circular does not apply to all kinds of obligations (e.g., from a contract of sale) and “all kinds of monetary judgment.” “The judgments spoken of and referred to are judgments in litigation involving loans or forbearance of any money, goods or credits, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other kind of monetary judgments which has nothing to do with nor involving loans or forbearance of any money, goods and credits does not fall within the coverage of the Usury Law for it is not within the ambit of the authority granted by the Central Bank. Thus, where the decision sought to be executed is one rendered in an action for damages for injury to persons and loss of property, the law applicable is Article 22094 of the Civil Code.” (Reformina vs. Tomol, Jr.,5 139 SCRA 260 [1985]; Phil. Rabbit Bus Lines, Inc. vs. Cruz, 143 SCRA 158 [1986]; Food Terminal, Inc. vs. Court of Appeals, 262 SCRA 339 [1996].) Article 2209 applies to transactions requiring the payment of indemnities as damages in the form of interest at 6% per annum, in connection with any delay in the performance of the obligation arising therefrom other than those involving loan or forbearance of money, goods, or credits. (Republic Planters Bank vs. Court of Appeals, 216 SCRA 738 [1992]; National Power Corp. vs. Angas, 208 SCRA 542 [1992]; Philippine National Bank vs. Court of Appeals, 263 SCRA 766 [1996].) Circular No. 416 was held applicable to judgments involving the payment of unliquidated cash advances to an employee by her employer (Villarica vs. Court of Appeals, 123 SCRA 259 [1983].) and the return of money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller.

4Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the con-trary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. (1108)

5This case stressed that the interest rate under Central Bank Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment involving a loan or forbearance of money, goods, or creates. Cases beyond the scope of said circular are governed by Article 2209 which considers interest a form of indemnity for the delay in the performance of an obligation. (Cristina Garments, Inc. vs. Court of Appeals, 304 SCRA 356 [1999].)

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(Buisier vs. Court of Appeals, 154 SCRA 438 [1987]; see Pilipinas Bank vs. Court of Appeals, 225 SCRA 268 [1993].) Section 1-a which, as distinguished from Section 1, appears to be the actual and operative grant of authority to the Monetary Board of the Bangko Sentral ng Pilipinas to prescribe maximum rates of interest where the parties have not stipulated thereon, in excluding mention of rates allowed in judgments, should be construed as limiting its authority only to loans or forbearances of money, etc. and to judgments involving such loans or forbearances. But the 12% interest may be imposed although there is neither a loan nor a forbearance in case of delay in the payment of the sums adjudged in a fi nal judgment, and not as part of the judgment for damages. (Nakpil & Sons vs. Court of Appeals, 160 SCRA 334 [1988].) The interim period from the fi nality of the judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to forbearance of credit. Thus, from the time the judgment becomes fi nal until its full satisfaction, the applicable rate of legal interest shall be 12%. (Food Terminal, Inc. vs. Court of Appeals, 262 SCRA 339 [1996]; Eastern Assurance and Surety Corporation vs. Court of Appeals, 322 SCRA 73 [2000].) That there is no longer any ceiling on interest or interest rates on loans (Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984].) applies only where the parties openly and expressly agree on a specifi c rate of interest to accrue on the loan. Where the interest rate is not expressly stipulated, the loan shall earn 12% interest per annum. (Sangrador vs. Villarama, 168 SCRA 215 [1988].) The interim period from the fi nality of the judgment awarding a monetary claim and until payment thereof, deemed to be equivalent to a forbearance of credit. Thus, from the time the judgment becomes fi nal until its full satisfaction, the applicable rate of legal interest shall be 12%. (Food Terminal, Inc. vs. Court of Appeals, 262 SCRA 339 [1996].) It has been held in a case that while the stipulated rate of interest at 5.5% per month on a P500,000 loan cannot be rendered “usurious in view of Central Bank Circular No. 905, it is “excessive, iniquitous, unconscionable and exhorbitant.” The courts are



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empowered to “reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.’’ (Medel vs. Court of Appeals, 299 SCRA 481 [1998]; see Art. 1229.) “Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets’’ (Solangon vs. Salazar, 360 SCRA 379 [2001]; Ruiz vs. Court of Appeals, 401 SCRA 410 [2003]; Dio vs. Japor, 463 SCRA 170 [2005].)

Interest rates. Under the Usury Law, they are: (1) Legal rate. — 12% per annum (2) Maximum rate. —

(a) 12% per annum, if loan is secured in whole or in part by a mortgage upon real estate with a Torrens title (Sec. 2.); or any agreement conveying such real estate (also registered) or an interest therein. For purposes of the ceiling, loans secured by government securities such as treasury bills, Central Bank certifi cates of indebtedness, etc. qualify as secured loans. (b) 14% per annum, if the loan is not secured as above stated (Sec. 3.); or (c) that prescribed by the Monetary Board of the Central Bank. This allows for more fl exible interest rate ceilings.

Note: Central Bank Circular No. 817 (July 21, 1981) fi xed the effective rates of interest as follows: (1) not exceeding 16% per annum, including commissions, premiums, fees, and other charges for secured loans of 365 days or less; (2) not exceeding 18% per annum, if such loans are unsecured; and (3) if the maturity of the loan is more than 365 days, the interest shall not be subject to any ceiling.

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EXAMPLES: (1) B borrowed P10,000.00 from L payable within one (1) year. The parties did not expressly stipulate in writing that B shall pay interest. Under the law, B is not liable to pay interest. (see Art. 1956.) (2) Suppose, in the above example, it is expressly stipulated in writing that B shall pay interest but the parties failed to fi x the rate thereof. In this case, the legal rate of 12% is payable. (3) Suppose now that B expressly agreed in writing to pay interest of 18% per annum. The interest stipulated is simple interest. If it was also agreed that the interest due and unpaid shall likewise earn interest, this interest on interest is called compound interest. (4) Under Central Bank Circular No. 817, if the loan is secured by a registered real estate, the interest of 18% including commissions, etc. is unlawful or usurious; if such loan is unsecured, then the interest is lawful.

ILLUSTRATIVE CASE: Borrower claimed that stipulation to pay “interest at the rate fi xed by Act No. 2655 x x x” did not specify rate of interest; hence, he was not obliged to pay more than the legal rate. Facts: L brought suit against B upon a registered mortgage deed of real estate which states the following with regard to interest: “x x x B should pay or cause to be duly paid to L x x x the aforesaid amount of P1,000.00, Philippine currency, together with the interest at the rate fi xed by Act No. 2655 x x x.” B offered 10% interest but it was rejected. A demand was made by L for 12%. B contended that as the contract did not specify the rate of interest to be paid, he was not obliged to pay more than 6% a year. Issue: Which among the several rates of interest fi xed in Act No. 2655 did the parties agree upon? Held: The contract between the parties was a loan secured by a mortgage of real estate, the ownership whereof had been duly registered. Therefore, when in the deed B stated that the loan should earn interest fi xed in Act No. 2655, he could not have had in mind anything else than Section 2 for that alone



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fi xed the maximum interest chargeable on loans secured by a mortgage, namely, 12% per annum. Furthermore, the subsequent act of B and his heirs after his death to pay L and his widow after his death also indicated that the rate of interest agreed upon by and between the parties was that fi xed in Section 2. (Rivero vs. Rabe, 54 Phil. 982 [1930].) Dissenting opinion (Justices Street and Ostrand): “The rate of interest to be allowed should be 6%, in accordance with Section 1. The rate of 12% which the court supposes to have been intended by the contracting parties, is not a rate fi xed by Act No. 2655, because the rate is merely a maximum rate beyond which the parties are not permitted to go in interest-bearing contracts secured by mortgages upon real property. The parties to such a contract can fi x any rate lower than 12%, but not more. If the agreement had been to pay the maximum rate of interest permissible under Act No. 2655, then the debtor would have been bound to pay at the rate of 12%.”

Multi-tiered interest rates. Under Section 1-a (par. 2.), the Monetary Board may prescribe higher maximum rates of interest for loans of low priority than those loans used for, say, productive purposes. Low priority loans are enumerated in Section 1-a. (par. 2.) Loans made by pawnshops, fi nance companies, and other similar credit institutions may also be allowed to charge higher rates although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is likewise authorized by the same pro-vision to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of fi nancial intermediaries. It may change the maximum interest rate or rates for loans “whenever warranted by prevail-ing economic and social conditions.” Such changes in interest rate ceilings “may be effected gradually on scheduled dates an-nounced in advance” (par. 1.), i.e., on a staggered basis.

Section 2 and Section 3 compared. Section 2 may be distinguished from Section 3 in the following manner:

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(1) In Section 2, the taking or receiving (not mere agreeing) of usurious interest is the act penalized, while in Section 3, the mere demanding or agreeing to charge excessive interest is also punishable; (2) In Section 2, the loan or forbearance is secured by a registered real estate, while in Section 3, it is not so secured or there may be no security at all; (3) In Section 2, the maximum rate of interest allowed is 12% per annum, while in Section 3, 14% per annum; and (4) In Section 2, commissions, premiums, fi nes, and penalties are included in the computation of interest, while in Section 3, they are not considered. (see C.B. Cir. No. 721, supra.) Under both sections, it is only the creditor who is criminally liable.

Validity of stipulation to pay penalty in case obligation not fulfi lled. Where a borrower has agreed to pay a rate of interest not forbidden by law, but has stipulated that, in the event of his not making payment at the time specifi ed, the obligation shall bear a higher rate of interest, either from default or from the date of its execution, or that some specifi c sum shall be paid in addition to the principal and interest contracted for, the increased rate is generally regarded as a penalty. (27 R.C.L. 232; see Art. 1226.) (1) Such a penalty does not include interest, and as such the two are different and distinct things which may be demanded separately. “When an excessive rate of interest is made payable only in case of default in payment of the principal, the higher rate is not for the use of the money, but imposed as a penalty for non-performance of the contract. x x x There is no policy and nowhere in Act No. 2655 is there a provision preventing the stipulation and enforcement of a penalty in case of a violation of the contract.” (Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249 [1925]; Bachrach Motor Co. vs. Espiritu, 52 Phil. 346 [1928]; Go Chioco vs. Martinez, 45 Phil. 256 [1923]; see Insular Bank of Asia and America vs. Spouses Salazar, 159 SCRA 133 [1988].)



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The above doctrine, however, is good only with respect to transactions falling under Section 3. Section 2, as amended, includes penalties in the computation of interest for the purpose of determining whether the same exceeds the rate fi xed by law or not. (2) In another case, the rate stipulated was 9% subject to an additional rate of 5% in the event of default, or a total of 14%. This stipulation about the payment of such additional rate, according to the Supreme Court, partakes of the nature of a penalty clause which is sanctioned by law. (Equitable Banking Corp. vs. Liwanag, 32 SCRA 293 [1970]; GSIS vs. Court of Appeals, 145 SCRA 311 [1986].) The case does not disclose whether the loan was secured or not by real estate mortgage.

Attorney’s fees to cover costs of collection not interest. Stipulations in negotiable instruments for the payment of collection as attorney’s fees are not forbidden by law in our jurisdiction. The lender may without violating the Usury Law provide in a note for an attorney’s fee to cover the cost of collection. Thus, in a case, the clause in a promissory note sued on, reading “and a further sum equal to 10% of the total amount due as and for expenses of collection for attorney’s fees whether actually incurred or not” was held as not in contravention of the Usury Law. The purpose of a stipulation in a note for reasonable attorney’s fees is not to give the lender a larger compensation for the loan than the law allows, but to safeguard the lender against future loss or damage by being compelled to retain counsel (in-house or not) to institute judicial proceedings for the collection of his credit (New Sampaguita Builders Construction, Inc. vs. PNB, 435 SCRA 565 [2004], citing De Leon, Comments and Cases on Credit Transactions, [1995], p. 64.). The additional words, “whether actually incurred or not” are merely surplusage where such expenses have actually incurred. But whether a creditor can enforce payment of attorney’s fees not actually incurred is questionable. (Andreas vs. Green, 48 Phil. 463 [1925].) In any case, courts have the power to determine their reasonableness based

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on quantum meruit and to reduce the amount thereof if excessive. (New Sampaguita Builders Construction, Inc. vs. PNB, supra.) Note: In a case (Gov’t. of the Phil. Islands vs. Lim, 61 Phil. 737 [1935].), a stipulation in the promissory notes executed by the defendants and incorporated in the mortgage deeds, wherein they voluntarily undertook “to pay the sum of P1,300.00 as court costs, expenses of collection and attorney’s fees whether incurred or not” was held a valid and a permissible penal clause the same being neither excessive nor exorbitant. (see also Gov’t. of the Phil. Islands vs. Vaca and Calderon, 64 Phil. 6 [1937]; Gov’t. of the Phil. Islands vs. Macanaya, 60 Phil. 1049 [1934].)

Where attorney’s fees stipulated excessive. If the amount of attorney’s fees stipulated is excessive, the same is subject to equitable reduction. In a case, the mortgagee binds herself to pay a loan of P50,000.00 within 30 days and, in case of foreclosure, to pay the mortgagee 30% of the sum owing and unpaid as attorney’s fees and liquidated damages, exclusive of costs and expenses of sale. The Supreme Court held that the contract was not usurious per se, there being no allegation that the mortgagee’s intention in inserting the stipulation in question was to exact a usurious interest nor that said contract was contra bonos mores, but sustained the reduction by the lower court of the stipulated attorney’s fees and liquidated damages to 5% in accordance with the provisions of Articles 1227 and 12296 of the Civil Code. (Geniza vs. Sy, 6 SCRA 20 [1962]; see Yulo vs. Pe, 101 Phil. 134 [1957]; Umali vs. Miclat, 105 Phil. 1109 [1959].)

Determination of existence of usury. (1) Corrupt agreement must be present. — The gist of the of-fense of usury is in actually receiving (at least where the criminal

6Art. 1229. The judge shall equitably reduce the penalty when the principal obliga-tion has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is inequitous or un-conscionable.



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prosecution is based on Section 2) unlawful interest. To consti-tute usury, within the prohibition of the law, there must be an intention knowingly to contract for or take usurious interest; for if neither party intend it but act bona fi de and innocently, the law will not infer a corrupt agreement. Where indeed the contract upon its very face, imports usury, as by an express reservation of more than lawful interest, there is no room for the presumption; for the intent is apparent, res ipsa loquitur. But where the contract on its face is for legal interest only, there must be proof that there was some corrupt agreement, or device or shift, to cover usury, and that it was in full contemplation of the parties. The real intention of the parties must be ascertained from the circumstances surrounding the transaction and from the language of the document itself. (U.S. vs. Tan Quingco Chua, 39 Phil. 552 [1919].) (2) Where consideration of loan is property or services of uncertain value. — A contract is ordinarily not usurious under which the creditor is to receive, in consideration of his loan or forbearance, property or services of uncertain value, even though the probable value is greater than lawful interest, unless the excess is so palpable as to show a corrupt intent to violate or evade the usury law. (91 C.J.S. 616-617.) Thus, “an agreement that instead of interest the lender of money would receive the rents and profi ts of certain land for a term of years, is not usurious where no intention to evade the statute is shown; and the fact that such rents and profi ts happen to amount to more than lawful interest does not render the contract usurious.” (Verzosa vs. Bucag [Unrep.], 97 Phil. 996 [1955]; Toquero vs. Villegas, [C.A.] 40 O.G. No. 15, p. 10.) This principle, of course, is not applicable where the contract upon its face imports usury, as by an express stipulation of more than the lawful rate. (3) Form of contract not conclusive. — The form of the contract is not conclusive. (see Art. 1957.) The cardinal inquiry is: Did the parties resort to the transaction for the purpose of disguising usury in violation of law? The law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admis-

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sible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt inten-tion to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury. (U.S. vs. Tan Quingco Chua, supra; see Art. 1957, Civil Code.)

EXAMPLE: B borrowed from L P1,000.00 with interest at 24% per annum or P240.00. The interest, let us suppose, is usurious. To hide the usurious transaction, the contract entered into by the parties is called pacto de retro (sale with right to repurchase) whereby B sells his land to L for P1,000.00 with right to repurchase the same within a fi xed period. It is stipulated that B shall continue in possession as lessee and pay a fi xed rental of P240.00 a year. Here, the real intention of the parties is that the pretended purchase price is the money loaned and the simulated rent is the interest. The courts have held this form of agreement as a mere cloak or device to circumvent the Usury Law.

When the Usury Law not applicable. Most of the ordinary contracts, when entered into in good faith, do not come within the pale of usury. Since the purpose of the Usury Law is to prevent excessive charges for the use of money, it applies only to those contracts which in substance involve a loan of money or forbearance to collect money due. (91 C.J.S. 587.) Hence, it does not apply to: (1) The rental in contract of lease where the relation between the contractors is that of landlord and tenant and not that of borrower and lender (Tolentino vs. Gonzales, 50 Phil. 558 [1927].) so that rent charges may be fi xed without regard to the Usury Law. The provision for the payment of rentals in advance where the lessee gets a rebate or discount for the advance payment cannot be construed as a repayment of a loan because there is no grant or forbearance of money as to constitute an indebtedness of the lessee. The provision for a discount is not unusual in lease



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contracts. (Herrera vs. Petrophil Corporation, 146 SCRA 385 [1986].) But where the lease provided for the imposition of an addi-tional 15% upon unpaid rent in the form of liquidated damages, it was held that such stipulation is in reality a mere cover for the payment of usurious interest. (Pamintuan vs. Tiglao, 53 Phil. 1 [1929].)

ILLUSTRATIVE CASE: Vendor a retro remained as tenant and agreed to pay rent. Facts: S sold to B a parcel of land with a right of repurchase. In the same deed, S agreed to become a tenant of B and to pay a rental price of P375.00 a month, based upon the value of the property, during the period of the existence of the right to repurchase. A case subsequently arose between S and B. Issue: Under a pacto de retro, where the vendor becomes a tenant of the vendee and agrees to pay a certain amount per month as rent, may such tenant charge his landlord with violation of the Usury Law upon the ground that the sum paid as rent, based upon the value of the property, amounts to usurious rate of interest? Held: In the present case, the court ruled that the transaction was one of rent and not a loan. The property in question was sold absolutely with the right only to repurchase. During the period of redemption, B, the vendee, and not S, the vendor, was the owner of the property. S was a tenant of B and the relation which existed between them was that of landlord and tenant. That relation could only be terminated by a repurchase of the property by S in accordance with the terms of the said contract. Dissenting opinion (Justice Malcolm): “The contract was merely a clever device to cover up the payment of usurious interest. The fact that the document purports to be a true sale with right of repurchase means nothing. The fact that the instrument includes a contract of lease on the property whereby the lessee as vendor apparently binds himself to pay rent at the rate of P375.00 per month and whereby default in the payment of the rent agreed for two consecutive months will terminate this lease and will forfeit any right of repurchase, as though the term had expired naturally does mean something

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and taken together with the oral testimony, is indicative of a subterfuge hiding a usurious loan. (Tolentino vs. Gonzales, 50 Phil. 558 [1927].)

Note: Under Article 1602 of the Civil Code (a new provision), a contract of pacto de retro “shall be presumed to be an equitable mortgage in any of the following cases: x x x (2) When the vendor remains in possession as lessee or otherwise; x x x and x x x any money, fruits, or otherwise shall be considered as interest which shall be subject to the usury law.” (2) A bona fi de sale, for a person has a right to sell his property at such price and at such terms as to the time and mode of payment as he may see fi t. A hard bargain need not necessarily be a void bargain. (U.S. vs. Constantino Tan Quingco Chua, 39 Phil. 552 [1919].)

ILLUSTRATIVE CASE: Clause in mortgage executed by buyer to secure payment with interest of balance of purchase price of property sold, gives seller right to collect rents for the fi rst 60 days after sale in consideration of his waiver of interest for said period. Facts: S, as administrator of an estate left by a deceased, sold with the consent of the heirs and approval of the probate court, a parcel of land to B at the agreed price of P75,000.00 of which P65,000.00 was paid at the time of the sale. To secure the balance, B executed a mortgage on the premises by the terms of which the balance of P10,000.00 was to bear interest at the rate of 12% per annum from maturity until fi nal payment and all rents of the property from the date of sale until full payment shall be collected by S for the benefi t of the estate under administration. It appeared that the court authorized the sale on the basis of a letter of B to S to the effect “that the said mortgage will carry no interest, during [the] period of sixty (60) days [after the sale], but whatever rent to be derived from said property during said period to redound to the benefi t of the estate.” Issue: Is the mortgage valid considering that in addition to the payment of 12% interest per annum, it gives the right to collect rents on the property?



74

Held: Yes. Standing alone and within itself, the mortgage might be construed as tending to show that S was to receive more than 12% interest on the amount of the rate. The circum-stances of the case show that the transaction was a sale of prop-erty as distinguished from a loan of money; that it was founded upon an order of the court; that it was the result of a series of negotiations between S and B; and that at the time the mort-gage was executed, it was contemplated by both parties that the note would be paid at its maturity, and that the clause giv-ing S the right to the rents for the fi rst 60 days was inserted in consideration of S’s waiver of interest on the note for the fi rst 60 days. The said clause in the mortgage was founded on B’s own proposition. It is very apparent that neither S nor B ever con-templated the making of a usurious contract and that, at the time it was made, neither of them ever thought or understood that it was. (Reyes vs. Elser, 45 Phil. 685 [1924].)

(3) The increase in price of thing sold as a result of a sale on credit, over its cash sales price, commonly known as time-price differential, for a vendor may well fi x upon his property one price for cash and another for credit and the mere fact that the credit price exceeds the cash price by a greater percentage than is permitted by the Usury Law is a matter of concern to the parties but not to the courts if the sale is made in good faith and not as a mere pretext to cover a usurious loan. (27 R.C.L. 214.) Such time-price differential is not interest within the meaning of the Usury Law. It serves not only to cover the expenses generally entailed by such transactions on credit, but also to encourage cash sales, so useful to commerce. (Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513 [1925]; also Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966].) But a stipulation in a contract of sale made on a cash basis and for a cash price whereby the vendor forbears to require the cash payment agreed upon in consideration of the vendee’s promise to pay at a future day a sum greater than such agreed cash value with lawful interest, renders the excessive charge therefor usurious. (see 91 C.J.S. 591.)

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ILLUSTRATIVE CASES: 1. Purchase price is P5,300.00 if paid in cash; to be increased by 5%, if purchase is on credit. Facts: M Company sold to T Company certain agricultural implements under the following terms: P5,300.00 if paid in cash, otherwise the amount of P265.00 or 5% on P5,300.00, would be added, making a total of P5,565.00, this total sum of P5,565.00 to be paid in the manner specifi ed in a chattel mortgage given to secure its payment by T. The goods were not paid in cash. Issue: Whether or not the increase of price of goods sold on credit upon their cash value constitutes interest within the meaning of the Usury Law. Held: No. In the contract of sale, the parties may fully agree upon the price of the goods sold, and it cannot be said that the credit, greater than the cash price, constitutes interest within the meaning of the Usury Law. It is up to the purchaser to decide which price he prefers in making the purchase. If he prefers to purchase for cash, he obtains a reduction of the price; if, on the contrary, he prefers to buy on credit, he cannot complain of the increase of the price demanded by the vendor. (Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513 [1925].) ———— ———— ———— 2. Present sale is made for cash price of P15,000.00, but in consideration for vendor’s forbearance to require cash payment, vendee promises to pay interest above maximum rate. Facts: L bought certain parcels of land which he subse-quently conveyed to B who executed a mortgage upon the same land to secure the payment of the purchase price. Under the mortgage, B bound himself to pay L the sum of P15,000.00 in a single payment, and interest, in the amount of P2,250.00, to be paid in two (2) semi-annual installments so long as the debt should subsist; and if B should not make payment within twelve (12) years from the date of the instrument, L may enter into the possession of the mortgaged property. Issue: Is the mortgage in question usurious? Held: Yes. The mortgage purports on its face to obligate B to pay 15% interest per annum well above the rate allowed by law. L contended that the interest represented the price which was agreed upon as the value of the property sold and, therefore,



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the contract did not truly represent a loan or forbearance at an unlawful rate. In this case, however, the contract was a present sale at the cash price of P15,000.00 and a forbearance in respect to the collection of that sum for an indefi nite period within the limits of 12 years, in consideration of an agreement to pay interest at a usurious rate so long as the indebtedness should subsist. The credit was not extended for a defi nite time and the debtor was left at liberty to pay off the whole debt at any time within the 12-year limit that he chose. The case more properly falls within the rule stated in 39 Cyr., page 927, to the effect that: ”. . . Where the sale is made on a cash basis and for a cash price and the vendor forbears to require the cash payment agreed upon in consideration of the vendee’s promising to pay at a future day a sum greater than such agreed cash value with lawful interest, in such case, there is a forbearance to collect an existing debt, and the excessive charge therefor is usurious.” (Delgado vs. Alfonso Duque Valgona, 44 Phil. 739 [1923].)

(4) A bona fi de pacto de retro sale, for if the parties have acted in good faith, such a transaction is not within the purview of the Usury Law.

Effect where principal not absolutely payable. The usury statutes are intended to prevent the charging of an excessive rate of interest for the lending of money. It is essential, therefore, to constitute usury that the principal sum be payable absolutely and at all events. Accordingly, the statutes have no application to those uncertain transactions in which the lender incurs risk of losing in whole or in part the principal sum lent, or in which the payment of the amount is contingent upon conditions beyond the control of the parties. (91 C.J.S. 599.) Thus, a loan given to save a business venture, to be repaid only if the venture be successful is not subject to the provisions of the Usury Law. The same is true in the case of loans on bottomry and respondentia (see Sec. 101, Pres. Decree No. 1460 [The Insurance Code of 1978].) because the

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repayment is subject to the perils of marine navigation. (see Sec. 99, Ibid.) Note: A loan on bottomry is a contract in the nature of a mortgage by which the owner of a ship borrows money for the use of the ship which is pledged as security, it being stipulated that if the ship be lost, the lender shall also lose his money. When the loan is constituted on the cargo, it is called loan on respondentia.

SEC. 4. No pawnbroker or pawnbroker’s agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum of value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding fi ve hundred pesos; and fourteen per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker’s agent shall be considered such, for the benefi ts of this Act, only if he be duly licensed and has an establishment open to the public.

It shall be unlawful for a pawnbroker or pawnbroker’s agent to divide the pawn offered by a person into two or more fractions in order to collect greater interest than that permitted by this section.

It shall be unlawful for a pawnbroker or pawnbroker’s agent to require the pawner to pay an additional charge as insurance premium for the safekeeping and conservation of the article pawned. (as amended by Pres. Decree No. 116.)

Interest that can be charged by a pawnshop. The Monetary Board has raised the basis of interest rates for pawnshops effective February 29, 1980, as follows: (1) 2 1/2% per month. — when the sum lent is not more than P2,000.00; and

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(2) 18% per annum. — when the sum lent is more than P2,000.007 (Central Bank Cir. No. 722, dated March 3, 1982, which repealed Central Bank Cir. No. 499.) It should be noted that under this section, the prohibition comprehends the act of stipulating or charging a higher rate of interest than that allowed by the section. Pawnbrokers are permitted to charge relatively higher interest rates for otherwise they will not make profi ts considering that loans applied for are usually very small and they have to maintain offi ces, keep books, pay taxes, etc. In addition to interest charges, pawnshops may impose a maximum service charge of P5.00, but in no case to exceed 1% of the principal loan. (Sec. 10, Pres. Decree No. 114 [Pawnshop Regulation Act]; see Appendix 9.)

Dividing pawn in several fractions not allowed. Under Section 4, a pawnbroker is not allowed to divide the pawn (object) into several fractions in order to collect greater interest than that permitted nor to require additional charge as insurance premium for safekeeping of the article pawned. The purpose is to prevent the collection of interest in excess of the rate permitted by said section.

EXAMPLE: B borrows from L, a pawnbroker, P4,000.00 with a diamond ring as security. Under Section 4 (as prescribed by the Monetary Board), the maximum interest that can be charged is 18% per annum. L cannot divide the security into, say, two fractions in order to collect 2 1/2% interest a month for two separate debts of P2,000.00 each. Similarly, if there are two rings pawned for a single debt of P4,000.00, L is not allowed to divide them into two separate pawns for two separate debts of P2,000.00 each.

7Under Central Bank Circular No. 905 (supra.) which removes interest rate ceilings on any loan or forbearance of money, pawnshops are prohibited from collecting interest on loans in advance for a period of more than one (1) year.

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SEC. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof or forbearance of money, goods, or credit, whenever warranted by prevail-ing economic and social conditions. (as amended by Pres. Decree No. 858.)

SEC. 4-b. In the exercise of its authority to fi x the maxi-mum rate or rates of interest under this Act, the Monetary Board shall be guided by the following:

1. The existing economic conditions in the country and the general requirements of the national economy;

2. The supply of and demand for credit;

3. The rate of increase in the price levels; and

4. Such other relevant criteria as the Monetary Board may adopt. (as amended by Pres. Decree No. 116.)

SEC. 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement: Pro-vided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board. No person or corpora-tion shall require interest to be paid in advance for a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board. (as amended by Pres. Decree No. 116.)

When compound interest allowed. Compound interest (which is interest on interest) is allowed only in two cases: (1) when there is an express written stipulation to that effect (see Art. 1959, Civil Code.) or, in default thereof;

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(2) upon judicial demand and this is so even if the contract be silent upon this point. (see Art. 2212,8 ibid., supra.) The debtor is not liable to pay compound interest even after judicial demand where there is no stipulation for the payment of interest. The compounding of interest may be annually, semi-annually, or monthly depending on the agreement.

EXAMPLE: B borrowed from L P10,000.00 payable in two (2) years. It was agreed in writing that interest would be 14% per annum and that interest due and unpaid shall earn interest compounded annually. At the end of two (2) years, B must pay: (1) P10,000.00 — Principal (2) P2,800.00 — interest for the use of the money for two years (14% per annum) (3) P196.00 — interest on the accrued interest of P1,400.00 for the fi rst year (14% per annum) or a total sum of P12,996.00

Demandability of compound interest. (1) Agreement to charge interest on interest. — When there is an express agreement to charge interest on interest, such fact should not be taken into consideration in determining whether or not the stipulated interest exceeds the limits prescribed by the Usury Law. Thus, the stipulated interest of 12% per annum9 on the interest due and unpaid on the principal which is payable also at 12% per annum is not usurious even if such accrued interest, when added to the original interest, exceeds the rate of interest that may legally be charged by the law for the loan. The reason is that accrued interest is not considered interest upon the original debt but on a new principal. (Gov’t. of the Phil. Islands vs. Vaca, 64 Phil. 6 [1937]; Villaruel vs. Alvayda & Vicencio, 46 Phil. 277 [1924].)

8Art. 2212. Interest due shall earn legal interest from the time it is judicially demand-ed although the obligation may be silent upon this point.

9See Section 2.

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But a contract which stipulates for the payment of the maxi-mum rate of interest on the principal sum, and of interest upon interest accruing monthly upon such sum, is usurious and the mere voluntary payment of the interest improperly charged, to the creditor by the debtor, is not binding. (Cu Unjieng y Hijos vs. Mabalacat Sugar Co., 54 Phil. 976 [1930].) (2) Judicial demand to pay debt with interest stipulated in contract. — Section 5 of the Usury Law, which provides that compound interest shall not be reckoned except by agreement or whenever the debt is judicially demanded, and Article 2212 of the Civil Code, which stipulates that interest due shall earn legal interest from the time it is judicially demanded, although the obligation is silent on this point, contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. Both legal provisions are not applicable where no interest is stipulated in the contract. (Phil. American Accident Ins., Co. vs. Flores, 97 SCRA [1980].)

Right of creditor to charge advance interest. (1) One year or less. — It is permissible under Section 5 for the creditor to charge interest in advance corresponding to not more than one year whatever the duration of the loan may be. In principle, the contract is usurious because by deducting or paying in advance the interest at the time of the loan, the principal sum is thereby reduced with the result that the lender is compensated for the use of the amount which, in fact, he has not loaned and so the borrower pays a rate greater than that allowed by law on the sum that he actually receives. In most American jurisdictions, taking the highest lawful interest in advance is permitted in the case of short term loans for they make the amount of the excess interest insignifi cant. While it does not appear that the line of demarcation between what is a short term loan and what is a long term loan has ever been defi nitely fi xed, the rule has frequently been applied where the loan is for a period of one year or less. (see 91 C.J.S. 613.) It has been held that a person found guilty of usury is ex-empted under Section 6 from the obligation to return the inter-

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est and commissions collected by him in advance, provided said interest and commissions are not for a period of more than one year and the rate of interest does not exceed the maximum limit fi xed by law. (Hodges vs. Salas, 63 Phil. 567 [1936]; see proviso, Sec. 7.) So that, where the stipulated interest is 20% a year but at the maturity of the obligation the debtor has paid 10% only, in advance for one year, the debtor cannot recover the interest paid on the ground that the original agreement was usurious in char-acter. (2) More than one year. — Under Section 5, the taking of interest for more than one (1) year is apparently prohibited. It is believed, however, that interest may be taken in advance for more than one (1) year as long as the “effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board.” (last clause.) This is possible if the interest is taken at a lesser rate. The test of usury in such case is whether the amount taken or deducted as interest exceeds the lawful maximum rate upon the money actually received and retained by the borrower, being the difference between the face amount of the amount and the amount so deducted. (91 C.J.S. 614.)

SEC. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered with costs and attorney’s fees in such sum as may be allowed by the court in an action against the person or corporation who took or received them if such action is brought within two years after such payment or delivery; Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year col-lected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and premiums, do not exceed the rates fi xed in this Act. (as amended by Act No. 3998.)

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Borrower’s right to recover usurious interest paid. As provided in this section, a borrower who has paid or delivered usurious interest may recover the entire interest he paid with costs and attorney’s fees. Thus, if the interest given is 20%, the whole 20% may be recovered and not merely 8% or 6%, the interest in excess of 12% or 14%,10 as the case may be. Accordingly, in a case (Go Chico vs. Martinez, 45 Phil. 256 [1923].) where the debtor paid interest amounting to P11,850.00 which is equivalent to 18% per annum, the court allowed the recovery of the whole P11,850.00 paid.

Right under the Civil Code. Article 1413 of the Civil Code, reads as follows:

“Interest paid in excess of the interest allowed by the usury law may be recovered by the debtor, with interest thereon from the date of the payment.”

Under the above-quoted provisions, it would seem that only the interest in excess of that allowed by the Usury Law should be returned. Has Section 6 of the Usury Law been amended by Article 1413 of the Civil Code? The Civil Code is inconsistent on the matter. While under Articles 1175 and 1957 (supra.), the Usury Law shall govern. Article 1961 (supra.) is to the effect that the Usury Law and special laws are applicable only “so far as they are not inconsistent with this Code.” However, in a case (Angel Jose Merchandising vs. Chelda Enterprises and D. Syjueco, 23 SCRA 119 [1968].), the Supreme Court ruled that the person paying usurious interest can recover not only the interest in excess of 12% or 14%,11 as the case may be, but the entire interest paid. Since a stipulation for the payment of usurious interest is void. (Arts. 1957, 1409[7], Civil Code.), the effect is the same as if there is no stipulation as to interest. (Art. 1956.) In another case (Sanchez vs. Buenviaje, 126 SCRA 208 [1983].), however, the Supreme Court allowed the creditor to

10See Sections 2 and 3.11See Sections 2 and 3.



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recover the principal loaned plus interest thereon at the legal rate from the fi ling of the complaint. The debtor is entitled to recover the interest paid with legal interest from the date of payment. (see Capule vs. De la Cruz, 10 C.A. Rep. 119.)

Pari delicto rule not applicable in usury cases. In allowing the recovery of usurious interest paid, the law does not consider the debtor in pari delicto12 with the creditor on the theory that the payment has not been made voluntarily. The lender in usury is regarded as the criminal and the borrower as the injured party. Ignorance of the Usury Law is no defense even where the lender acted honestly. To apply the pari delicto rule in usurious contracts would run counter to the avowed public policy to discourage usury. (see Go Chioco vs. Martinez, 45 Phil. 256 [1923]; People vs. Nullet, 73 Phil. 63 [1941].) The law (Sec. 6, fi rst sentence) fi xes the period of two (2) years after payment or delivery within which civil actions to recover usurious interest paid must be brought. (see Valdezco vs. Francisco, 52 Phil. 350 [1927]; Arevalo vs. Dimayuga, 89 Phil. 894 [1951].)

Where interest added to principal but not paid. Usurious interest not actually paid but simply added to the capital from time to time, cannot be regarded as “taken or re-ceived” by the lender within the meaning of Sections 2, 3, 4, and 6 of the Usury Law. (Garcia & Buencamino vs. Matias & Policar-pio, 49 Phil. 257 [1926].)

12Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

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(1) The right of recovery is given only to a borrower who “shall have paid or delivered” a higher rate on interest than is allowed. (Sec. 6.) Thus, a debtor who promises to pay 22% interest on the principal but pays only 12% cannot recover the 12% paid by him. (see Garcia and Buencamino vs. Matias and Policarpio, supra.) (2) The right to recover attorney’s fees given by Section 6 cannot also be exercised unless usurious interest has actually been taken or received. (Delgado vs. Alonzo Duque Valgona, 44 Phil. 739 [1923]; C. Viuda de Pamintuan vs. Tiglao, 53 Phil. 1 [1929].)

Borrower’s right to recover costs and attorney’s fees. Section 6, in effect, says that any person who has paid upon any usurious contract a higher rate than is allowed by law may recover the whole interest paid “with costs and attorney’s fees in such sum as may be allowed by the court.” The language recognizes a discretion in the court in respect to fi xing the amount of the fees but it has no discretion to deny the allowance altogether. When the right of action to recover interest paid is established, reasonable attorney’s fees should be allowed as a matter of course, the same as costs are awarded. The purpose of the law is to encourage persons who have suffered from contracts of this character to come to court and vindicate their rights and at the same time to serve as a wholesome deterrent to the taking of usurious interest. The ignorance of the creditor of the law against usury is not a defense to relieve him from the legal consequences of his contract. (Delgado vs. Alonzo Duque Valgona, supra.)

SEC. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall be stip-ulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money,



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goods, or credits than is hereinbefore allowed, shall be void; Provided, however, That no merely clerical error in the computation of interest, made without intent to evade any of the provisions of this Act, shall render a contract void; Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the maximum rates that may be made by the Monetary Board; and Provided, fi nally, That nothing herein contained shall be construed to prevent the purchase by an innocent pur-chaser of a negotiable mercantile paper, usurious or oth-erwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not a part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney’s fees may be allowed by the court. (as amended by Pres. Decree No. 116.)

Usurious loan void only with respect to interest. Section 7 avoids all usurious “covenants and stipulations” but immediately after this provision, it recognizes the validity of usurious negotiable instruments, whenever acquired in good faith by a third person so that the usurious contract which is void is not absolutely void, but perfectly valid under certain circumstances. Again, Section 8 makes void and of no effect whatever loans which are payable in agricultural products, etc., unless the price of the products is fi xed by referring to the current price thereof at the time of the performance of the obligation; and according to Section 10, the lender violating this law should be compelled to return to the borrower an amount equivalent only to what he may have received as interest. It results from the very context of the law, therefore, that the lawmaker, in using the word “void” in the Usury Law did not

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intend complete nullity but merely a nullity with respect to the agreed interest. The loan is to be considered without stipulation as to interest. (Lopez vs. El Hogar Filipino, 47 Phil. 250 [1925]; see Briones vs. Cammayo, 41 SCRA 404 [1971]; Development Bank of the Phils. vs. Perez, 442 SCRA 238 [2004].)

Effect of clerical error in computation of interest. Merely clerical error in the computation of interest, made without intent to evade any of the provisions of the Usury Law shall not render a contract “void.” Mistakes in calculation made in good faith, resulting in the lender’s unintentionally charging or receiving interest in excess of what is allowed by law, negative the existence of the unlawful intent necessary to constitute usury. (see 91 C.J.S. 586.)

Usurer’s right to recover principal loaned. Under the Usury Law, a usurious loan is void but this does not mean that the debtor may keep the principal received by him as loan thus justly enriching himself at the expense of the creditor, but the creditor has no right of action for the recovery of the stipulated interest, although he may seek for the recovery of the principal loaned (Go Chioco vs. Martinez, 45 Phil. 256 [1923].) by judicial action. (see Arts. 1169, 2209, 2211, Civil Code.) The debtor seeking equity must do equity by performing the moral obligation of returning to the creditor the capital that he may have received. The law, as it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contracts. (Lopez vs. El Hogar Filipino, 47 Phil. 250 [1925]; Delgado vs. Alonso Duque Valgona, 44 Phil. 739 [1923]; Pascua vs. Perez, 10 SCRA 199 [1964]; Palileo vs. Cosio, 97 Phil. 919 [1955].) It has been held, however, by the Court of Appeals that a usurious loan is wholly null and void not only as to the loan but also as to the usurious interest because it is inconsistent with Articles 1352 and 1409(1) of the Civil Code which provide that a contract whose cause is contrary to law or public policy is null



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and void and without effect whatsoever; and under Article 1411, both the debtor and the creditor have no action against each other. Hence, the creditor is not allowed to recover the principal of the loan. (Sebastian vs. Bautista, [CA] 58 O.G. No. 15, 3147; People vs. Masangkay, [CA] 58 O.G. No. 17, 3565; Torres vs. Joco, [CA] 59 O.G. No. 10, 1580.) Nevertheless, the principal may still be recovered in view of the following: (1) A usurious loan is not a complete nullity but only with respect to the agreed interest. The rule is that the nullity or extinguishment of the accessory obligation does not carry with it that of the principal obligation (see Arts. 1230, 1273, 1274, 1276, Civil Code.); (2) In a loan contract, the cause is, as to the borrower, the acquisition of the thing and as to the lender, the right to demand its return or its equivalent (Monte de Piedad vs. Javier, [CA] 36 O.G. 2176.) and not exactly the stipulated interest. If at all, payment of interest may be considered as a motive of the lender, which is different from the cause thereof (see Art. 1351; Antioquia vs. Dizon, 4 C.A. Rep. 736.); (3) The prestation to pay the interest is separable from that to pay the principal debt (see Art. 1420, Civil Code; Briones vs. Cammayo, 41 SCRA 404 [1971].); and (4) To deny the lender the right to recover the principal would be to unjustly enrich the borrower at the lender’s expense. (see Art. 22.) Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.

Forfeiture of right to interest of creditor in a usurious loan. In allowing the creditor to recover only the principal but not the stipulated usurious interest, the law, in effect, decrees the forfeiture of the right of the creditor to any interest. In cases of this character, therefore, it is erroneous for the court to allow the creditor the legal rate of interest on the judgment from the date of the fi ling of the complaint. The right to damages falls with the denial of the creditor’s right to usurious interest.

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(Phil. Commercial and Industrial Bank vs. Griño, 24 SCRA 620 [1968]; Sajo vs. Gustilo, 48 Phil. 451 [1926].) The stipulation as to interest is considered void, thus allowing the debtor to claim the whole interest paid. For example, in a loan of P10,000.00 with interest at 20% per annum or P2,000.00 a year, if the borrower pays P2,000.00 this whole amount would be considered usurious interest not just the portion thereof in excess of the interest allowed by law. In Sanchez vs. Buenviaje (126 SCRA 208 [1983].), the Supreme Court allowed the insurer to recover the legal interest on the principal amount loaned but such interest arose from the debtor’s delay in paying the principal from the time of the creditor’s demand. That is the reason why legal interest was counted only from the time the creditor fi led his complaint for the recovery of the debt. (Investors Finance Corporation vs. Autoworld Sales Corporation, 134 SCAD 222, 340 SCRA 735 [2000].)

SEC. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stip-ulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable max-imum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the ef-fectivity of the increase or decrease in the maximum rate or interest. (as amended by Pres. Decree No. 1684.)

Escalation clause in a loan agreement. The unilateral determination and imposition of increased interest by the lender will be violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. Section 7-a applies to contractual stipulations providing for adjustments in the interest rate agreed upon in the event there is a change in the legal rate of interest effected by law or

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the Monetary Board as authorized by law. Such change should benefi t both the creditor and the debtor. (1) Escalation clause must not be solely potestative. — It is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fi scal stability and to retain the value of money on long-term contracts. (New Sampaguita Builders Construction, Inc. vs. PNB, 935 SCRA 565 [2004], citing De Leon, Comments and Cases on Credit Transactions [1995], p. 87.) However, the enforcement of such stipulations are subject to certain conditions. (Insular Bank of Asia and America vs. Spouses Salazar, 159 SCRA 133 [1988]; Florendo vs. Court of Appeals, 265 SCRA 678 [1996]; see Premiere Development Bank vs. Central Surety & Insurance Co., Inc., 579 SCRA 359 [2009].)

(a) While the Usury Law ceiling on interest rates was lifted by Central Bank Circular No. 905, nothing in said circular grants a lender “carte blanche authority to raise interest rates to levels which would either enslave the borrower or lead to a hemorrhaging of their assets. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. (Almeda vs. Court of Appeals, 256 SCRA 292 [1996]; Phil. National Bank vs. Court of Appeals, 258 SCRA 549 [1996]; Solangon vs. Salazar, 360 SCRA 379 [2001].) (b) To give the lender unbridled right to unilaterally upwardly adjust the interest on a loan, would completely take away from the borrower the right to assent to an important modifi cation in their agreement and would negate the element of mutuality in contracts’’ ordained in Article 1308 of the Civil Code. (Phil. National Bank vs. Court of Appeals, 238 SCRA 20 [1994]; Concepcion vs. Court of Appeals, 274 SCRA 614 [1997]; Mendoza vs. Court of Appeals, 359 SCRA 438 [2001]; Florendo, Jr. vs. Metropolitan Bank & Trust Co., 532 SCRA 43 [2007]; Equitable PCI Bank vs. Ng Sheung Ngor, 541 SCRA 223 [2007].)

(2) De-escalation clause also stipulated. — An escalation clause can be valid only if it also includes a de-escalation clause or a stipulation that the rate of interest agreed upon shall be reduced in the event that the maximum rate of interest is reduced by law

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or by the Monetary Board. (see Banco Filipino Savings and Mort-gage Bank vs. Navarro, 152 SCRA 346 [1987]; Philippine Nation-al Bank vs. Intermediate Appellate Court, 183 SCRA 133 [1990].) The adjustment shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.13

The purpose of the law in mandating the inclusion of a de-escalation clause is to prevent one-sidedness in favor of the lender which is considered repugnant to the principle of mutuality of contracts ordained in Article 130814 of the Civil Code. (Lloren, Jr. vs. Court of Appeals, 218 SCRA 436 [1993].) (3) Increase or reduction of interest effected by law or the Monetary Board. — A contract which embodies an escalation clause authorizing automatic increase in interest rates in the event a law increasing the rates of interest that may be charged is passed, does not include a Central Bank Circular which, although having the force and effect of law, is not strictly a statute or law. The distinction is recognized in Section 7-a above which speaks of interest increased or reduced by law or by the Monetary Board. Administrative rules and regulations adopted pursuant to law have the force and effect of law but they do not fall within the term “law.” (Banco Filipino Savings and Mortgage Bank vs. Navarro, supra; see Almeda vs. Court of Appeals, supra; Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 332 SCRA 241 [2000].)

13The Monetary Board has ruled that if the authority of the lender under the loan agreement to increase the interest rate stipulated on the loan contract is predicated on the promulgation of a law or a CB regulation increasing the lawful rate of interest that may be charged in such kind of loan, “such lender may not increase the interest rates on the basis of the elimination of interest rate ceilings.’’ With the abolition of interest rate ceilings on July 1, 1981 on loans with maturity of more than 730 days, the Board ruled, “it cannot be said that the ceilings have been increased. Indeed, interest rates may even go down, depending on market forces, under a no-interest rate ceiling regime.

Besides, there is the question as to how much interest rates may be increased. If we take the position that stipulated interest rates may be increased due to the lifting of the interest rate ceilings, then we will be giving lenders the absolute discretion to increase the stipulated interest rate at any level.’’

14Art. 1308. The contract must bind both contracting parties; its validity or compli-ance cannot be left to the will of one of them.

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Interest to be based on the prevailing market rate. Where the clause authorizes the creditor “to correspondingly increase the rate of the interest in the event of changes in prevailing market rates,’’ it cannot be said to be dependent solely on the will of the creditor as it is also dependent on the prevailing market rates. Obviously, the fl uctuation in the market rates is beyond the control of the creditor. (Polotan vs. Court of Appeals, 296 SCRA 247 [1998].)

(a) The contractual provision in question states that “if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the cardholder other than the required posting on the monthly statement served to the Cardholder.’’ This, it was held, could not be considered an escalation clause for the reason that it neither states an increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate. Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate the reduction. (Ibid.) (b) While it may be acceptable, for practical reasons given the fl uctuating economic conditions, for banks to stipulate that interest rates on a loan not be fi xed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. The aforequoted provision was upheld notwithstanding that it may partake of the nature of an escalation clause, because at the same time it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In other words, the interest rate is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to “any increase or decrease in the interest rate,’’ without more, cannot be accepted as valid for it leaves solely to the creditor the determination of what interest rate to charge

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against an outstanding loan. (Consolidated Bank and Trust Corporation vs. Court of Appeals, 356 SCRA 671 [2001], citing Polotan vs. Court of Appeals, 296 SCRA 247 [1998].)

SEC. 8. All loans under which payment is to be made in agricultural products or seeds or in any other kind of com-modities shall also be null and void unless they provide that such products or seeds or other commodities shall be appraised at the time when the obligation falls due at the current local market price; Provided, That unless other-wise stated in a document written in a language or dialect intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural products or seeds or any other kind of commodities shall be understood to be a loan and any person or corporation having paid oth-erwise shall be entitled in case action is brought within two years after such payment or delivery, to recover all the products or seeds delivered as interest, or the value thereof together with the costs and attorney’s fees in such sum as may be allowed by the court. Nothing contained in this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the rate herein fi xed. (as amended by Act No. 2992.)

Determination of interest where loan of money payable in kind. Where interest for a loan or forbearance is paid in a medium other than money, such as “in agricultural products or seeds or in any other kind of commodities” the means of ascertaining whether the payment exceeds the rate allowed by law is to reduce the medium of payment to its equivalent in pesos “at the time the obligation falls due at the current local market price.” (1) When usurious. — If the value of the medium when so ascertained is more than the lawful rate upon the debt upon which the interest is paid, it amounts to the collection of usury. Thus, a contract of loan or forbearance which is made payable in a specifi ed commodity at a lower price or value than its current



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local market price is usurious if the difference between the agreed price and the actual price exceeds lawful interest upon the principal sum, except where the debtor is given the option of discharging his obligation by paying the sum lawfully due from him within a specifi ed time. (2) When not usurious. — On the other hand, even where a loan contract specifi es a usurious rate of interest, but the interest is made payable in a specifi ed quantity of goods, the transaction is not usurious if the money equivalent of the goods delivered in payment does not exceed lawful interest on the principal sum. (see 91 C.J.S. 616.) Under Section 8, any contract advancing money to be repaid later in goods shall be considered a loan and a borrower who paid it not as a loan but as some other transaction is entitled to recover the goods, delivered as interest, or the value thereof. The parties, however, may agree on the payment of interest on a loan of money payable in kind provided such interest be not in excess of the lawful rate.

EXAMPLE: B borrowed from L P20,000.00 payable in one year. It was stipulated that payment shall be made in palay at the rate of P400.00 per cavan of palay. The contract is not valid because it does not provide that the price per cavan of palay “shall be appraised at the time when the obligation falls due at the current local market price.” (see Art. 1958, supra.)

ILLUSTRATIVE CASES: 1. Sugar to be sold and delivered in the future at a fi xed selling price, buyer having advanced an amount upon the contract, and it turned out the price at date of delivery was higher than that fi xed. Facts: By two contracts, S bound himself to sell to B sugar from his crop of the agricultural year 1919-1920, at certain prices, the said sugar to be delivered during specifi ed months of the year 1920. S claimed that B advanced money to him upon both contracts as a loan payable in sugar which must be appraised

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on the basis of the current market price at the time of delivery, and since the prices stipulated (from P11.00 to P14.00 per picul) were not even one-half of the maximum market price (P30.00 per picul) on the respective dates of delivery, the said contracts were usurious. Issue: Are contracts of sale of agricultural products to be delivered in the future fi xing a selling price usurious or illegal when the market price should turn to be higher at the time of delivery? Held: No. The fact that on the date of delivery of the sugar, its market price was higher than that stipulated, did not make them usurious or illegal because B assumed the same risk of a loss taken by S due to the difference in price, and if the price instead of rising, had slumped, B would have had to pay the price stipulated, and not the market price. In this case, the court found the transactions to be contracts of sale. (Lutero vs. Siuliong & Co., 54 Phil. 272 [1903].) ———— ———— ———— 2. In addition to the payment of interest, mortgagor bound himself to sell mortgaged sugar crop at less than the market price. Facts: As security for the amount of P8,000.00 advanced by L to B, the latter mortgaged sugar cane planted and sown on his hacienda. B bound himself, in addition to the payment of interest, to deliver and sell to L crop estimated to be P2,500 piculs of sugar at P1.50 less than the price for each picul “in the Iloilo Market on the date or dates of its arrival.’’ Issue: Is the mortgage usurious? Held: Yes. The mortgage upon its face should be construed as a usurious transaction. Under the transaction, L would not only receive 12%15 interest on the amount of the loan, but in addition, the further sum of P3,750.00 and the difference between the market price of the sugar and the price he was to pay for it. L contended that he was to be paid the P1.50 per picul for his commission and expense in the handling and sale of the sugar. But the mortgage, according to the court, would not bear that construction as it did not contain any provision of that nature.

15See Section 2.



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The promise of B to sell the sugar for less than its market price in addition to the interest was one of the inducements for the making of the loan by L. (Gui Jong & Co. vs. Rivera and Avellar, 45 Phil. 781 [1924].)

SEC. 9. The person or corporation sued shall fi le its answer in writing under oath to any complaint brought or fi led against said person or corporation before a compe-tent court to recover the money or other personal or real property, seeds, or agricultural products, charged or re-ceived in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. SEC. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the provisions of this Act. (as added by Pres. Decree No. 116.)

Effect of failure of defendant to make denial of usury under oath. When an action for recovery of usurious interest is instituted, Section 9 requires the person against whom the action is fi led, to fi le his answer in writing under oath. If allegations of usury are not denied specifi cally and under oath, they are deemed admitted. (Sec. 1, Rule 9, Rules of Court.) But the only thing admitted is the allegation that the interest charged is usurious, not that the contract entered into is a loan which is something that must be proved independently of the admission. (Lo Bun Chay vs. Paulino, 54 Phil. 144 [1929].) The nature of the transaction is not admitted. (Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966].) Section 9 is applicable only if the action is brought “to recover the money x x x charged or received in violation of the provisions” of the Usury Law. If the person or corporation sued shall not fi le its answer under oath denying the allegation of usury by the plaintiff (debtor), the defendant (creditor) shall be deemed to have admitted the usury. The provision does not apply to a case where it is the defendant (debtor), not the plaintiff (creditor) in

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an action by the latter for collection, who is alleging usury. (Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984].)

Rule subject to waiver. The rule is a procedural one which is subject to waiver. In a case, it was held that the failure of the plaintiff (creditor) to make a denial of usury under oath is not deemed an admission where the defendant (debtor) has been declared in default for failure to appear at the pre-trial.16

In such a case, the defendant is deemed to have waived his right to consider the lack of oath as an admission and to object to the reception of plaintiff’s evidence establishing his cause of action and negating the charge of usury. Besides, the reglementary admission of the allegation of usury arising from such failure may, like any other admission in court, be withdrawn with leave of court under Sections 2 and 3, Rule 10 of the Rules of Court permitting “substantial amendments” of pleadings once as a matter of right when “the action has not been placed on the trial calendar,” and “after the case is set for hearing . . . only upon leave of Court.” (Dionisio vs. Puerto, 60 SCRA 471 [1974].)

Reasons for requiring denial of usury under oath. The law was enacted to do away with usury. It was passed against the usurer and not in his favor. And fi nding, no doubt, that the evil to be eradicated was so widespread, the legislator felt justifi ed in presuming that it existed whenever its existence was alleged unless denied under the oath, thus demanding the guaranty of his oath, not in the allegation, but in the denial of this fact. (Lo Bun Chay vs. Paulino, 54 Phil. 144 [1929].)

Presumptions and burden of proof. (1) Generally speaking, usury will not be presumed and the party who alleges or asserts that a transaction is usurious has the

16According to the Liam Law case (supra.), the rule is not applicable where the debtor is the one sued.

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burden of proving such assertion; more particularly, if neither party intends it and they both act bona fi de, the law will not infer a corrupt agreement. However, a usurious intent will be presumed where the in-strument or transaction is usurious on its face, or where there was an intentional doing of what is forbidden by the Act, that is, an intentional charging, of more than the legal rate of interest; and the payment or receipt of usurious interest raises a presump-tion that it was made in pursuance of a prior usurious agree-ment. (2) Also, the evidence introduced may be such as to cast on the lender the burden of introducing explanatory evidence; and the lender’s own evidence may suffi ciently establish usury so as to relieve the borrower of the burden of proof. (91 C.J.S. 699-700.) (3) Where there is no allegation or evidence to exact usurious interest, the contract of loan cannot be considered as a usurious contract. (Geniza vs. Sy, 5 SCRA 754 [1962].) Note: Usury is now legally non-existent. Interest can be charged as lender and borrower may agree upon. (see note p. 62.) Section 1, Rule 9 of the Rules of Court in regard to allegation of usury, being procedural in nature, should be considered repealed with retroactive effect.17 (Liam Law vs. Olympic Sawmill Co., supra.)

ILLUSTRATIVE CASES: 1. Complaint in intervention for annulment of sale failed to plead defense of usury to complaint for partition of parcel of land formerly owned in common by other defendants and intervenor who sold his share to plaintiff. Facts: B fi led a complaint for partition of a parcel of land. It appeared that the land in question was formerly owned by S and the defendants in joint ownership. B alleged that S sold his share to him. S fi led a complaint for intervention alleging that the contract was not in reality a sale but a loan with usurious

17Section 1 which provides, inter alia, that “allegations of usury are deemed admitted if not denied specifi cally and under oath’’ is deleted in the 1997 Rules of Civil Procedure.

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interest, and he prayed that the said sale be annulled and B be ordered to reimburse the usurious interest received. The records showed that after the sale of S’s share to B, the latter obtained the proper transfer title. Neither the defense of usury nor the answer to the third-party claim was made under oath. The trial court ruled that S was deemed to have admitted the facts alleged in B’s complaint for failure to plead the defense of usury under oath. Issues: (1) Who must take the oath, the person against whom the action is fi led for the recovery of the usurious interest, or the person who brings the action? (2) What is deemed admitted if no oath is taken? Held: (1) It is the person sued. Within the spirit of the law, it is immaterial whether the allegation of usury is made in the complaint or in a plea of intervention for the purpose of the oath. In third-party claims, the intervenor (b) may interpose his allegations against the plaintiff (S), and then he is, with respect to the third-party claim, the plaintiff, and the original plaintiff (S) is the defendant. The point of the law is then whenever a person or a corporation is alleged to have charged usurious interest, said person or corporation must deny such an imputation under oath or be deemed to admit the charge. (2) If no oath is taken to the answer, the only thing admitted is the allegation that the interest charged is usurious, not that the contract entered into is a loan, which is something that must be proved independently of the admission especially when this allegation is disputed. The law cannot presume an absurdity. In order that the admission of the collection of usurious interest may be invoked, it is necessary fi rst to establish the contract by virtue of which such interest could be collected. B, therefore, should have shown by competent evidence that the contract was really a loan. Dissenting opinion (Villareal, J. with whom Johnson and Villamor, JJ., concurred.): “x x x I am at a loss to see how the existence of usurious interest can be admitted without admitting the contract of loan whereof they are the cause or consideration. If the existence of usurious interests is admitted, then the consideration whereof they are cause or consideration must of necessity be admitted. x x x Section 9 x x x plainly provides that the lack of taking an oath to an answer to a



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complaint will mean the admission of the facts contained in the latter. If this is so, then the lack of the taking an oath to the answer to the complaint in intervention alleging that the contract is a loan contract with usurious interest admits both points, because both are facts contained in said complaint.” (Lo Bun Chay vs. Paulino, 54 Phil. 144 [1929].) ———— ———— ———— 2. Plaintiff (creditor) failed to deny under oath the affi rmative defense of usury set up by defendant (debtor). Facts: L brought an action against B to recover a mortgage debt with stipulated legal interest. B set up the affi rmative defense of usury, claiming that the loan camoufl aged the usurious interest by innocently providing that the principal shall bear interest at the legal rate. L failed to deny under oath the alleged usury. Issue: If the debtor is sued by the creditor for the recovery of loan together with interest, does the failure of the creditor to fi le a reply denying under oath the defense of usury amount to an admission thereof? Held: No. It is the failure of the creditor to deny under oath in his answer to a complaint fi led by the debtor against him for the recovery of usurious interest he has collected that is contemplated by Section 9 of the Usury Law as an admission of usury. It does not apply to the present case where the creditor is the plaintiff seeking the recovery of a loan together with interest and the debtor sets up the defense that the transaction is usurious. (O’laco vs. Sanchez, 6 C.A. Rep. 1092.) Note: In a subsequent case, however, the Court of Appeals ruled that “for the purpose of Section 9, the defendant who alleges usury as a defense in his answer is considered as plaintiff, and the original plaintiff who seeks to recover the alleged usurious interest as the defendant, hence, the latter is bound to deny the imputation under oath.” (Alcantara, Sr. vs. Gregorios, 8 C.A. Rep. 950.) In a case, the Supreme Court said: “If it is alleged that defendant [debtor] entered a contract of loan with plaintiff [creditor] in which the latter collected a usurious interest, there is need to deny the transaction under oath, and if no oath is taken, the only thing admitted is the allegation that the interest

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is usurious and not that the contract entered into is a loan.” (Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966].) Note: In Liam Law vs. Olympic Sawmill & Co. (129 SCRA 439 [1981]), the Supreme Court made the same ruling as in the O’laco case. ———— ———— ———— 3. Only one of three defendants (creditors) made a denial of usury under oath. Facts: After a complaint was fi led against defendants A, B (A’s husband), and C, an answer signed by a lawyer as “Attorney for the Defendants” was presented. The oath following was subscribed by B only. The plaintiff argued on appeal that this was in contravention of Section 9. Issue: Must all the defendants subscribe to the oath in their answer to a complaint charging usury or is the verifi cation of one suffi cient? Held: The better practice would be for the answer to be sworn to by the wife as well as by the husband. It would likewise be the better practice for the plaintiff, after the answer setting up usury as a defense is fi led, in his replication or otherwise, to raise the point of irregularity in defendant’s answer. When this is done, it is easy for the defendants to so amend as to meet the situation. If the plaintiff did not by any means contest the suffi ciency of the verifi cation in the lower court, it would be highly technical on appeal to throw the case out of court on such a specious excuse. (Sajo vs. Gustilo, 48 Phil. 451 [1925].) ———— ———— ———— 4. Debtor’s action is not for recovery of usurious interest received but for declaration of document as null and void on ground of usury. Facts: B brought an action against L, praying that a document in which he appeared as a party be declared null and void on the ground that the transaction evidenced by it was usurious. B did not bother to present any evidence as to the character of the transaction in question on the ground that L’s failure to verify his answer constituted an admission of the facts contained in the complaint. Issue: Is Section 9 applicable to the action of B? Held: No. Section 9 applies only to actions brought “to recover the money or other personal or real property, seeds,



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or agricultural products charged or received in violation of the provisions of this Act.” The action of B can hardly be said to have been brought for the recovery of money or property. (Cabigao vs. Lim, 50 Phil. 844 [1927].)

SEC. 10. Without prejudice to the proper civil action, violation of this Act and the implementing rules and regula-tions promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fi ne of not less than fi fty pe-sos nor more than fi ve hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in case of nonpayment, to suffer subsidiary imprisonment at the rate of one day for every two pesos; Provided, That in case of corporations, associations, societies or compa-nies, the manager, administrator or gerente or the person who has charge of the management or administration of the business shall be criminally responsible for any viola-tion of this Act. (as amended by Pres. Decree No. 116.)

Prescription of criminal action. The crime of usury prescribes in four (4) years from its commission. (Ramos vs. Buyson Lampa, 63 Phil. 215 [1936].) Where the accused received the annual usurious interest every year for three (3) years, the prescriptive period is to be counted from the date of the last payment of usurious interest. (People vs. Hodges, 66 Phil. 291 [1938].) The rule is that when usurious interest has been paid but the action to recover has already prescribed, such interest cannot be credited against and deducted from the principal. (Mendoza vs. Dujua, [CA] 41 O.G. 3014, citing Adorable vs. De Guzman, S.C.-G.R. No. 47102 [1940], cited in II Tolentino’s Code of Commerce, 4th ed., p. 1239.) It is also held that in a series of usurious transactions, it cannot be said that as the transactions are linked together, the period of prescription must begin from the last transaction. In a series of crimes, the period of prescription runs from the occurrence of each offense. (Mendoza case, supra, citing

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People vs. Fuentes and Norona, S.C.-G.R. No. 42449, cited in II Tolentino’s Code of Commerce, 4th ed., p. 1243.)

SEC. 11. All acts and parts of acts, inconsistent with the provisions of this Act are hereby repealed. SEC. 12. This Act shall take effect on the fi rst day of May, nineteen hundred and sixteen. ENACTED: February 24, 1916.

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IIIDEPOSIT*

(Arts. 1962-2009.)

Chapter 1DEPOSIT IN GENERAL AND ITS

DIFFERENT KINDS

ART. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a)

Defi nition of contract of deposit. The above article in effect gives the defi nition of a contract of deposit. The term “deposit” is derived from the word “depositum” of the Roman Law.

Governing law. The classifi cation of deposits into civil deposit governed by the old Civil Code and commercial deposit governed by the Code of Commerce has been abolished by the new Civil Code.

*Title XII, Book IV, Civil Code.

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(see Art. 2270[2].) All deposits, whether civil or commercial, are now primarily regulated by Title XII, Book IV of the new Civil Code (Arts. 1962-2009.) subject to its transitional provisions. (Arts. 2252-2269.)

Characteristics of the contract. (1) It is a real contract like commodatum and mutuum because it is perfected by the delivery of the subject matter. (2) When the deposit is gratuitous, it is a unilateral contract because only the depositary (depositorio) has an obligation. But when the deposit is for compensation, the juridical relation created becomes bilateral because it gives rise to obligations on the part of both the depositary and depositor (depositante).

Safekeeping, principal purpose of the contract. (1) Effect where safekeeping only an accessory obligation. — The principal purpose of the contract of deposit is the safekeeping of the thing delivered so that if safekeeping is only an accessory or secondary obligation of the recipient of the thing, deposit is not constituted but some other contract like lease, commodatum, or agency. (Art. 1868.) Thus, the delivery of money to a person so that he may make payment or invest the money for the account of the giver, or of documents or records to a lawyer hired to represent a party to a suit, cannot be regarded as constituting a deposit, but only as an agency. Here, the principal end of the contract is representation of one by another and not the custody and preservation of the thing delivered. (2) Balance of commission account in agent’s possession at principal’s disposal appropriated by agent. — Where the balance of a commission account remains in the possession of the agent at the principal’s disposal, the same acquires at once the character of a deposit which the former must return or restore to the latter at any time it is demanded. The agent undoubtedly commits the crime of estafa if he appropriates or diverts it to his own use. It could only become his as a loan, if so expressly agreed by its owner who would then be obligated not to demand it until the

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expiration of the legal or stipulated period. (U.S. vs. Igpuara, 27 Phil. 619 [1913].) (3) Dollars deposited with bank sold by bank which credited peso proceeds to depositor’s current account. — Where the document which embodies the contract states that U.S. dollars in cash were received by the bank for safekeeping, and the subsequent acts of the parties also show that the intent was really for the bank to safely keep the dollars and return it to the plaintiff who demanded the return of the money about fi ve months later, the above arrangement is the contract of deposit defi ned under Article 1962. The bank violates its obligation if it sells the dollars and it cannot defeat the plaintiff’s claim by asserting that the peso proceeds of the sale were properly credited to the latter’s current account. (Bank of the Phil. Islands vs. Intermediate Appellate Court, 164 SCRA 630 [1988].) The depositary cannot make use of the thing deposited except only in the two instances mentioned in Article 1977.

Deposit distinguished from mutuum. The distinctions are as follows: (1) In deposit, the principal purpose is safekeeping or mere custody, while in mutuum, the consumption of the subject matter; (2) In deposit, the depositor can demand the return of the subject matter at will, while in mutuum, the lender must wait until the expiration of the period granted to the debtor; and (3) In deposit, both movable and immovable property may be the object, while in mutuum, only money and any other fungible thing.

Deposit distinguished from commodatum. The following are the distinctions: (1) In deposit, the principal purpose is safekeeping, while in commodatum, the transfer of the use; (2) Deposit may be gratuitous, while commodatum is essen-tially and always gratuitous; and

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(3) In (extrajudicial) deposit, only movable (corporeal) things may be the object, while in commodatum, both movable and immovable property may be the object.

ART. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the de-livery of the thing. (n)

Binding effect of agreement to deposit. A deposit is a real contract and is, therefore, perfected only upon delivery of the object of the contract. Where there has been no delivery, there is merely an agreement to deposit which, however, is binding and enforceable upon the parties. Hence, a contract of future deposit is consensual. (see Art. 1934.)

ART. 1964. A deposit may be constituted judicially or extrajudicially. (1759)

Creation of deposit. A deposit may be created by virtue of a court order or by law and not by the will of the parties. This is the reason why the Code employs the word “constituted” in defi ning (Art. 1962.) and classifying (Art. 1964.) deposit. In a deposit, it is essential that the depositary is not the owner of the property deposited. (Art. 1962.)

Kinds of deposit. Deposit is either: (1) judicial or one which takes place when an attachment or seizure of property in litigation is ordered (Arts. 2005-2008.); or (2) extrajudicial (Art. 1967.) which may be;

(a) voluntary or one wherein the delivery is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited (Arts. 1968-1995.); or

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(b) necessary or one made in compliance with a legal obli-gation, or on the occasion of any calamity, or by travellers in hotels and inns (Arts. 1996-2004.) or by travellers with com-mon carriers. (Arts. 1734-1735.)1

ART. 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in the business of storing goods. (1760a)

Contract of deposit generally gratuitous. A contract of deposit is generally gratuitous. (1) Where there is contrary stipulation. — The fi rst exception is recognized in the general rule in contracts that the parties may establish any stipulation they may deem convenient provided it is not contrary to law, morals, good customs, public order, or public policy. (Art. 1306.) (2) Where depositary engaged in business of storing goods. — The second exception is based on the fact that the depositary is engaged in the business of storing goods (as in the case of a warehouseman) for compensation and not out of pure generosity. (3) Where property saved from destruction without knowledge of the owner. — In involuntary deposit, where property is saved from destruction during a calamity by another person without the knowledge of the owner, the latter is bound to pay the former just compensation. (see Arts. 1996[2], 1997, par. 2.)

ART. 1966. Only movable things may be the object of a deposit. (1761)

1Art. 1734. Common carriers are responsible for the loss, destruction, or deteriora-tion of the goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;(2) Act of the public enemy in war, whether international or civil;(3) Act or omission of the shipper or owner of the goods;(4) The character of the goods or defects in the packing or in the containers;(5) Order or act of competent public authority.Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the

preceding article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required in Article 1733.

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Subject matter of deposit. (1) Only movable or personal property may be the object of extrajudicial deposit, whether voluntary (Art. 1968.) or necessary. (Art. 1995.) Article 1966 proceeds from the object of a deposit which is safekeeping of a thing. The possibility that the thing may disappear or may be lost or stolen is not present in real property. Thus, the delivery of the keys of a house cannot be considered as a deposit of the same, and entrusting its care and custody is, juridically, an agency. (11 Manresa 671.) (2) Judicial deposit (Arts. 2005-2006.), however, may cover movable as well as immovable property its purpose being to protect the rights of parties to a suit.

Only corporeal things contemplated. Article 1966 does not embrace incorporeal or intangible property, such as rights and actions, for it follows the person of the owner, wherever he goes, and is not, by reason of its incorpo-reality, susceptible of custody in the tangible sense that deposit is juridically understood. True it is that the deeds or documents in which those rights are contained can be the object of deposit, but in such a case, they are only the materialized and representative expression of the rights. (11 Manresa 671.)

ART. 1967. An extrajudicial deposit is either voluntary or necessary. (1762)

Kinds of extrajudicial deposit. Deposit is generally voluntary. It becomes necessary in the three cases mentioned in Articles 1996 and 1998, i.e., when made in compliance with a legal obligation, on the occasion of any calamity, or by travellers in hotels and inns. The deposit of goods made by travellers or passengers with common carriers may also be regarded as necessary. (supra.)

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Chapter 2VOLUNTARY DEPOSIT

SECTION 1. — General Provisions

ART. 1968. A voluntary deposit is that wherein the de-livery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom be-lieves himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. (1763)

Voluntary deposit defi ned. A voluntary deposit is one wherein the delivery is made by the will of the depositor. Ordinarily, there are only two persons involved. Sometimes, however, the depositary may be a third person. (Art. 1968, par. 2.)

Voluntary and necessary deposits distinguished. The chief difference between a voluntary deposit and a necessary deposit is that in the former, the depositor has complete freedom in choosing the depositary, whereas in the latter, there is lack of free choice in the depositor. (see 11 Manresa 674.)

Depositor need not be owner of thing. Generally, the depositor must be the owner of the thing deposited. But it may belong to a person other than the depositor.

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Thus, a carrier, commission agent, a lessee, etc. may deposit goods temporarily in his possession considering that the contract does not involve the transfer of ownership. As a matter of fact, the depositary cannot dispute the title of the depositor to the thing deposited. (Art. 1984, par. 1.) The depositary is in estoppel. (see Art. 1436.)

Where there are several depositors. Two or more persons each claiming to be entitled to a thing may deposit the same with a third person. In such case, the third person assumes the obligation to deliver to the one to whom it belongs. The action to compel the depositors to settle their confl icting claims among themselves would be in the nature of an interpleader. (Sec. 1, Rule 62, Rules of Court.1) Here, one of the depositors is not the owner.

ART. 1969. A contract of deposit may be entered into orally or in writing. (n)

Form of contract of deposit. The above article follows the general rule that contracts shall be obligatory in whatever form they may have been entered into provided all the essential requisites for their validity are present. (Art. 1356.) Thus, except for the delivery of the thing, there are no formalities required for the existence of the contract.

ART. 1970. If a person having capacity to contract ac-cepts a deposit made by one who is incapacitated, the for-mer shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator of the person who made the deposit, or by the latter himself if he should acquire capacity. (1764)

1Section 1. When interpleader proper. — Whenever confl icting claims upon the same subject matter are or may be made against a person who claims no interest whatever in the subject matter, or an interest which in whole or in part is not disputed by the claim-ants, he may bring an action against the confl icting claimants to compel them to inter-plead and litigate their several claims among themselves.

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Where depositary capacitated and depositor incapacitated. If the depositary is capacitated, he is subject to all the obliga-tions of a depositary whether or not the depositor is capacitated. In the latter case, the depositary must return the property to the legal representative of the incapacitated2 or to the depositor him-self if he should acquire capacity. (see Art. 1986.) Under the law, “persons who are capable cannot allege the incapacity of those with whom they contract.” (Art. 1397.)

ART. 1971. If the deposit has been made by a capa-citated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may be enriched or benefi ted himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (1765a)

Where depositary incapacitated and depositor capacitated. The incapacitated depositary (like a minor or an insane person) does not incur the obligation of a depositary. However, he is liable (1) to return the thing deposited while still in his possession and (2) to pay the depositor the amount by which he may have benefi ted himself with the thing or its price subject to the right of any third person who acquired the thing in good faith.

2Art. 1327. The following cannot give consent to a contract:(1) Unemancipated minors;(2) Insane or demented persons, and deaf-mutes who do not know how to write.Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed

to in a state of drunkenness or during a hypnotic spell are voidable.Art. 1329. The incapacity declared in Article 1327 is subject to the modifi cations

determined by law, and is understood to be without prejudice to special disqualifi cations established in the laws.

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EXAMPLE: A deposited a watch with B, a minor who sold it to C. If C acted in bad faith, A may recover the watch from him. But if C acted in good faith, A’s only recourse is against B to compel him to return the price received for the watch or the amount by which he may have benefi ted himself.

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SECTION 2. — Obligations of the Depositary

ART. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the deposi-tary must observe. (1766a)

Obligation to keep the thing deposited and return it. The safekeeping and the return of the thing when required, are the two primary obligations of the depositary. (1) Degree of care. — Ordinarily, the depositary must exercise over the thing deposited the same diligence as he would exercise over his property for two reasons: First, because it is an essential requisite of the judicial relation which involves the depositor’s confi dence in his good faith and trustworthiness; and Second, because of the presumption that the depositor, in choosing the depositary, took into account the diligence which the depositary is accustomed with respect to his own property. (see 11 Manresa 683.) The depositary cannot excuse himself from liability in the event of loss by claiming that he exercised the same amount of care toward the thing deposited as he would toward his own if such care is less than that required by the circumstances.

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(2) Rules applicable. — The liability of the depositary for the care and delivery of the thing is governed by the rules on obligations. (Arts. 1163, et seq.)

(a) He is liable if the loss occurs through his fault or negligence (Art. 1170.), even if the thing was insured. (Art. 2207.3) (b) The loss of the thing while in his possession, ordinarily raises a presumption of fault on his part. (see Art. 1265.) (c) The required degree of care is greater if the deposit is for compensation than when it is gratuitous. This is similar to the rule in agency (Art. 1909.) and common carriers. (Art. 1733.) But even when it is gratuitous, due care must still be exercised.

(3) Return before specifi ed term. — The thing deposited must be returned to the depositor whenever he claims it, even though a specifi ed term or time for such may have been stipulated in the contract.

ILLUSTRATIVE CASE: Trust fund which trustee mixed with his own and deposited in a bank to his personal account was lost through force majeure. Facts: A had in his possession, as trustee or agent, the sum of P6,000.00 belonging to B as head of the church. A mixed this trust fund with his own and deposited the whole in a bank to his personal account or credit. Shortly thereafter and during the war of the revolution, A was arrested by the military authorities as a political prisoner and the entire deposit was confi scated by the government. Issue: Should A be made responsible for the loss of the money? Held: No. By placing the money in the bank and mixing it with his personal funds, A did not thereby assume an obligation

3Art. 2207. If the plaintiff’s property has been insured, and he has received indem-nity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the defi ciency from the person causing the loss or injury.

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different from that under which he would have lain if such deposit had not been made nor did he thereby make himself liable to repay the money at all hazards. If the money had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, he would have been exempt from responsibility. The fact that he placed the trust funds in the bank in his personal account did not add to his responsibility. Dissenting opinions (Trent, J.) “When A mixed the trust fund with his own and deposited the whole in the bank to his personal account, he stamped on the said fund his own private marks and unclothed it of all the protection it had. If this money had been deposited in the name of A as trustee or agent of B, the military authorities would not have confi scated it for the reason that they were looking for insurgent funds only.” (Roman Catholic Bishop of Jaro vs. De La Peña, 26 Phil. 144 [1913].)

ART. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third per-son. If deposit with a third person is allowed, the deposi-tary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfi t. The depositary is responsible for the negligence of his employees. (n)

Obligation not to transfer deposit. Unless authorized by express stipulation, the depositary is not allowed to deposit the thing with a third person because a deposit is founded on trust and confi dence and it can be supposed that the depositor, in choosing the depositary, has taken into consideration the latter’s qualifi cation. (1) Liability for loss. — Under Article 1973, the depositor is liable for the loss of the thing deposited if:

(a) he transfers the deposit with a third person without authority although there is no negligence on his part and the third person; (b) he deposits the thing with a third person who is man-ifestly careless or unfi t although authorized, even in the ab-sence of negligence; or (c) the thing is lost through the negligence of his employ-ees whether the latter are manifestly careless or not.

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(2) Exemption from liability. — The depositor is not responsible in case the thing is lost without negligence of the third person with whom he was allowed to deposit the thing if such third person is not “manifestly careless or unfi t.”

ART. 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger. (n)

Obligation not to change way of deposit. The depositary may change the way or manner of the deposit if there are circumstances indicating that the depositor would consent to the change. However, the depositary should fi rst notify the depositor and wait for the latter’s decision. This requirement may not be dispensed with unless delay would cause danger. It follows the general rule that the depositary must take good care of the thing with the diligence of a good father of a family.

ART. 1975. The depositary holding certifi cates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corre-sponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes. (n)

Obligation to collect interest on choses in action deposited. If the thing deposited should earn interest, the depositary is under the obligation (1) to collect the interest as it becomes due and (2) to take such steps as may be necessary to preserve its

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value and the rights corresponding to it. Thus, the depositary of a negotiable promissory note which has been dishonored by non-payment by the maker, must give notice of dishonor to indorsers for under the law, indorsers to whom such notice is not given are discharged from liability. (see Sec. 89, Negotiable Instrument Law [Act No. 2031].) Under Article 1975, the depositary is bound to collect not only the interest but also the capital itself when due.

Contract for rent of safety deposit boxes. A contract for the rent of safety deposit boxes (second paragraph) is not an ordinary contract of lease of things4 but a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit. (CA Agro-Industrial Dev. Corp. vs. Court of Appeals, 219 SCRA 426 [1993]; see Sia vs. Court of Appeals, 222 SCRA 24 [1993].) The prevailing rule in the United States is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of bailor and bailee. Thus:

“The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bailor is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee (whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule.

4Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be defi nite or indefi nite. However, no lease for more than ninety-nine years shall be valid.

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The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that, therefore, the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation, of the company.’’ (10 Am. Jur. 2d 440-441.)

ILLUSTRATIVE CASE: The contents of a safety deposit box which can be opened only with the use of one (1) of two (2) renter’s keys given to the joint renters and by a guard key in the possession of the bank were missing. Facts: B corporation, through its President, and spouses H and W entered into an agreement whereby the former purchased from the latter two (2) parcels of lands. Among the terms and conditions of the agreement were that the titles to the lots shall be transferred to B upon full payment of the purchase price and that the owner’s copies of certifi cates of titles thereto, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of B and the spouses upon full payment of the purchase price. B and the spouses then rented a safety deposit box of a private bank and for this purpose they signed a contract of lease, which contains inter alia, the following conditions. x x x “13. The bank is not a depository of the contents of the safe and has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith.’’ Thereafter, R offered to buy from B the property at a higher price. When the safety box was opened in the presence of B, the spouses, and the bank’s representative, the box yielded no certifi cates of title. Because of the delay in the reconstitution of the title, R withdrew her earlier offer to purchase the lots; as a consequence thereof, B, petitioner, allegedly failed to realize



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his expected profi ts. Hence, B fi led a complaint for damages against the respondent bank. In its answer, the bank alleged that B has no cause of action because of paragraphs 13 and 14 of the contract of lease. The Court of Appeals affi rmed the decision of the lower court principally on the theory that the contract between B and the bank is in the nature of a contract of lease and as such it is governed by Article 1643 of the Civil Code. In a nutshell, B maintains that regardless of nomenclature the contract in question is actually a contract of deposit. Accordingly, it is claimed that the respondent bank is liable for the loss of the certifi cates of title pursuant to Article 1972. It further argues that conditions 13 and 14 of the contract are null and void for being contrary to law and public policy. Issue: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter, one of bailor and bailee, or one of lessor and lessee? Held: The petition is partly meritorious. (1) Contract is not an ordinary contract of lease but a special kind of deposit. — “We agree with the petitioner’s contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defi ned in Article 1643 of the Civil Code. However, we do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions of the Civil Code on deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the petitioner and the Pugaos [H and W]. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter’s key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Article 1975 [cannot] be invoked by the respondent Court as an argument against the deposit theory. Obviously, the fi rst paragraph of such provision cannot apply to a depositary

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of certifi cates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present.’’ (2) Relation created is that of bailor and bailee. — “We observe, however, that the deposit theory itself does not altogether fi nd unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefi t. (10 Am. Jur. 2d 441.) This is just the prevailing view because:

‘There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. (10 Am. Jur. 2d 442-443.)’

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act (R.A. No. 337, as amended.) pertinently provides: ‘SEC. 72. In addition to the operations specifi cally autho-rized elsewhere in this Act, banking institutions other than building and loan associations may perform the following ser-vices: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. x x x



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The banks shall perform the services permitted under sub-sections (a), (b) and (c) of this section as depositaries or as agents.’ x x x.5 (emphasis supplied) (3) Conditions 13 and 14 of the contract are void. — “Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary’s responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box are void as they are contrary to law and public policy. We fi nd Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank’s responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit: ‘The Bank shall use due diligence that no unauthorized person shall be admitted to any

5“Agents’’ refers to paragraphs (b) and (c) while “depositaries’’ refers to paragraph (a).

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rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it.’ Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:

‘With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract defi ne their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation. (10 Am. Jur. 2d 448.)

(4) Bank was unaware of agreement between the joint renters. — “In the instant case, the respondent Bank’s exoneration cannot be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner



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and the Pugaos to the effect that the certifi cates of title were withdrawable from the safety deposit box only upon both parties’ joint signatures, and that no evidence was submitted to reveal that the loss of the certifi cates of title was due to the fraud or negligence of the respondent Bank. This in turn fl ows from this Court’s determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter’s key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank’s own guard key, could open the said box, without the other renter being present. Since, however, the petitioner cannot be blamed for the fi ling of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney’s fee.’’ (CA Agro-Industrial Development Corp. vs. Court of Appeals, 219 SCRA 426 [1993].)

ART. 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n)

Obligation not to commingle things deposited if so stipulated. As a rule, the depositary is permitted to commingle grain or other articles of the same kind and quality. In such case, the various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled to such portion of the entire mass as the amount deposited by him bears to the whole. (see Sec. 23, Warehouse Receipts Law.) The depositary cannot commingle goods, even if they are of the same kind and quality, if so stipulated.

EXAMPLE: A received from B for deposit 30 cavans of rice, from C, 20 cavans, and from D, 10 cavans, the rice being of the same kind and quality. In the absence of any contrary stipulation, A can commingle the 60 cavans and B, C, and D would become the

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co-owners of the entire 60 cavans in the proportion of 1/2, 1/3, and 1/6, respectively. If the articles deposited which belong to the different depositors are not of the same kind and quality, it is the duty of the depositary to keep them separate or at least identifi able as he must return to each depositor the identical article delivered.

ART. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages. However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a)

Obligation not to make use of thing deposited unless authorized. Deposit is for safekeeping of the subject matter and not for its use. (see Art. 1978.) The unauthorized use by the depositary would make him liable for damages. But the depositary may make use of the thing deposited even without the express permission of the depositor where such use is necessary for its preservation but in such case the use is limited for that purpose only. (see Art. 2104.) Thus, a depositary may use a radio received in deposit occasionally to prevent the accumulation of moisture.

ART. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. The permission shall not be presumed, and its exis-tence must be proved. (1768a)

Effect if permission to use is given. (1) Thing deposited, non-consumable. — If the thing deposited is non-consumable and the depositary has permission to use the



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thing, the contract loses the character of a deposit and acquires that of a commodatum despite the fact that the parties may have denominated it as a deposit, unless safekeeping is still the principal purpose of the contract. (2) Thing deposited, money or other consumable thing. — If the thing deposited is money or other consumable thing, the per-mission to use it will result in its consumption and converts the contract into a simple loan or mutuum. But if safekeeping is still the principal purpose of the contract, it is still a deposit but an irregular one; hence, it is called an irregular deposit. Bank deposits are in the nature of irregular deposits but they are really loans governed by the law on loans. (see Art. 1980.)

ILLUSTRATIVE CASE: After failing to “return” money received “as a deposit without interest,” debtors bound themselves to pay interest until refund was made. Facts: A and B received from C “as a deposit without interest, the sum of P2,600.00, which they will return, jointly and severally, on January 20, 1898.” When the obligation became due, A and B begged C for an extension of time for the payment thereof, binding themselves to pay interest at the rate of 15% of the amount of their indebtedness, to which C acceded. Issue: Was the contract entered into by the parties a deposit or a loan? Held: In the second document, the contract was a real loan of money with interest, notwithstanding that in the original document it was called a deposit, so that when A and B bound themselves to refund the P2,600.00 to C, they did not engage to return the same money received. For this reason, the debtors were lawfully authorized to make use of the amount deposited, as they have done, as subsequently shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected C, their creditor, to losses and damages, and being conscious that they had used, for their own profi t and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made.

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Such conduct on the part of A and B unquestionably showed that the transaction was not a deposit but a real contract of loan. (Javellana vs. Lim, 11 Phil. 141 [1908].)

Irregular deposit distinguished from mutuum. (1) Consumable thing demandable at will by depositor. — In an irregular deposit (supra.), the consumable thing deposited may be demanded at will by the irregular depositor for whose benefi t the deposit has been constituted, while in mutuum, the lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen; (2) Benefi t accrues to depositor only. — Another point of difference consists in the fact that in an irregular deposit, the only benefi t is that which accrues to the depositor, while in a loan, the essential cause for the transaction is the necessity of the borrower. A loan with a stipulation to pay interest is for the benefi t of both parties (see Compania Agricola de Ultramar vs. Nepomuceno, 55 Phil. 283 [1930]; Rogers vs. Smith, 10 Phil. 317 [1908].); and (3) Depositor has preference over other creditors. — The third one is that the depositor in an irregular deposit has preference over other creditors with respect to the thing deposited6 (see Art. 2241[13].), while common creditors enjoy no preference in the distribution of the debtor’s property. (see Art. 2245.)

ILLUSTRATIVE CASES: 1. Amount is received “as a deposit” but debtor binds himself to pay interest. Facts: L brought suit on the following contract: “Received from L the sum of P3,000, gold (3,000 pesos) as a deposit payable in two months” notice in advance with interest at 6% per annum with a hypothecation of the goods now owned

6Bank deposits are not preferred credits because they are considered simple loans. (see Art. 1980.)



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by me or which may be owned hereafter as security of the payment.

(Signed) B” Issue: Is the above document evidence of a deposit or of a contract of loan? Held: Although in the document a deposit is spoken nevertheless, it clearly appears therefrom that the contract was a loan and that was the intention of the parties. It is unnecessary to resort to the cannon of interpretation to arrive at this conclusion. The obligation of B to pay interest to L suffi ces to cause the obligation to be considered a loan and makes it likewise evident that it was the intention of the parties that B should have a right to make use of the amount deposited, since it was stipulated that the amount should be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Gavieres vs. Tavera, 1 Phil. 71 [1901]; see also Javellana vs. Lim, 11 Phil. 141 [1908]; Delgado vs. Bonnevie and Arandez, 23 Phil. 308 [1912]; Compania Agricola vs. Nepomuceno, 55 Phil. 283 [1930].) ———— ———— ———— 2. Depositary was allowed to mill the palay deposited and had milled and appropriated it to his own use before his rice mill was burned. Facts: R delivered palay to Y, owner of rice mill, with the understanding that Y was at liberty to convert it into rice and dispose of it at his pleasure. The palay was mixed with that of others. After sometime, the rice mill was burned with its contents. It appeared that all of R’s palay had been milled and disposed of long prior to the fi re. Issue: Is Y bound to account for its value? Held: Yes. Even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at R’s (depositor’s) election, nevertheless, if it was understood that Y (depositary) might mill the palay and he has, in fact, appropriated it to his own use, he is, of course, bound to account for its value. Under Article 1978, “the contract loses the concept of a deposit and becomes a loan.” (Baron vs. David, 51 Phil. 1 [1927].)

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Permission to use not presumed. In a deposit, the permission to use is not presumed except when such use is necessary for the preservation of the thing deposited (Art. 1977.) and the burden is on the depositary to prove that permission has been given. (Art. 1978, 2nd par.)

ILLUSTRATIVE CASE: Depositary appropriated to his personal benefi t money deposited which depositor failed to claim at once. Facts: C received a sum of money from A and B as a deposit. The document containing this obligation reads: “I have at the disposal of A the sum of P2,498.00, the balance from B’s sugar.” (Signed) C. C appropriated the money to his personal benefi t and was convicted of estafa in the Court of First Instance. On appeal, C claimed that the money was delivered as a loan. It appeared that A failed to claim at once the restitution of the money. Issue: Did this failure or delay imply permission to use the money? Held: No. In a loan, the lender transmits to the borrower the use of the thing lent, while in a deposit, the use of the thing is not transmitted but merely the possession for its custody or safekeeping. That demand was not made for restitution of the sum deposited, which could have been made on the same or the next day after the certifi cate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for some time in demanding restitution of the thing deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert the deposit into loan. (U.S. vs. Igpaura, 27 Phil. 619 [1913].)

ART. 1979. The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated; (2) If he uses the thing without the depositor’s permis-sion;



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(3) If he delays its return; (4) If he allows others to use it, even though he him-self may have been authorized to use the same. (n)

Liability for loss through fortuitous event. Generally, the depositary is not liable for loss through a fortuitous event without his fault (see Art. 1174; Obejera vs. Iga Sy, 76 Phil. 580 [1946].) The rule in this article is similar to Article 1942 which mentions the instances when the bailee is liable for loss of the thing loaned even if it should be through a fortuitous event.

ART. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n)

Relation between bank and depositor. (1) Contract of loan. — Deposits of money in banks, whether fi xed, savings, and current, are really loans to a bank because the bank can use the same for its ordinary transactions and for the banking business in which it is engaged.7 (Tian Tiong Tick vs. American Apothecaries, 65 Phil. 417 [1938]; Castro vs. Coll. of Internal Revenue, 4 SCRA 1093 [1962]; People vs. Ong, 204 SCRA 942 [1991].) Bank deposits8 are in the nature of irregular deposits; they are

7“Banks are entities engaged in the lending of funds obtained through deposits from the public. They borrow the public’s excess money (i.e., deposits) and lend out the same. Banks, therefore, redistribute wealth in the economy by channeling idle savings to profi t-able investments.

Banks operate (and earn income) by extending credit facilities fi nanced primarily by deposits from the public. They plough back the bulk of said deposits into the economy in the form of loans. Since banks deal with the public’s money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is un-deniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.’’ (Banco de Oro-EPCI, Inc. vs. JAPRL Dev. Corp., 551 SCRA 342 [2008].)

8Ordinarily, a time deposit is defi ned as “one the payment of which cannot legally be required within such a specifi ed number of days,’’ while demand deposits are “all those

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really loans because they earn interest. (Bank of the Phil. Islands vs. Court of Appeals, 232 SCRA 302 [1994]; Lucmen vs. Malaar, 511 SCRA 268 [2006].) Hence, such deposits are governed by the provisions on mutuum or simple loan, and the rules on the imposition of legal interest. (see Note 7, under Art. 1956.)9 While the bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. (Guingona, Jr. vs. City Fiscal of Manila, 128 SCRA 577 [1984]; see Citibank N.A. vs. Cabomongan, 488 SCRA 517 [2006].) (2) Relation of creditor and debtor. — Accordingly, the relation between a depositor and a bank is that of a creditor and a debtor. The depositor (creditor) lends the bank (debtor) money and the bank agrees to pay the depositor on demand. The deposit agreement between the bank and the depositor determines the rights and obligations of the parties. Consequently:

(a) A bank’s failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depositary’s failure to return the subject matter of the deposit. (Serrano vs. Central Bank, 96 SCRA 96 [1980].) It will not constitute estafa through misappropriation punishable

liabilities of the Bangko Sentral ng Pilipinas (BSP) and of other banks which are denomi-nated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of the depositor’s check. “Central Bank regulations do not prohibit demand deposits from earning interest. (BPI Family Savings Bank, Inc. vs. Metro Invest-ment Corporation, 429 SCRA 30 [2004].) It is in the nature of joint accounts that anyone of the depositors has access to the entire funds; hence, such funds are subject to ganishment on account of the liability of them. The deposits can sort it out amongst themselves as to the share of each. (Fernandez vs. Aniñon, 522 SCRA 1 [2007].)

9It has been held that the obligation of a bank to pay interest on a deposit ceases the moment the operations of the bank is completely suspended by the Central Bank. The deposit is not entitled to interest during the period the bank is not allowed to operate (Overseas Bank of Manila vs. Court of Appeals, 105 SCRA 49 [1981]; The Overseas Bank of Manila vs. Cordero, 113 SCRA 303 [1982]; The Overseas Bank of Manila vs. Court of Appeals, 113 SCRA 778 [1982].), and during the period of the bank’s forcible closure, it is not liable to the Central Bank for interest on loans and advances made by the latter. When called upon to deal with commercial banks and extend to them emergency loans and ad-vances, the Central Bank deals with them not as an ordinary creditor engaged in business but as an ultimate monetary authority of the government charged with the supervision and preservation of the banking system. (Ramos vs. Central Bank of the Phils. & Com-mercial Bank of Manila, 137 SCRA 685 [1985].)



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under Article 315 (par. 1[b].) of the Revised Penal Code. (Guingona, Jr. vs. City Fiscal of Manila, supra.) (b) The payment by a bank of the amount of a depositor’s check is not a loan to the latter by the former which may be satisfi ed by a subsequent deposit; but a payment by the bank as debtor to the depositor as creditor. Such payment extinguishes so much of the obligation of the bank as is represented by the check paid or honored by the bank out of the latter’s deposit. (Hilado vs. De La Costa, 83 Phil. 471 [1949].) (c) The general rule is that a bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor.10 (Gullas vs. Phil. National Bank, 62 Phil. 519 [1935]; Republic vs. Court of Appeals and Cuaycong, 65 SCRA 186 [1975]; Equitable PCI Bank vs. Ng Sheung Ngor, 541 SCRA 223 [2007].) In a true deposit, compensation is not allowed. (see Art. 1287.) The money received is termed a “deposit,” although it is not strictly so, as the depositor does not expect to receive the identical money in return but an equivalent sum. (see Art. 1953.) The money is mingled with other money, the entire amount forming a single fund from which depositors are paid. (2 C.J. 628.) (d) In the performance of its obligations, the drawee bank is bound by its internal banking rules and regulations and is liable to the depositor for fraud, negligence, or delay.

10Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Art. 1279. In order that compensation may be proper, it is necessary:(1) That each one of the obligors be bound principally, and that he be at the same

time a principal creditor of the other;(2) That both debts consists in a sum of money, or if the things due are consum-

able, they be of the same kind, and also of the same quality if the latter has been stated;(3) That the two debts be due;(4) That they be liquidated and demandable;(5) That over neither of them there be any retention or controversy, commenced by

third persons and communicated in due time to the debtor. x x x x x x x x xArt. 1290. When all the requisites mentioned in Article 1279 are present, compen-

sation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.

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(Gempesaw vs. Court of Appeals, 218 SCRA 5682 [1993]; see Arts. 1170, 1172.) The award of exemplary damages, howev-er, is unjustifi ed in the absence of malice, bad faith or gross negligence. But moral damages may be recovered even if the bank’s negligence may not have been attended with mal-ice and bad faith. (Tan vs. Court of Appeals, 239 SCRA 310 [1994].) (e) The bank is engaged in business impressed with public interest, and it is its duty to protect in return its many clients and depositors who transact business with it with the highest degree of care, more than that of a good father of the family or of an ordinary business fi rm. It is its obligation to see to it that all funds invested with it are properly accounted for and duly posted in its ledger. In every case, the depositor expects the bank to treat his account with utmost fi delity, whether such account consists of only a few hundred pesos or of millions, always having in mind the fi duciary nature of their relationship.11 (City Trust Banking Corp. vs. Intermediate Appellate Court, 232 SCRA 559 [1994]; Far East Bank and Trust Co. vs. Querimit, 373 SCRA 665 [2002]; Consolidated Bank and Trust Corporation vs. Court of Appeals, 410 SCRA 562 [2003]; Citibank vs. Cabamongan, 488 SCRA 517 [2006]; BPI Family Bank vs. Franco, 538 SCRA 184 [2007].) Like a common carrier whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its liability to its depositors. (Solid Bank Corporation vs. Tan, 520 SCRA 123 [2007].)

11The Foreign Currency Deposit Act (R.A. No. 6426, as amended by Pres. Decree No. 1246.) govern foreign currency deposits authorized under the Act. Under the Act, there is only a single exception to the secrecy of such deposits, that is, the disclosure is allowed only upon the written permission of the depositor. Where the accounts are in US dollar deposits, the applicable law is R.A. No. 6426, not R.A. No. 1405, the Secrecy of Bank Deposits Act. (Intengan vs. Court of Appeals, 377 SCRA 63 [2002]; see China Bank-ing Corporation vs. Court of Appeals, 511 SCRA 110 [2006].) R.A. No. 8791 is the General Banking Act of 2000.

The term “deposits’’ used in RA No. 1405 is to be understood broadly and not lim-ited only to accounts which give rise to a creditor-debtor relationship between the deposi-tor and the bank. If the money deposited under an account may be used by banks for authorized loans to third persons, them such account regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the eco-nomic development of the country. (Ejercito vs. Sandiganbayan, 509 SCRA 190 [2006].)



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It has been held that suspension of a bank which had fallen into a “distressed fi nancial situation” by order of the Central Bank cannot excuse it from its obligations to depositors who had nothing whatever to do with the Central Bank actuations or the events leading to the bank’s distressed state. (Overseas Bank of Manila vs. Court of Appeals, 172 SCRA 521 [1989].) But the bank may not be liable to pay interest on the deposit during the period of suspension. (Integrated Realty Corp. vs. Phil. National Bank, 174 SCRA 295 [1989]; Fidelity Savings and Mortgage Bank vs. Cenzon, 184 SCRA 141 [1990].)

ART. 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be liable for damages should the seal or lock be broken through his fault. Fault on the part of the depositary is presumed, unless there is proof to the contrary. As regards the value of the thing deposited, the state-ment of the depositor shall be accepted, when the forcible opening is imputable to the depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the value claimed by him. When the seal or lock is broken, with or without the depositary’s fault, he shall keep the secret of the deposit. (1769a) ART. 1982. When it becomes necessary to open a locked box or receptacle, the depositary is presumed au-thorized to do so, if the key has been delivered to him; or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. (n)

Where thing deposited delivered closed and sealed. (1) Obligations of depositary. — Under Article 1981, the depositary has the obligation to:

(a) return the thing deposited when delivered closed and sealed, in the same condition (par. 1.);

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(b) pay for damages12 should the seal or lock be broken through his fault (Ibid.) which is presumed unless proved otherwise (par. 2.); and (c) keep the secret of the deposit when the seal or lock is broken, with or without his fault. (par. 3.)

(2) Reason for rule. — Without the rule in this article, irresponsible depositaries may violate their trusts with impunity. The depositor having constituted the deposit in reliance upon the depositary’s fi delity, the most elementary sense of delicacy should move the depositary to respect the secrets which the depositor desires to keep and guard. (11 Manresa 700-701.) Under paragraph 3, the courts may pass upon the credibility of the depositor with respect to the value of the thing deposited. In other words, the statement of the depositor is prima facie evidence only. This is necessary in view of the natural tendency to exaggerate values. (3) When depositary justifi ed to open. — The depositary is authorized by Article 1982 to open the thing deposited which is closed and sealed when there is (a) presumed authority; or (b) necessity.

ART. 1983. The thing deposited shall be returned with all its products, accessories and accessions. Should the deposit consist of money, the provisions relative to agents in Article 1896 shall be applied to the depositary. (1770)

Obligation to return products, accessories, and accessions. The depositor is the owner or at least represents the owner of the thing deposited. The depositary must, therefore, return not only the thing itself but also all its products, accessions and accessories which are a consequence of ownership. (see Art.

12Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.



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1975.) Thus, the young of an animal which was deposited shall be returned to the depositor.

Obligation to pay interest on sums converted to personal use. If what has been deposited is money, the depositary has no right to make use thereof (Art. 1978.) and, therefore, he is not liable to pay interest. If the depositary be in delay or has used the money without permission, he shall be liable for interest as indemnity. The depositary owes interest on the sums he has applied to his own use from the day on which he did so, and those which he still owes after the extinguishment of the deposit.13

ART. 1984. The depositary cannot demand that the de-positor prove his ownership of the thing deposited. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (1771a)

Depositor need not prove his ownership. The depositary who receives the thing in deposit cannot require that the depositor prove his ownership over the thing. To constitute a deposit, it is not essential that the depositor be the owner of the thing deposited. Furthermore, to acquire proof

13Based on Article 1896, “agent’’ and “agency’’ are changed to “depositary’’ and “deposit,’’ respectively.

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of ownership may open the door to fraud and bad faith, for the depositary, on the pretense of requiring proof of ownership, may be able to retain the thing. (see 11 Manresa 706.)

Where third person appears to be owner. In such a case, Article 1984 (pars. 2, 3, 4.) states the steps the depositary should take to be relieved of all responsibility with respect to the thing deposited. Paragraphs 2 and 4 are similar except that for the application of paragraph 2, two conditions must exist: (1) the thing deposited must have been stolen; and (2) the depositary knows who its true owner is. (see Art. 559, par. 1.)

Effect of failure of owner to claim within one month. The period of one month provided in paragraph 3 is intended merely for the protection of the depositary. If the thing is returned to the depositor after one month, the true owner of the thing may still recover it through other legal processes. In this connection, the following observation has been made: “It is not enough to declare the depositary exempt from responsibility if the true owner does not claim the property within 30 days. Suppose the depositary discovers the true owner and notifi es him, but the maker of the deposit demands its return before the 30 days expire, can the depositary refuse to return the thing deposited if the true owner has made no claim as yet? Such course would be not only contrary to the nature of deposit but also risky, because if for some other reason the owner is precluded from claiming the thing as against the depositor, the depositary who refuses to return will be liable for conversion. Or is it intended that he should not be so liable.” (Justice J.B.L. Reyes, “Observation on the new Civil Code,” XVI L.J. 138 [1951].) Article 1984 is not clear on this point.



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ART. 1985. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share.

When there is solidarity or the thing does not admit of division, the provisions of Articles 1212 and 1214 shall govern. However, if there is a stipulation that the thing should be returned to one of the depositors, the deposi-tary shall return it only to the person designated. (1772a)

Right of two or more depositors. (1) Thing deposited divisible and depositors not solidary. — If the thing deposited is divisible and there are two or more depositors who are not solidary, each one can demand only his share proportionate thereto. Thus, if A and B deposited 150 and 300 cavans of rice, respectively, A can demand only 150 cavans. (2) Obligation solidary or thing deposited not divisible. — If the obligation is solidary (i.e., the depositary can return the thing deposited to any of the depositors), or if the thing is not divisible, the rules on active solidarity (solidarity among creditors) shall apply, to the effect that each one of the solidary depositors (creditors) may do whatever may be useful to the others but not anything which may be prejudicial to the latter (Art. 1212.), and the depositary (debtor) may return the thing to any one of the solidary depositors (creditors) unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case delivery should be made to him. (Art. 1214.) (3) Return to one of depositors stipulated. — If by stipulation the thing should be returned to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return. In the example above, if A and B are solidary or the thing deposited is a car which does not admit of division, the depositor can return to either, in the absence of a contrary stipulation.

ART. 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights. (1773)

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Person to whom return must be made. (1) The depositary is obliged to return the thing deposited, when required, to the depositor, to his heirs and successors, or to the person who may have been designated in the contract. (Art. 1972.) (2) If the depositor was incapacitated at the time of making the deposit, the property must be returned to his guardian or administrator or the person who made the deposit or to the depositor himself should he acquire capacity. (Art. 1970.) (3) Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative. (Art. 1986.)

ART. 1987. If at the time the deposit was made a place was designated for the return of the thing, the depo-sitary must take the thing deposited to such place; but the expenses for transportation shall be borne by the depositor. If no place has been designated for the return, it shall be made where the thing deposited may be, even if it should not be the same place where the deposit was made, provided that there was no malice on the part of the depositary. (1774)

Place of return. The thing must be returned (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 not be the same place where the original deposit was made provided the transfer was accomplished without malice on the part of the depositary. Note that in the fi rst case, the expenses for the transportation shall be borne by the depositor. This is just because the deposit is constituted for the benefi t of the depositor and not the depositary who assumes no more than the safekeeping and the return of the thing. (Art. 1972.) The rule in this article is similar to the general rule of law regarding the place of payment. (see Art. 1251.)



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EXAMPLE: Suppose the deposit was made in the residence of A in Manila and A transfers his residence to Pateros, Metro Manila and he has to bring the thing deposited to his new place of residence. In the absence of a contrary stipulation, the place of return is the residence of A in Pateros, Metro Manila, provided there was no malice on the part of A.

ART. 1988. The thing deposited must be returned to the depositor upon demand, even though a specifi ed period or time for such return may have been fi xed. This provision shall not apply when the thing is judi-cially attached while in the depositary’s possession, or should he have been notifi ed of the opposition of a third person to the return or the removal of the thing deposited. In these cases, the depositary must immediately inform the depositor of the attachment or opposition. (1775)

Time of return. As a rule, the depositor can demand the return of the thing deposited at will and this is true whether a period has been stipulated or not. In a deposit, whenever a period is agreed to, the same is for the benefi t of the depositor, but it may be validly waived by him. (11 Manresa 687-688.) But the period is generally binding upon the depositary. If the deposit is for a compensation, the depositary is entitled to the compensation corresponding to the entire period. In this case, the period is also for the benefi t of the depositary. The rule in commodatum is different. (see Art. 1946.)

When depositary not obliged to return thing deposited. The right to immediate restitution is subject to the two cases provided in the second paragraph. (see also Art. 1984, par. 2.) In the fi rst case, if the depositor returns the thing, he would be disobeying the judicial order of attachment. In connection with the second case, the following observation has been made:

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“To permit the depositary to refuse to return the thing depos-ited simply because of the opposition of another, is a power very prone to abuse and mischief. If at all, the depositary should only be authorized in case of confl icting claims to consign the thing in court through an action of interpleader.’’ (Justice J.B.L. Reyes “Observations on the new Civil Code,” XVI L.J. 138 [1951].)

ART. 1989. Unless the deposit is for a valuable consid-eration, the depositary who may have justifi able reasons for not keeping the thing deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. (1776a)

Right of depositary to return thing deposited. (1) Deposit gratuitous. — The depositary may likewise return the thing deposited notwithstanding that a period has been fi xed for the deposit if (a) the deposit is gratuitous and (b) justifi able reasons (e.g., necessity of his going abroad) exist for its return. In case the depositor refuses to receive the thing, the depositary may deposit the thing at the disposal of judicial authority. (see Art. 1258, par. 1.) (2) Deposit for a valuable consideration. — If the deposit is for a valuable consideration, the depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence. He is bound by the period and restitution before its expiration constitutes a breach of his obligation.

ART. 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. (1777a)

Liability for loss by force majeure or government order. The depositary has the obligation to return the thing depo-sited. (Art. 1972.) But he is not liable for loss of the thing by force



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majeure or by government order. However, if in place of the thing he receives money or another thing, he has the duty to deliver to the depositor what he has received otherwise, he would enrich himself at the expense of the depositor.

ART. 1991. The depositor’s heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. (1778)

Alienation in good faith by depositary’s heir. The above article envisions a situation where the depositary dies and the object of the deposit is left with his heir who, in good faith, sells it. The obligation of the heir is limited to the return of the price received or to assign the right to collect the same if it has not been paid and not the real value of the thing. The rule is based on considerations of equity. If the purchaser who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. If the heir acts in bad faith, he is liable for damages. The sale or appropriation of the thing deposited constitutes estafa. (Art. 315, par. 1[b], Revised Penal Code.) Note: The word “depositor’s” should be read as “depositary’s.”

EXAMPLE: Believing in good faith that the thing deposited by A with B, worth P10,000.00 belonged to B, C, heir of B, sold the thing to D who paid him P8,000.00. Under Article 1991, C is bound to return to A P8,000.00, the price he received, and not P10,000.00 or C may assign to A the right to collect from D the P8,000.00 if it has not been paid. If C acted in bad faith, he is liable to pay A P10,000.00 plus damages which A may have suffered. C is also criminally liable for estafa.

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SECTION 3. — Obligations of the Depositor

ART. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing depos-ited. (1779a)

Obligation to pay expenses of preservation. (1) Deposit gratuitous. — The above article applies only if the deposit is gratuitous. It rests on equity. The depositor would have incurred them just the same had the thing remained with him. Without the duty of reimbursement imposed by the article, the depositor would be enriching himself at the expense of the depositary. The rule is different in commodatum. (see Art. 1941.) As the law makes no distinction, the right to reimbursement covers all expenses for preservation, whether ordinary or extraordinary. The law refers to necessary expenses. Useful expenses or those for pure luxury or mere pleasure are not covered. (2) Deposit for compensation. — If the deposit is for a valuable consideration, the expenses of preservation are borne by the depositary because they are deemed included in the compensation. There can, however, be a contrary stipulation.

ART. 1993. The depositor shall reimburse the depo-sitary for any loss arising from the character of the thing deposited, unless at the time of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing, or unless he notifi ed the depositary of the same, or the latter was aware of it without advice from the depositor. (n)

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Obligation to pay losses incurred due to character of thing deposited. As a rule, the depositary must be reimbursed for loss suffered by him because of the character of the thing deposited. Under the four (4) exceptions enumerated, the depositor is freed from responsibility.

ART. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (1780)

Depositary’s right of retention. This article gives an example of a pledge created by the operation of law. (see Art. 2121.) The thing retained serves as security for the payment of what may be due to the depositary by reason of the deposit. (see Arts. 1965, 1992, 1993.) The right granted in this article is similar to that granted to the agent. (see Art. 1914.) The rule is different in commodatum. (see Arts. 1944, 1951.)

ART. 1995. A deposit is extinguished: (1) Upon the loss or destruction of the thing depos-ited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n)

Causes of extinguishment of deposit. The causes mentioned in Article 1995 are not exclusive. There are other causes such as return of the thing, novation, merger, expiration of the term, fulfi llment of the resolutory condition, etc. (see Art. 1231.)

Effect of death of depositor or depositary. (1) Deposit gratuitous. — If the deposit is gratuitous, the death of either the depositor or depositary extinguishes the deposit.

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(No. 2.) By the word “extinguished,” the law really means that the depositary is not obliged to continue with the contract of deposit. (2) Deposit for compensation. — A deposit for a compensation is not extinguished by the death of either party because, unlike a gratuitous deposit, an onerous deposit is not personal in nature. (see Art. 1411.) Hence, the rights and obligations arising therefrom are transmissible to their respective heirs. (Art. 1178.) But the heirs of either party have a right to terminate the deposit even before the expiration of the term.

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Chapter 3NECESSARY DEPOSIT

ART. 1996. A deposit is necessary: (1) When it is made in compliance with a legal obliga-tion; (2) When it takes place on the occasion of any calam-ity, such as fi re, storm, fl ood, pillage, shipwreck, or other similar events. (1781a) ART. 1997. The deposit referred to in No. 1 of the pre-ceding article shall be governed by the provisions of the law establishing it, and in case of its defi ciency, by the rules on voluntary deposit. The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2168. (1782)

When deposit is necessary. A deposit may be voluntary (Art. 1968.) or necessary. (1) A voluntary deposit is made by the free will of the depositor. (Art. 1968.) In a necessary deposit, this freedom of choice is absent. (2) Articles 1996 and 1997 mention two kinds of necessary deposit. The third kind is that made by travellers in hotels or inns. (Art. 1998.) The fourth kind is that made by passengers with common carriers. (see Art. 1754.)

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Necessary deposit in compliance with a legal obligation. The following are examples of such deposit: (1) The judicial deposit of a thing the possession of which is being disputed in a litigation by two or more persons (Art. 538.); (2) The deposit with a bank or public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservation (Art. 586.); (3) The deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way (Art. 2104.); (4) Those required in suits as provided in the Rules of Court; and (5) Those constituted to guarantee contracts with the gov-ernment. In this last case, the deposit arises from an obligation of public or administrative character. A deposit made in compliance with law is governed primarily by the provisions of such law, and in default thereof, by the rules on voluntary deposit. (Art. 1997, par. 1.)

Necessary deposit made on the occasion of any calamity. (1) Deposit created by accident or fortuitous event. — In this type of necessary deposit, the possession of movable property passes from one person to another by accident or fortuitously through force of circumstances and which the law imposes on the recipient the obligations of a bailee. Here, the more immediate object is to save the property rather than its safekeeping. Thus, if X saves Y’s television set in a fi re, X is supposed to be its depositary. Such a quasi-bailment is ordinarily distinguished by the name involuntary bailment or involuntary deposit. (see 6 Am. Jur. 177.) There must be a causal relation between the calamity and the constitution of the deposit. Another name given to it is “deposito miserable.”1 (11 Manresa, 732.)

1Depositum miserabile in Roman Law.

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(2) Governing rules. — Aside from the provisions concerning voluntary deposit, this kind shall be governed by Article 2168 (Art. 1997, par. 2.) which reads: “When during a fi re, fl ood, storm or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation.” Article 2168 establishes a quasi-contract.2

ART. 1998. The deposit of effects made by travellers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised rela-tive to the care and vigilance of their effects. (1783) ART. 1999. The hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel. (n)

Deposit by travellers in hotels and inns. Before keepers of hotels or inns may be held responsible as depositaries with regard to the effects of their guests, the following elements must concur: (1) They have been previously informed about the effects brought by the guests; and (2) The latter have taken the precautions prescribed regarding their safekeeping.3

2By implication, the fi nder of lost personal property becomes the depositary (bailee) of the property and holds it for the true owner. (see Arts. 719, 720, 7171; also Art. 438.) A similar relationship exists when a person comes into possession of stolen property (see Art. 559.) or of property by mistake. (see Arts. 2154, 2143.)

3Art. 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of estab-lishments. — In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulations shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery

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Extent of liability of keepers of hotels and inns. The liability is not limited to effects lost or damaged in the hotel rooms which come under the term “baggage” or articles such as clothing as are ordinarily used by travellers but include those lost or damaged in hotel annexes such as vehicles in the hotel’s garage. The responsibility imposed extends to all those who offer lodging for a compensation, whatever may be their character. (11 Manresa 759.)

Terms explained. (1) The words “travellers” and “guests,” as used by law, are synonymous. It refers to transients and not to boarders. Non-transients are governed by the rules on lease. (2) The terms “hotel-keeper” and “inn-keeper” are also syn-onymous.

(a) Hotel. — It has been defi ned as “a building of many rooms chiefl y for overnight accommodation of transients and several fl oors served by elevators, usually with a large open street-level lobby containing easy chairs, with a variety of compartments for eating, drinking, dancing, exhibitions, and group meetings, with shops having both inside and street-side entrances and offering for sale items of particular interest to a traveller, or providing personal services, and with telephone booths, writing tables, and wash rooms freely available.” (Webster’s Third New Int. Dictionary, p. 1095.) (b) Inn. — It has been defi ned as “a public house for the lodging of travellers for compensation and until capacity is reached; a place of public entertainment that does not provide lodging.” (Ibid., p. 1165.)

or theft within their houses from guests lodging therein, or for the payment of the value thereof, provided that such guests shall have notifi ed in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall fur-thermore have followed the directions which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the inn-keeper’s employees. (Revised Penal Code.)



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(c) Motel. — It has been defi ned as “an establishment which provides lodging and parking and in which the rooms are usually accessible from an outdoor parking area.” (Ibid., p. 1474.)

ART. 2000. The responsibility referred to in the two pre-ceding articles shall include the loss of, or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as by strangers; but not that which may proceed from any force majeure. The fact that travellers are constrained to rely on the vigilance of the keeper of the hotel or inn shall be con-sidered in determining the degree of care required of him. (1784a) ART. 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms or through an irresistible force. (n) ART. 2002. The hotel-keeper is not liable for compensa-tion if the loss is due to the acts of the guests, his family, servants or visitors, or if the loss arises from the character of the things brought into the hotel. (n)

When hotel-keeper liable. In the following cases, the hotel-keeper is liable regardless of the amount of care exercised: (1) The loss or injury is caused by his servants or employees as well as by strangers (Art. 2000.) provided that notice has been given and proper precautions taken (Art. 1998.); and (2) The loss is caused by the act of a thief or robber done without the use of arms and irresistible force. (Art. 2001.) for in this case, the hotel-keeper is apparently negligent.

When hotel-keeper not liable. The hotel keeper is not liable in the following cases: (1) The loss or injury is caused by force majeure, like fl ood, fi re (Art. 2000.), theft or robbery by a stranger (not by hotel-keeper’s servant or employee) with the use of arms or irresistible force (Art. 2001.), etc., unless he is guilty of fault or negligence in

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failing to provide against the loss or injury from his cause (see Arts. 1170, 1174.); (2) The loss is due to the acts of the guests, his family, servants, or visitors (Art. 2002.); and (3) The loss arises from the character of the things brought into the hotel. (Ibid.)

ART. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipula-tion between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. (n)

Exemption or diminution of liability. The rule in this article is similar to the rule on common carriers which does not allow a common carrier to dispense with or limit his responsibility by stipulation or by posting of notices. (see Art. 1760.) Such stipulation is deemed contrary to law, morals, and public policy. (Art. 1306.) (1) Hotel-keepers and inn-keepers in offering their accom-modations to the public, practically volunteer as depositaries, and as such, they should be subject to an extraordinary degree of responsibility for the protection and safety of travellers who have no alternative but rely on the good faith and care of those with whom they take lodging. (Art. 2000.) (2) Furthermore, inn-keepers, by the very nature of their business, have supervision and control of their inns and the premises thereof. As a matter of fact, authorities are to the effect that it is not necessary in order to hold an inn-keeper liable that the effects of the guests be actually delivered to him or his employees; it is enough that they are within the inn. (De Los Santos vs. Tan Khey, [CA] 580 O.G. 7693; 29 Am. Jur. 89-90.)

ART. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually fur-nished to hotel guests. (n)



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Hotel-keeper’s right to retain. The right of retention recognized in this article is in the nature of a pledge created by operation of law. (see Arts. 2121-2122.) It is given to hotel-keepers to compensate them for the liabilities imposed upon them by law. The bailee in commodatum may likewise retain the thing loaned for damages by reason of defects thereof. (Arts. 1944, 1951.) Incidentally, the act of obtaining food or accommodation in a hotel or inn without paying therefor constitutes estafa. (Arts. 315, Sec. 2[e], Revised Penal Code.)

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Chapter 4SEQUESTRATION OR JUDICIAL DEPOSIT

ART. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litiga-tion is ordered. (1785)

ART. 2006. Movable as well as immovable property may be the object of sequestration. (1786)

ART. 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a)

ART. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family. (1788)

When judicial deposit takes place. A deposit may be constituted judicially or extrajudicially. (Art. 1964.) Judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered by a court.1 (Art. 2005.) For example, properties may be attached by the sheriff upon the fi ling of a complaint (Rule 57, Rules of Court.), or a

1A notice of lis pendens is an announcement to the whole world that a particular real property is in litigation and serves as a warning that one who acquires an interest over said property does so at his own risk, or that he gambles on the result of the litigation. The property subject of the litigation is not by that fact alone in custodia legis. It is only when property is lawfully taken by virtue of legal process that it becomes in custodia legis, and not otherwise. (Los Baños Rural Bank, Inc. vs. Africa, 384 SCRA 535 [2002]; Ladanga vs. Aseneta, 471 SCRA 381 [2005].)

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receiver (a disinterested party) may be appointed by the court to administer and preserve the property in litigation2 (Rule 59, ibid.), or personal property may be seized by the sheriff in suits of replevin or manual delivery of personal property. (Rule 60, ibid.)

Nature and purpose of judicial deposit. The deposit is judicial because it is auxiliary to a case pending in court.3

The purpose is to maintain the status quo during the pendency of the litigation or to insure the right of the parties to the property in case of a favorable judgment.

Obligation of depositary of sequestrated property. The depositary of sequestrated property is the person appointed by the court. (Art. 2007.) He has the obligation to take care of the property with the diligence of a good father of a family (Art. 2008.) and he may not be relieved of his responsibility until the litigation is ended or the court so orders. (Art. 2007.)

2Property subject of litigation is not by that fact alone in custodia legis. A thing is in custodia legis, when it is shown that it has been and is subjected to the offi cial custody of a judicial or executive offi cer in pursuance of his execution of a legal writ. Only when property is lawfully taken by virtue of legal process is it considered in the custody of the law, and not otherwise. (Bagalihog vs. Fernandez, 108 Phil. 560 [1960]; Superline Trans-portation Co., Inc. vs. Phil. National Construction Co., 519 SCRA 432 [2007].)

3In our jurisdiction, an escrow order may be issued by a court in the exercise of its intrinsic power to issue orders and other ancillary writs and processes incidental or reasonably necessary to the exercise of its main jurisdiction. Thus, the deposit of rentals in escrow with a bank, receiver, or administrator, in the name of the court, is only an in-cident in the main proceeding — placing property in litigation under judicial possession. The usual defi nition is that an escrow is a written instrument which by its terms imports a legal obligation and which is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept by the depositary until the performance of a con-dition or the happening of a certain event, and then to be delivered over to the grantee, promisee, or obligee. While originally, the doctrine of escrow applied only to deeds by way of grant, or as otherwise stated, instruments for the conveyance of land, under mod-ern theories of law, the term “escrow’’ is not limited in its application to deeds, but is applied to the deposit of any written instrument with a third person. It is no longer open to question that money may be delivered in escrow. (Province of Bataan vs. Villafuerte, Jr., 367 SCRA 620 [2001].)

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Judicial and extrajudicial deposits distinguished. The differences between judicial and extrajudicial deposits are: (1) Cause or origin. — judicial, by the will of the court; extrajudicial, by the will of the parties; hence, there is a contract; (2) Purpose. — judicial, as security and to secure the right of a party to recover in case of a favorable judgment; extrajudicial, custody and safekeeping of the thing; (3) Subject matter. — judicial, either movable or immovable property but generally immovable property; extrajudicial, only movable property; (4) Remuneration. — judicial, always remunerated (onerous); extrajudicial, may be compensated or not, but generally gratuitous; and (5) In whose behalf it is held. — judicial, in behalf of the person who, by the judgment, has a right; extrajudicial, in behalf of the depositor or third person designated.

ART. 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court. (1789a)

Applicable law. The law on judicial deposit is remedial or procedural in nature. Hence, the Rules of Court are applicable. The relevant provisions of the Rules of Court are Rule 57 (Preliminary Attachment), Rule 59 (Receivership), and Rule 60 (Replevin). The Rules of Court provide also for attachment in criminal cases. (Rule 127 thereof.)

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IVTHE WAREHOUSE RECEIPTS LAW


INTRODUCTION

Scope of the law. The Warehouse Receipts Law is a full and complete treatise on the subject. It covers all warehouses, whether public or private. (Citizen’s State Bank of Vici vs. Galtig, 187 P. 217.), bonded or not. Thus, it has been held to be applicable to warehousemen licensed under Act No. 3893 (as amended by R.A. No. 247.), known as the General Bonded Warehouse Act, of special application to those engaged in the business of receiving commodities (e.g., palay and rice) for storage. (see People vs. Goco, 35 O.G. 2618; also Phil. Tobacco Flue Curing and Redrying Corp. vs. Pablo, 66 SCRA 136 [1975].)

When Civil Code applicable. The Act applies to warehouse receipts issued by a warehouse-man as defi ned in Section 58(a) of the Act, while the Civil Code, to other cases where the receipts are not issued by a warehouse-man as defi ned in said section.

Purposes of the law. The law has been enacted: (1) To regulate the status, rights, and liabilities of the parties in a warehousing contract;

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(2) To protect those who, in good faith and for value, acquire negotiable warehouse receipts by negotiation; (3) To render the title to, and right of possession of, property stored in warehouses more easily convertible; (4) To facilitate the use of warehouse receipts as documents of title; and (5) In order to accomplish these, to place a much greater responsibility on the warehouseman. (93 C.J.S. 400.)

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Chapter 1THE ISSUE OF WAREHOUSE

RECEIPTS SECTION 1. Persons who may issue receipts. — Ware-house receipts may be issued by any warehouseman.

Who may issue warehouse receipt. A warehouseman is a person lawfully engaged in the business of storing goods for profi t. (Sec. 58[a].) Under Section 1, only a warehouseman may issue warehouse receipts. Hence, receipts not issued by a warehouseman are not warehouse receipts although in the form of warehouse receipt. (National Bank of Commerce vs. Kansas City, 188 S.W. 117.) But a duly authorized offi cer or agent of a warehouseman may validly issue a warehouse receipt. (National Bank vs. Producer’s Warehouse Association, 42 Phil. 609 [1922]; see Sec. 2[g].)

Meaning of warehouse. The law does not defi ne what “warehouse” is. As used, however, in the Act, warehouse means the building or place where goods are deposited and stored for profi t. (see Sec. 2; also Sec. 2, General Bonded Warehouse Act [Act No. 3893, as amended].)

SEC. 2. Form of receipts; essential terms. — Ware-house receipts need not be in any particular form but ev-ery such receipt must embody within its written or printed terms: (a) The location of the warehouse where the goods are stored;

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(b) The date of issue of the receipt; (c) The consecutive number of the receipt; (d) A statement whether the goods received will be de-livered to the bearer, to a specifi ed person or to a specifi ed person or his order; (e) The rate of storage charges; (f) A description of the goods or of the packages con-taining them; (g) The signature of the warehouseman which may be made by his authorized agent; (h) If the receipt is issued for goods of which the ware-houseman is owner, either solely or jointly or in common with others, the fact of such ownership; and (i) A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims as lien. If the precise amount of such advances made or of such liabilities incurred is, at the same time of the issue of the receipt, unknown to the warehouseman or to his agent who issues it, a statement of the fact that advances have been made or liabilities incurred and the purpose thereof is suffi cient. A warehouseman shall be liable to any person injured thereby for all damages caused by the omission from a negotiable receipt of any of the terms herein required.

Defi nition and nature of warehouse receipt. (1) The Act does not also defi ne a warehouse receipt.

(a) It has been defi ned as a written acknowledgment by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued. (Vanett vs. Reilly-Hertz Automobile Co., 173 N.W. 466.) (b) It has also been defi ned as a simple written contract between the owner of the goods and the warehouseman to pay the compensation for that service. (Hale vs. Milwaukee Dock Co., 29 Wis. 482, 67 C.J. 463.)

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A warehouse receipt is included in “document of title to goods” as used by the Civil Code in its provisions relating to sales. (see Art. 1936[1], Civil Code.) (2) A warehouse receipt is a bilateral contract. It imports that goods are in the hands of a warehouseman and is a symbolical representation of the property itself. (3) A warehouse receipt is not a negotiable instrument within the meaning of the Negotiable Instruments Law in the technical sense that a bill of exchange or promissory note is negotiable, even though the Warehouse Receipts Act declares it negotiable. Negotiability is provided for by the Act. (see 11 Am. Jur. 2d 35; see Sec. 5.)

Form and contents of the receipt. Although the Act does not require or specify any particular form for warehouse receipts, it has provided for certain essential terms which must be embodied in every warehouse receipt. Together with their importance, they are enumerated below: (1) Location of warehouse. — This requirement is for the benefi t of the holders of warehouse receipts to enable them to determine where the goods are deposited especially when the warehouseman has more than one warehouse located in different places. (2) Date of issue of receipt. — Although a warehouse receipt is not essential to create a contract of storage (which is one of deposit and is perfected at the time of delivery of the goods deposited, Art. 1316, Civil Code.), the date of issue appearing therein, indicates prima facie the date when the contract of deposit is perfected and when the storage charges shall begin to run against the depositor. (3) Consecutive number of receipt. — The purpose of this requirement is to identify each receipt with the goods for which it was issued. There is no express requirement as to when the consecutive numbering shall begin. Thus, a warehouseman may issue a receipt numbered 99 although it is not, in fact, the ninety-ninth receipt issued by such warehouseman. (Smith Bros. Co. vs. Reicheimer & Co., 83 So. 255, 145 La. 1066.)

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(4) Person to whom goods are deliverable. — This requirement determines the person or persons who shall prima facie be entitled lawfully to the possession of the goods deposited. Thus, if by the terms of the receipt the goods are to be delivered to order or to bearer, then it is a negotiable warehouse receipt. The requirement, however, does not determine the negotiability of the receipt because notwithstanding the failure to use words of negotiability, the receipt may still be considered negotiable. This can be inferred from the last paragraph of the section. (Manufacturers Mercantile Co. vs. Monarch Refrigerator Co., 107 N.E. 885; see Secs. 5, 7.) (5) Rate of storage charges. — This states the consideration for the contract from the view of the warehouseman. In the absence of express agreement, the law presumes that the depositor shall pay the customary or reasonable compensation for the services of the warehouseman. (Devereux vs. Fleming, 53 F. 401.) (6) Description of goods or packages. — The general object of giving a description of the goods in the receipt is for identifi cation so that the identical property delivered to the warehouseman may be delivered back by him upon the return of the warehouse receipt. A warehouseman cannot be supposed to know the contents of each package or box of merchandise which was delivered to him, and so packed as to cover and conceal the real nature of the goods delivered. All he can be fairly charged with asserting by the mere acknowledgment of the receipt of merchandise thus described is that the package or box in which it is contained bears the same outward appearance as does the package or box in which merchandise of the character described is usually carried and that there is nothing unusual in the marks, appearance, signs or character of the package or box from that in which goods of the character described are usually transported, and that he believes them to be as described. (Dean vs. Driggs, 33 N.E. 326.) However, the mere fact that the goods deposited are incor-rectly described does not make ineffective the receipt when the identity of the goods is fully established by the evidence. In such case, its indorsement and delivery shall constitute a suffi cient



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transfer of the title to the goods. (American Foreign Banking Cor-poration vs. Herridge, 49 Phil. 975 [1927].) (7) Signature of warehouseman. — The warehouseman’s signature furnishes the best evidence of the fact that the warehouseman has received the goods described in the receipt and has bound himself to assume all obligations in connection therewith. (8) Warehouseman’s ownership of or interest in goods. — The purpose behind the provision is to prevent abuses which in the past had arisen from warehousemen issuing receipts on their goods. It seems wise that where they issue negotiable receipts in this way, the document should carry notice of the fact on its face. (Cowley Country National Bank vs. Rawlings Dobbs Elevator Co., 152 Pac. 647.) Under Section 53, the omission to state his ownership of the goods in the receipt issued by him, may render the warehouseman criminally liable. (9) Statement of advances made and liabilities incurred. — The purpose of this requirement is to preserve the lien of the ware-houseman over the goods stored or the proceeds thereof in his hands. (see Secs. 27-30.) Of course, where the warehouseman does not make any advance or does not incur any liability, there would be nothing to state on the receipt concerning advances or liabilities. (Smith Bros. Co., Ltd. vs. Reicheimer & Co., 145 La. 1066, 83 So. 255.)

Effect of omission of any of essential terms. The terms prescribed in Section 2 are required for the protection of the depositor and those succeeding to his right. (1) Validity of receipt not affected. — The omission of any of the requirements will not affect the validity of the warehouse receipt. (2) Warehouseman liable for damages. — It will only render the warehouseman liable for damages to those injured by his omission. (Wordson vs. Davenport Mill & Elevator Co., 13 P. [2d] 4778.) (3) Negotiability of receipt not affected. — Neither is the negotiability affected. Section 2 does not deal with negotiability

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of warehouse receipts. Note that the last paragraph of Section 2 refers expressly to “omission from a negotiable receipt of any of the terms herein required” and not from a receipt which would otherwise be negotiable. (Manufacturers Mercantile Co. vs. Monarch Refrigerating Co., 107 N.E. 885.) (4) Contract converted to ordinary deposit. — The issuance of a warehouse receipt in the form provided by the law is merely permissive and directory and not mandatory in the sense that if the requirements are not observed, then the goods delivered for storage become ordinary deposits. (Gonzales vs. Go Tiong and Luzon Surety Co., 104 Phil. 492 [1958].)

SEC. 3. Form of receipts. — What terms may be insert-ed. — A warehouseman may insert in a receipt, issued by him, any other terms and conditions provided that such terms and conditions shall not:

(a) Be contrary to the provisions of this Act;

(b) In any wise impair his obligation to exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonably careful man would exercise in regard to similar goods of his own.

Terms that cannot be included in a warehouse receipt. Under Section 3, the warehouseman is given the power to insert additional terms or conditions in receipts issued by him subject to the two limitations stated in subsections (a) and (b). Of course, in addition to those limitations, the stipulations in the receipt must not be contrary to law, morals, good customs, public order, or public policy. (Art. 1306, Civil Code.) (1) Exemption from liability for misdelivery. — Under Subsection (a), a warehouseman is not authorized to insert any term exempting him from liability for misdelivery of goods because such would be against Section 10 of the Act or for not giving statutory notice in case of sale of goods because such would be contrary to Sections 33 and 34.



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(2) Exemption from liability for negligence. — Under Subsection (b), the warehouseman cannot insert any term which would relieve him from liability for his own negligence, such as “For account and at the risk of the depositor.” The warehouseman is required by law “to exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonable careful man would exercise in regard to similar goods of his own.”

SEC. 4. Defi nition of non-negotiable receipt. — A re-ceipt in which it is stated that the goods received will be delivered to the depositor or to any other specifi ed person, is a non-negotiable receipt. SEC. 5. Defi nition of negotiable receipt. — A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt is a negotiable receipt. No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted, shall be void.

Meaning of “negotiable” under the Act. The word “negotiable” is not used in the sense in which it is applied to bills of exchange or promissory notes but only as indicating that in the passage of warehouse receipts through the channels of commerce, the law regards the property which they describe as following them and gives to their regular transfer by indorsement the effect of manual delivery of the things specifi ed in them. (Vanett vs. Reilly-Hertz Automobile Co., 173 N.W. 466.) A warehouse receipt is in no sense a negotiable instrument because it does not comply with Section 1(b) of Act No. 2031 (Negotiable Instruments Law) which requires an unconditional promise or order to pay a sum certain in money. (93 C.J.S. 429.) Article 1507 of the Civil Code is the same as Section 5 above except for the use of “document of title” instead of “receipt” and for paragraph 2 of Section 5 which is not contained in Article 1507 but in a more extended form in Article 1510.

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SEC. 6. Duplicate receipts must be so marked. — When more than one negotiable receipt is issued for the same goods, the word “duplicate” shall be plainly placed upon the face of every such receipt, except the fi rst one issued. A warehouseman shall be liable for all damages caused by his failure to do so to any one who purchased the subse-quent receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the warehouseman to the holder of the original receipt. SEC. 7. Failure to mark “not negotiable.” — A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it “non-negotiable,” or “not negotiable.” In case of the warehouseman’s failure to do so, a holder of the receipt who purchased it for value supposing it to be negotiable, may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. This section shall not apply, however, to letters, memo-randa, or written acknowledgment of an informal charac-ter.

Application of Sections 6 and 7. Section 6 refers only to negotiable receipts. Section 7 applies only to non-negotiable receipts. (see Sec. 52, for criminal liability of warehouseman.)

Effect of failure to mark “negotiable” or “non-negotiable.” (1) The word “negotiable” usually is written or printed on the face of a negotiable warehouse receipt and the failure to so mark it does not render it non-negotiable if it contains words of negotiability. (Sec. 5.) (2) In the case of non-negotiable receipts, the law imposes upon the warehouseman the duty to mark them “non-negotiable” or “not negotiable” otherwise they shall be considered negotiable provided the holder of such unmarked receipt purchased it for value supposing it to be negotiable.

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Negotiability of warehouse receipts enlarged. Section 7 enlarges the negotiability of warehouse receipts. It appears to give any warehouse receipt not marked “non-negotiable” or “not negotiable” practically the same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it for value supposing it to be negotiable. (Roman vs. Asia Banking Corporation, 46 Phil. 705 [1924].) This statement is, perhaps, too broad but it certainly applies as against the unsecured creditors of the depositor. (Bank of P.I. vs. Herridge, 47 Phil. 57 [1924].)

ILLUSTRATIVE CASE: Buyer (depositor) of merchandise became insolvent, and unpaid seller claimed that warehouse receipt (reciting that the merchandise is deposited in warehouse “por orden” instead of “a la orden” of depositor), issued by former to a person did not pass title. Facts: A bought merchandise from B but did not pay for them. A deposited the merchandise in his warehouse and issued a receipt in blank and delivered it to C, a bank. In the left margin of the face of the receipt, A certifi es that he is the sole owner of the merchandise therein described. The receipt recites that the merchandise is deposited in the warehouse “por orden” instead of “a la orden” or “sujeto a la orden” of the depositor and it contains no other direct statement showing whether the goods received are to be delivered to the bearer, to a specifi ed person, or to a specifi ed person or his order. It is not marked “non-negotiable” or “not negotiable.” A became insolvent. B claimed that the transfer of the receipt to C did not pass title. Issue: Is the receipt negotiable or non-negotiable? Held: (1) Mere clerical or grammatical error was committed. — “It is obvious that the deposit evidenced by the receipt in this case was intended to be made subject to the order of the depositor and, therefore, negotiable. That the words ‘por orden’ are used instead of ‘a la orden’ is very evidently a clerical or grammatical error. x x x The phrase must be construed to mean

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that A was the person authorized to indorse and deliver the receipt; any other interpretation would mean that no one had such power and the clause as well as the entire receipt would be rendered nugatory.” (2) Intention was to make receipt negotiable. — “Moreover, the indorsement in blank of the receipt in controversy together with its delivery by A to C took place on the very date of the issuance of the warehouse receipt, thereby immediately demonstrating the intention of A and C by the employment of the phrase ‘por orden del A’ to make the receipt negotiable and subject to the very transfer which he then and there made by such indorsement in blank and delivery of the receipt to C.” (Roman vs. Asia Banking Corporation, 46 Phil. 705 [1924].) “As the owner of the goods, A had, of course, full control over them while the title remained in him; we certainly cannot assume that it is the intention to have the goods in the warehouse subject to no one’s orders. That the receipts were intended to be negotiable is further shown by the fact that they were not marked ‘non-negotiable’ and that they were transferred by the indorsement of the original holder, who was also the warehouseman. In his dual capacity of warehouseman and the original holder of the receipt, A was the only party to the instrument at the time of its execution and the interpretation he gave it at that time must, therefore, be considered controlling as to its intent.” (3) Depositor was insuffi ciently acquainted with Spanish language. — “The rule is well known that whenever possible, writings must be so construed as to give effect to their general intent and so as to avoid absurdities. Applying this rule, it is diffi cult to see how the phrase in question can be given any other rational meaning than that suggested in the case mentioned. (Roman case.) It is true that the meaning would have been more grammatically expressed by the word ‘a la orden’; the word ‘por’ preceding the word ‘orden’ is generally translated into the English language as ‘by’ but ‘por’ also means ‘for’ or ‘for the account of’ and it is often used in the latter sense. The grammatical error of using it in connection with ‘orden’ in the present case is one which might reasonably be expected from a person insuffi ciently acquainted with the Spanish language.”(Bank of P.I. vs. Herridge, 47 Phil. 57 [1924], where

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the receipts issued also by A were identical in form with that involved in the Roman case.)

Construction of warehouse receipts. As instruments of credit, warehouse receipts play an important role in modern commerce and the present day tendency is towards a liberal construction of the law in favor of the bona fi de holders of such receipts. (Ibid.) The rule, however, has no application to actions against any party to the transactions other than a warehouseman. Thus, the purchaser of a non-negotiable receipt not marked “non-negotiable” or “not negotiable” from one who had stolen or found it cannot interpose the defense against the owner of the goods that the receipt is negotiable and has given him title to the goods, the warehouseman not being a party to the action. (Alexander Eccles & Co. vs. Munn, 210 S.W. 626.)

— oOo —

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Chapter 2OBLIGATIONS AND RIGHTS OF

WAREHOUSEMEN UPON THEIR RECEIPTS

SEC. 8. Obligation of warehouseman to deliver. — A warehouseman, in the absence of some lawful excuse provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a receipt for the goods or by the depositor; if such demand is accompanied with: (a) An offer to satisfy the warehouseman’s lien; (b) An offer to surrender the receipt, if negotiable with such indorsements as would be necessary for the negotia-tion of the receipts; and (c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the ware-houseman. In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder or depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of a lawful ex-cuse for such refusal.

Principal obligations of the warehouseman. A warehouseman is essentially a depositary with respect to the goods received and stored by him in his warehouse. The following are the principal obligations of the warehouseman: (1) to take care of the goods entrusted to his safekeeping (Sec. 21.); and

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(2) to deliver them to the holder of the receipt or the depositor provided the conditions under Section 8 are fulfi lled.

Necessity of demand. Generally speaking, a demand should be made on the warehouseman in order that the duty to deliver the goods will arise. But where demand is evidently useless as when the warehouseman has rendered it beyond his power to deliver the goods (see Art. 1169[3], Civil Code.), demand is dispensed with.

Offer to satisfy warehouseman’s lien. A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfi ed. (Sec. 31.) He loses his lien upon the goods by surrendering possession thereof. (Sec. 29[a].) The offer to satisfy the warehouseman’s lien is, therefore, required before the warehouseman is bound to deliver or return the goods. When, however, an offer is vain or useless, a formal tender is not required.

Offer to surrender and sign negotiable receipt. The offer to surrender the receipt is required for the protection of the warehouseman since the receipt represents the goods described therein. (see Sec. 11.) Furthermore, the warehouseman will be criminally liable if he delivers the goods without obtaining possession of such receipt. (Sec. 54.) The warehouseman’s right to require production of the receipt as a condition precedent to delivery is subject to waiver, as where he refuses to deliver on grounds other than its non-production. (67 C.J. 532.) If the receipt is negotiable, the demand for the delivery of the goods must be accompanied by an offer to surrender the receipt properly indorsed. If the receipt issued is not negotiable, any person lawfully entitled to the possession of the goods (e.g., one with written authority from the owner) may be entitled to delivery without surrender of the receipt. (Ibid.)

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Lawful excuses for refusal to deliver goods. Even if the demand is accompanied by the three conditions provided in Section 8, a warehouseman may still refuse delivery of goods covered by a warehouse receipt on some lawful excuses provided in the Act. (see Secs. 10, 16, 18, 21, 31, 36.) But the existence of a lawful excuse for such refusal is an affi rmative defense which the warehouseman must prove. (Sec. 8, par. 2.) The fact that the warehouseman has a claim for unpaid storage on certain property of the person seeking delivery does not justify him in refusing delivery of other property on which he has no such claim. (93 C.J.S. 482.)

ILLUSTRATIVE CASE: Corporation appointed as manager of warehouse business of another corporation pledged quedans of latter issued in name of former as collateral with a bank which brought action to recover value of goods. Facts: W appointed M, another corporation, as general manager of its warehouse business for a certain period, with full power to manage its business, subject only to the control of W’s board of directors. Under such power, M issued in its own name the quedans of W and pledged them as collateral with B, a bank, which received them in good faith. B brought action to recover the value of the goods. W alleged that the quedans were invalid and wrongfully issued and that the goods were not in W’s warehouse. Issue: Is W bound by the acts of M, its general manager, and estopped to deny its authority to issue such quedans? Held: Yes. W having alleged that the quedans were invalid and wrongfully issued, and that the copra described was not in its warehouse, was estopped to claim or assert that B did not comply with any condition precedent. In this kind of action, a person has no legal right to deny the existence of the instrument on which it is based, and then claim that the plaintiff has not complied with the provisions of the instrument. (Phil. National Bank vs. Producers Warehouse Association, 42 Phil. 602 [1922].)

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SEC. 9. Justifi cation of warehouseman in delivering. — A warehouseman is justifi ed in delivering the goods, subject to the provisions of the three following sections, to one who is: (a) The person lawfully entitled to the possession of the goods, or his agent; (b) A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper; or (c) A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or or-der, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of the receipt or by his mediate or immediate indorser.

Person to whom goods must be delivered. The warehouseman is justifi ed in delivering the goods and, therefore, will not be liable for misdelivery, to any person speci-fi ed in Section 9. (1) Person lawfully entitled to possession of goods or his agent. — Under subsection (a), the warehouseman is justifi ed in delivering the goods to the person to whom a competent court has ordered the delivery of the goods (see Secs. 14, 17.), or to an attaching creditor (see Sec. 25.), or to the purchaser in case of sale of the goods by the warehouseman to enforce his lien (see Sec. 33.) or where the goods are perishable or hazardous. (see Sec. 34.) (2) Person entitled to delivery under a non-negotiable receipt or with written authority. — Under subsection (b), an authority is suffi cient as the section does not provide that the warehouseman is justifi ed in making delivery only on the written authority of the party entitled to possession; and to give it that meaning would open the door to fraud by enabling an unscrupulous owner to repudiate his express verbal authorization and thereby reap the fruits of his own wrong. Moreover, such construction would be

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giving the provision the effect of a rule of evidence or statute of frauds under which the authority of the owner could not be proved except by writing. (3) Person in possession of a negotiable receipt. — Under subsec-tion (c), the warehouseman is liable for misdelivery to a mere possessor of a negotiable receipt by the terms of which the goods covered by it are deliverable to the order of another, not being an indorsee thereof. In a case where the warehouseman delivered the goods to one who acquired custody of the same through the use of falsifi ed delivery permit, it was held that the warehouseman cannot sue for the value of the goods unless he had been sued by the depositor or the consignee who are the real parties in interest, not the warehouseman. The warehouseman is not the owner of the goods. He would have a course of action had the depositor or consignee sued him for damages or for recovery of the goods. (Consolidated Terminals, Inc. vs. Artex Dev. Co., Inc., 63 SCRA 46 [1975].)

SEC. 10. Warehouseman’s liability for misdelivery. — Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all hav-ing a right of property or possession in the goods if he delivered the goods otherwise than as authorized by sub-divisions (b) and (c) of the preceding section, and though he delivered the goods as authorized by said subdivisions, he shall be so liable, if prior to such delivery he had either: (a) Been requested, by or on behalf of the person law-fully entitled to a right of property or possession in the goods, not to make such delivery; or (b) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods.

Warehouseman’s liability for misdelivery. (1) Liability similar to a bank paying a forged check. — The liability of a warehouseman for delivering to a person other



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than those specifi ed in Section 9 is the same as that of a bank paying a forged check. As the party liable for misdelivery, the duty rests upon the warehouseman of devising appropriate means by which deception can be avoided. The depositor is not obliged to volunteer or offer any suggestion calculated to afford protection to the warehouseman. (Osaka Boeki Kaishal Ltd. vs. Luzon Brokerage, [CA] O.G. 5th Suppl. 130 [1941].) (2) Liability as for conversion. — Where the delivery is other-wise than as authorized by subsections (b) and (c) of Section 9, the liability of the warehouseman for misdelivery is as for con-version. Conversion is unauthorized assumption and exercise of the right of ownership over goods belonging to another through the alteration of their condition or the exclusion of the owner’s right. (Bouvier’s Law Dictionary, p. 669.) And even if the ware-houseman delivers the goods to the persons entitled under sub-sections (b) and (c) of Section 9, he may still be liable for conver-sion if prior to delivery, he had been requested not to make such delivery (subsec. [a], Sec. 10.) or he had received notice of the adverse claim or title of a third person. (subsec. [b], ibid.)

SEC. 11. Negotiable receipts must be cancelled when goods delivered. — Except as provided in Section thirty-six, where a warehouseman delivers goods for which he had issued a negotiable receipt, the negotiation of which would transfer the right to the possession of the goods, and fails to take up and cancel the receipt, he shall be liable to any one who purchases for value in good faith such receipt, for failure to deliver the goods to him, whether such purchaser acquired title to the receipt before or after the delivery of the goods by the warehouseman.

SEC. 12. Negotiable receipts must be cancelled or marked when part of goods delivered. — Except as pro-vided in Section thirty-six, where a warehouseman deliv-ers part of the goods for which he had issued a negotiable receipt and fails either to take up and cancel such receipt, or to place plainly upon it a statement of what goods or packages have been delivered, he shall be liable to any one who purchases for value in good faith such receipt, for failure to deliver all the goods specifi ed in the receipt,

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whether such purchaser acquired title to the receipt be-fore or after the delivery of any portion of the goods by the warehouseman.

Cancellation of receipts on delivery of goods. The above provisions are not applicable to non-negotiable receipts because the warehouseman may make delivery without requiring their surrender and cancellation. Under Section 11, the receipt must be cancelled and under Section 12, the receipt must be either cancelled or marked as to the part of the goods delivered. Note that under Section 11, the negotiable receipt must be one “the negotiation of which would transfer the right to the possession of the goods.” So, the warehouseman who delivers the goods to the real owner without taking up and cancelling the receipt is not liable to the purchaser for value in good faith of such receipt from a thief for failure to deliver the goods to him as the thief has no title to the goods. (see Sec. 41[a].)

SEC. 13. Altered receipts. — The alteration of a receipt shall not excuse the warehouseman who issued it from any liability if such alteration was: (a) Immaterial; (b) Authorized; or (c) Made without fraudulent intent. If the alteration was authorized, the warehouseman shall be liable according to the terms of the receipt as al-tered. If the alteration was unauthorized but made without fraudulent intent, the warehouseman shall be liable ac-cording to the terms of the receipt as they were before al-teration. Material and fraudulent alteration of a receipt shall not excuse the warehouseman who issued it from liability to deliver, according to the terms of the receipt as originally issued, the goods for which it was issued but shall excuse him from any other liability to the person who made the



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alteration and to any person who took with notice of the al-teration. Any purchaser of the receipt for value without no-tice of the alteration shall acquire the same rights against the warehouseman which such purchaser would have ac-quired if the receipt had not been altered at the time of the purchase.

Effects of alteration on liability of warehouseman. The liability of a warehouseman under a warehouse receipt which has been altered depends on the nature of the alteration as follows: (1) Alteration immaterial. — If the alteration is immaterial (the tenor of the receipt is not changed like the substitution of the real name of a party), whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor; (2) Alteration material. — If the alteration is material (the tenor of the receipt is changed like the erasure of the name of a party and the insertion of another), but authorized, the warehouseman is liable according to the terms of the receipt as altered; (3) Material alteration innocently made. — If the alteration is material but innocently made though unauthorized, the warehouseman is liable on the altered receipt according to its original tenor; and (4) Material alteration fraudulently made. — If the alteration is material and fraudulently made, the warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for value without notice, and even to the alterer and subsequent purchasers with notice except that as regards to the last two, the warehouseman’s liability is limited only to delivery as he is excused from any liability. However, “it is diffi cult to conceive what liability the draftsman intended to excuse.” (Commissioner’s note.) Under this section, it is clear that even a fraudulent alteration cannot divest the title of the owner of stored goods and the warehouseman is, therefore, liable to return them to the owner.

Sec. 13

Without notice of the alteration

Changing the character of the party changes the tenor and is material

What else is he liable for but delivery? But according to warranties mere delivery cannot warrant other liabilities to the warehouseman unlike a person in good faith who is awarded all.

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(Ibid.) But a bona fi de holder acquires no right to the goods under a negotiable receipt which has been lost or stolen or to which the indorsement of the depositor has been forged. (93 C.J.S. 435.)

SEC. 14. Lost or destroyed receipts. — Where a nego-tiable receipt has been lost or destroyed, a court of compe-tent jurisdiction may order the delivery of the goods upon satisfactory proof of such loss or destruction and upon the giving of a bond with suffi cient sureties to be approved by the court to protect the warehouseman from any liabil-ity or expense, which he or any person injured by such de-livery may incur by reason of the original receipt remain-ing outstanding. The court may also in its discretion order the payment of the warehouseman’s reasonable costs and counsel fees.

The delivery of the goods under an order of the court as provided in this section, shall not relieve the warehouseman from liability to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods.

Liability of warehouseman in case of lost or destroyed receipts. Under Sections 8 and 11, the warehouseman is not liable for non-delivery without the surrender of the receipt. Indeed, even if the receipt is claimed to have been lost or destroyed, it is essential that the court shall pass upon the question and make sure that the receipt is really lost or destroyed, before the goods are delivered or a new receipt is issued for the rights of possible innocent purchasers of the original receipt may be involved. (Commissioner’s note; see Sec. 52.) Under Section 14, a competent court may order the delivery of the goods only (1) upon proof of the loss or destruction of the receipt; and (2) upon the giving of a bond with suffi cient sureties to be approved by the court. Note, however, that by virtue of the second paragraph, the warehouseman is still liable to a holder of the receipt for value without notice since the warehouseman can secure himself on the bond given.


What if it falls to someone who had no knowledge of the notice of the court? Wm is still liable to the one in good faith. But he can go after the bond


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SEC. 15. Effect of duplicate receipts. — A receipt upon the face of which the word “duplicate” is plainly placed is a representation and warranty by the warehouseman that such receipt is an accurate copy of an original receipt properly issued and uncancelled at the date of the issue of the duplicate, but shall impose upon him no other liability.

Liability of warehouseman as to duplicate. When more than one negotiable receipt is issued for the same goods, the word “duplicate” must be plainly placed by the warehouseman upon the face of every such receipt, except the one fi rst issued. (Sec. 6.) In such case, the warehouseman warrants (1) that the duplicate is an accurate copy of the original receipt; and (2) such original receipt is uncancelled at the date of the issue of the duplicate. Except for breach of this warranty, the duplicate imposes no other liability upon the warehouseman. It results that the warehouseman may not be compelled to deliver the goods by virtue of the duplicate only unless the procedure provided for in Section 14 is followed.

SEC. 16. Warehouseman cannot set up title in him-self. — No title or right to the possession of the goods, on the part of the warehouseman, unless such title or right is derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for storage, or from the warehouseman’s lien, shall excuse the warehouseman from liability for refusing to deliver the goods according to the terms of the receipt.

Ownership not a defense for refusal to deliver. The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of the same unless such title or right is derived (1) directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; or (2) from the warehouseman’s lien.

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Section 16 is based on the doctrine of estoppel.

SEC. 17. Interpleader of adverse claimants. — If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods, or as an original suit, whichever is appropriate, require all known claimants to interplead.

SEC. 18. Warehouseman has reasonable time to deter-mine validity of claims. — If someone other than the de-positor or person claiming under him has a claim to the title or possession of the goods, and the warehouseman has information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse claimant, until the warehouseman has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel all claimants to interplead.

Duty of warehouseman where there are several claimants. If there are several claimants to the goods, the warehouseman must determine within a reasonable time the validity of the confl icting claims (Sec. 18.), and deliver to the person whom he fi nds is entitled to the possession of the goods. However, he is not excused from liability in case he makes a mistake. (see Sec. 10.) For his own protection, the warehouseman must bring a complaint in interpleader (Sec. 1, Rule 62, Rules of Court.) and require the different claimants to litigate among themselves. (Sec. 17.) In such case, the warehouseman will be relieved from liability in delivering the goods to the person whom the court fi nds to have a better right.

ILLUSTRATIVE CASE: Arrastre operator who received into its custody shipment of cases of milk for two consignees delivered cases more than as per markings but less as per bill of lading to one of them.

Secs. 17-18 THE WAREHOUSE RECEIPTS LAWObligations and Rights of Warehousemen Upon Their Receipts


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Facts: A (arrastre operator) received into its custody a shipment of 5,000 cases of milk, of which 3,171 cases were marked for B, as consignee, and 1,829 cases were marked for C, but, according to the bills of lading in A’s possession, B was entitled only to 3,000 cases and C to 2,000 cases. A actually delivered 1,913 cases to C which is only 87 cases short of 2,000 cases as per bill of lading. Issue: Is A liable to C for the undelivered cases of milk? Held: Yes. The legal relationship between an arrastre operator and the consignee is akin to that of a depositor and warehouseman. As custodian of the goods discharged from the vessel, it was A’s duty like that of any other depositary to take good care of the goods and to turn them over to the party entitled to their possession. Under this particular set of circumstances, A should have withheld delivery because of the discrepancy between the bill of lading and the markings and conducted its own investigation not unlike that under Section 18 of the Warehouse Receipts Law, or called upon the parties to interplead such as in case under Section 17 of the same law, in order to determine the rightful owner of the goods. (Lu Kian vs. Manila Railroad Co. and Manila Port Service, 19 SCRA 5 [1967].)

Liability of warehouseman to rightful claimant. Where a warehouseman does not compel interpleader in a case requiring it, he is liable for refusal to deliver to the rightful claimant, and where he neither interpleads nor investigates, he will, after lapse of a reasonable time, be held guilty of conversion as of the date of original demand for the goods. The question of what constitutes a reasonable time is one of fact for determination in accordance with the circumstances of the particular case. Section 18 does not apply to cases where the warehouseman himself makes a claim to the goods. (67 C.J. 536.)

SEC. 19. Adverse title is no defense except as above provided. — Except as provided in the two preceding sec-tions and in sections nine and thirty-six, no right or title of a third person shall be a defense to an action brought

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by the depositor or person claiming under him against the warehouseman for failure to deliver the goods according to the terms of the receipt.

Adverse title of third person not a defense for refusal to deliver. The warehouseman cannot set up title in himself as an excuse for his failure or refusal to deliver the goods. (Sec. 16.) Neither can the warehouseman, as a depositary for hire, set up an adverse title in another as an excuse for his failure to deliver property to his bailor on demand. (Wetherington vs. Laurens Country Farmer’s Corp. Warehouse Co., 98 S.E. 228.) The exceptions to the above rule are the cases provided for in Sections 9, 17, 18, and 36.

SEC. 20. Liability of warehouseman for non-existence or misdescription of goods. — A warehouseman shall be liable to the holder of a receipt for damages caused by the non-existence of the goods or by the failure of the goods to correspond with the description thereof in the receipt at the time of its issue. If, however, the goods are described in a receipt merely by a statement of marks or labels upon them, or upon packages containing them or by a statement that the goods are said to be goods of a certain kind, or that the packages containing the goods are said to contain goods of a certain kind, or by words of like import, such statements, if true, shall not make liable the warehouse-man issuing the receipt, although the goods are not of the kind which the marks or labels upon them indicate, or of the kind they were said to be by the depositor.

Liability of warehouseman for non-existence or misdescription of goods. As a general rule, the warehouseman is under obligation to deliver the identical property stored with him and if he fails to do so, he is liable directly to the owner. (93 C.J.S. 472.) As against a bona fi de purchaser of a warehouseman receipt, the warehouseman is estopped, whether the receipt is negotiable or not, to deny that he has received the goods described in it.


Not supposed to open the boxes. Description of the packages is sufficient


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(Ibid., 483.) But if the description consists merely of marks or labels upon the goods or upon the packages containing them, etc., the warehouseman is not liable even if the goods are not of the kind as indicated in the marks or labels. “Anyone at all familiar with the business of a warehouseman knows that he could not transact business if he were required to examine the contents of each package, barrel or box of merchandise which was delivered to him and so packed as to cover and conceal the real nature of the goods delivered.” (Dean vs. Driggs, 33 N.E. 326.)

SEC. 21. Liability for care of goods. — A warehouseman shall be liable for any loss or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful owner of similar goods would exercise, but he shall not be liable, in the absence of an agreement to the contrary, for any loss or injury to the goods which could not have been avoided by the exercise of such care.

Liability of warehouseman for loss due to lack of care. The warehouseman is required to exercise ordinary or reasonable care in the custody of the goods, that is, the care a reasonably careful owner would exercise over similar goods of his own. Such care is also known as “the diligence of a good father of a family.” (Art. 1163, Civil Code.) In the absence of any agreement to the contrary, the ware-houseman is not liable for any loss or injury to the goods which could not have been avoided by the exercise of such care. Of course, what constitutes ordinary or reasonable care depends upon the circumstances such as the character and value of the property and the character and location of the warehouse. (93 C.J.S. 452.) While the warehouseman may limit his liability to an agreed value of the property received in case of loss, he cannot, however, stipulate with the depositor that he would not be responsible for any loss even if caused by his negligence. Such stipulation is void under Section 3.

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SEC. 22. Goods must be kept separate. — Except as provided in the following section, a warehouseman shall keep the goods so far separate from goods of other de-positors and from other goods of the same depositor for which a separate receipt has been issued, as to permit at all times the identifi cation and redelivery of the goods de-posited. SEC. 23. Fungible goods may be commingled if ware-houseman authorized. — If authorized by agreement or by custom, a warehouseman may mingle fungible goods with other goods of the same kind and grade. In such case, the various depositors of the mingled goods shall own the en-tire mass in common and each depositor shall be entitled to such portion thereof as the amount deposited by him bears to the whole. SEC. 24. Liability of warehouseman to depositors of commingled goods. — The warehouseman shall be sever-ally liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had been kept sepa-rate.

Commingling of deposited goods. As a general rule, a warehouseman may not mingle goods belonging to depositors. (Sec. 22.) In the case of fungible goods (see Sec. 58.), like rice, sugar, etc., the warehouseman may mingle them with the goods of the same kind and grade provided that he is authorized by agreement or custom. (Sec. 23.) In that case, the different owners become co-owners of the whole mass. (Sec. 24.) Sections 22 and 23 are intended for the benefi t of the holders of the receipts and not for the benefi t of the warehouseman. It would, indeed, be strange if the warehouseman could escape his liability to the owner of the goods by the simple process of commingling them without authorization. (Bank of P.I. vs. Herridge, 47 Phil. 57 [1924].) Under the Civil Code, “unless there is stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality.” (Art. 1976.)



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SEC. 25. Attachment or levy upon goods for which a negotiable receipt has been issued. — If goods are de-livered to a warehouseman by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner, and a nego-tiable receipt is issued for them, they cannot thereafter, while in the possession of the warehouseman, be attached by garnishment, or otherwise, or be levied upon under an execution, unless the receipt be fi rst surrendered to the warehouseman, or its negotiation enjoined. The ware-houseman shall in no case be compelled to deliver up the actual possession of the goods until the receipt is surren-dered to him or impounded by the court.

Attachment or levy of negotiable receipt. The warehouseman has the direct obligation to hold pos-session of the goods for the original owner or for the person to whom the negotiable receipt of title has been duly negotiated. (see Sec. 41.) While in possession of such warehouseman, the goods cannot be attached or levied upon under an execution un-less: (1) the document be fi rst surrendered; or (2) its negotiation is enjoined; or (3) the document is impounded by the court.

Delivery of goods covered by an outstanding negotiable receipt. The warehouseman cannot be compelled to deliver up the possession of the goods until the receipt is surrendered to him or impounded by the court. This prohibition is for the protection of the warehouseman since he could be made liable to a subsequent purchaser for value in good faith. (see Art. 1519 of the Civil Code which is substantially the same as Sec. 25.)

Where depositor not owner. The provisions of Section 25 do not apply if the person depositing is not the owner of the goods (like a thief) or one who

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has no right to convey title to the goods binding upon the owner. Neither does it apply to actions for recovery or manual delivery of goods by the real owner nor to cases where the attachment is made before the issuance of the negotiable receipt of title. The rights acquired by attaching creditors cannot be defeated by the issuance of a negotiable receipt of title thereafter. (see International Bredding Co. vs. Terminal Warehouse Co., 126 Atl. 902.)

SEC. 26. Creditor’s remedies to reach negotiable receipts. — A creditor whose debtor is the owner of a negotiable receipt shall be entitled to such aid from courts of appropriate jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim by means thereof as is allowed at law or in equity in these Islands in regard to property which cannot readily be attached or levied upon by ordinary legal process.

Remedies of creditor or owner of negotiable receipt. Here, what is attached by the creditor is the negotiable receipt in the debtor’s possession and not the goods covered by such receipt. (see Art. 1520 of the Civil Code which is substantially the same as Sec. 26; also Secs. 32, 35.) Inasmuch as the goods themselves in the warehouseman’s possession cannot readily be attached or levied upon by ordinary legal process, as limited by the preceding article, this article expressly gives the court full power to aid by injunction and otherwise a creditor seeking to get a negotiable receipt covering such goods.

SEC. 27. What claims are included in the warehouse-man’s lien. — Subject to the provisions of Section thirty, a warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transpor-tation, labor, weighing, cooperating and other charges and expenses in relation to such goods, also for all reason-



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able charges and expenses for notice and advertisements of sale, and for sale of the goods where default had been made in satisfying the warehouseman’s lien.

Extent of warehouseman’s lien. The warehouseman’s lien over the goods deposited with him is his security, just like a pledge or mortgage, for the payment of the charges, money advanced, and other expenses enumerated in Section 27. The lien exists for the benefi t of warehouseman as defi ned in Section 58, and not a casual bailee (Alton vs. New York Taxicab Co., 121 N.Y. Supp. 271.), and even though the receipt is negotiable. Section 30 prescribes the extent of lien when the receipt is negotiable.

SEC. 28. Against what property the lien may be en-forced. — Subject to the provisions of Section thirty, a warehouseman’s lien may be enforced: (a) Against all goods, whenever deposited, belonging to the person who is liable as debtor for the claims in regard to which the lien is asserted; and (b) Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor for the claims in regard to which the lien is asserted if such person had been so entrusted with the possession of the goods that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would have been valid.

Goods subject to lien. (1) Goods belonging to depositor or his principal. — Under Section 28, the warehouseman may enforce his lien (a) against the goods of the depositor who is liable to the warehouseman as debtor whenever such goods are deposited; and (b) against goods of other persons stored by the depositor who is liable to the warehouseman as debtor with authority to make a valid pledge.

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The evident purpose of the law in the second case is to give the warehouseman a lien for charges against the goods of persons who are primarily liable for the charge incurred, and who by their agreement create the relation of debtor and creditor. (67 C.J. 550.) (2) Goods stored in fraud of true owner’s rights. — There is noth-ing in the Act giving a warehouseman a lien on goods belonging to another and stored by a stranger in fraud of the true owner’s rights. If such were the effect of the Act, then a warehouseman could become a legalized receiver of stolen goods at least to the extent of the charges. (Farrell vs. Harlem Terminal Storage Ware-house, 172 N.Y. [supp.] 306; see Sec. 31.)

SEC. 29. How the lien may be lost. — A warehouseman loses his lien upon goods: (a) By surrendering possession thereof; or (b) By refusing to deliver the goods when a demand is made with which he is bound to comply under the provi-sions of this Act.

Loss and waiver of lien upon goods. (1) By surrendering possession of goods. — Under subsection (a), a warehouseman loses his lien upon goods by voluntarily surrendering the possession thereof without requiring payment of his lien. It will be presumed that the lien has been waived or abandoned where the warehouseman permits a depositor to remove the goods but not where the property is taken without the warehouseman’s consent or by force or under a legal process, as by a replevin suit. (Zahner vs. Harnish, 24 S.W. [2d] 641.)

(a) Involuntarily parting with possession of goods ordi-narily does not result in loss of his lien by a warehouseman. (93. C.J.S. 59.) (b) A warehouseman who has released his lien by the surrender of the goods may not thereafter claim a lien on other goods of the same depositor for unpaid charges on the goods surrendered if the goods were delivered to him under different bailments (covered by separate receipts). But he has



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a lien on retained goods for charges on surrendered goods where all goods were received under one and in the same bailment. (Ibid.)

(2) By wrongfully refusing to deliver goods. — Under subsection (b), the warehouseman also loses his lien by refusing to deliver the goods where the holder of the receipt offers to comply with the requirements of Section 8. The loss of the warehouseman’s lien, however, does not necessarily mean the extinguishment of the depositor’s obligation to pay the warehousing fees and charges which continues to be a personal liability. In case the warehouse receipt has been pledged as security, the depositor-pledgor, as owner, not the pledgee, continues to be liable. The pledgee does not become the owner of the goods covered by the receipt nor can he appropriate the goods to himself. (see Art. 2088, Civil Code.) The fact that the receipt was delivered and endorsed in blank to the pledgee does not alter the situation, the purpose of such indorsement being merely to transfer juridical possession of the goods to the pledgee and to forestall any possible disposition thereof on the part of the pledgor. (Phil. National Bank vs. Sayo, Jr., 292 SCRA 202 [1998].)

Valid reasons for refusing to deliver goods. Where a valid demand by the lawful holder of a warehouse receipt for the delivery of goods is refused by the warehouseman despite the absence of a lawful excuse provided by the law itself, the warehouseman’s lien is thereafter concommitantly lost as to what the law deems a valid demand. Section 8 enumerates what must accompany a demand while as regards the reasons which a warehouseman may invoke to legally refuse to effect delivery of the goods covered by the receipt, these are: (1) that the holder of the receipt does not satisfy the conditions prescribed in Section 8; (2) that the warehouseman has legal title in himself on the goods, such title or right being derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for storage, or from the warehouseman’s lien (Sec. 16.);

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(3) that the warehouseman has legally set up the title or right of third persons as lawful defense for nondelivery of the goods as follows:

(a) Where the warehouseman has been requested by or on behalf of the person lawfully entitled to a right of property of or possession in the goods, not to make such delivery (Sec. 10.), in which case, the warehouseman may, either as a defense to an action brought against him for nondelivery of the goods, or as an original suit, whichever is appropriate, require all known claimants to interplead (Sec. 17.); (b) Where the warehouseman had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods (Sec. 10.), in which case, the warehouseman shall be excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse claimant, until the warehouseman has had a reasonable time to ascertain the validity of the adverse claims or to bring legal proceedings to compel all claimants to interplead (Sec. 18.); and (c) Where the goods have already been lawfully sold to third persons to satisfy a warehouseman’s lien, or have been lawfully sold or disposed of because of their perishable or hazardous nature (Sec. 36.);

(4) that the warehouseman having a lien valid against the person demanding the goods refuses to deliver the goods to him until the lien is satisfi ed (Sec. 31.); and (5) that the failure was not due to any fault on the part of the warehouseman, as by showing that, prior to demand for delivery and refusal, the goods were stolen or destroyed by fi re, fl ood, etc., without any negligence on his part, unless he has contracted so as to be liable in such case, or that the goods have been taken by the mistake of a third person without the knowledge or implied assent of the warehouseman, or some other justifi able ground for non-delivery. (67 C.J. 532; Phil. National Bank vs. Sayo, Jr., supra, citing 3 Teodorico C. Martin, Commentaries and Jurisprudence on the Phil. Commercial Laws, 1989 ed., pp. 553-554.)



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SEC. 30. Negotiable receipt must state charges for which the lien is claimed. — If a negotiable receipt is issued for goods, the warehouseman shall have no lien thereon, except for charges for storage of those goods subsequent to the date of the receipt, unless the receipt expressly enu-merates other charges for which a lien is claimed. In such case, there shall be lien for the charges enumerated so far as they are within the terms of Section twenty-seven although the amount of the charges so enumerated is not stated in the receipt.

Lien where receipt negotiable. With the exception of the charges for storage and preservation of goods for which a negotiable receipt has been issued, the lien exists only for the other charges expressly enumerated in the receipt so far as they are written within the terms of Section 27 although the amount of the said charges is not stated. As to claims not specifi ed in the receipt, the warehouseman shares pro rata with the other creditors of the depositor the balance of the proceeds of the sale for the satisfaction of said claims (Secs. 33, 34.) after deducting the charges for storage.

SEC. 31. Warehouseman need not deliver until lien is satisfi ed. — A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfi ed. SEC. 32. Warehouseman’s lien does not preclude oth-er remedies. — Whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all the charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay. SEC. 33. Satisfaction of lien by sale. — A warehouse-man’s lien for a claim which has become due may be satis-fi ed as follows: The warehouseman shall give a written notice to the person on whose account the goods are held, and to any other person known by the warehouseman to claim an in-

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terest in the goods. Such notice shall be given by deliv-ery in person or by registered letter addressed to the last known place of business or abode of the person to be noti-fi ed. The notice shall contain: (a) An itemized statement of the warehouseman’s claim, showing the sum due at the time of the notice and the date or dates when it became due; (b) A brief description of the goods against which the lien exists; (c) A demand that the amount of the claim as stated in the notice, of such further claim as shall accrue, shall be paid on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally delivered, or from the time when the notice shall reach its destina-tion, according to the due course of post, if the notice is sent by mail; and (d) A statement that unless the claim is paid within the time specifi ed, the goods will be advertised for sale and sold by auction at a specifi ed time and place. In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods. The sale shall be had in the place where the lien was acquired, or, if such place is manifestly unsuitable for the purpose, at the nearest suitable place. After the time for the payment of the claim specifi ed in the notice of the depositor has elapsed, an advertisement of the sale, de-scribing the goods to be sold, and stating the name of the owner or person on whose account the goods are held, and the time and place of the sale, shall be published once a week for two consecutive weeks in a newspaper pub-lished in the place where such sale is to be held. The sale shall not be held less than fi fteen days from the time of the fi rst publication. If there is no newspaper published in such place, the advertisement shall be posted at least ten days before such sale in not less than six conspicuous places therein. From the proceeds of such sale, the warehouseman shall satisfy his lien, including the reasonable charges of notice, advertisement, and sale. The balance, if any, of



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such proceeds shall be held by the warehouseman, and delivered on demand to the person to whom he would have been bound to deliver or justifi ed in delivering the goods.

At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in serving notices and advertising and prepar-ing for the sale up to the time of such payment. The ware-houseman shall deliver the goods to the person making payment if he is a person entitled, under the provision of this Act, to the possession of the goods on payment of charges thereon. Otherwise, the warehouseman shall re-tain possession of the goods according to the terms of the original contract of deposit.

SEC. 34. Perishable and hazardous goods. — If goods are of a perishable nature, or by keeping will deteriorate greatly in value, or by their odor, leakage, infl ammability or explosive nature, will be liable to injure other property, the warehouseman may give such notice to the owner, or to the person in whose name the goods are stored, as is reasonable and possible under the circumstances, to sat-isfy the lien upon such goods, and to remove them from the warehouse, and in the event of the failure of such per-sons to satisfy the lien and to remove the goods within the time so specifi ed, the warehouseman may sell the goods at public or private sale without advertising. If the ware-houseman, after a reasonable effort, is unable to sell such goods, he may dispose of them in any lawful manner, and shall incur no liability by reason thereof.

The proceeds of any sale made under the terms of this section shall be disposed of in the same way as the pro-ceeds of sales made under the terms of the preceding sec-tion.

SEC. 35. Other methods of enforcing lien. — The rem-edy for enforcing of a lien herein provided does not pre-clude any other remedies allowed by law for the enforce-ment of a lien against personal property nor bar the right to recover so much of the warehouseman’s claim as shall not be paid by the proceeds of the sale of the property.

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SEC. 36. Effect of sale. — After goods have been law-fully sold to satisfy a warehouseman’s lien, or have been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not thereafter be liable for failure to deliver the goods to the depositor, or owner of the goods, or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable.

Enforcement of warehouseman’s lien. The remedies available to a warehouseman for enforcing his lien are as follows: (1) By refusing to deliver the goods until the lien is satisfi ed (Sec. 31.); (2) By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien (Secs. 33, 34.); and (3) By fi ling a civil action for collection of the unpaid charges or by way of counterclaim in an action to recover the property from him. (93 C.J.S. 502.), or such other remedies allowed by law for the enforcement of a lien against personal property (Sec. 35.), or to a creditor against his debtor, for the collection from the depositor of all the charges which the depositor has bound himself to pay. (Sec. 32.) A warehouseman is entitled to all the remedies allowed by law to a creditor against his debtor for the collection from the depositor of all charges which the depositor is obliged to pay.1 (Sec. 32.), including remedies allowed by law for the enforcement of a lien against personal property and recovery of any defi ciency in case it exists after sale of the property. (Sec. 35.)

Effect of sale of goods. (1) In case of sale of goods, the warehouseman is not liable for nondelivery even if the receipt given for the goods when they

1Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.



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were deposited be negotiated. (Sec. 36.) This rule necessarily qualifi es the right of a purchaser of a negotiable receipt. (Commissioners’ note.) (2) Where the sale was made without the publication required and before the time specifi ed by the law (Sec. 33, par. 2.), such sale is void and the purchaser of the goods acquires no title in them. (Eastern Paper Mills Co., Inc. vs. Republic Warehousing Corp., [CA] 71 O.G. 23 [1975].)

Acts for which warehouseman is liable. The following are acts for which a warehouseman may be held liable: (1) Failure to stamp “duplicate” on copies of a negotiable receipt (Sec. 6.); (2) Failure to place “non-negotiable” or “not negotiable” on a non-negotiable receipt (Sec. 7.); (3) Misdelivery of the goods (Sec. 10.); (4) Failure to effect cancellation of a negotiable receipt upon delivery of the goods (Sec. 11.); (5) Issuing receipt for non-existing goods or misdescribed goods (Sec. 20.); (6) Failure to take care of the goods (Sec. 21.); and (7) Failure to give notice in case of sale of goods to satisfy his lien (Sec. 33.) or because the goods are perishable or hazardous. (Sec. 34.)

— oOo —

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Chapter 3NEGOTIATION AND TRANSFER OF

RECEIPTS

SEC. 37. Negotiation of negotiable receipt by delivery. — A negotiable receipt may be negotiated by delivery:

(a) Where, by the terms of the receipt, the warehouse-man undertakes to deliver the goods to the bearer; or

(b) Where, by the terms of the receipt, the warehouse-man undertakes to deliver the goods to the order of a spec-ifi ed person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer.

Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a negotiable receipt has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any other specifi ed person, and in such case the receipt shall thereafter be negotiated only by the indorsement by such indorsee.

Negotiation of negotiable receipt. The manner of transferring negotiable warehouse receipt by negotiation is the same as in the negotiation of promissory notes and bills of exchange under the Negotiable Instruments Law. (Act No. 2031.) (1) A negotiable warehouse receipt is negotiable by delivery if the goods are deliverable to the bearer or when it is indorsed in blank or to the bearer by the person to whose order the goods are deliverable or by a subsequent indorsee. An indorsement is in blank when the holder merely signs his name at the back

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of the receipt without specifying to whom the goods are to be delivered. (2) If the receipt is specially indorsed, it becomes an order receipt and negotiation can only be effected by the indorsement of the indorsee. A special indorsement specifi es the person to whom or to whose order, the goods are to be delivered. (see Article 1508 which is substantially the same as Sec. 37.)

SEC. 38. Negotiation of negotiable receipt by indorse-ment. — A negotiable receipt may be negotiated by the in-dorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. Such indorsement may be in blank, to bearer, or to a specifi ed person. If in-dorsed to a specifi ed person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specifi ed person. Subsequent negotiation may be made in like manner.

Negotiation of negotiable receipt by indorsement. A negotiable document of title by the terms of which the goods are deliverable to a person specifi ed therein may be negotiated only by the indorsement of such person. (1) If indorsed in blank or to bearer, the document becomes negotiable by delivery. (Sec. 37.) (2) If indorsed to a specifi ed person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specifi ed person. Delivery alone is not suffi cient. (see Art. 1509 of the Civil Code which is substantially the same as Sec. 38.)

SEC. 39. Transfer of receipt. — A receipt which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or do-nee. A non-negotiable receipt can not be negotiated, and the indorsement of such a receipt gives the transferee no additional right.

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Transfer of non-negotiable receipt. The rights of a person to whom an order receipt has been transferred by delivery without indorsement are stated in Sections 42 (par. 1.) and 43. A non-negotiable receipt of title cannot be negotiated. Nevertheless, it can be transferred or assigned by delivery. In such case, the transferee or assignee acquires only the rights stated in Section 42. Even if the receipt is indorsed, the transferee acquires no additional right. (see Art. 1511 of the Civil Code which is substantially the same as Sec. 39.)

Advantages of a negotiable warehouse receipt. Some of the advantages of a negotiable warehouse receipt over one which is non-negotiable are the following: (1) It protects a purchaser for value and in good faith (Sec. 41.); (2) The goods covered by the receipt cannot be garnished or levied upon under execution unless it is surrendered, or impounded, or its negotiation enjoined (Sec. 25.); (3) In case of negotiation, the holder acquires the direct obligation of the warehouseman to hold possession of the goods for him without notice to such warehouseman (Sec. 41.); and (4) The goods it covers are not subject to seller’s lien or stoppage in transitu. (Sec. 49.)

SEC. 40. Who may negotiate a receipt. — A negotiable receipt may be negotiated: (a) By the owner thereof; or (b) By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the warehouseman undertakes to de-liver the goods to the order of the person to whom the pos-session or custody of the receipt has been entrusted, or if, at the time of such entrusting, the receipt is in such form that it may be negotiated by delivery.

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Persons who negotiate a receipt. It will be noticed that the provision does not give a power to negotiate warehouse receipts equal to that allowed by law in the case of bills of exchange and promissory notes inasmuch as neither a thief nor a fi nder is within the terms of the section. However, if the owner of the goods permits another to have the possession or custody of negotiable receipts running to the order of the latter or to be bearer, it is representation of title upon which bona fi de purchasers for value are entitled to rely despite breaches of trust or violations of agreement on the part of the apparent owner. As between two innocent persons, the loss must fall upon him whose misplaced confi dence made the loss possible. (Siy Cong Bieng & Co. vs. Hongkong & Shanghai Banking Corp., 56 Phil. 598 [1932]; see Art. 1512 of the Civil Code which is substantially the same as Sec. 40.)

SEC. 41. Rights of person to whom a receipt has been negotiated. — A person to whom a negotiable receipt has been duly negotiated acquires thereby: (a) Such title to the goods as the person negotiat-ing the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value; and (b) The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman had contracted directly with him.

Rights of person to whom receipt has been negotiated. This section specifi es the rights of a person to whom a negotiable warehouse receipt has been duly negotiated, either by delivery, in the case of a receipt to bearer, or by indorsement and delivery, in the case of a receipt to order. The rights acquired by such person are:

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(1) The title of the person negotiating the receipt over the goods covered by the receipt; (2) The title of the person (depositor or owner) to whose order by the terms of the receipt the goods were to be delivered, over such goods; and (3) The direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly contracted with him. One who purchases, therefore, a negotiable receipt issued to a thief acquires no right over the goods as the thief has no right to transfer notwithstanding that such purchaser is innocent. But the purchaser acquires a good title where the owner, by his conduct, is estopped from asserting his title. (see Art. 1513 of the Civil Code which is substantially the same as Sec. 41.)

SEC. 42. Rights of person to whom receipt has been transferred. — A person to whom a receipt has been trans-ferred but not negotiated, acquires thereby, as against the transferor, the title of the goods subject to the terms of any agreement with the transferor. If the receipt is non-negotiable, such person also ac-quires the right to notify the warehouseman of the transfer to him of such receipt, and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt. Prior to the notifi cation of the warehouseman by the transferor or transferee of a non-negotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by the creditor of the transferor, or by a notifi cation to the warehouseman by the transferor or a subsequent purchas-er from the transferor of a subsequent sale of the goods by the transferor.

Rights of person to whom receipt has been transferred. This section refers to the rights of a person to whom a nego-tiable warehouse receipt (not duly negotiated) has been trans-



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ferred (par. 1.) or of the transferee of a non-negotiable document. (pars. 2 and 3.) The rights of such person are: (1) The title to the goods as against the transferor; (2) The right to notify the warehouseman of the transfer thereof; and (3) The right, thereafter, to acquire the obligation of the ware-houseman to hold the goods for him. The right of the transferee is not absolute as it is subject to the terms of any agreement with the transferor. He merely steps into the shoes of the transferor.

Attachment of goods covered by receipt. (1) Receipt non-negotiable. — The transfer of a non-negotiable document of title does not effect the delivery of the goods covered by it. Accordingly, before notifi cation, the warehouseman is not bound to the transferee whose right may be defeated by a levy of an attachment or execution upon the goods by the creditor of the transferor or by a notifi cation to such warehouseman of the subsequent sale of the goods. (2) Receipt negotiable. — If the receipt is negotiable, the goods cannot be attached or be levied under an execution unless the receipt be fi rst surrendered to the warehouseman or its negotiation enjoined. (see Art. 1514 of the Civil Code which is substantially the same as Sec. 42.)

SEC. 43. Transfer of negotiable receipt without in-dorsement. — Where a negotiable receipt is transferred for value by delivery, and the indorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to indorse the receipt, unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made.

Rights of transferee of a negotiable receipt. This section specifi es the rights of a person to whom an order

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receipt, which may not properly be negotiated by mere delivery, has been delivered, without indorsement. They are: (1) The right to the goods as against the transferor (Sec. 42.); and (2) The right to compel the transferor to indorse the receipt. If the intention of the parties is that the receipt should be merely transferred, the transferee has no right to require the transferor to indorse the receipt.

Rule where receipt subsequently indorsed. For the purpose of determining whether the transferee is a purchaser for value in good faith without notice (see Sec. 41.), the negotiation shall take effect as of the time when the indorsement is actually made, not at the time the receipt is delivered. The reason for the rule is because the negotiation becomes complete only at the time of indorsement. So if by that time the purchaser already had notice that the title of the seller was defective, he cannot be considered a purchaser in good faith though he had no such notice when he bought the receipt. (see Art. 1515 which is substantially the same as Sec. 43.)

Ownership of goods covered by receipt negotiated or transferred. (1) Indorsee or transferee. — For purposes of facilitating com-mercial transactions, the indorsee or transferee or a warehouse receipt should be regarded as the owner of the goods covered by it. In other words, as regard the indorser or transferor even if he were the owner of the goods, he may not take possession and dispose of the goods without the consent of the indorsee or transferee of the warehouse receipt, and as regards third persons, the holder of a warehouse receipt is the owner of the goods cov-ered by it. (Martinez vs. Phil. National Bank, 93 Phil. 765 [1953].) (2) Indorser or transferor. — Where a warehouse receipt is indorsed or transferred to a creditor only to secure the payment of



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a loan or debt, the indorsee or transferee does not automatically become the owner of the goods covered by the warehouse receipt but he merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or pledge. Therefore, if the property covered by the warehouse receipt is lost without the fault of the mortgagee or pledgee or the indorsee or transferee of the warehouse receipt, the said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor. (Ibid.) (3) Innocent third persons. — Where, however, the rights of innocent third persons are involved, the indorsee-pledgee of a warehouse receipt is considered the owner of the goods covered by it whenever necessary for their protection. (see Sec. 41; Siy Cong Bieng & Co., Inc. vs. Hongkong and Shanghai Banking Corp., 56 Phil. 598 [1932]; Phil. Trust Co. vs. Phil. National Bank, 42 Phil. 413 [1921]; Bank of the Phil. Islands vs. Herridge, 47 Phil. 57 [1924]; Roman vs. Asia Banking Corp., 46 Phil. 705 [1924].)

SEC. 44. Warranties on sale of receipt. — A person who for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants: (a) That the receipt is genuine; (b) That he has a legal right to negotiate or transfer it; (c) That he has knowledge of no fact which would im-pair the validity or worth of the receipt; and (d) That he has a right to transfer the title to the goods and that the goods are merchantable or fi t for a particu-lar purpose, whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby.

Warranties on sale of receipt. This section treats of the warranties or liabilities of a person negotiating or transferring a receipt. They are similar to that of

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a person negotiating an instrument by delivery or by a qualifi ed indorsement under the Negotiable Instruments Law. (see Sec. 65, NIL.) The liability is limited only to a violation of the four warranties set forth in Section 44. (see Sec. 45.) Thus, a person negotiating or transferring a receipt could be held liable as when, for example, the receipt was a forgery, or he had stolen it, or he had knowledge that the receipt was invalid for want of consideration, or that the goods have been damaged. One who assigns for value a claim secured by a receipt of title is also liable for the violation of any of the four warranties enumerated unless a contrary intention appears. (see Art. 1516 of the Civil Code which is substantially the same as Sec. 44.) It is the duty of every indorsee to know that all previous indorsements are genuine, otherwise, he will not acquire a valid title to the instrument. (Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Banking Corporation, 43 Phil. 678 [1922].) Under the Negotiable Instruments Law (see Secs. 65, 66.), the last indorser warrants that all previous indorsements are genuine.

SEC. 45. Indorser not a guarantor. — The indorsement of a receipt shall not make the indorser liable for any fail-ure on the part of the warehouseman or previous indors-ers of the receipt to fulfi ll their respective obligations.

Liability of person negotiating or transferring receipt. The indorsement of negotiable instrument has a double effect. It is at the same time a conveyance of the instrument and a contract of the indorser with the indorsee that on certain conditions the indorser will pay the instrument if the party primarily liable fails to do so. The indorsement of a warehouse receipt amounts merely to a conveyance by the indorser, not a contract of guaranty. (see 2 Williston on Sales, pp. 627-628.) Accordingly, an indorser of a receipt shall not be liable to the holder if, for example, the warehouseman fails to deliver the goods because they were lost due to his fault or negligence. (see Art. 1517 of the Civil Code which is substantially the same as Sec. 45.)



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SEC. 46. No warranty implied from accepting payment of a debt. — A mortgagee, pledgee or holder for security of receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of such receipt or the quantity or quality of the goods therein described.

Liability of mortgagee, pledgee or holder for security. Under this section, a holder for security of a receipt who in good faith accepts payment of the debt from a person does not thereby warrant the genuineness of the receipt nor the quality or quantity of the goods therein described. Thus, if C receives from D a warehouse receipt as security for D’s debt and C delivers it to T who pays him for D, C, assuming he acts in good faith, is not liable to T in case T cannot obtain possession of the goods because they do not exist or because the receipt is not genuine.

SEC. 47. When negotiation not impaired by fraud, mis-take or duress. — The validity of the negotiation of a re-ceipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the ne-gotiation, or by the fact that the owner of the receipt was induced by fraud, mistake, or duress to entrust the pos-session or custody of the receipt to such person, if the person to whom the receipt was negotiated, or a person to whom the receipt was subsequently negotiated paid value therefor, without notice of the breach of duty, or fraud, mis-take or duress.

Validity of negotiation as against real owner. (1) Receipt acquired from owner’s agent. — As against the real owner, a bona fi de purchaser of a negotiable warehouse receipt acquires title to the goods where he purchases from the owner’s agent, within the actual or apparent scope of his authority; but

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not where the transfer is made by one other than the owner without any ostensible authority to issue or negotiate the receipt. (2) Lost or stolen receipt. — Where the receipt has been lost or stolen, a bona fi de transferee thereof from the thief or fi nder acquires no title as against the real owner of the receipt, unless the latter, by indorsing the receipt in blank and leaving it with his agent, put it in the power of such agent to steal and negotiate it. (see 93 C.J.S. 435.) It will be observed that one who takes by trespass or a fi nder is not included within the description of those who may negotiate. (Siy Cong Bieng & Co. vs. Hongkong & Shanghai Bank, 56 Phil. 598 [1932].)

ILLUSTRATIVE CASE: Buyer, without having paid for goods purchased, pledged to a bank the negotiable quedans given by seller who brought action against bank to recover the quedans or their value. Facts: S sold hemp (abaca) to R for a certain price. Negotiable quedans together with the covering invoice were sent by S to R, without the latter having paid for the hemp. Subsequently, R pledged the quedans to B (bank) to secure the payment of R’s pre-existing debt. R died on the evening of the day the quedans were delivered to B. S brought action against B to recover the quedans or their value. Issue: When the quedans were negotiated, did B acquire valid title to them? Held: Yes. The quedans in question were negotiable in form and pledged by R to B to secure the payment of the pre-existing debt of R. They were issued in the name of R and were duly indorsed by him in blank. It follows that on the delivery of the quedans to the bank they were no longer the property of R (indorser) unless he liquidated his debt with B. It is the intention of the law to facilitate the use of warehouse receipts as documents of title. The clear import of Sections 40, 41, and 47 is that if the owner of the goods permits another to have the possession or custody of negotiable warehouse receipts running to the order of the latter or to bearer, it is a representation of title upon



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which bona fi de purchasers for value are entitled to rely despite breaches of trust or violation of agreement on the part of the apparent owner. (Ibid.)

SEC. 48. Subsequent negotiation. — Where a person having sold, mortgaged, or pledged goods which are in a warehouse and for which a negotiable receipt has been issued, or having sold, mortgaged, or pledged the negotia-ble receipt representing such goods, continues in posses-sion of the negotiable receipt, the subsequent negotiation thereof by the person under any sale, or other disposition thereof to any person receiving the same in good faith, for value and without notice of the previous sale, mortgage or pledge, shall have the same effect as if the fi rst purchaser of the goods or receipt had expressly authorized the sub-sequent negotiation.

Effect of subsequent negotiation by seller, etc. This section imposes a duty upon the purchaser, mortgagee, or pledgee of goods for which a negotiable receipt has been issued, or of the negotiable receipt itself, to require the negotiation of the receipt to him otherwise, his failure will have the same effect as an express authorization on his part to the seller, mortgagor or pledgor in possession of such receipt to make any subsequent negotiation. The subsequent purchaser, however, must have taken the receipt in good faith and for value in order to acquire a better right.

SEC. 49. Negotiation defeats vendor’s lien. — Where a negotiable receipt has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notifi cation to the warehouseman who issued such receipt of the seller’s claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justifi ed in delivering the goods to an unpaid seller unless the receipt is fi rst surrendered for cancellation.

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Indorsee’s right superior to vendor’s lien. Under this section, an innocent holder of a negotiable warehouse receipt has a better right to the goods for which the receipt is given than the vendor who has a vendor’s lien upon such goods. (see Sec. 47.) So, the warehouseman is not obliged to deliver or justifi ed in delivering the goods to an unpaid seller unless the receipt is fi rst surrendered for cancellation. (Secs. 49, 54.) The term “purchaser,” as used in Section 49, includes mortgagee and pledgee. (see Sec. 58[a]; Roman vs. Asia Banking Corporation, 46 Phil. 705 [1924].)

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Chapter 4CRIMINAL OFFENSES

SEC. 50. Issue of receipt for goods not received. — A warehouseman, or any offi cer, agent, or servant of a ware-houseman, who issues or aids in issuing a receipt know-ing that the goods for which such receipt issued have not been actually received by such warehouseman, or are not under his actual control at the time of issuing such receipt, shall be guilty of a crime, and upon conviction shall be punished for each offense by imprisonment not exceeding fi ve years, or by a fi ne not exceeding ten thousand pesos, or by both.

Possession of goods by warehouseman. Under Section 50, it is made an offense to issue a receipt unless the property is actually in storage. In accordance with the defi nition of warehouseman, generally, warehouse receipts are issued for the goods or merchandise of others stored with the warehouseman. (see Sec. 58[a].) But it is essential to the validity of a warehouse receipt that the goods or merchandise, for which the receipt is issued, shall be in the warehouseman’s possession, that is, stored in his warehouse, under his care and control at the time the receipt is issued, and a receipt is a nullity as to goods described therein which are not in existence, or not in the warehouse, when the receipt is given. (93 C.J.S. 421-422.)

SEC. 51. Issue of receipt containing false statement. — A warehouseman, or any offi cer, agent or servant of a warehouseman, who fraudulently issues or aids in fraudu-lently issuing a receipt for goods knowing that it contains

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any false statement, shall be guilty of a crime, and upon conviction, shall be punished for each offense by impris-onment not exceeding one year, or by a fi ne not exceeding two thousand pesos, or by both.

SEC. 52. Issue of duplicate receipt not so marked. — A warehouseman or any offi cer, agent, or servant of a ware-houseman, who issues or aids in issuing a duplicate or additional negotiable receipt for goods knowing that a for-mer negotiable receipt for the same goods or any part of them is outstanding and uncancelled, without plainly plac-ing upon the face thereof the word “Duplicate” except in the case of a lost or destroyed receipt after proceedings as provided for in Section fourteen, shall be guilty of a crime, and upon conviction shall be punished for each offense by imprisonment not exceeding fi ve years, or by a fi ne not exceeding ten thousand pesos, or by both.

SEC. 53. Issue for warehouseman’s goods of receipt which does not state that fact. — Where they are depos-ited with or held by a warehouseman goods of which he is owner, either solely or jointly or in common with oth-ers, such warehouseman, or any of his offi cers, agents, or servants who, knowing this ownership, issues or aids in issuing a negotiable receipt for such goods does not state such ownership, shall be guilty of a crime, and upon conviction, shall be punished for each offense by impris-onment not exceeding one year, or by a fi ne not exceeding two thousand pesos, or by both.

SEC. 54. Delivery of goods without obtaining negotia-ble receipt. — A warehouseman, or any offi cer, agent, or servant of a warehouseman, who delivers goods out of the possession of such warehouseman, knowing that a nego-tiable receipt the negotiation of which would transfer the right to the possession of such goods is outstanding and uncancelled, without obtaining the possession of such re-ceipt at or before the time of such delivery, shall, except in the cases provided for in Sections fourteen and thirty-six, be found guilty of a crime, and upon conviction shall be punished for each offense by imprisonment not exceeding one year, or by a fi ne not exceeding two thousand pesos, or by both.

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SEC. 55. Negotiation of receipt for mortgaged goods. — Any person who deposits goods to which he has no title, or upon which there is a lien or mortgage, and who takes, for such goods a negotiable receipt which he after-wards negotiates for value with intent to deceive and with-out disclosing his want of title or the existence of the lien or mortgage, shall be guilty of a crime, and upon convic-tion, shall be punished for each offense by imprisonment not exceeding one year, or by a fi ne not exceeding two thousand pesos, or by both.

Offenses criminally punishable by the Act. Sections 50, 51, 52, 53, 54, and 55 enumerate offenses which are criminally punishable under the Act.

Ingredients of offense punished by Section 54. The offense punished under Section 54 consists of the following ingredients: (1) There is delivery of goods out of the possession of the warehouseman, by the warehouseman himself or by any offi cer, agent, or servant of the warehouseman; (2) The person who causes the delivery has knowledge that a negotiable receipt for the goods, which would transfer the right to the possession thereof, is outstanding and uncancelled; and (3) The person causing the delivery does so without obtaining possession of the receipt at or before the time of delivery. (People vs. Dichupa, [C.A.] 71 O.G. No. 8, p. 974, Feb. 24, 1975.)

Nature of criminal responsibility under Section 54. (1) Violation by the warehouseman himself. — Under Section 54, may a warehouseman be held criminally liable, irrespective of whether he is a warehouseman in name only, and irrespective of whether the duties of a warehouseman are actually performed by somebody else? No, if the accused had nothing to do with the withdrawal of goods in question.

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(2) Violation by some other person. — A reading of Section 54 shows that persons other than the warehouseman may be held liable for violations thereof. The disjunctive use of the word “or” in the phrase “A warehouseman or any other offi cer, agent, or servant of a warehouseman,” imparts an alternative sense. The criminal responsibility punished by the law is individual, not attributive, so that the warehouseman should not be punished even for violations which some other offi cer, agent, or servant of the warehouseman may have committed. It is fundamental in criminal law that unless conspiracy be shown, no one should be made to suffer for offenses committed by another. (People vs. Dichupa, supra.) (3) Possibility that right to goods sold has been transferred to a third person. — In order that a warehouseman may be punished under Section 54, for having delivered goods from his warehouse to a person other than the one entitled thereto according to the corresponding securities, it is not necessary that the right of possession to such stored goods has been transferred to a third person. It is suffi cient that such right could have been transferred to said third person in the course of his transactions with the depositor in whose name the receipt of the stored goods was issued. (People vs. Goco, 35 O.G. 2618, cited in T.C. Martin, Commentaries and Jurisprudence on the Phil. Commercial Laws [1961], pp. 467-468.)

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Chapter 5INTERPRETATION

SEC. 56. Case not provided for in Act. — Any case not provided for in this Act shall be governed by the provi-sions of existing legislation, or in default thereof, by the rule of the law merchant.

History and meaning of law merchant. The law merchant (or the custom of merchants) from which developed the rules of bills and notes, sales of goods, partnerships, guaranty, insurance, and agency, originated in the unwritten customs of merchants in different commercial countries. It consisted of usages of trade in different departments of commerce proved in court and ratifi ed by legal decisions, upon the assumption that persons entering upon transactions in different departments of trade dealt with each other on the footing of any custom or usage generally prevailing in those departments, so that the usage, is “engrafted upon or incorporated with’’ the law and accordingly binding on the courts. (see Babb & Martin, op. cit., pp. 5, 13-14.) (1) From the thirteenth century, maritime and commercial cases were determined in accordance with the customs of merchants and by merchant courts. It was not until the eighteenth century that merchants were encouraged, if not compelled, to try their causes in the common law courts. (Ibid., 14.) The usage adopted by the courts is the origin of the so-called “law merchant” as to negotiable instruments. (10 C.J.S. 406.) (2) The law merchant in the United States followed closely that of England. With the tremendous extension of commerce

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and its instrumentalities during the last quarter of the nineteenth century, the imperative need of uniformity in the law of negotiable instruments found expression in the Negotiable Instruments Law of 1897, which has been adopted by every state in the Union, the last being Georgia in 1924. (Babb & Martin, op. cit., pp. 14-15.)

SEC. 57. Name of Act. — This Act may be cited as the Warehouse Receipts Act. SEC. 58. Defi nitions. — (a) In this Act, unless the con-tent or subject matter otherwise requires: “Action” includes counterclaim, set-off, and suits in equity as provided by law in these Islands. “Delivery” means voluntary transfer of possession from one person to another. “Fungible goods” means goods of which any unit is, from its nature or by mercantile custom, treated as the equivalent of any other unit. “Goods” means chattels or merchandise in storage, or which has been or is about to be stored. “Holder” of a receipt means a person who has both actual possession of such receipts and a right of property therein. “Order” means an order by indorsement on the receipt. “Owner” does not include mortgagee. “Person” includes a corporation or partnership or two or more persons having a joint or common interest. To “purchase” includes to take as mortgage or as pledge. “Purchaser” includes mortgagee and pledgee. “Receipt” means a warehouse receipt. “Value” is any consideration suffi cient to support simple contract. An antecedent or pre-existing obligation, whether for money or not, constitutes value where a receipt is taken either in satisfaction thereof or as security thereof.

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“Warehouseman” means a person lawfully engaged in the business of storing goods for profi t. (b) A thing is done “in good faith” within the meaning of this Act when it is in fact done honestly, whether it be done negligently or not. SEC. 59. Application of Act. — The provisions of this Act do not apply to receipts made and delivered prior to the taking effect hereof. SEC. 60. Repeals. — All acts and laws and parts there-of inconsistent with this Act are hereby repealed. SEC. 61. Time when Act takes effect. — This Act shall take effect ninety days after its publication in the Offi cial Gazette of the Philippines shall have been completed. ENACTED: February 5, 1912.

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VGUARANTY AND SURETYSHIP*

(Arts. 2047-2084.)

Chapter 1NATURE AND EXTENT OF GUARANTY

ART. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfi ll the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)

Defi nition of guaranty. Guaranty, properly so-called, is defi ned in paragraph 1 of the above article. It is a contract between the guarantor and creditor. In its broad sense, guaranty includes pledge and mortgage because the purpose of guaranty may be accomplished not only by securing the fulfi llment of an obligation contracted by the principal debtor through the personal guaranty of a third person but also by furnishing to the creditor for his security, property with authority to collect the debt from the proceeds of the same in case of default. (see 11 Manresa 151-152.)

*Title XV, Book IV, Civil Code.

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Governing law. With the enactment of the new Civil Code, the classifi cation of guaranty into commercial and civil (or non-commercial) has been abolished. (see Art. 2270[2].) Guaranty is now primarily regulated by Title XV of Book IV (Arts. 2047-2084.) of the new Civil Code, subject to its transitional provisions. (Arts. 2252-2259.)

Characteristics of the contract. The following are its characteristics: (1) It is accessory because it is dependent for its existence upon the principal obligation guaranteed by it; (2) It is subsidiary and conditional because it takes effect only when the principal debtor fails in his obligation subject to limitation (see Arts. 2053, 2058, 2063, 2065.); (3) It is unilateral because —

(a) it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa although after its fulfi llment, the principal debtor becomes liable to indemnify the guarantor1 (Art. 2066.) but this is merely an incident of the contract; and also because (b) it may be entered into even without the intervention of the principal debtor (Art. 2050.); and

(4) It is a contract which requires that the guarantor must be a person distinct from the debtor because a person cannot be the personal guarantor of himself. A person cannot be both the primary debtor and the guarantor of his own debt as this is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the debtor defaults in his obligation. (Velasquez vs. Solidbank Corporation, 550 SCRA 119 [2008].) However, in real guaranty, like pledge (Art. 2093.) and mortgage (Art. 2124.), a person may guarantee his own obligation with his personal or real properties. (see 12 Manresa 155-156.)

1The contract between the guarantor and the debtor is called contract of indemnity.

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Classifi cation of guaranty. (1) Guaranty in the broad sense:

(a) Personal — This refers to guaranty properly so-called or guaranty in the strict sense. (Art. 2047.) Here, the guarantee is the credit given by the person who guarantees the fulfi llment of the principal obligation; or (b) Real — Here, the guaranty is property, movable or immovable. If immovable, the guaranty is in the form of real mortgage (Art. 2124.) or antichresis (Art. 2132.) and if movable, in the form of pledge (Art. 2093.) or chattel mortgage. (Art. 2140.)

(2) As to its origin: (a) Conventional. — One constituted by agreement of the parties (Art. 2051, par. 1.); (b) Legal. — One imposed by virtue of a provision of law (Ibid.); or (c) Judicial. — One required by a court to guarantee the eventual right of one of the parties in a case. (Ibid.)

(3) As to consideration: (a) Gratuitous. — One where the guarantor does not receive any price or remuneration for acting as such (Art. 2048.); or (b) Onerous. — One where the guarantor receives valuable consideration for his guaranty. (Ibid.)

(4) As to the person guaranteed: (a) Single. — One constituted solely to guarantee or secure performance by the debtor of the principal obligation (Art. 2051, par. 2.); or (b) Double or sub-guaranty. — One constituted to secure the fulfi llment by the guarantor of a prior guaranty. (Ibid.)

(5) As to its scope and extent: (a) Defi nite. — One where the guaranty is limited to the principal obligation only, or to a specifi c portion thereof (Art. 2055, par. 2.); or

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(b) Indefi nite or simple. — One where the guaranty includes not only the principal obligation but also all its accessories (e.g., interests) including judicial costs. (Ibid.) Note: Guaranty may also be continuing or not. (see Art. 2053.)

Law applicable to contract of suretyship. Suretyship may be defi ned as a relation which exists where one person (principal or obligor) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or other duty to a third person (obligee), who is entitled to but one performance, and as between the two who are bound, the one rather than the other should perform. (see Agro Conglomerates, Inc. vs. Court of Appeals, 348 SCRA 450 [2000].) Specifi cally, suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable to a third person for the debt, default, or miscarriage of another known as the principal. (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493 [1990]; Visayan Surety & Insurance Corp. vs. Court of Appeals, 364 SCRA 631 [2001].) (1) The second paragraph of Article 2047 states the law applicable to the contract of suretyship. It covers Articles 1207 to 1222, Title I (Obligations), Chapter 3 (Different Kinds of Obligations), Section 4 (Joint and Solidary Obligations), Book IV (Obligations and Contracts) of the Civil Code. If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety. (Phil. National Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956].) (2) In a solidary obligation, a solidary debtor is himself a principal debtor. Hence, a solidary debtor cannot be considered a guarantor of his co-debtor. Whenever applicable, the provisions on guaranty (Arts. 2047-2048.) also apply to suretyship. (see Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co., 101 Phil. 494 [1957].) It has been held that the provisions of the Civil Code on guaranty, other than the benefi t of excussion, are applicable and available to the surety. (Autocorp. Group vs. Intra Strata Assurance Corp., 556 SCRA 250 [2008].)

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Common law guaranty and suretyship. Under the old Civil Code, it was held by the Supreme Court that the civil law suretyship is nearly synonymous with the common law guaranty, and the civil law relationship existing between co-debtors liable in solidum is similar to the common law suretyship.2 (Castellvi de Higgins and Higgins vs. Sellner, 41 Phil. 142 [1921].)

Where party binds himself solidarily with principal debtor. Since guaranty consists in an undertaking to secure the fulfi llment of an obligation contracted by another in case the latter should fail to do so, it is quite possible for a guarantor to bind himself solidarily with the principal debtor without affecting the nature of the contract. It all depends upon the terms of the contract or the intention of the third person. Thus, if his intention is not to convert himself into a principal debtor but merely to constitute himself as a guarantor although binding himself solidarily with him, action may be brought against him outright by reason of the said solidarity but he retains his character as a guarantor and all the rights inherent in a guarantor by reason of payment by him. This case of guaranty under which guarantor binds himself solidarily must not be confused with suretyship as contemplated

2Nevertheless, a distinction must be made between a surety as a co-debtor under a suretyship agreement and a joint and solidary co-debtor. As elucidated in Escaño vs. Ortigas (526 SCRA 26 [2007]): [A] suretyship requires a separate debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact “become subrogated to all the rights and remedies of the creditor.” (see Diamond Builders Conglomeration vs. Country Bankers Insurance Corporation, 540 SCRA 194 [2007].)



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in the second paragraph of Article 2047.3 (see 11 Manresa 175-177; Stevenson & Co., Ltd. vs. Climaco, [C.A.] 36 O.G. 1571.) It has been held, however, that where a party signs a promissory note as a co-maker and binds herself to be jointly and severally or solidarily liable “with the principal maker of the note in case, the latter defaults in the payment of the loan, such undertaking of the said party is deemed to be that of a surety as an insurer of the debt, not of a guarantor who warrants the solvency of the debtor. (Palmares vs. Court of Appeals, 288 SCRA 422 [1998].)

Nature of surety’s undertaking. (1) Liability is contractual and accessory but direct. — Surety-ship is a contractual relation. The surety’s obligation is not an original and direct one for the performance of his act, but merely accessory or collateral to the obligation contracted by the princi-pal. Nevertheless, his liability to the creditor or promisee of the principal is said to be direct, immediate, primary and absolute. In other words, he is directly, primarily, and equally bound with the principal as original promisor although he possesses no direct or personal interest over the latter’s obligations nor does he receive any benefi t therefrom (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493 [1990]; Phil. National Bank vs. Pineda, 197 SCRA 1 [1991]; see Phil. National Bank vs. Court of Appeals, 198 SCRA 767 [1991]; Molino vs. Security Diners International Corporation, 363 SCRA 358 [2001]; Tiu Hiong Guan vs. Metropolitan Bank & Trust Co., 498 SCRA 246 [2006].) and regardless of whether or not the principal debtor is fi nancially capable to fulfi ll his obligations. (Suico Raltan & Buri Interiors, Inc. vs. Court of Appeals, 490 SCRA 560 [2006].) In law, a surety is considered as being the same party as the debtor and their liabilities are interwoven as to be inseparable. (Security Pacifi c Assurance Corporation vs. Tria-Infante, 468 SCRA 527 [2005]; Garon vs. Project Movers Realty & Dev. Corp., 520 SCRA 317 [2007].)

3It is a common banking practice to require the “joint and solidary signature’’ (JSS) of a major stockholder of a corporation or a corporate offi cer, as an additional security for loans granted to corporations. (Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA 781 [2000]; see Tañedo vs. Allied Banking Corporations, 374 SCRA 100 [2002].)

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In a suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal. A surety is usually bound with the principal by the same instrument, executed at the same time and upon the same consideration. (Palmares vs. Court of Appeals, 288 SCRA 422 [1998].) It is not for the obligee to see to it that the principal debtor pays the debt or fulfi ll the contract, but for the surety to see to it that the principal debtor pays or performs. (Paramount Insurance Corp. vs. Court of Appeals, 310 SCRA 377 [1999].) (2) Liability is limited by terms of contract. — It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. A contract of surety is not presumed; it cannot extend to more than what is stipulated. The extent of the surety’s liability is determined only by the clause of the contract of suretyship as well as the conditions stated in the bond. It cannot be extended by implication beyond the terms of the contract. (Phil. Commercial and Industrial Bank vs. Court of Appeals, 159 SCRA 24 [1988]; Umali vs. Court of Appeals, 189 SCRA 529 [1990]; Phil. National Bank vs. Court of Appeals, 198 SCRA 767 [1991]; Central Surety and Insurance Company, Inc. vs. Ubay, 135 SCRA 58 [1985]; Trade & Investment Dev. Corp. of the Phils. vs. Roblett Industrial Construction Corp., 474 SCRA 510 [2005].) A surety, however, is not released by a change in the contract which does not have the effect of making its obligation more onerous. (Intra Strata Assurance Corp. vs. Republic, 557 SCRA 363 [2008].) (3) Liability arises only if principal debtor is held liable. — A surety contract is made principally for the benefi t of the creditor-obligee and this is ensured by the solidary nature of the surety undertaking. (Intra Strata Assurance Corp. vs. Republic, supra.) The surety is “considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter,” or the liabilities of the two “are so interwoven and dependent as to be inseparable.” In other words, if the principal debtor and the surety are held liable, their liability to pay the creditor would be solidary but



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the nature of the surety’s undertaking is such that it does not incur liability unless and until the principal debtor is held liable. (Gov’t. of the Phils. vs. Tizon, 20 SCRA 1187 [1967]; Phil. National Bank vs. Pineda, supra; Empire Insurance Company vs. National Labor Relations Commission, 294 SCRA 263 [1998].)

(a) In the absence of collusion, the surety is bound by a judgment against the principal even though he was not a party to the proceedings. The nature of its undertaking makes it privy to all proceedings against its principal. (Finman General Assurance Corp. vs. Salik, 188 SCRA 740 [1990].) A surety not given notice when the claim for damages against the principal in the replevin bond was heard, is, however, entitled, as a matter of procedural due process, to be heard when the judgment for damages against, the principal is sought to be enforced against the surety’s replevin bond. (Malayan Insurance Co., Inc. vs. Salao, 90 SCRA 252 [1979]; Yu vs. Ngo Yet Te, 514 SCRA 423 [2007].) (b) The creditor may sue, separately or together, the principal debtor and the surety. (Nassco vs. Torrento, 20 SCRA 427 [1967].) Where there are several sureties, the obligee may proceed against any one of them. (Art. 1216.) A creditor’s right to proceed against the surely exists independently of his right to proceed against the principal. Thus, a surety of a distressed corporation can be sued separately to enforce his liability as such, notwithstanding an order by the Securities and Exchange Commission declaring the corporation under a state of suspension of payment. (Gateway Electronics Corp. vs. Asianbank Corp., 574 SCRA 698 [2008].) (c) Except where required by the provisions of the contract of suretyship, a demand or notice of default is not required to fi x the surety’s liability. (Umali vs. Court of Appeals, supra.) (d) An accommodation party, i.e., a person who has signed the instrument as maker, drawer, acceptor, or indors-er, without receiving value therefor, and for the purpose of lending his name to some other persons” (Sec. 29, Negotiable Instruments Law [Act No. 2031].), is liable on the instrument

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to a holder for value, notwithstanding that such holder at the time of taking the instrument knew such person to be only an accommodation party (Ibid.), although he has the right, after paying the holder, to obtain reimbursement from the party accommodated, since the relation between them is, in effect, that of principal and surety, the accommodation party being the surety. (People vs. Maniego, 148 SCRA 30 [1987].) (e) A surety bond is void where there is no principal debtor. While a surety binds himself to pay jointly and severally, such an undertaking presupposes that the obligation is to be enforceable against someone else besides the surety, and the latter can always claim that it was never its/his intention to be the sole person obligated thereby. (Manila Railroad Co., Inc. vs. Alvendia, 17 SCRA 154 [1986].) It has been held that the supersedeas bonds in an ejectment case not signed by the principal obligors, but only by the sureties were void as they “do not evidence any principal obligation and are devoid of consideration as to the sureties who have no privity with the judgment creditor nor any liability to him.’’4 (Singson vs. Babida, 79 SCRA 111 [1977].)

(4) Surety is not entitled to exhaustion. — A surety is not entitled to the exhaustion of the properties of the principal debtor. (see Art. 2059[2].) The reason is that a surety assumes a solidary liability for the fulfi llment of the principal obligation (Towers Assurance Corp. vs. Ororama Supermart, 80 SCRA 262 [1977].) as an original promissor and debtor from the beginning. But when demanded by the requirements of justice, the principal obligor rather than the surety may be required to pay the insured obligation such as where the former has the necessary amount it got under the bond with which to comply with the terms thereof.

4A surety bond is primarily a contract between the surety and the principal obligee, and the signature of the surety is not only a representation by him of the existence of the principal obligor but more importantly, an indubitable manifestation of his consent to be liable in case of default by the principal obligor. In the absence of a law requiring the signature of the principal obligor to a particular surety bond, the lack of such signature should not affect the validity of the bond where the existence of the principal obligor is not in issue.



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(Association de Agricultores de Talisay-Silay, Inc. vs. Talisay-Silay Milling Co., Inc., 88 SCRA 294 [1979].) (5) Undertaking is to creditor, not to debtor. — Under a contract of suretyship, the surety’s undertaking is that the principal shall fulfi ll his obligation and that the surety shall be relieved of liability when the obligation secured is performed. The principal cannot claim that there has been a breach of the surety’s obligation to him under the suretyship contract when the surety fails or refuses to pay the debt for the principal’s account. And such failure or refusal does not have the effect of relieving the principal of his obligation to pay the premium on the bond furnished by the surety in consideration of the premium, as long as the liability of the surety to the obligee subsists. In a contract of suretyship, unless otherwise expressly pro-vided, the surety makes no covenant or agreement with the prin-cipal that it will fulfi ll the obligation guaranteed for the benefi t of the principal. Such promise is not implied by law either; and this is true even where under the contract the creditor is given the right to sue the principal, or the latter and the surety at the same time. (Arranz vs. Manila Fidelity & Surety Co., Inc., 101 Phil. 272 [1957].) (6) Surety is not entitled to notice of principal’s default. — Demand on the surety is not necessary before bringing suit against them, since the commencement of the suit is a suffi cient demand. A surety is not even entitled, as a matter of right, to be given notice of the principal’s default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notifi ed him in the absence of a special agreement to that effect in the contract of suretyship. (Palmares vs. Court of Appeals, supra.) (7) Prior demand by the creditor upon principal not required. — A creditor’s right to proceed against the surety alone exists

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independently of his right to proceed against the principal where both principal and surety are equally bound. (see Art. 1216.) As soon as the principal is in default, the surety likewise is in default. The proper remedy of the surety is to pay the debt and pursue the principal for reimbursement. (Ibid.) (8) Surety is not exonerated by neglect of creditor to sue principal. — Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor’s rights vis-á-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal’s request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor’s mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. The raison de’étre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfi ed with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. (Ibid.)

Guaranty distinguished from suretyship. A surety and a guarantor are alike in that each promises to answer for the debt, default or miscarriage of another. In our jurisdiction. there are distinctions between a surety and a guarantor, as follows: (1) A surety and a guarantor are unlike in that the surety as-sumes liability as a regular party to the undertaking, while the



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liability of the guarantor depends upon an independent agree-ment to pay the obligation if the primary debtor fails to do so;5

(2) A surety is charged as an original promisor, while the engagement of the guarantor is a collateral undertaking; (3) The guarantor is secondarily or subsidiarily liable, i.e., he contracts to pay if, by the use of due diligence, the debt cannot be paid by the principal, while a surety is primarily liable, i.e., he undertakes directly for the payment without reference to the solvency of the principal (regardless of whether or not the principal is fi nancially capable to fulfi ll his obligation), and is so responsible at once if the latter makes default, without any demand by the creditor upon the principal whatsoever or any notice of default (see Castellvi de Higgins & Higgins vs. Sellner, 41 Phil. 142 [1921]; U.S. vs. Varadero dela Quinta, 40 Phil. 48 [1919]; see Palmares vs. Court of Appeals, 258 SCRA 422 [1998].); (4) A surety is ordinarily, held to know every default of his principal, while a guarantor is not bound to take notice of the non-performance of his principal; and (5) Usually, a surety will not be discharged either by the mere indulgence of the creditor of the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby, while a guarantor is often discharged by the mere indulgence of the creditor of the principal, and is usually not liable unless notifi ed of the default of the principal. (Export and Foreign Loan Guarantee Corp. vs. V.P. Eusebio Construction, Inc., 434 SCRA 202 [2004].)

5A surety is usually bound with his principal by the same instrument executed at the same time and on the same consideration. On the other hand, the contract of guaranty is the guarantor’s own undertaking often supported by a consideration separate from that supporting the contract of the principal; the original of his principal is not his contract. (Phil. Export and Foreign Guarantee Loan Corp. vs. V.P. Eusebio Construction, Inc., infra.) Although the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. (Philippine Bank of Communications vs. Lim, 455 SCRA 714 [2005].)

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Guarantor not insurer of debt guaranteed. It would then follow that while a surety undertakes to pay if the principal does not pay, without regard to his ability to do so, the guarantor only binds himself to pay if the principal cannot or unable to pay. One is the insurer of the debt itself, the other, an insurer of the solvency of the debtor. (Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922]; Ong vs. Philippine Commercial International Bank, 448 SCRA 705 [2005].) The essence of the obligation of the surety is to pay the creditor without qualifi cation if the principal debtor does not pay. (Lirag Textile Mills, Inc. vs. Social Security System, 153 SCRA 338 [1987].) A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. So the responsibility or obligation assumed by the surety is greater or more onerous than that of a guarantor. (see Manila Surety & Fidelity Co. vs. Batu Construction & Co., 101 Phil. 494 [1957]; Palmares vs. Court of Appeals, supra.)

EXAMPLE: D is indebted to C in the amount of P10,000.00 with G as guarantor. On the maturity of the obligation, D fails to pay. C cannot compel G to pay unless the former “has exhausted all the property of the debtor, and has resorted to all the legal remedies” against D (Art. 2058.) because the obligation of G is only secondary. If, however, G is a surety instead of a guarantor, C can pro-ceed against G immediately upon nonpayment by D without the exhaustion of the property of D because as surety, he is pri-marily liable to C. It is not a defense by G that he has not been informed by C of the demand for payment made on D.

ILLUSTRATIVE CASE: If promissory note executed by debtor is not paid, promisor undertakes to pay the same with interest after notice and surrender of security held by creditor. C brought action based on a letter written by “G” of the following tenor:



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“Dear Sir. I hereby obligate and bind myself, my heirs, successors, and assigns that if the promissory note executed by D in your favor and due six months after the date for P10,000.00 is not fully paid at maturity with interest, I will, within 15 days after notice of such default, pay you in cash the sum of P10,000.00 and interest upon your surrendering to me the 8,000 shares of stock of D held by you as security for the payment of said note.” (Sgd.) “G” Issue: What was the status of G in the transaction — a surety or a guarantor? Held: The obligation assumed by G was that of a guarantor. G was not bound with D by the same instrument executed at the time and the same consideration, but his responsibility was secondary, one founded on an independent collateral agreement. Neither was he jointly and severally liable with D. (Castellvi de Higgins and Higgins vs. Sellner, 41 Phil. 142 [1921].)

Terminology used by parties not controlling. The use of the term “guarantee” or “guarantor’’ however, is not conclusive that the contract is one of guaranty. The word “guarantee” is frequently employed in business transactions to describe not the securing of the debt but an intention to be bound by a primary or independent obligation. (38 Am. Jur. 2d 1000-1002.) Thus, if the promisor says “I guarantee payment,” “I will see you paid” or “I will pay if he does not pay,” or uses equivalent words, the promise standing alone is collateral or subsidiary, yet under all circumstances of the case, it may be adjudged original or an independent one (Reiss vs. Memije, 15 Phil. 350 [1910].), as where a corporation is referred to as guarantor but at the same time the agreement specifi cally states that it is “jointly and severally liable’’ with the principal obligor. (International Finance Corp. vs. Imperial Textile Mills, Inc., 475 SCRA 149 [2005].) But if from the language used and the circumstances, the intention to be liable as a surety cannot be inferred, the promisor must be

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deemed to have bound himself only as guarantor under the rule of reasonable construction applicable to all contracts. It is axiomatic that the written word “guarantor’’ prevails over the typewritten word “witness.’’ In case of confl ict, the written prevails over the printed word. (De Los Santos vs. Vibar, 558 SCRA 437 [2008].)

ILLUSTRATIVE CASES: 1. Lumber was sold to a building contractor who had no commercial standing on the sole credit of a person who told seller he would “guarantee” payment. Facts: S entered into a contract with D (building contractor) for the repair of a house. D undertook to furnish the necessary materials. Having no money and no credit, C refused to sell lumber to D without payment in advance. S accompanied D to C’s lumber yard and after satisfying C as to his (S’s) fi nancial responsibility, told C that he would “guarantee” payment for the lumber. The circumstances disclosed that the lumber was extended by C solely and exclusively to S under a verbal agreement with him. S admitted on the stand that D had no commercial credit or standing in the community, and that C, after investigation, absolutely refused to extend him any credit whatever upon any conditions and that S was well aware of the fact. C brought action against S for the purchase price of the lumber delivered to D. Issue: Did S assume liability as a guarantor or as an original promisor? Held: Upon the facts, it is evident that S used the word “guaranteed” not in its technical sense but rather that after satisfying C as to his own fi nancial responsibility, he obligated himself to pay for the lumber delivered to D for use in his house. Hence, S is primarily liable for the price of the lumber. If goods are sold upon the sole credit and responsibility of the party who makes the promise then, even though they be delivered to a third person, there is no liability of the third person to which that of the party promising can be collateral and consequently, such a promise to pay does not require a writing or memorandum to be enforceable by action. (Reiss vs. Memije, supra.)



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Note: Under the Statute of Frauds (infra.), the promise of a surety or original promisor may be proved by oral evidence. ———— ———— ———— 2. “We hereby guarantee compliance with the terms and conditions of the contract.” Facts: By a written agreement, D undertook to construct a building for C. One of the conditions was that D should obtain the “guarantee” of FSC. The following indorsement appears upon the contract: “For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.

FSC. (Sgd.) “Y, Vice President.”

Issue: Was the undertaking assumed by FSC that of guarantor or surety? Held: “It is true that notwithstanding the use of the words “guarantee” or “guaranty,” circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; on the contrary it appears affi rmatively that the contract is the guarantor’s separate undertaking in which the principal does not join, that it rests on a separate consideration moving from the principal, and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.” (Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922].) ———— ———— ———— 3. President of a corporation bound himself “as guarantor” for the loan contracted by him for corporation. Facts: G executed an “Agreement of Loan” of the following tenor: “In my capacity as the President of X Corporation as con-trolling stockholder and at the same time as guarantor for the same, I do by these presents contract a loan of P12,000.00, the receipt of which is hereby acknowledged from Y Corporation, for which I undertake, bind, and agree to use the loan as surety cash deposit for registration with the Securities and Exchange

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Commission of the incorporation papers relative to X Corpora-tion, and to pay the same amount with 12% interest to Y Cor-poration x x x.” Issue: Should G be held as a surety instead of a guarantor? Held: Under the terms of the contract, G expressly bound himself only as guarantor. A guaranty must be express (Art. 2055.) and it would be violative of the law to consider a party to be bound as surety when the very word used in the agreement is “guarantor,” and there are no circumstances in the record from which it can be deduced that his liability is that of a surety. (Piczon vs. Piczon, 61 SCRA 67 [1974].)

Guaranty and indorsement distinguished. There are well-defi ned distinctions between the contract of an indorser and that of a guarantor of a commercial paper, to wit: (1) The contract of indorsement is primarily that of transfer, while the contract of guaranty is that of security; (2) The liability of a guarantor is more extensive than that of an indorser. Unless the note is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time, he will be discharged absolutely from all liability thereon, whether he has suffered any actual damage or not (see Secs. 65, 66, 71, Negotiable Instruments Law [Act No. 2031].), whereas failure in either or both of these particulars does not, as a general rule, work an absolute discharge of a guarantor’s liability, but he is discharged only to the extent of the loss which he may have suffered in consequence thereof; (3) A guarantor warrants the solvency of the promisor which the indorser does not, he being answerable on a strict compliance with the law by the holder, whether the promisor is solvent or not; and (4) A guarantor cannot be sued as promisor, but an indorser may be sued. (see Sec. 84, ibid.) The language employed and the other circumstances of the particular transaction are the determining factors in ascertaining whether a particular contract is one of indorsement and not of guaranty, or vice versa. (28 C.J. 893-894.)



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Guaranty and warranty distinguished. Although contracts of guaranty and warranty (see Arts. 1546, 1547.6) have some corresponding features, in that each is an undertaking by one party to another to indemnify or make good the assured against some possible default or defect, in the contemplation of the parties, there is, in strict legal contemplation, difference between them. The principal distinction is that a guaranty is a contract by which a person is bound to another for the fulfi llment of a prom-ise or engagement of a third party, whereas a warranty is an un-dertaking that the title, quality, or quantity of the subject matter of a contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty. (38 C.J.S. 1134.)

ART. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)

Guaranty generally gratuitous. The general rule is that a guaranty is gratuitous. It is onerous only when there is a stipulation to the contrary. (see Arts. 1933, 1956, 1965.)

Cause of contract of guaranty. (1) Presence of cause which supports principal obligation. — The cause of the contract is the same cause which supports the

6Art. 1546. Any affi rmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affi rmation or promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No affi rmation of the value of the thing, nor any statement purporting to be a statement of the seller’s opinion only, shall be construed as a warranty, unless the seller made such affi rmation or statement as an expert and it was relied upon by the buyer.

Art. 1547. In a contract of sale, unless a contrary intention appears, there is:(1) An implied warranty on the part of the seller that he has a right to sell the thing

at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing;

(2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer.

This article shall not, however, be held to render liable a sheriff, auctioneer, mortga-gee, pledgee or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has legal or equitable interest.

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obligation as to the principal debtor. It is not necessary to prove any consideration as between the guarantor or surety and the creditor. The consideration which supports the obligation as to the principal debtor is a suffi cient consideration to support the obligation of a guarantor or surety. (Pyle vs. Johnson, 9 Phil. 249 [1907]; Phil. Guaranty Co. vs. Dinio, 102 Phil. 991 [1958].) Otherwise stated, a guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties. (Evangelista vs. Mercator Finance Corp., 409 SCRA 410 [2003].) (2) Absence of direct consideration or benefi t to guarantor. — The peculiar nature of a guaranty or surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either from the principal debtor or from the creditor. While a contract of guaranty or surety, like any other contract, must generally be supported by a suffi cient consideration, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal alone will suffi ce. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto.’’ (Rizal Commercial Banking Corp. vs. Arro, 115 SCRA 777 [1982].) The guarantor or surety, therefore, becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligation nor does he receive any benefi t there-from. (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493 [1990].) It is never necessary that he should receive any part or benefi t, if such there be, accruing to the principal. (Willex Plastic Industries Corp. vs. Court of Appeals, 256 SCRA 478 [1996].) Where a surety bond has been accepted by the obligee, it becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. (Phil. Pryce Assurance Corp. vs. Court of Appeals, 230 SCRA 164 [1994].)

ILLUSTRATIVE CASE: In consideration of dismissal of suit by creditor against debtor, the latter agreed to pay certain amount with another as guarantor.



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Facts: Upon the death of X, who left considerable property, a litigation ensued between C, X’s widow, and other heirs of X. A compromise was effected by which D, a son of X, took over the property pertaining to the estate of X at the same time agreeing to pay P100,000.00 to C, payable, fi rst, in P40,000.00 cash upon the execution of the document of compromise and the balance, in three equal installments. G affi xed his name as guarantor. Upon D’s failure to pay the balance, C instituted action against D and G, the latter contending that he received nothing for affi xing his signature as guarantor to the contract and that in effect the contract was lacking in consideration as to him. Issue: Is there a consideration for the guaranty? Held: (1) A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which C instituted against D was an adequate consideration to support the promise on the part of D to pay the sums stipulated in the contract subject of the action. (2) It is neither necessary that the guarantor or surety should receive any part of the benefi t, if such there be accruing to his principal. The true consideration of this contract was the detriment suffered by C in the former action in dismissing that proceeding and it is immaterial that no benefi t may have accrued either to the principal (D) or his guarantor (G). (Severino and Vergara vs. Severino, 56 Phil. 185 [1931].)

ART. 2049. A married woman may guarantee an obliga-tion without the husband’s consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n)

Married woman as guarantor. A married woman who acts as a guarantor ordinarily binds only her separate property. (see Art. 145, Family Code.) However, she may also bind the community or conjugal partnership property with her husband’s consent, and even without the consent of her husband, “in cases provided by law,” such as

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when the guaranty has redounded to the benefi t of the family. (see Arts. 70, 71, 94[3], 121[3], 122, ibid.) There is no express prohibition against a married woman acting as guarantor for her husband.

ART. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall ap-ply. (n)

Guaranty undertaken without knowledge of debtor. Guaranty is unilateral. It exists for the benefi t of the creditor and not for the benefi t of the principal debtor who is not a party to the contract of guaranty. Furthermore, the creditor has every right to take all possible measures to secure the payment of his credit. Hence, it can be constituted without the knowledge and even against the will of the principal debtor.

Rights of third person who pays. The rights of a third person who pays or performs the obligation of the debtor and one who guarantees the obligation of the debtor are similar. Hence, the rules on payment apply. A person who pays without the knowledge or against the will of the debtor can recover only insofar as the payment has been benefi cial to the debtor (Art. 1236.) and he “cannot compel the creditor to subrogate him in his (creditor’s) rights, such as those arising from a mortgage, guaranty or penalty.” (Art. 1237.) If he became a guarantor with the knowledge or consent of the debtor, he “is subrogated by virtue thereof [the payment] to all the rights which the creditor had against the debtor.” (Art. 2067.)

EXAMPLE: D owes C P10,000.00. Without the knowledge of D, G agrees to guarantee the obligation of D.



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If G pays C P10,000.00, he can ask reimbursement for P10,000.00 from D. If P4,000.00 had already been paid by D, then G is entitled to be reimbursed only for the amount of P6,000.00 because it is only to that amount that D has been benefi ted. G can recover P4,000.00 from C who should not have accepted it. It is but just that C reimburse G for any amount paid by him, otherwise C would be unduly enriching himself at the evident expense of G. Suppose the obligation of D is secured by the mortgage on a land owned by D. Payment by G without the knowledge or against the will of D does not give G the right to foreclose the mortgage because G has no right to subrogation.

ART. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of the prin-cipal debtor, but also in favor of the other guarantor, with the latter’s consent, or without his knowledge, or even over his objection. (1823)

Guaranty by reason of origin. According to its origin or manner of creation, guaranty may be conventional, legal, or judicial. (supra.) Judicial guaranty is one constituted by decree of court not by virtue of a provision of law or by virtue of an agreement of the parties.

Double or sub-guaranty. Paragraph 2 refers to a double or sub-guaranty or one consti-tuted to guarantee the obligation of a guarantor. It should not be confounded with guaranty wherein several guarantors concur. (see Arts. 2065, 2073.)

ART. 2052. A guaranty cannot exist without a valid ob-ligation. Nevertheless, a guaranty may be constituted to guar-antee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a)

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Necessity of valid principal obligation. Guaranty is an accessory contract. It is an indispensable condition for its existence that there must be a principal obligation. So, if the principal obligation is void it is also void. Note that Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clear in the other provisions of Article 2052. Under Article 2053, a guaranty may also be given as security for future debts, the amount of which is not yet known. (Diño vs. Court of Appeals, 216 SCRA 9 [1992].) A signatory to a guaranty (surety) agreement is liable on a promissory note for an unpaid loan obtained under that agreement although he did not sign the promissory note. (Rizal Commercial Banking Corp. vs. Cerro, 115 SCRA 777 [1982].)

ILLUSTRATIVE CASES: 1. Guarantors are being held liable under a bond fi led to secure compliance with a contract which was subsequently cancelled. Facts: The municipality of Gasan granted to D fi shing privileges within its jurisdictional waters. To secure the payment of the license fees for the said privilege, D fi led a bond subscribed by G and H who bound themselves to pay if D failed to comply with the terms of the contract. This contract was, however, declared by the Executive Bureau to be illegal. Accepting this decision, the municipality thereafter awarded the privilege to another person, who not only failed to make the deposit required but formally yielded the privilege granted to D or any other person selected by the municipal authorities. The municipality then advised D that the contract was to become effective. In a case that subsequently arose, the municipality sought to recover from D, G, and H an amount representing part of the license fees which D failed to pay for the privilege granted him. Issue: Are the contract and the bond valid and enforceable? Held: No. The contract was not only not consummated but was cancelled. It ceased to be valid from the time it was cancelled and this being so, neither D nor G and H were bound to comply with the terms of their respective contracts of fi shing



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privilege and guaranty. A guaranty cannot exist without a valid obligation. (Municipality of Gasan vs. Marasigan, 63 Phil. 510 [1936].) ———— ———— ———— 2. Surety company seeks recovery of renewal premiums on bonds which were already null and void upon grant of tax exemption to principal. Facts: P withdrew from the Bureau of Customs shipments of imported goods which were subject to customs duties and other taxes after posting surety bonds to cover the taxes due thereon pursuant to Republic Act No. 4086 because its applications for tax exemptions for said goods were not then approved by the Board of Industries. In consideration of the obligation assumed by S (surety company), P agreed to pay the premiums and cost of documentary stamps in advance due on the bonds for each period of (12) months beginning March, 1965 until “said bonds and its renewals, extensions or substitutions be cancelled in full by the person or entity guaranteed thereby, or by a court of competent jurisdiction.” Condition No. 2 of the original surety bonds reads: “That in case the application (of P for tax exemption) is approved by the Board of Industries, then this bond shall be null and void and of no force and effect.” P stopped paying premiums and costs of documentary stamps after it was granted tax exemption on December 19, 1966. S maintains that it has renewed the surety bonds in March, 1966, more or less eight (8) months, before the application for tax exemptions was granted. Issue: Is P liable for accrued premiums and costs of documentary stamps on renewals of the surety bonds after the grant of tax exemption to S? Held: No. Suretyship cannot exist without a valid obligation. The purported renewals were without consideration at all. S incurred no risk from the time P’s tax exemption application was approved. Any renewals were void from the beginning because the cause or object of said renewals did not exist at the time of the purported transaction. (Arts. 1409, 1352, and 1353, Civil Code.) S would not possibly be liable for any violation under the original surety bonds which were already void and of no force and effect nor was there a need for a formal release

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of the surety bonds by the Board of Industries or the Bureau of Customs. By express stipulation of the parties themselves, the surety bonds became null and void upon the grant of tax exemption. (Plaridel Surety & Insurance Co. vs. Artex Development Company, Inc., 120 SCRA 827 [1983].)

Guaranty of voidable, unenforceable, and natural obligations. A guaranty may secure the performance of a: (1) voidable contract inasmuch as such contract is binding, unless it is annulled by a proper action in court (see Art. 1390.7); or (2) an unenforceable contract (see Art. 1403.8) because such contract is not void; or

7Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;(2) Those where the consent is vitiated by mistake, violence, intimidation, undue

infl uence or fraud. These contracts are binding, unless they are annulled by a proper action in court.

They are susceptible of ratifi cation. (n)8Art. 1403. The following contracts are unenforceable, unless they are ratifi ed:(1) Those entered into in the name of another person by one who has been given

no authority or legal representation, or who has acted beyond his powers;(2) Those that do not comply with the Statute of Frauds as set forth in this number.

In the following cases, an agreement hereafter made shall be unenforceable by action, un-less the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;(c) An agreement made in consideration of marriage, other than a mutual promise

to marry;(d) An agreement for the sale of goods, chattels or things in action, at a price not

less than Five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of prop-erty sold, terms of sale, price, names of the purchasers and persons on whose account the sale is made, it is a suffi cient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

(f) A representation as to the credit of a third person.(3) Those where both parties are incapable of giving consent to a contract.



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(3) a natural obligation so that the creditor may proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable. (Art. 1423.9) When the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from natural into a civil one.

ART. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a)

Guaranty of future debts. Such guaranty provided in the above provision is denomi-nated as a continuing guaranty or suretyship.10 It is one which is not limited to a single transaction but which contemplates a fu-ture course of dealings, covering a series of transactions gener-ally for an indefi nite time or until revoked. It covers all transac-tions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. (Diño vs. Court of Appeals,

9Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfi llment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof.

10In Atok Finance Corp. vs. Court of Appeals (222 SCRA 232 [1993]), the Supreme Court explained the nature of a continuing surety in this wise: “Comprehensive or continuing surety agreements are in fact quite commonplace in present day fi nancial and commercial practice. A bank or fi nancing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debt-or to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each fi nancing or credit accommodation extended to the principal debtor.”

A “continuing guarantee’’ cannot be considered as one of the adhesion where the surety was free to reject it entirely.’’ (Tañedo vs. Allied Banking Corporation, 374 SCRA 111 [2002].)

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216 SCRA 9 [1992]; see Gateway Electronics Corp. vs. Asianbank Corp., 574 SCRA 698 [2008].) Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fi xed and demandable. The reason is that a contract of guaranty is subsidiary. (1) To secure the payment of a loan at maturity. — A surety agree-ment by the terms of which the surety binds himself to guarantee the punctual payment of a loan at maturity and all other obliga-tions or indebtedness which may become due or owing to the principal by the borrower, together with any and all expenses which may be incurred by the principal in collecting such obli-gations or indebtedness provided that the liability of the surety shall not exceed at any one time as a specifi ed sum is a guaranty of future debts. (Rizal Commercial Banking Corp. vs. Cerro, 115 SCRA 777 [1982].) (2) To secure payment of any debt to be subsequently incurred. — A continuing guaranty or surety is prospective in its operation and is generally intended to provide security with respect to future transactions for an indefi nite time or until a certain period. Hence, where the contract states that the guaranty is to secure advances to be made “from time to time,’’ or obligations “now in force or hereafter made,’’ it will be construed to be a continuing one. In other jurisdictions, it has been held that the use of particular words and expressions such as payment of “any debt,’’ “any indebtedness,’’ or “any sum,’’ or the guaranty of “any transaction,’’ or money to be furnished the principal debtor “at any time,’’ or “on such time’’ that the principal debtor may require, have been construed to indicate a continuing guaranty. (Diño vs. Court of Appeals, 216 SCRA 9 [1992], citing 38 C.J.S. 1209; Fortune Motors [Phils.] Corp. vs. Court of Appeals, 267 SCRA 653 [1997]; South City Homes, Inc. vs. BA Finance Corporation, 371 SCRA 603 [2001]; Philippine Blooming Mills, Inc. vs. Court of Appeals, 413 SCRA 445 [2003].) By no means, however, is it meant that in all instances a contract of guaranty or suretyship, should be prospective in application. (Willex Plastic Industries Corp. vs. Court of Appeals,



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256 SCRA 478 [1996].) A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefi nitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. (Diño vs. Court of Appeals, supra.) (3) To secure existing unliquidated debts. — “Future debts,” as used above, may also refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that obligation is born. But there is no theoretical or doctrinal diffi culty in saying that the surety agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent (infra.) are valid and binding before the occurrence of the condition precedent. (Atok Finance Corporation vs. Court of Appeals, 222 SCRA 232 [1993].)

EXAMPLES: (1) D and C are partners in business. G may guarantee the payment by D of C’s share from the profi t of the business which has not yet been ascertained. Under Article 2053, G cannot be liable to C before such share is liquidated. (2) C sold his land to D with G as guarantor for the payment of the purchase price. It was agreed that C would give to G the title papers showing that C is in fact the owner of the land sold. D became insolvent. In this case, G is liable only after the fulfi llment of the suspensive condition — the production of the proper papers. (3) Suppose, in the second example, C was given two (2) months within which to arrange and complete the papers relating to the property with the understanding that in case of failure of C to complete the title papers within said period, the contract of sale shall be deemed automatically cancelled.

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In this case, the fulfi llment of the condition subsequent — the failure to complete the title papers within the period stipulated — extinguishes the principal obligation of D to pay the purchase price as well as the guaranty of G.

Guaranty of conditional obligations. Obligations to be incurred in the future on the happening of a condition are covered by the second sentence. A guaranty may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (see Arts. 1179, 1180.) If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the fulfi llment of the condition. If it is subject to a resolutory condition, the happening of the condition extinguishes both the principal obligation and the guaranty. A conditional obligation may also be secured for it is valid and binding just like a pure one.

EXAMPLES: (1) C sold his land to D with G as guarantor for the payments of the purchase price. It was agreed that C would give to G the title papers showing that C is, in fact, the owner of the land sold. D became insolvent. In this case, G is liable only after the fulfi llment of the suspensive condition — the production of the proper papers. (2) Suppose, in the above example, C was given two (2) months within which to arrange and complete the papers relating to the property with the understanding that in case of failure of C to complete the title papers within said period, the contract of sale shall be deemed automatically cancelled. In this case, the fulfi llment of the condition subsequent — the failure to complete the title papers within the period stipulated — extinguishes the principal obligation of D to pay the purchase price as well as the guaranty of C.

ART. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.



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Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826)

Guarantor’s liability cannot exceed principal obligation. (1) Guaranty is a subsidiary and accessory contract. — Inasmuch as a contract of guaranty is only a subsidiary and accessory contract, the guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. (see Art. 2055, par. 2.) But a guarantor may bind himself for less than that of the principal. (Ibid., par. 1.)

EXAMPLES: (1) D borrowed from C P10,000.00. If G guarantees to answer for P15,000.00, the guaranty is not rendered void but he can be made to pay only P10,000.00 because his obligation cannot exceed the limits of the principal obligation. If the debt is not secured by a mortgage, and G mortgaged his land in favor of C, the latter may not foreclose the mortgage otherwise, G’s liability would be more onerous than that of A, the principal debtor. (2) D borrowed from C P15,000.00 with G limiting his guarantee to P10,000.00. D was able to pay only P10,000.00. In this case, C can still claim from G the balance of P5,000.00 by virtue of the latter’s guaranty. This is so because the payment by D must be applied fi rst to the unsecured portion of P10,000.00 for as regards him, it is more onerous as to the unsecured amount of P5,000.00.11

(2) Interest, judicial costs, and attorney’s fees as part of damages may be recovered. — Creditors suing on a suretyship bond may, however, recover from the surety as part of their damages, interest at the legal rate, judicial costs (see Art. 2055.), and attorney’s fees when appropriate (see Art. 2088.), even without stipulation and even if the surety would thereby become liable to pay more than

11See Arts. 1252-1254 which provide the rules on application of payments.

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the total amount stipulated in the bond. (see Diño vs. Court of Appeals, 216 SCRA 92 [1992]; see Republic vs. Court of Appeals, G.R. No. 103073, March 13, 2001.)

(a) In this case, the surety is made to pay, not by reason of the contract, but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. (b) Interest does not run from the time the obligation became due, but from the fi ling of the complaint (Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 100 Phil. 679 [1957]; Tagawa vs. Aldanese, 43 Phil. 852 [1922]; Commonwealth Insurance Corp. vs. Court of Appeals, 421 SCRA 367 [2004]; PNB vs. Luzon Surety Co., Inc., 68 SCRA 207 [1975]; Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA 805 [1990].) or from the time demand was made upon the surety until the principal obligation is fully paid. (Asian Surety and Insurance Co., Inc. vs. Nolasco, 79 SCRA 472 [1977].)

(3) Penalty may be provided. — Similarly, a surety may be held liable for the penalty provided for in a bond for violation of the condition therein. (General Insurance & Surety Co. vs. Republic, 7 SCRA 4 [1963].)

Principal’s liability may exceed guarantor’s obligation. The measure of the guarantor’s or surety’s obligation is not, however, the measure of the principal’s obligation. Thus, the amount specifi ed in a surety bond as the surety’s obligation does not limit the extent of the damages that may be recovered from the principal, the latter’s liability being governed by the obligation he assumed under his contract. (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145 [1952].)

ART. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefi nite, it shall comprise not only the principal obligation, but also all its accessories, includ-



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ing the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs in-curred after he has been judicially required to pay. (1827a)

Guaranty not presumed. As a contract, guaranty requires the expression of consent on the part of the guarantor to be bound. It cannot be presumed because of the existence of a contract or principal obligation. (Alvaran vs. Marquez, 11 Phil. 263 [1908].) Thus: (1) A power of attorney to loan money does not authorize the agent to make the principal liable as a surety for the payment of the debt of a third person. (Bank of the Phil. Islands vs. Coster, 47 Phil. 594 [1925].) (2) In a case, the credit administrator was authorized by petitioner corporation to approve loans up to P350,000 without any security requirement. However, he issued a guaranty for a loan of P60,000. Held: The guaranty was beyond the authority of the credit administrator. The phrase “contingent commitment set forth in the power of attorney’’ cannot be interpreted to mean “guarantees.’’ The authority of the agent should not be inferred from the use of vague or general words. Guaranty is not presumed; it must be expressed. (BA Finance Corp. vs. Court of Appeals, 211 SCRA 112 [1992].)

Reason for the rule. Consideration of prudence in the interest of the guarantor who in many cases fi nds himself under the harsh necessity of paying another’s debt without benefi t whatsoever for himself is the reason for the rule. It is true that he who guarantees does so in the confi dence that the debtor can and will pay, but that confi dence could be wrong. In prescribing the requisite that guaranty to be effective must be expressly constituted, the law wants, not alone that there be assurance that the guarantor had the true intention to bind himself, but also to make certain that, on making it, he proceeded with consciousness of what he was doing. (see 11 Manresa 234-235.)

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Guaranty covered by the Statute of Frauds. Guaranty must not only be expressed but must also be reduced to writing. A contract of guaranty (not suretyship) falls under the Statute of Frauds since it is “a special promise to answer for the debt, default or miscarriage of another.” It “shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents.” (Art. 1403[2, a]; Macondray & Co., Inc. vs. Piñon, 2 SCRA 1109 [1962].) Under Article 1358 of the Civil Code, a contract of guaranty need not appear in a public document to be valid or enforceable. (see Art. 1356.)

Guaranty strictly construed. Inasmuch as guaranty is a special obligation, it has to be strictly interpreted against the creditor and in favor of the guarantor and is not to be extended beyond its terms or specifi ed limits. (see Standard Oil Co. vs. Cho Chiong, 52 Phil. 612 [1928]; La Insular vs. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567 [1919]; Director of Public Works vs. Sing Juco, 53 Phil. 204 [1929]; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967 [1966].) If there is any doubt on the terms and conditions of the guaranty or surety agreements, the doubt should be resolved in favor of the guarantor or surety. (Phil. National Bank vs. Court of Appeals, 198 SCRA 767 [1991].) (1) Liability for obligation stipulated. — A guarantor is liable only for the obligation of the debtor stipulated upon, and not to obligations assumed previous to the execution of the guaranty unless an intent to be so liable is clearly indicated. (El Vencedor vs. Canlas, 44 Phil. 699 [1923].) This rule is a consequence of the statutory directive that guaranty is not presumed, etc. (Art. 2055, par. 1.)



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To hold the guarantor liable for debts contracted prior to the guaranty is, in effect, to make him answer for debts incurred outside of the guaranteed period, and this cannot be done without his express consent. (Traders Insurance & Surety Co. vs. Dy Eng Geok, 104 Phil. 806 [1958].) No liability attaches under a contract of suretyship for defaults occurring before it is entered into unless an intent to be liable is indicated. Although a contract of guaranty or suretyship is ordinarily not to be construed as retrospective, the rule must yield to the intention of the contracting parties as revealed by the evidence. (Willex Plastic Industries Corp. vs. Court of Appeals, 256 SCRA 478 [1996]; Olbes vs. China Banking Corporation, 484 SCRA 330 [2006].) (2) Guaranty to render accounting. — Also, a guaranty that the debtor will render an accounting “cannot be extended to include a guaranty that the money due the creditor will be delivered.” (Uy Aloo vs. Cho Jan King, 27 Phil. 247 [1914].) (3) Guaranty with a term subsequently cancelled. — Where the contract guaranteed beginning on January 1 to run until December 31 or the end of the year is subsequently cancelled, the guarantor is not liable for non-compliance by the principal debtor with a subsequent contract which the principal debtor and the creditor might have entered into on or after January 1 without the guarantor’s intervention. (Municipality of Gasan vs. Marasigan, 63 Phil. 510 [1936].) (4) Liability of surety limited to a fi xed period. — Where it is stipulated under a contract of suretyship that the liability of the surety “under this bond will expire 12 months from date hereof,” limiting thereby the obligation of the surety to no more than the period fi xed, the surety cannot be bound, for a longer time, unless the contract has been renewed. The surety must only be bound in the manner and to the extent, and under the circumstances which are set forth or which may be inferred from the contract of guaranty or suretyship, and no farther. (Jollye vs. Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 [1939]; also Santos vs. Mejia, 94 Phil. 211 [1953]; Solon vs. Solon, 64 Phil. 729 [1937]; La Insular vs. Machuca Go Tauco, 39 Phil. 567 [1919]; Diño vs. Court of Appeals, 216 SCRA 9 [1992].)

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An agreement whereby the sureties bound themselves to be liable in case of an extension or renewal of the bond without the necessity of executing another indemnity agreement for the purpose and without the necessity of being notifi ed of such extension or renewal is valid. There is nothing in it that militates against the law, good customs, good morals, public order, or public policy. (PhilAm General General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22 [1974]; Auto Group vs. Intra Strata Assurance Corp., 556 SCRA 250 [2008].) (5) Liability of surety to expire on maturity of principal obligation. — Where, however, one of the conditions of the bond fi led by the surety provides that the latter’s liability will expire on the date of the maturity of the principal obligation, which it interposed as a defense to an action instituted therefor, such stipulation is unfair and unreasonable for it practically nullifi es the nature of the undertaking it had assumed. As the terms of the bond should be given a reasonable interpretation, it is logical to hold that the liability of the surety attaches as soon as the principal debtor defaults, and notice thereof is given the surety within a reasonable time to enable it to take steps to protect its interest. The surety has a remedy under the law which is to foreclose the counterbond put up by the principal debtor. (Ongsiako vs. The World Wide Insurance & Surety Co., Inc., 104 Phil. 61 [1958].) (6) Liability of surety to pay in case of forfeiture of imported goods. — Where the surety bound itself to pay the sum of money mentioned in the bond “in the event that it should be fi nally decided that the merchandise herein mentioned should be forfeited to the Government,” the surety thus guaranteed, not the legality of the importation, but, merely, the payment of the appraised value of the goods imported and released, in the event aforementioned. (Phil. International Surety Co., Inc. vs. Comm. of Customs, 18 SCRA 1145 [1966].) (7) Bond requires lessor to report to surety any violation by lessee. — A bond requiring the lessor (creditor) to report to the surety any violation by the lessee (debtor) of the lease contract within fi ve (5) days does not cover defaults incurred prior to the acceptance by the lessor of the bond and the condition. A contract of guaranty or suretyship is only prospective, and not retroactive



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in operation unless a contrary intent is clearly shown. (Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].) (8) Bond issued to secure defendant from possible damages as a result of injunction. — A bond solely and expressly issued for the purpose of securing the prayer for preliminary injunction fi led by the plaintiff and to secure the defendant for whatever damage he may sustain as a result or by reason of the injunction, if the same should be declared as wrongfully issued, cannot be executed to satisfy the defendant’s mortgage claim against the plaintiff. (Jao vs. Royal Financing Corp., 4 SCRA 1210 [1962].) (9) Bond issued in favor of plaintiff who fi led a case for collection. — When a surety executes an attachment bond in favor of the plaintiff who fi led a case for collection of a sum of money, it does not guarantee that the plaintiff’s cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails. Its liability on the bond is not to be confounded with the liability of the principal on the judgment. The extent of a surety’s liability is determined only by the clause of the contract of suretyship. It cannot be extended by implication beyond the terms of the contract (Zenith Insurance Corp. vs. Court of Appeals, 199 SCRA 485 [1982]; Phil. Commercial and Industrial Bank vs. Court of Appeals, 159 SCRA 24 [1988].) or what is stipulated. (Central Surety and Insurance Co. vs. Ubay, 135 SCRA 58 [1985].) Since the liability of the surety cannot be extended by implication, it follows that the surety cannot be held liable to the intervenor who did not sign the contract of surety when the obligation of the surety is limited to the defendants specifi ed in the contract of surety. (Visayan Surety & Insurance Corp. vs. Court of Appeals, 364 SCRA 631 [2001].) But the surety’s liability may be increased beyond the maximum of the bond by making it liable to pay interest because of default and the necessity of judicial collection. (PNB vs. Luzon Surety Co., Inc., 68 SCRA 207 [1975].) (10) Contract requires that notice of principal’s default be given to surety. — Except when required by the provisions of the contract of suretyship, a demand or notice of default is not required to

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fi x the surety’s liability. Hence, where the contract stipulates that notice of the principal’s default be given to the surety, generally the failure to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition will not extinguish the surety’s liability such as failure to give notice of slight defaults which are waived by the obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the contract exempting the surety from liability therefor; or where the surety already has knowledge or is chargeable with knowledge of the default. (Umali vs. Court of Appeals, 189 SCRA 529 [1990].)

ILLUSTRATIVE CASES: 1. At the time of the execution of bond to secure payment of damages by principal debtor, guarantor had no knowledge that debtor has already incurred liability. Facts: An accounting between X Company and D, its agent for the sale of merchandise, showed that D had failed to pay X for merchandise of the value of P5,000.00. X thereupon refused to continue to furnish D merchandise for sale unless he gives a bond. Subsequently, G executed a document in favor of X whereby he bound himself “as surety and guarantor of D to become liable in case of his inability to pay any such damages, as X Company may suffer by reason of his failure to return such goods and merchandise as D may be legally obliged to return.” It did not appear that at the time of the execution of the bond G had knowledge of the fact that D was indebted to X in any sum whatever. X brought action on the bond for goods furnished to D. Issue: Should the bond respond for the debt contracted by D prior to its execution? Held: No. G was liable only for the value of goods furnished to D subsequent to the execution of the bond. A contract of suretyship or guaranty is ordinarily not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated either by express words or by necessary implication.



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G had a right to rely on the presumption that the suretyship was prospective and to assume that the merchandise and accounts for which he bound himself to respond related to future transactions. (El Vencedor vs. Canlas, 44 Phil. 699 [1923]; see Manila Terminal Co., Inc. vs. Hiponia, 101 Phil. 509 [1957].) ———— ———— ———— 2. At the time of the execution of bond to secure indebtedness of principal debtor upon its current account with creditor (bank), surety knew that a large portion of credit granted by creditor on such account and secured by the bond had already been drawn by debtor. Facts: The board of directors of corporation X authorized its treasurer, G, to obtain for X a credit on current account for P100,000.00 from the Bank of the P.I. The credit was granted and X began to draw against it even before the formal document of the agreement for the said credit was executed. Simultaneously with the execution of said document a month and a half later, G gave a bond “in his own name as surety” whereby he agreed to be bound jointly and severally in the sum of P100,000.00. X continued to draw against its credit with BPI until its overdraft including interest, amounted to P84,900.00. BPI was able to collect P43,100.00 from X as a result of an action brought against X, leaving a balance of P45,700.00 due and unpaid. The amount received from the bank subsequent to the date of the bond was only P25,500.00 which is less than P43,100.00, the amount already collected from X. Issue: Did the bond cover the amounts received from BPI prior to its date? Held: Yes. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed retrospectively, but that rule must yield to the intention of the contracting parties as revealed by the evidence. In the present case, the circumstances so clearly indicated that the bond given by G was intended to cover all of the indebtedness of X upon its current account with BPI. G was director-treasurer of X and was familiar with its fi nancial affairs. X had only one current credit account, a fact which was known to G, and there could be no doubt whatever that the bond was intended by all the parties to cover the entire account. G well knew that the time the bond was executed, a large portion of the credit secured by the bond had already been utilized.

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The situation would have been different if G at that time had been ignorant of the fact. (Bank of the P.I. vs. Forester, 59 Phil. 843 [1926].) ———— ———— ————- 3. Aside from subscribing to a personal bond to guarantee fulfi llment of obligation of creditor’s agent, surety executed an instrument assuming responsibility for account of creditor’s former agent. Facts: To guarantee the fulfi llment of the obligation of D, as agent of X, in the sale of the latter’s petroleum products, G subscribed to a personal bond in the sum of P3,000.00. By virtue of the agency, D received from X petroleum to the value of P14,065.00 and made good to X the amount of P14,000.00 thus leaving a balance of P65.00. On the same date when G subscribed the P3,000.00 bond, G signed an instrument in favor of X in which he assumed responsibility for all the accounts that might be owing to X by its former agent. Issue: Could G be held liable for the debt of the former agent of X which D assumed in virtue of another contract of which G was not even aware? Held: No. Under the terms of the bond, G did not answer for D, save for the latter’s acts by virtue of the contract of agreement between D and X. A contract of suretyship or guaranty is to be strictly interpreted and is not to be extended beyond its terms. (Standard Oil Co. of New York vs. Cho Siong, 52 Phil. 612 [1928].) ———— ———— ———— 4. Contract of lease calls for payment of rent of P23,000.00 “for each year,” while bond guarantees payment only of P23,000.00 “for the term of two years.” Facts: By a lease contract, the municipality of Lemery granted fi shing privilege to D for a period of two years beginning on January 1, 1921 and ending on December 31, 1922, for the sum of P23,000.00 for each year. Thereafter, G and H, as bondsmen, executed a document which declared, among other things, the lease by D of the privilege of fi shing referred to “for the value of P23,000.00 for the term of two years, from January 1, 1921 to December 31, 1922.” In said document, G and H obligated themselves jointly and severally for the payment to the municipality of Lemery



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the sum of P46,000.00 in case D, as grantee, shall fail to comply with the conditions of the bond of which we are informed.” D failed to pay the sum of P23,000.00 for the year 1922. Issue: Did G and H bind themselves in the sum of P46,000.00 or P23,000.00? Held: For P23,000.00. (1) The obligating clause of the contract of guaranty is quite clear to the effect that the rent to be paid for the privilege of fi shery was P23,000.00 for the full term of two years. It is true that G and H declared themselves bound for P46,000.00, but as in all bonds this was only because the bond was required to be made in double the amount of the principal liability as an assurance of the performance of the principal obligation. (2) The payment of D of the full sum of P23,000.00 for the year 1921 discharged G and H from all further liability. The circumstance that the sum of P23,000.00 paid by A was applied by the municipality to D’s indebtedness for the year 1921 was without signifi cance as against the sureties, since they were not parties to the contract of lease and were liable only upon the contract of suretyship (guaranty) which called for the payment of only P23,000.00 by the principal. The obligation of a surety must be express and cannot be extended by implication beyond its specifi ed limits. Avancena, C.J., Dissenting: “G, in securing the fulfi llment of the conditions of the contract by D, knew that this contract was for two years, as clearly stated in the bond which he signed, and besides, he also knew that the obligation of the principal obligor, D, was to pay P23,000.00 per year, for in the bond itself G stated being aware of the conditions of the contract. Through error, perhaps, it was stated in the bond that he was liable only to the amount of P46,000.00, the amount of the obligation of D for one year, because it was required that the bond be for double the value of the obligation. He cannot, however, take advantage of this mistake in the instant case which involves only nonpayment for one year which, after all, is one of the two years during which he secured the fulfi llment of the contract of the principal debtor D.” (Municipality of Lemery vs. Mendoza and Blas, 48 Phil. 415 [1925].) ———— ———— ———— 5. Contract of sale calls for payment of purchase price of P13,000.00, while bond guarantees payment by purchaser only of entire proceeds from his sale of merchandise purchased.

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Facts: D purchased merchandise from C on credit and agreed that D would apply the proceeds of its sale to the discharge of his indebtedness in the amount of P13,000.00, the purchase price. S, as surety for D, undertook that D would pay over to C the entire proceeds from the sale of the merchandise. Issue: Is S liable for the difference between the amount realized from the sale of the merchandise and the purchase price of the same? Held: No. S did not undertake absolutely to pay the sum of P13,000.00. His agreement was limited to respond for the performance by D of his undertaking to deliver to C the total proceeds of the sale of the merchandise for the invoice value of which a promissory note was given by D. (Wise and Co. vs. Kelly, 37 Phil. 696 [1918].)

Strictissimi juris rule applicable only to accommodation surety. The rule of strictissimi juris commonly refers to an accommo-dation surety. The rationale of this doctrine is reasonable. An accommodation surety acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to those of a fi duciary. (Pacifi c Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957]; Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].) The rule will apply only after it has been defi nitely ascertained that the contract is one of suretyship or guaranty. It cannot be used as an aid in determining whether a party’s undertaking is that of a surety or guarantor. (see Palmares vs. Court of Appeals, 288 SCRA 292 [1998].)

Rule of strict construction not applicable to compensated sureties. The rule of strictissimi juris, ordinarily applied in relief of an individual surety, is not applied in case of compensated sureties. The presumption indulged in by the law in favor of guarantors was premised on the fact that guarantees were originally gratuitous obligations, which is not true at present, at least in the



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great majority of cases. (PNB Luzon Surety Co., Inc., 68 SCRA 207 [1975].) The surety bond must be read in its entirety and together with the principal contract. (National Power Corporation vs. Court of Appeals, 145 SCRA 533 [1988].) If there is any ambiguity in the surety bond, it should be interpreted against the surety company that prepared it. (Pao Chuan Wei vs. Reposito, 103 Phil. 57 [1955]; Cosmopolitan Insurance Co., Inc. vs. Reyes, 15 SCRA 258 [1965].) The rationale of this doctrine is also reasonable. (1) Compensated corporate sureties are business associations organized for the purpose of assuming classifi ed risks in large numbers, for profi t and on an impersonal basis, through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests. (Commission on Immigration vs. Asian Surety and Insurance Co., Inc., 26 SCRA 680 [1969], citing Stearn’s The Law of Suretyship, 4th ed., 402-403; National Marketing Corp. vs. Marquez, 26 SCRA 772 [1969].) (2) Furthermore, they are secured from all possible loss by adequate counterbonds or indemnity agreements. (Reparations Commission vs. Northern Lines, 34 SCRA 203 [1970]; Pastoral vs. Mutual Security Insurance Corp., supra.) (3) Although calling themselves as sureties, such corporations are, in fact, insurers (see Secs. 2, 175-178, The Insurance Code of 1978 [Pres. Decree No. 1460].) and in determining their rights and liabilities, the rules peculiar to suretyship do not apply. (Pacifi c Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957].)

ILLUSTRATIVE CASES: 1. In the distributorship agreement secured by a bond, distributor bound himself to sell and distribute products of another “in Manila and Rizal Province.” Facts: C and D entered into a distributorship agreement whereby D bound himself to sell and distribute the products of C in Manila and Rizal province. To guarantee the fulfi llment of D’s part of the contract, he put up a bond with S, a compensated surety.

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Nowhere in the agreement appears a restriction against D’s acceptance of additional territories if he so desired. Issue: Does the delivery of merchandise to D at a place other than that appearing in the contract constitute a material alteration of the same that would release S from its liability? Held: No. (1) The mention of Manila and Rizal in said agreement was designed more as a declaration or identifi cation of the places wherein D was expressly authorized and assigned to sell C’s products which is no obstacle to D’s acceptance of additional territories in order to fulfi ll his obligation. The obligation of D remained the same — to settle his accounts to C at the specifi ed time. The addition or diminution of the territories could by no means alter or affect that duty to make payment on time and that is precisely D’s obligation secured by the bond. (2) A departure from the terms of contract will not have the effect of discharging a compensated surety unless it appears that such departure has resulted in injury, loss or prejudice to the surety. It has been said that to allow compensated surety companies to collect and retain premiums for their services, graded according to the nature and extent of their risk, and then to repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties. (Pacifi c Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957].) ———— ———— ———— 2. Liability under a bond is to expire a year before maturity of principal obligation. Facts: A stipulation in a bond is to the effect that the liability thereunder would expire a year before the fi rst installments of the principal obligation had become due. Issue: Is the stipulation valid? Held: No. Referring to a stipulation in a bond to the effect that the liability thereunder would expire on the date of maturity of the principal obligation, the court declared that said stipulation in effect nullifi ed the nature of said bond and was therefore, “unfair and unreasonable, as well as a subtle way of making money thru trickery and deception.”



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The situation in the case at bar is even worse, since the surety contends that its bond expired about a year before the fi rst installments had become due. To accept this theory, the result would be that the surety had never contracted any obligation or assumed any liability in favor of the creditor (Reparation Commission) in consequence of the execution of said bond which is manifestly contrary to the intention of the parties. The rule of strict construction of surety bonds does not apply to corporate sureties. (Reparation Commission vs. Northern Lines, Inc., 34 SCRA 203 [1970].)

Extent of guarantor’s liability. (1) Where guaranty defi nite. — In this kind of guaranty, the obligation of the guarantor under the terms of the contract is limited in whole or in part to the principal debt, to the exclusion of the accessories. (see 11 Manresa 196.) Thus, if the amount to be paid or the service to be performed by the person guaranteed is specifi ed in a contract of guaranty, then the obligation of the guarantor extends no further than the sum or services so specifi ed, and extrinsic facts cannot be resorted to for the purpose of enlarging the limit if the guarantor was ignorant of such facts. (38 C.J.S. 1211-1212.) Thus, even as a surety held himself liable for a credit accommodation or any modifi cation thereof, such clause should be understood in the context of the loan limit and its term. (Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA 781 [2000].) (2) Where guaranty indefi nite or simple. — As provided in Article 2055 (par. 2.), “it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided, with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.” If the terms of the contract of guaranty are general and indefi nite and do not specify in clear and express manner that the liability of the guarantor is limited to the principal obligation, in whole or in part, it extends not only to the said principal obligation but also to all its accessories, they being comprehended within the principal because the guaranty has secured it with all its consequences. (see 11 Manresa 199.)

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The reason for the rule is that the guarantor, in entering into the contract, could have fi xed the limits of his responsibility solely to the strict terms of the principal obligation and if he did not do so, it must be presumed that he wanted to be bound to the extent so established. (Ibid., 242-243.) Thus, in a case, the surety company was held jointly and severally liable with the principal debtor to pay the sum of P5,000.00 plus legal interest from the time of the fi ling of the complaint up to the time the surety offered to pay, over the objection that under the bond the surety was liable only for P5,000.00 for under Article 2055, paragraph 2 which the court said was clearly applicable, the liability of the surety “shall comprise not only the principal obligation, but also its accessories.” (Republic vs. Pal-Fox Lumber Co., 43 SCRA 365 [1972].)

Liability of guarantor for judicial costs. The guarantor shall answer for such judicial costs only as have been incurred after he has been judicially required to pay. This limitation is just because a guarantor as such should not be made responsible for whatever costs the debtor might have capriciously occasioned. (11 Manresa 243-244.) On the other hand, it is within the power of the guarantor to relieve himself from responsibility of responding for such judicial costs by making payment. From the time he had been judicially required to pay, all of the costs that arise depend upon his exclusive will and are, therefore, attributed to his fault if he does not do so. (Ibid., 199.)

Acceptance of guaranty by creditor and notice thereof to guarantor. In declaring that guaranty must be express, the law refers solely and exclusively to the obligation of the guarantor because it is he alone who binds himself by his acceptance. With respect to the creditor, no such requirement need to be prescribed because he binds himself to nothing. (see Ibid., 239-240.) (1) When necessary. — Where there is merely an offer of a guaranty, or merely a conditional guaranty in the sense that it



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requires action by the creditor before the obligation becomes fi xed, it does not become a binding obligation until it is accepted and (unless there is a waiver of notice) until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty. (National Bank vs. Garcia, 47 Phil. 662 [1925]; 28 C.J. 901; 24 Am. Jur. 899.)

(a) The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to an acceptance. (National Bank vs. Escueta, 50 Phil. 591 [1927].) In other words, the acceptance of the guaranty by the creditor may be implied. (b) The guarantor is entitled to notice in order that, being secondarily liable, he may know the nature and extent of his liability and have an opportunity of taking indemnity from the principal obligor or of otherwise securing himself against loss, and have a reasonable time in which to arrange for the necessary funds to pay the amount of his guaranty, if the principal defaults, and to avail himself of the appropriate means in law and equity to compel the other parties to discharge him from future responsibility. (28 C.J. 900; National Bank vs. Garcia, supra.)

(2) When not necessary. — Where, upon the other hand, the transaction is not merely an offer of guaranty, but it amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promisee (creditor) should act upon it, and notice of acceptance is not necessary the reason being that the contract of guaranty is unilateral. (Texas Co. vs. Alonso, 73 Phil. 90 [1941]; see Macondray and Co., Inc. vs. Piñon, 2 SCRA 1109 [1962].)

ILLUSTRATIVE CASES: 1. Creditor retained document evidencing surety agreement and on the strength of which, extended credit to principal debtor. Facts: To secure the payment of any obligation D might contract with Philippine National Bank, G and H signed a surety (guaranty) agreement in favor of Philippine National

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Bank. The document evidencing the agreement was delivered to Philippine National Bank which retained it without objection. On the strength of said agreement, Philippine National Bank extended credit to D. Issue: Was there acceptance by Philippine National Bank of the surety (guaranty) agreement? Held: Yes. The facts suffi ciently indicated such acceptance. Such acceptance need not necessarily be express or in writing. (National Bank vs. Escueta, 50 Phil. 991 [1927].) ———— ———— ———— 2. Guarantor was never notifi ed by creditor of the latter’s acceptance of bond signed by the former to guarantee performance of agency contract which required that bond had to be in such form and amount “as shall be satisfactory” to the creditor. Facts: G signed a bond whereby he guaranteed the faithful performance of an agency contract of D with Texas Co. The bond was executed at the request of Texas Co., by virtue of the following clause of the agency contract: “Additional security — The agent shall whenever requested by the company in addition to the guaranty herein provided furnish further guaranty or bond, conditioned upon the agent’s faithful performance of this contract, in such form and amount and with such bank as surety or with such individuals or fi rms as joint and several sureties as shall be satisfactory to the company.” G was never notifi ed by Texas Co. of its acceptance, and there was no evidence tending to show that G ever had knowledge of any act on the part of Texas Co. amounting to an implied acceptance. Issue: Was there merely an offer of guaranty on the part of G? Held: Yes, and, therefore, in the absence of the acceptance of the offer by Texas Co., G could not be held liable. The bond was subject to the creditor’s approval. Before the bond would be accepted, it had to be in such form and amount and with such sureties, “as shall be satisfactory to the company.” The logical implication arising from this requirement was that, if Texas Co. was satisfi ed with any such bond, notice of its acceptance or approval should necessarily be given to the proper party in interest, namely the surety or guarantor. (Texas Company, Inc. vs. Alonso, 73 Phil. 90 [1941].)



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———— ———— ———— 3. Creditor accepted a contract of suretyship to which he was not a party. Facts: A contract of suretyship was entered into between D, as principal, and G and H as sureties whereby G and H bound themselves jointly and severally to pay a certain amount which D obligated himself to pay C (a third person). For failure of D to pay C, the latter brought an action against G and H under their contract of suretyship. Issue: Can C maintain the action against G and H consider-ing that he was not a party to the contract? Held: Yes. The general rule is that a third person has no rights and obligations under a contract to which he is a stranger. However, when a contract, such as one of guaranty, contains a stipulation in favor of a third person who accepted and acted upon such stipulation before its revocation by the obligors, said third person may demand its fulfi llment. (see Art. 1311.) In the present case, C accepted the contract of suretyship, and upon the faith of it, allowed D to strip his (C’s) lands of valuable plantings of hemp to secure the payment of the price of which, the contract of suretyship was delivered by D to C. There was no revocation of the contract before it was accepted by C nor to any time before demand was made upon G and H for the fulfi llment thereof. (Poblete vs. Lo Singco, 44 Phil. 369 [1923].) ———— ———— ———— 4. Creditor received copy of bond after the date he should have complied the condition in the bond to report to surety default by debtor. Facts: The surety bond requires C (lessor) to report to the surety any violation of the lease contract by D (lessee-debtor) within fi ve (5) days, otherwise, the bond will be null and void. The bond was executed on October 22 and copy thereof was received by the lessor on November 21. By then, D defaulted in two (2) payments of the rentals, which defaults C should have reported between October 6-10 and November 6-10, as required by the bond, but C did so only on December 5. Issue: Does C’s failure to notify the surety of D’s defaults in between October 6-10 and November 6-10, and in notifying

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the surety only on December 5, constitute a violation of the condition of the bond that exonerated the surety from liability? Held: No. (1) By imposing on C the condition in question, the surety made it necessary that C should accept the bond; and C could not do so before learning of it. The rule is that where the guaranty requires action by the creditor before obligation becomes fi xed, it is not binding until accepted. The rule is grounded on common sense; otherwise, the debtor and the guarantor could easily defraud the creditor by inserting in the bond, conditions that would render it nugatory. The suretyship contract, therefore, was not perfected and was not binding on C until November 21, when he received a copy thereof and tacitly accepted it. (2) A contract of guaranty or suretyship is only prospective, and not retroactive in operation unless a contrary intent is clearly shown. (3) The rule holding sureties to be favorites of the law, and their contracts to be strictissimi juris does not apply to compensated sureties. (Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].)

ART. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and suffi cient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a) ART. 2057. If the guarantor should be convicted in fi rst instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifi cations required in the preceding article. The case is excepted where the creditor has required and stipulated that a specifi ed person should be the guarantor. (1829a)

Qualifi cations of guarantor. The qualifi cations of a guarantor are: (1) He possesses integrity; (2) He has capacity to bind himself; and

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(3) He has suffi cient property to answer for the obligation which he guarantees. It is evident that a guarantor without the above-mentioned qualifi cations would be useless. Of course, the creditor can waive the requirements. The second sentence of Article 2056 is based on the principle that the accessory follows the principal. (see Art. 1251.)

Effect of subsequent loss of required qualifi cations. The qualifi cations need only be present at the time of the perfection of the contract. So, the subsequent loss of integrity or property or supervening incapacity of the guarantor (Art. 2057.) would not operate to exonerate the guarantor of the eventual liability he has contracted, and the contract of guaranty continues. However, the creditor may demand another guarantor with the proper qualifi cations. (Ibid.) But he may waive it if he chooses and hold the guarantor to his bargain. (Estate of K.H. Hemady vs. Luzon Surety Co., Inc., 100 Phil. 388 [1956].) Note that Article 2057 requires conviction in the fi rst instance of a crime involving dishonesty; but a judicial declaration of insolvency is not necessary in order for the creditor to have the right to demand another guarantor.

ILLUSTRATIVE CASE: Creditor (surety) fi led a contingent claim against the estate of surety (indemnitor) on bonds executed by the latter before his death. Facts: L Surety Co. fi led a claim against the Estate of H on the different indemnity agreements or counterbonds, each subscribed by a distinct principal and by the deceased H, a surety (solidary guarantor) in all of them in consideration of L’s having guaranteed the various principals in favor of different creditors. L prayed for allowance, as a contingent claim, of the value of the counterbonds. The lower court dismissed the claim on the ground that “whatever losses may occur after H’s death, are not chargeable to his estate, because upon his death he ceased to be a guarantor.”

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Issue: Is a guarantor’s liability extinguished by his death? Held: No. (1) Under the law (see Art. 1311.), the general rule is that a party’s contractual rights and obligations are transmissible to his successors. The articles of the Civil Code that regulate guaranty and suretyship (Arts. 2047-2084.) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety. (2) From Article 2057, it is immediately apparent that the supervening incapacity of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor: it is his right, not his duty; he may waive it if he chooses and hold the guarantor to his bargain. Article 2057 is incompatible with the proposition that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal so linked to his individuality that the guaranty automatically terminates upon his death. (3) The contracts of suretyship entered into by H in favor of L, not being intransmissible, his eventual liability thereunder necessarily passed upon his death to his heirs. Such contracts give rise to contingent claims provable against his estate under Section 5, Rule 67 of the Rules of Court. L had, therefore, the right to fi le against the Estate of H a contingent claim for reimbursement. (Estate of Hemady vs. Luzon Surety Co., Inc., 100 Phil. 388 [1956].)

Selection of guarantor. (1) Specifi ed person stipulated as guarantor. — Where the creditor has required and stipulated that a specifi ed person should be a guarantor, the substitution of guarantor may not be demanded (Art. 2057.) because in such a case, the selection of the guarantor is a term or condition of the agreement and as a party, the creditor is, therefore, bound thereby. (see Arts. 1159, 1306.) (2) Guarantor selected by the principal debtor. — Where the guarantor is selected by the principal debtor, the latter answers for the integrity, capacity, and solvency of the former because the guarantor must possess the qualifi cations prescribed not only at the moment the guaranty is given but also thereafter, until the extinguishment of the debt.

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(3) Guarantor personally designated by the creditor. — Where, however, the guarantor is personally designated by the creditor, it is because he considers him to have the qualifi cations for the purpose, and the responsibility for the selection should, therefore, fall upon him, and not on the debtor.

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Chapter 2EFFECTS OF GUARANTY

SECTION 1. — Effects of Guaranty Between the Guarantor and the Creditor

ART. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the proper-ty of the debtor, and has resorted to all the legal remedies against the debtor. (1830a)

Right of guarantor to benefi t of excussion or exhaustion. (1) Guarantor only secondarily liable. — The rule contained in the above article arises from the character of the contract of guaranty which is accessory and subsidiary. The guarantor binds himself to the creditor to fulfi ll the obligation of the principal debtor only in case the latter should fail to do so (Art. 2047.) and cannot do so. It is the rule that distinguishes guaranty from suretyship. Conversely, if the principal debtor fulfi lls the obligation guaranteed, the guarantor is discharged from any responsibility. (2) All legal remedies against debtor to be fi rst exhausted. — To warrant recourse against the guarantor for payment, it may not be a suffi cient reason that the debtor appears insolvent. Such insolvency may be simulated. The law requires the creditor to resort “to all legal remedies against the debtor” including the bringing of actions for the rescission of fraudulent alienations of property made by the debtor. (see Arts. 1177, 1380[3], 1387.) This is what is otherwise known as the “benefi t of excussion.’’

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Article 2058 is not applicable to a contract of suretyship. (see Arts. 2047, par. 2; 2059[2].)

ILLUSTRATIVE CASE: Creditor fi led action against guarantor to recover the balance of judgment credit without asking for execution of judgment against debtor. Facts: G mortgaged two real properties belonging to him to secure the payment of a judgment credit of P640.00 obtained by C against D. As D paid only a part of the indebtedness, C fi led an action against G to recover the unpaid balance. Issue: Is G liable for the balance? Held: No. (1) G did not contract any personal responsibility for the payment of the sum of P640.00. The only obligation which he contracted was that resulting from the mortgage. However, a foreclosure suit was not instituted against G but a purely personal action for the recovery of the amount still owned by D. (2) At any rate, even granting that G may be considered a surety (or guarantor), the action does not lie against him on the ground that all the legal remedies against him have not previously been exhausted. The execution of the judgment against D has not been asked for and D has property suffi cient to pay the balance of the debt the payment of which is sought of G in his alleged capacity as surety. (Wise & Co. vs. Tanglao, 63 Phil. 372 [1936].)

Right of creditor to secure judgment against guarantor prior to exhaustion. As a rule, an ordinary personal guarantor, not a pledgor or mortgagor, may demand exhaustion of all the property of the debtor before he can be compelled to pay. (Art. 2058.) It has been held, however, that the creditor may, prior thereto, secure a judgment against the guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him, until after the properties of the principal debtor shall have been exhausted, to satisfy the latter’s obligation. (Southern Motors, Inc. vs. Barbosa, 99 Phil. 263 [1956]; Tupaz vs. Court of Appeals, 475 SCRA 398 [2005].)

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Thus, there is nothing procedurally objectionable in implead-ing the guarantor as a co-defendant. As a matter of fact, the Rules of Court on permissive joinder of parties (Rule 3, Sec. 6 thereof.) explicitly allows it. This equity rule is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact, saving the parties unnecessary work, trouble and expense. (Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992].)

ART. 2059. This excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; (3) In case of insolvency of the debtor; (4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representa-tive; (5) If it may be presumed that an execution on the property of the principal debtor would not result in the sat-isfaction of the obligation. (1831a)

Exceptions to benefi t of excussion. In the following cases, the guarantor is not entitled to the benefi t of excussion: (1) As provided in Article 2059; (2) If he does not comply with Article 2060; and (3) If he is a judicial bondsman and sub-surety (Art. 2084.); (4) Where a pledge or mortgage has been given by him as a special security. Guarantees without any such pledge or mortgage are governed by Title XV of the Civil Code, whereas pledges and mortgages fall under Title XVII thereof (Philamgen Ins. Co., Inc. vs. Ramos, 16 SCRA 298 [1966]; Southern Motors, Inc. vs. Barbosa, 99 Phil. 263 [1956].); and (5) If he fails to interpose it as a defense before judgment is rendered against him. (Saavedra vs. Price, 68 Phil. 699 [1939].)

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Exceptions provided in Article 2059. Article 2059 enumerates instances when the guarantor cannot avail of the benefi t of excussion. (1) Right waived. — The benefi t of excussion is a personal right recognized in a guarantor. Its waiver is valid. (see Art. 6.) It must, however, be made in express terms. Nothing prevents a guarantor from paying the obligation once demand is made on him without prejudice to his right to demand reimbursement from the debtor. (Art. 2066.) (2) Liability assumed that of surety. — If the guarantor binds himself solidarily with the principal debtor, he becomes a surety with primary liability as a solidary co-debtor. In effect, he renounces in the contract itself the benefi t of exhaustion.1 (see Luzon Steel Corp. vs. Sia, 28 SCRA 58 [1969]; Gov’t. of the Phil. Islands vs. Visayan Surety, 66 Phil. 326 [1938]; Imperial Insurance, Inc. vs. De Los Angeles, 111 SCRA 24 [1982].) (3) Insolvency of debtor proven by unsatisfi ed writ of execution. — A guarantor guarantees the solvency of the debtor. Hence, if the debtor becomes insolvent, the liability of the guarantor arises as the debtor cannot fulfi ll his obligation. The insolvency or inability to pay must be actual, and it may be proven by the return of a writ of execution unsatisfi ed or by other means, but it is not suffi ciently established by the mere fact that the debtor has been declared insolvent in insolvency proceedings, in which the extent of the insolvent’s inability to pay is not determined until the fi nal liquidation of his estate. (Machette vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922].) (4) Debtor absconds or cannot be locally sued. — If the debtor absconds or cannot be sued in the Philippines, then he cannot fulfi ll his obligation unless, of course, he has left a manager or representative. The creditor is not required to go after a debtor who is hiding or cannot be sued in our courts, and to incur the delays and expenses incident thereto.

1Section 17, Rule 57 of the Rules of Court cannot be construed that an execution against the debtor be fi rst returned unsatisfi ed even if the bond were a solidary one, for a procedural rule may not amend the substantive law expressed in the Civil Code.

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(5) Resort to all legal remedies, a useless formality. — If the creditor wants to hold the guarantor liable, he must resort to all legal remedies against the debtor (this includes suit against him) and exhaust his properties. (Art. 2058.) But if such judicial action including execution would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such remedies against the debtor as the same would be but a useless formality. Under No. (5) of Article 2059, it is not necessary that the debtor be judicially declared insolvent or bankrupt.

ART. 2060. In order that the guarantor may make use of the benefi t of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debt-or within Philippine territory, suffi cient to cover the amount of the debt. (1832)

ART. 2061. The guarantor having fulfi lled all the condi-tions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suf-fer the loss, to the extent of said property, for the insolven-cy of the debtor resulting from such negligence. (1833a)

Duty of creditor to make prior demand for payment from guarantor. (1) When demand to be made. — The demand for payment by the creditor upon the guarantor under Article 2060 can be made only after judgment on the debt for obviously the “exhaustion of the principal’s property” — the benefi t of which the guarantor claims — cannot even begin to take place before judgment has been obtained. It would be absurd and futile to point out “saleable property of the debtor” before the judgment when it cannot be seized or sold. (2) Actual demand to be made. — Joining the guarantor in the suit against the principal debtor is not the demand intended by law. The fact that the guarantor was joined in such suit does not necessarily mean that a demand has already been made upon him. (see Viuda de Syquia vs. Jacinto, 60 Phil. 861 [1934]; Baylon vs. Court of Appeals, 312 SCRA 502 [1990].)

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Duty of guarantor to set up benefi t of excussion. Article 2060 imposes a condition for the invocation by the guarantor of the benefi t of excussion. It is not enough that the guarantor claims the benefi t of excussion. Under Article 2060, as soon as he is required to pay, he must also point out to the creditor available property (not in litigation or encumbered) of the debtor within the Philippines. (Luzon Steel Corp. vs. Sia, 28 SCRA 58 [1969].) The failure of the guarantor to point out to the creditor the debtor’s property suffi cient to cover his debt forecloses his right to set up the defense of excussion. (Bitanga vs. Pyramid Construction Engineering Corp., 563 SCRA 544 [2008].) (1) Property located abroad. — The excussion of property located abroad would be a lengthy and extremely diffi cult proceeding and would not conform with the purpose of guaranty to provide the creditor with the means of obtaining the fulfi llment of the obligation guaranteed without hindrance or delays. (2) Property not easily available. — The same thing may be said of property which is not easily available. As the one most inter-ested in the benefi t of excussion, the guarantor should facilitate its realization and the payment of the debt, whereby he will be freed of his subsidiary obligation. The rule takes into account not only the interests of the guarantor but also those of the creditor, for without it, guaranty might become almost illusory. (12 Man-resa 263-265; Arroyo vs. Jungsay, 34 Phil. 589 [1915].)

Duty of creditor to resort to all legal remedies. After the guarantor has fulfi lled the conditions required for making use of the benefi t of exhaustion, it becomes the duty of the creditor to exhaust all the property of the debtor pointed out by the guarantor and to resort to all legal remedies against the debtor (Art. 2058.); and if he fails to do so, he shall suffer the loss, but only to the extent of the value of said property, for the insolvency of the debtor. (Art. 2061.) Obviously, the exhaustion of the principal debtor’s property — the benefi t of which the guarantor claims — cannot even

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begin to take place before judgment has been obtained against the debtor. (Baylon vs. Court of Appeals, 312 SCRA 502 [1999].) The creditor must notify the guarantor of the debtor’s inability to pay. (see Art. 2062.)

Joinder of guarantor and principal as parties defendant. (1) General Rule. — The guarantor, not being a joint contractor with his principal, cannot as a general rule, be sued with his principal. (see Art. 2062.) (2) Exception. — Yet adherence to this rule is not required where it would serve merely to delay the ultimate accounting of the guarantor. Thus, in case, the court overruled the objection that there was a misjoinder of parties defendant “it having been proved that the principal is not able to perform a contract which he has made and for which in a collateral agreement, the guarantors become liable . . . no different result would be attained if the plaintiff were forced to institute separate actions against the principal and the guarantors.” (U.S. vs. Varadero De La Quinta, 40 Phil. 48 [1919].)

ART. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may ap-pear so that he may, if he so desire, set up such defenses as are granted him by law. The benefi t of excussion men-tioned in Article 2058 shall always be unimpaired, even if judgment should be rendered against the principal debt-or and the guarantor in case of appearance by the latter. (1834a)

Procedure when creditor sues. (1) Sent against principal. — The creditor must sue the principal alone. The guarantor cannot be sued with his principal, much less alone except in the cases mentioned in Article 2059 where the guarantor is not entitled to the benefi t of excussion. As a rule, the creditor may hold the guarantor only after judgment



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has been obtained against the principal debtor and the latter is unable to pay. (2) Notice to guarantor of the action. — The guarantor, however, must be notifi ed so that he may appear, if he so desires, and set up defenses he may want to offer.

(a) If the guarantor appears, he is still given the benefi t of exhaustion even if judgment should be rendered against him and the principal debtor. His voluntary appearance does not constitute a renunciation of his right to excussion. (see Art. 2059[1].) (b) If he does not appear, he cannot set up the defenses which, by appearing, are allowed to him by law, and it may no longer be possible for him to question the validity of the judgment rendered against the debtor.

(4) Hearing before execution can be issued against guarantor. — A guarantor is entitled to be heard before an execution can be issued against him where he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Towers Assurance Corp. vs. Ororama Supermarket, 80 SCRA 313 [1970]; see Malayan Insurance Co., Inc. vs. Salas, 90 SCRA 252 [1979].)

ART. 2063. A compromise between the creditor and the principal debtor benefi ts the guarantor but does not preju-dice him. That which is entered into between the guarantor and the creditor benefi ts but does not prejudice the princi-pal debtor. (1835a)

Effects of compromise. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028.) (1) Where prejudicial. — A contract binds only the parties thereto and not third persons. (Art. 1311.) Hence, a compromise cannot prejudice the guarantor or the debtor, as the case may be, when he is not a party to such compromise. Furthermore,

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a guarantor may not bind himself for more than the principal debtor both as regards the amount and the onerous nature of the conditions. (Art. 2054, par. 2.) (2) Where in the nature of a stipulation in favor of a third person. — However, even if the guarantor or debtor is not a party to such compromise, the same can benefi t him as it is in the nature of a stipulation in favor of a third person which the guarantor or debtor may accept unless it has been revoked before his acceptance. (Art. 1311, par. 2.)

EXAMPLE: D owes C P10,000.00 with G as the guarantor. If for one reason or another D and C agree to have the debt reduced to P8,000.00, G, the guarantor, is liable to C for only P8,000.00 if D does not pay C because the compromise benefi ts G. If the amount instead is increased to P12,000.00, G is liable only for P10,000.00 because the compromise cannot prejudice him. Now, if the agreement is between C and G whereby D is given an extension of time within which to pay, such extension accrues to the benefi t of D, the principal debtor. But a compromise between C and G shortening the period for payment is not binding upon D because the same cannot prejudice him.

ART. 2064. The guarantor of a guarantor shall enjoy the benefi t of excussion, both with respect to the guarantor and to the principal debtor. (1836)

Sub-guarantor’s right to excussion. A guarantor has the right to demand the exhaustion of the properties of the principal debtor. (Art. 2958.) A sub-guarantor enjoys the benefi t of excussion not only with respect to the principal debtor but also with respect to the guarantor (see Art. 2051, par. 2.) for the reason that he stands with respect to the guarantor on the same footing as the latter does with respect to the principal debtor.



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ART. 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated. The benefi t of division against the co-guarantors ceas-es in the same cases and for the same reasons as the ben-efi t of excussion against the principal debtor. (1837)

Benefi t of division among several guarantors. (1) In whose favor applicable. — In addition to the benefi t of exhaustion granted under Article 2058, this article entitles the several guarantors of only one debtor and for the same debt, to what is known as the benefi t of division. This benefi t cannot be availed of it there are two or more debtors of one debt, even if they are bound solidarily, each with different guarantors, or if there be two or more guarantors of the same debtor but not only for the same debt. (2) Extent of liability of several guarantors. — Their liability is only joint, that is, the obligation to answer for the debt is divided among all of them. (see Art. 1208.) Therefore, the guarantors are not liable to the creditor beyond the shares which they are respectively bound to pay. (3) Exceptions. — The exception to this rule is when solidarity has been expressly stipulated. (see Art. 2047, par. 2.) The benefi t of division also ceases if any of the circumstances enumerated in Article 2059 should take place, as would the benefi t of exhaustion of the debtor’s property. (see Cacho vs. Valles, 45 Phil. 107 [1923].)

EXAMPLES: (1) If G and H are the guarantors of the debt of D to C in the amount of P10,000.00, C can demand from G or H only one-half of the obligation unless G and H had bound themselves solidarily with D in which case they would be sureties and, therefore, C can hold each of them responsible for the entire amount of P10,000.00.

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C may also demand from G or H the entire obligation in the cases mentioned in Article 2059 as where G or H has expressly renounced the benefi t of division. (2) If G and H are the guarantors of D and E (solidary debtors), respectively, for the debt of P10,000.00 which D and E borrowed from C, C can hold either G or H responsible as guarantor for the entire amount of P10,000.00. Here, the debtors are distinct and the guarantors are bound by distinct ties to different debtors. If the obligation of D and E is joint, there are actually two debts, the debt of D for P5,000.00 and the debt of E for P5,000.00. G, for instance, cannot demand that the claim of C for P5,000.00 against D be divided between G and H.

ILLUSTRATIVE CASE: One bond guarantees up to fi rst P3,000.00 and another, amount in excess of P3,000.00 up to P2,000.00 and debtor failed to pay P2,500.00 Facts: To secure the fulfi llment of the obligation of D, up to the sum of P3,000.00 under a contract with C who agreed to deliver to D merchandise for sale on consignment under certain specifi ed terms, G (insurance company) executed a bond of P3,000.00. The value of the merchandise received by D having exceeded P3,000.00 in value, H (another insurance company) executed a bond of P2,000.00 with the same terms and conditions as the bond of G, the understanding between the parties being that this bond would respond for the obligation of D only insofar as it might exceed the amount of P3,000.00 secured by the bond of G. C brought action against G and H for the amount of P2,500.00 which D recognized but was unable to pay. Issue: Is G entitled to the benefi t of division? Held: No. The benefi t of division is applicable only where there are several guarantors or sureties of only one debtor for the same debt. In the instant case, although the two bonds on their face appear to guarantee the same debt co-extensively up to P2,000.00 — that of G alone extending beyond the sum up to P3,000.00 — in reality said bonds, or G and H, do not guarantee the same debt, because G guarantees only the fi rst P3,000.00 and H, only the excess over and above said amount



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up to P5,000.00. Article 2065, therefore, does not apply to this factual situation. (Mira Hermanos, Inc. vs. Manila Tobaconists, Inc., 74 Phil. 367 [1943].)

Benefi t of excussion among several guarantors. In order that a guarantor may set up the benefi t of exhaustion of the property of the debtor, he must point out to the creditor available property of the debtor with which to satisfy the debt. (Art. 2060.) But in order that the guarantor may be entitled to the benefi t of division, it is not required that he point out the property of his co-guarantors. The reason is obvious. The obligation of the guarantor with respect to his co-guarantors is not subsidiary, but direct and does not depend as to its origin on the solvency or insolvency of the latter, although afterwards, if one of them should turn out to be insolvent, his share has to be borne by the others. (Art. 2073, par. 2.) Where, however, a creditor claims the share of a guarantor from the others on the ground of insolvency (Art. 2065, par. 2.), the latter can set up against the creditor the existence of the property of the supposed insolvent, possessing the same conditions as are required by Article 2060. (see 11 Manresa 295.)

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SECTION 2. — Effects of Guaranty Between the Debtor and the Guarantor

ART. 2066. The guarantor who pays for a debtor must be indemnifi ed by the latter. The indemnity comprises: (1) The total amount of the debt; (2) The legal interests thereon from the time the pay-ment was made known to the debtor, even though it did not earn interest for the creditor; (3) The expenses incurred by the guarantor after hav-ing notifi ed the debtor that payment had been demanded of him; (4) Damages, if they are due. (1838a)

Guaranty, a contract of indemnity. Since the debtor is the one directly and principally liable, it is just that the guarantor who makes payment must be indemnifi ed by said debtor. The indemnity comprises: (1) Total amount of the debt. — It is evident that the guarantor has no right to demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment. (Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924].) Of course, he cannot collect more than what he has paid. (Saenz vs. Yap Chuan, 16 Phil. 76 [1910]; see Arts. 2054 and 2063.)

ILLUSTRATIVE CASE: Debtor bound himself to pay guarantor as soon as the latter may have become liable whether or not he shall have actually paid creditor.

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Facts: G Company signed a note for P10,000.00 in favor of C Company to guarantee a liability of D Company to C. In turn, D and its president, E, the latter in his personal capacity, executed a document wherein they bound themselves solidarily to reimburse G all such sums as G may pay or become bound to pay, upon its obligation to C, whether or not it shall have actually paid such sums or any part thereof. D was declared insolvent. C brought action against G to recover the value of the note and obtained fi nal judgment. Later, G fi led a complaint against E to recover the amount which G was sentenced to pay C, plus attorney’s fees, judicial costs and sheriff’s fees, and interest, although G had not, in fact, paid the amount of the judgment. Issue: Is G entitled to the relief sought in view of the above facts? Held: Yes. It is indisputable that D became bound by virtue of the fi nal judgment to pay the value of the note executed by it in favor of C, and according to the document executed solidarily by D and E, E bound himself to pay G as soon as the latter may have become bound and liable, whether or not it shall have actually paid. (Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924].) (2) Legal interest thereon. — The guarantor is entitled to legal interest from the time notice of payment of the debt was made known to the debtor. The notice is, in effect, a demand so that if the debtor does not pay immediately, he incurs in delay (see Art. 1169.), and, hence, renders him liable for legal interest, as indemnity, from then on. (see Art. 2209.) The liability is increased not because of the contract but because of the default and the necessity of judicial collection. (Phil. National Bank vs. Luzon Surety Co., 68 SCRA 207 [1975].) It is immaterial that the debt did not earn interest for the creditor, because the guarantor’s right to legal interest is granted by law by virtue of the payment he has made, and is independent of the creditor’s right to claim interest which was necessarily regulated by the stipulations between him and the debtor. (3) Expenses incurred by the guarantor. — The expenses referred to are only those that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (see Art. 2055, par. 2.), not those which depend upon his will or own acts

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or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor. (11 Manresa 305-306.) These expenses are limited to those incurred by the guarantor after having notifi ed the debtor that payment has been demanded of him by the creditor. The debtor is to blame for said expenses for it is within him to free himself from the responsibility by making payment, and if he does not do so, then they are attributable to his fault.

ILLUSTRATIVE CASE: Debtor is being held liable by guarantor for expenses incurred by the latter in litigation between him and creditor. Facts: See preceding illustrative case. Issue: Has G the right to recover from E more than the value of the note executed by G in favor of C? Held: E must not be held responsible for the expenses incurred by G in the litigation between it and C. That litigation was originated by G having failed to fulfi ll its obligation with C and it cannot charge E with the expenses it was compelled to make by reason of its own fault. It is entitled, however, to the expenses incurred by it in the action brought by it against E: interest on P10,000.00, the value of the note which it was sentenced to pay, from the date of the fi ling of the complaint until full payment thereof plus attorney’s fees. (Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924], supra.) (4) Damages, if they are due. — In other words, the guarantor is entitled to recover damages only if they are due in accordance with law. On this matter, the Code has not established any norm for determining the same. Consequently, the general rules on damages (Arts. 2195-2235.) shall apply. (see 11 Manresa 306.)

Exceptions to right to indemnity or reimbursement. The right to indemnity of the guarantor is subject to certain exceptions or qualifi cations. (see Arts. 2068, 2069, 2070, and 2081; see also Secs. 68 and 69, The Insolvency Law [Act No. 1956].) (1) Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can

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recover only insofar as the payment had been benefi cial to the debtor. (Art. 2050.) (2) Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it. (Art. 1238.) (3) The right to demand reimbursement is subject to waiver.

ART. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839)

Guarantor’s right to subrogation. (1) Effect of subrogation. — Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation. (Art. 1303.) Simply stated, except only for the change in the person of the creditor by the guarantor, the obligation subsists in all respects as before payment. The rights to indemnifi cation and subrogation established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defi ned under Article 2047. (Escaño vs. Ortigas, Jr., 526 SCRA 26 [2007].) (2) Accrual, basis, and nature of right. — This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Article 2066.

(a) It arises by operation of law upon payment by the guarantor. It is not necessary that the creditor cede to the guarantor the former’s rights against the debtor. (see Perez vs. Barcia, 52 Phil. 197 [1928]; 11 Manresa 308-309.) (b) The right of the guarantor who has paid a debt to subrogation stands, not upon contract but upon the principles of natural justice. (Somes vs. Molina, 9 Phil. 653 [1908].)

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(c) It is thus not a contractual right. The guarantor is sub-rogated, by virtue of the payment, to the rights of the creditor, not those of the debtor. (Art. 2067, par. 2.) Thus, a guarantor who has been obliged to contribute to the satisfaction of a judgment rendered against him and the principal debtor can-not exercise the right of redemption of his principal with re-spect to real property belonging to the latter which was sold by virtue of a writ of execution issued upon said payment. (Urrutia & Co. vs. Morena and Reyes, 28 Phil. 261 [1914].) (d) If the guarantor paid a smaller amount to the creditor by virtue of a compromise, he cannot demand more than he actually paid. (Art. 2067, par. 2; see Art. 2063.)

(3) When right not available. — The benefi t of subrogation is the means of effectuating the right of the guarantor to indemnity or reimbursement. It cannot, therefore, be invoked in those cases where the guarantor has no right to be reimbursed.

ILLUSTRATIVE CASES: 1. Guarantor seeks reimbursement for P20,000.00, the amount of the bond executed by sub-guarantors, notwithstanding that he paid only P8,000.00 of his bond. Facts: By order of the court, X, as judicial administrator of an estate, gave a bond to guarantee his administration. The judicial bond was executed by X, G, and others jointly and severally in favor of the Government for the sum of P60,000.00. In turn, X and fi ve (5) others, executed in favor of G another bond as follows: A for P20,000.00; and B, C, D, and E, for P5,000.00 each to guarantee the reimbursement of whatever amounts which G might be required to pay by reason of the judicial bond aforementioned. As guarantor in solidum of X who was replaced by H as the new administrator, G was ordered by the court to pay to the estate the sum of P48,000.00. G paid to H P8,000.00, G still owing P40,000.00 plus interest. X could not pay G. In the suit instituted by G against X, A, B, C, D, and E, the lower court absolved A from the claim by reason of the fact that the share of the bond concerning him was executed by an attorney in fact without suffi cient authority for the purpose,



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and ordered B, C, D, and E to pay G the sum of P2,000.00 each and in equal shares, the costs. Thus, B, C, D, and E would be paying the proportional share (P4,000.00 or P1,000.00 each) of A in the P8,000.00 paid by G as well as A’s part of the costs. Issue: Should B, C, D, and E reimburse G P5,000.00 each or a total of P20,000.00 notwithstanding that G had paid only P8,000.00 of his bond? Held: No. (1) Guarantor’s right of reimbursement limited to amount paid. — The right of subrogation cannot be interpreted in such absolute terms as to include more than the surety (guarantor) has paid, for, though it is true that he puts himself in the place of the creditor and should have the same rights as the latter in consequence of the subrogation, it is no less certain that there would be an unjust enrichment to the prejudice of the debtor, if the surety who pays for him were permitted to claim more than what he paid. Moreover, the benefi t of subrogation is the means of uti-lizing the right of reimbursement, and he could not collect as such, the excess from the rights and actions of the creditor over and above the advance made by him. (citing 12 Manresa 304.) (2) An action of subrogation is an action of indemnity. — When the purse of the surety has suffered no detriment, to sue the debtor in order that he provide funds for the surety in expectancy of the action of the creditor, is not to ask an indemnity, but to demand a guaranty to recover the loss when it may occur, and this guaranty was already obtained by G from X on the latter’s placing beforehand four (4) parties in his stead in order that they may at the proper time insure him of the restitution, the reimbursement of what he shall have paid. The security or bond given by B, C, D, and E in favor of G had no other purpose than, in case he should make payment, to defend himself against the proceedings of the administrator of the estate and from the danger of insolvency of the debtor X. (see Art. 2071.) In view of the foregoing, the amount to be paid by B, C, D, and E to G was fi xed at P1,000.00, with legal interest from the date on which G paid to H, the new administrator, the sum of P8,000.00 until its complete payment. They were also ordered to pay the costs of the action in equal shares. The costs of the

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appeal were assessed against appellant G. (Saenz vs. Yap Chuan, 16 Phil. 76 [1910].) ———— ———— ———— 2. After securing a judgment in a civil case based on a counter-guaranty with a partial satisfaction of said judgment, surety caused sale at public auction of shares pledged to it as additional security. Facts: Two securities were given to S (Domestic Insurance) for the faithful compliance of the obligation of P to pay promissory note P executed in favor of C, namely, the counter-guaranty agreement jointly executed by P, D and E, and the second was the pledge of shares of stock made by F. S paid C, thereby subrogating itself to the rights of the latter against P, the maker of the note. Subsequently, S sued P, D and F under the indemnity agreement, obtaining a judgment with partial satisfaction, by reason of which S caused the sale at public auction of the pledged shares, with S acquiring them as the highest bidder. Issue: When S instituted the civil action based on the guaranty-agreement and obtained a favorable judgment, did it abandon and waive its right or cause of action under the pledge agreement? Held: No. The indemnity agreement and the pledge agree-ment are two different securities, and as the creditor did not avail of the remedy to obtain a personal judgment against the debtor, it is not barred to enforce its claim against both securi-ties. From the nature of the situation, S cannot prosecute its claim against the two securities in one and the same action. The foreclosure of the pledged shares would not require an action in court, whereas it would be necessary if the claim would be enforced under the indemnity agreement. Further, the pledge of the shares of stock of F did not release the obligation of the indemnitors. The pledge was an additional security for the indemnifi cation of damages and losses which S might and did suffer, under the surety bond issued for P. (Gidwani vs. Domestic Insurance Co. of the Philippines, 122 SCRA 732 [1983].) ART. 2068. If the guarantor should pay without notify-ing the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840)



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Effect of payment by guarantor without notice to debtor. If the guarantor should pay without notifying the debtor, the latter may interpose against the guarantor, those defenses which he could have set up against the creditor at the time the payment was made. Thus, if the debtor has already paid the creditor, when the guarantor pays, the debtor can set up against the guarantor the defense of previous extinguishment of the obligation by payment. The guarantor cannot be allowed, through his own fault or negligence, to prejudice or impair the rights or interests of the debtor. (see Arts. 2069, 2070, 2074.)

ART. 2069. If the debt was for a period and the guaran-tor paid it before it became due, he cannot demand reim-bursement of the debtor until the expiration of the period unless the payment has been ratifi ed by the debtor. (1841a)

Effect of payment by guarantor before/after maturity. (1) If the debtor’s obligation is with a period, it becomes demandable only when the day fi xed comes. (Art. 1193, par. 1.) The guarantor who pays before maturity is not entitled to reimbursement since there is no necessity for accelerating payment. A contract of guaranty being subsidiary in character, the guarantor is not liable for the debt before it becomes due. The debtor will be liable if the payment was made with his consent or if the payment was subsequently ratifi ed by him. The ratifi cation may be express or implied. In any case, the guarantor can recover what he has paid upon the expiration of the period. (2) Where demand on the guarantor was made during the term of the guarantee, the fact that payment was actually made after said term is not material. What is controlling is that default and demand on guarantor had taken place while the guarantee was still in force. (JN Dev. Corp. vs. Phil. Export and Foreign Loan Guarantee Corp., 468 SCRA 555 [2005].)

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ART. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Neverthe-less, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a)

Effect of repeat payment by debtor. (1) General rule. — Before the guarantor pays the creditor, he must fi rst notify the debtor. (Art. 2068.) If he fails to give such notice and the debtor repeats the payment, the guarantor’s only remedy is to collect from the creditor, but he has no cause of action against the debtor for the return of the amount paid by him (guarantor) even if the creditor should become insolvent. Being at fault for not advising the debtor, the guarantor must bear the loss. (2) Exception. — However, the guarantor may still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present:

(a) the creditor becomes insolvent; (b) the guarantor was prevented by fortuitous event to advise the debtor of the payment; and (c) the guaranty is gratuitous.

In a gratuitous guaranty, the guarantor receives nothing and it would be unfair to deny him the right to recover from the principal debtor. If the creditor is solvent, the guarantor must still recover from him.

ART. 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him

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from the guaranty within a specifi ed period, and this pe-riod has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for payment;

(5) After the lapse of ten years, when the principal ob-ligation has no fi xed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of be-coming insolvent.

In all these cases, the action of the guarantor is to ob-tain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1843a)

Right of guarantor to proceed against debtor before payment. As a rule, the guarantor has no cause of action against the debtor until after the former has paid the obligation. (Art. 2066.) Article 2071 enumerates seven (7) instances when the guarantor may proceed against the debtor even before payment, and specifi es the remedy to which the guarantor is entitled. The purpose is to enable the guarantor to take measures for the protection of his interest in view of the probability that he would be called upon to pay the debt. The provisions of Article 2071 are applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co., 101 Phil. 494 [1957].)

Remedy to which guarantor entitled. The guarantor cannot demand reimbursement for indemnity because he has not paid the obligation. His remedy is to obtain release from the guaranty or to demand a security that shall protect him from any proceedings by the creditor, and against

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the danger of insolvency of the debtor. (see Perez vs. Barcia, 52 Phil. 197 [1928].) Remember that there are certain cases when the guarantor cannot claim the benefi t of excussion (see Art. 2059.) and in such cases it is but proper that the guarantor be given the right to proceed against the debtor. The guarantor’s remedies are alternative. He has the right to choose the action to bring.

Suit by guarantor against creditor before payment. The guarantor’s or surety’s action for release can only be exercised against the principal debtor and not against the creditor. The reason is plain. The creditor is not compellable to release the guarantor (which is a property right) before payment of his credit against his will. For the release of the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor’s assent for its validity. (see Arts. 1270 and 1301.) Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency. (Manila Surety & Fidelity Co., Inc. vs. Almeda Trading, 34 SCRA 137 [1970].) Absent the creditor’s consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter-guaranty as is authorized by Article 2071. (Ibid.)

Article 2066 and Article 2071 distinguished. In their purposes, Articles 2066 and 2071 are quite distinct although in perfect harmony, the latter making more clearly effective the purpose of the former. (1) The fi rst provides for the enforcement of the rights of the guarantor against the debtor after he has paid the debt; the second, for his protection before he has paid but after he has become liable. The one gives a right of action after payment, the other a protective remedy before payment.



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(2) The one is a substantive right, the other of the nature of a preliminary remedy. (3) The one gives a right of action, which, without the pro-visions of the other, might be worthless. The remedy given in Article 2071 seeks to obtain for the guarantor “release from the guaranty or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.” Article 2066, strictly speaking, has no such purpose. When the guarantor’s rights under this article become available, he is past the point where a preliminary protective remedy is of any value to him. (Kuenzle & Streiff vs. Tan Sunco, 16 Phil. 670 [1910].)

ILLUSTRATIVE CASES: 1. Guarantor who obtained judgment against debtor (his principal), levied upon, before having paid the debt guaranteed, property of the debtor who is a defendant in a suit fi led by another creditor for recovery of an indebtedness. Facts: C instituted an action against D for the recovery of an indebtedness. Before C could secure judgment, G brought action against D for the payment of another obligation for which G acted as guarantor. D confessed judgment in favor of G. Immediately after obtaining judgment, G caused to be levied upon under execution all the property of D. C commenced action to set aside the judgment, claiming it was obtained by the fraud and collusion, and that G had not paid the debt for which as guarantor he obtained the judgment. Issue: Is a guarantor who sues his principal before paying the debt himself entitled to recover judgment for the debt? Held: No. It being evident that the purpose of Article 2071 is to give to the guarantor a remedy in anticipation of the payment of the debt, which debt being due, he could be called upon to pay at any time, the only procedure to enforce that right is by action. G availed himself of that right against D, the debtor. The method employed by him to realize his end was unusual but not of itself fraudulent. The evidence adduced was held insuffi cient to establish fraud and collusion as would justify a decision setting aside the judgment assailed.

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But while G has the right to obtain as he did the judgment against the principal debtor, he ought not to be allowed to realize on said judgment to the point of actual collection of the same until he has satisfi ed or caused to be satisfi ed the obligation, the payment of which he assures. Otherwise, a great opportunity for collusion and improper practices between the guarantor and his principal would be offered which might result to the injury and prejudice of the creditor who holds the claim against them. In short, a guarantor who obtains judgment against his principal cannot execute said judgment against the latter’s property until he has paid the debt for which he stands as guarantor. (Kuenzle & Streiff vs. Tan Sunco, supra.) ———— ———— ———— 2. Guarantor brought action against principal debtor for reimbursement but there was still a controversy as to whether or not guarantor actually paid creditor. Facts: G Indemnity Co. fi led a complaint against D for the recovery of P2,000.00 representing the amount of a loan allegedly taken by D from PNB, the payment of which G guaranteed with an indemnity bond, and for which D as counter-guaranty executed in G’s favor a mortgage on a parcel of land. There exists a controversy in the complaint and answer as to whether or not G had actually paid D’s obligation to the PNB. Issue: Is the action by the guarantor (or surety) against the principal debtor for payment before the guarantor has paid the creditor premature? Held: Yes. The matter of whether or not the guarantor has actually paid the creditor should be decided in the affi rmative before the guarantor can claim reimbursement from the principal debtor. Under the last paragraph of Article 2071, a guarantor who has not paid the creditor can proceed against the principal debtor only for the purpose of obtaining release from the guaranty or a security against an eventual insolvency of the debtor. An action by the guarantor against the principal debtor for payment, before the former has paid the creditor, is premature. (General Indemnity Co., Inc. vs. Alvarez, 100 Phil. 1059 [1957]; see also Banzon vs. Cruz, 15 SCRA 475 [1972].)



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Recovery by surety against indemnitor even before payment. (1) Indemnity agreement for benefi t of surety. — An indemnity agreement is not executed for the benefi t of the creditor but rather for the benefi t of the surety; and if the indemnitor (principal debtor) voluntarily agrees to its terms and conditions, the obligations arising from the contract have the force of law. (Mercantile Insurance Co., Inc. vs. Ysmael Jr. & Co., 169 SCRA 66 [1989].) (2) Indemnity agreement may be against actual loss as well as liability. — An indemnity agreement whereby the indemnitor binds himself to indemnify the surety for any damage or prejudice the latter may sustain under the surety bond, may provide for indemnifi cation not only against actual loss but against liability as well. Such agreement is enforceable and not violative of any public policy. In a contract of indemnity against loss, an indemnitor will not be liable until the person to be indemnifi ed makes payment or sustains loss, while in contract of indemnity against liability, the indemnitor’s liability arises as soon as the liability of the person to be indemnifi ed has arisen without regard to whether or not he has suffered actual loss. (Cochingyan, Jr. vs. R & B Surety & Ins. Co., 151 SCRA 339 [1987]; Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA 805 [1990].) (3) Such agreement valid. — A stipulation, therefore, in an indemnity agreement providing that the indemnitor shall pay the surety as soon as the latter becomes liable to make payment to the creditor under the terms of the bond, regardless of whether the surety has made payment actually or not, is valid and enforceable, and in accordance therewith, the surety may demand from the indemnitor even before the creditor has paid. Hence, an action by the surety against the principal debtor and the indemnitor to enforce payment under such an agreement is not premature. (Security Bank & Trust Co., Inc. vs. Globe Assurance Co., Inc., 107 Phil. 733 [1960]; Cosmopolitan Insurance Co. vs. Reyes, 15 SCRA 258 [1965].) And where the principal debtors are simultaneously the same persons who executed the indemnity agreement, the position

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occupied by them is that of a principal debtor and indemnitor at the same time, and their liability being joint and several with the surety, the creditor may proceed against either. The principle of guarantee in Article 2071 does not apply, i.e., there is no more need for the surety to exhaust all the properties of the principal debtors before it may proceed against them. (Mercantile Insurance Co., Inc. vs. Ysmael, Jr. & Co., supra.)

ART. 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfi es the debt may sue either the person so requesting or the debtor for reimbursement. (n)

Guarantor of a third person at request of another. The guarantor who guarantees the debt of an absentee at the request of another has a right to claim reimbursement, after satisfying the debt either from: (1) the person who requested him to be a guarantor; or (2) the debtor. (see Art. 2050.)

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SECTION 3. — Effects of Guaranty as Between Co-guarantors

ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent. (1844a)

Right to contribution of guarantor who pays. The obligation of several guarantors of the same debtor and for the same debt is joint. (see Arts. 1207, 1208.) Each is bound to pay only his proportionate share. (see Art. 2065.) (1) Restrictions. — Article 2073 contemplates a situation which arises when one guarantor has paid the debt to the creditor and is seeking reimbursement from each of his co-guarantors the share which is proportionately owing him. It is required, however, that the payment must have been made (a) in virtue of a judicial demand, or (b) because the principal debtor is insolvent. (par. 3.) Without the requirement, the guarantor who pays the debt under circumstances giving him the right to contribution may proceed directly against his co-guarantors for their respective shares, with the latter having to incur the trouble and expense of claiming afterwards from the debtor what they have paid. On the other hand, if the guarantor proceeds fi rst against the debtor (see Art. 2067, par. 1.) who, as a consequence, makes payment,

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then not only the debtor but the co-guarantors as well would be discharged at once from their obligations. In the cases specifi ed, the guarantor is perfectly justifi ed in paying the debt because any delay on his part may increase the liability for interest, expenses and other items. (see Arts. 2055, par. 2; 2059[3, 5].) (2) Effect of insolvency of any guarantor. — If any of the guarantors should be insolvent, his share shall be borne by the others including the paying guarantor in the same joint proportion. (par. 2.) This follows the rule in solidary obligations. (see Art. 1217, par. 2.) (3) Accrual and basis of right. — The right of the guarantor who has paid the debt in either of the cases specifi ed to demand proportionate contribution or reimbursement from his co-guarantors is acquired ipso jure by the guarantor by virtue of said payment without the need of obtaining from the creditor any prior cession of rights to such guarantor.

EXAMPLE: G, H, and I are D’s guarantors of a debt of P9,000.00 in favor of C. If D becomes insolvent, the right of G, H, and I to proportionate division of their obligation ceases as far as C is concerned. (Arts. 2065, par. 2; 2059[3].) C may demand payment of the entire obligation from any of the guarantors. If G pays the whole debt of P9,000.00 he can later demand from H and I P3,000.00 each. But if H is insolvent, his share shall be borne by G and I proportionately. Under paragraph 2, G can, therefore, demand P4,500.00 from I. If the benefi t of division ceases for reasons other than the insolvency of the principal debtor (Art. 2059[1, 2, 4, and 5].), the right to reimbursement granted to G against H and I may only be exercised if G makes payment in virtue of a judicial demand by C.

ART. 2074. In the case of the preceding article, the co-guarantors may set up against the one who paid, the same defenses which would have pertained to the princi-pal debtor against the creditor, and which are not purely personal to the debtor. (1845)

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Defenses available to co-guarantors. In the action fi led by the paying guarantor against his co-guarantors for their proportionate shares in the obligation, the latter may avail themselves of all defenses which the debtor would have interposed against the creditor but not those which cannot be transmitted for being purely personal to the debtor. (see Arts. 2068, 2081.)

EXAMPLE: In the preceding example, if G sues H and I, the latter may raise the defense of payment by D by virtue of which the obligation was extinguished. Other defenses such as fraud, prescription, remission, illegality, etc. may also be set up because they are defenses inherent in the obligation (see Art. 1222.2) the effect of which is to nullify the obligation or render it effective. But if D was a minor at the time the obligation was contracted, the defense of minority is not available to H and I because it is personal to D.

ART. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is respon-sible to the co-guarantors in the same terms as the guar-antor. (1846)

Liability of sub-guarantor in case of insolvency of guarantor. In case of the insolvency of the guarantor for whom he bound himself, a sub-guarantor (Art. 2064.) is liable to the co-guarantors in the same manner as the guarantor (see Art. 2074.) whom he guaranteed.

2Art. 1222. A solidary debtor may, in actions fi led by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are per-sonal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

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EXAMPLE: In the example given under Article 2073, if F is the guarantor of I, and I becomes insolvent, F is liable to G for P3,000.00 or P4,500.00 if H is also insolvent.

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Chapter 3EXTINGUISHMENT OF GUARANTY

ART. 2076. The obligation of the guarantor is extin-guished at the same time as that of the debtor, and for the same causes as all other obligations. (1847)

Causes of extinguishment of guaranty. (1) Guaranty being accessory and subsidiary, it is also ter-minated when the principal obligation is extinguished. (see Mc-Conn vs. Associated Insurance & Surety Co., 4 SCRA 251 [1962].) The causes of extinguishment of obligations, in general, it will be recalled, are:

(a) payment or performance; (b) loss of the thing due; (c) condonation or remission of the debt; (d) confusion or merger of the rights of the creditor and debtor; (e) compensation; and (f) novation.

(2) Other causes of extinguishment of obligations are annulment, rescission, fulfi llment of a resolutory condition, and prescription. (Art. 1231.) Death of the principal is not a defense a surety can use to wipe out its monetary obligation under a performance bond. The obligation is merely passed on to the decedent’s estate. A surety’s liability to the creditor or promisee of the principal is direct and primary like the principal. (Stronghold Insurance Company, Inc. vs. Republic Asahi Glass Corporation, 492 SCRA 179 [2006].)

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(2) The guaranty itself may be directly extinguished although the principal obligation still remains such as in the case of the release of the guarantor made by the creditor. (see Art. 2078.)

Material alteration of principal contract. (1) Effect of material alteration. — It is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety, will release the surety from liability. (21 R.C.L., 1004; National Bank vs. Veraguth, 50 Phil. 253 [1927]; Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA 781 [2000].) It is based on the rule that such material alteration would constitute a novation or change of the principal contract which is consequently extinguished. Upon such extinguishment, the accessory contract to guaranty is also terminated and the guarantor cannot be held liable on the new contract to which he has not given his consent. (2) When alteration material. — In short, the guarantor or surety will not be released by a change in the principal contract where such change does not have the effect of making its obligation more onerous. (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145 [1952].) There must be change which imposes new obligation or added burden on the party promising or which takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof. (NASSCO vs. Torrento, 20 SCRA 427 [1967].)

(a) Thus, a novation where the credit of P40,000.00 is increased by an additional P30,000.00 (National Bank vs. Veraguth, 50 Phil. 253 [1927].); or where the principal debtor is substituted (Barretto y Cia vs. Albo, 62 Phil. 593 [1935].); or where the agency to sell granted to the debtor is extended to places other than that covered by the contract of agency (Asiatic Petroleum vs. Hizon, 45 Phil. 532 [1923]; but see Pacifi c Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957].), releases the guarantor who did not give consent thereto. (b) In a case, the increase in the amount of loan from P40,200 to P56,800 without the knowledge and consent of

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the surety was held material and prejudicial to the surety although its ability was limited to P10,000 because “the increase in the amount of the debt proportionately decreased the probability of the principal debtor being able to liquidate the debt, thus, increasing the risk undertaken by the surety to answer for the failure of the debtor to pay.” (Phil. National Bank vs. Court of Appeals, 147 SCRA 273 [1987].) (c) It has been held, however, that the increase in the interest rates without the guarantor’s consent does not release the guarantor where the creditor is demanding only the original and not the increased rate of interest. (National Bank vs. Escueta, 50 Phil. 991 [1927].) (d) An assignment by the creditor without the knowledge or consent of the surety is not a material alteration of the contract suffi cient to discharge the surety. (Phil. National Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956].) (e) A change in the technical specifi cations of the items to be purchased (diameter of the steel bars), but their amount, length and quality remained unchanged, and, the period for payment and the amount of liability of the principal debtor and the surety were also untouched, is not material. (NASSCO vs. Torrento, 20 SCRA 427 [1967].)

ILLUSTRATIVE CASES: 1. Pursuant to an agreement entered into without the knowledge of surety, debtor delivered to creditor properties the value of which surety bound itself to pay should debtor fail to return them. Facts: In a civil case against D, for the recovery of a sum of money, C obtained a preliminary attachment of certain properties of the latter. Later, D secured the discharge of the attachment by fi ling a bond posted by S for P2,000.00, the condition of the bond being that, should C obtain a judgment against D, the latter would return to the properties discharged from attachment to the Sheriff, and should he fail to do so, S would pay the value thereof. C and D entered into an agreement, without the knowledge of S whereby D delivered to C the properties in question to be sold at public auction. C was the highest bidder and the

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properties were adjudicated to him. Eventually, C obtained judgment against D for P2,000.00. C asked for execution against S. Issue: Is S released from its obligation as surety? Held: Yes. The agreement between C and D subsequently altered their juridical relations as to the properties discharged from attachment and for the delivery of which S was a surety, which alteration necessarily released S from its obligation as surety. The properties having been turned over to C and thereafter publicly sold and adjudicated to C under said agreement, the obligation of D to return the properties in satisfaction, of the judgment, was extinguished and compliance therewith became impossible by C’s own act (see Art. 1266.), thereby resulting in the release of the surety from its obligation to pay the value of said properties. (J.V. House vs. Dela Costa, 68 Phil. 742 [1939].) ———— ———— ———— 2. Respondent contends that the surety bonds executed by it to guarantee the fulfi llment of the obligation under a contract of sale, had been extinguished by the deed of assignment subsequently executed by it on the same date. Facts: Petitioner CSIC, issued two surety bonds in behalf of private respondent to guaranty the fulfi llment of an obligation under a contract of sale the latter had entered into with the Singer Sewing Machine Company. In consideration of the bonds, two indemnity agreements were executed by said respondent followed by a deed of assignment executed on the same date. After respondent’s failure to comply with its obligation under the contract of sale, petitioner was compelled to pay under the surety bonds. When respondent failed to reimburse it, petitioner fi led a collection suit. Respondent opposed the money claim, and asserted that the surety bonds and the indemnity agreements had been extinguished by the execution of the deed of assignment. Issue: Was the obligation under the surety bonds automati-cally extinguished by the deed of assignment? Held: No. The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety bonds was automatically extinguished. Respondent’s



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subsequent acts showed that the deed of assignment was intended merely as a security for the issuance of the two bonds. The Court found that partial payments were made after the execution of the deed of assignment to satisfy the obligation under the two surety bonds. Moreover, a second real estate mortgage in favor of petitioner was executed by respondent. These circumstances showed that no debt was extinguished upon the execution of the deed of assignment, which was intended merely as another security for the issuance of the surety bonds. (Citizens Surety and Insurance Co., Inc. vs. Court of Appeals, 162 SCRA 738 [1988].)

ART. 2077. If the creditor voluntarily accepts immov-able or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849)

Release by conveyance of property. Usually, payment is made in money. But any substitute paid in lieu of money which is accepted by the creditor extinguishes the obligation and in consequence, the guaranty. If the creditor accepts property in payment of a debt from the debtor (Art. 1245.), the guarantor is relieved from responsibility. This is also true even in case the creditor is subsequently evicted from the property. Eviction revives the principal obligation but not the guaranty. The creditor’s action against the debtor is for eviction and this is different from what the guarantor guaranteed. (see 12 Manresa 363-364.)

ART. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefi ts all to the extent of the share of the guarantor to whom it has been granted. (1850)

Release of guarantor without consent of others. As a rule, the guarantors enjoy the benefi t of division. (Art. 2065.) However, if any of them should be insolvent all the other guarantors must bear his share. (Art. 2073.) A release made by

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the creditor in favor of one of the guarantors without the consent of the others may thus prejudice the latter should a guarantor become insolvent. Under the above article, the release benefi ts all to the extent of the share of the guarantor released. (see Araneta and Uy vs. Commonwealth Insurance Co., 103 Phil. 522 [1958].)

EXAMPLE: G, H, and I are guarantors for a debt of P9,000.00. If G is released without the consent of H and I, then H and I will each be liable for only P3,000.00 or 1/3. H and I are benefi ted to the extent of P3,000.00, the share of G. If the release is made with their consent, H and I will each be responsible for P4,500.00 or 1/2. If G is released with the consent only of H, H is liable for P6,000.00 and I, for P3,000.00.

ART. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a)

Release by extension of term granted by creditor to debtor. (1) Where release without consent of guarantor. — If the creditor grants an extension of time to the debtor without the consent of the guarantor (or surety), the latter is discharged from his undertaking. The reason for the rule is the necessity of avoiding prejudice to the guarantor. The debtor (and/or indemnitors) may become insolvent during the extension, thus depriving the guarantor of his right to reimbursement. (12 Manresa 367.) The guarantor has the right to pay his creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. (Cochingyan, Jr. vs. R & B Surety and Insurance Co., 151 SCRA 339 [1987]; Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA 781 [2000].)



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(a) Payments due to debtor from third persons assigned to creditor. — Where a surety signed a promissory note issued by the principal debtor in favor of the creditor because of a deed of assignment whereby the debtor assigned to the creditor all payments to be received by the debtor from the third person, it was held that the approval by the creditor of the release by the third person of three (3) payments directly to the debtor without any notice to the surety was a violation of the deed of assignment. The creditor, in effect, received payments of the said three (3) releases. In approving the third payment after the promissory note became due, the creditor, in effect, extended the term of the payment of the note without the consent of the debtor, an act clearly detrimental to the latter. (Prudencio vs. Court of Appeals, 143 SCRA 7 [1986]; see Toh vs. Solid Bank Corporation, 408 SCRA 544 [2003].) (b) Where obligation payable in installments. — Where a guarantor is liable for different payments, such as installments for rents, or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety for the others. (Villa vs. Garcia Bosque, 49 Phil. 126 [1926].) But if the whole unpaid balance has become automatically due (under an acceleration clause) for failure to pay an installment, the act of the creditor of extending the payment of said installment, without the guarantor’s consent, discharges the guarantor because, in this case, the extension constitutes, in fact, an extension of the payment of the whole amount of the indebtedness. (Radio Corp. of the Phils. vs. Roa, 62 Phil. 212 [1935.) (c) Consent to extension waived in advance by guarantor. — A guarantor may waive in advance his right to be notifi ed of or to give consent to the release by the creditor of securities given or the extension of the time for payment. Such waiver is not contrary to law, nor to public policy. (People’s Bank & Trust Co. vs. Tambunting, 42 SCRA 119 [1971].) Thus, where under the terms of the bond executed by a surety company it had agreed to guarantee that a non-immigrant Chinese stu-dent “would actually depart from the Philippines on or be-

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fore April 7, 1958, or within such period as, in his discretion, the Commissioner of Immigration or his authorized repre-sentative may properly allow,” this amounts to the surety’s consent to all the extensions granted to the non-immigrant student referred to. Similarly, the extensions of loans do not release the surety where the “continuing guarantee’’ execut-ed by the surety provides that he consents and agrees that the bank “may, at any time or from time to time, extend or change the time of payments and/or the manner, place or terms of payment of all such instruments loans, advances, credits, or other obligations guaranteed by the surety.’’ (Ta-ñedo vs. Allied Banking Corporation, 344 SCRA 100 [2002].) (d) Payment by guarantor after creditor’s demand. — The benefi t of excussion, as well as the requirement of consent to extensions of payment are protective devices pertaining to and conferred on the guarantor which the latter may invoke as defenses to bar any unwarranted enforcement of the guarantee. However, the guarantor may opt not to avail of these defenses by paying the obligation according to the tenor of the guarantee once demand is made on him by the creditor. The principal debtor cannot raise against the guarantor defenses which only the guarantor may invoke against the creditor. (JN Dev. Corp. vs. Phil. Export and Foreign Loan Guarantee Corp., 468 SCRA 555 [2005].) (e) Extension not granted by creditor on the bond. — Where, by the terms of a bond, the surety guaranteed to the Government (Dept. of Education) compliance by a private school “with all its obligations, including the payment of the salaries of its teachers and employees” and an extension of time was granted by the teachers, Article 2079 was held not applicable as the (supposed) extension was not granted by the Government, the creditor on the bond. (General Insurance & Surety Corp. vs. Republic, 7 SCRA 4 [1963].) (f) Extension granted to fi rst-tier obligors. — Where under the indemnity agreement, whereby the indemnitors bound themselves jointly and severally to the surety for the faithful compliance with the terms of the surety bond issued by the surety in favor of the creditor to secure a credit line extended



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to the principal debtor, the indemnitors remained simply such bound to the surety but not to the creditor. Such creditor cannot directly demand payment of the principal obligations from the indemnitors. Hence, the fi rst sentence of Article 2079 does not apply. The indemnitors are second-tier parties so far as the creditor is concerned and any extension of time granted by the creditor to any of the fi rst-tier obligors (the principal debtor and the surety) cannot prejudice the second-tier parties. (Cochingyan, Jr. vs. R & B Surety & Ins. Co., Inc., 151 SCRA 339 [1987].)

(2) Prejudice to guarantor and period of extension immaterial. — It is unimportant whether the extension given has actually proved prejudicial or not to the guarantor or surety. The rule stated in Article 2079 is quite independent of the event. Nor does it matter for how short a period the time of payment may have been extended. The principle is the same whether the time is long or short. The creditor must be in such a situation that when the guarantor or surety comes to be substituted in his place by paying the debt (see Art. 2067, par. 1.), he may have an immediate right of action against the principal. The suspension of the right to sue for a month, or even a day, is as effectual to release the guarantor or surety, as a year or two years. (21 R.C.L. 1018-1020; Radio Corp. of the Phils. vs. Roa, supra.) (3) Extension must be based on a new agreement. — The exten-sion of the term must be based on some new agreement between the creditor and the principal debtor by virtue of which the credi-tor deprives himself of his claim. Hence, the mere failure or ne-glect on the part of the creditor to enforce payment or to bring an action upon a credit, as soon as the same or any part of it matures, does not constitute an extension of the term of the obli-gation (Hongkong & Shanghai Bank vs. Aldecoa & Co., 30 Phil. 255 [1915].) and, therefore, the liability of the guarantor is not extinguished. The rule applies even if the debtor should become insolvent subsequent to the maturity of the debt. (Bank of the Phil. Islands

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vs. Albadejo, 53 Phil. 141 [1929].) The reason is that the guarantor would not be prejudiced since he could avail himself of the right granted him under Article 2071, namely, to ask the debtor for a release or to demand a security. (4) Diligence on the part of creditor to enforce his claim generally not required. — True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an act would have wholly or partially released the guarantor or surety. But it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor.

(a) The mere inaction, indulgence, passiveness, or delay of the creditor in proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available constitutes no defense at all for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor. The theory that the creditor’s laches may discharge the surety, meaning by laches a negligent forbearance, is not generally accepted. The courts almost universally consider it essentially inconsistent with the relation of the parties to the contract. (Clark vs. Sellner, 42 Phil. 384 [1921]; 21 R.C.L. 1032-1034.) (b) The raison d’etre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfi ed with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. The leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. (No. 3) (c) In order to constitute an extension discharging the surety, it should appear that the extension was for a defi nite period, pursuant to an enforceable agreement between the



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principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and precludes the surety from paying the debt. (Palmares vs. Court of Appeals, 288 SCRA 422 [1998]; Filipinas Textile Mills, Inc. vs. Court of Appeals, 415 SCRA 635 [2003].)

(5) No cause of action against creditor for delay. — The law does not even grant the surety the right to sue the creditor for delay, as protection against the risks of possible insolvency of the debtor; but in view of the effi cacy of the action on the contract against the surety, beginning with the date the obligation becomes due, his vigilance must be exercised rather against the principal debtor. (Shannon & Shannon vs. Phil. Lumber Trans. Co., 61 Phil. 872 [1935].)

ART. 2080. The guarantors, even though they be soli-dary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. (1852)

Release when guarantor cannot be subrogated. (1) Fault of creditor for non-subrogation. — The guarantor who pays is entitled to be subrogated to all the rights of the creditor. (Art. 2067.) If there can be no subrogation because of the fault of the creditor, as when the creditor releases or fails to register a mortgage, the guarantors are thereby released. The same rule applies even though the guarantors be solidary. The rule is founded on the principle of law that the act of one cannot prejudice another. It also avoids opportunity for collusion between the creditor and the debtor or a third person. (2) Duty of creditor to account for his lien on principals’ property. — If the creditor has acquired a lien upon the property of a principal, the creditor at once becomes charged with the duty of

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retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this security as a primary resource for the payment of a debt, will discharge the surety to the extent of the value of the property or lien released for there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the value of the security in his hands. (Toh vs. Solid Bank Corporation, 408 SCRA 544 [2003].)

ILLUSTRATIVE CASE: (1) Creditor (assignee and agent) was negligent in its duty under the power of attorney to collect sums due to debtor (assignor and principal) from the latter’s debtors, thereby allowing such funds to be exhausted by other creditors. Facts: A (PNB) had opened a letter of credit and advanced thereon P120,000.00 for 8,000 tons of hot asphalt in favor of P. Of this amount, 3,000 tons worth P280,500.00 were released and delivered to P under a trust receipt guaranteed by S (surety company). To pay the asphalt, P constituted A, its assignee and attorney-in-fact to receive and collect from D (Bureau of Public Works), the amount aforesaid out of funds payable to A. The assignment stipulated that the power of attorney shall remain irrevocable until P’s total indebtedness to A has been fully liquidated. A regularly collected from D for about eight (8) months. Thereafter, for unexplained reasons, A stopped collecting from D, moneys falling due in favor of P before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other creditors. A brought suit against P and S to recover the balance of the indebtedness. Issue: Is S exonerated from liability to A? Held: Yes. Even if the assignment with power of attorney from the principal debtor (P) was considered as a mere additional security, still, by allowing the assigned funds to be exhausted without notifying the surety (S), A deprived the former of the possibility of taking recourse against the security. A thereby exonerated S, pursuant to Article 2080. (Phil. National Bank vs. Manila Surety & Fidelity Co., Inc., 14 SCRA 776 [1965].) ———— ———— ————



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(2) Petitioner obligated itself as a surety of borrower under a “Continuing Guaranty’’ executed in favor of lender-bank. Facts: Respondent Spouses applied for a loan with respondent SOLIDBANK. The loan was granted subject to the condition that Spouses execute a chattel mortgage over the three (3) vessels to be acquired by them and that a continuing guarantee be executed by petitioner EZ, Inc. in favor of Solid Bank. The following, among others, are the pertinent stipulations, in the “Continuing Guaranty:

“For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account of the borrower, x x x. x x x If default be made in the payment of any of the instruments, indebtedness or other obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or become insolvent, x x x, or if any funds or other property of the Borrower, or of the undersigned which may be or come into your possession or control or that of any third party acting in your behalf as aforesaid should be attached or distrained, or should be or become subject to any mandatory order of court or other legal process, then, or any time after the happening of any such event any or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty) due and payable by the undersigned forthwith without demand of notice x x x.’’

Spouses defaulted in the payment of the entire obligation upon maturity. SOLIDBANK fi led a complaint for sum of money with a prayer for preliminary attachment against Spouses and EZ, Inc. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the fi rst chattel mortgage in view of SOLIDBANK’s failure to register

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the chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety. The Court of Appeals affi rmed the decision of the Regional Trial Court in favor of SOLIDBANK. Issues: (1) Whether Article 2080 is applicable to petitioner; (2) Whether petitioner’s obligations to SOLIDBANK under the continuing guaranty is that of a surety; and (3) Whether the failure of SOLIDBANK to register the chattel mortgage extinguish petitioner’s liability to SOLIDBANK. Held: (1) Guaranty and surety distinguished. — “Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordi-narily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the credi-tor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor’s own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that sup-porting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notifi ed of the default of the principal. Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.’’ (2) Petitioner obligated itself as a surety. — “Based on the aforementioned defi nitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a “Continuing Guaranty,” is a contract of surety. The terms of the



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contract categorically obligate petitioner as “surety” to induce SOLIDBANK to extend credit to respondent spouses. The contract clearly discloses that petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses’ properties before it can hold petitioner liable for the obligation.’’ (3) Terminology used not controlling. — “The use of the term “guarantee” does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word “guarantee” is frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation. (24 Am. Jur. 876, cited in De Leon, Credit Transactions, 1984 ed., p. 187.) As aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties. (4) Article 2080 not applicable where liability is as surety. — “Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, fi nds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa (188 SCRA 647 [1990]), we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.’’ (5) Petitioner bound itself irrespective of existence of collateral. — “But even assuming that Article 2080 is applicable, SOLIDBANK’s failure to register the chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of the contract so provides: x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective of the existence, value or condition of any collateral, x x x. x x x No act or omission of any kind on your part in the premises shall in any event affect or impair this guaranty, x x x.

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No reversible error was committed by the Court of Appeals in rendering the assailed decision. ’’ (E. Zobel, Inc. vs. Court of Appeals, 290 SCRA 1 [1998].)

ART. 2081. The guarantor may set up against the credi-tor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are purely personal to the debtor. (1853)

Defenses available to guarantor against creditor. The defenses available to a debt as against a guarantor are provided in Article 2068, and those available to co-guarantors in Article 2074. Article 2081 provides for the defenses, except those which are purely personal to the debtor, that may be interposed by the guarantor as against the creditor. Inasmuch as the guarantor proceeded against takes the place of the debtor, it would be absurd and unjust to deny him the defenses of the latter because the guarantor who is only subsidiarily liable would be put in a worse position than the debtor, the one principally liable.

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Chapter 4LEGAL AND JUDICIAL BONDS

ART. 2082. The bondsman who is to be offered in vir-tue of a provision of law or of a judicial order shall have the qualifi cations prescribed in Article 2056 and in special laws. (1854a)

Meaning and form of bond. A bond, when required by law, is commonly understood to mean an undertaking that is suffi ciently secured, and not cash or currency. Of course, whatever surety bonds are submitted are subject to any objections as to their suffi ciency or as to the solvency of the bondsman. (Comm. of Customs vs. Alikpala, 36 SCRA 208 [1970].)

Qualifi cations of personal bondsman. A bondsman is a surety (Art. 2047, par. 2.) offered in virtue of a provision of law or a judicial order. He must have the qualifi cations required of a guarantor (Art. 2056.) and in special laws like the Rules of Court (Secs. 12, 13, Rule 114, Rules of Court.1);

1Sec. 12. Qualifi cations of sureties in property bond. — The necessary qualifi cations of sureties to a property bond shall be as follows:

(a) Each of them must be a resident owner of real estate with in the Philippines;(b) Where there is only one surety, his real estate must be worth at least the amount

of the undertaking; and(c) In case there are two or more sureties, they may justify severally in amounts

less than that expressed in the undertaking, if the entire sum justifi ed to is equivalent to the whole amount of bail demanded.

In all cases, every surety must be worth the amount specifi ed in the undertaking over and above all just debts, obligations and property exempt from execution.

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Nature of bonds. All bonds including “judicial bonds” are contractual in nature. Bonds exist only in consequence of a meeting of minds under the conditions essential to a contract. (see Art. 1305.) Judicial bonds constitute merely a special class of contracts of guaranty, characterized by the fact that they are given “in virtue . . . of a judicial order.” (Gerardo vs. Plaridel Surety and Ins., Co., 100 Phil. 178 [1956].)

ART. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered suffi cient to cover his obligation shall be admitted in lieu thereof. (1855)

Pledge or mortgage in lieu of bond. Guaranty or suretyship is a personal security. On the other hand, pledge or mortgage is a property or real security. If the per-son required to give a legal or judicial bond should not be able to do so, a pledge or mortgage suffi cient to cover the obligation shall be admitted in lieu thereof.

ART. 2084. A judicial bondsman cannot demand the ex-haustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the ex-haustion of the property of the debtor or of the surety.

Bondsman not entitled to excussion. A judicial bondsman and the sub-surety are not entitled to the benefi t of excussion because they are not mere guarantors, but sureties whose liability is primary and solidary. (see Almarza vs. Salas, 47 Phil. 724 [1925].)

Effect of negligence of creditor. The contract of suretyship is not that the creditor will see that the principal debtor pays his debt or fulfi lls his contract, but that the surety will see that the debtor pays or performs. (50

Arts. 2083-2084 GUARANTY AND SURETYSHIPLegal and Judicial Bonds


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Am. Jur. 904.) Hence, mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability.

ILLUSTRATIVE CASE: Creditor neglected to collect from principal debtor’s debtors, contrary to its duty as holder of irrevocable power of attorney from debtor. Facts: See illustrative case under Article 2080. A (PNB) contends that the power of attorney obtained from P was merely an additional security in its favor and that it was the duty of S (surety) and not that of the creditor (A), to see to it that the obligor (P) fulfi lls its obligation, and that the creditor owed the surety no duty of active diligence to collect any sum from the principal debtor. Issue: Is the argument of A tenable? Held: No. A is not held answerable for negligence in failing to collect from the principal debtor (P) but for its neglect in collecting the sums due to the debtor from D (Bureau of Public Works), contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections. (Arts. 1884, 1887.2) The power of A to collect was expressly made irrevocable, so that D could very well refuse to make payments to P, itself, and a fortiori reject any demands by S. (Phil. National Bank vs. Manila Surety & Fidelity Co., Inc., 14 SCRA 776 [1965].)

— oOo —

2Art. 1884. The agent is bound by his acceptance to carry out the agency, and is liable for the damages which, through his non-performance, the principal may suffer. x x x.

Art. 1887. In the execution of the agency, the agent shall act in accordance with the instructions of the principal.

In default thereof, he shall do all that a good father of a family would do, as required by the nature of the business.

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VIPLEDGE*

(Arts. 2085-2123.)Chapter 1

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfi llment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mort-gage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal ob-ligation may secure the latter by pledging or mortgaging their own property. (1857) ART. 2086. The provisions of Article 2052 are applica-ble to a pledge or mortgage. (n) ART. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)

*Title XVI, Book IV, Civil Code.

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Defi nition of pledge. Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable (Art. 2094.) or document evidencing incorporeal rights (Art. 2095.) for the purpose of securing the fulfi llment of a principal obligation with the understanding that when the obligation is fulfi lled, the thing delivered shall be returned with all its fruits and accessions.

Kinds of pledge. Pledge may be either: (1) Voluntary or conventional or one which is created by agreement of the parties; or (2) Legal or one which is created by operation of law. (see Art. 2121.)

Characteristics of the contract. Pledge is: (1) a real contract because it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is called the pledgee, or to a third person by common agreement; (2) an accessory contract because it has no independent exis-tence of its own; (3) a unilateral contract because it creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfi llment of the principal obligation; and (4) a subsidiary contract because the obligation incurred does not arise until the fulfi llment of the principal obligation which is secured.

Cause or consideration in pledge. Pledge is an accessory contract. Its cause insofar as the pledgor is concerned is the principal obligation. But if he is not the debtor (Art. 2085, par. 2.), the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor. As an accessory contract, its validity would depend on the validity of the principal obligation secured by it.

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Essential requirements of pledge and mortgage. Pledge, mortgage (see Art. 2124.), chattel mortgage (Art. 2140.), and antichresis (Art. 2132.) are different species of that kind of contracts which are all intended to secure the performance of a principal and pre-existing obligation by specially subjecting to such security, property or the fruits thereof. While they possess certain common characteristics, each has certain special features which are not present in the others. (1) Common requisites. — Articles 2085 and 2087 enumerate the essential requisites common to pledge and mortgage. Thus, a mortgage executed before the mortgagor became the owner of the property, such as before the issuance of a patent to the mortgagor, is void and ineffective (Vda. de Bautista vs. Marcos, 3 SCRA 434 [1961].) In all these contracts, ownership of the thing given as security is retained by the debtor. A pledge or mortgage, being merely an accessory agreement, its invalidity does not affect the principal contract of loan. While void, it can still be considered as an instrument evidencing an indebtedness. (Philippine National Bank vs. Banalao, 584 SCRA 95 [2009].) (2) Necessity of delivery. — In addition to the said requisites, the thing pledged must be delivered to the creditor or to a third person by common agreement. (Art. 2093.) Without delivery there can be no pledge because, precisely, in this delivery lies the security of the pledge. (12 Manresa 411.) In a contract of mortgage, the mortgagor, as a general rule, retains the possession of the property mortgaged. (Legaspi vs. Celestial, 66 Phil. 372 [1938]; Cosio and de Rama vs. Palileo, 17 SCRA 196 [1966].)

Constituted to secure fulfi llment of a principal obligation. Pledge and mortgage are purely accessory contracts like guarantee. They cannot exist without a valid obligation. (Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515 [1957]; Abustan vs. Ferrer, 12 SCRA 488 [1964].) However, they may guarantee a voidable, unenforceable, or natural obligation. (Arts. 2086, 2052.)

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The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. It has been said that a transfer of property by the debtor to a creditor, even if suffi cient on its face to make an absolute conveyance, should be treated as a pledge (or mortgage) if the debt continues in existence and is not discharged by the transfer. Thus: (1) Assignment of stocks executed by debtor together with indem-nity agreement. — In a case where the deed of assignment of stocks executed by the principal debtor in favor of his surety speaks of an outright sale, the fact that the debtor also executed an in-demnity agreement (which connotes a continuing obligation of debtor to surety) to indemnify the surety against all losses which it may incur in consequence of it having become a surety upon a bond in favor of the principal creditor was held as inconsistent with the theory of an absolute sale and as proof (together with other circumstances) that the parties intended the stock assign-ment as a pledge to complement the indemnity agreement and thereby suffi ciently guarantee the indemnifi cation of the surety should it be required to pay the creditor. (Lopez vs. Court of Ap-peals, 144 SCRA 671 [1982].) (2) Assignment of rights executed to guarantee an obligation. — An assignment of rights, receivables, title or interest under a contract to guarantee an obligation is, in effect, a pledge or mortgage and not an absolute conveyance of title which confers ownership on the assignee. In case of doubt as to whether a transaction is a pledge (or mortgage) or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. (Manila Banking Corp. vs. Teodoro, Jr., 169 SCRA 95 [1989].)

Constituted by the absolute owner. (1) It is essential that the contract be constituted only by the absolute owner of the thing pledged or mortgaged (see De Lara vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs. Phil. National Bank, 96 Phil. 157 [1954].), or at least by the pledgor or mortgagor with the authority or consent of the owner of the property pledged or

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mortgaged.1 A pledge or mortgage constituted by an impostor is void and the pledgee or mortgagee in such a case acquires no right whatsoever in the property.2

(2) A foreclosure sale, though essentially a forced sale, is still a sale in accordance with Article 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason why Article 2085 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan. (Cavite Development Bank vs. Lim, 324 SCRA 346 [2000].)

Property pledged or mortgaged. (1) Future property. — Future property cannot be pledged or mortgaged. (Dilag vs. Heirs of Resurreccion, 76 Phil. 650 [1946]; see Gen. Insurance & Surety Co. vs. Masakayan, 54 SCRA 120 [1973]; Vda. de Bautista vs. Marcos, 3 SCRA 434 [1961].) (2) Property acquired subsequently. — A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it. (Phil. National Bank vs. Rocha, 55 Phil. 497 [1930].) Thus, a mortgage executed before the mortgagor became the

1“The rule that persons dealing with registered lands can rely solely on the certifi -cate of title does not apply to banks x x x Banks indeed should exercise more care and prudence in dealing with registered lands than private individuals for their business is one affected with public interest, keeping in trust money belonging to their depositors which they should guard against loss by not committing any act of negligence which amounts to lack of good faith.’’ (Robles vs. Court of Appeals, 328 SCRA 97 [2000]; To-mas vs. Tomas, 98 SCRA 280 [1980].) It has been held that the due diligence required of banks extends even to persons or institutions regularly engaged in the business of lend-ing money secured by real estate mortgages. (Government Service Insurance System vs. Santiago, 414 SCRA 563 [2003].)

2See “Doctrine of mortgagee in good faith, under Article 2125.



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owner of the property, such as before the issuance of a patent to the mortgagor, is void and ineffective. (Vda. de Bautista vs. Marcos, 3 SCRA 434 [1961].) It is the registration and issuance of the certifi cate of title that segregate public lands from the mass of public domain and convert it into private property. (Development Bank of the Phils. vs. Court of Appeals, 253 SCRA 414 [1996].) (3) Transfer of motor vehicles registered subsequently. — The fact, however, that the chattel mortgage of a car was executed on a date earlier than the transfer of the registration certifi cate thereof in the name of the buyer-mortgagor but after the perfection of the contract of sale, does not render the said mortgage made by the latter in favor of the seller invalid, because the registration of the transfer of motor vehicles and of the certifi cates of license for their use in the Motor Vehicles Offi ces (now Land Transportation Offi ce) merely constitutes an administrative proceeding which does not bear any essential relation to the contract entered into between the parties. (Montano vs. Lim Ang, 7 SCRA 250 [1963].) (4) Share in a co-ownership. — Under Article 493 of the Civil Code, “[e]ach co-owner shall have the full ownership of his part and of the fruits and benefi ts pertaining thereto, and he may, therefore, alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership.” Hence, a mortgage of a conjugal property by one of the spouses is valid only as to one-half (1/2) of the entire property. (Phil. National Bank vs. Court of Appeals, 98 SCRA 207 [1980].) (5) Property covered by Torrens title. — Article 2085 which requires that the mortgagor must have the free disposal of the property or at least have legal authority to do so, does not apply where the property involved is registered under the torrens system. While it is true that under Article 2085 it is essential that the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certifi cate of title and does not have to inquire further. Stated differently, an innocent purchaser for value (like mortgagee) relying on a Torrens title issued is protected. (Duran vs. Inter-

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mediate Appellate Court, 138 SCRA 491 [1985]; Cebuhat vs. Court of Appeals, 366 SCRA 176 [2001].) This is the doctrine of “the mortgagee in good faith.’’ The public interest in upholding the indefeasibility of a certifi cate of title as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certifi cate of title. (Cavite Development Bank vs. Lim, supra; Llanto vs. Alzona, 450 SCRA 288 [2005].) The rule (see Note 1.) that persons dealing with registered lands can rely solely on the certifi cate of title does not apply to banks which should exercise more case and prudence in dealing with registered lands, than private individuals, for their business is one affected with public interest. If a bank failed to observe due diligence in ascertaining the real owner of registered land given as security for a loan especially where the amount thereof is substantial, it cannot be considered a mortgagee in good faith. This doctrine can well apply to the GSIS, a government corporation created for the purpose of providing social security and insured benefi ts to government employees, whose funds come from the monthly contributions of its members. (Government Service Insurance System vs. Court of Appeals, 287 SCRA 204 [1998]; see Cavite Development Bank vs. Lim, supra; Canlas vs. Court of Appeals, 326 SCRA 415 [2000].)

ILLUSTRATIVE CASE: The property in question was mortgaged by the registered owner, the previous registered owner claiming that the sale thereof to the former by the latter was a forgery. Facts: A deed of sale of ten lots was made by D (daughter) in favor of R (mother) who mortgaged the same property to E in whose favor a certifi cate of sale was issued by the sheriff after foreclosure proceedings and sale at public auction of the property. D claims that the deed of sale in favor of R is a forgery. At the time the mortgage was executed, E, in good faith, actually believed R to be the owner, as evidenced by the registration of the property in her name. Issue: Is the mortgage made by R in favor of E valid?



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Held: Yes. “Even on the supposition that the sale was void, the general rule that the direct result of a previous illegal con-tract cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply here for we are confronted with the functionings of the Torrens System of Registration. The doctrine to follow is simple enough: A fraudulent or forged document of sale may become the root of a valid title if the cer-tifi cate of title has already been transferred from the name of the owner to the name of the forger or the name indicated by the forger.” E was a buyer (mortgagee) in good faith and for value at the time the mortgage was executed. The fact that at the time of the foreclosure proceedings E may have already known of D’s claim is immaterial. A mortgagee has the right to rely on what appears in the certifi cate of title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the certifi cate and investigate the title of the mortgagor appearing on the face of said certifi cate. If the rule were otherwise, the effi cacy and conclusiveness of Torrens certifi cates of title would be futile and nugatory. Where innocent third persons relying on the correctness of the certifi cate of title issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certifi cate for that would impair public confi dence in the certifi cate of title; otherwise, everyone dealing with property registered under the Torrens System would have to inquire in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed, this is contrary to the evident purpose of the law. (Duran vs. Intermediate Appellate Court, supra.)

Pledgor or mortgagor has free disposal of property or has legal authority. The act of pledging or mortgaging is an act of strict ownership involving as it does an alienation or transmission of real rights in property. Hence, the pledgor or mortgagor must have the capacity or authority to dispose of the property. (1) “Free disposal of the property” means that the property must not be subject to any claim of a third person.

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(2) “Capacity to dispose of property” means that the pledgor or mortgagor has the capacity or the authority to make a disposition of the property.

Thing pledged or mortgaged may be alienated. This is also the essence of pledge and mortgage because they are constituted to secure the fulfi llment of a principal obligation. Although this condition is not expressly stated in the contract, it is necessarily implied as an inherent element of the transaction of mortgage or pledge. (see Afable vs. Ruiz, [CA] No. 17164-R, Dec. 7, 1959, 56 O.G. 3767.) So, the creditor does not automatically become the owner if at the time stipulated the obligation is still unfulfi lled. (see Art. 2112.) The only remedy given to the mortgagee or pledgee is to have the security given sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgage or pledge. (Martinez vs. Phil. National Bank, 93 Phil. 765 [1953].) The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale. (see Arts. 2103, par. 1; 2112.) In the sale of the property mortgaged or pledged, just as in any ordinary contract of sale, there must be a “meeting of the minds” with respect to the specifi c subject of the contract, i.e., that what the vendor is selling is exactly what the vendee is purchasing. In the absence of such understanding as to the identity of the property being sold, no sale may be considered perfected. (see Lang vs. Acting Prov. Sheriff of Surigao, 93 Phil. 661 [1953].)

Creditor not required to sue to enforce his credit. The pledgee or mortgagee is not obligated to fi le an independent action for the enforcement of his credit. To do so would be a nullifi cation of his lien and would defeat the purpose of the pledge or mortgage which is to give him preference over the property given as security for the satisfaction of his credit. (see Northern Motors, Inc. vs. Coquia, 68 SCRA 374 [1975].)



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Pledgor or mortgagor may be a third person. It is not necessary that the principal debtor should always be the pledgor or mortgagor. (Art. 2085, par. 2.) (1) Accommodation pledge or mortgage. — It is not necessarily void simply because the accommodation pledgor or mortgagor did not benefi t from the same. Ordinarily, he is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that he should be appraised beforehand of the entire amount of the loan. (see Belo vs. Philippine National Bank, 353 SCRA 359 [2001].) As long as valid consent was given, the fact that the loan was solely for the benefi t of the debtor would not invalidate the pledge or mortgage. (Lustan vs. Court of Appeals, 266 SCRA 663 [1997]; Vda. de Jayme vs. Court of Appeals, 390 SCRA 380 [2002].) (2) Duty of mortgagee to make proper inquiry. — The creditor, however, is required to exercise due care and prudence by making proper inquiry where the debtor borrows money and mortgages another person’s property to secure the loan without the consent of the latter and he is guilty of negligence if he relied solely on the representations made by the debtor, particularly where the creditor is engaged in the banking business — a business affected with public interest. (Rural Bank of Caloocan, Inc. vs. Court of Appeals, 104 SCRA 151 [1981].) Where the mortgagee acts with undue haste in granting mortgage loans and does not ascertain the ownership of the lands being mortgaged, as well as the authority of the supposed agent executing the mortgage, it cannot be considered an innocent mortgagee. (Insurance Services and Commercial Traders, Inc. vs. Court of Appeals, 341 SCRA 572 [2000].) So long as valid consent was given, the fact that the loan was given solely for the benefi t of the principal debtor would not invalidate the mortgage. (Government Service Insurance System vs. Court of Appeals, 170 SCRA 533 [1989].) (3) Where mortgage gratuitous. — Where the contract of mortgage (or pledge) is purely gratuitous, the same should be

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strictly construed. In accordance with Article 1378 of the Civil Code, said contract should be so interpreted as to effect “the least transmission of rights or interests” as possible. (Buiser vs. Cabrera, 81 Phil. 669 [1948].) (4) Liability for defi ciency. — The pledgor or mortgagor who pledged or mortgaged his property to guarantee an indebtedness of another person, without expressly assuming personal liability for such debt, is not liable for the payment of any defi ciency, should the property not be suffi cient to cover the debt. (See Parson Hardware Co., Inc. vs. Acosta, [CA] Nos. 1943-44-R, May 5, 1949; Phil. Trust Co. vs. Echaves, 52 Phil. 852 [1929]; Bank of America vs. American Realty Corporation, 321 SCRA 659 [1999]; see Wise & Co. vs. Tanglao, 63 Phil. 372 [1936], under Art. 2058.)

(a) He is not solidarily bound with the principal obligor. Although pledge or mortgage may be an accessory contract, that fact alone does not make a third party pledgor or mortgagor solidarily bound with the principal debtor in fulfi lling the principal obligation. His liability extends only to the property pledged or mortgaged. Should there be any defi ciency, the creditor has recourse on the principal debtor, the signatory to the principal contract, who remains to be primarily bound. (b) A special power of attorney authorizing another to mortgage one’s property as security of the former’s obliga-tion does not of itself make the person executing the same a co-mortgagor of the debtor. (Cerna vs. Court of Appeals, 220 SCRA 517 [1993].) Thus, it has been held that an accommoda-tion mortgagor as such is not in any way liable for the pay-ment of the loan or principal obligation of the debtor/bor-rower. His liability extends only up to the loan value of his mortgaged property and not to the entire loan itself. Hence, he may redeem his mortgaged property by paying only the winning bid price thereof (plus interest and expenses there-on) at the public auction sale. (Belo vs. Philippine National Bank, supra.)



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ILLUSTRATIVE CASE: Jewelry delivered to agent for sale on commission was pledged by him without knowledge of owner to pawnshop which acted in good faith. Facts: P (principal) brought action for replevin of certain jewelry owned by her which she delivered for sale on commission to A (agent), and pledged without her knowledge by A in the pawnshop of B, who refused to deliver the said jewelry unless fi rst redeemed. B acted in good faith in accepting the pledge. Issue: Has B the right to collect the sum loaned to A out of the value of the said jewelry? Held: No. The contract of pledge was null and void, since A was not the owner of the jewelry pledged. “Between the supposed good faith of B and the undisputed good faith of P, the owner of the jewelry, neither law nor justice permit that the latter, after being the victim of embezzlement, should have to choose one of the two extremes of a dilemma, both of which without legal ground or reason, are injurious and prejudicial to his interests and rights, that is, she must either lose her jewelry or pay a large sum received by the embezzler as a loan from B, when P is not related to the latter by any legal or contractual bond out of which legal obligations arise. The business of pawnshops, in exchange for the high and onerous interest which constitutes its enormous profi ts, is always exposed to the contingency of receiving in pledge or security for the loans, jewels and other articles that have been robbed, stolen, or embezzled from their legitimate owners, and as the owner of the pawnshop accepts the pledging of jewelry from the fi rst bearer who offers the same and asks for money on it, without assuring himself whether such bearer is not the owner thereof, he cannot, by such procedure, expect from the law more preferential protection than the owner of the jewels or other articles, who was deprived thereof by means of a crime and is entitled to be excused by the courts.” (Arenas vs. Raymundo, 19 Phil. 46 [1911].) Note: The owner of personal property may recover the possession of the same from a pawnshop where another person had pledged it without authority to do so. Article 5993 applies

3Art. 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same.

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and the defense that the pawnshop acquired possession of the thing without notice of any defect in the title of the pledgor is unavailing. The owner is not estopped from pursuing an action against the pawnshop for the recovery of the possession of the property. Teehankee, J., concurring: The phrase “unlawfully deprived” in Article 559 extends to all cases where there has been no valid transmission of ownership, including the case where the proprietor has entrusted the thing to a borrower, depositary, or lessee who has sold the same. It is not used in the specifi c sense of deprivation by robbery or theft. To recover the lost article, the criminal conviction of the embezzler is not essential. (Dizon vs. Suntay, 47 SCRA 160 [1972].)

Pledge and real mortgage distinguished. The following are the distinctions. (1) Pledge is constituted on movables (Art. 2094.), while mortgage, on immovables. (Art. 2124.) (2) In pledge, the property is delivered to the pledgee, or by common consent to a third person (Art. 2093.), while in mortgage, delivery is not necessary (Legaspi & Salcedo vs. Celestial, 66 Phil. 372 [1938].); and (3) Pledge is not valid against third persons unless a description of the thing pledged and the date of the pledge

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor.

Art. 104. What is included in civil liability. — The civil liability established in Articles 100, 101, 102, and 103 of this Code includes:

1. Restitution;2. Reparation of the damage caused;3. Indemnifi cation for consequential damages. (Rev. Penal Code)Art. 105. Restitution — How made. — The restitution of the thing itself must be made

whenever possible, with allowance for any deterioration, or diminution of value as determined by the court.

The thing itself shall be restored, even though it be found in the possession of a third person who has acquired it by lawful means, saving to the latter his action against the proper person who may be liable to him.

This provision is not applicable in a case in which the thing has been acquired by the third person in the manner and under the requirements which, by law, bar an action for its recovery. (Rev. Penal Code)



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appear in a public instrument (Art. 2096.), while mortgage is not valid against third persons if not registered. (Art. 2125.) For defi nition of “mortgage,” see comments under Article 2124.

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

Right of creditor where debtor fails to comply with his obligation. The property given in pledge or mortgage stands as security for the fulfi llment of the principal obligation. (Art. 2085, par. 1.) (1) Sale of subject properly with formalities required by law. — If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled to move for the sale of the thing pledged or mortgaged (Art. 2087.) with the formalities required by law in order to collect the amount of his claim from the proceeds. (see Rango vs. Salmon, 15 Phil. 436 [1910]; Guanzon vs. Argel, 33 SCRA 374 [1970]; Mahoney vs. Tuason, 39 Phil. 952 [1919].) Upon failure of the mortgagor to pay his obligation within the required period, the remedy of the mortgagee is to foreclose the mortgage and if he wishes to secure a title to the mortgaged property, he can buy it in the foreclosure sale. An action for con-solidation of ownership is an inappropriate remedy on the part of the mortgagee in equity. (Montevirgen vs. Court of Appeals, 112 SCRA 641 [1982]; Vergara vs. People, 450 SCRA 482 [2005].) (2) Prohibition against appropriation of property. — The pled-gor’s or mortgagor’s default does not operate to vest in the pledgee or mortgagee the ownership of the property for any such effect is against public policy. The creditor in a contract of real security like pledge and mortgage, cannot appropriate to himself without foreclosure the thing held as pledge or under mortgage, nor can he dispose of the same as owner. (Art. 2088.) The prohibition applies to an immovable which is the object of the contract of antichresis. (see Art. 2137.) The act of the mort-gagee, for example, in registering the property mortgaged in his

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own name upon the mortgagor’s failure to redeem the property would amount to the exercise of the privilege of a mortgagee in a pactum commissorium. (Reyes vs. Sierra, 93 SCRA 472 [1979]; A. Francisco Realty & Development Corp. vs. Court of Appeals, 298 SCRA 349 [1998].) The only exception to pactum commissorium is provided in Article 2112.

Prohibition against pactum commissorium. (1) Stipulation null and void. — A stipulation whereby the thing pledged or mortgaged or under antichresis (Art. 2137.) shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fi xed is known as pactum commissorium or pacto commisorio which is forbidden by law and declared null and void. (Art. 2088; see Vda. de Reyes vs. De Leon, 20 SCRA 369 [1967]; Hechanova vs. Adil, 144 SCRA 450 [1986].) By such a stipulation, the creditor would be able to acquire ownership of the property given as security without need of public sale or foreclosure required by law. “This forfeiture clause has traditionally been outlawed because it is contrary to good morals and public policy.” (Report of the Code Commission, p. 156.) The reason for the prohibition is that the amount of the loan is ordinarily much less than the real value of the thing pledged or mortgaged. (2) Requisites. — There are two requisites or elements for pactum commissorium to exist, namely:

(a) There should be a pledge, mortgage, or antichresis of property by way of security for the payment of the principal obligation; and (b) There should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment of the obligation within the stipulated period. (Uy Tong vs. Court of Appeals, 161 SCRA 383 [1988].)

It is immaterial that the questioned stipulation was volun-tarily and freely entered into, pactum commissorium being void for being prohibited by law. (Ong vs. Roban Lending Corpora-tion, 557 SCRA 516 [2008].)

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(3) Stipulation presupposes existence of security contact. — Pactum commissorium referred to in Articles 2088 and 2137, therefore, presupposes the existence of mortgage or pledge or that of an antichresis. Thus, it has been held that there was no pactum commissorium where pursuant to the contract of sale, the sums already paid by the vendee were forfeited for his failure to pay the stipulated installments in due time considering that the person to whom the property was forfeited (vendor) was the real and equitable owner of the same because title would not pass until payment of the last installment. (see Caridad Estate vs. Santero, 71 Phil. 144 [1940].) There is also no pactum commissorium where the alienation of the subject property was by way of security and not by way of satisfying or extinguishing the debt of the debtor. (Ong vs. Roban Lending Corp., supra.) (4) Effect on security contract. — The vice of nullity which vitiates such a stipulation does not affect substantially the principal contract of pledge, mortgage, or antichresis with regard to its validity and effi cacy for the reason that the contract, having been perfected, can subsist although the contracting parties have not agreed as to manner the creditor can recover his credit inasmuch as the law has expressly established the procedure in order that he may recover the same, in case the debtor does not comply with his obligation. In short, the security contract remains valid; only the prohibited stipulation is void. (Mahoney vs. Tuason, 39 Phil. 952 [1919].)

ILLUSTRATIVE CASES: 1. If sum loaned is not paid, property of debtor would be considered as absolutely sold to creditor for said sum. Facts: D borrowed money from C under the agreement that if, at the expiration of the period stipulated, the sum loaned should not be paid, it would be understood that the house and lot owned by D, be considered as absolutely sold to C for the said sum. No payment was made by D within the time fi xed. In view of the refusal of D to deliver the property, C brought action to recover the property and rents from D.

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Issue: Is the contract in question in the nature of a pactum commissorium? Held: No. We have in this case a contract of loan and a promise of sale of property, the price of which should be the amount loaned, if within a fi xed period of time such amount should not be paid by the debtor-vendor (D) of the property to the creditor-vendee (C) of the same. The fact that the parties have agreed at the same time, in such a manner that the fulfi llment of the promise of sale would depend upon the nonpayment or return of the amount loaned, has not produced any change in the nature and legal conditions of either contract or any essential defect which would tend to nullify them. Pactum commissorium indicates the existence of the con-tracts of mortgage, or of pledge, or of antichresis, none of which has coincided in the loan in question. The property does not appear mortgaged. (see Art. 2125.) Said property could not be pledged, not being personal property, and notwithstanding the said double contract the debtor (D) continued in possession thereof and the said property had never been occupied by the creditor (C). Neither was there any contract of antichresis (see Art. 2132.) by reason of said contract of loan inasmuch as C has never been in possession thereof, nor has he enjoyed the said property nor for one moment ever received its rents. (Alcantara vs. Alinea, 8 Phil. 111 [1907].) ———— ———— ———— 2. Buyer executed a deed of assignment in favor of seller of property sold, pursuant to a judgment rendered in an action for specifi c performance fi led by seller. Facts: B and S agreed on the sale of trucks by the latter to the former. When B defaulted in the payment of the second and third installments, S fi led an action in court for specifi c performance. The trial court rendered judgment for S and ordered B to pay the balance of his obligation and in case of failure to do so, to execute a deed of assignment pursuant to the judgment. Issue: Is the deed of assignment in the nature of a pactum commissorium? Held: No. There was no contract of pledge or mortgage entered into by the parties; nor a case of automatic appropriation of the property by S because it took the intervention of the trial



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court to exact fulfi llment of the obligation, which by its very nature is “. . . anathema to the concept of pacto commissorio.” And even granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as it was executed pursuant to a valid judgment as can be gleaned from its very terms and conditions. (Uy Tong vs. Court of Appeals, 161 SCRA 383 [1988].)

Prohibition refers to stipulation authorizing automatic appropriation. What is prohibited by Article 2088 in connection with pacto commissorio is the automatic appropriation by the creditor of the thing pledged or mortgaged upon failure of the debtor to pay his debt within the period agreed upon by virtue of authority or right previously given the creditor. Thus: (1) A stipulation providing that the mortgaged property “shall be considered in full payment without further action in court” in case of nonpayment is null and void being in the form of pacto commissorio. (Reyes vs. Nebrija, 48 Phil. 639 [1926]; see Northern Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392 [1973].) (2) A stipulation in a purported pacto de retro sale (see VII, note 2.) that the ownership over the property sold would auto-matically pass to the vendee in case no redemption was effected within the stipulated period, is contrary to the nature of a true pacto de retro sale, under which the vendee acquires ownership of the thing sold immediately upon the execution of the sale, subject only to the vendor’s right of redemption. The said stipulation is a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclo-sure. It is void. Its insertion in the contract is an avowal of the intention to mortgage, rather than to sell, the property. (Lanuza vs. De Leon, 20 SCRA 369 [1969].)

Permissible stipulations. (1) Subsequent modifi cation of original contract. — The stipula-tions that are prohibited by Articles 2080 and 2137 (antichresis)

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are those executed or made simultaneously with the original contract, not those subsequently entered into. The principle does not prohibit modifi cation of the original contract by subsequent agreement such as the parties may see fi t to adopt. (Cojuangco vs. Gonzales, 93 Phil. 718 [1953].) (2) Subsequent voluntary cession of property. — The prohibition does not include a subsequent voluntary act of the debtor making cession of the property mortgaged in payment of the debt which amounts in its legal effect to a novation of the original contract and to a voluntary sale of the said property for the amount of the debt. (Ocampo vs. Potenciano, [CA] 48 O.G. 2230.) (3) Promise to assign or sell. — Neither is the prohibition applicable to a promise to assign or sell said property in payment of the obligation if, upon its maturity, it is not paid because the title thereto remains in the debtor. The promise is merely a personal obligation of the mortgagor and does not in any way bind the property.

(a) The mortgagor can validly sell the property to a third person and if there should be any action accruing to the mortgagee, it would be a personal action for damages against the mortgagor. (see, however, Bustamante vs. Rosel, 319 SCRA 413 [1999], infra.) (b) If the vendee contributed to the breach of the contract by the mortgagor, the former, together with the latter, may also be held liable for damages; or if the vendee was guilty of fraud which would be a ground for rescission of the sale in his favor, the mortgagor and not the mortgagee would be the party entitled to bring the action for annulment. (Guerrero vs. Yuigo & Court of Appeals, 96 Phil. 77 [1954]; Dulay vs. Aquiatin & Maximo,4 47 Phil. 951 [1925]; Tan Chun Tic vs.

4In a dissenting opinion, Justice Street said: “It is not to be denied that a mortgagor of property may transfer the mortgaged property to the creditor in satisfaction of the mort-gage debt after the mortgage has fallen due. But such a transfer implies the independent exercise of the power vested in the mortgagor, as owner . . . By virtue of this stipulation (to the effect that in case the specifi ed date should arrive and the debtor should be un-able to pay the amount due, it should be paid with the property security), the debtor was bound to transfer the property to the creditor in satisfaction of the mortgaged debt, the mortgagor being unable at the time to pay the same. Said stipulation should be declared



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West Coast Life Insurance Co. and Locsin, 54 Phil. 361 [1930].) (4) Authority to take possession of property upon foreclosure. — A stipulation authorizing the mortgagee, for the purpose therein specifi ed, to take possession of the mortgaged premises upon foreclosure of a mortgage is not repugnant to either Article 2088 or Article 2137. On the contrary, such a stipulation is in consonance with or analogous to the provisions of Articles 2132, et seq. regarding antichresis and the provisions of the Rules of Court (Rule 59.) regarding the appointment of a receiver as a convenient and feasible means of preserving and administering the property in litigation. (Agricultural and Industrial Bank vs. Tambunting, 73 Phil. 555 [1942]; Development Bank of the Phils. vs. Dayan, 582 SCRA 403 [2009].)

ILLUSTRATIVE CASES: 1. Mortgagor appoints mortgagee in deed of assignment as attorney-in-fact with authority to dispose of mortgage properties in case of default of mortgagor and to apply the proceeds in the payment of loan. Facts: C, a grantee of a Fishpond Lease Agreement from the Government, obtained from DBP three (3) separate loans, each of which was covered by a promissory note. Simultaneous with the execution of the notes was the execution of “Assignment of Leasehold Rights’’ by C, as borrower of the mortgaged properties by way of security in the payment of the loans. Condition No. 12 provides for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights in case of default by C and to apply the proceeds to the payment of the loan. Issue: (1) Whether the condition in question constitute pactum commissorium.

invalid, as contrary to the spirit, if not the letter of Article 1859 (now Art. 2088), as well as directly contrary to the general principles of jurisprudence applicable to the relation of mortgagor and mortgagee. If a stipulation of this kind is valid, every mortgage in which such stipulation is inserted will become self-executing and the debtor, upon making de-fault in the payment of the debt, will be bound to transfer the property in satisfaction of the mortgage, with the result that the right of redemption is lost from the mere fact that the debtor is unable to pay at the date stipulated.”

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(2) Whether the act of DBP in appropriating to itself C’s leasehold rights with foreclosure proceedings was contrary to Article 2088 and, therefore, invalid. Held: (1) Elements of pactum commissorium are not present. — “Condition No. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon CUBA’s failure to pay the loan on time. x x x This provision is a standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the principal obligation.’’ (2) DBP exceeded authority vested by condition. — “DBP, however, exceeded the authority vested by condition No. 12 of the deed of assignment. As admitted by it during the pre-trial, it had “[w]ithout foreclosure proceedings, whether judicial or extrajudicial . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fi shpond in question.’’ Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. The deed stated:

‘WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein vendees [Cuba spouses] the former acquired all the rights and interest of the latter over the above-described property;

x x x x x x The Title to the real estate property [sic] and all improvements thereon shall remain in the name of the vendor until after the purchase price, advances and interest shall have been fully paid.’ (Emphasis supplied.)

It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBA’s leasehold rights merely on the strength of the deed of assignment. DBP cannot take refuge in condition No. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier, condition No. 12 did not provide that CUBA’s default would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee.’’ (Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14 [1998].)



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———— ———— ———— 2. The lender is given the option to buy at a certain price the property given as collateral in the event the borrower fails to pay. Facts: Respondent C (lender) entered into a loan agreement with petitioner B (borrower) and her late husband, under, among others, the following terms and conditions:

“2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN PERCENT (18%) per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the event the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein.’’

When the loan was about to mature on March 1, 1989, C proposed to buy at the pre-set price of P200,000 the collateral given to guarantee the payment of the loan, but B refused to sell. On March 1, 1989, B tendered payment of the loan to C which the latter refused to accept, insisting B’s signing a prepared deed of absolute sale. C consigned the amount of P47,500 with the trial court with which C fi led a complaint for specifi c performance. In arriving at the amount deposited, C considered the principal loan of P100,000 and 18% interest per annum thereon, which amounted to P52,500, leaving a balance of P47,500 from the amount of P200,000. On the other hand, B fi led a petition for consignation and deposited the amount of P153,000 with the trial court. Issue: Whether the stipulation in the loan contract was valid and enforceable. Held: (1) Stipulation embraced in concept of pactum commissorium. — “B did not fail to pay the loan. x x x when C refused to accept payment, B consigned the amount with the trial court. x x x A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as

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security for the loan. This is embraced in the concept of pactum commissorium, which is proscribed by law. The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.” (2) Intent to appropriate property given as collateral appears to be evident. — “A signifi cant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words used by the parties to project that intention. In this case, the intent to appropriate the property given as collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non-payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.’’ (3) Duty of court to protect necessitious borrowers. — “All persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their fi nancial burden albeit temporarily. Hence, courts are duty bound to exercise caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey.’’ (Bustamante vs. Rosel, 319 SCRA 413 [1999].) Note: Here, the agreement between the parties was not a sale with right of repurchase, but a loan with interest of 18% per annum for a period of two (2) years and if B fails to pay, C was given the option to purchase the property given as collateral for P200,000. There was no stipulation for automatic appropriation by C of the property in case of non-payment of the loan within the stipulated period.

Risk of loss of property pledged or mortgaged. As the pledgee or mortgagee does not become the owner of the property pledged or mortgaged and the ownership thereof remains with the debtor, therefore, under the maxim, res perit domino suo, the debtor-owner bears the loss of the property.



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The principal obligation is not extinguished by the loss of the pledged or mortgaged property. (Warner, Barnes, & Co., Ltd. vs. Flores, 1 SCRA 881 [1961].)

ART. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not com-pletely satisfi ed. Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have the right to the ex-tinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfi ed. (1860) ART. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

Pledge or mortgage indivisible. A pledge or mortgage is one and indivisible as to the contract-ing parties (National Bank vs. Agudelo, 58 Phil. 655 [1933].) and the rule applies even if the obligation is joint and not solidary. (Arts. 2090, 1207, 1208.) Generally, the divisibility of the principal obligation is not affected by the indivisibility of the pledge or mortgage. (Gonzales vs. GSIS, 107 SCRA 492 [1981].) As a conse-quence of this indivisibility: (1) Single thing. — Every portion of the property pledged or mortgaged is answerable for the whole obligation as soon as it falls due. (see Phil. National Bank vs. Amores, 155 SCRA 445 [1987].)

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(2) Several things. — When several things are pledged or mortgaged to secure the same debt in its entirety, all of them are liable for the totality of the debt and the creditor does not have to divide his action by distributing the debt, among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are liable for such balance. The debtor cannot ask for the release of one or some of the several properties pledged or mortgaged (or any portion thereof) or the proportionate extinguishment of the pledge or mortgage unless and until the debt secured has been fully paid. (Dayrit vs. Court of Appeals, 36 SCRA 548 [1970]; Vda. De Jayme vs. Court of Appeals, 390 SCRA 380 [2002]; see Yap vs. Philippine Commercial International Bank, 485 SCRA 56 [2006].) (3) Debtor’s heir/creditor’s heir. — The debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinction of the pledge or mortgage (par. 2.) nor can the creditor’s heir who has received his share of the debt return the pledge or cancel the mortgage if the debt is not completely satisfi ed. (par. 3.)

Exceptions to rule of indivisibility. (1) Where each one of several things guarantees determinate portion of credit. — The exception is where there are several things given in pledge or mortgage and each one of them guarantees only a determinate portion of the credit. (pars. 3 and 4.) Actually it is not an exception because in such a case, there would be as many pledges or mortgages as there are things given in pledge or mortgage.

EXAMPLES: (1) A borrowed from B P20,000.00 and to guarantee payment, A pledged his diamond ring worth P15,000.00 and a pair of earrings worth P5,000.00. If A pays P15,000.00, he cannot ask for the return of the ring because both the ring and the earrings are given to secure payment of the entire obligation of P20,000.00. This is because the pledge is indivisible. B may cause the sale of either or both for the payment of his credit. (see Art. 2112.) The same is true if A dies leaving W and X as his heirs and W pays P15,000.00 to B.



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If the creditors are B and C, and A pays B P15,000.00, B cannot return the ring to the prejudice of C who has not received his share. The same is true if B is the only creditor and he dies leaving Y and Z as his heirs and A pays Y P15,000.00. However, if it was agreed that the ring was given to secure the payment of P15,000.00 and the earrings, the balance of P5,000.00, and A (or his heir W) pays P15,000.00, A can demand the return of the ring. (2) A and B are jointly liable to C in the sum of P20,000.00 secured by A’s ring worth P15,000.00 and B’s watch worth P5,000.00. If A pays P15,000.00, he cannot demand the return of the ring even if their liability is only joint or proportionate because pledge is indivisible. Indivisibility is not the same as solidarity. The former refers to the object or prestation of the obligation, while the latter, to the legal tie of the obligation.

(2) Where only portion of loan was released. — The rule of indivisibility of the mortgage as outlined by Article 2089 presupposes several heirs of the debtor or creditor. It was held not applicable to a situation where out of an P80,000.00 loan agreement entered into by a bank and a borrower, only P17,000.00 was released, such that the real estate mortgage on the loan became unenforceable to the extent of P63,000.00 or 78.75% and subsists as a security only for the P17,000.00 debt or 21.25%. In other words, in case of default by the borrower, the mortgage can be foreclosed only to the extent of 21.25%. Thus, if the mortgage covers 100 hectares of land, the foreclosure shall extend to 21.25 hectares only. (Central Bank of the Phils. vs. Court of Appeals, 139 SCRA 46 [1985].) (3) Where there was failure of consideration. — Neither does it apply where there was failure of consideration on the part of the mortgagee as where the mortgagee (bank) took over the management of the borrowing corporation as one of the conditions for the granting of the loan, and said corporation was led to bankruptcy thru mismanagement, thereby defeating the very purpose of the loan, for it is as if the loan was never delivered. (Rose Packing Co., Inc. vs. Court of Appeals, 167 SCRA 309 [1988].)

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(4) Where there is no debtor-creditor relationship. — Although a mortgage (or pledge) is indivisible as to the contracting parties and as to their successors in interest, it is not so with respect to a third person who did not take part in the constitution thereof either personally or through an agent. (Philippine National Bank vs. Agudelo, 58 Phil. 655 [1933].) From the wordings of the law (Art. 2089, par. 1.), indivisibility arises only when there is a debt, that is, there is a debtor-creditor relationship. The indivisibility concept is not applicable to the right of redemption of an accommodation mortgagor and his assignee with respect to whom this relationship is not present. Thus, in a case where the mortgage covers four (4) parcels of residential lots belonging to the debtor-mortgagor and an agricultural land belonging to the accommodation mortgagor who assigned her right to redeem to petitioners, it was held that petitioners, being total strangers to said lots, lack legal personality to redeem the same. Fair play and justice demand that petitioners, who are not indebted to the mortgagee, redeem only the property belonging to their assignor. (Belo vs. Philippine National Bank, 353 SCRA 350 [2001].)

Foreclosure of mortgage constituted on several properties. The rule that real property, consisting of several lots, should be sold separately, applies to sales in execution (Sec. 19, Rule 39, Rules of Court.) and not to foreclosure of mortgages. (1) A mortgage, even if constituted on two or more properties, is one and indivisible (Art. 2089.), that is, it cannot be divided among the different properties, and the mortgagee has the right to have the properties either or both, jointly or singly, sold to satisfy his claim. (Villar vs. Javier de Paderanga, 97 Phil. 604 [1955]; Aquino vs. Macondray & Co., Inc., 97 Phil. 731 [1955]; Phil. National Bank vs. Mallorca, 21 SCRA 694 [1967].) (2) And even assuming that the rule cited applies to foreclosure sales, the sale of the mortgagor’s properties cannot be set aside in the absence of evidence to show that a better price could have been obtained if they were sold separately, or the sale of one or some alone would bring suffi cient proceeds to satisfy



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the mortgage credit. (Villar vs. Javier and Paderanga, supra; Hernan vs. La Urbana, 59 Phil. 621 [1936]; Tria vs. Villareal, 69 Phil. 478 [1940].)

Where real mortgage and chattel mortgage in one instrument. The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole. Both remain distinct agreements, differing not only in the subject matter of the contract, but also in the governing legal provisions. The mortgagee, therefore, may legally foreclose the real estate mortgage extrajudicially and waive the chattel mortgage foreclosure, and maintain instead a personal action for the recovery of the unpaid balance of the credit. (Phil. Bank of Commerce vs. Macadaeg, 109 Phil. 981 [1960]; De La Rama vs. Sajo, 45 Phil. 703 [1924]; Solomon vs. Dantes, 63 Phil. 522 [1936]; Bachrach Motor Co. vs. Icarangal, 68 Phil. 287 [1939].)

ART. 2091. The contract of pledge or mortgage may se-cure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861)

All kinds of obligations can be secured by pledge or mortgage. Any kind of obligation, whether pure or conditional, may be secured by a contract of pledge or mortgage. The same applies in guaranty which may also secure a conditional obligation. (Art. 2053, see Arts. 2086, 2052.) The pledge agreement may stipulate that the pledge will also stand as security for any future advancements or renewals thereof that the pledgor may procure from the pledgee. (China Banking Corp. vs. Court of Appeals, 270 SCRA 503 [1997].)

ART. 2092. A promise to constitute a pledge or mort-gage gives rise only to a personal action between the con-tracting parties, without prejudice to the criminal respon-

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sibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

Promise to constitute pledge or mortgage creates no real right. A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal right binding upon the parties and creates no real right in the property. In other words, what exists is only a right of action to compel the fulfi llment of the promise but there is no pledge or mortgage yet. (see Mitsui Bussan Kaisha vs. Hongkong & Shanghai Bank, 36 Phil. 27 [1917].) It has been held that the creditor can enforce an agreement to constitute a mortgage together with the right to recover the indebtedness they being in no wise inconsistent with each other. (Laplana vs. Garchitorena Chereau, 48 Phil. 163 [1925].)

Criminal responsibility of pledgor or mortgagor. Under the Revised Penal Code, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same or knowing that the real property is encumbered shall dispose of the same as unencumbered. (Art. 316[1, 2] thereof.) It is essential that fraud or deceit be practised upon the vendee at the time of the sale.

— oOo —



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Chapter 2PROVISIONS APPLICABLE ONLY TO

PLEDGE*

ART. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the con-tract of pledge, that the thing pledged be placed in the pos-session of the creditor, or of a third person by common agreement. (1863)

Transfer of possession essential in pledge. A pledge is a real contract which requires delivery for its perfection. (Art. 1316.) (1) To constitute contract. — An agreement to constitute a pledge only gives rise to a personal action between the contracting parties. (Art. 2092.) Unless the movable given as security by way of pledge be delivered to and placed in the possession of the creditor or of a third person designated by common agreement, the creditor acquires no right to the property because pledge is merely a lien and possession is indispensable to the right of a lien. (U.S. vs. Terrell, 2 Phil. 222 [1903].) Without delivery, therefore, there cannot be a pledge. (McMicking vs. Martinez, 15 Phil. 204 [1910].) (2) To affect third persons. — Article 2096 (infra.) has been interpreted in the sense that for the contract to affect third persons, apart from being in a public instrument, possession of the thing pledged must, in addition, be delivered to the pledgee. (Ong vs. Intermediate Appellate Court, 201 SCRA 543 [1991].)

*The Pawnshop Regulations Act (Pres. Decree No. 114.) regulates the establishment and operation of pawnshops. (see Appendix 10.)

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Type of delivery depends upon nature of thing pledged. (1) Actual delivery. — The delivery of possession referred to in Article 2093 as essential to the validity of a pledge means actual possession of the property pledged and a mere symbolic delivery is not suffi cient. Thus, where the animal pledged by A to B were actually in the possession of C and nothing was stated in the contract that C was by common consent made by the depositary of B who never took possession of the animal, it was held that no pledge had been constituted. (Betita vs. Ganzon, 49 Phil. 87 [1926].) (2) Constructive delivery. — It has been held, however, in an earlier case, that the symbolical transfer of the goods by means of the delivery of the keys to the warehouse where the goods were stored was suffi cient to show that the depositary appointed by common consent of the parties was legally placed in possession of the goods, since the owner, as pledgor, could no longer dispose of the same, the pledgee being the only one authorized to do so through the depositary and special agent who represented him. (Banco Español-Filipino vs. Peterson, 17 Phil. 409 [1910].) Whether or not a symbolic or constructive delivery is suf-fi cient to validate a pledge would depend on the peculiar nature of the thing pledged.

ILLUSTRATIVE CASE: Because vessels pledged remained in pledgor’s possession, merely “subject to the order of the pledgee,” pledgor contended that pledge was not effective. Facts: D borrowed money from C. As security, D executed a contract of pledge over his vessels which, however, were not actually delivered to C but remained in D’s possession “who shall hold said property subject to the order of the Pledgee.” D defaulted. Pursuant to the terms of the pledge, C took possession of the vessels and sold the same. D contended that the pledge was not effective because there was only constructive and not actual delivery of the vessels to C. Issue: Is the contention of D tenable?

Art. 2093 PLEDGEProvisions Applicable Only to Pledge


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Held: No. “In Betita vs. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Español vs. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse suffi ced. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the ‘pledgor to the pledgee who shall hold said property subject to the order of the pledgee.’ Considering the circumstances of the case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is suffi cient.” (Yuliongsui vs. Phil. National Bank, 22 SCRA 585 [1968].)

ART. 2094. All movables which are within commerce may be pledged, provided they are susceptible of posses-sion. (1864) ART. 2095. Incorporeal rights, evidenced by negotia-ble instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be in-dorsed. (n)

Subject matter of pledge. (1) “In the very nature of things, a pledge (or chattel mort-gage) is confi ned and limited to personal property (Arts. 416, 417.1) and it cannot be extended or made to apply to real prop-

1Art. 416. The following things are deemed to be personal property:(1) Those movables susceptible of appropriation which are not included in the

preceding article;(2) Real property which by any special provision of law is considered as person-

alty;(3) Forces of nature which are brought under control by science; and (4) In general, all things which can be transported from place to place without

impairment of the real property to which they are fi xed.

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erty.” (Pacifi c Commercial vs. National Bank, 49 Phil. 236 [1926].) The movable must be within the commerce of men and suscep-tible of possession. (Art. 2094.) (2) Incorporeal rights evidenced by documents whether negotiable or not may also be pledged. The document must be delivered to the creditor; if negotiable, it must be indorsed in favor of the creditor. (Art. 2095.)

ART. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a)

Public instrument necessary to bind third persons. (1) Contents of public instrument. — Even if all the essential requisites provided in Articles 2085 and 2093 are present, the contract of pledge is not effective against third persons unless in addition to delivery of the thing pledged, it is embodied in a public instrument (i.e., one attested and certifi ed by a public offi cer authorized by law to administer oath, such as a notary public) wherein it shall appear the description of the thing pledged; and the date of the pledge. Article 2096 prescribes a requirement without which the contract of pledge cannot adversely affect third persons, such as, for example, the innocent buyer of the thing pledged notwithstanding that the pledgee has already taken possession of the same. (Ocejo Perez & Co. vs. International Bank, 37 Phil. 631 [1918]; Bachrach Motor Co. vs. Lacson Ledesma, 64 Phil. 681 [1937].) (2) Object of the requirement. — The object is to forestall fraud, because a debtor may attempt to conceal his property from his creditors when he sees it in danger of execution by simulating a pledge thereof with an accomplice. (Tec Bi & Co. vs. Chartered

Art. 417. The following are also considered as personal property:(1) Obligations and actions which have for their object movables or demandable

sums; and (2) Shares of stock of agricultural, commercial and industrial entities, although

they may have real estate.



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Bank of India, 41 Phil. 576 [1921].) The requirement is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of the pledge contract, but a rule of substantive law prescribing a condition without which the execution of a contract of pledge cannot affect third persons adversely. (Caltex [Phils.], Inc. vs. Court of Appeals, 212 SCRA 448 [1992].)

ART. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is trans-mitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n)

Alienation by the pledgor of thing pledged. The pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledgee consents to the sale. As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee subject to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation (Art. 2112.) and that the pledgee must continue in possession during the existence of the pledge. (Arts. 2093, 2098.) But the pledge would not bind or adversely affect third persons unless Article 2096 has been followed. “The second part of Article 2097 furnishes one of those cases in the Code where ownership is transferred without actual delivery of the thing alienated.” (Report of the Code Commission, p. 156.)

ILLUSTRATIVE CASE: Plaintiff in a case, who has previously assigned in favor of his creditor his litigated credit in said case, by a deed of assignment which was duly submitted to the court, entered into a compromise agree-ment thereafter releasing the defendant therein from his claim with-out notice to his assignee. Facts: T brought an action against M for the collection of a sum of money. While the case was pending resolution, T assigned in favor of L by way of securing or guaranteeing T’s

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obligation to L his litigated credit against M duly submitted to the court with notice to the parties. The lower court ruled in favor of T. Subsequently, pending resolution of the appeal of M to the Court of Appeals, M entered into a compromise agreement with T wherein T acknowledged that all his claims against M had been settled. After the Court of Appeals rendered a decision affi rming in toto the decision of the lower court, M fi led a motion for reconsideration praying that said decision be set aside, principally anchored upon the ground that a compromise agreement was entered into between him and T which, in effect, released M from liability. The validity of the guarantee or pledge in favor of L has not been questioned and it appears that the deed of assignment fulfi lls the requisites of a valid pledge or mortgage. Issue: Is the compromise agreement valid? Held: No. Although M may validly alienate the litigated credit under Article 1634,2 said provision should not be taken to mean as a grant of an absolute right on the part of the assignor (T) to indiscriminately dispose of the thing or the right given as security. It should be read in consonance with Article 2097. Although the pledgee or assignee (L) did not ipso facto become the creditor of M, the pledge being valid, the incorporeal right assigned by T in favor of L can only be alienated by T with due notice to and consent of L or his duly authorized representative. To allow the assignor to dispose of or alienate the security without notice to and consent of the assignee will render nuga-tory the very purpose of a pledge or an assignment of credit. Moreover, under Article 1634, the debtor (M) has a correspond-ing obligation to reimburse the assignee (L) for the price the lat-ter paid or for the value given in consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by T in favor of M by way of a compromise agreement does not bind L.

2Art. 1634. When a credit or other incorporeal in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid.

A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same answered.

The debtor may exercise his right within thirty days from the date the assignee demands payment from him.



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Furthermore, having knowledge of the assignment, M was estopped from entering into the compromise agreement without notice to and consent of L, more so, in the light of the fact that no reimbursement has ever been made in favor of L as required under Article 1634. M acted in bad faith and in connivance with T so as to defraud L in entering into the compromise agreement. (Estate of G. Litton vs. Mendoza, 163 SCRA 246 [1988].)

ART. 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. (1866a)

Right of pledgee to retain thing pledged. As has been stated, the possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its return until the debt secured by it is paid. (see Art. 2105; see Serrano vs. Court of Appeals, 196 SCRA 107 [1991].) But the right of retention is limited only to the fulfi llment of the principal obligation for which the pledge was created.

EXAMPLE: D owes C P500.00. As security, D pledged his diamond ring. Later, D again borrowed P200.00. C has a right to retain the thing until the P500.00 is paid. But C cannot retain the thing until he has been paid the remaining debt of P200.00. C’s right of retention is limited to the payment of the P500.00 for which the ring was given in pledge.

Under the old Civil Code (Art. 1866, par. 2.), the creditor is granted the right to retain the property pledged as a security for any other obligation of the debtor. The provision has been eliminated. “It is thought that this provision is unjust. If the creditor wants the original pledge to apply also to the new claim, he should so demand at the time the latter obligation is entered into. It cannot be fairly presumed that the debtor consented to the new pledge.” (Report of the Code Commission, p. 156.)

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ART. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has the right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deteriora-tion, in conformity with the provisions of this Code. (1867)

Obligation of pledgee to take due care of thing pledged. Upon fulfi llment of the principal obligation, the pledgee must return the thing pledged. Having possession of the property, he has the obligation to take care of the same with the diligence of a good father of the family. (Art. 1163.) He is, however, entitled to reimbursement of the expenses incurred for its preservation. In case of the loss or deterioration of the thing pledged due to fortuitous event, the pledgee cannot be held responsible but he is liable for loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract. (Arts. 1174, 1170.)

ILLUSTRATIVE CASE: Pledged pawn ticket was lost for failure of creditor to renew loan of debtor with pawnshop. Facts: C took from D a pawn ticket in pledge to secure an obligation. The pledge was lost for failure of C to renew the loan of D with the pawnbroker. Issue: Is C bound to renew the ticket from time to time, by the payment of the interest or premium? Held: Yes. The ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket. It results that one who takes a pawn ticket in pledge acquires domination over the pledge. Article 2099 contemplates that the pledgee (C) may have to undertake expenses in order to prevent the pledge from being lost; and these expenses the pledgee is entitled to recover from the pledgor (D). This follows that where, in a case like this, the pledge is lost by the failure of C to renew the loan, he is liable for the resulting damage. This duty of C is not destroyed by the fact that he has obtained a judgment for the debt of D which was secured by the pledge.



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The duty to use the diligence of a good father of a family in caring for the thing pledged subsists as long as the same remains in the power of the pledgee. (Cruz and Serrano vs. Chua A.H. Lee, 54 Phil. 10 [1929].)

ART. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n)

Obligation of pledgee not to deposit thing pledged with another. While the pledgee is entitled to retain the possession of the thing pledged until the debt is paid (Art. 2098.), he is not authorized to transfer possession to a third person. The prohibition is necessary for the protection of the pledgor or the owner of the thing pledged. The exception is when there is stipulation authorizing him to do so. (Art. 2100; see Art. 2093.)

Responsibility of pledgee for acts of his employees or agents. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged (Art. 2100, par. 2.) because their acts are, in legal effect, deemed his.

ART. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951. (n)

Responsibility of pledgee for fl aws of thing pledged. Please see comments under Article 1951.

ART. 2102. If the pledge earns or produces fruits, in-come, dividends, or interests, the creditor shall compen-sate what he receives with those which are owing him; but

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if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall ex-tend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall per-tain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a)

Right of pledgee to compensate earnings of pledge with debt. The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner. (Art. 2104; see Art. 1977.) But the pledgee can apply the fruits, income, dividends, or interests earned or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit. (see Art. 2132.) Unless there is a stipulation to the contrary, the interest and earnings of the right pledged and in case of animals, their offsprings (see Art. 2127.), are included in the pledge.

EXAMPLE: D borrowed from C P1,000.00 at 12% interest, with certifi cates of stocks as security. The interest is payable six months after the execution of the contract. If the stocks earn dividends, the same shall also be subject to the pledge if there is no stipulation to the contrary. C shall apply such dividends to the interest, if any, owing him after six months. If none is owing him or insofar as the dividends may exceed the interest due, C shall credit it to the principal of P1,000.00 when it matures.

ART. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. (1869)



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Right of pledgee against third persons. Except as provided in Article 2112, the pledgor remains the owner of the property pledged. The creditor to whom the property pledged has been delivered is obliged to take care of it with the diligence of a good father of a family. (Art. 2099.) He is authorized to bring such action as pertaining to the owner in order to recover it or defend it, against claims of third persons. Furthermore, unless given the right, the creditor might be prejudiced by the negligence of the owner. The right of a pledgee is a real right enforceable against third persons but it is necessary that the contract of pledge be embodied in a public instrument which shall contain a description of the thing pledged and the date of the pledge. (Art. 2096.)

ART. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that pur-pose. (1870a)

Obligation of pledgee not to use thing pledged. The pledgee who is in possession of the thing pledged has no right to make use of it without permission from the owner. This is the same rule in deposit. (see Art. 1977.) It is in consequence of the fact that the pledgor in parting with his property transmits only possession but not ownership. If, however, the thing pledged is of such a character that use is necessary in properly caring for it, then it becomes his duty to use it so that it will not suffer from its disuse. If from the use of the property profi ts are derived, the pledgee must account therefor to the pledgor, and apply the net proceeds of such use to the payment of his claim. (see 21 R.C.L. 665.)

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Right of pledgor to ask that thing pledged be deposited. In the following cases, the owner may ask that the thing pledged be deposited judicially or extrajudicially: (1) if the creditor uses the thing without authority; (2) if he misuses the thing in any other way; or (3) if the thing is in danger of being lost or impaired because of the negligence or willful act of the pledgee. (Art. 2106.)

ART. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871)

Right of pledgor to demand return of thing pledged. The thing pledged stands as security for the fulfi llment of the pledgor’s obligation. Hence, he cannot ask for its return until said obligation is fully paid including interest due thereon and expenses incurred for its preservation. (Art. 2099.) Prescription will not begin to run on the action to demand the return of the thing pledged while the obligation subsists, neither will the possession of the pledgee as such ripen into ownership by prescription because such possession is not in the concept of an owner. (Art. 1118.) As an exception to this rule, the pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same kind and quality. (Art. 2107.)

ART. 2106. If through the negligence or willfull act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n)

Arts. 2105-2106 PLEDGEProvisions Applicable Only to Pledge


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Right of pledgor to ask for deposit of thing pledged. The pledgee has the duty to preserve the thing pledged with the diligence of a good father of a family. (Art. 2099.) If the thing should be exposed to loss or impairment through the negligence or willful act of the pledgee, the pledgor may demand that it be deposited with a third person. The pledgor may also require such deposit should the pledgee use the thing without authority or misuse it in any other way. (Art. 2104.) “Articles 2106 to 2108 formulate rules applicable when the thing pledged is in danger of destruction or impairment.” (Report of the Code Commission, p. 157.)

ART. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the re-turn of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n)

Right of pledgor to substitute thing pledged. Two remedies are actually granted by Article 2107, to wit: to the pledgor, the right to demand the return of the thing pledged upon offering another thing in pledge; and to the pledgee, the right to cause the same to be sold at a public sale. (Art. 2108.) The following are the requisites for the application of Article 2017: (1) The pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged; (2) There is no fault on the part of the pledgee; (3) The pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as the former; and

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(4) The pledgee does not choose to exercise his right to cause the thing pledged to be sold at public auction. (Ibid.)

ART. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a secu-rity for the principal obligation in the same manner as the thing originally pledged. (n)

Right of pledgee to cause sale of thing pledged. The pledgee’s right to have the thing pledged sold at public sale granted under the above article is superior to that given to the pledgor to substitute the thing pledged under Article 2107. The law says the pledgor is given the right “without prejudice to the right of the pledgee.” (Art. 2107.) The sale must be a “public sale.” The pledgee shall keep the proceeds of the sale as security for the fulfi llment of the principal obligation. In other words, they shall belong to the pledgor.

ART. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n)

Right of pledgee to demand substitute or immediate payment. This article grants two remedies to the pledgee, in case he is deceived as to the substance or quality of the thing pledged: (1) to claim another thing in pledge; and (2) to demand immediate payment of the principal obligation. The remedies are alternative, that is, he is privileged to choose only one and not both. “Article 2109 is of evident fairness to both parties.” (Report of the Code Commission, p. 157.)



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ART. 2110. If the thing pledged is returned by the pledg-ee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n)

Extinguishment of pledge by return of thing pledged. One of the essential requisites of pledge is that the object be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093.) Hence, the pledge is extinguished if the object is returned by the pledgee, and this is true notwithstanding any stipulation that the pledge would continue although the pledgee is no longer in possession. The pledge is also extinguished by payment of the debt (see Art. 2105.), by renunciation or abandonment of the pledge (Art. 2111.), and by the sale of the thing pledged at public auction. (see Art. 2115.)

Presumption of extinguishment of pledge. The possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been extinguished. The presumption may be rebutted by evidence to the contrary, as for example, that the return was merely for the substitution of the thing pledged (Art. 2105.), or that the thing was stolen and given by the thief to the pledgor or owner. There is authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattel pledged (e.g., vessels) to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property

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merely as trustee for the pledgee. (Yuliongsui vs. Phil. National Bank, 22 SCRA 585 [1968].) Be it noted that when the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation itself. (Art. 1274.)

ART. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is suffi cient to ex-tinguish the pledge. For this purpose, neither the accep-tance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)

Extinguishment of pledge by renunciation or abandonment. The pledge is a personal right of the pledgee which may be waived. (Art. 6.) Under Article 2111, renunciation or abandon-ment must be in writing to extinguish the pledge, and such renunciation is not conditioned upon the acceptance by the pled-gor or owner nor upon the return of the thing pledged. The waiv-er transforms the pledgee into a depositary with the rights and obligations of one. The principal debt, however, is not affected by the waiver of the pledge. But the waiver of the principal obliga-tion carries with it that of the pledge. (see Art. 1273.) Under this article, the thing pledged remains in the possession of the pledgee. Hence, the waiver must be in writing. Under Article 2110, the pledge is extinguished even in the absence of waiver if the thing pledged is returned to the pledgor. Other causes of extinguishment of pledge are prescription, loss of the thing, merger, compensation, novation, etc. (see Art. 1231.)

ART. 2112. The creditor to whom the credit has not been satisfi ed in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notifi cation to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the fi rst



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auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquit-tance for his entire claim. (1872a)

Right of pledgee to cause sale of thing pledged. One of the essential requisites of pledge is that the object pledged may be alienated for the payment to the creditor when the principal obligation becomes due. (Art. 2087.) The formalities required for such sale under the above article are as follows: (1) The debt is due and unpaid; (2) The sale must be at a public auction; (3) There must be notice to the pledgor and owner, stating the amount due; and (4) The sale must be made with the intervention of a notary public. Note that Article 2112 does not require posting of the notice of sale and publication. Notifi cation to the pledgor and the owner of the thing pledged is suffi cient. Only a notary public can conduct a public auction after proper notice is sent to the pledgor and owner of the thing pledged. The sale is actually extrajudicial in character without intervention by the courts. “The public auction before a Notary Public is regulated in Articles 2112 to 2115.” (Report of the Code Commission, p. 157.) No provision in the Rules of Court or in any law requires that pledged properties sold at public auction be sold separately. (Paray vs. Rodriguez, 479 SCRA 571 [2006].)

Right of pledgee to appropriate thing pledged. The pledgee may appropriate the thing pledged if after the fi rst and second auctions, the thing is not sold. This is an exception to the prohibition against pacto commisorio. (Art. 2088.)

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If the creditor appropriates the thing, it shall be considered as full payment for his entire claim. He is thus obliged to give an acquittance for the same. The debtor is not entitled to the excess in case the value of the thing pledged is more than the principal obligation. (see Art. 2115.)

ART. 2113. At the public auction, the pledgor or own-er may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Right of pledgor and pledgee to bid at public sale. If the debt is not paid and a public sale takes place, both the pledgor and the pledgee may bid. The pledgor shall be preferred if he offers the same terms as the highest bidder, the rule is just considering that all the things belong to him. To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder.

ART. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accept-ed, the pledgee is deemed to have received the purchase price, as far as the pledgor or owner is concerned. (n)

Bid must be for cash. All bids, including that of the pledgor, must be for cash. If the pledgee accepts a bid other than for cash, the pledgor or owner has the right to consider that the pledgee has received the purchase price in cash.

ART. 2115. The sale of the thing pledged shall extin-guish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obliga-tion, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed.



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If the price of the sale is less, neither shall the creditor be entitled to recover the defi ciency, notwithstanding any stipulation to the contrary. (n)

Effect of sale of thing pledged. The sale of the thing pledged extinguishes the principal obligation whether the price of the sale is more or less than the amount due. (1) If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided. (2) In the same way, if the price of the sale is less, neither is the creditor entitled to recover the defi ciency. A contrary stipulation is void.

(a) The reason is to compel the creditor to hold an honest public sale. (b) Furthermore, the creditor should see to it, which he usually does, that he loans only as much as he is likely to realize at a public sale. (see Report of Code Commission, p. 1571; see Manila Surety & Fidelity Co., Inc. vs. Velayo, 21 SCRA 515 [1967].)

The provisions of Article 2115 “are in line with the policy of Act No. 4112 (Adding Article 1454-A to the present Code) which forbids the recovery of the defi ciency in case of the execution of a chattel mortgage.” (Ibid.)

Right of debtor to excess. As a general rule, therefore, the debtor is not entitled to the excess unless there is an agreement to the contrary. This is obviously to compensate the creditor for his risk of not being able to recover the defi ciency in case the thing pledged is sold below the amount of the principal obligation. The rule is nevertheless unfair since the obligation is fully satisfi ed. (see Art. 2121.) In effect, the rule would amount to a pacto commisorio which is prohibited. (Art. 2088.) Under the Chattel Mortgage Law, the mortgagor is entitled to recover the excess of the proceeds of the sale in foreclosure

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proceedings. (Sec. 14, Act No. 1508; see Art. 2141; Phil. National Bank vs. Manila Investment & Construction, Inc., 38 SCRA 462 [1971].)

Right of creditor to recover defi ciency. In the case of the creditor, he is not entitled to recover the defi ciency in all cases. By electing to sell the thing pledged, instead of suing on the principal obligation, the creditor waives any other remedy, and must abide by the results of the sale. The creditor may sue on the principal obligation instead of electing to sell the thing pledged, and in such case, he may recover the defi ciency from the debtor. (Manila Surety and Fidelity Co., Inc. vs. Velayo, 21 SCRA 515 [1967].)

ART. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n)

Obligation of pledgee to advise pledgor or owner of result of sale. The purpose of this article is to enable the pledgor or owner to take steps for the protection of his rights where he has reasonable grounds to believe that the sale was not an honest one.

ART. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable. (n)

Right of third person to satisfy obligation. As a general rule, the creditor is not bound to accept payment or performance by a third person who has no interest in the fulfi llment of the obligation. (Art. 1236.) Under this article, a third person who has any right in or to the thing pledged (as when the pledgor has contracted to sell it to him) may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept the payment.



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ART. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n)

Right of pledgee to collect and receive amount due on credit pledged. It would seem that under this article, it is not obligatory for the pledgee to collect and receive the amount due on the credit pledged. He is given merely the right to do so. However, in view of Article 2009 which imposes upon him the obligation to take care of the thing pledged with the diligence of a good father of a family, he has the duty to collect if delay would endanger the recovery of the credit.

ART. 2119. If two or more things are pledged, the pledg-ee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the pay-ment of the debt. (n)

Right of pledgee to choose which of several things pledged shall be sold. The right of choice given to the pledgee as to which of the things pledged he shall cause to be sold is limited only by stipulation. After suffi cient property has been sold to satisfy the obligation plus interests and expenses (Art. 2115.), no more shall be sold. Usually the value of the property pledged exceeds the amount of the debt guaranteed.

ART. 2120. If a third person secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n)

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Right of third person who pledged his own property. A third person who is not a party to the principal obligation may secure the latter by pledging his own property. (Art. 2085, par. 2.) The law grants him the same rights as a guarantor (see Arts. 2066-2070, 2077-2081.) and he cannot be prejudiced by any waiver of defense by the principal debtor.

ART. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) ART. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)

Instances of pledges by operation of law. Articles 546, 1731, and 1994 referred to in Article 2121 are instances of legal pledges or pledges which are created by operation of law. Herein below are the provisions of the fi rst two articles:

“Art. 546. Necessary expenses shall be refunded to every possessor, but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.”



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“Art. 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.”

Other examples are: “Art. 1914. The agent may retain in pledge the things which are the object of the agency until the principal effects the reimbursement and pays the indemnity set forth in the two preceding articles.” “Art. 1707. The laborer’s wages shall be a lien on the goods manufactured or the work done.”

Articles 1994 refers to a depositary. Article 2004 is also an instance of a legal pledge and refers to a hotelkeeper.

Rules in cases of pledge by operation of law. (1) The provisions on the possession (see Art. 2098.), care (see Art. 2099.), and sale of the thing pledged (see Art. 2112.) as well as on the extinguishment of the thing pledged (see Arts. 2110, 2111.) governing conventional pledges are applicable to pledges created by operation of law. Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is otherwise agreed (Art. 2115.), in legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall be delivered to the debtor. (Art. 2121.) (2) In legal pledge, there is no defi nite period for the payment of the principal obligation. The pledgee must, therefore, make a demand for the payment of the amount due him. Without such demand, he cannot exercise the right of sale at public auction. (Art. 2112.) The pledgee must proceed with the sale within one month after demand; otherwise, the debtor may require him to return the thing retained. (Art. 2122.) The new rules on pledges created by operation of law dealt with in Articles 2121 and 2122 “are necessary because the [former] code [was] silent on how the thing should be disposed of in case of its retention by the creditor in accordance with law.” (Reports of the Code Commission, pp. 157-158.)

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ART. 2123. With regard to pawnshops and other es-tablishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a)

Rules as to pawnshops and other establishments. The Title referred to is Title XVI on “Pledge, Mortgage, and Antichresis,” covering Articles 2085 to 2141. Presidential Decree No. 114 regulates the establishment and operation of pawnshops. (see Appendix 10.)

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VIIREAL MORTGAGE

(Arts. 2124-2131.)Chapter 3

MORTGAGE* ART. 2124. Only the following property may be the ob-ject of a contract of mortgage: (1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables. Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Defi nition of mortgage. Mortgage (otherwise known as “real estate mortgage” or “real mortgage’’) is a contract whereby the debtor secures to the creditor the fulfi llment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property which obligation shall be satisfi ed with the proceeds of the sale of said property or rights in case the said obligation is not complied with at the time stipulated.

Characteristics of mortgage. It is a real, accessory, and subsidiary contract. It is also unilateral because it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfi lled.


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The essence of a contract of mortgage is that a property has been identifi ed or set apart from the mass of the property of the debtor-mortgagor as security for the fulfi llment of his obligation, in case of default of payment. (China Banking Corporation vs. Court of Appeals, 265 SCRA 327 [1996]; Ocampo vs. Land Bank of the Phils., 591 SCRA 562 [2009].)

ILLUSTRATIVE CASE: Stipulation in a mortgage gives mortgagee the option to purchase mortgaged property. Facts: To secure a loan in the amount of P1,800.00, D mortgaged his parcel of land to C, giving the latter the option to “purchase said land absolutely on any date within the two-year of this mortgage” at the agreed price of P3,900.00. Issue: Having seasonably advised D that he had decided to buy the land in question, is C entitled to specifi c performance? Held: Yes. While the stipulation is a mortgage and con-tains the customary stipulation concerning redemption by the mortgagor (D), it carries the added special provision aforequoted which renders D’s right to redeem defeasible at the election of C. There is nothing illegal or immoral in this. It is simply an option to buy sanctioned by Article 1479.1 In this case, D’s promise to sell is supported by the same consideration as that of the mortgage itself, which is distinct from that which would support the sale, an additional amount having been agreed upon to make up the entire price of P3,900.00, should the option be exercised. D’s promise was in the nature of a continuing offer, non-withdrawable during a period of two years which upon acceptance by C gave rise to a perfected contract of purchase and sale. (Soriano vs. Bautista, 6 SCRA 946 [1962].)

Possession of property mortgaged. In a contract of mortgage, the mortgagor-debtor, as a general

1Art. 1479. A promise to buy and sell a determinate thing for a price certain is recip-rocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price cer-tain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

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rule, retains possession of the property mortgaged as security for the payment of the sum borrowed from the mortgagee-creditor, because by the mortgage, the debtor merely subjects the property to a lien but ownership thereof is not parted with. The debtor pays the creditor a certain percent thereof as interest on his principal by way of compensation for his sacrifi ce in depriving himself of the use of said money and the enjoyment of its fruits, in order to give them to the mortgagor. Since it is the mortgagor in a contract of mortgage who is entitled to the possession of the subject property, it follows that one’s status as mortgagee cannot be the basis of possession. (Recebido vs. People, 346 SCRA 881 [2000].) In a case (Lao vs. Court of Appeals, 275 SCRA 237 [1997].), the private respondent bought the subject property from petitioner’s family corporation by a deed of sale but the real transaction was found to be loan secured by a mortgage. It was held that being a mere mortgagee, private respondent has no right to eject petitioner. As creditor and mortgagee, private respondent “x x x cannot appropriate the things given by way of pledge or mortgage or dispose of them. Any stipulation to the contrary is null and void.’’ (Art. 2088.) It is not, however, an essential requisite of the contract of mortgage that the property mortgaged remains in the possession of the mortgagor. (see Art. 2085.) Hence, the mortgagor may deliver said property to the mortgagee, without thereby altering the nature of the contract.

Payment of interest on mortgage credit. It is not also an essential requisite of the contract of mortgage that the principal of the mortgage credit bears interest, or that the interest as compensation for the use of the principal and enjoyment of its fruits be in the form of a certain percent thereof. The interest may be in the form of fruits of the mortgaged property, without the contract’s losing thereby its character of a mortgage contract. (Legaspi vs. Celestial, 66 Phil. 372 [1938].) In such case, the mortgagee shall be subject to the obligation of an antichresis creditor. (see Macapinlac vs. Gutierrez Repide, 43 Phil. 770 [1922].) But if it is expressly agreed that the creditor shall apply the fruits of the property, “to the payment of interest,

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if owing, and thereafter to the principal of his credit,” the contract is a true antichresis as defi ned in Article 2132.

Cause or consideration in mortgage. As mortgage is an accessory contract, its consideration is the same as of the principal contract from which it receives its life, and without which it cannot exist as an independent contract, although the obligation thereby secured is incurred by a third person and, therefore, it will be valid if the principal obligation is valid, and cannot be avoided on the ground of lack of consideration. (China Banking Corp. vs. Lichauco, 46 Phil. 460 [1924]; Banco de Oro vs. Bayuga, 93 SCRA 443 [1979].) Being an accessory contract, its validity would depend on the validity of the debt secured by it. In a case, a corporate borrower was granted a loan on condition that its operation shall be run by the lending bank and consultancy fi rm but the people designated to manage the corporation misspent proceeds of the loan by taking advantage of the positions that they were occupying in the corporation which resulted in the latter’s devastation instead of its rehabilitation. It was held that it is as if the loan was never delivered and thus, there was failure on the part of the mortgagee bank to deliver the consideration for which the mortgage was executed. The contract of a loan being invalid, the accessory contract of mortgage was null and void. (Filipinas Marble Corporation vs. Intermediate Appellate Court, 142 SCRA 180 [1986].) The mortgage must suffi ciently describe the debt sought to be secured. An obligation is not secured by a mortgage unless it comes fairly within its terms. (Viola vs. Equitable PCI Bank, Inc., 572 SCRA 245 [2008].)

Kinds of mortgage. A mortgage may be: (1) Voluntary. — one which is agreed to between the parties or constituted by the will of the owner of the property on which it is created (Art. 138, Spanish Mortgage Law.); or (2) Legal. — one required by law to be executed in favor of certain persons (see Art. 2125, par. 2; Arts. 2082, 2083.); or



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(3) Equitable. — one which, although it lacks the proper formalities or other requisites of a mortgage required by law, nevertheless reveals the intention of the parties to burden real property as a security for a debt, and contains nothing impossible or contrary to law. An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage. (Rosales vs. Suba, 408 SCRA 664 [2003].) The provisions in the Civil Code governing equitable mort-gages are found in Articles 1365, 1450, 1454, 1602, 1603, 1604, and 1607. The instances when a contract regardless of its nomencla-ture may be presumed to be an equitable mortgage are enumer-ated in Article 1602.2 The Code Commission which prepared the

2Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is usually inadequate;(2) When the vendor remains in possession as lessee or otherwise;(3) When upon or after the expiration of the right to repurchase another instru-

ment extending the period of redemption or granting a new period is executed;(4) When the purchaser retains for himself a part of the purchase price;(5) When the vendor binds himself to pay the taxes on the thing sold;(6) In any other case where it may be fairly inferred that the real intention of the

parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefi t to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale.

It has been held that an arrangement where the ownership of the land is supposedly transferred to the buyer who provides for the funds to redeem the property from the bank but nonetheless allows the seller to later on buy back the property is in the nature of an equitable mortgage governed by Articles 1602 and 1604. (Bacuñgan vs. Court of Appeals, 574 SCRA 642 [2008].)

Note: For the presumption in Article 1602 to arise, it must appear that the parties entered into a contract of sale and that their intention was not to effect a sale in favor of the supposed vendee but to secure an existing debt of the supposed vendor by way of mortgage of the subject property. The presence of even one of the circumstances enumer-ated in Article 1602 is suffi cient to make a contract of sale with right to repurchase an eq-uitable mortgage. Parol evidence is admissible to prove that the instrument was in truth and in fact given merely as a security for the payment of a loan. There is no conclusive test to determine whether a deed purporting to be a pacto de retro or an absolute sale on its

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draft of our present Civil Code, has made these observations on the above provisions:

“It is a matter of common knowledge that in practically all of the so-called contracts of sale with right of repurchase, the real intention of the parties is that the pretended purchase price is money loaned, and in order to secure the payment of the loan a contract purporting to be a sale with pacto de retro is drawn up.” “x x x it is well-known that the practice in these so-called contracts of sale with pacto de retro is to draw up another contract purporting to be a lease of the property to the supposed vendor who pays in money or in crops as so-called rent. It is, however, no secret to anyone that this simulated rent is, in truth and in fact, interest on the money loaned. In many instances, the interest is usurious. Thus, the Usury Law is also circumvented.” (Report of the Code Commission, p. 63; for cases on equitable mortgage, see Comments and Cases on Sales and Lease, 2005 ed., by the same author.)

Subject matter of mortgage. The objects of contract of mortgage are immovables (Art. 415.3) and alienable real rights imposed upon immovables.

face is in reality a loan secured by a mortgage. The decisive factor, however, in evaluating whether or not the agreement is really a loan agreement secured by a mortgage, is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances (Sps. Reyes vs. Court of Appeals, 339 SCRA 97 [2000]; Arrofo vs. Quiño, 449 SCRA 284 [2005].) The owner of the property may disprove the contract by means of parol evidence if the same does not express the true intent of the parties provided that the nature of the agreement is placed in issue by the pleadings fi led with the trial court. (Ramos vs. Sarao, 451 SCRA 103 [2005]; Madrigal vs. Court of Appeals, 456 SCRA 247 [2005].)

3Art. 415. The following are immovable property:(1) Land, buildings, roads and constructions of all kinds adhered to the soil;(2) Trees, plants, and growing fruits, while they are attached to the land or form an

integral part of an immovable;(3) Everything attached to an immovable in a fi xed manner, in such a way that

it cannot be separated therefrom without breaking the material or deterioration of the object;

(4) Statues, reliefs, paintings, or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements;



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(Art. 2124.) A real right over real property is real property. (Art. 414[10].) Hence, a mortgage on real property is in itself a real property. The inclusion of “buildings” under Article 415 of the Civil Code, separate and distinct from the land means that a build-ing is by itself an immovable property. While a mortgage of land necessarily includes, in the absence of stipulation, the improve-ments thereon, a building by itself may be mortgaged apart from the land on which it is built. Possessory rights over said property before title is vested on the grantee may be validly transferred or conveyed as in a deed of mortgage. (Prudential Bank vs. Panis, 153 SCRA 390 [1987]; Nartales vs. GSIS, 156 SCRA 205 [1987]; Soriano vs. Galit, 411 SCRA 631 [2003].) The objects of pledge and chattel mortgage are movables. (Arts. 2094, 2140.)

Future property cannot be object of mortgage. Future property cannot be object of a contract of mortgage. (Art. 2085[2].) Thus, a stipulation in a contract of mortgage whereby the mortgagor also constituted a mortgage in favor of the mortgagee and his assignees “on any other property he then might have and those he might acquire in the future” did not constitute a valid mortgage on the properties acquired subsequent to the constitution of the mortgage because the mortgagor could

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fi sh ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included;

(7) Fertilizer actually used on a piece of land;(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the

bed, and waters either running or stagnant;(9) Docks and structures which, though fl oating, are intended by their nature and

object to remain at a fi xed place on a river, lake, or coast;(10) Contracts for public works, and servitudes and other real rights over immov-

able property.

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not legally mortgage any property he did not yet own. (Dilag vs. Heirs of Resurreccion, 70 Phil. 650 [1940].) However, a stipulation subjecting to the mortgage lien, prop-erties (improvements) which the mortgagor may subsequently acquire, install, or use in connection with real property already mortgaged belonging to the mortgagor is valid. (People’s Bank and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967], infra; see Art. 2127.)

ART. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)

Essential requisites of mortgage. In addition to the requisites stated as common to pledge and mortgage (Arts. 2085, 2087.), it is indispensable in order that a mortgage may be validly constituted that it appears in a public document duly recorded in the Registry of Property. (see Gaotian vs. Gaffud, 24 SCRA 706 [1969].) A duly executed mortgage is presumed to be valid until the contrary is shown. To the party attacking, rests the burden of proving its invalidity due to fraud, duress or illegality. The right to attack the validity of a mortgage may be lost by a waiver of defects and objections, or by unreasonable delay to act amounting to ratifi cation. (San Juan vs. Court of Appeals, 363 SCRA 387 [2001].) (1) Where mortgage in a private document. — No valid mortgage is constituted where the alleged deed of mortgage is a mere private document and, therefore, is not registered. (Hechanova vs. Adil, 144 SCRA 450 [1986].) The creditor may recover the loan, although the mortgage document evidencing the loan was non-registrable being a purely private document. He has the right to



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compel the debtor to execute a contract of mortgage in a public instrument. (see Arts. 1357, 1358.) (2) Where mortgage not registered. — However, an additional provision is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties.” (Report of the Code Commission, p. 158.) In other words, registration only operates as a notice of the mortgage to others but neither adds to its validity nor converts an invalid mortgage into a valid one between the parties. (Samanilla vs. Cajucom, 107 Phil. 432 [1960].) Hence, an order for foreclosure cannot be refused on the ground that the mortgage had not been registered (Mobil Philippines, Inc. vs. Diocares, 29 SCRA 656 [1969].) provided no innocent third parties are involved. (see Tan vs. Valdehueza, 66 SCRA 61 [1975].) Under the Old Civil Code (Art. 1875 thereof.), an unrecorded mortgage was not valid and binding even between the contracting parties themselves. (3) Where mortgage registered under Act No. 3344. — The registration of a mortgage over real property under Act No. 3344 (see Appendix 7-B.) is without prejudice to the better right of third parties. Thus, an unregistered pacto de retro sale over a house is superior to a recorded mortgage over the same house of a later date. (Lanuza vs. De Leon, 20 SCRA 369 [1967].)

Doctrine of mortgagee in good faith. (1) Reliance in good faith on certifi cate of title of mortgagor. — A mortgagee has a right to rely in good faith on the certifi cate of title of the mortgagor of the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is nonetheless entitled to protection. This is the doctrine of “mortgagee in good faith.” The doctrine is based on the rule that all persons dealing with the property covered by a Torrens Certifi cate of Title,

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as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding the indefeasibility of a certifi cate of title, as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certifi cate of title. (2) Title in name of mortgagor, not of rightful owner. — This doctrine presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining a Torrens title over the property in his name and that, after obtaining the said title, he succeeds in mortgaging the property to another who relies on what appears on the said title. The innocent purchaser (mortgagee in this case) for value protected by law is one who purchases a titled land by virtue of a deed executed by the registered owner. The doctrine does not apply to a situation where the title is still in the name of the rightful owner and the mortgagor is a different person pretending to be the owner. In such a case, the mortgagee is not an innocent mortgagee for value and the registered owner will generally not lose his title. (Ereña vs. Querrer-Kauffman, 192 SCRA 298 [2006]; see Cavite Development Bank vs. Lim, 324 SCRA 346 [2000]; Bank of Commerce vs. San Pablo, Jr., 522 SCRA 713 [2007].) (3) Duty of mortgagee to look beyond certifi cate of title. — As a general rule, where there is nothing on the certifi cate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or the mortgagee does not directly deal with the registered owner of real property. (Abad vs. Guimba, 465 SCRA 356 [2005].) or that he was aware of suffi cient facts to induce a reasonably prudent man to inquire into the status of a property in litigation. When the purchaser or mortgagee is a bank or fi nancing



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institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply. (Premiere Development Bank vs. Court of Appeals, 453 SCRA 630 [2005]; Dela Merced vs. GSIS, 365 SCRA 365 [2001]; Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court, 203 SCRA 210 [1996]; Philippine National Bank vs. Offi ce of the President, 252 SCRA 5 [1996].) (4) Greater care and diligence required of mortgagee-bank. — A mortgagee-bank is expected to exercise greater care and pru-dence before entering into a mortgage contract even those in-volving registered lands in its dealings than private individuals as their business is impressed with public interest. It is a matter of judicial notice that before a bank grants a loan on the security of land it fi rst undertakes a careful examination of title of the applicant as well as a physical and on-the-spot investigation of the land itself offered as security. A bank that failed to observe due diligence cannot be accorded the status of a bona fi de mort-gagee. (Navarro vs. Laguna Development Bank, 398 SCRA 227 [2003]; Ursal vs. Court of Appeals, 473 SCRA 52 [2005]; Rural Bank of Siaton vs. Macajitos, 495 SCRA 127 [2005]; Erasustada, Jr. vs. Court of Appeals, 495 SCRA 319 [2006]; Mercado vs. Allied Banking Corporation, 528 SCRA 444 [2007]; Metropolitan Bank & Trust Company vs. SLGT Holdings, Inc., 533 SCRA 316 [2007].) The due diligence required of banks extends even to persons regularly engaged in the business of lending money secured by real estate mortgages. (Cruz vs. Bancom Finance Corporation, 379 SCRA 490 [2002]; Agag vs. Alpha Financing Corp., 407 SCRA 602 [2003]; Premiere Development Bank vs. Court of Appeals, 453 SCRA 630 [2005]; Philippine National Bank vs. Heirs of G. Militar, 494 SCRA 308 [2006]; Tio vs. Abayata, 556 SCRA 175 [2008].) Thus, in granting a loan, a bank should not have content merely with a clean title, considering the presence of circum-stances (i.e., loan was to be used for a real estate development project, other funds could have been used to fi nance the project, the property or any part thereof was already intended to be sub-ject of any other contract involving buyers or potential buyers) indicating the need for a thorough investigation of the existence

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of buyers and the submission by the mortgagor of certifi ed true copies of relevant-documents and verifi cation of their authentic-ity. (Development Bank of the Phils. vs. Capulong, 577 SCRA 582 [2009].)

Right in case of legal mortgages. The second paragraph refers to legal mortgages. It is in con-formity with the rule established under the law on “Form of Con-tracts” which gives to the contracting parties the right to compel each other to observe the form required by law like the execution of a document or other special forms provided the contract be-tween them is valid and enforceable. (see Arts. 1357, 1358.)

Registration of mortgage. (1) Mortgagee entitled to registration of mortgage as a matter of right. — Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of right. By executing the mortgage, the mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it unilaterally. The validity or compliance of contracts cannot be left to the will of one of the contracting parties. (see Art. 1308.) The reasoning that inasmuch as a mortgage is a voluntary transaction, the Register of Deeds has no authority to register it without the consent of both parties is fallacious. It confuses the execution of the mortgage with its registration. It is the execution of the mortgage that is voluntary. (Gonzales vs. Basa, Jr., 73 Phil. 704 [1942].) (2) Proceedings for registration do not determine validity of mort-gage or its effect. — Registration is a mere ministerial act by which a deed, contract or instrument is sought to be inscribed in the records of the Offi ce of the Register of Deeds and annotated at the back of the certifi cate of title covering the land subject of the deed, contract or instrument.

(a) It is not a declaration by the state that such an instru-ment is a valid and subsisting interest in land. It is merely a declaration that the record of the title appears to be burdened



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with the mortgage described. The mere fact that a mortgage was registered does not stop any party to it from setting up that it has no force and effect (Agricultural Credit Coopera-tive Association of Hinigaran vs. Yusay, 107 Phil. 791 [1960].) and ask for the avoidance of the deed and the cancellation of its registration. (b) But until such action is fi led and decided, it would be too dangerous to the rights of the mortgagee to deny registra-tion of his mortgage because his rights can easily be defeated by a transfer or conveyance of the mortgaged property to an innocent third person. If the purpose of registration is merely to give notice, the questions regarding the effect or invalid-ity of instruments are expected to be decided after, not before, registration. It must follow as a necessary consequence that registration must fi rst be allowed and its validity or effect litigated afterwards. (Samanilla vs. Cajucom, 107 Phil. 432 [1960].) Actual knowledge of defect of title is equivalent to notice of registration. (RFC vs. Javillonar, 107 Phil. 664 [1960].)

(3) Registration without prejudice to better right of third parties. — A registered mortgage right over property previously sold is inferior to the buyer’s unregistered right. The unrecorded sale is preferred for the reason that if the original owner (seller) had parted with his ownership of the thing sold then he no longer had ownership and free disposal of the thing so as to be able to mortgage it. Registration is of no moment since it is understood to be without prejudice to the better right of third parties. (State Investment House, Inc. vs. Court of Appeals, 254 SCRA 368 [1996].) A registered mortgage, however, is superior to a contract to sell, subject to any liabilities the owner (vendor/mortgagor) may have incurred in favor of the buyer. In a contract to sell, title is retained by the vendor until full payment of the price. (Flancia vs. Court of Appeals, 457 SCRA 224 [2005].) (4) Registrability of encumbrance acquired subsequent to the mortgage. — Where the mortgage deed has been duly registered, said deed forms part of the records for the registration of the

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property mortgaged. So, in a proceeding for the annotation of an encumbrance (e.g., leasehold rights) over the same property subsequently acquired, which annotation is opposed by the mortgagee, the latter need not introduce the mortgage deed in evidence to prove its existence. Where the mortgage deed contains a prohibition against encumbrance of the mortgaged land, without the mortgagee’s consent, rights over the same property, which came into existence after the execution of the deed, cannot be annotated as an adverse claim on the title of the land over the mortgagee’s opposition. (Rivera vs. Peña, 1 SCRA 747 [1961].) (5) Registrability of mortgage by surviving spouse of his/her undivided share of conjugal property. — The mortgage by the wife, after the death of her husband, of her rights, interest and participation in an undivided one-half share of the conjugal partnership (or community property) is legal and valid, and should, therefore, be registered, registration being an essential requirement in order that the mortgage may be validly constituted. Registration will, in no way, affect the rights of the deceased husband’s creditors, if any, or of his heirs, for their interest is limited to the husband’s half of the estate not covered by the mortgage. Neither would the mortgage affect the debts, if any, of the conjugal partnership, their payment being provided for by law before the one-half share of the wife-mortgagor is fi nally determined. (Taningco vs. Register of Deeds, 5 SCRA 381 [1962].) (6) Subsequent registration of an adverse claim. — Settled is the doctrine that a prior registration of a lien creates a preference; hence, the subsequent annotation of an adverse claim cannot defeat the rights of the mortgagee or the purchaser at the auction sale whose rights were derived from a prior mortgage validly registered. A contrary rule will make a prior registration of a mortgage or any lien nugatory or meaningless. The doctrine applies with greater force in a case where the annotation of the notice of lis pendens was made not only after the registration of the mortgage but also, and much later, after the conclusion of the foreclosure sale. (Phil. Veterans Bank vs. Monillas, 550 SCRA 251 [2008]; see No. [3] which refers to prior unrecorded sale.)



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Effect of invalidity of mortgage on principal obligation. (1) Principal obligation remains valid. — Where a mortgage is not valid, e.g., it is executed by one who is not the owner of the property (Art. 2085[2].), or the consideration of the contract is simulated (Arts. 1345, 1352.) or false (Art. 1353.), the principal obligation which it guarantees is not rendered null and void. That obligation matures and becomes demandable in accordance with the stipulation pertaining to it. What is lost only is the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation. (2) Mortgage deed remains as evidence of a personal obligation. — In case of nullity, the mortgage deed remains as evidence or proof of a personal obligation of the debtor and the amount due to the creditor may be enforced in an ordinary personal action. (De Jesus vs. Abastillas, 6 C.A. Rep. 789; Compania General de Tabacos vs. Jeanjaquet, 12 Phil. 195 [1908]; Lim Julian vs. Lutero, 49 Phil. 703 [1926]; Lozano vs. Tan Suico, 23 Phil. 16 [1912]; Development Bank of the Phils. vs. Court of Appeals, 249 SCRA 331 [1995].) The mortgage derives its vitality from the validity of the principal obligation; hence, the invalidity of the stipulation on interest does not render void the ancillary mortgage contract. (Carpo vs. Chua, 471 SCRA 471 [2005].)

ART. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfi llment of the obligation for whose security it was constituted. (1876)

Effect of mortgage. (1) Creates real right. — Article 2126 means, in other words, that a registered mortgage creates right in rem, a real right, a lien inseparable from the property mortgaged, which is enforceable against the whole world, affording specifi c security for the satisfaction of a debt. The personality of the owner is disregarded.

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Until discharged upon payment of the obligation, it follows the property wherever it goes and subsists notwithstanding changes of ownership. (see Art. 2129.)

(a) Therefore, if the mortgagor sells the mortgaged property, the property remains subject to the fulfi llment of the obligation secured by it. (see Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].) All subsequent purchasers of the property must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. But the mortgage must be registered (Art. 2125.) or, if not registered, the buyer must know of its existence (see Phil. National Bank vs. Mallorca, 21 SCRA 694 [1967]; Consolidated Bank & Trust Corp. vs. Court of Appeals, 193 SCRA 158 [1991]; Asuncion vs. Evangelista, 316 SCRA 848 [1999].), his knowledge of the prior unregistered mortgage having the effect of registration as to him. The mortgagor may not be the principal debtor. (Art. 2085, 2nd par.) (b) Again, the mortgagee has a right to rely in good faith on what appears on the certifi cate of title of the mortgagor to the property given as security and in the absence of anything to excite suspicion, he is under no obligation to look beyond the certifi cate and investigate the title of the mortgagor appearing on the face of the certifi cate. Accordingly, the right or lien of an innocent mortgagee for value upon the mortgaged property must be respected and protected, even if the mortgagor obtained his title through fraud. The remedy of the persons prejudiced is to bring an action for damages against the person who caused the fraud and if the latter is insolvent, an action against the Treasurer of the Philippines may be fi led for the recovery of damages against the Assurance Fund. (Philippine National Bank vs. Court of Appeals, 187 SCRA 735 [1990]; Cebu International Finance Corp. vs. Court of Appeals, 268 SCRA 178 [1997].) (c) Until an action for expropriation has been completed and terminated, ownership over the property being expropriated remains with the registered owner who can exercise all rights pertaining to an owner, including the right to mortgage the property or even to dispose of it. Any person



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who deals with a property subject of an expropriation does so at his own risk, taking into account the ultimate possibility of losing it in favor of the State through expropriation. (Republic vs. Lim, 462 SCRA 265 [2005].) (d) While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in the case of a banking institution, as noted earlier, a mortgagee must exercise a greater degree of diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owner thereof. (Development Bank of the Phils. vs. Court of Appeals, 331 SCRA 267 [2000]; Rural Bank of Sta. Ignacia, Inc. vs. Dimatulac, 401 SCRA 742 [2003]; Home Bankers Savings & Trust Co. vs. Court of Appeals, 457 SCRA 167 [2005].) (e) Under ordinary circumstances, if a person is the fi rst mortgagee over a property which was sold in an auction sale by the second mortgagee, the only right left to him is to collect his mortgage credit from the purchaser thereof during the sale conducted. This is so because a “mortgage directly and immediately subjects the property on which it is constituted whoever the possessor may be, x x x.’’ This step need not be taken where the second mortgagee is also the fi rst mortgagee of the same property given as security by the same mortgagor for two (2) separate loans and it purchased the subject property with full knowledge that it had a mortgage thereon. Under Article 1275 of the Civil Code, obligations are extinguished by the merger of the rights of the creditor and debtor. (Valmonte vs. Court of Appeals, 303 SCRA 278 [1999].) (f) In a suit to nullify an existing torrens certifi cate of title (TCT) in which a real estate mortgage is annotated, the mortgagee is an indispensable party. In such suit, a decision cancelling the TCT and the mortgage annotation is subject to a petition for annulment of judgment, because the non-joinder of the mortgagee deprived the court of jurisdiction to pass upon the controversy. A mortgage affects the land itself

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and not merely the TCT covering it. The nullifi cation of the TCT would adversely affect the rights of the mortgagee over the mortgaged property because they would no longer be known and respected by third parties, considering that a real mortgage is a real right and a real property by itself. (Metro-politan Bank and Trust Co. vs. Alejo, 364 SCRA 812 [2001].) (g) Under B.P. Blg. 877 “no lessor or his successor-in-interest shall be entitled to eject the lessee upon the ground that the leased premises has been sold or mortgaged to a third person regardless of whether the lease or mortgage is registered or not.’’ (Sec. 5, last par. thereof.)

ILLUSTRATIVE CASE: Land, subject matter of sale, was previously mortgaged by seller and then subsequently sold to another as highest bidder at the foreclosure sale. Facts: P bought a parcel of land from S and the sale was recorded in the Offi ce of the Register of Deeds. Prior to the sale, S had already mortgaged the land to C, which mortgage was also registered. For failure of S to pay the mortgage debt, C foreclosed the mortgage, and the land was sold to D as the highest bidder. D opposed the application for registration fi led by P. Issue: In whose name should the land be registered, D or P? Held: In D, but subject to P’s equitable right of redemption which right should be exercised within three months4 (see Sec. 2, Rule 68, Rules of Court.) from the date the decision becomes fi nal. P’s equity of redemption is, of course, registerable, but only as an encumbrance on a registered title of ownership. P does not become the owner of the land until he has exercised his right to redeem. Before such redemption, the registration of the land in P’s name would be subject to the objection that it is premature, if not altogether anomalous. (Santiago vs. Dionisio, 92 Phil. 495 [1953].)

4“x x x within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment x x x.’’ (as amended by the Supreme Court, April 8, 1997.)



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(2) Creates merely on encumbrance. — A mortgage is merely a security for a debt, an encumbrance upon the property and does not extinguish the title of the debtor who does not lose his principal attribute as owner, that is, the right to dispose. (McCullough vs. Veloso & Serna, 46 Phil. 1 [1924].) Indeed, the law considers void any stipulation forbidding the owner from alienating the immovable mortgaged. (Art. 2130.)

(a) A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon.5 It gives the mortgagee no right or claim to the possession of the property, and, therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged. (Lagrosa vs. Court of Appeals, 312 SCRA 298 [1999].) A mortgage does not give a mortgagee a right to the possession of the property unless the mortgage should contain some provision to that effect. (Isaguirre vs. De Lara, 332 SCRA 803 [2000].) (b) What is divested from the mortgagor is only his full right as owner thereof to dispose of and sell the property, that is, the mortgagor does not have the unconditional power to absolutely sell the property since the same is encumbered by a lien of a third person. Actually, what is delimited is not the mortgagor’s jus disponendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted. (Medida vs. Court of Appeals, 208 SCRA 887 [1992].) (c) The only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. (Guanzon vs. Argel, 33

5The mortgagor or mortgagee may take out a separate insurance policy on the mort-gaged property in his own name only and in his favor alone. Section 8 of the Insurance Code (Pres. Decree No. 1460, as amended.) provides: “Unless the policy otherwise pro-vides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his prior to the loss which would other-wise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same ef-fect as if it had been performed by the mortgagor.

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SCRA 474 [1970].) It is basic and fundamental that the fi rst mortgagee has superior rights over junior mortgagees or attaching creditors. (Rizal Commercial Banking Corporation vs. Court of Appeals, 289 SCRA 292 [1998].) (d) The mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property. His failure to redeem the property does not automatically vest ownership of the property to the mortgagee which would grant the latter the right to appropriate the property or dispose of it for such effect is against public policy enunciated by Article 2088 which prohibits pactum commissorium. (Reyes vs. Sierre, 93 SCRA 472 [1979]; Oronce vs. Court of Appeals, 298 SCRA 133 [1998]; Ramirez vs. Court of Appeals, 409 SCRA 133 [2003].) (e) Since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance with Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon. (Medida vs. Court of Appeals, supra.) (f) By mortgaging his property, a debtor merely subjects it to a lien but ownership thereof is not parted with. In a case, the grantee of a parcel of land executed a deed of sale with mortgage in favor of the City of Manila as grantor-mortgagee. Later, he assigned his rights to the property with the assignee agreeing to shoulder all the obligations including the payment of amortization to the City of Manila. The assignee, in turn, transferred his right and interest to another. The deed of sale with mortgage contains a prohibition against selling the property within the fi ve-year period imposed by the City of Manila. The assignment involves no transfer of ownership but merely effects the transfer of rights which the assignor has at the time to the assignee. It did not operate to efface liens or restrictions burdening the right assigned because an



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assignee cannot acquire a greater right than that pertaining to the assignor. (Casabuena vs. Court of Appeals, 286 SCRA 594 [1998].) (g) Upon payment of the mortgage debt, there is no more mortgage, and, therefore, there is more no basis or reason for the mortgagee’s refusal to return the certifi cate of title to the mortgagor. (De Los Santos vs. Court of Appeals, 278 SCRA 629 [1997].) (h) In a sale with assumption of mortgage, the assumption of mortgage is a condition to the seller’s consent so that without the approval of the mortgagee, no sale is perfected (see Art. 1181.); the seller remains the owner and mortgagor of the property. (Ramos vs. Court of Appeals, 279 SCRA 118 [1997].) (i) An action to compel the mortgagee to accept payment and for the consequent cancellation of a real estate mortgage is a personal action if the mortgagee has not foreclosed the mortgage and the mortgagor is in possession of the premises since neither the mortgagor’s title to nor possession of the property is in question. (Far East Bank and Trust Co. vs. Plaza, 407 SCRA 306 [2003].)

ART. 2127. The mortgage extends to the natural acces-sions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mort-gaged, or in virtue of expropriation for public use, with the declarations, amplifi cations and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (1877)

Extent of mortgage. A real estate mortgage constituted on immovable property is not limited to the property itself but also extends to all its accessions, improvements, growing fruits and rents or income (see Art. 2102.) as well as to the proceeds of insurance should the property be destroyed, or the expropriation value of the

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property should it be expropriated. The law is predicated on the assumption that the ownership of such accessions and accessories and improvements subsequently introduced also belongs to the mortgagor is the owner of the principal. (Castro, Jr. vs. Court of Appeals, 250 SCRA 661 [1995].) To exclude them, it is necessary that there be an express stipulation to that effect. Thus, the following are deemed included in a mortgage of real property: (1) new plantings; (2) fruits, except those collected before the obligation falls due, and those removed and stored when it falls due; (3) accrued and unpaid rents as well as those which should have to be paid while the credit remains wholly unsatisfi ed (Hijos de I. de la Rama vs. Betia, 54 Phil. 991 [1930]; National Bank vs. Alejano, 55 Phil. 811 [1931].); (4) buildings, machinery and accessories belonging to the mortgage debtor installed on a mortgaged sugar central (Cu Unjieng & Hijos vs. Mabalacat Sugar Co., 58 Phil. 439 [1933].); (5) all objects permanently attached to a mortgaged land or building, although they may have been placed there after the execution of the mortgage are also included (Bischoff vs. Pomar, 12 Phil. 690 [1909]; Manahan vs. Cruz, 61 SCRA 137 [1974]; Cea vs. Villanueva, 18 Phil. 538 [1911].); and (6) a more costly building erected in place of the mortgaged building which was torn down by the debtor. (Phil. Sugar Estates Dev. Co. vs. Campos, 36 Phil. 85 [1917].) But if the mortgaged estate passes into the hands of a third person, the mortgage does not extend to any machinery, object, chattel or construction which he may have brought or placed there and which such third person may remove whenever it is convenient for him to do so. (Art. 112, Spanish Mortgage Law.)

Stipulation in mortgage contract including after-acquired properties. (1) Stipulation valid; purpose. — In a case, the deed of mortgage contains a provision that “all property of every nature



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and description taken in exchange or replacement, as well as all buildings, machineries, fi xtures, tools, equipments and others that the mortgagor may acquire, construct, install, attach, or use in its lumber concession shall immediately be and become subject to the lien of this mortgage in the same manner and to the extent as if now included therein.” This kind of stipulation is common and indeed, logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold or to be used but with the understanding, express or implied, that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by the circumstances, the original value of the properties given as security. (People’s Bank & Trust Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967]; Torres vs. Limjap, 56 Phils. 141 [1931]; Mendoza vs. Court of Appeals, G.R. No. 116710, June 25, 2001.) (2) Attachment of lien retroactive. — When a mortgage is made to include new or future improvements on registered land, said lien attaches and vests not at the time said improvements are constructed but on the date of the recording and registration of the deed of mortgage. (Luzon Lumber & Hardware Co., Inc. vs. Quiambao, 94 Phil. 663 [1954].)

Mortgage with “dragnet’’ clauses to secure future advancements. (1) Stipulation necessary to secure future advancements. — As a general rule, an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage. But the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgaged may stand as security, if from the four corners of the instrument the intent to secure future loans or advancements and other indebtedness can be gathered (Arangco vs. Baloso, 49 SCRA 296 [1973]; Republic Planters Bank vs. Sarmiento, 53 SCRA 303 [2007].), as for example, “for the payment of loan of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors as makers. x x x’’ (Mojica vs. Court of Appeals, 201 SCRA 517 [1991].) or “x x x as well as those that the mortgagee

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may extend to the mortgagor’’ which clearly means that the mortgage is not limited to just the fi xed amount but also covers other credit accommodations in excess thereof. Such stipulation is valid and binding between the parties. (Ajax Marketing & Dev. Corp. vs. Court of Appeals, 248 SCRA 222 [1995]; China Banking Corporation vs. Court of Appeals, 265 SCRA 327 [1996]; Quintanilla vs. Court of Appeals, 279 SCRA 397 [1997].) (2) Usefulness of mortgage with a “dragnet clause.’’ — A mortgage given to secure future advancements enables the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. (Prudential Bank vs. Alviar, supra; Union Bank of the Phils. vs. Court of Appeals, 471 SCRA 751 [2005]; Cuyco vs. Cuyco, 487 SCRA 693 [2006]; Producers Bank of the Philippines vs. Excelsa Industries, Inc., 587 SCRA 370 [2009].) (3) Construction of mortgage with a “dragnet’’ clause. — The stipulation mentioned above to secure future and other indebt-edness is known as the “blanket’’ mortgage clause, also known in American jurisprudence as a “dragnet’’ clause. It is one which is specifi cally phrased to subsume all debts of past or future ori-gin.

(a) Such dragnet clauses are “carefully scrutinized and strictly construed’’ particularly where the mortgage contract is one of adhesion, that is, it was prepared solely by the mortgagee and the only participation of the mortgagor was the affi xing of his signature or “adhesion’’ thereto, in order to shield the wary or weaker party from deceptive schemes contained in ready-made convenants.6 (Premiere

6Art. 24. In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weak-ness, tender age or other handicap, the courts must be vigilant for his protection.



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Development Bank vs. Central Surety & Insurance Co., Inc., 579 SCRA 359 [2009].) Thus, in a case where the sole issue was whether in the foreclosure of a real estate mortgage, the penalties stipulated in two (2) promissory notes secured by the mortgage may be charged against the mortgagors as part of the sums secured although the mortgage contract does not mention the said penalties, it was held that construing the silence or ambiguity against the petitioner bank, no penalty was intended to be included in the amount covered by the mortgage and, therefore, proceeding by the general rule, such penalty cannot be recovered on the foreclosure of the mortgage. A mortgage must suffi ciently describe the debt sought to be secured, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. (Phil. Bank of Communications vs. Court of Appeals, 253 SCRA 241 [1996]; Prudential Bank vs. Alviar, 464 SCRA 353 [2005]; Republic Planters Bank vs. Sarmiento, supra.) (b) Where the plain terms of the mortgage evidence the intention of the mortgagor to secure a larger amount, the action to foreclose may be for the larger amount. In such case, the specifi c amount mentioned in the mortgage is not controlling. (Lim Julian vs. Lutero, 49 Phil. 703 [1926].) But where the obligation is not a series of indeterminate sums incurred over a period of time but two specifi c amounts procured in a single instance, what applies is the general rule stated above (Phil. Bank of Communications vs. Court of Appeals, 253 SCRA 241 [1996].), that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.

(4) Mortgage, a continuing security. — A mortgage (or pledge) given to secure future advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage, until the full amount of the advancements are paid. Under such contracts which are common in the Philippines and elsewhere in agricultural countries, the mortgagor (agriculturist) is permitted to take the money as it is needed and thus avoid the

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necessity of paying interest until the necessity for its use actually arises. (Ibid.; China Banking Corporation vs. Court of Appeals, supra.) In fact, it has also been held that “where the annotation on the back of a certifi cate of title about a fi rst mortgage states ‘that the mortgage secured the payment of a certain sum of money plus interest plus other obligations arising thereunder,’ there was no necessity for any notation of the later loans on the mortgagor’s title. It was incumbent upon any subsequent mortgagee or encumbrance of the property in question to examine the books and records of the bank, as fi rst mortgagee regarding the credit standing of the debtor.” (Mojica vs. Court of Appeals, supra; Tady-Y vs. Phil. National Bank, 12 SCRA 19 [1964].)

ART. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878)

Alienation or assignment of mortgage credit. The mortgage credit (the right of the mortgagee) is a real right and directly and immediately subjects the mortgaged property to the fulfi llment of the principal obligation. Such real right may be alienated or assigned to a third person, in whole or in part, by the mortgagee who is the owner of said right and the assignee may foreclose the mortgage in case of nonpayment of the mortgage indebtedness. (Santiago vs. Pioneer Savings and Loan Bank, 157 SCRA 100 [1988].) The alienation or assignment is valid even if it is not registered. Registration is necessary only to affect third persons.

ART. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formali-ties which the law establishes. (1879)

Arts. 2128-2129 REAL MORTGAGE


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Right of creditor against transferee of mortgaged property. The fact that the mortgagor has transferred the mortgaged property to a third person does not relieve him from his obliga-tion to pay the debt to the mortgage creditor in the absence of no-vation. (McCullough & Co. vs. Veloso & Serna, 41 Phil. 1 [1921].) The mortgage on the property may still be foreclosed despite the transfer. A recorded real estate mortgage is merely an accessory con-tract. It is inseparable from the property subject thereto regard-less of who its owner may subsequently be. (Republic vs. Lim, 462 SCRA 265 [2005].) The mortgage credit being a real right which follows the property, the creditor may demand from any possessor the payment only of the part of the credit secured by said property. It is necessary, however, that prior demand for payment must have been made on the debtor and the latter failed to pay. (Bank of the Phil. Islands vs. Concepcion & Hijos, Inc., 53 Phil. 906 [1929].)

EXAMPLE: A mortgaged his land worth P500,000.00 in favor of B to secure A’s debt of P600,000.00. A then sold the land to C. In this case, the obligation of A to pay the debt is not affected by the transfer. On the due date of the obligation, B may demand payment from A and if A fails to pay, B may foreclose the mortgage. (see Art. 2131.) B has the right to claim from C the payment of P500,000.00 which is part of the credit secured by the property sold to C. C is not liable for any defi ciency in the absence of a contrary stipulation. “The spirit of the law is to let the obligation of the debtor to pay the debt to stand although the property mortgaged to secure the payment of said debt may have been transferred to a third person.” (Ibid.) The remedy of C is to proceed against A.

ART. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n)

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Stipulation forbidding alienation of mortgaged property. The law considers void any stipulation forbidding the owner from alienating the mortgaged property. “Such a prohibition would be contrary to the public good inasmuch as the transmission of property should not be unduly impeded.” (Report of the Code Commission, p. 158.) The mortgagee can simply withhold his consent and thereby prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. (Litonjua vs. L & R Corporation, 320 SCRA 405 [1999].) However, if the mortgagor alienates the property, the trans-feree is bound to respect the encumbrance because being a real right, the property remains subject to the fulfi llment of the obli-gation for whose guaranty it was constituted. (Art. 2126.)

Stipulation granting right of fi rst refusal. There is nothing wrong in a stipulation granting the mort-gagee the right of fi rst refusal over the mortgaged property in the event the mortgagor decides to sell the same. The right of fi rst refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage may be said to include the consideration for the right of fi rst refusal. Thus, while the mortgagor has every right to sell the mortgaged property without securing the consent of the mortgagee, he has the obligation under a right of fi rst refusal provision which is perfectly valid, to notify the mortgagee of his intention to sell the property and give him priority over other buyers. A sale made in violation of the mortgagee’s contractual right of fi rst refusal is rescissible. The buyer is presumed to have been notifi ed thereof by the registration of the mortgage deed containing such stipulation, which equates to notice to the whole world. (Litonjua vs. L & R Corporation, supra.)

ART. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modifi cation and



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extinguishment, and as to the other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

Laws governing mortgage. As to other matters not included in Chapter 3 of the Civil Code, the Land Registration Law (Act No. 496, as amended.) and the Revised Administrative Code, more particularly Section 194, as amended by Act No. 3344, govern the form, extent, and consequences of a mortgage, and also its constitution, modifi cation and extinguishment. (see Phil. Bank of Commerce vs. De Vera, 6 SCRA 1026 [1962].) Note: Presidential Decree No. 892 has discontinued the Span-ish mortgage system of registration. This discontinuance was reiterated in Presidential Decree No. 1529, the Property Registra-tion Decree, which superseded the Land Registration Law. As to aliens becoming mortgagees, the pertinent law is Republic Act No. 4882.

Meaning of foreclosure (of mortgage). Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given. (59 C.J.S. 482.) It presupposes something more than a mere demand to sur-render possession of the object of the mortgage. (Industrial Fi-nance Corp. vs. Tobias, 78 SCRA 28 [1977].) It denotes the pro-cedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. (Develop-ment Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978].)

Validity and effect of foreclosure. Foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. As a rule, the mortgage can be foreclosed only when the debt remains unpaid at the time it is due. (Producers Bank of the Phils. vs. Court of Appeals, 365 SCRA 326 [2001].) It is valid only when the debtor is in default in the

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payment of his obligation. (see Bicol Savings and Loan Association vs. Court of Appeals, 171 SCRA 630 [1989]; see Gobonseng, Jr. vs. Court of Appeals, 246 SCRA 472 [1995]; Selegna Management and Development Corp. vs. United Coconut Planters Bank, 489 SCRA 125 [2006].) The right of foreclosure cannot be exercised by any person other than the creditor-mortgagee or his assigns.7 (Borromeo vs. Court of Appeals, 550 SCRA 269 [2008].) (1) In a real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation. (Commodity Financing Co., Inc. vs. Jimenez, 91 SCRA 57 [1979].) Foreclosure must be limited to the amount mentioned in the mortgage document. (Landrito, Jr. vs. Court of Appeals, 466 SCRA 107 [2005].)As a general rule, a demand before foreclosure is essential. (see Art. 1169.) (2) A mortgage contract may contain an acceleration clause which is a stipulation stating that, on the occasion of the mort-gagor’s default, the whole sum remaining unpaid automatically becomes due and payable. The failure of the mortgagor to pay any installment will trigger the activation of the acceleration clause and give the mortgagee the right to foreclose the mort-gage against the contention of prematurity. (Luzon Development Bank vs. Conquilla, 470 SCRA 533 [2005].) (3) The essence of a contract of mortgage indebtedness is that a property has been identifi ed or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfi llment of an obligation to answer the amount of indebtedness in case of default of payment. (Fiestan vs. Court of Appeals, 185 SCRA 751 [1990]; China Banking Corp. vs. Court of Appeals, 265 SCRA 327 [1996].)

7A mortgage-creditor has single cause of action against a mortgage-debtor, which is to recover the debt, but he has the option of either fi ling a personal action for collec-tion of sum of money or instituting a real action to foreclose on the mortgage security. Nevertheless, a creditor who elects to foreclose may yet fi le an independent civil action for recovery whatever defi ciency may remain. (Tanchan vs. Allied Banking Corp., 571 SCRA 512 [2008].)



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The power to foreclose a mortgage or not resides in the mortgagee. (Valmonte vs. Court of Appeals, 303 SCRA 278 [1999].) (4) Once the proceeds have been applied to the payment of the obligation, the debtor cannot anymore be required to pay, unless, of course, there is a defi ciency between the amount of the loan and the foreclosure sale price, because the obligation has already been extinguished. (State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992].) (5) The rule is that statutory provisions governing public notice of foreclosure sales must be strictly complied with, and even slight deviations therefrom will invalidate the sale or render it at least voidable. (Tambunting vs. Court of Appeals, 167 SCRA 16 [1988]; Roxas vs. Court of Appeals, 221 SCRA 729 [1993].) (6) The only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his property are the right to redeem the same and the possession, use, and enjoyment of the same during the period of redemption. (GSIS vs. Court of Appeals, 377 SCRA 54 [2002]; Litonjua vs. L & R Corporation, 320 SCRA 405 [1999].) (7) The mortgagee may take steps to recover the mortgaged property to enable him to enforce or protect his foreclosure right. If he is unable to obtain possession for its sale on foreclosure, he must bring a civil action either to recover such possession as a preliminary step to the sale, or to obtain judicial foreclosure. (Uypitching vs. Quiamco, 510 SCRA 172 [2006].) (8) Foreclosure proceedings have in their favor the presump-tion of regularity and the burden of evidence to rebut the same is on the party that seeks to challenge the proceedings. (Consue-lo Metal Corp. vs. Planters Development Bank, 555 SCRA 465 [2008].) An allegation that the mortgagee committed fraudulent acts in the constitution of a real estate mortgage is actually an attack on the mortgage contract and not just a foreclosure of the mortgage. The nullity of the foreclosure is a necessary consequence of the invalidity of the mortgage. A general prayer in the complaint “for

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other reliefs equitable and just in the premises’’ justifi es the grant of a relief not otherwise specifi cally prayed for if warranted by the facts alleged in the complaint and the evidence introduced. (United Overseas Bank vs. Rosemoor Mining and Development Cor., 534 SCRA 528 [2007].)

Kinds of foreclosure. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action by the mortgagee or by foreclosure by the mortgagee under power of sale contained in the mortgage. These two (2) types of foreclosure sale are to be distinguished from an ordinary execution sale which is governed by the perti-nent provisions of Rule 39 of the Rules of Court on “Execution, Satisfaction and Effect of Judgments.’’ Each of these three (3) common types of forced sales arising from a failure to pay a mortgage debt, peculiarly has its own requirements. The parties are not precluded from imposing additional requirements. (Concepcion vs. Court of Appeals, 274 SCRA 614 [1997].)

Judicial foreclosure under the Rules of Court. This is governed by Rule 68 of the Rules of Court. (see Appendix 3.) (1) Judicial action for the purpose. — A mortgage may be fore-closed judicially by bringing an action for that purpose, in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof, is situated. (see Sec. 1, Rule 4, Rules of Court.) (2) Order to mortgagor to pay mortgage debt. — If the court fi nds the complaint to be well-founded, it shall order the mortgagor to pay the amount due upon the mortgage debt or obligation with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment. (Sec. 2, Rule 68, Ibid.) (3) Sale to highest bidder at public auction. — If the mortgagor fails to pay at the time directed in the order, the court, upon



402

motion, shall order the property to be sold to the highest bidder at public auction. (Sec. 3, Ibid.) (4) Confi rmation of sale. — The sale when confi rmed by an order of the court, also upon motion, shall operate to divest the rights of all parties to the action and to vest their rights in the purchaser subject to such right of redemption as may be allowed by law. (Ibid.) Before the confi rmation of a judicial foreclosure sale, the court retains control of the proceedings by exercising a sound discretion in regard to it, either granting or withholding confi rmation as the rights and interests of the parties and the ends of justice may require. From this standpoint, any order which neither sets aside nor confi rms the foreclosure is merely interlocutory in character. (Salazar vs. De Torres, 108 Phil. 209 [1960].) (5) Execution of judgment. — No judgment rendered in an action for foreclosure or mortgage can be executed otherwise than in the manner prescribed by the law on mortgages, because parties to an action are not authorized to change the procedure which it prescribed. (Piano vs. Cayanong, 7 SCRA 397 [1963].) It has been held that the proper remedy to seek reversal of a judgment in an action for foreclosure of real estate mortgage is not a petition for annulment of judgment but an appeal from the judgment itself or from the order confi rming the sale of the foreclosed real estate. After failing to avail of appeal without suffi cient justifi cation, the mortgagor cannot conveniently resort to the action for annulment for otherwise he would benefi t from his own inaction and negligence. (Agbada vs. Inter-Urban Developers, Inc., 389 SCRA 430 [2002].) (6) Application of proceeds of sale. — The proceeds of the sale shall be applied to the payment of the:

(a) costs of the sale; (b) the amount due the mortgagee; (c) claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and (d) the balance if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it. (Sec. 4, Rule 68, Rules of Court.)

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If the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the foreclosure sale but simply gives the mortgagor a cause of action to recover such surplus. The mortgagee who has been ordered by the court to return the surplus, but fails to do so, may be cited for contempt. (Sulit vs. Court of Appeals, 268 SCRA 441 [1997].) (7) Execution of sheriff’s certifi cate. — In judicial foreclosures, the “foreclosure” is not complete until the sheriff’s certifi cate is executed, acknowledged and recorded. In the absence of a Certifi cate of Sale, no title passes by the foreclosure proceedings to the vendee. It is only when the foreclosure proceedings are completed and the mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property. Therefore, the mortgagor is liable for additional interests properly chargeable on the balance of the mortgage indebtedness during the period from the notice of sale to actual sale. This principle is applicable to extrajudicial foreclosures. (Development Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978].) A sheriff’s report on the auction sale is clothed with the presumption of regularity especially where no objection has been raised against it. (Sayson vs. Luna, 433 SCRA 502 [2004].)

Extrajudicial foreclosure under Act No. 3135. This is governed by Act No. 3135, as amended. (see Appendix 2.)8 This law prescribes a procedure which effectively safeguards the rights of both debtor and creditor. Thus, its construction (or interpretation) must be equally and mutually benefi cial to both parties. (Phil. National Bank vs. Cabatingan, 557 SCRA 426 [2008].) (1) Express authority to sell given to mortgagee. — The law covers only real estate mortgages. It is intended merely to regulate the

8In A.M. No. 99-10-05-0 that took effect on January 15, 2000 and further amended by Resolutions of January 30, 2001 and August 7, 2001, the Supreme Court in an en banc reso-lution clarifi ed the procedure for extrajudicial foreclosure of both real estate mortgage under Act No. 3135, as amended, and chattel mortgage under Act No. 1508, as amended, whether the sale is conducted by a sheriff or notary public. SC Circular No. 7-2002 pre-scribes the guidelines for the enforcement of the Resolution.



404

extrajudicial sale of the property mortgaged if and when the mortgagee is given a special power or express authority to do so in the deed itself or in a document annexed thereto. (Luna vs. Encarnacion, 91 Phil. 531 [1952]; Ponce de Leon vs. Rehabilitation Finance Corp., 36 SCRA 289 [1970].) It is a special law that governs particularly extrajudicial foreclosure sales which are proper only when so provided in the real estate mortgage contract as the title itself of the Act suggests and as provided in Section 1 thereof. (Casano vs. Magat, 374 SCRA 508 [2002].)

(a) It has been held that foreclosures made extrajudicially by the Philippine National Bank are governed by Act No. 3135 in relation to Sections 29, 30, and 34, Rule 39 of the Rules of Court, and not by the PNB charter. (Phil. National Bank vs. Court of Appeals, 140 SCRA 360 [1985].) Note: PNB is now a private bank. (b) Where there are two loans, it is immaterial whether the real estate mortgaged is also a security for the earlier loan, for the foreclosure rule would still be valid insofar as the later loan is concerned where the mortgagors themselves admit that the later loan is already due and demandable and that the real estate is security for said loan. (Reynoso IV vs. Commercial Credit Corp., 169 SCRA 60 [1989].)

(2) Authority not extinguished by death of mortgagor or mortgagee. — A mortgage may be foreclosed extrajudicially where there is inserted in the contract a clause giving the mortgagee the power, upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property. (Sec. 1, Act No. 3135, as amended by Act No. 4148.) The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an essential and inseparable part of a bilateral agreement. (Perez vs. Phil. National Bank, 17 SCRA 833 [1966].) (3) Public sale after proper notice. — Statutory provisions gov-erning publication of notice of mortgage foreclosure sales must be strictly complied with, and that even slight deviations there-from will invalidate the notice and render the sale at least void-able. The purpose of the publication of the Notice Sheriff’s Sale is to inform all interested parties of the date, time, and place of

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the foreclosure sale of the real property subject thereof. (Spouses Suico vs. Philippine National Bank, 531 SCRA 514 [2007].) The sale, which cannot be made legally outside of the prov-ince in which the property is situated (Sec. 2, Act No. 3135.), shall be made at public auction (Sec. 4, Ibid.; see Langkaan Realty De-velopment Corporation, Inc. vs. United Coconut Planters Bank, 347 SCRA 542 [2000].) after the giving of proper notice which consists in the posting of the notice of the sale in at least three (3) public places at the municipality or city where each mortgaged property is situated and the publication thereof in a newspaper of general circulation in said municipality or city. (Sec. 3, Ibid.) (4) Public sale at different places/on different dates. — The indi-visibility of a real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged properties located in different cities or municipalities as long as each par-cel of land is answerable for the entire debt. (Yu vs. Philippine Commercial International Bank, 485 SCRA 56 [2006].) Nothing is mentioned in Section 3 about the public auction of a real estate being held on two different dates. (LBC Bank vs. Marquez, 478 SCRA 160 [2006].) (5) Publication of notice of auction sale. — Publication is required to give the foreclosure sale a reasonably wide publicity such that those interested might attend the public sale. (Ouano vs. Court of Appeals, 398 SCRA 525 [2003].)

(a) Publication mandatory. — Failure to comply with the statutory requirements as to publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale or at least render the sale voidable. Even slight deviations therefrom are not allowed. (Lucena vs. Court of Appeals, 313 SCRA 47 [1999].) A sale held after the scheduled date indicated in the notice of sale is void. (Development Bank of the Phils. vs. Aguirre, 364 SCRA 755 [2001]; Masantol Rural Bank, Inc. vs. Court of Appeals, 204 SCRA 752 [1991].) Question of non-compliance with notice of publication requirements is a factual issue. (Tamayo, Jr. vs. Heirs of G. Dominguez, 498 SCRA 342 [2006].) (b) Contents of notice. — The notice of sheriff’s sale to be valid, must contain the correct number of the certifi cate of



406

title and the correct technical description of the real property to be sold. Under normal conditions, the failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale, and a substantial error or omission in a notice of sale will render the notice insuffi cient and vitiate the sale. (San Jose vs. Court of Appeals, 225 SCRA 450 [1993].) However, the requisite publication of notices is not so all-embracing as to deny justifi ed exceptions thereto under appropriate situations. (Olizon vs. Court of Appeals, 236 SCRA 148 [1994].) The validity of a notice of sale is not affected by immaterial errors not calculated to deter or mislead bidders. Thus, the mere discrepancy between the amount of the obligation as refl ected in the notice of sale and the amount actually due and collected during the bidding does not constitute a substantial error that should invalidate the notice. (K-Phil., Inc. vs. Metropolitan Bank & Trust Co., 569 SCRA 459 [2008].) (c) Object of notice. — The object of a notice of sale is not so much to notify the mortgagor as to inform the public generally of the nature and condition of the property sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifi ce of the property. If these objects are attained, immaterial errors and mistakes will not affect the suffi ciency of the notice. (Olizon vs. Court of Appeals, supra; Philippine National Bank vs. Nepomuceno Productions, Inc., 394 SCRA 405 [2002]; Spouses Suico vs. Philippine National Bank, 531 SCRA 514 [2007].) Publication in a newspaper of general circulation is required to achieve a “reasonably wide publicity’’ of the auction sale. (Olizon vs. Court of Appeals, supra.; Metropolitan Bank & Trust Company vs. Penafi el, 380 SCRA 352 [2009].) (d) Personal notice to mortgagor not generally required. — Section 3 of Act No. 3135 (Appendix 2.) which contains the requirement on notice in extrajudicial foreclosure sales, does not require personal notice or any particular notice on the mortgagor (Government Service and Insurance System vs. Court of Appeals, 170 SCRA 533 [1989]; Bohanan vs. Court of Appeals, 256 SCRA 355 [1996]; Philippine National Bank

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vs. Rabat, 344 SCRA 706 [2000].) much less on his successors-in-interest (Cruz vs. Court of Appeals, 191 SCRA 170 [1991]; Gravina vs. Court of Appeals, 220 SCRA 178 [1993].), where there is no contractual stipulation therefor. (Phil. National Bank vs. International Corporate Bank, 199 SCRA 508 [1991]; Concepcion vs. Court of Appeals, 274 SCRA 614 [1997]; Tamayo vs. Heirs of G. Dominguez, supra.) Hence, unless required in the mortgage contract, the lack of personal notice to the mortgagor is not a ground to set aside a foreclosure sale. Such notice is not necessary as publication of notice in a newspaper is more than suffi cient compliance. (Villavicencio vs. Mojares, 398 SCRA 314 [2003]; Olizon vs. Court of Appeals, supra; Metropolitan Bank and Trust Company vs. Wong, 359 SCRA 608 [2001]; Ardiente vs. Province Sheriff, 436 SCRA 655 [2004].) (e) Notice to executing mortgagee-creditor not provided by law. — There is no provision in the law on extrajudicial foreclosure of real estate mortgage to the effect that notice be given to the executing mortgagee-creditor. This is explained by the fact that it is the creditor who causes the mortgaged property to be sold and the date of sale is fi xed upon his instruction because it is he who causes the sale and controls its details. (L.F. Lang vs. Prov. Sheriff of Surigao, 93 Phil. 661 [1953]; LBC Bank vs. Marquez, 478 SCRA 160 [2006].) (f) Posting of notice on mortgaged property not required. — Neither does Section 3 of Act No. 3135 require posting of the notice of sale on the mortgaged property. It merely requires that the notice of sale be posted in at least three (3) public places in the city or municipality where the property is situated, to wit: the Sheriff’s Offi ce, the Assessor’s Offi ce, and the Register of Deeds which are certainly the public places contemplated by law as these are the places where people interested in purchasing real estate congregate.9 (Fortune

9Under Section 5 of R.A. No. 720 (Rural Banks Act), as amended by R.A. No. 7939, the posting of a notice of the foreclosure of the real estate mortgage in at least three of the most conspicuous public places not only in the municipality but also in the barrio where the land mortgaged is situated during the 60-day period immediately preceding the pub-lic auction is mandatory. (Guanco vs. Antolo, 497 SCRA 273 [2006].)



408

Motor [Phils.] vs. Metropolitan Bank & Trust Co., 265 SCRA 72 [1996]; see Tagunicar vs. Lorna Express Credit Corp., 483 SCRA 486 [2006].) (g) Certifi cate of posting not required. — A certifi cate of posting is not required, much less considered indispensable, for the validity of a foreclosure sale under Act No. 3135. Hence, the fact alone that there is no certifi cate of posting attached to the sheriff’s records is not suffi cient to prove the lack of posting. Such certifi cate is signifi cant only when it becomes necessary to prove compliance with the required notice of posting. Thus, in a case, the absence of the affi davit of publication was considered fatal because no equally convincing and competent proof of compliance was offered to compensate for its non-presentation. (Bohanan vs. Court of Appeals, supra; Tambunting vs. Court of Appeals, 167 SCRA 16 [1988]; Sulit vs. Court of Appeals, 268 SCRA 441 [1997]; Cristobal vs. Court of Appeals, 328 SCRA 256 [2000].) What the law requires is the posting of the notice of sale and not the execution of the certifi cate of posting. (Development Bank of the Philippines vs. Court of Appeals, 403 SCRA 460 [2003].) (h) Burden of proving non-compliance with notice-posting requirement upon mortgagor. — Foreclosure proceedings have in their favor the presumption of regularity. (Union Bank of the Phils. vs. Court of Appeals, 471 SCRA 751 [2005].) The mortgagor who alleges non-compliance with the publication requirement and the posting in public places of the notice of sale has the burden of proving the factum probandum. Finding by the lower court that there was compliance with the statutory requirements is binding upon the Supreme Court the question of non-compliance with the notice and publication requirements being a factual issue. (Reyes vs. Court of Appeals, 107 SCRA 126 [1981]; Bonnevie vs. Court of Appeals, supra; Valmonte vs. Court of Appeals, 303 SCRA 278 [1999]; Cristobal vs. Court of Appeals, supra; Philippine National Bank vs. Rabat, supra; Langkaan Realty Development, Inc. vs. United Coconut Planters Bank, 347 SCRA 541 [2000].)

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(i) Publication of notice of sale in newspaper of general cir-culation suffi cient compliance. — The statutory requirements of posting and publication are mandated not for the mort-gagor’s benefi t, but for the public or third persons. As such, they are imbued with public policy considerations and any waiver thereon would be inconsistent with the intent and let-ter of Act No. 3135. To allow the parties to waive the post-ing and publication requirements, would result in converting into a private sale what ought to be a public auction. (Philip-pine National Bank vs. Nepomuceno Productions, Inc., 394 SCRA 405 [2002]; Ouano vs. Court of Appeals, 398 SCRA 525 [2003].) It has been held, however, that the failure to post a notice is not per se a ground for invalidating a foreclosure sale provided that the notice thereof is duly published in a newspaper of general circulation. (Development Bank of the Phils. vs. Aguirre, 364 SCRA 755 [2001].) The publication of the notice of sale in a newspaper of general circulation alone is more than suffi cient compliance with the notice-posting requirement of the law considering that such newspaper, which is distributed nationwide, has a readership of more people than notice posted in a public bulletin board, no matter how strategic its location may be, which caters only to a limited few. Hence, a foreclosure sale cannot be annulled for alleged failure to comply with the notice requirement where what is lacking is only the posting of the notice in three (3) public places, and not the publication thereof in a newspaper of general circulation, especially where there is no showing that the property was sold for a price far below its value, or of collusion between the sheriff who conducted the sale and the mortgagee. (Olizon vs. Court of Appeals,10 supra; Cristobal vs. Court of Appeals, supra; Baluyut vs. Poblete, 514 SCRA 370 [2007].)

10Olizon has not actually dispensed with the posting requirement: “What prompted the Court to dispense with the posting requirement is the ‘unusual nature of the attend-ant facts and the peculiarity of the confl uent circumstances’ involved in said case where the extrajudicial foreclosure sought to be annulled was conducted more than 15 years ago, thus, even on the equitable ground of laches, the Olizons’ action for annulment of foreclosure proceedings and certifi cate of sale was bound to fail.’’ (Metropolitan Bank and Trust Co. vs. Wong, G.R. No. 120859, June 26, 2001.)



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(j) When newspaper of general circulation. — To be a news-paper of general circulation, it is enough that it is published for the dissemination of local news and general information, that it has a bona fi de subscription list of paying subscribers, and that it is published at regular intervals. Over and above all these, the newspaper must be available to the public in general, and not just to a select few chosen by the publisher, othewise the precise objective of publishing the notice of sale in the newspaper will not be realized. It must not be devoted to the interests or published for the entertainment of a par-ticular class, profession, trade, calling, race or religious de-nomination. It need not have the largest circulation as long as it is of general circulation in the place where the property to be foreclosed is located, whether conducted by a sheriff or a notary public. (Metropolitan Bank & Trust Co., Inc. vs. Penafi el, supra.; Fortune Motor [Phils.] vs. Metropolitan Bank & Trust Co., supra; Perez vs. Perez, 454 SCRA 72 [2005].) Neither P.D. No. 1079 (Appendix 4.) nor Act No. 3135 requires that the newspaper which publishes judicial notices should be a daily newspaper. (Ibid.) (k) Formalities of levy not required. — The formalities of a levy11 are not required before an extrajudicially foreclosed property can be sold at public auction. (Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].) (l) Notice to bidder of all bids offered at auction sale not required. — Neither is there a law which requires the auctioning sheriff to inform a bidder of all bids offered before the actual sale.

11Levy means the essential act or acts by which an offi cer sets apart or appropriates a part or the whole of the property of the judgment debtor for purposes of the prospective execution sale. The object of a levy is to take property into the custody of the law, and thereby renders it liable to the lien of the execution, and put it out of the power of the judgment debtor to divert it to any other use or purpose. To effect a levy upon a realty, the sheriff is required to do two (2) specifi c things: (1) fi le with the register of deeds a copy of the order of attachment or execution, together with the description of the at-tached property and notice of attachment or execution; and (2) leave with the occupant of the property copy of the same order, description and notice. These are prerequisites to a valid levy, non-compliance with any of which is fatal. (Cagayan de Oro Coliseum, Inc. vs. Court of Appeals, 320 SCRA 731 [1999].) On the other hand, an execution sale is a sale by a sheriff or other ministerial offi cer under the authority of a writ of execution which he has levied on the property of the debtor. (Caja vs. Nanquit, 438 SCRA 174 [2004].)

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(Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205 [1986].) (m) Section 4 of Act No. 3135 provides that the sale must take place “between the hours of nine in the morning and four in the afternoon.’’ A sale at public auction held within the intervening period provided by the law (i.e., at any time from 9:00 a.m. until 4:00 p.m.) is valid without regard to the duration or length of time it took the questioner to conduct the proceeding. (Phil. National Bank vs. Cabatingan, 557 SCRA 426 [2008].)

(6) Payment of cash by highest bidder. — Where the highest bidder is the mortgagee and the amount of his bid represented the total mortgage debt, it is not necessary for him to pay cash although Section 5 of Act No. 3135 requires that the creditor must bid “under the same condition as any other bidder.” It would serve no purpose for the sheriff to go through the ceremony of receiving the money and paying it back to the creditor. (Ruiz vs. Sheriff of Manila, 34 SCRA 83 [1970].) In case of a surplus in the purchase price, the mortgagee must account for the proceeds as if the price were paid in cash, and in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was received. (Sulit vs. Court of Appeals, supra.) (7) Surplus proceeds from foreclosure sale. — By their very nature, surplus money arising from a sale of real property like land under foreclosure stands in the same place of the land itself with respect to liens thereon or vested right therein. They are constructively, at least, real property and belong to the mortgagor or his assigns.

(a) Surplus money, in case of foreclosure sale, gains much signifi cance when there are junior encumbrancers on the mortgaged property. When there are several liens upon the property, the surplus money must be applied to their discharge in the order of their priority. The lien of the junior mortgagee on the property, after satisfying any prior mortgage, is transferred to the surplus fund. (b) A senior mortgagee who realizes more than the amount of his debt on a foreclosure sale is regarded, although



412

not in a purely equitable sense, as a trustee for the benefi t of the mortgagor and junior encumbrancers. (Ibid.) A mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of the fund and, being bound to apply it properly, is liable to the persons entitled thereto. He is under obligation to return the excess of the bid price to the mortgagor. (LCK Industries, Inc. vs. Planters Development Bank, 538 SCRA 634 [2007].)

(8) Redemption of property sold. — The debtor (natural person) has the right to redeem the property sold within the term of one year from and after the date of the sale.12 (Sec. 6, Act No. 3135.) The reckoning date in cases of registered land is from the registration of the certifi cate of sale since it is only from the date that the sale takes effect as a conveyance. (Jose vs. Blue, 42 SCRA 351 [1971]; Gorospe vs. Santos, 69 SCRA 191 [1976]; General vs. Barrameda, 60 SCRA 182 [1976].) In the case of juridical persons (corporations and partnerships), they have the right to redeem the property until, but not after the registration of the certifi cate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, which ever is earlier, as provided in Section 47 of R.A. No. 8791, the General Banking Law of 2000. Rule 39 of the Rules of Court is a rule of procedure with general application, while Act No. 3135 is a specifi c legislative enactment particularly applicable to extrajudicial foreclosure sale. Rule 39 applies only to ordinary execution sale. If at all, Rule 39 applies to extrajudicial foreclosure sale but only on the manner of redemption and computation of interest. (Abaca Corp. of the Phils. vs. Garcia, 272 SCRA 475 [1997].) (9) Remedy of party aggrieved by foreclosure. — Under Section 8, of Act No. 3135 (Appendix 2.) the debtor may, in the proceedings in which possession was requested, petition that the sale be set aside and the writ of possession cancelled, because the mortgage was not violated or the sale was not made in accordance with

12“Every conveyance of lands acquired under the free patent or homestead provi-sions, when proper, shall be subject to repurchase by the applicant, his widow or legal heirs, within a period of fi ve years from the date of the conveyance” (Sec. 119, C.A. No. 141 [Public Land Law] as amended.) or foreclosure sale. (Tupas vs. Damasco, 132 SCRA 593 [1984].)

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the provisions thereof. (GSIS vs. Court of Appeals, 266 SCRA 187 [1997].) He may ask for the annulment of the foreclosure sale on the ground that:

(a) There was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (b) The sale had not been fairly and regularly conducted; or (c) The price was inadequate and the inadequacy was so great as to shock the conscience of the court. (United Coconut Planters Bank vs. Spouses Beluso, 530 SCRA 567 [2007].)

(10) Republication. — Republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale. The parties have no right to waive the publication requirement. (Development Bank of the Philippines vs. Court of Appeals, supra; Ouano vs. Court of Appeals, supra.)Right of mortgagee to recover defi ciency. (1) Mortgage merely a security, not a satisfaction of an obligation. — If there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the defi ciency. (Development Bank of the Phils. vs. Mirang, 66 SCRA 141 [1975].) In judicial foreclosure, the Rules of Court specifi cally gives the mortgagee the right to claim for defi ciency in case defi ciency exists (Sec. 6, Rule 68.) while Act No. 3135 governing extrajudicial foreclosures of mortgage does not give a mortgagee the right to recover defi ciency after the public auction sale, neither does it expressly or impliedly prohibit such recovery.13

13In respect to pledge (Art. 2115.) and to chattel mortgage on the thing sold in install-ments (Art. 1484[3].), the law expressly forecloses the right of the creditors to sue for any defi ciency resulting from the sale of the security given to guarantee the obligation. While silent as to the mortgagee’s right to recover defi ciency, Act No. 3135, does not prohibit its recovery. Accordingly, it has been held that a defi ciency claim arising from the extraju-dicial foreclosure is allowed. (Philippine National Bank vs. Court of Appeals, 308 SCRA 229 [1999], citing cases; Cuñada vs. Drilon, 432 SCRA 618 [2004]; Suico Rattan & Buri Interiors, Inc. vs. Court of Appeals, 490 SCRA 560 [2006].)



414

To recover defi ciency, the extrajudicial foreclosure must be valid. (Development Bank of the Philippines vs. Licuanan, 516 SCRA 644 [2007].) In both judicial and extrajudicial foreclosures, the principle is the same, that the mortgage is but a security and not a satisfaction of the indebtedness. It is of no importance whether the buyer or the highest bidder in the public auction is the creditor himself. (Phil. Bank of Commerce vs. De Vera, 6 SCRA 1026 [1962]; Development Bank of the Phils. vs. Mirang, supra; Development Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978]; see Prudential Bank vs. Martinez, 189 SCRA 612 [1990].) Where a third person is the mortgagor, he is not liable for any defi ciency in the absence of a contrary stipulation. The action for the recovery of such defi ciency must be directed against the debtor. (2) Action for recovery of defi ciency. — If the defi ciency is embodied in a judgment, it is referred to as defi ciency judgment. (see Art. 2115.) It is the settled rule that a mortgagee may recover any defi ciency in the mortgage account which is not realized in a foreclosure sale and that an independent civil action for the recovery of defi ciency may be fi led even during the period of redemption. (Tarnate vs. Court of Appeals, 241 SCRA 254 [1995].) Once the auction sale of the mortgaged property is effected and the resulting defi ciency is ascertained, the mortgagee-creditor is then and there entitled to secure a defi ciency judgment which may immediately be executed, whether or not the mortgagor is still entitled to redeem the property sold. (Development Bank of the Phils. vs. Vda. de Moll, 43 SCRA 82 [1972].) (3) Prescriptive period of action. — The action to recover a defi ciency after foreclosure prescribes after ten (10) years from the time the right of action accrues as provided in Article 1144(2) of the Civil Code.14 The mortgagee in both real and chattel mortgages

14Art. 1144. The following actions must be brought within ten years from the time the right of action accrues:

(1) Upon a written contract;(2) Upon an obligation created by law;(3) Upon a judgment. (a)

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has, by law, the right to claim for the defi ciency resulting from the price obtained in the sale of the property at public auction. Correlatively, the mortgagor has the corresponding obligation created by law to pay such defi ciency. It can also be said that the action can be governed by Article 1144(1) if the mortgagee, in suing for the defi ciency, is merely seeking to enforce the written promissory note secured by the mortgage. Finally, the suit is in the nature of a mortgage action because its purpose is precisely to enforce the mortgage contract. Such being the case, Article 1142 of the Civil Code15 is likewise applicable. (Development Bank of the Phils. vs. Toneldan, 101 SCRA 171 [1980]; Quirino Gonzales Logging Concessionaire vs. Court of Appeals, 402 SCRA 181 [2003].)

Nature of judicial foreclosure proceeding. (1) An action quasi in rem. — A proceeding for judicial foreclosure of mortgage16 is an action quasi in rem. It is based on a personal claim against a specifi c property of the defendant. Its purpose is to have the property seized and sold by court order to the end that the proceeds thereof be applied to the payment of plaintiff’s claim. (Ocampo vs. Domalanta, 20 SCRA 1136 [1967].) A judgment ordering a foreclosure sale is conditioned upon a

15Art. 1142. A mortgage action prescribes after ten years. (1964a)16Section 2(a), Rule 4 of the Rules of Court provides that “[a]ctions affecting title

to, or for recovery of possession, or for partition or condemnation of, or foreclosure of mortgage on, real property, shall be commenced and tried in the province where the property or any part thereof lies.” The rule mentions an action for foreclosure of a real estate mortgage but does not mention an action for the cancellation of a real mortgage. The latter action is primarily to compel the mortgagee to accept payment of the mortgage debt and to release the mortgage. It does not involve the title to the mortgaged property. It is a personal action and not a real action. (Hernandez vs. Rural Bank of Lucena, Inc., 81 SCRA 75 [1978].)

Note: Section 2(a) is now Section 1 which reads: “Venue of real actions. — Actions affecting title to or possession of real property, or

interest therein shall be commenced and tried in the proper court which has jurisdiction over the area wherein the real property involved, or a portion thereof, is located.

Forcible entry and detainer actions shall be commenced and tried in the municipal trial court of the municipality or city wherein the real property involved or a portion thereof, is situated.’’



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fi nding on the correct amount of the unpaid mortgage debt and the failure of the mortgagor to pay the said amount. (Heirs of Z. Espiritu vs. Landrito, 520 SCRA 383 [2007].) (2) Result or incident of failure to pay indebtedness. — An action for the foreclosure of mortgage seeks to reach the property and subject it to the payment of a principal obligation. The principal obligation is the money indebtedness, and the subjection of the property is only resorted to upon failure to pay the debt. Hence, the money indebtedness is the principal thing, not the foreclosure of the property which is only the result or an incident of the failure to pay the indebtedness. (Salvador vs. Locsin, 93 Phil. 225 [1953].) Therefore, the fact that the property mortgaged is destroyed is not a ground to reduce the indebtedness secured. (Development Bank of the Phils. vs. Mirang, supra.) (3) Survives death of mortgagor. — An action for the foreclo-sure of a mortgage is an action which survives the death of the mortgagor because the claim against him is not a pure money claim but an action to enforce a mortgage lien. Being so, the judg-ment rendered therein may be enforced by a writ of execution. The action may be prosecuted by the interested person against the executor or administrator independently of the testate or intestate proceedings for the settlement of the mortgagor’s estate “for the reason that such claims cannot in any just sense be considered claims against the estate, but the right to subject specifi c property to the claim arises from the contract of the debtor whereby he has during life set aside certain property for its payment, and such property does not, except in so far as its value may exceed the debt, belong to the estate.” (Testamentaria de Don Amadeo Matute Olave vs. Canlas, 4 SCRA 463 [1962]; Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978].)

Nature of power of foreclosure by extrajudicial sale. (1) Conferred for mortgagee’s protection. — The power to fore-close is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an

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authority conferred upon the mortgagee for the latter’s own pro-tection. (2) An ancillary stipulation. — It is an ancillary stipulation supported by the same cause or consideration for the mortgage and forms an essential and inseparable part of the bilateral agreement. The sale proscribed by a special power to mortgage under Article 187917 is a voluntary and independent contract, and not an auction sale resulting from extrajudicial foreclosure which is precipitated by the default of the mortgagor. (Perez vs. Phil. National Bank, 17 SCRA 833 [1966]; Bicol Savings and Loan Assn. vs. Court of Appeals, 171 SCRA 630 [1989]; Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].) The extrajudicial foreclosure is proper only when so provided under a special power inserted in or attached to the mortgage contract. (Sec. 1, Act No. 3135, as amended.) The duty to examine an application for extrajudicial foreclosure to determine whether it incorporates a special power authorizing the mortgagee to extrajudicially foreclose a mortgage in the event non-payment of the debt devolves upon the clerk of court. (Paguyo vs. Gatbunton, 523 SCRA 156 [2007].) (3) A prerogative of the mortgagee. — The power to decide to foreclose or not is the prerogative of the mortgagee. After this, the act of the auctioning sheriff is governed by the provisions of Act No. 3135, as amended, and not by the instructions of the mortgagee. (Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205 [1986].)

ILLUSTRATIVE CASES: 1. The public auction sale was held on April 11, 1961, which was the next business day after the scheduled date of the sale on April 10, 1961, a special public holiday. Facts: See above. Issue: Is the sale valid?

17Art. 1879. A special power to sell excludes the power to mortgage; and a special power to mortgage does not include the power to sell.



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Held: No, it not having been carried out in accordance with Section 3 of Act No. 3135. (see Appendix 2.) Under Section 31 of the Revised Administrative Code which ordains “Pretermission of holiday. — Where the day, or the last day, for doing any act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day,” the pretermission applies only when the last day of a given period for doing an act falls on a holiday. It does not apply to a day fi xed by an offi ce or offi cer of the government for an act to be done, as distinguished from a period of time within which an act should be done, which may be on any day within that specifi ed period. For example, if a party is required by law to fi le his answer to a complaint within fi fteen (15) days from receipt of summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But if the court fi xes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period, but a date fi xed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notice of the sale on that day being posted as prescribed in Section 9, Act No. 3135.” (Rural Bank of Caloocan, Inc. vs. Court of Appeals, 104 SCRA 151 [1981].) ———— ———— ———— 2. Extrajudicial foreclosure sale of mortgaged land was con-ducted by the sheriff without fi rst effecting a levy on the mortgaged property. Facts: Upon failure of petitioners to redeem the mortgaged land within one (1) year, their TCT was cancelled by the Register of Deeds and in lieu thereof, another TCT was issued to DBP (mortgagee) upon presentation of a duly executed affi davit of consolidation of ownership. P, purchaser from DBP, mortgaged the lot to PNB. Since petitioners were still in possession of the property, the Provincial Sheriff ordered them to vacate the same. Petitioners seek to annul the extrajudicial foreclosure sale in favor of DBP on the ground that it was conducted by the Provincial Sheriff without fi rst effecting a levy on said property

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before selling the same at the public auction sale. They main-tain that the extrajudicial foreclosure being null and void by virtue of lack of a valid levy, the certifi cate of sale issued to DBP cannot transfer ownership over the lot in question and consequently, the deed of sale in favor of P and the real estate mortgage constituted by the latter in favor of PNB are likewise null and void. Issue: Are the formalities of a levy required before an extrajudicial foreclosure of property can be effected? Held: No. (1) Three different kinds of sale under the law. — “The formalities of a levy, as an essential requisite of a valid execution sale under Section 1518 of Rule 39 and a valid attachment lien under Rule 57 of the Rules of Court, are not basic requirements before an extrajudicially foreclosed property can be sold at public auction. At the outset, distinction should be made of the three different kinds of sale under the law: namely, an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale, because a different set of laws applies to each class of sale mentioned. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court. Rule 68 of the Rules of Court applies in cases of judicial foreclosure sale. On the other hand, Act No. 3135, as amended by Act No. 4118, applies in cases of extrajudicial foreclosure.’’ (2) Act No. 3135 governs extrajudicial foreclosure sale. — “The case at bar, as the facts disclose, involves an extrajudi-cial foreclosure sale. In the mortgage contract, petitioners, as mortgagors had appointed DBP, for the purpose of extraju-dicial foreclosure, ‘as his attorney-in-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all docu-ments and perform any act requisite and necessary to accom-plish said purpose x x x. In case of foreclosure, the mortgagor hereby consents to the appointment of the mortgagee or any of his employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same x x x.’ There is no justifi able basis, therefore, to apply by analogy the provisions of Rule 39 of the Rules of Court on ordinary

18Now Section 9.



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execution sale, particularly Section 15 thereof as well as the jurisprudence under said provision, to an extrajudicial foreclosure sale conducted under the provisions of Act No. 3135, as amended. Act No. 3135, as amended, being a special law governing extrajudicial foreclosure proceedings, the same must govern as against the provisions on ordinary execution sale under Rule 39 of the Rules of Court.’’ (3) Requirement of levy not applicable. — “In that sense, the case of Appari vs. Court of Appeals, 13 SCRA 611 (1965), cited by petitioners, must be distinguished from the instant case. On the question of what should be done in the event the highest bid made for the property at the extrajudicial foreclosure sale is in excess of the mortgage debt, this Court applied the rule and practice in a judicial foreclosure sale to an extrajudicial foreclosure sale in a similar case considering that the governing provisions of law as mandated by Section 6 of Act No. 3135, as amended, specifi cally Sections 29, 30, and 3419 of Rule 39 of the Rules of Court (previously Sections 464, 465 and 466 of the Code of Civil Procedure) are silent on the matter. The said ruling cannot, however, be construed as the legal basis for applying the requirement of a levy under Section 15 of Rule 39 of the Rules of Court before an extrajudicially foreclosed property can be sold at public auction when none is expressly required under Act No. 3135, as amended. Levy, as understood under Section 15, Rule 39 of the Rules of Court in relation to execution of money judgments, has been defi ned by this Court as the act whereby a sheriff sets apart or appropriates for the purpose of satisfying the command of the writ, a part or the whole of the judgment-debtor’s property.’’ (4) Essence of a contract of mortgage indebtedness. — “In extrajudicial foreclosure of mortgage, the property sought to be foreclosed need not be identifi ed or set apart by the sheriff from the whole mass of property of the mortgagor for the purpose of satisfying the mortgage indebtedness. For, the essence of a contract of mortgage indebtedness is that a property has been identifi ed or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfi llment of an obligation to answer the amount of indebtedness, in case of default or payment.

19Now Sections 27, 28, and 32, respectively.

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By virtue of the special power inserted or attached to the mortgage contract, the mortgagor has authorized the mortgagee-creditor or any other person authorized to act for him to sell said property in accordance with the formalities required under Act No. 3135, as amended.” (Fiestan vs. Court Appeals, 185 SCRA 75 [1909].) (5) Need not be expressed in a particular form. — Although a power of sale will not be recognized as contained in a mortgage unless it is given by express grant and in clear and implicit terms, and that there can be no implied power to that effect, it is generally held that no particular formality is required in the creation of the power of sale. Any words are suffi cient which evince an intention that the sale may be made upon default or other contingency. (59 C.J.S. 885; Tan Chat vs. C.N. Hodges, 98 Phil. 928 [1956].)

Stipulation of upset price in mortgage contract void. A stipulation in a mortgage of real property fi xing a “tipo” or upset price, i.e., the minimum price at which the property shall be sold, to become operative in the event of a foreclosure sale at public auction, is null and void for the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the law and interfere with the lawful procedure of the courts. (Banco Español-Filipino vs. Donaldson, Sim & Co., 5 Phil. 418 [1906]; Yangco vs. Cruz Herrera, 11 Phil. 402 [1908]; Bank of the Phil. Islands vs. Yulo, 31 Phil. 476 [1915].) It is debatable whether the rule still applies where the pur-chaser happens to be the creditor or mortgagee himself. The mortgagor can argue that the stipulation should be binding on the mortgagee on the principle of estoppel. (Art. 1431.)

Effect of inadequacy of price in foreclosure sale. (1) General rule; exception. — Where there is a right to redeem, inadequacy of price is not material because the judgment debtor may reacquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the auction sale. (Velasquez vs. Coronel, 5



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SCRA 985 [1962]; Philippine National Bank vs. Court of Appeals, 308 SCRA 229 [1999].) Mere inadequacy of the price obtained at the sheriff’s sale will not be suffi cient to annul or set aside the foreclosure sale unless “the price is so inadequate as to shock the conscience of the court” taking into consideration the peculiar circumstances attendant thereto. (National Bank vs. Gonzales, 45 Phil. 693 [1924]; Director of Lands vs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma, 64 Phil. 1058 [1937]; Sulit vs. Court of Appeals, 268 SCRA 441 [1997]; United Coconut Planters Bank vs. Spouses Beluso, 530 SCRA 567 [2007].) (2) At a nominal cost. — Mortgagors whose properties are foreclosed and are purchased by the mortgagee as highest bidder at the auction sale are decidedly at a great disadvantage because almost invariably, mortgagors forfeit their properties at a great loss as they are purchased at a nominal cost by the mortgagee himself, who ordinarily bids in no more than his credit or the balance thereof at the auction sale. That is the reason why the law gives them a chance to redeem their properties within a fi xed period. (General vs. Barrameda, 69 SCRA 182 [1976].) (3) Less than its fair market value. — In fact, the property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to effect the redemption so that the low price even works to his advantage. (Development Bank of the Phils. vs. Moll, 43 SCRA 82 [1972]; Vda. de Gordon vs. Court of Appeals, 109 SCRA 388 [1981]; Prudential Bank vs. Martinez, 189 SCRA 612 [1990]; Suico Rattan & Buri Interiors, Inc. vs. CA, 490 SCRA 560 [2006].) In several cases where the mortgaged properties were sold for even less than one-third (1/3) of their value, our Supreme Court has seen fi t not to disturb such sales. (see National Bank vs. Gonzales, supra; Tria vs. Villareal, 69 Phil. 478 [1940]; Medina vs. Phil. National Bank, 56 Phil. 651 [1932]; Bank of the P.I. vs. Green, 52 Phil. 491 [1928].) Section 29 of Rule 39 of the Rules of Court provides that the redemption price should be equivalent to “the amount of the purchase price, with 1% interest per month up to the time of redemption x x x.’’ (4) Bid price at the public auction. — The value of the mortgaged property has no bearing on the bid price at the public auction,

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provided that the public auction was regularly and honestly conducted. (Escudero vs. Ticson, 7 C.A. Rep. 139.) In the absence of any irregularity in the foreclosure proceeding, the sale cannot be nullifi ed on the mere allegation of a disparity in the bid price and the property’s fair market value. (Hi-Cement Corporation vs. Insular Bank of Asia and America, 534 SCRA 269 [2007].) The fact that the mortgagee eventually acquired the mort-gaged property and that the bid price was low is not a valid reason for the mortgagor to refuse to pay the remaining balance of the obligation for settled is the rule that a mortgage is simply a surety and not a satisfaction of indebtedness. (Suico Rattan & Buri Interiors, Inc. vs. Court of Appeals, supra.)

Waiver of security by mortgagee. (1) Personal action to recover indebtedness. — The mortgagee may institute either a personal action for debt or a real action to foreclose the mortgage. He may waive the right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. In either case, he is entitled to obtain a defi ciency judgment for whatever sum might be due after the liquidation of the property covered by the mortgage. There is no statutory provision in our jurisdiction prohibiting a personal action to recover a sum of money even though a mortgage has been given as security for the payment of the same. (Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [1924]; Solomon and Lachica vs. Dantes, 63 Phil. 522 [1937]; BPI Family Savings Bank, Inc. vs. Vda. De Cosculluela, 493 SCRA 472 [2006].) (2) Remedy alternative, not cumulative or successive. — The mortgagee cannot have both remedies. He has only one cause of action, i.e., non-payment of the mortgage debt; hence, he cannot split up his cause of action by fi ling a complaint for payment of the debt, and another complaint for foreclosure. (Caltex Phils. vs. Intermediate Appellate Court, 176 SCRA 741 [1989]; Bank of America vs. American Realty Corporation, 321 SCRA 659 [1999].) As to extrajudicial foreclosure, the mortgagee is deemed to have elected such remedy upon fi ling with the proper offi ce of the sheriff of the petition for the sale of the property in accordance with Act No. 3135, as amended.



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(3) Options in case of death of debtor. — The rule is that a secured creditor holding a real estate mortgage has three (3) distinct, independent, and mutually exclusive remedies that can be alternatively pursued by him for the satisfaction of his credit in case the mortgagor dies,20 to wit:

(a) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim; (b) to foreclose the mortgage judicially and prove any defi ciency as an ordinary claim; and (c) to rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription without right to fi le a claim for any defi ciency. (Perez vs. Philippine National Bank, 17 SCRA 833 [1966]; Jacob vs. Court of Appeals, 184

20Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the de-ceased secured by mortgage or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the general distri-bution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a defi ciency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his defi ciency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or other security alone, and foreclose the same at any time within the period of the statute of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; but nothing herein contained shall prohibit the executor or administrator from redeem-ing the property mortgaged or pledged, by paying the debt for which it is held as a secu-rity, under the direction of the court, if the court shall adjudge it to be the best interest of the estate that such redemption shall be made. (Rule 86, Rules of Court.)

This section gives to the mortgagee three distinct alternative remedies. The third alternative, i.e., to foreclose without action at any time within the period allowed by the statute of limitations, is evidently, a foreclosure under power of sale contained in the mortgage. (see Perez vs. Philippine National Bank, 17 SCRA 833 [1966].) It refers to a case where the mortgagor is already dead at the time the mortgagee decides to enforce his mortgage lien. (concurring opinion of Justice R.C. Aquino in Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978].) If the creditor elects to abandon the security given him by his mortgage, he forfeits his rights to bring an action upon the security in another separate and distinct action. (Osorio vs. Agustin, 25 Phil. 404 [1913]; see Davao vs. Court of Appeals, 154 SCRA 446 [1987].)

When the mortgagee-creditor fi les a criminal case for violation of B.P. Blg. 22 (Bounc-ing Checks Law), his civil action for the recovery of the amount of the dishonored check is impliedly instituted pursuant to Section 1(b), Rule 111 of the Rules of Court; hence, he is barred from subsequently resorting to an action for foreclosure. (Chieng vs. Santos, 531 SCRA 730 [2007].)

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SCRA 294 [1990]; Maglaque vs. Planters Development Bank, 307 SCRA 156 [1999].)

The third option includes extrajudicial foreclosure which bars any subsequent defi ciency claim against the estate of the deceased. (Philippine National Bank vs. Court of Appeals, 360 SCRA 370 [2001].) A mortgagee-creditor is not synonymous to a judgment credi-tor. While the law expects a mortgagee-creditor to inquire as a reasonably prudent man would regarding the encumbrances on the property in question, no such knowledge is imputed to a judgment creditor who merely seeks the satisfaction of the judg-ment awarded in his favor. (DSM Construction & Development Corp. vs. Court of Appeals, 478 SCRA 618 [2006].)

Foreclosure retroacts to date of registration of mortgage. The character of being an innocent mortgagee continues up to the date of actual foreclosure and sale at public auction. (Gonzales vs. Intermediate Appellate Court, 157 SCRA 587 [1988].) A foreclosure sale retroacts to the date of the registration of the mortgage and that a person who takes a mortgage in good faith and for valuable consideration, the record showing clear title to the mortgagor, will be protected against equitable claims on the title in favor of third persons of which he had no actual or constructive notice. (St. Dominic Corp. vs. Intermediate Appellate Court, 151 SCRA 577 [1987].) Accordingly, a notice of adverse claim by a third party annotated after the registration of the mortgage but before the foreclosure and sale at public auction of the property subject thereto cannot affect the rights of the mortgagee. The fact that the foreclosure of the mortgage and the consequent public auction may have been effected long after the annotation of the adverse claim is of no moment, because the foreclosure sale retroacts to the date of registration of the mortgage. (Bank of the Phil. Islands vs. Noblejas, 105 Phil. 418 [1959].) Simply put, it no longer matters that the annotation of the sheriff’s certifi cate of sale and the affi davit of consolidation of ownership was made



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subsequent to the annotation of the notice of lis pendens. (Phil. Veterans Bank vs. Monillas, 550 SCRA 251 [2008].)

Meaning of redemption (of foreclosed property). Redemption may be defi ned as a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. (59 C.J.S. 813.) In general, the concept of redemption is to allow the owner to repurchase or buy back, within a certain period and for a certain amount, a property that has been sold due to debt, tax, or encumbrance. (Iligan Bay Manufacturing Corp. vs. Dy, 524 SCRA 55 [2007].) It is allowed in cases of foreclosures in favor of banking and credit institutions and in extrajudicial foreclosures.

Kinds of redemption. They are: (1) Equity of redemption or the right of the mortgagor in case of judicial foreclosure to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the confi rmation of the sale of the mortgaged property (see Top-Rate International Services, Inc. vs. Intermediate Appellate Court, 142 SCRA 467 [1986].); and (2) Right of redemption or the right of the mortgagor in case of extrajudicial foreclosure to redeem the mortgaged property within a certain period from and after it was sold for the satisfaction of the mortgage debt.21

21“The right to redeem becomes functus offi cio on the date of its expiry, and its exer-cise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase, however, of foreclosed property, after redemption pe-riod, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for after all, the property already be-longs to him as owner.’’ (Nalino vs. Intermediate Appellate Court, 197 SCRA 323 [1991]; Vda. De Urbano vs. GSIS, 367 SCRA 672 [2001].)

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Equity of redemption. (1) Exercised before confi rmation of sale. — In judicial foreclosure, the mortgagor may exercise his equity of redemption before but not after the sale is confi rmed by the court. It is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes fi nal in accordance with Rule 68, or even after the foreclosure sale but prior to its confi rmation. (see Secs. 2, 3, Rule 68, Rules of Court; Raymundo vs. Sunico, 25 Phil. 365 [1913]; Rosales vs. Suba, 408 SCRA 664 [2003].) Where the foreclosure is judicially effected, no equivalent right of redemption exists. (Limpin vs. Intermediate Appellate, 166 SCRA 87 [1987].) (2) Acquired by second mortgagee. — A second mortgagee acquires only the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the fi rst mortgagee. (Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]; Piano vs. Cayanong, 7 SCRA 397 [1963].) (3) Taking physical possession not necessary for levy. — To levy upon the mortgagor’s equity of redemption, it is not necessary for the sheriff to take physical possession of the mortgaged property. Levying upon the property is distinguishable from levying on the mortgagor’s interest in it. Being an incorporeal or intangible right, the value of an equity of redemption can neither be quantifi ed nor equated with the actual value of the property upon which it may be exercised. (Top-Rate International Services, Inc. vs. Intermediate Appellate Court, supra.) (4) Levy by means of a writ of execution. — The mortgagor’s equity of redemption can be levied upon by means of a writ of execution,22 with the result that this interest will pass to the

22Levying upon the property itself is distinguishible from levying on a person’s in-terest in it. To levy upon a mortgagor’s incorporeal right or equity of redemption, it is not necessary for the sheriff to take physical possession of the mortgaged property. Such interest can be levied upon by means of a writ of execution. (Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975]; Looyuko vs. Court of Appeals, 361 SCRA 150 [2001].)



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purchaser at the execution sale. (Blouse Potenciano vs. Mariano, 96 SCRA 463 [1980].) In a case, it was held that the fact that the mortgage was a security for only P10,000.00 did not render void the foreclosure sale ordered by the lower court for the satisfaction of the sum of P16,778.84, for the mortgagors could have stopped the foreclosure, if they wanted to, by paying the P10,000.00 to the mortgagee before the auction sale was held and they failed to do so. (Alfaro vs. Llanes & Company, 77 SCRA 6 [1977].) (5) Remedy of mortgagee to obtain possession. — If a mortgagee cannot obtain possession of the mortgaged property for its sale on foreclosure, he must bring a civil action either to recover such possession as a preliminary step to the sale or to obtain judicial foreclosure. Replevin is, of course, the appropriate action to recover possession preliminary to the extrajudicial foreclosure of a chattel mortgage. It is not only the owner but a person “entitled to the possession’’ of the property can institute a replevin suit. (Filinvest Credit Corp. vs. Court of Appeals, 248 SCRA 549 [1995].) Properly speaking, a mere mortgagee of property is not yet a transferee. He becomes a transferee only after acquiring the property in the foreclosure sale and subsequently consolidates his title to it. A mortgagee in bad faith, being aware of the title of the mortgagor, is a transferee in pendente lite (see Sec. 47[b], Rule 39, Rules of Court.) who stands exactly in the shoes of the transferor, and his title is subject to the incidents and results of the pending litigation involving the property. (The Malayan Bank vs. Lagrama, 357 SCRA 429 [2001].)

Right of redemption. (1) Period within which to exercise right. — What is extant in extrajudicial foreclosure is the right of redemption. In all cases of extrajudicial sale, the (individual) mortgagor may redeem the property at any time within the term of one year from and after the date of the sale (Sec. 6, Act No. 3135.), i.e., date of registration of the certifi cate of sale with the appropriate Registry of Deeds. (Sec. 28, Rule 39, Rules of Court; Reyes vs. Tolentino, 42 SCRA 365 [1971]; Sta. Ignacia Rural Bank, Inc. vs. Court of Appeals, 230 SCRA 513 [1994].)

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(a) The fi ling of an action by the redemptioner to enforce his right to redeem does not suspend the running of the statutory period to redeem the property, nor bar the purchaser at public auction from procuring a writ of possession after the period had lapsed, without prejudice to the fi nal outcome of the action to enforce the right of redemption. (Pahang vs. Vestil, 434 SCRA 139 [2004]; Ong vs. CA, 333 SCRA 189 [2000].) Neither is the period suspended by the institution of an action to annul the foreclosure sale. (Metropolitan Bank & Trust Co. vs. Tan, 569 SCRA 814 [2008].) (b) The existence of the right of redemption operates to depress the market value of the land until the period expires and to render that period indefi nite because of the suit with either party unable to foresee when the fi nal judgment will terminate the action, would render nugatory the period fi xed by law for making the redemption and virtually paralyze any efforts of the purchaser to realize the value of his land. (BPI Family Savings Bank, Inc. vs. Veloso, 436 SCRA 1 [2004].) Under Article 13 of the Civil Code, a year is understood to be 365 days. Thus, where the certifi cate of sale was registered on September 2, 1968, the one-year redemption expired on September 3, 1969. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].) In another case, the certifi cate of sale was registered on August 24, 1983. Excluding the fi rst day and counting from August 25, 1983 (under par. 3 of Art. 13, Civil Code), and 1984 being a leap year, it was held that the mortgagor had only until August 23, 1984 within which to redeem the foreclosed property in accordance with law. (State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992].) Note: The Administrative Code of 1987 (Exec. Order No. 292), however, provides that “year’’ shall be understood to be 12 calendar months, and “month,’’ of 30 days unless it refers to a specifi c calendar month (Chap. viii, Bk. 1, Sec. 31 thereof.) (c) By an amendment by the General Banking Law of 2000 (R.A. No. 8791.), enacted on May 23, 2000, juridical mortgagors like partnerships and corporations are barred from the right of redemption of mortgaged property sold



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pursuant to an extrajudicial foreclosure, after the registration of the certifi cate of foreclosure with the applicable Register of Deeds.

Section 47 (par. 2.) of the Act provides: “Notwithstanding Act No. 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after the registration of the certifi cate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act retain their redemption rights until their expiration.’’

Note that under the amendatory provision, the right of one-year redemption of juridical mortgagors shall be retained but only if the foreclosure sale took place before the effectivity of the Act. This amendment is open to constitutional objection of being violative of the equal protection guarantee (Sec. 1, Art. III, Constitution.) for it discriminates against corporate or juridical mortgagors and the prohibition against impairment of the obligation of contracts (Sec. 10, Ibid.) because it takes from them a vested right of redemption acquired under a contract executed prior to the effectivity of the new law. Before, they have one (1) year to redeem, reckoned from the registration of the sale with the registry of deeds. R.A. No. 8791 now limits the redemption period to only three (3) months, to begin from the date of the foreclosure sale but not after the registration of the certifi cate of foreclosure sale which ever comes fi rst. The shorter period is also provided in Supreme Court En Banc Resolution A.M. No. 99-10-05-0, dated August 7, 2001. (supra.) (2) Effect of failure to exercise right. — Title to the property sold under a mortgage foreclosure remains with the mortgagor or his grantee until the expiration of the redemption period. The right of the purchaser at the foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. (Medida vs. Court of Appeals, 208 SCRA 887

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[1992]; Philippine Commercial International Bank vs. Court of Appeals, 344 SCRA 596 [2000].)

(a) If no redemption is made within the prescribed period, the purchaser becomes the absolute owner of the property. He has the absolute right to a writ of possession (infra.) which is the fi nal process to carry out or consummate the extrajudicial foreclosure. Henceforth, the mortgagor loses his right over the property. (Bernardez vs. Reyes, 201 SCRA 648 [1991].) (b) The one-year period for the exercise of the right of redemption is subject to the provisions of special laws. The statutory period of redemption is only directory and can be extended by agreement of the parties but two requisites must be established, namely: (a) voluntary agreement of the parties to extend the redemption period; and (b) the debtor’s commitment to pay the redemption price on a fi xed date. (Development Bank of the Phils. vs. West Negros College, Inc., 429 SCRA 50 [2004]; Gojudo vs. Traders Royal Bank, 485 SCRA 108 [2006].)

(3) Effect of exercise of right. — What actually is effected where redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery of the property which ownership is never lost.

(a) The redemption by the debtor eliminates but from his title the lien created by the levy or attachment or judgment or registration of the mortgage thereon. The redemption defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been made. Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed. (Medida vs. Court of Appeals, supra.) (b) The exercise of the right of redemption is an implied admission of the regularity of the foreclosure sale and estops the mortgagor from later impugning its validity on that ground. Redemption is inconsistent with the claim of the invalidity of the sale. (Aclon vs. Court of Appeals, 387 SCRA 415 [2002].)



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(4) Where mortgaged property sold to a third party. — A sale by the mortgagor to a third party of the mortgaged property during the period for redemption transfers only the right to redeem the property and the right to possess, use and enjoy the same during said period. Under the Rules of Court (Rule 39, Sec. 31.), the judgment debtor remains in possession of the property foreclosed and sold, during the period of redemption, but he cannot make a conveyance of the ownership of the property as said ownership belongs to the purchaser at the foreclosure sale. (Dizon vs. Gaborro, 83 SCRA 688 [1978].) Suppose, the mortgaged property is sold by the mortgagee after foreclosure? In a case, the question to be determined is whether the mortgagor should redeem or repurchase the mort-gaged property from the mortgagee bank, the highest bidder in the foreclosure sale, or from the purchaser of the property which was sold by the bank because the amount to be paid by the mort-gagor as consideration for the repurchase would depend upon whether the mortgagor should repurchase from the bank or the purchaser. It was held that the mortgagor is entitled to repurchase from the mortgagee bank and the amount to be paid therefor should be only “such amount as may correspond to the principal obligation and the accumulated interest up to and including the time of actual repurchase. The high tribunal rationalized that a different ruling would render it easy for the buyer at the foreclosure sale to render nugatory the right to repurchase granted by law to the mortgagor by making a conveyance of the property for an amount beyond the capacity of the mortgagor to pay. The right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party. (Sta. Ignacia Rural Bank, Inc. vs. Court of Appeals, 230 SCRA 513 [1994]; Philippine National Bank vs. Landeta, 18 SCRA 272 [1967]; Villafl or vs. Barreto, 92 Phil. 297 [1952].) (5) Where sale not registered and made without consent of mortgagee. — Where the mortgagor, two days after the execution of the mortgage to a bank, executed in favor of a third party a Deed of Sale with Assumption of Mortgage, no consent having

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been secured from the bank to the sale which was not registered so that the title remained in the name of the mortgagor, it was held that the buyer was not validly substituted as debtor, and hence, had no right to redeem. The mortgagee-bank was charged with the obligation to recognize the right of redemption only of the mortgagor. (Bonnevie vs. Court of Appeals, supra.) (6) Where extrajudicial foreclosure effected with fraud. — An extrajudicial foreclosure effected with fraud is null and void ab initio. Consequently, the consolidation of ownership of the subject property to the mortgagee as the highest bidder and its subsequent resale to a third party (who was a buyer in bad faith) are also without legal force and effect. The mortgagor is entitled to the equitable remedy of redemption. (Community Savings and Loan Association, Inc. vs. Court of Appeals, 153 SCRA 564 [1987].)

Confi rmation by court of auction sale in judicial foreclosure. (1) Equity of redemption. — The equity of redemption is different from and should not be confused with the right of redemption. The latter in relation to a mortgage — understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale — exists only in the case of extrajudicial foreclosure of mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a banking institution. (infra.) (2) Procedure. — The mortgagor’s equity of redemption is simply the right of the mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 120-day period from the entry of judgment in accordance with Section 2, Rule 68 of the Rules of Court (see Appendix 3.), or even after the foreclosure sale but prior to its confi rmation. (see Limpin vs. Intermediate Appellate Court, 166 SCRA 87 [1988]; Huerta Alba Resort, Inc. vs. Court of Appeals, 339 SCRA 534 [2000].) The procedure, however, can be modifi ed by a valid agreement of the parties, such as in a compromise agreement, wherein the parties specifi cally agree on the amounts to be paid, when they should be paid, and the effects of non-



434

payment or violation of the terms of their agreement. (Cruz vs. Intermediate Appellate Court, 169 SCRA 9 [1969].) (3) Effect and nature. — In judicial foreclosure of real estate mortgage, the general rule is that the mortgagor cannot exercise his right of redemption after the sale is confi rmed. (Raymundo vs. Sunico, 25 Phil. 365 [1913]; Benedicto vs. Yulo, 26 Phil. 160 [1913].) Confi rmation of the sale of mortgaged real property cuts off all the rights or interests of the mortgagor and of the mortgagee and persons holding under him, and with them the equity of redemption in the property and vests them in the purchaser. Confi rmation retroacts to the date of the sale. It is fi nal order, not interlocutory. (Ocampo vs. Domalanta, 20 SCRA 1136 [1967]; Binalbagan Estate, Inc. vs. Gatuslao, 76 Phil. 128 [1946]; Villar vs. Javier, 97 Phil. 604 [1955]; Lonzome vs. Amores, 134 SCRA 380 [1985].) However, if the property has been mortgaged in favor of the Philippine National Bank, redemption is allowed within one year from the confi rmation of the sale.23 (Gonzales vs. Phil. National Bank, 48 Phil. 824 [1926].) (4) Control of court over proceedings before confi rmation. — A foreclosure sale is not complete until it is confi rmed and before such confi rmation, the court retains control of the proceedings by exercising sound discretion in regard to it either granting or withholding confi rmation as the rights and interests of the parties and the ends of justice may require. Thus, the court may grant the judgment debtor or mortgagor an opportunity to pay the proceeds of the sale and thereby refrain from confi rming it. The subsequent sale by the purchaser to a third person of the mortgaged property does not prevent the court from granting the mortgagor a period within which to redeem the property by paying the judgment debt and the expenses of the sale and costs. The acceptance of a bid at the foreclosure sale confers no title on the purchaser who is nothing more than a preferred bidder, until the sale has been validly confi rmed by the court. But in case

23Under its Revised Charter (Pres. Decree No. 694.), the period is within one (1) year from the registration of the foreclosure (judicial or extrajudicial) sale. (see Sec. 25 thereof.)

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where the statutory one-year period for exercising the right of redemption has expired and the mortgaged property was sold by the mortgagee-bank (as the only bidder in the auction sale) to a third person who was not a party in the foreclosure proceeding, it was held that the trial court should give such third person a chance to be heard before allowing the mortgagor to redeem the property. (Rural Bank of Oroquieta vs. Court of Appeals, 101 SCRA 5 [1980].) (5) Requirement of notice and hearing. — In order that a foreclo-sure sale may be validly confi rmed by the court, it is necessary that a hearing be given the interested parties, at which they may have an opportunity to show cause why the sale should not be confi rmed. Notice and hearing of a motion for confi rmation of sale are essential to the validity of the order of confi rmation, not only to enable the interested parties to resist the motion but also to inform them of the time when their right of redemption is cut off. An order of confi rmation, void for lack of notice and hearing, may be set aside anytime and the mortgagor may still redeem the mortgaged property. (Ibid.)

Nature of mortgagor’s right of redemption. After foreclosure and sale of the mortgaged property, the mortgage indebtedness is extinguished except to the extent that there is a defi ciency. What remains is the right vested by law in favor of the mortgagor to redeem the property within the prescribed period. (1) An absolute privilege. — This right of redemption is an absolute privilege, the exercise of which is entirely dependent upon the will and discretion of the redemptioner.

(a) There is, thus, no legal obligation to exercise the right of redemption. Should the mortgagor choose not to exercise it, nobody can compel him to do so nor will such choice give rise to a cause in favor of the purchaser at the auction sale. In fact, the relationship between the said purchaser and the redemptioner is not even that of creditor and debtor.



436

(b) Redemption being optional and not compulsory, a formal offer to redeem, accompanied by a bona fi de tender of the redemption price within the prescribed period of redemp-tion is only essential to preserve the right of redemption for future enforcement even beyond such period. But where the right to redeem is exercised thru the fi ling of judicial action, within the period of redemption, such fi ling is equivalent to a formal offer to redeem and have the effect of preserving the right of redemption. (Tolentino vs. Court of Appeals, 106 SCRA 513 [1981]; Tioseco vs. Court of Appeals, 143 SCRA 705 [1986]; Belisareo vs. Intermediate Appellate Court, 165 SCRA 101 [1988].)

In sum, the formal offer to redeem is not a distinct step or condition sine qua non to the fi ling of the action in court for the valid exercise of the right of legal redemption. What constitutes a condition precedent is either a formal offer to redeem or the fi ling of an action in court together with the consignation of the redemption price within the reglementary period. (Lee Chuy Realty Corp. vs. Court of Appeals, 250 SCRA 596 [1995].) (2) A mere statutory privilege. — The right of redemption is a mere statutory privilege; hence, it must be exercised in the mode and within the period prescribed by the statute. (Mateo vs. Court of Appeals, 99 Phil. 1042 [1956].)

(a) The general rule in redemption is that in making a repurchase, it is not suffi cient that a person offering to redeem makes a manifestation of his desire to repurchase; his intention must be accompanied by an actual and simultaneous tender of payment of the full amount of the repurchase price, which constitutes the legal use of exercise of the right to repurchase. The exception is where the right to redeem is exercised through the fi ling of a judicial action. (See State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992].) The fi ling of an action to enforce redemption within the period of redemption is equivalent to a formal offer to redeem and should the court allow the redemption, the redemption-er should then pay the amount already determined. (Pahang vs. Vestil, 434 SCRA 139 [2004].)

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(b) The right on redemption is liberally construed in fa-vor of the original owner of the property. The policy of the law is 1) to aid rather than to defeat him in the exercise of his right of redemption (Tioseco vs. Court of Appeals, supra; Tib-ajia vs. Court of Appeals, 193 SCRA 581 [1991].), regardless of whether the redemptioner is a co-owner (see Art. 1623.) or mortgagor although perhaps with unequal force and effect since each is given a fi xed but different period (Lee Chuy, Re-alty Corp. vs. Court of Appeals, supra.), and 2) to look upon redemption with favor and interpret liberally the rule on re-demption. (De los Reyes vs. Intermediate Appellate Court, 176 SCRA 394 [1989]; Serrano vs. Court of Appeals, 417 SCRA 415 [2003]; Iligan Bay Manufacturing Corp. vs. Dy, 524 SCRA 55 [2007].) Thus, in a case, inasmuch as the tender of the redemption price (P337,580.00) based on the computation of the sheriff was timely and in good faith, and the defi ciency (P8,500.00) in said price (P346,080.00) is not substantial, the Supreme Court gave the debtor-mortgagor, in the interest of justice, 15 days from the time the decision became fi nal, to complete the redemption as provided in Section 26, Rule 39 of the Rules of Court. (Bodiongan vs. Court of Appeals, 248 SCRA 496 [1995].) (c) A dacion en pago was executed by the mortgagors in favor of the mortgagee in lieu of the foreclosure of the prop-erty mortgaged when the former failed to pay their loan ob-ligations, held: By executing a dacion, the sellers (mortgagors) effectively waived the redemption period normally given a mortgagor. (First Global Realty and Development Corpora-tion vs. San Agustin, 377 SCRA 341 [2002].)

(3) Involves title to foreclosed property. — An action to redeem by the mortgage debtor affects his title to the foreclosed property. If the action is seasonably made, it seeks to erase from the title of the judgment or mortgage debtor the lien created by registration of the mortgage and sale. If not made seasonably, it may seek to recover ownership to the property since the purchaser’s inchoate title to the property becomes consolidated after expiration of the redemption period. Either way, redemption involves the title to



438

the foreclosed property. It is a real action. (Commodities Storage & Ice Plant Corp. vs. Court of Appeals, 274 SCRA 439 [1997].)

Requisites for valid redemption. Pursuant to Section 28, Rule 39 of the Rules of Court (see Sec. 6, Act No. 3135, Appendix 2.), and subject to the provisions of special laws (see Canque vs. Court of Appeals, 275 SCRA 741 [1997].), the requisites for valid redemption are: (1) The redemption must be made within one (1) year from the date of the registration of the certifi cate of sale,24 not from the date of the foreclosure sale. The existence of the right of redemption operates to depress the market value of the property until the period expires, and to render the period indefi nite would render nugatory the period fi xed by statute. (Estanislao, Jr. vs. Court of Appeals, 362 SCRA 229 [2001]; Basbas vs. Entena, 28 SCRA 665 [1965].) The period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the person exercising redemption. (Landrito, Jr. vs. Court of Appeals, 466 SCRA 107 [2005].) (2) Payment of the purchase price of the property plus 1% interest per month together with the taxes thereon, if any, paid by the purchaser and the amount of his prior lien, if any, with the same rate of interest computed from the date of registration of the sale, up to the time of redemption; and (3) Written notice of the redemption must be served on the offi cer who made the sale and a duplicate fi led with the proper Register of Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983].)

24What is the redemptioner’s option when the redemption period is about to expire and the redemption cannot take place on account of disagreement over the redemption price? According to jurisprudence, the redemptioner faced with such a problem may preserve his right of redemption through judicial action which in every case must be fi led within the one-year period of redemption. The fi ling of the court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and “freezing” the expiration of the one-year period. This is a fair interpretation provided the action is fi led on time and in good faith, the redemption price is fi nally determined and paid within a reasonable time, and the rights of the parties are respected. (Hi-Yield Realty, Inc. vs. Court of Appeals, 388 SCRA 655 [2002]; Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64 [2005].)

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(4) In judicial foreclosure, the general rule is that the mort-gagor of real estate can no longer exercise his right of redemption after the sale is confi rmed by the court. Allowing a redemption after the lapse of the statutory period, when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the right of redemption. There is nothing in the law which prevents a waiver of the statutory period for redemption. (Ramirez vs. Court of Appeals, 219 SCRA 598 [1993].) (5) The mortgagor or his assignee is required to tender payment within the prescribed period to make said redemption valid, or to preserve the right of redemption for future enforcement beyond such period of redemption.

(a) Where the right to redeem is exercised through judicial action within the reglementary period the offer to redeem, accompanied by the a bona fi de tender of the redemption price, while proper, may be unessential. The fi ling of a court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of “freezing’’ the expiration of the one-year period. (Heirs of N.J. Quisumbing vs. Philippine National Bank, 576 SCRA 762 [2009].) (b) The tender of payment must be for the full amount of the purchase price; otherwise, to allow payment by installments would be to allow the indefi nite extension of the redemption period. (Estanislao, Jr. vs. Court of Appeals, 362 SCRA 229 [2001].) The statement of intention to redeem must be accompanied by an actual and simultaneous tender of payment or else validly consigned in court; otherwise, the rule on the redemption period fi xed by law can easily be circumvented. Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption price within the said period. (BPI Family Savings Bank vs. Veloso, 436 SCRA 1 [2004]; Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64 [2005]; Tolentino vs. Court of Appeals, 517 SCRA 732 [2007]; Metropolitan Bank & Trust Co. vs. Tan, 569 SCRA 814 [2008].)



440

Although it is required that full payment of the redemption price be made within the redemption period, the rule on redemption is actually liberally construed in favor of the original owner of the property. (Ysmael vs. Court of Appeals, 318 SCRA 215 [1999].)

Payment of redemption money. (1) To whom it may be made. — The payment of the redemption money “may be made to the purchaser or redemptioner, or for him to the offi cer who made the sale.” (Sec. 29, Rule 39, Rules of Court; Reyes-Gregorio vs. Reyes, 27 SCRA 427 [1969].) It may be made to the sheriff. (Reyes vs. Chavoso, 27 SCRA 1253 [1969]; Reyes vs. De los Santos, 50 SCRA 431 [1973].) (2) Medium of payment. — Article 124925 of the Civil Code which expressly provides for the medium in the “payment of debts” is not applicable. The redemption is not rendered invalid by the fact that the sheriff accepted a check for the amount necessary to make a redemption instead of requiring payment in money. If he sees fi t to do so, he may require payment to be made in lawful money, but in accepting a check, he undoubtedly places himself in a position where he can be held liable to the purchaser at the public auction if any damage has been suffered by the latter as a result of the medium in which payment was made. But this cannot affect the validity of the payment.26

25Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mer-cantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

26Sec. 21. Judgment obligee as purchaser — When the purchaser is the judgment obli-gee, and no third-party claim has been fi led, he need not pay the amount of the bid if it does not exceed the amount of his judgment. It it does, he shall pay only the excess. (Rule 39, Rules of Court.) Under Section 21, there is no requirement to pay the bid in cash. What the Rule emphasizes is that in the absence of a third party claim, the purchaser in an execution sale need not pay his bid if it does not exceed the amount of the judgment, otherwise, he shall only pay the excess. By implication, if there is a third party claim, the purchaser should pay the amount of his bid without, however, requiring that it be made in cash. (Villavicencio vs. Mojares, 398 SCRA 314 [2003].)

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The check as a medium of payment in commercial transactions is too fi rmly established by usage to permit of any doubt upon this point at the present day. No importance may thus be attached to the circumstance that a stop-payment order was issued against said check the day following the deposit, for the same will not militate against the right to redeem, in the same manner that a withdrawal of the redemption money being deposited cannot be deemed to have forfeited the right to redeem, such redemption being optional and not compulsory. (Tolentino vs. Court of Appeals, supra.) The Supreme Court has already sanctioned redemption by check. (Co vs. Philippine National Bank, 114 SCRA 842 [1982].)

Amount payable. (1) Purchase price. — In the redemption of mortgaged proper-ty, the rule is that the amount payable is no longer the judgment debt but the purchase price at the auction sale. Thus, where 17 parcels of land were sold at public auction for P82,598, the eight (8) parcels sold for P17,017 may be released by paying the latter amount. (Dulay vs. Cariaga, 123 SCRA 794 [1983].) Similarly, at-torney’s fees awarded by the trial court shall not be added to the redemption price because the amount payable is no longer the judgment debt but that which is stated in Section 30, Rule 39 of the Rules of Court. (Bodiongan vs. Court of Appeals, 248 SCRA 496 [1995].) The rule does not apply where a balance or residue due to the mortgagor from the proceeds of the auction sale is not received for one reason or another, by the mortgagor without his fault. In such case, the amount payable is the purchase price less such balance. The ruling in DBP vs. Mirang (66 SCRA 141 [1975]), wherein the mortgagor was ordered to pay his entire indebtedness before the redemption was allowed is not controlling because of the different factual settings. The charter of the mortgagee (DBP) requires the payment of such amount. In the redemption of the mortgaged property, no charter requires the payment of sums of money other than those provided for under Section 30 of Rule



442

39. Redemption of properties mortgaged with the Philippine National Bank and the Development Bank of the Philippines and foreclosed either judicially or extrajudicially are governed by special laws which provide for the payment of all the amounts owed by the debtor. This special protection given to government lending institutions is not accorded to judgment creditors in ordinary civil actions.27 (see Dulay vs. Cariaga, supra.) (2) Amount fi xed by the court. — Under Section 78 of the former General Banking Act (R.A. No. 337, as amended.) in the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right, within one year after the sale of the real estate, to redeem the property by paying “the amount fi xed by the court in the order of execution, or the amount due under the mortgage deed,’’ with interest thereon at the rate specifi ed in the mortgage, and all the costs, and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. Thus, in a situation where the mortgagee was a bank, banking or credit institution, the General Banking Act was the applicable law in determining the redemption price, to wit: the amount fi xed by the court or the amount due under the mortgage deed, as the case may be, plus interest, costs and expenses, less the income received from the property. This was true although the foreclosure was done pursuant to Act No. 3135. Section 78 partakes of the nature of an amendment to Act No. 3135 insofar as the redemption price is concerned. A credit institution is a fi nancial intermediary engaged in quasi-banking functions. (Sy vs. Court of Appeals, 172 SCRA 125 [1989]; De Leon vs. Rehabilitation Finance Corp., 146 SCRA 862 [1970]; see Union

27Redemption of properties mortgaged with the Development Bank of the Phil-ippines and foreclosed either judicially or extra-judicially is governed by special laws which provide for the payment of all the amounts owed by the debtor. This special pro-tection given to a government lending institution is not accorded to judgment creditors in ordinary civil actions. (Development Bank of the Philippines vs. West Negros College, Inc., 391 SCRA 330 [2002], citing Dulay.)

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Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June 25, 2001.) Section 47 of the General Banking Law of 2000 (R.A. No. 8791.) now requires the mortgagor or debtor to pay “the amount due under the mortgage deed, x x x’’ deleting the phrase “the amount fi xed by the court in the order of execution.’’ (3) One percent (1%) interest per month. — In case of extrajudicial foreclosure under Act No. 3135 in relation to Rule 39, Section 28 of the Rules of Court, the redemptioner is bound to pay only 1% interest per month from the date of registration of the certifi cate sale up to the time of redemption rather than the interest stipulated in the contract of loan. This is so because when the foreclosure proceedings are completed and the mortgaged property is sold to the purchaser, then all interests of the mortgagor are cut off from the property. Prior to the completion of foreclosure, the mortgagor is liable for the interests on the mortgage. (Phil. National Bank vs. Court of Appeals, 140 SCRA 360 [1985]; Development Bank of the Phils. vs. Zaragoza, supra.) (4) Necessary expenses incurred by the purchaser/taxes. — The purchaser is entitled to reimbursement of the reasonable cost of improvements made by him to preserve the property during the period of redemption (see Flores vs. Lim, 50 Phil. 738 [1927].), as well as the amount of any assessments or taxes which the purchaser may have paid on the property after the purchase, including interest of 1% per month. (5) Rentals received by purchaser. — Before its amendments, Section 34, Rule 39 of the Rules of Court allowed a purchaser, from the time of the sale until a redemption is made, to receive the rentals of the property sold “when such property is in the possession of a tenant.’’ He is, however, accountable to the mortgagor or judgment debtor, as the case may be, for the amounts so received and the same will be duly credited against the redemption price when said mortgagor or debtor effects the redemption. (Tambunting vs. Court of Appeals, 167 SCRA 16 [1988].) But the purchaser at the foreclosure sale cannot claim back rentals from the mortgagor during the period of redemption where the property was possessed not by a tenant, but by the mortgagor



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(judgment debtor) for the latter may possess the property without having to pay rents for the use thereof. (Bernardez vs. Reyes, 201 SCRA 548 [1991]; see Quintin vs. Espe, 1 SCRA 1004 [1961]; Velasco vs. Rosenberg’s, Inc., 32 Phil. 72 [1915].) Section 34 is now Section 32 which explicitly provides that the purchaser or redemptioner shall not be entitled to receive the rents, earnings and income of the property sold on execution, or the value of the use and occupation thereof when such property is in the possession of a tenant which rents, etc. “shall belong to the judgment obligor until the expiration of the period of redemption.’’ (6) In case of surplus in the purchase price. — It would be highly iniquitous if the amount required for redemption is based on the purchase price which is unjustifi ably higher than the real amount of the mortgage obligation. Such a construction will be prejudicial to the substantive rights of the mortgagor and it could even effectively prevent him from exercising his right of redemption. Where the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right. (Sulit vs. Court of Appeals, 268 SCRA 441 [1997].)

Rights of persons with subordinate interest. (1) Mortgagor’s equity of redemption before foreclosure. — A second or junior mortgagee acquires only the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the fi rst mortgagee. (Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928].) Thus, a second mortgagee has to wait until after the debtor’s obligation to the fi rst mortgagee has been fully settled. (Alpha Insurance & Surety Co., Inc. vs. Reyes , 106 SCRA 274 [1981]; Top-Rate International Services, Inc. vs. Intermediate Appellate Court, 142 SCRA 467 [1986].) (2) Mortgagor’s right of redemption after foreclosure. — When the debt becomes demandable, the fi rst mortgagee is entitled to have the mortgaged property sold in order to apply the proceeds

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to the payment of his credit. In all cases in which an extrajudicial sale is made, any person having a lien on the property subsequent to the mortgage may redeem the same at any time within the term of one year from and after the date of sale. (see Sec. 6, Act No. 3135.) After the foreclosure sale, there remains in the second mortgagee a mere right of redemption; and only this right passes to him by virtue of the second mortgage. His remedy is limited to the right to redeem by paying off the debt secured by the fi rst mortgage. (see Tizon vs. Valdez and Morales, 48 Phil. 910 [1926].) An attaching creditor may succeed to the incidental rights to which the debtor was entitled by reason of his ownership of the property, as for example, a right to redeem from a prior mortgagee. (Consolidated Bank and Trust Corp. vs. Intermediate Appellate Court, 150 SCRA 951 [1987].) (3) Payment of his credit from excess of proceeds of auction sale. — Aside from the right of repurchase, the second mortgagee is entitled, under the mortgage constituted in his favor, to the payment of his credit the excess of the proceeds of the auction sale, after covering the mortgagor’s obligations to the fi rst mortgagee. (Tady-Y vs. Phil. National Bank, 12 SCRA 19 [1964]; El Hogar Filipino vs. National Bank, 64 Phil. 582 [1937].) In case the credit of the fi rst mortgagee has absorbed the entire proceeds of the sale, the second mortgage is extinguished with it because said mortgage cannot be enforced by the second mortgagee beyond the total value of the mortgaged property. Consequently, the property passes to the purchaser free from the second mortgage. (Ibid.) (4) Where persons with subordinate interest not made defendants. — All persons having or claiming an interest in the mortgaged property subordinate in right to that of the holder of the mortgage should be made defendants in the action for the foreclosure of the mortgage. The requirement, however, for joinder of the person claiming an interest subordinate to the mortgage sought to be foreclosed (see Sec. 1, Rule 68, Rules of Court.) is not mandatory in character but merely directory, in the sense that failure to comply therewith will not invalidate the (judicial) foreclosure proceedings. A subordinate lien holder is a proper, even a necessary, but not an indispensable, party to a foreclosure



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proceeding. (Looyuko vs. Court of Appeals, 361 SCRA 150 [2001]; Monzon vs. Relova, 565 SCRA 514 [2008].)

(a) The effect of the failure of the mortgagee to implead a subordinate lien-holder or subsequent purchaser or both is to render the foreclosure ineffective as against them, with the result that there remains in their favor the unforeclosed equity of redemption. (Sec. 2, Rule 68, Rules of Court.) The lien on the equity of redemption is not affected by the decree of foreclosure. (b) A second mortgagee merely takes what is called an “equity of redemption’’ and thus, a second mortgagee has to wait until after the debtor’s obligation to the fi rst mortgagee has been fully settled. The rights of a second mortgagee are strictly subordinate to the superior lien of the fi rst mortgagee. The proper foreclosure of the fi rst mortgage gives not only the fi rst mortgagor, but also subsequent lien holders, the right to redeem the property within the statutory period. (Ramirez vs. Court of Appeals, 219 SCRA 598 [1993].) The failure of the registered second mortgagee to exercise his equity of redemption on property foreclosed by the fi rst mortgagee divests him of his right to claim title against an unrecorded assignee of right of redemption of the fi rst mortgagee who redeemed the same. (c) A separate foreclosure proceeding should be brought to require the mortgagor’s successor-in-interest or junior lien-holders to redeem from the fi rst mortgagee, or the party requiring title to the mortgaged property at the judicial foreclosure sale, within 90 days under penalty of losing that prerogative to redeem. (Limpin vs. Intermediate Appellate Court, 166 SCRA 87 [1988].) But the foreclosure is valid as between the parties. (Santiago vs. Dionisio, 92 Phil. 495 [1952].)

(5) Where irregularities attended foreclosure. — Upon a proper foreclosure of a fi rst mortgage, all liens subordinate to the mortgage are likewise foreclosed, and the purchaser at public auction held pursuant thereto acquires title free from the subordinate liens. Ordinarily, therefore, and unless representation is duly presented at the time of the cancellation of the certifi cate

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of title by reason of the foreclosure of the superior mortgage lien, that irregularities attended the foreclosure, such as lack of notice to or non-inclusion of inferior lienholders in the foreclosure suit or proceeding, the Register of Deeds is authorized, even without court order, to issue the new title without carrying over the annotations of subordinate liens.

(a) This does not prejudice, however, the right, if any, of inferior lien holders to question, in an appropriate ordinary action, the legality of the foreclosure proceedings or the effect of the alleged lack of notice to them of such foreclosure. (G. Puyat & Sons, Inc. vs. Phil. National Bank, 4 SCRA 1275 [1962].) (b) Even in instances of this nature, it has been held that the failure to so notify or include inferior lienholders does not invalidate the foreclosure proceedings (Somes vs. Gov’t., 62 Phil. 432 [1935].) but at most will leave the equity of redemption unforeclosed as against such lienholders. (Santiago vs. Dionisio, supra; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]; Gov’t. vs. Cajigas, 55 Phil. 567 [1931].)

(6) Unpaid seller of property. — It has been held that the mort-gagee’s act of including in the foreclosure the unpaid goods and merchandise earlier sold on credit and delivered to the mort-gagor and which the mortgagee acquired at the foreclosure sale, does not make said mortgagee an obligor to pay for such unpaid goods, ownership of which has been acquired by the mortgagor. The seller has no cause of action against the mortgagee because the obligation to pay for the goods remains with the mortgagor as buyer. (Philippine National Bank vs. Court of Appeals, 367 SCRA 198 [2001].) This ruling can very well apply where the subject matter of the mortgage is real property.

Equity of redemption in judicial foreclosure. (1) Period for exercise. — In a judicial foreclosure of mortgages under Rule 68 of the Rules of Court, there is no right of redemption



448

after the judicial sale is confi rmed. There is only the equity of redemption in favor of the mortgagor consisting in the right to redeem the mortgaged property within the ninety-day period from the order of foreclosure (Sun Life Association Company of Canada vs. Gonzales Diaz, supra.), or even thereafter but before confi rmation of the sale. (Anderson vs. Reyes, 54 Phil. 944 [1930]; Grimalt vs. Velasquez, 36 Phil. 936 [1917]; Villar vs. Javier, 97 Phil. 604 [1955].) (2) Reckoning of ninety-day period. — The ninety-day period granted the mortgage debtor within which to pay the amount of the mortgage in Section 2, Rule 68 of the Rules of Court, is counted “from the date of the service of such order.” The order referred to in the Rule is the order requiring the debtor to pay the judgment within ninety days. (Herrera vs. Arellano, 97 Phil. 776 [1955].) This provision cannot be literally complied with in case the mortgagor appeals from the lower court’s judgment. It would seem that the period for the payment to the court of the mortgage debt should be reckoned from “the date of the entry of judgment.” (Concurring Opinion, Justice R.C. Aquino, Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978].) (3) Where period never began to run. — Where the original judgment of the court required payment within ninety days but this same judgment was expressly held in abeyance, the ninety-day period never began to run. In such case, the remedy of the mortgage creditor is to seek another order of the court directing the payment of the judgment within ninety days therefrom and the sale of the property mortgaged in case of failure of the mortgagor to comply therewith. (Herrera vs. Arellano, supra.) (4) Period given, a substantive right. — The period given in the rule is not merely a procedural requirement . It is a substantive right granted to the mortgage debtor as the last opportunity to pay the debt and save his mortgaged property from fi nal disposition at the foreclosure sale. It is one of the two steps necessary to destroy what in law is known as the mortgagor’s “equity of redemption,” the other being the sale. It may not be omitted. An order for the sale of mortgaged property within the ninety-day period would be a denial of a substantial right and void. (Ibid.)

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Persons entitled to exercise right of redemption. (1) Mortgagor or one in privity of title with mortgagor. — The matter of redemption is wholly statutory. Only such persons can redeem as are authorized to do so by statute. As a general principle, if one is in privity of title with the mortgagor, and he has such an interest that he would be a loser by the foreclosure, he may redeem. (De Castro vs. Intermediate Appellate Court, 165 SCRA 654 [1988].) (2) Successor-in-interest. — The right of redemption provided for in Section 6 of Act No. 3135 (see Appendix 2.), like any other property right, may be transferred or assigned by its owner. The transferee of such right stands in the position of a successor-in-interest of the mortgagor within the purview of Section 29, Rule 39 of the Rules of Court which is also applicable to redemption of real property sold on extrajudicial foreclosure of mortgage by virtue of said Section 6 of Act No. 3135. The right of redemption is especially conferred by Section 29, Rule 39 of the Rules of Court on the judgment debtor and his successors-in-interest. The term “successor-in-interest” includes:

(a) one to whom the debtor has transferred his right of redemption; or (b) one to whom the debtor has conveyed his interest in the property for the purpose of redemption; or (c) one who succeeds to the interest of the debtor by operation of law; or (d) one or more joint debtors who were joint owners of the property sold; or (e) one with a joint interest in the property, or his spouse, or heirs.

Such successor-in-interest is subrogated to the position of the debtor-mortgagor and is bound by exactly the same conditions that bound the latter. (Gorospe vs. Santos, 69 SCRA 191 [1976]; Sy vs. Court of Appeals, 172 SCRA 125 [1989].) So, redemption is proper where made by the debtor, grantee, or assignee for the benefi t of creditors, or assignee or trustee in solvency proceedings (De Castro vs. Intermediate Appellate Court, supra.), or vendee



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of the mortgage-debtor. (Litonjua vs. L & R Corporation, 320 SCRA 405 [1999].) A compulsory heir to the judgment debtor qualifi es as a successor-in-interest who can redeem property sold on execution. (Villanueva vs. Malaya, 330 SCRA 278 [2000]; China Banking Corporation vs. Court of Appeals, 364 SCRA 638 [2001].) (3) Under the Rules of Court. — When real property is sold on execution of a judgment, the same may be redeemed by the following persons:

(a) the judgment debtor, or his successor-in-interest in the whole or any part of the property; or (b) a creditor having a lien by attachment, judgment or mortgage on the property sold or some part thereof, subsequent to the judgment under which the property was sold. Such a redeeming creditor is termed a redemptioner. (Sec. 29, Rule 39, Rules of Court.)

The redemption may be made by one acting in behalf of the judgment debtor as long as the latter does not oppose the former’s capacity to act as such. The policy of the law is to aid rather than to defeat the right of redemption. (Tioseco vs. Court of Appeals, 143 SCRA 705 [1986].) To give due course to such redemption would better serve the ends of justice. (Tibajia vs. Court of Appeals, 193 SCRA 581 [1991].)

Registration of transfer of right of redemption. The transfer of the right of redemption from the original debtor-mortgagor need not be registered with the Register of Deeds to enable the transferee or assignee to exercise the same. (1) Where redemption is proper, the purchaser at the foreclosure sale cannot refuse to allow the same, considering that his right over the property is purely inchoate until after the period of redemption has elapsed without the right being exercised by those allowed by law. (2) Besides, public policy demands that the original debtor-mortgagor or his successor-in-interest should, as much as possible, be allowed to redeem a foreclosed property. (Ibid.)

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ILLUSTRATIVE CASE: Purchaser from mortgagor of a portion of mortgaged parcels of land, claims right to redeem entirety of said property. Facts: D mortgaged four (4) contiguous parcels of land covered by TCT No. 17011 to C (Phil. National Bank), which mortgage was duly annotated on the title. More than a year later, D sold to B a portion (about 381.44 sq.m.) of the same land. The sale was not registered. Another TCT No. 24761 was issued to C in view of the failure of D to redeem the property within one (1) year after foreclosure. Prior to expiration of said period, B offered to purchase the property from C who rejected the offer. B maintains that as successor-in-interest of the mortgage debtor (D), in part of the property and, therefore, qualifi ed to redeem, he should be declared entitled to repurchase the entirety of said property. Issue: Has B the right to redeem all the parcels of land? Held: No. B has, at best, a personal right to demand from D (who had repurchased the land from C while the case was pending) a status of co-ownership over said property because the deed of sale in his favor had not been registered, and the portion covered by said deed had not been surveyed so that the precise boundaries thereof had not been delimited by metes and bounds much less segregated from the mass of D’s property covered by the TCT’s aforementioned. Inasmuch as, even if B had managed to redeem the whole property, so much thereof as exceeded the portion sold to him by D could have been repurchased by D and the title to said property has meanwhile reverted fully to the latter, it follows that B is entitled to no more than the consummation of the sale made in his favor. B is declared co-owner of the land in question to the extent of the interest conveyed to him, subject to his right to partition said property. (Dimasacat vs. Court of Appeals, 27 SCRA 101 [1969].)

Rights and obligations of mortgagee in possession. A mortgagee in possession, as this term is used in American equity jurisprudence, is “one who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under



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another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt.’’ (27 Cyc. 1237, cited in Diaz vs. De Mendezona, 48 Phil. 666 [1926].) (1) Similar to those of an antichresis creditor. — As such mort-gagee in possession, his rights and obligations are similar to those of an antichresis creditor. (Art. 2132.) He is entitled to retain such possession until the indebtedness is satisfi ed and the property redeemed. (Macapinlac vs. Gutierrez Repide, 43 Phil. 770 [1922]; Cosio and de Rama vs. Palileo, 17 SCRA 196 [1966].) Thus, a creditor with a lien on real property who takes possession thereof with the consent of the debtor holds it as an “antichresis creditor with the right to collect the credit with interest from the fruits, returning to the antichretic debtor, the balance, if any, after deducting the expense.” (Enriquez vs. Phil. National Bank, 55 Phil. 414 [1930]; see Arts. 2132-2139.) The mortgagee has to account for the fruits received. (Diego vs. Fernando, 109 Phil. 143 [1960].) (2) Without right to reimbursement for useful expenses. — Gen-erally, however, a mortgagee in possession of mortgaged prop-erty who introduces improvements thereon is not entitled to re-imbursement for the value thereof upon the redemption of the mortgage, for according to Article 2125 (par. 2.), “the persons in whose favor the law establishes a mortgage have no other right than to demand execution and the recording of the document in which the mortgage is formalized.” To hold otherwise would render redemption oppressive, if not nugatory, as a scheming mortgagee could then put so much improvements thereon, until the debtor-mortgagor is “improved out” of his property by his failure to pay the increased redemption costs. (Gardner vs. Court of Appeals, 80 SCRA 399 [1977].)

ILLUSTRATIVE CASE: Mortgagee who had foreclosed disputed property was not allowed to redeem mortgaged property sold at public auction in another civil suit against the mortgagor within the one-year period. Facts: On February 1, 1957, R mortgaged two parcels of land to E to secure a loan. The mortgage was foreclosed on

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January 19, 1959, after which E took possession of the property. On March 3, 1980, R sold the property to E. In the meanwhile, on February 29, 1959, the disputed property was levied upon and sold at public auction to satisfy a judgment for money against R, in favor of X, rendered on June 18, 1956. The highest bidder was Y. On February 27, 1960, within one year after the auction sale, E offered to redeem the property but Y refused to accept the amount deposited with the sheriff. E withdrew the deposit on March 11, 1960 after R had sold the property to her. On March 14, 1960, the sheriff issued a deed of conveyance to Y who obtained a writ of possession on April 11, 1960. Issue: Who has a better right to the property, E or Y? Held: E. The mortgage was foreclosed on January 1959 after which E took possession of the property. When it was sold at public auction on February 28, 1959, R as judgment debtor was no longer the owner; ownership having been acquired by E on January 19, 1959. At the very best, E should have been allowed to redeem the property. The mortgage executed on February 1, 1957 was subsequent to the judgment against R, rendered on June 18, 1956. (Lim vs. Court of Appeals, 137 SCRA 782 [1985].)

Vendee’s right to possession of mortgaged property sold. (1) Contingent. — Before the expiration date of the redemp-tion period, the vendee’s right to possession (or continued pos-session) of the property sold is contingent upon the failure of the mortgagor to redeem. (2) Final. — After the redemption period is terminated, the right to redeem is barred, the mortgagor is divested of his rights to the mortgaged property sold, and the vendee’s right of possession of the property becomes fi nal. In case of non-redemption, the purchaser at the foreclosure sale shall fi le with the Register of Deeds either a fi nal deed of sale executed by the person authorized by virtue of the power of at-torney embodied in the deed of mortgage or his sworn statement attesting to the fact of non-redemption. The Register of Deeds shall thereupon issue a new certifi cate in favor of the purchaser after the owner’s duplicate certifi cate shall have been previous-



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ly delivered and cancelled. (Pres. Decree No. 1529, Sec. 63[b].) Thus, upon failure to redeem the foreclosed realty, consolidation of title becomes a matter of right on the part of the auction buyer, and the issuance of a certifi cate of title in favor of the purchaser becomes ministerial upon the Register of Deeds. (Union Bank of the Philippines vs. Court of Appeals, 311 SCRA 795 [1999].)

Right of purchaser to writ of possession. A writ of possession is generally understood to be an order by a court whereby the sheriff is commanded to place in possession of real or personal property the person entitled thereto such as when a property is extrajudicially foreclosed.28 (1) The issuance of the writ to a purchaser in an extrajudicial foreclosure is merely a ministerial function (A.G. Development Corporation vs. Court of Appeals, 281 SCRA 155 [1997]; Suico Industrial Corporation vs. Court of Appeals, 301 SCRA 212 [1999]; Mamerto Marquez Foundation, Inc. vs. Pizarro, 448 SCRA 140 [2005]; see Security Bank Corporation vs. Gonzalbo, 485 SCRA 136 [2006]; see Mendoza vs. Salinas, 514 SCRA 414 [2007].) The law and jurisprudence are clear that both during and after the period of redemption, the purchaser at the foreclosure sale is entitled as of right to a writ of possession, regardless of whether or not there is a pending suit for annulment of the mortgage or the foreclosure itself (without prejudice, of course, to the eventual outcome of said case.) (2) As a rule, any question regarding the validity of the mortgage or its foreclosure is not a legal ground for refusing the

28A writ of possession may be issued under the following instances: (1) in land reg-istration proceedings under Section 17 of Act No. 496, now Pres. Decree No. 1529, The Property Registration Decree; (2) in a judicial foreclosure, provided the debtor is in pos-session of the mortgaged realty and no third person, not a party to the foreclosure suit, had intervened; (3) in an extrajudicial foreclosure of a real estate mortgage under Section 7 of Act No. 3135; and (4) in execution sales (last part. of Section 33, Rule 39 of the Rules of Court.). (Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287 [2005]; Maglente vs. Baltazar-Padilla, 517 SCRA 643 [2007].) An order granting a writ of possession under Act No. 3135 is a fi nal order; hence, appealable. The order of posses-sion shall continue in effect during the pendency of the appeal. (Bank of the Philippine Islands vs. Tarampi, 573 SCRA 537 [2008].) The issuance of the writ in connection with a complaint for expropriation under Rule 65 of the Rules of Court is, however, interlocu-tory in nature. (San Fernando Rural Bank, Inc. vs. Pampanga Omnibus Dev. Corp., 520 SCRA 564 [2007].)

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issuance of the writ. Hence, an injunction to prohibit the issuance of the writ is entirely out of place.29 (Kho vs. Court of Appeals, 203 SCRA 160 [1991]; Veloso vs. Intermediate Appellate Court, 205 SCRA 227 [1992]; see Ong vs. Court of Appeals, 333 SCRA 189 [2000]; Samson vs. Rivera, 428 SCRA 7595 [2004]; Development Bank of the Phils. vs. Gatal, 452 SCRA 697 [2005]; Espiridion vs. Court of Appeals, 490 SCRA 273 [2006]; Metropolitan Bank & Trust Co. vs. Tan, 555 SCRA 502 [2008].) (3) Any objection on the validity of the sale and the writ issued pursuant thereto should be threshed out in a subsequent proceeding under Section 8 of Act No. 3135 before the Regional Trial Court. Even then, under Section 8, the order of possession shall continue in effect during the pendency of appeal (4) The right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession never prescribes. (Rodil vs. Benedicto, 95 SCRA 137 [1980]; Paderes vs. Court of Appeals, 463 SCRA 504 [2005].)

Right before lapse of redemption period. In cases of extrajudicial foreclosure sales of real estate mort-gages, the issuance of a writ possession is governed by Section 730 of Act No. 3135. (see Appendix 2.) (1) Said provision allows the purchaser to take possession of the foreclosed property during the period of redemption upon fi ling of an ex parte application and approval of a bond (De Gar-cia vs. San Jose, 94 Phil. 625 [1954].) The duty of the trial court to grant the writ is ministerial. Such writ issues as a matter of course upon the fi ling of the proper motion and the approval of the corresponding bond.

29The period of redemption is not interrupted by the fi ling of an action assailing the validity of the mortgage. To rule otherwise would constitute a dangerous precedent. A likely offshoot of such a ruling is the institution of frivolous suits for annulment of mortgage intended merely to give the mortgagor more time to redeem the mortgaged property. (Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June 25, 2001; see VACA vs. Court of Appeals, 234 SCRA 146 [1994].)

30The procedure under Section 7 may be availed of by a purchaser after the redemp-tion period has expired without redemption having been made. (China Banking Corp. vs. Lozada, 557 SCRA 177 [2008].)



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(2) Any question regarding the regularity and validity of the writ shall, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8 (infra.) of Act No. 3135. Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. (Samson vs. Rivera, 428 SCRA 759 [2004]; Idolor vs. Court of Appeals, 450 SCRA 396 [2005]; Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287 [2005].) (3) The bond is required to protect the rights of the mortgagor so that he may be indemnifi ed in case it be shown that the foreclosure sale was not justifi ed (see Sec. 8, Act No. 3135.), i.e., it was conducted without complying with the requirements of the law or without the mortgagor violating the mortgage contract.

Right after lapse of redemption period. If a writ of possession may be issued even before the redemption period has expired on the ex parte application of the purchaser, with greater reason could such writ be issued after the time for redemption has expired, without redemption having been made (Rivera vs. Court of First Instance of Nueva Ecija, 61 Phil. 201 [1935]; Ramos vs. Mañalac, 89 Phil. 270 [1951]; Del Rosario vs. Yatco, [CA] No. 20055-R [1957]; see also Marcelo Steel Corp. vs. Court of Appeals, 54 SCRA 89 [1973] and Banco Filipino Savings and Mortgage Bank vs. Intermediate Appellate Court, 142 SCRA 44 [1986].), especially where a new title has already been issued in the name of the purchaser. (GSIS vs. Court of Appeals, 145 SCRA 341 [1986].) The purchaser at public auction has only to fi le a petition for issuance of the writ pursuant to Section 33 (see Note 31.), Rule 39 of the Rules of Court. (Development Bank of the Phils. vs. Gatal, 452 SCRA 697 [2005].) (1) Nature of petition/motion for issuance of writ. — The petition and/or motion for the issuance of a writ of possession is sum-mary in nature and a non-litigious proceeding authorized in an extrajudicial foreclosure of mortgage pursuant to Act No. 3135, as amended. It is brought for the benefi t of one party only, and without notice to, or consent by, any person adversely interested. There is no necessity of giving notice to the mortgagor who had

Art. 2131

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lost all interests in the mortgaged property when he failed to re-deem the same. (De Vera vs. Agloro, 448 SCRA 203 [2005]; Idolor vs. Court of Appeals, supra; Dayot vs. Shell Chemical [Phil.], Inc., 525 SCRA 535 [2007]; Sagabarria vs. Philippine Business Bank, 593 SCRA 645 [2009]; Motos vs. Real Bank, Inc., 593 SCRA 216 [2009].) The order for the issuance of the writ is simply an incident in the transfer of title in the name of the petitioner. The trial court is mandated and it is its ministerial duty to issue the writ upon a fi nding of the lapse of the statutory period for redemption, the effect of which is to make the right of the purchaser to the possession of the property absolute. (Pahang vs. Vestil, 434 SCRA 139 [2004]; Idolor vs. Court of Appeals, 450 SCRA 396 [2005]; Dayot vs. Shell Chemical Co. [Phil.], Inc., 525 SCRA 535 [2007].) The possession of the property becomes an absolute right of the purchaser as confi rmed owner. (Oliveros vs. Presiding Judge, RTC, 532 SCRA 109 [2007].) (2) Right of purchaser to a conveyance and to possession. — The rule is that after the redemption period has expired, the purchaser of the property has the right to a conveyance and to be placed in possession thereof. (PDCP Development Bank vs. Vestil, 264 SCRA 467 [1996]; see Secs. 27, 28, 29, 33, Rule 39, Rules of Court.) The posting of a bond is no longer needed. (Esperidion vs. Court of Appeals, 490 SCRA 273 [2006].) To obtain possession, the vendee or purchaser may either ask for a writ of possession or bring an appropriate independent action, such as a suit for ejectment. (Javelosa vs. Court of Appeals, 265 SCRA 493 [1996].) The right to possession is based simply on the purchaser’s ownership of the property. Thus, the mere fi ling of an ex parte motion for the issuance of a writ of possession would suffi ce. (Green Asia Construction & Development Corp. vs. Court of Appeals, 508 SCRA 79 [2006]; Maluwat vs. Metropolitan Bank & Trust Co., 532 SCRA 124 [2007].) Upon the expiration of the redemption period, without the mortgagor having made use of his right of redemption, ownership of the property becomes consolidated in the purchaser. (Ley vs. Union Bank of the Phils., 520 SCRA 369 [2007].)



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(3) Right of purchaser to aid of court. — The purchaser of the property sold is entitled to the aid of the court in effecting its delivery, the reason being that upon expiration of the redemption period (or confi rmation of the sale), the ownership of the property is transferred to him. (Barrameda vs. Gontang, 19 SCRA 387 [1967].)

(a) Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court (F. David Enterprises vs. Insular Bank of Asia and America, 191 SCRA 516 [1990]; Vda. de Zaballero vs. Court of Appeals, 229 SCRA 810 [1994]; see Sec. 1, Act No. 3135.), and the relief is granted ex parte without giving the person against whom the relief is sought an opportunity to be heard. (Oliveros vs. Presiding Judge, RTC, 532 SCRA 109 [2007].) (b) The purchaser is not obliged to bring a separate and independent suit for possession. But to give effect to his right of possession, he must invoke the aid of the courts and ask for a writ of possession. He cannot simply take the law into his own hands and enter the property without judicial authorization. (Joven vs. Court of Appeals, 212 SCRA 700 [1992]; see Manalo vs. Court of Appeals, 366 SCRA 752 [2001]; Alarilla vs. Ocampo, 417 SCRA 485 [2003].) (c) As adverted to earlier, the pendency of an action questioning the validity of a mortgage or its foreclosure cannot bar the issuance of the writ of possession particularly after title to the property has been consolidated in the mortgagee as the purchaser at the public auction, without prejudice to the outcome of the action. (Union Bank of the Phils. vs. Court of Appeals, 359 SCRA 480 [2001]; Lam vs. Metropolitan Bank and Trust Company, 546 SCRA 200 [2008].) (d) The motion for issuance of the writ can proceed inde-pendently. Its issuance does not bar a separate case for annul-ment of mortgage and foreclosure sale and, therefore, the ex parte nature of the proceeding does not deny due process to the mortgagor. (Carlos vs. CA, 537 SCRA 247 [2007].) (e) No bond is required of the purchaser after the redemption period if the property is not redeemed. To impose

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a bond requirement upon the purchaser who has become the absolute owner of the foreclosed property purchased would be unreasonable if not illogical, for if there are any rights to be protected, they are those of the purchaser who, as owner, has a superior right over said property against all other persons. (United Coconut Planters Bank vs. Reyes, 193 SCRA 756 [1991].)

(4) Suspension of implementation of writ. — Accordingly, where a writ of possession has been issued by a court, it is the inescap-able duty of the sheriff to enforce the writ. The sheriff has no authority to give a grace period, and it would be gross error for the court which is mandated by law to give effect to such right, to suspend the implementation of the writ of possession which should issue as a matter of course. Once the writ of possession has been issued, the court has no alternative but to enforce the writ without delay. Where the reason given by a judge in issuing the order of suspension of the writ of possession was not specifi ed in the order, but stated only in general terms, as “humanitarian reasons,” the court did not act within the bounds of law, especially if such order was issued motu proprio and without the purchaser being afforded the right to present his side. (Phil. National Bank vs. Adil, 118 SCRA 110 [1982].) (5) Where mortgaged property under lease. — A mortgagee who has foreclosed upon the mortgaged real property and has purchased the same at the foreclosure sale can be granted a writ of possession over the property despite the fact that the premises are in the possession of a lessee thereof and whose lease has not as yet been terminated, unless the lease had been previously registered in the Registry of Property31 or unless despite non-registration, the mortgagee had prior knowledge of the existence and duration of the lease, actual knowledge being equivalent to registration. (Ibasco vs. Caguioa, 143 SCRA 538 [1986].)

31Art. 1648. Every lease of real estate may be recorded in the Registry of Property. Unless a lease is recorded, it shall not be binding upon third persons.



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(6) Where mortgagor refuses to surrender property sold. — In case of refusal to surrender the possession of the property sold by the sheriff on the part of the debtor or mortgagor, the purchaser cannot merely fi le petition for a writ of possession.32 The remedy is to fi le an ordinary action for the recovery of possession in order that the debtor may be given an opportunity to be heard not only regarding possession but also regarding the obligation covered by the mortgage. The purchaser cannot take possession of the property by force either directly or through the sheriff. The reason for this is that the creditor’s right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of controversy. (Luna vs. Encarnacion, 91 Phil. 531 [1952].) (7) Where third party in actual possession. — The writ of possession issues as a matter of course even without the fi ling and approval of a bond after consolidation of ownership and the issuance of a new transfer certifi cate of title in the name of the purchaser. But the rule is not without exception. Under Section 35, Rule 39 of the Rules of Court, which is made suppletory to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135, as amended, the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure unless a third party is actually holding the property adversely to the judgment debtor. Under Article 433 of the Civil Code, one who claims to be the owner of a property possessed by another must bring the appropriate judicial action for its physical recovery. The term “judicial process” could mean no less than an ejectment suit or reivindicatory action in which ownership claims of the contending parties may be properly heard and

32In the case of Mabale vs. Apalisok (88 SCRA 234 [1979]), it was held that the writ of possession is available “(1) in a land registration proceeding, which is a proceeding in rem (Sec. 17, Act No. 496 [Land Registration Act]; Estipona vs. Navarro, 69 SCRA 285 [1976].); (2) in an extrajudicial foreclosure of a realty mortgage (Sec. 7, Act No. 3155.); (3) in a judi-cial foreclosure of a mortgage, a quasi in rem proceeding provided that the mortgagor is in possession of the mortgaged realty and no third person, not a party to the foreclosure suit, had intervened; and (4) in execution sales. (last par., Sec. 35, Rule 39, Rules of Court.) Since the instant case does not fall among the cases mentioned above, the issuance of the writ of possession was not proper.” (see Cometa vs. Intermediate Appellate Court, 151 SCRA 563 [1987]; Canlas vs. Court of Appeals, 164 SCRA 160 [1988].)

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adjudicated. An ex parte petition for issuance of a possessory writ under Section 7 of Act 3135, as amended, is not, strictly speaking, a “judicial process” as contemplated in Article 433. The reason for the limitation is that the writ does not issue in case of doubt. (Phil. National Bank vs. Court of Appeals, 374 SCRA 22 [2002]; Development Bank of the Phils. vs. Prime Neighborhood Assoc., 587 SCRA 582 [2009].)

Issuance of writ before lapse of redemption period. (1) Where bond fi led by purchaser. — As already pointed out, the purchaser at the auction sale is entitled to a writ of possession pending the lapse of the redemption period upon petition in the form of an ex parte motion and upon the posting of a bond. In such case, “no discretion is left to the court.” There is, therefore, no necessity for the purchaser to fi le an ejectment case. (Banco Filipino Savings & Mortgage Bank vs. Pardo, 151 SCRA 481 [1987]; see Mirasol vs. Intermediate Appellate Court, 162 SCRA 306 [1960].) The requirement of a bond is a consequence of the inchoate character of the right of the purchaser during the redemption period inasmuch during said period full ownership has not yet vested on the creditor-mortgagee. After the one-year period and no redemption was made. The mortgagor loses all interest over the mortgaged property. The rationale for the ministerial issuance of a writ of posses-sion is to put the foreclosure buyer in possession of the property sold without delay, since the right of possession is founded on ownership of the property. (Bukidnon Doctors’ Hospital, Inc. vs. Metropolitan Bank & Trust Co., 463 SCRA 222 [2005].) The pur-chaser of the property sold at public auction is entitled to the aid of the court in effecting its delivery the reason being that upon the expiration of the redemption period (or confi rmation of sale), the ownership of the property is transferred to him. (Barrameda vs. Gontang, 19 SCRA 387 [1967].) But where a lease agreement is subsequently entered into by the mortgagor and the mortgagee



462

after the expiration of the redemption period and the consoli-dation of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ of motion for a writ of possession is the proper remedy in order to evict from the ques-tioned premises a mortgagor-turned-lessee. What applies is no longer the law on foreclosure but the law on lease. (Bukidnon Doctors’ Hospital, Inc. vs. Metropolitan Bank & Trust Co., supra.) (2) Remedy of mortgagor. — Any question regarding the regularity and validity of the sale as well as the consequent cancellation of the writ of possession is to be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135. It cannot be raised as a justifi cation for opposing the issuance of the writ of possession since, under the Act, the proceeding for this is ex parte. (Sulit vs. Court of Appeals, 268 SCRA 441 [1997]; Suico Industrial Corporation vs. Court of Appeals, 301 SCRA 212 [1999]; De Gracia vs. San Jose, 94 Phil. 623 [1954]; Camacho vs. Phil. National Bank, 363 SCRA 352 [2001].)

(a) The only remedy of the mortgagor is to question the validity of the sale as provided in Section 8 of Act No. 3135 (see Appendix 2.), namely, by a petition to set aside the sale and to cancel the writ of possession, which should be disposed of in accordance with the summary procedure prescribed in Section 112 of Act No. 496, the Land Registration Act,33 provided the petition is fi led “not later than thirty days after the purchaser was given possession.” (De los Angeles vs. Court of Appeals, 60 SCRA 116 [1974]; De Garcia vs. San Jose, 94 Phil. 675 [1954]; see De Ramos vs. Court of Appeals, 213 SCRA 207 [1992].) (b) Section 8 of Act No. 3135 lists the exclusive grounds for the petition, namely, 1) that the mortgage was not violated, and, 2) that the sale was not made in accordance with the provisions of Act No. 3135. Any question regarding validity of the mortgage or its foreclosure cannot be a legal ground for refusing the issuance of a writ of possession. (Green Asia

33Section 112 of the former Act, now Section 108 of the Property Registration Decree (Pres. Decree No. 1529.), is entitled “Erasures and Alterations.’’

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Construction & Development Corp. vs. Court of Appeals, 508 SCRA 79 [2006].) Regardless of whether or not there is a pending suit for annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession, without prejudice to the eventual outcome of the said case. (Jehi Construction Corp. vs. Bank of the Phil. Islands, 524 SCRA 522 [2007].) (c) Section 8 of Act No. 3135 is clear that the purchaser must fi rst be placed in possession of the mortgaged property pending proceedings assailing the issuance of the writ of possession. If the trial court later fi nds merit in the petition to set aside the writ, it shall dispose in favor of the mortgagor the bond furnished by the purchaser. Thereafter “either of the parties may appeal from the order of the judge in accordance with Section 14 of Act No. 496’’ which provides that “every order, decision, and decree of the Court of the Land Registration may be reviewed . . . . in the same manner as an order, decision, decree or judgment of a Court of First Instance might be reviewed.’’34 The rationale for the mandate is to allow the purchaser to have possession of the foreclosed property without delay such possession being founded on his right of ownership. (Ong vs. Court of Appeals, 333 SCRA 189 [2000]; see Dayrit vs. Philippine Bank of Communications, 386 SCRA 117 [2002].) (d) Section 8 of Act No. 3135 mandates that even if an appeal is interposed from an order granting a petition for a writ of possession, such order shall continue to be in effect during the pendency of the appeal. (Sps. Santiago vs. Merchant Rural Bank of Talavera, Inc., 453 SCRA 756 [2005].) Absent grave abuse of discretion, the soundness of an order granting the writ of possession is a matter of judgment with respect to which the remedy is ordinary appeal instead of

34There is no more Court of Land Registration. The Court of First Instance (CFI) is now known as Regional Trial Court (RTC).



464

a petition for certiorari. (Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287 [2005].) (e) Section 8 of Act No. 3135 affords both parties an ex-peditious way to resolve any confl ict regarding the writ of possession alone issued by reason of a extrajudicial foreclo-sure. It should be distinguished from those cases (e.g., Jose vs. Zulueta, 2 SCRA 574 [1961]; Matute vs. Court of Appeals, 26 SCRA 768 [1969]; Romero, Jr. vs. Court of Appeals, 40 SCRA 172 [1971]; Belfront Surety & Insurance Company vs. People, 111 SCRA 385 [1982].) which involved writs of possession is-sued in the course of the execution of judgment. (see Mallari vs. Banco Filipino Savings & Mortgage Bank, 563 SCRA 664 [2008].)

Where rights of third persons involved. (1) Claimants with interest adverse to mortgagor. — Under Sections 27 to 29 and Section 3335 of Rule 39 of the Rules of Court which are made applicable by Section 6 of Act No. 3135 (see Appendix 2.), in case of an extrajudicial foreclosure of a real estate mortgage, the possession of the property sold may be given to the purchaser by the sheriff after the period of redemption had expired, unless a third person is actually holding the property adversely to the mortgagor or judgment debtor (Clapano vs. Gapultos, 132 SCRA 429 [1985]; China Banking Corp. vs. Lozada,

35Sec. 33. Deed and possession to be given at expiration of redemption period; by whom executed or given. — If no redemption be made within one (1) year from the date of regis-tration of the certifi cate of sale, the purchaser is entitled to a conveyance and possession of the property; or, if so redeemed whenever sixty (60) days have elapsed and no other redemption has been made, and notice thereof given, and the time or redemption has expired, the last redemptioner, is entitled to the conveyance and possession; but in all cases, the judgment debtor shall have the entire period of one (1) year from the date of the registration of the sale to redeem the property. The deed shall be executed by the offi cer making the sale or by his successor in offi ce, and in the latter case shall have the same validity as though the offi cer making the sale had continued in offi ce and executed it.

Upon the expiration of the right of redemption, the purchaser or redemptioner, shall be substituted to and acquire all the rights, title, interest and claim of the judgment debtor to the property as of the time of the levy. The possession of the property shall be given to the purchaser or last redemptioner by the same offi cer unless a third party is actually holding the property adversely to the judgment debtor.

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557 SCRA 177 [2008].) in which case an ordinary action is necessary to recover possession from such third person.

(a) It is implicit in Section 7 of Act No. 3135 that it is mi-nisterial upon the court to issue an ex parte writ of possession in favor of the purchaser in a foreclosure sale of a mortgaged property provided no rights of third persons are involved. (ITC Service and Leasing Corp. & Acceptance vs. Nera, 19 SCRA 181 [1967]; Barican vs. Intermediate Appellate Court, 162 SCRA 358 [1988]; Joven vs. Court of Appeals, 212 SCRA 700 [1992].) This obligation of a court to issue the writ ceases to be ministerial once it appears that there is a third party in pos-session of the foreclosed property who is claiming a right adverse to that of the debtor-mortgagor and is a stranger to the foreclosure proceedings in which the ex parte writ of possession was applied for. He may not be dispossessed on the strength of a mere ex parte possessory writ, since to do so would be tantamount to his summary ejectment, in viola-tion of the basic tenets of due process. For this exception to apply, the property must be possessed by a third party and such possession must be adverse to the debtor-mortgagor. (Philippine National Bank vs. Court of Appeals, 374 SCRA 22 [2002]; Policarpio vs. Active Bank, 566 SCRA 27 [2008]; Pen-son vs. Maranan, 491 SCRA 396 [2006]; Heirs of D.N. Nicolas vs. Metropolitan Bank & Trust Company, 532 SCRA 38 [2007]; Top Art Shirt Mftg., Inc. vs. Metropolitan Bank & Trust Co., 595 SCRA 323 [2009].) (b) Section 16, Rule 39 of the Rules of Court, bestows upon third parties claiming rights to properties under execution the right to protect their interests by interposing a third-party claim in the same case, or by instituting a separate reinvindicatory action against the executing creditor. Proceedings to resolve the possession of third-party claimants may proceed independently of the action which said claimants may bring to enforce or protect their claim of ownership over the property. (Bon-Mar Realty & Sport Corp. vs. De Guzman, 563 SCRA 737 [2008].)



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(c) A proceeding for the issuance of a writ of possession is a mere incident in the transfer of title. The court may not grant the writ through a mere motion where title is in doubt. The actual possession under claim of ownership raises a disputable presumption of ownership. The true owner must resort to judicial process for the recovery of the property. (Ibid.) (d) As adverted to earlier, an ex-parte petition for issuance of a possessory writ under Section 7 of Act No. 3135 is not, strictly speaking, a “judicial process’’ as contemplated above. Even if the same may be considered a judicial proceeding for the enforcement of one’s right of possession as purchaser in a foreclosure sale, it is not an ordinary suit fi led in court, by which one party “sues another for the enforcement or protection of a right, or the prevention or redress of a wrong.’’ (Philippine National Bank vs. Court of Appeals, supra., Idolor vs. Court of Appeals, 450 SCRA 396 [2005].) It is in the nature of an ex parte motion in which the court hears only one side. (Metropolitan Bank & Trust Co. vs. Bance, 553 SCRA 507 [2008].) The issuance of a writ of possession is not a judgment on the merits. (Primetown Property Group, Inc. vs. Juntilla, 459 SCRA 683 [2005].) (e) Such petition, in the form of an ex parte motion,36 is a non-litigious proceeding and summary in nature as well authorized in an extrajudicial foreclosure of mortgage pursu-ant to Act 3135, as amended. Unlike a judicial foreclosure of real estate mortgage under Rule 68 of the Rules of Court, any property brought within the ambit of the Act is foreclosed by

36What distinguishes a “motion’’ from a “petition’’ or other pleading is not its form or the title given by the party executing it, but rather its purpose. The offi ce of a motion is not to initiate new litigation, but to bring a material but incidental matter arising in the progress of the case in which the motion is fi led. A motion is not an independent right or remedy, but is confi ned to incidental matters in the progress of a cause. It relates to some question that is collateral to the main object of the action and is connected with and dependent upon the principal remedy. An application for a writ of possession is a mere incident in the registration proceeding. Hence, although it is denominated as a “petition,” it may be in substance merely a “motion.’’ (Arquiza vs. Court of Appeals, 459 SCRA 753 [2005].)

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the fi ling of a petition, not with any court of justice, but with the offi ce of the sheriff of the province (or city) where the sale is to be made. As such, a third person in possession of an extrajudicially foreclosed realty, who claims a right superior to that of the original mortgagor, will have no opportunity to be heard on his claim in a proceeding of this nature. It stands to reason, therefore, that such third person may not be dis-possessed on the strength of a mere ex-parte possessory writ, since to do so would be tantamount to his summary eject-ment, in violation of the basic tenets of due process. (Ibid.) (f) Section 16, Rule 39, reserves to adverse third parties the remedies of 1) terceria to determine whether the sheriff has rightly or wrongly taken hold of the property not belonging to the judgment debtor or obligor and 2) an independent “separate action” to vindicate their claim of ownership and/or possession over the foreclosed property. Under Section 16, a third party claimant or stranger to the foreclosure suit, like respondents herein, can opt to fi le a remedy known as terceria against the sheriff or offi cer effecting the writ by serving on him an affi davit of his title and a copy thereof upon the judgment creditor. By the terceria, the offi cer shall not be bound to keep the property and could be answerable for damages. A third-party claimant may also resort to an independent “separate action,” the object of which is the recovery of ownership or possession of the property seized by the sheriff, as well as damages arising from wrongful seizure and detention of the property despite the third-party claim. If a “separate action” is the recourse, the third-party claimant must institute in a forum of competent jurisdiction an action, distinct and separate from the action in which the judgment is being enforced, even before or without need of fi ling a claim in the court that issued the writ. Both remedies are cumulative and may be availed of independently of or separately from the other. Availment of the terceria is not a condition sine qua non to the institution of a “separate action.” (China Banking Corporation vs. Ordinario, 399 SCRA 430 [2003].)



468

(g) The judge to whom an application for the writ is fi led need not look into the validity of the mortgage or the manner of its foreclosure. No discretion is left to the judge. Any question regarding the cancellation of the writ or in respect of the validity and regularity of the public sale, should be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135. (Charlease Finance Corporation vs. Ma, 409 SCRA 250 [2003]; Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287 [2005].) (h) An ordinary civil action may be consolidated with a petition for a writ of possession although the latter is an ex parte proceeding to thresh out thoroughly all related issues in the interest of a more expeditious and less expensive resolution of the controversy. (Philippine Savings Bank vs. Manalac, Jr., 457 SCRA 203 [2005].) (i) A purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands. Hence, for merely relying on the certifi cate of title and for its failure to ascertain the status of the mortgaged property as is the standard operating procedure in the operation of a bank, it cannot be said that a bank is a mortgagee in good faith. (Consolidated Rural Bank vs. Court of Appeals, 448 SCRA 347 [2005].) The general rule that a mortgagee or purchaser of land need not look beyond the four corners of the title is inapplicable.

(2) Successor-in-interest of mortgagor. — The purchaser, as absolute owner, is entitled to the possession of the property bought and cannot be excluded therefrom by one who merely claims to be a successor-in-interest of the mortgagor and whose possession is, therefore, not adverse to the mortgagor unless it is adjudged that the alleged successor has a better right to the property than the purchaser.

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(a) Stated differently, the purchaser’s right of possession is recognized only as against the mortgagor or judgment debtor and his successor-in-interest but not against persons whose right of possession is adverse to the latter. A separate and independent action is not necessary to recover posses-sion where no rights of third persons are involved. (Roxas vs. Buan, 167 SCRA 43 [1988]; IFC Service Leasing and Ac-ceptance Corp. vs. Nera, 19 SCRA 181 [1967].) (b) In the case of a chattel mortgage, an ordinary action is necessary to recover possession of the mortgaged chattel in case of the refusal of the mortgagor to surrender it. (Luna vs. Encarnacion, 91 Phil. 531 [1952].) The Chattel Mortgage Law (Appendix 5.) does not contain any provision similar to Section 6 of Act No. 3135. (IFC Service Leasing and Acceptance Corp. vs. Nera, supra.)

(3) Lessee of agricultural land. — The agricultural lessee’s pre-emptive right to buy the land he cultivates, as well as his right to redeem the land, if sold to a third person without his knowledge, under Sections 11 and 12, respectively, of the Code of Agrarian Reforms, is statutory in character and attaches to the particular landholding by operation of law. It is superior to the mortgagee of land. The remedy of the mortgagee is not against the land nor the agricultural lessee but against the mortgagee-landowner. (Cuiaño vs. Court of Appeals, 237 SCRA 122 [1994].) (4) Buyer of condominium unit. — Under the Subdivision and Condominium Buyers’ Protective Decree. (Sec. 25, Pres. Decree No. 957.), upon full payment by the buyer, the seller is duty-bound to deliver the title of the unit to the buyer. Even with a valid mortgage on the lot, the seller is still bound to redeem said mortgage without any cost to the buyer apart from the balance of the purchase price if any, and registration fees. Where the condominium buyer is found to have superior right to the unit over the loan funder’s and the mortgage in favor of the latter which foreclosed the mortgage, is found to be contrary to said law (Sec. 18 thereof.), the proper remedy is to annul mortgage foreclosure sale and the condominium certifi cate of title issued



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in favor of the highest bidder. (De Vera, Jr. vs. Court of Appeals, 367 SCRA 534 [2001].)

ILLUSTRATIVE CASE: The mortgagee-buyer of foreclosed property was ordered by the trial court to execute a deed of sale in favor of the vendee of the property from the mortgagor; the foreclosure sale took place after the institution of case by the vendee against vendor (mortgagor). Facts: Notwithstanding the absence of a deed of sale, private respondents AL and PA entered into and took possession of a parcel of land sold to him by DL. AL and PA later paid the balance of the purchase price of the lot. Subsequently in 1982, DL mortgaged the property to petitioner MB. As DL failed to pay his indebtedness, the mortgage was foreclosed and the property was sold with MB as the highest bidder. DL failed to redeem the property. In 1983, AL and PA fi led a complaint for specifi c performance to compel DL to execute the necessary deed of absolute sale in their favor. Impleaded were it attorney in fact of DL, and MB who alleged that it was a mortgagee in good faith. Issue: Whether or not petitioner bank may be compelled to execute a deed of reconveyance transferring the parcel of land mortgaged to petitioner in favor of private respondents. Held: Yes. (1) MB took title to the mortgaged property pendente lite. — “Both the trial court and the Court of Appeals correctly held that petitioner bank was a transferee pendente lite whose title was subject to the incidents and results of the pending litigation. Petitioner bank contends that it constituted the mortgage more than a year before the private respondents’ action for specifi c performance was fi led and the fact that the foreclosure and public auction sale took place after the institution of the case is immaterial since the foreclosure sale retroacts to the date of the constitution of the mortgage. Petitioner bank argues that it was a purchaser for value long before the fi ling of the case and, therefore, it cannot be considered a transferee pendente lite. This argument is specious. Petitioner acquired the property only after the fi ling of private respondents’ case for specifi c performance. When the mortgage was constituted, petitioner was not yet, properly speaking, a

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transferee, being a mere mortgagee of the property. Only when petitioner acquired the property in the foreclosure sale and subsequently consolidated its title did it become the transferee of the property. Thus, petitioner bank is a transferee pendente lite of the property in litigation within the contemplation of Rule 39, Sec. 47(b). As such, it is bound by the decision against Demetrio Llego.’’ (2) Transferee pendente lite stands in shoes of transferor. — “A transferee pendente lite stands exactly in the shoes of the transferor and is bound by any judgment or decree which may be rendered for or against the transferor; his title is subject to the incidents and results of the pending litigation, and his transfer certifi cate of title will, in that respect, afford him no special protection. Petitioner bank may thus be properly ordered to execute the necessary deed of reconveyance in favor of private respondents. The remedy left to petitioner is to pursue its claim against Llego and his Attorney-in-Fact Ceferino Tan by fi ling the appropriate action to recover the unpaid indebtedness.’’ (3) MB acted in bad faith. — Petitioner insists that it is not a transferee pendente lite because it was a purchaser for value long before the case for specifi c performance was fi led. The contention is without merit. Even if it is not a transferee pendente lite, petitioner nevertheless cannot claim a right superior to that of private respondents because petitioner acted in bad faith when it foreclosed and acquired the property. As the Court of Appeals pointed out, petitioner was aware of the charge of fraud against Demetrio Llego in mortgaging the property to it despite the previous sale thereof to private respondent Agustin Lagrama. The trial court found the existence of fraud in the transaction and declared private respondents to be the absolute owners of the property. x x x’’ (4) Petitioner’s reliance in case of St. Dominic Corp. vs. Intermediate Appellate Court (151 SCRA 577 [1987]) misplaced. — “The facts of that case are different from those of the case at bar. x x x In the case of St. Dominic, when the property in question was mortgaged to Manufacturer’s Bank, the title showed that it was valid, regular, and free from any lien or encumbrance. When it was later foreclosed and sold at public auction and a new transfer certifi cate of title was issued to the buyer, the notice of lis pendens was not carried over to the new title. And,



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when the property was sold to petitioner St. Dominic Corp., which was again issued TCT No. 22337, no notice of any lien or encumbrance appeared on the title. These factual circumstances led the Court to conclude that the mortgagee bank and its subsequent transferrees had acted in good faith. It is obvious that the case of St. Dominic Corp. vs. Intermediate Appellate Court cannot be invoked in this case where both the trial court and the Court of Appeals found that petitioner bank did not act in good faith in acquiring title to the property.’’ (Malayan Bank vs. Lagrama, 357 SCRA 429 [2001].)

— oOo —

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473

VIIIANTICHRESIS*

(Arts. 2132-2139.)

Chapter 4ANTICHRESIS

ART. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the pay-ment of the interest, if owing, and thereafter to the princi-pal of his credit. (1881)

Defi nition of the contract of antichresis. The above article defi nes the contract of antichresis.

Characteristics of the contract. Antichresis is: (1) an accessory contract because it secures the performance of a principal obligation. Manresa, however, believes that it is an independent contract (see 12 Manresa 547.); and (2) a formal contract because it must be in a specifi ed form to be valid, i.e., “in writing.” (Art. 2134.)



474 Art. 2132

Delivery of property. Antichresis requires the delivery by the debtor of the property given as security to the creditor. But such delivery is required only in order that the creditor may receive the fruits and not that the contract shall be binding. The contract does not cover the immovable but only its fruits.

Right of creditor to the fruits. Antichresis normally covers all the fruits of the encumbered property, but the law gives the parties the freedom to stipulate otherwise. (see Art. 1306.) The reduction of the amount of fruits available to the creditor does not vary the nature of the contract. (Villanueva vs. Ipondo, [CA] No. 885-R [1947], 44 O.G. 4377.)

Obligation to pay interest not essential. The obligation to pay interest is not of the essence of the contract of antichresis, any more than it is indispensable in a contract of loan. The words “if owing” (interest) reveal that it is not essential that the loan should earn interest in order that it can be guaranteed with a contract of antichresis, there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional. (Javier vs. Valliser, [CA] No. 2648-R, April 29, 1950; Sta. Rosa vs. Noble, 35 O.G. 27241.)

ILLUSTRATIVE CASE: In consideration of the payment of mortgagor’s indebtedness to mortgagee, payor was given possession of mortgaged property until he is fully reimbursed. Facts: After the foreclosure by DBP (mortgagee) of the mortgage on the property of A (mortgagor), the latter entered into a contract with B entitled “Deed of Sale with Assumption of Mortgagee.” Under the contract, B would assume and pay the indebtedness of A to DBP and in consideration therefor, B was given the possession, the enjoyment and use of the lands

475

until A can reimburse fully B the amounts paid by the latter to DBP. Issue: What is the nature of the contract entered into between A and B? Held: The agreement between A and B is one of those innominate contracts under Article 1307 of the New Civil Code whereby A and B agreed “to give and to do” certain rights and obligations respecting the lands and the mortgage debts of A which would be acceptable to the bank, but partaking of the nature of antichresis insofar as the principal parties A and B, are concerned. (Dizon vs. Gaborro, 83 SCRA 688 [1978].)

Antichresis and pledge compared. The distinctions are as follows: (1) Antichresis refers to real property, while pledge, to per-sonal property; and (2) Antichresis is perfected by mere consent, while pledge is perfected by the delivery of the thing pledged; and (3) Antichresis is a consensual contract, while pledge is a real contract. Both are similar in that the debtor loses control of the subject matter of the contract.

Antichresis and real mortgage compared. The following are the distinctions: (1) In antichresis, the property is delivered to the creditor, while in mortgage, the debtor usually retains possession of the property; (2) In antichresis, the creditor acquires only the right to receive the fruits of the property; hence, it does not produce a real right, while in mortgage, the creditor does not have any right to receive the fruits, but mortgage creates a real right over the property which is enforceable against the whole world; (3) In antichresis, the creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the

Art. 2132 ANTICHRESIS


476 Art. 2132

estate (Art. 2135.), while in mortgage, the creditor has no such obligation; and (4) In antichresis, it is expressly stipulated that the creditor given possession of the property shall apply the fruits thereof to the payment of interest, if owing, and thereafter to the principal of the credit, while in a mortgage, there is no such obligation on the part of the mortgagee. Both are similar in that the subject matter is real property. Like pledge and mortgage, antichresis gives a real and not merely a personal right if it is registered in the Registry of Property. (12 Manresa 547-548.)

Application of the fruits to interest and then to principal. It is not an essential requisite to a mortgage that possession of mortgaged premises be retained by the mortgagor. To be antichresis, it must be expressly agreed between creditor and debtor that the former, having been given possession of the properties given as security, is to apply their fruits to the payment of interest, if owing, and thereafter to the principal of his credit (Art. 2132.); so that if a contract of loan with security does not stipulate the payment of interest but provides for the delivery to the creditor by the debtor of the real property constituted as security for the payment therefor, in order that the creditor may administer the same and avail himself of its fruits, without stating that said fruits are to be applied to the payment of the interest, if any, and afterwards to that of the principal of the credit, the contract shall be considered to be one of mortgage and not of antichresis. (Legaspi and Salcedo vs. Celestial, 66 Phil. 372 [1938]; Alojado vs. Lim Siongco, 51 Phil. 339 [1927]; Diego vs. Fernando, 109 Phil. 143 [1960]; Adrid vs. Morga, 108 Phil. 927 [1960].) In a case, the court held the contract as one of mortgage in view of the existence of three provisions which are indicative of the contract of mortgage: (1) The agreement that the full amount of the indebtedness must be returned to the lenders before the borrowers could demand the return of the property, which is contrary to an antichretic contract wherein the products of the

477

land should be applied to the interest and then to the principal; (2) the use of the term “mortgage” in various parts of the contract; and (3) the agreement that the lenders are not to pay rentals on the property in consideration of the fact that the borrowers do not pay interest on the sum which they obtained as a loan. (Verzosa vs. Bucag, [Unrep.] 97 Phil. 996 [1955].)

ART. 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. (n)

Measure of application of fruits to interest and principal. The contract does not cover the immovable but only its fruits.The fruits of the immovable which is the object of the antichresis must be appraised at their actual market value at the time of the application. (see Art. 2138.) “The foregoing rule will forestall the use of antichresis for purposes of usury.” (Report of the Code Commission, p. 158.)

ART. 2134. The amount of the principal and of the inter-est shall be specifi ed in writing; otherwise, the contract of antichresis shall be void. (n)

Form of the contract. Article 2134 is an instance when the law requires that a contract be in some form in order that it may be valid (Art. 1356.) and not only to affect third persons. Even if the antichresis is void, the principal obligation, however, is still valid. This article, like Articles 2133 and 2138, is intended to forestall the use of antichresis for purposes of usury. (see Report of the Code Commission, p. 158.)

ART. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the estate. He is also bound to bear the expenses necessary for its preservation and repair.

Arts. 2133-2135 ANTICHRESIS


478 Art. 2136

The sums spent for the purposes stated in this article shall be deducted from the fruits. (1882.)

Obligations of the antichretic creditor. The creditor acquires, by virtue of the contract of antichresis, the right to enjoy the fruits of the property delivered to him. (Art. 2132.) This right carries two obligations (pars. 1 and 2.) which are the necessary consequences of the contract because they arise from its very nature. (1) Payment of taxes and charges upon the estate. — The creditor is obliged, unless there is a stipulation to the contrary, to pay the taxes and charges upon the estate. If he does not pay the taxes, he is by law (Art. 1170.) required to pay indemnity for damages to the debtor. (Pando vs. Gimenez, 54 Phil. 459 [1980].) Where the debtor has paid for the taxes on the property which the creditor should have paid, the amount is to be applied to the payment of the debt, and the debtor is entitled to the return of the property free from all encumbrances if he, in effect, by advancing the taxes, had already discharged the debt. (Rosales vs. Tanseco, 90 Phil. 459 [1951].) (2) Application of the fruits of the estate. — Another obligation of the creditor is to apply the fruits, after receiving them, to the interest, if owing, and thereafter to the principal (Art. 2132.) in accordance with the provisions of Article 2133 or 2138; hence, the duty of the creditor to render an account of said fruits to the debtor, and the corresponding right of the latter to apply the said fruits to the debt. (Barretto vs. Barretto, 37 Phil. 234 [1917]; Diaz and Rubillos vs. De Mendezona, 48 Phil. 666 [1926]; Macapinlac vs. Gutierrez Repide, 43 Phil. 770 [1922].) The sums spent by the creditor in fulfi llment of the obligations under the article shall be charged against the fruits of the property.

ART. 2136. The debtor cannot reacquire the enjoyment of the immovable without fi rst having totally paid what he owes the creditor.

But the latter, in order to exempt himself from the ob-ligations imposed upon him by the preceding article, may

479

always compel the debtor to enter again upon the enjoy-ment of the property, except when there is a stipulation to the contrary. (1883)

Right of antichretic debtor to reacquire enjoyment of property. The property delivered stands as a security for the payment of the obligation of the debtor in antichresis. Hence, the debtor cannot demand its return until the debt is totally paid. (see Arts. 2098, 2105; see Macapinlac vs. Gutierrez Repide, supra.) However, if the creditor does not want to pay the taxes and incur the expenses necessary for the preservation and repair of the property (Art. 2135.), he may compel the debtor to reacquire the enjoyment of the same except when there is a contrary stipulation. (Art. 2136.)

ART. 2137. The creditor does not acquire the owner-ship of the real estate for nonpayment of the debt within the period agreed upon. Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply. (1884a)

Remedy of creditor in case of nonpayment of debt. If the debt is not paid, it is clear enough that the creditor does not acquire ownership of the real estate since what was transferred is not the ownership but merely the right to receive its fruits. (Art. 2132.) A stipulation authorizing the antichretic creditor to appropriate the property upon the nonpayment of the debt within the period agreed upon is void. (see Art. 2088.) The remedy of the creditor is (1) to bring an action for specifi c performance; or (2) to petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court. The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage



480 Art. 2138

and pledge. (see Art. 1307; Tavera vs. El Hogar Filipino, Inc., 68 Phil. 712 [1939].)

Acquisition by creditor of property by prescription. The creditor in antichresis and his successors-in-interest cannot ordinarily acquire by prescription the land given to him, any agreement to the contrary being void. (Valencia vs. Alcala, 42 Phil. 177 [1921]; Bernardo vs. Barretto, 37 Phil. 234 [1917]; Trillana vs. Manansala, 96 Phil. 865 [1955].) Possession, for the purpose of acquisitive prescription, must be in the concept of an owner. (Art. 1118.) The possession of an antichretic creditor is not in the concept of an owner. (Art. 2132.) He is a mere holder placed in possession of the land by the debtor, the owner. (Ramirez vs. Court of Appeals, 144 SCRA 292 [1986]; see Art. 540.) He cannot acquire the ownership of the real estate subject of the antichresis unless he repudiates his status as an antichretic creditor.

ART. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the principal. (1885a)

Interest in antichresis subject to the Usury Law. The antichretic creditor is under obligation to apply the fruits of the property in satisfaction, fi rst, of whatever interest on the debt is due, and secondly, to the payment of the principal. (Art. 2132.) The fruits must be appraised on the basis of their actual market value at the time of the application. (Art. 2133.) If their value should exceed the amount of interest allowed by the Usury Law, the excess shall be applied to the principal. Note: The rate of interest on loan or forbearance of money,

481

goods, or credit is no longer subject to any ceiling prescribed under the Usury Law. (see II–The Usury Law, supra.)

ART. 2139. The last paragraph of Article 2085, and Ar-ticles 2089 to 2091 are applicable to this contract. (1886a)

Applicability of certain articles. Please see comments under Article 2085 and Articles 2089 to 2091 which are provisions on pledge and mortgage.

— oOo —



482

IXCHATTEL MORTGAGE

(Arts. 2140-2141.)

Chapter 5CHATTEL MORTGAGE*

ART. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mort-gage. (n)

Defi nition of chattel mortgage. Chattel mortgage is that contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. Under the old law (Sec. 3, Act No. 1508 [The Chattel Mort-gage Law]; Appendix 5.), a chattel mortgage is considered a con-ditional sale which the Code Commission considered inaccurate (see Serra vs. Rodriguez, 56 SCRA 538 [1974].); hence, the new defi nition. (see Report of the Code Commission, p. 158.) The foregoing article also makes a distinction between a chattel mortgage and a pledge. (Ibid.; Art. 2140, last sentence.)


482

483

Characteristics of chattel mortgage. Chattel mortgage is: (1) an accessory contract because it is for the purpose of securing the performance of a principal obligation; (2) a formal contract because of its validity, registration in the Chattel Mortgage Register is indispensable (see, however, Filipinas Marble Corp. vs. Intermediate Appellate Court, 142 SCRA 180 [1986].); and (3) a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance on fulfi llment of the obligation.

Chattel mortgage and pledge distinguished. The following are the distinctions: (1) In chattel mortgage, the delivery of the personal property to the mortgagee is not necessary, while in pledge, such delivery is necessary; (2) In chattel mortgage, the registration of the same in the Chattel Mortgage Register is required by law, while in pledge, registration in the Registry of Property is not necessary; (3) The procedure for the sale of the thing given as security is different. In chattel mortgage, the procedure is found in Section 14 of Act No. 1508, as amended, while in pledge, it is found in Article 2112 of the Civil Code; (4) In chattel mortgage, if the property is foreclosed, the excess over the amount due goes to the debtor (Sec. 14, Act No. 1508.), while in pledge, if the property is sold, the debtor is not entitled to the excess unless it is otherwise agreed (Art. 2125.) or except in the case of a legal pledge (Art. 2121.); and (5) In chattel mortgage, if the property is foreclosed and there is a defi ciency, the creditor is entitled to recover the defi ciency from the debtor (Ablaza vs. Ignacio, [Unrep.] 103 Phil. 1151 [1958].) except if the chattel mortgage is a security for the purchase of personal property in installments. (see Art. 1484.)

Art. 2140 CHATTEL MORTGAGE


484 Art. 2141

In pledge, if the property is sold, and there is a defi ciency, the creditor is not entitled to recover the defi ciency notwithstanding any stipulation to the contrary. (Art. 2115.)

Similarities between chattel mortgage and pledge. They are: (1) Both are executed to secure performance of a principal obligation; (2) Both are constituted only on personal property; (3) Both are indivisible; (4) Both constitute a lien on the property; (5) In both cases, the creditor cannot appropriate the property to himself in payment of the debt; (6) In both cases, when the debtor defaults, the property must be sold for the payment of the creditor; and (7) Both are extinguished by the fulfi llment of the principal obligation or by the destruction of the property pledged or mortgaged.

ART. 2141. The provisions of this Code on pledge, in-sofar as they are not in confl ict with the Chattel Mortgage Law, shall be applicable to chattel mortgages. (n)

Laws governing chattel mortgage. The laws principally governing chattel mortgages are: (1) the Chattel Mortgage Law, Act No. 1508, as amended (see Appendix 5.); (2) the Civil Code (see Phil. National Bank vs. Manila Investment & Construction, Inc., 38 SCRA 462 [1971]; Garrido vs. Tuazon, 24 SCRA 727 [1968].); (3) the Revised Administrative Code; and (4) the Revised Penal Code. The Ship Mortgage Decree of 1978 (Pres. Decree No. 1521.) governs the mortgage of vessels of domestic ownership. (see Appendix 7.)

485

Offenses involving chattel mortgage. Under the Revised Penal Code, the following acts are punishable: (1) Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; and (2) Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chattel Mortgage Register. (Art. 319, Revised Penal Code.) An essential element common to the two acts punished under Article 319 of the Revised Penal Code is that the property removed or repledged, as the case may be, should be the same or identical property that was mortgaged or pledged before such removal or pledging. (People vs. Chupeco, 10 SCRA 640 [1964].) The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 61 [1915].), or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged. (People vs. Alvares, 45 Phil. 472 [1923].) But the sale is valid although no written consent was obtained from the mortgagee but the mortgagor lays himself open to criminal prosecution. (Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1991].)

Applicability of provisions on pledge. It is clear from Article 2141 that the provisions of the Civil Code on pledge shall apply to a chattel mortgage only insofar as they are not in confl ict with any provision of the Chattel Mortgage Law; otherwise, the provisions of the latter will apply. It has been ruled that “the provisions of the Chattel Mortgage Law with regard to the effects of the foreclosure of a chattel



486 Art. 2141

mortgage are precisely contrary to the provisions of Article 2115 of the Civil Code.’’ (Phil. National Bank vs. Manila Investment and Construction, Inc., 38 SCRA 462 [1971].) And “accordingly, the chattel mortgage creditor may maintain an action for defi ciency.” (Garrido vs. Tuason, 24 SCRA 727 [1968]; Phil. National Bank vs. Manila Investment and Construction Co., supra.) Note: Actually, the Chattel Mortgage Law is silent on the matter of recovering defi ciency after the foreclosure sale of the mortgaged chattel.

Subject matter of chattel mortgage. The subject matter of chattel mortgage must always be personal or movable property. (Art. 2140; Sec. 2, Act No. 1508.) Certain deviations, however, have been allowed for various reasons. The following have been held mortgageable under the Chattel Mortgage Law: (1) Shares of stock in a corporation (Monserrat vs. Ceron, 58 Phil. 469 [1933].); but if the owner of the shares is not domiciled in the same province where the corporation is domiciled, the registration must be made in both provinces. (Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935].) (2) An interest in business, for it is personal property capable of appropriation. (Strochecker vs. Ramirez, 44 Phil. 933 [1923].) (3) Machinery treated by the parties as personal property subsequently installed on leased land. (Davao Sawmill Co., Inc. vs. Castillo, 61 Phil. 709 [1935].) Thus, the nature of the machineries in dispute (i.e., that they were heavy, bolted or cemented on the real property mortgaged) does not make them ipso facto immovable under Article 415(3) and (5) of the Civil Code. Machinery and equipment, appearing to be immobile, may be treated by the parties as chattels to secure an obligation under the principle of estoppel. An immovable may be considered a personal property, if there is a stipulation as when it is used as security in the payment of an obligation where a chattel mortgage is executed over it. (Tsai vs. Court of Appeals, 366 SCRA 324 [2001].)

487

Where, however, the parties had treated the “after acquired properties” as real property by expressly agreeing that they shall automatically become subject to the lien of the real estate mortgage, this characterization impresses upon the properties the character determined by the parties who must be held in estoppel to question it. Such “after-acquired properties” must be deemed to have been immobilized with the result that it is not necessary to register them a second time as chattel mortgages to affect third parties. The fact that the mortgagor (lumber company) is not the owner of the land (area of its lumber concession) is not important since the parties had characterized the said “after-acquired properties” as real property. (People’s Bank and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967]; see GSIS vs. Calsons, Inc., 23 SCRA 891 [1968]; Art. 415[5].) (4) Vessels but it is essential that the mortgage is recorded in the offi ce of the Philippine Coast Guard of the port of documentation of such vessels (Pres. Decree No. 1521 [The Ship Mortgage Decree], Sec. 5[a]; Appendix 6; see Philippine Refi ning Co., Inc. vs. Jarque, 61 Phil. 229 [1935].) to be effective as to third persons. It is not necessary that it be recorded in the offi ce of the register of deeds. (Rubiso and Gelito vs. Rivera, 37 Phil. 72 [1917]; Arroyo vs. Yu de Sane, 54 Phil. 511 [1930].) (5) Motor vehicles but the mortgage must also be registered in the Land Transportation Commission (now Land Transporta-tion Offi ce) and with respect to vehicles used for public services, the mortgage must also carry the approval of the Public Service Commission (now Land Transportation Franchising and Regula-tory Board) to make it effective against the public and the Com-mission. (Montoya vs. Ignacio, 94 Phil. 182 [1953].) The recording provisions of the Revised Motor Vehicles Law (now Land Transportation and Traffi c Code) are merely complimentary to those of the Chattel Mortgage Law. A mortgage of any motor vehicle in order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles Offi ce (now Land Transportation Offi ce) as required by said law. The failure of the mortgagee to report the mortgage executed in his favor has the



488 Art. 2141

effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase of the same vehicle in the Motor Vehicles Offi ce. (Borlough vs. Fortune Enterprises, Inc. and Court of Appeals, 100 Phil. 1063 [1957]; see Montano vs. Lim, 7 SCRA 250 [1963]; Aleman vs. De Catera, 1 SCRA 776 [1961]; Uy vs. Zamora, 13 SCRA 508 [1968].) (6) House of mixed materials “which by its very nature is considered personal property” and because it was so expressly designated by the parties. (Luna vs. Encarnacion, 91 Phil. 531 [1952].) (7) House intended to be demolished for what are really mort-gaged in this case are the materials thereof and they are, there-fore, personal property. (3 Manresa 19.) (8) House built on rented land, where not only because the deed of mortgage considered it as such, but also because it did not form part of the land, for it is settled that an object placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not become immobilized by attachment. The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purpose of said contract is, however, good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel. (Evangelista vs. Abad, [CA] 36 O.G. 2913; Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630 [1923]; Tumalad vs. Vicencio, 41 SCRA 143 [1971]; Navarro vs. Pineda, 9 SCRA 631 [1963]; Piansay vs. David, 12 SCRA 227 [1964].) But the mere fact that a house, whether it is erected by the owner of the land or by the usufructuary or lessee, was the subject of a chattel mortgage and was considered as personal property by the parties does not make said house personal for purposes of the notice to be given for its sale at public auction. This ruling is demanded by the need for a defi nite, orderly and well-defi ned regulation for offi cial and public guidance and which would prevent confusion and misunderstanding. Sales on execution affect the public and third persons. (Evangelista vs. Alto Surety & Insurance Co., Inc., 103 Phil. 401 [1958]; Navarro vs. Pineda, 9 SCRA 63 [1963]; see Sec. 16, Rule 39, Rules of Court.)

489

(9) If a house of strong materials may be considered as personal property for purposes of executing a chattel mortgage as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery which is movable in its nature and becomes immobilized only by destination or purpose may not be likewise treated as such. (Makati Leasing and Finance Corp. vs. Weaver Textiles Mills, Inc., 122 SCRA 296 [1983].) But the registration of a building of strong materials produces no effect as far as the building is concerned. (Leung Yee vs. Strong Machinery Co., 37 Phil. 644 [1918].) As a building is an immovable property, it cannot be divested of its character of a realty by the fact that it belongs to another. If the status of the building were to depend on the ownership of the land, a situation would be created where a permanent fi xture changes its nature or character as the ownership of the land changes hands. As personal properties could only be the subject of a chattel mortgage, the execution of a chattel mortgage on a building is invalid and a nullity, and the registration of the document in the chattel mortgage register is merely a futile act and cannot affect the rights of a subsequent real estate mortgagee of the same property. (Associated Insurance & Surety Co., Inc. vs. Iya, 103 Phil. 971 [1958].)

Mortgage of improvements on land. (1) Chattel mortgage. — For purposes of the Chattel Mortgage Law, both growing crops and large cattle (Sec. 7, pars. 2 and 3, Act No. 1508.) are personal property and, therefore, capable of being mortgaged although they would be considered as immovable property under the conditions stated in Article 415, Nos. (2) and (6) of the Civil Code. There is no confl ict between the Chattel Mortgage Law and the Civil Code because Article 416(2) of the Civil Code classifi es as personal property “Real property which by any special provisions of law is considered as personalty.” (2) Real estate mortgage. — Although the parties to a contract may treat certain improvements and crops as chattels, insofar as they are concerned, it is now settled in our jurisdiction that, in general, and so far as the public is concerned, such improvements,



490 Art. 2141

if falling under the provisions of Article 4151 of the Civil Code are immovable property. As a consequence, a mortgage constituted on said improvements must be susceptible of registration as a real estate mortgage and of annotation on the certifi cate of title to the land of which they form part, although the land itself may not be subject to said encumbrance. (Tolentino vs. Baltazar, 1 SCRA 822 [1961].)

No absolute criterion between personal and real property. Articles 4152 and 4163 of the Civil Code which mention what are deemed real property and personal property, respectively, supply no absolute criterion for discriminating between the two kinds of property for purposes of the application of the Chattel Mortgage Law. Said articles state rules which, considered as a general doctrine, are laws in this jurisdiction. (1) It must not be forgotten that, under given conditions, property may have character different from that imputed to it in said articles. (2) It is undeniable that the parties to a contract may, by agreement, treat as personal property that which by nature would be real property; and it is a familiar phenomenon to see things classed as real property for purposes of taxation which on general principles might be considered as personal property. (3) Other situations are constantly arising in which the proper classifi cation of one thing or another as real or personal property may be said to be doubtful. (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630 [1923].)

Subject matter to be described and identifi ed. Section 7 of the Chattel Mortgage Law does not demand a minute and specifi c description of every chattel mortgaged in

1See note 2.2See note 3 under Article 2124.3See note 1 under Articles 2094 and 2095.

491

the deed of mortgage, but only requires that the description of the mortgaged property be such as to enable the parties to the mortgage or any other person to identify the same after a reasonable investigation and inquiry (Saldaña vs. Phil. Guaranty Co., Inc., 106 Phil. 919 [1960].); otherwise, the mortgage is invalid. The identifi cation of the mortgaged property was held impossible from the following description: (1) “A store No. 79 on Magallanes Street, Municipality of Cebu, formerly belonging to T. Thakurdas, with all the merchandise effects, wares and other bazaar goods contained in the said store.” (2) “A store No. 9 on Real Street, Iloilo, Panay, P.I., formerly belonging to Guillermo Asayas, with all the merchandise effects, wares and other bazaar goods contained in the said store.” (Giberson vs. A.N. Jureidini Bros., 44 Phil. 216 [1922].) (3) The provision in a deed of mortgage that “all property of every nature and description, taken in exchange or replacement, as well as all buildings, machineries, fi xtures, tools, equipment, and other property that may be acquired by the mortgagor and installed for use in its lumber concession would be subject to the mortgage lien.” (People’s Bank & Trust Co. vs. Dahican Lumber Co., 26 SCRA 84 [1967].) In a case where the thing was described as the half interest of the debtor in the drug business known as “Antigua Botica Ramirez,” owned by a certain person therein named and the mortgagor, with the exact and defi nite location of the same being stated, it was held that description meets the requirements of the law. (Strochecker vs. Ramirez, 44 Phil. 933 [1923].)

Extent of chattel mortgage. Section 7, paragraph 4 of Act No. 1508 provides:

“A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depositary as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.”



492 Art. 2141

(1) Coverage extends only to property described therein. — The limitation found in this provision makes reference to “like or substituted property thereafter acquired . . .” not to those already existing and originally included at the date of the constitution of the mortgage. A contrary view would unduly impose a more rigid condition than what the law prescribes which is that the description be only such as to enable identifi cation after a reasonable inquiry and investigation. (Saldaña vs. Phil. Guaranty Co., Inc., 106 Phil. 919 [1960]; see Tsai vs. Court of Appeals, 366 SCRA 324 [2001].) The above-quoted provision does not apply “to stores open to the public for retail business where the goods are constantly sold and substituted with new stock, such as drugstores, grocery stores, dry goods stores, etc.; otherwise, “it would be practically impossible to constitute a mortgage on such stores without closing them contrary to the very spirit and purpose of the Act. Such a construction would bring about a handicap to trade and business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit: the promotion of business and the economic development of the country. x x x’’ (2) Stipulation including after-acquired property. — A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding x x x where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (Torres vs. Limjap, 56 Phil. 141 [1931]; Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975]; 11 C.J. 436.) Where the facts, taken together, evince the conclusion that the parties’ intention is to treat the controverted properties (i.e., machineries) as chattels (although they appear to be immobile), a fortiori, the after — acquired properties, which are of the same description as the properties enumerated (under the title “List of Machineries and Equipment’’) in the contract (“Real Estate Mortgage and Chattel Mortgage’’) must also be treated as chattels. (Tsai vs. Court of Appeals, 366 SCRA 324 [2001].)

493

Chattel mortgage of after-incurred obligations. A pledge, real estate mortgage, or antichresis may exception-ally secure after-incurred obligations so long as these future debts are accurately described. A chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute such agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the fi nancing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. (Acme Shoe Rubber & Plastic Corp. vs. Court of Appeals, 260 SCRA 714 [1996].)

Creation of a chattel mortgage. The law as it now stands provides for only one way for executing a valid chattel mortgage, i.e., the registration of the personal property in the Chattel Mortgage Register as security for the performance of an obligation.4 (Art. 2140; see Art. 2085.) Under the Chattel Mortgage Law, if the property is situated in a different province from that in which the mortgagor resides, the registration must be in both registers (Sec. 4, Act No. 1508.); otherwise, the chattel mortgage is void. It has been ruled that if the chattel mortgage is not recorded, it is nevertheless binding between the parties. (see Filipinas Marble Corp. vs. Intermediate Appellate Court, 142 SCRA 180 [1986]; Art. 2125; see however, Art. 2140.)

4See Appendix 7-C.



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Period within which registration should be made. The law does not provide any specifi c time within which a chattel mortgage should be recorded in the Chattel Mortgage Register. It has been held that “the law is substantially and suffi ciently complied with where the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of innocent third persons is prejudiced. This view is more in accord with practical justice, for the law does not intend that its provisions be used as a shield to avoid performance of an obligation under what would otherwise be a valid contract.” (Ledesma vs. Perez, 2 C.A. Rep. 126.)

Effect of registration. (1) Creates real right. — The registration of the chattel mort-gage is an effective and binding notice to other creditors of its existence and creates a real right or a lien which, being recorded, follows the chattel whenever it goes. The registration gives the mortgagee symbolical possession. (Northern Motors, Inc. vs. Coquia, 68 SCRA 374 [1975].) To protect him from the debtor’s possible disposal of the property, the chattel mortgage is made effective against third persons by the process of registration. (Phil. National Bank vs. RBL Enterprises, Inc., 430 SCRA 299 [2004].)

(a) That the chattel mortgagee has the symbolical possession and that he has preferential right to have physical possession is inferable from Article 319 of the Revised Penal Code (supra.) which penalizes wrongful removal, sale, or pledge of the mortgaged chattel without the written consent of the mortgagee. (In re Du Tec Chuan, 34 Phil. 488 [1915], cited in Northern Motors, Inc. vs. Coquia, supra; Allied Banking Corporation vs. Salas, 168 SCRA 414 [1988].) (b) Therefore, the lien of a chattel mortgagee over the mortgaged property is superior to the levy made on the same by the assignee of the unsecured judgment creditor of the chattel mortgagor. The theory that the breach by the mortgagor of the chattel mortgage should not affect

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the assignee because he is not a privy to such contract is untenable. A judgment-creditor can only attach the equity or right of redemption of the mortgagor. (Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975].) (c) Although the rule that “a mortgagee has the right to rely in good faith on the certifi cate of title of the mortgagor to the property given as a security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation,’’ generally pertains to real property, particularly registered land, it may also be applied by analogy to personal property, specifi cally vessels or ships, since shipowners are likewise required by law to register their vessels with the Philippine Coast Guard. (Cebu International Finance Corp. vs. Court of Appeals, 268 SCRA 178 [1997]; see Appendix 6.)

(2) Adds nothing to mortgage. — The effi cacy of the act of recording a chattel mortgage consists in the fact that it operates as a constructive notice of the existence of the contract, and the legal effects of the contract must be discovered in the instrument itself in relation with the fact of notice. Registration adds nothing to the instrument, considered as a source of title and affects nobody’s rights except as a species of notice. (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630 [1923].)

Registration of assignment of mortgage not required. Applying by analogy Article 2128 of the Civil Code to a chattel mortgage, it appears that a chattel mortgage credit may be alienated or assigned to a third person. (Servicewide Specialists, Inc. vs. Court of Appeals, 320 SCRA 478 [1999].) There is no law expressly requiring the recording of the as-signment of a mortgage. While such assignment may be record-ed, the law is permissive and not mandatory.5

5The assignee is subrogated to the rights and obligations of the assignor-mortgagee with respect to the chattel mortgage constituted in favor of the latter. Consequently, the assignee is bound by the terms and conditions of the chattel mortgage executed between the mortgagor and the mortgagee. (BA Finance Corp. vs. Court of Appeals, 201 SCRA 157 [1991].)



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It is clear then that the debtor is protected if he pays his creditor without actual knowledge that the debt has been assigned. (see Art. 1626.) Such notice must be actual, and the recording of the assignment will not operate as constructive notice to the debtor. (Sison and Sison vs. Yap Tico and Avancena, 37 Phil. 584 [1918].)

Duty of Register of Deeds ministerial. The duties of a register of deeds in respect to the registration of chattel mortgages are of a purely ministerial character. There is no provision of law which confers upon the Register of Deeds any judicial or quasi-judicial power to determine the nature of any document of which registration is sought as a chattel mortgage. It is his duty to accept the proper fee and place the instrument on record, leaving the effects of registration to be determined by the court if such question should arise for legal determination. Thus, he cannot refuse registration on the ground only that the interests mortgaged do not appear to be personal property, within the meaning of the Chattel Mortgage Law. (Standard Oil Co. of New York vs. Jaramillo, supra.)

Affi davit of good faith required. The affi davit of good faith is an oath in a contract of chattel mortgage wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligation specifi ed in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud.” (Sec. 5, Ibid.) (1) Effect of absence. — The Chattel Mortgage Law, in Section 5, in describing what shall be deemed suffi cient to constitute a good chattel mortgage, includes the requirement of an affi davit of good faith appended to the mortgage and recorded therewith. But the absence of the affi davit vitiates a mortgage only as against third persons without notice like creditors and subsequent encumbrancers. (Lilius vs. Manila Railroad Co., 62 Phil. 50 [1935]; Phil. Refi ning Co. vs. Jarque, 61 Phil. 229 [1935]; Giberson vs. A.N. Jurreidini Bros., 44 Phil. 216 [1922].)

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The special affi davit is required only for the purpose of trans-forming an already valid mortgage into “preferred mortgage.’’ Thus, it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. (Cebu International Finance Corp. vs. Court of Appeals, supra.) (2) Where mortgage includes debt thereafter to be contracted. — It is obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. A deed of chattel mortgage is void where it provides that the security stated therein “is for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee.” A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. (Jaca vs. Davao Lumber Co., 113 SCRA 107 [1982].) As already stated elsewhere, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Once said obligations are paid, there can be no foreclosure in new loans concluded after the execution of the chattel mortgage since there is no longer any mortgage.

ILLUSTRATIVE CASE: Transferee from fi rst mortgagee of mortgage credit increased the credit in favor of mortgagor after execution of second mortgage on same personal property in favor of second mortgagee. Facts: X Co. had a mortgage credit against Y Co. for the sum of P14,000.00 secured by a fi rst chattel mortgage. Z Co. also had a mortgage credit for the amount of P30,000.00 secured by a second chattel mortgage on the same personal property. After this second mortgage has been executed, the payment of the mortgage credit of X Co. became due, which credit had been reduced to the sum of P8,000.00 through partial payments. W acquired said mortgage credit and increased it by P6,000.00. Issue: Who has a preferential right to the mortgaged property — Z Co., the second mortgagee, or W, the transferee?



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Held: Z Co. X Co., at the time of the transfer of its mortgage right to W, had a preferential right over that of Z Co. for the remainder of the amount of the credit, that is P8,000.00. Z Co. had a preferential right to the rest of the value of the mortgaged property after deducting the remaining mortgage credit of X Co. The increase of P6,000.00 made by W in favor of Y Co. and the extension of the mortgage thereto are not only subordinate to the mortgage credit of Z Co., being subsequent in time of registration, but said increase in security is also void. The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. In accordance with the provisions of Section 5, the parties to the original deed swore that the same was mortgaged “to secure the obligation specifi ed therein and for no other purpose.” Neither the increase in question, nor the extension of the mortgage to secure the payment of the same, is specifi ed in the deed. “Where the Statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgage, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted.” (Belgian Catholic Missionaries vs. Magallanes Press, 49 Phil. 647 [1926].)

Right of redemption. (1) When the condition of a chattel mortgage is broken the following may redeem:

(a) the mortgagor; (b) a person holding a subsequent mortgage; or (c) a subsequent attaching creditor.

(2) An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it. (3) The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and

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expenses incurred by such breach of condition before the sale thereof. (Sec. 13, Act No. 1508.) Upon the sale of personal property at the foreclosure (or execution) sale, all rights of ownership leave the mortgagor (judgment debtor) and become vested in the purchaser. There is no right to redeem personal property. (see Lee vs. Trocino, 561 SCRA 178 [2008].)

Right acquired by second mortgagee and subsequent purchaser. (1) Before payment of debt. — After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of a second mortgage. As between the fi rst and second mortgagees, therefore, the latter can only recover the property from the former by paying him the mortgage debt. Even when the second mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the fi rst mortgagee. (Tizon vs. Valdez and Morales, 48 Phil. 910 [1926]; see Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975].) (2) After payment of debt. — If the only leviable or attachable interest of a chattel mortgagor in a mortgaged property is his right of redemption, it follows that the judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption. He is not entitled to the actual possession and delivery of the property without fi rst paying the mortgage debt. (Ibid.)

Right of mortgagee to possession. (1) After default. — When default occurs and the creditor desires to foreclose, the right of the creditor to take the mortgaged property is clearly implied from the provision which gives him the right to sell. (2) Before default. — A chattel mortgagee is not entitled to the possession of the property upon the execution of the chattel mortgage for otherwise, the contract becomes a pledge and ceases to be a chattel mortgage. (Art. 2093.)



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(3) Where mortgagor refuses to surrender possession. — Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action either to effect a judicial foreclosure directly or to secure possession as a preliminary to the sale contemplated in Section 14 of Act No. 1508.

(a) Mortgagee’s right of possession conditioned upon fact of default. — The creditor cannot lawfully take the property by force against the will of the debtor. The reason is that the creditor’s right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of controversy. (b) Sheriff mere agent of mortgagee. — Nor can the public offi cer, such as a sheriff, upon whom the law places the responsibility of conducting the sale, seize the property where the creditor could not, as it is manifest that such offi cer proceeding under the authority or the language of Section 14 becomes the mere agent of the creditor. The conclusion is thus clear that for the recovery of possession, where the right is disputed, the creditor must proceed along the usual channels by action in court. (Bachrach Motors Co. vs. Summers, 42 Phil. 3 [1921]; Bataan Hardwood Corp. vs. Dy Pac & Co., Inc., 43 SCRA 450 [1972].) (c) Sheriff without authority to seize mortgaged property. — It is not required in case of such default and the mortgagor refuses upon demand to surrender possession of the mortgaged chattel, for the mortgagee before he can fi le an action for replevin or for judicial foreclosure, to fi rst ask the sheriff to foreclose the mortgage or take possession of the property. Such a procedure is completely unnecessary not only because the sheriff has no authority in the fi rst instance to seize the mortgaged property but also because it would certainly be an exercise in futility. (Northern Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392 [1973].) (d) Recoverable expenses against mortgagor. — Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon his failure to pay two or more installments, or if he conceals the chattel to place it beyond the reach of the

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mortgagee, it logically follows as a matter of common sense, that the necessary expenses incurred in the prosecution by the mortgagee of the action for replevin so that he can regain possession of the chattel should be borne by the mortgagor. Recoverable expenses would include expenses properly incurred in effecting seizure of the chattel and reasonable attorney’s fees in prosecuting the action for replevin. (Agustin vs. Court of Appeals, 271 SCRA 457 [1997].)

(4) Where right of mortgage conceded/disputed. — Where the right of the plaintiff to the possession of the specifi c property is so conceded or evident, the action need only be maintained against him who so possesses the property. Persons having a special right of property in the goods the recovery of which is sought, such as a chattel mortgagee, may maintain an action for replevin therefor. Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may fi nd them. In effect then, the mortgagee, upon the mortgagor’s default, is constituted an attorney-in-fact of the mortgagor enabling such mortgagee to act for and in behalf of the owner. Accordingly, that the defendant is not privy to the chattel mortgage should be inconsequential. By the fact that the object of replevin is traced to his possession, one can properly be a defendant in an action for replevin. It is here assumed that the plaintiff’s right to possess the thing is not or cannot be disputed. In case the right of possession on the part of the plaintiff, or his authority to claim such possession or that of his principal, is put to great doubt (a contending party might contest the legal basis for plaintiff’s cause of action or an adverse and independent claim of ownership or right of possession is raised by that party), it could become essential to have other persons involved and accordingly impleaded for a complete determination and resolution of the controversy. (BA Finance Corp. vs. Court of Appeals, 258 SCRA 102 [1996].) (5) Where third-party claims title. — Under Section 14, Rule 57 of the Rules of Court, a third party claimant to a property levied upon by a writ of attachment must make an affi davit showing



502

that he has a title thereto or right to the possession thereof. This provision excludes a chattel mortgagee because a chattel mortgage is merely a security for a loan (Art. 2140.) and does not transfer title to the property mortgaged to the chattel mortgagee. (Serra vs. Rodriguez, 56 SCRA 538 [1974].) (6) Where claimant is an unpaid seller. — In a case, the issue presented is whether the Philippine National Bank is liable to pay for unpaid goods and merchandise supplied by Remington Industrial Sales Corporation to Marinduque Mining and Industrial Corporation by way of sales on credit simply because the goods and merchandise were included in the foreclosure of Marinduque’s property mortgaged to the Philippine National Bank. Remington’s claim is for unpaid purchases of construction materials and other merchandise that it supplied to MMIC during the period from July 16, 1982 to October 4, 1983. The claim was only against MMIC. However, on August 31, 1984, PNB foreclosed its chattel and real estate mortgages on the property of MMIC constituted as security for its loans secured from PNB: Held: “The foreclosure was an exercise of a legal right granted to PNB. The contract between Remington and MMIC was one of sale on credit which commenced July 16, 1982 to October 4, 1983. The goods and merchandise, subject of the sale were delivered to the MMIC. Remington was an unpaid seller. When PNB foreclosed the assets of MMIC on August 31, 1984, the goods and merchandise sold by Remington to PNB were in the actual possession and control of MMIC and were included in the foreclosure sale. Remington, however, had relinquished ownership of the merchandise sold to MMIC and the fact the goods were delivered to MMIC transferred ownership over the same to the latter. Thus, MMIC’s possession of the goods and merchandise was in the concept of owner and when the PNB foreclosed the mortgages on MMIC’s property, real and personal, MMIC was the owner of the goods and merchandise sold to it on credit. The failure of MMIC to pay the purchase price of the goods does not ipso facto revert ownership of the goods to the seller unless the sale was fi rst invalidated. PNB’s act of including in its foreclosure the unpaid goods and merchandise sold to MMIC and which PNB acquired at the auction sale did not make

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PNB an obligor to pay for such unpaid goods. Consequently, Remington has no cause of action against PNB for recovery of the value of the goods and merchandise. PNB caused Remington no injury. The obligation to pay remains with MMIC. If there was any damage to Remington resulting from the inclusion of the unpaid goods and merchandise in the foreclosure, it was damnum absque injuria.’’ (Philippine National Bank vs. Court of Appeals, 367 SCRA 198 [2001].)

Foreclosure of chattel mortgage. After payment of the debt or the performance of the condition specifi ed in the Chattel Mortgage (Sec. 3, Act No. 1508.), the mortgagee must discharge the mortgage in the manner provided by law otherwise, he may be held liable for damages by any person entitled to redeem the mortgage. (Sec. 8, Ibid.) (1) Public sale. — If the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor has no right to appropriate to himself the personal property (Arts. 2141, 2088.) because he is permitted only to recover his credit from the proceeds of the sale of the property at public auction through a public offi cer in the manner prescribed in Section 14 of Act No. 1508. (Mahoney vs. Tuason, 39 Phil. 951 [1919]; Esguerra vs. Court of Appeals, 173 SCRA 1 [1989].)

(a) Section 14 allows the mortgagee to have the property mortgaged sold in almost the same manner as that allowed by Act No. 3135 which governs the extrajudicial foreclosure of real estate mortgage. It is necessary that the requirements of the law relative to notice and registration are complied with. (Tumalad vs. Vicencio, 41 SCRA 143 [1971]; Luna vs. Encarnacion, 91 Phil. 531 [1952].) (b) The mere fact that the mortgagee was the sole bidder for the mortgaged property in the public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing evidence. (PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281 [1999].)



504

Note: Supreme Court Administrative Order No. 3 (Oct. 19, 1984) as amended by Administrative Order No. 99-10-05-0, Jan. 15, 2000), makes its provisions uniformly applicable to all extrajudicial foreclosure of both real estate mortgage under Act No. 3135, as amended and chattel mortgage under Act No. 1508, as amended, whether conducted under the direction of the Sheriff or a notary public. (See Procedure in extrajudicial foreclosure sales, VII-Real Mortgage.) (2) Private sale. — There is nothing illegal, immoral, or against public order in an agreement for the private sale of the personal properties covered by the chattel mortgage. (see Art. 1306.) The mortgagor is in estoppel to question it except on the ground of fraud or duress. (Phil. National Bank vs. Manila Investment & Construction, Inc., 38 SCRA 462 [1971].)

Period to foreclose mortgage. (1) Chattel mortgage. — The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public offi cer. (see Sec. 14, Act No. 1508.) The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel with at least ten (10)-days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. (Cabral vs. Evangelista, 28 SCRA 1000 [1969].) (2) Real estate mortgage. — In real estate mortgages, in case of judicial foreclosure, the grace period for the mortgagor to pay the amount due is not less than 90 days nor more than 120 days from the entry of judgment on foreclosure. In default of such payment, the property shall be sold at public auction to satisfy the judgment. (Sec. 2, Rule 68, Rules of Court.)

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Civil action to recover credit. (1) Independent action for enforcement of credit not required. — The mortgagee is not obligated to fi le an independent action for the enforcement of his credit. To require him to do so would be nullifi cation of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgage chattels for the satisfaction of his credit. (Northern Motors, Inc. vs. Coquia, 68 SCRA 374 [1975]; see Art. 2087.) As signatory to a valid and subsisting promissory note secured by a chattel mortgage, the mortgagor is the one primarily and directly liable to the mortgagee for the amount of the loan. It is not a defense that he has transferred the possession or ownership of the mortgaged property (motor vehicle) to the seller (car dealer) thereof. (Friend vs. Development Bank of the Phils., 476 SCRA 453 [2005].) (2) Mortgage lien deemed abandoned by obtaining a personal judgment. — A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. By instituting a civil action to recover the amount of the loan from the mortgagor and by securing a judgment in his favor, the mortgagee abandons his mortgage lien on the mortgaged chattel (Movido vs. Rehabilitation Finance Corp., 105 Phil. 886 [1959].) for he thereby clearly manifests his lack of desire and interest to go after the mortgaged property as security for the principal obligation. (Cerna vs. Court of Appeals, 220 SCRA 517 [1993].)

Ordinary action to recover possession of chattel. In case of refusal of the mortgagor to surrender the possession of the mortgaged chattel sold by the sheriff, the remedy of the purchaser is to bring an ordinary action for recovery of possession, instead of merely asking for a writ of possession, in order to give the mortgagor the opportunity to be heard not only regarding possession but also regarding the obligation covered by the mortgage. (Luna vs. Encarnacion, supra.) The Chattel Mortgage Law does not contain provisions similar to Sections 6 and 7 of Act No. 3135 (see Appendix 2.) governing



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extrajudicial foreclosure of real estate mortgages, which make the provisions of Rule 39 of the Rules of Court on redemption in case of execution sales applicable to an extrajudicial foreclosure of a real estate mortgage. (IFC Service Leasing and Acceptance Corp. vs. Nera, 19 SCRA 181 [1967].)

Action for replevin as a remedy. (1) Nature of remedy. — Replevin, broadly understood, is both a form of principal remedy and of a provisional relief. It may refer either to the action itself, i.e., to regain the possession of personal chattels being wrongfully detained from the plaintiff by another, or to the provisional remedy that would allow the plaintiff to retain the thing during the pendency of the action and hold it pendente lite. The action is primarily possessory in nature and generally determines nothing more than the right of possession. Replevin is so usually described as a mixed action, being partly in rem and partly in personam — in rem insofar as the recovery of specifi c property is concerned, and in personam as regards to damages involved. As an action in rem, the gist of the replevin action is the right of the plaintiff to obtain possession of specifi c personal property by reason of his being the owner or of his having a special interest therein. (B.A. Finance Corp. vs. Court of Appeals, 258 SCRA 102 [1996].) (2) Where right of possession is not disputed. — Where the right of the plaintiff to the possession of the specifi c property is so conceded or evident, the action need only be maintained against him who so possesses the property. There can be no question that persons having a special right of property in the goods the recovery of which is sought, such as a chattel mortgagee, may maintain an action for replevin therefor. Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may fi nd them. In effect then, the mortgagee, upon the mortgagor’s default, is constituted an attorney-in-fact of the mortgagor enabling such

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mortgagee to act for and in behalf of the owner. Accordingly, that the defendant is not privy to the chattel mortgage should be inconsequential. By the fact that the object of replevin is traced to his possession, one properly can be a defendant in an action for replevin. It is here assumed that the plaintiff’s right to possess the thing is not or cannot be disputed. (Ibid.) (3) Where right of possession disputed. — In case the right of possession on the part of the plaintiff, or his authority to claim such possession or that of his principal, is put to great doubt (a contending party might contest the legal basis for plaintiff’s cause of action or an adverse and independent claim of ownership or right of possession is raised by that party), it could become essential to have other persons involved and accordingly impleaded for a complete determination and resolution of the controversy. (Ibid.) Since the mortgagee’s right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor’s default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property. The burden to establish a valid justifi cation for such action lies with the plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin. (Servicewide Specialists, Inc. vs. Court of Appeals, 318 SCRA 493 [1999].) (4) Matters to be established. — A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the possession of the property unless and until the mortgagor defaults and the mortgagee thereupon seeks to foreclose thereon. Since the mortgagee’s right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be



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required in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor’s default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property. The burden to establish a valid justifi cation for that action lies with the plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin. (Ibid.)

Right of mortgagee to recover defi ciency. (1) Where mortgage foreclosed. — The creditor may maintain an action for the defi ciency although the Chattel Mortgage Law is silent on this point. (see Ablaza vs. Ignacio, [Unrep.] 103 Phil. 1151 [1958]; Garrido vs. Tuason, 24 SCRA 727 [1968]; Phil. National Bank vs. Manila Investment & Construction, Inc., supra; Bank of the Phil. Islands vs. Olutanga Lumber Co., 47 Phil. 20 [1924].) The reason is that a chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. (Bicol Savings & Loan Assn. vs. Guinhawa, 188 SCRA 642 [1990].) Both the Chattel Mortgage Law and Act No. 3135 governing extrajudicial foreclosure of real estate mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from recovering defi ciency of the principal obligation. (Superlines Transportation Company, Inc. vs. ICC Leasing & Financing Corporation, 398 SCRA 508 [2003].) In our jurisdiction, when the law intends to foreclose the right of a creditor to sue for any defi ciency resulting from a foreclosure of a security given to guarantee an obligation, it so expressly provides such as with respect to sale of thing pledged (see Art. 2115.) and foreclosure of chattel mortgage on personal property sold on installment basis. (see Art. 1484[3], note 6.) The action may be brought within ten (10) years from the time the cause of action accrues, even if it is not upon a written

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contract because the obligation of the mortgagor to pay the defi ciency is one created by law (see Art. 1144[1, 2], Civil Code.), and furthermore, the action is in the nature of a mortgage action (see Art. 1142, Ibid.) because its purpose is precisely to enforce the mortgage contract. (Development Bank of the Phils. vs. Tomeldan, 101 SCRA [1980].) (2) Where mortgage constituted as security for purchase of per-sonal property payable in installments. — If the chattel mortgage is constituted, whether by the debtor-vendee or a third person, as security for the purchase of personal property payable in install-ments, no defi ciency judgment can be asked and any agreement to the contrary shall be void. (Art. 1484.6) Once the vendor of personal property sold on installment has foreclosed the chattel mortgage on the thing sold, he is precluded from proceeding against the security put up by a third person for if the latter should be compelled to pay the balance of the purchase price, he will, in turn, be entitled to recover what he has paid from the debtor-vendee (see Art. 2066.); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him, thereby indirectly subverting the protection given by Article 1484. (Pascual vs. Universal Motors, Inc., 61 SCRA 121 [1974].) The remedies granted by Article 1484 are alternative, not cumulative, and exclusive, that is, the exercise of one would bar the exercise of the others. (see Borbon II vs. Servicewide Specialists, Inc., 258 SCRA 634 [1996].)

6Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfi llment of the obligation, should the vendee fail to pay;(2) Cancel the sale, should the vendee’s failure to pay cover two or more install-

ments;(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,

should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

Article 1484 is specifi cally applicable to a sale of personal property the price of which is payable in installments. Paragraph (3) of Article 1484 expressly bars any further action against the purchaser to recover any unpaid balance where the vendor opts to foreclose the chattel mortgage on the thing sold.



510

(3) Where mortgaged property subsequently attached and sold. — The chattel mortgagee is entitled to defi ciency judgment in an action for specifi c performance (Art. 1484[1].) where the mortgaged property is subsequently attached and sold. The execution sale in such case is not a foreclosure sale. (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152 [1977]; Palma vs. Court of Appeals, 232 SCRA 714 [1994].)

Application of proceeds of sale. The proceeds of the sale are to be applied to the payment of the following: (1) Costs and expenses of keeping and sale; (2) Payment of the obligation secured by the mortgage; (3) Claims of persons holding subsequent mortgages in their order; and (4) The balance, if any, shall be paid to the mortgagor, or person holding under him. (Sec. 14, Act No. 1508.) In pledge, the sale of the thing pledged extinguishes the entire principal obligation such that the pledgor may no longer recover the proceeds of the sale in excess of the amount of the principal obligation. Section 14 of the Chattel Mortgage Law, on the other hand, expressly entitles the mortgagor to the balance of the proceeds upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds, there is a corollary obligation on the part of the debtor-mortgagor to pay the defi ciency in case of a reduction in the price at public auction. (PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281 [1999].)

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Art. 2141

511

XCONCURRENCE AND

PREFERENCE OF CREDITS*(Arts. 2236-2251.)

Features of Title XIX of the Civil Code. According to the Code Commission, “the Title on ‘Concur-rence and Preference of Credits’ is characterized by four features: (1) The liens and mortgages with respect to specifi c movable and immovable property have been increased; (2) The proposed Civil Code1 and the Insolvency Law have been brought into harmony; (3) Preferred claims as to the free property of the insolvent have also been augmented; and (4) The order of preference, laid down in Articles 19262 and 19273 of the present Civil Code,4 among claims with respect to specifi c personal and real property has been abolished, except that taxes must fi rst be satisfi ed.” (Report of the Code Commission, pp. 163-164.)

Scope of Title XIX. Title XIX applies to other creditor-debtor relationships.

1New Civil Code.2Now, Articles 2246-2247.3Now, Articles 2248-2249.4Old Civil Code.

*Title XIX, Book IV, Civil Code.

511


512

Nothing in the Civil Code indicates that its provisions on concurrence and preference of credits are applicable only to the insolvent debtor. If those provisions are intended only to insolvency cases, then other creditor-debtor relationships where there are concurrence and preference of credits, would be left without governing rules, a view that would render purposeless the laws on insolvency. (Barretto vs. Villanueva, 1 SCRA 288 [1961].) The provisions are applicable to liquidation proceedings. (Cordova vs. Reyes, etc., Law Offi ces, 526 SCRA 300 [2007].)

Meaning of concurrence of credits. Concurrence of credits implies the possession by two or more creditors of equal rights or privileges over the same property or all of the property of a debtor.

Meaning of preference of credit. Preference of credit is the right held by a creditor to be preferred in the payment of his claim above others (i.e., to be paid fi rst) out of the debtor’s assets.5

Nature and effect of preference. (1) A preference is an exception to the general rule. For this reason, the law as to preferences is strictly construed. (Roman vs. Herridge, 47 Phil. 98 [1924].) (2) Preference does not create an interest in property. It creates simply a right of one creditor to be paid fi rst the proceeds of the sale of property as against another creditor. It creates no lien on

5Consummation of electronic transactions with banks. — Electronic transactions made through networking among banks, or linkages thereof with other entities or network and vice versa shall be deemed consummated upon the actual dispensing of cash or the debit of one account and the corresponding credit to another, whether such transaction is initi-ated by the depositor or by an authorized collecting party. The obligation of one bank, entity, or person similarly to another arising therefrom shall be considered absolute and shall not be subjected to the process of preference of credit. (Sec. 16, R.A. No. 8792, the Electronic Commerce Act of 2000.) The foregoing shall apply only to transactions utiliz-ing the automated teller machine switching network. (No. 16, Implementing Rules and Regulations of the Act.)

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property, and, therefore, gives no interest in property, specifi c or general, to the preferred creditor but a preference in application of the proceeds after the sale. (Molina vs. Somes, 31 Phil. 76 [1915].) (3) The law does not give the creditor who has a preference, a right to take the property or sell it as against another creditor. It is not a question of who takes or sells; it is one of the application of the proceeds after the sale — of payment of the debt. (Ibid.) (4) The right of preference is one which can be made effective only by being asserted and maintained. If the right claimed is not asserted and maintained, it is lost. Unless the property has actually been seized by one creditor and a right of preference in application of the proceeds of the sale thereof has been asserted by another, an action to obtain a declaration of preference will not lie. If the property has not been seized, it is open to seizure by another. (Ibid.) (5) Where a creditor released his levy, leaving the property in possession of the debtor, thereby indicating that he did not intend to press his claim further as to that specifi c property, after that act, his claim to preference, if one had been asserted by him, could not exist because he had ceased to contest. He did not maintain. He, in effect, abandoned, at least at that moment, any claim of preference. (Ibid.)

When rules on preference of credits applicable. The rules on preference of credits apply only where two or more creditors have separate and distinct claims against the same debtor who has an insuffi cient property. Indeed, it is a matter of necessity and logic that the question of preference should arise only when the debtor’s assets are insuffi cient to pay his debts in full. For, if debtor A is able to pay all his three creditors B, C, and D, no need shall arise in determining which of the three creditors shall be paid fi rst or whether they shall be paid out of the proceeds of a specifi c property. (Pacifi c Farms, Inc. vs. Esguerra, 30 SCRA 684 [1969].) Indubitably, the preferential right of credit attains signifi cance only after the properties of the debtor have been inventoried

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514

and liquidated, and the claims held by his various creditors have been established. (Barretto vs. Villanueva, 6 SCRA 928 [1962]; Philippine Savings Bank vs. Lantin, 124 SCRA 476 [1983]; Development Bank of the Phils. vs. National Labor Relations Commission, 183 SCRA 328 [1990].)

Preference of credit and lien distinguished. A distinction should be made between a preference of credit and lien. A preference applies only to claims which do not attach to specifi c properties. A lien creates a charge on a particular property. Thus, the right of fi rst preference as regards unpaid wages recognized by Article 110 of the Labor Code (see Arts. 2237, 2244.) does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the fi nal distribution of the proceeds of the insolvent’s assets. It is a right to a fi rst preference in the discharge of the funds of the judgment debtor. (Development Bank of the Phils. vs. National Labor Relations Commission, supra; and 236 SCRA 117 [1994]; see however, Philippine National Bank vs. Cruz, 180 SCRA 206 [1989], infra.; Barayoga vs. Asset Privatization Trust, 473 SCRA 690 [2005].)

Credits must be due. The Title on “Concurrence and Preference of Credits” refers to credits which are already due. That is why it opens with the mention of the “fulfi llment of his obligations” in Article 2236 which does not take place except when the obligations are already demandable. (see Jacinto vs. De Leon, 51 Phil. 992 [1928].)

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515

Chapter 1GENERAL PROVISIONS

ART. 2236. The debtor is liable with all his property, present and future, for the fulfi llment of his obligations, subject to the exemptions provided by law. (1911a)

Liability of debtor’s property for his obligations. The creditors have the right to pursue the property in possession of the debtor to satisfy their claims. They are given the right to exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; and impugn the acts which the debtor may have done to defraud them. (Art. 1177.) As a rule, a debtor is liable with all his property, present and future, for the fulfi llment of his obligations. To this rule, the law provides for property which are exempt from such fulfi llment.

Exempt property. (1) Present property. — With respect to present property of the debtor, exemptions are established in the following provisions:

“Art. 152. The family home, constituted jointly by the husband and the wife or by an unmarried head of a family, is the dwelling house where they and their family reside, and the land on which it is situated. (Family Code [Exec. Order No. 209, as amended].) Art. 153. The family home is deemed constituted on a house and lot from the time it is occupied as a family

515


516 Art. 2236

residence. From the time of its constitution and so long as any of its benefi ciaries actually resides therein, the family home continues to be such and is exempt from execution, forced sale or attachment except as hereinafter provided and to the extent allowed by law. (Ibid.) Art. 154. The benefi ciaries of a family home are: (1) The husband and wife, or an unmarried person who is the head of a family; and (2) Their parents, ascendants, descendants, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. (Ibid.) Art. 155. The family home shall be exempt from execution, forced sale or attachment, except: (1) For non-payment of taxes; (2) For debts incurred prior to the constitution of the family home; (3) For debts secured by mortgages on the premises before or after such constitution; and (4) For debts due to laborers, mechanics, architects, builders, materialmen and others who have rendered service or furnished material for the construction of the building. (Ibid.) Art. 205. The right to receive support under this Title [VIII] as well as any money or property obtained as such support shall not be levied upon on attachment or execution.” (Ibid.) “Sec. 13. Property exempt from execution. — Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution. (a) The judgment obligor’s family home as provided by law or the homestead in which he resides, and land necessarily used in connection therewith; (b) Ordinary tools and implements personally used by him in his trade, employment, or livelihood;

517

(c) Three horses, or three cows, or three carabaos, or other beasts of burden, such as the judgment obligor may select, necessarily used by him in his ordinary occupation; (d) His necessary clothing, and articles for ordinary per-sonal use, excluding jewelry; (e) Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment debtor may select, of a value not exceeding one hundred thousand pesos; (f) Provisions for individual or family use suffi cient for four months; (g) The professional libraries of judges, lawyers, physi-cians, pharmacists, dentists, engineers, surveyors, clergy-men, teachers, and other professionals, not exceeding three hundred thousand pesos in value; (h) One fi shing boat and accessories, not exceeding the total value of one hundred thousand pesos, owned by a fi sherman and by the lawful use of which he earns his livelihood; (i) So much of the salaries, wages, or earnings of the judgment debtor for his personal services within the four months preceding the levy as are necessary for the support of his family; (j) Lettered gravestones; (k) Moneys, benefi ts, privileges, or annuities accruing or in any manner growing out of any life insurance; (l) The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the government; (m) Properties especially exempted by law. But no article or species of property mentioned in this section shall be exempt from execution issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon.” (Rule 39, Rules of Court.)

Art. 2236 CONCURRENCE AND PREFERENCE OF CREDITSGeneral Provisions


518 Art. 2237

“Sec. 118. Exception in favor of the Government or any of its branches, units, or institutions, land acquired under free patent or homestead provisions shall not . . . become liable to the satisfaction of any debt contracted prior to the expiration of said period [a term of fi ve years from and after the date of the issuance of the patent or grant] . . .” (The Public Land Act [C.A. No. 141, as amended].)

(2) Future property. — With respect to his future property, a debtor who obtains a discharge from his debts on account of his insolvency, is not liable for the unsatisfi ed claims of his creditors with said property subject to certain exceptions expressly provided by law. (Secs. 68, 69, The Insolvency Law [Act No. 1956], infra.) (3) Property in custodia legis and of public dominion. — Property under legal custody (Springer vs. Odlin, 3 Phil. 344 [1903].) and those owned by municipal corporations necessary for govern-mental purposes (Viuda de Tan Toco vs. Municipal Council of Iloilo, 49 Phil. 52 [1926].) have been held exempt from attach-ment or execution.

ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n)

Insolvency governed by special laws. By virtue of the above provisions, the Civil Code prevails in case of confl ict with special laws on insolvency unless otherwise provided in the latter. The Insolvency Law is Act No. 1956, as amended. (infra.) Under the Labor Code (Art. 110, Pres. Decree No. 442, as amended by R.A. No. 6715.), “in the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy fi rst preference as regards unpaid wages and other monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and other monetary claims, shall be paid in full before claims of the government and other creditors may be paid.” The amendment expands the workers’ preference to cover

519

not only unpaid wages but also other monetary claims to which even the claims of the Government must be deemed subordinate. (Development Bank of the Phils. vs. National Labor Relations Commission, 183 SCRA 328 [1990] and 242 SCRA 59 [1995]; see Art. 2244.) Insolvency proceedings, as well as liquidation proceedings have only one aim — to conserve all the remaining assets of the insolvent/liquidated person/corporation for distribution to the creditors, after payment of taxes.

ART. 2238. So long as the conjugal partnership or abso-lute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor’s obligations, except insofar as the latter have redounded to the benefi t of the family. If it is the husband who is insolvent, the adminis-tration of the conjugal partnership or absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n)

Exemption of conjugal partnership or absolute community property. The assets of the conjugal partnership or the absolute community do not pass to the assignee in insolvency elected by the creditors or appointed by the court as they do not belong to the individual spouses, but a distinct entity: the partnership or the community. The exemption applies provided that: (1) the partnership or community subsists; and (2) the obligations of the insolvent spouse have not redound-ed to the benefi t of the family. The insolvency of the husband does not have the effect of dissolving the conjugal partnership or the absolute community. (Art. 2238, 2nd sentence.)

ART. 2239. If there is property, other than that men-tioned in the preceding article, owned by two or more per-sons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be

Arts. 2238-2239 CONCURRENCE AND PREFERENCE OF CREDITSGeneral Provisions


520

taken possession of by the assignee for the payment of the insolvent debtor’s obligation. (n)

Rule involving undivided share or interest of a co-owner. If there is a co-ownership (see Arts. 484, 493.) and one of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets. The share of the other co-owners cannot, of course, be taken possession of by the assignee.

ART. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n)

Rule involving property held in trust. The trustee is not, strictly speaking, the owner of the trust property although he has the legal title thereto. Hence, property held in trust by the insolvent debtor should be excluded from the insolvency proceedings.

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521

Chapter 2CLASSIFICATION OF CREDITS

ART. 2241. With reference to specifi c movable property of the debtor, the following claims or liens shall be pre-ferred: (1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public offi cials committed in the performance of their duties, on the movables, money or securities obtained by them; (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repairs, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed;

521


522 Art. 2241

(6) Claims for laborers’ wages, on the goods manufac-tured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, aris-ing from the contract of tenancy on shares,1 on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travellers by hotel-keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits har-vested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instru-ments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a)

General categories of credit. The Civil Code classifi es credits against a particular insolvent into three (3) general categories: (1) special preferred credits listed in Articles 2241 and 2242 (see Art. 2243.);

1Share tenancy has been abolished and converted to agricultural leasehold. (Sec. 4, R.A. No. 3844, as amended.)

523

(2) ordinary preferred credits listed in Article 2244; and (3) common credits under Article 2245. (Republic vs. Peralta, 150 SCRA 37 [1987].)

Preferred credits with respect to specifi c movable property. The number of claims or liens with respect to specifi c mov-able property “has been increased from seven to thirteen. The new liens are either required by public policy (Nos. 1, 2, and 13.) or by social justice. (Nos. 6, 7, and 8.)” (Report of the Code Com-mission, p. 164.) Articles 2241 and 2242 do not give the order of preference or priority of payment. They merely enumerate the credits which enjoy preference with respect to specifi c movables or immov-ables. With respect to the same specifi c movable or immovable, creditors, with the exception of the State (No. 1), merely concur. There is no preference among them; there is only concurrence. (see Arts. 2246-2247.) The credit of a mortgagee of a motor vehicle cannot be considered preferred until it has been recorded in the Land Transportation Offi ce. (Uy vs. Zamora, 13 SCRA 508 [1965].)

Wrongful taking of movables to which lien attaches. The last paragraph of Article 2241 applies only when the right of ownership in such property continues in the debtor, and, therefore, it is not applicable to cases where the debtor has parted with his ownership therein, as where he has sold the property. (see Peña vs. Mitchell, 9 Phil. 587 [1908].) The lessor of property under a contract which stipulates that the permanent improvements made by the lessee on the leased premises shall belong to the lessor, has a better right to such improvements than the manufacturer thereof who sold the same on credit to the lessee and has not been paid, where said improvements were delivered and installed in the leased premises, because ownership thereof was transferred to the lessee

Art. 2241 CONCURRENCE AND PREFERENCE OF CREDITSClassifi cation of Credits


524 Art. 2242

upon delivery and to the lessor, upon installation. Payment of the purchase price is not essential to the transfer of ownership as long as the thing sold has been delivered. (Sampaguita Pictures, Inc. vs. Jalwindor Manufacturing, Inc., 93 SCRA 420 [1979].)

ART. 2242. With reference to specifi c immovable prop-erty and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall consti-tute as encumbrance on the immovable or real right: (1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contrac-tors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the con-struction, reconstruction, or repair of buildings, canals, and other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Prop-erty, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved; (7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits; (8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided; (9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated; (10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a)

525

Preferred credits with respect to specifi c immovable property. “With respect to real property, the encumbrances have been increased from fi ve to ten. The new ones are Nos. 2, 3, 6, 8, and 9, all of which are demanded by consideration of justice.” (Report of the Code Commission, p. 164.) Article 2242, like Article 2241, merely enumerates the pre-ferred claims on specifi c immovables. The enumeration is not an order of preference. (see Arts. 2248-2249; Carried Lumber Co. vs. ACCFA, 63 SCRA 411 [1975].) Again, with the sole exception of the State, the creditors with respect to the same specifi c immov-able merely concur. (see Arts. 2248-2249.)

Unpaid price of real property sold. Article 2242 makes no distinction between registered and unregistered vendor’s lien. (No. 2.) Hence, any lien of that kind enjoys the preferred credit status. Unlike, however, the unpaid price of real property sold, mortgage credits (No. 5.), in order to be given preference, should be recorded in the Registry of Property. But a recorded mortgage credit is superior to an unrecorded unpaid vendor’s lien. (De Barretto vs. Villanueva, 1 SCRA 288 [1961].)

ILLUSTRATIVE CASE: Seller sold her option to acquire property from owner, and buyer, after obtaining title, mortgaged the property to another and then failed to pay the purchase price. Facts: S mortgaged her property (land, buildings, and improvements) to RFC (now Development Bank of the Philippines) to secure a loan. As S failed to pay some of the installments, RFC foreclosed the mortgage and acquired the property. A new certifi cate of title was issued in the name of RFC in 1950. Subsequently, RFC sold back the property to S, payable in installments, subject to the condition (among others) that the title to the property shall remain in RFC until after the obligation of S shall have been fully paid. S defaulted, for which reason RFC rescinded the sale, and forfeited the payments made, in accordance with the terms of



526 Art. 2242

the contract. Two years later, S sold his “rights, title and interest” over the property to B, the latter undertaking to assume the obligation of S to RFC which executed a deed of absolute sale in favor of B. After obtaining a new transfer certifi cate of title, B mortgaged the property to X. B failed to pay S the unpaid balance of the purchase price. B also defaulted on the mortgage loan in favor of X. Issue: Is S an unpaid vendor of the property in question as to be entitled to preference under Article 2242? Held: No. It is clear from the facts above-stated that ownership of the property had passed to RFC since 1950. The subsequent resale to S did not revest ownership in her since she failed to comply with its terms. S merely assigned to B whatever rights or claims she might still have to the property the ownership thereof rested with RFC. In law, the operative sale was that from RFC to B and it was RFC that should be regarded as the true vendor of the property. At the most, S transferred to B an option to acquire the property but not the property itself, and S’s credit, therefore, cannot legally constitute a vendor’s lien on the corpus of the property that should stand on equal footing with the mortgage credit held by X. (De Barretto vs. Villanueva, supra.)

Recorded mortgage credits. (1) A special preferred credit. — A mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfi llment of the obligation for whose security it was constituted. (Art. 2176.) It creates a real right which is enforceable against the whole world. It is a lien on an identifi ed immovable property, which a preference is not. A recorded mortgage credit is a special preferred credit under Article 2242(5). The preference given to workers by Article 110 of the Labor Code (supra.) when not falling within Article 2241(6) and Article 2242(3) and not attached to any specifi c property, is an ordinary preferred credit although its impact is to move it from second priority to fi rst priority in the order of preference established by Article 2244. (Development Bank of the Phils. vs. National

527

Labor Relations Commission, 183 SCRA 328 [1990]; see however, Philippine National Bank vs. Cruz, 180 SCRA 206 [1989].)2

(2) Effect of registration under Act No. 3344. — Section 194 of the Revised Administrative Code, as amended by Act No. 2837 and later by Act No. 33 (see Appendix 7-B.), governs the recording of instruments or deeds relating to real estate not registered under the Land Registration Act. (Act No. 496, as amended.) It continues to remain in force as provided by the Property Registration Decree (Sec. 3, Pres. Decree No. 1529.) which superseded the Land Registration Act. Between an unrecorded sale (or pacto de retro sale) of a house (or land) of a prior date and a recorded mortgage of the same property of a later date, the former is preferred to the latter for the reason that, if the original owner had parted with his ownership of the thing sold, then he no longer had the ownership and free disposal of the thing so as to be able to mortgage it. Registration of a mortgage under Act No. 3344 is without prejudice to the better right of third parties — nor would it avail the mortgagee any to assert that he is in actual possession of the property, for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the vendee.3 (Lanuza vs. De Leon, 20 SCRA 369 [1967].) (3) Priority of registration of mortgages. — While a pacto de retro sale of a house which is in reality an equitable mortgage4 is valid as between the parties, it cannot prevail over a subsequent recorded mortgage over the same property. Preference of mortgage credits is determined by the priority of registration of the mortgages, following the maxim “Prior tempore potior jure.” (He who is fi rst in time is preferred in right.) Under Article 2125,

2This case cited A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commis-sion (150 SCRA 498 [1987]), where the Supreme Court explicitly stated that “the worker’s preference applies even if the employee’s properties are encumbered by means of a mort-gage contract.’’

3Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept.

4Under Article 1602; see note 2 under Article 2124.



528 Art. 2243

the prior unrecorded mortgage cannot prevail over registered mortgage of a later date. (Ibid.)

Credits annotated in virtue of judicial order. The priority rule applies to credits annotated in the Registry of Property. As to credits mentioned in No. 7 of Article 2242, there is preference among the attachments or executions according to the order of the time they were levied upon the property. The pro rata rule in Article 2249 does not apply; otherwise, the result would be absurd. The preference of a credit annotated by an attachment or execution could be defeated by simply obtaining a writ of attachment or execution, no matter how much later. (Manabat vs. Laguna Federation of Facomas, Inc., 19 SCRA 621 [1967].)

Refectionary credit. Refectionary credit is primarily an indebtedness incurred in the repair or reconstruction of something previously made, such repair or construction being made necessary by the deterioration or destruction of the thing as it formerly existed. (see Nos. 3, 4, and 6.) The term does not ordinarily include an entirely new work, although Spanish jurisprudence appears to have sanctioned this broader concept in certain cases. (Director of Public Work vs. Sing Juco, 53 Phil. 205 [1929].) This liberal interpretation of refectionary credit to include new construction has been adopted by the Supreme Court as it “is in consonance with principles of justice and fairness for there seems to be no valid reason why one furnishing materials for purposes of repair or reconstruction should be given preference while another furnishing materials on new construction is not given the same consideration.” (Luzon Lumber & Hardware Co., Inc. vs. Quiambao and RFC, 94 Phil. 603 [1954].)

ART. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the

529

purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall fi rst be satisfi ed. (n)

Nature of claims or credits in Articles 2241 and 2242. As provided in Article 2243, they shall be considered as mortgages or pledges of real or personal property. Hence, the provisions on pledge and mortgage are also applicable. In case of the insolvency of the debtor, such claims or credits shall be considered as liens within the purview of legal provisions governing insolvency. Hence, they are not included in the insolvent debtor’s assets. According to the Code Commission, “the question as to whether the Civil Code and the Insolvency Law can be harmo-nized is settled by this article. The preference named in Articles 2241 and 2242 are to be enforced in accordance with the Insolven-cy Law. Taxes on the specifi c property will be paid fi rst.” (Report of the Code Commission, p. 164.) Articles 2241 and 2242 only fi nd application when there is a concurrence of credits, i.e., when the same specifi c property of the debtor is subjected to the claims of several creditors and the value of such property is insuffi cient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings. (J.L. Bernardo Construction vs. Court of Appeals, 324 SCRA 24 [2000].) A preferred creditor’s third-party claim to the proceeds of a foreclosure sale by the mortgagee is not the proceeding contemplated by law for the enforcement of preferences under Articles 2241 and 2242 unless the claimant is enforcing a credit for taxes that enjoy absolute priority. Thus, in a case, where an unpaid seller of construction materials and other merchandise sought to



530 Art. 2243

claim its pro rata share from the mortgagee in the extrajudicial foreclosure sale instituted by the mortgagee of the mortgaged real property of the mortgagor, the buyer of the materials, it was held the extrajudicial foreclosure is not the liquidation proceeding contemplated in Article 2243. (Development Bank of the Phils. vs. Court of Appeals, 363 SCRA 307 [2001].)

ILLUSTRATIVE CASE: Petitioner SIHI asked to be declared to have highest preference, as mortgagee of respondent PBM, over specifi c real property subject of the mortgage despite the pendency of rehabilitation/receivership proceedings pending before the Securities and Exchange Commission (SEC). Facts: Petitioner fi led with the SEC in the pending action for settlement of claims of the various creditors of respondent PBM, a “Motion to Declare and Confi rm the Highest Preference of Movant’s First Mortgage Lien.’’ The SEC hearing offi cer denied said motion. Petitioner appealed this denial to the SEC en banc, which dismissed the appeal. Then, on appeal before respondent court, the Court of Appeals affi rmed the SEC decision. Finally, fi nding no reversible error committed by respondent Court of Appeals, the Supreme Court denied due course to the instant petition. Now, the present motion for reconsideration. Issue: Is SIHI entitled to be declared to have highest preference over the property subject of the mortgage? Held: “Under the factual circumstances obtaining in the instant case, as well as the applicable provisions of the law, the Court is duty bound to resolve this issue in the negative. (1) Petitioner’s motion premature. — “In any rehabilitation/receivership proceedings where claims of several creditors shall have to be resolved, the provisions of Title XIX of the Civil Code — “Concurrence and Preference of Credits’’ apply. In the present case where a mortgaged piece of realty is involved, the following relevant articles [Arts. 2242 and 2243.] govern, to wit: x x x. It may easily be seen that petitioner’s motion to declare and confi rm the highest preference of its fi rst mortgage lien is at the very least premature. There may or may not exist claims enumerated in the above-cited Article 2242 which, by virtue of

531

Article 2243, shall be considered as mortgagees of the specifi c property involved. At best this issue should be resolved in the light of the rehabilitation plan approved by the SEC on January 3, 1990 which includes the schedule of payment. Verily, this rehabilitation plan is not included among the matters submitted for review in the present petition. On this score alone, without having to refer to any of the above-cited decisions yet, the instant petition may already be dismissed. We shall reserve our ruling on whether or not petitioner may be adjudged to be a preferred creditor at the proper opportunity when the entire judgment of the SEC shall be before us for review.’’ (2) The RCBC Case. — “Petitioner cannot compel us to blindly adhere to the case of Philippine Commercial International Bank vs. Court of Appeals (172 SCRA 436 [1989]), which relied upon the case of Chartered Bank vs. Imperial and National Bank. (48 Phil. 931 [1928]) It is signifi cant to note that Chartered Bank was decided before the passage of Republic Act No. 386, the Civil Code of the Philippines (which took effect on August 30, 1950), when the above cited Articles 2242 and 2243 or any similar provisions were not yet operative. However, if only to appease petitioner on its insistence that the instant case should be consolidated with the RCBC as these two cases involve similar facts and issues, we rule to deny such prayer fi rst, because the decision in RCBC had long been rendered, and second, the factual premises in RCBC are not on all fours with the instant case. It is worthy to stress that RCBC was precipitated by the Rizal provincial sheriff’s refusal to execute a certifi cate of sale of the property sold on public auction before any writ of execution against the conduct of such public auction had been issued. The regional trial court before which the action for mandamus was fi led by RCBC granted the petition, thereby ordering respondent provincial sheriff to execute and deliver to petitioner the Certifi cate of Auction Sale of January 29, 1985, involving the property sold therein. (RCBC vs. IAC, 213 SCRA 830, 833-834.) Aggrieved thereby, BF Homes fi led an original complaint with then Intermediate Appellate Court (IAC) for the annulment of this judgment of the regional trial court. This action for annulment before the IAC prospered and the Register of Deeds



532 Art. 2244

of Pasay City was accordingly ordered to suspend the issuance to the mortgagee-purchaser RCBC of the owner’s copies of the new land titles until the matter shall have been resolved by the Securities and Exchange Commission in the rehabilitation case before it. It was this judgment of the IAC which was the subject of the aforecited RCBC Case. The issues involved in the RCBC Case are, therefore, essentially different from the issues in the instant case. There, the question of retroactive application of the writ of injunction to the foreclosure proceedings was involved. Also, the propriety of the IAC’s disposition of the original action for annulment of judgment which is the proper subject of the petition in the RCBC Case necessarily involves issues concerning the requisite elements of a void judgment, such as lack of jurisdiction and/or fraud, accident, mistake or excusable negligence.’’ (3) The case at bar. — “In the present petition, the fore-closure sale of the mortgaged property was declared by this Court in G.R. No. 87053 to be totally null and void, and pe-titioner SIHI’s claim was accordingly referred to the SEC for determination of the preferences or priorities under the law in the settlement of claims of fi rms under receivership or liqui-dation. Hence, unlike in RCBC, in the present case there are no longer any previous foreclosure proceedings to speak of. Also, in the present petition, the factual considerations in the issuance of the pertinent rehabilitation plan where SIHI’s claim had been reportedly included in the schedule of payment fi nds relevance. This was not true in the RCBC Case. As seen in the foregoing disquisition, the resolution of the motion for reconsideration in the RCBC Case is not a crucial matter in the present case.’’ (State Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997].)

ART. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by em-ployees, laborers, or household helpers for one year pre-

533

ceding the commencement of the proceedings in insolven-cy; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own; (4) Compensation due the laborers or their depen-dents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the na-ture of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnifi cation arising from a crim-inal offense; (8) Legal expenses, and expenses incurred in the ad-ministration of the insolvent’s estate for the common in-terest of the creditors, when properly authorized and ap-proved by the court;5

(9) Taxes and assessments due the national govern-ment, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or munici-pality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1; (12) Damages for death or personal injuries caused by a quasi-delict; (13) Gifts due to public and private institutions of charity or benefi cence;

5Art. 1059. If the assets of the estate of a decedent which can be applied to the pay-ment of debts are not suffi cient for that purpose, the provisions of Articles 2239 to 2251 on Preference of Credits shall be observed, provided that the expenses referred to in Article 2244, No. 8, shall be those involved in the administration of the decedent’s estate.



534 Art. 2244

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in the fi nal judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)

Order of preference with respect to other properties of the debtor. Article 2244 not only enumerates the preferred credits with respect to other property, real and personal, of the debtor, but also gives their order of preference “in the order named.” Note that in this article, taxes and assessments are mentioned only as Nos. 9, 10, and 11. If the property is specifi c, duties and taxes (not fees) on said property are placed as No. 1 in the order of preference. Commenting on this article, the Code Commission says: “The Insolvency Law in Section 50 enumerates seven preferred claims, in the order named, as to the free property of the insolvent. It is proposed that these preferred claims be increased to fourteen. (Art. 2244.) The added ones are Nos. 3, 5, 6, 7, 12, 13, and 14. It is but right that these credits which are of special importance, should receive priority with regard to the free assets.” (Report of the Code Commission, p. 164.) In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority. (Republic vs. Peralta, 150 SCRA 37 [1987]; see Development Bank of the Philippines vs. National Labor Relations Commission, 222 SCRA 264 [1993], and 236 SCRA 117 [1994].)

Order of priority only with respect to insolvent’s “free property.” (1) Specially preferred credits. — Credits which are specially preferred because they constitute liens (tax or non-tax) take

535

precedence over ordinary preferred credits so far as concerns the property to which the liens have attached.

(a) Specifi c property involved of greater value. — If the value of the specifi c property involved is greater than the sum total of tax liens and other specially preferred credits, the residual value will form part of the “free property” of the insolvent, i.e., property not impressed with liens by operation of Articles 2241 and 2242. (b) Specifi c property involved of lesser value. — If, on the other hand, the value of the specifi c property is less than the aggregate of the tax liens and other specially preferred credits, the unsatisfi ed balance of the tax liens and other such credits are to be treated as ordinary preferred credits under Article 2244 and to be paid in the order of preference therein provided.

(2) Ordinary preferred credits. — Only in respect of the in-solvent’s “free property” is an order of priority established by Article 2244. In this sequence, certain taxes and assessments also fi gure but, as already pointed out, these do not have the same kind of overriding preference that Articles 2241, No. 1 and 2242, No. 1, create for taxes which constitute liens on the taxpayer’s property. (Ibid.) Taxes and assessments due the national govern-ment other than those in Articles 2241, No. 1 and 2242, No. 1, come only in ninth place in the order of preference under Article 2244.

Preference of claims for unpaid wages and other monetary claims. Article 110 of the Labor Code (supra.) under Art. 2237 does not purport to create a lien in favor of workers or employees for unpaid wages and other monetary claims either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not, therefore, fall at all within the category of specially preferred claims established under Articles 2241 and 2242 except to the extent that such claims for unpaid wages are already covered by Article 2241, No. 6 and Article 2242, No. 3 (Republic vs. Peralta, 150 SCRA 37 [1987];



536 Art. 2244

Commissioner of Internal Revenue vs. National Labor Relations Commission, 238 SCRA 42 [1994].) (1) Category of ordinary preferred credits. — Article 110 of the Labor Code did not upgrade the workers’ claim as absolutely preferred credit; it did not alter Articles 2241 and 2242 of the Civil Code so much so that creditors with liens over a certain property are still given special preferences over the proceeds of that property. (Banco Filipino vs. National Labor Relations Commission, 188 SCRA 700 [1990].) To the extent that claims for unpaid wages fall outside the scope of said provisions, they would come within the ambit of the category of ordinary preferred credits under Article 2244.6 The use of the phrase “fi rst preference” in Article 110 of the Labor Code indicates that what it intends to modify is the order of preference found in Article 2244, which relates to property of the insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242.7 Article 110 of the Labor Code has modifi ed Article 2244 of the Civil Code in two respects:

(a) fi rstly, by removing the one-year limitation found in Article 2244, No. 2; and (b) secondly, by moving up claims for unpaid wages (and other monetary claims) of laborers or workers of the insolvent from second priority to fi rst priority in the order of preference established by Article 2244.8 (Ibid.)

6Quoted in Development Bank of the Philippines vs. National Labor Relations Com-mission. (183 SCRA 328 [1990] and 236 SCRA 117 [1994]) But in Philippine National Bank vs. Cruz (180 SCRA 206 [1989]) decided after Peralta but before DBP, the Supreme Court ruled that the phrase “any provisions of law to the contrary notwithstanding,” “in Article 110 of the Labor Code indicates that such preference shall prevail despite the order set forth in Articles 2241 to 2245 of the Civil Code. No exceptions were provided under said article, henceforth none shall be considered. Furthermore the Labor Code was signed into law decades after the Civil Code took effect.”

7“While the decision (in DBP vs. NLRC, 218 SCRA 183 [1993].) had expressed that under the new Article 110 of the Labor Code, even mortgage credits are subordinate to workers’ claims, the statement, however, was merely an obiter.’’ (Hautea vs. National La-bor Relations Commission, 230 SCRA 119 [1994].)

8Cruz, J., dissenting: The language of Article 110 is clear and categorical. The phrase “any position of law to the contrary notwithstanding,” means exactly what it says. If the law had intended an exception, it would have and could easily have provided for it. The Labor Code prevails over the Civil Code, the Insolvency Law, and the Tax Code as it represents the later expression of the legislative will. The general rule on the preference of

537

The term “wages,’’ as used above, refers to all remunerations, earnings and other benefi ts in terms of money accruing to the employees or workers for services rendered. (A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commission, 150 SCRA 498 [1987].) Separation pay is part of remuneration for services rendered or to be rendered. (Philippine National Bank vs. Cruz, 180 SCRA 206 [1989].) In a case, a bank which bought at a mortgage foreclosure sale the assets of a corporation which had a previously approved application for clearance from the Secretary of Labor to terminate its employees was held to have bought such assets subject to the preferential right to laborers to be paid their unpaid wages and salaries. (Phil. Commercial and Industrial Bank vs. National Mines & Allied Workers’ Union [NAMAWU-MIF], 115 SCRA 873 [1982].) (2) Necessity of bankruptcy or liquidation proceedings. — From the provisions of Article 110 of the Labor Code and Section 10,9 Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code, a declaration of bankruptcy or a judicial liquidation must be present before the worker’s preference may be enforced. (Development Bank of the Philippines vs. Santos, 171 SCRA 138 [1989]; Commissioner of Internal Revenue vs. National Labor Relations Commission, 238 SCRA 42 [1994];

taxes over other claims must be read in the light of the policy embodied in the Labor Code for the protection of the working class and the constitutional demands of social justice. In reading into the law an exception that is not there, the Court arrogates a power rightly belonging to the legislature.”

9Sec. 10. Payment of wages in case of bankruptcy. — Unpaid wages earned by the em-ployee before the declaration of bankruptcy or judicial liquidation of the employer’s business shall be given fi rst preference and shall be paid in full before other creditors may establish any claim to the assets of the employer.

Note: Section 10 has also been amended by Section 1 of the Rules and Regulations Implementing R.A. No. 6715 which amended Section 110 of the Labor Code. It now pro-vides: “Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of bankruptcy or liquidation of the employer’s business, the unpaid wages and other monetary claims of the employees shall be given fi rst preference and shall be paid in full before the claims of the government and other creditors may be paid.” The terms “dec-laration’’ of bankruptcy or “judicial” liquidation have been eliminated. Nevertheless, ac-cording to the Supreme Court, bankruptcy or liquidation proceedings are still necessary for the operation of the preference accorded to workers under Article 110 of the Labor Code. (Development Bank of the Phils. vs. National Labor Relations Commission, 183 SCRA 328 [1990].) R.A. No. 6715 took effect on March 21, 1989. It cannot be retroactively applied. (Development Bank of the Phils. vs. National Labor Relations Commission, 218 SCRA 183 [1993].)



538 Art. 2244

Development Bank of the Phils. vs. National Labor Relations Commission, 242 SCRA 59 [1995].) The rule assures an orderly determination of preference given to creditors’ claims, preserving in harmony the legal scheme of classifi cation, concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code. (Barayoga vs. Asset Privatization Trust, 473 SCRA 690 [2005].)

(a) Civil Code scheme preserved. — “Article 110 did not sweep away the overriding preference accorded under the scheme of the Civil Code . . . It cannot be assumed simpliciter that the legislative authority, by using the words ‘fi rst preference’ and ‘any provisions of law to the contrary notwithstanding,’ intended to disrupt the elaborate and symmetrical structure set up in the Civil Code.” (Republic vs. Peralta, supra.) Because of its impact on the entire system of credit, Article 110 cannot be viewed in isolation but must be read in relation to the Civil Code scheme on concurrence and preference of credits.10 (Development Bank of the Phils. vs. National Labor Relations Commission, 183 SCRA 328 [1990].) It should not be treated apart from other laws but applied in conjunction with the pertinent provisions of the Civil Code and the Insolvency Law to the extent that piece-meal distribution of the assets of the debtor is avoided. (Ibid., 242 SCRA 59 [1995].) (b) Judicial proceedings in rem required. — The provisions of the Civil Code on concurrence and preference of credit, including Article 110 of the Labor Code, require judicial proceedings in rem in adjudication of creditors’ claims against

10Padilla, J., dissenting: “With the amendment of Article 110 of the Labor Code by Republic Act No. 6715, a three-tier order of preference is established wherein unpaid wages and other monetary claims of workers enjoy absolute preference over all other claims, including those of the Government, in cases where a debtor-employer is unable to pay in full all his obligations. The absolute preference given to monetary claims of workers, to which claims of the Government, i.e., taxes, are now subordinated, manifests the clear and deliberate intent of our lawmakers to put fl esh and blood into the expressed constitutional policy of protecting the rights of workers and promoting their welfare. Thus take exception to the proposition that a prior formal declaration of insolvency or bankcruptcy or a judicial liquidation of the employer’s business is a condition sine qua non to the operation of the preference accorded to workers under Article 110 of the Labor Code.’’

539

the debtor’s assets to become operative. R.A. No. 6715, the law which amended Article 110, has the effect of expanding the “worker’s preference’’ to cover not only unpaid wages but also other monetary claims of laborers, to which even claims of the Government must be deemed subordinate. The Act, which took effect on March 21, 1989, should only be given prospective application. (Development Bank of the Philippines vs. National Labor Relations Commission, 229 SCRA 350 [1994].) (c) Reason for requirement. — The rationale is that to hold that Article 110 is also applicable in extrajudicial proceedings would be putting the worker in a better position than the State which could only assert its own prior preference in case of a judicial proceeding. The reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be applied is to bind all interested parties. The claims of all credits, whether preferred or non-preferred, the identifi cation of the preferred ones and the totality of the employer’s assets should be brought into the picture so that there can be an authoritative, fair and binding adjudication instead of piece-meal settlement of the various claims. (Bolinao, Jr. vs. Padolina, 186 SCRA 368 [1990].) Accordingly, a foreclosing bank creditor cannot be held liable for unpaid wages and the like, of employees of mort-gagor. The employees should fi le their claims in a proceeding in bankruptcy on their employer. (Development Bank of the Phils. vs. National Labor Relations Commission, 186 SCRA 841 [1990].) (d) The preferential right of workers and employees un-der Article 110 may be invoked only upon the institution of insolvency or liquidation proceedings. In these proceedings, a company, for example, stops operating and the claims of creditors are satisfi ed from the assets of the insolvent cor-poration. The purpose of rehabilitation proceedings, on the other hand, is precisely to enable the company to gain a new lease in life and thereby allow creditors to be paid the claims from its earnings. If the case involves the rehabilitation, not



540 Art. 2244

the liquidation, of a company, the preference of credit granted to workers or employees under Article 110 of the Labor Code is not applicable. (Rubberworld [Phils.] vs. Court of Appeals, 305 SCRA 722 [1999].) (e) Liability for improper application of debtor’s assets. — The act of the former general manager of a company which has ceased operations in taking advantage of his position by selling part of the company’s assets and applying the proceeds of the same as well as the remaining assets, to satisfy his own claims against the company, although such claims are not disputed, without deference to the pending legitimate claims of employees who fi led a complaint for illegal dismissal and non-payment of statutory benefi ts, and other creditors of the company, was held done in bad faith, rendering him directly liable for moral and exemplary damages based on the provisions of Articles 19, 21, 2219(10), and 2229 of the Civil Code. His claims were properly cognizable at the proceedings for the company’s dissolution. In addition, he was also held liable to return the company’s assets which he appropriated, or their value. (De Guzman vs. National Labor Relations Commission, 253 SCRA 46 [1996].)

Preference of credits evidenced by public instruments and fi nal judgments. Under the last paragraph, credits evidenced by a public instrument and those evidenced by a fi nal judgment are placed in the same order of preference. Preference among themselves is determined by considering the priority of the dates of the instruments and of the fi nal judgments. In a case, however, where an intervenor registered its chattel mortgage of a vehicle belonging to the debtor subsequent to the date a writ of attachment obtained by the plaintiff (another creditor) in an action for the recovery of a sum of money against the debtor, the court held that the credit of the intervenor cannot prevail over that of the plaintiff, despite the fact that the intervenor’s credit may have been embodied in a public instrument of an earlier date. The reason is that the credit of the intervenor cannot be considered preferred until the same

541

has been recorded in the former Land Transportation Offi ce. A mortgage of motor vehicle, in order to affect third persons, should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Land Transportation Offi ce. (Uy vs. Zamora, 13 SCRA 508 [1965].)

Statutory preference not applicable to the Government. Article 2244 (No. 4[a].) confers a preference on credits consti-tuted in the form of a duly notarized instrument over credits not so constituted, such preference being determined in the order of priority of the respective dates of notarization. To determine its applicability to obligations of the Govern-ment, it is necessary to inquire into the legislative intent underly-ing Article 2244. (1) Object of rules on classifi cation and priority. — On the one hand, any statutory formulation of a scheme of classifi cation and priority among credits, such as that embodied in Title XIX, is basically designed to meet the situation where the value of a debtor’s assets is not suffi cient to enable him to meet all his maturing obligations. It is to minimize the potential clash of rights among his creditors that the law established the rules on classifi cation and priority. (12 Manresa 704, et seq.) (2) Article 2244 not applicable to State. — Upon the other hand, the law could not have been intended to include the State itself among the debtors referred to therein, considering that in this jurisdiction, it is a recognized doctrine that the State is always solvent (Araneta vs. Hon. Gatmaitan, 101 Phil. 328 [1957]; Gutierrez vs. Camus, 96 Phil. 114 [1954]; Tolentino vs. Carlos, 66 Phil. 140 [1938].) On this theory, the provisions of Article 2244 of the Civil Code, and in particular paragraph (14), item (1) thereof, were not intended to apply and do not apply to obligations of the Republic.

(a) State not subject to insolvency proceedings. — The operation or enforcement of the statutory preferences established by the Civil Code in favor of certain claims and credits should be limited to insolvency proceedings or



542 Art. 2244

similar proceedings involving a general liquidation of the assets of the debtor, or a gathering of his creditors, since as a matter of logic and necessity, the question of preference should arise only where the debtor cannot pay his debts in full. It is inconceivable for a sovereign State voluntarily to initiate insolvency or general liquidation proceedings or to be subjected to such proceedings under its own laws. (b) State regarded as always solvent. — There is, in fact, no procedure known in Philippine law countenancing the institution and prosecution of such proceedings by or against the government. The reason for this may be found in the judicially confi rmed principle earlier pointed out that the State is to be regarded as always solvent, a principle born out of the inherent power of the State to impose taxes within its jurisdiction in a manner limited only by applicable constitutional provisions on equality and uniformity of taxation and on the requirement of public purpose. (Sinco, Political Law, 4th Ed., p. 535.) (c) Debtor-State going out of existence with liability for international transactions. — In terms of the State’s international transactions, the reason may be found in the fact that the question of liquidating or disposing of the assets, debts and other obligations of a sovereign State would arise only in the context of State succession consequent upon conquest and annexation, or other occurrence involving the debtor-State going out of existence or a new debtor-State coming into existence. (see Feilichenfeld, Public Debts and State Succession [1931]; O’Connell, the Laws of State Succession [1956].)

(3) Immaterial whether obligations of State those of a borrower or guarantor. — Considering that the government cannot, under its own laws, voluntarily subject itself to or be compelled to undergo insolvency or liquidation proceedings calling for a general distribution of its assets, the statutory preferences listed in Title XIX, do not apply to its obligations. Having arrived at this conclusion, it would be immaterial whether such obligations be obligations of a borrower or of a guarantor. In particular respect

543

of the government’s guaranteed obligations, this means that the mere fact that the guaranteed principal obligation appears in a notarized document does not operate to confer upon the guaranteed creditor any preference attaching to the principal obligation in the event the government is called upon to perform under its guarantee. (Op. No. 138 of the Minister of Justice [1978].)

ART. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding ar-ticles, shall enjoy no preference. (1925)

Non-preferred or common credits. As provided in this article, credits other than those mentioned in Articles 2241, 2242, and 2244, shall enjoy no preference and such common credits shall be paid pro rata regardless of dates. (Art. 2251[2].)

Insolvency proceedings involving banks. (1) Remedy against actions of Monetary Board. — The actions of the Monetary Board of the Central Bank in proceedings in receivership and liquidation are explicitly declared by Section 29 of the Central Bank Act (R.A. No. 265,11 as amended.), to be “fi nal and executory.” They may not be set aside or restrained, or enjoined by the courts, except upon “convincing proof that the action is plainly arbitrary and made in bad faith.” (Central Bank vs. De la Cruz, 191 SCRA 346 [1990].) (2) Remedy of depositor or creditor to recover claims. — After a bank is declared insolvent by the Monetary Board of the Central Bank, a depositor cannot bring a separate action against it, his remedy being to intervene in the judicial proceedings for liquidation instituted by the Board thru the Solicitor General.

11Repealed by R.A. No. 7653, the New Central Bank Act, Section 29 is now Section 30. The remedy is to fi le a “petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.’’



544 Art. 2245

(a) The reason is that the execution of the fi nal judgment rendered in a separate suit will cause the bank’s assets to be unduly depleted to the obvious prejudice of other depositors and creditors. The liquidation court acquires exclusive jurisdiction over all claims against the bank to the exclusion of other courts.12 (Central Bank of the Phils. vs. Court of Appeals, 163 SCRA 482 [1988].) (b) All claims against the insolvent bank should be fi led in the liquidation proceedings “to obviate the proliferation of litigations and to avoid injustice and arbitrariness.” Indeed, it will be burdensome on the part of the liquidator if he were to appear before several courts to litigate claims against the insolvent bank. Convenience and practicality, and the prevention of multiplicity of suits are the overriding considerations investing exclusive jurisdiction in the liquidation court. (Star Forwarders, Inc. vs. Navarro, 191 SCRA 403 [1990]; Ong vs. Court of Appeals, 253 SCRA 105 [1996]; Manalo vs. Court of Appeals, 366 SCRA 752 [2003].)

(3) Deviation from required procedure. — However, taking into consideration the circumstances of the case and in the interest of justice, a deviation from this procedure may be allowed as where to order the plaintiffs, who are admittedly living in poverty to refi le and relitigate their case before the liquidation court would be an exercise in futility as it would mean another several years of trial and additional expenses to them. (Valenzuela vs. Central Bank, 168 SCRA 623 [1988].)

ILLUSTRATIVE CASE: A bank depositor obtained a fi nal judgment for the payment of his time deposit in a savings bank prior to the institution of liquidation proceedings but after the bank was declared insolvent. Facts: The Monetary Board of the Central Bank found F savings bank insolvent and directed the superintendent of banks to take charge of its assets. Prior to the institution of

12See “Rule with respect to distressed corporation’’ under Sections 2-13, the Insol-vency Law (XI).

545

liquidation proceedings, but after declaration of insolvency, D, bank depositor, instituted a complaint in the CFI for the recovery of the balance of his time deposit. A fi nal judgment for the payment of his time deposit was obtained by D. Issue: Is the fi nal judgment a preferred claim against the bank? Held: No. (1) Bank deposits not preferred credits. — Bank deposits (Art. 1980.) are considered simple loans and, as such, are not preferred credits. Considering that the deposit in question, in its inception, was not a preferred credit, it does not seem logical and just that it should be raised to the category of a preferred credit simply because D, taking advantage of the long interval between the declaration of insolvency and the fi ling of the petition for judicial assistance and supervision, was able to secure judgment for the payment of his time deposit. (2) Effect of contrary rule. — Article 2244(14, b) does not apply to judgments for the payment of deposits in an insolvent bank which were obtained after the declaration of insolvency. (see Sec. 29, R.A. No. 265 [Central Bank Act].) A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors, after learning that the bank is insolvent, would rush to the courts to secure judgments for the payment of their deposits. Some of the judgments would be default judgments. Less alert depositors would be prejudiced. The general principle of equity that the assets of an insolvent are to be distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. (3) Effect of fi nal judgment. — The effect of the fi nal judgment is only to fi x the amount of the debt, and not give priority over other depositors and creditors. After the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets for the equal benefi t of all the creditors, including depositors. After its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise. (Central Bank of the Phils. vs. Morfe, 63 SCRA 114 [1975]; see also Serrano vs. Central Bank of the Phils., 96 SCRA 96 [1980]; Banco Filipino



546

Savings and Mortgage Bank vs. National Labor Relations Commission, 188 SCRA 700 [1990].) Note: The stay of the execution of the judgment obtained by a depositor is warranted by the fact that the bank was placed under receivership. (Lipana vs. Development Bank of Rizal, 154 SCRA 257 [1987].)

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Art. 2245

547

Chapter 3ORDER OF PREFERENCE OF CREDITS

ART. 2246. Those credits which enjoy preference with respect to specifi c movables, exclude all others to the ex-tent of the value of the personal property to which the pref-erence refers. ART. 2247. If there are two or more credits with respect to the same specifi c movable property, they shall be satis-fi ed pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a) ART. 2248. Those credits which enjoy preference in relation to specifi c real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. ART. 2249. If there are two or more credits with respect to the same specifi c real property or real rights, they shall be satisfi ed pro rata, after the payment of the taxes and assessments upon the immovable property or real right. (1927a) ART. 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to specifi c property, real or personal, shall be added to the free prop-erty which the debtor may have, for the payment of the other credits. (1928a)

Concurrence of credits with respect to same specifi c property. Under the former Civil Code, confl icts among creditors enti-tled to preference as to specifi c property under Articles 1922 and

547


548 Arts. 2246-2250

1923 (now Arts. 2241 and 2242) were to be resolved according to an order of priorities established by Articles 1926 and 1927 (now Arts. 2246 to 2249), whereby one class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfi ed out of the proceeds of the sale of the property sub-ject of the preference and could exhaust such property if neces-sary. Under the present Civil Code, only taxes and assessments upon specifi c movable and immovable property enjoy absolute preference. All the remaining classes of preferred creditors under Articles 2241 and 2242 enjoy no priority among themselves, but must be paid concurrently and pro rata, i.e., in proportion to the amount of their respective credits. (see De Barretto vs. Villanueva, 1 SCRA 288 [1961]; Philippine Savings Bank vs. Lantin, 209 SCRA 383 [1983].)

Two-tier order of preference. Put another way, Articles 2241 and 2242, jointly with Articles 2246 to 2249, establish a two-tier order of preference. The fi rst-tier includes only taxes, duties and fees due on a specifi c movable or immovable property. All other special preferred (non-tax) credits stand on the second-tier to be satisfi ed pari passu and pro rata, out of any residual value of the specifi c property to which such other credits relate. (Republic vs. Peralta, supra.) The pro rata rule, however, does not apply to “credits annotated in the Registry of Property in virtue of a judicial order, by attachments and executions” which are preferred to as “later credits.” In satisfying several credits annotated by attachments or executions, the rule is still preference according to the priority of the credits in the order of time. (Manabat vs. Laguna Federation of Facomas, Inc., 19 SCRA 621 [1967].) The term pro rata in Article 2249 means in proportion or ratably, or a division according to share, interest or liability of each. (72 C.J.S. 967-968; Carried Lumber Co. vs. ACCFA, 63 SCRA 411 [1975].) On the elimination of the old rule regarding priority of pay-ment in regard to credits referring to the same specifi c movable

549

and immovable property in favor of the pro rata rule, the Code Commission makes the following comment:

“. . . As to these claims attaching to specifi c property, it is extremely diffi cult to determine a just order of preference among themselves. Doubtless, the holder of each lien or encumbrance could give plausible reasons why his claim should be placed ahead of the others. But it would seem to be a fairer course to divide the value of the property pro rata among the lien-holders.” (Report of the Code Commission, pp. 164-165.)

Proceeding for payment pro rata of preferred creditors. (1) Proceeding required for adjudication of claims of preferred creditors. — In order to make the pro rating provided in Article 2249 fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. The full application of Articles 2249 and 2242 demands that there must be fi rst some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent’s estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import. This explains the rule of Article 2243 that the claims or credits enumerated in Articles 2241 and 2242 “shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. x x x.” And the rule is further clarifi ed in the Report of the Code Commission (supra.), as follows: “x x x The preferences named in Article 2241 and 2242 are to be enforced in accordance with the Insolvency Law.” (De Barretto vs. Villanueva, 1 SCRA 288 [1961].) (2) Pro rata rule contemplates more than one creditor. — The requirement that the pro rata dividend should be ascertained in an insolvency or similar proceeding should not be enforced where there are not more than one creditor. (Carried Lumber Co. vs. ACCFA, 63 SCRA 411 [1975].)

Arts. 2246-2250 CONCURRENCE AND PREFERENCE OF CREDITSOrder of Preference of Credits


550 Arts. 2246-2250

ILLUSTRATIVE CASES: 1. Claim of unpaid seller against buyer of registered land is not recorded while subsequent mortgage by buyer of the property is duly recorded. Facts: S sold a registered parcel of land and the house thereon for P19,000.00 to B who executed a promissory note for the balance of P17,500.00. B could only pay P5,500.00 on account of the note, for which reason S obtained judgment for the unpaid balance of P12,000.00. In the meantime, B was able to secure a clean certifi cate of title and mortgaged the property to X (who acted in good faith) to secure a loan, said mortgage having been duly recorded. B defaulted on the mortgage loan. X foreclosed the mortgage in her favor, obtained judgment, and upon its becoming fi nal asked for execution. Subsequently, S fi led a motion for the recognition of her vendor’s lien, invoking Articles 2242, 2243, and 2249. The lower court ordered the lien annotated on the back of the certifi cate of title to the property with the proviso that in case of sale under the foreclosure decree, the vendor’s lien and the mortgage credit should be paid pro rata from the proceeds. Issue: Is the order decreeing that the proceeds of the foreclosure sale be apportioned between S and X correct? Held: No. One preferred creditor’s third-party claim to the proceeds of a foreclosure sale, as in the case at bar, is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant is enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditor likewise enjoying preference under Article 2242 cannot be ascertained. In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor’s estate), the confl ict between S and X must be decided pursuant to the well-established principle concerning registered lands — that a purchaser in good faith and for value takes registered property free from liens and encumbrances other than statutory liens and those recorded in certifi cate of title. There being no insolvency or liquidation, the claim of S, as unpaid vendor, did not require

551

character and a rank of a statutory lien co-equal to X’s recorded mortgage, and must remain subordinate to the latter. No argument is needed to stress that if a person dealing with registered land were to be held to take it in every instance subject to all the fourteen preferred claims enumerated in Article 2244, even if the existence and import thereof cannot be ascertained from the records, all confi dence in torrens titles would be destroyed, and credit transactions on the faith of such titles would be hampered, if not prevented, with incalculable results. Upon the other hand, it is not excessively burdensome to require the privileged creditors to cause their claims to be recorded in the books of the Register of Deeds should they desire to protect their rights even outside of insolvency or liquidation proceedings. (De Barretto vs. Villanueva, supra.) ———— ———— ———— 2. Claim of unpaid contractor against owner of registered land is not recorded while mortgage by owner of the property duly recorded, with mortgagee subsequently acquiring title after foreclosure. Facts: C built a duplex-apartment house on a registered lot for spouses X and Y, using his own money, P25,788.50, to fi nish the construction. Meanwhile, X and Y obtained from PSB (bank) a loan secured by a mortgage to complete the construction. At the time of the registration of the mortgage, the transfer certifi cate of title over the property was free from all liens and encumbrances. PSB foreclosed the mortgage, and being the highest bidder a new certifi cate of title was subsequently issued in its favor. C fi led an action against the spouses to collect the unpaid cost of construction. As X and Y did not have any properties to satisfy the judgment rendered in his favor, C demanded from PSB a pro rata share in the value of the duplex-apartment in accordance with Article 2242. Issue: Is C entitled to claim a pro rata share in the value of the property in question? Held: No. The action fi led by C to collect the unpaid cost of the construction of the duplex-apartment is far from being a general liquidation of the estate of X and Y. Although the lower court found that there were no known creditors other than C and PSB, this cannot be conclusive. It will not bar other creditors in the event they show up and

Arts. 2246-2250 CONCURRENCE AND PREFERENCE OF CREDITSOrder of Preference of Credits


552 Art. 2251

present their claims against PSB, claiming they have also preferred claims against the property. Consequently, the transfer certifi cate of title issued to PSB which is supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory liens. Neither does the De Barretto case sanction such instability. (Philippine Savings Bank vs. Lantin, 124 SCRA 476 [1983].)

ART. 2251. Those credits which do not enjoy any pref-erence with respect to specifi c property, and those which enjoy preference, as to the amount not paid, shall be satis-fi ed according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro rata regardless of dates. (1929a)

Satisfaction of other credits. (1) With order of preference. — Credits which do not enjoy any preference with respect to specifi c property because they are not among those mentioned in Articles 2241 and 2242 and those while included in said articles are unpaid because the value of the property to which the preference refers is less than the preferred credit or credits, shall be satisfi ed in the order established in Article 2244 with reference to the other real and/or personal property of the debtor. (2) Without any order of preference. — Common credits are those which do not fall under Articles 2241, 2242, and 2244. They do not enjoy any preference (Art. 2245.) and shall be paid pro rata regardless of dates.

EXAMPLE: A is an insolvent. The assets of A available for payment consists of his car worth P248,000, a small parcel of land in the province with a market value of P111,200, and P24,000 cash. His obligations are as follows:

553

P 8,000 — to the State, for unpaid taxes on the car. 160,000 — to B, for unpaid balance of the price of said

car which he bought from B. 16,000 — to C, for cost of repair on the car made by

C. 80,000 — to D, for loan secured by a chattel mortgage

on the car. P264,000 — Total

48,000 — to E, for the funeral expenses of the child of A who died.

16,000 — to F, for medicines purchased during the last illness of his wife.

11,200 — to the State, for unpaid business taxes. 32,000 — to G, for an unsecured loan contracted in

2005. 96,000 — to H, for an unsecured loan contracted in

2005. P203,200 — Total

The order of preference of the creditors is as follows: (1) With respect to the car (specifi c personal property), the taxes (P8,000) shall be paid fi rst. (see Art. 2241.) (2) With respect to the same car, the claims of B for the unpaid price (P160,000) of C for the repair (P16,000), and D for the secured loan (P80,000) exclude all others to the extent of the value of the car. (see Arts. 2246, 2248.) Said claims enjoy no preference. There is merely concurrence among them. (see Arts. 2247, 2249.) (3) The claims of B, C, and D shall be satisfi ed pro rata (see Ibid.) as the remaining value of the car (P240,000) is not suffi cient to satisfy all their credits, as follows:

P160,000 x P240,000 = P150,000 P256,000

P16,000 x P240,000 = 15,000 P256,000

Art. 2251 CONCURRENCE AND PREFERENCE OF CREDITSOrder of Preference of Credits

B —

C —


554

P80,000 x P240,000 = 75,000 P256,000 P240,000

(4) B, C, and D are entitled to have the unpaid portions of their credits satisfi ed from the other property of A subject to the right of preference of other creditors. (see Art. 2244.) (5) Assuming that the credit of D is only P48,000, the excess of P16,000 (with respect to the car) after deducting the credits of the State, B, C, and D (P248,000 – P232,000), shall be added to the other property of A for the payment of his other obligations. (see Art. 2250.) (6) With respect to the P8,000 excess, the parcel of land worth P111,200 and the P24,000 cash, a total of P139,200, the other credits shall be paid in the following order:

E — P48,000 F — 16,000 State — 11,200 G — 16,000 H — 48,000 P139,200

G and H shall be paid pro rata regardless of the dates of their credits. (see Art. 2251.) Note that the State is not given preference as the taxes do not refer to specifi c property. (7) If the car of A has been totally destroyed, the unpaid tax of P8,000 on the car shall be satisfi ed after the payment of the credits of E and F.

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D —

Art. 2251

555

APPENDICES

1. DISCONTINUANCE OF THE SPANISH MORTGAGE SYSTEM

A. PRESIDENTIAL DECREE NO. 892

DISCONTINUANCE OF THE SPANISH MORTGAGE SYSTEM OF REGISTRATION AND OF THE USE OF SPANISH TITLES AS EVIDENCE IN LAND REGISTRATION PROCEEDINGS.

WHEREAS, fraudulent sales, transfers, and other forms of conveyances of large tracts of public and private lands to unsuspecting and unwary buyers appear to have been perpetrated by unscrupulous persons claiming ownership under Spanish titles or grants of dubious origin; WHEREAS, these fraudulent transactions have often resulted in confl icting claims and litigations between legitimate title holders, bona fi de occupants or applicants of public lands, on the one hand, and the holders of, or persons claiming rights under the said Spanish titles or grants, on the other, thus creating confusion and instability in property ownership and threatening the peace and order conditions in the areas affected; WHEREAS, statistics in the Land Registration Commission1 show that recording in the system of registration under the Spanish Mortgage Law is practically nil and that this system has become obsolete; WHEREAS, Spanish titles to lands which have not yet been brought under the operation of the Torrens system, being subject to prescription, are now ineffective to prove ownership unless accompanied by proof of actual possession;

1Reorganized and renamed the National Land Titles and Deeds Registration Admin-istration by Executive Order No. 649, dated Feb. 1981 now, Land Registration Authority under the Administrative Code of 1987. (Exec. Order No. 292.)

555


556 P.D. No. 892

WHEREAS, there is an imperative need to discontinue the system of registration under the Spanish Mortgage Law and the use of Spanish titles as evidence in registration proceedings under the Torrens system; NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby decree and order: SECTION 1. The system of registration under the Spanish Mortgage Law is discontinued, and all lands recorded under said system which are not yet covered by Torrens title shall be considered as unregistered lands. All holders of Spanish titles or grants should apply for registration of their lands under Act No. 496, otherwise known as the Land Registration Act, within six (6) months from the effectivity of this decree. Thereafter, Spanish titles cannot be used as evidence of land ownership in any registration proceedings under the Torrens system. Hereafter, all instruments affecting lands originally registered under the Spanish Mortgage Law may be recorded under Section 194 of the Revised Administrative Code, as amended by Act 3344. SEC. 2. All laws, executive orders, administrative orders, rules and regulations inconsistent with the foregoing provisions are hereby repealed or accordingly modifi ed. SEC. 3. This decree shall take effect immediately. ISSUED: February 16, 1976.

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557

B. PRESIDENTIAL DECREE NO. 15292

AMENDING AND CODIFYING THE LAWS RELATIVE TO REGISTRATION OF PROPERTY AND FOR OTHER PURPOSES. x x x x x x x x x SEC. 3. Status of other pre-existing land registration system. — The system of registration under the Spanish Mortgage Law is hereby discontinued and all lands recorded under said system which are not yet covered by Torrens title shall be considered as unregistered lands. Hereafter, all instruments affecting lands originally registered under the Spanish Mortgage Law may be recorded under Section 113 of this Decree, until the land shall have been brought under the operation of the Torrens system. The books of registration for unregistered lands provided under Section 194 of the Revised Administrative Code, as amended by Act No. 3344, shall continue to remain in force; provided, that all instruments dealing with unregistered lands shall henceforth be registered under Section 113 of this Decree. x x x x x x x x x SEC. 122. Effectivity. — This Decree shall take effect upon its approval. ISSUED: June 11, 1978.

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2The Property Registration Decree.

P.D. No. 1529 APPENDICESDiscontinuance of the Spanish Mortgage System


558

2. EXTRAJUDICIAL FORECLOSUREOF REAL ESTATE MORTGAGE

A. ACT NO. 3135, AS AMENDED BY ACT NO. 4118

AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGES.

SECTION 1. When a sale is made under a special power inserted in or attached to any real estate mortgage hereafter made as security for the payment of money or the fulfi llment of any other obligation, the provisions of the following sections shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. SEC. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in said place in the municipal building of the municipality in which the property or part thereof is situated. SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated and if such property is worth more than Four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.1

1The phrase “such notice shall be published once a week for at least three consecu-tive weeks’’ does not mean notice should be published for three full weeks. Thus, it was held that the publication of notice on June 30, July 7, and July 14, 1968 satisfi ed the pub-lication requirement notwithstanding the fact that June 31 to July 14 is only 14 days. Personal notice to the mortgagee is not required. The affi davit of publication, executed by the publisher, business/advertising manager of a newspaper that it is “a newspaper of general circulation in Rizal and that the Notice of Sheriff’s sale was published in said paper on June 30, July 7 and July 14, 1983’’ constitutes prima facie evidence of compliance with the requisite publication. To be a newspaper of general circulation, it is enough that “it is published for the dissemination of local news and general information; that it has a

558

559

SEC. 4. The sale shall be made at public auction, between the hours of nine in the morning and four in the afternoon, and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which such sale has to be made, or of a notary public of said municipality, who shall be entitled to collect a fee of Five pesos for each day of actual work performed, in addition to his expenses. SEC. 5. At any sale, the creditor, trustee, or other person, authorized to act for the creditor, may participate in the bidding, and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made. SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale, and such redemption shall be governed by the provisions of sections2 four hundred and sixty four to four hundred and sixty six, inclusive, of the Code of Civil Procedure, insofar as these are not inconsistent with the provisions of this Act. SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance3 of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and fi led in form of an ex parte motion in registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property is registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code,4 or of

bona fi de subscription list of paying subscribers; that it is published at regular intervals.’’ It need not have the largest circulation as long as it is of general circulation. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].)

2Now, embodied in Sections 29-31 and 35 of the Rules of Court.3Now, Regional Trial Court.4Sec. 194 is entitled “Recording of instruments or deeds relating to real estate not

registered under Act No. 496 or under the Spanish Mortgage Law.’’

Act No. 3135 APPENDICESExtrajudicial Foreclosure of Real Estate Mortgage


560 Act No. 3135

any other real property, encumbered with a mortgage duly registered in the offi ce of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the fi ling of such petition, collect the fees specifi ed in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred sixty-six,5 and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately. SEC. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered four hundred and ninety-six6 and if it fi nds the complaint of the debtor justifi ed, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six;7 but the order of possession shall continue in effect during the pendency of the appeal. SEC. 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in section four hundred and sixty-fi ve of the Code of Civil Procedure.8

5Sec. 114 entitled “Fees payable under this Act’’ provides: “For any memorandum made in a standing co-owner’s, mortgagee’s or lessee’s copy of a certifi cate of title after a similar memorandum has been made in the original thereof, for each such certifi cate of title, a peso.’’ The fee to the Register of Deeds payable is now P5.00 under Section 111(c, 11) of Pres. Decree No. 1529.

6Sec. 112 of Act No. 496 is entitled “Erasures and Alterations,’’ now Section 108 of Pres. Decree No. 1529.

7Sec. 14 of Act No. 496 is entitled “Review of orders, decisions, and decrees.’’ It is now Section 33 (Appeals from judgment, etc.) of Pres. Decree No. 1529.

8Now, found in Section 30, Rules of Court.

561

Sec. 10. This Act shall take effect on its approval. APPROVED: March 6, 1924. (Act No. 3135.) APPROVED: December 7, 1933. (Act No. 4118.)

B. SUPREME COURT A.M. NO. 99-10-05-09 AS AMENDED BY RESOLUTION OF JUNE 30, 2001 AND AUGUST 7, 2002.

In line with the responsibility of an Executive Judge under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-

9A.M. No. 99-10-05-0 amends or modifi es S.C. Administrative Order No. 3 (Oct. 19, 1994) and S.C. Administrative Order No. 3-98 (Feb. 9, 1998). It is an administrative rever-sal of the ruling of the Supreme Court in China Banking Corporation vs. Court of Appeals (265 SCRA 327 [1996].) wherein it held that “a petition for foreclosure with the notary public is not within the contemplation of the directive in Administrative Order No. 3 as the said [petition] is not fi led with the court. At any rate, Administrative Order No. 3 cannot prevail over Act No. 3135, as amended.’’ Under the amendatory circular, the ap-plication for extrajudicial foreclosure under the direction of the Notary Public must now be fi led with the Executive Judge through the Clerk of Court who is also the Ex-Offi cio Sheriff. Since a Notary Public is an offi cer of the court, there is nothing legally objectionable in including notaries public in the coverage of Administrative Order No. 3 requiring that all petitions for extrajudicial foreclosure be fi led before the Executive Judge and be given corresponding File and Docket Numbers after collecting the fi ling fees, and be subject to scrutiny of the Ex-Offi cio Sheriff under the supervision of the Executive Judge to insure that all the requirements for extrajudicial foreclosure are complied with before the public auction is conducted especially in view of the fact that the notary public who is hired and paid by the mortgagee, is naturally biased in favor of the latter. Furthermore, if Administrative Order No. 3 is valid insofar as extrajudicial foreclosure sales conducted by the Ex-Offi cio Sheriff are concerned, there is nothing legally objectionable in applying its requirements to extrajudicial foreclosure sales under the direction of a notary public who, as an offi cer of the court like the Ex-Offi cio Sheriff, is likewise subject to the supervision of the Executive Judge. Actually, there is no confl ict between Administrative Order No. 3, a procedural rule, and the provisions of Act No. 3135, as amended. Under the Resolution, the applicant in an extrajudicial foreclosure covering properties located in different provinces is required to pay only one fi ling fee regardless of the number of properties to be foreclosed as long as the application covers only one transaction or indebtedness. The venue, however, of the extrajudicial proceedings is the place where each of the mortgaged property is located. (Benguet Management Corporation vs. Court of Appeals, 411 SCRA 347 [2003]; see Lee vs. Court of Appeals, 496 SCRA 668 [2006].) SC. Administrative No. 3 is a directive for executive judges and clerks of courts which is “in line with the responsibility of an Executive Judge under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-offi cio Sheriff, and his staff x x x.’’



562 Act No. 3135

Offi cio Sheriff, and his staff, and the issuance of commissions to notaries public and enforcement of their duties under the law, the following procedures are prescribed in extrajudicial foreclosure of mortgages: (1) All applications for extrajudicial foreclosure of mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be fi led with the Executive Judge, through the Clerk of Court who is also the Ex-Offi cio Sheriff. (2) Upon receipt of an application for extrajudicial foreclosure of mortgage, it shall be the duty of the Clerk of Court to:

(a) receive and docket said application and to stamp there-on the corresponding fi le number, date and time of fi ling; (b) collect the fi ling fees thereof pursuant to Rule 141, Section 7(c), as amended by A.M. No. 00-2-01-SC, and issue the corresponding offi cial receipt; (c) examine, in case of real estate mortgage foreclosure, wheth-er the applicant has complied with all the requirements before the public auction is conducted under the direction of the sheriff or a notary public, pursuant to Section 4 of Act 3135, as amended; (d) sign and issue the certifi cate of sale, subject to the approval of the Executive Judge, or in his absence, the Vice-Executive Judge. No certifi cate of sale shall be issued in favor of the highest bidder until all fees provided for in the aforementioned sections and in Rule 141, Section 9(1), as amended by A.M. No. 00-2-01-SC, shall have been paid. In no case shall the amount payable under Rule 141, Section 9(1), as amended, exceed P100,000.00; and (e) after the certifi cate of sale has been issued to the highest bidder, keep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certifi cate of sale with the Register of Deeds concerned, after which, the records shall be archived. Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extra-judicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certifi cate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier, as provided in Section 47 of R.A. No. 8791 (as amended by Res. of August 7, 2001).

Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels in different locations covering

563

one indebtedness, only one fi ling fee corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall, apart from the offi cial receipt of the fees, issue a certifi cate of payment indicating the amount of indebtedness, the fi ling fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, which certifi cate shall serve the purpose of having the application docketed with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial foreclosure to proceed thereat. (3) The notices of auction sale in extrajudicial foreclosure for publication of the sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No. 1079, dated January 2, 1977, and non-compliance therewith shall constitute a violation of Section 6 thereof. (4) The Executive Judge shall, with the assistance of the Clerk of Court, raffl e applications for extrajudicial foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to the Offi ce of the Clerk of Court and Sheriffs IV assigned in the branches. (5) The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale of the Clerk of Court before the issuance of the certifi cate of sale. This Resolution amends or modifi es accordingly Administrative Order No. 3 issued by then Chief Justice Enrique M. Fernando on 19 October 1984 and Administrative Circular No. 3-98 issued by the Chief Justice Andres R. Narvasa on 5 February 1998. The Court Administrator may issue the necessary guidelines for the effective enforcement of this Resolution. The Clerk of Court shall cause the publication of this Resolution in a nuewspaper of general circulation not later than August 14, 2001 and furnish copies thereof to the Integrated Bar of the Philippines. This Resolution shall take effect on the 1st day of September of the year 2001. Promulgated this 7th day of August 2001 in the City of Manila.



564 Circular No. 7-2002

C. CIRCULAR NO. 7-2002

TO: ALL EXECUTIVE JUDGES, CLERKS OF COURT, SHERIFFS IN THE OFFICE OF THE CLERK OF COURT AND BRANCH SHERIFFS IN THE REGIONAL TRIAL COURTS

SUBJECT: GUIDELINES FOR THE ENFORCEMENT OF SUPREME COURT RESOLUTION OF DECEMBER 14, 1999 IN ADMINISTRATIVE MATTER NO. 99-10-05-0 (RE: PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE), AS AMENDED BY THE RESOLUTIONS DATED JANUARY 30, 2001 AND AUGUST 7, 2001

These guidelines are issued pursuant to the Supreme Court En Banc Resolution of December 14, 1999 in Administrative Matter No. 99-10-05-0, as amended by the resolutions of January 30, 2001 and August 7, 2001, directing the Offi ce of the Court Administrator to prepare the guidelines for the enforcement of A.M. No. 99-10-05-0 on the extra-judicial foreclosure of mortgages.

Sec. 1. All applications for extrajudicial foreclosure of mortgage, whether under the direction of the Sheriff or a notary public pursuant to Art. No. 3135, as amended, and Act 1508, as amended, shall be fi led with the Executive Judge, through the Clerk of Court, who is also the Ex-Offi cio Sheriff (A.M. No. 99-10-05-0, as amended, March 1, 2001).

Sec. 2. Upon receipt of the application, the Clerk of Court shall:a. Examine the same to ensure that the special power of attorney

authorizing the extrajudicial foreclosure of the real property is either inserted into or attached to the deed of real estate mortgage (Act No. 3135, Sec. 1, as amended);

b. Give a fi le number to the application and endorse the date and time of its fi ling and thereafter docket the same, keeping, in this connection, separate docket books for extrajudicial foreclosure sales conducted by the Sheriff and those conducted by notaries public;

c. For the conduct of extrajudicial foreclosure of real estate or chattel mortgage under the direction of the sheriff, collect the appropriate fi ling fees and issues the corresponding offi cial receipt pursuant to the following schedule:

If the amount of the indebtedness or the mortgagee’s claim is: (1) Less than P50,000.00 .................................................. P275.00 (2) P50,000.00 or more but less than P100,000.00 ........ 400.00

565

(3) P100,000.00 or more but less than P150,000.00 ...... 500.00 (4) P150,000.00 or more but less than P200,000.00 ...... 650.00 (5) P200,000.00 or more but less than P250,000.00 ...... 1,000.00 (6) P250,000.00 or more but less than P300,000.00 ...... 1,250.00 (7) P300,000.00 or more but less than P400,000.00 ...... 1,500.00 (8) P400,000 or more but less than P500,000.00 ........... 1,750.00 (9) P500,000.00 or more but not more than P100,000,000.00 .......................................................... 2,000.00(10) For each P1,000.00 in excess of P1,000,000.00 ......... 10.00

Section 7 (c), Rule 141, Rules of Court, as amended by A.M. No. 00-2-01-SC, February 1, 2000). Cooperatives, thrift banks, and rural banks are not exempt from the payment of fi ling fees and other fees under these guidelines (A.M. No. 98-9-280-RTC, September 29, 1998; A.M. No. 99-3-93-RTC, April 20, 1999; and A.M. No. 92-9-408-0). d. In case the application is for the extrajudicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, issue, apart from the offi cial receipt for the fees, a certifi cate of payment indicating the amount of indebtedness, the fi ling fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with the Clerks of Court in the places where the other properties are located and of allowing the extra-judicial foreclosure to proceed thereat. (A.M. No. 99-10-05-0, par. 2(e).

Sec. 3. The application for extrajudicial foreclosure shall be raffl ed under the supervision of the Executive Judge, with the assistance of the Clerk of Court and Ex-Ofi cio Sheriff, among all Sheriffs including those assigned to the Offi ce of the Clerk of court and Sheriffs assigned in the branches of the court. A Sheriff to whom the case has been raffl ed shall be excluded in the succeeding raffl es and shall participate again only after all other Sheriffs shall have been assigned a case by raffl e (Administrative Circular No. 3-98, Feb. 5, 1998).

Sec. 4. The Sheriff to whom the application for extrajudicial foreclo-sure of mortgage was raffl ed shall do the following:

a. Prepare a Notice of Extrajudicial Sale using the following form:“NOTICE OF EXTRAJUDICIAL SALE”

“Upon extra-judicial petition for sale under Act 3135 / 1508 fi led __________________ against (name and address of Mortgator/s)

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566 Circular No. 7-2002

to satisfy the mortgage indebtedness which as of ___________ amounts to P _________________, excluding penalties, charges, attorney’s fees and expenses of foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date of sale) _______________ at 10:00 A.M. or soon thereafter at the main entrance of the ___________ (place of sale) to the highest bidder, for cash or manager’s check and in Philippine Currency, the following property with all its improvements, to wit: “(Description of Property)” “All sealed bids must be submitted to the undersigned on the above stated time and date.” “In the event the public auction should not take place on the said date, it shall be held on _______________, _______________ without further notice.”

________________ (date) “SHERIFF”

b. (1) In case of foreclosure of real estate mortgage, cause the publication of the notice of sale by posting it for not less than twenty (20) days in at least three (3) public places in the municipality or city where the property is situated and if such property is worth more than four hundred (P400.00) pesos, by having such notice published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city (Sec. 3, Act No. 3135, as amended). The Executive Judge shall designate a regular working day and defi nite time each week during which said notice shall be distributed personally by him for publication to qualifi ed newspapers or periodicals as defi ned in Sec. 1 of P.D. No. 1079, which distribution shall be effected by raffl e (A.M. No. 01-1-07-SC, Oct. 16, 2001). Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be personally served a copy of the notice of the extrajudicial foreclosure. For real estate mortgages covering loans not exceeding P100,000.00, exclusive of interests due and unpaid, granted by rural banks (R.A. No. 7353, Sec. 6) or thrift banks (R.A. No. 7906, Sec. 18),publication in a newspaper shall be dispensed with, it being suffi cient that the notices of foreclosure are posted for a period of sixty (60) days immediately preceding the public auction in the most conspicuous areas of the municipal building, the municipal public market, the rural bank, the barangay hall, and the barangay public market, if any, where the land

567

mortgaged is situated. Proof of publication shall be accomplished by an affi davit of the Sheriff and shall be attached to the records of the case.

(2) In case of foreclosure of a chattel mortgage, post the notice for at least ten (10) days in two (2) or more public places in the municipality where the mortgagor resides or where the property is situated (Sec. 14, Act No. 1508, as amended).Sec. 5. Conduct of the extrajudicial foreclosure sale —a. The bidding shall be made through sealed bids which must

be submitted to the Sheriff who shall conduct the sale between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act 3135, Sec. 4). The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a tie, an open bidding shall be conducted between the highest bidders. Payments of the winning bid shall be made either in cash or in manager’s check, in Philippine currency, within fi ve (5) days from notice.

b. The sale must be made in the province in which the real property is situated and, in case the place within the said province in which the sale is to be made is the subject of stipulation, such sale shall be made in said place in the municipal building of the municipality in which the property or part thereof is situated (Act No. 3135, as amended, Sec. 2); in case of a chattel mortgage, the sale shall be made at a place in the municipality where the mortgagor resides or where the property is situated (Sec. 14, Act No. 1508, as amended).

Sec. 6. After the sale, the Clerk of Courts shall collect the appropriate fees pursuant to Sec. 9(1), Rule 141, as amended by A.M No. 00-2-01-SC, computed on the basis of the amount actually collected by him, which fee shall not exceed P100,000.00 (A.M. No. 99-10-05-0, March 1, 2001, 2[d]). The amount paid shall not be subject to a refund even if the foreclosed property is subsequently redeemed.

Sec. 7. In case of foreclosure under Act No. 1508, the Sheriff shall, within thirty (30) days from the sale, prepare a return and fi le the same in the Offi ce of the Registry of Deeds where the mortgage is recorded.

Sec. 8. The Sheriff or the notary public who conducted the sale shall report the name/s of the bidder/s to the Clerk of Court.

Sec. 9. Upon presentation of the appropriate receipts, the Clerk of Court shall issue and sign the Certifi cate of Sale, subject to the approval of the Executive Judge or, in the latter’s absence, the Vice-Executive Judge. Prior to the issuance of the certifi cate of Sale, the Clerk of court shall, in extra-judicial foreclosure conducted under the direction of the sheriff, collect P300.00 as provided in Section 20(d), Rule 141, as

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568

amended, and in extrajudicial foreclosure sales conducted under the direction of a notary public, collect the appropriate fees pursuant to Rule 141, §20(e), which amount shall not exceed P100,000.00 (Minute Res., A.M. No. 99-10-05-0, August 7, 2001).

Sec. 10. After the Certifi cate of Sale has been issued, the Clerk of Court shall keep the complete records for a period of one (1) year from the date of registration of the certifi cate of sale with the Register of Deeds, after which the records shall be archived. Notwithstanding the foregoing, juridical persons whose property is sold pursuant to an extra-judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certifi cate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier (R.A. 8791, Section 47). In case the property is redeemed, the Clerk of Court shall assess the redemptioner’s fee as provided in Section 7 (k), Rule 141, as amended. If the property is not redeemed, the Clerk of Court shall, as a requisite for the issuance of the fi nal Deed of Sale, assess the highest bidder the amount of P300.00 as provided in Section 20(d), Rule 141, as amended.

Sec. 11. These guidelines shall take effect on April 22, 2002.Issued this 22nd day of January 2002.

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569

3. JUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE

(Rule 68, Rules of Court.)

SECTION 1. Complaint in action for foreclosure. — In an action for the foreclosure of a mortgage or their encumbrance upon a real estate, the complaint shall set forth the date and due execution of the mortgage, its assignments, if any, the names and residences of the mortgagor and mortgagee, a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action. (1a) SEC. 2. Judgment on foreclosure for payment or sale. — If upon the trial in such action the court shall fi nd the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (2a) SEC. 3. Sale of mortgaged property; effect. — When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specifi ed therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confi rmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

569


570 Rule 68, Rules of Court

Upon the fi nality of the order of confi rmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a) SEC. 4. Disposition of proceeds of sale. — The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrances in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it. (4a) SEC. 5. How sale to proceed in case the debt is not all due. — If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment, as soon as a suffi cient portion of the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards, as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the fi rst instance, and the entire debt and costs shall be paid, if the proceeds of the sale be suffi cient therefor, there being a rebate of interest where such rebate is proper. (5a) SEC. 6. Defi ciency judgment. — If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. (6a) SEC. 7. Registration. — A certifi ed copy of the fi nal order of the court confi rming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certifi cate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser.

571

Where a right of redemption exists, the certifi cate of title in the name of the mortgagor shall not be cancelled, but the certifi cate of sale and the order confi rming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certifi cate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certifi cate of title. If the property is not redeemed, the fi nal deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certifi cate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. (n) SEC. 8. Applicability of other provisions. — The provisions of Sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter. (8a)

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4. JUDICIAL AND OTHER LEGAL NOTICES

A. PRESIDENTIAL DECREE NO. 1079, AS AMENDED

REVISING ANG CONSOLIDATING ALL LAWS AND DECREES REGULATING THE PUBLICATION OF JUDICIAL NOTICES, AD-VERTISEMENTS FOR PUBLIC BIDDINGS, NOTICES OF AUCTION SALES AND OTHER SIMILAR NOTICES. WHEREAS, in order to better serve the public good, it is necessary to properly disseminate information contained in judicial notices, advertisements for public biddings, notices of auction sales and other similar notices required by Republic Act No. 4569, as amended by Republic Act No. 4883 and Presidential Decree No. 795; WHEREAS, Presidential Decree No. 19 has further amended the above-mentioned law by authorizing the publication of the said notices in any existing newspaper or periodical in any part of the country during the present national emergency; WHEREAS, there is an urgent need to revised Presidential Decreee No. 19 to preclude any confusion in the distribution of the notices referred to above; WHEREAS, Presidential Decree No. 19 was intended merely as an emergency measure to prevent the paralyzation of the normal transactions of the government and the private sector which might have resulted from the scarcity of newspapers in the provinces during the early stage of martial law, which possibility no longer exists today; WHEREAS, to better implement the philosophy behind the publication of the above-mentioned notices and announcements and prevent crass commercialism and unfair competition among community newspapers,which conditions prove to be inimical to the development of a truly free and responsible press, it is necessary to revise and consolidate all laws and decrees affecting the publication of judicial notices and other announcements herein referred to:

572

573

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by law, do hereby order and decree the following. SECTION 1. All notices of auction sales in extrajudicial foreclosure of real estate mortgage under Act No. 3135, as amended, judicial notices such as notices of sale on execution of real properties, notices in special proceedings, court orders and summonses and all similar announcements arising from court litigation required by law to be published in a newspaper or periodical of general circulation in particular provinces and/or cities shall be published in newspapers or publications published, edited and circulated in the same city and/or province where the requirement of general circulation applies: Provided, That the province or city where the publication’s principal offi ce is located shall be considered the place where it is edited and published: Provided, further, That in the event there is no newspaper or periodical published in the locality, the same may be published in the newspaper or periodical published, edited and circulated in the nearest city or province: Provided, fi nally, That no newspaper or periodical which has not been authorized by law to publish and which has not been regularly published for at least one year before the date of publication of the notices or announcements which may be assigned to it shall be qualifi ed to publish the said notices. SEC. 2. The executive judge of the Court of First Instance1 shall designate a regular working day and a defi nite time each week during which the said judicial notices or advertisements shall be distributed personally by him for publication to qualifi ed newspapers or periodicals as defi ned in the preceding section, which distribution shall be done by raffl e: Provided, That should the circumstances require that another day be set for the purpose, he shall notify in writing the editors and publishers concerned at least three (3) days in advance of the designated date: That the distribution of the said notices by raffl e shall be dispensed with in case only one newspaper or periodical is in operation in particular province or city. SEC. 3. No newspaper or periodical shall charge for the publication of the said notices and announcements less than ten pesos (P10.00) per column inch, nor more than eighty percent (80%) of their regular commercial display advertising rates: Provided, That publications whose regular commercial advertising rates are lower than ten pesos (P10.00) shall not charge below ten pesos (P10.00) per column inch for

1Now, Regional Trial Court.

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574

the publication of the above-mentioned notices and announcements: Provided, further, That in the case of publications that do not carry commercial display advertising, the rate for the publication of legal and judicial notices shall be fi xed at ten pesos (P10.00) per column inch: Provided, fi nally, That newspapers or periodicals may only charge more than ten (P10.00) up to eighty percent (80%) of their regular commercial display advertising rates when there is proper and adequate proof that the rate claimed is the regular commercial display advertising rate. SEC. 4. In the publication of the legal and judicial notices referred to above, newspapers or periodicals shall use less but not more than eight (8) points for the text, less but not more than ten (10) points for the heading and more but not less than nine (9) cms. column width: Provided, That the printing of the text and heading shall be solid, without slugs or leads between lines and margins. SEC. 5. No publisher, editor, media personnel or any other person shall directly or indirectly offer to give money, commission or gifts of any kind to executive judges of the court of fi rst instance or any court employee in consideration of the award of legal and judicial notices and similar announcements defi ned in section 1 hereof. Neither shall the latter directly or indirectly demand of or receive from the former money, commission or gifts or any kind in consideration of any publication herein referred to. SEC. 6. Violation of any provision of this Decree shall be punished by a fi ne of not less than Five thousand pesos (P5,000.00) nor more than Twenty thousand pesos (P20,000.00) and imprisonment for not less than six (6) months nor more than two (2) years. The offending executive judge or court personnel shall be perpetually disqualifi ed from holding any public offi ce in the government. SEC. 7. Any provision of law, decree, executive order, rule or regulation contrary to or inconsistent with the provision of this Decree are hereby amended, modifi ed or repealed accordingly. SEC. 8. This Decree shall take effect immediately. ISSUED: January 28, 1977.

P.D. No. 1079

575

B. A.M. NO. 01-1-07-SC-RE: GUIDELINES IN THE ACCREDITATION OF NEWSPAPERS AND

PERIODICALS AND IN THE DISTRIBUTION OF LEGAL NOTICES AND ADVERTISEMENTS FOR PUBLICATION.

RESOLUTION

GUIDELINES IN THE ACCREDITATION OF NEWSPAPERS AND PERIODICALS SEEKING TO PUBLISH JUDICIAL AND LEGAL NOTICES AND OTHER SIMILAR ANNOUNCEMENTS AND IN THE RAFFLE THEREOF.

The concern has been expressed by various sectors that despite circulars and other issuances of the Supreme Court, there remain variances in the application and implementation by the Executive Judges of the Regional Trial Courts of the provisions of Presidential Decree No. 1079 (Revising and Consolidating All Laws and Decrees Regulating the Publication of Judicial Notices, Advertisements for Public Biddings, Notices of Auction Sales and Other Similar Notices). To ensure uniform compliance with the said law and to protect the interests of the public, in general, and of the litigants, in particular, the following guidelines are set forth for all concerned:

I. Accreditation SECTION 1. Scope of application. — These Guidelines apply only in cases where judicial or legal notices are to be published in newspapers or periodicals that are of general circulation in a particular province or city. Publication of notices for national dissemination may be published in newspapers or periodicals with national circulation without need of accreditation. SEC. 2. Requirement of accreditation. — Only accredited newspapers or periodicals may publish judicial or legal notices. SEC. 3. Application for accreditation. — A verifi ed application for accreditation may be fi led with the offi ce of the Executive Judge of the Regional Trial Court having administrative supervision over the courts whose orders are to be published. (a) The application shall include complete and accurate information on the following:

(1) Title of the publication;

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576 A.M. No. 01-1-07-SC

(2) Name of the publisher; (3) Name of the editor-in-chief; (4) Frequency of publication; (5) Address, telephone number and fax machine number (if any), of the principal offi ce; (6) Total number of copies printed (as of the date of application for accreditation); and (7) Month, date and year of fi rst issue.

(b) A newspaper or periodical has its principal offi ce in the address registered with the Securities and Exchange Commission or with the Department of Trade and Industry. (c) A newspaper or periodical which has its principal offi ce in any of the cities or municipalities in a province may be accredited by any one or all of the Regional Trial Court Executive Judges in the province, provided that all requisites for accreditation are complied with. A newspaper or periodical which has its principal offi ce in any of the cities or municipalities in the National Capital Judicial Region may be accredited by any one or all of the Regional Trial Court Executive Judges therein, provided that it satisfi es all the requirements for accreditation. (d) The application for accreditation shall include statements on the following:

(1) That the applicant is duly registered as a newspaper or periodical; (2) That the newspaper or periodical is edited, published and circulated in the province or city where accreditation is sought; (3) That the newspaper or periodical has been regularly published for at least one (1) year before the date of the application of accreditation; (4) That the newspaper or periodical is not participating in the raffl e of legal and judicial notices in other provinces and/or cities; (5) Whether or not the newspaper or periodical carries commercial display advertising. If the newspaper or periodical carries such advertising, the applicant should submit a copy of the publication’s current contract form showing its commercial display advertising rates; and

577

(6) That the newspaper or periodical does not merely repro-duce or reprint news pages of other newspapers or periodicals within the region of the province or city of the Regional Trial Court involved.

(e) The application for accreditation shall be accompanied by the following:

(1) Three (3) sample copies of the newspaper’s or periodical’s printed format for legal and judicial notices following the requisites prescribed by Section 4 of P.D. No. 1079, to wit:

(a) Font size — eight (8) points for the text or less, and not more than ten (10) points for the heading; (b) Column width — more but not less than nine (9) ems; and (c) Line spacing for text and heading — normal single-space.

(2) Copy of an issue of the newspaper containing commercial advertisement published in the last twelve (12) months; (3) Certifi ed true copy of a contract or insertion order or invoice describing the size and rate of the advertisement; and (4) Certifi ed true copy of a newspaper’s offi cial receipt showing payment per contracted advertising rate.

SEC. 4. Application fees. — A fee shall be collected in an amount to be fi xed by the Offi ce of the Court Administrator for every application for accreditation fi led with the Regional Trial Court. SEC. 5. Non-compliance with requirements. — Any application for accreditation that fails to comply with any of the requirements prescribed by the preceding provisions shall be denied without further evaluation. SEC. 6. Evaluation and approval of applications. — An application for accreditation shall be evaluated and approved by the Executive Judge of the Regional Trial Court having administrative supervision over the courts whose orders are to be published, taking into consideration the following criteria: (a) The applicant is duly registered as a newspaper or periodical. (b) The applicant must have its principal offi ce in and must be of general circulation in the city and/or province where it seeks accreditation.



578 A.M. No. 01-1-07-SC

A newspaper or periodical is of general circulation if it is published for the dissemination of local news and general information (not for a limited interest group); it has a bona fi de subscription list of paying subscribers; and it is published at regular intervals. (Fortune Motors [Phils.], Inc. vs. Metropolitan Bank and Trust Co., et al., G.R. No. 115068, November 28, 1996, 265 SCRA 72) (c) The newspaper or periodical must have been regularly published for at least one (1) year before the date of the application; and, after accreditation, before the date of each and every raffl e participated in by the accredited publication. A newspaper or periodical is regularly published if it comes out with 365 or 52 issues for those issued daily or weekly, respectively. (d) A newspaper or periodical must not merely reproduce or reprint news pages of other newspapers or periodicals within the region of the province or city of the Regional Trial Court involved. SEC. 7. Absence of qualifi ed newspapers or periodicals. — In the event that there is no newspaper or periodical qualifi ed to be accredited in the station of the Regional Trial Court, the qualifi ed publication in the nearest city or province may be accredited. SEC. 8. Period of validity of accreditation. — The accreditation shall be valid for a period of fi ve (5) years from date of approval of the application for accreditation. During the fi ve-year period, however, the accreditation may be suspended or revoked in accordance with Section 16 of these Guidelines. SEC. 9. Posting of names of accredited newspaper or publication. — The Executive Judge shall cause the posting of the names of the accredited newspaper or publication, the amount they charge per column inch and a sample of the maximum font and minimum column width prescribed by law in three (3) conspicuous places in the courthouse or Hall of Justice Building.

II. Raffl e SEC. 10. Requirement of raffl e. — All notices, announcements and advertisements subject hereof shall be distributed for publication to accredited newspapers or periodicals by raffl e. No such notices, announcements and advertisements may be assigned for publication without being raffl ed. The raffl e of judicial or legal notices for publication shall be included in the regular raffl e of cases, provided that special raffl es may

579

be conducted for notices that need to be published before the regular raffl e could be conducted. The posting of judicial notices for publication, the raffl e procedure and the publication of the results thereof shall be conducted in the same manner as the raffl e of cases as provided in the Manual for Clerks of Court. All accredited newspapers or periodicals shall as much as possible be assigned an equal number of notices to publish but the same must be done thru raffl e. SEC. 11. Directive to the Branch Clerk of Court. — Orders issued by judges in cases that require publication of any notice or notices shall include a directive to the Branch Clerk of Court instructing the latter to furnish the Offi ce of the Clerk of Court with a copy of the order so that such notice may be published in accordance with the provisions of P.D. No. 1079. SEC. 12. When raffl e not necessary. — The distribution by raffl e of notices, announcements and advertisements for publication shall be dispensed with in case there is only one accredited newspaper or periodical in a particular province, city or municipality.

III. Rates of Publication SEC. 13. Rates of publication charges. — Newspapers or periodicals whose regular commercial rates are lower than ten pesos (P10) per column inch shall not charge below ten pesos (P10) per column inch of the notices, announcements and advertisements. In case of newspapers or periodicals that do not carry commercial display advertising, the rate for the publication of notices, announcements and advertisements shall be fi xed at ten pesos (P10) per column inch. Newspapers or periodicals may only charge more than ten pesos (P10) up to eighty percent (80%) of their regular commercial display advertising rates when there is proper and adequate proof that the rate claimed is the regular commercial advertising rate. SEC. 14. Determination of rates of publication charges. — The Executive Judge shall determine the allowable rates as mentioned in the preceding Section, using as basis the contracts and proofs of payment submitted by the publishers.

IV. Font Sizes and Column Width SEC. 15. Samples of font sizes and column width. — The Offi ce of the Court Administrator shall issue the appropriate order indicating the



580

samples of the maximum font sizes and minimum columns width for notices, announcements and advertisements.

V. Revocation of Accreditation SEC. 16. When accreditation may be suspended or revoked. — The Executive Judge may suspend or revoke the accreditation of a newspaper or periodical when it is established in a summary hearing that the said newspaper or periodical no longer complies with the requirements for an accredited newspaper or periodical as prescribed herein or has violated any of the provisions of P.D. No. 1079.

VI. Appeal SEC. 17. Appeal to the Offi ce of the Court Administrator. — Appeals in the grant and denial of accreditation or in the suspension or revocation of accreditation may be brought before the Offi ce of the Court Administrator by the aggrieved party. The decision of the Court Administrator shall be fi nal. The Guidelines prescribed in this Resolution shall take effect on November 7, 2001 after fi fteen (15) days following its publication in two (2) newspapers of general circulation. Promulgated this 16th day of October, 2001.

— oOo —

A.M. No. 01-1-07-SC

581

5. THE CHATTEL MORTGAGE LAW

(Act No. 1508, as amended.)

SECTION 1. The short title of this Act shall be “The Chattel Mortgage Law.” SEC. 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed a chattel mortgage. SEC. 3. A chattel mortgage is a conditional sale1 of personal property as security for the payment of a debt, or the performance of some other obligation specifi ed therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. SEC. 4. A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee2 or unless the mortgage is recorded in the offi ce of the Register of Deeds of the province in which the mortgagor resides at the time of making the same, or if, he resides within the Philippines, in the province in which the property is situated: Provided, however, That if the property is situated in a different province from that in which the mortgagor resides, that mortgage shall be recorded in the offi ce of the Register of Deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act, the City of Manila shall be deemed to be a province.

1This defi nition is no longer accurate. See Article 2140, Civil Code.2Article 2140 of the Civil Code, in defi ning a chattel mortgage as the recording of

personal property in the Chattel Mortgage Register as security for the performance of an obligation, has preserved the distinction between pledge and chattel mortgage which was blurred by Section 4 when it provided that in a chattel mortgage “the possession of the property is delivered or retained by the mortgagee.’’ (Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975].)

581


582 Act No. 1508

SEC. 5. A chattel mortgage shall be deemed to be suffi cient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affi davit in substance as hereinafter set forth, which affi davit, signed by the parties to the mortgage as above stated, and the certifi cate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT “This mortgage made this ............... day of .............. 19 ........ by .......................... , a resident of municipality of ...................... Province of ............................ Philippines, mortgagor, to ............ a resident of the municipality of .................................., Province of .............................. Philippines, mortgagee, witnesseth: “That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of ....................... Province of .............................. , and now in the possession of said mortgagor, to wit:.................................................................................................................... ................................................................................................................... (Here insert specifi c description of the property mortgaged.) This mortgage is given as security for the payment to the said ........................ mortgagee, of promissory notes for the sum of ......................... pesos, with (or without, as the case may be) interest thereon at the rate of ............................ per centum per annum, according to the terms of .......................... certain promissory notes, dated ..................................... , and in the words and fi gures following:........................................................................................................................... .................................................................................................................... (Here insert copy of the note or notes secured.) (If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be performed.) The conditions of this obligation are such that if the mortgagor, his heirs, executors, or administrators shall well and truly perform the full

583

obligation, (or obligations) above stated according to the terms thereof, then this obligation shall be null and void. Executed at the municipality of ...................................... in the Province of ............................ this .............. day of ............. , 19 .......

................................................(Signature of mortgagor.)

In the presence of:................................................................................................................ (Two witnesses sign here.)”

FORM OF OATH “We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specifi ed in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud.”

FORM OF CERTIFICATE OF OATH “At ........................................ , in the Province of ............................, personally appeared ............................. the parties who signed the foregoing affi davit and made oath to the truth thereof before me.

...............................................................(Notary public, justice of the peace,3 or

other offi cer, as the case may be.)”

SEC. 6. When a corporation is a party to such mortgage, the affi davit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage, the affi davit may be made and subscribed by one member thereof.

3Now, Judge, Metropolitan Trial Court/Municipal Trial Court/Municipal Circuit Trial Court.

Act No. 1508 APPENDICESThe Chattel Mortgage Law


584 Act No. 1508

SEC. 7. The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same. If the property mortgaged be “large cattle,” as defi ned by Section one of Act Numbered Eleven hundred and forty-seven, and the amendments thereof,4 the description of said property in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos or cowlicks, and other marks of ownership as described and set forth in the certifi cate of ownership of said animal or animals, together with the number and place of issue of such certifi cates of ownership. If growing crops be mortgaged, the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for, and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties, the mortgagee may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale, pay all expenses incurred in caring for, harvesting and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any, shall be paid to the mortgagor or those entitled to the same. A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depositary as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. SEC. 8. If the mortgagee, assignee, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or after tender of the performance of the condition, at or after the time fi xed for the performance, does not, within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover from the person whose duty is to discharge the same, twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject matter thereof.

4Now, Section 511, Revised Administrative Code.

585

SECS. 9 to 12. (Repealed by Art. 367, Revised Penal Code.) SEC. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. An attaching creditor who redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this Act. SEC. 14. The mortgagee, his executor, administrator, or assign, may, after thirty days, from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public offi cer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale. The offi cer making the sale shall, within thirty days thereafter, make in writing a return of his doings and fi le the same in the offi ce of the registry of deeds where the mortgage is recorded, and the registry of deeds shall record the same. The fees of the offi cer for selling the property shall be the same as in the case of sale on execution as provided in Act Numbered One hundred and ninety, and the amendments thereto, and the fees of the Register of Deeds for registering the offi cer’s return shall be taxed as a part of the cost of sale, which the offi cer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, fi rst, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand. If the sale includes any “large cattle,” a certifi cate of transfer as required by Section sixteen of Act Numbered Eleven hundred and



586

forty-seven shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof. SEC. 15.5 Every register of deeds shall keep a primary entry book and a registration book for chattel mortgages; shall certify on each mortgage fi led for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in such books any chattel mortgage, assignment, or discharge thereof, and any other instruments relating to a recorded mortgage, and all such instruments shall be presented to him in duplicate, the original to be fi led and the duplicate to be returned to the person concerned. The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgagee and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument fi led, giving proper fi le number thereof. The recording of other instruments relating to a recorded mortgage shall be effected by way of annotations on the space provided therefor in the registration book, after the same shall have been entered in the primary entry book. The register of deeds shall also certify the offi cer’s return of sale upon any mortgage, making reference upon the record of such offi cer’s return to the volume and page of the record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certifi ed copy thereof, when requested, upon payment of the lawful fees for such copy; and certify upon each mortgage offi cer’s return of sale or discharge of mortgage, and upon any other instrument relating to such a recorded mortgage, both on the original and on the duplicate, the date, hour and minute when the same is received for record, and record such certifi cate with the return itself, and keep an alphabetical index of mortgagors and mortgagees, which record and index shall be open to public inspection. Duly certifi ed copies of such records and of fi led instruments shall be receivable as evidence in any court. The register of deeds shall collect the following fees for services rendered by him under this section: (a) For entry or presentation of any document in the primary entry book, one peso. Supporting papers presented together with the

5Superseded by Sections 115 and 116 of the Property Registration Decree. (see Ap-pendix 7-C.)

Act No. 1508

587

principal document need not be charged any entry or presentation fee unless the party in interest desires that they be likewise entered. (b) For fi ling and recording each chattel mortgage, including the necessary certifi cates and affi davits, the fees established in the following schedule shall be collected:

1. When the amount of the mortgage does not exceed six thousand pesos, three pesos and fi fty centavos for the fi rst fi ve hundred pesos or fractional part thereof, and one peso and fi fty centavos for each additional fi ve hundred pesos or fractional part thereof. 2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, twenty-four pesos for the initial amount not exceeding eight thousand pesos, and four pesos for each additional two thousand pesos or fractional part thereof. 3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, seventy-fi ve pesos for the initial amount not exceeding thirty-fi ve thousand pesos, and seven pesos for each additional fi ve thousand pesos or fractional part thereof. 4. When the amount of the mortgage is more than one hundred thousand pesos but does not exceed fi ve hundred thousand pesos, one hundred and seventy-six pesos for the initial amount not exceeding one hundred ten thousand pesos, and ten pesos for each additional ten thousand pesos or fractional part thereof. 5. When the amount of the mortgage is more than fi ve hundred thousand pesos, fi ve hundred eighty-one pesos for the initial amount not exceeding fi ve hundred twenty thousand pesos, and fi fteen pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the property is situated shall be suffi cient registration: And provided, further, That if the mortgage is to be registered in more than one city or province, the register of deeds of the city or province where the instrument is fi rst presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the register of deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the fi rst city or province, but in no case shall the fees payable in any registry be less than the minimum fi xed in said schedule.



588

(c) For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the latter is stated in the instrument. (d) For recording each notice of attachment, including the necessary index and annotations, four pesos. (e) For recording each release of mortgage, including the necessary index and references, the fees established in the schedule under paragraph (b) above shall be collected on the basis of fi ve per centum of the amount of the mortgage. (f) For recording each release of attachment, including the proper annotations, two pesos. (g) For recording each sheriff’s return of sale, including the index and references, three pesos. (h) For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instruments in which a person is given power to act in behalf of another in connection with a mortgage, three pesos. (i) For recording each instrument or order relating to a recorded mortgage, including the necessary index and references, for which no specifi c fee is provided above, two pesos. (j) For certifi ed copies of records, such fees as are allowed by law for copies kept by the register of deeds. (k) For issuing a certifi cate relative to, or showing the existence or non-existence of an entry in the registration book, or a document fi le, for each such certifi cate containing not more than two hundred words, three pesos; if it exceeds that number, an additional fee of fi fty centavos shall be collected for every one hundred words or fractional part thereof, in excess of the fi rst two hundred words. (As amended by Sec. 198, Rev. Adm. Code, and by R.A. No. 2711, approved June 18, 1960.) SEC. 16. This Act shall take effect on August fi rst, nineteen hundred and six. ENACTED: July 2, 1906.

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Act No. 1508

589

6. THE SHIP MORTGAGE DECREE OF 1978

(Pres. Decree No. 1521.)

WHEREAS, it is the declared policy of the State to accelerate the growth and development of the shipping industry; WHEREAS, due to the heavy capital requirement for ship acquisition and operation, the shipping industry has turned to fi nancial institutions, both local and foreign, for assistance; WHEREAS, Philippine laws on ship mortgage have not been responsive to the needs of vessel fi nancing such that it has deterred the extension of needed loans to the industry; WHEREAS, there is a recognized need for extending the benefi ts accorded to overseas shipping under Presidential Decree No. 214 to domestic shipping. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order the enactment of a ship mortgage law as follows: SECTION 1. Title. — This Decree shall be known as “The Ship Mortgage Decree of 1978.”1

1This Decree is the governing law concerning maritime liens for the services ren-dered for repair of vessels. (Negros Navigation Co., Inc. vs. Court of Appeals, 573 SCRA 434 [2008].)

The provisions of our Ship Mortgage Decree of 1978 were patterned quite closely after the U.S. Ship Mortgage Act of 1920. Signifi cantly, the Federal Maritime Lien Act of the United States, like our Ship Mortgage Decree of 1978, provides that “any person fur-nishing repairs, supplies, towage, use of drydock, or marine railway, or other necessaries, to any foreign or domestic vessel on the order of the owner of such vessel, or of a person authorized by the owner has a maritime lien on the vessel, which may be enforced by suit in rem.” Being of foreign origin, the provisions of the Ship Mortgage Decree of 1978 may thus be construed with the aid of foreign jurisprudence from which they are derived except insofar as they confl ict with existing laws or are inconsistent with local customs and institutions.

As held by the public respondent Court of Appeals, those who provide credit to a master of a vessel for the purpose of discharging a maritime lien also acquire a lien over the said vessel. Under American jurisprudence, “(f)urnishing money to a master in good

589


590 P.D. No. 1521

SEC. 2. Who may Constitute a Ship Mortgage. — Any citizen of the Philippines, or any association or corporation organized under the laws of the Philippines, at least sixty per cent of the capital of which is owned by citizens of the Philippines may, for the purpose of fi nancing the construction, acquisition, purchase of vessels or initial operation of vessels, freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank or other fi nancial institutions, domestic or foreign.2

SEC. 3. Mortgage of Vessel of Domestic Ownership; records. — (a) No mortgage, which at the time such mortgage is made includes a vessel of domestic ownership as this term is defi ned in Presidential Decree No. 761, or any portion thereof, as the whole or any part of the property mortgaged, shall be valid, in respect to such vessel, against any person other than the mortgagor, his heir or assign, and a person having actual notice thereof, until such mortgage is recorded in the offi ce of the Philippine Coast Guard of the port of documentation of such vessel. (b) The Coast Guard District or Station Commander shall record mortgages delivered to him, in the order of their reception, in books to be kept for that purpose and indexed to show —

(1) The name of the vessel;

faith to obtain repairs or supplies or to remove liens, in order to forward the voyage of the vessel, raises a lien just as though the things (for which) money was obtained to pay for had been furnished by the lender.” Likewise, “(a)dvances to discharge maritime liens create a lien on the vessel, and one advancing money to discharge a valid lien gets a lien of equal dignity with the one discharged.” There is no reason why these doctrines cannot be given persuasive application in the instant case considering that they do not violate or contravene any of our existing laws. Moreover, as pointed out by the appellate court, these doctrines are in accord with our provisions on subrogation particularly Art. 1302, paragraph 2 of the New Civil Code which provides that there is legal subrogation “when a third person, not interested in the fulfi llment in the obligation, pays with the express or tacit approval of the debtor.”

Under these doctrines, a person who extends credit for the purpose of discharging a maritime lien is not entitled to the said lien “where the funds were not furnished to the ship on the order of the master and there was no evidence that the money was actually used to pay debts secured by the lien.” As applied in the instant case, it becomes neces-sary to prove that the credit advanced by Citibank to PISC was actually utilized for the repair and conversion of the vessel M/V “Asean Liberty.” Otherwise, Citibank could not have acquired the maritime lien of Hongkong United Dockyards, Ltd. over the vessel M/V “Asean Liberty.” (Philippine National Bank vs. Court of Appeals, 337 SCRA 381 [2000]; see Crescent Petroleum, Ltd. vs. M/V “Lok Maheswari,’’ 474 SCRA 623 [2005].)

2See Poliand Industrial Limited vs. National Development Company, 467 SCRA 500 (2005).

591

(2) The names of the parties to the mortgage; (3) The time and date of reception of the instrument; (4) The interest in the vessel so mortgaged; (5) The amount and date of maturity of the mortgage; (6) Name, citizenship, nationality and residence of owner; and (7) Any material change of condition in respect to any of the preceding items.

A copy of the instrument or mortgage shall be furnished the Central Bank of the Philippines. SEC. 4. Preferred Mortgages. — (a) A valid mortgage which at the time it is made includes the whole of any vessel of domestic ownership shall have, in respect to such vessel and as of the date of recordation, the preferred status given by the provisions of Section 17 hereof, if —

(1) The mortgage is recorded as provided in Section 3 hereof; (2) An affi davit is fi led with the record of such mortgage to the effect that the mortgage is made in good faith and without any design to hinder, delay, or defraud any existing or future creditor of the mortgagor or any lien or of the mortgaged vessel; (3) The mortgage does not stipulate that the mortgagee waives the preferred status thereof.

(b) Any mortgage which complies with the above conditions is hereafter called a “preferred mortgage.” For purposes of this Decree, a vessel holding a Provisional Certifi cate of the Philippine Registry is considered a vessel of domestic ownership such that it can be subject of preferred mortgage. The Philippine Coast Guard is hereby authorized to enter a vessel holding a Provisional Certifi cate of Philippine Registry in the Registry of Vessels and to record any mortgage executed thereon. Such mortgage shall have the preferred status as of the date of recordation upon compliance with the above conditions. (c) There shall be endorsed upon the documents of a vessel covered by a preferred mortgage —

(1) The names of the mortgagor and mortgagee; (2) The time and date the endorsement is made; (3) The amount and date of maturity of the mortgage; and

P.D. No. 1521 APPENDICESThe Ship Mortgage Decree of 1978


592

(4) Any amount required to be endorsed by the provisions of paragraph (e) or (f) of this Section.

(d) Such endorsement shall be made (1) by the Coast Guard District or Station Commander of the port of documentation of the mortgaged vessel, or (2) by the Coast Guard District or Station Commander of any port in which the vessel is found, if such Coast Guard District or Station Commander is directed to make the endorsement by the Coast Guard District or Station Commander of the port of documentation. The Coast Guard District or Station Commander of the port of documentation shall give such direction by wire or letter at the request of the mortgagee and upon the tender of the cost of communication of such direction. Whenever any new document is issued for the vessel, such endorsement shall be transferred to and endorsed upon the new document by the Coast Guard District or Station Commander. In the case of a vessel holding a provisional certifi cate of Philippine Registry, the endorsement shall be made by the Philippine consul abroad upon direction by wire or letter from the Maritime Industry Authority at the request of the mortgagee and upon tender of the cost of communication of such direction. A certifi cate of such endorsement, giving the place, time and description of the endorsement, shall be recorded with the records of registration to be maintained at the Philippine Consulate. (e) A mortgage which includes property other than a vessel shall not be held a preferred mortgage unless the mortgage provides for the separate discharge of such property by the payment of specifi ed portion of the mortgage indebtedness. If a preferred mortgage so provides for the separate discharge, the amount of the portion of such payment shall be endorsed upon the documents of the vessel. (f) If a preferred mortgage includes more than one vessel and provides for the separate discharge of each vessel by the payment of a portion of mortgage indebtedness, the amount of such portion of such payment shall be endorsed upon the documents of the vessel. In case such mortgage does not provide for the separate discharge of a vessel and the vessel is to be sold upon the order of a district court of the Philippines in a suit in rem in admiralty, the court shall determine the portion of the mortgage indebtedness increased by 20 per centum (1) which, in the opinion of the court, the approximate value of all the vessels covered by the mortgage, and (2) upon the payment of which the vessel shall be discharged from the mortgage.

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SEC. 5. Certifi ed Copies of Mortgage; exhibition. — The Coast Guard District or Station Commander upon the recording of a preferred mortgagee shall deliver two certifi ed copies thereof to the mortgagor who shall place, and use due diligence to retain, one copy on board the mortgaged vessel notice of which shall be posted in a conspicuous place thereat and cause such copy and the documents of the vessel to be exhibited by the master to any person having business with the vessel, which give rise to a maritime lien upon the vessel or to the sale, conveyance, or mortgage thereof. The master of the vessel shall upon the request of any such person, exhibit to him the documents of the vessel placed on board thereof. The requirements of this Section that a copy of a preferred mortgage be placed and retained on board the mortgaged vessel shall not apply in the case of a mortgaged vessel which is not self-propelled (including but not limited to, barges, scores, lighters, and car fl oats). If the master of the vessel willfully fails to exhibit the documents of the vessel or the copy of any preferred mortgage thereof, the Philippine Coast Guard may suspend or cancel the master’s license. SEC. 6. Prior and Subsequent Maritime Liens on Mortgaged Vessel. — The mortgagor (1) shall, upon request of the mortgagee, disclose in writing to him prior to the execution of any preferred mortgage, the existence of any maritime lien, prior mortgage, or other obligation or liability upon the vessel to be mortgaged, that is known to the mortgagor, and (2) without the consent of the mortgagee, shall not incur, after the execution of such mortgage and before the mortgagee has had a reasonable time in which to record the mortgage and have indorsements in respect thereto made upon the documents of the vessel, any contractual obligation creating a lien upon the vessel other than a lien, for wages of stevedores when employed directly by the owner, operator, master, ship’s husband, or agent of the vessel, for wages of the crew of the vessel, for general average, or for salvage, including contract salvage, in respect to the vessel, tonnage dues and all other charges (not to exceed P20,000) of the Philippine Government in respect to the vessel. A mortgagor who, with intent to defraud, violates the above provision and if the mortgagor is a corporation or association, the president or other principal executive offi cer of the corporation or association, shall be punished by a fi ne of not more than P5,000 or imprisonment of not more than two years, or both. The mortgage indebtedness shall thereupon become immediately due and payable at the election of the mortgagee.



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SEC. 7. Records of Notice of Claim of Lien on Mortgaged Vessel; discharge of lien. — (a) The Coast Guard District or Station Commander of the port of documentation shall, upon the request of any person, record notice of his claim of lien upon a vessel covered by a preferred mortgage, together with the nature, date of creation, and amount of the lien, and the name and address of the person. Any person who has caused notice of his claim of lien to be so recorded shall, upon a discharge in whole or in part of the indebtedness, forthwith fi le with the Coast Guard District or Station Commander a certifi cate of such discharge. The Coast Guard District or Station Commander shall thereupon record the certifi cate. (b) The mortgagor upon a discharge in whole or in part of the mortgage indebtedness, shall forthwith fi le with the Coast Guard District or Station Commander for the port of documentation of the vessel, a certifi cate of such discharge duly executed by the mortgagee. Such Coast Guard District or Station Commander shall thereupon record the certifi cate. In case of a vessel covered by a preferred mortgage, the Coast Guard District or Station Commander at the port of documentation shall endorse upon the documents of the vessel, or direct the Coast Guard District or Station Commander at any port in which the vessel is found, to so endorse, the fact of such discharge. A certifi cate of such endorsement, giving the time, place and description of the endorsement, shall be recorded with the Philippine Coast Guard. Where the endorsement is made by a person other than the Coast Guard District or Station Commander such certifi cate shall be promptly forwarded to the Philippine Coast Guard. SEC. 8. Conditions Precedent to Record; interest on Preferred Mort- gage. — (a) No mortgage shall be recorded unless it states the interest of the mortgagor in the vessel, and the interests so mortgaged. (b) No mortgage, notice of claim of lien, or certifi cate of discharge thereof, shall be recorded unless previously acknowledged before the Coast Guard District or Station Commander of the port of documentation or a notary public or other offi cer authorized by a law of the Philippines to take acknowledgment of deeds or before a Philippine consul or consular agent. (c) In case of a change in the port of documentation of a vessel of the Philippines, no mortgage shall be recorded at the new port of documentation unless there is furnished to the Coast Guard District

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or Station Commander of such port, together with the copy of the mortgage to be recorded, a certifi ed copy of the record of the vessel at the former port of documentation furnished by the Coast Guard District or Station Commander of such port. The Coast Guard District or Station Commander at the new port of documentation is authorized and directed to record such certifi ed copy. SEC. 9. Inspection of the Copies from Records; fees. — Each Coast Guard District or Station Commander shall permit records made under the provisions of this decree to be inspected during offi ce hours, under such reasonable regulation as the Philippine Coast Guard may establish. Upon the request of any person the Coast Guard District or Station Commander shall furnish him from the records of the Coast Guard’s offi ce (1) a certifi cate setting forth the names of the owners of any vessel, the interest held by each owner, and the material facts as to any mortgage covering, or any lien or other encumbrance upon, a specifi ed vessel, (2) a certifi ed copy of any mortgage, notice of claim of lien, or certifi cate of discharge in respect to such vessel, or (3) a certifi ed copy as required by subsection (c) of Section 8 hereof. The Philippine Coast Guard shall collect the fees as provided for under existing laws and regulations for any mortgage recorded, or any certifi cate or certifi ed copy furnished by it. SEC. 10. Lien of preferred Mortgage; foreclosure; jurisdiction; procedure. — A preferred mortgage shall constitute a lien upon the mortgaged vessel in the amount of the outstanding mortgage indebtedness secured by such vessel. Upon the default of any term or condition of the mortgage such lien may be enforced by the mortgagee by suit in rem in admiralty, wherein the vessel itself may be made a party defendant and be arrested in the manner as provided in Section 11 hereof. Original jurisdiction of all such suits is granted to the Court of First Instance of the Philippines exclusively. In addition to any notice by publication, actual notice of commencement of any such suit shall be given by the mortgagee, in such manner as the court shall direct, to (1) the master, other ranking offi cer, or caretaker of the vessel, and (2) any person who has recorded a notice of claim of an undischarged lien upon the vessel, as provided in Section 7 hereof, unless after search by the mortgagee satisfactory to the court, such mortgagor, master, other ranking offi cer, caretaker, or claimant is not found within the Philippines. Failure to give notice to any such person, as required by this Section, shall not constitute a jurisdictional defect but the mortgagee shall be liable to such person for damages in the amount of his interest in the vessel terminated by the suit.



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In case of judicial foreclosure as provided herein, the provisions of Rule 68 of the New Rules of Court, if not inconsistent herewith, shall apply. The lien of a preferred ship mortgage may also be enforced by a suit in rem in admiralty or otherwise in any foreign country in which the vessel may be found pursuant to the procedure of said country for the enforcement of ship mortgages constituting maritime liens on vessels documented under the laws of said country. SEC. 11. Arrest of Vessels. — Upon the fi ling of the petition for the judicial foreclosure of a Preferred Ship Mortgage, or immediately thereafter, the applicant may apply ex parte for an order of the arrest of the mortgaged vessel or vessels and the judge shall immediately issue the same, provided that it is made to appear by affi davit of the applicant, or of some other person who personally knows the facts that a default in the mortgage has occurred and that applicant fi les a bond executed to the adverse party in an amount to be fi xed by the judge, not exceeding the applicant’s claim, conditioned that the latter will pay all the costs which may be adjudged to the adverse party and all damages which he may sustain by reason of such arrest, if the court shall fi nally adjudge that the applicant was not entitled thereto. SEC. 12. Discharge of Order of Arrest; Counterbond. — At any time after an order of arrest has been granted, the party whose vessel or vessels had been arrested, or the person appearing in his behalf, may, upon reasonable notice to the applicant, apply to the judge who granted the order, or to the judge of the court in which the action is pending, for an order discharging the order of arrest. That judge shall order the discharge of the arrest if a cash deposit is made, or counterbond executed to the creditor is fi led, on behalf of the adverse party, with the clerk or judge of the court where the application is made in an amount double the value of the claim to secure the payment of any judgment that the creditor may recover in the action. Upon the fi ling of such counterbond, copy thereof shall forthwith be served on the creditor or his lawyer. Upon discharge of the order of arrest, the property arrested or seized shall be delivered to the party making the deposit or giving the counterbond, or the person appearing in his behalf, the deposit or counterbond aforesaid standing in place of the vessel or vessels released. Should such deposit or counterbond for any reason be found to be, or become insuffi cient, and the party furnishing the same fails to fi le an additional counterbond, the attaching creditor may apply for a new order of arrest or seizure.

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SEC. 13. Discharge of Order of Arrest for Improper or Irregular Issuance. — The party whose vessel/s has been arrested may also, at any time either before or after the release of the arrested vessel, or before any arrest or seizure has been effected, upon reasonable notice to the creditor, apply to the judge who granted the order, or to the judge of the court in which the action is pending, for an order to discharge the order of arrest or seizure on the ground that the same was improperly or irregularly issued. After hearing, the judge shall order the discharge of the order of arrest or seizure if it appears that it was improperly or irregularly issued and the defect is not cured forthwith. SEC. 14. Extrajudicial Foreclosure. — The provisions of the Chattel Mortgage Law on the remedy of extrajudicial foreclosure of mortgages insofar as they are not inconsistent herewith shall still apply. For the purpose of taking possession of the vessel or vessels, the foreclosing creditor may secure from a judge of the Court of First Instance of the province where the vessel may be found or where the creditor or debtor resides an order for the arrest or seizure of the vessel. Upon such order of seizure or arrest being issued, the sheriff shall immediately take possession of the vessel or vessels for the purpose of foreclosure and sale. The vessel may only be released in accordance with the provisions of Section 13 of this Act, or when the debtor pays the outstanding obligation. SEC. 15. Foreign Ship Mortgages. — As used in Sections 10 to 18 hereof, the term “preferred mortgage” shall include, in addition to a preferred mortgage made pursuant to the provisions of this Decree, any mortgage, hypothecation, or similar charge created as security upon any documented foreign vessel if such mortgage, hypothecation, or similar charge has been duly and validly executed in accordance with the laws of the foreign nation under the laws of which the vessel is documented and has been duly registered in accordance with such laws in a public register either at the port of registry of the vessel or at a central offi ce; and the term “preferred mortgage lien” shall also include the lien of such mortgage, hypothecation, or similar charge: Provided, however, That such “preferred mortgage lien” in the case of a foreign vessel shall be subordinate to maritime liens for repairs, supplies, towage, use of drydock or marine railway, or other necessaries, performed or supplied in the Philippines. SEC. 16. Receiver in Foreclosure; possession by sheriff. — In any suit in rem in admiralty for the enforcement of the preferred mortgage lien, the court may appoint a receiver and, in its discretion, authorize the



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receiver to operate the mortgaged vessel. The sheriff may be authorized and directed by the court to take possession of the mortgaged vessel notwithstanding the fact that the vessel is in the possession or under the control of any person claiming a possessory common law lien. SEC. 17. Preferred Maritime Lien, Priorities, Other Liens. — (a) Upon the sale of any mortgaged vessel in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims in the vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree, shall be held terminated and shall thereafter attach, in like amount and in accordance with the priorities established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all claims against the vessel, except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government; (2) crew’s wages; (3) general average; (4) salvage; including contract salvage; (5) maritime liens arising prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered prior in time.3

(b) If the proceeds of the sale should not be suffi cient to pay all creditors included in one number or grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall subsist as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances of Vessels in the port of documentation.4

SEC. 18. Suit in Personam in Admiralty on Default. — (a) Upon the default of any term or condition of a preferred mortgage upon a vessel, the mortgagee may, in addition to all other remedies granted by this Decree, bring suit in personam in admiralty in a district court of the Philippines, against the mortgagor for the amount of the outstanding mortgage indebtedness secured by such vessel or any defi ciency in the full payment thereof. (b) This Decree shall not be construed, in the case of a mortgage covering, in addition to vessels, realty or personalty other than vessels, or both, to authorize the enforcement by suit in rem in admiralty of the rights of the mortgagee in respect to such realty or personalty other than vessels.

3See Note 2.4See Note 5.

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SEC. 19. Surrender of Documents; termination of mortgagee’s interest; sale of mortgaged vessel. — (a) The documents of a vessel of the Philippines covered by a preferred mortgage may not be surrendered (except in the case of the forfeiture of the vessel or its sale by the order of any court of the Philippines or any foreign country) without the approval of the Maritime Industry Authority. The Administrator shall not grant such approval without the mortgagee’s consent. (b) The interest of the mortgage in a vessel of the Philippines covered by a mortgage, shall not be terminated by the forfeiture of the vessel for a violation of any law of the Philippines, unless the mortgagee authorized, consented, or conspired to effect the illegal act, failure, or omission which constituted such violation. Neither shall the change by the ship owner in the use or character of the vessel or in the business of the mortgagor, without the consent of the mortgagee, nor the failure by the mortgagor to comply with the provisions of Section 5 hereof affect the validity or preference of the preferred ship mortgage as against third persons. (c) Upon the sale of any vessel of the Philippines covered by a preferred mortgage in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a maritime lien other than a preferred maritime lien, the vessel shall be sold free from all pre-existing claims thereon; but the court shall, upon the request of the mortgagee, the plaintiff, or any intervenor, require the purchaser at such sale to give and the mortgagee to accept a new mortgage of the vessel for the balance of the term of the original mortgage. The conditions of such new mortgage shall be the same, so far as practicable, as those of the original mortgage and shall be subject to the approval of the court. If such new mortgage is given, the mortgagee shall not be paid from the proceeds of the sale and the amount payable as the purchase price shall be held diminished in the amount of the new mortgage indebtedness. (d) No vessel of domestic ownership shall be mortgaged, nor, any rights under said mortgage shall be assigned, to any person not a citizen of the Philippines without the approval of the Maritime Industry Authority. The penalties and sanctions provided for under Commonwealth Act No. 606 shall apply in case of any violation hereof. (e) The foreclosure sale of vessels mortgaged under the provisions of this Decree, whether judicially or extrajudicially, shall not require the approval of the Maritime Industry Authority.



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SEC. 20. Who May Bid in the Foreclosure Sale. — The following persons are qualifi ed to bid in the foreclosure sale of the mortgaged vessel: (a) Citizens of the Philippines or corporations 60% of the capital of which is owned by Filipino citizens. (b) A foreign mortgagee or foreign national whose country has diplomatic relations with the Philippines or whose country grants reciprocal rights to Filipino citizens. In case the purchaser is a foreign individual or entity, the Philippine Coast Guard shall, upon presentation of the certifi cate of sale, cancel the registration of the vessel and issue a certifi cate to that effect upon request. SEC. 21. Maritime Lien for Necessaries; persons entitled to such lien. — Any person furnishing repairs, supplies, towage, use of drydock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel.5

SEC. 22. Persons authorized to Procure Repairs, Supplies, and Necessaries. — The following persons shall be presumed to have authority from the owner to procure repairs, supplies, towage, use of dry dock or marine railway, and other necessaries for the vessel: The managing owner, ship’s husband, master or any person to whom the management of the vessel at the port of supply is entrusted. No person tortiously or unlawfully in possession or charge of a vessel shall have authority to bind the vessel. SEC. 23. Notice to Person Furnishing Repairs, Supplies, and Necessaries. — The offi cers and agents of a vessel specifi ed in Section 22 of this Decree shall be taken to include such offi cers and agents when appointed by a charterer, by an owner pro hac vice, or by an agreed

5“Under these provisions (Secs. 17 and 21) any person furnishing repairs, supplies, or other necessaries to a vessel on credit will have a maritime lien on the said vessel. Such maritime lien, if it arose prior to the recording of a preferred mortgage lien, shall have priority over the said mortgage lien. x x x A maritime lien “constitutes a present right of property in the ship, a jus in re, to be afterward enforced in admiralty by process in rem. From the moment the claim or privilege attaches, it is inchoate, and when carried into effect by legal process, by a proceeding in rem, it relates back to the period when it fi rst attached.” (Philippine National Bank vs. Court of Appeals, 337 SCRA 381 [2000]; see Note 2; Crescent Petroleum Ltd. vs. M/V “Lok Maheswhari, 474 SCRA 623 [2005].)

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purchaser in possession of the vessel; but nothing in this Decree shall be construed to confer a lien when the furnisher knew, or by exercise of reasonable diligence could have ascertained, that because of the terms of a charter party, agreement for sale of the vessel, or for any other reason, the person ordering the repairs, supplies, or other necessaries was without authority to bind the vessel therefor. SEC. 24. Waiver of Right to Lien. — Nothing in this Decree shall be construed to prevent the furnisher of repairs, supplies, towage, use of dry dock or marine railway, or other necessaries, or the mortgagee, from waiving his right to a lien, or in the case of a preferred mortgage lien, to the preferred status of such lien, at any time by agreement or otherwise. SEC. 25. Existing Mortgages Not Affected; exception. — This Decree shall not apply (1) to any existing mortgage, or (2) to any mortgage hereafter placed at any vessel under an existing mortgage, so long as such existing mortgage remains undischarged. The Decree shall, however, apply to mortgages executed pursuant to Presidential Decree No. 214, provided, that no vested rights of third parties are affected thereby. SEC. 26. Rules and Regulations by Philippine Coast Guard and the Maritime Industry Authority. — The Philippine Coast Guard and the Maritime Industry Authority are hereby authorized to make such rules and regulations within their respective spheres of jurisdiction, as they may deem necessary for the effi cient execution of the provisions of this Decree. SEC. 27. Port of Documentation. — Whenever in the Ship Mortgage Decree of 1978 the words “port of documentation” are used, they shall be deemed to mean the port of registry of the vessel. SEC. 28. Instruments and Acts Validated. — All mortgages of any vessel of any part thereof, and all documentations, recordations, indorsements and indexing thereof, and proceedings incidental thereto made or done, prior to the effectivity of this Decree are declared valid to the extent they would have been valid in the port or ports at which it should have been documented in accordance with law; and this Section is declared retroactive so as to accomplish such validations: Provided, That nothing herein contained shall be construed to deprive any person of any vested right. SEC. 29. Repealing Clause. — The provisions of the New Civil Code, the Code of Commerce, the Chattel Mortgage Law, the Revised Rules of Court and of such other laws, decrees, executive orders, rules and



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regulations which are in confl ict or inconsistent with the provisions of this Decree are hereby repealed, amended or modifi ed accordingly. If for any reason, any section, subsection, sentence, clauses or term of this Decree is held to be unconstitutional such decision shall not affect the validity of the other provisions of this Decree. SEC. 30. Effectivity. — This Decree shall take effect upon its approval. DONE in the City of Manila, this 11th day of June, in the year of Our Lord, nineteen hundred and seventy-eight.

— oOo —

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7. REGISTRATION OF MORTGAGES

A. REGISTERED REAL ESTATE

Under the Property Registration Decree(Pres. Decree No. 1529.)

SEC. 54. Dealings less than ownership, how registered. — No new certifi cate shall be entered or issued pursuant to any instrument which does not divest the ownership or title from the owner or from the transferee of the registered owners. All interests in registered land less than ownership shall be registered by fi ling with the Register of Deeds the instrument which creates or transfers or claims such interests and by a brief memorandum thereof made by the Register of Deeds upon the certifi cate of title, and signed by him. A similar memorandum shall also be made on the owner’s duplicate. The cancellation or extinguishment of such interests shall be registered in the same manner.

x x x SEC. 60. Mortgage or lease of registered land. — Mortgages and leases shall be registered in the manner provided in Section 54 of this Decree. The owner of registered land may mortgage or lease it by executing the deed in a form suffi cient in law. Such deed of mortgage or lease and all instruments which assign, extend, discharge or otherwise deal with the mortgage or lease shall be registered, and shall take effect upon the title only from time of registration. No mortgagee’s or lessee’s duplicate certifi cate of title shall hereafter be issued by the Register of Deeds, and those issued prior to the effectivity of this Decree are hereby deemed cancelled and the holders thereof shall immediately surrender the same to the Register of Deeds concerned. SEC. 61. Registration. — Upon presentation for registration of the deed of mortgage or lease together with the owner’s duplicate, the Register of Deeds shall enter upon the original of the certifi cate of title and also upon the owner’s duplicate certifi cate a memorandum thereof, the date and time of fi ling and the fi le number assigned to the

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604 P.D. No. 1529

deed, and shall sign the said memorandum. He shall also note on the deed the date and time of fi ling and a reference to the volume and page of the registration book in which it is registered. SEC. 62. Discharge or cancellation. — A mortgage or lease on registered land may be discharged or cancelled by means of an instrument executed by the mortgagee or lessee in a form suffi cient in law, which shall be fi led with the Register of Deeds who shall make the appropriate memorandum upon the certifi cate of title. SEC. 63. Foreclosure of Mortgage. — (a) If the mortgage was foreclosed judicially, a certifi ed copy of the fi nal order of the court confi rming the sale shall be registered with the Register of Deeds. If no right of redemption exists, the certifi cate of title of the mortgagor shall be cancelled, and a new certifi cate issued in the name of the purchaser. Where the right of redemption exists, the certifi cate of title of the mortgagor shall not be cancelled, but the certifi cate of sale and the order confi rming the sale shall be registered by a brief memorandum thereof made by the Register of Deeds upon the certifi cate of title. In the event the property is redeemed, the certifi cate or deed of redemption shall be fi led with the Register of Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the certifi cate of title of the mortgagor. (a) If the property is not redeemed, the fi nal deed of sale executed by the sheriff in favor of the purchaser at a foreclosure sale shall be registered with the Register of Deeds; whereupon the title of the mortgagor shall be cancelled, and a new certifi cate issued in the name of the purchaser. (b) If the mortgage was foreclosed extrajudicially, a certifi cate of sale executed by the offi cer who conducted the sale shall be fi led with the Register of Deeds who shall make a brief memorandum thereof on the certifi cate of title. In the event of redemption by the mortgagor, the same rule provided for in the second paragraph of this section shall apply. In case of non-redemption, the purchaser at foreclosure sale shall fi le with the Register of Deeds, either a fi nal deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage, or his sworn statement attesting to the fact of non-redemption; whereupon, the Register of Deeds shall issue a new certifi cate in favor of the purchaser after the owner’s duplicate of the certifi cate has been previously delivered and cancelled.

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B. UNREGISTERED REAL ESTATE

(1) Under Section 194 of the Revised Administrative Code, as amended by Act No. 2837 and later by Act No. 3344. SEC. 194. Recording of instruments or deeds relating to real estate not registered under Act Numbered Four hundred and ninety-six or under the Spanish Mortgage Law. — No instrument or deed establishing, transmitting, acknowledging, modifying or extinguishing rights with respect to real estate not registered under the provisions of Act Numbered Four hundred and ninety-six, entitled “The Land Registration Act,” and its amendments, or under the Spanish Mortgage Law, shall be valid, except as between the parties thereto, until such instrument or deed has been registered, in the manner hereinafter prescribed, in the offi ce of the Register of Deeds for the province or city where the real estate lies. It shall be the duty of the register of deeds for each province or city to keep a daybook and a register book for unregistered real estate, in accordance with a form to be prepared by the Chief of the General Land Registration Offi ce,1 with the approval of the Secretary of Justice. The daybook shall contain the names of the parties, the nature of the instrument or deed for which registration is requested, the hour and minute, date and month of the year when the instrument was received. The register book shall contain, among other particulars, the names, ages, the civil status, and the residences of the parties interested in the act or contract registered and, in case of marriage, the name of the wife or husband, as the case may be, the character of the contract and its conditions, the nature of each piece of land and its own improvements only, and not any other kind or real estate or properties, its situation, boundaries, area in square meters, whether or not the boundaries of the property are visible on the land by means of monuments or otherwise, and in the affi rmative case, in what they consist; the permanent improvements existing on the property; the page number of the assessment of each property in the year when the entry is made, and the assessed value of the property for that year; the notary or the offi cer who acknowledged, issued, or certifi ed the instrument or deed; the name of the person or persons who, according to the instrument are in present possession of each property; a note that the land has not been registered under Act Numbered Four hundred

1Now, Administrator of the Land Registration Authority.

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and ninety-six nor under the Spanish Mortgage Law; that the parties have agreed to register said instrument under the provisions of this Act No. 3344, and that the original instrument has been fi led in the offi ce of the register of deeds, indicating the fi le number, and that the duplicate has been delivered to the person concerned; the exact year, month, day, hour, and minute when the original of the instrument was received for registration, as stated in the day book. It shall be the duty of the register of deeds to keep an index-book of persons and an index-book of estates, respectively, in accordance with a form to be also prepared by the Chief of the General Land Registration Offi ce, with the approval of the Secretary of Justice. Upon presentation of any instrument or deed relating to real estate not registered under Act Numbered Four hundred and ninety-six and its amendments or under the Spanish Mortgage Law, which shall be accompanied by as many duplicates as there are parties interested, it shall be the duty of the register of deeds to ascertain whether said instrument has all the requirements for proper registration. If the instrument is suffi cient and there is no legitimate objection thereto, or, in case, of there having been one, if the same has been dismissed by fi nal judgment of the courts, and if there does not appear in the register any valid previous entry that may be affected wholly or in part by the registration of the instrument or deed presented, and if the case does not come under the prohibition of section fourteen hundred and fi fty-two of Act Numbered Twenty-seven hundred and eleven, the register of deeds shall register the instrument in the proper book. In case the instrument or deed presented has defects preventing its registration, said register of deeds shall refuse to register it until the defects have been removed, stating in writing his reasons for refusing to record said instrument as requested. Any registration made under this section shall be understood to be without prejudice to a third party who has a better right. The register of deeds shall be entitled to collect in advance as fees for the services to be rendered by him in accordance with this Act, the same fees established for similar services relating to instruments or deeds in connection with real estate in section one hundred fourteen of Act Numbered Four hundred and ninety-six, entitled “The Land Registration Act,” as amended by Act Numbered Two thousand eight hundred and sixty-six. APPROVED: December 8, 1926.

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(2) Under the Property Registration Decree2 (Pres. Decree No. 1529), beginning June 11, 1978. SEC. 113. Recording of instruments relating to unregistered lands. — No deed, conveyance, mortgage, lease or other voluntary instrument affecting land not registered under the Torrens System shall be valid, except as between the parties thereto, unless such instrument shall have been recorded in the manner herein prescribed in the offi ce of the Register of Deeds for the province or city where the land lies. (a) The Register of Deeds for each province or city shall keep a Primary Entry Book and a Registration Book. The Primary Entry Book shall contain among other particulars, the entry number, the names of the parties, the nature of the document, the date, hour and minute it was presented and received. The recording of the deed and other instruments relating to unregistered lands shall be effected by annotation on the space provided therefor in the Registration Book, after the same shall have been entered in the Primary Entry Book. (b) If, on the face of the instrument, it appears that it is suffi cient in law, the Register of Deeds shall forthwith record the instrument in the manner provided herein. In case the Register of Deeds refuses its admission to record, said offi cial shall advise the party in interest in writing of the ground or grounds for his refusal, and the latter may appeal the matter to the Commissioner of Land Registration in accordance with the provisions of Section 117 of this Decree. It shall be understood that any recording made under this section shall be without prejudice to a third party with a better right. (c) After recording on the Record Book, the Register of Deeds shall endorse, among other things, upon the original of the recorded instruments, the fi le number and the date as well as the hour and minute when the document was received for recording as shown in the Primary Entry Book, returning to the registrant or person in interest the duplicate of the instrument, with appropriate annotation, certifying that he has recorded the instrument after reserving one copy thereof to be furnished the provincial or city assessor as required by existing law. (d) Tax sale, attachment and levy, notice of lis pendens, adverse claim and other instruments in the nature of involuntary dealings with respect to unregistered lands, if made in the form suffi cient in law, shall likewise be admissible to record under this section.

2See Appendix 1-B.



608

(e) For the services to be rendered by the Register of Deeds under this section, he shall collect the same amount of fees prescribed for similar services for the registration of deeds or instruments concerning registered lands.

C. PERSONAL PROPERTY

Under the Property Registration Decree (Pres. Decree No. 1529), beginning June 11, 1978. SEC. 114. Recording of chattel mortgages. — A chattel mortgage shall be recorded in the offi ce of the Register of Deeds of the province or city where the mortgagor resides as well as where the property is situated or ordinarily kept. SEC. 115. Manner of recording chattel mortgages. — Every Register of Deeds shall keep a Primary Entry Book and a Registration Book for chattel mortgages; shall certify on each mortgage fi led for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in such books any chattel mortgage, assignment or discharge thereof, and any other instruments shall be presented to him in duplicate, the original to be fi led and the duplicate to be returned to the person concerned. The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgagee and the mortgagor, the sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the terms and conditions of the mortgage, is mentioned in detail in the instrument fi led, giving the proper fi le number thereof. The recording of other instruments relating to a recorded mortgage shall be effected by way of annotation on the space provided therefor in the Registration Book, after the same shall have been entered in the Primary Entry Book. The Register of Deeds shall also certify the offi cer’s return of sale upon any mortgage, making reference upon the record of such offi cer’s return to the volume and page of the record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certifi ed copy thereof, when requested, upon payment of the legal fees for such copy and certify upon each mortgage, offi cer’s return of sale or discharge of mortgage, and upon any other instrument relating to such a recorded mortgage, both on the original and in the duplicate, the date, hour, and minute when the same is received for record and record

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such certifi cate with the return itself, and keep an alphabetical index of mortgagor or mortgagees, which record and index shall be open to public inspection. Duly certifi ed copies of such records and of fi led instruments shall be receivable as evidence in any court. SEC. 116. Fees for chattel mortgages, etc. — The Register of Deeds shall collect the following fees for services rendered by him under this section: 1. Entry fee. — For entry or presentation of any document in the Primary Entry Book, fi ve pesos. Supporting papers presented together with the principal document need not be charged any entry or presentation fee unless the party in interest desires that they be likewise entered. 2. Chattel Mortgage. — For fi ling and recording each chattel mortgage, including the necessary certifi cates and affi davits, the fees established in the following schedule shall be collected:

(a) Six thousand pesos maximum. — When the amount of the mortgage does not exceed six thousand pesos, seven pesos for the fi rst fi ve hundred pesos, or fractional part thereof, and three pesos for each additional fi ve hundred pesos, or fractional part thereof. (b) Thirty thousand pesos maximum. — When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, forty-eight pesos for the initial amount not exceeding eight thousand pesos, and eight pesos for each additional two thousand pesos or fractional part thereof. (c) One hundred thousand pesos maximum. — When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, one hundred fi fty pesos for the initial amount not exceeding thirty-fi ve thousand pesos, and fourteen pesos for each additional fi ve thousand pesos or fractional part thereof. (d) Five hundred thousand pesos maximum. — When the amount of the mortgage is more than one hundred thousand pesos but does not exceed fi ve hundred thousand pesos, three hundred fi fty-two pesos for the initial amount not exceeding one hundred ten thousand pesos and twenty pesos for each additional ten thousand pesos or fractional part thereof. (e) More than fi ve hundred thousand pesos. — When the amount of the mortgage is more than fi ve hundred thousand pesos, one



610

thousand one hundred sixty-two pesos for the initial amount not exceeding fi ve hundred twenty thousand pesos, and thirty pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the property is situated shall be suffi cient registration; and provided, further, That if the mortgage is to be registered in more than one city or province, the Register of Deeds of the city or province where the instrument is fi rst presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the Register of Deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in the fi rst city or province, but in no case shall the fees payable in any Registry be less than the minimum fi xed in this schedule.

3. Conveyance of mortgaged property, etc. — For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof, provided, that the latter is stated in the instrument. 4. Notice of attachment. — For recording each notice of attachments, including the necessary index and annotations, eight pesos. 5. Release of mortgage. — For recording such release of mortgage, including the necessary index and references, the fees established in the schedule under paragraph (b) above shall be collected on the basis of fi ve per centum of the amount of the mortgage. 6. Release of attachment. — For recording each release of attachment, including the proper annotations, fi ve pesos. 7. Sheriff’s return of sale. — For recording each sheriff’s return of sale, including the index and references, seven pesos. 8. Power of attorney, appointment of guardian, and administrator or trustee. — For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instrument in which a person is given power to act in behalf of another in connection with a mortgage, ten pesos. 9. No specifi c fee. — For recording each instrument or order relating to a recorded mortgage, including the necessary index and references, for which no specifi c fee is provided above, fi ve pesos.

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10. Certifi ed copy. — For certifi ed copies of records, such fees as are allowed by law for copies kept by the Register of Deeds. 11. Certifi cation. — For issuing a certifi cate relative to, or showing the existence or non-existence of an entry in the registration book, or a document on fi le, for each such certifi cate containing not more than two hundred words, fi ve pesos; if it exceeds that number, an additional fee of one peso shall be collected for every one hundred words or fractional part thereof, in excess of the fi rst two hundred words. 12. Research Fee. — For services rendered in attending to requests for references to, or researches on any document on fi le in the Registry, there shall be collected a fee of two pesos per document.

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8. THE TRUTH IN LENDING ACT*

(R.A. No. 3765.)

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT. SECTION 1. This Act shall be known as the “Truth in Lending Act.” SEC. 2. Declaration of Policy. — It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.1

SEC. 3. As used in this Act, the term — (1) “Board” means the Monetary Board of the Central Bank of the Philippines. (2) “Credit” means (a) any loan, mortgage, deed of trust, advance, or discount; (b) any conditional sales contract; any contract to sell, or sale of property or services, either for present or future delivery, under which part of all of the price is payable subsequent to the making of such sale or contract; or (c) any rental-purchase contract; (d) any contract or arrangement for the hire, bailment, or leasing of property; (e) any option, demand, lien, pledge, or other claim against, or for the delivery of property or money; (f) any purchase, or other acquisition of, or any credit upon the security of any obligation or claim arising out of any of the foregoing; and (g) any transaction or series of transactions having a similar purpose or effect. (3) “Finance charge” includes interest, fees, collection charges discounts, and such other charges incident to the extension of credit as the Board may by regulation prescribe.

1See United Coconut Planters Bank vs. Spouses Beluso, 530 SCRA 567 (2007.)

*R.A. No. 9474 (May 22, 2007), the Lending Company Regulation Act of 2007, governs the establishment, operation and regulation of lending companies.

612

613

(4) “Creditor” means any person engaged in the business of extending credit (including any person who as a regular business practice makes loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a fi nance charge. (5) “Person” means any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or any of its political subdivisions, or any agency of the foregoing. SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (1) the cash price or delivered price of the property or service to be acquired: (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2); (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be fi nanced; (6) the fi nance charge expressed in terms of pesos and centavos; and (7) the percentage that the fi nance bears to the total amount to be fi nanced expressed as a simple annual rate on the outstanding unpaid balance of the obligation. SEC. 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carrying on the provisions of this Act. Any rule or regulation prescribed hereunder may contain such classifi cations and differentiations as in the judgment of the Board are necessary or proper to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate the enforcement of this Act, or any rule and regulation issued thereunder.

R.A. No. 3765 APPENDICESThe Truth in Lending Act


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SEC. 6. (a) Any creditor who in connection with a credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the fi nance charge required by such creditor in connection with such transaction, whichever is greater, except that the liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney’s fees and court costs as determined by the court. (b) Except as specifi ed in subsection (a) of this action, nothing contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract of transaction. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fi ned by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agent or any political subdivision thereof. (e) A fi nal judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. SEC. 7. This Act shall become effective upon approval. APPROVED: June 22, 1963.

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9. RULES AND REGULATIONS IMPLEMENTING THE TRUTH IN LENDING ACT

A. Central Bank Circular No. 158 (October 29, 1963.)

Pursuant to the provisions of Section 5 of Republic Act No. 3765, otherwise known as the Truth in Lending Act, the following rules and regulations are hereby promulgated: SECTION 1. Requirement of Disclosure. — Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth the following information: (a) The cash price or delivered price of the property or service to be acquired; (b) The amounts, if any, to be credited as down payment and/or trade-in; (c) The difference between the amounts set forth under clauses (a) and (b); (d) The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (e) The total amount to be fi nanced; (f) The fi nance charges expressed in terms of pesos and centavos; and (g) The percentage that the fi nance charge bears to the total amount to be fi nanced expressed as a simple annual rate on the outstanding unpaid balance of the obligation. The contract covering the credit transaction, or any other document to be acknowledged and signed by the debtor, shall indicate the above seven items of information. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor.

615


616 CBC No. 158

SEC. 2. Defi nition of Terms. (a) “Creditor” (who shall furnish the information) means any person engaged in the business of extending credit (including any person who as a regular business practice makes loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a fi nance charge. (b) “Person” means any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or any of its political subdivisions, or any agency of the foregoing. (c) “Cash price or delivered price,” in case of trade transactions, is the amount of money which would constitute full payment upon delivery of the property (except money) or service purchased at the creditor’s place of business. In the case of fi nancial transaction, cash price represents the amount of money received by the debtor upon consummation of the credit transaction, net of fi nance charges collected at the time the credit is extended (if any). (d) “Down Payment” represents the amount paid by the debtor at the time of the transaction in partial payment for the property or service purchased. (e) “Trade-in” represents the value of an asset, agreed upon by the creditor and debtor, given at the time of the transaction in partial payment for the property or service purchased. (f) “Non-fi nance charges” correspond to the amounts advanced by the creditor for items normally associated with the ownership of the property or of the availment of the service purchased which are not incident to the extension of credit. For example, in the case of the purchase of an automobile on credit, the creditor may advance the insurance premium as well as the registration fee for the account of the debtor. (g) “Amount to be fi nanced” consists of the cash price plus non-fi nance charge less the amount of the down payment and value of the trade-in. (h) “Finance charge” represents the amount to be paid by the debtor incident to the extension of credit such as interest or discounts, collection fees, credit investigation fees, attorney’s fees, and other service charges. The total fi nance charge represents the difference between (1) the aggregate consideration (down payment plus installments) on the

617

part of the debtor, and (2) the sum of the cash price and non-fi nance charges. (i) “Simple annual rate” is the uniform percentage which represents the ratio, on an annual basis, between the fi nance charges and the amount to be fi nanced. In the case of a single payment upon maturity, the simple annual rate in percent is determined by the following method:

R = x

In the case of the normal installment type of credit of at least one year in duration, where installment payments of equal amount are made in regular time periods spaced not more than one year apart, the simple annual rate (R), in percent, is computed by the following method:R = x

In cases where the credit matures in less than one year (e.g., installment payments are required every month for six months), the same formula will apply except that: the number of payments in a year would refer to the number of installment periods, as defi ned in the credit contract, if the credit matures in one year. For example, the number of payments a year would be twelve for this purpose in cases where six monthly installment payments are called for the credit transaction.1

In cases where credit terms provide for premium or penalty charges depending on, say, the timeliness of the debtor’s payments, the annual rate to be disclosed in writing shall be the rate for regular payments, i.e., the premium and penalty need not be taken into account in the determination of the annual rate. Such premium or penalty charges shall, however, be indicated in the credit contract. SEC. 3. Scope of Requirements. — The above regulations shall apply to all creditors engaged in the following types of credit transactions. (a) Any loans, mortgages, deeds of trust, advances and discounts; (b) Any conditional sales contract, any contract to sell, or sale or contract of sale of property or services, either for present or future

1This can be determined by dividing 12, the number of months in a year, by the number or fraction of months between installments payments.

2 x fi nance charge 12 x 100% amount to be fi nanced maturity period in months

2 x fi nance charge 12 x 100% amount to be fi nanced total number of payment plus one

CBC No. 158 APPENDICESRules and Regulations Implementing the Truth in Lending Act


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delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; (c) Any rental-purchase contract; (d) Any contract or arrangement for the hire, bailment, or leasing of property; (e) Any option, demand, lien, pledge, or other claim against, or for delivery of, property or money; (f) Any purchase, or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing; and (g) Any transaction or series of transactions having a similar purpose or effect. Considering that the specifi c purpose of the law is the full disclosure of the true cost of credit, the following categories of credit transactions are outside the scope of the above regulations: (a) Credit transactions which do not involve the payment of any fi nance charge by the debtor; and (b) Credit transactions in which the debtor is the one specifying a defi nite and fi xed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc. SEC. 4. Penal Provision. — Section 6 of Republic Act No. 3765 provides that: “(a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the fi nance charge required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney’s fees and court costs as determined by the court. (b) Except as specifi ed in subsection (a) of this section, nothing contained in this Act or any regulation issued thereunder shall affect the validity or enforceability of any contract or transaction. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fi ned by not less than P1,000

CBC No. 158

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nor more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A fi nal judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has wilfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto.” SEC. 5. These Rules and Regulations shall take effect 30 days after publication in the Offi cial Gazette.

B. Central Bank Circular No. 431 (September 2, 1974)

Pursuant to the provisions of Section 5 of Republic Act. No. 3765, otherwise known as the Truth in Lending Act, the following rules and regulations are hereby promulgated to supersede those embodied under Circular No. 221 of May 18, 1966 and supplement those embodied in Circular No. 158, dated October 29, 1963: SECTION 1. Offi ces Authorized to Enforce Rules and Regulations. — All orders, policies, instructions, rules and regulations, promulgated by the Monetary Board to implement Republic Act No. 3765 shall be enforced by the following departments and offi ce of the Central Bank of the Philippines: (a) Department of Commercial and Savings Banks, with respect to commercial, savings and development banks, and building and loan associations; (b) Department of Rural Banks and Savings and Loan Associations, with respect to rural banks and savings and loan associations; and (c) Offi ce of Non-Bank Financial Intermediaries, with respect to non-bank fi nancial institutions and other persons, whether natural or juridical, covered by the Act and not otherwise assigned to the above departments. The respective heads of the above departments and offi ce shall have the authority to inspect or examine, personally or by deputy, all books, documents, papers or records of any creditor, necessary in their judgment to ascertain the facts relative to any credit transaction

CBC No. 158 APPENDICESRules and Regulations Implementing the Truth in Lending Act


620

where the creditor requires as an incident to the extension of credit, the payment of a fi nance charge. Furthermore, they may require every creditor to submit data or information regarding contracts within the purview of Republic Act No. 3765 which they may deem necessary in carrying out the purposes of said Act. SEC. 2. Availability for Inspection of Copies of Contracts. — Every creditor shall keep in his offi ce or place of business copies of contracts covering all credit transactions entered into by him which involve the extension of credit to another and the payment of fi nance charges therefor. Such copies shall be available for inspection or examination by the respective directors of the appropriate supervising and examining departments of the Central Bank of the Philippines or their duly authorized deputies. In case the seven items of information mentioned in Section 1 of Circular No. 158 are not disclosed in the contract covering the credit transaction, said items, to the extent applicable, shall be disclosed in another document in a form to be prescribed by the Monetary Board, to be signed by the debtor and appended to the main contract. SEC. 3. Submission of Information Sheets and Other Reports. — Every creditor shall fi le with the appropriate supervising and examining department an information sheet and such other reports as the respective directors of the said departments may require, in the form or forms to be prescribed by the Monetary Board, regarding credit transactions entered into by such creditor. SEC. 4. Posters. — Every creditor shall post in a conspicuous place in his principal place of business, and branches, if any, an abstract of the provisions of Republic Act No. 3765 in the form or forms as may be prescribed by the Monetary Board. SEC. 5. Who are Included in the Term “Creditor.” — The term “creditor” as defi ned in Sec. 3, paragraph (4), of Republic Act No. 3765, and Sec. 2, paragraph (a), of Circular No. 158, shall include, but shall not be limited to banks and banking institutions, insurance and bonding companies, savings and loan associations, credit unions, fi nancing companies, installment houses, real estate dealers, lending investors, pawnshops, and any other person or entity engaged in the business of extending credit, who requires as an incident to the extension of credit, the payment of a fi nance charge. SEC. 6. Effectivity. — These additional rules and regulations shall take effect immediately.

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10. THE CONSUMER ACT OF THE PHILIPPINES

(R.A. No. 7394.)

x x x x x x

Art. 2. Declaration of Basic Policy. — It is the policy of the State to protect the interests of the consumer, promote his general welfare and to establish standards of conduct for business and industry. Towards this end, the State shall implement measures to achieve the following objectives: a) protection against hazards to health and safety; b) protection against deceptive, unfair and unconscionable sales acts and practices; c) provision of information and education to facilitate sound choice and the proper exercise of rights by the consumer; d) provision of adequate rights and means of redress; and e) involvement of consumer representatives in the formulation of social and economic policies. Art. 3. Construction. — The best interest of the consumer shall be considered in the interpretation and implementation of the provisions of this Act, including its implementing rules and regulations. Art. 4. Defi nition of Terms. — For purposes of this Act, the term: x x x x x x f) “Amount fi nanced’’ in a consumer credit sale constitutes the cash price plus non-fi nance charges less the amount of any downpayment whether made in cash or in property traded in, or in a consumer loan the amount paid to, receivable by or paid or payable to the buyer or to another person in his behalf. x x x x x x j) “Cash price or delivered price,’’ in case of trade transaction, means the amount of money which would constitute full payment upon

621


622 R.A. No. 7394

delivery of the property (except money) or service purchased at the creditor’s place of business. In the case of fi nancial transactions, cash price represents the amount received by the debtor upon consummation of the credit transaction, net of fi nance charges collected at the time the credit is extended, if any. x x x x x x n) “Consumer’’ means a natural person who is a purchaser, lessee, recipient or prospective purchaser, lessor or recipient of consumer products, services or credit. o) “Consumer credit’’ means any credit extended by a creditor to a consumer for the sale or lease of any consumer product or service under which part or all of the price or payment therefor is payable at some future time, whether in full or in installments. p) “Consumer loan’’ means a loan made by the lender to a person which is payable in installments for which a fi nance charge is or may be imposed. This term includes credit transactions pursuant to an open-end-credit plan other than a seller credit card. x x x x x x s) “Consumer transaction’’ means (1) (i) a sale, lease, assignment, award by chance, or other disposition of consumer products, including chattels that are intended to be affi xed to land, or of services, or of any right, title, or interest therein, except securities as defi ned in the Securities Act (BP Blg. 178) and contracts of insurance under the Insurance Code (PD No. 1460), or (ii) grant of provision of credit to a consumer for purposes that are primarily personal, family, household or agricultural, or (2) a solicitation or promotion by a supplier with respect to a transaction referred to in clause (1). x x x x x x (w) “Credit card’’ means any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor or services on credit. (x) “Credit sale’’ means a sale of products, services or an interest in land to a person on credit where a debt is payable in installments or a fi nance charge is imposed and includes any agreement in the form of a bailment of products or lease of products or real property if the bailee or lessee pays or agrees to pay compensation for use a sum substantially equivalent to or in excess of the aggregate value of the products or real property involved and it is agreed that the bailee or lessee will become, or for no other or a minimal consideration has the option to become, the

623

owner of the products or real property upon full compliance with the terms of the agreement. y) “Credit transaction’’ means a transaction between a natural person and a creditor in which real or personal property, services or money acquired on credit and the person’s obligation is payable in installment. z) “Creditor’’ means any person engaged in the business of extending credit and shall include any person who as a regular business practice makes loans or sells or rents property or services on a time, credit or installment basis, either as principal or as agent who requires as an incident to the extension of credit, the payment of a fi nance charge. aa) “Default or delinquency charge’’ means, with respect to a consumer credit transaction, the penalty charge payable by the consumer-debtor for failure to pay an amount or installment in full on the date the same becomes due and demandable, or on or before the period specifi ed for the purpose in the consumer credit sale documents. x x x x x x x x x ay) “Open-end-credit plan’’ means a consumer credit extended on an account pursuant to a plan under which: 1) the creditor may permit the person to make purchases or obtain loans, from time to time, directly from the creditor or indirectly by use of credit card, check or other device; 2) the person has the privilege of paying the balance; or 3) a fi nance charge may be computed by the creditor from time to time on an outstanding unpaid balance. x x x x x x x x x

Title IVConsumer Credit Transactions

Art. 131. Declaration of Policy. — The State shall simplify, clarify and modernize the laws governing credit transactions and encourage the development of fair and economically sound consumer credit practices. To protect the consumer from lack of awareness of the true cost of credit to the user, the State shall assure the full disclosure of the true cost of credit. Art. 132. Determination of Finance Charges. — Except as otherwise provided, the amount of the fi nance charges in connection with any

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consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended and imposed directly or indirectly by the creditor as an incident to the extension of credit, including any of the following type of charges which are applicable: a) interest or time price differential and any amount payable under point or other system of additional charges; b) collection fees which include fi nder’s fees or similar charges; c) credit investigation fees; d) notarial fee, if any; e) premium or other charges for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss. The implementing agency shall determine what items shall be exempted from the computation of the fi nance charges. Art. 133. Determination of Simple Annual Rate. — The simple annual rate applicable to any extension of consumer credit shall be determined in accordance with the rules and regulations promulgated by the implementing agency. Art. 134. Delinquency Charges. — With respect to a consumer credit transaction other than one pursuant to an open-end credit plan, the parties may agree to a delinquency charge on any installment not paid in full on or before the tenth day after its scheduled or deferred due date. Art. 135. Deferral Charges. — The parties in a consumer credit transaction may at any time agree in writing to a deferral of all or part of one or more unpaid installments and the creditor may make and collect a charge which shall not exceed the rate previously disclosed pursuant to the provisions on disclosure. A deferral charge may be collected at the time it is assessed. Art. 136. Finance Charge on Refi nancing. — The parties may agree on a fi nance charge in an open-end credit plan based on the amount fi nanced resulting from the refi nancing or consolidation at a rate not exceeding that permitted by the rules promulgated by the implementing agency. Art. 137. Right to Prepay. — The person to whom credit is extended may prepay in full or in part, at any time without penalty, the unpaid balance of any consumer credit transaction. Art. 138. Rebate on Prepayment. — Upon prepayment in full of the unpaid balance of a precomputed consumer credit transaction,

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refi nancing or consolidation, an amount not less than the unearned portion of the fi nance charge calculated according to this Article shall be related to the person to whom credit is extended. The unearned portion of the precomputed fi nance charge on consumer transaction repayable in substantially equal successive installments shall be equal to at least that portion of fi nance charge which the sums of the installment balances of the obligation scheduled to be outstanding after the installment date nearest the date of prepayment bears to the sum of all installment balances originally scheduled to be outstanding under the obligation. For the purpose of determining the installment date nearest the date of prepayment when payments are monthly, any payment made on or before the fi fteenth day following an installment due date shall be deemed to have been made as of the installment due date, and if pre-payment occurs after the fi fteenth day, it shall be deemed to have been made on the succeeding installment due date. This method of calculat-ing rebates may be referred to as the “rule of 78’’ or “sum of the digits’’ method. The implementing agency may promulgate and adopt rules and regulations with respect to other precomputed consumer credit transactions. Art. 139. General Requirements on Credit Cost Disclosure. — Each creditor shall disclose, in accordance with the regulations of the implementing agency, to each person to whom consumer credit is extended, the disclosures required by this Act. If there is more than one obligor, a creditor need not furnish a statement of information required under this Act to more than one of them. Art. 140. Credit Sale, Required Disclosures. — Any creditor extending a consumer credit sale other than one pursuant to an open-end credit plan shall disclose in a statement to the extent applicable, the following information: a) the cash price or delivered price of the property or service to be acquired; b) the amounts, if any, to be credited as downpayment and/or trade in; c) the total amount to be fi nanced or the difference between the amounts set forth under paragraphs (1) and (2);



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d) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; e) the fi nance charge expressed in terms of pesos and centavos; f) the percentage that the fi nance charge bears to the total amount to be fi nanced expressed as a simple annual rate on the outstanding balance of the obligation; g) the effective interest rate; h) the number, amount and due dates or periods of payments scheduled to repay the indebtedness; and i) the default, delinquency or similar charges payable in the event of late payments. Art. 141. Required Disclosure on Open-end Credit Plan. — Before opening any account under an open-end consumer credit plan, the creditor shall disclose, to the extent applicable, the following information: a) the conditions under which a fi nance charge may be imposed, including the time period, if any, within which any credit extended may be repaid without incurring a fi nance charge; b) the method of determining the balance upon which a fi nance charge may be imposed; c) the method of determining the amount of the fi nance charges, including any minimum or fi xed amount imposed as a fi nance charge; d) where one or more periodic rates may be used to compute a fi nance charge, each such rate, the range of balances to which it is applicable, and the corresponding simple annual rate; e) the conditions under which the creditor may impose a security lien and a description of the goods to which such lien may attach. The implementing agency shall prescribe regulations consistent with commonly accepted accounting standards to carry out the requirements of this Article. Art. 142. Required Disclosures on Consumer Loans Not Under Open-end Credit Plan. — Any creditor extending a consumer loan or in a transaction which is neither a consumer credit sale nor under an open-end consumer credit plan shall disclose, to the extent applicable, the following information: a) the amount of credit of which the debtor will have the actual

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use, or which is or will be paid to him or for his account or to another person on his behalf; b) all charges, individually itemized, which are included in the amount of credit extended but which are not part of the fi nance charge; c) the total amount to be fi nanced or the sum of the amounts referred to in paragraphs (a) and (b); d) the fi nance charge expressed in terms of pesos and centavos; e) the effective interest rate; f) the percentage that the fi nance charge bears to the total amount to be fi nanced expressed as a simple annual rate on the outstanding unpaid balance of the obligation; g) the default, delinquency or similar charges payable in the event of late payments; h) a description of any security interest held or to be held or to be retained or acquired by the creditor in connection with the extension of credit and a clear identifi cation of the property to which the security interest relates. Art. 143. Form and Timing of Disclosure. — All disclosures required under this Act shall be made clearly and conspicuously in writing before the transaction is consummated. Art. 144. Periodic Statement of Charges. — The periodic statement transmitted by the creditor in connection with any extension of consumer credit other than under an open-end consumer credit plan, shall set forth the following information: a) the simple annual rate; b) the effective interest rate; c) the date by which, or the period (if any) within which payment must be made in order to avoid additional fi nance charges; d) method of determining the balance upon which the fi nance charge may be imposed. Art. 145. Exempted Transaction. — The foregoing requirements on consumer credit transactions shall not apply to the following credit transactions: a) those involving extension of credits for business or commercial purposes, or to the Government and governmental agencies and instrumentalities, juridical entities or to organizations;



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b) those in which the debtor is the one specifying the defi nite set of credit terms such as bank deposits, insurance contracts, sale of bonds or analogous transactions. Art. 146. Sale of Consumer Products on Installment Payment. — In a consumer credit sale other than one pursuant to an open-end credit plan, the obligation of the consumer to whom credit is being extended shall be evidenced by a single instrument which shall include, in addition to the disclosures, required by this Act, the signature of the seller and the person to whom credit is extended, the date it was signed, a description of the property sold and a description of any property transferred as a trade-in. The instrument evidencing the credit shall contain a clear and conspicuous typewritten notice to the person to whom credit is being extended that: a) he should not sign the instrument if it contains any blank space; b) he is entitled to a reasonable return of the pre-computed fi nance charge if the balance is prepaid; and c) he is entitled to an exact, true copy of the agreement. In cases where the instrument will be sold at a discount to a bank, fi nancing company or other lender, the said transferee shall be subject to all claims and defenses which the debtor could assert against the seller of consumer products obtained hereto or with the proceeds thereof. Art. 147. Penalties. — Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Chapter or the implementing rules and regulations issued thereunder shall be liable to such person in the amount of One thousand pesos (P1,000.00) or in an amount equal to twice the fi nance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed Three thousand pesos (P3,000.00) for any credit transaction and actual damages with the non-disclosure of the required information. Action to recover such penalty may be brought by such person within one (1) year from the date of the occurrence of the violation in any court of competent jurisdiction. x x x x x x x x x

Title VITransitory and Final Provisions

Art. 167. Relation of the Act to Other Rights. — The provisions of this Act shall apply notwithstanding any agreement to the contrary but

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shall not restrict, limit or derogate from any other rights or remedies of a consumer under any other law. Art. 168. Application of Laws Enacted Prior to the Act. — All actions or claims accruing prior to the effectivity of this Act shall be determined in accordance with the acts, laws, decrees and regulations in force at the time of the accrual. Art. 169. Prescription. — All actions or claims accruing under the provisions of this Act and the rules and regulations issued pursuant thereto shall prescribe within two (2) years from the time the consumer transaction was consummated or the deceptive or unfair and unconscionable act or practice was committed and in case of hidden defects, from discovery thereof. Art. 170. Repealing Clause. — All laws, executive orders, rules and regulations or parts thereof which are inconsistent with this Act are hereby repealed or amended accordingly. x x x x x x x x x Art. 173. Effectivity. — This Act shall take effect thirty (30) days from the date of its publication in the Offi cial Gazette. (Published on June 15, 1992, Vol. 88, No. 24, pp. 3639-3715.) Approved, April 13, 1992.

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11. PAWNSHOP REGULATION ACT

(Pres. Decree No. 114.)

REGULATING THE ESTABLISHMENT AND OPERATION OF PAWNSHOPS. WHEREAS, pawnshops provide an additional source of credit especially for small borrowers left unserved by the banking and other fi nancial institutions in the country. WHEREAS, there is no specifi c law in the Philippines that governs pawnshop establishments, particularly providing defi nite and uniform standards for their operation; WHEREAS, the recommendations contained in a report on the fi nancial system which have been accepted, with modifi cations, by monetary authorities, strongly advocate the enactment of a law regulating pawnshops; NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers in me vested by the Constitution, as Commander-in-Chief of the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social, economic, and political structure of our society, do hereby order and decree and make as part of the law of the land the following: SECTION 1. Short Title. — This Decree may be cited as the “Pawnshop Regulation Act.” SEC. 2. Declaration of policy. — It is hereby declared the policy of the State to regulate the establishment of pawnshops and to place their operation on a sound and stable basis to derive the optimum advantages from them as an additional source of credit; to prevent and mitigate, as far as practicable, practices prejudicial to public interest; and to lay down the minimum requirements and standards under which they may be established and do business.

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SEC. 3. Defi nitions. — As used in this Decree, unless the context otherwise requires, the following terms shall have the following meanings: “Pawnshop” shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawnbrokerage. “Pawner” shall refer to the borrower from a pawnshop. “Pawnee” shall refer to the pawnshop or pawnbroker. “Pawn” is the personal property delivered by the pawner to the pawnee as security for a loan. “Pawn ticket” is the pawnbroker’s receipt for a pawn. It is neither a security nor a printed evidence of indebtedness. “Property” shall include only such personal property as may actually be delivered to the control and possession of the pawnshop: Provided, however, That certain specifi ed chattels such as guns, knives and similar weapons whose reception in pawn is expressly prohibited by other laws or regulations shall not be included. SEC. 4. Form of organization. — A pawnshop may be established as a single proprietorship, partnership or corporation. SEC. 5. Registration and licensing. — Any person or entity desiring to engage in pawnshop business shall (a) register with the Bureau of Commerce1 in the case of single proprietorship or the Securities and Exchange Commission in the case of a corporation or any other association and (b) secure a license from the appropriate city or municipality having territorial jurisdiction over the place of establishment and operation. SEC. 6. Requirement of registration with the Central Bank. — Any individual, corporation or association duly registered and licensed to engage in the pawnshop business shall fi le an information sheet, under oath, with the Central Bank before commencement of actual operations: Provided, however, That pawnshops duly licensed and operating before the approval of this Decree shall, within six months from the date of effectivity of the same, register with the Central Bank. For this purpose, the Central Bank shall furnish pawnshops, upon request, with necessary copies of the prescribed information sheet.

1Now, Bureau of Trade Regulation and Consumer Protection.

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SEC. 7. Capital. — The minimum paid-in capital of any pawnshop which may be established after the effectivity of this Decree shall be one hundred thousand pesos (P100,000.00): Provided, however, That pawnshops established and in operation prior thereto shall comply with the minimum capitalization required under the provisions of this section within such time as may be prescribed by the Monetary Board, which time shall, in no case, be less than three years from the date of effectivity of this Decree. SEC. 8. Citizenship requirement. — Upon the effectivity of this Decree, only Filipino citizens may establish and own a pawnshop organized in the form of a single proprietorship: Provided, however, That in the case of a partnership, at least seventy percent (70%) of its capital shall be owned by Filipino citizens: Provided, further, That in the case of a corporation, at least seventy percent (70%) of the voting capital stock shall be owned by citizens of the Philippines, or if there be no capital stock, at least seventy percent (70%) of the members entitled to vote, shall be citizens of the Philippines. The percentage of foreign-owned voting stock or non-citizens entitled to vote in any domestic pawnshop existing prior to the effectivity of this Decree, if such percentage is in excess of thirty percent (30%) of the voting stock or members entitled to vote of the pawnshop shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond thirty percent (30%) of the voting stock, or number of members entitled to vote, of the pawnshop. The percentage of foreign-owned voting stocks in any pawnshop shall be determined by the citizenship of the individual stockholders in that pawnshop. In the case of corporations owning shares in a pawnshop, the citizenship of the individual owners of voting stock in such corporations shall be the basis of computing the percentage. SEC. 9. Amount of loan. — Pawnshops may grant such amount of loans as may be agreed upon between the parties: Provided, That the amount of loan shall, in no case, be less than thirty percent (30%) of appraised value of the security offered for the loan unless the pawner manifests in writing the desire to borrow a lesser amount. SEC. 10. Rates of interest.2 — No pawnshop shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury Law for such transactions. It shall be unlawful for a pawnshop to

2See Central Bank Circular No. 905 in II — The Usury Law.

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divide the pawn offered by a pawner in order to collect greater interest and/or to require the pawner to pay an additional charge as insurance premium for the safe-keeping and conservation of the article pawned. In addition to interest charges, pawnshops may impose a maximum service charge of fi ve pesos (P5.00), but in no case to exceed one percent (1%) of the principal loan. SEC. 11. Maintenance of records. — Every pawnbroker shall keep a memorandum book in which shall be entered, in ink, at the time of each loan or pledge, an accurate account and description, in Filipino or English with corresponding translation in the local dialect of every pawn, the amount of money loaned thereon, the date of pawning or pledging the same, the rate of interest to be paid on the loan, and the name and residence of each pawner, together with a particular description of such pawner, including his or her nationality, sex, and general appearance, and no pawnbroker or other person shall alter or erase any entry made in such book. Every person pawning or pledging any article or thing with a pawnbroker shall sign his name and give his address to said pawnbroker and such name and address shall be made part of the record heretofore described in this section: Provided, That a person who is unable to write shall imprint his thumbmark, and his name shall be written by a competent person, who shall sign his own name as witness to said thumbmark. SEC. 12. Pawn ticket. — Every pawnbroker shall, at the time of every such loan or pledge, deliver to each person pawning or pledging any article or thing a memorandum or ticket signed by such pawnbroker and containing the substance of the record required to be kept in such pawnbroker’s memorandum book in section eleven hereof, excluding the description of the person so pawning or pledging such article or thing, and no compensation of any kind whatsoever shall be received by any pawnbroker for any such memorandum or ticket. SEC. 13. Redemption. — The pawner who fails to pay his obligation on the date it falls due may, within ninety days from the date of maturity of the obligation, redeem the pawn by the payment of the principal of the debt with interest: Provided, however, That for the purpose of computing interest due after maturity of the obligation, the basis shall be the sum of the principal of the obligation and interest earned at the time the obligation matured. SEC. 14. Disposition of pawn on default of pawner. — In the event the pawner fails to redeem the pawn within ninety days from the date of the maturity of the obligation in accordance with the preceding section, the pawnbroker may sell or otherwise dispose of any article taken or



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received by him in pawn: Provided, however, That the pawner shall be duly notifi ed of such sale on or before the termination of the ninety-day period, the notice particularly stating the date, hour, and place of sale. SEC. 15. Public auction of pawned articles. — No pawnbroker shall sell or otherwise dispose of any article or thing taken or received in pawn or pledge except at public auction in his place of business as such pawnbroker or in any other public place within the territorial limits of the municipality or city where the pawnshop has its place of busi-ness, under the control and direction of an auctioneer with license duly issued by the corresponding authorities, nor shall any such article or thing be sold or disposed of unless said pawnbroker has published a notice once in at least two daily newspapers printed in the city or mu-nicipality during the week preceding the date of such sale. In remote areas where newspapers are neither published nor circulated, notice by newspaper publication shall be substituted by posting notices in con-spicuous public places within the territorial limits of the city or mu-nicipality where the pawnshop has its place of business. Said notice, whether published or posted, shall be in English, and either in Pilipino or in the local dialect, and shall contain the name of the pawnshop, its owner, address of the establishment, hour, and the date of the auction sale. SEC. 16. Closing and removal of business period. — No pawnbroker shall close or transfer his place of business within three months after the expiration of the period for which any article or thing shall have been taken or received by him at his place of business in pawn or pledge, or before any such article or thing shall have been sold or otherwise disposed of in accordance with the provisions of this Decree: Provided, however, That removal or transfer of a pawnbroker’s place of business from one place to another within the territorial limits of the same city or municipality may be authorized on condition that the pawnbroker shall publish a notice of such removal in two local daily papers one in English, another in Pilipino or in the local dialect, for a period of not less than three days, the last day of which shall take place fi ve days before the removal, stating in the notice the date of removal, the address of the premises to be vacated and of the premises to which the pawnshop will transfer; and that he shall likewise post in a conspicuous place in both premises one copy of the notice in English and another in either Pilipino or the local dialect during the period of its publication, in the said local papers. SEC. 17. Grant of authority to the Central Bank. — The Central Bank is hereby authorized: (a) to issue rules and regulations to implement the

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provisions contained herein; (b) to require from pawnshops reports of condition and such other reports necessary to determine compliance with the provisions of this Decree; (c) to exercise visitorial powers whenever deemed necessary; and (d) to impose such administrative sanctions including the imposition of fi nes for violations of this Decree and regulations issued by the Central Bank in pursuance thereto. SEC. 18. Penalties. — A fi ne of not less than one hundred pesos (P100.00) and not more than one thousand pesos (P1,000.00) or imprisonment for not less than thirty days and not more than one year, or both, at the discretion of the court, shall be imposed for violations of the provisions of this Decree and its implementing rules and regulations: Provided, That if the violation is committed by a corporation, partnership or an association, the penalty provided for in this Decree shall be imposed upon the directors, offi cers, employees or persons therein responsible for the offense, without prejudice to civil liabilities arising from the criminal offense. SEC. 19. Matters not covered by this Decree. — The provisions of existing laws, insofar as they are not in confl ict with any provision of this Decree, shall apply in matters not otherwise specifi cally provided for in this Decree. SEC. 20. Separability Clause. — If any provision or section of this Decree, or the application thereof to any person or circumstances, is held invalid, the other provisions or sections of this Decree, and the application of such provisions or sections to other persons or circumstances, shall not be affected thereby. SEC. 21. Effectivity. — This Decree shall take effect immediately. ISSUED: January 29, 1973.

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12. FINANCING COMPANY ACT

(R.A. No. 5980, as amended by R.A. No. 8556.)

AN ACT AMENDING REPUBLIC ACT NO. 5980, AS AMENDED, OTHERWISE KNOWN AS THE FINANCING COMPANY ACT

Section 1. This Act shall be known as the “Financing Company Act of 1998.” Sec. 2. Declaration of Policy. — It is hereby declared to be the policy of the State to regulate and promote the activities of fi nancing and leasing companies to place their operations on a sound, competitive, stable and effi cient basis as other fi nancial institutions, to recognize and strengthen their critical role in providing medium and long-term credit for investments in capital goods and equipment especially by small and medium enterprises particularly in the countryside and to curtail and prevent acts or practices prejudicial to the public interest so that they may be in a better position to extend effi cient service in a fair manner to the general public and to industry, commerce and agriculture and thereby more fully contribute to the sound development of the national economy. Sec. 3. Defi nition of Terms. — As used in this Act, the term: (a) “Financing companies’’ hereinafter called companies, are corporations, except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other fi nancial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by fi nancial leasing of movable as well as immovable property; (b) “Securities and Exchange Commission’’ shall mean the offi ce of the Securities and Exchange Commission of the Philippines;

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(c) “Credit’’ shall mean any loan, mortgage, fi nancial lease, deed of trust, advance or discount, any conditional sales contract, contract to sell, or sale or contract of sale of property or service, either for present or future delivery, under which, part of all or the price is payable subsequent to the making of such sale or contract; any contract, any option, demand, lien or pledge, or to the other claims against, or for the delivery of, property or money, any purchase, or other acquisition of or any credit upon the security of, any obligation or claim arising out of the foregoing, and any transaction or series of transactions having similar purpose or effect; and (d) “Financial leasing’’ is a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and offi ce machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fi xed amount of money suffi cient to amortize at least seventy percent (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profi t over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.1 (e) “Purchase discount’’ is the difference between the value of the receivable purchased or credit assigned, and the net amount paid by the fi nance company for such purchases or assignment, exclusive of fees, services, charges, interest and other charges incident to the extension of credit. (f) “Lease rentals’’ shall refer to the periodic payments made by the lessee to the lessor under Section 3(d), above. Sec. 4. Grant of Authority to Securities and Exchange Commission. — The Securities and Exchange Commission is hereby empowered to enforce the provisions of this Act and issue implementing regulations except insofar as the Bangko Sentral may have supervisory authority under the provisions of Republic Act No. 7653 with respect to fi nancing companies licensed to perform quasi-banking functions, and insofar as the Monetary Board has authority to prescribe fi nancing company rates and charges under Section 5 hereof.

1See Ong Lim Sing, Jr. vs. FEB Leasing & Finance Corporation, 524 SCRA 333 (2007).

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Sec. 5. Limitation on Purchase Discounts, Lease Rentals, Fees, Service and Other Charges. — The Monetary Board of the Bangko Sentral ng Pilipinas is hereby empowered to prescribe, in consultation with fi nancing companies and the Securities and Exchange Commission, the maximum rate or rates of purchase discounts, lease rentals, fees, service and other charge of fi nancing companies, and to change, eliminate or grant exemptions from or suspend the effectivity of such rules whenever warranted by prevailing economic and social conditions. Sec. 6. Form of Organization and Capital Requirements. — Financing companies shall be organized in the form of stock corporations at least forty percent (40%) of the voting stock of which is owned by citizens of the Philippines and shall have a paid-up capital of not less than Ten million pesos (P10,000,000) in case the fi nancing company is located in Metro Manila and other fi rst class cities, Five million pesos (P5,000,000) in other classes of cities and Two million fi ve hundred thousand pesos (P2,500,000) in municipalities: Provided, however, That no foreign national may be allowed to own stock in any fi nancing company unless the country of which he is a national accords the same reciprocal rights to Filipinos in the ownership of fi nancing companies or their counterpart entities in such country: and Provided, further, That fi nancing companies duly existing and in operation before the effectivity of this Act shall comply with the minimum capital requirement within one (1) year from the date of the said effectivity. Sec. 7. Requirement for Registration. — Aside from requiring compli-ance with the provisions of the Corporation Code, the Securities and Exchange Commission shall not register the articles of incorporation of any fi nancing company unless its offi ce is satisfi ed on the evidence submitted to it, that: (a) All the requirements of existing laws to engage in the business for which the applicant is proposed to be incorporated or organized have been complied with; (b) The organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the protection of the interest of the general public; (c) All the requirements of this Act have been complied with: Provided, That fi nancing companies duly incorporated or registered prior to the approval of this Act, and which are actually existing and operating as such, shall fi le an information sheet with the Securities and Exchange Commission in the form to be prescribed by the Securities and Exchange Commission within sixty (60) days after notice from the

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said Commission. No person, association, partnership, or corporation shall hold itself out as doing business as a ‘fi nancing company’ or ‘fi nance and investment company’ or any other title or name tending to give the public the impression that it is engaged in the operations and activities of a fi nancing company, unless so authorized under this Act.2

Sec. 8. Revocation and Suspension of Registration. — The Securities and Exchange Commission may revoke or suspend the registration of any fi nancing company by entering an order to this effect together with its fi ndings in respect thereto, if upon investigation into the affairs of said fi nancing company or complaint by any person, it shall appear that: (a) it is insolvent; or (b) it has violated any provision of this Act. Sec. 9. Rights and Powers. — Financing companies shall have the following powers, in addition to those granted by this Act and by other laws: (a) Engage in quasi-banking and money market operations with the prior approval of the Bangko Sentral ng Pilipinas; (b) Engage in trust operations subject to the provisions of the General Banking Act upon prior approval by the Bangko Sentral ng Pilipinas; (c) Issue bonds and other capital instruments subject to pertinent rules and regulations of the Bangko Sentral ng Pilipinas; (d) Rediscount their paper with government fi nancial institutions subject to relevant laws, rules and regulations; (e) Participate in special loan or credit programs sponsored by or made available through government fi nancial institutions; and (f) Provide foreign currency loans and leases to enterprises who earn foreign currency by exports or other means, subject to existing laws and rules and regulations promulgated by the Bangko Sentral ng Pilipinas. Nothing in this section shall be construed as precluding a fi nancing company from performing such services or exercising such powers as may be granted by the Bangko Sentral ng Pilipinas or the Securities

2The amendatory Act repealed Section 8 of R.A. No. 5980, re “Citizenship Require-ment of the Board of Directors.’’



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and Exchange Commission or as may be incidental to its activities as a corporation. Sec. 10. Applicability of Incentives and Exemptions to Financial Leases. — Any incentive, exemption or benefi t, including tax credits and investment incentives granted by law or regulation to any purchaser, importer, borrower or other eligible person in connection with any purchase, importation, acquisition, or other transaction shall not be lost, diminished or impaired when the associated fi nancing is through a fi nancial lease rather than through borrowing or other conventional method of fi nancing. Financing companies providing the fi nancial lease in such cases shall be entitled to any incentive, exemption, benefi t or privilege available to lenders, importers, purchasers or other eligible person in such transactions under the applicable law or regulation. Sec. 11. Parity Clause. — When providing medium and long-term credit to small and medium enterprises, fi nancing companies shall enjoy such other rights, powers, benefi ts and privileges as may be granted by the law or regulation to other non-bank fi nancial institutions when they provide similar credit to such enterprises. Sec. 12. Liability of Lessors. — Financing companies shall not be liable for loss, damage or injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or other property leased to a third person or entity except when the motor vehicle, aircraft, vessel, equipment or other property is operated by the fi nancing company, its employees or agents at the time of the loss, damage or injury. Sec. 13. Registry of Financial Lease. — The Register of Deeds shall open and maintain a register of fi nancial leases, as an adjunct to the chattel mortgage registry. Said lease register shall contain the following particulars: (1) Name or description of property, including:

(a) Brand name or name of manufacturer; (b) Name of model, if any; (c) Year of model, or manufacture, if available; and (d) Serial number, if any.

(2) Acquisition cost; (3) Name of owner or fi nance company lessor; (4) Name of lessee; (5) Date of lease agreement or schedule;

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(6) Date of expiry of lease; and (7) Date of entry in lease registry. Sec. 14. Penalty. — A fi ne of not less than Ten thousand pesos (P10,000.00) and not more than One hundred thousand pesos (P100,000.00) or imprisonment for not more than six (6) months or both, at the discretion of the court, shall be imposed upon: (1) Persons, associations, partnerships or corporations, including the managing offi cer thereof, that shall:

(a) Engage in the business of a fi nancing company without authority from the Securities and Exchange Commission; (b) Hold themselves out to be fi nancing companies, either through advertisement in whatever form, whether in its stationery, commercial paper or other document, or through other representations without authority; (c) Make use of trade or fi rm name containing the words ‘Financing Company’ or ‘Leasing Company’ or ‘Finance and Leasing Company’ or ‘Finance and Investment Company’ or any other designation that would give the public the impression that it is engaged in the business of a fi nancing company or leasing company as defi ned in this Act without authority; and (d) Violate the provisions of this Act.

(2) Any offi cer, employee, or agent of a fi nancing company who shall:

(a) Knowingly and willingly make any statement in any application, report or document required to be fi led under this Act, which statement is false or misleading with respect to any material fact; or (b) Overvalue or aid in overvaluing any securities for the purpose of infl uencing in any way the action of the company on any loan, or discounting line.

(3) Any offi cer, employee or examiner of the Securities and Exchange Commission directly charged with the implementation of this Act who shall commit, connive, aid or assist in the commission of acts enumerated under subsections 1 and 2 of this section. Sec. 15. Separability of Clause. — If any provision or section of this Act or the application thereof to any person or circumstances is held invalid, the other provisions or sections of the Decree, and the application of



642

such provisions or sections to another persons or circumstances shall not be affected thereby. Sec. 16. Repealing Clause. — All acts inconsistent with this Act are hereby repealed. Sec. 17. Effectivity. — This Act shall take effect upon its approval. R.A. No. 5980: APPROVED August 4, 1969. It took effect “upon its approval.’’ (Sec. 13 thereof.) R.A. No. 8556. APPROVED February 26, 1998. It took “effect fi fteen (15) days following the completion of its publication in the Offi cial Gazette or in two newspapers of general circulation.’’ (Sec. 13 thereof.)

ILLUSTRATIVE CASES: 1. A company engaged in the business of selling trucks in install-ment, imposed and collected fi nance charges on the installments sales of trucks. Facts: Medina purchased on installment from appellant IHMI 24 truck engines. IHMI imposed and collected fi nance charges on the installment sales using the words “Finance Income Unearned,” Finance Rate,” “Rate per year,” “Total Amount Financed,” and “Date Finance Begun,” to denote certain entries in the document (Retail Notes Analysis executed by M) evidencing the transactions. Issue: In its petition for certiorari, IHMI raises the lone issue of whether by imposing and collecting fi nance charges in connection with the installment sale of its trucks, IHMI, which is admittedly not a fi nancing company, violated R.A. No. 5980 by engaging in the business of a fi nancing company without requisite authority from the Securities and Exchange Commission. The main argument of IHMI is that the type of “fi nancing” involved in its business of selling trucks and machinery on installment, is not the business of fi nancing defi ned in Section 3, R.A. No. 5980. Held: (1) Transaction in question not a fi nancing transaction. — “Section 5 of R.A. No. 5980 limits the rate of discount, fees, service, and other charges that fi nancing companies may collect on the purchase of commercial papers and receivables. Evidently, the fi nancing transaction that is regulated by R.A. No. 5980 involves the buying, discounting, or factoring of

R.A. No. 5980

643

promissory notes and sales on credit or installment. IHMI did not purchase from itself the Retail Notes Analysis executed by Medina. IHMI only extended credit to Medina by allowing him to pay for the 24 truck engines in installment. While the increased price of the sale included a fi nancing charge, that charge was simply another name for the interest to be paid by the installment buyer (Medina) on the deferred payment of the purchase price of the vehicles sold and delivered to him by IHMI. The use of the words ‘fi nance charge,’ ‘fi nancing’ or ‘fi nance operation’ in the documents prepared, and letters sent by IHMI to Medina, was in compliance with R.A. No. 3765 (Truth in Lending Act) which requires a creditor (or seller) to fully disclose to debtor (or buyer) the true cost of credit ‘with a view of preventing the uniformed use of credit to the detriment of the national economy.’ Section 3, R.A. No. 3765 defi nes ‘credit,’ ‘fi nance charge,’ and ‘creditor’ while Section 4 requires the creditor or seller to disclose the information therein mentioned. IHMI used the word ‘fi nance charge’ instead of ‘interest’ in the Retail Notes Analysis which it delivered to Medina, because that is the term used in the Truth in Lending Act. (Sec. 4, subpar. 6, R.A. No. 3765.) (2) Distinguished from a fi nancing transaction. — “IHMI correctly pointed out that its transaction with Medina differs from a fi nancing transaction under R.A. No. 5980, in that there were only two parties in its transaction with Medina, namely: IHMI and Medina, while in a fi nancing transaction under R.A. No. 3765, there are three (3) parties involved, namely: (1) the installment buyer, (2) the seller, and (3) the fi nancing company. The buyer executes a note or notes for the unpaid balance of the price of the thing purchased by him on installment. The seller assigns the notes or discounts them with a fi nancing company which is subrogated in the place of the seller, as creditor of the installment buyer. The transaction between IHMI and Medina did not involve any discounting, factoring or assignment of IHMI’s credit against Medina to a fi nance company. The transaction was bilateral, not trilateral. No fi nancing company stepped into the shoes of IHMI as assignee or purchaser of IHMI’s credit against Medina. Medina himself, not a fi nancing company, paid IHMI for the truck engines. Medina made his installment payments or amortizations to IHMI, not to a fi nancing company.



644

Since IHMI’s business of selling trucks in installments is not the business of a fi nancing company under R.A. No. 5980, IHMI did not need SEC authorization to engage in it. (3) R.A. No. 3765 applicable. — “R.A. No. 3765 [Appendix 8.] was not repealed by R.A. No. 5980. The two statutes do not deal with the same subject matter and not repugnant to each other. Each was enacted for a different purpose. R.A. No. 3765 deals with the requisites for the full disclosure of the cost of credit. R.A. No. 5980, on the other hand, regulates the business of fi nancing companies.’’ (International Harvester McLeod, Inc. vs. Medina, Jr., 183 SCRA 685 [1990].) ———— ———— ———— 2. The transaction between petitioner and respondent involves a sale-lease back scheme whereby the former sells the equipment it owns to the latter which leases it back to him, petitioner claiming that the true transaction is a loan with security. Facts: Being in need of additional capital, petitioner CCCC approached MLFC, fi nancing company, for the purpose of securing a loan. MLFC agreed to extend fi nancial assistance to CCCC but, instead of a customary loan covered by a security, MLFC induced CCCC to adopt and apply a sale and lease back scheme. The arrangement provided for the equipment of CCCC to be made to appear as sold to MLFC and then leased back to CCCC which will then pay lease rentals to MLFC. The rentals will be treated as installment payments to repurchase the equipment. It is CCCC’s claim that the arrangement is nothing more than an equitable mortgage, and consequently ask for reformation. Pursuant to the sale and lease back scheme, CCCC executed two deeds of sale over its equipment in favor of MLFC, which were then leased back to CCCC. To facilitate payment of the rentals, MLFC required CCCC to execute a deed of assignment of its collectibles from the Ministry of Public Highways (now Department of Public Works and Highways). In addition, CCCC was also required to execute a chattel mortgage over its other properties as a security. CCCC’s position is that it is no longer indebted to MLFC because the total amounts collected by the latter from the Ministry of Public Highways, by virtue of the deed of assignment, and from the proceeds of the foreclosed chattels were more than enough to cover CCCC’s liabilities. Finally, CCCC submits that, in any

R.A. No. 5980

645

event, the deed of assignment itself already freed CCCC from its obligation to MLFC. Issues: (1) Is the sale-lease back scheme in reality an equitable mortgage? (2) Is CCCC completely freed from its obligation to MLFC under the lease agreement when it assigned to MLFC its collectibles from the Ministry of Public Highways? Held: (1) Transaction involves fi nancial leasing or fi nancing lease. — “It is clear that the transaction between CCCC and MLFC is what is popularly known as a ‘fi nancial leasing’ or ‘fi nancing lease.’ Transactions of this sort are not new to the commercial world and have been recognized as genuine or legitimate contracts, accorded with statutory and administrative recognition. In Beltran vs. PAIC Finance Corporation (209 SCRA 105 [1992]), this Court had occasion to discuss the nature of a fi nancing lease. A fi nancing lease may be seen to be a contract sui generis, possessing some but not necessarily all the elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is lodged in the fi nancial lessor. The fi nancial lessee is entitled to the possession and use of the leased equipment. At the same time, the fi nancial lessee is obligated to make periodic payments denominated as lease rentals, which enable the fi nancial lessor to recover the purchase price of the equipment which had been paid to the supplier thereof. MLFC’s own evidence discloses that it offers two types of fi nancing lease: a direct lease and a sale-lease back. A direct lease is one where the client buys equipment through a fi nancing company. MLFC would, in effect, initially purchase equipment that is needed by the client and then lease it to the latter. In a sale-lease back, the client already has the equipment but needs working capital. The client sells to MLFC equipment that it owns, which will be leased back to him. The transaction between CCCC and MLFC involved the second type of fi nancing lease.’’ (2) Distinction between fi nancial leasing and ordinary loan. — Section 3(d) of R.A. No. 5980, as amended by R.A. No. 8556 defi nes fi nancial leasing. ‘In Investors Finance Corporation v. Court of Appeals (193 SCRA 701 [1991]), the Court, applying the defi nition of fi nancial leasing, differentiated between a true fi nancial leasing and an ordinary



646

loan with mortgage in the guise of a lease. It was explained that the defi nition contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own. Thus, in a true ‘fi nancial leasing,’ a fi nance company purchases on behalf of or at the instance of the lessee the equipment which the latter is interested to buy but has insuffi cient funds for the purpose. The fi nance company therefore leases the equipment to the lessee in consideration of the periodic payment by the lessee of a fi xed amount of ‘rental.’ However, where the client already owns the equipment but needs additional working capital and the fi nance company purchases such equipment with the intention of leasing it back to him, the lease agreement is simulated to disguise the true transaction that is a loan with security. In that instance, it is clear that the intention of the parties was not to enable the client to acquire and use the equipment, but to extend to him a loan. MLFC admits that the transaction with CCCC involved the purchase of already-owned equipment. Consequently, there can be no doubt that the transaction between the parties is not one of fi nancial leasing, as defi ned by law, but simply a loan secured by a chattel mortgage over CCCC’s equipment.’’ (3) Deed of Assignment did not completely free CCCC from its obligations. — “The deed was dated August 27, 1976. CCCC, by its own evidence, was shown to have made partial payments on the obligation, apart from those obtained by MLFC from the Ministry of Public Highways. These partial payments were made after the execution of the deed of assignment. Since subsequent payments were made by CCCC itself, it follows that the execution of the deed of assignment did not extinguish its obligation. In addition, the fact that a chattel mortgage was executed after the execution of the deed of assignment further confi rms the existence of CCCC’s obligation under the lease agreement. If indeed the deed of assignment extinguished the obligation, there was no reason to execute a chattel mortgage. Evidently, the only conceivable reason for the execution of a chattel mortgage was because the obligation under the lease agreement subsisted.’’ (Cebu Contractors Consortium Co. vs. Court of Appeals, 407 SCRA 154 [2003].)

— oOo —

R.A. No. 5980

647

647

INDEX

— A —Affi davit of Good Faith, 496Antichresis, 473 characteristics, 473 distinguished from pledge and real mortgage, 475 creditor obligations, 478 right in case of non-payment of debt, 479 interest is subjected to usury law, 481

— B —Bailee (Comodante), 3 extent of right to the use of the thing loaned, 14 right to lend thing loaned to third person, 17 exceptions to extent of usage of thing loaned to members of bailee’s

household, 17 obligations and liabilities (commodatum)

for expenses for use and preservation of thing loaned (ordinary expenses), 18

for loss of thing loaned (extraordinary expenses), 19instances of fortuitous event, which still constitutes liability for

loss, 18-19 for deterioration of thing loaned, 19-20 to return thing loaned, 20 effect of retention or adverse claim, 21 solidary liability in case of two or more bailees, 21 acts by bailee that constitutes ingratitude to bailor, 26 right to imbursement of extraordinary expenses, 27Bailment, 2-3 parties in bailment, 3 classifi cations, 3 for hire, 4 kinds, 4Bailor (Comodatario), 3 entitlement to the fruits of the thing loaned, 14 requirement of possessory interest to thing loaned in commodatum, 15 obligations (commodatum)


648

to respect stipulated duration of loan, 23 to refund extraordinary expenses to bailee, 27 to pay damages for known hidden fl aws of thing loaned, 28 requisites to apply rule, 28 right to demand return of thing loaned for acts of ingratitude by bailee, 26Bangko Sentral ng Pilipinas authority of its monetary board in prescribing interest rates, 58 limitation, 63 prescribing higher maximum rates, 66

authority to eliminate, provide exemption or suspend the effect of interest rate ceiling, 79

Banks, 130 relation to depositor, 130-131 nature of bank deposits, 130 governing rules on deposits, 131Barter (Exchange) Contract, 35 distinguished from loan (mutuum and commodatum), 35Bond, 314 surety bond, 223 nature, 315Bondsman, 314Borrower (Mutuum) obligation in contract of mutuum (simple loan), 30-31 distinction (in relation to ownership of thing loaned) from commodatum, 31 cases, right to recover (cost and attorney’s fees) is given to the borrower, 85 right to recover usurious interest paid, 83

— C —Central Bank Circular No. 416, 41 applicability, 62Central Bank Circular No. 905, 49, 52 issue in the legality of the circular, 52Chattel Mortgage, 482 characteristics, 483 distinguished from pledge, 483 similarities, 484 governing laws, 484 punishable acts related to mortgage, 485 subject matter of mortgage, 486 extent, 491-493 creation of mortgage, 493 period of registration, 494 effect of registration, 494 requirement of affi davit of good faith, 496 redemption in mortgage, 498-500 foreclosure of mortgage, 503

649 INDEX

period of foreclosure, 504 application of proceeds of sale, 510Civil Obligations, 240Commodatum, 5, 6 distinguished from mutuum, 9-10 kinds, 10 similarity to donation, 14 extent of bailee’s right to the use of the thing loaned, 14 exceptions to extent of use to members of bailee’s household, 16 purpose, 14 essential feature of the contract, 13, 14 subject matter of loan, 15 ownership (of bailor to thing loaned), unessential to perfection of loan, 16 necessity of possessory interest of bailor, 16 personal character of loan, 17 right of bailee to lend thing loaned in commodatum, 17 obligations and liabilities of bailee, see Bailee distinguished from deposit, 106Common Carriers

causes, carriers will not be obliged for loss, damage or deterioration of goods, 108

Compensated Corporate Sureties, 256Compensatory Interest, 38Compounding Interest, 48, 61 cases interest is allowed, 79-80 demand of compound interest, 81Compromise, 274Concurrence (of Credit), 512Consumables (Things), 6 as subject matter of commodatum loan, 15 as subject matter in a contract of lease, 15Conversion (in Ownership of Goods), 174Credit (Credit Transactions), 1 purpose, 1 types, 1 scope, 1-2 distinguished from simple loan, 7 defi nition as oppose to “debt”, 7 concurrence and preference of credits, 512 general categories of credit, 522-523Custodia Legis (Thing in), 154

— D —Dacion en pago, 437Debt as opposed to credit, 7


650

forbearance of debt, 54 exempt properties from liability from debt, 515Defi ciency Judgment, 414Delivery (of Goods) as requirement for the perfection of loan, 10 of pledge, 346 lawful excuses for refusal of delivery by warehouseman, 171, 188-189 types in related to delivery of thing pledged, 347Demand Deposit, 130Deposit, 104 governing law, 104-105 characteristics, 105 purpose, 105 distinguished from mutuum¸106 distinguished from commodatum, 106-107 requirement for perfection of agreement to deposit, 107 manner of creation, 107 kinds, 107-108 when deposit is deemed necessary, 109 gratuitous character, 108 subject matter, 109

in case depository is capacitated and depositor is incapacitated, vice versa, 112

Depositary guidelines in case depositary is capacitated, or incapacitated, 112 obligations primary obligations, 114 governing rules, 115 not to transfer deposit, 116 rules in changing way or manner of deposit, 117 in case thing deposited is earning interest, 117-118

not to commingle deposited things of the same kind and quality, 124-125

not to make use of thing deposited, 125-126 if the thing deposited is closed and sealed, 134-135 in sequestrated property, 154

cases depositary will be held liable for loss of thing deposited, exemption, 116

cases depositary will be liable for loss of thing through fortuitous event, 130

person to whom depository should return thing deposited, 139 place and time of return, 139-140 right to return thing deposited, 141 hotels/inn keepers held as depositaries, elements to concur, 148 extent of liability as depositary, 149Deposito Miserable, 147

651 INDEX

Depositor ownership not essential to be proven by depositor, 136-137 rights in case of two or more depositors, 138 authority to demand return of deposited thing at will, 140 obligations to pay expenses of preservation, 143Discount (of Paper), 8 distinguished from loan, 7-8Donation similarity to commodatum (loan), 14Dragnet Clauses (in Mortgage Contract), 394

— E —Encumbrance, 1Equitable Mortgage, 373 cases mortgage is presumed as equitable, 374Escrow, 154Estafa, 345Execution Sale, 410Extrajudicial Deposit kinds, 107-108, 109 distinguished from judicial deposits, 155

— F —Family Home, 515-516Forbearance (of Debt), 54Foreclosure (of Real Mortgage), 398 validity and effect, 398-400 kinds, 401 judicial foreclosures, under the Rules of Court, 401-403 nature of proceedings, 415 extrajudicial foreclosures, governed by R.A. No. 3135, 403 remedies for aggrieved party, 413 nature of power of foreclosure, 416-417 redemption of property foreclosed, see Redemption period of foreclosure, 504Foreign Currency Deposit Act (R. A. No. 6426), 133Fungible Things (Goods), 33, 213Future Debts, 242 guaranty of debts, 240-242

— G —Goods, 213Gratuitous Bailment, 4Guarantor married woman, as guarantor, 234


652

extent of guarantor’s liability, 258 liability for judicial costs, 259 qualifi cations, 263-264 cases of selection of guarantor, 265-266 benefi t of excussion to guarantor, 267 exceptions, 269-270 benefi ts to sub-guarantor, 275-276 among several guarantors, 278 right to indemnity or reimbursement, 279-281 items included, 279-280 exceptions, 281 right to subrogation, 282 effect of payment by guarantor without notice, 286 before or after maturity, 286 effect of repeat payment, 287 right to proceed against principal debtor before payment, 287-288 available defenses against creditor, 313Guaranty, 215 governing laws, 216 characteristics, 216 classifi cations, 217-218 distinguished from suretyship, 225-226 distinguished from indorsement, 231 distinguished from warranty, 231 gratuitous character, in general, 232 when contract is onerous, 232 causes of contract, 232-233 rule, if guaranty undertaken without knowledge of debtor, 235 judicial guaranty, 236 double or sub-guaranty, 236 necessity of principal obligation in existence of guaranty, 236-237 voidable or annullable contracts, 239 guaranty of future debts, 240-242 guaranty not presumed rule, 246 covered by Statute of Frauds, 247 items comprising indemnity of debtor to guarantor, 279 causes of extinguishment, 298

—H —Hotels, 149

elements to held hotel keepers as depositaries by the effects of their guests, 148

extent of liability as depositaries to their guests, 149 cases hotel-keeper is held liable or not, 150 exemption or diminution of liability, 151 right to retain, 152

653 INDEX

— I —Immovable Property, 375-376Indorsement distinguished from guaranty, 231Inn, 149


extent of liability as depositaries to their guests, 149 exemption or diminution of liability, 151Innominate Contracts (of Loan) regulating provision, 13Interest, 59 requisites to allow charging of interest, 38 kinds, 38, 60-61 rules on existence of stipulation to pay interest, 37-38 instances interest can be charged in the absence of stipulation, 39-42 distinct from surcharges and penalty stipulations, 44 cases due and unpaid (accrued) interests can earn interest, 48 governing law on interest rates, 51 interest rate under the law, 51 when ceiling on interest or interest rates apply, 63 prescribed interest rates, 64 rates for pawnshops, 77-78 charging of advance interest, 81 test of usury, 82 recovery of usurious interest, 83 recovery of interest added to principal but not paid, 84-85 effect of clerical errors in computation of interest, 87 on payment in kind, 93-94 interest in mortgage contract, 372 in antichresis, 480Involuntary Deposit (Bailment), 147Irregular Deposit, 126 distinguished from mutuum, 127

— J —Judicial Deposit, 108, 153 nature and purpose, 154 distinguished from extrajudicial deposits, 155Judicial Guaranty, 236Judicial Process, 460

— L —Law Merchant, 212Lawful Interest, 61


654

Lease (Rent) Contract, 32 subject matter in contract of lease, 15 distinguished from mutuum (simple loan), 31Legal Interest, 61Levy, 410Lis Pendens (Notice), 153Loan (Contract of Loan), 5 kinds, 5 commodatum, see Commodatum mutuum (simple loan), see Mutuum on bottomry, 77 on respondentia, 77 differences, 9-10 governing law, 5-6 characteristics, 6 consideration in contract, 6 distinguished from credit, 7 distinguished from discounting of paper, 7-8 manner of perfecting contract of loan, 11 requirement of delivery of subject matter for perfection of loan, 10 binding effect of promise to loan or lend, 11 distinguished from barter or exchange, 35 validity of penalty clause in case of failure to pay interest obligation, 67-68 validity of adding attorney’s fees covered in costs of collection, 68 instance stipulated attorney’s fee is excessive, 69 escalation clause in agreement, 90 conditions for enforcement of clause, 90 inclusion of de-escalation clause, 90-91 purpose, 91 interest of loan payable in kind, 93-94

— M —Monetary Interest, 38Money Market, 30 nature of transactions, 30Mortgage (Real Mortgage), 370 essential requisites, 317, 319, 377 distinctions with pledge, 329 indivisibility, 340 exceptions, 341 characteristics of contract, 370 object of contract, 370 future property, void as object of contract, 376 rules on possession of thing mortgaged, 371-372 payment of interest, 372

655 INDEX

cause in mortgage contract, 373 kinds of mortgage, 373-374 cases, contract is presumed to be of equitable mortgage, 374 subject matter of contract, 375 in good faith, 378 registration of mortgage, 381 effect of invalidity of mortgage on principal obligation, 384 effects of mortgage, 384-390 extent of mortgage, 391 stipulation including after-acquired properties, 392 “dragnet” clause, purpose and construction, 393 governing laws, 398 foreclosure of mortgage, see Foreclosure acceleration clause in mortgage, 399 redemption of foreclosed mortgage property, see Redemption distinguished from antichresis contract, 475Mortgagee-in-Possession, 451-452 rights and obligations, 452Motel


extent of liability as depositaries to their guests, 149Motion distinguished from petition or any other pleading, 465Movable Property, 15Mutual-Benefi t Bailment, 4Mutuum (Simple Loan), 5, 6, 30 distinguished from commodatum, 9-10 borrower in contract of loan, see Borrower distinguished from contract of rent or lease, 31 form of payment (object of loan), 35-36 requisites to allow charging of “interest”, 37 existence of stipulation to pay interest, rules, 37-38 instances interest can be charged in the absence of stipulation, 39-42 contract instances disguised to cover usurious loans, 45-46 stipulation of attorney’s fees to cover costs of collection, 68-69 distinguished from deposit, 106 irregular deposit, 127

— N —Natural Obligations, 240Necessary Deposit when deposit is deemed necessary, 109, 146 distinguished from necessary deposit, 110 examples of deposit in compliance with legal obligation, 147 made on occasion of any calamity, 147


656

— O —Obligations civil and natural obligations, 50Owner (Mutuum)

— P —Pacto de Retro Contract case, contract is presumed as equitable mortgage, 72Pactum Commissorium prohibitions (related to pledge and mortgage), 331 requisites/elements to exist, 331Pari Delicto inapplicability in usury cases, 84Pawnshops, 734 basis of interest rates, 77 prohibition to divide pawn object into fractions to collect more interest, 78Personal Property objects considered as personal property, 348, 349 exempt properties from liability of debt, 515-518Personal Security, 2Pledge, 318 essential requisites, 317, 319 kinds, 318 characteristics, 318 cause of contract, 318-319 distinctions with real property mortgage, 329 indivisibility, 340 exceptions, 341 essential requirement for perfection of pledge, 346 types of delivery depending on nature of pledge, 347 subject matter in pledge, 348-349 instrument required to bind third persons, 349 extinguishment by return of thing pledged, 360 effect of sale of thing pledged, 364 pledge by operation of law, instances, 367-368 distinguished from antichresis contract, 475 distinguished from chattel mortgage, 483 similarities, 484Pledgee, 318 right to retain thing pledged, 352 principal obligation, 353 other obligations and responsibilities, 354-355 obligation not to use the thing pledged, 356 right to compensate earning of pledge with principal debt, 355 right against third persons, 356

657 INDEX

right to demand substitute or ask immediate payment of obligation, 359 required formalities to exercise right to cause sale of thing pledged, 362 right to appropriate thing pledged, 362 right to bid at public sale, 363Pledgor, 318 alienation of thing pledged, 350 cases of pledgor’s right to ask that thing pledged be deposited, 357 right to ask for deposit, 358 right to demand return of thing pledged, 357 right to substitute thing pledged, 358 requisites, 358 right to bid at public sale, 363Precarium, 10, 15, 24 cases, constituting precarium, 24Preference (of Credit), 512 nature and effect, 512 applicability of rules on preference, 513-514 distinguished from lien, 514 orders of preference, 548Pro rata, 548Proceeds, 8

— R —Real (Property) Security, 2Real Property as subject matter in commodatum loan, 15

ordinary and extraordinary acquisitive prescription of property, requisites, 21

exempt properties from liability from debt, 515Redemption (of Foreclosed Real Mortgage Property), 426 kinds, 426 equity of redemption, 427 guidelines in exercising right of redemption, 428-429 effect of failure to exercise right, 430-431 requisites, 431 effects of the right, 431 nature of the right, 435-436 entitled persons to exercise right, 449 transfer of right to redeem, 450 requisites of a valid redemption, 438 guidelines in payment of redemption money, 440 equity of redemption is judicial foreclosure, 448Refl ectionary Credit, 528Rent, see LeaseReplevin, 506Republic Acts


658

usury law, No. 2566, see Usury foreign currency deposit act, No. 6426, 133 warehouse receipts law, No. 2137, see Warehouse Receipts Law

regulating sale of property under inserted special power (mortgages), No. 3135, 403

—S —Safety Deposit Boxes (Contract for Rent) rules, 118-119Security, 2 kinds, 2Sequestration, see Judicial DepositStatute of Frauds guaranty covered, 247Strictissimi Juris application of the rule, 255Sub-Guaranty, 236Subrogation, 282Successor-in-Interest, 449Surety, 218, 226 as co-debtor distinguished from joint and solidary co-debtor, 219 nature of undertaking, 220-224 surety bond, 223 determination of extent of liability, 250 strictissimi juris rule on accommodation surety, 255 compensated corporate sureties, 256 qualifi cations in a property bond, 314Suretyship, 215, 218 applicable laws, 218 distinguished from guaranty, 226

—T —Terceria, 467Time Deposit, 130Time-Price Differential, 74Travelers (Hotel/Inn Guests), 149Trust Receipts, 32

— U —Usurious Interest, 61Usury, 52 usurious loan contracts declared void, 44-45 instances of loan contracts disguised to cover usury, 45-46 governing laws to usurious loan contracts, 49

659 INDEX

usury law (R. A. No. 2566), 53 general provisions, 51 transactions where law is applicable, 53-54 purpose, 54 nature of the law, 54-55 historical background, 55 general rules in the construction of usury statutes, 56-57 interest rates prescribed by the law, 64 when not applicable, 71-72 interest in antichresis subjected to law, 478 statutory character, 53 elements of usury, 53 theory of inequality in usurious loans, 55 validity of adding attorney’s fees covered in costs of collection, 68 determining existence of usury, 69-70 recovery of usurious interest, 83 inapplicability of pari delicto rule, 84 recovery of principal loaned by usurer, 87-88 requirement to deny charge of usury under oath, 96 effect of failure, 96 purpose of requirement, 97 presumptions and burden of proof in cases, 98

— V —Voluntary Deposit, 110, 146 distinguished form necessary deposit, 110 form of contract, 111

— W —Wages, 535Warehouse Receipts Law (R. A. No. 2137) scope of the law, 156 purpose of the law, 156 punishable acts under the law, 208-210Warehouse Receipts, 159 nature, 160 form and contents, 160 effect of omission of any essential content, 162 terms not allowed to be included in the receipt, 163-164 negotiable and non-negotiable receipt, 164 effect of failure to mark, 165-166 negotiation of receipts (negotiable receipts), 195-196 advantages of negotiable receipt, 197 persons who may negotiate a receipt, 198 rights, 199


660

liability, 203-204 rights of person to whom receipt has been transferred, 199-200 related acts criminally punishable, 208-210Warehouse, 158Warehouseman, 158 principal obligations, 169-170 requirements before warehouseman is bound to deliver goods offer to satisfy warehouseman’s lien, 170 offer to surrender and sign negotiable receipt, 170 lawful excuses to refuse delivery of goods, 171, 188-189 persons to whom warehouseman should deliver the goods, 172 requirement to cancel warehouse receipts upon delivery of goods, 175 liabilities of warehouseman failure to deliver goods, 173-174 in case of alteration of warehouse receipts, 175-176 in case of lost or destroyed receipts, 177 as to duplicate receipts, 178 to rightful claimant of goods, 180 for non-existence or wrong description of goods, 181-182 for loss of goods due to negligence, 182 acts that may held warehouseman liable, 194

prohibition on refusal to deliver goods due to acquired right over goods, 178

duty in case there are several claimants to goods, 179 prohibition to commingle goods with same kind and quality, 183 lien over deposited goods, extent, 186 goods subject to lien, 186 loss and waiver of lien, 187 procedures to satisfy lien by sale, 190-193 acts punishable by the law, 208-210Warranty, 232 distinguished from guaranty, 232 express warranty, 232 implied warranty, 232Writ of Possession, 454 instances writ may be issued, 454 issuance before lapse of redemption period (mortgage), 461

661

661

CASE INDEX

— A —

A. Francisco Realty & Development Corp. vs. Court of Appeals, 298 SCRA 349 [1998], 331

A.C. Enterprises, Inc. vs. Construction Industry Arbitration Commission, 244 SCRA 55 [1995], 41

A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commis sion (150 SCRA 498 [1987]), 527

A.G. Development Corporation vs. Court of Appeals, 281 SCRA 155 [1997], 454Abaca Corp. of the Phils. vs. Garcia, 272 SCRA 475 [1997], 412Abad vs. Guimba, 465 SCRA 356 [2005], 379Abustan vs. Ferrer, 12 SCRA 488 [1964], 319Aclon vs. Court of Appeals, 387 SCRA 415 [2002], 432Acme Shoe Rubber & Plastic Corp. vs. Court of Appeals, 260 SCRA 714 [1996],

1, 493Afable vs. Ruiz, [CA] No. 17164-R, Dec. 7, 1959, 56 O.G. 3767, 325Agag vs. Alpha Financing Corp., 407 SCRA 602 [2003], 380Agbada vs. Inter-Urban Developers, Inc., 389 SCRA 430 [2002], 402Agricultural and Industrial Bank vs. Tambunting, 73 Phil. 555 [1942], 336Agricultural Credit Cooperative Association of Hinigaran vs. Yusay, 107 Phil.

791 [1960], 382Agro Conglomerates, Inc. vs. Court of Appeals, 348 SCRA 450 [2000], 218Aguilar vs. Rubiato and Gonzales Villa, 40 Phil. 570 [1919], 58Agustin vs. Court of Appeals, 271 SCRA 457 [1997] , 501Ajax Marketing & Dev. Corp. vs. Court of Appeals, 248 SCRA 222 [1995], 393Alarilla vs. Ocampo, 417 SCRA 485 [2003], 458Alcantara vs. Alinea, 8 Phil. 111 [1907], 333Alcantara, Sr. vs. Gregorios, 8 C.A. Rep. 950, 100Aleman vs. De Catera, 1 SCRA 776 [1961], 488Alexander Eccles & Co. vs. Munn, 210 S.W. 626, 168Alfaro vs. Llanes & Company, 77 SCRA 6 [1977], 428Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008], 30Almarza vs. Salas, 47 Phil. 724 [1925], 315Almeda vs. Court of Appeals, 256 SCRA 292 [1996], 90Alojado vs. Lim Siongco, 51 Phil. 339 [1927], 474Alton vs. New York Taxicab Co., 121 N.Y. Supp. 271, 186Alvaran vs. Marquez, 11 Phil. 263 [1908], 246American Foreign Banking Corporation vs. Herridge, 49 Phil. 975 [1927], 162


662

Anderson vs. Reyes, 54 Phil. 944 [1930], 448Andreas vs. Green, 48 Phil. 463 [1925], 68Angel Jose Merchandising vs. Chelda Enterprises and D. Syjueco, 23 SCRA 119

[1968], 83Angel Jose Warehousing Co., Inc. vs. Chelda Enterprises, 41 SCRA 404 [1971],

45Antioquia vs. Dizon, 4 C.A. Rep. 736, 88Appari vs. Court of Appeals, 13 SCRA 611 (1965), 420Araneta and Uy vs. Commonwealth Insurance Co., 103 Phil. 522 [1958], 303Araneta vs. Hon. Gatmaitan, 101 Phil. 328 [1957], 541Arangco vs. Baloso, 49 SCRA 296 [1973], 392Ardiente vs. Province Sheriff, 436 SCRA 655 [2004], 407Arenas vs. Raymundo, 19 Phil. 46 [1911], 328Arevalo vs. Dimayuga, 89 Phil. 894 [1951], 84Arquiza vs. Court of Appeals, 459 SCRA 753 [2005], 466Arranz vs. Manila Fidelity & Surety Co., Inc., 101 Phil. 272 [1957], 224Arrofo vs. Quiño, 449 SCRA 284 [2005], 375Arroyo vs. Jungsay, 34 Phil. 589 [1915], 272Arroyo vs. Yu de Sane, 54 Phil. 511 [1930], 487Asian Surety and Insurance Co., Inc. vs. Nolasco, 79 SCRA 472 [1977], 245Asiatic Petroleum vs. Hizon, 45 Phil. 532 [1923], 299Associated Insurance & Surety Co., Inc. vs. Iya, 103 Phil. 971 [1958], 489Association de Agricultores de Talisay-Silay, Inc. vs. Talisay-Silay Milling Co.,

Inc., 88 SCRA 294 [1979], 224Asuncion vs. Evangelista, 316 SCRA 848 [1999], 385Atlantic Gulf & Pacifc Company of Manila, Inc. vs. Court of Appeals, 249 SCRA

397 [1995], 39Atok Finance Corp. vs. Court of Appeals (222 SCRA 232 [1993], 240Auto Group vs. Intra Strata Assurance Corp., 556 SCRA 250 [2008], 249Autocorp. Group vs. Intra Strata Assurance Corp., 556 SCRA 250 [2008], 218

— B —B.A. Finance Corp. vs. Court of Appeals, 258 SCRA 102 [1996] , 501, 506BA Finance Corp. vs. Court of Appeals, 211 SCRA 112 [1992], 246Bachrach Motor Co. vs. Espiritu, 52 Phil. 346 [1928], 68Bachrach Motor Co. vs. Icarangal, 68 Phil. 287 [1939], 344Bachrach Motor Co. vs. Lacson Ledesma, 64 Phil. 681 [1937], 349Bachrach Motors Co. vs. Summers, 42 Phil. 3 [1921], 500Bacolor vs. Banco Filipino Savings & Mortgage Bank, 515 SCRA 79 [2007], 50Bacuñgan vs. Court of Appeals, 574 SCRA 642 [2008], 374Bagalihog vs. Fernandez, 108 Phil. 560 [1960], 154Baluyut vs. Poblete, 514 SCRA 370 [2007], 409Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64

[2005], 439Banco de Oro vs. Bayuga, 93 SCRA 443 [1979], 373Banco de Oro-EPCI, Inc. vs. JAPRL Dev. Corp., 551 SCRA 342 [2008], 130

663 CASE INDEX

Banco Español-Filipino vs. Donaldson, Sim & Co., 5 Phil. 418 [1906], 421Banco Español-Filipino vs. Peterson, 17 Phil. 409 [1910], 347Banco Filipino Savings & Mortgage Bank vs. Pardo, 151 SCRA 481 [1987], 461Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 332 SCRA 241

[2000], 91Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64

[2005], 439Banco Filipino Savings and Mortgage Bank vs. Intermediate Appellate Court,

142 SCRA 44 [1986], 456Banco Filipino Savings and Mortgage Bank vs. Navarro, 152 SCRA 346 [1987],

91Bank of the Phil. Islands vs. Yulo, 31 Phil. 476 [1915], 421Bank of America vs. American Realty Corporation, 321 SCRA 659 [1999], 327,

423Bank of Commerce vs. San Pablo, Jr., 522 SCRA 713 [2007], 379Bank of P.I. vs. Herridge, 47 Phil. 57 [1924], 166Bank of the P.I. vs. Forester, 59 Phil. 843 [1926], 252Bank of the P.I. vs. Green, 52 Phil. 491 [1928], 422Bank of the Phil. Islands vs. Albadejo, 53 Phil. 141 [1929], 307Bank of the Phil. Islands vs. Concepcion & Hijos, Inc., 53 Phil. 906 [1929], 396Bank of the Phil. Islands vs. Coster, 47 Phil. 594 [1925], 246Bank of the Phil. Islands vs. Court of Appeals, 232 SCRA 302 [1994], 131Bank of the Phil. Islands vs. Herridge, 47 Phil. 57 [1924], 202Bank of the Phil. Islands vs. Intermediate Appellate Court, 164 SCRA 630 [1988],

106Bank of the Phil. Islands vs. Noblejas, 105 Phil. 418 [1959], 425Banzon vs. Cruz, 15 SCRA 475 [1972], 291Barayoga vs. Asset Priva! za! on Trust, 473 SCRA 690 [2005] , 538Barican vs. Intermediate Appellate Court, 162 SCRA 358 [1988], 464Baron vs. David, 51 Phil. 1 [1927], 128Barrameda vs. Gontang, 19 SCRA 387 [1967], 458Barretto vs. Barretto, 37 Phil. 234 [1917], 478Barretto vs. Villanueva, 1 SCRA 288 [1961], 512Barretto vs. Villanueva, 6 SCRA 928 [1962], 514Barretto y Cia vs. Albo, 62 Phil. 593 [1935], 299Basbas vs. Entena, 28 SCRA 665 [1965], 438Bataan Hardwood Corp. vs. Dy Pac & Co., Inc., 43 SCRA 450 [1972], 500Bautista vs. Pilar Development Authority, 312 SCRA 64 [1999], 50Baylon vs. Court of Appeals, 312 SCRA 502 [1990], 272Belgian Catholic Missionaries vs. Magallanes Press, 49 Phil. 647 [1926], 498Belisareo vs. Intermediate Appellate Court, 165 SCRA 101 [1988], 436Belo vs. Philippine National Bank, 353 SCRA 359 [2001], 326Benedicto vs. Yulo, 26 Phil. 160 [1913], 434Bernardo vs. Barretto, 37 Phil. 234 [1917], 480Betita vs. Ganzon, 49 Phil. 87 [1926], 347Bicol Savings and Loan Association vs. Court of Appeals, 171 SCRA 630 [1989],

399, 417


664

Bicol Savings and Loan Association vs. Guinhawa (188 SCRA 647 [1990]), 312Binalbagan Estate, Inc. vs. Gatuslao, 76 Phil. 128 [1946], 434Bischoff vs. Pomar, 12 Phil. 690 [1909], 391Bitanga vs. Pyramid Construction Engineering Corp., 563 SCRA 544 [2008], 272Blouse Potenciano vs. Mariano, 96 SCRA 463 [1980], 428Bodiongan vs. Court of Appeals, 248 SCRA 496 [1995], 437Bohanan vs. Court of Appeals, 256 SCRA 355 [1996], 408Bolinao, Jr. vs. Padolina, 186 SCRA 368 [1990], 539Bon-Mar Realty & Sport Corp. vs. De Guzman, 563 SCRA 737 [2008], 465Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983], 11, 38, 385, 429Borlough vs. Fortune Enterprises, Inc. and Court of Appeals, 100 Phil. 1063

[1957], 488Borromeo vs. Court of Appeals, 550 SCRA 269 [2008], 399BPI Family Savings Bank vs. Veloso, 436 SCRA 1 [2004], 439BPI Family Bank vs. Franco, 538 SCRA 184 [2007], 133BPI Family Savings Bank, Inc. vs. Vda. De Cosculluela, 493 SCRA 472 [2006],

423BPI Family Savings Bank, Inc. vs. Metro Investment Corporation, 429 SCRA 30

[2004], 131BPI Family Savings Bank, Inc. vs. Veloso, 436 SCRA 1 [2004], 429BPI Investment Corp. vs. Court of Appeals, 377 SCRA 117 [2002], 11Briones vs. Cammayo, 41 SCRA 404 [1971], 44, 47, 87, 88Buiser vs. Cabrera, 81 Phil. 669 [1948], 327Buisier vs. Court of Appeals, 154 SCRA 438 [1987], 63Bukidnon Doctors’ Hospital, Inc. vs. Metropolitan Bank & Trust Co., 463 SCRA

222 [2005], 461Bulos, Jr. vs. Yasuma, 527 SCRA 727 [2007], 50 Bustamante vs. Rosel, 319 SCRA 413 [1999], 335

— C —C. Viuda de Pamintuan vs. Tiglao, 53 Phil. 1 [1929], 85CA Agro-Industrial Dev. Corp. vs. Court of Appeals, 219 SCRA 426 [1993], 118,

124Cabigao vs. Lim, 50 Phil. 844 [1927], 102Cacho vs. Valles, 45 Phil. 107 [1923], 276Cagayan de Oro Coliseum, Inc. vs. Court of Appeals, 320 SCRA 731 [1999], 410Caja vs. Nanquit, 438 SCRA 174 [2004], 410Caltex [Phils.], Inc. vs. Court of Appeals, 212 SCRA 448 [1992], 350Caltex Phils. vs. Intermediate Appellate Court, 176 SCRA 741 [1989], 423Camacho vs. Phil. National Bank, 363 SCRA 352 [2001], 462Canlas vs. Court of Appeals, 164 SCRA 160 [1988], 459Canlas vs. Court of Appeals, 326 SCRA 415 [2000], 323Canque vs. Court of Appeals, 275 SCRA 741 [1997], 438Capule vs. De la Cruz, 10 C.A. Rep. 119, 84Caridad Estate vs. Santero, 71 Phil. 144 [1940], 332Carlos vs. CA, 537 SCRA 247 [2007], 458

665 CASE INDEX

Carpo vs. Chua, 471 SCRA 471 [2005], 384Carried Lumber Co. vs. ACCFA, 63 SCRA 411 [1975] , 549Casa Filipina Development Corp. vs. Deputy Executive Secretary, 209 SCRA

399 [1992], 38Casabuena vs. Court of Appeals, 286 SCRA 594 [1998], 390Casano vs. Magat, 374 SCRA 508 [2002], 404Castellvi de Higgins & Higgins vs. Sellner, 41 Phil. 142 [1921], 226Castelo vs. Court of Appeals, 244 SCRA 180 [1995], 40Castro vs. Coll. of Internal Revenue, 4 SCRA 1093 [1962], 131Castro, Jr. vs. Court of Appeals, 250 SCRA 661 [1995], 391Catholic Vicar Apostolic of the Mt. Province vs. Court of Appeals, 165 SCRA

515 [1988], 21Cavite Development Bank vs. Lim, 324 SCRA 346 [2000], 321, 379Cavite Development Bank vs. Lim, supra; Llanto vs. Alzona, 450 SCRA 288

[2005], 323Cea vs. Villanueva, 18 Phil. 538 [1911], 391Cebu International Finance Corp. vs. Court of Appeals, 268 SCRA 178 [1997],

385Cebu International Finance Corp. vs. Court of Appeals, 316 SCRA 488 [1999], 30Cebuhat vs. Court of Appeals, 366 SCRA 176 [2001], 323Central Bank of the Phils. vs. Court of Appeals, 139 SCRA 46 [1985], 12, 342Central Bank of the Phils. vs. Court of Appeals, 163 SCRA 482 [1988] , 544Central Bank of the Phils. vs. Morfe, 63 SCRA 114 [1975], 545Central Bank vs. De la Cruz, 191 SCRA 346 [1990] , 543Central Surety and Insurance Co. vs. Ubay, 135 SCRA 58 [1985], 250Cerna vs. Court of Appeals, 220 SCRA 517 [1993], 327Charlease Finance Corporation vs. Ma, 409 SCRA 250 [2003], 468Chartered Bank vs. Imperial and National Bank. (48 Phil. 931 [1928] , 531China Banking Corporation vs. Ordinario, 399 SCRA 430 [2003], 467China Banking Corp. vs. Court of Appeals, 265 SCRA 327 [1996], 399China Banking Corp. vs. Court of Appeals, 270 SCRA 503 [1997], 344China Banking Corp. vs. Lichauco, 46 Phil. 460 [1924], 373China Banking Corp. vs. Lozada, 557 SCRA 177 [2008], 464China Banking Corporation vs. Court of Appeals, 265 SCRA 327 [1996], 393China Banking Corporation vs. Court of Appeals, 511 SCRA 110 [2006], 133Ching vs. Land Bank of the Philippines, 201 SCRA 190 [1991], 363Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935], 486Citibank N.A. vs. Cabomongan, 488 SCRA 517 [2006], 131Citibank vs. Cabamongan, 488 SCRA 517 [2006], 133Citibank vs. Sabeniano, 504 SCRA 378 [2006], 30Citizen’s State Bank of Vici vs. Galtig, 187 P. 217, 156Citizens Surety and Insurance Co., Inc. vs. Court of Appeals, 162 SCRA 738

[1988], 302City Trust Banking Corp. vs. Intermediate Appellate Court, 232 SCRA 559

[1994], 133Clapano vs. Gapultos, 132 SCRA 429 [1985], 464Clark vs. Sellner, 42 Phil. 384 [1921]; 21 R.C.L. 1032-1034, 307


666

Cochingyan, Jr. vs. R & B Surety & Ins. Co., 151 SCRA 339 [1987], 292Cojuangco vs. Gonzales, 93 Phil. 718 [1953], 335Cometa vs. Intermediate Appellate Court, 151 SCRA 563 [1987], 459Comm. of Customs vs. Alikpala, 36 SCRA 208 [1970], 314Commission on Immigration vs. Asian Surety and Insurance Co., Inc., 26 SCRA

680 [1969], 256Commodities Storage & Ice Plant Corp. vs. Court of Appeals, 274 SCRA 439

[1997], 438Commodity Financing Co., Inc. vs. Jimenez, 91 SCRA 57 [1979], 399Commonwealth Insurance Corp. vs. Court of Appeals, 421 SCRA 367 [2004],

245Community Savings and Loan Association, Inc. vs. Court of Appeals, 153 SCRA

564 [1987], 433Compania Agricola de Ultramar vs. Nepomuceno, 55 Phil. 283 [1930], 127Compania General de Tabacos vs. Jeanjaquet, 12 Phil. 195 [1908], 384Concepcion vs. Court of Appeals, 274 SCRA 614 [1997], 90, 407Concurring Opinion, Justice R.C. Aquino, Spouses Manalansan vs. Castañeda,

Jr., 83 SCRA 777 [1978], 448Consolidated Rural Bank vs. Court of Appeals, 448 SCRA 347 [2005], 468Consolidated Bank & Trust Corp. vs. Court of Appeals, 193 SCRA 158 [1991],

385Consolidated Bank and Trust Corporation vs. Court of Appeals, 356 SCRA 671

[2001], 93Consolidated Bank and Trust Corporation vs. Court of Appeals, 410 SCRA 562

[2003], 133Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No.

114286, April 19, 2001, citing Colinares vs. Court of Appeals, 339 SCRA 609 [2000], 33

Consolidated Terminals, Inc. vs. Artex Dev. Co., Inc., 63 SCRA 46 [1975], 173Construction Dev. Corp. of the Phils. vs. Estrella, 501 SCRA 228 [2006], 40Consuelo Metal Corp. vs. Planters Development Bank, 555 SCRA 465 [2008],

400Cordova vs. Reyes, etc., Law Offi ces, 526 SCRA 300 [2007], 512Cosio and de Rama vs. Palileo, 17 SCRA 196 [1966], 319Cosme, Jr. vs. People, 508 SCRA 190 [2006], 39Cosmopolitan Insurance Co., Inc. vs. Reyes, 15 SCRA 258 [1965], 256Cowley Country National Bank vs. Rawlings Dobbs Elevator Co., 152 Pac. 647,

162Cristina Garments, Inc. vs. Court of Appeals (304 SCRA 356 [1999]), 40Cristobal vs. Court of Appeals, 328 SCRA 256 [2000], 408Cruz vs. Bancom Finance Corporation, 379 SCRA 490 [2002], 380Cruz and Serrano vs. Chua A.H. Lee, 54 Phil. 10 [1929], 354Cruz vs. Court of Appeals, 191 SCRA 170 [1991], 407, 408Cruz vs. Intermediate Appellate Court, 169 SCRA 9 [1969], 434Cu Unjieng y Hijos vs. Mabalacat Sugar Co., 54 Phil. 976 [1930], 81Cuiaño vs. Court of Appeals, 237 SCRA 122 [1994], 470Cuyco vs. Cuyco, 487 SCRA 693 [2006], 393

667 CASE INDEX

— D —Davao Sawmill Co., Inc. vs. Castillo, 61 Phil. 709 [1935], 486David vs. Court of Appeals, 310 SCRA 710 [1999], 42Dayot vs. Shell Chemical [Phil.], Inc., 525 SCRA 535 [2007], 457Dayrit vs. Philippine Bank of Communications, 386 SCRA 117 [2002], 463Dayrit vs. Court of Appeals, 36 SCRA 548 [1970], 341DBP vs. Mirang (66 SCRA 141 [1975]), 441De los Reyes vs. Intermediate Appellate Court, 176 SCRA 394 [1989], 437De Castro vs. Intermediate Appellate Court, 165 SCRA 654 [1988], 449De Garcia vs. San Jose, 94 Phil. 625 [1954], 455De Guzman vs. National Labor Relations Commission, 253 SCRA 46 [1996], 540De Jesus vs. Abastillas, 6 C.A. Rep. 789, 384De La Rama vs. Sajo, 45 Phil. 703 [1924], 344De Lara vs. Ayroso, 95 Phil. 185 [1954], 320De Lima vs. Laguna Tayabas Co., 160 SCRA 70 [1988], 61De Los Santos vs. Court of Appeals, 278 SCRA 629 [1997], 390De Los Santos vs. Tan Khey, [CA] 580 O.G. 7693; 29 Am. Jur. 89-90, 151De Los Santos vs. Vibar, 558 SCRA 437 [2008], 229De Vera vs. Agloro, 448 SCRA 203 [2005], 457De Vera, Jr. vs. Court of Appeals, 367 SCRA 534 [2001], 469Dean vs. Driggs, 33 N.E. 326, 161Del Rosario vs. Yatco, [CA] No. 20055-R [1957], 456Dela Merced vs. GSIS, 365 SCRA 365 [2001], 380Delgado vs. Alfonso Duque Valgona, 44 Phil. 739 [1923], 76Delgado vs. Bonnevie and Arandez, 23 Phil. 308 [1912], 128Development Bank of the Phils. vs. Court of Appeals, 331 SCRA 267 [2000], 386Development Bank of the Phils. vs. West Negros College, Inc., 429 SCRA 50

[2004], 431Development Bank of the Phils. vs. Toneldan, 101 SCRA 171 [1980], 415Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14 [1998],

337Development Bank of the Philippines vs. Licuanan, 516 SCRA 644 [2007], 414Development Bank of the Philippines vs. Court of Appeals, 403 SCRA 460

[2003], 408Development Bank of the Philippines vs. National Labor Relations Com-

mission. (183 SCRA 328 [1990] and 236 SCRA 117 [1994]) , 536Development Bank of the Phils. vs. Aguirre, 364 SCRA 755 [2001], 405Development Bank of the Phils. vs. Capulong, 577 SCRA 582 [2009], 381Development Bank of the Phils. vs. Court of Appeals, 249 SCRA 331 [1995], 384Development Bank of the Phils. vs. Court of Appeals, 253 SCRA 414 [1996], 322Development Bank of the Phils. vs. Gatal, 452 SCRA 697 [2005], 455Development Bank of the Phils. vs. Mirang, 66 SCRA 141 [1975], 413Development Bank of the Phils. vs. Moll, 43 SCRA 82 [1972], 422Development Bank of the Phils. vs. National Labor Relations Commission, 183

SCRA 328 [1990], 514Development Bank of the Phils. vs. Perez, 442 SCRA 238 [2004], 87


668

Development Bank of the Phils. vs. Prime Neighborhood Assoc., 587 SCRA 582 [2009], 461

Development Bank of the Phils. vs. Vda. de Moll, 43 SCRA 82 [1972], 414Development Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978], 398Devereux vs. Fleming, 53 F. 401, 161Diamond Builders Conglomeration vs. Country Bankers Insurance Corporation,

540 SCRA 194 [2007], 219Diaz and Rubillos vs. De Mendezona, 48 Phil. 666 [1926], 478Diego vs. Fernando, 109 Phil. 143 [1960], 452Digutan vs. Court of Appeals, 376 SCRA 560 [2002], 44Dilag vs. Heirs of Resurreccion, 70 Phil. 650 [1940], 377Dilag vs. Heirs of Resurreccion, 76 Phil. 650 [1946], 321Dimasacat vs. Court of Appeals, 27 SCRA 101 [1969], 451Diño vs. Court of Appeals, 216 SCRA 9 [1992], 237Dio vs. Japor, 463 SCRA 170 [2005], 64Dionisio vs. Puerto, 60 SCRA 471 [1974], 97Director of Lands vs. Abarca, 61 Phil. 70 [1934], 422Director of Public Work vs. Sing Juco, 53 Phil. 205 [1929], 526Dizon vs. Gaborro, 83 SCRA 688 [1978], 432Dizon vs. Suntay, 47 SCRA 160 [1972], 329DSM Construction & Development Corp. vs. Court of Appeals, 478 SCRA 618

[2006], 425Dulay vs. Aquiatin & Maximo, 47 Phil. 951 [1925], 335Dulay vs. Cariaga, 123 SCRA 794 [1983], 441Duran vs. Intermediate Appellate Court, 138 SCRA 491 [1985], 323Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1991], 485

— E —E. Zobel, Inc. vs. Court of Appeals, 290 SCRA 1 [1998], 313Eastern Assurance and Surety Corporation vs. Court of Appeals, 322 SCRA 73

[2000], 63Eastern Paper Mills Co., Inc. vs. Republic Warehousing Corp., [CA] 71 O.G. 23

[1975], 194Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 [1994], 39Ejercito vs. Sandiganbayan, 509 SCRA 190 [2006], 133El Vencedor vs. Canlas, 44 Phil. 699 [1923], 247Empire Insurance Company vs. National Labor Relations Commission, 294

SCRA 263 [1998], 222Enriquez vs. Phil. National Bank, 55 Phil. 414 [1930], 452Equitable Banking Corp. vs. Liwanag, 32 SCRA 293 [1970], 68Equitable PCI Bank vs. Ng Sheung Ngor, 541 SCRA 223 [2007], 90Erasustada, Jr. vs. Court of Appeals, 495 SCRA 319 [2006], 380Ereña vs. Querrer-Kauffman, 192 SCRA 298 [2006], 379Escaño vs. Ortigas, Jr., 526 SCRA 26 [2007], 282Escudero vs. Ticson, 7 C.A. Rep. 139., 423Esguerra vs. Court of Appeals, 173 SCRA 1 [1989], 503

669 CASE INDEX

Espiridion vs. Court of Appeals, 490 SCRA 273 [2006], 455Estanislao, Jr. vs. Court of Appeals, 362 SCRA 229 [2001], 439Estate of G. Litton vs. Mendoza, 163 SCRA 246 [1988], 352Estate of K.H. Hemady vs. Luzon Surety Co., Inc., 100 Phil. 388 [1956], 264Evangelista vs. Abad, [CA] 36 O.G. 2913, 488Evangelista vs. Alto Surety & Insurance Co., Inc., 103 Phil. 401 [1958], 488Evangelista vs. Mercator Finance Corp., 409 SCRA 410 [2003], 233Export and Foreign Loan Guarantee Corp. vs. V.P. Eusebio Construction, Inc.,

434 SCRA 202 [2004], 226

— F —F. David Enterprises vs. Insular Bank of Asia and America, 191 SCRA 516

[1990], 458Far East Bank and Trust Co. vs. Plaza, 407 SCRA 306 [2003], 390Far East Bank and Trust Co. vs. Querimit, 373 SCRA 665 [2002], 133Farrell vs. Harlem Terminal Storage Warehouse, 172 N.Y. [supp.] 306, 187Fernandez vs. Aniñon, 522 SCRA 1 [2007], 131Fidelity Savings and Mortgage Bank vs. Cenzon, 184 SCRA 141 [1990], 134Fiestan vs. Court Appeals, 185 SCRA 75 [1909], 421Fiestan vs. Court of Appeals, 185 SCRA 751 [1990], 399Filinvest Credit Corp. vs. Court of Appeals, 248 SCRA 549 [1995], 428Filipinas Marble Corporation vs. Intermediate Appellate Court, 142 SCRA 180

[1986], 373Filipinas Textile Mills, Inc. vs. Court of Appeals, 415 SCRA 635 [2003], 308Finman General Assurance Corp. vs. Salik, 188 SCRA 740 [1990], 222First Global Realty and Development Corporation vs. San Agustin, 377 SCRA

341 [2002], 437First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA

99 [2001], 45, 47, 50Flancia vs. Court of Appeals, 457 SCRA 224 [2005], 382Florendo vs. Court of Appeals, 265 SCRA 678 [1996], 90Florendo, Jr. vs. Metropolitan Bank & Trust Co., 532 SCRA 43 [2007], 90Food Terminal, Inc. vs. Court of Appeals, 262 SCRA 339 [1996], 62, 63Fortune Motors [Phils.] Corp. vs. Court of Appeals, 267 SCRA 653 [1997], 241Fortune Motor [Phils.] vs. Metropolitan Bank & Trust Co., 265 SCRA 72 [1996],

407Francisco vs. Gregorio, 115 SCRA 394 [1982], 39Friend vs. Development Bank of the Phils., 476 SCRA 453 [2005] , 505

— G —Gaotian vs. Gaffud, 24 SCRA 706 [1969], 377Garcia & Buencamino vs. Matias & Policarpio, 49 Phil. 257 [1926], 84Garcia, Jr. vs. Court of Appeals, 191 SCRA 493 [1990], 218Gardner vs. Court of Appeals, 80 SCRA 399 [1977], 452Garon vs. Project Movers Realty & Dev. Corp., 520 SCRA 317 [2007], 220


670

Gateway Electronics Corp. vs. Asianbank Corp., 574 SCRA 698 [2008], 222Gavieres vs. Tavera, 1 Phil. 71 [1901], 128Gempesaw vs. Court of Appeals, 218 SCRA 5682 [1993], 133Gen. Insurance & Surety Co. vs. Masakayan, 54 SCRA 120 [1973], 321General Indemnity Co., Inc. vs. Alvarez, 100 Phil. 1059 [1957], 291General Insurance & Surety Co. vs. Republic, 7 SCRA 4 [1963], 245General vs. Barrameda, 60 SCRA 182 [1976], 412General vs. Barrameda, 69 SCRA 182 [1976], 422Geniza vs. Sy, 6 SCRA 20 [1962], 69Geniza vs. Sy, 5 SCRA 754 [1962], 98Gerardo vs. Plaridel Surety and Ins., Co., 100 Phil. 178 [1956], 315Giberson vs. A.N. Jureidini Bros., 44 Phil. 216 [1922], 491Gidwani vs. Domestic Insurance Co. of the Philippines, 122 SCRA 732 [1983],

285Go Chico vs. Martinez, 45 Phil. 256 [1923], 83, 87Gobonseng, Jr. vs. Court of Appeals, 246 SCRA 472 [1995], 399Gojudo vs. Traders Royal Bank, 485 SCRA 108 [2006], 431Gonzales vs. Intermediate Appellate Court, 157 SCRA 587 [1988], 425Gonzales vs. Basa, Jr., 73 Phil. 704 [1942], 381Gonzales vs. Go Tiong and Luzon Surety Co., 104 Phil. 492 [1958], 163Gonzales vs. GSIS, 107 SCRA 492 [1981], 340Gonzales vs. Phil. National Bank, 48 Phil. 824 [1926], 434Gorospe vs. Santos, 69 SCRA 191 [1976], 450Gov’t. of the Phil. Islands vs. Vaca and Calderon, 64 Phil. 6 [1937], 69Gov’t. of the Phil. Islands vs. Lim, 61 Phil. 737 [1935], 69Gov’t. of the Phil. Islands vs. Macanaya, 60 Phil. 1049 [1934], 69Gov’t. of the Phil. Islands vs. Visayan Surety, 66 Phil. 326 [1938], 270Gov’t. of the Phils. vs. Tizon, 20 SCRA 1187 [1967], 222Government Service and Insurance System vs. Court of Appeals, 170 SCRA 533

[1989], 408Government Service Insurance System vs. Court of Appeals, 287 SCRA 204

[1998], 323Government Service Insurance System vs. Santiago, 414 SCRA 563 [2003], 321Gravina vs. Court of Appeals, 220 SCRA 178 [1993], 408Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Banking Corporation, 43

Phil. 678 [1922], 202Green Asia Construction & Development Corp. vs. Court of Appeals, 508 SCRA

79 [2006], 457Grimalt vs. Velasquez, 36 Phil. 936 [1917], 448GSIS vs. Calsons, Inc., 23 SCRA 891 [1968] , 487GSIS vs. Court of Appeals, 377 SCRA 54 [2002], 400GSIS vs. Court of Appeals, 145 SCRA 311 [1986], 68GSIS vs. Court of Appeals, 266 SCRA 187 [1997], 413Guanco vs. Antolo, 497 SCRA 273 [2006], 407Guanzon vs. Argel, 33 SCRA 474 [1970], 389Guanzon vs. Argel, 33 SCRA 374 [1970], 330

671 CASE INDEX

Guerrero vs. Yuigo & Court of Appeals, 96 Phil. 77 [1954], 335Gui Jong & Co. vs. Rivera and Avellar, 45 Phil. 781 [1924], 96Guingona, Jr. vs. City Fiscal of Manila, 128 SCRA 577 [1984], 131Gullas vs. Phil. National Bank, 62 Phil. 519 [1935], 132Gutierrez vs. Camus, 96 Phil. 114 [1954], 541

— H —Hale vs. Milwaukee Dock Co., 29 Wis. 482, 67 C.J. 463, 159Hechanova vs. Adil, 144 SCRA 450 [1986], 331Heirs of D.N. Nicolas vs. Metropolitan Bank & Trust Company, 532 SCRA 38

[2007], 464Heirs of N.J. Quisumbing vs. Philippine National Bank, 576 SCRA 762 [2009],

439Heirs of Z. Espiritu vs. Landrito, 520 SCRA 383 [2007], 416Hernan vs. La Urbana, 59 Phil. 621 [1936], 344Herrera vs. Arellano, 97 Phil. 776 [1955], 448Herrera vs. Petrophil Corporation, 146 SCRA 385 [1986], 54Hi-Cement Corporation vs. Insular Bank of Asia and America, 534 SCRA 269

[2007], 423Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [1924], 423Hijos de I. de la Rama vs. Betia, 54 Phil. 991 [1930], 391Hilado vs. De La Costa, 83 Phil. 471 [1949], 132Hi-Yield Realty, Inc. vs. Court of Appeals, 388 SCRA 655 [2002], 439Hodges vs. Salas, 63 Phil. 567 [1936], 82Home Bankers Savings & Trust Co. vs. Court of Appeals, 457 SCRA 167 [2005],

386Hongkong & Shanghai Bank vs. Aldecoa & Co., 30 Phil. 255 [1915], 306Huerta Alba Resort, Inc. vs. Court of Appeals, 339 SCRA 534 [2000], 433

— I —Ibasco vs. Caguioa, 143 SCRA 538 [1986], 458Idolor vs. Court of Appeals, 450 SCRA 396 [2005], 456IFC Service Leasing and Acceptance Corp. vs. Nera, 19 SCRA 181 [1967], 468Iligan Bay Manufacturing Corp. vs. Dy, 524 SCRA 55 [2007], 426Imperial Insurance, Inc. vs. De Los Angeles, 111 SCRA 24 [1982], 270Imperial vs. Juacian, 427 SCRA 517 [2004], 50Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977], 398Insular Bank of Asia and America vs. Spouses Salazar, 159 SCRA 133 [1988], 90Insurance Services and Commercial Traders, Inc. vs. Court of Appeals, 341

SCRA 572 [2000], 326Integrated Realty Corp. vs. Phil. National Bank, 174 SCRA 295 [1989], 134Intengan vs. Court of Appeals, 377 SCRA 63 [2002], 133International Bredding Co. vs. Terminal Warehouse Co., 126 Atl. 902, 185International Container Terminal Services, Inc. vs. FGU Insurance Corp., 556

SCRA 174 [2008], 41


672

International Finance Corp. vs. Imperial Textile Mills, Inc., 475 SCRA 149 [2005], 228

Intra Strata Assurance Corp. vs. Republic, 557 SCRA 363 [2008], 221Investors Finance Corporation vs. Autoworld Sales Corporation, 134 SCAD

222, 340 SCRA 735 [2000], 89Isaguirre vs. De Lara, 332 SCRA 803 [2000], 388ITC Service and Leasing Corp. & Acceptance vs. Nera, 19 SCRA 181 [1967], 465

— J —J.L. Bernardo Construction vs. Court of Appeals, 324 SCRA 24 [2000] , 529J.V. House vs. Dela Costa, 68 Phil. 742 [1939], 301Jacob vs. Court of Appeals, 184 SCRA 294 [1990], 425Jalandoni vs. Ledesma, 64 Phil. 1058 [1937], 422Jao vs. Royal Financing Corp., 4 SCRA 1210 [1962], 250Jardenil vs. Salas, 73 Phil. 636 [1942], 37Javellana vs. Lim, 11 Phil. 141 [1908], 128Javelosa vs. Court of Appeals, 265 SCRA 493 [1996], 457Javier vs. Valliser, [CA] No. 2648-R, April 29, 1950, 474Jehi Construction Corp. vs. Bank of the Phil. Islands, 524 SCRA 522 [2007], 463JN Dev. Corp. vs. Phil. Export and Foreign Loan Guarantee Corp., 468 SCRA

555 [2005], 286Jollye vs. Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 [1939], 248Jose vs. Blue, 42 SCRA 351 [1971], 412Joven vs. Court of Appeals, 212 SCRA 700 [1992], 458Joven de Cortes vs. Venturanza, 79 SCRA 709 [1977], 43Joven vs. De Guzman, 193 SCRA 434 [1990], 49

— K —Kho vs. Court of Appeals, 203 SCRA 160 [1991], 455Korean Airlines vs. Court of Appeals, 234 SCRA 717 [1994], 61K-Phil., Inc. vs. Metropolitan Bank & Trust Co., 569 SCRA 459 [2008], 406Kuenzle & Streiff vs. Tan Sunco, 16 Phil. 670 [1910], 290

— L —L.F. Lang vs. Prov. Sheriff of Surigao, 93 Phil. 661 [1953], 407La Insular vs. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567 [1919], 247Ladanga vs. Aseneta, 471 SCRA 381 [2005], 153Lagrosa vs. Court of Appeals, 312 SCRA 298 [1999], 388Lam vs. Metropolitan Bank and Trust Company, 546 SCRA 200 [2008], 458Landrito, Jr. vs. Court of Appeals, 466 SCRA 107 [2005], 399Lang vs. Acting Prov. Sheriff of Surigao, 93 Phil. 661 [1953], 325Langkaan Realty Development Corporation, Inc. vs. United Coconut Planters

Bank, 347 SCRA 542 [2000], 405

673 CASE INDEX

Langkaan Realty Development, Inc. vs. United Coconut Planters Bank, 347 SCRA 541 [2000], 408

Lanuza vs. De Leon, 20 SCRA 369 [1967], 378Lanuza vs. De Leon, 20 SCRA 369 [1969], 334Lao vs. Court of Appeals, 275 SCRA 237 [1997], 372Laplana vs. Garchitorena Chereau, 48 Phil. 163 [1925], 345LBC Bank vs. Marquez, 478 SCRA 160 [2006], 405LCK Industries, Inc. vs. Planters Development Bank, 538 SCRA 634 [2007], 412Lee Chuy Realty Corp. vs. Court of Appeals, 250 SCRA 596 [1995], 436Lee vs. Trocino, 561 SCRA 178 [2008], 499Legaspi vs. Celestial, 66 Phil. 372 [1938], 319Legaspi & Salcedo vs. Celestial, 66 Phil. 372 [1938], 329Legaspi vs. Celestial, 66 Phil. 372 [1938], 372Leung Yee vs. Strong Machinery Co., 37 Phil. 644 [1918], 489Ley vs. Union Bank of the Phils., 520 SCRA 369 [2007], 457Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984], 49Lim Julian vs. Lutero, 49 Phil. 703 [1926], 394Lim vs. Court of Appeals, 137 SCRA 782 [1985], 452Limpin vs. Intermediate Appellate, 166 SCRA 87 [1987], 427Lipana vs. Development Bank of Rizal, 154 SCRA 257 [1987], 544Lirag Textile Mills, Inc. vs. Social Security System, 153 SCRA 338 [1987], 227Litonjua vs. L & R Corporation, 320 SCRA 405 [1999], 397Lloren, Jr. vs. Court of Appeals, 218 SCRA 436 [1993], 91Lo Bun Chay vs. Paulino, 54 Phil. 144 [1929], 96Lonzome vs. Amores, 134 SCRA 380 [1985], 434Looyuko vs. Court of Appeals, 361 SCRA 150 [2001], 428Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249 [1925], 68Lopez vs. Court of Appeals, 144 SCRA 671 [1982], 320Lopez vs. El Hogar Filipino, 47 Phil. 250 [1925], 87Los Baños Rural Bank, Inc. vs. Africa, 384 SCRA 535 [2002], 153Lozano vs. Tan Suico, 23 Phil. 16 [1912], 384Lu Kian vs. Manila Railroad Co. and Manila Port Service, 19 SCRA 5 [1967], 180Lucena vs. Court of Appeals, 313 SCRA 47 [1999], 405Lucmen vs. Malaar, 511 SCRA 268 [2006], 131Luna vs. Encarnacion, 91 Phil. 531 [1952], 460Lustan vs. Court of Appeals, 266 SCRA 663 [1997], 326Lutero vs. Siuliong & Co., 54 Phil. 272 [1903], 95Luzon Development Bank vs. Conquilla, 470 SCRA 533 [2005], 399Luzon Lumber & Hardware Co., Inc. vs. Quiambao and RFC, 94 Phil. 603

[1954], 526Luzon Steel Corp. vs. Sia, 28 SCRA 58 [1969], 270

— M —Mabale vs. Apalisok (88 SCRA 234 [1979]), 460Macapinlac vs. Gutierrez Repide, 43 Phil. 770 [1922], 373Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922],

227


674

Macondray & Co., Inc. vs. Piñon, 2 SCRA 1109 [1962], 247Madrigal vs. Court of Appeals, 456 SCRA 247 [2005], 375Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967 [1966], 247Maglaque vs. Planters Development Bank, 307 SCRA 156 [1999], 425Mahoney vs. Tuason, 39 Phil. 952 [1919], 330Mahoney vs. Tuason, 39 Phil. 952 [1919], 332Makati Leasing and Finance Corp. vs. Weaver Textiles Mills, Inc., 122 SCRA 296

[1983], 489Malayan Insurance Co., Inc. vs. Salas, 90 SCRA 252 [1979], 274Mallari vs. Banco Filipino Savings & Mortgage Bank, 563 SCRA 664 [2008], 463Maluwat vs. Metropolitan Bank & Trust Co., 532 SCRA 124 [2007], 457Mambulao Lumber Co. vs. Phil. National Bank, 22 SCRA 359 [1968], 48Mamerto Marquez Foundation, Inc. vs. Pizarro, 448 SCRA 140 [2005], 454Manabat vs. Laguna Federation of Facomas, Inc., 19 SCRA 621 [1967], 526Manahan vs. Cruz, 61 SCRA 137 [1974], 391Manalo vs. Court of Appeals, 366 SCRA 752 [2001], 458Manalo vs. Court of Appeals, 366 SCRA 752 [2003], 544Manila Banking Corp. vs. Teodoro, Jr., 169 SCRA 95 [1989], 320Manila Railroad Co., Inc. vs. Alvendia, 17 SCRA 154 [1986], 223Manila Surety & Fidelity Co. vs. Batu Construction & Co., 101 Phil. 494 [1957],

218, 227Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515 [1957], 319Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA 805 [1990],

292Manila Terminal Co., Inc. vs. Hiponia, 101 Phil. 509 [1957], 252Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513 [1925],

74Manufacturers Mercantile Co. vs. Monarch Refrigerating Co., 107 N.E. 885, 163Marcelo Steel Corp. vs. Court of Appeals, 54 SCRA 89 [1973], 456Martinez vs. Phil. National Bank, 93 Phil. 765 [1953], 201Masantol Rural Bank, Inc. vs. Court of Appeals, 204 SCRA 752 [1991], 405Mateo vs. Court of Appeals, 99 Phil. 1042 [1956], 436Mc-Conn vs. Associated Insurance & Surety Co., 4 SCRA 251 [1962], 298McCullough & Co. vs. Veloso & Serna, 41 Phil. 1 [1921], 396McCullough vs. Veloso & Serna, 46 Phil. 1 [1924], 388McMicking vs. Martinez, 15 Phil. 204 [1910], 346Medel vs. Court of Appeals, 299 SCRA 481 [1998], 64Medel vs. Court of Appeals, 299 SCRA 481 [1998], 50Medida vs. Court of Appeals, 208 SCRA 887 [1992], 431Medina vs. Phil. National Bank, 56 Phil. 651 [1932], 422Mendoza vs. Court of Appeals, 359 SCRA 438 [2001], 90Mendoza vs. Court of Appeals, G.R. No. 116710, June 25, 2001, 392Mendoza vs. Dujua, [CA] 41 O.G. 3014, citing Adorable vs. De Guzman, S.C.

G.R. No. 47102 [1940], 102Mendoza vs. Salinas, 514 SCRA 414 [2007], 454Mercado vs. Aguilar, [C.A.] 45 O.G. Sup. 5, p. 118., 16Mercado vs. Allied Banking Corporation, 528 SCRA 444 [2007], 380

675 CASE INDEX

Mercantile Insurance Co., Inc. vs. Ysmael Jr. & Co., 169 SCRA 66 [1989], 292Metropolitan Bank & Trust Co. vs. Tan, 555 SCRA 502 [2008], 455Metropolitan Bank & Trust Co. vs. Bance, 553 SCRA 507 [2008], 466Metropolitan Bank & Trust Co. vs. Tan, 569 SCRA 814 [2008], 439Metropolitan Bank and Trust Co. vs. Alejo, 364 SCRA 812 [2001], 387Metropolitan Bank and Trust Co. vs. Wong, G.R. No. 120859, June 26, 2001, 409Metropolitan Bank and Trust Company vs. Wong, 359 SCRA 608 [2001], 408Mina vs. Pascual, 25 Phil. 540 [1913], 15Mira Hermanos, Inc. vs. Manila Tobaconists, Inc., 74 Phil. 367 [1943], 278Mirasol vs. Intermediate Appellate Court, 162 SCRA 306 [1960], 461Mitsui Bussan Kaisha vs. Hongkong & Shanghai Bank, 36 Phil. 27 [1917], 345Mobil Philippines, Inc. vs. Diocares, 29 SCRA 656 [1969], 378Mojica vs. Court of Appeals, 201 SCRA 517 [1991], 393Molino vs. Security Diners International Corporation, 363 SCRA 358 [2001], 220Monserrat vs. Ceron, 58 Phil. 469 [1933], 486Montano vs. Lim Ang, 7 SCRA 250 [1963], 322Monte de Piedad vs. Javier, [CA] 36 O.G. 2176, 88Montevirgen vs. Court of Appeals, 112 SCRA 641 [1982], 330Montoya vs. Ignacio, 94 Phil. 182 [1953], 487Motos vs. Real Bank, Inc., 593 SCRA 216 [2009], 457Municipality of Gasan vs. Marasigan, 63 Phil. 510 [1936], 238Municipality of Lemery vs. Mendoza and Blas, 48 Phil. 415 [1925], 254

— N —Nakpil & Sons vs. Court of Appeals, 160 SCRA 334 [1988], 63Nalino vs. Intermediate Appellate Court, 197 SCRA 323 [1991], 246Nartales vs. GSIS, 156 SCRA 205 [1987], 376Nassco vs. Torrento, 20 SCRA 427 [1967], 222NASSCO vs. Torrento, 20 SCRA 427 [1967], 299National Bank vs. Veraguth, 50 Phil. 253 [1927], 299National Power Corporation vs. Court of Appeals, 145 SCRA 533 [1988], 256National Bank of Commerce vs. Kansas City, 188 S.W. 117, 158National Bank vs. Producer’s Warehouse Association, 42 Phil. 609 [1922], 158National Bank vs. Agudelo, 58 Phil. 655 [1933], 340National Bank vs. Alejano, 55 Phil. 811 [1931], 391National Bank vs. Escueta, 50 Phil. 591 [1927], 260National Bank vs. Garcia, 47 Phil. 662 [1925]; 28 C.J. 901; 24 Am. Jur. 899., 260National Bank vs. Gonzales, 45 Phil. 693 [1924], 422National Marketing Corp. vs. Marquez, 26 SCRA 772 [1969], 256National Power Corp. vs. Angas, 208 SCRA 542 [1992], 62Navarro vs. Laguna Development Bank, 398 SCRA 227 [2003], 380Navarro vs. Pineda, 9 SCRA 63 [1963], 488Navoa vs. Court of Appeals, 251 SCRA 545 [1995], 2New Sampaguita Builders Construction, Inc. vs. PNB, 435 SCRA 565 [2004], 54Nolan vs. Majinay, 12 Phil. 559 [1909], 48Northern Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392 [1973], 334


676

Northern Motors, Inc. vs. Coquia, 66 SCRA 415 [1975], 428Northern Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392 [1973], 500

— O —O’laco vs. Sanchez, 6 C.A. Rep. 1092, 100Obejera vs. Iga Sy, 76 Phil. 580 [1946], 130Ocampo vs. Domalanta, 20 SCRA 1136 [1967], 415Ocampo vs. Potenciano, [CA] 48 O.G. 2230, 335Ocejo Perez & Co. vs. International Bank, 37 Phil. 631 [1918], 349Olbes vs. China Banking Corporation, 484 SCRA 330 [2006], 248Oliveros vs. Presiding Judge, RTC, 532 SCRA 109 [2007], 458Olizon vs. Court of Appeals, 236 SCRA 148 [1994], 406Ong vs. Philippine Commercial International Bank, 448 SCRA 705 [2005], 227Ong vs. CA, 333 SCRA 189 [2000], 429Ong vs. Court of Appeals, 253 SCRA 105 [1996], 544Ong vs. Court of Appeals, 333 SCRA 189 [2000], 455Ong vs. Intermediate Appellate Court, 201 SCRA 543 [1991], 346Ong vs. Roban Lending Corporation, 557 SCRA 516 [2008], 331Ongsiako vs. The World Wide Insurance & Surety Co., Inc., 104 Phil. 61 [1958],

249Oronce vs. Court of Appeals, 298 SCRA 133 [1998], 389Osaka Boeki Kaishal Ltd. vs. Luzon Brokerage, [CA] O.G. 5th Suppl. 130 [1941],

174Ouano vs. Court of Appeals, 398 SCRA 525 [2003], 405Ouano vs. Court of Appeals, 398 SCRA 525 [2003], 409Overseas Bank of Manila vs. Court of Appeals, 105 SCRA 49 [1981], 131Overseas Bank of Manila vs. Court of Appeals, 172 SCRA 521 [1989], 134

— P —Pacifi c Commercial vs. National Bank, 49 Phil. 236 [1926], 349Pacifi c Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957], 255Pacifi c Farms, Inc. vs. Esguerra, 30 SCRA 684 [1969], 513Paguyo vs. Gatbunton, 523 SCRA 156 [2007], 417Pahang vs. Vestil, 434 SCRA 139 [2004], 429Pajuyo vs. Court of Appeals, 430 SCRA 492 [2004], 24Palileo vs. Cosio, 97 Phil. 919 [1955], 87Palmares vs. Court of Appeals, 258 SCRA 422 [1998], 226Palmares vs. Court of Appeals, 288 SCRA 292 [1998], 255PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281

[1999], 503Pamintuan vs. Tiglao, 53 Phil. 1 [1929], 72Pando vs. Gimenez, 54 Phil. 459 [1980], 478Pao Chuan Wei vs. Reposito, 103 Phil. 57 [1955], 256Paramount Insurance Corp. vs. Court of Appeals, 310 SCRA 377 [1999], 221Paray vs. Rodriguez, 479 SCRA 571 [2006], 362

677 CASE INDEX

Parqui vs. Phil. National Bank, 96 Phil. 157 [1954], 320Parson Hardware Co., Inc. vs. Acosta, [CA] Nos. 1943-44-R, May 5, 1949, 327Pascua vs. Perez, 10 SCRA 199 [1964], 87Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965], 263PDCP Development Bank vs. Vestil, 264 SCRA 467 [1996], 457Peña vs. Mitchell, 9 Phil. 587 [1908], 523Penson vs. Maranan, 491 SCRA 396 [2006], 465People vs. Goco, 35 O.G. 2618, 211People vs. Alvares, 45 Phil. 472 [1923] , 485People vs. Chupeco, 10 SCRA 640 [1964], 485People vs. Concepcion, 44 Phil. 126 [1922], 7, 8People vs. Dichupa, [C.A.] 71 O.G. No. 8, p. 974, Feb. 24, 1975, 210People vs. Goco, 35 O.G. 2618, 156People vs. Hodges, 66 Phil. 291 [1938], 102People vs. Maniego, 148 SCRA 30 [1987], 223People vs. Masangkay, [CA] 58 O.G. No. 17, 3565, 88People vs. Nullet, 73 Phil. 63 [1941], 84People vs. Ong, 204 SCRA 942 [1991], 131People’s Bank & Trust Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967], 392People’s Bank & Trust Co. vs. Dahican Lumber Co., 26 SCRA 84 [1967], 493People’s Bank & Trust Co. vs. Tambunting, 42 SCRA 119 [1971], 304Perez vs. Barcia, 52 Phil. 197 [1928], 282Perez vs. Perez, 454 SCRA 72 [2005], 410Perez vs. Phil. National Bank, 17 SCRA 833 [1966], 404Perez vs. Philippine National Bank, 17 SCRA 833 [1966], 425Phil. Airlines, Inc. vs. Court of Appeals, 275 SCRA 621 [1997], 61Phil. Bank of Commerce vs. De Vera, 6 SCRA 1026 [1962], 414Phil. National Bank vs. Cabatingan, 557 SCRA 426 [2008], 411Phil. National Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956], 300Phil. American Accident Ins., Co. vs. Flores, 97 SCRA [1980], 81Phil. Bank of Communications vs. Court of Appeals, 253 SCRA 241 [1996], 394Phil. Bank of Commerce vs. Macadaeg, 109 Phil. 981 [1960], 344Phil. Bank of Communications vs. Court of Appeals, 253 SCRA 241 [1996], 394Phil. Commercial and Industrial Bank vs. Griño, 24 SCRA 620 [1968], 89Phil. Commercial and Industrial Bank vs. Court of Appeals, 159 SCRA 24

[1988], 221Phil. Commercial and Industrial Bank vs. National Mines & Allied Workers’

Union [NAMAWU-MIF], 115 SCRA 873 [1982], 537Phil. Guaranty Co. vs. Dinio, 102 Phil. 991 [1958], 233Phil. International Surety Co., Inc. vs. Comm. of Customs, 18 SCRA 1145 [1966],

249Phil. National Bank vs. Court of Appeals, 198 SCRA 767 [1991], 221Phil. National Bank vs. Encina, 544 SCRA 608 [2008], 49Phil. National Bank vs. Adil, 118 SCRA 110 [1982], 459Phil. National Bank vs. Amores, 155 SCRA 445 [1987], 340Phil. National Bank vs. Cabatingan, 557 SCRA 426 [2008], 403Phil. National Bank vs. Court of Appeals, 140 SCRA 360 [1985], 404


678

Phil. National Bank vs. Court of Appeals, 147 SCRA 273 [1987], 300Phil. National Bank vs. Court of Appeals, 196 SCRA 536 [1991], 38Phil. National Bank vs. Court of Appeals, 198 SCRA 767 [1991], 220Phil. National Bank vs. Court of Appeals, 238 SCRA 20 [1994], 52Phil. National Bank vs. Court of Appeals, 258 SCRA 549 [1996], 90Phil. National Bank vs. Court of Appeals, 98 SCRA 207 [1980], 322Phil. National Bank vs. International Corporate Bank, 199 SCRA 508 [1991], 407Phil. National Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956], 218Phil. National Bank vs. Mallorca, 21 SCRA 694 [1967], 385Phil. National Bank vs. Manila Investment & Construction, Inc., 38 SCRA 462

[1971], 365Phil. National Bank vs. Pineda, 197 SCRA 1 [1991], 220Phil. National Bank vs. Producers Warehouse Association, 42 Phil. 602 [1922],

171Phil. National Bank vs. RBL Enterprises, Inc., 430 SCRA 299 [2004], 494Phil. National Bank vs. Rocha, 55 Phil. 497 [1930], 321Phil. National Bank vs. Sayo, Jr., 292 SCRA 202 [1998], 188Phil. Phosphate Fertilizer Corp. vs. Kamalig Resources, Inc., 540 SCRA 139

[2007], 37Phil. Pryce Assurance Corp. vs. Court of Appeals, 230 SCRA 164 [1994], 233Phil. Rabbit Bus Lines, Inc. vs. Cruz, 143 SCRA 158 [1986], 62Phil. Sugar Estates Dev. Co. vs. Campos, 36 Phil. 85 [1917], 391Phil. Tobacco Flue Curing and Redrying Corp. vs. Pablo, 66 SCRA 136 [1975],

156Phil. Trust Co. vs. Echaves, 52 Phil. 852 [1929], 327Phil. Trust Co. vs. Mitchell, 59 Phil. 30 [1933], 555Phil. Trust Co. vs. Phil. National Bank, 42 Phil. 413 [1921], 202Phil. Veterans Bank vs. Monillas, 550 SCRA 251 [2008], 383PhilAm General General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22 [1974], 249Phil-American Accident Insurance Co., Inc. vs. Flores, 97 SCRA 811 [1980], 42Philamgen Ins. Co., Inc. vs. Ramos, 16 SCRA 298 [1966], 269Philippine National Bank vs. Agudelo, 58 Phil. 655 [1933], 343Philippine Savings Bank vs. Manalac, Jr., 457 SCRA 203 [2005], 468Philippine Bank of Communications vs. Lim, 455 SCRA 714 [2005], 226Philippine Blooming Mills, Inc. vs. Court of Appeals, 413 SCRA 445 [2003], 241Philippine Commercial International Bank vs. Court of Appeals, 344 SCRA 596

[2000], 431Philippine Commercial International Bank vs. Court of Appeals (172 SCRA 436

[1989]), 531Philippine National Bank vs. Court of Appeals, 263 SCRA 766 [1996], 62Philippine National Bank vs. Nepomuceno Productions, Inc., 394 SCRA 405

[2002], 406Philippine National Bank vs. Court of Appeals, 263 SCRA 766 [1996], 41Philippine National Bank vs. Court of Appeals, 187 SCRA 735 [1990], 385Philippine National Bank vs. Court of Appeals, 308 SCRA 229 [1999], 413Philippine National Bank vs. Court of Appeals, 360 SCRA 370 [2001], 425Phil. National Bank vs. Court of Appeals, 374 SCRA 22 [2002], 461

679 CASE INDEX

Philippine National Bank vs. Cruz, 180 SCRA 206 [1989], 527Philippine National Bank vs. Heirs of G. Militar, 494 SCRA 308 [2006], 380Philippine National Bank vs. Intermediate Appellate Court, 183 SCRA 133

[1990], 91Philippine National Bank vs. Landeta, 18 SCRA 272 [1967], 432Philippine National Bank vs. Nepomuceno Productions, Inc., 394 SCRA 405

[2002], 409Philippine National Bank vs. Offce of the President, 252 SCRA 5 [1996], 380Philippine National Bank vs. Rabat, 344 SCRA 706 [2000], 408Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287

[2005], 456, 465Philippine Refi ning Co., Inc. vs. Jarque, 61 Phil. 229 [1935], 487Philippine Savings Bank vs. Lantin, 124 SCRA 476 [1983], 514Philippine Savings Bank vs. Lantin, 124 SCRA 476 [1983], 552Piano vs. Cayanong, 7 SCRA 397 [1963], 402Piansay vs. David, 12 SCRA 227 [1964], 488Piczon vs. Piczon, 61 SCRA 67 [1974], 231Pilipinas Bank vs. Court of Appeals, 225 SCRA 268 [1993], 41Plaridel Surety & Insurance Co. vs. Artex Development Company, Inc., 120

SCRA 827 [1983], 239Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 100

Phil. 679 [1957], 245PNB vs. Luzon Surety Co., Inc., 68 SCRA 207 [1975], 245Poblete vs. Lo Singco, 44 Phil. 369 [1923], 262Policarpio vs. Active Bank, 566 SCRA 27 [2008], 465Polotan vs. Court of Appeals, 296 SCRA 247 [1998], 93Ponce de Leon vs. Rehabilitation Finance Corp., 36 SCRA 289 [1970], 404Premiere Development Bank vs. Central Surety & Insurance Co., Inc., 579 SCRA

359 [2009], 90Premiere Development Bank vs. Court of Appeals, 453 SCRA 630 [2005], 380Primetown Property Group, Inc. vs. Juntilla, 459 SCRA 683 [2005], 466Private Dev. Corp. of the Phils. vs. Intermediate Appellate Court, 213 SCRA 282

[1992], 45Producers Bank of the Phils. vs. Court of Appeals, 365 SCRA 326 [2001], 398Province of Bataan vs. Villafuerte, Jr., 367 SCRA 620 [2001], 154Prudencio vs. Court of Appeals, 143 SCRA 7 [1986], 304Prudential Bank vs. Alviar, 464 SCRA 353 [2005], 394Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992], 269Prudential Bank vs. Martinez, 189 SCRA 612 [1990], 414Prudential Bank vs. Panis, 153 SCRA 390 [1987], 376Prudential Guarantee and Assurance, Inc. vs. Court of Appeals, 491 SCRA 411

[2006], 41Pyle vs. Johnson, 9 Phil. 249 [1907], 233

— Q —Quintanilla vs. Court of Appeals, 279 SCRA 397 [1997], 393Quintos and Ansaldo vs. Beck, 69 Phil. 108 [1939], 26


680

Quirino Gonzales Logging Concessionaire vs. Court of Appeals, 402 SCRA 181 [2003], 415

— R —Radio Corp. of the Phils. vs. Roa, 62 Phil. 212 [1935], 304Radiowealth Finance Company vs. Del Rosario, 335 SCRA 288 [2000], 37Ramirez vs. Court of Appeals, 409 SCRA 133 [2003], 389Ramirez vs. Court of Appeals, 144 SCRA 292 [1986], 480Ramirez vs. Court of Appeals, 219 SCRA 598 [1993], 439Ramos vs. Buyson Lampa, 63 Phil. 215 [1936], 102Ramos vs. Central Bank of the Phils. & Commercial Bank of Manila, 137 SCRA

685 [1985], 131Ramos vs. Court of Appeals, 279 SCRA 118 [1997], 390Ramos vs. Mañalac, 89 Phil. 270 [1951], 456Ramos vs. Sarao, 451 SCRA 103 [2005], 375Rango vs. Salmon, 15 Phil. 436 [1910], 330Raymundo vs. Sunico, 25 Phil. 365 [1913], 427RCBC vs. IAC, 213 SCRA 830, 833-834, 529Recebido vs. People, 346 SCRA 881 [2000], 372Reformina vs. Tomol, Jr.,5 139 SCRA 260 [1985], 62Reiss vs. Memije, 15 Phil. 350 [1910], 228Relucio vs. Bullante-Garfn, 187 SCRA 405 [1990], 38Reparations Commission vs. Northern Lines, 34 SCRA 203 [1970], 256Republic Planters Bank vs. Sarmiento, 53 SCRA 303 [2007], 392Republic Planters Bank vs. Court of Appeals, 216 SCRA 738 [1992], 62Republic vs. Bagtas, 6 SCRA 262 [1962], 14, 19Republic vs. Court of Appeals and Cuaycong, 65 SCRA 186 [1975], 132Republic vs. Court of Appeals, G.R. No. 103073, March 13, 2001, 245Republic vs. First National City Bank of New York, 3 SCRA 851 [1961], 7Republic vs. Grijaldo, 15 SCRA 681 [1965], 34Republic vs. Lim, 462 SCRA 265 [2005], 386Republic vs. Pal-Fox Lumber Co., 43 SCRA 365 [1972], 259Reyes vs. Court of Appeals, 107 SCRA 126 [1981], 408Reyes vs. Chavoso, 27 SCRA 1253 [1969], 440Reyes vs. De los Santos, 50 SCRA 431 [1973], 440Reyes vs. Elser, 45 Phil. 685 [1924], 74Reyes vs. Nebrija, 48 Phil. 639 [1926], 334Reyes vs. Sierra, 93 SCRA 472 [1979], 331Reyes vs. Sierre, 93 SCRA 472 [1979], 389Reyes vs. Tolentino, 42 SCRA 365 [1971], 429Reyes-Gregorio vs. Reyes, 27 SCRA 427 [1969], 440Reynoso IV vs. Commercial Credit Corp., 169 SCRA 60 [1989], 404RFC vs. Javillonar, 107 Phil. 664 [1960], 382Rivera vs. Court of First Instance of Nueva Ecija, 61 Phil. 201 [1935], 456Rivera vs. Peña, 1 SCRA 747 [1961], 383Rivero vs. Rabe, 54 Phil. 982 [1930], 66

681 CASE INDEX

Rizal Commercial Banking Corp. vs. Arro, 115 SCRA 777 [1982], 233Rizal Commercial Banking Corp. vs. Cerro, 115 SCRA 777 [1982], 237Rizal Commercial Banking Corporation vs. Court of Appeals, 289 SCRA 292

[1998], 44, 389Robles vs. Court of Appeals, 328 SCRA 97 [2000], 321Rogers vs. Smith, 10 Phil. 317 [1908], 127Roman Catholic Bishop of Jaro vs. De La Peña, 26 Phil. 144 [1913], 116Roman vs. Asia Banking Corp., 46 Phil. 705 [1924], 202Roño vs. Gomez, 83 Phil. 890 [1949], 61Rosales vs. Suba, 408 SCRA 664 [2003], 374Rosales vs. Yboa, 120 SCRA 869 [1983], 438Rose Packing Co., Inc. vs. Court of Appeals, 167 SCRA 309 [1988], 342Roxas vs. Buan, 167 SCRA 43 [1988], 468Roxas vs. Court of Appeals, 221 SCRA 729 [1993], 400Royal Shirt Factory, Inc. vs. Co Bon Tic, 94 Phil. 994 [1954], 38Rubiso and Gelito vs. Rivera, 37 Phil. 72 [1917], 487Ruiz vs. Court of Appeals, 401 SCRA 410 [2003], 64Ruiz vs. Caneba, 191 SCRA 865 [1990], 42Ruiz vs. Sheriff of Manila, 34 SCRA 83 [1970], 411Rural Bank of Oroquieta vs. Court of Appeals, 101 SCRA 5 [1980], 435Rural Bank of Caloocan, Inc. vs. Court of Appeals, 104 SCRA 151 [1981], 326Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205

[1986], 411, 417Rural Bank of Siaton vs. Macajitos, 495 SCRA 127 [2005], 380Rural Bank of Sta. Ignacia, Inc. vs. Dimatulac, 401 SCRA 742 [2003], 386

— S —Saavedra vs. Price, 68 Phil. 699 [1939], 269Saenz vs. Yap Chuan, 16 Phil. 76 [1910], 279Sagabarria vs. Philippine Business Bank, 593 SCRA 645 [2009], 457Sajo vs. Gustilo, 48 Phil. 451 [1925], 101Sajo vs. Gustilo, 48 Phil. 451 [1926], 89Salazar vs. De Torres, 108 Phil. 209 [1960], 402Saldaña vs. Phil. Guaranty Co., Inc., 106 Phil. 919 [1960] , 491Salvador vs. Locsin, 93 Phil. 225 [1953], 416Samanilla vs. Cajucom, 107 Phil. 432 [1960], 378Sampaguita Pictures, Inc. vs. Jalwindor Manufacturing, Inc., 93 SCRA 420

[1979], 524Samson vs. Rivera, 428 SCRA 759 [2004], 456San Jose vs. Court of Appeals, 225 SCRA 450 [1993], 406San Juan vs. Court of Appeals, 363 SCRA 387 [2001], 377Sanchez vs. Buenviaje, 126 SCRA 208 [1983], 84Sangrador vs. Villarama, 168 SCRA 215 [1988], 63Santiago vs. Pioneer Savings and Loan Bank, 157 SCRA 100 [1988], 395Santos vs. Mejia, 94 Phil. 211 [1953], 248Santuban vs. Fule, 133 SCRA 762 [1984], 42


682

Saura Import and Export Co., Inc. vs. Development Bank of the Phils., 44 SCRA 445 [1972], 11

Sayson vs. Luna, 433 SCRA 502 [2004], 403Sebastian vs. Bautista, [CA] 58 O.G. No. 15, 3147, 88Security Pacifc Assurance Corporation vs. Tria-Infante, 468 SCRA 527 [2005],

220Security Bank & Trust Co. vs. RTC Makati, 263 SCRA 483 [1996], 38Security Bank & Trust Co., Inc. vs. Globe Assurance Co., Inc., 107 Phil. 733

[1960], 292Security Bank & Trust Company vs. RTC of Makati, 263 SCRA 483 [1996], 52Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA 781 [2000], 299Security Bank Corporation vs. Gonzalbo, 485 SCRA 136 [2006], 454Selegna Management and Development Corp. vs. United Coconut Planters

Bank, 489 SCRA 125 [2006], 399Sentinel Insurance Co., Inc. vs. Court of Appeals, 182 SCRA 517 [1990], 41Serra vs. Rodriguez, 56 SCRA 538 [1974], 502Serrano vs. Central Bank, 96 SCRA 96 [1980], 131Serrano vs. Court of Appeals, 196 SCRA 107 [1991], 352Serrano vs. Court of Appeals, 417 SCRA 415 [2003], 437Servicewide Specialists, Inc. vs. Court of Appeals, 318 SCRA 493 [1999], 505Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80

[1989], 485Severino and Vergara vs. Severino, 56 Phil. 185 [1931], 234Shannon & Shannon vs. Phil. Lumber Trans. Co., 61 Phil. 872 [1935], 308Sia vs. Court of Appeals, 222 SCRA 24 [1993], 118Singson vs. Babida, 79 SCRA 111 [1977], 223Siy Cong Bieng & Co., Inc. vs. Hongkong and Shanghai Banking Corp., 56 Phil.

598 [1932], 202Siy Cong Bieng & Co. vs. Hongkong & Shanghai Banking Corp., 56 Phil. 598

[1932], 198Smith Bros. Co. vs. Reicheimer & Co., 83 So. 255, 145 La. 1066, 160Smith Bros. Co., Ltd. vs. Reicheimer & Co., 145 La. 1066, 83 So. 255., 162Solangon vs. Salazar, 360 SCRA 379 [2001], 64Solid Bank Corporation vs. Tan, 520 SCRA 123 [2007], 133Solid Homes, Inc. vs. Intermediate Appellate Court, 508 SCRA 165 [2006], 39Solidbank Corporation vs. Court of Appeals, 379 SCRA 159 [2002], 42Solomon and Lachica vs. Dantes, 63 Phil. 522 [1937], 423Solon vs. Solon, 64 Phil. 729 [1937], 248Somes vs. Molina, 9 Phil. 653 [1908], 282Soncuya vs. Azarraga, 65 Phil. 635 [1938], 38Soriano vs. Bautista, 6 SCRA 946 [1962], 371Soriano vs. Galit, 411 SCRA 631 [2003], 376South City Homes, Inc. vs. BA Finance Corporation, 371 SCRA 603 [2001], 241Southern Motors, Inc. vs. Barbosa, 99 Phil. 263 [1956], 269Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978], 416Spouses Suico vs. Philippine National Bank, 531 SCRA 514 [2007], 405Sps. Reyes vs. Court of Appeals, 339 SCRA 97 [2000], 375

683 CASE INDEX

Sps. Santiago vs. Merchant Rural Bank of Talavera, Inc., 453 SCRA 756 [2005], 463

St. Dominic Corp. vs. Intermediate Appellate Court (151 SCRA 577 [1987]), 472Sta. Ignacia Rural Bank, Inc. vs. Court of Appeals, 230 SCRA 513 [1994], 432Sta. Rosa vs. Noble, 35 O.G. 27241, 474Standard Oil Co. of New York vs. Cho Siong, 52 Phil. 612 [1928], 253Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630 [1923], 488Standard Oil Co. vs. Cho Chiong, 52 Phil. 612 [1928], 247Star Forwarders, Inc. vs. Navarro, 191 SCRA 403 [1990], 544State Investment House, Inc. vs. Court of Appeals, 254 SCRA 368 [1996], 382State Investment House, Inc. vs. Court of Appeals, 198 SCRA 390 [1991], 40State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992], 400State Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997], 532Stevenson & Co., Ltd. vs. Climaco, [C.A.] 36 O.G. 1571, 220Strochecker vs. Ramirez, 44 Phil. 933 [1923], 486Stronghold Insurance Company, Inc. vs. Republic Asahi Glass Corporation, 492

SCRA 179 [2006], 298Suico Raltan & Buri Interiors, Inc. vs. Court of Appeals, 490 SCRA 560 [2006],

220Suico Industrial Corporation vs. Court of Appeals, 301 SCRA 212 [1999], 454Suico Rattan & Buri Interiors, Inc. vs. CA, 490 SCRA 560 [2006], 422Sulit vs. Court of Appeals, 268 SCRA 441 [1997], 422Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966], 74Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928], 427Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court, 203

SCRA 210 [1996], 380Superline Transportation Co., Inc. vs. Phil. National Construction Co., 519

SCRA 432 [2007], 154Superlines Transportation Company, Inc. vs. ICC Leasing & Financing

Corporation, 398 SCRA 508 [2003], 508Svendsen vs. People, 546 SCRA 659 [2008], 50Sy vs. Court of Appeals, 172 SCRA 125 [1989], 450

— T —Tady-Y vs. Phil. National Bank, 12 SCRA 19 [1964], 395Tagawa vs. Aldanese, 43 Phil. 852 [1922], 245Tagunicar vs. Lorna Express Credit Corp., 483 SCRA 486 [2006], 408Tamayo, Jr. vs. Heirs of G. Dominguez, 498 SCRA 342 [2006], 405Tambunting vs. Court of Appeals, 167 SCRA 16 [1988], 400Tan Chat vs. C.N. Hodges, 98 Phil. 928 [1956], 421Tan Chun Tic vs. West Coast Life Insurance Co. and Locsin, 54 Phil. 361 [1930],

336Tan vs. Court of Appeals, 239 SCRA 310 [1994], 133Tan vs. Court of Appeals, 367 SCRA 571 [2001], 48Tan vs. Valdehueza, 66 SCRA 61 [1975], 37Tanchan vs. Allied Banking Corp., 571 SCRA 512 [2008], 399


684

Tañedo vs. Allied Banking Corporation, 344 SCRA 100 [2002], 305Tañedo vs. Allied Banking Corporations, 374 SCRA 100 [2002], 220Taningco vs. Register of Deeds, 5 SCRA 381 [1962], 383Tarnate vs. Court of Appeals, 241 SCRA 254 [1995], 414Tavera vs. El Hogar Filipino, Inc., 68 Phil. 712 [1939], 480Tec Bi & Co. vs. Chartered Bank of India, 41 Phil. 576 [1921], 350Terminal Facilities and Services Corp. vs. Philippine Ports Authority, 378 SCRA

82 [2002], 41Testamentaria de Don Amadeo Matute Olave vs. Canlas, 4 SCRA 463 [1962],

416Texas Co. vs. Alonso, 73 Phil. 90 [1941], 260The Malayan Bank vs. Lagrama, 357 SCRA 429 [2001], 428The Overseas Bank of Manila vs. Cordero, 113 SCRA 303 [1982], 131The Overseas Bank of Manila vs. Court of Appeals, 113 SCRA 778 [1982], 131Tian Tiong Tick vs. American Apothecaries, 65 Phil. 417 [1938], 131Tibajia vs. Court of Appeals, 193 SCRA 581 [1991], 437Tio vs. Abayata, 556 SCRA 175 [2008], 380Tio Khe Cheo vs. Court of Appeals, 202 SCRA 119 [1991], 41Tioseco vs. Court of Appeals, 143 SCRA 705 [1986], 436Tiu Hiong Guan vs. Metropolitan Bank & Trust Co., 498 SCRA 246 [2006], 220Toh vs. Solid Bank Corporation, 408 SCRA 544 [2003], 304Toh vs. Solid Bank Corporation, 408 SCRA 544 [2003], 309Tolentino vs. Baltazar, 1 SCRA 822 [1961], 490Tolentino vs. Carlos, 66 Phil. 140 [1938], 541Tolentino vs. Court of Appeals, 106 SCRA 513 [1981], 436Tolentino vs. Court of Appeals, 517 SCRA 732 [2007], 439Tolentino vs. Gonzales, 50 Phil. 558 [1927], 32Tomas vs. Tomas, 98 SCRA 280 [1980], 321Toquero vs. Villegas, [C.A.] 40 O.G. No. 15, p. 10, 70Torres vs. Joco, [CA] 59 O.G. No. 10, 1580, 88Torres vs. Limjap, 56 Phils. 141 [1931], 392Toung vs. Ganzon Olan, 568 SCRA 376 [2008], 38Towers Assurance Corp. vs. Ororama Supermarket, 80 SCRA 313 [1970], 274Trade & Investment Dev. Corp. of the Phils. vs. Roblett Industrial Construction

Corp., 474 SCRA 510 [2005], 221Traders Insurance & Surety Co. vs. Dy Eng Geok, 104 Phil. 806 [1958], 248Tria vs. Villareal, 69 Phil. 478 [1940], 344Trillana vs. Manansala, 96 Phil. 865 [1955], 480Tsai vs. Court of Appeals, 366 SCRA 324 [2001], 486Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924], 279Tumalad vs. Vicencio, 41 SCRA 143 [1971], 488Tupas vs. Damasco, 132 SCRA 593 [1984], 412Tupaz vs. Court of Appeals, 475 SCRA 398 [2005], 269

— U —U.S. vs. Varadero dela Quinta, 40 Phil. 48 [1919], 226U.S. vs. Constantino Tan Quingco Chua, 39 Phil. 552 [1919], 73

685 CASE INDEX

U.S. vs. Diaz, 42 Phil. 766 [1922]; 8 Cyc., 996, 57U.S. vs. Igpaura, 27 Phil. 619 [1913], 129U.S. vs. Kilayko, 32 Phil. 61 [1915] , 485U.S. vs. Tan Quingco Chua, 39 Phil. 552 [1919], 56U.S. vs. Terrell, 2 Phil. 222 [1903], 346U.S. vs. Varadero De La Quinta, 40 Phil. 48 [1919], 273Umali vs. Court of Appeals, 189 SCRA 529 [1990], 221Umali vs. Court of Appeals, 189 SCRA 529 [1990], 251Umali vs. Miclat, 105 Phil. 1109 [1959], 69Union Bank of the Phils. vs. Court of Appeals, 471 SCRA 751 [2005], 393Union Bank of the Philippines vs. Court of Appeals, 311 SCRA 795 [1999], 454United Coconut Planters Bank vs. Reyes, 193 SCRA 756 [1991], 459United Coconut Planters Bank vs. Spouses Beluso, 530 SCRA 567 [2007], 413United Overseas Bank vs. Rosemoor Mining and Development Cor., 534 SCRA

528 [2007], 401Urrutia & Co. vs. Morena and Reyes, 28 Phil. 261 [1914], 282Ursal vs. Court of Appeals, 473 SCRA 52 [2005], 380Uy Aloo vs. Cho Jan King, 27 Phil. 247 [1914], 248Uy Chao vs. Compania Maritima, 10 C.A. Rep. 294., 38Uy Tong vs. Court of Appeals, 161 SCRA 383 [1988], 331Uy vs. Zamora, 13 SCRA 508 [1965], 523Uypitching vs. Quiamco, 510 SCRA 172 [2006], 400

— V —Valdezco vs. Francisco, 52 Phil. 350 [1927], 84Valencia vs. Alcala, 42 Phil. 177 [1921], 480Valenzuela vs. Central Bank, 168 SCRA 623 [1988], 544Valmonte vs. Court of Appeals, 303 SCRA 278 [1999], 400Valmonte vs. Court of Appeals, 303 SCRA 278 [1999], 386Vanett vs. Reilly-Hertz Automobile Co., 173 N.W. 466., 159Vda. De Jayme vs. Court of Appeals, 390 SCRA 380 [2002], 341Vda. de Bautista vs. Marcos, 3 SCRA 434 [1961], 319Vda. de Gordon vs. Court of Appeals, 109 SCRA 388 [1981], 422Vda. de Jayme vs. Court of Appeals, 390 SCRA 380 [2002], 326Vda. de Reyes vs. De Leon, 20 SCRA 369 [1967], 331Vda. De Urbano vs. GSIS, 367 SCRA 672 [2001], 426Vda. de Zaballero vs. Court of Appeals, 229 SCRA 810 [1994], 458Velasquez vs. Coronel, 5 SCRA 985 [1962], 422Velasquez vs. Solidbank Corporation, 550 SCRA 119 [2008], 216Veloso vs. Intermediate Appellate Court, 205 SCRA 227 [1992], 455Verdejo vs. Court of Appeals, 157 SCRA 743 [1988], 52Vergara vs. People, 450 SCRA 482 [2005], 330Verzosa vs. Bucag, [Unrep.] 97 Phil. 996 [1955], 477Villafor vs. Barreto, 92 Phil. 297 [1952], 432Villanueva vs. Ipondo, [CA] No. 885-R [1947], 44 O.G. 4377, 474Villar vs. Javier, 97 Phil. 604 [1955], 434


686

Villarica vs. Court of Appeals, 123 SCRA 259 [1983], 62Villaruel vs. Alvayda & Vicencio, 46 Phil. 277 [1924], 80Villavicencio vs. Mojares, 398 SCRA 314 [2003], 440Viloria vs. Court of Appeals, 123 SCRA 259 [1983], 61Viola vs. Equitable PCI Bank, Inc., 572 SCRA 245 [2008], 373Visayan Distributors, Inc. vs. Flores, 92 Phil. 145 [1952], 245Visayan Surety & Insurance Corp. vs. Court of Appeals, 364 SCRA 631 [2001],

218Viuda de Syquia vs. Jacinto, 60 Phil. 861 [1934], 272

— W —Warner, Barnes, & Co., Ltd. vs. Flores, 1 SCRA 881 [1961], 340Wetherington vs. Laurens Country Farmer’s Corp. Warehouse Co., 98 S.E. 228,

181Willex Plastic Industries Corp. vs. Court of Appeals, 256 SCRA 478 [1996], 233Wise & Co. vs. Tanglao, 63 Phil. 372 [1936], 268Wise and Co. vs. Kelly, 37 Phil. 696 [1918], 255Wordson vs. Davenport Mill & Elevator Co., 13 P. [2d] 4778, 162

— Y —Yangco vs. Cruz Herrera, 11 Phil. 402 [1908], 421Yap vs. Philippine Commercial International Bank, 485 SCRA 56 [2006], 341Ysmael vs. Court of Appeals, 318 SCRA 215 [1999], 440Yu vs. Ngo Yet Te, 514 SCRA 423 [2007], 222Yu vs. Philippine Commercial International Bank, 485 SCRA 56 [2006], 405Yuliongsui vs. Phil. National Bank, 22 SCRA 585 [1968], 348Yulo vs. Pe, 101 Phil. 134 [1957], 69

— Z —Zahner vs. Harnish, 24 S.W. [2d] 641, 187Zenith Insurance Corp. vs. Court of Appeals, 199 SCRA 485 [1982], 250

i

Comments and Caseson

CREDIT TRANSACTIONSBy

HECTOR S. DE LEONLL.B., University of the Philippines

Author: Philippine Constitutional Law: Principles and Cases(2 vols.); Comments and Cases on Succession; Comments

and Cases on Sales and Lease; etc.Co-author: Comments and Cases on Property; Comments and Cases on Obligations and Contracts; Comments and Cases on Partnership,

Agency, and Trusts; Comments and Cases on Torts and Damages; Administrative Law: Text and Cases; The Law on Public Offi cers and Election Law;

The Corporation Code of the Philippines Annotated; The Insurance Code of the Philippines Annotated; The Philippine Negotiable Instrument Law (and Allied

Laws) Annotated; The Fundamentals of Taxation; The Law on Income Taxation; The Law on Transfer and Business Taxation;

The National Internal Revenue Code Annotated (2 vols.); etc.and

HECTOR M. DE LEON, JR.A.B., LL.B., University of the Philippines

LL.M., University of MichiganPartner, Sycip Salazar Hernandez & Gatmaitan

Co-author: Comments and Cases on Property; Comments and Cases on Obligations and Contracts; Comments and Cases on Partnership,

Agency, and Trusts; Comments and Cases on Torts and Damages; Administrative Law: Text and Cases;

The Law on Public Offi cers and Election Law; The Corporation Code of the Philippines Annotated; The Insurance Code of the Philippines Annotated;

The Philippine Negotiable Instrument Law (and Allied Laws) Annotated; The Fundamentals of Taxation;

The Law on Income Taxation; The Law on Transfer and Business Taxation; and The National Internal Revenue Code Annotated (2 vols.).

Eleventh Edition2010

856 Nicanor Reyes, Sr. St.Tel. Nos. 736-05-67 • 735-13-64

1977 C.M. Recto AvenueTel. Nos. 735-55-27 • 735-55-34

Manila, Philippineswww.rexpublishing.com.ph

Published & Distributed by

ii

Printed by

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Philippine Copyright, 2010

by

HECTOR S. DE LEONand

HECTOR M. DE LEON, JR.

ISBN 978-971-23-5535-6

No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or in any other form, for distribution or sale, without the written permission of either of the authors except brief passages in books, articles, reviews, legal papers, and judicial or other offi cial proceedings with proper citation.

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ALL RIGHTS RESERVEDBY THE AUTHORS

No. ____________

ISBN 978-971-23-5535-6

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05-CI-00050

iii

PREFACE

This volume which is now on its eleventh edition, has been written to provide a basic text for the law course in CREDIT TRANSACTIONS. It comprises the Civil Code provisions on loan, deposit, guaranty, pledge, mortgage, and antichresis, and concurrence and preference of credits. Also discussed are the Usury Law, the Warehouse Receipts Law, the law on Judicial and Extrajudicial Foreclosure of Real Estate Mortgages, the Chattel Mortgage Law, and the Insolvency Law. In addition, other related special laws are included as ap-pendices. An attempt is made by the author to explain the legal provi-sions as simply as possible and to correlate them so that they may be easily understood. The reason for the law is set forth when-ever necessary to enable the student to better grasp the matter being explained. In many instances, brief examples and decided cases which have been concisely digested, are given to illustrate the application of the law in specifi c factual situations. It is sincerely hoped that this work would be of some use to law teachers, students, and practitioners, and likewise to the bench.

HECTOR S. DE LEONHECTOR M. DE LEON, JR.

June 2010

v

CONTENTS

Preface ............................................................................................................. iiiIntroduction .................................................................................................... 1 1. Meaning and scope of credit transactions .................................... 1 2. Meaning and kinds of security ....................................................... 2 3. Meaning of bailment ........................................................................ 2 4. Creation of bailment ........................................................................ 2 5. Parties in bailment ........................................................................... 3 6. Kinds of contractual bailment ........................................................ 3 7. Kinds of bailment for hire ............................................................... 4

ILOAN

(Arts. 1933-1961.)General Provisions

Article 1933 ..................................................................................................... 5 1. Defi nition of contract of loan .......................................................... 5 2. Governing law .................................................................................. 5 3. Characteristics of the contract ........................................................ 6 4. Cause or consideration in a contract of loan ................................ 6 5. Kinds of loan ..................................................................................... 6 6. Loans distinguished from credit .................................................... 7 7. Meaning of credit as opposed to debt ........................................... 7 8. Loan distinguished from discounting of paper ........................... 7 9. Commodatum and mutuum (simple loan) distinguished ............................................................................. 9 10. Kinds of commodatum ....................................................................... 10Article 1934 ..................................................................................................... 10 1. Delivery essential to perfection of loan ........................................ 10 2. Binding effect of accepted promise to lend .................................. 11

Chapter 1. — CommodatumSection 1. — Nature of Commodatum

Article 1935 ..................................................................................................... 13 1. Commodatum essentially gratuitous ............................................... 13

vi

2. Contract similar to donation........................................................... 14 3. Extent of bailee’s right of use ......................................................... 14 4. Purpose of the contract .................................................................... 14

Articles 1936-1937 .......................................................................................... 15 1. Subject matter of the contract ......................................................... 15

Article 1938 ..................................................................................................... 15 1. Bailor need not be owner ................................................................ 16

Article 1939 ..................................................................................................... 16 1. Commodatum, purely personal in character .................................. 16 2. Right of bailee to lend thing loaned to third persons ................. 17

Article 1940 ..................................................................................................... 17 1. Contrary stipulation as to fruits ..................................................... 17

Section 2. — Obligations of the BaileeArticle 1941 ..................................................................................................... 18 1. Liability for ordinary expenses ...................................................... 18

Article 1942 ..................................................................................................... 18 1. Liability for loss of thing loaned .................................................... 19

Article 1943 ..................................................................................................... 19 1. Liability for deterioration of thing loaned .................................... 19

Article 1944 ..................................................................................................... 20 1. Obligation to return thing loaned .................................................. 20 2. Effect of retention or adverse claim by bailee .............................. 20 3. Right of retention for damages ...................................................... 21

Article 1945 ..................................................................................................... 21 1. Liability when there are two or more bailees ............................... 21

Section 3. — Obligations of the BailorArticle 1946 ..................................................................................................... 23 1. Obligation to respect duration of loan .......................................... 23

Article 1947 ..................................................................................................... 24 1. Precarium defi ned ............................................................................ 24 2. Cases when contract is precarium ................................................. 24

vii

Article 1948 ..................................................................................................... 26 1. Right of bailor to demand return of thing for acts of ingratitude ............................................................... 26

Article 1949 ..................................................................................................... 26 1. Obligation to refund extraordinary expenses .............................. 27Article 1950 ..................................................................................................... 28 1. No obligation to assume all other expenses ................................. 28

Article 1951 ..................................................................................................... 28 1. Liability to pay damages for known hidden fl aws ..................... 28 2. Where fl aw unknown to bailor ...................................................... 29

Article 1952 ..................................................................................................... 29 1. No right of abandonment for expenses and damages ................ 29

Chapter 2. — Simple Loan or Mutuum Article 1953 ..................................................................................................... 30 1. Simple loan or mutuum defi ned ..................................................... 30 2. Obligation of borrower is to pay .................................................... 30 3. No criminal liability for failure to pay .......................................... 31 4. Simple loan distinguished from contract of rent ......................... 31 5. Simple loan distinguished from trust receipt .............................. 32 6. Meaning of fungible things ............................................................ 33 7. Distinction between fungible and consumable things ............... 34

Article 1954 ..................................................................................................... 35 1. Mutuum and commodatum distinguished from barter ................. 35

Article 1955 ..................................................................................................... 35 1. Form of payment .............................................................................. 35

Article 1956 ..................................................................................................... 37 1. Requisites for recovery of interest ................................................. 37 2. Existence of stipulation to pay interest ......................................... 37 3. Liability for interest even in the absence of stipulation ............................................................................. 39 4. Liability for surcharges and penalties ........................................... 43 5. Interest separate and distinct from surcharges and penalties ... 44Article 1957 ..................................................................................................... 44 1. Usurious contracts declared void .................................................. 44 2. Instances of contracts disguised to cover usurious loans ............................................................................................ 45

viii

Article 1958 ..................................................................................................... 47 1. Determination of interest payable in kind ................................... 47

Article 1959 ..................................................................................................... 48 1. When unpaid interest earns interest ............................................. 48

Article 1960 ..................................................................................................... 48 1. Recovery of unstipulated interest paid ......................................... 49

Article 1961 ..................................................................................................... 49 1. Usurious transactions governed by special laws ....................... 49

IITHE USURY LAW


1. Rate of interest no longer subject to any ceiling prescribed under Usury Law ..................................... 51 2. Legality of Central Bank Circular No. 905.................................... 52 3. Usury defi ned ................................................................................... 52 4. Usury, purely a statutory creation ................................................. 53 5. Elements of usury ............................................................................ 53 6. When the Usury Law applies ......................................................... 53 7. Purpose, theory, and nature of the Usury Law ............................ 54 8. Historical background of the Usury Law ..................................... 55 9. Construction of the law ................................................................... 56

Sections 1-3 ..................................................................................................... 58 1. Interest defi ned ................................................................................. 59 2. Kinds of interest ............................................................................... 60 3. Interest rates ...................................................................................... 64 4. Multi-tiered interest rates ............................................................... 66 5. Section 2 and Section 3 compared ................................................. 66 6. Validity of stipulation to pay penalty in case obligation not fulfi lled ............................................................. 67 7. Attorney’s fees to cover costs of collection not interest .............. 68 8. Where attorney’s fees stipulated excessive .................................. 69 9. Determination of existence of usury ............................................. 69 10. When the Usury Law not applicable ............................................. 71 11. Effect where principal not absolutely payable............................. 76

Section 4 ..................................................................................................... 77 1. Interest that can be charged by a pawnshop ................................ 77 2. Dividing pawn in several fractions not allowed ......................... 78

ix

Sections 4-a-5 .................................................................................................. 79 1. When compound interest allowed ................................................ 80 2. Demandability of compound interest ........................................... 80 3. Right of creditor to charge advance interest ................................ 81Section 6 .......................................................................................................... 82 1. Borrower’s right to recover usurious interest paid ..................... 83 2. Right under the Civil Code ............................................................. 83 3. Pari delicto rule not applicable in usury cases .............................. 84 4. Where interest added to principal but not paid .......................... 84 5. Borrower’s right to recover costs and attorney’s fees................. 85Section 7 ..................................................................................................... 85 1. Usurious loan void only with respect to interest ........................ 86 2. Effect of clerical error in computation of interest ........................ 87 3. Usurer’s right to recover principal loaned ................................... 87 4. Forfeiture of right to interest of creditor in a usurious loan ..... 88

Section 7-a ..................................................................................................... 89 1. Escalation clause in a loan agreement ........................................... 89 2. Interest to be based on the prevailing market rate ...................... 92

Section 8 ..................................................................................................... 93 1. Determination of interest where loan of money payable in kind ......................................................................... 93

Sections 9-9a ................................................................................................... 96 1. Effect of failure of defendant to make denial of usury under oath .................................................................. 96 2. Rule subject to waiver ..................................................................... 97 3. Reasons for requiring denial of usury under oath ...................... 97 4. Presumptions and burden of proof ............................................... 97

Section 10 ..................................................................................................... 102 1. Prescription of criminal action ....................................................... 102

Sections 11-12 ................................................................................................. 103

IIIDEPOSIT

(Arts. 1962-2009.)

Chapter 1. — Deposit in General and Its Different Kinds

Article 1962 ..................................................................................................... 104 1. Defi nition of contract of deposit .................................................... 104

x

2. Governing law .................................................................................. 104 3. Characteristics of the contract ........................................................ 105 4. Safekeeping, principal purpose of the contract ........................... 105 5. Deposit distinguished from mutuum ............................................. 106 6. Deposit distinguished from commodatum ..................................... 106

Article 1963 ..................................................................................................... 107 1. Binding effect of agreement to deposit ......................................... 107

Article 1964 ..................................................................................................... 107 1. Creation of deposit ........................................................................... 107 2. Kinds of deposit ............................................................................... 107

Article 1965 ..................................................................................................... 108 1. Contract of deposit generally gratuitous ...................................... 108

Article 1966 ..................................................................................................... 108 1. Subject matter of deposit ................................................................. 109 2. Only corporeal things contemplated ............................................. 109

Article 1967 ..................................................................................................... 109 1. Kinds of extrajudicial deposit ........................................................ 109

Chapter 2. — Voluntary DepositSection 1. — General Provisions

Article 1968 ..................................................................................................... 110 1. Voluntary deposit defi ned .............................................................. 110 2. Voluntary and necessary deposits distinguished ........................ 110 3. Depositor need not be owner of thing .......................................... 110 4. Where there are several depositors ............................................... 111

Article 1969 ..................................................................................................... 111 1. Form of contract of deposit ............................................................. 111

Article 1970 ..................................................................................................... 111 1. Where depositary capacitated and depositor incapacitated ...... 112

Article 1971 ..................................................................................................... 112 1. Where depositary incapacitated and depositor capacitated ...... 112

Section 2. — Obligations of the Depositary

Article 1972 ..................................................................................................... 114 1. Obligation to keep the thing deposited and return it ................. 114

xi

Article 1973 ..................................................................................................... 116 1. Obligation not to transfer deposit.................................................. 116

Article 1974 ..................................................................................................... 117 1. Obligation not to change way of deposit ...................................... 117

Article 1975 ..................................................................................................... 117 1. Obligation to collect interest on choses in action deposited ...... 117 2. Contract for rent of safety deposit boxes ...................................... 118

Article 1976 ..................................................................................................... 124 1. Obligation not to commingle things deposited if so stipulated .......................................................................... 124

Article 1977 ..................................................................................................... 125 1. Obligation not to make use of thing deposited unless authorized ..................................................................... 125

Article 1978 ..................................................................................................... 125 1. Effect if permission to use is given ............................................... 125 2. Irregular deposit distinguished from mutuum ............................. 127 3. Permission to use not presumed .................................................... 129

Article 1979 ..................................................................................................... 129 1. Liability for loss through fortuitous event ................................... 130

Article 1980 ..................................................................................................... 130 1. Relation between bank and depositor .......................................... 130

Articles 1981-1982 ........................................................................................... 134 1. Where thing deposited delivered closed and sealed .................. 134

Article 1983 ..................................................................................................... 135 1. Obligation to return products, accessories and accessions ........ 135 2. Obligation to pay interest on sums converted to personal use .......................................................................... 136

Article 1984 ..................................................................................................... 136 1. Depositor need not prove his ownership ..................................... 136 2. Where third person appears to be owner ..................................... 137 3. Effect of failure of owner to claim within one month ................. 137

Article 1985 ..................................................................................................... 138 1. Right of two or more depositors .................................................... 138

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Article 1986 ..................................................................................................... 138 1. Person to whom return must be made.......................................... 139

Article 1987 ..................................................................................................... 139 1. Place of return ................................................................................... 139

Article 1988 ..................................................................................................... 140 1. Time of return ................................................................................... 140 2. When depositary not obliged to return thing deposited ............ 140

Article 1989 ..................................................................................................... 141 1. Right of depositary to return thing deposited ............................. 141

Article 1990 ..................................................................................................... 141 1. Liability for loss by force majeure or government order .......... 141

Article 1991 ..................................................................................................... 142 1. Alienation in good faith by depositary’s heir .............................. 142

Section 3. — Obligations of the Depositor

Article 1992 ..................................................................................................... 143 1. Obligation to pay expenses of preservation ................................. 143

Article 1993 ..................................................................................................... 143 1. Obligation to pay losses incurred due to character of thing deposited ............................................... 144

Article 1994 ..................................................................................................... 144 1. Depositary’s right of retention ....................................................... 144

Article 1995 ..................................................................................................... 144 1. Causes of extinguishment of deposit ........................................... 144 2. Effect of death of depositor or depositary .................................... 144

Chapter 3. — Necessary Deposit

Articles 1996-1997 .......................................................................................... 146 1. When deposit is necessary .............................................................. 146 2. Necessary deposit in compliance with a legal obligation ......... 147 3. Necessary deposit made on the occasion of any calamity ......... 147

Articles 1998-1999 ........................................................................................... 148 1. Deposit by travellers in hotels and inns ....................................... 148

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2. Extent of liability of keepers of hotels and inns........................... 149 3. Terms explained ............................................................................... 149

Articles 2000-2002 ........................................................................................... 150 1. When hotel-keeper liable ................................................................ 150 2. When hotel-keeper not liable ......................................................... 150

Article 2003 ..................................................................................................... 151 1. Exemption or diminution of liability ............................................ 151

Article 2004 ..................................................................................................... 151 1. Hotel-keeper’s right to retain ......................................................... 152

Chapter 4. — Sequestration or Judicial Deposit

Articles 2005-2008 .......................................................................................... 153 1. When judicial deposit takes place ................................................. 153 2. Nature and purpose of judicial deposit ........................................ 154 3. Obligation of depositary of sequestrated property ..................... 154 4. Judicial and extrajudicial deposits distinguished ...................... 155

Article 2009 ..................................................................................................... 155 1. Applicable law .................................................................................. 155

IVTHE WAREHOUSE RECEIPTS LAW


Introduction

1. Scope of the law ................................................................................ 156 2. When Civil Code applicable ........................................................... 156 3. Purposes of the law .......................................................................... 156

Chapter 1. — The Issue of Warehouse Receipts

Section 1 ..................................................................................................... 158 1. Who may issue warehouse receipt ................................................ 158 2. Meaning of warehouse .................................................................... 158

Section 2 ..................................................................................................... 158 1. Defi nition and nature of warehouse receipt ................................. 159 2. Form and contents of the receipt ................................................... 160 3. Effect of omission of any of essential terms ................................. 162

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Section 3 .......................................................................................................... 163 1. Terms that cannot be included in a warehouse receipt .............. 163

Sections 4-5 ..................................................................................................... 164 1. Meaning of “negotiable’’ under the Act........................................ 164

Sections 6-7 ..................................................................................................... 165 1. Application of Sections 6 and 7 ...................................................... 165 2. Effect of failure to mark “negotiable’’ or “non-negotiable’’ ...... 165 3. Negotiability of warehouse receipts enlarged ............................. 166 4. Construction of warehouse receipts .............................................. 168

Chapter 2. — Obligations and Rights of Warehousemen Upon Their Receipts

Section 8 ..................................................................................................... 169 1. Principal obligations of the warehouseman ................................. 169 2. Necessity of demand ....................................................................... 170 3. Offer to satisfy warehouseman’s lien ............................................ 170 4. Offer to surrender and sign negotiable receipt ............................ 170 5. Lawful excuses for refusal to deliver goods ................................. 171

Section 9 ..................................................................................................... 172 1. Person to whom goods must be delivered ................................... 172

Section 10 ..................................................................................................... 173 1. Warehouseman’s liability for misdelivery .................................... 173

Sections 11-12 .................................................................................................. 174 1. Cancellation of receipts on delivery of goods .............................. 175

Section 13 ..................................................................................................... 175 1. Effects of alteration on liability of warehouseman ...................... 176

Section 14 ..................................................................................................... 177 1. Liability of warehouseman in case of lost or destroyed receipts ................................................................ 177

Section 15 ..................................................................................................... 178 1. Liability of warehouseman as to duplicate .................................. 178

Section 16 ..................................................................................................... 178 1. Ownership not a defense for refusal to deliver ........................... 178

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Sections 17-18 .................................................................................................. 179 1. Duty of warehouseman where there are several claimants ................................................................................... 179 2. Liability of warehouseman to rightful claimant ......................... 180

Section 19 ..................................................................................................... 180 1. Adverse title of third person not a defense for refusal to deliver ................................................................. 181

Section 20 ..................................................................................................... 181 1. Liability of warehouseman for non-existence or misdescription of goods ...................................................... 181

Section 21 ..................................................................................................... 182 1. Liability of warehouseman for loss due to lack of care .............. 182

Sections 22-24 ................................................................................................. 183 1. Commingling of deposited goods ................................................. 183

Section 25 ..................................................................................................... 184 1. Attachment or levy of negotiable receipt ..................................... 184 2. Delivery of goods covered by an outstanding negotiable receipt ...................................................................... 184 3. Where depositor not owner ............................................................ 184

Section 26 ..................................................................................................... 185 1. Remedies of creditor or owner of negotiable receipt ................. 185

Section 27 ..................................................................................................... 185 1. Extent of warehouseman’s lien ...................................................... 186

Section 28 ..................................................................................................... 186 1. Goods subject to lien ........................................................................ 186

Section 29 ..................................................................................................... 187 1. Loss and waiver of lien upon goods ............................................. 187 2. Valid reasons for refusing to deliver goods .................................. 188

Section 30 ..................................................................................................... 190 1. Lien where receipt negotiable ........................................................ 190

Sections 31-36 .................................................................................................. 190 1. Enforcement of warehouseman’s lien ........................................... 193 2. Effect of sale of goods ...................................................................... 193

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3. Acts for which warehouseman is liable ........................................ 194

Chapter 3. — Negotiation and Transfer of Receipts

Section 37 ..................................................................................................... 195 1. Negotiation of negotiable receipt................................................... 195

Section 38 ..................................................................................................... 196 1. Negotiation of negotiable receipt by indorsement ...................... 196

Section 39 ..................................................................................................... 196 1. Transfer of non-negotiable receipt ................................................. 197 2. Advantages of a negotiable warehouse receipt ........................... 197

Section 40 ..................................................................................................... 197 1. Persons who negotiate a receipt ..................................................... 198

Section 41 ..................................................................................................... 198 1. Rights of person to whom receipt has been negotiated ............. 198

Section 42 ..................................................................................................... 199 1. Rights of person to whom receipt has been transferred ............. 199 2. Attachment of goods covered by receipt ...................................... 200

Section 43 ..................................................................................................... 200 1. Rights of transferee of a negotiable receipt .................................. 200 2. Rule where receipt subsequently indorsed .................................. 201 3. Ownership of goods covered by receipt negotiated or transferred ......................................................... 201

Section 44 ..................................................................................................... 202 1. Warranties on sale of receipt ........................................................... 202

Section 45 ..................................................................................................... 203 1. Liability of person negotiating or transferring receipt ......................................................................................... 203

Section 46 ..................................................................................................... 204 1. Liability of mortgagee, pledgee or holder for security ................................................................................. 204

Section 47 ..................................................................................................... 204 1. Validity of negotiation as against real owner ............................... 204

Section 48 ..................................................................................................... 206

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1. Effect of subsequent negotiation by seller, etc. ........................... 206

Section 49 ..................................................................................................... 206 1. Indorsee’s right superior to vendor’s lien .................................... 207

Chapter 4. — Criminal Offenses

Section 50 ..................................................................................................... 208 1. Possession of goods by warehouseman ........................................ 208

Sections 51-55 ................................................................................................. 208 1. Offenses criminally punishable by the Act................................... 210 2. Ingredients of offense punished by Section 54 ............................ 210 3. Nature of criminal responsibility under Section 54 ................... 210

Chapter 5. — Interpretation

Section 56 ..................................................................................................... 212 1. History and meaning of law merchant ......................................... 212

Sections 57-61 ................................................................................................. 213

VGUARANTY AND SURETYSHIP

(Arts. 2047-2084.)

Chapter 1. — Nature and Extent of Guaranty

Article 2047 ..................................................................................................... 215 1. Defi nition of guaranty ..................................................................... 215 2. Governing law .................................................................................. 216 3. Characteristics of the contract ........................................................ 216 4. Classifi cation of guaranty ............................................................... 217 5. Law applicable to contract of suretyship ...................................... 218 6. Common law guaranty and suretyship ........................................ 219 7. Where party binds himself solidarily with principal debtor ........................................................................ 219 8. Nature of surety’s undertaking ...................................................... 220 9. Guaranty distinguished from suretyship ..................................... 225 10. Guarantor not insurer of debt guaranteed ................................... 227 11. Terminology used by parties not controlling ............................... 228 12. Guaranty and indorsement distinguished ................................... 231 13. Guaranty and warranty distinguished ......................................... 232

Article 2048 ..................................................................................................... 232 1. Guaranty generally gratuitous ....................................................... 232

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2. Cause of contract of guaranty ........................................................ 232

Article 2049 ..................................................................................................... 234 1. Married woman as guarantor ........................................................ 234

Article 2050 ..................................................................................................... 235 1. Guaranty undertaken without knowledge of debtor ................. 235 2. Rights of third person who pays .................................................... 235

Article 2051 ..................................................................................................... 236 1. Guaranty by reason of origin ......................................................... 236 2. Double or sub-guaranty .................................................................. 236

Article 2052 ..................................................................................................... 236 1. Necessity of valid principal obligation ......................................... 237 2. Guaranty of voidable, unenforceable, and natural obligations ............................................................ 239

Article 2053 ..................................................................................................... 240 1. Guaranty of future debts ................................................................. 240 2. Guaranty of conditional obligations ............................................. 243

Article 2054 ..................................................................................................... 243 1. Guarantor’s liability cannot exceed principal obligation ........... 244 2. Principal’s liability may exceed guarantor’s obligation ................................................................................... 245

Article 2055 ..................................................................................................... 245 1. Guaranty not presumed .................................................................. 246 2. Reason for the rule ........................................................................... 246 3. Guaranty covered by the Statute of Frauds ................................. 247 4. Guaranty strictly construed ............................................................ 247 5. Strictissimi juris rule applicable only to accommodation surety ........................................................ 255 6. Rule of strict construction not applicable to compensated sureties .......................................................... 255 7. Extent of guarantor’s liability ........................................................ 258 8. Liability of guarantor for judicial costs ......................................... 259 9. Acceptance of guaranty by creditor and notice thereof to guarantor ................................................................. 259

Articles 2056-2057 .......................................................................................... 263 1. Qualifi cations of guarantor ............................................................. 263 2. Effect of subsequent loss of required qualifi cations .................... 264 3. Selection of guarantor ...................................................................... 265

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Chapter 2. — Effects of GuarantySection 1. — Effects of Guaranty Between the Guarantor

and the Creditor

Article 2058 ..................................................................................................... 267 1. Right of guarantor to benefi t of excussion or exhaustion ......... 267 2. Right of creditor to secure judgment against guarantor prior to exhaustion ................................................. 268

Article 2059 ..................................................................................................... 269 1. Exceptions to benefi t of excussion ................................................. 269 2. Exceptions provided in Article 2059 .............................................. 270

Articles 2060-2061 .......................................................................................... 271 1. Duty of creditor to make prior demand for payment from guarantor ................................................... 271 2. Duty of guarantor to set up benefi t of excussion ........................ 272 3. Duty of creditor to resort to all legal remedies ............................ 272 4. Joinder of guarantor and principal as parties defendant .......... 273

Article 2062 ..................................................................................................... 273 1. Procedure when creditor sues ........................................................ 273

Articles 2063 ................................................................................................... 274 1. Effects of compromise ..................................................................... 274

Article 2064 ..................................................................................................... 275 1. Sub-guarantor’s right to excussion ............................................... 275

Article 2065 ..................................................................................................... 276 1. Benefi t of division among several guarantors ............................. 276 2. Benefi t of excussion among several guarantors .......................... 278

Section 2. — Effects of Guaranty Between the Debtor and the Guarantor

Article 2066 ..................................................................................................... 279 1. Guaranty, a contract of indemnity ................................................. 279 2. Exceptions to right to indemnity or reimbursement................... 281

Article 2067 ..................................................................................................... 282 1. Guarantor’s right to subrogation ................................................... 282

Article 2068 ..................................................................................................... 285 1. Effect of payment by guarantor without notice to debtor ......... 286

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Article 2069 ..................................................................................................... 286 1. Effect of payment by guarantor before/after maturity .............. 286

Article 2070 ..................................................................................................... 287 1. Effect of repeat payment by debtor ............................................... 287

Article 2071 ..................................................................................................... 287 1. Right of guarantor to proceed against debtor before payment ......................................................................... 288 2. Remedy to which guarantor entitled ............................................ 288 3. Suit by guarantor against creditor before payment .................... 289 4. Article 2066 and Article 2071 distinguished ................................. 289 5. Recovery by surety against indemnitor even before payment ......................................................................... 292

Article 2072 ..................................................................................................... 293 1. Guarantor of a third person at request of another ...................... 293

Section 3. — Effects of Guaranty as Between Co-guarantors

Article 2073 ..................................................................................................... 294 1. Right to contribution of guarantor who pays .............................. 294

Article 2074 ..................................................................................................... 295 1. Defenses available to co-guarantors .............................................. 296

Article 2075 ..................................................................................................... 296 1. Liability of sub-guarantor in case of insolvency of guarantor ............................................................................... 296

Chapter 3. — Extinguishment of Guaranty

Article 2076 ..................................................................................................... 298 1. Causes of extinguishment of guaranty ......................................... 298 2. Material alteration of principal contract ....................................... 299

Article 2077 ..................................................................................................... 302 1. Release by conveyance of property ............................................... 302

Article 2078 ..................................................................................................... 302 1. Release of guarantor without consent of others .......................... 302

Article 2079 ..................................................................................................... 303 1. Release by extension of term granted by creditor to debtor ................................................................. 303

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Article 2080 ..................................................................................................... 308 1. Release when guarantor cannot be subrogated ........................... 308

Article 2081 ..................................................................................................... 313 1. Defenses available to guarantor against creditor ........................ 313

Chapter 4. — Legal and Judicial Bonds

Article 2082 ..................................................................................................... 314 1. Meaning and form of bond ............................................................. 314 2. Qualifi cations of personal bondsman ........................................... 314 3. Nature of bonds ................................................................................ 315

Article 2083 ..................................................................................................... 315 1. Pledge or mortgage in lieu of bond ............................................... 315

Article 2084 ..................................................................................................... 315 1. Bondsman not entitled to excussion.............................................. 315 2. Effect of negligence of creditor ....................................................... 315

VIPLEDGE

(Arts. 2085-2123.)

Chapter 1. — Provisions Common to Pledge and Mortgage

Articles 2085-2087 .......................................................................................... 317 1. Defi nition of pledge ......................................................................... 318 2. Kinds of pledge ................................................................................ 318 3. Characteristics of the contract ........................................................ 318 4. Cause or consideration in pledge .................................................. 318 5. Essential requirements of pledge and mortgage ......................... 319 6. Constituted to secure fulfi llment of a principal obligation ........ 319 7. Constituted by the absolute owner ............................................... 320 8. Property pledged or mortgaged .................................................... 321 9. Pledgor or mortgagor has free disposal of property or has legal authority .......................................... 324 10. Thing pledged or mortgaged may be alienated .......................... 325 11. Creditor not required to sue to enforce his credit ....................... 325 12. Pledgor or mortgagor may be a third person .............................. 326 12. Pledge and real mortgage distinguished ...................................... 329

Article 2088 ..................................................................................................... 330 1. Right of creditor where debtor fails to comply with his obligation .................................................................... 330

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2. Prohibition against pactum commissorium ..................................... 331 3. Prohibition refers to stipulation authorizing automatic appropriation .......................................................... 334 4. Permissible stipulations .................................................................. 334 5. Risk of loss of property pledged or mortgaged ........................... 339

Articles 2089-2090 .......................................................................................... 340 1. Pledge or mortgage indivisible ...................................................... 340 2. Exceptions to rule of indivisibility ................................................. 341 3. Foreclosure of mortgage constituted on several properties ...... 343 4. Where real mortgage and chattel mortgage in one instrument...................................................................... 344

Article 2091 ..................................................................................................... 344 1. All kinds of obligations can be secured by pledge or mortgage ............................................................. 344Article 2092 ..................................................................................................... 344 1. Promise to constitute pledge or mortgage creates no real right .................................................................. 345 2. Criminal responsibility of pledgor or mortgagor ....................... 345

Chapter 2. — Provisions Applicable Only to Pledge

Article 2093 ..................................................................................................... 346 1. Transfer of possession essential in pledge .................................... 346 2. Type of delivery depends upon nature of thing pledged ......... 347Articles 2094-2095 .......................................................................................... 348 1. Subject matter of pledge .................................................................. 348Article 2096 ..................................................................................................... 349 1. Public instrument necessary to bind third persons ..................... 349

Article 2097 ..................................................................................................... 350 1. Alienation by the pledgor of thing pledged ................................. 350

Article 2098 ..................................................................................................... 352 1. Right of pledgee to retain thing pledged ...................................... 352Article 2099 ..................................................................................................... 353 1. Obligation of pledgee to take due care of thing pledged .......... 353

Article 2100 ..................................................................................................... 354 1. Obligation of pledgee not to deposit thing pledged with another ............................................................... 354

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2. Responsibility of pledgee for acts of his employees or agents ..................................................................................... 354

Article 2101 ..................................................................................................... 354 1. Responsibility of pledgee for fl aws of thing pledged ................. 354

Article 2102 ..................................................................................................... 354 1. Right of pledgee to compensate earnings of pledge with debt .................................................................. 355

Article 2103 ..................................................................................................... 355 1. Right of pledgee against third persons ......................................... 356

Article 2104 ..................................................................................................... 356 1. Obligation of pledgee not to use thing pledged .......................... 356 2. Right of pledgor to ask that thing pledged be deposited ........... 357

Article 2105 ..................................................................................................... 357 1. Right of pledgor to demand return of thing pledged ................ 357

Article 2106 ..................................................................................................... 357 1. Right of pledgor to ask for deposit of thing pledged ................. 358

Article 2107 ..................................................................................................... 358 1. Right of pledgor to substitute thing pledged ............................... 358

Article 2108 ..................................................................................................... 359 1. Right of pledgee to cause sale of thing pledged .......................... 359

Article 2109 ..................................................................................................... 359 1. Right of pledgee to demand substitute or immediate payment ............................................................. 359

Article 2110 ..................................................................................................... 360 1. Extinguishment of pledge by return of thing pledged .............. 360 2. Presumption of extinguishment of pledge ................................... 360

Article 2111 ..................................................................................................... 361 1. Extinguishment of pledge by renunciation or abandonment ... 361

Article 2112 ..................................................................................................... 361 1. Right of pledgee to cause sale of thing pledged .......................... 362 2. Right of pledgee to appropriate thing pledged ........................... 362

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Article 2113 ..................................................................................................... 363 1. Right of pledgor and pledgee to bid at public sale ..................... 363

Article 2114 ..................................................................................................... 363 1. Bid must be for cash......................................................................... 363

Article 2115 ..................................................................................................... 363 1. Effect of sale of thing pledged ........................................................ 364 2. Right of debtor to excess ................................................................. 364 3. Right of creditor to recover defi ciency .......................................... 365

Article 2116 ..................................................................................................... 365 1. Obligation of pledgee to advise pledgor or owner of result of sale ........................................................ 365

Article 2117 ..................................................................................................... 365 1. Right of third person to satisfy obligation .................................... 365

Article 2118 ..................................................................................................... 366 1. Right of pledgee to collect and receive amount due on credit pledged .............................................................. 366

Article 2119 ..................................................................................................... 366 1. Right of pledgee to choose which of several things pledged shall be sold ................................................... 366

Article 2120 ..................................................................................................... 366 1. Right of third person who pledged his own property ................ 367

Articles 2121-2122 .......................................................................................... 367 1. Instances of pledges by operation of law ..................................... 367 2. Rules in cases of pledge by operation of law ............................... 368

Article 2123 ..................................................................................................... 369 1. Rules as to pawnshops and other establishments ....................... 369

VIIREAL MORTGAGE

(Arts. 2124-2131.)Chapter 3. — Mortgage

Article 2124 ..................................................................................................... 370 1. Defi nition of mortgage .................................................................... 370

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2. Characteristics of mortgage ............................................................ 370 3. Possession of property mortgaged ................................................ 371 4. Payment of interest on mortgage credit ........................................ 372 5. Cause or consideration in mortgage ............................................. 373 6. Kinds of mortgage............................................................................ 373 7. Subject matter of mortgage ............................................................. 375 8. Future property cannot be object of mortgage ............................ 376

Article 2125 ..................................................................................................... 377 1. Essential requisites of mortgage .................................................... 377 2. Doctrine of “mortgagee in good faith’’ ......................................... 378 3. Right in case of legal mortgages .................................................... 381 4. Registration of mortgage................................................................. 381 5. Effect of invalidity of mortgage on principal obligation ................................................................................... 384

Article 2126 ..................................................................................................... 384 1. Effect of mortgage ............................................................................ 384

Article 2127 ..................................................................................................... 390 1. Extent of mortgage ........................................................................... 390 2. Stipulation in mortgage contract including after-acquired properties ......................................................... 391 3. Mortgage with dragnet clause to secure future advancements ........................................................................... 392

Article 2128 ..................................................................................................... 395 1. Alienation or assignment of mortgage credit .............................. 395

Article 2129 ..................................................................................................... 395 1. Right of creditor against transferee of mortgaged property ..................................................................................... 396

Article 2130 ..................................................................................................... 396 1. Stipulation forbidding alienation of mortgaged property ..................................................................................... 397 2. Stipulation granting right of fi rst refusal ...................................... 397

Article 2131 ..................................................................................................... 397 1. Laws governing mortgage .............................................................. 398 2. Meaning of foreclosure (of mortgage)........................................... 398 3. Validity and effect of foreclosure ................................................... 398 4. Kinds of foreclosure ......................................................................... 401 5. Judicial foreclosure under the Rules of Court .............................. 401 6. Extrajudicial foreclosure under Act No. 3135 .............................. 403 7. Right of mortgagee to recover defi ciency ..................................... 413

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8. Nature of judicial foreclosure proceeding .................................... 415 9. Nature of power of foreclosure by extrajudicial sale .................. 416 10. Stipulation of upset price in mortgage contract void ................. 421 11. Effect of inadequacy of price in foreclosure sale ......................... 421 12. Waiver of security by mortgagee ................................................... 423 13. Foreclosure retroacts to date of registration of mortgage .......... 425 14. Meaning of redemption (of foreclosed property) ....................... 426 15. Kinds of redemption ........................................................................ 426 16. Equity of redemption....................................................................... 427 17. Right of redemption ......................................................................... 428 18. Confi rmation by court of auction sale in judicial foreclosure ................................................................................. 433 19. Nature of mortgagor’s right of redemption ................................. 435 20. Requisites for valid redemption..................................................... 438 21. Payment of redemption money ..................................................... 440 22. Amount payable ............................................................................... 441 23. Rights of persons with subordinate interest ................................ 444 24. Equity of redemption in judicial foreclosure ............................... 447 25. Persons entitled to exercise right of redemption ......................... 449 26. Registration of transfer of right of redemption ........................... 450 27. Rights and obligations of mortgagee in possession .................... 451 28. Vendee’s right to possession of mortgaged property sold ......... 453 29. Right of purchaser to writ of possession ...................................... 454 30. Right before lapse of redemption period ...................................... 455 31. Right after lapse of redemption period ......................................... 456 32. Issuance of writ before lapse of redemption period ................... 461 33. Where rights of third persons involved ........................................ 464

VIIIANTICHRESIS

(Arts. 2132-2139.)

Chapter 4. — Antichresis

Article 2132 ..................................................................................................... 473 1. Defi nition of the contract of antichresis ........................................ 473 2. Characteristics of the contract ........................................................ 473 3. Delivery of property ........................................................................ 474 4. Right of creditor to the fruits .......................................................... 474 5. Obligation to pay interest not essential ........................................ 474 6. Antichresis and pledge compared ................................................. 475 7. Antichresis and real mortgage compared .................................... 475 8. Application of the fruits to interest and then to principal................................................................................. 476Article 2133 ..................................................................................................... 477 1. Measure of application of fruits to interest and principal ......... 477

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Article 2134 ..................................................................................................... 477 1. Form of the contract ......................................................................... 477

Article 2135 ..................................................................................................... 477 1. Obligations of the antichretic creditor .......................................... 478

Article 2136 ..................................................................................................... 478 1. Right of antichretic debtor to reacquire enjoyment of property ............................................................. 479

Article 2137 ..................................................................................................... 479 1. Remedy of creditor in case of nonpayment of debt .................... 479 2. Acquisition by creditor of property by prescription ................... 480

Article 2138 ..................................................................................................... 480 1. Interest in antichresis subject to the Usury Law .......................... 480

Article 2139 ..................................................................................................... 481 1. Applicability of certain articles ...................................................... 481

IXCHATTEL MORTGAGE

(Arts. 2140-2141.)

Chapter 5. — Chattel Mortgage

Article 2140 ..................................................................................................... 482 1. Defi nition of chattel mortgage ....................................................... 482 2. Characteristics of chattel mortgage ............................................... 483 3. Chattel mortgage and pledge distinguished ................................ 483 4. Similarities between chattel mortgage and pledge ..................... 484

Article 2141 ..................................................................................................... 484 1. Laws governing chattel mortgage ................................................. 484 2. Offenses involving chattel mortgage ............................................ 485 3. Applicability of provisions on pledge ........................................... 485 4. Subject matter of chattel mortgage ................................................ 486 5. Mortgage of improvements on land .............................................. 489 6. No absolute criterion between personal and real property ...... 490 7. Subject matter to be described and identifi ed .............................. 490 8. Extent of chattel mortgage .............................................................. 491 9. Chattel mortgage of after-incurred obligations ........................... 493 10. Creation of a chattel mortgage ....................................................... 493 11. Period within which registration should be made ...................... 494 12. Effect of registration ......................................................................... 494

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13. Registration of assignment of mortgage not required ................ 495 14. Duty of Register of Deeds ministerial ........................................... 496 15. Affi davit of good faith required ..................................................... 496 16. Right of redemption ......................................................................... 498 17. Right acquired by second mortgagee and subsequent purchaser .............................................................. 499 18. Right of mortgagee to possession .................................................. 499 19. Foreclosure of chattel mortgage ..................................................... 503 20. Period to foreclose mortgage .......................................................... 504 21. Civil action to recover credit .......................................................... 505 22. Ordinary action to recover possession of chattel ........................ 505 23. Action for replevin as a remedy ..................................................... 506 24. Right of mortgagee to recover defi ciency ..................................... 508 25. Application of proceeds of sale ...................................................... 510

XCONCURRENCE AND PREFERENCE OF CREDITS

(Arts. 2236-2251.) 1. Features of Title XIX of the Civil Code .......................................... 511 2. Scope of Title XIX ............................................................................. 511 3. Meaning of concurrence of credits ................................................ 512 4. Meaning of preference of credit ..................................................... 512 5. Nature and effect of preference ...................................................... 512 6. When rules on preference of credits applicable ........................... 513 7. Preference of credit and lien distinguished .................................. 514 8. Credits must be due ......................................................................... 514

Chapter 1. — General Provisions

Article 2236 ..................................................................................................... 515 1. Liability of debtor’s property for his obligations ........................ 515 2. Exempt property .............................................................................. 515

Article 2237 ..................................................................................................... 518 1. Insolvency governed by special laws ............................................ 518Article 2238 ..................................................................................................... 519 1. Exemption of conjugal partnership or absolute community property ................................................................ 519Article 2239 ..................................................................................................... 519 1. Rule involving undivided share or interest of a co-owner ............................................................................. 520

Article 2240 ..................................................................................................... 520 1. Rule involving property held in trust ........................................... 520

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Chapter 2. — Classifi cation of Credits

Article 2241 ..................................................................................................... 521 1. General categories of credit ............................................................ 522 2. Preferred credits with respect to specifi c movable property ..................................................................... 523 3. Wrongful taking of movables to which lien attaches .................. 523

Article 2242 ..................................................................................................... 524 1. Preferred credits with respect to specifi c immovable property ................................................................ 525 2. Unpaid price of real property sold ................................................ 525 3. Recorded mortgage credits ............................................................. 526 4. Credits annotated in virtue of judicial order................................ 528 5. Refectionary credit ........................................................................... 528

Article 2243 ..................................................................................................... 528 1. Nature of claims or credits in Articles 2241 and 2242 ................ 529

Article 2244 ..................................................................................................... 532 1. Order of preference with respect to other properties of the debtor ........................................................... 534 2. Order of priority only with respect to insolvent’s “free property” .......................................................................... 534 3. Preference of claims for unpaid wages and other monetary claims...................................................... 535 4. Preference of credits evidenced by public instruments and fi nal judgments ........................................... 540 5. Statutory preferences not applicable to the Government ......... 541

Article 2245 ................................................................................................... 543 1. Non-preferred or common credits ................................................. 543 2. Insolvency proceedings involving banks ..................................... 543

Chapter 3. — Order of Preference of Credits

Articles 2246-2250 .......................................................................................... 547 1. Concurrence of credits with respect to same specifi c property ....................................................................... 547 2. Two-tier order of preference ........................................................... 548 3. Proceeding for payment pro rata of preferred creditors ............................................................... 549

Article 2251 ..................................................................................................... 552 1. Satisfaction of other credits ............................................................. 552

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APPENDICES

1. Discontinuance of the Spanish Mortgage System ....................... 555 2. Extrajudicial Foreclosure of Real Estate Mortgage ..................... 558 3. Judicial Foreclosure of Real Estate Mortgage .............................. 569 4. Judicial and Other Legal Notices ................................................... 572 5. The Chattel Mortgage Law ............................................................. 581 6. The Ship Mortgage Decree of 1978 ................................................ 589 7. Registration of Mortgages ............................................................... 603 8. The Truth in Lending Act ................................................................ 612 9. Rules and Regulations Implementing the Truth in Lending Act ............................................................................... 615 10. The Consumer Act of the Philippines ........................................... 621 11. Pawnshop Regulation Act .............................................................. 630 12. Financing Company Act ................................................................. 636Index .................................................................................................................. 637Case Index ......................................................................................................... 663

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De LEON - Comments & Cases on Credit Transactions

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