San Beda Reviewer - Credit

7/28/2019 San Beda Reviewer - Credit

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San Beda College of Law182

MEMORYAIDIN CIVIL LAW

CREDIT TRANSACTIONS

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

Contracts of securityTypes:1. Secured transactions or contracts of

real security - supported by acollateral or an encumbrance ofproperty

2. Unsecured transactions or contracts

of personal security- supported onlyby a promise or personalcommitment of another such as aguarantor or surety

Security

Something given, deposited, orserving as a means to ensurefulfilment or enforcement of anobligation or of protecting someinterest in property

Types of Securitya. personal when an individual

becomes surety or guarantorb. real or property when a

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

Bailment

The delivery of property of oneperson to another in trust for a

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

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

property

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

LOAN (Articles 1933 1961)

A contract wherein one of theparties delivers to another, eithersomething not consumable so thatthe latter may use the same for acertain time and return it or moneyor other consumable thing, upon thecondition that the same amount ofthe same kind and quality shall bepaid. (Art 1933)

Characteristics:1. Real Contract delivery of the thing

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

2. Unilateral Contract - once the

subject matter has been delivered,it creates obligations on the part ofonly one of the parties (i.e.borrower).

Kinds:1. Commodatum when the bailor

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

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

b. Precarium - one whereby thebailor may demand the thingloaned at will and it exists in thefollowing cases:i. neither the duration nor

purpose of the contract isstipulated

CIVIL LAW COMMITTEECHAIRPERSON: Romuald Padilla

ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad

EDP : Alnaiza Hassiman, Dorothy Gayon SUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma.

RhodoraFerrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease),John StephenQuiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), AnthonyPurganan(LTD),Ma. Ricasion Tugadi (Conflicts of Law)

CREDIT TRANSACTIONS


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ii. the use of the thing ismerely tolerated by theowner

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

Commodatum Mutuum

Key: COPS-LOTR1. Object

Non-consumable Consumable

2. CauseGratuitous May or may not be

gratuitous

3. Purpose

Use or temporarypossession

Consumption

4. Subject Matter

Real or personalproperty

Only personalproperty

5. Ownership of the thing

Retained by thebailor

Passes to the debtor

6. Thing to be returned

Exact thing loaned Equal amount of thesame kind andquality

7. Who bears risk of loss

Bailor Debtor

8. When to return

In case of urgentneed, even beforethe expiration of theterm

Only after theexpiration of theterm

Loan CreditDelivery by one party

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

Ability of a person to

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

Loan Credit1. Interest taken at Interest is taken in

the expiration of thecredit

advance

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

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

COMMODATUM (Articles 1935 1952)

Nature:

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

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

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

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

that the bailor has loaned thething for having no needtherefor.

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

4. Bailor need not be the owner of the

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

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

5. Purely Personal (Art 1939):






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

or both parties. Bailee can neither lend nor lease

the object of the contract to athird person.

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

a. contrary stipulation;b. nature of the thing

forbids such use

Obligations of the Bailee: (Arts 1941 1945)1. To pay for the ordinary expenses for

the use and preservation of the thingloaned. (Art 1941)

2. To be liable for the loss of the thingeven if it should be through afortuitous event in the followingcases: (KLAS D)a. when he keeps it longer than the

period stipulated, or after theaccomplishment of its use

b. when he lends or leases it tothird persons who are notmembers of his household

c. when the thing loaned has beendelivered with appraisal of itsvalue

d. when, being able to save eitherof the thing borrowed or his ownthings, he chose to save thelatter; or

e. when the bailee devoted thething for any purpose differentfrom that for which it has beenloaned (Art 1942)

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

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

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

5. To return the thing loaned The bailee has no right to retain

the thing loaned as security forclaims he has against the bailoreven for extraordinary expensesexcept for a claim for damagessuffered because of the flaws ofthe thing loaned.

NOTES:

However, the bailees rightextends no further thanretention of the thing loaned

until he is reimbursed for thedamages suffered by him.

He cannot lawfully sell thething to satisfy such damageswithout courts approval.

In case there are two ormore bailees, theirobligation shall be solidary.

Obligations of the bailor (Art 1946 Art1952):1. To respect the duration of the loan

GENERAL RULE: Allow the baileethe use of the thing loaned for theduration of the period stipulated oruntil the accomplishment of thepurpose for which the commodatumwas instituted.

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

2. To refund to the baileeextraordinary expenses for thepreservation of the thing loaned,provided the bailee brings the sameto the knowledge of the bailorbefore incurring them, except whenthey are so urgent that the reply tothe notification cannot be awaitedwithout danger.






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

Requisites:

a. There is flaw or defect in thething loaned;

b. The flaw or defect is hidden;c. The bailor is aware thereof;d. He does not advise the bailee of

the same; ande. The bailee suffers damages by

reason of said flaw or defect

NOTES:

If the above requisites concur,the bailee has the right ofretention for damages.

The bailor cannot exempthimself from the payment ofexpenses or damages byabandoning the thing to thebailee.

SIMPLE LOAN OR MUTUUM (Art 1953 1961)

A contract whereby one party

delivers to another, money or otherconsumable thing with theunderstanding that the same amountof the same kind and quality shall bepaid. (Art. 1953)

NOTES:

The mere issuance of the checksdoes not result in the perfection ofthe contract of loan. The Civil Codeprovides that the delivery of bills ofexchange and mercantiledocuments, such as checks, shallproduce the effect of payment onlywhen they have been encashed(Gerales vs. CA 218 SCRA 638). It isonly after the checks have producedthe effect of payment that thecontract of loan may be deemedperfected.

The obligation is to pay and not to

return because the consumption ofthe thing loaned is the distinguishing

character of the contract of mutuumfrom that of commodatum.

No estafa is committed by a personwho refuses to pay his debt or denies

its existence.

Simple Loan/Mutuum Rent

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

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

2. There is a transferof ownership of the

thing delivered

There is no transferof ownership of the

thing delivered

3. Relationshipbetween the partiesis that of obligor-obligee

Relationship is thatof a landlord andtenant

4. Creditor receivespayment for his loan

Owner of theproperty rentedreceivescompensation orprice either inmoney, provisions,

chattels, or labor

from the occupantthereof in return forits use (Tolentino vsGonzales, 50 Phil 5581927)

Loan Sale

1. Real contract Consensual contract

2. Generallyunilateral becauseonly borrower hasobligations

Bilateral andreciprocal

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

Commodatum/ Barter






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Mutuum

1. Subject matter ismoney or fungiblethings

Subject matter isnon-fungible, (nonconsumable) things

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

The thing withequivalent value isgiven in return forwhat has beenreceived

3. Mutuum may begratuitous andcommodatum isalways gratuitous

Onerous, actually amutual sale

Form of Payment (Art 1955):1. If the thing loaned is money -

payment must be made in thecurrency stipulated, if it is possible;otherwise it is payable in thecurrency which is legal tender in thePhilippines and in case of extraordinary inflation or deflation,

the basisi of payment shall be thevalue of the currency at the time ofthe creation of the obligation

2. If what was loaned is a fungiblething other than money - theborrower is under obligation to paythe lender another thing of the samekind, quality and quantity. In case itis impossible to do so, the borrowershall pay its value at the time of theperfection of the loan.

Interest

The compensation allowed by law orfixed by the parties for the loan orforbearance of money, goods orcredits

Requisites for Demandability: (ELI)1. must be expressly stipulated

Exceptions:a. indemnity for damagesb. interest accruing from

unpaid interest2. must be lawful

3. must be in writing

Compound Interest

GENERAL RULE: Unpaid interest shall

not earn interest.EXCEPTIONS:

1. when judicially demanded2. when there is an express

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

Guidelines for the application ofproper interest rates1. If there is stipulation: that rate shall

be applied2. The following are the rules of thumb

for the application/imposition of

interest rates:a) When an obligation, regardless

of its source, i.e., law,contracts, quasi-contracts,delicts or quasi-delicts isbreached, the contravenor canbe held liable for damages.

b) With regard particularly to anaward of interest in the conceptof actual and compensatorydamages, the rate of interest, aswell as the accrual thereof, isimposed, as follows:

i. When the obligationbreached consists of payment of a sum of money(loan or forbearance ofmoney), the interest shall bethat which is stipulated oragreed upon by the parties.In absence of an agreement,the rate shall be the legalrate (i.e. 12% per annum)computed from default.NOTE: The interest due shallitself earn legal interestfrom the time it is judiciallydemanded

ii. In other cases, the rate ofinterest shall be six percent(6%) per annum.NOTE: No interest, however,shall be adjudged onunliquidated claims ordamages except when oruntil the demand can beestablished with reasonable






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certainty. When the demandcannot be established, theinterest shall begin to runonly from the date of the

judgment of the court ismade.

iii. When the judgment of thecourt awarding a sum ofmoney becomes final andexecutory, the rate of legalinterest, whether the casefalls under paragraph i or iiabove, shall be 12% perannum from such finalityuntil its satisfaction, thisinterim period being deemedto be by then an equivalent

to a forbearance of credit.(Eastern Shipping Lines vs.CA, July 12, 1994)

NOTES:

Central Bank Circular No. 416 fixing

the rate of interest at 12% perannum deals with loans, forbearanceof any money, goods or credits andjudgments involving such loans, orforbearance in the absence ofexpress agreement to such rate

Interest as indemnity for damages ispayable only in case of default ornon-performance of the contract. Asthey are distinct claims, they may bedemanded separately. (SentinelInsurance Co., Inc. vs CA, 182 SCRA517)

Central Bank Circular No. 905 (Dec.10, 1982) removed the Usury Lawceiling on interest rates for securedand unsecured loans, regardless ofmaturity.

Validity of unconscionable interest ratein a loan

Supreme Court in Sps. Solangonvs. Jose Salazar, G.R. No. 125944, June29, 2001, said that since the usury lawhad been repealed by CB Cir. No. 905there is no more maximum rate ofinterest and the rate will just depend onthe mutual agreement of the parties(citing Lim Law vs. Olympic Sawmill Co.,129 SCRA 439). But the Supreme Court

said that nothing in said circular grantslenders carta blanche authority to raiseinterest rates to level which will eitherenslave their borrowers or lead to a

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

DEPOSIT (Articles 1962 2009)

A contract constituted from themoment a person receives a thingbelonging to another, with theobligation of safely keeping it and ofreturning the same.

Characteristics:1. Real Contract - contract is

perfected by the delivery of thesubject matter.

2. Unilateral (gratutitous deposit) -

only the depositary has anobligation.

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

Deposit Mutuum1. Purpose

Principal purpose issafekeeping orcustody

Principal purpose isconsumption

2. When to Return

Depositor candemand the return ofthe subject matter atwill

The lender must waituntil the expirationof the period grantedto the debtor

3. Subject MatterSubject matter maybe movable orimmovable property

Subject matter isonly money or otherfungible thing

4. Relationship






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Relationship is thatof lender (creditor)and borrower(debtor).

Relationship is thatof depositor anddepositary.

5. CompensationThere can becompensation ofcredits.

NO compensation ofthings deposited witheach other (exceptby mutualagreement).

Deposit Commodatum

1. Purpose isSafekeeping

1. Purpose is thetransfer of the use

2. May be gratuitous 2. Essentially and

always gratuitous

3. Movable/corporealthings only in case ofextrajudicial deposit

3. Both movable andimmovable may bethe object

Kinds of Deposit:1. Judicial (Sequestration) takes place

when an attachment or seizure ofproperty in litigation is ordered.

2. Extra-judiciala. Voluntary one wherein the

delivery is made by the will ofthe depositor or by two or morepersons each of whom believeshimself entitled to the thingdeposited. (Arts 1968 1995)

b. Necessary one made incompliance with a legalobligation, or on the occasion ofany calamity, or by travellers inhotels and inns (Arts 1996 -2004), or by travellers withcommon carriers (Art 1734 1735).

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

Judicial Extra-judicial1. Creation

Will of the court Will of the partiesor contract

2. Purpose

Security or to insure

the right of a partyto property or torecover in case offavorable judgment

Custody and

safekeeping

3. Subject Matter

Movables orimmovables,but generallyimmovables

Movables only

4. Cause

Always onerous May be compen-sated or not, butgenerally gratuitous

5. When must the thing be returned

Upon order of thecourt or whenlitigation is ended

Upon demand ofdepositor

6. In whose behalf it is held

Person who has aright

Depositor or thirdperson designated

GENERAL RULE: Contract of deposit isgratuitous (Art 1965)

EXCEPTIONS:1. when there is contrary

stipulation2. depositary is engaged in business

of storing goods3. property saved from destruction

without knowledge of the owner

NOTES:

Article 1966 does not embrace

incorporeal property, such as rightsand actions, for it follows the personof the owner, wherever he goes.

A contract for the rent of safety

deposit boxes is not an ordinarycontract of lease of things but aspecial kind of deposit; hence, it isnot to be strictly governed by theprovisions on deposit. The relationbetween a bank and its customer isthat of a bailor and bailee. (CA Agrovs CA, 219 SCRA 426)

Obligations of the Depositary (Art 19721991):






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1. To keep the thing safely (Art 1972)

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

property2. To return the thing (Art 1972)

Person to whom the thing mustbe returned:

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

b. If the depositary is capacitated -he is subject to all theobligations of a depositarywhether or not the depositor iscapacitated. If the depositor is

incapacitated, the depositarymust return the property to thelegal representative of theincapacitated or to the depositorhimself if he should acquirecapacity (Art 1970).

c. If the depositor is capacitatedand the depositary isincapacitated - the latter doesnot incur the obligation of adepositary but he is liable:

i..to return the thingdeposited while still in his

possession;ii.to pay the depositor the

amount which he may havebenefited himself with thething or its price subject tothe right of any third personwho acquired the thing ingood faith (Art 1971)

Time of return:a. Upon demand even though aspecified period or time for such

return may have been fixedexcept when the thing isjudicially attached while in thedepositarys possession or shouldhe have been notified of theopposition of a third person tothe return or the removal of thething deposited. (Art 1998)b. If deposit gratuitous, thedepositary may return the thingdeposited notwithstanding that aperiod has been fixed for the

deposit if justifiable reasonsexists for its return.c. If the deposit is for avaluable consideration, the

depositary has no right to returnthe thing deposited before theexpiration of the timedesignated even if he shouldsuffer inconvenience as aconsequence.(Art 1989)

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

3. Not to deposit the thing with a thirdperson unless authorized by expressstipulation (Art 1973)

The depositor is liable for the

loss of the thing deposited underArticle 1973 if:a. hetransfers the deposit with a thirdperson without authorityalthough there is no negligenceon his part and the third person;b. hedeposits the thing with a thirdperson who is manifestlycareless or unfit although

authorized even in the absenceof negligence; orc. the thingis lost through the negligence ofhis employees whether the latterare manifestly careless or not.

4. If the thing deposited should earninterest (Art 1975):a. to collect interest and the

capital itself as it fall dueb. to take steps to preserve its

value and rights corresponding toit

5. Not to commingle things deposited ifso stipulated (Art 1976)

6. Not to make use of the thingdeposited unless authorized (Art1977)

GENERAL RULE: Deposit is forsafekeeping of the subject matterand not for use. The unauthorizeduse by the depositary would makehim liable for damages.

EXCEPTIONS:






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1. When the preservation of thething deposited requires its use

2. When authorized by thedepositor

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

Effect if permission to use is given(Art 1978):1. If thing deposited is

non-consumable, the contractloses the character of a depositand acquires that of acommodatum despite the fact

that the parties may havedenominated it as a deposit,unless safekeeping is still theprincipal purpose.

2. If thing deposited consists ofmoney/consumable things, thecontract is converted into asimple loan or mutuum unlesssafekeeping is still the principalpurpose in which case it is calledan irregular deposit. Example:bank deposits are irregulardeposits in nature but governed

by law on loans.7. When the thing deposited is

delivered sealed and closed :a. to return the thing deposited in

the same conditionb. to pay for damages should the

seal or lock be broken throughhis fault, which is presumedunless proved otherwise

c. to keep the secret of the depositwhen the seal or lock is brokenwith or without his fault (Art1981)NOTE: The depositary isauthorized to open the thingdeposited which is closed andsealed when (Art 1982):i. there is presumed authority

(i.e. when the key has beendelivered to him or theinstructions of the depositorcannot be done withoutopening it)

ii. necessity

8. To change the way of the deposit ifunder the circumstances, thedepositary may reasonably presumethat the depositor would consent to

the change if he knew of the facts ofthe situation, provided, that theformer notifies the depositor thereofand wait for his decision, unlessdelay would cause danger

9. To pay interest on sums converted topersonal use if the deposit consistsof money (Art 1983)

10. To be liable for loss throughfortuitous event (SUDA): (Art 1979):a. if stipulatedb. if he uses the thing without the

depositor's permission

c. if he delays its returnd. if he allows others to use it,

even though he himself mayhave been authorized to use thesame

NOTES:

Fixed, savings, and current deposits

of money in banks and similarinstitutions shall be governed by theprovisions concerning simple loan.(Art 1980)

The general rule is that a bank cancompensate or set off the deposit inits hands for the payment of anyindebtedness to it on the part of thedepositor. In true deposit,compensation is not allowed.

Irregular deposit Mutuum

1. The consumablething deposited maybe demanded at willby the depositor

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

2. The only benefit isthat which accruesto the depositor

2. Essential cause forthe transaction is thenecessity of theborrower

3. The irregulardepositor has apreference over

3. Common creditorsenjoy no preferencein the distribution of






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other creditors withrespect to the thingdeposited

the debtorsproperty

Rule when there are two or moredepositors (Art 1985):1. If thing deposited is divisible and

depositors are not solidary: Eachdepositor can demand only hisproportionate share thereto.

2. If obligation is solidary or if thing isnot divisible: Rules on activesolidarity shall apply, i.e. each oneof the solidary depositors may dowhatever may be useful to theothers but not anything which may

be prejudicial to the latter, (Art.1212) and the depositary may returnthe thing to anyone of the solidarydepositors unless a demand, judicialor extrajudicial, for its return hasbeen made by one of them in whichcase, delivery should be made to him(Art. 1214).

3. Return to one of depositorsstipulated. The depositary is boundto return it only to the persondesignated although he has not madeany demand for its return.

NOTES:

The depositary may retain the thingin pledge until full payment of whatmay be due him by reason of thedeposit (Art 1994).

The depositors heir who in goodfaith may have sold the thing whichhe did not know was deposited, shallonly be bound to return the price hemay have received or to assign hisright of action against the buyer in

case the price has not been paid him(Art 1991).

Obligations of the Depositor (Art 1992 1995):1. To pay expenses for preservation

a. If the deposit is gratuitous, thedepositor is obliged toreimburse the depositary forexpenses incurred for the

preservation of the thingdeposited (Art 1992)

b. If the deposit is for valuableconsideration, expenses for

preservation are borne by thedepositary unless there is acontrary stipulation

2. To pay loses incurred by thedepositary due to the character ofthe thing deposited

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

EXCEPTIONS:1. at the time of the deposit, the

depositor was not aware of thedangerous character of the thing

2. when depositor was not expectedto know the dangerous characterof the thing

3. when the depositor notified thedepository of the same

4. the depositary was aware of itwithout advice from the depositor

Extinguishment of Voluntary Deposit(Art 1995)1. Loss or destruction of the thing

deposited2. In case of gratuitous deposit, upon

the death of either the depositor orthe depositary

3. Other causes, such as return of thething, novation, merger, expirationof the term fulfilment of theresolutory condition, etc (Art 1231)

Necessary Deposits1. Made in compliance with a legal

obligation2. Made on the occasion of any

calamity such as fire, storm, flood,pillage, shipwreck or other similarevents (deposito miserable)

3. Made by travellers in hotels and innsor by travellers with common carrier

Deposit by Travellers in hotels andinns:






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The keepers of hotels or inns shall beresponsible as depositaries for thedeposit of effects made by travellers

provided:

a. Notice was given to them or totheir employees of the effectsbrought by the guest; and

b. The guests take the precautionswhich said hotel-keepers or theirsubstitutes advised relative tothe care and vigilance of theireffects.

NOTES:

Liability extends to vehicles, animalsand articles which have beenintroduced or placed in the annexesof the hotel.

Liability shall EXCLUDE losses which

proceed from force majeure. The actof a thief or robber is not deemedforce majeure unless done with theuse of arms or irresistible force.

The hotel-keeper cannot freehimself from the responsibility byposting notices to the effect that heis not liable for the articles broughtby the guest. Any stipulation to sucheffect shall be void.

Notice is necessary only for suing

civil liability but not in criminalliability.

GUARANTY (Articles 2047 2084)

A contract whereby a person(guarantor) binds himself to thecreditor to fulfil the obligation ofthe principal debtor in case thelatter fail to do so.

Classification of Guaranty:

1. In the Broad sense:a. Personal - the guaranty is thecredit given by the person whoguarantees the fulfilment of theprincipal obligation.

b. Real - the guaranty is theproperty, movable orimmovable.

2. As to its Origina. Conventional - agreed upon by

the parties.

b. Legal - one imposed by virtue ofa provision of a law.

c. Judicial - one which is requiredby a court to guarantee theeventual right of one of theparties in a case.

3. As to Considerationa. Gratuitous - the guarantor does

not receive any price orremuneration for acting as such.

b. Onerous - the guarantor receivesvaluable consideration.

4. As to the Person guaranteed

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

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

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

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

b. Indefinite or simple - one which

not only includes the principalobligation but also all itsaccessories including judicialcosts

SURETYSHIP

A contract whereby a person (surety)binds himself solidarily with theprincipal debtor

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

NOTES:






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The reference in Article 2047 to

solidary obligations does not meanthat suretyship is withdrawn fromthe applicable provisions governing

guaranty. A surety is almost thesame as a solidary debtor, exceptthat he himself is a principal debtor.

In suretyship, there is but onecontract, and the surety is bound bythe same agreement which binds theprincipal. A surety is usually boundwith the principal by the sameinstrument, executed at the sametime and upon the sameconsideration (Palmares vs CA, 288SCRA 422)

It is not for the obligee to see to itthat the principal debtor pays thedebt or fulfill the contract, but forthe surety to see to it that theprincipal debtor pays or performs(Paramount Insurance Corp vs CA,310 SCRA 377)

Nature of Suretys undertaking:1. Liability is contractual and

accessory but directNOTE: He directly, primarily andequally binds himself with the

principal as original promisor,although he possesses no direct orpersonal interest over the lattersobligation, nor does he receive anybenefits therefrom. (PNB vs CA, 198SCRA 767)

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

3. Liability arises only if principaldebtor is held liable.

NOTES:

The creditor may sue separately

or together the principal debtorand the surety. Where there areseveral sureties, the obligee mayproceed against any one ofthem.

In the absence of collusion, thesurety is bound by a judgmentagainst the principal even

though he was not a party to theproceedings. The nature of itsundertaking makes it privy to allproceedings against its principal

(Finman General AssuranceCorp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefitof exhaustionNOTE: He assumes a solidary liabilityfor the fulfilment of the principalobligation (Towers Assurance Corpvs. Ororama Supermart, 80 SCRA262) as an original promissory anddebtor from the beginning.

5. Undertaking is to creditor and notto debtor.

NOTE: The surety makes nocovenant or agreement with the

principal that it will fulfil theobligation guaranteed for the benefitof the principal. Such a promise isnot implied by law either; and this istrue even where under the contractthe creditor is given the right to suethe principal, or the latter and thesurety at the same time. (Arranz vs.Manila Fidelity & Surety Co., Inc.,101 Phil. 272)

6. Surety is not entitled to notice of

principals defaultNOTE: The creditor owes no duty ofactive diligence to take care of theinterest of the surety and the suretyis bound to take notice of theprincipals default and to performthe obligation. He cannot complainthat the creditor has not notifiedhim in the absence of a specialagreement to that effect. (Palmaresvs CA, 288 SCRA 422)

7. Prior demand by the creditor uponprincipal is not requiredNOTE: As soon as the principal is indefault, the surety likewise is indefault.

8. Surety is not exonerated by neglectof creditor to sue principal

Characteristics of Guaranty andSuretyship:1. Accessory - It is indispensable

condition for its existence that theremust be a principal obligation.






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NOTES:

Guaranty may be constituted toguarantee the performance of avoidable or unenforceable

contract. It may also guaranteea natural obligation. (Art 2052)

The guarantor cannot bind

himself for more than theprincipal debtor and even if hedoes, his liability shall bereduced to the limits of that ofthe debtor.

2. Subsidiary and Conditional - takeseffect only in case the principaldebtor fails in his obligation.

NOTES:

The guarantor cannot bindhimself for more than theprincipal debtor and even if hedoes, his liability shall bereduced to the limits of that ofthe debtor. But a guarantor maybind himself for less than that ofthe principal (Art 2054)

A guaranty may be given as

security for future debts, theamount of which is not yetknown; there can be no claim

against the guarantor until thedebt is liquidated. A conditionalobligation may also be secured.(Art 2053)

3. Unilateral - may be entered evenw/o the intervention of the principaldebtor, in which case Art. 1236 and1237 shall apply and it gives rise onlyto a duty on the part of theguarantor in relation to the creditorand not vice versa.

4. Nominate5. Consensual6. It is a contract between the

guarantor/surety and creditor.

NOTES:

Acceptance of guaranty bycreditor and notice thereof toguarantor:

In declaring that guaranty

must be express, the lawrefers solely and exclusively

to the obligation of theguarantor because it is healone who binds himself byhis acceptance. With respect

to the creditor, no suchrequirement is neededbecause he binds himself tonothing.

However, when there is

merely an offer of aguaranty, or merely aconditional guaranty, in thesense that it requires actionby the creditor before theobligation becomes fixed, itdoes not become bindinguntil it is accepted and until

notice of such acceptance bythe creditor is given to, oracquired by, the guarantor,or until he has notice orknowledge that the creditorhas performed the conditionand intends to act upon theguaranty.

But in any case, the creditoris not precluded fromwaiving the requirement ofnotice.

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

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

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

8. Falls under the Statute of Fraudssince it is a special promise toanswer for the debt, default ormiscarriage of another.

9. Strictly interpreted against thecreditor and in favor of theguarantor/surety and is not to beextended beyond its terms or






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specified limits. (Magdalena Estates,Inc. vs Rodriguez, 18 SCRA 967) Therule of strictissimi juris commonlypertains to an accommodation surety

because the latter acts withoutmotive of pecuniary gain and hence,should be protected against unjustpecuniary impoverishment byimposing on the principal, dutiesakin to those of a fiduciary.

NOTES:

The rule will apply only after it

has been definitely ascertainedthat the contract is one ofsuretyship or guaranty. It cannotbe used as an aid in determining

whether a partys undertaking isthat of a surety or guarantor.(Palmares vs CA, 288 SCRA 292)

It does not apply in case of

compensated sureties.10. It is a contract which requires that

the guarantor must be a persondistinct form the debtor because aperson cannot be the personalguarantor of himself.NOTE: However, in a real guaranty,like pledge and mortgage, a person

may guarantee his own obligationwith his personal or real properties.

Guaranty Suretyship

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

1. Surety assumesliability as regularparty to theundertaking

2. Collateral under-taking

2. Surety is anoriginal promisor

3. Guarantor issecondarily liable

3. Surety isprimarily liable

4. Guarantor bindshimself to pay ifthe principalCANNOT PAY

4. Surety undertakesto pay if the principalDOES NOT PAY

5. Insurer ofsolvency of debtor

5. Insurer of thedebt

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

6. Surety cannotavail of the benefit ofexcussion and division

Indorsement Guaranty

1. Primarily of transfer

1. Contract of security

2. Unless the note ispromptly presentedfor payment atmaturity and duenotice of dishonor

given to the indorserwithin a reasonabletime he will bedischarged abso-lutely from allliability thereon,whether he hassuffered any actualdamage or not

2. Failure in either orboth of theseparticulars does notgenerally work as anabsolute discharge of

a guarantorsliability, but his isdischarged only tothe extent of the losswhich he may havesuffered inconsequence thereof

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

3. Guarantorwarrants the solvencyof the promisor

4. Indorser can besued as promisor

4. Guarantor cannot besued as promisor

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

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

NOTES:

A guaranty is gratuitous, unless thereis a stipulation to the contrary. Thecause of the contract is the same






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cause which supports the obligationas to the principal debtor.

The peculiar nature of a guaranty orsurety agreement is that is is

regarded as valid despite theabsence of any direct considerationreceived by the guarantor or suretyeither from the principal debtor orfrom the creditor; a considerationmoving to the principal alone willsuffice.

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

Double or sub-guaranty (Art 2051 2ndpar)

One constituted to guarantee theobligation of a guarantor

Continuing guaranty (Art 2053)

One which is not limited to a singletransaction but which contemplates

a future course of dealings, coveringa series of transactions generally foran indefinite time or until revoked.

NOTES:

Prospective in operation (Dio vs CA,216 SCRA 9)

Construed as continuing when by the

terms thereof it is evident that theobject is to give a standing credit tothe principal debtor to be used fromtime to time either indefinitely or

until a certain period, especially ifthe right to recall the guaranty isexpressly reserved (Dio vs CA, 216SCRA 9)

Future debts may also refer todebts existing at the time of theconstitution of the guaranty but theamount thereof is unknown and notto debts not yet incurred andexisting at that time.

Exception to the concept of

continuing guaranty is chattelmortgage. A chattel mortgage canonly cover obligations existing at the

time the mortgage is constituted andnot those contracted subsequent tothe execution thereof (The BelgianCatholic Missionaries, Inc. vs.Magallanes Press, Inc., 49 Phil 647).An exception to this is in case ofstocks in department stores, drugstores, etc. (Torres vs. Limjap, 56Phil 141).

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

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

2. Where guaranty indefinite or simple:It shall comprise not only theprincipal obligation, but also all itsaccessories, including the judicialcosts, provided with respect to thelatter, that the guarantor shall onlybe liable for those costs incurredafter he has been judicially requiredto pay.

Qualifications of a guarantor: (Arts2056-2057)

1. possesses integrity2. capacity to bind himself3. has sufficient property to answer

for the obligation which heguarantees

NOTES:

The qualifications need only bepresent at the time of the perfectionof the contract.

The subsequent loss of the integrityor property or superveningincapacity of the guarantor wouldnot operate to exonerate theguarantor or the eventual liability hehas contracted, and the contract ofguaranty continues.

However, the creditor may demandanother guarantor with the properqualifications. But he may waive it if






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he chooses and hold the guarantor tohis bargain.

Benefit of Excussion (Art 2058)

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

NOTE:

Not applicable to a contract ofsuretyship (Arts 2047, par. 2;2059[2])

Cannot even begin to take placebefore judgment has been obtainedagainst the debtor (Baylon vs CA,312 SCRA 502)

When Guarantor is not entitled to thebenefit of excussion: (PAIRS)1. If it may be presumed that an

execution on the property of theprincipal debtor would not result inthe satisfaction of the obligation

Not necessary that the debtor bejudicially declared insolvent or

bankrupt2. When he has absconded, or cannot

be sued within the Philippines unlesshe has left a manager orrepresentative

3. In case ofinsolvency of the debtor

Must be actual4. If the guarantor has expressly

renounced it5. If he has bound himself solidarily

with the debtor

Other grounds:(BIPS)6. If he is a judicial bondsman or sub-

surety7. If he fails to interpose it as a

defense before judgment is renderedagainst him

8. If the guarantor does not set up thebenefit against the creditor upon thelatters demand for payment fromhim, and point out to the creditoravailable property to the debtorwithin Philippine territory, sufficient

to cover the amount of the debt (Art2060)

Demand can be made only afterjudgment on the debt

Demand must be actual; joiningthe guarantor in the suit againstthe principal debtor is not thedemand intended by law

9. Where the pledge or mortgage hasbeen given by him as special security

Benefit of Division (Art 2065)

Should there be several guarantorsof only one debtorand for the samedebt, the obligation to answer forthe same is divided among all.

Liability: Joint

NOTES:

The creditor can claim from the

guarantors only the shares they arerespectively bound to pay exceptwhen solidarity is stipulated or ifany of the circumstancesenumerated in Article 2059 shouldtake place.

The right of contribution ofguarantors who pays requires thatthe payment must have been made(a) in virtue of a judicial demand, or(b) because the principal debtor isinsolvent (Art 2073).

If any of the guarantors should beinsolvent, his share shall be borne bythe others including the payingguarantor in the same jointproportion following the rule insolidary obligations.

The above rule shall not beapplicable unless the payment hasbeen made in virtue of a judicial

demand or unless the principaldebtor is insolvent.

The right to contribution orreimbursement from his co-guarantors is acquired ipso jure byvirtue of said payment without theneed of obtaining from the creditorany prior cession of rights to suchguarantor.






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The co-guarantors may set up

against the one who paid, the samedefenses which have pertained tothe principal debtor against the

creditor and which are not purelypersonal to the debtor. (Art 2074)

Procedure when creditor sues: (Art.2062)

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

1. Notice to guarantor of the action

The guarantor must be NOTIFIED

so that he may appear, if he sodesires, and set up defenses hemay want to offer.

If the guarantor appears, he is

still given the benefit ofexhaustion even if judgmentshould be rendered against himand principal debtor. Hisvoluntary appearance does notconstitute a renunciation of hisright to excussion (see Art.2059(1)).

Guarantor cannot set up the

defenses if he does not appearand it may no longer be possiblefor him to question the validityof the judgment renderedagainst the debtor.

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

Guarantors Right of Indemnity or

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

NOTE: The indemnity consists of: (DIED)1. Total amount of the debt no

right to demand reimbursementuntil he has actually paid thedebt, unless by the terms of thecontract, he is given the right

before making payment. Hecannot collect more than whathe has paid.

2. Legal interest thereon from the

time the payment was madeknown (notice of payment ineffect a demand so that if thedebtor does not payimmediately, he incurs in delay)to the debtor, even though it didnot earn interest for thecreditor. Guarantors right tolegal interest is granted by lawby virtue of the payment he hasmade.

3. Expenses incurred by theguarantor after having notified

the debtor that payment hasbeen demanded of him by thecreditor; only those expensesthat the guarantor has to satisfyin accordance with law as aconsequence of the guaranty(Art. 2055) not those whichdepend upon his will or own actsor his fault for these are hisexclusive personal responsibilityand it is not just that they beshouldered by the debtor.

4. Damages if they are due in

accordancewith law. General rules ondamages apply.

EXCEPTIONS:1. Where the guaranty is

constituted without theknowledge or against the will ofthe principal debtor, theguarantor can recover onlyinsofar as the payment had beenbeneficial to the debtor (Art.2050).

2. Payment by a third person whodoes not intend to be reimbursedby the debtor is deemed to be adonation, which, however,requires the debtors consent.But the payment is in any casevalid as to the creditor who hasaccepted it (Art. 1238).

3. Waiver of the right to demandreimbursement.






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Guarantors right to Subrogation(ART.2067)

Subrogation transfers to the personsubrogated, the credit with all the

rights thereto appertaining eitheragainst the debtor or against thirdpersons, be they guarantors orpossessors of mortgages, subject tostipulation in conventionalsubrogation.

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

It arises by operation of law uponpayment by the guarantor. It is not

necessary that the creditor cede tothe guarantor the formers rightsagainst the debtor.

It is not a contractual right. Theright of guarantor who has paid adebt to subrogation does not standupon contract but upon theprinciples of natural justice.

The guarantor is subrogated byvirtue of the payment to the rightsof the creditor, not those of thedebtor.

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

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

2068)

The debtor may interposeagainst the guarantor thosedefenses which he could haveset up against the creditor at the

time the payment was made,e.g. the debtor can set upagainst the guarantor thedefense of previousextinguishment of the obligationby payment.

2. Before Maturity (Art 2069)

Not entitled to reimbursement

unless the payment was made

with the consent or has beenratified by the debtor

Effect of Repeat Payment by debtor:

(Art 2070)GENERAL RULE: Before guarantor paysthe creditor, he must first notify thedebtor (Art. 2068). If he fails to givesuch notice and the debtor repeatspayment, the guarantor can only collectfrom the creditor and guarantor has nocause of action against the debtor forthe return of the amount paid byguarantor even if the creditor shouldbecome insolvent.

EXCEPTION: The guarantor can still

claim reimbursement from the debtor inspite of lack of notice if the followingconditions are present: (PIG)

a. guarantor was prevented byfortuitous event to advise thedebtor of the payment; and

b. the creditor becomes insolvent;c. the guaranty is gratuitous.

Right of Guarantor to proceed againstdebtor before payment

GENERAL RULE: Guarantor has nocause of action against debtor until afterthe former has paid the obligation

EXCEPTION: Article 2071

NOTES:

Article 2071 is applicable and

available to the surety. (ManilaSurety & Fidelity Co., Inc. vs BatuConstruction & Co., 101 Phil 494)

Remedy of guarantor:(a) obtain release from the

guaranty; or(b) demand a security that shall

protect him from anyproceedings by the creditor, andagainst the danger of insolvencyof the debtor

Art. 2066 Art. 2071Provides for theenforcement of therights of theguarantor/suretyagainst the debtor

Provides for hisprotection before hehas paid but after hehas become liable






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afterhe has paid thedebt

Gives a right ofaction afterpayment

Protective remedybefore payment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE2)1. Release in favor of one of the

guarantors, without the consent ofthe others, benefits all to the extentof the share of the guarantor towhom it has been granted (Art2078);

2. If the creditor voluntarily acceptsimmovable or other properties inpayment of the debt, even if heshould afterwards lose the same

through eviction or conveyance ofproperty (Art 2077);3. Whenever by some act of the

creditor, the guarantors even thoughthey are solidarily liable cannot besubrogated to the rights, mortgagesand preferences of the former (Art2080);

4. For the same causes as all otherobligations (Art 1231);

5. When the principal obligation isextinguished;

6. Extension granted to the debtor by

the creditor without the consent ofthe guarantor (Art 2079)

BOND

An undertaking that is sufficientlysecured, and not cash or currency

Bondsman (Art 2082)

A surety offered in virtue of aprovision of law or a judicial order.He must have the qualificationsrequired of a guarantor and inspecial laws like the Rules of Court.

NOTES:

Judicial bonds constitute merely aspecial class of contracts of guarantyby the fact that they are given invirtue of a judicial order.

If the person required to give a legalor judicial bond should not be ableto do so, a pledge or mortgagesufficient to cover the obligation

shall admitted in lieu thereof (Art2083)

A judicial bondsman and the sub-surety are NOT entitled to the

benefit of excussion because theyare not mere guarantors, butsureties whose liability is primaryand solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESISI. Common Elements of Pledge,Mortgage, and Antichresis (Articles2085 2092)

A. Essential Requisites (SOD) (Art2085)

1. Secures the fulfillment of a principal

obligation;2. Pledgor, mortgagor, antichretic

debtor must be the absolute ownerof the thing pledged or mortgaged;and

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

3. Pledgor, mortgagor, antichreticdebtor must have free disposal oftheir property, or be legallyauthorized for such purpose.

NOTES:

Third persons can pledge ormortgage their own property tosecure the principal obligation.

It is not necessarily void simplybecause the accommodation pledgoror mortgagor did not benefit from

the same. So long as valid consentwas given, the fact that the loan wasgiven solely for the benefit of theprincipal debtor would not invalidatethe mortgage (GSIS vs CA, 170 SCRA533)

The accommodation pledgor ormortgagor, without expresslyassuming personal liability for suchdebt, is not liable for the payment ofany deficiency, should the property






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not be sufficient to cover the debt(Bank of America vs. AmericanRealty Corporation, 321 SCRA 659).

The accommodation pledgor or

mortgagor is not solidarily boundwith the principal obligor but hisliability extents only to the propertypledged or mortgaged. Should therebe any deficiency, the creditor hasrecourse on the principal debtor whoremains to be primarily bound.

The law grants to theaccommodation pledgor ormortgagor the same rights as aguarantor and he cannot beprejudiced by any waiver of defenseby the principal debtor.

B. Prohibition against PactumCommissorium (Art 2088; 2137)

Pactum Commissorium

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

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

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

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

GENERAL RULE: Pactum Commissoriumis forbidden by law and is declared null

and void.EXCEPTION: The pledgee mayappropriate the thing pledged if afterthe first and second auctions, the thingis not sold. (Art 2112)

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

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

D. Indivisibility(Art 2089)GENERAL RULE: A pledge, mortgage,or antichresis is indivisible, even thoughthe debt may be divided among thesuccessors in interest of the debtor or ofthe creditor.

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

Consequences of indivisibility:1. Single thing Every portion of the

property pledged or mortgaged is

answerable for the whole obligation2. Several things All of the several

things pledged or mortgaged areliable for the totality of the debt

3. Debtors heir/creditors heir -Neither the debtors heir who haspaid part of the debt cannot ask forproportionate extinguishment, norcreditors heir who received hisshare of the debt return the pledgeor cancel the mortgage as long asthe debt is not completelysatisfied.

EXCEPTIONS:1. Where each one of several things

guarantees a determinateportion of the credit

2. Where only a portion of the loanwas released

3. Where there was failure ofconsideration.

4. Where there is no debtor-creditor relationship

NOTES:

The mere embodiment of a realestate mortgage and a chattelmortgage in one document does nothave the effect of fusing bothsecurities into an indivisible whole.

The mortgagee, therefore, maylegally foreclose the real estatemortgage extrajudicially and waivethe chattel mortgage foreclosure,and maintain instead a personalaction for the recovery of the unpaid






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balance of the credit (Phil. Bank ofCommerce vs. Macadaeg, 109 Phil981)

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

NOTES:

If the debtor fails to comply with the

obligation at the time it falls due,the creditor is merely entitled tomove for the sale of the thingpledged or mortgaged in order to

collect the amount of his claim fromthe proceeds.

If he wishes to secure a title to the

mortgaged property, he can buy it inthe foreclosure sale (Montevirgin vs.CA, 112 SCRA 641)

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

PLEDGE (Arts 2093 2123)

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

Special Requisites (in addition to

the common essential requisites):1. Possession of the thing pledged must

be transferred to the creditor or athird person by agreement (Art2093);

2. It can only cover movable propertyand incorporeal rights evidenced bydocuments of title and theinstruments proving the rightpledged shall be delivered to the

creditor, and if negotiable must beendorsed (Art 2094); and

3. The description of the thing pledgedand the date must appear in a public

instrument to bind third persons, butnot for the validity of the contract(Art 2096).

Kinds:1. Conventional /Voluntary created

by contract2. Legal created by operation of law

(examples: Art. 546, 1731 and 1914NCC)

NOTES:

The provisions of possession, care

and sale of the thing as well as onthe termination of the pledgegoverning conventional pledges areapplicable to pledges created byoperation of law (Art 2121)

Unlike, however, in conventionalpledge where the debtor is notentitled to the excess unless it isotherwise agreed, in legal pledge,the remainder of the price of thesale after payment of the debt andexpenses, shall be delivered to the

debtor. In legal pledge, there is no definite

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

Characteristics:1. Real

contract it is perfected by the

delivery of the thing pledged by thedebtor who is called the pledgortothe creditor who is called the

pledgee, or to a third person bycommon agreement;

2. Accessory contract it has no independentexistence of its own;

3. Unilateral contract it creates an obligationsolely on the part of the creditor to






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return the thing subject thereofupon the fulfilment of the principalobligation; and

4. Subsidiar

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

Consideration in pledge:

Insofar as the pledgor is concerned,

the cause is the principal obligation.

If the pledgor is not the debtor, thecause is the compensation stipulatedfor the pledge or the mere liberalityof the pledgor.

Extent of pledge: Unless stipulatedotherwise, pledge extends to the fruits,interests or earnings of the thing.

Rights and Obligations of a PledgorRights Obligations

1. To demand return incase of reasonablegrounds to feardestruction orimpairment of the thingwithout the pledgeesfault, subject to the

duty of replacement(Art 2107)2. To bid and bepreferred at the publicauction (Art 2113)3. To alienate the thingpledged provided thepledgee consents to thesale (Art 2097)4. To ask that the thingpledged be deposited(Arts 2104 & 2106)

1. To advise thepledgee of theflaws of the thing(Art 2101)2. Not to demandthe return of thething until after

full payment ofthe debt,including interestdue thereon andexpenses incurredfor itspreservation (Art2105)

Rights of the Pledgee

KEY: D SBC BA2R2OPS2

1. Option to demand replacement orimmediate payment of the debt in caseof deception as to substance or quality(Art 2109)2. To sell at public auction in case ofreasonable grounds to fear destructionor impairment of the thing without hisfault (Art 2108)3. To bring actions pertaining to theowner (Art 2103)

4. To choose which of several thingspledged shall be sold5. To bid at the public auction (Art2113)

6. To appropriate the thing in case offailure of the 2nd public auction (Art2112)7. To apply said fruits, interests orearnings to the interest, if any, then tothe principal of the credit (Art 2102)8. To retain excess value received inthe public sale (Art 2115)9. To retain the thing until after fullpayment of the debt (Art 2098)10. To be reimbursed for the expensesmade for the preservation of the thingpledged (Art 2099)

11. To object to the alienation of thething12. To possess the thing (Art 2098)13. To sell at public auction in case ofnon-payment of debt at maturity (Art2112)To choose which of the several thingspledged shall be sold (Art 2119)14. Option to demand replacement orimmediate payment of the debt in caseof deception as to substance or quality(Art 2109)15. To sell at public auction in case of

reasonable grounds to fear destructionor impairment of the thing without hisfault (Art 2108)16. To bring actions pertaining to theowner (Art 2103)17. To choose which of several thingspledged shall be sold18. To bid at the public auction (Art2113)19. To appropriate the thing in case offailure of the 2nd public auction (Art2112)20. To apply said fruits, interests orearnings to the interest, if any, then tothe principal of the credit (Art 2102)21. To retain excess value receivedin the public sale (Art 2115)22. To retain the thing until after fullpayment of the debt (Art 2098)23. To be reimbursed for the expensesmade for the preservation of the thingpledged (Art 2099)24. To object to the alienation of thething






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25. To possess the thing (Art 2098)26. To sell at public auction in case ofnon-payment of debt at maturity (Art2112)

27. To choose which of the severalthings pledged shall be sold (Art 2119)

Obligations of the PledgeeKEY: CUDA3

1. Take care of the thing with thediligence of a good father of a family(Art 2099)2. Not to use thing unless authorized orby the owner or its preservation requiresits use (Art 2104)3. Not to deposit the thing with a 3rd

person unless so stipulated (Art 2100)

4. Responsibility for acts of agents andemployees as regards the thing (Art2100)5. To advise pledgor of danger to thething (Art 2107)6. To advise pledgor of the result of thepublic auction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTETHING PLEDGED (ART.2107)

Requisites:1. The pledgor has reasonable

grounds to fear the destruction

or impairment of the thinpledged

2. There is no fault on the part ofthe pledgee

3. The pledgor is offering in placeof the thing, another thing inpledge which is of the same kindand quality as the former

4. The pledge does not choose toexercise his right to cause thething pledged to be sold atpublic auction

NOTE: The pledgees right to have thething pledged sold at public sale grantedunder the Article 2108 is superior to thatgiven to the pledgor to substitute thething pledged under Article 2107.

Prohibition against double pledge

Property which has been lawfullypledged to one creditor cannot bepledged to another as long as thefirst one subsists.

NOTE: Possession of a creditor of thething pledged is an essential requisite ofpledge.

Extinguishment of Pledge (CRAPS)1. For the same causes as all other

obligations (Art 1231)2. Return of the thing pledged by the

pledgee to the pledgor (Art 2110)3. Statement in writing by the

pledgee that he renounces orabandons the pledge (Art 2111)

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

auction (Art 2115)NOTE: The possession by the debtor orowner of the thing pledged subsequent

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

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

and owner, stating the amount due

4. Sale must be with the interventionof a notary public

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

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

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

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

REAL ESTATE MORTGAGE(Articles 2124-2131)






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A contract whereby the debtorsecures to the creditor thefulfilment of a principal obligation,specially subjecting to such security

immovable property or real rightsover immovable property in case theprincipal obligation is not compliedwith at the time stipulated.

Characteristics of the contract:1. Real2. Accessory3. Subsidiary4. Unilateral it creates only an

obligation on the part of thecreditor who must free theproperty from the encumbrance

once the obligation is fulfilled.

NOTES:

As an accessory contract, its

consideration is that of the principalcontract from which it receives life.

A mortgage does not involve atransfer, cession or conveyance ofproperty but only constitutes a lienthereon. Until discharged, it follows

the property wherever it goes andsubsists notwithstanding changes ofownership.

A mortgage gives the mortgagee no

right or claim to the possession ofthe property, and therefore, a meremortgagee has no right to eject anoccupant of the property mortgagedunless the mortgage should containsome provision to that effect. Theonly right of a mortgagee in case ofnon-payment of a debt secured bymortgage would be to foreclose the

mortgage and have the encumberedproperty sold to satisfy theoutstanding indebtedness. If thepossession is transferred to themortgagee, it must not expressly befor purpose of applying the fruits tothe interest then to the principal ofthe credit, for then it would be anantichresis.

It is not an essential requisite that

the principal of the mortgage credit

bears interest, or that the interestas compensation for the use of theprincipal and enjoyment of its fruitsbe in the form of a certain percent

thereof.

Special Requisites (in addition tothe common essential requisites):

1. It can cover only immovableproperty and alienable real rightsimposed upon immovables (Art2124);

2. It must appear in a public instrument(Art. 2125); and

3. Registration in the registry ofproperty is necessary to bind thirdpersons, but not for the validity of

the contract (Art 2125). An order for foreclosure cannot

be refused on the ground thatthe mortgage had not beenregistered provided no innocentthird parties are involved.

NOTE: Where a mortgage is not valid orfalse, the principal obligation which itguarantees is not rendered null and void.What is lost only is the right to foreclosethe mortgage as a special remedy forsatisfying or settling the indebtednesswhich is the principal obligation but the

mortgage deed remains as evidence orproof of a personal obligation of thedebtor and the amount due to thecreditor may be enforced in an ordinarypersonal action.

Kinds:1. Voluntary agreed to by the parties

or constituted by the will of theowner of the property on which it iscreated

2. Legal one required by law to be

executed in favour of certainpersons

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

3. Equitable one which, althoughlacking the formalities of a






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

PLEDGE REAL MORTGAGE1. Constituted onmovables

1. Constituted onimmovables

2. Property isdelivered to pledgeeor by commonconsent to a thirdperson

2. Delivery is notnecessary

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

instrument

3. Not valid againstthird persons unlessregistered

Extent of Mortgage:

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

2127)

Object of Mortgage:

Future property cannot be an objectof a contract of mortgage (Art2085[2]) However, a stipulationsubjecting to the mortgage lien,properties (improvements) which themortgagor may subsequently acquireinstall, or use in connection withreal property already mortgagedbelonging to the mortgagor is valid(Peoples Bank and Trust Co. vs.Dahican Lumber Co., 20 SCRA 84)

Special Rights:1. Mortgagor - To alienate the

mortgaged property but themortgage shall remain attached tothe property.

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

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

2. Mortgagee - To claim from a 3rd

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

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

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