UST Golden Notes 2011

CREDIT TRANSACTIONS
CREDITTRANSACTIONS
Q:Whatiscredit?
A: It is a persons ability to borrow money by

virtue of confidence or trust reposed in him by
thelenderthathewillpaywhathemaypromise.
Q:Whatiscredittransaction?
A:Itreferstoagreementbasedontrustorbelief
of someone on the ability of another person to
complywithhisobligations.
Q:Whatdocredittransactionsinclude?
A:Theyincludealltransactionsinvolvingloansof:
1. goods
2. servicew
3. money extended to another either
gratuitously or onerously with a
promisetopayordeliverinthefuture.
Q:Whatissecurity?
A:Itissomethinggiven,deposited,orservingasa
means to ensure the fulfillment or enforcement
ofanobligationorofprotectingsomeinterestin
theproperty.
Q:Whatarethetypesofsecurity?
A:
Personal: whenan individual become asurety
oraguarantor.
Real or property: when an encumbrance is

madeonproperty.
Q:Whatarethekindsofcredittransactions?
A:
1. Ascontractsofsecurity
a. Contracts of real security These
b.
2.
are contracts supported by

collateral/s or burdened by an
encumbrance on property such as
mortgageandpledge.
Contracts of personal security
These are contracts where
performance by the principal debtor
is not supported by collateral/s but
only by a promise to pay or by the
personal
undertaking
or
commitmentofanotherpersonsuch
asinsuretyorguaranty.
Astotheirexistence
a. Principal contracts They can exist
b.
3.
depend on the existence of another

contract. (e.g. commodatum and
mutuum)
Accessory contracts They have to
depend on another contract. These
accessory contracts depend on the
existence of a principal contract of
loan. (e.g. guaranty proper,
suretyship, pledge, mortgage and
antichresis)
Astotheirconsideration
a. Onerous This is a contract where
b.
there is consideration or burden

imposedlikeinterest.
GratuitousThisisacontractwhere
there is no consideration or burden
imposed.(e.g.commodatum)
Q:Whatisbailment?
A: It is the delivery of a personal property for

some particular use, or on mere deposit, upon a
contract, express or implied, that after the
purposehasbeenfulfilled,itshallberedelivered
tothepersonwhodeliveredit,orotherwisedealt
with according to his directions, or kept until he
reclaimsit,asthecasemaybe.
Note: Generally, no fiduciaryrelationship is created

by bailment. No trusteebeneficiary relationship is
created.
Q: What are the contractual bailments with

referencetocompensation?
A:
1. For the sole benefit of the bailor
(gratuitous)
e.g.gratuitousdeposit,commodatum
2. For the sole benefit of the bailee

(gratuitous)
e.g.commodatum,mutuum
3. Forthebenefitofbothparties(mutual
benefitbailments)
a. e.g.depositforcompensaton,
involuntary deposit, pledge
andbailmentsforhire:
b. hireofthingstemporaryuse
c. hire of service for work or
labor
d. hireofcarriageofgoodsfor
carriage
e. hireofcustodyforstorage
alone. Their existence does not

ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
UNIVERSITYOFSANTOTOMAS
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
Facultad de Derecho Civil
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UST GOLDEN NOTES 2011
I.LOAN
Q:Whatisloan?
A: It is a contract where 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 is
called a commodatum; or money or other
consumable things, upon the condition that the
same amount of the same kind and quality shall
be paid, in which case the contract is simply
calledaloanormutuum(Art.1933,NCC)
Q:Whatarethekindsofloan?
A:
1. Commodatum where the bailor
(lender) delivers to the bailee
(borrower) a nonconsumable thing so
that the latter may use it for a given
timeandreturnthesamething
2. Mutuum where the bailor (lender)
deliverstothebailee(borrower)money
or other consumable thing upon the
conditionthatthelattershallpaysame
amountofthesamekindandquality
Q:Whatmaybetheobjectofacontractofloan?
A:Itdependsuponthekindofloan.
1. Commodatum the object is generally
notconsumable;
2. Mutuumtheobjectisconsumable.
Q: Distinguish consumable from non

consumablethings.
A:Athingisconsumablewhenitcannotbeused
in a manner appropriate to its nature without
being consumed. (Art. 418) (e.g. food, firewood,
gasoline)
On the other hand, a nonconsumable thing is a

movable thing which can be used in a manner
appropriate to its nature without it being
consumed.(Art.418)(e.g.car,television,radio)
Q:Distinguishfungiblefromnonfungiblethings.
A: Fungible thing is one where the parties have

agreedtoallowthesubstitutionofthethinggiven
ordeliveredwithanequivalentthing(3Manresa
58). Nonfungible thing is one where the parties
have the intention of having the same identical
thingreturnedaftertheintendeduse(Ibid).
Note:Astowhetherathingisconsumableornot,it
dependsuponthenatureofthething.
376
Astowhetheritisfungibleornot,itdependsupon
theintentionoftheparties.
Fungiblesareusuallydeterminedbynumber,weight
ormeasure.
Q:Arenonfungiblethingsirreplaceable?
A:
GR: Nonfungible things are irreplaceable.
Theymustbereturnedtothelenderafterthe
purposeoftheloanhadbeenaccomplished.
XPN:Nonfungiblethingsmaybereplacedby
agreement of the parties. In such case, the
contractisbarterandnotloan.
Q:Distinguishloanfrom:
Credit;
Discount;
Rentorlease;and
Barter.
A:
CREDIT
Abilitytoborrowmoney
byvirtueofthe
confidencereposedby
thelenderuntohimthat
hewillpaywhathehas
promised
DISCOUNT
Interestisdeductedin
advance
Alwaysondoublename
paper
RENT
Theownerofproperty
doesnotlosethe
ownership;heloseshis
controlovertheproperty
rentedduringtheperiod
ofcontract
Landlordtenant
relationship
BARTER
Subjectmatterarenon
fungiblethings
Alwaysonerous
Thereisamutualsale
resultinginthetransfer
ofownershiponboth
sides
Thepartiesdonotreturn
thethingssubjectofthe
exchange
LOAN
Deliverybyonepartyandthe
receiptbytheotherpartyofa
givensumofmoney,uponan
agreement,expressedorimplied,
torepaythesumloaned,withor
withoutinterest
LOAN
Interestistakenattheexpiration
ofacredit
Generallyonasinglenamepaper
LOAN
Thethingloanedbecomesthe
propertyoftheobligor
Obligorobligeerelationship
LOAN
Subjectmatterismoneyorother
fungiblethings
Maybegratuitousoronerous
inmutuum,thereistransferof
ownership,thereisnosale
incommodatum,thebailee
returnsthethingafterthe
expirationoftheperiodagreed
upon
CIVILLAWTEAM:
ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII;
ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ.
FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM
CREDIT TRANSACTIONS
Q:Whatisbarter?
A: It is a contract whereby one of the parties

bindshimselftogiveonethinginconsiderationof
the others promise to give another thing. (Art.
1638,NCC)
Q: What is the legal effect of an accepted

promisetodeliversomethingbywayofmutuum
orsimpleloan?
A:Itisbindingupontheparties,butthemutuum
or simple loan itself shall not be perfected until
the delivery of the object of the contract (Art.
1934,NCC).
Q: What is the effect if the loan is for an

unlawfulpurpose?
A:Iftheloanisexecutedforillegalorimmoralor
unlawfulpurposeoruse,thecontractisvoid.The
bailor may immediately recover the thing before
any illegal act is committed and provided he is
innocent or in good faith (Arts. 1411 and 1412,
NCC).
A.COMMODATUMANDMUTUUM
COMMODATUM
Q:Whatiscommodatum?
A:Itisacontractwhereoneoftheparties(bailor)
delivers to another (bailee) something not
consumable so that the latter may use the same
foracertaintimeandthereafterreturnsit.
Q: What are the characteristics of a contract of

commodatum?
A:
1. Real contract delivery of the thing
loanedisnecessaryfortheperfectionof
thecontract
2. Unilateral contract once subject
matter is delivered, creates obligations
on the part of only one of the parties
(theborrower)
3. Essentiallygratuitous
4. Purpose is to transfer the temporary
useofthethingloaned
5. Principalcontract
6. Purelypersonalcontract
Q:Whataretheelementsofcommodatum?
A:Theremustbe:
1. abaileeandbailor
2.
3.
thebaileeacquirestheuseofthething
itmustbegratuitous
Q:Whatcouldbethesubjectofcommodatum?
A:
GR: Under Art. 1933, the subject matter of
commodatum must be nonconsumable
becausethethingmustbereturned.
XPN:Consumablegoodsmaybetheobjectof
commodatum if the purpose is not to
consume them such as when they were
loaned merely for ad ostentationem or
exhibitionpurposes.Aftertheaffair,thesame
and identical goods shall be returned to the
lenderorbailor(Art.1936,NCC).
Q:Whatmaybetheobjectofcommodatum?
A:Bothmovableandimmovablepropertymaybe
theobjectofcommodatum.(Art.1937,NCC)
Q:Whatarethekindsofcommodatum?
A:
1. Ordinary commodatum bailor cannot
just demand the return of the thing at
will, because there is a period agreed
uponbytheparties.
2. Precarium one whereby the bailor

maydemandthethingloanedatwillin
thefollowingcases:
a. ifthedurationofthecontract
hadnotbeenstipulated;
b. if the use to which the thing
loanedshouldbedevotedhad
notbeenstipulated;or
c. if the use of the thing is
merely by tolerance of the
owner
Note: The word owner in Art. 1947 (2) is not proper

becausethebailorneednotbetheownerofthething.
(Pineda,CreditTransactionsandQuasicontracts,p.26,
2006ed)
Q: What are the consequences of the purely

personalcharacterofcommodatum?
A:
GR: Commodatum is purely personal in
character hence death of either bailor
orbaileeextinguishesthecontract(Art.
1939,NCC)
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XPN: By stipulation, the commodatum

is transmitted to the heirs of either or
bothparty.
In case of lease of the thing subject of

commodatum:
GR: The bailee can neither lend nor

lease the object of the contract to a
thirdperson.
XPN: Members of the bailees

household may make use of the thing
loaned.
Note:Membersofthebaileeshousehold
arenotconsideredasthirdpersons.
XPNtotheXPN:
Contrarystipulation;or
Natureofthethingforbidssuchuse.
Note:Householdmembersarethosewhopermanently
living or residing within the same residence including
thehouseholdhelpers.
Q:Distinguishcommodatumfromlease.
A:
COMMODATUM
Realcontract
Objectisanon
consumable(non
fungible)thing
Essentiallygratuitous
LEASE
Consensual
Objectmayevenbe
workorservice
Onerous
MUTUUM
Q:Whatismutuum?
A: It is a contract whereby one of the parties

calledthelenderdeliverstoanothercalledthe
borrower, money or other consumable thing
subjecttotheconditionthatthesameamountof
thesamekindandquantityshallbepaid.
Q: What are the characteristics of a contract of

mutuum?
A:
Borroweracquiresownershipofthething.
If the thing loaned is money, payment must
be made in the currency which is legal
tenderinthePhilippinesandincaseof
extraordinary deflation or inflation, the
basis of payment shall be the value of
thecurrencyatthetimeofthecreation
oftheobligation.
378
Iffungiblethingwasloaned,theborroweris
obligedtopaythelenderanotherthing
ofthesamekind,qualityandquantity.
Note:Mereissuanceofchecksdoesnotperfectthe
contractofloan.Itisonlyafterthecheckshavebeen
encashed that the contact may be deemed
perfected. Further, when the movable thing
deliveredinloanisnottobereturnedtothebailor,
but may be substituted or replaced with another
equivalentthing,itisafungiblething.
Q:Distinguishcommodatumfrommutuum.
A:
COMMODATUM
MUTUUM
Object
Nonconsumable(Non
Consumable
fungible)
Cause
Gratuitous,otherwiseitisa
Mayormaynotbe
lease
gratuitous
Purpose
Useortemporarypossession
ofthethingloanedbut
GR: not its fruit because the

bailorremainstheowner
Consumption
XPNs:
use of the fruits is
stipulated;
enjoyment of the fruits
isstipulated;or
enjoyment of the fruits
isincidentaltoitsuse
SubjectMatter
Real orpersonalproperty
Generallynonconsumable
Onlypersonal
thingsbutmaycover
property
consumablesifthepurpose
ofthecontractisfor
exhibition.
Ownershipofthething
Retainedbythebailor
Passestothedebtor
Thingtobereturned
Equalamountofthe
Exactthingloaned
samekindandquality
Whobearsriskofloss
Bailor
Debtor
Whentoreturn
Incaseofurgentneedeven
Onlyafterthe
beforetheexpirationof
term(thecontractisinthe expirationoftheterm
meantimesuspended)
Contract
Contractof
Contractofuse
consumption
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q:Distinguishmutuumfrom:
Lease;and
Barter.(seeArticle1954)
A:
MUTUUM
Objectismoneyorany
consumable(fungible)
thing
Thereistransferof
ownership
Creditordebtor
relationship
Unilateral
LEASE
Objectmaybeanything,
whethermovableor
immovable,fungibleor
nonfungible
Notransferofownership
Lessorlesseerelationship
Bilateral
MUTUUM
Subjectmatterismoney
orotherfungiblethings
Maybegratuitousor
onerous
Whileinmutuum,there
istransferofownership,
thereisnosale
BARTER
Subjectmatterarenon
fungiblethings
Alwaysonerous
Thereisamutualsale
resultinginthetransfer
ofownershiponboth
sides
Themoneyor
consumablething
Thepartiesdonotreturn
loanedisnotreturned
thethingssubjectofthe
butthesameamount
exchange
ofthesamekindand
quantityshallbepaid.
Q:Whatisthecauseinasimpleloan?
A:
1. As to the borrower the acquisition of
thething
2. As to the lender the right to demand
the return of the thing loaned or its
equivalent (Monte de Piedad v. Javier,
CA,36Off.Gaz.2176).
Q:Whatmaybetheobjectofmutuum?
A:Moneyorfungibleandconsumablethings.
Q:Canloanofmoneybepayableinkind?
A: Yes, if there is an agreement between the

parties(Art.1958,NCC).
Q:Whenisacontractofsimpleloanperfected?
A: Real contracts, such as deposit, pledge and

commodatum, are not perfected until the
deliveryoftheobjectoftheobligation.(Art.1316,
NCC) While mutuum or simple loan is not
mentioned, it has the same character as
commodatum. Hence, mutuum is also a real
contract which cannot be perfected until the

deliveryoftheobject.
Q: What are the governing rules on paymentof

loan?
A: It depends on the object of the contract of

loan.
Money governed by Arts. 1249 and 1250,
NCC
GR: Payment shall be made in the

currencystipulated.
XPN:Ifnot,thatcurrencywhichislegal
tenderinthePhilippines.
Note: In case of extraordinary inflation

value of the currency at the time of the
creationoftheobligation.
Consumable or fungible thing debtor or

borrowershallpayanotherthingofthe
same kind, quality and quantity even if
it should change in value. If cannot be
done,thevalueofthethingatthetime
of its perfection (delivery) shall be the
basisofthepaymentoftheloan.
Q:Mayapersonbeimprisonedfornonpayment
ofdebt?
A: No. This is because of the constitutional

provision under Article III, Section 3 of the 1987
Constitution which expressly provides that no
personshallbeimprisonedfornonpaymentofa
debtorpolltax.
Q: Can estafa be committed by a person who

refusestopayhisdebtordeniesitsexistence?
A: No, because the debtor in mutuum becomes

the owner of the thing delivered to him. If he
consumedordisposedofthething,theactwhich
is an act of ownership is not misappropriation.
Hence, there is no basis for a criminal
prosecution.
Q: Does destruction of the thing loaned

extinguishonesobligationinasimpleloan?
A: The destruction of the thing loaned does not

extinguish ones obligation to pay because his
obligationisnottoreturnthethingloanedbutto
payagenericthing.
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Q: Who are the parties to a commodatum?

Distinguish.
A:
1. Bailor/Comodatario/Commodans the
giver/ lender the party who delivers
the possession or custody of the thing
bailed.
2. Bailee/Comodante/Commodatarius
therecipient/borrowerthepartywho
receives the possession or custody of
thethingthusdelivered.
B.OBLIGATIONSOFTHEBAILORANDBAILEE
BAILOR
OBLIGATIONSOFTHEBAILOR
Q:Whataretheobligationsofthebailor?
A:
Allowthebaileetheuseofthethingloaned
forthedurationoftheperiodstipulated
or until the accomplishment of the
purpose.
Refund the extraordinary expenses the

bailee incurred for the preservation of
thething.
GR: The bailee must bring to the

knowledge of the bailor such expenses
beforeincurringthesame.
XPN:Incasethereisurgencyanddelay
wouldcauseimminentdanger.
Note: If the extraordinary expenses arise

on the occasion of the actual use of the
thing loaned by the bailee, the expenses
shall be borne by the bailor and bailee
equally,eventhoughthebaileeiswithout
fault.(Art.1949,NCC)
To be liable for damages for known hidden

defects.
Cannot exempt himself from payment of

expenses or damages by abandonment
ofthethingtobailee.
Q:Whenisthebailorliableforhiddendefects?
A:Whenthefollowingrequisitesarepresent:
1. there was a flaw or defect in the thing
loaned;
2. theflawordefectishidden;
380
3.
4.
5.
thebailorisawarethereof;
he does not advise the bailee of the
same;and
thebaileesuffersdamagesbyreasonof
saidflawordefect.
Q:Whatisthecauseofactionagainstthebailor
whodidnotdisclosetheflawordefect?
A:Actionforrecoveryofdamagesontheground
ofquasidelictbecauseofnegligenceorbadfaith.
RIGHTSOFABAILOR
Q: Can the bailor demand the return of thing

loanedanytimehepleases?
A:
GR:No
XPNs:
1. Incaseofurgentneedbythebailor
2. Incaseofprecarium
3. If the bailee commits an act of
ingratitudetothebailor(Art.1948,NCC),
towit:
a. If the bailee should commit

some offenses against the
person,honorortheproperty
of the bailor, or his wife or
children under his parental
authority;
b. If the bailee imputes to the
bailoranycriminialoffense,or
any act involving moral
turpitude, even though he
should prove it, unless the
crime or the act has been
committedagainstthebailee,
his wife or children under his
authority;or
c. If the bailee unduly refuses
the bailor support when the
bailee is legally or morally
bound to give support to the
bailor.
Note: The rationale for the application of Art. 765

which refers to donations is the fact that
commodatum,likedonation,isgratuitousinnature.
Q: If the contract of commodatum is a

precarium,willArt.1942(1)and(2)stillapply?
A:Itdepends.Iftherehasbeenademandonthe
part of the bailor before the loss of the thing
underthecircumstancessetforthunderArt.1942
(1)and(2)andthebaileedidnotreturnthething,
CIVILLAWTEAM:
CREDIT TRANSACTIONS
then the latter is liable. However, if there has
beennodemandonthepartofthebailorandthe
thingwaslost,thebailorisestoppedandcannot
hold the bailee liable for under a contract of
precarium, the use of the thing by the bailee
depends on the pleasure of the bailor and no
timeisfixedforsuchuse.Hence,demandonthe
partofthebailorisneededforthereturnofthe
thing. Without such, loss of the thing on the
handsofthebaileewillnotmakehimliable.
Note:Article1942.Thebaileeisliableforthelossof
the thing, even if it should be through a fortuitous
event:
Ifhedevotesthethingtoanypurposedifferent
fromthatforwhichithasbeenloaned;
Ifhekeepsitlongerthantheperiodstipulated,
or after the accomplishment of the use for
whichthecommodatumhasbeenconstituted;
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Q:Mustthebailorbetheownerofthething
loaned?
A: No. The bailor in commodatum need not be

theownerofthethingloaned.Itissufficientthat
he has possessory interest over subject matter
(Art.1938,NCC).
Note: A mere lessee or usufructuary may

gratuitously give the use of the thing leased or in
usufruct, provided there is no prohibition against
such.
under Articles 1207 and 1208. Solidarity is

providedtosafeguardeffectivelytherightsofthe
bailoroverthethingloaned.
Note: The concurrence of two or more creditors or

twoormoredebtorsinoneandthesameobligation
does not imply that each one of the former has a
right to demand, or that each one of the latter is
bound to render, entire compliance with the
prestation. There is solidary liability only when the
obligation expressly so states, or when the law or
thenatureoftheobligationrequiressolidarity.(Art.
1207)
Iffromthelaw,orthenatureorthewordingofthe
obligationstowhichtheprecedingarticlerefersthe
contrarydoesnotappear,thecreditordebtshallbe
presumedtobedividedintoasmanyequalsharesas
there are creditors or debtors, the credits or debts
beingconsidereddistinctfromoneanother,subject
to the Rules of Court governing the multiplicity of
suits.(Art.1208)
OBLIGATIONSOFTHEBAILEE
Q:Whataretheobligationsofabailee?
A:
Astoordinary
expenses
BAILEE
Q:Iftherearetwoormorebaileestoacontract
of commodatum, what is the nature of their
liability?
A: When thereare 2 or more bailees to whoma

thing is loaned in the same contract, they are
liablesolidarily.(Art.1945,NCC)
Astothelossof
thethingin
caseof
fortuitous
event
Note:Theirliabilityissolidaryinordertoprotectthe
bailorsrightsoverthethingloaned.
Q: Following the principle of autonomy of

contracts, may the parties to a contract of
commodatum validly stipulate that the liability
ofthebaileesshallbejoint?
A: No. Article 1245 expressly provides that in a

contractofcommodatum,whentherearetwoor
more bailees to whom a thing is loaned in the
same contract, they are liable solidarily. It
constitutesasanexceptiontothegeneralruleof
joint obligations where there are two or more
debtors, who concur in one and same obligation
Astothe
deterioration
ofthething
loaned
Payfortheordinaryexpensesfor
theuseandpreservationofthe
thing
Liableforlosseventhrough
fortuitouseventwhen
[askdl]:
when being able to save
either of the thing
borrowedorhisownthing,
hechosetosavethelatter
hekeepsitlongerthanthe
period stipulated, or after
the accomplishment of its
use(indefault);
the thing loaned has been
deliveredwithappraisalof
itsvalue
when he lends or leases it
to third persons who are
not members of his
household
thereisdeviationfromthe
purpose
Notliableforthedeteriorationof
thethingloanedcausedbythe
ordinarywearandtearofthething
loaned.(Art.1943)
Note:Whentherearetwoormore
bailees,theirliabilityissolidary.
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RIGHTSOFABAILEE
Q:Whataretherightsofabailee?
A:FRUD
Useofthething;
Make use of the fruits of the thing when
suchrightisstipulatedinthecontract;
Not answerable for the deterioration of the
thingloanedduetotheusethereofand
withouthisfault;and
Right of retention for damages due to
hidden defects or flaws of the thing of
whichhewasnotadvisedbythebailor.
Q: Art. 1178 of the NCC provides that all rights

acquired by virtue of an obligation are
transmissible. Is the right to use the thing by
virtue of a contract of commodatum
transmissible?
A:No,itisnottransmissiblefor2reasons:
Art.1178providesthatthetransmissibilityof
saidacquiredrightsareeithersubjectto
thelawsortoacontrarysipulation;and
Art. 1939 provides that a contract of
commodatum is purely personal in
character.
Note:Toruleotherwisewouldbetoruncounterto
the purely personal character of the commodatum
and to the proviso that transmissibility issubject to
thelawgoverningsuchobligations.
Q:Canthebaileelendorleasetheobjectofthe
contracttoathirdperson?
A:
GR:Thebaileecanneitherlendnorleasethe
objectofthecontracttoathirdperson.
XPN: Members of the bailees household

maymakeuseofthethingloaned.
Note: Members of the bailees household are

notconsideredasthirdpersons.
XPNtotheXPN:
Contrarystipulation;or
Nature of the thing forbids such
use.
Q:Whatisthelegaleffectifthebaileepaysfor
theuseofthething?
A: The contract ceases to be commodatum; it

becomeslease.
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Q:Incommodatum,doesthebaileeacquirethe
useofthefruitsofthething?
A: No. The bailee in commodatum acquires only

theuseofthethingloanedbutnotitsfruits(Art.
1935,NCC).
Q:Isastipulationthatthebaileemaymakeuse
ofthefruitsofthethingloanedvalid?
A:Yes.Itisunderstoodthattheenjoymentofthe
fruits must only be incidental to the use of the
thing.Itshouldnotbethemaincause;otherwise,
thecontractisnotacommodatumbutausufruct
(Art.1940,NCC).
Q:Willthestipulationthatthebaileemaymake
use of the fruits of the thing loaned impair the
essenceofcommodatum?
A: No. It will not impair the essence of

commodatum because the actual cause or
considerationthereforeisstilltheliberalityofthe
bailororlender.
Q:Isthererightofretentionincommodatum?
A:
GR:Thebaileecannotretainthethingloaned
onthegroundthatthebailorowesthebailee.
XPN:Thebaileehastherightofretentionfor
claims of damages which the bailee incurred
orsufferedbyreasonofthehiddendefectsor
flawsofthethingloaned,ofwhichhewasnot
informedoradvisedbythebailor.
Note: The reason for the general rule that there is

norightofretentionisthatbailmentimpliesatrust
thatassoonasthetimehasexpiredorthepurpose
accomplished,thebailedpropertymustbereturned
to the bailor. Also, Art. 1287 provides that
compensation shall not be proper when one of the
debts arises from the obligations of a bailee in
commodatum.(Art.1287,reworded)
Q: Suppose during the said retention of the

bailee,thethingislostduetoafortuitousevent.
Canthebailorholdthebaileeliableforsaidloss
basedonArt.1942(2)?
A: No, the bailee cannot be held liable for the

loss. Art. 1942 (2) contemplates wrongful
retention or a situation where the bailee is not
entitledtoretainthethingloaned.
Note: Article 1942 (2) provides that the bailee is

liable for the loss of the thing, even if it should be
throughafortuitouseventifhekeepsitlongerthan
the period stipulated, or after the accomplishment
CIVILLAWTEAM:
CREDIT TRANSACTIONS
of the use for which the commodatum has been
constituted.
Q: What if the bailee is entitled to payment or

reimbursementofexpensesincurredordamages
sufferedandthebailoroffersthethingloanedas
payment for said expenses or damages, would
such offer be valid or not, in view of the
prohibitionunderArt.1952whichstatesthatthe
bailorcannotexempthimselffromthepayment
ofexpensesordamagesbyabandoningthething
tothebailee?
A:Theofferisnotvalid.Itmaybeconsideredas
dationinpayment.Inthiscase,theabandonment
done by the bailor was made in favor of the
bailee for the payment of the expenses incurred
by the latter, hence, a violation of what the law
hasexpresslyprohibitedunderArticle1952.
Q: When is the bailee not entitled to

reimbursementfortheexpensesheincurred?
A: If, for the purpose of making use and

preservation of the thing, the bailee incurs
expenses other than those ordinary and
extraordinaryexpenses.
Q: Before he left for Riyadh to work as a

mechanic, Pedro lefthis van with Tito, with the
understandingthatthelattercoulduseitforone
year for his personal or family use while Pedro
works in Riyadh. He did not tell Tito that the
brakes of the van were faulty. Tito had the van
tuned up and the brakes repaired. He spent a
total amount of P15,000.00. After using the
vehicle for two weeks, Tito discovered that it
consumed too much fuel. To make up for the
expenses,heleasedittoAnnabelle.Twomonths
later, Pedro returned to the Philippines and
askedTitotoreturnthevan.
Unfortunately, while being driven by Tito, the

van was accidentally damaged by a cargo truck
withouthisfault.
Who shall bear the P15,000.00 spent for the

repairofthevan?Explain.
A:ThecontractbetweenPedroandTitoisoneof
commodatum. Of the P15, 000.00 spent, Pedro,
the bailor, shall bear the expenses for the repair
of the faulty brakes, they being extraordinary
expenses incurred due to the nondisclosure by
thebailorofthedefectorfault;Tito,ontheother
hand,shallshoulder"thatpartoftheP15,000.00
spent for the tuneup, said expense being
ordinaryfortheuseandpreservationofthevan.
Who shall bear the costs for the van's fuel, oil
and other materials while it was with Tito?
Explain.
A: The costs for the fuel and other materials are

considered ordinary expenses, and consequently
Tito, the bailee, shall shoulder them (Art. 1941,
NCC)
Does Pedro have the right to retrieve the van

evenbeforethelapseofoneyear?Explain.
A: No, Pedro cannot demand the return of the

van until after the expiration of the oneyear
periodstipulated.However,ifinthemeantimehe
should have urgent need of the van, he may
demanditsreturnortemporaryuse.
Who shall bear the expenses for the accidental

damagecausedbythecargotruck,grantingthat
the truck driver and truck owner are insolvent?
Explain.
A: Both Tito and Pedro shall bear equally the

costsoftheextraordinaryexpenses,havingbeen
incurredontheoccasionofactualuseofthevan
byTito,thebailee,eventhoughheactedwithout
fault.[Art.1949(2),NCC](2005BarQuestion)
C.INTERESTANDTHESUSPENSIONOFTHE
USURYLAW
Q:Whatisinterest?
A:Itisnothingmorethanthecompensationtobe
paid by the borrower for the use of the money
lenttohimbythelender.
Q:Whatistheruleoninterests?
A:
GR: No interest shall be due unless it is
stipulatedinwriting.(Art.1956,NCC)
XPN: In case of interest on damages or

indemnity for damages, it need not be in
writing.
Q:Whatisthebasisoftherighttointerest?
A: It only arises by reason of the contract

(stipulation in writing) or by reason of delay or
failure to pay principal on which interest is
demanded (Baretto v. Santa Marina, No. 11908,
feb.4,1918).
Iftheobligationconsistsofthepaymentofasum
of money, and the debtor incurs delay, the
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indemnity for damages shall be the payment of

legal interest (Philrock, Inc. v. Construction
Industry Arbitration Commission, G.R. Nos.
13284849,June25,2001)
Q:Cantherebeinterestinequitablemortgage?
A: No. Interest could not be collected on

equitable mortgage because the same is not
stipulatedinwriting(Tanv.Valdehueza,G.R.No.
L38745,Aug.6,1975).
Note: One which, although it lacks the proper

formalities or other requisites of a mortgage
required by law, nevertheless reveals the intention
of the parties to burden real property as a security
for a debt, and contains nothing impossible or
contrarytolaw.
Q:Canpaidunstipulatedinterestberecovered?
A:Ifpaidbymistakethedebtormayrecoverasin
the case of solutio indebiti or undue payment.
However if payment is made voluntarily, no
recovery can be made as in the case of natural
obligation.
Q: Sabugo granted a loan to Samilin. The loan

agreement was not reduced in writing.
Thereafter, Sabugo demanded additional
interest which was paid by Samilin in cash and
checks. Upon advice of her lawyer, Samilin
demanded for the return of the amount of
interestpaid.Isthepaymentofinterestvalid?
A: No. Payment of monetary interest is allowed

onlyif:
1. therewasanexpressstipulationforthe
paymentofinterest;and
2. the agreement for the payment of
interestwasreducedinwriting.
Theconcurrenceofthetwoconditionsisrequired
for the payment of monetary interest. Thus,
collection of interest without any stipulation
thereforinwritingisprohibitedbylaw.(Sigaanv.
Villanueva,G.R.No.173227,Jan.20,2009.)
Q: May interest be adjudged on unliquidated

claims?
A:
GR:No.
XPN:Unlessthesamecanbeestablishedwith
reasonablecertainty.(AtlanticGulfandPacific
Company of Manila, Inc. v. CA, G.R. Nos.
11484142,Aug.23,1995)
384
Q: In case the interest may be adjudged on

unliquidatedclaimbutthepleadingsincourtdid
not spell out said amount with certitude, when
shalllegalinterestthereonrun?
A: The legal interest thereon shall run only from

the promulgation of judgment of said court, it
being at that stage that the quantification of
damages may be deemed to have been
reasonablyascertained.(Ibid)
Q: What is the actual base for computing such

legalinterest?
A: It shall be the amount as finally adjudged by

theSupremeCourt.(Ibid)
Q: What is the basis for computation for

indemnityfordamages?
A: It shall be the interest agreed upon by the

partiesandintheabsenceofstipulation,thelegal
interestwhichis6%perannum(Art.2208,NCC).
Note:6%becauseitisbasedondamagesandithas
been said that judgments other than loans,
forbearance,etc.isbasedon6%.
Q:Whataretheclassesofinterest?
A:
1. Simple interest which is paid for the
use of the money, at a certain rate
stipulatedinwritingbytheparties.
2. Compound interest which is imposed
upon accrued interest, that is, the
interestdueandunpaid.
3. Legal that interest which the law
directstobepaidintheabsenceofany
agreementastotherate.
Q:Whencantherebe:
1. Monetaryinterest;
2. Compensatoryinterest?
A:
1. Monetary interest must be expressly
stipulated in writing and it must be
lawful.(Art.1956,NCC)Itispayableon
thedelayoftheuseofthemoney.
2. Indemnity for damages (compensatory
interest) the debtor in delay is liable
to pay legal interest (6% or 12%) as
indemnity for damages even in the
absence of stipulation for the payment
interest. Such interest as indemnity for
damages is payable only in case of
defaultornonperformanceofcontract.
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Note: If the obligation consists in the payment of a
sum of money and the debtor incurs in delay, the
debtorisliablefordamages.(Art.2209,NCC)
Q: What is the basis for the interest rate for

compensatoryinterest?
A:
1. Central Bank Circular 416 12% per annum
incasesof:
a. Loans
b. Forbearance of money, goods and
credits
c. Judgement involving such loan or
forbearance, in the absence of
expressagreementastosuchrate
ofinterest
Note:Duringtheinterimperiodfrom
the date of judgment until actual
payment.
d. Pursuant to P.D. No. 116 amending

Act No. 2655 (Usury Law), the
Central Bank of the Philippines
issued Circular No. 416 raising the
legalrateofinterestfrom6%to12%
perannum.
e. In the absence of a stipulation as to

interest, the loan due will now earn
interest at the legal rate of 12% per
annum.(Sulitv.CA,G.R.No.119247,
Feb.17,1997).
2.
3.
Art.2209,NCC6%perannumincasesof:
a. Othersources(i.e.sale)
b. Damages arising from injury from
person.
c. Loss of property which does not
involvealoan.
Interest accruing from unpaid interest
interest due shall earn interest from the
time it is judicially demanded although the
obligationmaybesilentuponthispoint.
Q:Whatisforbearance?
A: It signifies the contractual obligation of the

creditor to forbear during a given period of time
torequirethedebtorpaymentofanexistingdebt
thendueandpayable.Suchforbearanceofgiving
timeforthepaymentofadebtis,insubstance,a
loan(91C.J.S.598).
Q: What is the interest rate imposable for back

rentals?
A: Back rentals being equivalent to a loan or

forbearance of money, the interest rate due
thereonis12%perannumfromthetimeofextra
judicial demand (Catungal v. Hao, G.R. No.
134972,Mar.22,2001).
Note: Back rental is the full extended value of land

letbylease,payablebytenantforlifeoryears.
Q:Whatistheruleoncompoundingofinterest?
A:
GR: Accrued interest (interest due and
unpaid)shallnotearninterest.
XPN:When:
1. judiciallydemanded;or
2. thereisexpressstipulationmadebythe
parties that the interest due and
unpaid shall be added to the principal
obligation and the resulting total
amountshallearninterest.
Note:Compoundingofinterestmaybeavailedonly
when there is a written stipulation in the contract
forthepaymentofinterest.
Q:Whatisfloatinginterest?
A: It is the interest stipulated by banks which is

not fixed and made to depend upon the
prevailing market conditions, considering the
fluctuatingeconomicconditions.
Q:Isastipulationforfloatinginterestvalid?
A: No. While it may be acceptable for practical

reasonsgiventhefluctuatingeconomicconditions
forbankstostipulatethatinterestratesonaloan
not be fixed and instead be made dependent on
prevailing market conditions, there should be a
reference rate upon which to peg such variable
interestrates[ConsolidatedBankandTrustCorp.
(Solid Bank) v. CA, G.R. No. 114672, Apr. 19,
2001].
Q:Whatisinterestondamages?
A: Interest that which is imposed in a judgment

asindemnityfordamages.
Note:Itneednotbeinwritingandcomputedfrom
thetimeofthefinalityofdecision.
Q: A judgment was rendered ordering the

defendant Maybel to pay Vanessa with legal
interest of 12% from the filing of the complaint
until paid. The decision became final and
executory. Maybel argues that the rate of 12%
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underCentralBankCircular416wasmisapplied.
How much by way of legal interest should a
judgmentdebtorpaythejudgmentcreditor?
A: The judgments spoken of and referred to

underCentralBankCircular416arejudgmentsin
litigations involving loans or forbearances of
money, goods or credits. Any other kind of
monetary judgments which has nothing to do
with, nor involving loans or forbearance of any
money goods or credits does not fall within the
coverage of said law. Coming to the case at bar,
thedecisionhereinsoughttobeexecutedisone
rendered in an Action for Damages for injury to
personsandlossofpropertyanddoesnotinvolve
any loan, much less forbearances of any money,
goodsorcredits.
Q: Carlos sues Dino for (a) collection on a

promissory note for a loan, with no agreement
on interest, on which Dino defaulted, and (b)
damages caused by Dino on his (Carlos')
priceless Michaelangelo painting on which Dino
accidentally spilled acid while transporting.it.
The court finds Dino liable on the promissory
note and awards damages to Carlos for the
damaged painting, with interests for both
awards. What rates of interest may the court
imposewithrespecttobothawards?Explain.
A: With respect to the collection of money or

promissorynote,itbeingaforbearanceofmoney,
the legal rate of interest for having defaulted on
the payment of 12% will apply. With respect to
the damages to the painting, it is 6% from the
timeofthefinaldemanduptothetimeoffinality
ofthedecisionand12%ofthetotalamountfrom
finality of judgment until judgment credit is fully
paid. The court considers the latter as a
forbearance of money. (Eastern Shipping Lines,
Inc. v. CA, G.R. No. 97412, July 12, 1994; Arts.
2210and2211,NCC)(2002BarQuestion)
Q:Musttheprincipaldebtstillbepaidin
usurioustransactions?
A: Yes. Under the Usury Law, notwithstanding

stipulationsofusuriousinterest,thedebtormust
still pay the principal debt (Lopez v. El Hogar
Filipino,No.22678,Jan.12,1925).
Q: What is the rationale behind the validity of

unconscionableInterestrateinaloan?
A:TheSupremeCourtsaidnothinginsaidcircular
(Circular905)suspendingUsuryLawgrantslender
authority to raise interest rates to levels which
will either enslave their borrowers or lead to a
386
hemorraghing of their assets (Almeda v. CA, G.R.

No.113412,Apr.17,1996)
InthecaseofMedelv.CA(G.R.No.131622,Nov.
27, 1998), the court ruled that while stipulated
interest of 5.5% per month on a loan is usurious
pursuant to CBC No. 905, the same must be
equitably reduced for being iniquitous,
unconscionable and exorbitant. It is contrary to
morals. It was reduced to 12% per annum in
consonantwithjusticeandfairplay.
Q: Samuel borrowed P300,000.00 housing loan

from the bank at 18% per annum interest.
However, the promissory note contained a
proviso that the bank "reserves the right to
increase interest within the limits allowed by
law." By virtue of such proviso, over the
objections of Samuel, the bank increased the
interestrateperiodicallyuntilitreached48%per
annum. Finally, Samuel filed an action
questioningtherightofthebanktoincreasethe
interest rate up to 48%. The bank raised the
defensethattheCentralBankofthePhilippines
had already suspended the Usury Law. Will the
actionprosperornot?Why?
A:Theactionwillprosper.Whileitistruethatthe
interest ceilings set by the Usury Law are no
longerinforce,ithasbeenheldthatPDNo.1684
andCBCircularNo.905merelyallowcontracting
parties to stipulate freely on any adjustment in
the interest rate on a loan or forbearance of
moneybutdonotauthorizeaunilateralincrease
of the interest rate by one party without the
other'sconsent(PNBv.CA,G.R.No.107569,Nov.
8, 1994). To say otherwise will violate the
principle of mutuality of contracts under Article
1308oftheCivilCode.Tobevalid,therefore,any
changeofinterestmustbemutuallyagreedupon
by the parties (Dizon v. Magsaysay, G.R. No. L
23399, May 31, 1974). In the present problem,
the debtor not having given his consent to the
increase in interest, the increase is void. (2001
BarQuestion)
II.DEPOSIT
Q:Whatisdeposit?
A: It is a contract whereby a person (depositor)

delivers a thing to another (depositary), for the
principal purpose of safekeeping it, with the
obligationofreturningitwhendemanded.
Q:Whenisacontractofdepositconstituted?
CIVILLAWTEAM:
CREDIT TRANSACTIONS
A: From the moment a person receives a thing
belongingtoanother,withtheobligationofsafely
keepingitandreturningthesameupondemand.
Q: What are the characteristics of contract of

deposit?
A:
1. Real contract because it can only be
perfectedbythedeliveryoftheobjectofthe
contract.
However, an agreement to
constitute a future deposit is a
consensual contract and is
thereforebinding.
Note: There is no consensual

contract of deposit; there is only a
consensual promise to deliver which
isbindingifsuchisaccepted.
2.
Object of the contract must be a movable

property. However, in cases of judicial
deposit, the subject matter may be a real
property.
3.
Purpose is for the safekeeping of the thing

deposited. This must be the principal
purposeandnotonlysecondary.
4.
Itisgratuitous,unlessthereisa:
a. Contraryagreement;or
b. The depositary is engaged in the
business of storing goods, like a
warehouseman.
5. The depositary cannot use the thing

deposited,unless:
a. Permittedbythedepositor;or
b. Preservation of the thing requires
itsuse,butonlyforsaidpurpose.
Maybemadeorallyorinwriting.
Q:Distinguishdepositfrom:
1. Mutuum;
2. Commodatum;
3. Agency;
4. Lease;and
5. Sale.
A:
1.
DEPOSIT
MUTUUM
Purpose
Safekeeping/custody
Consumption
Whentoreturn
Upondemandofthe
Uponexpirationofthe
depositor
termgrantedtothe
borrower
SubjectMatter
Movable(extrajudicial)or
Moneyorotherfungible
maybeimmovable
thing
(judicial)
Relationship
Depositordepositary
Lenderborrower
Compensation
Nocompensationof
Therecanbe
thingsdepositedwith
compensationofcredits
eachother(exceptby
mutualagreement)
2.
DEPOSIT
COMMODATUM
PrincipalPurpose
Safekeeping
Transferofuse
Nature
Maybegratuitousor
Alwaysgratuitous
onerous
3.
DEPOSIT
AGENCY
Purpose
Representationofthe
Safekeeping
principalbytheagent
Reasonforcustodyofthething
Thecustodyofthething
Itismerelyanincidental
istheprincipaland
obligationoftheagent
essentialreasonforthe
deposit
Nature
Itisgenerallyonerousor
Essentiallygratuitous
forcompensation
4.
DEPOSIT
LEASE
PrincipalPurpose
Safekeeping
Useofthething
Whentoreturn
Upondemandofthe
Uponterminationofthe
depositor
leasecontract.
5.
DEPOSIT
SALE
Ownership
Retainedbydepositor.
Transferredtobuyer.
Q:Whatarethekindsofdeposit?
A:
1. Judicial(sequestration)
2. Extrajudicial
a. Voluntarythedeliveryismadeby
thewillofthedepositor.
b. Necessary made in compliance
with a legal obligation, or on the
occasion of any calamity, or by
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travelers in hotels and inns, or by

travelerswithcommoncarriers.
Q: Distinguish judicial from extrajudicial

deposit?
A:
JUDICIAL
EXTRAJUDICIAL
Creation
Willofthecontracting
Willofthecourt
parties
Purpose
Securityortoensurethe
rightofapartyto
propertyortorecoverin Custodyandsafekeeping
caseoffavorable
judgment
SubjectMatter
Movablesor
immovablesbut
Movablesonly
generallyimmovables
Cause
Generallygratuitousbut
Alwaysonerous
maybecompensated
Whenmustthethingbereturned
Uponorderofthecourt
Upondemandof
orwhenlitigationis
depositor
ended
Inwhosebehalfitisheld
Depositororthird
Personwhohasaright
persondesignated
Q: What is the nature of the rent of safety

depositboxes?
A:Therentofsafetydepositboxesisanordinary
contractofleaseofthingsandnotaspecialkind
of deposit because the General Banking Act as
revised has deleted the part where banks are
expressly authorized to accept documents or
papersforsafekeeping.
The case of Sia v. CA, G.R. No. 102970, May 13,

1993 enunciating that a rent of a safety deposit
box is a special kind of deposit, was decided
undertheformerGeneralBankingAct.However,
SC has not yet decided a case abandoning the
ruling in Sia v. CA, making it conform with the
newGeneralBankingAct.
Fixed, savings and current deposits in banks and

othersimilarinstitutionsarenottruedepositsbut
are considered simple loans because they earn
interest.(Art.1980,NCC)
Q: Is ownership necessary in a contract of

deposit?
388
A: The depositor need not be the owner of the

thing deposited because the purpose of the
contract is safekeeping and not transfer of
ownership.
Note: A deposit may also be made by two or more

persons each of whom believes himself entitled to
the thing deposited with a third person, who shall
deliver it in a proper case to the one to whom it
belongs.
Q: What is the nature of advance payment in a

contractofsale?
A: A so called deposit of an advance payment in

thecaseofasaleisnotthedepositcontemplated
underArt.1962.Itisthatadvancepaymentupon
whichownershipistransferredtotheselleronce
it is given subject to the completion of payment
by the buyer under an agreement. (Cruz v.
AuditorGeneral,No.L12233,May30,1959).
A.VOLUNTARYDEPOSIT
Q: What are the obligations of depositary in

voluntarydeposit?
A:
1. Tokeepthethingsafelyandreturnit
2. Exercisesamediligenceashewouldexercise
overhisownproperty
rd
3. Not to deposit the thing with a 3 person
unlessexpresslyauthorizedbystipulation
a.
b.
4.
5.
6.
Note:Depositaryisliablefortheloss
if:
Hedepositsthethingtoa3rdperson
without authority, even though the
lossisduetofortuitousevents
Deposits the thing to a 3rd person
who is manifestly careless or unfit
althoughthereisauthority.
Ifthethingshouldearninterest:
a. collectinterestasitfallsdue
b. take steps to preserve the value
andrightscorrespondingtoit
Nottocomminglethingsifsostipulated
GR:Nottomakeuseofthethingdeposited
XPNs:
a. When preservation of thing
depositedrequiresitsuse
b. Whenauthorizedbydepositor
CIVILLAWTEAM:
CREDIT TRANSACTIONS
c.
d.
7.
8.
GR: In such case it is no longer a

deposit but a contract of loan or
commodatum,asthecasemaybe.
XPN: Principal reason for the
contract is still safekeeping, it is
stilldeposit.
Whenthethingdepositedisdeliveredsealed
andclosed:
a. return the thing in the same
condition
b. pay damages if seal be broken
throughhisfault
c. keep the secret of the deposit
when seal is broken w/ or w/o his
fault
d. However, the depositary is

authorizedtoopenthesealorlock
when:
a. there
is
presumed
authority
b. outofnecessity
GR: Pay for any loss or damage that may

ariseduetohisfault
XPN:Liabilityoflossthroughfortuitousevent
XPNs to XPN: Even in case of loss through

fortuitousevent,stillliableif(USAD):
a. Stipulated
b. he Uses thing w/o depositors
permission
c. heDelaysitsreturn
d. he Allows others to use it (even if
hehimselfisauthorizedtouseit)
9.
Returnthethingdepositedwithallitsfruits,
accessions,andaccessories
10. Pay interest on sums converted to personal
useifthedepositconsistsofmoney
Q:Whenisavoluntarydepositextinguished?
A:
1. Lossordestructionofthingdeposited;
2. In gratuitous deposit, upon death of
eitherdepositorordepositary;or
3. Other causes (e.g. return of thing,
novation, expiration of the term,
fulfillmentofresolutorycondition)
PARTIES
Q:Whoarethepartiestoacontractofdeposit?
A:
1. Depositary to whom the thing is
deposited
2. Depositor the one who deposits the
thing
DEPOSITARY
Q:Whoisadepositary?
A:Thedepositaryistheonetowhomthethingis
deposited.
Q:Maythedepositarychangethemannerofthe
deposit?
A: Yes, if he may reasonably presume that the

depositorwouldconsenttothechangeifheknew
ofthefactsofthesituation.However,beforethe
depositarymaymakesuchchange,heshallnotify
the depositor thereof and wait for his decision,
unlessdelaywouldcausedanger(Art.1974,NCC).
Q: Is a guardian a depositary of the wards

property?
A: The guardian is not holding the funds of the

ward merely for safekeeping exclusively but also
intended for the latters maintenance and
support. Losses, if any without the fault of the
guardianshallbedeductedfromthefundsofthe
ward (Phil. Trust Co. v. Ballesteros, No. L8261,
April20,1956).
Q: What is the effect when the depositary has

permissiontousethethingdeposited?
A:
GR: The contract loses the concept of a
deposit and becomes a loan or
commodatum.
XPN:Wheresafekeepingisstilltheprincipal
purposeofthecontract(Art.1978,NCC).
Note:Thepermissionshallnotbepresumed,andits
existencemustbeproved.
Q: What is the rule with respect to the

determinationofthevalueofthething?
A:
GR: The statement of the depositor shall be
acceptedasprimafacieevidenceofthevalue
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iftheforcibleopeningoftheboxorreceptacle
isimputabletothedepositary.
XPN:Ifthereisaclear,strongandconvincing
evidencetothecontrary.
It is significant to know the value of the thing

depositedincasewhenthereisacontroversyon
the value of the thing deposited which is
deliveredclosedandsealed.
Q:UnderArt.1983,whatisincludedintheterm
products,accessoriesandaccessions?
A: The depositors ownership over the thing

carries with it the right to the fruits and all
accessionstheretoincluding:
1.
2.
3.
Naturalfruits
Industrialfruits
Civilfruits(Art.441,NCC)
Q: When the deposit consists of money, what

must be returned upon the extinguishment of
contract?
A: The provision of Article 1896 shall apply

wherein the money deposited must be returned
together with interest for the use thereof. The
impositionofinterestisintheformofpenaltyfor
the use of money there being no agreement to
pay the interest at the outset, otherwise, the
contractwillbeamutuum.
Q: Can the depositary demand that the

depositor should prove his ownership of the
thingdeposited?
A:
GR:No.
XPN: Should he discover that the thing has

been stolen and who its true owner is, he
mustadvisethelatterofthedeposit.
Note: If the depositary has reasonable grounds to

believethatthethinghasnotbeenlawfullyacquired
bythedepositor,theformermayreturnthesame.
Q:Whatshouldthedepositarydoifhelosesthe
thing through force majeure or government
orderandreceivesmoneyoranotherthinginits
place?
A: He shall deliver the sum or other thing to the

depositor.
390
Q:Whatisthedutyofthedepositarysheirifhe
sold the thing which he did not know was
deposited?
A: He shall be bound to return the price he may

have received or to assign his right of action
against the buyer in case the price has not been
paidbyhim(Art.1991,NCC).
Note: The provision applies only when the

depositary has died and left heir/s who took
possession of the thing in the concept of an owner
andsolditingoodfaithtoathirdperson.
Q: What is the right of the depositary if he has

notbeenpaidtheamountduetohim?
A: The depositary may retain the thing in pledge

until full payment of what may be due him by
reasonofthedeposit(Art.1994,NCC).
Q:Maythedepositarysellthethingretainedin
pledge?
A: Yes, Article 2108 provides that if, without the

faultofthepledgee,thereisdanger,destruction,
impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at
public auction. The proceeds of the auction shall
be a security for the principal obligation in the
same manner as the thing originally pledged.
(Pineda,p.93,2006ed)
Q:ManejaassignedandconveyedtoSerranoher
time deposit. Notwithstanding series of
demandsforencashmentoftheaforementioned
time deposits, OBM refused to honor the time
deposits. Is OBM liable to Serrano despite the
fact the Central Bank declared that OBM could
no longer operate due to its chronic reserve
deficiencies?
A: Yes. Bank deposits are in the nature of

irregular deposits. They are really loans because
they earn interest. All kinds of bank deposits,
whether fixed, savings or current, are to be
treatedasloansandaretobecoveredbythelaw
on loans. Current and savings deposits are loans
toabankbecauseitcanusethesame.Serrano,in
makingtimedepositsthatearninterestwithOBM
was in reality a creditor of the respondent bank,
and not a depositor. The bank was in turn a
debtor of Serrano. Failure of OBM to honor the
time deposits is failure to pay its obligation as a
debtor and not a breach of trust arising from a
depositarys failure to return the subject matter
ofthedeposit.(Serranov.CentralBank,G.R.No.
30511,Feb.14,1980)
CIVILLAWTEAM:
CREDIT TRANSACTIONS
DEPOSITOR
Q:Whoisadepositor?
A: The depositor is the one who deposited the

thing.
Q:Whatistherulewhentherearetwoormore
depositors?
A:Iftheyarenotsolidary,andthethingadmitsof
division,eachonecannotdemandmorethanhis
share.
When there is solidarity or the thing does not

admitofdivision,theprovisionsofArt.1212and
1214 shall govern. However, if there is a
stipulation that the thing should be returned to
oneofthedepositors,thedepositaryshallreturn
itonlytothepersondesignated(Art.1985,NCC).
Q:Whataretheobligationsofdepositor?
A:
1. Payment for necessary expenses for
preservation
a. If the deposit is gratuitous
reimbursedepositary
b. With compensation no need for
reimbursement; expenses borne
bydepositary
2. GR:Paylossesincurredbydepositarydueto
thecharacterofthethingdeposited.
XPNs:
a. When at the time of deposit, the
depositor was not aware of the
dangerous character of the thing
orwasnotexpectedtoknowit;
b. When the depositor notified the
depositary;or
c. Whenthedepositarywasawareof
it without advice from the
depositor.
3. In case of an onerous deposit, to pay the

compensationagreeduponasconsideration
forthedeposit.
Q: To whom should the thing deposited be

returned?
A:
1. To the depositor, to his heirs and
successors, or to the person who may
have been designated in the contract
(Art.1972,NCC).
2.
If the depositor was incapacitated at

the time of making the deposit, to his
guardian or administrator or to the
depositor himself should he acquire
capacity(Art.1970,NCC).
3. Evenifthedepositorhadcapacityatthe
time of making the deposit but he
subsequently loses his capacity during
thedeposit,thethingmustbereturned
to his legal representative (Art.1988,
NCC).
Q: Where should the thing deposited be
returned?
A:
GR:Attheplaceagreedupon.
XPN: In the absence of stipulation, at the

place where the thing deposited might be,
evenifitshouldnotbethesameplacewhere
the original deposit was made provided the
transferwasaccomplishedwithoutmaliceon
thepartofthedepositary.
Q: When should the thing deposited be

returned?
A:
GR:Upondemandoratwill,whetherornota
periodhasbeenstipulated.
XPNs:
1. Thing is judicially attached while in the
depositaryspossession.
2. Depositary was notified of the
opposition of a third person to the
return or the removal of the thing
deposited(Art.1986,NCC).
3. Whenthethingisstolenandtheperiod
of 30 days from notice to the true
owner for him to claim it had not yet
lapsed, the depositary cannot return
the thing deposited to the depositor.
This is intended to protect the true
owner.
4. In case of gratuitous deposit, if the
depositary has a justifiable reason for
not keeping the deposit. If the
depositor refuses, the depositary may
secure its consignation from the court
(Art.1989,NCC).
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B.NECESSARYDEPOSIT
Q:Whenisdepositconsideredasnecessary?
A:
1. When it is in compliance with a legal
obligation;
2. It takes place on the occasion of any
calamity, such as fire, storm, flood,
pillage, shipwreck, or other similar
events;
3. Made by passengers with common
carriers;or
4. Madebytravelersinhotelsorinns.
Q: When can the keepers of hotels or inns be

held responsible for loss of thing in case of
deposit?
A:Whenbotharepresent:
1. they have been previously informed by
guest about the effects the latter
broughtin;and
2. the guest has taken precautions
prescribedfortheirsafekeeping.
Note: They are liable regardless of the

degreeofcareexercisedwhen:
a. loss or injury is caused by his
employees or even by
strangers;or
b. lossiscausedby act ofthief or
robberwhenthereisnouseof
armsorirresistibleforce.
Q: What are the instances when the keepers of

hotels or inns are not liable for loss of thing in
caseofdeposit?
A:Theyarenotliablewhen:
1. loss or injury is caused by force
majeure;
2. lossduetotheactsofguests,hisfamily,
hisemployees,orvisitors;and
3. loss arises from the character of the
goods.
Q:Arehotelorinnkeepersstillliableregardless
of the posting of notices exempting themselves
fromanyliability?
A: Yes. Hotel/Innkeepers cannot escape or limit

liability by stipulation or the posting of notices.
Anystipulationbetweenthehotelkeeperandthe
guest whereby the responsibility of the former
(Arts. 19982001) is suppressed or diminished
shallbevoid.
392
Q:Whatistheextentoftheliabilityofthehotel
keepersincaseofloss?
A:
1. It covers liability in hotel rooms which
come under the term baggage or
articlessuchasclothingasareordinarily
usedbytravelers.
2. It includes lost or damages in hotels
annexes such as vehicles in the hotels
garage.
Q:Canthekeepersofthehotelsorinnsexercise
therightofretention?
A:Yes,assecurityforcreditsincidenttothestay
atthehotel(inthenatureofapledgecreatedby
operationoflaw).
C.JUDICIALDEPOSIT
Q:Whendoesjudicialdeposit(sequestration)
takeplace?
A:Whenanattachmentorseizureofpropertyin
litigationisorderedbyacourt.(Art.2005,NCC)
Note: It is auxiliary to a case pending in court. The

purpose is to maintain the status quo during the
pendency of the litigation or to insure the right of
the parties to the property in case of a favorable
judgment.(DeLeon,Commentsandcasesoncredit
transaction,p.154,2010)
Q: What may be the object of Judicial

sequestration?
A:Movablesandimmovables(Art.2006,NCC)
Q: When will the properties sequestered cease

tobeincustodialegis?
A: When the insolvency proceedings of a

partnership terminated because the assignee in
insolvency has returned the remaining assets to
the firm, said properties cease to be in custodia
legis(NgChoCio,etal.v.NgDiong&Hodges,L
14832,Jan.28,1961)
III.GUARANTYANDSURETYSHIP
A.NATUREANDEXTENTOFGUARANTY
Q:Whatisguaranty?
A: It is a contract where a person called the

guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
lattershouldfailtodoso.
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q:Whatissuretyship?
A: It is a contract where a person binds himself

solidarilywithprincipaldebtor.
Q:Distinguishguarantyfromsuretyship.
A:
GUARANTY
Collateralundertaking
Guarantorsecondarily
liable
Guarantorbindshimself
topayiftheprincipal
cannotpay
Insurerofsolvencyof
debtor
Guarantorcanavailof
thebenefitofexcussion
anddivisionincase
creditorproceedsagainst
him
Q:Whatarethekindsofguaranty?
A:
1. Generalclassification
a. Personal guaranty where an
b.
SURETYSHIP
Suretyisanoriginal
promissory
2.
Suretyprimarilyliable
b.
Legal imposed by virtue of a
c.
Judicialrequiredbyacourtto
provisionoflaw
guarantee theeventual right of
thepartiesinacase.
Insurerofthedebt
3.
Suretycannotavailof
thebenefitofexcussion
anddivision
Astoconsideration
a. Gratuitous guarantor does
b.
GUARANTY
acontractbywhicha
personisboundto
anotherforthe
fulfillmentofa
promiseor
undertakingofathird
person
Astoitsorigin
a. Conventional constituted by
agreementoftheparties
Suretyundertakestopay
ifprincipal
doesnotpay
Q: What is the similarity between guaranty and

suretyship?
A: Both guarantor and surety promise or

undertake to answer for the debt, default or
miscarriageofanotherperson.
Q: What are the characteristics of guaranty and

suretyship?
A:ACCUNCS
1. Accessory
2. Consensual
3. Conditional
4. Unilateral
5. Nominate
6. Cannotbepresumed
7. CoveredbytheStatuteofFrauds
Q:Distinguishguarantyfromwarranty.
A:
WARRANTY
anundertakingthatthe
title,qualityorquantityof
thesubjectmatterofa
contractiswhatitis
representedtobe,and
relatestosome
agreementmade
ordinarilybytheparty
whomakesthewarranty
individual personally assumes

the fulfillment of the principal
obligation;
Real guaranty is property,
movable,orimmovable.
4.
Astoperson
a. Single constituted solely to
b.
5.
not receive any price or

remuneration for acting as
such.
Onerous one where the
guarantor receives valuable
considerationforhisguaranty
guarantee
or
secure
performance by the debtor of
theprincipalobligation.
Double or subguaranty
constituted to secure the
fulfillmentoftheobligationofa
guarantorbyasubguarantor
Astoscopeandextent
a. Definite where the guaranty
b.
is limited to the principal

obligation only, or to a specific
portionthereof.
Indefinite or simple where
the guaranty included all the
accessory obligations of the
principal, e.g. costs, including
judicialcosts.
B.EFFECTSOFGUARANTY
Q:Whataretheobligationsthatmaybesecured
inacontractofguaranty?
A:
1. Validobligations
2. Voidableobligations
3. Unenforceableobligations
4. Natural obligations When the debtor
himself offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the
obligationfromanaturalintoacivilone.
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5.
Conditional obligations only in case of

suspensive condition because it gives rise
totheprincipalandhence,givesrisealso
totheaccessoryobligation.
Note: Voidable contract is one which has all the

essential elements of a valid contract, except that
the element of consent is vitiated. It is valid and
obligatorybetweenthepartiesbeforeitsannulment.
Unenforceable contact, on the other hand, is one
whichcannotbeenforcedbyactionorcomplaintin
court, unless they have been ratified by the party
whodidnotgivehisconsentthereto.Sincebothare
considered valid obligations between the parties
until their annulment, and subject to ratification,
theycanbesecuredinacontractofguaranty.
Q: Is a valid principal obligation necessary in

contractofguaranty?
A:Sinceguarantyisanaccessorycontract,itisan
indispensable condition for its existence that
theremustbeaprincipalobligation.Hence,ifthe
principalobligationisvoid,itisalsovoid.
Q:Inwhatformshouldacontractofguarantybe
made?
A:Itmustbeexpressedandinwriting(par.2,Art.
1403,NCC);otherwise,itisunenforceableunless
ratified.Itneednotbeinapublicinstrument.
Note: Guaranty, as a contract, requires the

expressionoftheconsentoftheguarantorinorder
tobebound.Itcannotbepresumedbecauseofthe
existenceofacontractorprincipalobligation.
Q: Is acceptance necessary in a contract of

guaranty?
A:
GR: The acceptance of the creditor is not
essentialinsuchcontracts.
XPN: When there is a mere offer of a

guaranty or a conditional guaranty wherein
theobligationdoesnotbecomebindinguntil
it is accepted by the creditor and notice of
suchacceptanceisgiventotheguarantor.
Q: In case of doubt, in whose favor should a

contractofguarantyorsuretyberesolved?
A:
GR: Strict construction against the creditor
andliberalinfavoroftheguarantororsurety;
termscannotbeextendedbeyonditsterms.
XPN:Incasesofcompensatedsureties.
394
Q:Statethegeneralcharacterofguaranty.
A:
GR:Generallygratuitous(Art.2048,NCC)
XPN:Stipulationtothecontrary.
Q: Who are the parties to a contract of

guaranty?
A:
1. Guarantor
2. Creditor
GUARANTOR
Q:Whoisaguarantor?
A: The guarantor is the person who is bound to

another for the fulfillment of a promise or
undertakingofathirdperson.
Q:Whatarethequalificationsofaguarantor?
A:
1. Possessesintegrity;
2. Capacitytobindhimself;and
3. Has sufficient property to answer for
theobligationwhichheguarantees.
Note:Thequalificationsneedonlybepresentatthe
timeoftheperfectionofthecontract.
Q: What is the effect of subsequent loss of

requiredqualifications?
A: The subsequent loss of integrity, property or

supervening incapacity of the guarantor would
not operate to exonerate the guarantor or the
eventual liability he has contracted, and the
contractofguarantycontinues.
However, the creditor may demand another

guarantor with the proper qualifications. But he
maywaiveitifhechoosesandholdtheguarantor
tohisbargain.
Q: When is the qualification of the guarantor

lost?
A:
Convictionofacrimeinvolvingdishonesty
Insolvency
Q: What is the effect of absence of direct

considerationorbenefittoguarantor?
A:Guarantyorsuretyagreementisregardedvalid
despite the absence of any direct consideration
CIVILLAWTEAM:
CREDIT TRANSACTIONS
received by the guarantor or surety, such
consideration need not pass directly to the
guarantor or surety; a consideration moving to
theprincipalwillsuffice.
Q:Whatistherulewhenamarriedwomanisa
guarantor?
A:
GR:Bindsonlyherseparateproperty.
XPNs:
1. If with her husbands consent, it binds
the community or conjugal partnership
property.
2. Without husbands consent, in cases
provided for by law, such as when the
guaranty has redounded to the benefit
ofthefamily.
Q: What are the rights of a third person who

paysforthedebtguaranteedorsecured?
A:
1. If payment is made without the
knowledge or against the will of the
debtor:
a. Guarantorcanrecoveronlyinsofar
asthepaymenthasbeenbeneficial
tothedebtor
b. Guarantor cannot compel the
creditor to subrogate him in his
rights.
2. Ifpaymentismadewiththeknowledge
or consent of the debtor Subrogated
to all the rights which creditor had
againstthedebtor.
Q:Whatistheextentofguarantorsliability?
A:
1. Where the guaranty is definite It is
limited in whole or in part to the
principal debt to the exclusion of
accessories.
2. Where the guaranty is indefinite or

simple It shall comprise not only the
principal obligation but also all its
accessories, including the judicial costs
provided that the guarantor shall only
beliableforthosecostincurredafterhe
hasbeenjudiciallyrequiredtopay.
Q: What are the situations when a guarantor

may lawfully be required to pay more than the
originalobligationoftheprincipaldebtor?
A:
1. Ifupondemand,aguarantorfailstopay
theobligation,hecanbeheldliablefor
interest, even if in thus paying, the
liability becomes more than that in the
principal obligation. The increased
liability is not because of the contract
but because of the default and the
necessity for judicial collection. It
should be noted, however, that the
interest runs from the time the
complaintisfiled,notfromthetimethe
debt becomes due and demandable
(Tagawa v. Aldanese, No.18636, sept.
28,1922).
2. Creditors suing on a surety bond may

recoverfromthesurety,aspartoftheir
damages, interest at the legal rate,
judicial cost and attorneys fees when
appropriate even if the surety would
therebybecomeliabletopaymorethan
thetotalamountstipulatedinthebond
(Dino v. CA, G.R. No. 89775, Nov. 26,
1995).
3. A penalty clause may also increase the

liabilityofthesurety(GeneralInsurance
SuretyCo.v.Republic,G.R.No.L13873,
Jan.31,1963)
Q:Whatistheeffectofguarantorsdeath?
A: His heirs are still liable to the extent of the

valueoftheinheritancebecausetheobligationis
not purely personal and is therefore
transmissible.
Q:Whatistheeffectofthedebtorsdeath?
A: His obligation will survive. His estate will be

answerable.Iftheestatehasnosufficientassets,
theguarantorshallbeliable.
Q:Whatistherulewithrespecttojurisdictionin
anactionbasedonacontractofguaranty?
A: The guarantor shall be subject to the

jurisdiction of the court of the place where the
obligationistobecompliedwith.
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BENEFITOFEXCUSSION
Q:Whatisthebenefitofexcussion?
A: It is a right by which the guarantor cannot be

compelledtopaythecreditorunlessthelatterhas
exhausted all the properties of the principal
debtor and has resorted to all legal remedies
againstsuchdebtor.
Q: What are the requisites of benefit of

exhaustionorexcussion?
A:
The guarantor must set up the right of
excussionagainstthecreditoruponthe
lattersdemandforpaymentfromhim;
and
1.
2.
8.
He must point out to the creditor the
available property of the debtor (not
exempted from execution) found
within the Philippine territory (Art.
2060,NCC).
Q: May a complaint be filed against the debtor

andguarantorsimultaneouslyinonecasebefore
the exhaustion of all the properties of the
debtor?
A: Yes. There is nothing procedurally

objectionable in impleading the guarantor as a
codefendant. As a matter of fact, the Rules of
Court on permissive joinder of parties explicitly
allow it. If the creditor obtained a favorable
judgment against the debtor and guarantor, the
latterisentitledtoadefermentoftheexecution
of the said judgment against him until all
properties of the debtor shall have been
exhausted to satisfy the latters obligation
involvedinthecase.
Q:Whatistheeffectofdeclarationofinsolvency
withrespecttotherightofexcussion?
A: Just because the debtor has been declared

insolvent in insolvency proceeding does not
necessarily mean that he cannot pay, for part of
the debtors assets may still be available to the
creditor.Onegoodproofofthedebtorsinability
to pay is an unsatisfied writ of execution which
has been returned by the implementing sheriff
(Machetti v. Hospicio de San Jose, 43 Phil. 297,
Feb.7,1920)
Q:Whenistherenobenefitofexcussion?
A:RJSAIRFEDS
396
3.
4.
5.
6.
7.
9.
Guarantorhasexpresslyrenouncedit.
Guarantor has bound himself solidarily
withtheDebtor.
Debtorisinsolvent.
Guarantorhasabsconded,orcannotbe
sued within the Philippines unless he
leftamanagerorrepresentative.
Ifitmaybepresumedthatanexecution
on the property of the Debtor cannot
satisfytheobligation.
Guarantor does not invoke the benefit
against Creditor upon demand to him
forpaymentandhedoesnotpointout
available property of the Debtor within
the Philippines sufficient to cover the
obligation(Art.2060,NCC).
Guarantor is a judicial bondsman or
subsurety.
A pledge or mortgage of his own
property has been given by Guarantor
asspecialsecurity.
Guarantor fails to interpose it as a
defensebeforejudgmentisrendered.
BENEFITOFDIVISION
Q:Whatistheprincipleofbenefitofdivision?
A:Shouldtherebeseveralguarantorsofonlyone
debtor for the same debt, the obligation to
answer for the same is divided among all. (Joint
liability)
Note:
GR: Creditor can claim from the guarantors
only up to the extent they are respectively
boundtopay.
XPN:Whensolidarityhasbeenstipulated.
Should any of the guarantors become insolvent, his

share shall be borne by the other guarantors
including the paying guarantor in the same joint
proportion in accordance with the rule in solidary
obligations.
Therighttobereimbursedfromhiscoguarantorsis
acquiredipsojurebyvirtueofsaidpayment.
Q:Distinguishbenefitofdivisionfrombenefitof
contribution.
A:
BENEFITOF
BENEFITOFDIVISION
CONTRIBUTION
Controversyisbetween
Controversybetween
thecoguarantorsand
andamongtheseveral
thecreditor
coguarantors
Thereisnopayment
Thereisalready
CIVILLAWTEAM:
CREDIT TRANSACTIONS
yet,butthereismerely
paymentofdebt;the
aclaimpressedagainst
payingcoguarantoris
oneormoreco
seekingthecontribution
guarantors
ofthecoguarantors
Q:Whatistheeffectofthecreditorsnegligence
inexhaustingthepropertiesofthedebtor?
A: He shall suffer the loss to the extent of the

value of the pointed property which was not
exhaustedbythecreditor(Art.2061,NCC).
Note: The article applies when the guarantor has

compliedwiththeconditionsofArt.2060(requisites
ofbenefitofexcussion).
Q:Whatistherulewithregardtoactionofthe
creditoragainstthedebtor?
A:
GR:Onlytheprincipaldebtorshouldbesued
alone.
XPN: If the benefit of excussion is not

available, the guarantor can be sued jointly
withthedebtor.
Q:Istheguarantorentitledtobenotifiedofthe
complaintagainstthedebtor?
A:Yes.Iftheguarantordesirestosetupdefenses
as are granted him by law, he may have the
opportunitytodoso.
Q: What are the consequences of the

guarantors appearance or nonappearance in
thecaseagainstthedebtor?
A:
1. If he does not appear and judgment is
renderedagainstthedebtor,hecannot
setupdefenseswhichhecouldhaveset
up had he appeared; moreover, he
cannotquestionthedecisionanymore;
2. Ifheappearssuchasbyfilingananswer
inintervention,hemayloseormaywin
thecase.Ifhelosses,heisstillentitled
tothebenefitofexcussion.Thereisno
waiverofhisbenefitofexcussionbyhis
appearanceinthecase.
Q: What is the effect of compromise between

thecreditorandthedebtortotheguarantor?
A: If the compromise is beneficial to the

guarantor, it is valid; otherwise, it is not binding
st
uponhim(1 sentence,Art.2063,NCC).
Q: What is the effect of compromise between

the creditor and the guarantor to the principal
debtor?
A: If compromise is beneficial to the principal

debtor, it is valid; otherwise, it is not binding
upon him (2nd sentence, Art. 2063, NCC). To be
binding, it must benefit both the guarantor and
thedebtor.
Q:Whatistheruleontherightofindemnityand
reimbursement of the guarantor who paid the
debt?
A:
GR:Guarantorisentitledtobereimbursedby
Debtorfor:
1. totalamountofthedebtpaid;
2. legal interest from the time payment
wasmadeknowntothedebtor;
3. expenses incurred after notifying
debtor that demand to pay was made
uponhim;and
4. damagesinaccordancewithlaw.
XPNs:
1. Guaranty is constituted without the
knowledge or against the will of the
debtor.
Effect: Guarantor may only recover only
somuchaswasbeneficialtothedebtor.
2. Payment by 3rd persons who does not

intendtobereimbursed.
Effect: deemed a donation and as such
requirestheconsentofdebtor.
Q: What is the right of the guarantor after the

paymentofthedebtismadetothecreditor?
A: Right of subrogation. The guarantor is

subrogated to all the rights which the creditor
st
hadagainstthedebtor(1 par.,Art.2067)
Q: What happens when guarantor pays without

noticetothedebtor?
A: The debtor may interpose against the

guarantor defenses available to the debtor as
against the creditor at the time payment was
made.
Note:
GR: Guarantormust1stnotifythedebtorbefore
paying, otherwise, if the debtor pays again, the
guarantorcanonlycollectfromthecreditorand
guarantor will have no cause of action against
the debtor even if the creditor becomes
insolvent.
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XPN:Guarantormaystillrecoverfromdebtor
ifthefollowingcircumstancesconcur:
1. Guarantyisgratuitous;
2. Guarantor was prevented by fortuitous
eventfromnotifyingthedebtor;and
3. Creditorwasinsolvent.
Q: Can the guarantor proceed against the

principal debtor even before having paid the
creditor?
A:
GR:No.
XPNs:
1. Whenheissuedforpayment;
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. Whenthedebthasbecomedemandable
byreasonoftheexpirationoftheperiod
ofpayment;
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 are reasonable grounds to fear
that the principal debtor intends to
abscond;or
7. If the principal debtor is in imminent
dangerofbecominginsolvent.
Note: In all these cases, the cause of action of the

guarantor is either to obtain release from the
guaranty,ortodemandasecuritythatshallprotect
himfromanyproceedingsbythecreditorandfrom
the danger of insolvency of the debtor (Art. 2071,
NCC).
Q:Whatistheremedyofapersonwhobecomes
a guarantor at the request of another for the
debtofathirdpersonwhoisnotpresent?
A:Hehastheoptionofsuingeithertheprincipal
debtorortherequestingparty(Art.2072,NCC).
Note:Theprovisionapplieswhentheguarantorhas
actuallypaidthedebt.
398
SUBGUARANTY
Q:Whatisdoubleorsubguaranty?
A: It is one constituted to guarantee the

obligationoftheguarantor.
Note: In case of insolvency of the guarantor for

whomheboundhimself,heisresponsibletotheco
guarantorsinthesametermsastheguarantors(Art.
2075,NCC).
Q: Is a subguarantor entitled to the right of

excussion?
A:Yes,bothwithrespecttotheguarantorandto
theprincipaldebtor(Art.2064,NCC).
CONTINUINGGUARANTY
Q:Whatiscontinuingguarantyorsuretyship?
A:
GR:Itisnotlimitedtoasingletransactionbut
contemplates a future course of dealings,
coveringaseriesoftransactionsgenerallyfor
anindefinitetimeoruntilrevoked.
XPN: A chattel mortgage can only cover

obligations existing at the time the mortgage
is constituted and not to obligations
subsequenttotheexecutionofthemortgage.
XPN to the XPN: In case of stocks in

departmentstores,drugstoresetc.
Q:Whatisthetestofcontinuingguaranty?
A: A guaranty shall be construed as continuing

when by the terms thereof it is evident that the
objectistogiveastandingcredittotheprincipal
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 (Dino v. CA, G.R. No. 89775, Nov. 26,
1995)
Q:Mayguarantysecurefuturedebts?
A: Yes. A guaranty may be given to secure even

future debts, the amount of which may not be
knownatthetimetheguarantyisexecuted.This
is the basis for contracts denominated as
continuingguarantyorsuretyship.Itisonewhich
covers all transactions, including those arising in
the future, which are within the description or
contemplation of the contract of guaranty, until
theexpirationorterminationthereof.(Dinov.CA,
G.R.No.89775,Nov.26,1995)
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q: PAGRICO submitted a Surety Bond issued by
R&BSuretytosecureanincreaseinitscreditline
withPNB.ForconsiderationoftheSuretyBond,
Cochingyan and Villanueva entered into an
Indemnity Agreement with R&B Surety and
bound themselves jointly and severally to the
termsandconditionsoftheSuretyBond.When
PAGRICOdefaulted,PNBdemandedpaymentto
R&B Surety; R&B Surety, in turn, demanded
payment to Cochingyan and Villanueva. R&B
suedthem.Villanuevaarguedthatthecomplaint
was premature because PNB had not yet
proceeded against R&B Surety to enforce the
latter's liability under the Surety Bond. Is the
contentioncorrect?
A: No. Indemnity Agreements are contracts of

indemnification not only against actual loss but
against liability as well. While in a contract of
indemnity against loss an indemnitor will not be
liable until the person to be indemnified makes
payment or sustains loss, in a contract of
indemnity against liability, as in this case, the
indemnitor'sliabilityarisesassoonastheliability
ofthepersontobeindemnifiedhasarisenwithout
regard to whether or not he has suffered actual
loss. Accordingly, R & B Surety was entitled to
proceed against petitioners not only for the
partial payments already made but for the full
amount owed by PAGRICO to the PNB.
(Cochingyan, Jr. v. R&B Surety and Ins.
Co.,GR.No.L47369,June30,1987)
C.EXTINGUISHMENTOFGUARANTY
Q: What are the grounds for extinguishing a

contractofguaranty?
A:
1. Principalobligationisextinguished
2. Samecausesasallotherobligations
3. If
creditor
voluntarily
accepts
immovable or other properties in
payment of the debt (even if he should
afterwardslosethesamethrougheviction
orconveyanceofproperty)
4.
5.
6.
Release in favor of one of the

guarantors, w/o consent of the others,
benefitsalltotheextentoftheshareof
the guarantor to whom it has been
granted
Extensiongrantedtodebtorbycreditor
withoutconsentofguarantor
When by some act of the creditor, the
guarantors even though they are
solidarilyliablecannotbesubrogatedto
the rights, mortgages, and preferences
oftheformer
D.LEGALANDJUDICIALBONDS
Q:WhatisaBond?
A: A bond, when required by law, is commonly

understood to mean an undertaking that is
sufficiently secured, and not cash or currency.
Whateversuretybondsaresubmittedaresubject
to any objections as to their sufficiency or as to
thesolvencyofthebondsman.
Q:WhatisaBondsman?
A:Abondsmanisasuretyofferedinvirtueofa
provisionoflaworajudicialorder.Hemusthave
thequalificationsrequiredofaguarantorandin
speciallawsliketheRulesofCourt.
Q:Whatarethequalificationstoaproperty
bond?
A: The necessary qualifications of sureties to a

propertybondshallbeasfollows:
1. Eachofthemmustbearesidentowner
ofrealestatewithinthePhilippines;
2. Wherethereisonlyonesurety,hisreal
estate must be worth at least the
amountoftheundertaking;
3. Incasetherearetwoormoresureties,
they may justify severally in amounts
lass than that expressed in the
undertaking, if the entire sum justified
toisequivalenttothewholeamountof
bail demanded. (Sec. 12, Rule 114,
RulesofCourt)
Q:Whatisthenatureofabond?
A: All bonds including judicial bonds are

contractualinnature.
Q:WhatisaJudicialBond?
A: Judicial bonds constitute merely as a special

class of contracts of guaranty, characterized by
thefactthattheyaregiveninvirtueofajudicial
order.
Q: Is the right of excussion available to a

bondsman?
A:No.Ajudicialbondsmanandthesubsuretyare
not entitled to the benefit of excussion because
theyarenotmereguarantors,butsuretieswhose
liabilitiesisprimaryandsolidary.(ART2084,NCC)
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Q: What is the liability of the surety if the

creditorwasnegligentincollectingthedebt?
A: A surety is still liable even if the creditor was

negligent in collecting from the debtor. The
contract of suretyship is not that the oblige will
seethattheprincipalpaysthedebtorfulfillsthe
contract, but that the surety will see that the
principalpayorperform(PNBv.ManilaSurety&
FidelityCo.,Inc.,14SCRA776,1965)
Q:Whatistheeffectofviolationbythecreditor
ofthetermsofthesuretyagreement?
A:Aviolationbythecreditorofthetermsofthe
surety entitles the surety to be released
therefrom. (Associated Ins. & Surety Co. v.
BacolodMurciaMillingCo.,GR.No.L12334,May
22,1959)
Q:Whatistheeffectofasuretybondfiledforan
alienstayinginthecountrywhichisforfeitedfor
violatingitsterms?
A: The effect of the violation is that its

subsequent unauthorized cancellation thru
mistake or fraud does not relieve the surety. A
bond surrendered thru mistake or fraud may,
therefore,beconsideredasavalidandsubsisting
instrument.(FarEasternSuretyandIns.Co.,v.CA,
GRNo.L12019,Oct16,1958)
Q: What is the rule when the performance of a

bondisrenderedimpossible?
A:Itisthesuretysdutytoinformthecourtofthe
happeningoftheeventsothatitmaytakeaction
ordecreeinthedischargeofthesuretywhenthe
performance of the bond is rendered impossible
by an act of God, or the obligee, or the law.
(Peoplev.OtiakOmal&LuzonCo.,Inc.,GR.No.L
14457,June30,1961)
PLEDGE,MORTGAGE,ANDANTICHRESIS
Q:Whatispledge,mortgageandantichresis?Distinguish.
A:
PLEDGE
MORTGAGE(Real)
Definition
Anaccessorycontractwherebyadebtor
deliverstothecreditororathirdperson
amovableorpersonalproperty,or
documentevidencingincorporealrights,
tosecurethefulfillmentofaprincipal
obligationwiththeconditionthatwhen
theobligationissatisfied,thething
deliveredshallbereturnedtothe
pledgorwithallitsfruitsandaccessions,
ifany.
movableorpersonalproperty,or
documentevidencingincorporealrights
Itisacontractwherebythedebtor
securestothecreditorthe
fulfillmentofaprincipalobligation,
speciallysubjectingtosuch
security,immovablepropertyor
realrightsoverimmovable
property,incasetheprincipal
obligationisnotpaidorcomplied
withatthetimestipulated.
Objectofthecontract
immovablepropertyorrealrights
overimmovableproperty
ANTICHRESIS
AcontractwherebytheCR
acquirestherighttoreceivethe
fruitsofanimmovableofthe
dedtor,withtheobligationto
applythemtothepaymentof
interest,ifowing,andthereafter
totheprincipalofhiscredit.
fruitsofanimmovable
Q: What are the similarities of pledge and

mortgage?
A:
1. Bothareaccessorycontracts;
2. Both pledgor and mortgagor must be
theabsoluteowneroftheproperty;
3. Bothpledgorandmortgagormusthave
thefreedisposaloftheirpropertyorbe
authorizedtodoso;and
4. In both, the thing proffered as security
maybesoldatpublicauction,whenthe
principal obligation becomes due and
nopaymentismadebythedebtor.
400
Q: Are the contracts of pledge, mortgage or

antichresisindivisible?
A:
GR: A pledge, mortgage or antichresis is
indivisible.
Note: Indivisibility may be waived. Indivisibility

onlyappliestothecontractingparties.
XPNs:
1. Where each one of several things
guarantees determinate portion of the
credit
CIVILLAWTEAM:
CREDIT TRANSACTIONS
2.
3.
Where only a portion of the loan was

released
Where there was failure of
consideration
Q:Whataretheobligationsthatcanbesecured
bypledge,mortgageandantichresis?
A:
1. Validobligations
2. Voidableobligations
3. Unenforceableobligations
4. Naturalobligations
5. Conditionalobligations
Q: What rules are common to pledge and

mortgage?
A:
Constituted to secure the fulfillment of a
validprincipalobligation.
Pledgor or mortgagor must be the absolute
owner of the thing pledged or
mortgaged.
They must have the free disposal of their
property, and in the absence thereof,
thattheybelegallyauthorizedforsuch
purpose.
Debtor retains ownership of the thing given
asasecurity.
Q: May property acquirable in the future be

mortgaged?
A: No. Where the mortgagor mortgaged a

property and in the contract he agreed to
mortgage additional properties which he may
acquire in the future, there was no valid
mortgageastothelatterbecausehewasnotyet
the owner of the properties at the time of the
mortgage (Dilag v. Heirs of Ressurrecion, No.
48941,May6,1946).
Q: Is mortgage constituted to secure future

advancesvalid?
A: Yes. It is a continuing security and not

dischargedbyrepaymentoftheamountnamedin
the mortgage, until the full amount of the
advances is paid. A chattel mortgage can only
cover obligations existing at the time the
mortgage is constituted and not to obligations
subsequenttotheexecutionofthemortgage.
Q:Isathirdpersonwhopledgedandmortgaged
hispropertyliableforanydeficiency?
A:
GR:No.
XPN: If the third party pledgor or mortgagor

expressly agreed to be bound solidarily with
theprincipaldebtor.
Q: What is the right of an owner of personal

propertypledgedwithoutauthority?
A:HemayinvokeArt.559,NCC.Thedefensethat
pawnshopowneracquiredownershipofthething
ingoodfaithisnotavailable.
Note:Art.559Thepossessionofmovableproperty
acquired in good faith is equivalent to a title.
Nevertheless,onewhohaslostanymovableorhas
been unlawfully deprived thereof, may recover it
fromthepersoninpossessionofthesame.
If the possessor of a movable lost or of which the

ownerhasbeenunlawfullydeprived,hasacquiredit
in good faith at a public sale, the owner cannot
obtainitsreturnwithoutreimbursingthepricepaid
therefore.
Q:Whatisthenatureofanassignmentofrights
toguaranteeanobligationofadebtor?
A: It is in effect a mortgage and not an absolute

conveyance of title which confers ownership on
the assignee (Manila Banking Corp. v. Teodoro,
Jr.,G.R.No.53955,Jan.13,1989)
ACCOMMODATIONMORTGAGE
Q:Whoisanaccommodationmortgagor?
A: He is a third person who is not a party to a

principal obligation and secures the latter by
mortgagingorpledginghisownproperty.
Q: What is the extent of the liability of an

accommodationmortgagor?
A: It extends up to the loan value of their

mortgaged property and not to the entire loan
itself.
PACTUMCOMMISSORIUM
Q:Whatispactumcommisorium?
A:Itisastipulationwherebythethingpledgedor
mortgaged or subject of antichresis shall
automatically become the property of the
creditorintheeventofnonpaymentofthedebt
withinthetermfixed.Suchstipulationisnulland
void.
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Q: What are the elements of pactum

commissorium?
A:
1. There is a pledge, mortgage or
antichresis of a property by way of
security;and
2. There is an express stipulation for the
automaticappropriationbythecreditor
ofthepropertyincaseofnonpayment
Note: What are prohibited are those stipulations

executed or made simultaneously with the original
contract,andnotthosesubsequentlyenteredinto.
Q: ABC loaned to MNO P40,000 for which the

latterpledged400sharesofstockinXYZInc.It
was agreed that if the pledgorfailed to pay the
loan with 10% yearly interestwithin four years,
the pledgee is authorized to foreclose on the
shares of stock. As required, MNO delivered
possession of the shares to ABC with the
understanding that the shares would be
returnedtoMNOuponthepaymentoftheloan.
However, the loan was not paid on time. A
month after 4 years, may the shares of stock
pledged be deemed owned by ABC or not?
Reason.
A:Thesharesofstockcannotbedeemedowned
by ABC upon default of MNO. They have to be
foreclosed.UnderArticle2088,NCC,thecreditor
cannot appropriate the things given by way of
pledge. And even if the parties have stipulated
thatABCbecomestheownerofthesharesincase
MNOdefaultsontheloan,suchstipulationisvoid
for being a pactum commissorium. (2004 Bar
Question)
Q:Tosecurealoanobtainedfromaruralbank,
Purita assigned her leasehold rights over a stall
in the public market in favor of the bank. The
deed of assignment provides that in case of
default in the payment of the loan, the bank
shallhavetherighttosellPurita'srightsoverthe
marketstallasherattorneyinfact,andtoapply
theproceedstothepaymentoftheloan.
Was the assignment of leasehold rights a

mortgageoracession?Why?
Assumingtheassignmenttobeamortgage,does
the provision giving the bank the power to sell
Purita's rights constitute pactum commissorium
ornot?Why?
A:
Theassignmentwasamortgage,notacession,of
the leasehold rights. A cession would have
transferredownershiptothebank.However,the
402
grant of authority to the bank to sell the

leaseholdrightsincaseofdefaultisproofthatno
suchownershipwastransferredandthatamere
encumbrancewasconstituted.Therewouldhave
beennoneedforsuchauthorityhadtherebeena
cession.
No, the clause in question is not a pactum

commissorium.Itispactum commissoriumwhen
default in the payment of the loan automatically
vests ownership of the encumbered property in
thebank.Intheproblemgiven,thebankdoesnot
automatically become owner of the property
upon default of the mortgagor. The bank has to
sell the property and apply the proceeds to the
indebtedness.(2001BarQuestion)
Q:XborrowedmoneyfromYandgaveapieceof
land as security by way of mortgage. It was
expressly agreed between the parties in the
mortgagecontractthatuponnonpaymentofthe
debt on time by X, the mortgaged land would
already belong to Y. If X defaulted in paying,
would Y now become the owner of the
mortgagedland?Why?
A: No, Y would not become the owner of the

land. The stipulation is in the nature of pactum
commissorium which is prohibited by law. The
propertyshouldbesoldatpublicauctionandthe
proceeds thereof applied to the indebtedness.
Anyexcessshallbegiventothemortgagor.
Q: Suppose in the preceding question, the

agreementbetweenXandYwasthatifXfailed
topaythemortgagedebtontime,thedebtshall
be paid with the land mortgaged by X to Y.
Would your answer be the same as in the
precedingquestion?Explain.
A:No,theanswerwouldnotbethesame.Thisis
avalidstipulationanddoesnotconstitutepactum
commissorium. In pactum commissorium, the
acquisition is automatic without need of any
furtheraction.Intheinstantproblemanotheract
is required to be performed, namely, the
conveyance of the property as payment (dacion
enpago).(1999BarQuestion)
Q: In order to secure a bank loan, XYZ

Corporation surrendered its deposit certificate,
withamaturitydateofSeptember1,1997tothe
bank. The corporation defaulted on the due
repayment of the loan, prompting the bank to
encash the deposit certificate. XYZ Corporation
questioned the above action taken by the bank
as being a case of pactum commissorium. The
bankdisagrees.Whatisyouropinion?
CIVILLAWTEAM:
CREDIT TRANSACTIONS
A:Isubmitthatthereisnopactumcommissorium
here. Deposits of money in banks and similar
institutions are governed by the provisions of
simple loans (Art. 1980, NCC). The relationship
between the depositor and a bank is one of
creditor and debtor. Basically, this is a matter of
compensation as all the elements of
compensationarepresentinthiscase.(BPIv.CA,
G.R. No. 104612, May 10, 1994) (1997 Bar
Question)
Q: Spouses Uy Tong purchased seven motor

vehicles from Bayanihan Investment payable in
installments. It was agreed that if the spouses
shouldfailtopaytheirobligation,Bayanihanwill
automatically be the owner of the apartment
which the spouses has a leasehold right. The
spousesafterpayingthedownpayment,failedto
pay the balance, hence, Bayanihan filed an
action for specific performance against the
spouses.Thejudgmentprovidedthatincasethe
spouses failed to pay the obligation within 30
daysfromnotice,theyaretoexecuteaDeedof
Absolute Sale over the apartment and/or
leasehold rights. Is the stipulation a pactum
commissorium?
A: No. The questioned agreement evinces no

basis for the application of pactum
commissorium. There is no contract of pledge or
mortgage entered into by the parties. Bayanihan
sought the intervention of the court by filing an
actionforspecificperformance.Hencetherewas
no automatic appropriation of the property. (Uy
Tongv.CA,G.R.No.77465,May21,1988)
IV.PLEDGE
A.DEFINITION
Q:Whatispledge?
A:Acontractwheredebtordeliverstocreditoror
rd
3 person a movable or document evidencing
incorporeal right for the purpose of securing
fulfillment of a principal obligation with the
understanding that when the obligation is
fulfilled,thethingdeliveredshallbereturnedw/
allitsfruitsandaccessions.
B.KINDSOFPLEDGE
Q:Whatarethekindsofpledge?
A:
1. Conventionalbyagreementofparties
2. Legalbyoperationoflaw
Note: A thing lawfully pledged to one creditor,

cannot be pledged to another as long as the 1st
pledgesubsists.
C.ESSENTIALREQUISITES
Q: What are the essential requisites for a

contractofpledge?
A:
1. Constitutedtosecurethefulfillmentof
aprincipalobligation;
2. Pledgor is the absolute owner of the
thingpledged;
3. Persons constituting the pledge have
the free disposal of their property, and
in the absence thereof, that they be
legallyauthorizedforthepurpose.(Art.
2085,NCC)
Note:Acontractofpledgenotappearinginapublic
instrument does not affect its validity. It is valid
betweentheparties.
Q: What kind of possession is required in

pledge?
A:Themeretakingofthepropertyisnotenough.
There must be continuous possession of the
thing. However, the pledgee is allowed to
temporarilyentrustthephysicalpossessionofthe
thingpledgedtothepledgorwithoutinvalidating
the contract. But here, the pledgor would be in
possessionasameretrusteeandhispossessionis
subjecttotheorderofthepledgee.
Q: Pablo owns a tractor which he left with his

sonMikeforsafekeeping.Mikethenofferedthe
saidtractortoCaliboassecurityforthepayment
ofhisdebt.WhenPablocamebackandlearned
thatthetractorwasinthecustodyofCalibo,he
demanded its return. Calibo, however, refused.
Calibo alleged that the tractor was pledged to
him, and in the alternative, the tractor was left
with him in the concept of deposit and he may
validly hold on to it until Mike pays his
obligation.IsCalibocorrect?
A: No. There is no valid pledge because Mike is

nottheabsoluteownerofthe propertypledged.
He who is not the owner or proprietor of the
propertypledgedormortgagedtoguaranteethe
fulfillmentofaprincipalobligation,cannotlegally
constitutesuchaguarantyasmayvalidlybindthe
propertyinfavorofhiscreditor,andthepledgee
or mortgagee in such a case acquires no right
whatsoever in the property pledged or
mortgaged. There is likewise no valid deposit, in
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this case, where the principal purpose for

receivingtheobjectisnotsafekeeping.(CaliboJr.
v.CA,G.R.No.120528,Jan.29,2001)
Q: Is constructive or symbolic delivery of the

thingsufficienttoconstitutepledge?
A:
GR:No.
XPN:Ifthepledgeconsistsofgoodsstoredin
a warehouse for purposes, of showing the
pledgeescontroloverthegoods,thedelivery
to him of the keys to the warehouse is
sufficient
delivery
of
possession
(constructive/symbolicdelivery).
The type of delivery will depend upon the

nature and peculiar circumstances of each
case(Yuliongsiuv.PNB,G.R.No.L19227,Feb.
17,1968)
Note: Constructive or symbolic delivery does not

confer physical possession of the thing, but by
construction of law, is equivalent to acts of real
delivery.
Q:Whatistherationalebehindtherequirement
that the pledge cannot take effect against third
personsifthethingisnotdescribedandthedate
doesnotappearinapublicinstrument?
A: To forestall fraud because a debtor may

attempttoconcealhispropertyfromhiscreditors
when he sees it in danger of execution by
simulating a pledge thereof with an accomplice
(TecBi&Co.v.CharteredBankofIndia,No.9802,
Feb.5,1916/March31,1917).
Q:Whatisadoublepledge?
A: A double pledge is when the same thing or

property subject of a first pledge will be the
subjectofanotherpledge.
Q:Cantherebeavaliddoublepledge?
A: No. A property already pledged cannot be

pledged while the first pledge is subsisting
(Mission de San Vicente v. Reyes, No. 5508, Aug.
14,1911).
Q: Can incorporeal rights evidenced by proper

documentbepledged?
A: Yes (Art. 2095, NCC). It is, however, required

that the actual instrument be delivered to the
pledge. More, if the instrument is a negotiable
document,itmustbeindorsed.
404
D.OBLIGATIONSOFPLEDGORANDPLEDGEE
Q:Whoarethepartiesinacontractofpledge?
A:
1. Pledgor the debtor; the one who
delivers the thing pledged to the
creditor
2. Pledgee the creditor; the one who
receivesthethingpledged
Q:Whataretherightsofapledgee?
A:
1. Retainthethinguntildebtispaid.(Art.
2018,NCC)
2. To be reimbursed for the expenses
made for the preservation of the thing
pledged.(Art.2099,NCC)
3. Creditor may bring any action
pertaining to the pledgor in order to
rd
recoveritfromordefenditagainsta3
person.
Q:Whataretheobligationsofapledgee?
A:
1. Takecareofthethingpledgedwiththe
diligence of a good father of a family.
(Art.2099,NCC)
Note: Pledgee is liable for the loss or

deterioration of the thing by reason of
fraud, negligence, delay, or violation of
thetermsofthecontract.
2.
GR: Pledgee cannot deposit the thing

pledgedtoa3rdperson.
XPN: Unless there is stipulation to the

contract(Art.2100,NCC)
Note: Pledgee is liable for the loss or

deteriorationofthethingpledgedcaused
bytheactsornegligenceoftheagentsor
employeesofthepledgee.
3.
4.
Apply the fruits, income, dividends, or

interests produced or earned by the
property, to interests or expenses first,
thentotheprincipal.(Art.2102,NCC)
GR: Cannot use the thing pledged

withoutauthority.
XPNs:
a. If the pledgor had given him
authorityorpermissiontouse
it;
CIVILLAWTEAM:
CREDIT TRANSACTIONS
b.
5.
If the use of the thing is

necessary for its preservation
butonlyforthatpurpose.
Returnthethingpledgedtothepledgor
whentheprincipalobligationisfulfilled
orsatisfiedit.
Q:Doesthedebtorcontinuetobetheownerof
thethingincasethesameisexpropriatedbythe
State?
A: No. Ownership is transferred to the

expropriatingauthority.
Note: The creditor may bring actions pertaining to

theownerofthethingpledgedinordertorecoverit
from,ordefenditagainstathirdperson(Art.2103,
NCC).
Q:Canthedebtoraskforthereturnofthething
pledgedagainstthewillofthecreditor?
A:
GR:No.
XPNs:
1. If the debtor has paid the debt and its
interest,withexpensesinapropercase
(Art.2105,NCC).
2. If the thing is in danger of destruction
or impairment provided, the pledgor
offers an acceptable substitute for it
which is of the same kind and not of
inferiorqualityandwithoutprejudiceto
the application of Art. 2108 whenever
warranted.
Q: Can the pledgee cause the sale of the thing

pledgedinpublicauctionwheretheobligationis
notyetdue?
A:Yes,ifwithoutthefaultofthepledge,thereis
danger of destruction, impairment or diminution
invalueofthethingpledged.Theproceedsofthe
auction shall be security for the principal
obligation in the same manner as the thing
originallypledged(Art.2108,NCC).
Q: What are the rights of the creditor who is

deceivedonthesubstanceorqualityofthething
pledged?
A:Todemand:
1. from the pledgor an acceptable
substituteofthething;or
2. theimmediatepaymentoftheprincipal
obligation(Art.2109,NCC).
Note: The remedies are alternative and not

cumulative. Only one may be chosen. The law used
theconjunctiveor.Eitheroneismoreconvenient
thanannulment.
Q: What is the effect of the return of the thing

pledgedtothepledgorbythepledgee?
A: The pledge shall be extinguished. Any

stipulation to the contrary shall be void (Art.
2110,NCC).
Q: What is the presumption when the thing is

found in the possession of the pledgor
subsequenttotheperfectionofthepledge?
A:Thereisprimafaciepresumptionthatthething
pledgedhasbeenreturnedbythepledgeetothe
pledgor or owner, in any of the following
circumstances:
1. Ifthethingisfoundinthepossessionof
the pledgor or owner after the pledge
hadbeenperfected;or
2. Ifthethingisfoundinthepossessionof
athirdpersonwhoreceiveditfromthe
pledgororowneraftertheperfectionof
nd
thepledge(2 par.,Art.2110,NCC).
Note:Itispresumedthattheaccessoryobligationof
pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who
ownsthething(Art.1274,NCC).
Q:Whatistherequisitefortherenunciationor
abandonmentofthepledgebythepledgee?
A: There must be a statement in writing to that

st
effect(1 sentence,Art.2111,NCC).
Note:Therenunciationofthepledgeisnotcontrary
to law, public order, public policy, morals or good
customs.Further,Art.1356oftheNCC,whichspeaks
oftheformofcontracts,mustbecompliedwith.
Q:Isacceptanceorreturnofthethingnecessary
for the validity of the renunciation under Art.
2111?
A: No. it is not a case of donation where

acceptance is necessary to make the donation
valid.
Q:Supposethethingwasnotreturned,isthere
extinctionofthepledge?
A:Yes.Evenifthethingwasnotreturned,aslong
as there is an effective renunciation,
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abandonment or waiver, the pledge is already

extinguished.
The pledgor is considered a depositor and the

pledgee shall become a depositary of the thing.
Accordingly,thelawondepositwillapply.
Q: What is the right of the pledgee when the

debthasnotbeensatisfiedinduetime?
A:Thepledgeehastherighttoproceedwiththe
saleofthethingatapublicauctiontoraisefunds
forpaymentoftheobligation(Art.2112,NCC).
Q:Whataretherequisitesofpublicsale?
A:
1. Theobligationmustbedueandunpaid;
2. Thesaleofthethingmustbeatapublic
auction;
3. There must be notice to the pledgor
and owner stating the amount for
whichthesaleistobeheld;and
4. ThesalemustbeconductedbyaNotary
Public.
Q:Whatisdeedofacquittance?
A:Itisadocumentofthereleaseordischargeof
the pledgor from the entire obligation including
interestsandexpenses.Thisshallbeexecutedby
thepledgeeafterappropriatingthethingincasea
nosalewasmadeinasecondauction.
Q: May the pledgor participate in the public

auction?
A:Yes.Moreover,heshallhaveabetterrightifhe
offersthesametermsasthehighestbidder[Art.
2113(1),NCC].
Q:Whocanbidinthepublicauction?
A:
1. Thepublic
2. Pledgor/owner/debtor shall be
preferred if same terms as the highest
bidderisoffered
3. Pledgee/creditor he must not be the
only one bidder, otherwise, his bid is
invalidandvoid
Q: Can checks be accepted as payment as

purchasepriceinapublicsale?
A:No,theyarenotlegaltenders.(CFIv.CA,No.L
4191,April30,1952).
406
Note:Thesameruleappliestopromissorynotes,bill
of exchange and other negotiable instruments
because they produce the effect of payment only
whentheyhavebeenencashed.
Paymentincashmustbemadeatonce.
Q:Mayathirdpersonpaythepledgorsdebt?
A:Yes,ifhehasanyinterestinthefulfillmentof
theprincipalobligation(Art.2117,NCC).
Q:Whatistherulewhenwhathasbeenpledged
isacredit?
A: The pledgee may collect and receive the

amount due. He shall apply the same to the
payment of his claim, and deliver the surplus,
should there be any, to the pledgor (Art. 2118,
NCC).
Q: Santos made time deposits with OBM. IRC,

through its president Santos, applied for a loan
withPNB.Tosecuretheloan,Santosexecuteda
DeedofAssignmentofthetimedepositsinfavor
of PNB. When PNB tried to collect from OBM,
the latter did not pay the CTDs. PNB then
demanded payment from Santos and IRC, but
the latter refused payment alleging that the
obligationwasdeemedpaidwiththeirrevocable
assignmentoftheCTDs.
IstheliabilityofIRCdeemedpaidbyvirtue
ofthedeedofassignment?
IsOBMliablefordamages
A:
1. No. For all intents and purposes, the
deed of assignment in this case is
actually a pledge. Where a CTD in a
bank, payable at a future time, was
handedoverbyadebtortohiscreditor,
itwasnotpayment,unlesstherewasan
express agreement on the part of the
creditortoreceiveitassuch.
2. Yes. While it is true that no interest
shallbedueunlessithasbeenexpressly
stipulatedinwriting,thisappliesonlyto
interest for the use of money. It does
not comprehend interest paid as
damages. Santos has the right to
recover damages resulting from the
default of OBM and the measure of
such damages is interest at the legal
rate of 6% per annum on the amounts
dueandunpaidattheexpirationofthe
periods respectively provided in the
contracts. (Integrated Realty Corp. v.
PNB,G.R.No.60705,June28,1989)
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q:Whatistherulewhentwoormorethingsare
pledged?
A:Thepledgeemaychoosewhichhewillcauseto
be sold, unless there is a stipulation to the
st
contrary(1 sentence,Art.2119,NCC).
Q: What is the restriction on the right of the

pledgeeunderthe1stsentenceofArt.2119?
A:Hemayonlydemandthesaleofonlyasmany
ofthethingsasarenecessaryforthepaymentof
nd
thedebt(2 sentence,Art.2119,NCC).
E.RIGHTSOFPLEDGOR
Q:Whataretherightsofthepledgor?
A:
1. Right to dispose the thing pledged,
provided there is consent of the
pledgee(Art.2097,NCC)
2. Right to ask that the thing pledged be
deposited (Art. 2104 and Art. 2106,
NCC)
3. Right to substitute thing pledged (Art.
2107,NCC)
Q: When may the owner ask that the thing

pledged
be
deposited
judicially
or
extrajudicially?
A:
1. If the creditor uses the thing without
authority
2. Ifhemisusesthethethinginanyother
way;or
3. Ifthethingisindangerofbeinglostor
impaired because of the negligence or
willfulactofthepledge(Art.2106,NCC)
Q: Does the pledgor have the right to demand

the return of the thing pledged against the will
ofthecreditor?
A: No. He cannot ask for its return until the

obligation is fully paid including interest due
thereon and expenses incurred for its
preservation(Art.2105,NCC)
Q: What are the requisites before the pledgor

may substitute the thing pledged with another
thing?
A:
1. Pledgorhasreasonablegroundstofear
the destruction or impairment of the
thingpledged;
2.
3.
4.
Nofaultonthepartofthepledge
Pledgorisofferinginplaceofthething,
another thing in pledge which is of the
same kind and quality as the former;
and
Pledgeedoesnotchoosetoexercisehis
right to cause the thing pledged to be
soldatpublicauction(Art.2107,NCC)
F.PERFECTION
Q:Howisacontractofpledgeperfected?
A: A contract of pledge is perfected when the

thingpledgedisplacedintheactualpossessionof
or delivered to the pledgee or a third person
designated by the parties by common consent.
(Art.2093,NCC)
Note:IfArt.2093isnotcompliedwith,thepledge
isvoid.
Q:FourcarabaoswerepledgedbyTtoE.Tisthe
registered owner of the carabaos. The carabaos
wereactuallyinthepossessionofJ.Enevertook
possession of the carabaos. There is nothing in
thecontractwhichstatedthatJwasbycommon
consentmadethedepositaryofthecarabaosin
Esbehalf.Istherealawfullyconstitutedpledge?
A: None. The delivery of possession of the

property pledged requires actual possession and
ameresymbolicdeliveryisnotsufficient.(Betita
vGanzon,49Phil.87)
Q: What is the effect when possession or

deliveryofthethingpledgedwasnotmade?
A:Anagreementtoconstituteapledgeonlygives
risetoapersonalactionbetweenthecontracting
parties.Unlessthemovablegivenasasecurityby
way of pledge be delivered to and placed in the
possession of the creditor or of a third person
designated by common agreement, the creditor
acquiresnorighttothepropertybecausepledge
ismerelyalienandpossessionisindispensableto
therightofalien.
Q:Whatistheeffectifthepledgeefailstotake
thepropertypledgedintohispossession?
A: If a pledgee fails or neglects to take the

property pledged into his possession, he is
presumed to have waived the right granted him
bythecontract.(U.S.v.Terrel,2Phil.222)
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Q:Whataretherequisitestobindthirdpersons
inacontractofpledge?
A: To bind third persons, the pledge must be

embodied in a public instrument where the
followingentriesmustappear
Adescriptionofthethingpledged;and
Statement of date when the pledge was
executed.(Art.2096,NCC)
Q:AisindebtedtoB.Apledgeshisdiamondring
toB.TheringisdeliveredtoB,butinthepublic
instrument executed, there is no description of
the ring, and the date of the pledge does not
appear. If A sells the ring to C, does C have to
respectthepledgeinfavorofB?
A: No. C does not have to respect the pledge

since as to him, the pledge is not effective and
valid.
Q:Whatisthereasonbehindtherequisites?
A:Thepurposeoftherequirementsistoforestall
fraud, because a debtor may attempt to conceal
hispropertyfromhiscreditorswhenheseesitin
danger of execution by simulating a pledge
thereof with an accomplice. (Tec Bi & Co. v.
CharteredBankofIndia,41Phil.576)
Q: What is the effect if no public instrument is

made?
A:Whenthecontractofpledgeisnotrecordedin
a public instrument, it is void as against third
persons;thebuyerofthethingpledgedisathird
person. The fact that the person claiming as
pledgee has taken actual physical possession of
the thing sold will not prevent the pledge from
being declared void insofar as the innocent
stranger is concerned. (Tec Bi & Co. v. Chartered
Bank of India, Australia and China, 16 O.G. 908;
Ocejo, Perez and Co. v. International Bank, 37
Phil.631)
Q: What is the effect of an undated contract of

pledge?
A:Anundatedinstrumentofpledgecannotripen
intoavalidpledge.(Betitav.Ganzon,49Phil.87)
G.FORECLOSURE
Q: When may a pledgee foreclose the thing

pledged?
408
A:Whenthereisnopaymentofthedebtontime,
theobjectofthepledgemaybealienatedforthe
purposeofsatisfyingtheclaimsofthepledgee.
Q:Whatistheprocedureforthepublicsaleofa
thingpledged?
A:
1. Theobligationmustbedueandunpaid
2. Thesaleofthethingpledgedmustbeat
publicauction
3. Theremustbenoticetothepledgor
andowner,statingtheamountfor
whichthesaleistobeheld
4. ThesalemustbeconductedbyNotary
Public.
H.PLEDGEBYOPERATIONOFLAW
Q:Whatisapledgecreatedbyoperationoflaw?
A:PledgebyoperationoflaworLegalPledgesare
thoseconstitutedorcreatedbyoperationoflaw.
Thisreferstotherightofretention.
Q:Whatrulesapplytolegalpledge?
A:
1. The rules governing conventional
pledgeapplies.
2. There is no definite period for the
paymentoftheprincipalobligation.The
pledgemust,therefore,makeademand
for the payment of the amount due
him. Without such demand, he cannot
exercise the right of sale at public
auction.(DeLeon)
Q:Whataretheinstancesoflegalpledgeswhere
thereisrightofretention?
A:
1. Art. 546 Right of the possessor in
good faith to retain the thing until
refundedofnecessaryexpenses.
2. Art. 1707 Lien on the goods
manufactured or work done by a
laboreruntilhiswageshadbeenpaid.
3. Art. 1731 Right to retain of a worker
who executed work upon a movable
untilheispaid.
4. Art. 1914 Right of an agent to retain
the thing subject of the agency until
reimbursed of his advances and
damages(Arts.1912and1913,NCC).
5. Art. 1994 Right of retention of a
depositaryuntilfullpaymentofwhatis
duehimbyreasonofthedeposit.
CIVILLAWTEAM:
CREDIT TRANSACTIONS
6.
Art.2004Rightofthehotelkeeperto
retain things of the guest which are
brought into the hotel, until his hotel
billshadbeenpaid.
Q: What must the pledgee do before he may

causesaleofthethingpledged?
A:Thepledgeemustfirstmakeademandofthe
amountforwhichthethingisretained.Afterthe
demand,thepledgeemustproceedwiththesale
of the thing within thirty (30) days. Otherwise,
the pledgor can require of him the return of the
thingretained.
Note: there is only one public auction here.

(Paras)
Q: To whom will the remainder of the price

pertain?
A: The remainder of the price of sale shall be

deliveredtotheobligor.(Art.2121)
Q:Whataretheinstanceswhenthepledgormay
demand that the thing pledged be deposited
judiciallyorextrajudicially?
A:
1. Creditor uses the thing without
authority
2. Creditormisusesthething
3. The thing is in danger of being lost or
impaired due to the negligence or
willfulactsofthepledgee.
Q: What are the effects of sale of the thing

pledged?
A:
1. Extinguish the principal obligation even
iftheproceedsofthesaledonotsatisfy
thewholeamountoftheobligation.
2. If proceeds from the sale exceed the
amount due, the debtor is not entitled
to the excess, the excess goes to the
pledgee. This is to compensate him for
the eventuality where the purchase
price is lesser than the amount of the
debt, wherein he cannot receive any
deficiency unless there is a contrary
agreement or in case of legal pledge,
thepledgorisentitledtotheexcess
3. If the proceeds of the sale is less than
the amount due, the creditor has no
right to recover the deficiency and the
pledgor is not liable for the deficiency
evenifthereisastipulationthathebe
soliable.Suchstipulationisvoid.
Q: What is the meaning of the right of the

mortgageeorpledgeetoforeclose?
A: If the debtor failed to pay on maturity date,

the thing pledged or mortgaged may be sold at
public auction as provided by law so that the
proceeds may be used for payment of the
obligation.
I.PLEDGEDISTINGUISHEDFROMMORTGAGE
Q: Distinguish contract of pledge from chattel

mortgage.
A:
CHATTELMORTGAGE
PLEDGE
Delivery
Deliveryisnotnecessary
Deliveryisnecessary
Registration
Registrationinthe
Registrationinthe
ChattelMortgageregister
RegistryPropertyisnot
isnecessaryforits
necessary.
validity
Lawgoverningthesale
Procedureforthesaleof
thethinggivenas
Art.2112,NCC
securityisgovernedby
Sec.14,ActNo.1508
Excess
Ifthepropertyissold,the
Ifthepropertyis
debtorisnotentitledto
foreclosed,theexcess
theexcessunless
goestothedebtor
otherwiseagreed.
Recoveryofdeficiency
Thecreditorisentitledto
Thecreditorisnot
recoverthedeficiency
entitledtorecoverthe
fromthedebtorexceptif
deficiency
thechattelmortgageisa
notwithstandingany
securityforthepurchase
stipulationtothe
ofpropertyin
contrary.
installments
Possession
Possessionremains with
Possessionisvested in
thedebtor
thecreditor
Contract
Formalcontract
Realcontract
Recordinginapublicinstrument
Mustbeinapublic
instrumentcontaining
Mustberecordedina
descriptionofthething
publicinstrumenttobind
pledgedandthedate
thirdpersons
thereoftobindthird
persons
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Q: Distinguish contract of pledge from real

estatemortgage.
A:
PLEDGE
Realcontract
Subjectmatteris
personalproperty
Possessionofthething
pledgedisvestedinthe
creditor
Pledgeehastherightto
receivethefruitsofthe
thingpledged,withthe
obligationofapplyingthe
sametotheinterestof
thedebt,ifowing,and
thebalance,ifany,tothe
principal
Saleatpublicauctionof
thethingpledgedis
alwaysextrajudicial
Descriptionofthething
andthedateofpledge
mustappearinapublic
instrumentotherwise,it
isnotvalidastothird
person
REALESTATE
MORTGAGE
Consensualcontract
Subjectmatterisreal
property
Possessionofthething
mortgagedremainswith
thedebtor
Mortgageedoesnot
possesssuchright
Salemaybejudicialor
extrajudicial
Mustberegistered,
otherwise,itisnotvalid
againstthirdpersons
althoughbinding
betweentheparties
Realrightandreal
propertybyitself
Notarealright
V.REALMORTGAGE
A.DEFINITIONANDCHARACTERISTICS
Q:Whatisrealestatemortgage(REM)?
A:Itisacontractwherebythedebtorsecuresto
the creditor the fulfillment of the principal
obligation, specially subjecting to such security
immovable property or real rights over
immovable property in case the principal
obligationisnotfulfilledatthetimestipulated
Note:Registrationisnecessarytobindthirdpersons
butnotforthevalidityofthecontract.
Beinganaccessorycontract,itsconsiderationisone
andthesameasthatoftheprincipalobligation.
B.ESSENTIALREQUISITES
Q:Whataretherequisitesforvalidconstitution
ofarealmortgage?
A:
410
1.
2.
3.
It covers only immovable property and

alienable real rights imposed upon
immovables
Itmustappearinapublicinstrument
Registration in the registry of property
rd
isnecessarytobind3 persons
Q:Whatarethekindsofrealmortgages?
A:
1. Conventional mortgages constituted
voluntarilybythecontractingparties.
2. Legalmortgagerequiredbylaw.
3. Equitable mortgage intention of the
parties is to make the immovable as a
security for the performance of the
obligation but the formalities of a real
mortgagearenotcompliedwith.
Q: Distinguish contract of real estate mortgage

fromcontractofsalewithrightofrepurchase.
A:
REALESTATE
MORTGAGE
Accessorycontract
Thereisnotransferof
titleandpossessionof
theproperty
Creditorhasnorightto
thefruitsoftheproperty
duringthependencyof
themortgage
Ifthedebtorfailstopay
hisdebt,thecreditor
cannotappropriatethe
propertymortgagednor
disposeofit
SALEWITHRIGHTOF
REPURCHASE
Principaland
independentcontract
Thereistransferoftitle
andpossessionofthe
property,although
conditional
Thevendeearetrois
entitledtothefruitseven
duringtheperiodof
redemption
Assoonasthereisa
consolidationoftitlein
thevendeearetro,he
maydisposeofitasan
absoluteowner
Q:Isregistrationofmortgageamatterofright?
A:Yes.Byexecutingthemortgage,themortgagor
is understood to have given his consent to its
registration, and he cannot be permitted to
revokeitunilaterally.
Q: What is the meaning of mortgage as a real

andinseparableright?
A: The mortgage directly and immediately

subjects the property upon which it is imposed,
whoeverthepossessormaybe,tothefulfillment
of the obligation for whose security it was
constituted(Art.2126,NCC).
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q:Whatarethethingsthataredeemedincluded
inthemortgage?
A:
1. Naturalaccessions
2. Improvements
3. Growingfruits
4. Rents
5. Income
6. Insuranceproceeds
7. Expropriationprice(Art.2127,NCC)
Q: When does the mortgage lien attach in case

ofneworfutureimprovements?
A:Onthedateoftheregistrationofthemortgage
(Luzon Lumber and Hardware Co., Inc, v.
Quiambao,G.R.No.L5638,Mar.20,1954).
Q:Whatisdragnetclause?
A: It is a mortgage provision which is specifically

phrased to subsume all debts of past or future
origin.Suchclausesarecarefullyscrutinizedand
strictlyconstrued.Themortgagecontractisalso
one of adhesion (Philippine Bank of
Communications v. CA, G.R. No. 118552, Feb. 5,
1996).
Q: Is the amount stated in the contract

controlling in case of mortgage securing future
advancements?
A: No. The amount named in the contract does

not limit the amount for which the mortgage
standasasecurity,if,fromthefourcornersofthe
instrumenttheintenttosecurefutureandother
indebtednesscanbegathered.
Q: Petitioner obtained a loan of P20K from

defendant Rural Bank of Kawit. The loan was
secured by a REM over a parcel of land. The
mortgagecontractstatesthatthemortgagewill
coverthepaymentoftheloanofP20Kandsuch
other loans or other advances already obtained
or to be obtained by the mortgagors from the
bank.TheloanofP20kwasfullypaid.Thereafter
they again obtained a loan of P18K, secured by
thesamemortgage.Thespousesdefaulted.The
bank extra judicially foreclosed the mortgage.
Wastheforeclosuresalevalid?
A: Yes. It has long been settled that mortgages

given to secure future advancements are valid
and legal contracts; that the amounts named as
consideration in said contract do not limit the
amount for which the mortgage may stand as
security, if from the four corners of the
instrumenttheintenttosecurefutureandother
indebtednesscanbegathered.Amortgagegiven
to secure advancement is a continuing security
and is not discharged by repayment of the
amount named in the mortgage, until the full
amount of the advancements is paid (Mojica v.
CA,G.R.No.94247,Sept.11,1991).
Q: May a mortgage credit be alienated or

assignedtoathirdperson?
A: Yes, in whole or in part, with the formalities

requiredbylaw(Art.2128,NCC).
Q: What are the requisites to be followed for

assignmentofcredit?
A:Anassignmentofacredit,rightoractionshall
producenoeffectasagainstthirdpersons,unless
it appears in a public instrument, or the
instrumentisrecordedintheRegistryofProperty
incasetheassignmentinvolvesrealproperty(Art.
1625,NCC).
Q:Maythecreditorclaimfromthethirdperson
in possession of the property payment of the
credit?
A:Yes,uptotheextentsecuredbytheproperty
which the third party possesses, in terms and
with the formalities which the law establishes
(Art.2129,NCC).
Q: Is a stipulation forbidding the owner from

alienatingtheimmovablemortgagedvalid?
A: No. The prohibition to alienate is contrary to

public good inasmuch as the transmission of
property should not be unduly impeded (Report,
CodeCommission,p.58).
Q: What are the laws that govern contract of

realmortgage?
A:
1. NewCivilCode
2. MortgageLaw
3. PropertyRegistrationDecree(PD1529)
4. Sec.194,asamendedbyActNo.3344,
RevisedAdministrativeCode(Phil.Bank
of Commerce v. De Vera, G.R. No. L
18816,Dec.29,1962)
5. R.A. 4882 law governing aliens who
becomemortgagees.
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C.FORECLOSURE
Q:Whatisforeclosure?
A: It is a remedy available to the mortgagee in

whichhesubjectsthemortgagedpropertytothe
satisfactionoftheobligation.
Q:Whatarethekindsofforeclosure?
A:
Judicial governed by Rule 68, Rules of
Court
Extrajudicial mortgagee is given a SPA to
sell the mortgaged property (Act No.
3135)
Q:Whatisthenatureofjudicialforeclosure?
A: It is an action quasi in rem (Ocampo v.

Domalanta,20SCRA1136).
Q: Does an action for foreclosure of mortgage

survivethedeathofmortgagor?
A:Yes,becausetheclaimisnotpuremoneyclaim
but an action to enforce a mortgage lien. Being
so, the judgment rendered therein may be
enforced by a writ of execution. The action may
be prosecuted by the interested person against
the executor or administrator independently of
the testate or intestate proceedings of the
settlement of the mortgagors estate for the
reason that such claims cannot in any just sense
be considered claims against the estate, but the
right to subject specific property to the claim
arises from the contract of the debtor whereby
hehasduringlifesetasidecertainpropertyforits
payment, and such property does not, except in
sofarasitsvaluemayexceedthedebt,belongto
the estate (Testamentaria de Don Amadeo
Matute Olave v. Canlas, No. L12709, Feb. 28,
1962).
Q: What are the options or remedies of the
mortgageeincaseofdeathofthedebtor?
A:
1. To waive the mortgage and claim the
entire debt from the estate of the
mortgagorasanordinaryclaim;
2. Toforeclosethemortgagejudiciallyand
prove any deficiency as an ordinary
claim;or
3. To rely on the mortgage exclusively,
foreclosingthesameatanytimebefore
it is barred by prescription, without
right to file claim for any deficiency
412
(Maglaque v. Planters Development

Bank,GRNo.109472,May18,1999).
Q: When is judicial foreclosure considered

completed?
A: A foreclosure sale is not complete until it is

confirmed and before such confirmation, the
court retains control of the proceedings by
exercising sound discretion in regard to it either
grantingorwithholdingconfirmationastherights
and interests of the parties and the ends of
justice may require (Rural Bank of Oroquieta v.
CA,No.53466,Nov.10,1980).
Q: What is the significance of confirmation in

judicialforeclosure?
A: Confirmation cuts off all the rights and

interestsofthemortgagorandofthemortgagee
and persons holding under him, and with them
the equity of redemption in the property and
vests them in the purchaser. Confirmation
retroactstothedateofthesale.Itisafinalorder,
not interlocutory (Ocampo v. Domalanta, No. L
21011,Aug.30,1967).
Note:Ifthepropertyhasbeenmortgagedinfavorof
thePhilippineNationalBank,redemptionisallowed
within one year from the confirmation of the sale
(Gonzalesv.PNB,No.24850,March1,1926).
Theredemptionmustbemadewithinoneyearafter
thesale,ifthemortgageeisabank,bankingorcredit
institutions(Sec.78,R.A.337).
Q:Whataretheeffectsofconfirmationofsale?
A: There can be no redemption of the property.

Such confirmation retroacts to the date of the
auctionsale.Aftertheconfirmation,theprevious
ownersloseanyrighttheymayhavehadoverthe
property, which rights in turn vested on the
Purchaser of the property (Lonzame v. Amores,
No.L53620,Jan.31,1985).
Q:Whatisthebasisofextrajudicialforeclosure?
A: An extrajudicial foreclosure may only be

effected if in the mortgage contract covering a
realestate,aclauseisincorporatedthereingiving
the mortgagee the power, upon default of the
debtor, to foreclose the mortgage by an
extrajudicial sale of the mortgage property (Sec.
1,ActNo.3135,asamendedbyActNo.4148).
The authority to sell may be done in a separate

document but annexed to the contract of
mortgage. The authority is not extinguished by
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thedeathofthemortgagorormortgageeasitis
an essential and inseparable part of a bilateral
agreement (Perez v. PNB, No. L21813, July 30,
1966).
Q:Howisextrajudicialforeclosureinitiated?
A:Byfilingapetitionwiththeofficeofthesheriff.
It may also be initiated through a Notary Public
commissionedintheplacewherethepropertyis
situated.
Note: Notice containing the place and date is

required before an auction sale is made in
extrajudicialforeclosure.(Sec.3,ActNo.3135)
Q: What governs extrajudicial foreclosure by

PNB?
A:ThesameshallbegovernedbySections29,30
and 34 of Act No. 3135 and not by the PNB
Charter(PNBv.CA,G.R.No.60208,December5,
1985).
Q: What are the requisites of notice of sheriffs

sale?
A: It must contain the correct number of the

certificate of title and the correct technical
description of the real property to be sold (San
Josev.CA,GRNo.106953,Aug.19,1993).
Q:Whatisthepurposeofnoticeofsale?
A: To inform the public of the nature and

condition of the property sold, and of the time,
placeandtermsofthesale.
Q: MBTC granted a loan to spouses Peafiel,

who mortgaged their two (2) parcels of land in
Mandaluyong. The spouses defaulted in the
payment. MBTC instituted an extrajudicial
foreclosureproceedingunderActNo.3135.The
Notice of Sale was published in Maharlika
Pilipinas, which has no business permit in
Mandaluyong and its list of subscribers shows
that there were no subscribers from
Mandaluyong. Did MBTC comply with the
publication requirement under Section 3, Act
No.3135?
A: No. Maharlika Pilipinas is not a newspaper of

general circulation in Mandaluyong where the
propertyislocated.Tobeanewspaperofgeneral
circulation,itisenoughthatitispublishedforthe
dissemination of local news and general
information, that it has a bona fide subscription
listofpayingsubscribers,andthatitispublished
at regular intervals. The newspaper must be
availabletothepublicingeneral,andnotjusttoa
select few chosen by the publisher. Otherwise,
the precise objective of publishing the notice of
sale in the newspaper will not be realized.
(Metropolitan Bank and Trust Company, Inc. v.
EugenioPeafiel,G.R.No.173976,Feb.27,2009)
Q: May a mortgagor enjoin the implementation

ofawritofpossessiononthegroundthatthere
is a pending case for annulment of the
extrajudicialforeclosureoftheREM?
A: No. As a rule, any question regarding the

validityofthemortgageoritsforeclosurecannot
be a legal ground for refusing the issuance of a
writ of possession. Regardless of whether or not
there is a pending suit for annulment of the
mortgage or the foreclosure itself, the purchaser
is entitled to a writ of possession, without
prejudice to the outcome of the case. Hence, an
injunction to prohibit the issuance of writ of
possession is entirely out of place. Prohibition
does not lie to enjoin the implementation of a
writ of possession. Once the writ of possession
hasbeenissued,thetrialcourthasnoalternative
buttoenforcethewritwithoutdelay.(Sps.Ongv.
CA,G.R.No.121494,June8,2000)
Q:Canthemortgageerecoverthedeficiency?
A: If there be a balance due to the mortgagee

after applying the proceeds of the sale, the
mortgagee is entitled to recover the deficiency
(DBPv.Mirang,G.R.No.L29130,Aug.8,1975).
Note: In judicial foreclosure, the Rules of Court

specificallygivesthemortgageetherighttoclaimfor
deficiencyincaseadeficiencyexists(Sec.6,Rule70).
While Act No. 3135 governing extrajudicial

foreclosuresofmortgagedoesnotgiveamortgagee
the right to recover deficiency after the public
auction sale, neither does it expressly or impliedly
prohibitsuchrecovery.
This right to recover deficiency had been

categoricallyresolvedinStateInvestmentv.CA(G.R.
No.101163,January11,1993).Thus,themortgagee
isentitledtorecoverthedeficiencyincasethesale
proceeds are not sufficient to cover the debt in
extrajudicialforeclosures.
The action to recover a deficiency after foreclosure

prescribes after ten (10) years from the time the
rightofactionaccruesasprovidedinArticle1144(2),
NCC (DBP v. Tomeldan, G.R. No. 51269, Nov. 17,
1980).
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Q:Whatisstipulationofupsetprice?
A: It is a stipulation of minimum price at which

thepropertyshallbesoldtobecomeoperativein
theeventofaforeclosuresaleatpublicauction.It
isnullandvoid.
REDEMPTION
Q:Whatisredemption?
A:Transactionbywhichthemortgagorreacquires
orbuysbackthepropertywhichmayhavepassed
underthemortgageordiveststhepropertyofthe
lienwhichthemortgagemayhavecreated.
Q:Whatarethekindsofredemption?
A:
1. Equity of redemption right of
mortgagor to redeem the mortgaged
property after his default in the
performance of the conditions of the
mortgage but before the sale of the
mortgaged property or confirmation of
sale. It applies in case of judicial
foreclosure.
2. Right of redemption right of the
mortgagor to redeem the mortgaged
propertywithinoneyearfromthedate
of registration of the certificate of sale.
It applies in case of extrajudicial
foreclosure.
Q: X and Y, judgment creditors of A, obtained

the transfer of the title of the mortgaged
property in their names. Earlier, A executed a
mortgage over the same property in favor of
FGU Insurance.The latter mortgage was
registered. When A defaulted, FGU foreclosed
theproperty.Acertificateofsalewasthereafter
issued in FGUs favor, which was confirmed by
theRTC.However,beforethenewTCTcouldbe
issued,XandYfiledtheirrespectivemotionfor
intervention and to set aside the judgment
alleging that they are the new owners of the
propertyandthefailureofFGUtoimpleadXand
Yintheactionforforeclosuredeprivedthelatter
of due process. Is the contention of X and Y
correct?
A:No.Subordinatelienholdersacquireonlyalien
upon the equity of redemption vested in the
mortgagor, and their rights are strictly
subordinate to the superior lien of the
mortgagee. Such equity of redemption does not
constitute a bar to the registration of the
property in the name of the mortgagee.
414
Registration may be granted in the name of the

mortgagee but subject to the subordinate lien
holders equity of redemption, which should be
exercised within ninety (90) days from the date
the decision becomes final. This registration is
merelyanecessaryconsequenceoftheexecution
of the final deed of sale in the foreclosure
proceedings. (Looyuko v. CA, G.R. No. 102696,
July12,2001)
Q: What are the requisites for valid right of

redemption?
A:
1. Mustbemadewithinoneyearfromthe
timeoftheregistrationofthesale.
2. Payment of the purchase price of the
property plus 1% interest per month
togetherwiththetaxesthereon,ifany,
paid by the purchaser with the same
rateofinterestcomputedfromthedate
ofregistrationofthesale;and
3. Written notice of the redemption must
beservedontheofficerwhomadethe
sale and a duplicate filed with the
proper Register of Deeds (Rosales v.
Yboa,G.R.No.L42282,Feb.28,1983).
Note: The redemptioner should make an actual

tender in good faith of the full amount of the
purchase price as provided above, i.e., the amount
fixed by the court in the order of execution or the
amount due under the mortgage deed, as the case
maybe,withinterestthereonattheratespecifiedin
the mortgage, and all the costs, and judicial and
other expenses incurred by the bank or institution
concerned by reason of the execution and sale and
as a result of the custody of said property less the
income received from the property. (Heirs of
Quisimbingv.PNB,G.R.No.178242,Jan.20,2009)
Q: Is the period of redemption a prescriptive

period?
A: No. The period of redemption is not a

prescriptive period but a condition precedent
providedbylawtorestricttherightoftheperson
exercisingredemption.
Ifapersonexercisingtherightofredemptionhas
offeredtoredeemthepropertywithintheperiod
fixed,heisconsideredtohavecompliedwiththe
condition precedent prescribed by law and may
thereafter bring an action to enforce
redemption.
If, on the other hand, the period is allowed to

lapsebeforetherightofredemptionisexercised,
then the action to enforce redemption will not
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prosper, even if the action is brought within the
ordinaryprescriptiveperiod.
Q: D obtained a loan from C secured by a REM

over a parcel of land. When D defaulted, C
extrajudicially foreclosed the property. C was
declared the highest bidder in the auction. On
October 29, 1993, C caused the registration of
the certificate of sale. On November 9, 1994 D
filed a complaint for annulment of the
extrajudicialforeclosureandauctionsale.CanD
redeem the property beyond the one year
redemptionperiod?
A:No.Dlostanyrightorinterestoverthesubject
property primarily because of his failure to
redeem the same in the manner and within the
period prescribed by law. His belated attempt to
question the legality and validity of the
foreclosure proceedings and public auction must
accordingly fail. (Sps. Landrito v. CA G.R. No.
133079,Aug.9,2005)
Q: Can a mortgagor, whose property has been
extrajudicially foreclosed and sold, validly
execute a mortgage contract over the same
property in favor of a third party during the
periodofredemption?
A: Yes. The purchaser at the foreclosure sale

merelyacquiredaninchoaterighttotheproperty
which could ripen into ownership only upon the
lapseoftheredemptionperiodwithouthiscredit
havingbeendischarged,itisillogicaltoholdthat
during that same period of twelve months the
mortgagorwas"divested"ofhisownership,since
the absurd result would be that the land will
consequently be without an owner although it
remainsregisteredinthenameofthemortgagor.
Such mortgage does not involve a transfer,
cession or conveyance of the property but only
constitutesalienthereon(Medidav.CA,G.R.No.
98334,May8,1992).
Q: DBP guaranteed LCDs loan. When LCD

defaulted, DBP paid it and sought
reimbursement. LCD failed to reimburse DBP,
hence DBP extrajudicially foreclosed the REM,
where it was the highest bidder. The Sheriffs
certificate of sale was annotated in the
certificateoftitlesonApril30,1976.LaCampana
failed to redeem the properties. The court,
amongothers,orderedLCDtopaysuchsumsof
money unlawfully collected or received by way
of rentals and/or fruits from the subject
properties to DBP. When should the period for
the
remittance
of
collected/received
rentals/fruitsfromtheproperties,ofLCDtoDBP
start?
A:Inforeclosureproceedings,thebuyerbecomes
theabsoluteownerofthepropertypurchasedifit
is not redeemed during the prescribed period of
redemption, which is one year from the date of
registrationofthesale.TheSheriffscertificateof
sale was annotated in the certificate of titles on
April 30, 1976. DBP became the absolute owner
of the properties on May 1, 1977. Thus, the
period to be considered in determining the
amount of collection should start from May 1,
1997 up to the time when the possession of the
properties are actually and completely
surrendered to DBP. (La Campana Development
Corporation v. DBP, G.R. No. 146157, Feb. 13,
2009)
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Flowchart of Extra-judicial
Foreclosure of Real Estate Mortgage
Executionofloan+REMagreement(REM
withbuiltinSPAtosellincaseofdefault)
Defaultofmortgagorfornonpaymentor
violationofthetermsoftheloanorREM
agreement
Filingofpetitionforsalewith
Clerk of Court
Publication/postingofnotice/
jurisdictionalrequirements
Onceaweekfor3consecutiveweeksina
newspaperofgeneralcirculation
Foreclosuresale
Registrationofthesale
withRegistryofDeeds
Note:Theredemptionprice:
Ifthemortgageeisabank:
outstandingobligation
Oneyearredemptionperiod
+intereststipulatedintheagreement
Consolidationoftitlebyfilingaffidavit
withRegistryofDeeds(operative
document)
Cancellationoftitleofthemortgagor
andissuanceofnewtitleinfavorof
mortgagee
Petitionforwritofpossession
416
Note:
if after the expiration of the redemption period,
thepetitionforwritofpossessionismandatoryor
ministerial
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Flowchart for Judicial Foreclosure of Real Estate Mortgage
Complaint with the court. Include

subsequent lien holders, otherwise
equity of redemption will not be
divested. (Lampin v. IAC, No. L70987, Sept. 29, 1988))
Mortgagee to
file motion for
confirmation of
sale
Hearing
Execution sale
Issuance of order confirming

the sale (order is appealable)
(Ocampo v. Dimalanta, No. L21011, Aug. 30, 1967)
Entry of
judgment
Judgment
Upon failure to pay,

mortgagee to file
motion for execution
foreclosing
mortgage
Registration of the order

confirming the sale
90 days 120 days

from entry of
judgment for
mortgagor to pay his
debt, as determined
by court
Cancellation of the title of

the mortgagor/issuance of
new title to the mortgagee
Wait for finality of order
* If mortgagee/bidder is bank or credit

institution, mortgagor has one more year
from registration of order confirming the
sale + certificate of sale to redeem the
property.
Secure a writ of
possession, by motion,
from the same court that
ordered the foreclosure
Note:
GR: In judicial foreclosure, there is only equity of redemption.
XPN: If the mortgagee is a bank or credit institution, there is one year right of redemption.
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VI.CHATTELMORTGAGE
Q:Whatischattelmortgage?
A: It is a contract by virtue of which personal

property is recorded in the Chattel Mortgage
Register as a security for the performance of an
obligation.
Q: What are the characteristics of chattel

mortgage?
A:
1. It is a formal contract because it must
beembodiedinapublicinstrumentand
recorded in the Chattel Mortgage
Register;
2. It is an accessory contract because its

existence depends upon an existing
validprincipalobligation;
3. It is a unilateral contract because the

obligation is only on the part of the
creditor to free the chattel from
encumbranceuponthepaymentofthe
principalobligation;
4.
Itdoesnotconveydominionbutisonly
a security (In re: Du Tec Chuan, No.
11156,March28,1916);
5.
It creates a real right or a lien which is

being recorded and follows the chattel
whereveritgoes(NorthernMotors,Inc.
v.Coquia,No.L40018,Dec.15,1975).
Q: What are the requisites in a chattel

mortgage?
A:
1. GR:Itcoversonlymovableproperty
XPN: When the parties treat as

personaltythatwhichisaccordingtoits
naturerealty.
2. Registration with the Chattel Mortgage

Register.
3. Descriptionoftheproperty.
4. Accompanied by an affidavit of good
rd
faithtobind3 persons.
Note:Theabsenceofanaffidavitofgoodfaithdoes
notaffectthevalidityofthecontract.
418
Q: What are the laws that govern chattel

mortgages?
A:
1. ChattelMortgageLaw(ActNo.1508)
2. ProvisionsoftheCivilCodeonpledge
Note:Incaseofconflictbetweennos.1and
2,theformershallprevail.
RevisedAdministrativeCode
RevisedPenalCode(Art.319)
Other special laws (i.e. Motor vehicle
law)
6. ShipMortgageDecreeof1978(P.D.No.
1521)
Q: What may be the subject matter of chattel
mortgage?
A:
1. Sharesofstockinacorporation;
2. Interestinbusiness;
3. Machinery and house of mixed
materialstreatedbypartiesaspersonal
property and no innocent third person
will be prejudiced thereby (Makati
Leasing and Finance Corp. v. Weaver
TextileMills,Inc.,No.L58469,May,16,
1983);
4. Vessels, the mortgage of which have
beenrecordedwiththePhilippineCoast
Guard in order to be effective as to
thirdpersons;
5. Motor vehicles, the mortgage of which
hadbeenregisteredbothwiththeLand
Transportation Commission and the
Chattel Mortgage Registry in order to
affectthirdpersons;
6. House which is intended to be
demolished;or
7. Growing crops and large cattle (pars. 2
and3,Sec.7,ActNo.1508).
3.
4.
5.
Note: Section 7 of the Chattel Mortgage Law does

not demand specific description of every chattel
mortgaged in the deed of mortgage, but only
requires that the description of the mortgaged
property be such as to enable the parties to the
mortgage or any other person to identify the same
afterareasonableinvestigationandinquiry(Saldana
v. Phil. Guaranty Co., Inc., No. L13194, Jan. 29,
1960);otherwise,themortgageisinvalid.
Q:Whatisaffidavitofgoodfaith?
A:Itisanoathinacontractof chattelmortgage
wherein the parties severally swear that the
mortgageismadeforthepurposeofsecuringthe
obligationspecifiedintheconditionsthereofand
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fornootherpurposesandthatthesameisajust
andvalidobligationandonenotenteredintofor
thepurposeoffraud.
Note: The absence of the affidavit vitiates the

mortgage only as against third persons without
noticelikecreditorsandsubsequentencumbrances.
Q:Distinguishcontractofchattelmortgagefrom
contractofrealestatemortgage.
A:
REALESTATE
CHATTELMORTGAGE
MORTGAGE
Subjectmatter
Personalproperty
Realproperty
Requirementofregistration
Essentialforthevalidity Merelyforthepurpose
ofthiscontract
ofbindingthirdpersons
Procedurefortheforeclosureofachattelmortgage
isdifferentfromtheprocedureofforeclosurefor
realestatemortgage
B.REGISTRATION
Q:Whatisthelegalsignificanceofregistration?
A:Itistantamounttothesymbolicdeliveryofthe
mortgage to the mortgagee, which is equivalent
toactualdelivery(Meyersv.Thein,No.5577,Feb.
21,1910).
Q: What is the difference in registration of real

mortgageandchattelmortgage?
A: A deed of real estate mortgage is considered
registered once recorded in the entry book.
However, chattel mortgage must be registered
notonlyintheentrybookbutalsointheChattel
Mortgage Register. (Associated Insurance and
SuretyCo.v.LimAng,(CA)52Off.Gaz.5218)
Q: What is the effect if the chattel mortgage is

notregisteredinthechattelmortgageregister?
A:Itisstillbindingbetweenthepartiesbutitwill
notbebindingtoinnocentthirdparties.
Q: When should the registration of the chattel

mortgagebemade?
A: The law is silent on the time or period when

registration should be made. The Court of
Appeals has held though that the law is
substantiallyandsufficientlycompliedwithwhere
theregistrationismadebythemortgageebefore
the mortgagor has complied with his principal
obligationandnorightofinnocentthirdpersons
isprejudiced(Ledesmav.Perez,2C.A.Rep.126).
Q: Should the foreclosure sale in chattel

mortgagebedoneinpublicauction?
A:ActNo.1508providesfortheforeclosuresale
in chattel mortgage be done by public auction.
However,thepartiesarefreetostipulatethatthe
foreclosurebedonebyprivatesale.
Q: In case of foreclosure sale in chattel

mortgage,maythecreditorrecoverdeficiencyif
the redemption price is less than the debt
secured?
A:
GR:CRmayrecoverdeficiency.
XPN: when the chattel mortgage is used to

secure the purchase of personal property in
installments(RectoLaw).
Q:Whatistheeffectofanincreaseinmortgage
credit?
A: If the parties to a chattel mortgage take an

oaththatthedebt,honestlydueandowingfrom
the mortgagor to the mortgagee, it is obvious
thatavalidmortgagecannotbemadetosecurea
debt to be thereafter contracted (11 C.J. 448). A
mortgage that contains astipulation in regardto
futureadvancesinthecreditwilltakeeffectonly
from the date of the mortgage. The increase in
the mortgage credit becomes a new mortgage
(Belgian Catholic Missionaries v. Magallanes
Press,No.25729,Nov.24,1926).
Q: What is the effect of obtaining a personal

judgmentonthemortgagelien?
A:Itisdeemedabandoned.
Q: What are the offenses involving chattel

mortgage?
A:
1. Knowingly removing any personal
property mortgaged under the Chattel
Mortgage Law to any province or city
other than the one in which it was
located at the time of the execution of
the mortgage without the written
consentofthemortgagee;or
2. Selling or pledging personal property
alreadymortgaged,oranypartthereof,
under the terms of the Chattel
Mortgage Law without the consent of
the mortgagee written on the back of
the mortgage and duly recorded in the
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Chattel Mortgage Register (Art. 319,

RPC).
C.FORECLOSURE
Q:Howischattelmortgageforeclosed?
A:
Publicsale
Privatesale
GR: If there is an express stipulation in
thecontract.
XPN:Fraudorduress
Q: What is the procedure in foreclosure of a

chattelmortgage?
A:Themortgageemay,afterthirty(30)daysfrom
the time of the default or from the time the
condition is violated, cause the mortgaged
property to be sold at public auction by a public
officer(Sec.14,ActNo.1508)
The30dayperiodtoforecloseachattelmortgage
is the minimum period after violation of the
mortgageconditionforthemortgage
The creditor has at least ten (10) days notice
servedtothemortgagor
The notice of time, place and purpose of such

sale,isposted
Afterthesaleofthechattelatpublicauction,the
right of redemption is no longer available to the
mortgagor. (Cabral v. Evangelista, 28 L26860,
July30,1969)
Q: What are the legal consequences of

establishing a chattel mortgage over a building
erectednotbytheowneroftheland?
A: A building is immovable or real property

whetheritiserectedbytheowneroftheland,by
a usufructuary, or by a lessee. It may be treated
asamovablebythepartiestoachattelmortgage
butsuchisbindingonlybetweenthemandnoton
third parties. As far as third parties are
concerned,thechattelmortgagedoesnotexist.
Q:Viniconstructedabuildingonaparcelofland
he leased from Andrea. He chattel mortgaged
the land to Felicia. When he could not pay
Felicia, Felicia initiated foreclosure proceedings,
Vini claimed that the building he had
constructedontheleasedlandcannotbevalidly
foreclosedbecausethebuildingwas,bylaw,an
immovable.IsVinicorrect?
420
A:IfitwasthelandwhichVinichattelmortgaged,
such mortgage would be void, or at least
unenforceable,sincehewasnottheownerofthe
land.
Ifwhatwasmortgagedasachattelisthebuilding,
the chattel mortgage is valid as between the
partiesonly,ongroundsofestoppelwhichwould
preclude the mortgagor from assailing the
contract on the ground that its subjectmatter is
an immovable. Therefore Vinis defense is
untenable,andFeliciacanforeclosethemortgage
over the building, observing, however, the
procedureprescribedfortheexecutionofsaleof
a judgment debtors immovable under Rule 39,
Rules of Court, specifically, that the notice of
auction sale should be published in a newspaper
ofgeneralcirculation.(1994BarQuestion)
VII.ANTICHRESIS
Q:Whatisantichresis?
A: It is a contract whereby the CR acquires the

righttoreceivethefruitsofanimmovableofthe
debtor, with the obligation to apply them to the
payment of interest, if owing, and thereafter to
theprincipalofhiscredit.
Q:Whatarethecharacteristicsofantichresis?
A:
1. Accessorycontract.
2. Formal contract the amount of the
principalandoftheinterestmustbothbe
in writing; otherwise the contract of
antichresisisvoid.
3.
4.
5.
6.
7.
Itdealsonlywithimmovableproperty.
Itisarealright.
Thecreditorhastherighttoreceivethe
fruitsoftheimmovable.
Itisarealcontract.
It can guarantee all kinds of valid
obligations.
Note: It is not essential that the loan should earn

interest in order that it can be guaranteed with a
contract of antichresis. Antichresis is susceptible of
guaranteeing all kinds of obligations, pure or
conditional. [Javier v. Valliser, (CA) N. 2648R, Apr.
29,1950;Sta.Rosav.Noble,35O.G.27241]
A stipulation authorizing the antichretic creditor to

appropriate the property upon the nonpayment of
thedebtwithintheperiodagreeduponisvoid(Art.
2038,NCC).
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q: What is the form of a contract of antichresis
anditscontents?
A:FDAPa
1. CoversonlytheFruitsofrealproperty
2. Delivery of the property necessary so

that CR may receive the fruits
therefrom
2.
Note: Delivery of the property to the creditor is

requiredonlyinorderthatthecreditormayreceive
thefruitsandnotforthevalidityofthecontract.
ANTICHRESIS
Creditorisgiventheright
toenjoythefruitsand
applythemtothe
paymentoftheinterest
andtotheprincipalof
theloan
3.
4.
Amount of principal and interest must

be specified in writing, otherwise, the
contractshallbevoid.
Expressagreementthatdebtorwillgive
Possession to the CR and that CR will
applythefruitstotheinterestandthen
totheprincipal.
Note: The fruits of the immovable which is the

object of the antichresis mustbeappraised at their
actual market value at the time of the application
(Art. 2138).The property delivered stands as a
security for the payment of the obligation of the
debtor in antichresis. Hence, the debtor cannot
demanditsreturnuntilthedebtistotallypaid.
Q:Distinguishantichresisfrom:
1. Realestatemortgage;
2. Pledge;and
3. Pactoderetrosale.
A:
ANTICHRESIS
Propertyisdeliveredto
creditor
Creditoracquiresonly
therighttoreceivethe
fruitsoftheproperty;
doesnotproduceareal
rightunlessregisteredin
theRegistryProperty
Creditorobligedtopay
thetaxesandcharges
upontheestateunless
stipulatedotherwise
Thereisanexpress
stipulationthatthe
creditorshallapplythe
fruitstothepaymentof
theinterest,ifowing,and
thereaftertothe
principalofthedebt.
REALESTATE
MORTGAGE
Debtorusuallyretains
possessionofthe
property
Creditorhasnorightto
receivefruits,but
mortgagecreatesreal
rightagainsttheproperty
Creditorhasnosuch
obligation
ANTICHRESIS
Referstorealproperty
Formal
Principalandinterest
mustbespecifiedin
writing,otherwise
contractisvoid
PLEDGE
Personalproperty
Real
Neednotbeinwriting,
oralevidencemaybe
allowedtoprovethe
same.
3.
PACTODERETROSALE
Creditordoesnothave
suchright
Q: Is prescription as a mode of acquiring

ownership available to the creditor in
antichresis?
A:No.Hispossessionofthepropertyisnotinthe
concept of an owner but that of a mere holder
during the existence of the contract (Ramirez v.
CA,G.R.No.L38185,September24,1986).
Q: How should the amount of payment in

antichresisbedetermined?
A: The actual market value of the fruits at the

timeoftheapplicationthereoftotheinterestand
the principal shall be the measure of such
application(Art.2133,NCC).
Q: What is the effect if the amount of the

principal and of the interest is not specified in
writing?
A:Thecontractisvoid(Art.2134,NCC).
Q: Who are the parties to a contract of

antichresis?
A:
1. Antichretic creditor one who receives
thefruitsontheimmovablepropertyof
thedebtor.
2. Antichretic debtor one who pays his
debt through the application of the
fruitsofhisimmovableproperty.
Thereisnosuch
obligationonthepartof
themortgage
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B.OBLIGATIONSOFANTICHRETICCREDITOR
Q: What are the obligations of an antichretic

creditor?
A:To:
paythetaxesandchargesassessableagainst
the property like real estate taxes and
others;
bear the necessary expenses for the
preservationoftheproperty;
beartheexpensesnecessaryfortherepairof
theproperty;and
applythefruitsreceivedforpaymentofthe
outstanding interests, if any, and
thereafteroftheprincipal.
Q: When can the antichretic debtor reacquire

thepossessionofhisproperty?
A:Thedebtorcanonlydemandthereturnofthe
propertyafterhavingfullypaidhisobligationsto
thecreditor.Itisnotfairforthedebtortoregain
thepossessionofthepropertywhenhisdebthas
notbeenfullypaid.Untilthereisfullpaymentof
theobligation,thepropertyshallstandassecurity
therefor (Macapinlac v. Gutierrez Repide, No.
18574,Sept.20,1922).
Q: How can the creditor be exempted from the

obligationsimposedbyArt.2135?
A: The creditor may compel the debtor to re

enterintotheproperty.
Note: Article 2135. The creditor, unless, there is a

stipulation to the contrary, is obliged to pay the
taxesandchargesupontheestate.
He is also bound to bear the expenses

necessaryforitspreservationandrepair.
Thesumsspentforthepurposesstatedin
thisarticleshallbedeductedfromthefruits.
Q:Whatistheremedyofthecreditorincaseof
nonpaymentofhiscredit?
A:File:
1. anactionforcollection;or
2. a petition for the public sale of the
property (Barretto v. Barretto, No.
11933,Dec.1,1917).
VIII.QUASICONTRACTS
Q:WhatisaQuasiContract?
A: Quasicontracts are lawful, voluntary, and

unilateralactswhichgenerallyrequireapersonto
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reimburse or compensate another in accordance

with the principle that no one shall be unjustly
enriched at the expense of another. (Art. 2142,
NCC)
Q:Whatarethebasesforquasicontracts?
A:
1. No one must unjustly enrich himself at
anothersexpense
2. ifonebenefits,hemustreimburse
3. justiceandequity
Q:Whatareexamplesofquasicontracts?
A:
NegotiorumGestio
SolutioIndebiti
A.NEGOTIORUMGESTIO
Q:WhatisNegotiorumGestio?
A:Thisisakindofquasicontractwheresomeone
called the gestor takes the management of the
businessorpropertyofanotherpersonknownas
owner without the consent or authority of the
latter.
Q: What are the essential requisites for

negostiorumgestio?
A:
1. Nomeetingoftheminds
2. Taking charge of anothers business or
property
3. The property or business must have
beenabandonedorneglected
4. Theofficiousmanager(gestor)mustnot
have been expressly or implicitly
authorized
5. The officious manager (gestor) must
havevoluntarilytakencharge
Q:Whatareexamplesofnegotiorumgestio?
A:
1. If an attorneyinfact continues to
manage the principals estate after the
principals death, the former agent
becomes a gestor (Julian, et al. v. De
Antonio, [CA] 2 O.G.966, October 14,
1943).
2. Ifacoownershipisillegallypartitioned,
thepossessorsbecomegestorswiththe
dutytorendertheaccounting(DeGala
v.DeGala&Albatros,60Phil311).
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Q:Whatistherequireddiligencefromagestor?
A: Diligence of a good father of a family (Art.

2145, NCC). Hence, a gestor is liable for the acts
or negligence of his employees (MRR Co. v.
CompaniaTransatlantica,38Phil.875).
Note:Theliabilityfordamages,whichhowever,in
certaincases,maybemitigated.
Q:Whatistheeffectofratificationoftheowner
ofthebusiness?
A: Ratification produces the effect of an express

agency;andthisistrueevenifthebusinessisnot
successful(Art2149,NCC).
Q: What are the liabilities of the owner even if

thereisnoratification?
A:
1. Liability for the obligation incurred in
hisinterest.
2. Liability for necessary and useful
expenses and for damages. (Art 2150,
NCC)
Q:Whatistheruleiftheownerisaminor?
A: Even if the owner is a minor, he is still liable

under the article for he should not be unjustly
enrichedatanothersexpense.(Roteav.Delupio,
67Phil.330)
B.SOLUTIOINDEBITI
Q:WhatisSolutioIndebiti?
A:Solutioindebitiisthequasicontractthatarises
whenapersonisobligedtoreturnwhateverwas
received by him through error or mistake or
received by him although there was no right to
demandit.
Q:Whataretherequisitesforsolutionindebiti?
A:
1. Receiptofsomething.
2. Therewasnorighttodemandit
3. Unduedeliverywasbecauseofmistake.
Note: When the payment was not by mistake or

voluntary, but was made because if the coercive
process of the writ of execution, solutio indebiti
does not apply (Manila Surety & Fidelity Co., Inc. v.
Lim,GRno.L0343,December29,1959)
Q:Whatareexamplesofsolutioindebiti?
A:
1. Erroneous payment of interest not due
(Velezv.Balzarza,73Phil.630)
2. Erroneouspaymentofrentalnotcalled
forinviewoftheexpirationofthelease
contract(Yansonv.Sing,C.A.382438)
3. Taxes erroneously given (Aquinena and
Co.v.Muertequi,32Phil.261)
Q: Can solutio indebiti be applied because of

doubtfulordifficultquestionoflaw?
A: Yes, there can be payment because of

doubtfulordifficultquestionoflawmayleadto
solutio indebiti because of the mistake
committed.(Art.2155,NCC)
Q: GMC Corp. used to compute and pay its

monthly cost of living allowance (COLA) on the
basis of 30days a month ever since law
mandatedthepaymentofCOLA.WageOrder6
was implemented, increasing the COLA by P3 a
day. GMC however multiplied the P3 additional
COLA by 22days. The Union objected arguing
that the managements unilateral act was
tantamounttowithdrawalofbenefits.Istherea
mistakeintheapplicationoflaw?
A: GMC cannot be faulted for the erroneous

applicationoflaw.Paymentmaybesaidtohave
been made by reason of a mistake in the
construction or application of doubtful or
difficult question of law. Since it is a past error
that is being corrected, no vested right may be
saidtohavearisennoranydiminutionofbenefit
underArt.100oftheLaborCode,maybesaidto
have resulted by virtue of the correction. (Globe
Mackay Cable and Radio Corp. v. NLRC, GR no.
74156,June29,1988)
Q:Whatistheliabilityofapayeeingoodfaith?
A:
1. Incaseofimpairmentorloss,liabilityis
onlytotheextentofbenefit.
2. In case of alienation, the price is to be
reimbursed, or in case of credit, the
sameshouldbeassigned.
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IX.CONCURRENCEANDPREFERENCEOFCREDITS
A.MEANINGOFCONCURRENCEAND
PREFERENCE
Q:Whatisconcurrenceofcredits?
A: Concurrence of credit implies the possession

by two or more creditors of equal rights or
privileges over the same property or all the
propertyofadebtor.
Q:Whatispreferenceofcredit?
A:Preferenceofcreditisarightheldbyacreditor
tobepreferredinthepaymentofhisclaimabove
othersoutofthedebtorsassets.
Note: The rules apply when two or more creditors

have separate and distinct claims against the same
debtorwhohasinsufficientproperty.
B.CLASSIFICATIONOFCREDITS
Q:Whatarethegeneralcategoriesofcredit?
A:
1. Specialpreferredcredits thoselistedin
2.
3.
Arts. 22412242, NCC shall be considered

mortgages and pledges of real and
personal property or liens (Art. 2243).
Hence, they are not included in the
insolventdebtorsassets.
Ordinary preferred credits those listed
in Art 2244,NCC as amendedbyArt. 110
oftheLaborCode
Commoncredits thoselistedunderArt.
2245, NCC, which shall be paid pro rata
regardlessofdates.
Q:Whatistheextentofliabilityofadebtorfor
hisobligations?
A: The debtor is liable with all his property,

present and future, for the fulfillment of his
obligations, subject to the exemptions provided
bylaw.
C.PREFERREDCREDITSONSPECIFICMOVABLES
Q:Whatarethepreferredcreditswithrespectto
thespecificmovableproperty?
A:
1. Duties, taxes and fees due thereon to the
stateoranysubdivisionthereof;
2. Claimsarisingfrommisappropriation,breach
of trust, or malfeasance by public officials
committed in the performance of their
424
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
duties,onthemovables,moneyorsecurities
obtainedbythem;
Claimsfortheunpaidpriceofmovablesold,
onsaidmovables,solongastheyareinthe
possessionofthedebtor,uptothevalueof
the same, and if the movable has been
resold by the debtor and the price is still
unpaid, the lien may be enforced on the
price; this right is not lost by the
immobilization of the thing by destination,
provided it has not lost its form, substance
and identity; neither is the right lost by the
sale of the thing together with other
property for a lump sum, when the price
thereofcanbedeterminedproportionally;
Credits guaranteed with a pledge so long as
the things pledged are in the hands of the
creditor, or those guaranteed by a chattel
mortgageuponthethingsmortgaged,upto
thevaluethereof;
Credits for making repairs or preservation or
personal property on the movable thus
made,repaired,keptorpossessed;
Claims for laborers wages, on the goods
manufacturedortheworkdone;
For expenses of salvage, upon the goods
salvaged;
Creditsbetweenthelandlordandthetenant
arising from the contract of tenancy on
shares, on the share of each in the fruits or
harvest;
Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and
forthirtydaysthereafter;
Credits for lodging and supplies usually
furnished to travelers by hotelkeepers, on
themovablesbelongingtotheguestaslong
as such movables are in the hotel, but not
formoneyloanedtotheguests;
Credits for seeds and expenses for
cultivation and harvest advanced to the
debtor,uponthefruitsharvested;
Credits for rent for one year, upon the
personal property of the lessee existing on
the immovable leased on the fruits of the
same, but not on money or instruments of
credit;
Claims in favor of the depositor if the
depository has wrongfully sold the thing
deposited,uponthepriceofthesale.
Note: In the foregoing cases, if the movables to

which the lien or preference attaches have been
wrongfully taken, the creditor may demand them
fromanypossessorwithinthirty(30)daysfromthe
unlawfulseizures.
CIVILLAWTEAM:
CREDIT TRANSACTIONS
Summary:
1. taxes
2. malversationbypublicofficials
3. vendorslien
4. pledge,chattelmortgage
5. mechanicslien
6. laborerswages
7. salvage
8. tenancy
9. carrierslien
10. hotelslien
11. croploan
12. rentalsoneyear
13. deposit
10. Credits of insurers, upon the property

insured, for the insurance premium for
twoyears.
Summary:
1. taxes
2. vendorslien
3. contractorslien
4. lienofmaterialmen
5. mortgage
6. expensesofpreservation
7. recordedattachments
8. warrantyinpartition
9. conditionaldonations
10. premiumsfor2yearinsurers
D.PREFERREDCREDITSONSPECIFIC
IMMOVABLES
Q:Whatarethepreferredcreditswithrespectto
specificimmovableproperty?
A:
1. Taxesdueuponthelandorbuilding;
2. For the unpaid price of real property
soldupontheimmovablesold;
3. Claims of laborers. Masons, mechanics
and other workmen, as well as of
architects, engineers and contractors,
engaged
in
the
construction,
reconstruction or repair of buildings,
canals or other works, upon said
buildings,canalsorotherworks;
4. Claimsoffurnishersofmaterialsusedin
the construction, reconstruction, or
repair of buildings, canals, and other
works, upon said buildings, canals or
otherworks;
5. Mortgage credits recorded in the
Registry of Property, upon the real
estatemortgage;
6. Expenses for the preservation or
improvementofrealpropertywhenthe
law authorizes reimbursement, upon
theimmovablepreservedorimproved;
7. Credits annotated in the Registry of
Property,byvirtueofajudicialorder,by
attachments or executions, upon the
property affected, and only as to later
credits;
8. Claims of coheirs for warranty in the
partitionofanimmovableamongthem,
upontherealpropertythusdivided;
9. Claims of donors or real property for
pecuniary charges or other conditions
imposed upon the donee, upon the
immovabledonated;
E.EXEMPTPROPERTIES
Q: What are the exempt properties from

executionandsale?
A:FSTBCFPLBELMCL
1. GR: Family home constituted jointly by
husbandandwifeorbyunmarriedhead
ofafamily(Art.152,FC).
XPNs:For:
a. nonpaymentoftaxes;
b. debts incurred prior to the
constitution of the family
home;
c. debts secured by mortgages
on the premises before or
aftersuchconstitution;and
d. debts due to laborers,
mechanics,
architects,
builders, material men and
others who have rendered
service or furnished material
for the construction of the
building
2. Right to receive Support as well as any

money or property obtained as such
support.(Art.205,FC)
3. Tools and implements necessarily used
byhiminhistradeoremployment;
4. Two horses, or two cows, or two
carabaos or other Beasts of burden,
such as the debtor may select, not
exceeding one thousand pesos in value
and necessarily used by him in his
ordinaryoccupation;
5. HisnecessaryClothingandthatofallhis
family.
6. Household Furniture and utensils
necessary for housekeeping and used
forthatpurposebythedebtor,suchas
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7.
8.
9.
10.
11.
12.
13.
14.
Provisions for individual or family use

insufficientforthreemonths;
TheprofessionalLibrariesofattorneys,
judges,physicians,pharmacists,dentist,
engineers,
surveyors,
clergymen,
teachers and other professionals, not
exceeding three thousand pesos in
value;
OnefishingBoatandnet,notexceeding
the total value of one thousand pesos,
the property of any fisherman, by the
lawful use of which he earns a
livelihood;
So much of the Earnings of the debtor
for his personal services within the
month preceding the levy as are
necessaryforthesupportofhisfamily;
Letteredgravestones;
All Moneys, benefits, privileges or
annuities accruing or in any manner
growingoutofanylifeinsurance,ifthe
annual premiums paid do not exceed
five hundred pesos, and if they exceed
the sum, a like exemption shall exist
whichshallbearthesameproportionto
the moneys, benefits privileges and
annuitiessoaccruingorgrowingoutof
such insurance that said five hundred
pesos bears to the whole premiums
paid;
Copyrights and other properties
especially exempted by law (Sec. 12,
Rule39)
PropertyunderLegalcustodyandofthe
publicdominion.
Q:Whatistheorderofpreferencewithrespect
tootherpropertiesofthedebtor?
A:
1. Properfuneralexpensesforthedebtor,
or children under his or her parental
authoritywhohavenopropertyoftheir
own,whenapprovedbythecourt;
2. Credits for services rendered the
insolvent by employees, laborers, or
household helpers for one year
preceding the commencement of the
proceedingsininsolvency;
3. Expenses during the last illness of the
debtor or of his or her spouse and
children under his or her parental
authority, if they have no property of
theirown;
4. Compensation due to the laborers of
their dependents under laws providing
426
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
for indemnity for damages in cases of

labor accident or illness resulting from
thenatureoftheemployment;
Creditsandadvancementsmadetothe
debtorforsupportofhimselforherself,
and family, during the last preceding
insolvency;
Support during the insolvency
proceedings, and for three months
thereafter;
Fines and civil indemnification arising
fromacriminaloffense;
Legal expenses, and expenses incurred
in the administration of the insolvents
estate for the common interest of the
creditors, when properly authorized
andapprovedbythecourt;
Taxesandassessmentsduethenational
government, other those mentioned in
Articles2241,No.1,and2242,No.1;
Taxes and assessments due any
province, other than those mentioned
inArticles2241,No.1and2242,No.1;
Taxes and assessments due any city or
municipality other than those
mentioned in Articles 2241, No.1 and
2242,No.1;
Damages for death or personal injuries
causedbyaquasidelict;
Gifts due to public and private
institutionsofcharityorbeneficence;
Credits which without special privilege,
appearin(a)apublicinstrument;or(b)
inthefinaljudgment,iftheyhavebeen
the subject of litigation. These credits
shall
have
preference
among
themselves in the order of priority of
thedatesoftheinstrumentsandofthe
judgments,respectively(Art.2244).
Summary:
1. funeralexpenses
2. wagesofemployeesoneyear
3. expensesoflastillness
4. workmenscompensation
5. supportforoneyear
6. supportduringinsolvency
7. finesincrimes
8. legalexpensesadministration
9. taxes
10. tort
11. donations
12. appearing in public instrument or final
judgment
CIVILLAWTEAM:
CREDIT TRANSACTIONS
F.ORDEROFPREFERENCEOFCREDIT
Q:Whatistheorderofpreferenceofcredits?
A:
1. Those credits which enjoy preference with
respect to specific movable, excluded all
others to the extent of the value of the
personal property to which the preference
refers(Article2246).
2. Iftherearetwoormorecreditswithrespect
to the same specific movable property, they
shallbesatisfiedprorata,afterthepayment
of duties, taxes, and fees due the State or
anysubdivisionthereof(Art.2247,NCC).
3. Those credits which enjoy preference in
relation to specific real property or real
rights,excludeallotherstotheextentofthe
valueoftheimmovableorrealrighttowhich
thepreferencerefers(Art.8).
4. Iftherearetwoormorecreditswithrespect
to the same specific real property or real
rights, they shall be satisfied pro rata, after
the payment of the taxes and assessments
upon the immovable property or real right
(Art.2249,NCC).
5. The excess, if any, after the payment of the
credits which enjoy preference with respect
tospecificproperty,realorpersonal,shallbe
addedtothefreepropertywhichthedebtor
may have, for the payment of the other
credits(Art.2250,NCC).
6. Those credits which do not enjoy any
preference with respect to specific property
and those which enjoy preference, as to the
amountnotpaid,shallbesatisfiedaccording
tothefollowingrules:
a. In the order established in Article
2244;
b. Common credits referred to in
Article 2245 shall enjoy no
preference and shall be paid pro
rataregardlessofdated(Art.2251,
NCC).
X.INSOLVENCYLAW
A.DEFINITIONOFINSOLVENCY
Q:Whatisinsolvency?
A:Thestateofapersonwhoseliabilitiesaremore
than his assets. The term is frequently used in
themorerestrictedsensetoexpressinabilityofa
person to pay his debts as they become due in
theordinarycourseofhisbusiness.
Q:Whataretheteststodetermineinsolvency?
A:
1. Equity test A state of inability of a
persontopayhisdebtsatmaturity.
2. Balance sheet test The assets, if all
madeimmediatelyavailable,wouldnot
besufficienttodischargethebalance.
Q: What are the remedies of an insolvent

debtor?
A:
1. Petitionthecourttosuspendpayments
ofhisdebts;or
2. To be discharged from his debts and
liabilities by voluntary or involuntary
insolvencyproceedings.(Sec.1)
Q: What is the effect of insolvency proceedings

filedbyindividualdebtors?
A:
1. Suitspendingincourt
a. securedobligations
suspendeduntilassignee
appointed
b. unsecuredobligations
terminatedexcepttofix
amountofobligation
c. foreclosuresuitspending
continue
2. Suitsnotyetfiledcannotbefiled
anymorebutclaimsmaybepresented
toassignee.
Note: The result is different if the petitioner is a

corporation because under the Revised Rules on
Corporate Recovery, all claims whether secured or
unsecuredarestayed.
Q: If A is declared an insolvent by the court,

what would be the effect, if any, of such
declarationonhiscreditors?Explain.
A:
1. The sheriff shall take possession of all
assets of the debtor until the
appointmentofareceiverorassignee;
2. Paymenttothedebtorofanydebtsdue
tohimandthedeliverytothedebtorof
anypropertybelongingtohim,andthe
transfer of any property by him are
forbidden;
3. Allcivilproceedingspendingagainstthe
insolventshallbestayed;and
4. Mortgagesandpledgesarenotaffected
by the order declaring a person
insolvent.(Sec.59,InsolvencyLaw)
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Q:AssumingthatAhasguarantorsforhisdebts,
are the guarantors released from their
obligationsonceAisdischargedfromhisdebts?
A: The guarantors are not discharged, because

the discharge is limited to A only (Sec. 68).
Precisely under the principle of excussion, the
liability of the guarantors arises only after the
exhaustion of the assets of the principal obligor.
The effect of discharge merely confirms
exhaustion of the assets of the obligor available
tohiscreditors.
Q. What remedies are available to the

guarantors in case they are made to pay the
creditors?Explain.
A: Their remedy is to prove in the insolvency

proceedingthattheypaidthedebtandthatthey
substitutedforthecreditors,ifthecreditorshave
notproventheirclaims(Sec.56).
Under Article 2081 of the Civil Code, the

guarantormaysetupagainstthecreditorall the
defensesthatpertaintotheprincipaldebtor.The
dischargeobtainedbythedebtorontheprincipal
obligation can now be used as a defense by the
guarantors against the creditors. The guarantors
arealsoentitledtoindemnityunderArticle2066
oftheCivilCode.
Q: X and Y were employees of ATLAS which

hypothecated its certain assets to DBP. When
ATLAS defaulted in its obligations, DBP
foreclosedandacquiredthemortgagedassetsby
virtueoftheforeclosuresale.Meanwhile,Xand
YfiledanactionagainstbothATLASandDBPfor
unpaidwages.TheLaborArbiterruledinfavorof
XandY.IstheLAcorrectinconsideringworkers
preference under Article 110 of the Labor Code
overthatofDBPsmortgagelien?
A: Declaration of bankruptcy or a judicial

liquidation must be present before the workers
preferencemaybeenforced.Adistinctionshould
be made between a preference of credit and a
lien.Apreferenceappliesonlytoclaimswhichdo
notattachtospecificproperties.Aliencreatesa
chargeonaparticularproperty.Therightoffirst
preference as regards unpaid wages recognized
by Article 110 does not constitute a lien on the
property of the insolvent debtor in favor of
workers. It is but a preference of credit in their
favor, a preference in application. It is a method
adopted to determine and specify the order in
which credits should be paid in the final
distribution of the proceeds of the insolvent's
assets. It is a right to a first preference in the
428
dischargeofthefundsofthejudgmentdebtor.A
recorded mortgage is a special preferred credit
while the preference given to workers under
Article 110 of the Labor Code is an ordinary
preferred credit. (DBP v. NLRC, G.R. No. 86227,
Jan.19,1994)
Q: Is the power to petition for the adjudication

ofbankruptcygrantedtojuridicalpersons?
A:Thelawgrantstoajuridicalperson,aswellto
natural persons, the power to petition for the
adjudication of bankruptcy of any natural or
juridical person provided that with respect to
juridical persons, it is a resident corporation and
adjoinsatleasttwootherresidentsinpresenting
the petition to the Bankruptcy Court. When a
foreign bank alleged in its petition that it is
licensed to do business in the Philippines and
actually doing business in the country, it is in
effect stating that it is a resident foreign
corporation in the Philippines. (State Investment
House v. Citibank, N.A., G.R. Nos. 7992627, Oct.
17,1991)
B.SUSPENSIONOFPAYMENTS
Q:Whatissuspensionofpayments?
A:Itisthepostponement,bycourtorder,ofthe
payment of debts of one who, while possessing
sufficient property to cover his debts, foresees
the impossibility of meeting them when they
respectivelyfalldue.
Q: When is the remedy of suspension of

paymentsavailable?
A:Thedebtorwho,possessingsufficientproperty
tocoverallhisdebts,foreseestheimpossibilityof
meeting them when they respectively fall due,
may petition that he be declared in the state of
suspension of payments by the court of the
province or city in which he has resided for six
months next preceding the filing of his petition
(Sec.2[1]).
Q:Whendoessuspensiontakeeffect?
A:Uponthefilingofthepetition.
Q: What are the steps in suspension of

payments?
A:
1. Filingofthepetitionbythedebtor(Sec.
2);
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2.
3.
4.
Issuancebythecourtofanordercalling
ameetingofcreditors(Sec.3);
Publication of the order and service of
summons(Sec.4);
Meetings of creditors for the
consideration
of
the
debtors
proposition(Sec.8);
Note: To hold a valid meeting, the

creditorsrepresentingatleast3/5of
the liabilities of the debtor must be
present.
5.
6.
7.
8.
Approval by the creditors of the

debtorsproposition(Sec.8,[20]);
The Double Majority Rule applies. To
obtain a majority vote, it is necessary
that:
a. At least 2/3 of the creditors
must vote on the same
proposition,and
b. Said2/3representatleast3/5
of the total liabilities of the
debtor.
Objections, ifany,to thedecisionmust

be made within 10 days following the
meeting.(Sec.11);
Issuanceoforderbythecourtdirecting
that the agreement be carried out in
case the decision is declared valid, or
when no objection to said decision has
beenpresented.
Q: What are the documents that should

accompanythepetition?
A:
1. Averifiedschedulecontainingafulland
true statement of the debts and
liabilitiesofthepetitionertogetherwith
alistofcreditors;(Secs.15,2)
2. A verified inventory containing a list of
creditors, an accurate description of all
thepropertyofthepetitionerincluding
property exempt from execution and a
statement as to the value of each item
of property, its location, and
encumbrances thereon, if any; (Secs.
16,2)
3. Astatementofhisassetsandliabilities;
(Sec.2)and
4. The proposed agreements he requests
ofhiscreditors.(Ibid.)
Q:Whataretheeffectsoffilingofthepetition?
A:
1. No disposition in any manner of his
propertymaybemadebythepetitioner
exceptinsofarasconcernstheordinary
operations of commerce or of industry
inwhichheisengaged;(Sec.3[2])
2. No payments may be made by the

petitionerexceptintheordinarycourse
ofhisbusinessorindustry(Ibid.);and;
3. Upon the request to the court, all

pending executions against the debtor
shall be suspended except execution
against property especially mortgaged.
(Sec.6)
Q:Whoarethecreditorsaffectedbythefilingof
thepetition?
A: Only creditors included in the schedules filed

bythedebtorshallbecitedtoappearandtotake
partinthemeeting.(Sec.5)Hence,thosewhodid
not appear because they were not informed of
theproceedingsareunaffectedbythesame.
Q: Who are the creditors not affected by order

ofsuspensionofpayments?
A:
1. Those having claims for personal labor,
maintenance, expenses of the last
illness and funeral of wife or child of
debtor, incurred during the 60 days
immediately preceding the filing of the
petition;and
2. Those having legal or contractual

mortgages.(Sec.9)
Q: When is a petition for suspension of

paymentsdeemedrejected?
A:
1. When the number of creditors
representing at least 3/5 of the
liabilitiesnotattend;(Secs.8,10)or
2. When the two majorities required are
notinfavoroftheproposedagreement
(Sec.10).
Q:Whatistheeffectofdisapprovalofpetition?
A: If the decision of the meeting be negative as

regardstheproposedagreementorifnodecision
is had in default of such number or of such
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majorities, the proceeding shall be terminated

without recourse. In such case, the parties
concernedshallbeatlibertytoenforcetherights
whichcorrespondtothem.(Sec.11)
PETITION
FOR
ORDINARY
SUSPENSION
OF
PAYMENTS
PETITIONFORCORPORATE
REHABILITATION
Purpose
Toobtain
defermentin
thepayment
ofdebts.
Torehabilitatethepetitioning
company.
Insolvency
Law.
Law
InterimRulesonCorporate
Rehabilitation
Creditors
Doesnot
coversecured
creditors.
Coversallcreditors,whether
securedornot.
180daysor3
months
Thedebtor,
naturalor
juridical
person
Duration
Suspensionvaliduntil:
Dismissalofthepetitionor
Terminationofthe
rehabilitation
proceedings.
Filedby
Corporation,partnershipor
association,or
Thecreditorsholdingatleast
20%ofthedebtorstotal
liabilities.
Effect
Nomore
Thecourt,still,hastoissueastay
needforthe
ordernotlaterthan5daysfrom
courttoissue
thefilingofthepetition.
astayorder.
Effectsoffilingthepetition
Allclaimsagainstthedebtorare
Allactionsor
stayedupontheissuanceofstay
claimsagainst
order.
the
corporation
Thecreditorsmayproceedto
pending
enforcetheirclaimagainstthe
beforethe
suretyevenifduringthependency
court,
oftherehabilitationproceedings
tribunal,
involvingthecorporatedebtor.
board,or
(Phil.BloomingMills,Inc.and
bodyshallbe
AlfredoChingv.CA,G.R.No.
suspended.
142381,Oct.5,2003)
Q: What are the modes or forms of suspension

ofpayment?
A:
1. Petition for ordinary suspension of
paymentsunderAct1956
430
2.
Verified petition for rehabilitation

under the Interim Rules of Procedure
for Corporate Rehabilitation which
includessuspensionofpayments.
C.VOLUNTARYINSOLVENCY
Q:Whatisavoluntaryinsolvency?
A: This is availed of a debtor who, having debts

exceedingP1,000.00,cannotdischargeallofthem
with all of his existing assets and who, as a
consequence, voluntarily goes to court to have
himselfdeclaredasaninsolventsothathisassets
maybeequitablydistributedamonghiscreditors.
(Sec.14)
Q: What is the procedure for voluntary

insolvency?
A:
1. Filing of the petition by the debtor
prayingforthedeclarationofinsolvency
(Sec.2);
2. Issuance of an order of adjudication
declaring the petitioner insolvent
(Sec.18);
3. Publication and service of the order
(Sec.19);
4. Meeting of the creditors to elect the
assigneeininsolvency(Sec.30);
5. Conveyanceofthedebtorspropertyby
the clerk of court to the assignee (Sec.
32);
6. Liquidation of the debtors assets and
paymentofhisdebts(Sec.33);
7. Composition,ifagreedupon(Sec.63);
8. Discharge of the debtor on his
application (Sec. 64), except a
corporation;
9. Objection, ifany,to thedischarge(Sec.
66);
10. AppealtotheSCincertiorari.
Q: X, a wellknown architect, is suffering from

financial reverses. He has four creditors with a
total claim of P26 Million. Despite his intention
to pay these obligations, his current assets are
insufficienttocoverallofthem.Hiscreditorsare
about to sue him. Consequently, he was
constrained to file a petition for insolvency.
Since X was merely forced by circumstances to
petition the court to declare him insolvent, can
the judge properly treat the petition as one for
involuntaryinsolvency?Explain.
A: The petition cannot be treated as one of

involuntary insolvency, because it was filed by X
CIVILLAWTEAM:
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himself,thedebtor,andnotbyhiscreditors(Sec.
20). To treat it as one of involuntary insolvency
would unduly benefit X as a debtor, because he
would not be subject to the limitation of time
withinwhichheissubjectinthecaseofvoluntary
insolvencyforpurposesofdischarge(Sec.65).
Q: What are the requisites of petition for

voluntaryinsolvency?
A:Thepetitionwhichmustbeverified(Sec.17)is
tobefiled:
1. Byaninsolventdebtor
2. Owing debts exceeding in amount the sum
ofP1,000.00
3. IntheRTCoftheprovinceorcityinwhichhe
hasresidedfor6monthsnextprecedingthe
filingofsuchpetition,and
4. Settingforthinhispetitionthefollowing:
a. Hisplaceofresidence;
b. The period of residence therein
immediately prior to filing said
petition;
c. His inability to pay all his debts in
full;
d. His willingness to surrender all his
property, estate, and effects not
exempt from execution for the
benefitofhiscreditors;and
e. An application to be adjudged an
insolvent.(Sec.14)
Q: What are the documents to accompany the

petition?
A:
1. Averifiedschedulemustcontain:
a. A full and true statement of all
debts and liabilities of the
insolventdebtor;and
b. Anoutlineofthefactsgivingriseor
whichmightgiverisetoacauseof
action against such insolvent
debtor;(Sec.15)
2. Averifiedinventory,whichmustcontain:
a. An accurate description of all the
personal and real property of the
insolvent exempt or not from
executionincludingastatementas
to its value, location and
encumbrancesthereon;and
b. Anoutlineofthefactsgivingriseor
which might give rise to a right of
action in favor of the insolvent
debtor.(Sec.16)
Q:Whomaypetitionforvoluntaryinsolvency?
A: The petition may be filed by any officer duly

authorized by the vote of the board of directors
ortrusteesatameetingespeciallycalledforthat
purpose,orbyassentinwritingofthemajorityof
thedirectorsortrustees,asthecasemaybe.(Sec.
52)
Q:Whatistheeffectoffilingpetition?
A: Once the petition is filed, it ipso facto takes

away and deprives the debtor petitioner of the
righttodoorcommitanyactofpreferenceasto
creditors, pending the final adjudication.
(PhilippineTrustCo.v.NationalBank,42Phil413)
Q:Whataretheeffectsofcourtorderdeclaring
debtorinsolvent?
A:
1. Alltheassetsofthedebtornotexempt
fromexecutionaretakenpossessionof
bythesheriffuntiltheappointmentofa
receiverorassignee;
2. Thepaymenttothedebtorofanydebts
due to him and the delivery to the
debtor or to any person for him of any
property belonging to him, and the
transfer of any property by him are
forbidden;
3. Allcivilproceedingspendingagainstthe
insolventdebtorshallbestayed;and
4. Mortgages or pledges, attachments, or
executions on property of the debtor
dulyrecordedandnotdissolvedarenot
affectedbytheorder.(Sec.59)
D.INVOLUNTARYINSOLVENCY
Q:Whatisaninvoluntaryinsolvency?
A: This is availed of by the petition of 3 or more

creditors, none of whom became a creditor by
assignment within 30 days prior to filing of
petition and whose aggregate credit is not less
thanP1,000.00,becauseofcommissionofoneor
moreactsofinsolvency.(Sec.20)
Q:Whataretheactsofinsolvency?
A:
1. Such person is about to depart or has
departedfromthePhilippines,withintentto
defraudhiscreditors;
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2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Being absent from the Philippines, with

intent to defraud his creditors, he remains
absent;
He conceals himself to avoid the service of
legal process for purpose of hindering or
delayingordefraudinghiscreditors;
He conceals, or is removing, any of his
propertytoavoiditsbeingattachedortaken
onlegalprocess;
Hehassufferedhispropertytoremainunder
attachment or legal process for 3 days for
the purpose of hindering or delaying or
defraudinghiscreditors;
He has confessed or offered to allow
judgmentinfavorofanycreditororclaimant
for the purpose of hindering or delaying or
defraudinganycreditororclaimant;
He has willfully suffered judgment to be
takenagainsthimbydefaultforthepurpose
of hindering or delaying or defrauding his
creditors;
He has suffered or procured his property to
betakenonlegalprocesswithintenttogive
apreferencetooneormoreofhiscreditors
and thereby hinder, delay, or defraud any
oneofhiscreditors;
He has made any assignment, gift, sale,
conveyance, or transfer of his estate,
property, rights, or credits with intent to
delay,defraud,orhinderhiscreditors;
He has, in contemplation of insolvency,
made any payment, gift, grant, sale,
conveyance, or transfer of his estate,
property,rights,orcredits;
Being a merchant or tradesman he has
generally defaulted in the payment of his
currentobligationsforaperiodof30days;
For a period of 30 days he has failed after
demand, to pay any moneys deposited with
him or received by him in a fiduciary
capacity;and
Anexecutionhavingbeenissuedagainsthim
on final judgment for money, he shall have
beenfoundtobewithoutsufficientproperty
subjecttoexecutiontosatisfythejudgment.
(Sec.20)
Q: What is the procedure in involuntary

insolvency?
A:
1. Filing of the petition by three or more
creditors(Sec.20);
2. Issuance of order requiring the debtor
to show cause why he should not be
adjudgedinsolvent(Sec.21);
3. Serviceofordertoshowcause(Sec.22);
432
4.
Filing of answer or motion to dismiss

(Sec.23);
5. Hearingofthecase(Sec.24);
6. Issuance of order or decision adjudging
debtorinsolvent(Ibid.)
7. Publication and service of order (Sec.

25);
8. Meetingsofcreditorsforelectionofan
assigneeininsolvency(Sec.30);
9. Conveyance of debtors property by
clerkofcourttotheassignee(Sec.32);
10. Liquidation of the debtors assets and
paymentofdebts(Sec.33);
Note:Assetsoftheinsolventwhicharenotexempt
from execution will then be distributed among his
creditors in accordance with the rules of
concurrence and preference of credits in the Civil
Code.
11. Composition,ifagreedupon(Sec.63);
12. Discharge of the debtor on his
application, except a corporation (Sec.
52);
13. Objection, ifany,to thedischarge(Sec.
66);and
14. AppealtotheSupremeCourtincertain
cases(Sec.62)
Q:Whataretherequisitesforfilingapetitionfor
InvoluntaryInsolvency?
A:Thepetitionisfiledby:
1. Threeormorecreditors;
2. None of whom has become such a
creditor by assignment, within 30 days
priortothefilingofsaidpetition;
3. Whose credits accrued in the
Philippines;
4. Thetotalamountofwhichcreditsisnot
lessthanP1,000.00;and
5. In the RTC of the province or city in
which the debtor resides or has his
principalplaceobusiness.
6. Thepetitionmust:
7. be verified by at least 3 of the
petitioningcreditors;
8. setforthoneormoreactsofinsolvency
mentionedinthelaw;and
9. be accompanied by a bond, approved
by the court with at least 2 sureties, in
suchpenalsumasthecourtshalldirect.
CIVILLAWTEAM:
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Q: Can a surety institute involuntary
proceedings?
A: No, a surety for the debtor is not a creditor.

Hence, he cannot institute involuntary
proceedings.Allhecandoistoprovehisclaim.
Q: Distinguish voluntary insolvency from

involuntaryinsolvency.
A:
VOLUNTARY
INSOLVENCY
Filedbythedebtor.
Only1creditoris
required.
Norequirementfor
creditors.
Venue:wherehe
hasresided6
monthspriortothe
filingofpetition.
Noneedforthe
commissionofany
oftheactsof
insolvency.
Amountofdebts
mustexceed
P1,000.00.
Debtordeemed
insolventthrough
anorderof
adjudicationafter
filingofthepetition;
adjudicationmaybe
grantedexparte.
Bondisnot
required.
INVOLUNTARYINSOLVENCY
Filedby3ormorecreditors.
3ormorecreditorsare
required.
Requirementsforcreditors:
1. Residents of the
Philippines;
2. Their credits or demands
must have accrued in the
Philippines;and
3. Must not have been a
creditor by assignment
within 30 days prior to the
filingofthepetition.
Wherethedebtorhas
residenceorhashisprincipal
placeofbusiness.
Debtormusthave
committedanyoftheactsof
insolvency.
Amountofdebtsmustnot
belessthanP1,000.00.
Debtorisconsidered
insolventupontheissuance
bythecourtofanorderafter
duehearingdeclaringhim
insolvent;adjudication
grantedonlyafterhearing.
Bondisrequired.
Q:Whoisanassigneeininsolvency?
A:Apersonelectedbythecreditorsorappointed
bythecourttowhomaninsolventdebtormakes
an assignment of all his property for the benefit
ofhiscreditors.
Note: The assignee must be a person elected by

the majority of the creditors who have proven
their claims, such majority being in number and
amount.
Q:Whoarethecreditorsnotentitledtovotein
theelectionofassignee?
A:
1. Those who did not file their claims at
least2dayspriortothetimeappointed
forsuchelection;(Sec.29)
2. Those whose claims are barred by the
statuteoflimitations;(Ibid.)
3. Securedcreditorsunlesstheysurrender
their security or lien to the sheriff or
receiver or unless they shall first have
the value of such security fixed as
providedinSec.59;and
4. Holders of claims for unliquidated
damagesarisingoutofpuretort.
Q:Istheassigneerequiredtogiveabond?
A: After his election, the assignee is required to

give a bond for the faithful performance of his
duties.(Secs.30,31)
Note:Courtshavethepowertoappointreceiversto
hold the property of individuals or corporations
although no insolvency proceedings are involved. A
receiverappointedbyacourtbeforetheinstitution
oftheinsolvencyproceedingsmaybeappointedthe
permanentassigneeinsuchproceedings.
Q:Whatisthedateofcleavage?
A:Thedatewhenthepetitionisfiled,fromwhich
is counted backward or forward, in determining
the effects provided for under the Insolvency
Law.
Illustrations:
1. Acreditorbyassignmentofcreditmade
within 30 days from date of cleavage
shall be disqualified as petitioning
creditor(Sec.20);
2. Attachmentlevieduponwithinaperiod
of 30 days before the date of cleavage
may be set aside by the assignee (Sec.
32);
3. Judgment on cases filed and decided
within 30 days prior to the date of
cleavage may be set aside by the
assignee(Sec.32);
4. Judgmentsoncasesfiledbefore30days
from the date of cleavage but decided
within30daysbecauseofconfessionof
judgment or declaration of default by
debtor may be set aside by action of
assignee;
5. Properties acquired after date of
cleavage, after discharge of debtor in
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6.
good faith shall not be liable for debts

incurredpriortothedateofcleavage;
Fraudulentpreferencesmadewithin30
days prior to the date of cleavage may
be set aside in action brought by
assignee.
Q:Whatisadividendininsolvency?
A:Aparcelofthefundarisingfromtheassetsof
theestate,rightfullyallottedtoacreditorentitled
to share in the fund whether in the same
proportion with other creditors or in a different
proportion. It is paid by the assignee only upon
orderofthecourt(Secs.43,44).
Q: When may a partnership be declared

insolvent?
A: A partnership may be declared insolvent by a

petitionofthe partnersandmaybedoneduring
the continuation of the partnership business or
after its dissolution and before the final
settlementthereof.
A partnership may be declared insolvent

notwithstanding the solvency of the partners
constituting the same. (Campos Rueda & Co. v.
Pacific Commercial Co., G.R. No. L18703 Aug.
28,1922)
Q: Who may petition for declaration of

insolvencyofapartnership?
A:
1. Voluntary insolvency By all the
partnersoranyofthem;
2. InvoluntaryinsolvencyByoneormore
of the partners or three or more
creditorsofthepartnership.
Q: What are the properties included in the

insolvencyproceedings?
A:
Allthepropertyofthepartnership;and
All the separate of each of the partners
except:
Separate properties of limited partners
(Art.1843,NCC)
Properties which are exempt by law
(Sec.51)
434
Q:Whataretheeffectsoffilingofpetition?
A:
1. The proceedings are deemed to
commence against the partners at the
sametime;
2. Upon order of the court, all the
properties of the partnership and also
all the separate property of each
partner, if they are liable, shall be
taken;(Sec.51)
3. Allcreditorsofthepartnershipandthe
separatecreditorsofeachpartnershall
be allowed to prove their respective
claims;(Ibid.)
4. The assignee shall be chosen by the
creditorsofthepartnership;and(Ibid.)
5. Pending insolvency proceedings by or
against any partnership, person or
corporation no statute of limitations
shallrunuponaclaimoforagainstthe
estateofthedebtor.(Sec.73)
Q: What is the effect of insolvency of

partnershiporanypartner?
A:
1. A partnership may be declared
insolvent notwithstanding the solvency
ofthepartnersconstitutingthesame.
2. A partnership is not necessarily
insolventbecauseoneofitsmembersis
insolvent. The solvent members are
bound to wind up the partnership
affairs.
3. Under the law, a partnership is
automatically dissolved by the
insolvency of any partner or of the
partnership
Q:Whatistheeffectwhencorporationdeclared
insolvent?
A: Its property and assets shall be distributed to

thecreditorsbutnodischargeshallbegrantedto
anycorporation.(Sec.52)
Q:Isinsolvencylawapplicabletocorporations?
A:TheInsolvencyLawexpresslyprovidesthatitis
notapplicabletocorporations:
1. Engaged principally in the banking
business
2. Anyothercorporationastowhichthere
is a special provision of law for its
liquidationincaseofinsolvency.(Ibid)
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Q:Inthefilingofclaimsinaninsolvencyproceeding,whatdebtsmayandmaynotbeproved?
A:
DEBTSTHATMAYBEPROVED
Thedebtswhichmaybeprovedagainsttheestateofthe
debtorininsolvencyproceedingsarethefollowing:
1. All debts due and payable from the debtor at the

timeofadjudicationofinsolvency;(Sec.53)
2. All debts existing at the time of the adjudication of
insolvency but not payable until a future time, a
discountbeingmadeifnointerestispayablebythe
termsofthecontract;
3. Anydebtoftheinsolventarisingfromhisliabilityas
indorser, surety, bail or guarantor, where such
liability became absolute after the adjudication of
insolvency but before the final dividend shall have
beendeclare;(Sec.54)
4. Other contingent debts and contingent liabilities
contracted by the insolvent if the contingency shall
happenbeforetheorderoffinaldividend;(Sec.55);
and
5. Anydebtoftheinsolventarisingfromhisliabilityto
any person liable as bail, surety, or guarantor or
otherwise, for the insolvent, ho shall have paid the
debtinfull,orinpart.(Sec.56)
DEBTSTHATMAYNOTBEPROVED
The following debts are not provable or allowed in
insolvencyproceedings:
1. Claims barred by the statute of limitations; (Sec.

29,73)
2. Claims of secured creditors with a mortgage or
pledge in their favour unless they surrender the
security;(Sec.59)
3. Claims of creditors who hold an attachment or
execution on the property of the debtor duly
recordedandnotdissolved;(Sec.32)
4. Claims on account of which a fraudulent
preferencewasmadeorgiven;(Sec.61)
5. Support, as it does not arise from any business
transactionbutfromtherelationofmarriage;and
6. Aclaimforunliquidateddamagesarisingoutofa
pure tort, which neither constitutes a breach of
an express contract nor results in any unjust
enrichment of the tortfeasor that may form the
basisofanimpliedcontract.
Q:Whatisacontingentclaim?
A: A claim in which liability depends on some

future event that may or may not happen and
which makes it uncertain whether there will be
anyliability.
Note: After the close of the insolvency proceedings

and the happening of the contingency, the creditor
may pursue any available remedy for the collection
ofhisclaim.
Q: How are claims arising or acquired after

insolvencytreated?
A:
1. Claim arose after commencement of
proceedings An obligation coming in
force after the initiation of the
proceedings is not generally a proper
claimtobeproved.
2. Claim owned by insolvent purchased

after insolvency One indebted to an
insolvent will not be permitted to
interposeasanoffset,aclaimownedby
the insolvent which he has purchased
aftertheinsolvency.
Q: What are the alternative rights of a secured

creditor?
A:
1. Tomaintainhisrightsunderhissecurity
or lien and ignore the insolvency
proceedings,inwhichcase,itistheduty
oftheassigneetosurrendertohimthe
propertyencumbered;
2. Towaivehisrightunderthesecurityor
lien and thereby share in the
distributionoftheassetsofthedebtor;
or
3. To have the value of the encumbered

property appraised and then share in
the distribution of the assets of the
debtor with respect to the balance of
hiscredit.
Q:Whatiscomposition?
A: It is an agreement, made upon a sufficient

consideration, between an insolvent or
embarrassed debtor and his creditors, whereby
the latter for the sake of immediate or sooner
payment,agreetoacceptadividendlessthanthe
whole amount of their claims, to be distributed
pro rata, in discharge and satisfaction of the
wholedebt.
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Q:Distinguishcompositionfromaccord.
A: Accord properly denotes an agreement

between a debtor and a single creditor for a
discharge of the obligation by a part payment or
ondifferentterms.
Composition, on the other hand, designates an

arrangement between a debtor and the whole
body of his creditors (or at least a considerable
portionofthem)fortheliquidationoftheirclaims
bythedividendoffered.
Q:Whataretherequirementsforavalidofferof
composition?
A:
1. The offer of the terms of composition
must be made after the filing of the
schedule of the debtors property and
the submission of the list of his
creditors;
2. The offer must be accepted in writing
by a majority of the creditors
representing a majority of the claims
whichhavebeenallowed;
3. Itmustbemadeafterthedepositingin
suchplacedesignatedbythecourt,the
consideration to be paid and the costs
oftheproceedings;and
4. The terms of the composition must be
approved or confirmed by the court.
(Sec.63)
Q:Whenmaythecourtconfirmacomposition?
A:When:
1. It is for the best interest of the
creditors;
2. Thedebtorhasnotbeenguiltyofanyof
the acts, or of a failure to perform any
of the duties which would create a bar
tohisdischarge;and
3. Theofferanditsacceptanceareingood
faith and have not been made or
procuredinamannerforbiddenbythe
Act.
Q: What are the effects of confirmation of

composition?
A:
1. The consideration shall be distributed
asthejudgeshalldirect;
2. The insolvency proceedings shall be
dismissed;
3. The title to the insolvents estate shall
revertinhim;
436
4.
Theinsolventshallbereleasedfromhis
debts
Q:Whenmayconfirmationbesetaside?
A: The court may, upon application of a party in

interest within 6 months after the composition
has been confirmed, set the same aside and
reinstate the case if it shall be made to appear
uponatrial:
1. That fraud was practiced in the
procuringofsuchcomposition;and
2. Theknowledgethereofhascometothe
petitioner since the confirmation of
suchcomposition.(Sec.63)
Q:Whatisdischarge?
A: Discharge, under the Insolvency Law, is the

formalandjudicialreleaseofaninsolventdebtor
from his debts with the exception of those
expresslyreservedbylaw.
Note: Only natural persons may ask for discharge;

corporations cannot ask for discharge. (Sec. 52)
When granted, takes effect not from its date, but
from the commencement of the proceedings in
insolvency.
Q: When insolvent debtor may apply for

discharge?
A:AdebtormayapplytotheRTCforadischarge
atanytimeaftertheexpirationof3monthsfrom
theadjudicationofinsolvency,butnotlaterthan
1 year from such adjudication of insolvency,
unlessthepropertyoftheinsolventhasnotbeen
convertedintomoney(Sec.64)withouthisfault,
thereby delaying the distribution of dividends
amongthecreditorsinwhichcasethecourtmay
extendtheperiod
Any creditor may oppose the discharge by filing

his objections thereto, specifying the grounds of
his opposition. After the debtor has filed and
servedhisverifiedanswer,thecourtshalltrythe
issueorissuesraised.(Sec.66)
Q:Whataretherequisitesfordischarge?
A:
1. Compliance
with
statutory
requirementsregardingsurrenderofhis
assets for the benefit of the creditors
and regarding the rendition of an
accountofhisassetsandliabilities;
a.
Note: A discharge ininsolvency

is a matter of legislative grace
CIVILLAWTEAM:
CREDIT TRANSACTIONS
or favour to the debtor, to be
obtained only by a strict
compliance with the conditions
prescribedbythestatute.
2.
1.
Applicationfordischargeshouldbefiled
after the expiration of 3 months from
theadjudicationofinsolvency,butnot
laterthan1year;(Sec.64);and
2.
3.
Insolvent debtor must not have

committedanyoftheactsofinsolvency
preventingdischarge.
Q:Whataretheactsofdebtororgroundswhich
willpreventdischarge?
A: No discharge shall be granted, or if granted,

shallbevalid,tothefollowingcases:
1. Falseswearing;
2. Concealmentofanypartofhisestateor
effects;
3. Fraudorwillfulneglectinthecareofhis
property or in the delivery thereof to
theassignee;
4. Procuring his properties to be attached
or seized on execution within 1 month
before the commencement of
insolvencyproceedings;
5. Destruction, mutilation, alteration or
falsification of his books, documents,
andpapers;
6. Giving fraudulent preference to a
creditor;
7. Nondisclosure of the assignee of a
proven false or fictitious debt within 1
monthafteracquiringknowledge;
8. Being a merchant, failure to keep
properbooksoraccounts;
9. Influencingtheactionofanycreditor,at
any state of the proceedings, by
pecuniaryconsideration;
10. Effecting any transfer, conveyance or
mortgage in contemplation of
insolvency;
11. Conviction of any misdemeanor under
theInsolvencyLaw:
12. In case of voluntary insolvency, he has
received the benefit of insolvency
within 6 years next preceding his
applicationfordischarge;and
13. If insolvency proceeding in which he
could have applied are pending by or
against him in the RTC of any other
provinceorcity.(Sec.65)
Q:Whataretheeffectsofdischarge?
A:
3.
4.
5.
It releases the debtor from all claims,

debts,liabilitiesanddemandsetforthin
the schedule or which were or might
have been proved against his estate in
insolvency. (Sec. 69). Hence, non
provable debts are not affected
whether or not they were properly
scheduled;
It operates as a discharge of the
insolvent and future acquisitions, but
pemits mortgagees and other lien
creditors to have their satisfaction out
ofthemortgageorsubjectofthelien;
It is a special defense which may be
pledged and be a complete bar to all
suitsbroughtonanysuchdebts,claims,
liabilitiesordemands.(Ibid.)
It does not operate to release any
person liable for the same debt, for or
withthedebtor,eitheraspartner,joint
contractor, indorser, surety or
otherwise;(Sec.68)
The certificate of discharge is prima
facie evidence of the fact of release,
andtheregularityofsuchdischarge.
Note: Where a debtor is judicially declared

insolvent, the remedy of the guarantor or
suretywouldbetofileacontingentclaiminthe
insolvency proceeding, if his rights as such
guarantor or sureties are not to be barred by
the subsequent discharge of the insolvent
debtorfromallhisliabilities.
Q: What are the debts and obligations not

affectedbydischargeofinsolvent?
A:
1. Taxes or assessments due the
Government,whethernationalorlocal;
2. Any debt created by the fraud or
embezzlementofthedebtor;
3. Any debt created by the defalcation of
the debtor as a public officer or while
actinginafiduciarycapacity;
4. Debt of any person liable for the same
debt, for or with the insolvent debtor,
either as partner, joint contractor,
inorser,suretyorotherwise;(Sec.68)
5. Debtsofacorporation(Sec.52);
6. Claimforsupport;
7. Discharged debt but revived by a
subsequentnewpromisetopay;
8. Debts which have not been duly
scheduled in time for proof and
allowance, unless the creditors had
notice or actual knowledge of the
insolvency proceedings, are not
dischargedastosuchcreditors;
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9.
Claimsforunliquidateddamagesarising
outofapuretort;
10. Claimsofsecuredcreditors;(Sec.59)
11. Claimsnotinexistenceornotmatureat
thetimeofthedischarge;
12. Claims that are contingent at the time
ofdischarge.
Q:Whendischargemayberevoked?
A:Adischargemayberevokedbythecourtwhich
granteditonpetitionofanycreditor:
1. Whose debt was proved or provable

against the estate in insolvency on the
ground that the discharge was
fraudulentlyobtained;
2. Who has discovered facts constituting

the fraud subsequent to the discharge
andfraudulenttransfer;andprovided,
3. The petition is filed within 1 year after

thedateofthedischarge.(Sec.69)
438
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CREDIT TRANSACTIONS

A: It is a persons ability to borrow money by

Real or property: when an encumbrance is

are contracts supported by

depend on the existence of another

there is consideration or burden

A: It is the delivery of a personal property for

Note: Generally, no fiduciaryrelationship is created

Q: What are the contractual bailments with

2. For the sole benefit of the bailee

alone. Their existence does not

A: It is a contract where one of the parties

Q: Distinguish consumable from non

On the other hand, a nonconsumable thing is a

A: Fungible thing is one where the parties have

A: It is a contract whereby one of the parties

Q: What is the legal effect of an accepted

Q: What is the effect if the loan is for an

Q: What are the characteristics of a contract of

2. Precarium one whereby the bailor

Note: The word owner in Art. 1947 (2) is not proper

Q: What are the consequences of the purely

UST GOLDEN NOTES 2011

XPN: By stipulation, the commodatum

In case of lease of the thing subject of

GR: The bailee can neither lend nor

XPN: Members of the bailees

A: It is a contract whereby one of the parties

Q: What are the characteristics of a contract of

GR: not its fruit because the

A: Yes, if there is an agreement between the

A: Real contracts, such as deposit, pledge and

contract which cannot be perfected until the

Q: What are the governing rules on paymentof

A: It depends on the object of the contract of

GR: Payment shall be made in the

Note: In case of extraordinary inflation

Consumable or fungible thing debtor or

A: No. This is because of the constitutional

Q: Can estafa be committed by a person who

A: No, because the debtor in mutuum becomes

Q: Does destruction of the thing loaned

A: The destruction of the thing loaned does not

UST GOLDEN NOTES 2011

Q: Who are the parties to a commodatum?

Refund the extraordinary expenses the

GR: The bailee must bring to the

Note: If the extraordinary expenses arise

To be liable for damages for known hidden

Cannot exempt himself from payment of

Q: Can the bailor demand the return of thing

a. If the bailee should commit

Note: The rationale for the application of Art. 765

Q: If the contract of commodatum is a

A: No. The bailor in commodatum need not be

Note: A mere lessee or usufructuary may

under Articles 1207 and 1208. Solidarity is

Note: The concurrence of two or more creditors or

A: When thereare 2 or more bailees to whoma

Q: Following the principle of autonomy of

A: No. Article 1245 expressly provides that in a

UST GOLDEN NOTES 2011

Q: Art. 1178 of the NCC provides that all rights