Mickey Ingles CredTrans Notes 1

+ Ad Majorem Dei Gloriam

Security and Credit Transactions

Mickey Ingles Ateneo Law 2012 Librat

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SECURITY & CREDIT TRANSACTIONS INTRODUCTION Meaning and scope of credit transactions Credit transactions include all transactions involving the

o Purchase or loan of goods, services, or money in the present o With a promise to pay or deliver in the future

Credit transactions are really contracts of security. Two types:

o Secured transactions or contracts of real security Supported by a collateral or an encumbrance of

property Pledge, mortgage, antichresis, etc

o Unsecured transactions or contracts of personal security Secured or supported only by a promise to pay or the

personal commitment of another Guarantor or surety

Meaning and kinds of security Security is something given, deposited, or serving as a means to ensure

the fulfillment or enforcement of an obligation or of protecting some interest in property

Meaning of bailment Delivery of property of one person to another in trust for a specific

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

It may be created by a contractual relation or by operation of law Parties in bailment Bailor – the giver, the one who delivers the possession of the thing

bailed Bailee – the recipient, the party who receives the possession or custody

of the thing delivered Kinds of contractual bailment 1. For the sole benefit of the bailor

Gratuitous deposit, mandatum 2. Sole benefit of the bailee

Commodatum and gratuitous simple loan or mutuum 3. Benefit of both parties

Deposit for a compensation, involuntary deposit, pledge, bailments for hire

1. The first two kinds are gratuitous bailments, really no consideration. 2. The last one involves business transactions, also known as mutual-

benefit bailments. 3. But in all cases, 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 therefore.

What are bailments for hire? They arise when goods are left with the bailee for some use or service

by him Always for some compensation

o Hire of things (locatio rei) – where goods are delivered for the temporary use of the hirer (lease)

o Hire for service (locatio operas faciendi) – where goods are delivered for some work or labor upon itby the bailee (contract for a piece of work)

o Hire for carriage of goods (locatio operas mercium vehendarum) – where goods are delivered either to a common carrier or to a private person for the purpose of being carried from place to place

o Hire for custody (locatio custodiae) – where goods are delivered for storage

I – LOAN GENERAL PROVISIONS Art 1933 By the contract of loan, one of the parties 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 commodatum; or money or other consumable thing, upon the condition 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.




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Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Characteristics of the loan contract 1. Real (delivery of thing loaned is necessary for the perfection of the

contract) 2. Unilateral (once the subject matter has been delivered, it creates

obligations on the part of only the borrower) Kinds of loan 1. Commodatum

Bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter ay use it for a certain time and return the identical thing

2. Simple loan or mutuum 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. What’s the difference between a loan and credit? The credit of an individual means his ability to borrow money or things

by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period

A loan means the delivery by one party and receipt by another of a given sum or money other consumable thing, which has to be repaid.

The concession of a credit necessarily involves the granting of ‘loans’ up to the limit of the amount fixed in the ‘credit’.

What’s the difference between a loan and discounting of paper?

Loan Discount Interest taken at the expiration

of a credit Single-named paper Loaned P1000 at 16% interest,

borrower would pay P1,160 at

Interest is deducted in advance Double-named paper Loaned P1000 at 16% interest,

borrower gets P840 but would

the end of the year pay back P1000 at the end of the year

What’s the difference between a commodatum and a mutuum? Commodatum Mutuum Object Ownership Consideration Obligation Property Purpose Demand Loss

Not consumable Retained by lender Gratuitous Borrower must return

the same thing loaned Real or personal Use or temporary

possession Bailor may demand the

return of the thing loaned before the expiration of the term in case of urgent need

Suffered by the bailor

Money or other consumable thing

Transferred to borrower Gratuitous or onerous,

with stipulation of interest

Need only pay the same amount of same kind and quality

Personal Loan for consumption Lender may not

demand its return before the lapse of the term agreed upon

Suffered by the

borrower even if caused exclusively by a fortuitous event and he is not discharged from his duty to pay

Kinds of commodatum 1. Ordinary 2. Precarium (bailor may demand the thing loaned at will) Art 1934 An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the




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commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. Delivery is essential to perfection of loan Delivery is necessary in view of the purpose of the contract which is to

transfer either the use or ownership of the thing loaned. But, an accepted promise to lend also has binding effects. An accepted promise to make a future loan is a consensual contract,

and binding upon the parties but it is only after delivery, will the real contract of loan arise.

o If an application for a loan of money was approved 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. (In this case, the money had yet to be given)

o A lender gives a check to the borrower for a loan. The borrower mortgages his house. But the borrower has not encashed or deposited the check, there is no real contract still, as there is a need to encash the check to effect payment, according to the Civil Code. So lender cannot foreclose the mortgage (Naguiat case)

CHAPTER TWO COMMODATUM SECTION ONE – NATURE OF COMMODATUM Art 1935 The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. Commodatum is essential gratuitous. The contract ceases to be a commodatum if any compensation is to be

paid by the borrower who acquires its use. o In such a case, there arises a lease contract

Extent of bailee’s right of use Right to use is limited to the thing loaned

o Not to its fruits unless there is a stipulation to the contrary (Art 1940)

o As the owner of the thing loaned, the bailor is naturally entitled to its fruits

What’s the purpose of a commodatum anyway? The purpose must be temporary use of the thing loaned.

o If the bailee is not entitled to the use of the thing, the contract may be a deposit (Art 1962)

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 1936 Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Art 1937 Movable or immovable property may be the object of commodatum. General rule: Subject matter of commodatum is generally non-

consumable, whether real or not. o Exception: Consumable goods may be the subject, when it is

merely for exhibition. o Oversized bottle of mango juice (gasgas na yung wine

example eh.) borrowed by a museum. The bottle of mango juice was actually owned by Jose Rizal.

Example of a commodatum involving real property A person allowed another to build a mixed martial arts gym on the

former’s land so that the latter may use the property for a certain period without any payment of rentals

Art 1938 The bailor in commodatum need not be the owner of the thing loaned. Bailor need not be owner Bailor need not be the owner of the thing loaned since by the loan,

ownership does not pass to the borrower. The borrower may not lend nor lease the thing loaned to him to a third

person.




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Sufficient that 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 (?)

Art 1939 Commodatum is purely personal in character. Consequently: 1. The death of either the bailor or the bailee extinguishes

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.

Purely personal nature of a commodatum Unlike mutuum, commodatum is a purely personal contract, the lender

having in view the character, credit, and conduct of the borrower. Hence, the general rule: the death of either party terminates the contract

o Exception: Unless by stipulation, the commodatum is transmitted to the heirs of either or both parties.

o NB: If there are two or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contrary

This article is an exception to the general rule that all rights acquired in virtue of an obligation are transmissible.

Right of bailee to lend thing loaned to third persons General rule: Bailee can neither lend nor lease the object of the contract

to a third person, in absence of some understanding or agreement to that effect.

o Exception: The use of the thing loaned may extend to the members of the bailee’s household (those who live in the same home)

Exception to the exception: There is a stipulation to the contrary, or The nature of the thing forbids such use.

Art 1940 A stipulation that the bailee may make use of the fruits of the thing loaned is valid. General rule: In commodatum, the bailor gets the fruits of the thing

loaned.

o Exception: When there is a stipulation that the bailee may also make use of the fruits of the thing.

SECTION II – 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. Bailee liable for ordinary expenses Borrower is liable for the expenses for the use and preservation of the

thing loaned. o Example: Draco borrows Mr. Weasley’s car. He must pay for

the gasoline, motor oil, washing, greasing and spraying. Draco can’t demand reimbursement.

As a rule, the borrower must take good care of the thing with the diligence of a good father of a family.

As to extraordinary expenses, check 1949 Art 1942 The bailee is liable for the loss of thing, even if 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 commodatum has been constituted;

3. If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

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.

Liability for loss of thing loaned General rule: Bailee is not liable for loss or damage due to a fortuitous

event. (Because bailor retains the ownership of the thing loaned) o Exception: 5 instances in Article 1942




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Art 1943 The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. Bailor Liable for deterioration of thing loaned 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. Art 1944 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 Art 1951. Obligation to return thing loaned General rule: Bailee must return the thing loaned, even if bailor owes

him for expenses – whether ordinary or extraordinary. o Exception: If he has a right of retention for damages against

the bailor because of the flaws of the thing loaned (Art 1951). Art 1945 When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. The law presumes that the bailor takes into account the personal

integrity and responsibility of all the bailees and that he would not have constituted the commodatum if there were only one bailee.

SECTION III – OBLIGATIONS OF THE BAILOR Art 1946 – The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In case of temporary use by the bailor, the contract of commodatum is suspended while thing is in the possession of the bailor. Bailor’s obligation to respect duration of loan General rule: Bailor can’t demand return thing loaned until

1. After the expiration of the period stipulated, or 2. After the accomplishment of the use for which the

commodatum has been constituted Exception: Bailor can demand return of the thing when:

1. He should have an urgent need of the thing 2. Borrower commits an act of ingratitude (Art 1948)

Art 1947 – The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

1. If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

2. If the use of the thing is merely tolerated by the owner. What’s a precarium? Kind of commodatum where the bailor may demand the thing at will. Precarium in the following cases:

1. No duration of the contract 2. No use of thing to be devoted has been stipulated 3. Use of the thing is merely tolerated by the owner

Art 1948 The bailor may demand the immediate return of the thing if the bailee commits any acts of ingratitude specified in Art 765. Right of bailor to demand return of thing for acts 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.

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 notification cannot be awaited without danger. 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.




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Article covers extraordinary expenses Preservation of the thing loan Arising from the actual use of thing loaned

Preservation for the thing loaned General rule: Expenses shall be borne by the bailor. As a rule, notice is

required because it is possible that the bailor may not want to incur the extraordinary expenses at all.

o Exception to the NOTICE rule: When the expenses are so urgent that the reply to the notification cannot be awaited without danger

Arising from the actual use of the thing General rule Such expenses (caused by fortuitous event) arising on the

occasion of the actual use of the thing loaned shall be borne by both on a 50-50 basis.

o Exception: 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.

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 reimbursment. Expenses for ostentation are to be borne by the bailee because they are

not necessary for the preservation of thing. Art 1951 The bailor, who, knowing the flaws 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. Liability to pay damages for known hidden flaws Requisites for Art 1951 to apply:

1. There is a hidden flaw or defect in the thing loaned 2. Bailor is aware of it 3. Does not advise the bailee of the same 4. Bailee suffers damages by reason of said flaw or defect

The bailee is given the right of retention until he is paid damages. Where the defect is not known to the bailor, he is not liable because

commodatum is gratuitous.

Art 1952 The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. Summary: Who pays what? Bailee pays for:

o Ordinary expenses for the use and preservation of the thing o Half of the extraordinary expenses arising from actual use of

the thing (unless stipulated otherwise) o Not necessary for the preservation of the thing

Bailor pays for: o Deterioration of the thing loaned o Extraordinary expenses for the preservation of the thing loaned o Half of the extraordinary expenses arising from the actual use

of the thing (unless stipulated otherwise) CHAPTER TWO SIMPLE 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. What’s a simple loan or mutuum? 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.

Involves the return of the equivalent only and not the identical thing Borrower acquires ownership Object: Money or any other fungible thing No criminal liability for failure to pay

oo No estafa is committed by a person who refuses to pay his debt or denies its existence

Simple loan distinguished from contract of rent

Simple loan Contract of Rent Delivery of money or some

other consumable thing, with promise to repay an equivalent amount

One delivers to another some non-consumable thing in order that the latter may use it during a certain period and return it to




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Relation is that of obligor and

obligee Creditor receives payment

the former. Owner or lessor does not lose his ownership

Relation is that of landlord and tenant

Owner receives compensation Meaning of fungible things Those which are usually dealt with by number, weight or measure Any given unit or portion is treated as equivalent of any other unit or

portion Depends upon the intention of the parties (compared to consumable

which depend upon the nature of the thing itself) 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 barter. Barter is a contract whereby one of the parties bind himself to give one

thing in consideration of the other’s promise to give another thing. Commodatum and Mutuum Barter

Subject matter: Money or any other fungible thing

Commodatum: Bailee bound to return the identical thing

May be gratuitous (mutuum) Always gratuitous

(commodatum)

Non-fungible (non-consumable) thing

Equivalent thing is given in return for what has been received

Onerous contract

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 money, the debtor owes another thing of the same kind, quantity 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. Form of payment Loan of money

o Payment must be made in the currency stipulated, if possible to deliver such currency

o Otherwise, it is payable in the currency which is legal tender in the Philippines

o In case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of the creation of the obligation

Draco borrowed from Harry P500 payable after five years. On the maturity of the obligation, the value of P500 dropped to P250 because of inflation. In this case, the basis of payment shall be the equivalent value of the currency today five years ago. Hence, D is liable to pay P1000 unless there is an agreement to the contrary. Consumable or fungible

o The borrwer is under obligation to pay the lender another thing of the same kind, quality and quantity

o In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan

Draco borrowed from Harry two sacks of rice of a certain kind and quality. At the time the loan was perfected, the price of each sack was P400. Draco should return to Harry two sacks of rice of the same kind and quality although at the time of the payment, the price had increase to P500. If on the due date of the obligation, the same kind or rice could not be delivered by Draco because it was not available for some reason, then Draco should pay Harry the sum of P800 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. Requisites for recovery of interest 1. Payment of interest must be expressly stipulated 2. Agreement must be in writing 3. Interest must be lawful Existence of stipulation to pay interest 1. If a particular rate of interest has been expressly stipulated by the

parties, that interest shall be applied.




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2. If the exact rate of the interest is not mentioned, the legal rate of 12% shall be payable. In this case, interest was stipulated upon, but the parties just didn’t

say at what rate.

General rule: No interest unless it has been expressly stipulated in writing.

Exception: Liability for interest comes in even in the absence of stipulation when: 1. Indemnity for damages 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)

o Applicable only where interest has been stipulated by the parties

o Art 2212 contemplates the presence of stipulated or conventional interest which has accrued when demand was judicially made

o In cases where no interest has been stipulated by the parties, no accrued conventional interest could further earn interest upon judicial demand

See Usury part for the interest computations. Doctrines on interests No increase in interest shall be due unless such increase has also been

expressly stipulated. 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 Art 1956. Therefore, the obligor is not liable for the interest except only the legal interest (6% since not loan or forbearance) under Art 2209 on the amount due in case of delay.

It is only in contracts of loan, with or without security, that interest may be stipulated and demanded.

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.

Escalation clauses cannot depend solely on the will of a creditor. They should always be a reference rate upon which to peg such variable

interest rates and there must always be a de-escalation clause stipulated.

Banks aren’t required to pay interests at the time they were prohibited by the Central Bank. (Overseas Bank and Ramos v CB cases)

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. Parol evidence is admissible to show that a written document though

legal in form was in fact a cloak or device to cover usury A usurious contract should not be considered void in its entirety but only

as to the interest involved The whole interest is void, not just the balance above the lawful interest.

(Borrower may recover ENTIRE interest)

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 payment. Determination of interest payable in kind Appraised the current price at the time and place of payment Draco borrowed P100 from Harry payable in palay in 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 P50. On the date of the loan, the price increased to P60. In this case, the value of the palay shall be appraised at P60, the price at the time and place of payment.

Art 1959 Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added prinipal, shall earn new interest. When unpaid interest earns interst General rule: Accrued interest (interest due and unpaid) shall not earn

interest except in two instances: o Judicially demanded as provided for in Art 2212




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o Express stipulation made by the parties that the interest due and unpaid shall be added to the principal obligation and the resulting total amount shall earn interest (must be in writing)

See Usury part for clearer explanations. Art 1960 If the borrower pays interest when there has been no stipulation therefore, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. If unstipulated interest is paid by mistake, the debtor may recover as

this would be a case of unjust enrichment. But where the stipulated 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 1961 Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this code. II – THE USURY LAW Suspended by CB Circular 905 While there are no more ceilings on interests, courts can still lower them

if they are iniquitous Elements of usury

1. Loan or forbearance 2. 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 sue of

money or its equivalent 4. The taking or agreeing to take for the use of the loan of something

in excess of what is allowed by law Rules on interests (Eastern Shipping Lines v CA, 1994 and from Atty Lerma’s lecture) 1. When an obligation, regardless of its source, is breached, the

contravenor can be held liable for damages.

2. If obligation consists in the payment of a sum of money (loan, forbearance of money, judgment money)

a. Interest due is what has been stipulated by the parties b. The interest shall earn legal interest from the time of judicial

demand c. If there’s no stipulation, the rate is 12% from default (judicial or

extrajudicial demand) 3. If obligation is not a loan or forbearance of money

a. Interest on the amount of damages awarded may be imposed at the discretion of the court at 6%

b. No interest shall be adjudged on unliquidated claims or damages, except when or until the amount can be established with reasonable certainty

c. Where the amount is established with reasonable certainty, the interest shall begin from the time the claim is made judicially or extrajudicially

d. But when such certainty cannot be so reasonably established the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made

e. The actual base (principal) for the computation of the legal interest shall, in any case, be on the amount finally adjudged.

4. When judgment of court awarding a sum of money becomes final and executory, 12% interest from such until its payment

Examples 1. X sued Y for nonpayment of debt (no stipulation on interest1) no demand letter, only judicial demand 12% 12%

due date filing of case final judgment with demand letter 12% 12% 12%

1 2c applies here, Art 1169




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due date demand filing of case final judgment 2. X sued Y for nonpayment of debt (interest stipulated upon, but no rate specified) 12% 12% 12% + 12%2 12%

due date demand decision final judgment 3. X sued Y for nonpayment of debt (stipulated interest 10%) 10% 10% 10% + 12%3 12%

due date demand final judgment 4. X sued Y for nonpayment of debt (stipulated interest 10% compounded) 10%c 10%c 10%c + 12%c4 12%

due date demand final judgment 5. X sued Y for non-delivery of goods Reasonable certainty of amount No interest no interest 6% 12%

due date demand final judgment No reasonable certainty of amount5 No interest no interest no interest 6% 12%

2 Of the accrued interest at time of demand 3 Of the accrued interest at time of demand 4 Of the accrued interest at time of demand 5 interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained)

due date demand decision (of TC) finality 6. X sued Y for non-delivery of goods (penalty clause of 10% - which is considered “interest”) 10% 10% + 12%6 12%

due date demand judicial demand final judgment 7. X sued Y for a loan (15% interest, 18% penalty clause) 15% 15% 15% 15% 18% 18% 12% of 15%7 12% of 18%8 12%

due date demand letter judicial demand final judgment Check the case of RCBC v Alfa RTW Manufacturing (368 SCRA 611) for a good

explanation of application of charges V-GUARANTY AND SURETYSHIP CHAPTER ONE NATURE AND EXTENT OF GUARANTY Art 2047 By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

6 of the accrued penalty amount at the time of judicial demand 7 12% of the accrued interest at time of judicial demand 8 12% of the accrued penalty charge at the time of judicial demand




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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. Characteristics of the contract 1. Accessory 2. Subsidiary and conditional (takes effect only when the principal debtor

fails in his obligation subject to limitation) 3. Unilateral 4. Requires that the guarantor must be a person distinct from the debtor

because a person cannot be the personal guarantor of himself

Guarantor Surety Liability depends upon an

independent agreement to pay the obligation if the primary debtor fails to do so

Collateral undertaking Secondarily or subsidiarily liable Not bound to know if principal

debtor’s default Often discharged by the mere

indulgence of the creditor of the principal, not liable unless notified of the default of the principal

Binds himself to pay if the principal cannot or unable to pay

Assumes liability as a regular party

Charged as an original promisor Primarily liable (undertakes

directly for the payment without reference to the solvency of the principal)

Held to know every default of his principal

Not be discharged either by the mere indulgence of the creditor or by want of notice of the default of the principal

Binds himself to pay if the principal does not pay

Essence of the obligation of the surety is to pay the creditor without

qualification if the principal debtor does not pay Guarantor does not contract that the principal will pay, but simply that

he is able to do so. Guarantor Indorsement

Contract of security Liability more extensive Warrants the solvency of the

promisor Cannot be sued as promisor

Contract of transfer May be sued as promisor

Guaranty Warranty

Contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party

Undertaking that the title, quality or quantity of the subject matter of a contract is what is has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty

Art 2048 A guaranty is gratuitous, unless there is a stipulation to the contrary. General rule: Guaranty is gratuitous Cause of contract of guaranty Cause of the contract is the same cause which supports the obligation

as to the principal debtor Not necessary to prove any consideration as between the guarantor or

surety and the creitor Consideration which supports the obligation as to the principal debtor is

sufficient consideration to support the obligation of a guarantor or surety Valid despite absence of any direct consideration received by guarantor Art 2049 A married woman may guarantee an obligation without the husband’s consenet, but shall not thereby bind the conjugal partnership, except in cases provided by law. Married woman as guarantor Married woman ordinarily binds only her separate property 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 when the guaranty has redounded to the benefit of the family)

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 apply. Guaranty undertaken without knowledge of debtor




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Guaranty exists for the benefit of the creditor and not for the benefit of the principal debtor who is not a party to the contract of guaranty

Creditor has every right to take all possible measures to secure the payment of his credit

Rights of third person who pays Against the will of the debtor or without the knowledge of the debtor

o He can only recover insofar as the payment has been beneficial to the debtor, AND

o He cannot compel to creditor to subrogate him the creditor’s rights

With knowledge or consent of the debtor o Third person subrogated by virtue of payment to all the rights

which the creditor had against the debtor Draco owes Harry P100. Without the knowledge of Draco, Ginny agrees to guarantee the obligation of Draco. If Ginny pays Harry P100, she can ask reimbursement for P100 from Draco. If P40 had already been paid by Draco, then Ginny is entitle to be reimbursed only P60, that which was beneficial to Draco. Ginny can recover the P40 from Harry who should not have accepted it. Suppose the obligation of Draco is secured by the chattel mortgage of his wand. Payment by Ginny without the knowledge or against the will of Draco does not give Ginny the right to foreclose because Ginny 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 principal debtor, but also in favor of the other guarantor, with the latter’s consent, or without his knowledge, or even over his objection. According to manner of creation: legal, conventional or judicial (one

constituted by decree of court) Paragraph 2 refers to a double or sub-guaranty – not to be confused

with several guarantors (Art 2065 and 2073) Art 2052 A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. A guaranty is an accessory contract Indispensable condition for its existence that there must be a principal

obligation Void principal obligation, void guaranty Article 2052 speaks about a valid obligation, as distinguished from a

void obligation, and not an existing or current obligation o Under Article 2053, a guaranty may also be given as security

for future debts, the amount of which is not yet known o A signatory to a guaranty agreement is liable on a promissory

note for an unpaid loan obtained under that agreement although he did not sign the promissory note

A guaranty may secure the performance of a o Voidable contact o Unenforceable contract o 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 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. Guaranty of future debts – continuing guaranty or suretyship Continuing gurranty or suretyship

o Not limited to a single transaction o Contemplates a future course of dealings, covering a series of

transactions generally for an indefinite time or until revoked o Prospective in its operation o Generally intended to provide security with respect to future

transactions 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

o Ascertained, or o Fixed and demandable




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NB: By no means however is it meant that in all instances a contract of guaranty or suretyship should be prospective in application

o It will only be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved

“Future debts” 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.

Guaranty of conditional obligations If principal obligation is subject to a suspensive condition, the guarantor

is liable only after the fulfillment of the condition. If it is subject to a resolutory condition, the happening of the condion

extinguishes both the principal obligation and the guaranty. i. Draco and Harry are partners in business. Ginny may guarantee the payment by Draco of Harry’s share from the profit of the business which has not yet been ascertained. Under Article 2053, Ginny cannot be liable to Harry before such share is liquidated. ii. Harry sold his land to Draco with Ginny as guarantor for the payment of the purchase price. It was agreed that Harry would give to Ginny the title papers showing that Harry is in fact the owner of the land sold. Draco became insolvent. In this case, Ginny is liable only after the fulfillment of the suspensive condition – the production of the proper papers. iii. Suppose, in ii, Harry was given two months within which to arrange and complete the papers relating to the property with the understanding that in case of failure of Harry to complete the title papers within said period, the contract of sale shall be deemed automatically cancelled. In this case, the fulfillment of the condition subsequent – the failure to complete the title papers within the period – extinguishes the principal obligation of Draco to pay the price as well as Ginny’s guaranty.

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. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. 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.

But a guarantor may bind himself for less than that of the principal. NB: Creditors suing on a surety bond may recover from the surety as

part of their damages: o Interest, at the legal rate

Runs from the filing of the complaint or from the time demand was made upon the surety until the principal obligation is paid

o Judicial costs o Attorney’s fees when appropriate o Even without stipulation and even in surety would thereby

become liable to pay more than the total amount stipulated in the bond

Draco borrowed from Harry P100. If Ginny guarantees to answer for P150, the guaranty is rendered void but she can be made to pay only P100 because her obligation cannot exceed the limits of the principal obligation. If the debt is not secured by a mortgage, and Ginny mortgaged the Burrow in favor of Harry, Harry may not foreclose the mortgage otherewise, Ginny’s liability would be more onerous than that of Draco, the principal debtor. Draco borrowed from Harry P150 with Ginny limiting her guarantee to P100. Draco was able to pay only P100. In this case, Harry can still claim from Ginny the balance of P50 by virtue of the guaranty. This is so because the payment by Draco must be applied first to the unsecured portion of P100 for as regards him, it is more onerous as to the unsecured amount of P50. 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 indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall be




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liable for those costs incurred after he has been judicially required to pay. Guaranty not presumed Guaranty require the expression of const on the part of the guarantor to

be bound. It cannot be presumed because of the existence of a contract or principal obligation.

Guaranty must be in writing. It’s covered by the Statute of Frauds. Guaranty strictly construed, and its consequences Strictly interpreted against the creditor and in favor of the guarantor and

is not to be extended beyond its terms or specified limits 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

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

When liability of surety limited to a fixed period, the surety cannot be bound, unless the contract has been renewed

o Where, however, one of the conditions of the bond filed by the surety provides that the latter’s liability will expire on the date of the maturity of the principal obligation, such stipulation is unfair for it practically nullifies that nature of the surety undertaking

A contract of suretyship or guaranty is only prospective, and not retroactive in operation unless a contrary intent is clearly shown

The extent of a surety’s liability is determined only by the clause of the contract of suretyship

Application of strictissimi juris Applicable only to an accommodation surety, or one who does so

gratuitously Not applicable to compensated sureties Extent of guarantor’s liability Where guaranty definite

o 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

o If the amount to be paid or the service to be performed by the person guaranteed is specified in the contract of guaranty, then

the obligation of the guarantor extends no further than the sum or services so specified

Where guaranty indefinite or simple o If the terms of the contract of guaranty are general and

indefinite and do not specify in clear and express manner that the liability of the guarantor is limited to the principal obligation, 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

o Mickey: So, general rule is that it’s indefinite. Since the it is needed that the terms of the contract be limited for it to be definite. Without a specification that it’s limited, Manresa considers it indefinite. (What do you think?)

Liability of guarantor for judicial costs Guarantor shall answer for such judicial costs only as have been

incurred after he has been judicially required to pay 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 needs to be prescribed because he binds himself to nothing

When necessary o Where there is merely an offer of a guaranty, it does not

become a binding obligation until is accepted and until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or until has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty

o Acceptance need not be in writing When not necessary

o Where the transaction is not merely an offer of guaranty, but it amounts to direct or unconditional promise of guaranty, all that is necessary to make the promise binding is that promisee (creditor) should act upon it, and notice of acceptance is not necessary the reason being that the contract of guaranty is unilateral




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Art 2056 One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient 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. Art 2057 If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. Qualifications of a guarantor 1. Possesses integrity 2. Capacity to bind himself, and 3. Sufficient property to answer for the obligation which he guarantees Of course, the creditor can waive the requirements. Need only be present at the time of the perfection of the contract Subsequent loss of integrity or property or supervening incapacity of the

guarantor would not operate to exonerate the guarantor of the eventual liability he has contracted, and the contract of guaranty continues

o However, the creditor may demand another guarantor with the proper qualifications.

But he may waive it if he chooses and hold the guarantor to his bargain.

Judicial declaration of insolvency is not necessary in order for the creditor to have the right to demand another guarantor

Does a guarantor’s liability extinguish upon his death? The Civil Code contains no provision that the guaranty is extinguished

upon the death of the guarantor or the surety From this article, it is immediately apparent that the supervening

incapacity of the guarantor 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.

o It is his right, not his duty; he may waive it if he choose and hold the guarantor to his bargain.

The contracts of suretyship entered, not being intransmissible, his eventual liability thereunder necessarily passed upon his death to his heirs.

Selection of guarantor Where the creditor has required and stipulated that a specified person

should be a guarantor, the substitution of guarantor may not be demanded.

Guarantor personally designated by the creditor o Where the guarantor is personally designated by the creditor, it

is because he considers him to have the qualifications for the purpose, and the responsibility for the selection should, therefore, fall upon him, and not on the debtor.

Guarantor selected by principal debtor o 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 qualifications not only at the moment the guaranty is given, but also until the extinguishment of the debt.

CHAPTER TWO EFFECTS OF GUARANTY SECTION I – EFFECTS OF GUARANTY BETWEEN THE GURANTOR AND THE CREDITOR Art 2058 The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. Right of guarantor to benefit of excussion or exhaustion 1. Guarantor only secondarily liable 2. All legal remedies against debtor must be first exhausted

Includes rescission of fraudulent alienations of property made by the debtor

not applicable to contracts of suretyship Right of creditor to secure judgment against guarantor prior to exhaustion




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General 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. However, the creditor may secure a judgment against the guarantor before the exhaustion of the debtor’s properties. In this case, the guarantor shall be entitled to a deferment of the execution of the judgment against him until after the properties of the debtor have been exhausted. (based on trial convenience) 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 (debtor) has absconded, or cannot be sued within the

Philippines unless he has left a manager or representative; 5. If it be presumed that an execution on the property of the

principal debtor would not result in the satisfaction of the obligation.

Exceptions to benefit of excussion 1. those provided in Art 2059 2. if he does not comply with Art 2060; 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 5. if he fails to interpose it as a defense before judgment is rendered

against him Exceptions provided in 2059 1. Express renunciation 2. Binds himself solidarily, as a surety 3. Insolvency of debtor

Must be proven by unsatisfied writ of execution Judicial declaration of insolvency not enough

4. Debtor absconds or cannot be locally sued 5. Resort to all legal remedies would be a useless formality

If such judicial actions including execution would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such remedies

Art 2060 In order that the guarantor may make use of the benefit 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 debtor within Philippine territory, sufficient to cover the amount of the debt. Art 2061 The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. Duty of creditor to make prior demand for payment from guarantor 1. Demand for payment by the creditor upon the guarantor can be made

only after judgment on the debt. 2. Actual demand must be made.

1. Joining the guarantor in the suit against the principal debtor is not the demand intended by law.

Duty of guarantor to set up benefit of excussion As soon as he is required to pay, the guarantor must

1. Claim the benefit of excussion 2. Also point out to the creditor available property (not in litigation

or encumbered) of the debtor within the Philippines Duty of creditor to resort to all legal remedies 1. Exhaust all the property of the debtor pointed out by the guarantor 2. Resort to all legal remedies against the debtor

If he fails to do so because of negligence, he shall suffer the loss, but only to the extent of the value of said property, for the insolvency of the debtor

3. Creditor must notify the guarantor of the debtor’s inability to pay (Art 2062)

General rule: Guarantor, not being a joint contractor with his principal cannot be sued with his principal. Exception: Adherence to this rule is not required when it would serve merely to delay the accounting of the guarantor.




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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 appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Art 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter. Procedure when creditor sues 1. Creditor must sue principal alone. 2. Notice to guarantor of the action so that he may choose to appear

a. If he appears, he is still given the benefit of exhaustion. Voluntary appearance does not constitute a renunciation of his right to excussion.

b. If he does not appear, he cannot set up the defenses which are allowed to him by law by appearing. It may no longer be possible for him to question the validity of the judgment rendered against the debtor.

3. Hearing before execution an be issued against guarantor a. Where he is not a party in the case involving his principle, the

guarantor is entitled to be heard before an execution can be issued against him.

Art 2063 A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him (guarantor). That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. 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. Debtor owes creditor P100, with Jojo as guarantor. 1. Debtor and creditor agree to reduce debt to P70. Jojo also liable for

P70, as it benefited him. 2. Debtor and creditor agree to increase debt to P130. Jojo only liable for

P100, as it prejudiced him. 3. Creditor and Jojo agree to extend time. Extension also applies to debtor

as it was to his benefit.

4. Creditor and Jojo shortened the period of payment. Not binding to debtor as it prejudiced him.

Art 2064 The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. Sub-guarantors also have a right to excussion, both with respect to the guarantor and to the principal debtor 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 benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. Art 2065 only applies to instances wherein

1. Several guarantors 2. Only one debtor 3. Same debt

Benefit of division among several guarantors 1. General rule: Liability is only joint

Guarantors are not liable to the creditor beyond the shares which they are respectively bound to pay

2. Exception: solidarity, but must be stipulated and those cases in 2059, but with respect to guarantors, not the principal debtor

Draco owes Harry P100. Ginny and Ron are guarantors. 1. Harry can only demand P50 each from Ginny and Ron. 2. If they Ginny and Ron bound themselves solidarily, creditor can hold

either of them liable for P100. Moreover, credtor can demand from Ginny or Ron the entire obligation in cases mentioned in 2059 as where Ginny or Ron has expressly renounced the benefit of division.

Debtor Draco and debtor Dumbledore jointly and severally owe creditor Harry P100. Ginny and Ron are their respective guarantors.




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1. Creditor Harry can hold Ginny and Ron responsible as guarantor for the entire amount of P100. Here, the debtors are distinct and the guarantors are bound by distinct ties to different debtors.

2. If the obligation of Draco and Dumbledore is joint, there are actually two debts – Draco’s debt of P500 and Dumbledore’s debt of P500. Guarantor Ginny cannot demand that the claim of creditor Harry for P500 against Dumbledore be divided between guarantor Ginny and guarantor Ron.

NB. In this example, as Ginny guaranteed for Draco, and Ron guaranteed for Dumbledore, the guarantors are only liable for their respective principal debtors.

Benefit of excussion among several guarantors While it is needed to point out to the creditor the debtor’s available

property in order to set up the guarantor’s benefit of exhaustion, this is not needed for a guarantor to be entitled to the benefit of division.

Obligation of guarantor with 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)

SECTION II – EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR Art 2066 The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises: 1. The total amount of the debt; 2. The legal interests thereon from the time the payment

was made known to the debtor, even though it did not earn interest for the creditor;

3. The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him;

4. Damages, if they are due. Guaranty, a contract of indemnity 1. Total amount of debt (of course, he cannot collect more than what he

paid)

2. Legal interest thereon Starting from the time notice of payment of debt was made known

to the debtor Immaterial that the debt did not earn interest for the creditor Guarantor’s right to legal interest is granted by law

3. Expenses incurred by the guarantor Only those that the guarantor has to satisfy in accordance with law

as a consequence of the guaranty (Art 2055, par 2 - judicial costs, attorney’s fees etc);; not those which depend upon his will or by his fault

Limited to those incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor

4. Damages, if they are due Exceptions to right to indemnity or reimbursement 1. Guaranty constituted without knowledge or against the will of the debtor,

recovery only insofar as the payment has been beneficial to the debtor (Art 2050)

2. Payment by a third person who does NOT intend to be reimbursed by the debtor is deemed a donation, which requires the debtor’s consent. (Art 1238)

3. 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. Guarantor’s right to 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 said, except for the change of person of the creditor by the guarantor, the obligation subsists in all respects as before payment. 1. Right of subrogation is necessary to enable the guarantor to enfore the

indemnity given in Art 2066. a. Arises by operation of law upon payment by the guarantor. b. Not a contractual right




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c. Guarantor is subrogated, by virtue of the payment, to the rights of the creditor, not those of the debtor

If guarantor paid a smaller amount to the creditor by virtue of a compromise, he cannot demand more than he actually paid. Cannot be invoked in those cases where the guarantor has not right to be reimbursed. Art 2068 If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. Effect of payment by guarantor without notice to debtor See codal. 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. NB. Do not confuse this with Art 2050. In that article, no guaranty exists to begin with. Here, there is an existing guaranty relationship and the guarantor goes ahead and pays. Art 2069 If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. Art 2069 applies when:

1. Debt has a period/maturity date 2. Guarantor pays the debt before due date

Effect of payment by guarantor before maturity General rule: Guarantor not entitled to reimbursement since there is no necessity for accelerating payment. He can only demand for reimbursement upon expiration of the period. Exception: If payment is ratified or with consent by the debtor (then the guarantor can demand reimbursement even before maturity) NB: If guarantor pays before due date, the interest does not run even if debtor has been notified.

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, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. Art 2070 applies when:

1. Guarantor pays without notice to debtor 2. Debtor, without knowledge, repeats payment to creditor

General rule: Guarantor’s only remedy is to collect from the creditor. He has no cause of action against the debtor even if the creditor should become insolvent. It’s his fault for not advising the debtor that he was going to pay. Before the guarantor pays the creditor, he must first notify the debtor. Exception: Guarantor may still claim from debtor in spite of lack of notice if the following conditions are present:

1. Guaranty is gratuitous 2. Creditor becomes insolvent 3. Guarantor was prevented by fortuitous even to advise the debtor of

the payment if creditor is solvent, 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 from the

guaranty within a specified period, and this period 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 obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;

6. If there be reasonable grounds to feat that the principal debtor intends to abscond;




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7. If the principal debtor is in imminent danger of becoming insolvent

In all cases, the action of the guarantor is to obtain release from

the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. Right of guarantor to proceed against debtor before payment General rule: The guarantor has no cause of action against the debtor until after the former has paid the obligation (Art 2066) Exception: The seven instances in Art 2071. Here, the guarantor may proceed against the debtor even before payment. 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. NB: In Art 2071 (1), the creditor doesn’t have to be the one to sue the guarantor, as the law does not distinguish. Remedy to which guarantor entitled 1. Obtain release from the guaranty 2. Demand a security that shall protect him from any proceedings by the

creditor, and against the danger of insolvency of the debtor Guarantor cannot demand reimbursement for indemnity because he has

yet to pay the obligation. Remedies are alternative. Guarantor has the right to choose the action

to bring. Remember that there are certain cases when the guarantor cannot

claim the benefit of excussion and in such cases it is but proper that the guarantor be given the right to proceed against the debtor. (?)

Suit by guarantor against creditor before payment Action for release can only be exercised against the principal debtor and

not against the debtor o The creditor is not compellable to release the guarantor before

payment of his credit against his will.

o 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

Absent the creditor’s consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter-guranty as is authorized by 2071.

2066 2071

Provides for enforcement of the rights of the guarantor against the debtor AFTER he has paid the debt

Right of action after payment Substantive right

Provides for protection BEFORE he has paid but AFTER he has become liable

Protective remedy before

payment Preliminary remedy

Recovery by surety against indemnitor even before payment 1. Indemnity agreement for benefit of surety 2. Indemnity agreement may be against actual loss as well as liability

a. Indemnity agreement against loss – indemnitor will not be liable until the person to be indemnified makes payment of sustains loss

b. Indemnity agreement against liability – indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has sufferered actual loss

3. A stipulation in an indemnity agreement providing that the indemniotr shall pay the surety as soon as the latter becomes liable to make payments to the creditor under the terms of the bond, regardless of whether the surety has made payment actually or not, is valid and enforceable. Where the principal debtors are simultaneously the same persons

who executed the indemnity agreement, the position 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.




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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 satisfies the debt may sue either the person so requesting or the debtor for reimbursement. Art 2072 applies when: 1. Person requests a guarantor 2. To guarantee a debt of an absentee Guarantor, after satisfying the debt, can seek reimbursement from: 1. The person who requested, or 2. The debtor SECTION III – 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. Applies when: 1. Several guarantors 2. One debt 3. One guarantor has paid the debt and is seeking reimbursement 4. Payment was made either by

a. In virtue of a judicial demand, or b. Because the principal debtor is insolvent

If any of the guarantors should be insolvent, his share shall be borne by

the others including the paying guarantor in the same proportion. The right of the guarantor who has paid the debt 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

Ginny, Ron and Fred are Draco’s guarantors of a debt of P900 in favor of Harry. If Draco becomes insolvent, the right of Ginny, Ron and Fred to proportionate division of their obligation ceases as far as Harry is concerned (art 2065, 2059). Harry may demand payment of the entire obligation from any of the guarantors. If Ginny pays the whole debt of P900 he can later demand from Ron and Fred P300 each. But if Ron is insolvent, his share shall be borne by Ginny and Fred proportionately. Thus, Ginny can demand from Fred P450. If the benefit of division ceases for reasons other than the insolvency of the principal debtor (Art 2059), the right to reimbursement granted to Ginny against Ron and Fred may only be exercised if Ginny makes payment in virtue of a judicial demand by Harry. 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 principal debtor against the creditor, and which are not purely personal to the debtor. Defenses available to co-guarantors In the action filed 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.

In the example above, if Ginny sues Ron and Fred, the latter may raise the defense of payment by Draco by virtue of which the obligation was extinguished. But if Draco was a minor at the time the obligation was contracted, the defense of minority is not available to Ron and Fred because it is personal to Draco. Art 2075 A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. Liability of sub-guarantor in case of insolvency of guarantor




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In case of the insolvency of the guarantor for whom he bound himself, a sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whom he guaranteed.

In the example above, if Hermione (co-guarantor) is the guarantor of Ron, and Ron becomes insolvent, Hermoine is liable to Ginny for P300 or P450 if Fred is also insolvent. CHAPTER THREE EXTINGUISHMENT OF GUARANTY Art 2076 The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. Causes of extinguishment of guaranty Guaranty being accessory and subsidiary, it is also terminated when the

principal obligation is extinguished. The guaranty itself may be directly extinguished although the principal

obligation still remains as in the case of the release of the guarantor made by the creditor (art 2078)

Material alteration of principal contract Effect of material alteration

o 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

o Such material alteration would constitute a novation or change of the principal contract which is consequently extinguished

When alteration material o 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

o 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

Art 2077 If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. Release by conveyance of property 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, the

guarantor is relieved from responsibility. This is also true even inc ase the creditor is subsequently evicted from the property.

o Eviction revives the principal obligation but not the guaranty. Art 2078 A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. Release of guarantor without consent of others As a rule, the guarantors enjoy the benefit of division. However, if any of them should be insolvent all the other guarantors

must bear his share. So, a release made by 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.

Ginny, Ron and Fred are guarantors for a debt of P900. If Ginny is released without the consent of Ron and Fred, then Ron and Fred will each be liable only for P300. They are benefited to the extent of P300, the share of Ginny. If the release is made with their consent, Ron and Fred will each be responsible for P450. If Ginny is released with the consent only of Ron, Ron is liable for P600, while Fred is liable for P300. 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. Release by extension of the term granted by creditor to debtor 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.




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o Reason: To avoid prejudice to the guarantor. The debtor may become insolvent during the extension, and guarantor loses right to be reimbursed.

With regard to payables in installments and acceleration clauses: o 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.

Draco owes Harry P900, payable by P300 at the end of each month. Ginny guaranteed each month’s payable. Harry granted an extension to Draco for the first month’s payment. Ginny is discharged from liability in the first month’s payment, but not the others.

o But if the whole unpaid balance has become automatically due (acceleration clause), the act of the creditor of extending the payment of said installment, without the guarantor’s consent, discharges the guarantor because the extension constitutes in fact an extension of the payment of the whole amount of the indebtedness.

Of course, the guarantor may waive in advance his right to be notified or to give consent to the release by the creditor of securities given or to the extension of the time of payment.

The benefit of excussion, as well as the requirement of consent to the 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.

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 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.

o 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 first-tier obligors (principal debtor and the surety) cannot prejudice the second-tier parties. (whut?)

It is unimportant whether the extension given has actually proved prejudicial or not to the guarantor or surety.

The extension of the term must be based on some new agreement between the creditor and the principal debtor by virtue of which the creditor deprives himself of his claim.

It should appear that the extension was for a definite period, pursuant to an enforceable agreement between the 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.

o The mere failure or neglect on the part of the creditor to enforce payment as soon as the debt matures, does not constitute an extension of the term of the obligation, meaning the liability of the guarantor is not extinguished.

o The rule applies even if the debtor should become insolvent subsequent to the maturity of the debt. The reason is that the guarantor would not be prejudiced since he could avail himself of the right granted him under Art 2071, namely, to ask the debtor for a release or to demand a security.

Draco owes Harry P900, due on January 31, 2010. Ginny guaranteed the debt. Come February, Harry neglected to demand from Draco. Is Ginny discharged? No.

Supposing Draco becomes insolvent after the debt matured, is Ginny discharged? No. She can, however, ask Draco for a release from the guaranty or demand a security.

The creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, etc in proceeding against the principal debtor, or the fact that he did not enforrce 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.

o Why? There is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of the 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.




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Art 2080 The guarantors, even though they be solidary, 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. Release when guarantor cannot be subrogated The guarantor who pays is entitled to be subrogated to all the rights of

the creditor. 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. (Applies even if guarantors are solidary)

o Why? The act of one cannot prejudice another. It also avoids opportunity for collusion between the creditor and the debtor or a third person

Art 2081 The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are purely personal to the debtor. Defenses available to guarantor against creditor Defenses available to a debt as against a guarantor are provided in Art

2068, and those available to co-guarantors in Art 2074 This article provides for the defenses, except those which are purely

personal to the debtor, that may be interposed by the guarantor as against the creditor

In summary, when is a guarantor discharged from liability? 1. When principal obligation is extinguished (Art 2076) 2. When creditor accepts immovable or other property in payment of the

debt (Art 2077) 3. When creditor releases one of the guarantors (Art 2078) 4. When an extension is granted to the debtor without the consent of the

guarantor (Art 2079) 5. When, by the act of the creditor, they cannot be subrogated to the

rights, mortgages and preferences of the creditor (Art 2080) CHAPTER FOUR LEGAL AND JUDICIAL BONDS

Art 2082 The bondsman who is to be offered in virtue of a provision of law or of judicial order shall the qualifications prescribed in Art 2056 and in special laws. What is a bond? An undertaking that is sufficiently secured, and Not cash or currency Whatever surety bonds are submitted are subject to any objections as

to their sufficiency or as to the solvency of the bondsman Qualifications of personal bondsman A bondsman is a surety offered in virtue of a provision of law or a

judicial order He must qualifications

o Required of a guarantor (Art 2056) o Rules of Court (Sec 12, 13, Rule 114)

Resident owner of real estate within the Philippines Only one surety? His real estate must be worth at

least the amount of the undertaking, and Two or more sureties? They may justify severally in

amounts less than that expressed in the undertaking, if the entire sum justified to is equivalent to the whole amount of bail demanded.

In all cases, every surety must be worth the amount specified in the undertaking over and above all just debts, obligations and property exempt from execution.

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 sufficient to cover his obligation shall be admitted in lieu thereof. Guaranty or suretyship is a personal security. On the other hand, pledge or mortgage is a property or real security. If the person required to give a legal or judicial bond should not be able

to do so, a pledge or mortgage sufficient to cover the obligation shall be admitted in lieu thereof.

Art 2084 A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.




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A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety. A judicial bondsman and the sub-surety are not entitled to the benefit of

excussion. o Because they are not mere guarantors, but sureties whose

liability is primary and solidary. The contract of suretyship is not that the creditor will see that the

principal debtor pays his debt or fulfills his contract, but that the surety will see that the debtor pays or performs.

o So, mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability.

VI PLEDGE CHAPTER ONE 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 fulfillment of a principal obligation;

2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

Art 2086 The provisions of article 2052 are applicable to a pledge or mortgage.

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. What is a pledge? Contract by virtue of which the debtor delivers to the creditor or to a

third person o a movable o or document evidencing incorporeal rights,

for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Kinds of pledge 1. Voluntary or conventional 2. Legal, or created by operation of law Characteristics of the contract of pledge 1. Real contract (perfected by the delivery of thing pledged) 2. Accessory 3. Unilateral (creates an obligation solely on the part of the creditor to

return the thing upon the fulfillment of the principal obligation) 4. Subsidiary (obligation incurred does not arise until the fulfillment of the

principal obligation which is secured) Cause or consideration in pledge If he (pledgor) is the debtor, the cause is the principal obligation If he is not the debtor, the cause is the compensation stipulated for the

pledge or the mere liberality of the pledgor Essential requirements of pledge and mortgage 1. Constituted to secure fulfillment of a principal obligation 2. Constituted by the absolute owner of the thing pledged or mortgaged

1. Or at least by the pledgor or mortgagor with the authority or consent of the owner of the property pledged or mortgaged

2. Why? In anticipation of the foreclosure sale. o Future property cannot be pledged or mortgaged o A pledge or mortgage executed before the pledgor or

mortgagor became the owner of the property is void and ineffective




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o A mortgage of conjugal property by one of the spouses is valid only as to ½ of the entire property

3. Pledgor or mortgagor has free disposal of property or has legal authority Free disposal meaning the property must not be subject to any

claim of a third person Capacity to dispose of property means the pledgor or mortgagor

has the capacity or the authority to make a disposition of the property

o Read with reference to special powers of attorney, since this an act of strict ownership

4. 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 in this delivery

lies the security of the pledge In a contract of mortgage, the mortgagor, as a general rule, retains

the possession of the property mortgaged. 5. Thing pledged or mortgaged may be alienated

You can’t pledge your nephew, no matter how annoying he is What is the doctrine of the mortgagee in good faith? The requirement 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 the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further.

o So if Draco mortgages his land to Harry, and Harry relies on the TCT given by Draco, then the mortgage is valid – even if it turns out that the land wasn’t Draco’s, but is actually Ron’s.

An innocent purchaser for value (like mortgagee) relying on a Torrens system title is protected.

Based on the public interest in upholding the indefeasibility of a certificate of title.

Exception: This rule does not apply to banks (and analogously to the GSIS) which should exercise more care and prudence in dealing with registered lands, than private individuals, for their business is one affected with public interest. The bank must observe due diligence in ascertaining the real owner of the registered land given as security for a loan.

Pledgor or mortgagor may be a third person

Not necessary that the principal debtor should always be the pledgor or mortgagor

As long as valid consent was given by the pledgor or mortgagor, it’s valid, even if no benefit redounded to the pledgor or motgagor

Difference with mortgages/pledges by debtor: Creditor is required to exercise due care and prudence by making

proper inquiry where the debtor borrows money

Pledge Mortgage Movables Property delivered to

pledgee, or by common consent to a third person

Not valid against third persons unless a description of the thing pledged and the date of the pledge appear in a public instrument

Immovables Delivery is not necessary Not valid against third

persons if not registered

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. Creditor is merely entitled to move for the sale of the thing pledged or

mortgaged, with the formalities required by law in order to collect the amount of his claim from the proceeds.

The default does not operate to vest in the pledgee or mortgagee the ownership of the property for any such effect is against public policy.

Pactum commissorium Requisites:

1. There should be a pledge, mortgage, antichresis of property by way of security for the payment of the principal obligation; and

2. There should be a stipulation for an automatic appropriation b the creditor of the property in the event of non-payment of the obligation within the stipulated period

In the event that there is a pactum commissorium, only the stipulation is void, not the principal obligation




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Permissible stipulations Subsequent agreements (like dacion en pago) Cession of property voluntarily I promise to sell (because not necessarily to the creditor)

o But “I promise to sell to you, my creditor” is void Authority to take possession (but not ownership!) Art 2089 A pledge of 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 along as the debt is not completely satisfied. 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 extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. Art 2090 The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. Pledge or mortgage indivisible A pledge or mortgage is one and indivisible as to the contracting parties Rule applies even if the obligation is joint and not solidary

o Divisibility of the principal obligation is not affected by the indivisibility of the pledge or mortgage

Consequences: o Single thing pledged – every portion of the property

pledged or mortgaged is answerable for the whole obligation as soon as it falls due.

o Several things pledged – 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.

o Debtor’s heir/creditor’s heir – the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinction or mortgage; 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 satisfied

Exceptions to the general rule that mortgage or pledge indivisible 1. Where there are several things given in pledge or mortgage and each

one of them guarantees only a determinate portion of the credit As many pledges or mortgages as there are things given in pledge

or mortgage 2. Where only portion of loan was released

Case of Central Bank v CA, 139 SCRA 46 Bank approved a loan for P80k, secured by mortgage of property.

But they only release P17k. SC said they can foreclose 21% of the property.

SC also said that Art 2089 presupposes several heirs of the debtor or creditor. (Atty. Lerma said that it’s a bad decision and that this wasn’t the spirit of the law. SC should have ruled on equity instead..

3. Where there was failure of consideration 4. Where there is no debtor-creditor relationship

Although a mortgage or pledge is indivisible as to the contracting parties, it is not so with respect to a third person who did not take part in the constitution thereof either personally or through and agent.

Indivisibility arises only when there is a debt. 1. Draco borrowed from Harry P200, and to guarantee payment, Draco pledged his broomstick worth P150 and his wand worth P50. If Draco pays P150, he cannot ask for the return of the broomstick because both the broomstick and the wand are given to secure payment of the entire obligation of P200. Harry may cause the sale of either or both for the payment of his credit. The same is true if Draco dies leaving Junior and Bella as his heirs and Junior pays 150 to Harry. If the creditors are Harry and Hermione, and Draco pays P150, Harry cannot return the broomstick to the prejudice of Hermione who has not received her

Quito Nitura

SCPA




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share. The same is true if Harry is the only creditor and he dies leaving Severus and Albus as his heirs and Draco pays Severus P150. However, if it was agreed that the broomstick was given to secure the payment of P150, and the wand for the balance of P50, and Draco (or his heir) pays P150, Draco can demand the return of the ring. (Example of exception 1) 2. Draco and Voldemort are jointly liable to Harry in the sum of P200

secured by Draco’s broomstick and Voldemort’s wand worth P50. If Draco pays P150, he cannot demand the return of the ring even if their liability is only joint or proportionate because pledge is indivisible. Remember children, 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.

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 and not to foreclosure of mortgages.

A mortgage, even if constituted on two or more properties, is one and indivisible, it cannot be divided among the different properties. The mortgagee has the right to have the properties either or both – jointly or singly, sold to satisfy his claim.

What if the real mortgage and chattel mortgage is in one instrument? 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. Mortgagee 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.

Art 2091 The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. Art 2092 A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility 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. 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.

What exists is only a right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet. (But isn’t this an obligation to do, which can not be compelled by specific performance?)

Mickey Ingles CredTrans Notes 1

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