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GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
2.) As to consideration:
a.) Gratuitous: guarantor does not receive any
price or remuneration for acting as a guaranty
b.) Onerous: gurantor receives a valuable
consideration
3.) As to the person guaranteed:
a.) Single: constituted solely to guarantee the
performance by the debtor of the principal
obligation
b.) Double or sub-guaranty: constituted to
secure the fulfillment by the guarantor of a
prior guaranty.
4.) As to its scope and content:
a.) Definite: limited to the principal obligation
only or to a specific portion thereof
b.) Indefinite or simple: includes not only the
principal obligation but also all its accessories
including judicial costs
Q: What is a contract of suretyship
A: A contractual relation resulting from an agreement
whereby one person, the surety, engages to be
answerable to a third person, the oblige, for the debt,
default or miscarriage of another known as the principal
obligor. (Visayan Surety & Insurance Co. v. CA)
Q: What is the difference between a guaranty and
suretyship?
A: With respect to their condition on when the obligation
arises. In a contract of guaranty, the guarantor will only be
held liable when the debtor cannot pay. In a surety, when
the debtor will not pay. At the moment of the debtors
default the surety can already be held liable for the
obligation while in a guaranty, the guarantor will be onlhy
held liable when the debtor can no longer pay.
When does obligation arise?
Guaranty: debtor cannot pay
Surety: debtor will not pay
Remember with regard to surety, the creditor can collect
from him as soon as default sets in because his liability is
direct and primary.
ASSET BUILDERS CO. vs STRONGHOLD INSURANCE
Q: Is there a contract of surety here? Who is the surety here?
A: Yes, the surety here is stronghold
Q: What is the principal obligation subject to the surety?
A: the completion of the construction of the building.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence
of express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only joint.
It thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact
with a preponderance of evidence. Note that Article 2047
itself specifically calls for the application of the provisions on
joint and solidary obligations to suretyship contracts. Article
1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor,
in case of suretyship) in favor of the one who paid (i.e. the
surety).
ESCANO vs ORTIGAS
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
liable. It points out that it uses the word sureties all over
the document. However, take note, the obligation here in
the undertaking is presumed only to be joint. The
undertaking does not contain any express stipulation that
the petitioners agreed to bind themselves jointly and
severally. So they are considered only as joint debtors.
Likewise, there was no suretyship agreement here
because a suretyship agreement requires a principal
debtor to whom the surety is solidarily bound by way of an
ancillary the obligation of segregate entity from the
obligation between the principal debtor and the creditor.
Now, do take note of the distinction pointed out between
a solidary co-debtor and a surety. A guarantor who binds
himself in solidum in other words, a surety does not
become a solidary co-debtor for all intents and purposes.
Again, there are distinctions.
With that, take note of the distinction and take note of the
nature of the obligation of a suretys undertaking.
1. It is contractual and accessory but direct. Immediate,
primary and absolute.
CASTELVI vs SELLNER
Q: Who is Sellner here? Is he a surety or a guarantor?
A: A guarantor.
Q: Who is the debtor here?
A: The debtor here is Mining, Clarke and Maye.
Q: Why is Sellner a guarantor when it was stated in the
promissory note that he signed that he is jointly and severally
liable?
A: It is because the term jointly and severally liable in the
note refers not to Sellners obligation but refers to Keystone
Mining and John Maye to creditor Higgins. It does not pertain
to the obligation of Sellner which was a guaranty.
Q:Why was it a guaranty and not a surety?
A: the nature of the obligation of Selner is evidenced by the
note executed. It was an independent agreement, his liability
was subject to the condition that the primary payor fails to do
so. It is perfectly clear that the obligation assumed by
defendant is simply that of a guarantor.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
benefit of excussion of property in favor of the surety
unlike in the contract of guaranty.
MACHETTI vs HOSPICIO DE SAN JOSE
Q: What is the issue here?
A: Whether or not there is a contract of guaranty or surety.
Q: What do we have here?
A: A contract of guaranty. The guarantor is Fidelity and Surety
Co.
Q: Why is there a contract of guaranty here and not a
suretyship?
A: It is because Fidelity having bound itself to pay only in the
event its principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that Machetti is
unable to pay.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
executed simultaneously therewith, providing that the
signers of the agreement agreed to the terms of the
principal contract, the signers were "sureties" jointly liable
with the buyer.
A surety usually enters into the same obligation as that
of his principal, and the signatures of both usually appear
upon the same instrument, and the same consideration
usually supports the obligation for both the principal and
the surety.
There is no merit in petitioner's contention that the
complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there
having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to
the same conditions expressed in the promissory note.
Significantly, paragraph of the note states that "should I
fail to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in
order that delay may exist since the contract itself already
expressly so declares. As a surety, petitioner is equally
bound by such waiver.
So you have here a contract of guaranty. Again, take note
of the distinctions between suretyship and guaranty.
1. A surety undertakes to pay if the principal does
not pay. A guarantor only binds himself to pay if
the principal cannot pay. . A surety is the insurer
of the debt. A guarantor is the insurer of the
solvency of the debtor.
2.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
Q: With regard to that issue, was the defense of UCPB here
that it should refer to arbitration first before it can be held
liable, was that upheld by the SC?
A: No, The existence of a suretyship agreement does not give
the surety the right to intervene in the principal contract, nor
can an arbitration clause between the buyer and the seller be
invoked by a non-party such as the surety. Petitioner alleges
that arbitration laws mandate that no court can compel
arbitration, unless a party entitled to it applies for this relief.
This referral, however, can only be demanded by one who is
a party to the arbitration agreement. Considering that neither
petitioner nor One Virtual has asked for a referral, there is no
basis for the CAs order to arbitrate.
Here the parties to the arbitration clause are only One Virtual
and Gilat Satellite, UCPB is not a party thereto.
Moreover, Articles 1216 and 2047 of the Civil Code clearly
provide that the creditor may proceed against the surety
without having first sued the principal debtor. Even the Surety
Agreement itself states that respondent becomes liable upon
"mere failure of the Principal to make such prompt payment."
Thus, petitioner should not be ordered to make a separate
claim against One Virtual (via arbitration) before proceeding
against respondent.
On the other hand, respondent maintains that a surety
contract is merely an accessory contract, which cannot exist
without a valid obligation. Thus, the surety may avail itself of
all the defenses available to the principal debtor and inherent
in the debt that is, the right to invoke the arbitration clause
in the Purchase Agreement.
Q: Is UCPB still liable?
A: Yes, UCPB is still liable. Is is the oft-repeated rule is that a
suretys liability is joint and solidary with that of the principal
debtor. This undertaking makes a surety agreement an
ancillary contract, as it presupposes the existence of a
principal contract.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
Take note in this case that to require the creditor to
proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce.
The court here made mention of the ruling in Palmares v.
Court of Appeals that "if the surety is dissatisfied with the
degree of activity displayed by the creditor in the pursuit
of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor."
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary.
General Rule: A contract of guaranty is gratuitous in
nature.
Exception: (onerous) by stipulation of the parties
WILLEX PLASTIC INDUSTRIES, CO vs CA
Q: Do you have a guraranty here or suretyhip?
A: A suretyship.
Q: Isnt it that was denominated in the agreement that is was
a continuing guaranty? Why did the court rule that it was a
suretyship?
A: The SC held that the name or the title of the contract is not
controlling but it is the stipulations of the agreement that
shows the intent of the parties.
Q: Since you are saying that there was a surety contract,
what was the consideration?
A: The consideration to secure the payment of Interbank
(formerly IUCP) of amounts paid to Manilabank. Such, gave
rise to the execution of a continuing guaranty. Willexs
contention based on the fact that it is not a party either to the
Continuing Surety Agreement or to the loan agreement
between Manilabank and Inter-Resin Industria is untenable.
The consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving
to the principal alone being sufficient. For a guarantor or
surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. . . . It
is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage,
guaranty, or penalty.
He who pays for another may demand from the debtor
what he has paid; except that if he has paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the
debtor. In other words, that is beneficial reimbursement.
For example:
Giovanni borrowed money from Ron. Here comes Jordan,
who without the knowledge of Giovanni, paid his
obligation to Ron. Even if Giovanni did not give his
express consent to Jordans act of paying his obligation
to Ron, Jordan can still seek reimbursement from
Giovanni. However, if it was without the consent of
Giovanni or knowledge on his part, Jordan can only be
reimbursed to the extent that Giovanni was benefited.
That is beneficial reimbursement.
Lets say part of Giovannis debt has already prescribed,
but Jordan paid the full obligation of Giovanni and Ron
accepted the payment by Jordan. Can Jordan recover the
full obligation? Jordan cannot anymore recover the
payment for the prescribed obligation of Giovanni, but
only the balance which was beneficial on the part of
Giovanni. The excess will be borne by Ron, and he will be
liable to Jordan, because here there is solution indebiti.
Now, distinguish, if the payment was made with the
consent of Giovanni, Jordan is not only entitled to
beneficial reimbursement but also subrogation to all the
rights available to the creditor.
So if for example, Giovanni executed a chattel mortgage
to Ron to secure his obligation, if Jordan pays Giovannis
obligation with his consent, then Jordan can seek not only
beneficial reimbursement for whatever he has paid but
eventually, he can subsequently seek for the foreclosure
of the chattel mortgage as he is now subrogated to the
rights of the creditor.
Article 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the
principal debtor, but also in favor of the other guarantor,
with the latter's consent, or without his knowledge, or
even over his objection.
The first paragraph deals with the classification I
mentioned earlier. The second paragraph also deals with
what I mentioned earlier with double guaranty and sub
guaranty.
You have another person who
performance of another guarantor.
guarantees
the
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
rescinded. Unenforceable? Again, it is also valid but it
cannot be enforced, nevertheless it can be a valid
contract of guaranty.
Also a natural obligation can also be subject to a
guaranty. This obligation is valid, you cannot enforce the
natural obligation but once there is performance, the
debtor cannot demand what he has given or paid.
Therefore, if the guarantor secured the performance of a
natural obligation, the creditor may proceed against the
guarantor although he does not have the right of action
against the principal debtor. So, the debtors obligation is
not unenforceable anymore. When the debtor himself
offers to guaranty his natural obligation, he impliedly
recognizes his liability and as to him it transforms the
natural obligation from a natural to a simple one.
Article 2053. A guaranty may also be given as security
for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the
debt is liquidated.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
Article 2049, just take note when a married woman enters
into a contract of guaranty.
Article 2050. If a guaranty is entered into without the
knowledge or consent, or against the will of the
principal debtor, the provisions of articles 1236 and
1237 shall apply.
So the effect is beneficial reimbursement or subrogation,
when is there subrogation or when is there beneficial
reimbursement only.
Article 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the
principal debtor, but also in favor of the guarantor, with
the latters consent, or without his knowledge, or even
his objection.
So here we have the different kinds of guaranty. We have
a double guaranty or sub guaranty or one constituted to
guarantee the obligation of the guarantor.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
A: Yes, they are liable.
Q: Now when was the obligation or the contract if loan
perfected?
A: It was perfected at the time of the agreement itself.
Q: What is the ruling of the court that there is no consideration
for that continuing suretyship agreement?
A: The SC held in the wise, Surety agreements may secure
future debts.
Q: Now how was this suretyship agreement one of a
suretyship agreement? What was provided in the
agreement?
Q: Now how was this suretyship agreement one of a
suretyship agreement? What was provided in the
agreement?
A:The terms any indebtedness of the Principal now or
hereafter held by the Surety is hereby subordinated to the
indebtedness of the Principal to the Creditor; and if the
Creditor so requests, such indebtedness of the Principal of
the Surety shall be collected, enforced and shall be paid over
to the Creditor and shall be paid over to the Creditor and shall
be paid over to the Creditor on account of the indebtedness
of the Principal to the Creditor but without reducing or
affecting in any manner the liability of the Surety under the
provisions of this suretyship.
For valuable and/or other consideration . . ., jointly and
severally unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called Creditor), the full, faithful
and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called
Principal) to the Creditor. The word "indebtedness" is used
herein in its most comprehensive sense and includes any and
all advances, debts, obligations and liabilities of Principal or
any one or more of them, here[to]fore, now or hereafter
made, incurred or created, whether voluntary or involuntary
and however arising, whether direct or acquired by the
Creditor by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated,
determined or undetermined and whether the Principal may
be may be liable individually of jointly with others, or whether
recovery upon such indebtedness may be or hereafter
become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
which such surety agreement, there would be no need to
execute a separate surety contract or bond for each
financing or credit accommodation extended to the
principal debtor.
Article 2054. A guarantor may bind himself for less, but
not for more than the principal debtor, both as regards
the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.
GATEWAY vs ASIANBANK
Q: What is the effect of the order of insolvency of gateway?
A: The declaration of insolvency merely suspends the action
to collect of sum of money but it does not extinguish the
obligation of gateway.
Now why is this important because, in insolvency
proceedings all the civil actions are suspended in the
meantime because
Q: How about on the part of Geronimo?
A: The court held here that Geronimo is also liable because
he acted as a surety of gateway.
Q: Can I not say that the obligation here of Geronimo is
suspended in the sense that it would be unfair because the
collection to gateway is suspended by reason of insolvency
but Geronimo as a surety can still be held liable?
A: The court ruled that Geronimo will still be held liable
because to free him or to suspend him from his liability
defeats the very purpose of suretyship agreements which is
to pay the obligation of the principal debtor in case he
defaults.
Q: What kind of a suretyship agreement is contemplated
here? A continuing suretyship?
A: Yes, in this case Geronimo will be held liable for all the
debts Gateway has incurred with Asianbank.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
A: No. The court held here that there was a novation that
extinguished the obligation.
Here, the main reason why Cuenca was not held liable
was because of that provision that said without his
consent and not because he was no longer a stockholder
of the corporation then. Your obligation as a surety can
still continue even if you are no longer a stockholder it will
depend on the provisions of the agreement.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
Therefore, BA Finance cannot guaranty the obligation of
the Cayetanos as surety of the obligation of Renatos to
Traders Royal Bank.
Recap
Article 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall compromise not only
the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those
costs incurred after he has been judicially required to
pay.
There is no presumption that a contract of guaranty exists.
The obligation of the one who executed, that he
undertakes to answer for the obligation of another, such
document must be clearly stipulated. And of course if
were talking about the person who acts as a surety must
likewise be clearly stipulated clearly the nature of his
obligation, that he is solidarily bound with the principal
debtor.
Also remember the distinction between a contract of
guaranty and suretyship. The contract of guaranty is
covered by the statute of frauds. Under the statute of
fraud, specifically Article 1403 paragraph 2(e):
Article 1403.
xxx
Section 2.
(a) x x x
xxx
(e) An agreement of the leasing for a longer period
than one year, or for the sale of real property
or of an interest therein;
A special promise to answer for the debt or miscarriage of
another refers to a contract of guaranty.
The requirement that the contract of guaranty be in writing
is for enforceability. It is not required for validity. What is
required from a person to be considered as a guarantor is
that it must be express, as clearly stipulated in 2055. It
must be express and cannot extend to more than what is
stipulated therein. However, there is no requirement that
the contract of guaranty be in a public instrument.
How about on the part of the creditor regarding the
acceptance of a person who acts as a guarantor or
surety? On the part of the creditor, his acceptance need
not be express or in writing.
You have 2 kinds of acceptance here in which we have to
consider:
1.) If it is merely an offer of guaranty or
2.) If it an unconditional promise of guaranty.
This was emphasized in the case of Texas Company v.
Alonso.
TEXAS COMPANY vs ALONSO
Q: Is there a surety or guarantor under the facts of this case?
A: None.
Q: Why Not?
A: There was only an offer.
Q: Thomas Alonso made an offer, what is the relevance of
the nature of the obligation or the offer here? What if it is
merely an offer of guaranty?
Q: Was it stated there that it must be accepted? Why was it
considered merely as an offer and not an unconditional
promise of guaranty?
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
Q: Now what is the importance, or why is there a need to
determine that it is merely an offer and not an unconditional
promise of guaranty? Why do we have to make the
distinction? You said, it was merely an offer of guaranty. Why
do we have to determine that it was merely an offer of
guaranty that could not bind Alonso as a guarantor or surety
in this case?
Q: So the extent of the liability here of the party who executed
a contract, if it is an unconditional promise, which was not
accepted by the creditor, would the person who executed the
guaranty or suretyship, be liable even if it was not accepted?
A: Yes.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
Q: Why not? Under the facts of the case, who could have the
right to file a claim against the replevin bond by Visayan
surety?
A: Only the spouses Bartolome because of the case between
the spouses Danilo and Mila Ibajan and spouses Bartolome
to which Dominador is not a party thereto.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
qualifications here does not necessarily render the
contract void.
The second sentence or the last sentence in 2056, it
refers to the jurisdiction. The place of performance and,
that is the court, which has the jurisdiction over the case.
This in consonance with the provisions of the Rules of
Court regarding venue and jurisdiction.
Article 2057. If the guarantor should be convicted in the
first instance of a crime involving dishonesty or should
become insolvent, the creditor may demand another
who has all the qualifications required in the preceding
article. The case is expected where the creditor has
required and stipulated that a specified person should
be the guarantor.
The qualifications under Article 2056 if all of these are
present upon the perfection of the contract of guaranty, it
is not required that it be present until the maturity of the
obligation or until demand is made by the creditor. While
under Article 2056 qualifications are required at the
inception of contract of guaranty, unless waived by the
creditor, it is not required that these qualifications must
continually subsist afterwards as emphasized in Article
2057.
Under Article 2057, the guarantor is subsequently
convicted of a crime involving dishonesty. In other words,
he is now a person without integrity or lacks integrity or
becomes insolvent so he does not have sufficient property
to answer for the obligation. If that happens, it will not
affect the validity of the contract. But it gives the creditor
the right to demand for another guarantor. In fact under
Obligations and Contracts, if the parties have agreed for
securities or collateral and the security becomes impaired
or destroyed, the obligation becomes immediately
demandable wherein the debtor uses the right to make
use of the period. So these are the consequences if the
guarantor loses any of the qualifications in Article 2056
the creditor may ask or may require from the debtor for
another guarantor or surety; otherwise, the obligation
becomes immediately demandable.
Will the death of the surety or guarantor extinguish his
obligation? No.
ESTATE OF HEMADY vs LUZON SURETY
Q: Is he a guarantor or a surety?
A: Surety.
Q: What is the effect of the death of Hemady on his the
obligation as a surety?
A: It bound his successor.
Q: So his successors will now be liable to the principal
obligation of which Hemady acted as a surety?
A: No. However, the estate of Hemady will be held
accountable for his obligation as surety,
Q: So what if his properties at the time of his death are not
sufficient to answer his obligations as a surety?
A: His heirs cannot be asked more than what the estate of
Hemady can cover.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a
third person.
Article 1311 is the application of the doctrine of relativity.
During his lifetime Hemady acted as a surety in this case,
wherein he will become liable to Luzon Surety Company.
When such surety company demanded from the estate of
Hemady, the trial court dismissed its claim on the ground
that upon Hemadys death he ceased to be a surety.
However, take note in this case, the contract he executed
takes effect as against the successors or heirswhich in
this case, the estate at the time of his death. As pointed
out, his successors or heirs will not be liable more than
what they have received from the estate of Hemady.
Therefore, the death of Hemady did not extinguish his
liability as a surety, thus the Luzon insurance company
can go after the remaining estate of the deceased
Hemady. But if it turns out that the estate is not sufficient
to answer for the liability of Hemady as against Luzon
Surety, Luzon Surety has no recourse against the heirs or
successors of Hemady because the heirs cannot be held
personally liable for the obligations of Hemady.
Also in this case, it was pointed out that if any of the
qualifications would supervene after the execution of the
contract of guaranty or suretyship, it will not terminate the
contract. But applying Article 2057, it gives the creditor the
right to demand a replacement. The right to make a
demand [a replacement] is not a duty, therefore it remains
optional to the creditor, and he may waive it and chooses
and hold the guarantor to his bargain.
In Article 2057, it provides that in case he should be
convicted in the first instance of the crime involving
dishonesty. Conviction in the sense that there is already
a final judgment.
How about insolvency? Is it required that the court has
declared the guarantor to be insolvent? NOT
NECESSARILY. As long as the guarantor is incapable of
meeting his obligations when they become due he can
already be considered as insolvent which then be gives
the creditor the right to demand for another guarantor as
provided in Article 2057.
Those are the provisions in relation to the nature and
extent of guaranty and suretyship.
Effects of Guaranty
How about the effects thereof? Article 2058:
Article 2058. The guarantor cannot be compelled to
pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal
remedies against the debtor.
What we have in Article 2058 is what the main distinction
between a guarantor and a surety. The benefit if
excussion or also known as the benefit of exhaustion.
What is the nature of this benefit? Remember that this
benefit is only available to a guarantor. This benefit is in
favor of the guarantor and unlike the obligation of a surety,
the obligation of the guarantor is merely accessory and
subsidiary in nature. It cannot be enforced before the
obligation of the principal debtor is enforced.
Before the creditor can proceed and collect from the
guarantor, he must first proceed and try to collect from the
principal debtor. Because again the obligation of the
guarantor is only subsidiary and secondary. Only when
the principal debtor fails to pays, shall the guarantor be
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
liable. And if the principal debtor fulfills his obligation, then
the guarantor is discharged from any responsibility.
When do we say that the benefit of excussion or benefit
of exhaustion is given to the guarantor? When the creditor
has exhausted all the property of the debtor. So try to
collect first from the debtor and also resort to all legal
remedies available as against the debtor. If these are not
done by the creditor, then he cannot collect from the
guarantor.
The general rule with regard to guarantorbenefit of
excussion: before you can proceed to the guarantor, go
after first the principal debtor.
WISE COMPANY vs TANGLAO
Q: Is there suretyship here? So there is no suretyship here?
No contract of guaranty?
A: No.
Q: Why is it that we have the term guarantor in the power of
attorney?
Q: Assuming that Atty. Tanglao agreed to act as a guarantor,
can Wise Company demand payment from him?
A: No.
Q: Why not?
Q: What are the legal remedies that are available?
A: Foreclosure, because there was a mortgage that was
executed.
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to collect from Tanglao. All legal remedies, such as if
there is mortgage have it foreclosed, or filing an action for
sum of money against the principal debtor.
Also another remedy that may be available, is
emphasized in the case of PB COM vs CA.
PB COM vs CA
Q: What is the nature of the action filed by PB Com against
Chua?
A: Accion Pauliana
Q: What do you mean by that?
Q: So in this case was it proven that the deed of exchange
was executed in bad faith?
Q: To whom was the property transferred?
A: Jaleco Deveopment, Corp
Q: Why would it constitute as a defraudation on the part of
Chua in addition to your basis that it was his only property at
the time and also the fact that it was entered into after he
agreed to be a surety? What is the relation of Chua to Jaleco?
Q: After there was an execution of the deed of exchange,
what happened to the property?
Q: Who remains in possession of the property even after the
execution of the deed of exchange?
A: It was still Chua who remained in possession of the
property which provides additional proof indeed the deed of
exchange and subsequent transactions were entered into to
defraud the creditor.
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Relate this again to the concept of a corporation having a
personality separate and distinct from its stockholders.
That is general rule. So therefore, Jaleco has a separate
personality from Chua.
In this case, this is an exception. Under Corporation Law,
there is the doctrine of piercing the corporate fiction or
corporate entitythe corporation has no separate entity
corporation if that separation of personality is used to
defraud third person. In this case, Chua and his
immediate family was actually in control of Jaleco
Corporation. So the execution of that deed of exchange
was clearly not into exchange, not into sale, as all the
evidences under the circumstance of this case would
show that it was a sham or simulated transaction, wherein
the property was not really divested from Chua as he
remained in control of the property. It is clear as the
evidence shown in this case that it is to defraud the
creditor so that they cannot go after Chua.
Recap
The main distinction between a guaranty and a suretyship
is that a guarantor is given the benefit of excussion. This
is provided under Article 2058. So, the guarantor here
cannot be compelled to pay the creditor unless the
creditor has exhausted all the properties of the debtor and
has resorted to all the legal remedies available against the
debtor. Again, this benefit of excussion is in favor of the
guarantor because unlike the obligation of a surety, the
obligation of a guarantor is subsidiary in nature.
As emphasized in the case of PBCOM vs. CA, one of the
legal remedies that is available to the creditor is the
accion pauliana, an action intended to rescind or refute
the contract or alienation made by the debtor in fraud of
the creditor. Aside from that, other remedies would be
collection for sum of [money], mortgage or foreclosure of
such mortgage.
As discussed in the case of Wise Co. vs. Tanglao, the
benefit of excussion is applicable in a contract of guaranty
and not in a contract of suretyship.
Now, if you are the principal creditor and the debtor is
already in default, and despite demand the debtor refuses
to pay. So you now file an action against the debtor. What
about the guarantor? Is it necessary that the guarantor be
included in the action? Or do you have to wait for the court
to adjudge that the principal debtor is indeed liable to the
creditor before you can implead the guarantor?
PRUDENTIAL BANK vs CA
Q: What is the basis here that the contract was a contract of
guaranty and not a contract of suretyship? (Despite the fact
that it was labeled as a solidary guaranty clause)
Q: Was it proper that Anacleto be included as a defendant in
the complaint?
A: (He may or may not be included in the complaint. The
guarantor is considered as a permissive party in Civil
Procedure)
Q: What is the effect of the benefit of excussion in relation to
the fact that the defendants guarantor may or may not be
included?
Q: When can the guarantor be made liable?
A: After the debtor has been found liable to the principal
creditor. Thereafter, before the creditor can collect from the
guarantor, the guarantor can of course avail of the benefit of
excussion. Meaning, before the creditor can collect from the
guarantor, the former must collect first from the principal
debtor.
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(4) When he has absconded, or cannot be sued
within the Philippines unless he has left a
manager or representative;
(5) If it may be presumed that an execution on the
property of the principal debtor would not result
in the satisfaction of the obligation.
GENERAL RULE: Benefit of excussion
EXCEPTION: Article 2059
The creditor, need not need exhaust all the properties of
the debtor before he can proceed against the guarantor.
The exceptions are the following:
1. If the guarantor has expressly renounced it
- This is a privilege or a right granted to the
guarantor. So like any other right, the person
entitled to that right, in this case the guarantor,
can waive it. However such waiver must be
express and it is only the guarantor who can
make such waiver; it cannot be made by the
creditor or debtor in behalf of the guarantor since
the right to waive is a personal right.
2. If he has bound himself solidarily with the debtor
- In this case he becomes a surety. Because of the
term solidarily meaning he makes himself
primarily liable with the debtor.
3. In case of insolvency of the debtor
- Take note that it is not required that the debtor be
declared insolvent or bankrupt by the court. As
long as his assets are not sufficient to meet his
obligations when it mature, the debtor shall be
considered insolvent and excussion will not be
available anymore; so no need of a judicial
declaration of bankruptcy or insolvency.
Insolvency here must be actual.
- Also, while there is no need for a judicial
declaration of insolvency of the debtor, do recall
the case of Machetti vs. Hospico where there was
already a declaration of insolvency. However the
Court held there that the declaration of insolvency
is not enough, there must be a final liquidation.
4. When he has absconded, or cannot be sued
within the Philippines unless he has left a
manager or representative
- It is not expected that the creditor should first
proceed against the principal debtor since it is
impossible to enforce a court decision against the
principal debtor who is abroad. But if he has
properties in the Philippines then you go after
such properties first. In relation to jurisdiction of
the court in CivPro, if the debtor is outside of the
Philippines or not residing herein, the court
cannot acquire jurisdiction over him unless he
voluntarily presents himself to the jurisdiction of
the Philippine courts. For an action for sum of
money and he has properties in the Philippines
then you can acquire jurisdiction over the thing.
But if there is no property here in the Philippines,
even if he has properties abroad still it would be
useless since it would be expensive for the
creditor to go after such properties abroad.
- However, do take note of the exception unless
he has left a manager or a representative.
5. If it may be presumed that an execution on the
property of the principal debtor would not result
in the satisfaction of the obligation
- If it appears that the debtor has no more
properties, you do not have to wait to exhaust the
properties of the principal debtor since it is
already evident that even if there are still
properties [or no properties at all] it would not
result in the satisfaction of the obligation.
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despite having been served of a demand letter, Bitanga
failed to point out properties of Macrogen Realty. Such
failure forecloses his right to set up the defense of
excussion. Even if he was the one who pointed out such
amount, look at Article 2059, such defense is not available
anymore when it is presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation.
JN DEVT vs PHIL. EXPORT
Q. What was the role here of Phil Guaratee?
A. It is the guarantor of JN Devt for the credit line extended
by Traders Royal Bank (TRB).
Q. If you look at the facts of this case, it is Phil Guarantee
who sued JN Devt, who is the principal debtor. What is then
the basis of the action of Phil Guarantee against JN Devt?
A. For the payment [of JN] of what it[Phil Guarantee] has paid
to TRB by virtue of the guaranty executed in favor of JN.
Q. What are the reasons why JN Devt refuse to pay Phil
Guarantee?
A. One of the reasons alleged by JN was that Phil Guarantee
has no more obligation to pay TRB since the contract of
guaranty has already expired. Here the guaranty was only up
to December 17, 1980 but the payment made by Phil
Guarantee was made after the expiration of the contract of
guaranty.
Q. Was that defense upheld by the SC?
A. No.
Q. What about the allegation raised by JN that Phil Guarantee
have raised the benefit of excussion?
A. SC said that this excussion is a right personal only to Phil
Guarantee and it may waive it. JN therefore cannot (exercise)
Phil Guarantees option to waive such benefit.
Q. Can Phil Guarantee still seek for reimbursement of what it
has paid to TRB even if the property of JN was already
foreclosed?
A. Yes, here, notice of payment by Phil Guarantee [to TRB]
was given to JN. So JN should have filed motion to stop the
foreclosure, in order to prevent the double payment.
Q. With the foreclosure of JNs property by TRB, and the
payment made by Phil Guarantee to TRB, what is then the
remedy available to JN Devt?
A. Run after the creditor, TRB.
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Article 2061. The guarantor having fulfilled all the
conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out
shall suffer the loss, to the extent of said property, for
the insolvency of the debtor resulting from such
negligence.
Who is at fault here in Article 2061? The creditor.
The creditor fails to proceed against the property of the
principal debtor and it proceeded against the guarantor.
And the guarantor as provided under 2060 was able to set
up the benefit of excussion and pointed out to the creditor
properties of the debtor that are sufficient and available in
the Philippines to cover such obligation. However, even
after compliance by the guarantor [under 2060], the
creditor, despite such knowledge, fails to proceed against
the properties of the debtor. What happens thereafter?
The principal debtor becomes insolvent. Now can the
creditor go after the guarantor? NOT ANYMORE. The
creditor cannot anymore proceed against the properties
of the debtor or even if the debtor still has some properties
but becomes insolvent.
But what is the effect as to obligation of the guarantor?
The creditor who is negligent, or did not make action, shall
suffer the loss provided that the guarantor has complied
with the conditions as provided under 2060.
Article 2062. In every action by the creditor, which must
be against the principal debtor alone, except in the
cases mentioned in Article 2059, the former shall ask
the court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire,
set up such defenses as are granted him by law. The
benefit of excussion mentioned in Article 2058 shall
always be unimpaired, even if judgment should be
rendered against the principal debtor and the guarantor
in case of appearance by the latter.
If the creditor files an action for collection, it must be made
first against the principal debtor. But there is no legal
impediment if the creditor includes the guarantor in the
action. As mentioned, it would be a permissive joinder of
parties wherein the cause of action or transaction arose
out of the same proceeding. So even if the guarantor is
impleaded in the proceeding as a co-defendant, as long
as the conditions set forth under Article 2060 is complied
with (raise as defense, point out properties) the benefit of
excussion is not deemed waived.
While the creditor can proceed against the property of the
debtor, it is only when the debtor cannot pay his obligation
can the creditor go after the guarantor. In 2062, if the
creditor files an action against the principal debtor, then
the court shall notify the guarantor if such action. Of
course, the creditor shall move to ask the court to notify
the guarantor of such action.
Once the guarantor is notified, he may appear in the
proceedings. Take note of the word may, meaning it is
not required. But also do take note of the effect. If he
appears in the case, the guarantor can set up the
defenses which are otherwise available to the principal
debtor. Examplesthat the obligation has already
prescribed, or that there was already partial payment, or
it is null and void because there is no consideration.
These are the same defenses that can be raised by the
guarantor once he is notified and appeared in the same
case. If these defenses are successfully proven, then the
principal debtor would not be made liable at the same
time, also the guarantor.
It is also possible that the creditor files a case against the
principal debtor but the guarantor was not notified.
Nevertheless, the guarantor voluntarily appears in the
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case. Now he can still raise the defense of the benefit of
excussion but the creditor must first go after the properties
of the debtor first.
What if after notice, the guarantor does not appear? Take
note that 2062 uses the word may, meaning it is
permissive. He may or he may not. But if he does not
appear despite such notice he cannot set up the defenses
that are allowed to him under the law. And it would no
longer be possible for him to question the validity of the
decision or judgment against the debtor.
Can the guarantor be sued alone? NO. The creditor must
go first against the principal debtor.
Article 2063. A compromise between the creditor and
the principal debtor benefits the guarantor but does not
prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not
prejudice the principal debtor.
We have here a compromise agreement. Review under
Article 2028:
Article 2028. A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.
Here there is a reciprocal concession, give and take []
situation for both parties so they do not go to further
litigation. We already know that it is a preferred mode
since if you go to a litigation you will incur more expenses
and time.
But what if there is a litigation and there is a compromise.
Obviously it is binding to the guarantor if such
compromise benefits the guarantor even if the same is
without the consent of the latter.
Lets say the total obligation is 100,000. They entered into
a compromise agreement that only 70,000 be paid after
the execution of the compromise agreement. What if
despite the compromise agreement with approval from
the court the debtor still fails to pay the agreement, then
the guarantor would become liable but only up to the
extent of the compromise agreement. If the debtor pays
the obligation is deemed extinguished.
Now what if they agreed that the obligation will be more
than the amount of the original obligation, say instead of
100,000 they agreed to pay 120,000 to be paid at the end
of the year. But in this case the guarantor will be
prejudiced because there is an increase in the obligation.
Hence such increase will not be applied to the guarantor.
You cannot compel the guarantor to guaranty more than
what was originally stipulated; UNLESS the guarantor
consents to such increase in the compromise agreement.
Compromise between the creditor and the debtor will
benefit but should not prejudice the guarantor. The
compromise between the creditor and the guarantor will
benefit but will not prejudice the principal debtor.
Article 2064. The guarantor of a guarantor shall enjoy
the benefit of excussion, both with respect to the
guarantor and to the principal debtor.
This is the concept of double guaranty or subguaranty.
We have the creditor, the debtor, the guarantor and the
subguarator who guarantees the obligation of the first
guarantor. We all know that the first guarantor is entitled
to the benefit of excussion. In the same manner the
subguarantor is also entitled to the same benefit. All the
properties of the debtor and the first guarantor must first
be exhausted before the creditor can go against the
subguarantor.
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TUAZON vs MACHUCA
Q. When you say recover, do you mean reimbursement in
this case? Was the action here for reimbursement?
A. Yes.
Q. Do you have a guaranty here or a suretyship?
A. Surety
Q. Was there payment here to Manila Compania?
A. NO.
Q. But can the plaintiff recover from the principal debtor?
A. Yes. It was expressly stipulated. It was stated in the
document [which was solidarily executed by the defendant
and the Universal Trading Co.] that the defendant bound
himself to pay as soon as the latter has become bound and
liable whether or not he has actually paid.
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So you have here the debtor who was not notified of the
payment made by the guarantor to the principal creditor.
The right available to the debtor if the guarantor seeks
reimbursement from him--- he may enforce all the
defenses which he could have set up against the creditor
at the time the payment was made.
So we have here a guarantor who acted as such, paid the
creditor without notifying the debtor or against the will of
the debtor. So the right of the guarantor here is limited to
beneficial reimbursement.
What is now the obligation of the guarantor? In applying
2068, beneficial reimbursement, and subrogation, it is
best that the guarantor forst notify the debtor that he is
going to pay the creditor. Because in this case the debtor
can advise him as to what extent the payment can be
made. Even if the guarantor acted as such at the time of
payment, still notification to the debtor is necessary
otherwise his right to reimbursement would only be limited
up to the extent that the debtor was benefited.
Article 2069. If the debt was for a period and the
guarantor paid it before it became due, he cannot
demand reimbursement of the debtor until the
expiration of the period unless the payment has been
ratified by the debtor.
Even if the obligation is not yet due, you cannot stop the
guarantor from paying the creditor. And as long as
accepted by the creditor, then the obligation will be
extinguished. But as to the right of reimbursement from
the debtor---if he paid before due date, the guarantor
cannot demand reimbursement until after expiration of the
period. The only exception is that if payment was ratified
by the debtor. So the guarantor has to wait until the debt
becomes due unless the payment made by the guarantor
before due date was ratified by the debtor himelf.
Article 2070. If the guarantor has paid without notifying
the debtor, and the latter not being aware of the
payment, repeats the payment, the former has no
remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous
event from advising the debtor of the payment, and the
creditor becomes insolvent, the debtor shall reimburse
the guarantor for the amount paid.
This is in relation to Article 2068 in the sense that the
guarantor should first notify the debtor so that the debtor
can properly advise the guarantor regarding the
obligation. But in 2070, the situation here is that the
guarantor did not notify the debtor of the payment. Since
the debtor here has no knowledge of the payment made
by the guarantor, the debtor likewise paid to the creditor.
Hence there was a repeat payment. In this instance, the
debtor pays after the guarantor paid without the
knowledge of the former. What are the rights of the
guarantor, can it seek reimbursement from the debtor?
No. the guarantor cannot seek reimbursement from the
debtor because of the absence of advice. The remedy
then of the guarantor is to go against the creditor. Again,
no one shall be unjustly enriched at the expense of the
other. Reimbursement here would come from the creditor
and not the debtor.
Distinguish it with the case of Phil Guarantee where it paid
the bank TRB. The subsequent foreclosure by TRB in that
case was made with the knowledge (of both the debtor
and TRB) of payment by Phil Guarantee. So the debtor
here should have objected to the foreclosure. Because
there was already notice to both of them that payment
was already made.
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EXCEPTION: There is an exception where the guarantor
can nevertheless recover from the debtor in case of
double payment. But ALL these requisites must be
present:
1. It has to be a gratuitous guaranty.
2. That the guarantor was prevented by a fortuitous
event from notifying the principal debtor.
3. The creditor becomes insolvent. (in other words
he cannot anymore reimburse the guarantor)
In absence of any of these requisites, the guarantor
cannot proceed against the debtor--- general rule is to go
against the creditor.
Article 2071. The guarantor, even before having paid,
may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve
him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable, by
reason of the expiration of the period for
payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be
extinguished except within a period longer than
ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
In all these cases, the action of the guarantor is to
obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by
the creditor and from the danger of insolvency of the
debtor.
First thing to notice here is that this is a remedy available
to a guarantor even before payment has been made to
the creditor. The guarantor has not yet paid but he can
already proceed against the debtor. The general rule that
a contract of guaranty is a contract of indemnity, where it
is only when the guarantor has already paid the creditor
can the former seek reimbursement from the debtor. But
under 2071, the guarantor even if no payment has yet
been made can nevertheless proceed against the debtor.
Is there a contradiction here? NO, because 2071 is not a
proceeding for reimbursement.
What is the purpose of this article? To enable the
guarantor to take measures for the protection of his
interests in view of the probability that he may be called
upon to pay. What are these instances?
1. When he is sued for payment
2. The benefit of excussion will not be applied
because of debtors insolvency.
3. The debtor is now in breach of his obligation with
respect to the guarantor.
o Example there is an agreement in the
contract of guaranty that payment shall
be made at a specified period, so it
presupposes that the debtor really has to
pay upon that period. But then period has
elapsed but the debtor has not yet paid.
4. The obligation has become due and demandable
5. The general rule is after 10 years if the obligation
has no fixed period.
o But suppose the obligation has a fixed
period, then apply that period. If the
obligation cannot be performed until after
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10 years and they have agreed that it will
be demandable on the 11th year (after
the expiration of the contract) of course
within 10 years it cannot be enforced as
yet.
6. There are reasonable grounds to believe that the
debtor intends to abscond.
o Here intent to abscond is sufficient.
7. If the principal debtor is in imminent danger of
becoming insolvent.
o How is this shown? If there are several
attachments made by other creditors in
the properties of the debtor so there is a
probability in that case that the debtor will
become insolvent.
What is then the action under Article 2071?
1. To seek relief from the guaranty;
2. To demand another security to protect him from
the proceedings.
A contract of guaranty is executed between a guarantor
and a creditor; if the guarantor seeks relief under 2071 [to
release him from the contract guaranty], the same must
be made with the consent of the creditor.
If he files an action under 2071 to release him from the
guaranty but he cannot acquire the consent of the creditor
then he can apply the other remedy---to demand another
security to protect him from the proceedings. The
guarantor will demand, for example, that the debtor set up
a counterbond or surety to answer for whatever obligation
that the guarantor may be compelled to answer.
If there is a showing that the debtor intends to abscond,
by filing an action under 2071 then the guarantor may ask
the debtor to put up a bond in case that he will indeed
abscond and the guarantor will be made to pay.
After the action under 2071 and the guarantor pays the
creditor, he can then file a separate action for
reimbursement under 2066.
What is the difference under Arts. 2066 and 2071 (as cited
in the case of Kuenzle vs. Sunco):
1. In 2066, it provides for the enforcement of the
rights of the guarantor against the debtor after he
has paid the debt; whereas in 2071, it provides
for his protection before he has paid but after he
has become liable;
2. Art 2066 gives a right of action after payment
whereas Art 2071 gives a protective remedy
before payment;
3. Art 2066 is a substantive right while Art 2071 is in
the nature of a preliminary remedy;
4. Art 2066 gives a right of action, which, without the
provisions of the other, might be worthless; in Art
2071, the remedy seeks to obtain for the
guarantor release from the guaranty or to
demand a security that shall protect him from any
proceedings by the creditor and from the danger
of insolvency of the debtor. Art 2066 has no such
purpose. When the guarantors rights under this
article becomes available, he is past the point
where a preliminary protective remedy is of any
value to him.
Art 2066
provides
for
the
enforcement of the rights
of the guarantor against
the debtor after he has
paid the debt
gives a right of action after
payment
Art 2071
it
provides
for
his
protection before he has
paid but after he has
become liable
gives a protective remedy
before payment
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a substantive right
gives a right of action,
which,
without
the
provisions of the other,
might be worthless
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in the nature of a
preliminary remedy
the remedy seeks to
obtain for the guarantor
release
from
the
guaranty or to demand a
security that shall protect
him from any proceedings
by the creditor and from
the danger of insolvency
of the debtor
KUENZLE vs SUNCO
Q. What was applied here? 2071 or 2066?
A. 2071.
Q. What was the limitation?
A. Until he has satisfied or has caused for the satisfaction of
the debt, that is the time where he can actually collect.
What was referred here was 2071 (1843 in the old code)
which provides for the enforcement of the rights of the
surety protection before he has paid but after he becomes
liable.
Art 2071 provides the surety a remedy in anticipation of
payment of the debt which being due can be called upon
to pay at any time. In this connection, the only procedure
is to enforce the right by action. Sunco availed himself of
that right against the debtor by going after the properties
of the latter and such action is not considered fraudulent.
But while the surety has the right to obtain, as in this case
a favorable judgment against the principal debtor, he
ought not to be allowed to realize such judgment. In other
words, he cannot yet execute to the point of actual
collection until he has satisfied or caused to satisfy the
payment of the obligation to which he assures. Otherwise,
it will bring an opportunity for collusion between the surety
and his principal which might result to the prejudice of
other creditors.
Sunco should not execute the said judgment until he has
paid the debt to which he stands as a surety.
RECAP
We have already discussed 2071 we need to discuss the
difference between 2071 and 2066.
Article 2071. The guarantor, even before having paid,
may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve
him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable, by
reason of the expiration of the period for
payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be
extinguished except within a period longer than
ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
In all these cases, the action of the guarantor is to
obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by
the creditor and from the danger of insolvency of the
debtor.
Article 2066. The guarantor who pays for a debtor must
be indemnified by the latter.
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Par 7 does not apply no reason of becoming insolvent,
there was no proof. So just take note of the instances
where 2071 will apply and remember that it also applies
to contracts of suretyship.
Article 2072. If one, at the request of another, becomes
a guarantor for the debt of a third person who is not
present, the guarantor who satisfies the debt may sue
either the person so requesting or the debtor for
reimbursement.
We have here a person who is not a party to the principal
obligation, he's not a party to the guaranty but he
nevertheless liable. Why? Because he is the one who
requested a person to become a guarantor.
Illustration
Giovanni borrowed money from Ron but let us say, here
comes Dolly, without Giovanni, goes to Jordan. Dolly
(being the one endorsing Jordan to Ron to pay) Jordan
who has the money to pay Ron but Ron will not be lent
without a guarantor/surety.
So if Jordan agrees, if the principal debtor fails to pay and
the guarantor becomes liable, take note, Dolly who is not
a party to the principal obligation, not a party to the
accessory contract of guaranty or suretyship can
nevertheless be liable as expressly stipulated in Article
2072. The third person here, Dolly, cannot make the
defense that she cannot be sued because she is not a
party to the contract. The third person here can be held
liable.
EFFECTS OF GUARANTY AS BETWEEN COGUARANTORS
Article 2073. When there are two or more guarantors of
the same debtor and for the same debt, the one among
them who has paid may demand of each of the others
the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the
same proportion.
The provisions of this article shall not be applicable,
unless the payment has been made by virtue of a
judicial demand or unless the principal debtor is
insolvent.
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Illustration
Let us say Julian is insolvent, so what happens to that
P120,000?
Jordan can collect 60,000 so 50/50 because they [Jordan
and Azzedine] have to shoulder the proportionate share
of Julian in their respective shares.
If Julian obtains money the two guarantors can collect
20,000 each from him.
So regarding insolvency of guarantors, we cannot use
that as a defense: Azzedine cannot say it is not my fault
Julian does not have money. So what would happen?
The co-guarantors will have to shoulder their
proportionate share.
Any of the guarantors should be insolvent, his share will
be in proportion.
However under the last paragraph, not applicable unless
the payment be made by virtue of a judicial demand or
unless the principal debtor is insolvent. In other words, for
example, Jordan can seek reimbursement from Azzedine
and/or Julian if he has paid by virtue of a judicial demand
or unless the principal debtor is insolvent.
Article 2074. In the case of the preceding article, the
co-guarantors may set up against the one who paid,
the same defenses which would have pertained to the
principal debtor against the creditor, and which are not
purely personal to the debtor.
Remember under contract of guaranty, any of
defenses of the principal debtor can be made by
guarantor as against the co-guarantor who paid
obligation.
However, he cannot invoke those defenses which
purely personal to the debtor.
the
the
the
are
Illustration
It is possible for example Jordan, who has a lot of money,
pays for the whole obligation. So for the P120,000
obligation the proportionate share is only 40,000 for each.
But upon demand from Ron, all the guarantors pay for the
P120,000.
Extinguishment of Guaranty
Article 2076. The obligation of the guarantor is
extinguished at the same time as that of the debtor and
for the same causes as all other obligation.
There are several modes of extinguishing obligations:
compensation, confusion, payment or performance etc.
Recall in the case of Estate of Hemandy vs Luzon
Surety where there are several debtors and previously
the surety died, his estate could nevertheless be liable to
the obligation of which he insured.
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But what if the principal debtor dies; will it extinguish the
obligation releasing the guarantor/surety of the
obligation?
STRONGHOLD vs REPUBLIC
The death of the surety/guarantor will not extinguish the
accessory contract and also with regard to death of the
principal debtor, same, it will not also extinguish the debt
of guaranty or suretyship but take note of the distinction
here, if the principal debtor dies, the creditor can demand
performance of the obligation from the surety/guaranty to
the extent of other stipulations in their contract.
In other words, it should be instituted in the remaining
estate of the principal debtor.
When you compare it in the surety/guarantor who dies,
his estate will be liable to the principal obligation but the
limitation is up to his estate and their successors in
interest could not be held liable or in other words, they
cannot be held personally liable.
Remember that if the rights existed from the principal
obligation, if any of the modes of extinguishment is
present, then the principal obligation is extinguished as
well as the contract of guaranty/suretyship but it is
possible that the contract of guaranty/suretyship be
extinguished but the principal obligation remains.
Remember the principle: the accessory follows the
principal and not the other way.
Article 2077. If the creditor voluntarily accepts
immovable or other property in payment of the debt,
even if he should afterwards lose the same through
eviction, the guarantor is released.
Dation of payment is a form of extinguishing an obligation
and that if the principal obligation is extinguished; the
contract of guaranty/suretyship is also extinguished.
Illustration
Giovanni borrowed money from Ron P120,000. So
Giovanni said that instead of paying cash, he has a parcel
of land.
Will that constitute dation in payment?
- Yes, the guarantors obligation will also be
extinguished but what happens if upon such dacion
en pago, Ron who received such property as a form
of payment was subsequently evicted. Why?
Because apparently Giovanni has no right with
respect to the real property and some person has a
better right over the property.
So what is the effect thereof as to the obligation of the
guaranty or surety?
Take note, the creditor is evicted because the debtor has
no right or title over the said property. Then the contract
of guaranty/suretyship is not revived, it will be considered
as extinguished. So in other words, the creditor cannot go
after the guarantor/suretyship.
So it will be the principal debtor who would be liable to the
creditor. So the principal creditor would have to take into
consideration that when he would enter into dacion en
pagohe would have to take into the possibility that he
would be evicted, but in the event that it will happen, he
can no longer go after the guaranty/suretyship
considering that the obligation of the latter has already
been extinguished by virtue of such dacion en pago. But
he can go after the principal debtor.
Take note as well that dacion en pago is different from
pactum commisorium. Pactum commisorium is automatic
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appropriation of property in case the principal debtor fails
for the payment of his obligation which is against public
policy and the law as well Article 2088:
Article 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
It is different from dacion en pago because the original
obligation is a sum of money, at the time it is due and
demandable, that would only be the time that the debtor
will offer the property as a form of payment. In fact, it will
not extinguish the obligation unless the creditor consents
because he can refuse.
So he still needs to get the consent of the creditor
because he will use a property to satisfy the monetary
obligation. Unlike in pactum commisorium, automatic
appropriationif the debtor fails to fulfill the obligation,
then it (the property) will be automatically appropriated or
will automatically belong to the creditor which again is not
a valid provision in the contract in violation of Article 2088.
Article 2078. A release made by the creditor in favor of
one of the guarantors, without the consent of the
others, benefits all to the extent of the share of the
guarantor to whom it has been granted.
Illustration
You have here 3 co-guarantors and the obligation is
120,000 so by benefit of division 40,000 is the share of
each co-guarantors. If the creditor condoned 40,000 of
the obligation of one of the co-guarantor, what is the effect
to the other co-guarantors?
You cannot impose the share of the one being condoned
(co-gurantor) against the others if such condonation is
made without the consent of the other co-guarantors. So
the creditor could only collect up to their proportionate
share of 40,000 each. But if the others consented, they
are not released of their obligation because they are not
prejudiced as they consented.
So if the others consented by virtue of such condonation
in favor of one of the co-guarantors, the others respective
share of such portion is 60,000 each.
Assuming that the guaranty is solidary, you cannot seek
reimbursement from your co-guarantors as in this case.
The person compelled to pay may still recover from the
others if there is a release in favor of onethis does not
amount to release of the entire obligation but only with his
share.
So regardless if the co-guarantors are solidary or their
share is proportionate, if one of the co-guarantors is
released from his obligation, the other co-guarantor could
only be held liable for their respective shares.
Side comment: (Meaning, magiging 80,000 nlang ang
pwedeng bayaran nung other co-guarantors dito in case
solidary ung obligation and was made without the consent
of the other co-guarantors.)
Same concept applies: therefore, take note if the consent
was given or not. Of course, if it is the debtor being the
one condoned then the principal obligation is extinguished
as well as all the guarantors are also released from their
liability. (The accessory follows the principal)
Article 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part
of the creditor to demand payment after the debt has
become due does not of itself constitute any extention
of time referred to herein.
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So we have here a specific provision dealing with the
extinguishment of contract of guaranty wherein there is an
extension granted to the debtor.
The guaranty is extinguished. Why? Because if you give
an extension to the principal debtor to pay his liability,
there is a possibility that he will become insolvent so such
extension would be prejudicial to the guarantor therefore
is such extension was made without the consent of the
guarantor, the latter would be released from his obligation
or the guaranty will be extinguished.
If the guarantor consented, then it will imply that the
guarantor agreed to the extension so he will not be
prejudiced and he can still be held liable despite such
extension.
There must be a specific period giving the debtor an
extension of time to pay is what is contemplated by this
provision that will extinguish the obligation of the
guarantor. The mere failure to demand payment on the
part of the creditor is not what is contemplated by this
provision that will extinguish the obligation of the guaranty
after the debt has become due.
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exhausted, without notifying the surety, the bank deprived
the surety of recourse against the debtor. Thats why
Article 2080 is applicable in this case, because of PNBs
neglect and consequently, the other creditors of Ataco
were able to collect. Thus, there was no more [money] for
the bank to collec, and Manila Surety was prejudiced,
thats why the surety must be released.
Because of the neglect on the part of the creditor, the
surety is released from his obligation. This is an
application of article 2080.
Article 2081. The guarantor may set up against the
creditor all the defenses which pertain to the principal
debtor and are inherent in the debt; but not those that
are personal to the debtor.
Whatever defenses are available to the principal debtor
are available to the guarantor.
EXAMPLE: the obligation has already prescribed, and
then the guarantor can refuse to pay on the ground of
prescription.
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mortgage are real securities, because properties are
involved.
The pledge or mortgage given must be sufficient to cover
or secure the obligation in lieu of a legal or judicial bond.
Article 2084. A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the
exhaustion of the property of the debtor or of the surety.
A judicial bondsman does not have the right pertaining to
that of a guarantor. A judicial bondsman and sub-surety
are not entitled to the benefit of excussion, because their
liability is that of a surety: primary and direct.
Remember that guaranty and surety are contracts of
security which are personal since there are no properties
involved. You have a third person who is not party to the
principal obligation who acts to secure the principal
obligation.
PLEDGE
(Art 2085-2123)
Remember that pledge and mortgage are contracts of real
security. The property itself is the security and not the
promise of the owner of the property. Compare that to
guaranty and security where you only have the promise
of the guarantor and the surety. For suretyship, it is
required that the surety has sufficient property. But take
note that the property is not the security itself, but it is the
undertaking or promise of the surety to pay when the
creditor demands paymentthat is the difference
between
surety/guaranty
with
respect
to
pledge/mortgage.
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depositedthat can be considered as a
pledge by operation of law.
Parties in a contract of pledge
1. Pledger
2. Pledgee
We have the pledgor and the pledgee. Take note that the
pledgor may not be necessarily the debtor in the principal
obligation while the pledgee is the creditor.
Characteristics of pledge
1. Pledge is a real contract.
o It is perfected by the delivery of the thing
pledged by the debtor or a third person
who is called the pledgor to the creditor
who is called the pledgee. So delivery of
the subject matter results into the
perfection of the contract of pledge.
2. Pledge is an accessory contract.
o Relate that with the first requirement
under Article 2085 which says that
they be constituted to secure the
fulfillment of a principal obligation. A
contract of pledge cannot exist on its own
and its existence depends upon the
validity of the principal obligation.
Remember that when an accessory
contract is void, it does automatically
mean that the principal is also void. But
when the principal is void, the accessory
is also void by virtue of the principle the
accessory follows the principal.
3. Pledge is a unilateral contract.
o It creates an obligation solely on the part
of the creditor to return the thing subject
thereof upon the fulfillment of the
principal obligation.
o
4. Pledge is a subsidiary contract.
o The obligation incurred does not arise
until the fulfillment of the principal
obligation which is secured.
What is the cause and consideration for a contract of
pledge? In default, it is the consideration of the principal
obligation. The money borrowed by the debtor is the
consideration. But what if the pledgor is a third person or
he is not the debtor? You cannot say that the loan or
money borrowed in the principal obligation is the
consideration. In that instance, the consideration of the
pledgor is the cost agreed upon by the debtor and pledgor
or the mere liberality of the pledgor.
Do take note that pledge is specific to movables; a thing
that can be moved from one place to another. Usually, it
involves vehicles or jewelry or even cellphones. How
about good will? It is intangible, it has no physical form.
The right of a stockholder is also not tangible. These are
incorporeal rights. So you have two types of properties
involved in pledge: movables and incorporeal rights.
Incorporeal rights refer to those that are intangible but
exist by provision of law. If the stockholder has a
certificate of stocks, he cannot say that he owns the
stocks by virtue of that paper. His share certificate is
merely an evidence of his right. In a pledge, what is
delivered is the document evidencing the incorporeal
right.
We also have a contract of antichresis. This type of
contract is also a contract of real security intended to
secure the principal obligation by subjecting to the
security the property as well as the fruits thereof.
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Article 2085 not only governs pledge but mortgage as
well. The key difference is that mortgage involves real
property. Under the Civil Code, the term mortgage is
most often used to refer to real estate mortgage rather
than chattel mortgage, because there are specific
provisions for chattel mortgage. Chattel mortgage
involves movable property, while real estate mortgage
involves real or immovable properties.
The purpose of mortgage is to secure the principal
obligation and if the debtor cannot fulfill his obligation, the
creditor can proceed against the property and apply the
proceeds to the payment of the obligation.
Pledge versus mortgage
(1) Pledge is constituted on movables while real
mortgage is on immovable.
(2) Mortgage has different requisites. Delivery is
essential for the validity of the pledge while
delivery is not essential in mortgage.
Again, in mortgage, delivery is not essential, in
contrast with pledge. For example, in a real
mortgage, of course you cannot deliver the parcel
of land. There is no requirement of actual
delivery.
(3) Pledge is not valid against third persons unless a
description of the thing pledged and the date of
the pledge appear in a public instrument, while
mortgage is not valid against third persons if not
registered.
Requisites of pledge/mortgage under Article 2085
(1) That they be constituted to secure the fulfillment
of a principal obligation.
- Again as an accessory contract, when the
principal is void, the accessory contract is also
void.
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
- Even if you have rights over the property because
you are the lessee, you cannot mortgage the
property because that would be considered as a
void contract. If you borrow jewelry from you
friend, and you place those properties under
pledge to another person, there is no contract of
pledge that actually arises because you are not
the owner of the movable.
The reason why ownership over the thing is essential in
pledge and mortgage is because such involves acts of
disposition. Remember what would happen if the debtor
fails to comply with his obligation, the property would be
foreclosed and sold to the highest bidder. There is an act
of disposition. The act of pledging or mortgaging is an act
of strict ownership as it does an alienation or transmission
of real rights in property.
Under the Law on Sales, the ownership is transferred
from the seller to the buyer by delivery. It could be actual
or constructive.
CALIBO vs CA
In a contract of pledge, the creditor is given the right to retain
his debtors movable property in his possession, or in that of
a third person to whom it has been delivered, until the debt is
paid.
For the contract to be valid, it is necessary that:
a. the pledge is constituted to secure the fulfillment of a
principal obligation;
(1) the pledgor be the absolute owner of the thing
pledged; and
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(2) the person constituting the pledge has the free
disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
Q: You mentioned that one of the requisites is that the
personal is legally authorized, so can we not say that Mike
(the pledger) acted as an agent?
A: There is no implied agency in this case because Dr. Abella
(the owner) had no idea that Mike pledge the property. For
an agency relationship to be deemed as implied, the principal
must know that another person is acting on his behalf without
authority.
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mortgagor, he is not solidarily bound with the obligor. He
did not guarantee to pay. But he offered his property as a
security for the obligation. His liability is only to the extent
of the value of the property offered.
Again, in relation to the last paragraph of Article 2085,
remember that pledge and mortgage are strict acts of
ownership involving alienation and disposition of real right
over the property so therefore, the pledgor or mortgagor
has the capacity to dispose of the property.
When you say free disposal of the property it means that
the property is not subject to a claim of a third person. It
should not be subject to an encumbrance or a lien,
otherwise, you do not have free disposal over the
property.
If you recall your Revised Penal Code, there is that
provision that punishes those who mortgage a property
while claiming it is unencumbered, when in fact it is not:
Article 316. Other forms of swindling. - The penalty of
arresto mayor in its minimum and medium period and
a fine of not less than the value of the damage caused
and not more than three times such value, shall be
imposed upon:
1. Any person who, pretending to be owner of any real
property, shall convey, sell, encumber or mortgage the
same.
xxx
Another instance, if the property is in the custody of the
court or if there is an attachment, there is no free disposal
thereof.
As to capacity to dispose property, the person must not
be convicted of a crime with a penalty of civil interdiction.
He must also be legally authorized for that purpose, like
for example an agent authorized to pledge the property.
Another example is when the property is attached by the
court, the owner can ask the permission of the court to
pledge the property and the court may authorized the
pledge of that property. But again, the owner needs the
consent of the court.
DEVELOPMENT BANK vs PRUDENTIAL BANK
Q: There were trust receipts issued. Who was the entrustor
and who is the entrustee?
A: The entruster is Prudential Bank. The entrustee is Litex
Company.
Q: What is the obligation of the entrustee?
A: The obligation of the entrustee is to turn over to the
entruster the proceeds of the goods to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods.
Q: So who is in possession of the property?
A: it is Litex Company.
Q: So with the nature of trust receipt transactions, is there a
chattel mortgage here?
A: Litex had neither absolute ownership, free disposal nor
the authority to freely dispose of the articles. Litex could not
have subjected them to a chattel mortgage.
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entruster or as appears in the trust receipt, or the
goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in
accordance with the terms and conditions
specified in the trust receipt.
So with that, the various agreements between Prudential
Bank (entruster) and Litex (entrustee) commonly
denominated as trust receipts were valid. So therefore,
the article were owned by Prudential Bank and held by
Litex in trust.
So the chattel mortgage executed by Litex in favor or
Prudential Bank is void because Article 2085 requires that
the pledgor is the absolute owner of the thing pledged or
mortgaged. The person must have the free disposal of the
property.
Litex had neither absolute ownership, free disposal nor
the authority to freely dispose of the articles. Litex could
not have subjected them to a chattel mortgage. Their
inclusion in the mortgage was void and had no legal
effect. There being no valid mortgage, there could also be
no valid foreclosure or valid auction sale. Thus, DBP
could not be considered either as a mortgagee or as a
purchaser in good faith.
It is important for a mortgagee to check into the title or the
right of the mortgagor over the property subjected to the
pledge or mortgage. What happened in this case? Instead
of benefitting, DBP even became liable to Prudential
Bank.
CAVITE DEVELOPMENT BANK vs SPS LIM
Q: In a contract of sale, when is it required that the seller own
the property?
A: At the time of delivery
Q: But in this case, do they have to wait for the delivery in
order for there to be a valid contract of mortgage?
A: Yes.
Q: Is it possible for a contract of pledge or mortgage even if
the pledgor or mortgagor is not the owner?
A: No.
Q: Who was the owner at the time of the mortgage and who
was the mortgagor?
A: Spouses Lim were the owner and Rodolfo Guansing was
the mortgagor.
Q: One of the contentions of the bank here is they are
mortgagees in good faith is that upheld by the court?
A: No. We are not convinced, however, that under the
circumstances of this case, CDB can be considered a
mortgagee in good faith. While petitioners are not expected
to conduct an exhaustive investigation on the history of the
mortgagor's title, they cannot be excused from the duty of
exercising the due diligence required of banking institutions.
Q: What should have the bank done?
A: The self-executed deed should have placed CDB on guard
against any possible defect in or question as to the
mortgagor's title.
Q: Who discovered that it was the father who actually owned
the property?
A: It was Lim who discovered.
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sale, the rule that the seller must be the owner of the thing
sold also applies in a foreclosure sale.
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The case was for the annulment of the deed of sale and
the evidence to question the execution of the private
document which was the basis of the sale. They could
redeem the said property with a stipulation that in case
they cannot redeem the said property they shall become
the sole owner thereof. In this case there is a contract of
mortgage. In order for a contract of mortgage to be valid
one must conform to the requisites not just of article 2085
but also the subsequent articles.
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Pactum Commissorium
null and void under Article
2088.
The
property
upon
nonpayment
of
the
obligation
automatically
transfer to the creditor
a contract, of pledge,
mortgage or antichresis
There
is
automatic
appropriation of the subject
matter.
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Illustration
Let us say the debtor A B C and D who borrowed money
from X in the amount of 100,000. In the absence of any
stipulation, the debtors here will be jointly liable. But to
secure, A executed a REM. Even if A pays his
proportionate share of 25,000, he cannot seek the release
the REM whether partially or wholly. Again indivisibility of
the mortgage will not affect the joint liability of the debtors.
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MCMICKING vs MARTINEZ
Held:
This case emphasizes that a contract of pledge is a real
contract there must be delivery for its perfection.
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person becomes the owner thereof. If the debtor fails to
pay, the property will be foreclosed. The debtor may
proceed against the thing pledged and any proceeds will
be applied to the obligation. The excess will not go to the
debtor but to the real owner, as we can see in the
suceeding articleswhat would happen if in the public
auction, the puchase price is more than or less than the
obligation.
We have the case of Estate of Litton vs Mendoza. What
happened here?
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A pledge is a real contract, perfected by the delivery of
the thing to the pledgee. As long as the obligation or the
debt has not yet been paid, obviously, the pledgee has
the right to retain possession of the subject matter. You
distinguish it from commodatum where there is no right to
retain. And also compare it to the right to retain available
in a contract of deposit.
In pledge, once the debt has been paid, it is the obligation
of the pledgee to return the thing to the pledgor. Take
note, notwithstanding the debtor contracts another debt.
What do we mean by that?
Illustration
The debtor borrows from the creditor, let us say, P50,000
and delivers a watch subject to a pledge. Now if the debtor
borrows P20,000, and delivers a pair of earrings. If he pay
the P50,000, the debtor already has the right to demand
the return of the watch. If he already paid the second
obligation, then obviously, he will have to return the pair
of earrings.
But if he still another legal obligationsay another
P50,000which was not secured by any contract
(pledge, mortgage, or others), can the pledgee retain the
thing and say Uy, may utang ka pa sa akin. So dito muna
sa akin itong watch or earrings? Remember, if a contract
of pledge is executed, it is in relation to an existing
principal obligation. Therefore, in that circumstance, the
pledgee has the obligation to return the thing,
notwithstanding that the debtor has some other obligation
which has remained unpaid. Unless of course, the debtorpledgor agrees that the same thing may secure the other
obligation.
Again, as a plegdee, you cannot retain the thing if the
debtor transacted another debt if the principal obligation
secured by the thing pledged has already been paid
unless, the debtor-pledgor consents thereto. So the right
of retention here is limited only to the fulfillment of the
principal obligation which the pledge was created.
Article 2099. The creditor shall take care of the thing
pledged with the diligence of a good father of a family; he
has a right to the reimbursement of the expenses made
for its preservation, and is liable for its loss or
deterioration, in conformity with the provisions of this
Code.
We have here the obligation of the creditor-pledgee. What
if a watch was delivered to secure the obligation? Then
the pledgee has the obligation to take care of it with the
diligence of a good father of a family. Remember here, the
creditor-pledgee is in possession of the thing, but he
cannot be considered as the owner thereof. In other
words, he cannot make use of it in any manner that he
wants to because he is not the owner of the thing [held as
security]. Remember, the creditor still has to return the
thing pledged to the debtor once the obligation is paid.
And of course, he has the obligation to take care of it. So
when the thing is returned to the debtor, it is in the same
condition when it was delivered to him (creditor) subject
to the ordinary wear and tear under the circumstance of
each case.
If the thing requires for its preservation, expenses shall be
advanced by the pledgee, but he is entitled to
reimbursement from the pledgor-debtor.
Article 2100. The pledgee cannot deposit the thing
pledged with a third person, unless there is a stipulation
authorizing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.
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Atty. Jazzie M. Sarona, CPA
Remember that the general rule here is that the pledgee
cannot deposit the thing pledged to a third person. The
Exception is that stipulated by the parties. Likewise, the
pledgee is responsible for the acts of his employees with
respect to the thing pledged because the acts of the
employees are deemed the acts of the pledgee-creditor
since they (employees) are under the supervision of the
latter (employee).
Article 2101. The pledgor has the same responsibility
as a bailor in commodatum in the case under Article
1951.
So Article 1951 states that:
Article 1951. The bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same,
shall be liable to the latter for the damages which he
may suffer by reason thereof.
Here, same obligation on the part of the pledgor. If he
(pledgor) knows that the flaws of the thing pledged, and
he delivers the thing to the pledgee, he has to advise the
creditor. Otherwise, if the pledgee suffers from the
damages from the thing loaned, then the pledgor is liable
to the pledgee.
Example
What should be the example here? For example, some
appliancerefrigerator and it was delivered by the
pledgor to the pledgee for an obligation. However, there
is an electrical defect on the refrigerator and the pledgor
was aware thereof, then he must inform the pledgee.
Otherwise, if the pledgee will figure into an accident, then
there will be damages on the part of the pledgor.
Article 2102. If the pledge earns or produces fruits,
income, dividends, or interests, the creditor shall
compensate what he receives with those which are
owing him; but if none are owing him, or insofar as the
amount may exceed that which is due, he shall apply it
to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and
earnings of the right pledged.
In case of a pledge of animals, their offspring shall
pertain to the pledgor or owner of animals pledged, but
shall be subject to the pledge, if there is no stipulation
to the contrary.
Again, even if there is delivery of the thing, ownership is
still not transferred. So the pledgor still owns the thing. He
still has the right to the fruits thereof. So the owner of the
thing owns the fruits thereof as well as the accessions and
accessories.
What happens to the fruits? Remember that the thing is
still with the pledgee. The pledgee may apply the interest
in payment of the loan or obligation wherein it would
reduce the obligation of the debtor. This is consistent with
the principle that in pledge, there is no transfer of
ownership. The pledgor still owns the thing and therefore,
their fruits and income has to benefit said pledgors. So it
would be applied to the payment of the debt or to the
interest or the principal debt.
If you have a pledge in the form of an animalthe subject
matter is an animal. Of course, upon delivery, the pledgor
still owns the animals. During the possession of the thing
on the part of the pledgee, what happens to the offspring?
It shall pertain to the pledgor. He will still remain the owner
of the animals and of their offsprings. But the offsprings
shall be subject to the pledge, if there is no stipulation to
the contrary. So the parties can stipulate that if the animal
delivered subject to the pledge will give birth to offspring
which are not included in the pledge, then they must
clearly stipulate that.
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Article 2103. Unless the thing pledged is expropriated,
the debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
Ownership of the thing continues with the pledgor. There
is no transfer of ownership in pledge unless the thing
pledged is expropriated. So if it is expropriated, obviously,
the debtor has not owned the thing anymore. Obviously,
the pledgee could not own the thing.
The right of the pledge. Remember it is a real right
enforceable against third persons. But if there is
expropriation, the expropriation prevails.
The creditor, however, may bring actions which pertain to
the owner of the thing pledged in order to recover it from
or defend it against a third person. Here, since there is a
real right, you can enforce as a pledgeenot as an
ownerto third persons. But remember the requirements
under Article 2093that it must be in a public instrument,
the description of the thing and the date pledgedso you
can enforce your right as a pledgee as against third
persons.
Article 2104. The creditor cannot use the thing pledged,
without the authority of the owner, and if he should do
so, or should misuse the thing in any other way, the
owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only
for that purpose.
Again, as a x x x, it transfers to the pledgee. Nevertheless,
the general rule is that the pledgee cannot use the thing
pledged in the absence of consent or permission from the
pledgor. This is the same rule with respect to deposit
the thing cannot be borrowed by a third person. However,
if the use of the thing is allowed in a certain way, then it is
limited to that. The pledgee must use the thing in the way
agreed upon. If he uses it in a different way, then what is
the remedy here on the part of the debtor? He can
demand it be judicially or extrajudicially deposited. Take
note, he cannot demand the return of the thing to him.
Why? What is mentioned here is to be deposited,
judicially or extrajudicially. Again, when the pledgeecreditor uses the thing or he misuses the thing in any other
way. So judicial or extrajudicial deposit to a third person.
When the preservation of the thing requires its use, again,
it will only be used by the creditor for that purpose. If from
the use of the property profits are derived, therefore the
obligation here of the pledgee is to account for such fruits
and apply the proceeds as payment to be made.
So there are instances when the owners may ask the
thing be deposited judicially or extrajudicially, under
Article 2104. When the creditor uses the thing without
authority or misuses the thing in any other way different
from what was agreed upon. And when we go to 2103, if
the thing is in danger of being lost or impaired because of
the negligence or acts of the pledgee.
Article 2105. The debtor cannot ask for the return of the
thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest, with
expenses in a proper case.
On the part of the debtor, he cannot ask that the thing be
returned to him unless the obligation has already been
paid. Remember, this contract of pledge, it acts as a
security or a collateral to the payment of the obligation.
The only instance where the pledgor-debtor may ask for
the return of the thing is when he already paid the debt.
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This includes the interest and the expenses incurred for
its preservation. In any other circumstance, you can ask
for the return of the thing but you have to replace it with
another thing as we will see in the succeeding articles.
The only reason for the return of the thing is the
extinguishment of the obligation or extinguishment of the
contract of pledge. This is because in the subsequent
articles that will be discussed, if the thing pledged is found
in the possession of the pledgor after the constitution of
the pledge, there is a presumption that the pledge is
already extinguished.
Article 2106. If through the negligence or wilful act of
the pledgee, the thing pledged is in danger of being lost
or impaired, the pledgor may require that it be
deposited with a third person.
This is another instance wherein the pledgor can require
that the thing be deposited. This is the third instance, as I
have mentioned before, in relation to Article 2104. Here,
the pledgee is negligent and by his willful act, the thing
pledged is in danger of being lost or impaired. This is in
relation to the obligation of the pledgee to preserve the
thing with the diligence of a good father of a family.
Article 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without
the fault of the pledgee, the pledgor may demand the
return of the thing, upon offering another thing in
pledge, provided the latter is of the same kind as the
former and not of inferior quality, and without prejudice
to the right of the pledgee under the provisions of the
following article.
The pledgee is bound to advise the pledgor, without
delay, of any danger to the thing pledged.
Here, the pledgor has reasonable grounds to believe to
fear the destruction or impairment of the thing pledged.
Do take note that here, it is without the fault on the part of
the pledgee.
You compare with Article 2106in danger of being lost or
impaired through the willful act of the pledgee. When it is
in 2106, there is deposit, while in Art 2107, the destruction
or impairment is without the fault of the pledgee. The
pledgor here may demand the return of the thing, but is
asked to substitute the thing pledged. Again, you connect
those to the concept that the demand for the return of the
thing for which the obligation has been made.
Under Article 2107, it is not required that the pledge has
already been extinguished, what is required here is the
fear for the destruction or impairment of the thing on the
part of the pledgee. But the obligation is to offer
something in substitution and not just to return the thing
and retain the possession thereof.
Substitution must be of the same kind and not of an
inferior quality. Thus, it is allowed that the same kind or
superior kind. When there is danger of the thing, the
obligation is to advise the pledgor. Again, this is in
connection to the obligation of the pledgee to observe due
diligence of a good father of a family.
So requisites for the application of Article 2107:
1. The pledgor has reasonable grounds to fear the
destruction or impairment of the thing pledged.
2. No fault on the part of the pledgee
3. The pledgor is offerning in replacement of the
thing or matter being pledged, which is of the
same kind and not of inferior quality.
4. The pledgee does not choose to exercise his right
to cause the thing pledged to be sold in a public
auction.
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Where does the 4th requisite come from?
Article 2108. If, without the fault of the pledgee, there is
danger of destruction, impairment, or diminution in
value of the thing pledged, he may cause the same to
be sold at a public sale. The proceeds of the auction
shall be a security for the principal obligation in the
same manner as the thing originally pledged.
The purpose of Arts 2108 and 2107 are one and the
same. In Art 2107, there is a reasonable ground of fear
for the destruction of the thing pledged, while in Art 2108,
there is danger of destruction, impairment or diminuition
of the thing pledged.
Under Art 2108, the pledgee has the right to cause the
sale or to sell the thing pledged in a public sale.
Art 2108 vs Art 2107
1. In Art 2108 there is danger of destruction,
impairment, or diminution in the value without the
fault of the pledgee. In Art 2107 there are
reasonable grounds to fear the destruction or
impairment of the thing pledged, without the fault
of the pledgee.
2. In Art 2108, the pledgee will have the right to sell
the thing pledged in a public auction; while in Art
2107, there is a right to substitute on the part of
the pledgor.
So, how do we reconcile these two articles? Notice that in
Art 2107, we have there the phrase without prejudice to
the right of the pledgee under the provisions of the
following article. The following Article is 2108. That is
why, in the requisites mentioned earlier for the application
of 2107, the fourth requisite is that the pledgee does not
choose to exercise his right to cause the thing pledged to
be sold at a public auctionthat is what is provided for
under Art 2108. That would mean that Article 2108
prevails over Article 2107. So if the thing is in danger of
destruction, impairment of the value of the thing being
pledged without the fault of the pledgee, the pledgee may
choose to sell the thing in a public auction. The proceeds
of the thing, however (and take note), will not be
considered as payment. But the proceeds from the said
sale will be considered as a security. This is because the
obligation here is not yet due.
The right to sell the property mentioned in Art 2108, in
case of destruction, impairment or diminuition of value, is
merely: MAY sell. So in other words, the pledgee may not
exercise this right if he wants to. If the pledgee does not
want to sell it in a public auction and all the other
requisites in Art 2107 are present, then that's the time that
the pledgor can demand the return of the thing provided
again, he offers a substitute. So please take note of these
two articles.
Article 2109. If the creditor is deceived on the
substance or quality of the thing pledged, he may either
claim another thing in its stead, or demand immediate
payment of the principal obligation.
So here the creditor is prejudiced, wherein he was
deceived on the substance or quality of the thing pledged.
Example
The debtor borrows money from the creditor. And as a
form of security, delivered a diamond ring. However, the
diamond on the ring is just crystal. So that is deception on
the part of the pledgor.
What are the rights here of the creditor-pledgee? He may
claim another thing in its stead or demand immediate
payment of the principal obligation wherein the obligation
becomes due and demandable. Again, the creditor here
is deceived on the substance or quality of the thing
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pledged. Remedy on the part of the creditor is that he may
demand immediate payment or claim another thing
substitute another thing that was delivered.
Relate this to Article 1198 under the Obligations and
Contracts wherein the debtor loses the right to use the
period:
Article 1198. The debtor shall lose every right to make
use of the period:
(1) When after the obligation has been contracted,
he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) When he does not furnish to the creditor the
guaranties or securities which he has
promised;
(3) When by his own acts he has impaired said
guaranties
or
securities
after
their
establishment, and when through a fortuitous
event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to
the period;
(5) When the debtor attempts to abscond.
For example in a diamond ring, and what was actually
delivered was not a diamond ring but a crystal. So,
remember here that the creditor cannot yet demand the
obligation because it is not yet due. But because he was
deceived, the debtor did not deliver the security as
promised, then the obligation becomes immediately due
and demandable. The debtor loses the right to make use
of the period.
So there are two remedies here in case of deceit:
1. To claim another thing in pledge; or
2. To demand payment of the principal obligation.
These two remedies are alternative. They are not
cumulative. The creditor cannot exercise both. He (the
creditor) cannot claim another thing and at the same time
declare the obligation to be due and demandable and
demand payment from the debtor.
Article 2110. If the thing pledged is returned by the
pledgee to the pledgor or owner, the pledge is
extinguished. Any stipulation to the contrary shall be
void.
If subsequent to the perfection of the pledge, the thing
is in the possession of the pledgor or owner, there is a
prima facie presumption that the same has been
returned by the pledgee. This same presumption exists
if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner
after the constitution of the pledge.
This is what I mentioned earlier regarding the
presumption on the return of the thing. If the thing is
returned by the pledgee to the debtor, then it is
considered that the pledge has already been
extinguished. Once the thing pledged is in the possession
of the pledgor, then there is now a presumption that the
pledge is already extinguished.
The presumption in Article 2110 is not a conclusive
presumption, as evidence to the contrary may be
presented. Like for example, why is the subject matter of
the contract of pledge with the pledgor? Because he stole
it. But the presumption is that, it was returned to the
pledgor; thus extinguishing the contract of pledge. If the
pledgee says otherwise, of course, you have the burden
of proof.
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Any stipulation to the contrary shall be void. What does
this mean? If the thing is in the possession of the pledgorowner, and they agreed that the possession shall be with
the pledgor-owner but nevertheless the pledge still
subsists. That stipulation to the contrary is not valid.
Remember that this is with relation to the nature of the
contract of pledge wherein it is a contract perfected by
delivery. When the pledgor and the pledgee stipulate that
the thing pledged which is in the possession of the
pledgor [and that there is still a contract of pledge] will not
be considered as valid.
However, take note of what happened in the case of
Yuliongsiu vs Philippine National Bank. What happened
in this case?
YULIONGSIU vs PNB
Q: Who is the pledgor here?
A: Yuliongsiu.
Q: And the pledgee was?
A: PNB.
Q: Who was in possession of the vessels here?
A: PNB (since there was a loan obtained by Yuliongsiu from
PNB).
Q: Was there a delivery from Yuliongsiu to PNB?
A: There was a constructive delivery here ma'am.
Q: So with constructive delivery, can you say that there is a
valid contract of pledge presented?
A: Considering the circumstances of this case and the nature
of the objects pledged, i.e., vessels used in maritime
business, such delivery is sufficient. The provision of Art.
2110 of the present Civil Code being new cannot apply to
the pledge contract here which was entered into on June 30,
1947. On the other hand, there is an authority supporting the
proposition that the pledgee can temporarily entrust the
physical possession of the chattels pledged to the pledgor
without invalidating the pledge. In such a case, the pledgor is
regarded as holding the pledged property merely as trustee
for the pledgee.
Q: What if the pledge was constituted at the time when the
New Civil Code already took effect? Can we say that the
presumption is applicable here?
A: The presumption will apply. Nevertheless, it can be
overturned by the evidences presented.
Q: So what would be the evidence here that would say na
even if the vessels were in the possession of Yuliongsiu, his
obligation was not yet extinguished?
A: The defendant bank as pledgee was therefore entitled to
the actual possession of the vessels. While it is true that
plaintiff continued operating the vessels after the pledge
contract was entered into, his possession was expressly
made "subject to the order of the pledgee."
Q: In other words, in what capacity was Yuliongsiu in
possession of the said vessels?
A: He was merely a trustee.
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chattels pledged to the pledgor without invalidating the
pledge. Here, the pledgor is regarded as holding the
pledged property merely as trustee for the pledgee.
Also in this case, it was emphasized that there could still
be a contract of pledge through symbolic delivery. We
have also discussed this before. Again here, for purposes
of showing the transfer of control to the pledgee, delivery
to him of the keys to the warehouse sufficed. In other
words, the type of delivery will depend upon the nature
and the peculiar circumstances of each case. Likewise we
have discussed before that the goods subject by the
pledge is covered by the warehouse receipt. The
evidence of the goods is the warehouse receipt itself,
although what was delivered was not the goods but the
warehouse receipt. Nevertheless, there is a perfected
contract of sale. So here, there is symbolic delivery.
Nevertheless, a contract of pledge is perfected.
So let's go to Article 2111:
Article 2111. A statement in writing by the pledgee that
he renounces or abandons the pledge is sufficient to
extinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of
the thing pledged is necessary, the pledgee becoming
a depositary.
Here, while a pledge is a real right, as to the pledgee it is
a personal right which he can waive. So here, this is an
example of an extinguishment of a pledge. Take note of
the requirement: there must be a statement in writing by
the pledgee that he renounces or abandons the pledge.
There must be a statement in writing and not verbal;
otherwise, it is not valid. The statement, however, need
not be under oath. What is required under 2111 is that it
must only be in writing.
Likewise, it is not required that the pledgor be notified of
the said statement or that the pledgor must accept the
waiver made by the pledgee. What is clear under 2111 is
the requirement that the statement must be in writing and
that the pledgee abandons or renounces his plegde. But
he remains in possession of the thing.
Now what happened in the possession? There is no more
pledge but he remains in possession? He will now be
considered as a depositary. And therefore, his liability will
be subject to the obligations of the depositary in the
Articles applicable to contracts of deposit.
Do take note that Article 2111 was made only in a contract
of pledge. Unless otherwise stipulated, it only the pledge
that is extinguished which would mean that the principal
obligation still subsists. So the principal debtor will not be
affected by the waiver of the pledgee unless the pledgee
condones or renounces said principal obligation. But of
course, if it was made to the principal obligation,
automatically, the contract of pledge is likewise
extinguished.
Article 2112. The creditor to whom the credit has not
been satisfied in due time, may proceed before a
Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification
to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be
held; and if at the second auction there is no sale either,
the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his
entire claim.
This is the procedure to be observed by the creditor if the
principal obligation has not been paid. So of course, the
requirements are to apply 2112 are:
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1. The obligation must be already due and
demandable.
2. The debtor has not yet paid his obligation, and
3. Thereafter, the creditor cannot sell the thing
pledged at a public auction.
4. There must be notice to the pledgor-owner
stating the amount due;
5. The sale shall be made with the intervention of a
notary public.
However, it is required that the pledgee must notify the
debtor. The claim must be made in a public auction. It is
not a private sale but a public auction in a sense that it
must be announced. So there is a bidding and it will be
awarded to the highest bidder.
Who intervene or can conduct the sale? It is clear under
2112 that you have a notary public. The sale here is
extrajudicial in nature. So the bid starts as to the amount
of the obligation. The highest bidder may be given the
thing pledged. The proceeds will be applied as payment
of the obligation. This time, the sale of the property will be
applied to the obligation. This is different from Art 2108
wherein it was sold but the proceeds will be taken as a
security. However, what happened under Art 2108, there
is danger of destruction or diminuition of value. Here, the
obligation is already due and demandable.
If in the first public auction the thing is not sold, then there
shall be a second public auction. Then if there is no
highest bid, then that is the time wherein the creditor can
apply the proceeds as payment of the obligation. Again,
do not confuse this with Article 2088 on pactum
commissorium. Because in pactum commissorium, there
is automatic appropriation, while in Article 2112, there is
no automatic appropriation because in the first place,
there has to be two public auctions. However, if there are
no highest bidders then that's the time the creditor can
appropriate it as payment of the obligation.
At first instance, you appropriate the proceedsthen
that's pactum commissorium. But as to the second sale, if
it cannot be sold, then that's the time the creditor-pledgee
may now appropriate the thing.
So what is required under Article 2112?
1. The obligation must be already due and
demandable.
2. The debtor has not yet paid his obligation, and
3. Thereafter, the creditor cannot sell the thing
pledged at a public auction.
4. There must be notice to the pledgor-owner
stating the amount due;
5. The sale shall be made with the intervention of a
notary public.
It is also clear under Article 2112 that there is no
requirement of posting of notice of sale and publication.
Notice to the pledgor and owner of the thing pledged is
sufficient.
Recap
Article 2112. The creditor to whom the credit has not
been satisfied in due time, may proceed before a
Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification
to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be
held; and if at the second auction there is no sale either,
the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his
entire claim.
Formalities required to apply 2112:
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a. The debt is due and unpaid
b. The sale must be at a public auction
c. There must be notice to the pledger and
owner, stating the amount due;
d. The sale must be made with the intervention
of a notary public.
LIM TAY VS CA
Q: What kind of controversy or issue does SEC have
jusrisdiction over?
A: Intracoporate controversies.
Q: In this case was there an intracorporate controversy?
A: No because Lim Tay is not the part of the corporation.
Q:Why can he not be considerd as the owner?
A: Because in this case, he is a mere pledgee, and the
contract of pledge does not vest ownership over the shares
of stocks.
Q: But he remains in possession of the shares of stocks?
A: Yes.
Q: Can we not say that through prescription he is considered
as the owner of the subject shares?
A: No because for acquisitive prescription to apply, one must
be in possession in the concept of an owner. Here, he is a
mere pledgee, his possession of the stocks is in the concept
of a holder. His possession cannot ripen into ownership.
Q: What are the steps that Lim Tay should have taken so he
can own the said shares?
A: He should have foreclosed the debt and there should be a
public sale and that he bids for it. It is only then would he be
able to acquire ownership over the shares.
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Illustration
Let us say the pledger bids for 100K that is the same bid
as the highest bidderas between them the pledger will
only be preferred if he offers the same terms. By terms, it
could be terms of payment, because this can vary. If the
offer of pledger is 100K but in installment but the third
person (highest bidder) offers 100k in cash or one-time
payment, then here the pledger would have no better
preference as to the highest bidder.
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then that is the time the pledgee can appropriate the thing
pledged to him and apply the proceeds to the obligation.
Article 2114. All bids at the public auction shall offer to
pay the purchase price at once. If any other bid is
accepted, the pledgee is deemed to have been
received the purchase price, as far as the pledgor or
owner is concerned.
If you will bid you must have the amount in cash ready
with you. So if you are required to pay at once. But the
pledgee has the discretion if he agrees to a bidder who
offers to pay in installment but that will not bind the debtor.
Because as to the debtor if a bid has been accepted
regardless of the nature of the payment thereof, as far as
the debtor is concerned, the debt has already been
extinguished.
If you are the pledgee you have to take note, if you accept
payment on installment basis, if subsequently the bidder
fails to pay the balance, you no longer can go after the
debtor.
Article 2115. The sale of the thing pledged shall
extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper
case. If the price of the sale is more than said amount,
the debtor shall not be entitled to the excess, unless it
is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the
contrary.
Take note of the effect of the foreclosure sale
extinguishes the principal obligation regardless of the bid
of the said public auction.
What happens if the price of the bid is higher than the
amount of the principal obligation? Article 2115 states that
it is the pledgee who is entitled to the excess and the
debtor shall not claim unless there is a stipulation to the
contrary.
What about if there is a deficiency? The principal
obligation is higher than the bid of the auction sale, it is
still the pledgee who will shoulder the deficiency. This is
just to be fair because if there is an excess it accrues to
the favor of the pledgee as such, if there is also a
deficiency, it is also the pledgee who shall bear the same.
General Rule: In case of excess benefit accrues to the
benefit of the pledgee.
Exception: If there is a stipulation to the contrary.
In case of deficiency, pledgee shall bear the same even if
there is a stipulation that says that the debtor shall be
liable in case of deficiency, that stipulation is INVALID.
Rationale: For the creditor to hold an honest public
auction sale. Otherwise, it would be very easy for the
creditor-pledgee to be in collusion with third persons to
bid a lower price just to get the deficiency from the
debtor.
MANILA SURETY vs VELAYO
Q: What do you mean by monetary value of the jewelry, what
does it pertain to, the value of the jewelry or the proceeds?
A: The value of the proceeds.
Maam: There is a difference of the value of the jewelry and
proceeds. Because what is considered in a foreclosure sale
is the proceeds.
Q: How much was the obligation to the surety company?
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
A: 2,800 pesos
Q: How much was the jewelry sold for?
A: 235 pesos.
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
Under Art 2117, the debtor and the pledgor are different
persons.
Article 2118. If a credit which has been pledged
becomes due before it is redeemed, the pledgee may
collect and receive the amount due. He shall apply the
same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor.
The subject matter of the [pledge] here is receivables,
credit so the debtor here is a creditor of another person.
What he pledges to the pledgee is the account receivable.
It is not obligatory for the pledgee to collect the amounts
receivable that are due on the credit pledged. He is
merely given the right to collect the amount.
In other words the pledgee may choose not to collect, the
law does not impose upon him to really collect and apply
the amount due. Now distinguish this with our discussion
on guarantors because here the creditor, where he will be
considered negligent in collecting, so what will happen?
He can no longer collect from the guarantor but in the
case of pledge the creditor can still collect.
In other words, if the right is available under Art 2118 and
the creditor-pledgee fails to collect on the credit which is
already due and then subsequently the third person who
has a debt to the creditor becomes insolvent, can the
debtor say that the pledgee is negligent because you did
not collect, thus I have no more liability to you? No, the
debtor cannot do that. Such is not a proper defense
because it is clear under Art 2118, it is not the obligation
of the creditor to collect and receive the amount of the
said credits. The creditor has the right but it is not an
obligation on his part.
Now, if the creditor chooses to apply it and collect, he shall
apply the proceeds collected and if there is any excess he
can give it to the debtor. This is different from 2115 where
the pledgee is entitled to the surplus.
Article 2119. If two or more things are pledged, the
pledgee may choose which he will cause to be sold,
unless there is a stipulation to the contrary. He may
demand the sale of only as many of the things as are
necessary for the payment of the debt.
As soon as the obligation becomes due and demandable,
and the debtor refuses to pay, the pledgee is given the
right to sell the thing pledged.
Example
What if the obligation is 100k and several things were
delivered to secure the obligation. For instance, a
cellphone, a watch, and a pair of earrings. The pledgee
has the discretion to choose which of those will he first
like to sell.
But again, as soon as the debt is already satisfied from
the sale of only one of the things pledged. The creditor is
obliged to return the other things pledged and has no
more right to sell the remaining things pledged.
Let us say from the example above, he chose to sell the
watch and it was sold but the proceeds was not sufficient
to satisfy the principal obligation? The pledgee can
choose another one of the remaining things pledged to be
sold until the proceeds thereof are sufficient to satisfy the
obligation.
Article 2120. If a third party secures an obligation by
pledging his own movable property under the
provisions of article 2085 he shall have the same rights
as a guarantor under articles 2066 to 2070, and articles
2077 to 2081. He is not prejudiced by any waiver of
defense by the principal obligor.
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015
CREDIT TRANSACTIONS
Atty. Jazzie M. Sarona, CPA
GUARANTY TO PLEDGE
2 Manresa Roman 2ND sem, AY 2014-2015