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Credit Transactions Upon delivery of the object of the contract of loan (in
this case the money received by the debtor when the
MEANING AND SCOPE OF CREDIT checks were encashed) the debtor acquires
TRANSACTIONS ownership of such money or loan proceeds and is
Credit transactions include all transactions involving bound to pay the creditor an equal amount. [Garcia
the purchase or loan of goods, services, or money in v. Thio, G.R. No. 154878]
the present with a promise to pay or deliver in the
future. COMMODATUM V. MUTUUM

TWO TYPES OF CREDIT Commodatum Mutuum

TRANSACTIONS/CONTRACTS OF SECURITY
Ordinarily involves Involves money or other
(1) Secured transactions or contracts of real security
something not consumable thing
– supported by a collateral or an encumbrance
consumable* (Art.1936)
of property
(2) Unsecured transactions or contracts of personal Ownership of the thing Ownership is transferred to
security – fulfillment by the debtor is supported loaned is retained by the borrower
only by a promise to pay or the personal lender (Art.1933)
commitment of another Essentially gratuitous May be gratuitous or
(Art.1933) onerous, i.e. with stipulated
Examples of credit transactions interest
(1) Bailment contracts Borrower must return Borrower need only pay an
(2) Contracts of guaranty and suretyship the same thing loaned equal amount of the same
(3) Mortgage (Art.1933) kind and quality (Art. 1953)
(4) Antichresis May involve real or Refers only to personal
(5) Concurrence and preference of credits personal property property
(Art.1937)
Loan for use or Loan for consumption
temporary possession
Loan (Art.1935)
Bailor may demand the Lender may not demand its
[A] contract by which one of the parties delivers to return of the thing return before the lapse of
another, either something not consumable so that loaned before the the term agreed upon
the latter may use the same for a certain time and expiration of the term in
return it, in which case the contract is called case of urgent need
commodatum; or money or other consumable thing, (Art.1946)
upon the condition that the same amount of the Bailor suffers the loss of Borrower suffers the loss
same kind and quality shall be paid, in which case the subject matter since even if caused exclusively by
the contract is called a simple loan or mutuum. he is the owner a fortuitous event and he is
[Art.1933] (Art.1942; Art.1174) not, therefore, discharged
from his duty to pay
CHARACTERISTICS OF A LOAN Purely personal in Not purely personal in
(1) Real contract character (Art 1939) character
(a) Delivery is essential for perfection of the
contract of loan. If consumable goods are loaned only for purposes of
(b) An accepted promise to loan, is nevertheless exhibition, or when the intention of the parties is to
binding on the parties, it being a consensual lend consumable goods and to have the very same
contract. goods returned at the end of the period agreed upon,
the loan is a commodatum and not a mutuum.
(2) Unilateral contract [Producers Bank v. CA, Feb. 19, 2003]
(a) creates obligations on only one party, i.e., the
borrower OBLIGATIONS OF BAILOR AND BAILEE
WHO MAY BE A BAILOR IN COMMODATUM?
In a contract of loan, the cause is, as to the borrower, (a) Anyone. The bailor in commodatum need not be
the acquisition of the thing, and as to the lender, the the owner of the thing loaned. [Art.1938]
right to demand its return or its equivalent. [Monte (b) But the bailee himself may not lend nor lease the
de Piedad v. Javier] thing loaned to him to a third person [Art 1939(2)]

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WHAT ARE THE TWO (2) KINDS OF COMMODATUM?
(a) Ordinary commodatum [Art. 1933]
(b) Precarium - bailor may demand the thing loaned
at will [Art. 1947]
OBLIGATIONS OF A BAILOR IN COMMODATUM
(1) To allow the bailee the use of the thing loaned for
the duration of period stipulated or until the
accomplishment of the purpose for which
commodatum was constituted.
Exceptions:
(a) Urgent need of the thing, during which time
he may demand its return or temporary use
(Art.1946)
(b) Precarium (Art.1947)
(i) If duration of the contract has not been
stipulated
(ii) If use or purpose of the thing has not been
stipulated
(iii) If use of thing is merely tolerated by the
bailor
(c) Bailee commits an act of ingratitude specified
in Art. 765 [Art. 1948]:
(1) Commission of offenses against the
person, the honor, or the property of the
bailor, or of his wife or children under his
parental authority
(2) Imputing to the bailor any criminal offense,
or any act involving moral turpitude, even
though he should prove it, unless the crime
or the act has been committed against the
bailee himself, his wife, or children under
his authority
(3) Undue refusal to give the bailor support
when the bailee is legally or morally bound
to do so
(NOTE: Article 765 is applicable, because like
donation, commodatum is essentially gratuitous.
[Art.1933, par.2]
(2) To refund extraordinary expenses for the
preservation of the thing loaned provided bailor is
notified before the expenses were incurred. [Art.
1949]
(a) Exception: Urgent need such that reply to the
notification cannot be awaited without
danger, hence no notice is necessary.
(3) To bear 50% of the extraordinary expenses
arising from actual use of bailee of the thing
loaned [Art. 1949]
(a) Exception: Contrary stipulation
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(4) To pay damages to bailee for known hidden flaws
in the thing loaned [Art. 1951]
(NOTE: Bailor has no right of abandonment; he
cannot exempt himself from payment of expenses or
damages to the bailee by abandoning the thing to
the latter. [Art. 1952])
OBLIGATIONS OF A BAILEE IN COMMODATUM
(1) Obligation to pay for the ordinary expenses for
the use and preservation of the thing loaned [Art.
1941]
(2) Obligation to take good care of the thing with the
diligence of a good father of a family [Art. 1163]
(3) Liability for loss, even if loss through fortuitous
event, under certain circumstances [Art. 1942]
(4) Liability for deterioration of thing loaned, except
under certain circumstances [Art. 1943]
(5) Obligation to return the thing upon expiration of
term or upon demand in case of urgent need [Art.
1946]
(6) Solidary obligation where there are 2 or more
bailees to whom a thing was loaned in the same
contract [Art.1945]
General Rule: Bailee is not liable for loss or damage
due to a fortuitous event [Art. 1174], since the bailor
retains ownership of the thing
Exception: Bailee is liable for loss even if due to a
fortuitous event when: [Art. 1942]
(1) He devotes the thing to any purpose different
from that for which it was loaned
(2) He keeps it longer than the period stipulated, or
after the accomplishment of the use for which the
commodatum has been constituted
(3) The thing loaned has been delivered with
appraisal of its value, unless there is stipulation
exempting the bailee from responsibility in case
of a fortuitous event
(4) He lends or leases the thing to a third person who
is a not a member of his household
(5) Being able to save either the thing borrowed or
his own thing, he chose to save the latter.
General Rule [1]: Bailee is liable for deterioration of
thing loaned.
Exception [1]: The deterioration of the thing is due
only to the use thereof and without his fault [Art.
1943]
General Rule [2]: Bailee has no right of retention of
the thing loaned, on the ground that the bailor owes
him something. [Art. 1944]
Exception [2]: Bailee has a right of retention for
damages for known hidden flaws mentioned in Art
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1951. [Art. 1944]
INTEREST AND SUSPENSION OF USURY LAW
Interest – is the compensation allowed by law or fixed
by the parties for the loan or forbearance of money,
goods or credits
KINDS OF INTEREST
(1) Simple interest – Paid for the principal at a certain
rate fixed or stipulated by the parties.
(2) Compound Interest – that which is imposed upon
interest due and unpaid.
(3) Legal Interest – that which the law directs to be
charged in the absence of any agreement as to
the rate between the parties.
(4) Lawful Interest – that which the laws allow or do
not prohibit
(5) Unlawful or Usurious Interest – paid or stipulated
to be paid beyond the maximum fixed by law.
However, by virtue of CB Circular 905, usury has
become “legally inexistent.”
WHEN IS COMPOUND INTEREST ALLOWED?
(1) When there is an express written stipulation to
that effect [Art. 1956]
(2) Upon judicial demand. HOWEVER, debtor is not
liable to pay compound interest even after
judicial demand when there is no stipulation for
payment of interest. [Art. 2212]
REQUISITES FOR INTEREST TO BE CHARGEABLE
(1) Must be expressly stipulated [Art 1956]
(2) Agreement must be in writing [Art.1956]
(3) Must be lawful
While it is true that under Article 1956 of the Civil
Code no interest shall be due unless it has been
expressly stipulated in writing, this applies only to
interest for the use of money. It does not
comprehend interest paid as damages. [Integrated
Realty Corporation v. Philippine National Bank, 174
SCRA 295]
EXCEPTIONS TO REQUISITE OF EXPRESS STIPULATION
(1) The debtor in delay is liable to pay legal interest
(6% or 12% per annum) as indemnity for
damages [Art. 2209]
(2) Interest accruing from unpaid interest – Interest
demanded shall earn interest from the time it is
judicially demanded [Art. 2212] or where there is
an express stipulation [Art. 1959]
RULES FOR AWARD OF INTEREST IN THE CONCEPT OF
ACTUAL AND COMPENSATORY DAMAGES (Eastern
Shipping Lines v. CA, 234 SCRA 78)
(1) When the obligation breached consists in the
payment of a sum of money, i.e., a loan or
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forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Art.1169.
(2) When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially
or extrajudicially (Art. 1169) but when such
certainty cannot be so reasonably established at
the time the demand is made, the interest shall
begin to run only from the date the judgment of
the court is made (at which time the
quantification of damages may be deemed to
have been reasonably ascertained). The actual
base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
(3) When the judgment of the court awarding a sum
of money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Forbearance is defined, within the context of usury
law, as a contractual obligation of lender or creditor
to refrain, during given period of time, from requiring
borrower or debtor to repay loan or debt then due
and payable (Bataan Seedling v. Republic, 383 SCRA
590)
THE USURY LAW (Act No.2566) is an act fixing rates
of interests upon loans and declaring the effect of
receiving or taking usurious rates and for other
purposes. (Arevalo v. Dimayuga, 49 Phil 894)
CB Circular No. 905 – abolished interest rate ceilings.
With the promulgation of such circular, usury has
become “legally inexistent” as the parties can now
legally agree on any interest that may be charged on
the loan.
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ELEMENTS OF USURY
(1) A loan or forbearance of money
(2) An understanding between parties that the loan
shall and may be returned
(3) An unlawful intent to take more than the legal
rate for the use of money or its equivalent
(4) The taking or agreeing to take for the use of the
loan of something in excess of what is allowed by
law.
A usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest.
(Carpo v. Chua, G.R. Nos. 150773 and 153599)
Deposit
Deposit is constituted from the moment a person
receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no
deposit but some other contract. [Art.1962]
CHARACTERISTICS
(1) Real Contract because it is perfected by the
delivery of the subject matter.
(2) Principal purpose of the contract of deposit is the
safekeeping of the thing delivered.
(3) If gratuitous, it is unilateral because only the
depository has an obligation. If onerous, it is
bilateral.
The principal purpose is safekeeping of the thing
delivered, so that if it is only an accessory or
secondary obligation, deposit is not constituted but
some other contract.
CONTRACT OF DEPOSIT IS GENERALLY
GRATUITOUS [Art. 1965], subject to the following
exceptions:
(1) There is a contrary stipulation
(2) Depository is in the business of storing goods
(3) Property saved from destruction during calamity
without owner’s knowledge; just compensation
should be given to the depository. [Art. 1996(2)
and Art. 1997, par.2]
ONLY MOVABLE THINGS MAY BE THE OBJECT
OF A DEPOSIT [Art. 1966] if the deposit is either
voluntary [Art. 1968] or necessary [Art. 1996].
HOWEVER, a judicial deposit may cover movable as
well an immovable property, its purpose being to
protect the rights of parties to the suit [Art. 2006].
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OBLIGATIONS OF DEPOSITOR
(1) Depositor is obliged to reimburse the depositary
for expenses incurred for preservation – if deposit
is gratuitous. [Art. 1992]
(2) Depositor is obliged to pay losses incurred due to
character of thing deposited. [Art. 1993]
General Rule: The depositor shall reimburse the
depositary for any loss arising from the character of
the thing deposited [Art. 1993]
Exceptions
(1) Depositor was not aware of the danger;
(2) Depositor was not expected to know the
dangerous character of the thing;
(3) Depositor notified the depositary of such
dangerous character;
(4) Depositary was aware of the danger without
advice from the depositor.
EXTINGUISHMENT OF DEPOSIT
A DEPOSIT IS EXTINGUISHED:
(1) Upon the loss or deterioration of the thing
deposited;
(2) Upon the death of either the depositor or the
depositary, ONLY in gratuitous deposits;
(3) By other modes provided in the Civil Code, e.g.
novation, merger, etc. [See Art. 1231]
EFFECT OF DEATH OF DEPOSITOR OR
DEPOSITARY [Art. 1995]
(1) Where deposit gratuitous – death of either of the
depositor or depositary extinguishes the deposit
(personal in nature). By the word “extinguished,”
the law really means that the depositary is not
obliged to continue with the contract of deposit.
(2) Where deposit for compensation – not
extinguished by the death of either party.
KINDS OF DEPOSIT
(1) Judicial
(2) Extrajudicial
(a) Voluntary
(b) Necessary
VOLUNTARY DEPOSIT
Voluntary Deposit - delivery is made by the will of the
depositor or by two or more persons each of whom
believes himself entitled to the thing deposited [Art.
1968]
NECESSARY DEPOSIT
Necessary Deposit - made in compliance with a legal
obligation, or on the occasion of any calamity, or by
travelers in hotels and inns [Arts. 1996-2004] or by
travelers with common carriers [Arts. 1734-1735]
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KINDS OF NECESSARY DEPOSITS
(1) It is made in compliance with a legal obligation,
in which case it is governed by the law
establishing it, and in case of deficiency, the rules
on voluntary deposit e.g. Arts. 538, 586 and 2104
(2) It takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or
other similar events. There must be a causal
relation between the calamity and the
constitution of the deposit. In this case the
deposit is governed by the rules on voluntary
deposit and Art. 2168
(3) Made by passengers with common carriers. [Art.
1754]
(4) Made by travelers in hotels or inns. [Art. 1998]
DEPOSITS BY TRAVELERS IN HOTELS AND INNS
Before keepers of hotels or inns may be held
responsible as depositaries with regard to the effects
of their guests, the following must concur:
(1) They have been previously informed about the
effects brought by the guests; and
(2) The latter have taken the precautions prescribed
regarding their safekeeping.
EXTENT OF LIABILITY UNDER ART.1998
(1) Those in hotel rooms which come under the
term “baggage” or articles such as clothing as
are ordinarily used by travelers
(2) Include those lost or damaged in hotel annexes
such as vehicles in the hotel’s garage.
WHEN HOTEL-KEEPER LIABLE
Regardless of the amount of care exercised:
(1) The loss or injury to personal property is caused
by his servants or employees as well as by
strangers [Art. 2000].
(2) The loss is caused by the act of a thief or robber
done without the use of arms and irresistible
force. [Art. 2001]
WHEN HOTEL-KEEPER NOT LIABLE
(1) The loss or injury is caused by force majeure, like
flood, fire, [Art. 2000] theft or robbery by a
stranger - not the hotel-keeper’s servant or
employee with the use of firearms or irresistible
force [Art. 2001]
Exception: Hotel-keeper is guilty of fault or
negligence in failing to provide against the loss or
injury from his cause. [Arts. 1170 and 1174]
(2) The loss is due to the acts of the guests, his
family, servants, visitors [Art.2002]
(3) The loss arises from the character of the things
brought into the hotel (Ibid.)
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(Note: The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he
is not liable for the articles brought by the guest.
Such kind of stipulation shall be VOID. [Art. 2003])
Triple-V Food Services v. Filipino Merchants Insurance
Company: Regarding the legal deposit of a vehicle
that was stolen while parked with Saisaki restaurant,
“the depositary may not exempt itself from
responsibility for loss or damage of the thing
deposited with it, by exclusionary stipulation. Such
stipulations are void for being contrary to law.”
HOTEL-KEEPER’S RIGHT TO RETENTION
(1) The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security
for credits on account of
(a) lodging, and
(b) supplies usually furnished to hotel guests (Art.
2004)
(2) NOTE: The right of retention recognized in this
article is in the nature of a pledge created by
operation of law.
JUDICIAL DEPOSIT
Judicial Deposit – takes place when an attachment or
seizure of property in litigation is ordered [Arts.
2005-2009]
NATURE AND PURPOSE
It is auxiliary to a case pending in court. The purpose
is to maintain the status quo during pendency of the
litigation or to insure the right of the parties to the
property in case of a favorable judgment.
DEPOSITARY OF SEQUESTERED PROPERTY
A person is appointed by the court [Art. 2007] with
the obligations:
(1) To take care of the property with the diligence of
a good father of the family. [Art. 2008]
(2) To continue in his responsibility until the
controversy which give rise thereto is ended
unless the court so orders. [Art. 2007]
APPLICABLE LAW
(1) The law on judicial deposit is remedial or
procedural in nature.
(2) Rules of Court shall govern matters not provided
for in the Civil Code. [Art. 2009]
Guaranty and Suretyship
Guaranty is a contract whereby a person, called the
guarantor, binds himself to the creditor to fulfill the
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obligation of the principal debtor in case the latter

should fail to do so. [Art. 2047]
While a surety undertakes to pay if the principal does
not pay, the guarantor only binds himself to pay if
the principal cannot pay [See benefit of excussion, Art.
2058].
Suretyship is a relation which exists where one
person (principal) has undertaken an obligation and
another person (surety) is also under a direct and
primary obligation or other duty to a third person
(oblige), who is entitled to but one performance, and
as between the two who are bound, the one rather
than the other should perform.
If a person binds himself solidarily with the principal
debtor, the contract is called suretyship and the
guarantor is called a surety.
(a) Presence of cause which supports principal
obligation: Cause of the contract is the same
cause which supports the obligation as to the
principal debtor. The consideration which
supports the obligation as to the principal
debtor is a sufficient consideration to support
the obligation of a guarantor or surety.
(b) Absence of direct consideration or benefit to
guarantor: Guaranty or surety agreement is
regarded valid despite the absence of any
direct consideration received by the guarantor
or surety, such consideration need not pass
directly to the guarantor or surety; a
consideration moving to the principal will
suffice.
(3) A married woman who is a guarantor binds only
her separate property, generally [2049]

GUARANTY DISTINGUISHED FROM SURETYSHIP Exceptions

(a) With her husband’s consent, bind the
Guaranty Suretyship community or conjugal partnership property
Guarantor’s liability Surety assumes liability (b) Without husband’s consent, in cases provided
depends upon an as a regular party to the by law, such as when the guaranty has
independent agreement undertaking redounded to the benefit of the family.
to pay the obligation
Guarantor’s engagement Surety is an original (4) A guaranty need not be undertaken with the
is a collateral promissory knowledge of the debtor [2050]
undertaking (a) Guaranty is unilateral – exists for the benefit
of the creditor and not for the benefit of the
Guarantor is subsidiarily Surety is primarily liable
principal debtor
liable i.e. only obliged to i.e. bound to pay if the
(b) Creditor has every right to take all possible
pay if the principal principal does not pay
measures to secure payment of his credit –
cannot pay
guaranty can be constituted even against the
Guarantor not bound to Surety ordinarily held to
will of the principal debtor
take notice of default of know every default of his
his principal principal
However, as regards payment made by a third
Guarantor often Surety not discharged person:
discharged by the mere either by the mere (a) Payment without the knowledge or against
indulgence of the indulgence of the the will of the debtor:
creditor and is usually creditor or by want of (i) Guarantor can recover only insofar as the
not liable unless notified notice of default of the payment has been beneficial to the debtor
of the principal’s default principal [Art. 1236]
(ii) Guarantor cannot compel the creditor to
NATURE AND EXTENT OF GUARANTY subrogate him in his rights [Art. 1237]
NATURE AND EXTENT OF GUARANTY (b) Payment with knowledge or consent of the
(1) A guaranty is generally gratuitous [2048] debtor: Subrogated to all the rights which the
(a) General Rule: Guaranty is gratuitous creditor had against the debtor
(b) Exception: When there is a stipulation to the
contrary (5) The guaranty must be founded on a valid principal
obligation [2052(1)]
(2) On the cause of a guaranty contract
A guarantor or surety is bound by the same Guaranty is an accessory contract: It is an
consideration that makes the contract effective indispensable condition for its existence that
between the principal parties thereto. [Severino v. there must be a principal obligation. Hence, if the
Severino] principal obligation is void, it is also void.

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(6) A guaranty may secure the performance of a
voidable, unenforceable, and natural obligation
[2052(2)]
A guaranty may secure the performance of a:
(a) Voidable contract – such contract is binding,
unless it is annulled by a proper court action
(b) Unenforceable contract – because such
contract is not void
(c) Natural obligation – the creditor may proceed
against the guarantor although he has no
right of action against the principal debtor for
the reason that the latter’s obligation is not
civilly enforceable. When the debtor himself
offers a guaranty for his natural obligation, he
impliedly recognizes his liability, thereby
transforming the obligation from a natural
into a civil one.
(7) A guaranty may secure a future debt [2053]
Continuing Guaranty or Suretyship:
(a) Under the Civil Code, a guaranty may be given
to secure even future debts, the amount of
which may not be known at the time the
guaranty is executed. This is the basis for
contracts denominated as continuing
guaranty or suretyship. [Diño v. CA]
(b) Future debts, even if the amount is not yet
known, may be guaranteed but there can be
no claim against the guarantor until the
amount of the debt is ascertained or fixed and
demandable
Rationale: A contract of guaranty is subsidiary.
(a) To secure the payment of a loan at maturity –
surety binds himself to guarantee the
punctual payment of a loan at maturity and
all other obligations of indebtedness which
may become due or owing to the principal by
the borrower.
(b) To secure payment of any debt to be
subsequently incurred – a guaranty shall be
construed as continuing when by the terms
thereof it is evident that the object is to give a
standing credit to the principal debtor to be
used from time to time either indefinitely or
until a certain period, especially if the right to
recall the guaranty is expressly reserved.
(c) To secure existing unliquidated debts – refers
to debts existing at the time of the
constitution of the guaranty but the amount
thereof is unknown and not to debts not yet
incurred and existing at that time.
(d) The surety agreement itself is valid and
binding even before the principal obligation
intended to be secured thereby is born, just
like obligations which are subject to a
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condition precedent are valid and binding
before the occurrence of the condition
precedent.
A continuing guaranty is one which is not limited to a
single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended
to provide security with respect to future transactions
within certain limits, and contemplates a succession
of liabilities, for which, as they accrue, the guarantor
becomes liable.
A continuing guaranty is one which covers all
transactions, including those arising in the future,
which are within the description or contemplation of
the contract of guaranty, until the expiration or
termination thereof. A guaranty shall be construed
as continuing when by the terms thereof it is evident
that the object is to give a standing credit to the
principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved.
Where the contract of guaranty states that the same
is to secure advances to be made "from time to time"
the guaranty will be construed to be a continuing
one.”
(8) A guaranty may secure the performance of a
conditional obligation [2053]
(a) Principal obligation subject to a suspensive
condition – the guarantor is liable only after
the fulfillment of the condition.
(b) Principal obligation subject to a resolutory
condition – the happening of the condition
extinguishes both the principal obligation and
the guaranty
(9) A guarantor’s liability cannot exceed the principal
obligation [2054]
General Rule:
Guaranty is a subsidiary and accessory contract –
guarantor cannot bind himself for more than the
principal debtor and even if he does, his liability
shall be reduced to the limits of that of the
debtor. But the guarantor may bind himself for
less than that of the principal.
Exceptions
(a) Interest, judicial costs, and attorney’s fees as
part of damages may be recovered – creditors
suing on a suretyship bond may recover from
the surety as part of their damages, interest at
the legal rate, judicial costs, and attorney’s
UP COLLEGE OF LAW CREDIT TRANSACTIONS
fees when appropriate, even without
stipulation and even if the surety would
thereby become liable to pay more than the
total amount stipulated in the bond.
Interest runs from:
(1) Filing of the complaint (upon judicial
demand); or
(2) The time demand was made upon the surety
until the principal obligation is fully paid
(upon extra-judicial demand)
Rationale: Surety is made to pay, not by
reason of the contract, but by reason of his
failure to pay when demanded and for having
compelled the creditor to resort to the courts
to obtain payment.
(b) Penalty may be provided – a surety may be
held liable for the penalty provided for in a
bond for violation of the condition therein.
Principal’s liability may exceed guarantor’s
obligations
The amount specified in a surety bond as the
surety’s obligation does not limit the extent of the
damages that may be recovered from the
principal, the latter’s liability being governed by
the obligations he assumed under his contract
(10) The existence of a guaranty is not presumed
[2055]
Guaranty requires the expression of consent on
the part of the guarantor to be bound. It cannot
be presumed because of the existence of a
contract or principal obligation.
Rationale:
(a) There be assurance that the guarantor had
the true intention to bind himself;
(b) To make certain that on making it, the
guarantor proceeded with consciousness of
what he was doing.
(11) Contract of guaranty is covered by the Statute of
Frauds [See Art. 1403(2)(b)]
Guaranty must not only be expressed but must so
be reduced into writing. Hence, it shall be
unenforceable by action, unless the same or
some note or memorandum thereof be in writing,
and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement
cannot be received without the writing, or a
secondary evidence of its contents. However, it
need not appear in a public document
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NATURE AND EXTENT OF SURETYSHIP
(1) Liability is contractual and accessory but direct
(2) Liability is limited by the terms of the contract
(3) Liability arises only if principal debtor is held liable
(a) In the absence of collusion, the surety is
bound by a judgment against the principal
even though he was not a party to the
proceedings;
(b) The creditor may sue, separately or together,
the principal debtor and the surety;
(c) A demand or notice of default is not required
to fix the surety’s liability
Exception: Where required by the provisions of
the contract of suretyship
(d) A surety bond is void where there is no
principal debtor because such an undertaking
presupposes that the obligation is to be
enforceable against someone else besides the
surety, and the latter can always claim that it
was never his intention to be the sole person
obligated thereby.
Note: Surety is not entitled to exhaustion
(1) The undertaking is to the creditor, not the debtor
The surety makes no covenant or agreement with
the principal that it will fulfill the obligation
guaranteed for the benefit of the principal. The
surety’s undertaking is that the principal shall
fulfill his obligation and that the surety shall be
relieved of liability when the obligation secured is
performed.
Exception: Unless otherwise expressly provided.
(2) Prior demand by the creditor upon principal not
required. Surety is not exonerated by neglect of
creditor to sue principal.
Strictissimi juris rule applicable only to
accommodation surety
Reason: An accommodation surety acts without
motive of pecuniary gain and hence, should be
protected against unjust pecuniary impoverishment
by imposing on the principal, duties akin to those of
a fiduciary. This rule will apply only after it has been
definitely ascertained that the contract is one of
suretyship or guaranty.
Strictissimi juris rule NOT applicable to compensated
sureties
Reasons:
(1) Compensated corporate sureties are business
associations organized for the purpose of
assuming classified risks in large numbers, for
profit and on an impersonal basis.
(2) They are secured from all possible loss by
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adequate counter-bonds or indemnity
agreements.
Such corporations are in fact insurers and in
determining their rights and liabilities, the rules
peculiar to suretyship do not apply.
The stipulation in the indemnity agreement allowing
the surety to recover even before it paid the creditor
is enforceable. In accordance therewith, the surety
may demand from the indemnitors even before
paying the creditors. [Mercantile Insurance Company
v. Ysmael, 169 SCRA 66]
EFFECT OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND
THE CREDITOR
(1) The guarantor has the right to benefit from
excussion/ exhaustion [2058]
The guarantor cannot be compelled to pay the
creditor unless the latter has:
(a) Exhausted all of the property of the debtor;
and
(b) Resorted to all the legal remedies against the
debtor.
Exceptions to the benefit of excussion (2059)
(a) As provided in Art. 2059:
(i) If the guarantor has expressly
renounced it.
(ii) If he has bound himself solidarily
with the debtor. Here, the liability
assumed is that of a surety. The
guarantor becomes primarily liable
as a solidary co- debtor. In effect,
he renounces in the contract itself
the benefit of exhaustion.
(iii) In case of insolvency of the debtor
– guarantor guarantees the
solvency of the debtor. If the
debtor becomes insolvent, the
liability of the guarantor arises as
the debtor cannot fulfill his
obligation
(iv) When the debtor has absconded,
or cannot be sued within the
Philippines – the creditor is not
required to go after a debtor who is
hiding or cannot be sued in our
courts, and to incur the delays and
expenses incident thereto.
Exception: When the debtor has
left a manager or representative
(v) If it may be presumed that an
execution on the property of the
principal debtor would not result in
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the satisfaction of the obligation –
If such judicial action including
execution would not satisfy the
obligation, the guarantor can no
longer require the creditor to resort
to all such remedies against the
debtor as the same would be but a
useless formality. It is not
necessary that the debtor be
judicially declared insolvent.
Southern Motors, Inc. v. Barbosa: “The right of
guarantors…to demand exhaustion of the property of
the principal debtor, exists only when a pledge or a
mortgage has not been given as special security for
the payment of the principal obligation.”
Luzon Steel Corp. v. Sia: “The surety in the present
case bound itself "jointly and severally" (in solidum)
with the defendant; and excussion (previous
exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself
solidarily with the debtor".
(b) In order that the guarantor may make use of
the benefit of excussion, he must:
(i) Set it up against the creditor upon
the latter’s demand for payment
from him;
(ii) Point out to the creditor:
(a) Available property of the debtor – the
guarantor should facilitate the
realization of the excussion since he is
the most interested in its benefit.
(b) Within the Philippine territory –
excussion of property located abroad
would be a lengthy and extremely
difficult proceeding and would not
conform with the purpose of the
guaranty to provide the creditor with the
means of obtaining the fulfillment of the
obligation.
(c) Sufficient to cover the amount of the
debt
(c) If he is a judicial bondsman and sub- surety
(2084)
(d) Where a pledge or mortgage has been given
by him as a special security
(e) If he fails to interpose it as a defense before
judgment is rendered against him.
(2) The creditor has the right to secure a judgment
against the guarantor prior to the excussion
General Rule: An ordinary personal guarantor
(NOT a pledgor or mortgagor), may demand
exhaustion of all the property of the debtor
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before he can be compelled to pay.
Exception: The creditor may, prior thereto, secure
a judgment against the guarantor, who shall be
entitled, however, to a deferment of the execution
of said judgment against him, until after the
properties of the principal debtor shall have been
exhausted, to satisfy the latter’s obligation.
(3) The creditor has the duty to make prior demand for
payment from the guarantor 2060)
(a) The demand is to be made only after
judgment on the debt
(b) Joining the guarantor in the suit against the
principal debtor is not the demand intended
by law. Actual demand has to be made.
(4) The guarantor has the duty to set up the benefit of
excussion [2060]
As soon as he is required to pay, guarantor must
also point out to the creditor available property
(not in litigation or encumbered) of the debtor
within the Philippines.
(5) The creditor has the duty to resort to all legal
remedies [2058, 2061]
After the guarantor has fulfilled the conditions
required for making use of the benefit of
excussion, it becomes the duty of the creditor to:
(a) Exhaust all the property of the debtor pointed
out by the guarantor;
(b) If he fails to do so, he shall suffer the loss for
the insolvency of the debtor, but only to the
extent of the value of the said property
(6) The creditor has the duty to notify the guarantor in
the action against the debtor [2062]
Notice to the guarantor is mandatory in the
action against the principal debtor. The
guarantor, however, is not duty bound to appear
in the case, and his non- appearance shall not
constitute default, w/ its consequential effects.
Rationale: To give the guarantor the opportunity
to allege and substantiate whatever defenses he
may have against the principal obligation, and
chances to set up such defenses as are afforded
him by law
(7) A compromise shall not prejudice the person not
party to it [2063]
(a) A compromise between creditor and principal
debtor benefits the guarantor but does not
prejudice him.
(b) A compromise between guarantor and the
creditor benefits but does not prejudice the
principal debtor.
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(8) Co-guarantors are entitled to the benefit of division
[2065]
The benefit of division applies only when there
are several guarantors and one debtor for a
single debt. Except when solidarity has been
stipulated, a co-guarantor is liable only to the
extent of his share in the obligation as divided
among all the co-guarantors.
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR
(1) The guarantor who pays has the right to be
subrogated to the rights of the creditor [2067]
A guarantor who pays the debt is entitled to every
remedy which the creditor has against the
principal debtor, to enforce every security and all
means of payments; to stand in the place of the
creditor not only through the medium of the
contract, but even by means of the securities
entered into w/out the knowledge of the surety;
having the right to have those securities
transferred to him though there was no
stipulation for it, and to avail himself of all
securities against the debtor
The need to enforce the provisions on indemnity
in Article 2066 forms the basis for the
subrogation clause of Article 2067. The
assumption, however, is that the guarantor who is
subrogated to the rights of the creditor, has the
right to be reimbursed for his answering for the
obligation of the debtor. Absent this right of
reimbursement, subrogation will not be proper.
(2) The guarantor has the duty to notify the debtor
before paying the creditor [2068].
Should payment be made without notification,
and supposing the debtor has already made a
prior payment, the debtor would be justified in
setting up the defense that the obligation has
already been extinguished by the time the
guarantor made the payment. The guarantor will
then lose the right of reimbursement and
consequently the right of subrogation.
(3) The guarantor cannot demand reimbursement for
payment made by him before the obligation has
become due [2069].
General Rule: Since a contract of guaranty is only
subsidiary, the guarantor cannot be liable for the
obligation before the period on which the
debtor’s Liability will accrue. Any payment made
by the guarantor before the obligation is due
cannot be indemnified by the debtor.
UP COLLEGE OF LAW CREDIT TRANSACTIONS
Exception: Prior consent or subsequent
ratification by the debtor
(4) The guarantor may proceed against the debtor
even before payment has been made [2071]
General Rule: Guarantor has no cause of action
against the debtor until after the former has paid
the obligation.
Exceptions (Art. 2071)
(a) When he is sued for the payment;
(b) In case of insolvency of the principal debtor;
(c) When the debtor has bound himself to relieve
him from the guaranty within a specified
period, and this period has expired;
(d) When the debt has become demandable, by
reason of the expiration of the period for
payment;
(e) After the lapse of 10 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 10 years;
(f) If there are reasonable grounds to fear that
the principal debtor intends to abscond;
(g) If the principal debtor is in imminent danger of
becoming insolvent.
Rationale: To enable the guarantor to take
measures for the protection of his interest in view
of the probability that he would be called upon to
pay the debt. As such, he may, in the alternative,
obtain release from the guaranty; or demand
security that shall protect him from any
proceeding by the creditor, and against the
insolvency of the debtor.
EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS
When there are two or more guarantors, one debtor
and one debt:
(a) The one who pays may demand from each of the
others the share proportionally owing to him
(b) If any of the guarantors is insolvent, his share
shall be borne by the others, including the payer,
in the same proportion [Art. 2073]
For purposes of proportionate reimbursement, the
other guarantors may interpose such defenses
against the paying guarantor as are available to the
debtor against the creditor, except those that are
personal to the debtor [Art. 2074]
Requisites for the applicability of Art. 2073:
(1) Payment has been made by one guarantor;
(2) The payment was made because
(a) Of the insolvency of the debtor, or
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BAR OPERATIONS COMMISSION
(b) By judicial demand
(3) The paying guarantor seeks to be indemnified
only to the extent of his proportionate share in
the total obligation.
EXTINGUISHMENT OF GUARANTY
(1) Once the obligation of the debtor is extinguished
in any manner provided in the Civil Code, the
obligation of the guarantor is also extinguished
[2076]. However, there may be instances when,
after the extinguishment of the guarantor’s
obligation (as in the case of a release from the
guaranty), the obligation of the debtor still
subsists.
(2) Although the guarantor generally has to make
payment in money, any other thing of value, if
accepted by the creditor, is valid payment and
therefore releases the guarantor [dacion en pago]
[2077].
(3) If one guarantor is released without the consent
of the others, the release would benefit the co-
guarantors to the extent of the proportionate
share of the guarantor released [2078].
(4) A guarantor is released if the creditor, without the
guarantor’s consent, extends the time within
which the debtor may perform his obligation
[2079]. This is to protect the interest of the
guarantor should the debtor be insolvent during
the period of extension and deprive the guarantor
of his right to reimbursement.
(5) The guarantors are released if by some act of the
creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. [2080]
In order to constitute an extension discharging the
surety, it should appear that the extension was for (1)
a definite period, (2) pursuant to an enforceable
agreement between the principal and the creditor,
and (3) that it was made without the consent of the
surety or with a reservation of rights with respect to
him. (Filipinas Textile Mills v. CA, November 12, 2003)
LEGAL AND JUDICIAL BONDS
Bond – an undertaking that is sufficiently secured,
and not cash or currency.
Bondsman – a surety offered in virtue of a provision
of law or a judicial order.
QUALIFICATIONS OF PERSONAL BONDSMAN [2082 IN
RELATION TO ART. 2056]
(1) He possesses integrity;
(2) He has capacity to bind himself;
(3) He has sufficient property to answer for the
obligation which he guarantees.
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PLEDGE OR MORTGAGE IN LIEU OF BOND [2083]
(a) Guaranty or suretyship is a personal security.
(b) Pledge or mortgage is a property or real security.
If the person required to give a legal or judicial
bond should not be able to do so, a pledge or
mortgage sufficient to cover the obligation shall
be admitted in lieu thereof.
(6) Creditor has the right to retain the thing in his
possession or in that of a third person to whom it
has been delivered, until the debt is paid [2098].
(7) Special Laws apply to pawnshops and
establishments engaged in making loans secured
by pledges. Provisions of the Civil Code shall
apply subsidiarily to them.

BONDSMAN NOT ENTITLED TO EXCUSSION [2084] In case of doubt as to whether a transaction is a

A judicial bondsman and the sub-surety are not
entitled to the benefit of excussion.
(a) Reason: They are not mere guarantors, but
sureties whose liability is primary and solidary.
(b) Effect of negligence of creditor: Mere negligence
on the part of the creditor in collecting from the
debtor will not relieve the surety from liability.
pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser
transmission of rights and interests. (Manila Banking
Corp. v. Teodoro, 169 SCRA 95)
KINDS
(1) Voluntary or conventional – Created by agreement
of parties.
(2) Legal – Created by operation of law.

Pledge ESSENTIAL REQUIREMENTS

ESSENTIAL REQUISITES COMMON TO PLEDGE AND
MORTGAGE [ART. 2085]
DEFINITION
(1) Constituted to secure the fulfillment of a principal
Pledge is a contract by virtue of which the debtor
obligation.
delivers to the creditor or to a third person a movable
(2) Pledgor or mortgagor must be the absolute
or document evidencing incorporeal rights for the
owner of the thing pledged or mortgaged.
purpose of securing the fulfillment of a principal
(3) The persons constituting the pledge or mortgage
obligation with the understanding that when the
have the free disposal of their property, and in the
obligation is fulfilled, the thing delivered shall be
absence thereof, that they be legally authorized
returned with all its fruits and accessions. [Art.2085
for the purpose.
in relation to 2093]
(4) Cannot exist without a valid obligation.
(5) Debtor retains the ownership of the thing given
PROVISIONS APPLICABLE ONLY TO PLEDGE
as a security.
(1) Transfer of possession to the creditor or to third
(6) When the principal obligation becomes due, the
person by common agreement is essential
thing pledged or mortgaged may be alienated for
[2093].
the payment to the creditor. [Art. 2087]
(a) Actual delivery is important.
(b) Constructive or symbolic delivery of the key to
OBLIGATION OF PLEDGEE
the warehouse is sufficient to show that the
(1) The pledgee cannot deposit the thing pledged
depositary appointed by common consent of
with a 3rd person, unless there is a contrary
the parties was legally placed in possession.
stipulation [2100].
(2) All movables within the commerce of man may
(2) Is responsible for the acts of his agents or
be pledged as long as they are susceptible of
employees with respect to the thing pledged
possession [2094].
[2100].
(3) Incorporeal rights may be pledged. The
(3) Has no right to use the thing or to appropriate its
instruments representing the pledged rights shall
fruits without authority from the owner [2104]
be delivered to the creditor; if negotiable, they
(4) May cause the public sale of the thing pledged if,
must be indorsed [2095].
without fault on his part, there is danger of
(4) Pledge shall take effect against 3rd persons only
destruction, impairment or dimunition in value of
if the following appear in a public instrument:
the thing. The proceeds of the auction shall be a
(a) Description of the thing pledged.
security for the principal obligation [2108].
(b) Date of the pledge [2096].
(5) The thing pledged may be alienated by the
RIGHTS OF PLEDGOR
pledgor or owner only with the consent of the
(1) Takes responsibility for the flaws of the thing
pledgee. Ownership of the thing pledged is
pledged [2101 in relation to Art. 1951].
transmitted to the vendee or transferee as soon
(2) Cannot ask for the return of the thing against the
as the pledgee consents to the alienation, but the
will of the creditor, unless and until he has paid
latter shall continue to have possession [2097].

PAGE 290
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the debt and its interest, with expenses in a
proper case [2105].
Yuliongsiu vs. PNB: There is 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.
The type of delivery will depend upon the nature and
the peculiar circumstances of each case.
PNB vs. Atendido: according to law, a pledgee cannot
become the owner of, nor appropriate to himself, the
thing given in pledge. If by the contract of pledge the
pledgor continues to be the owner of the thing
pledged during the pendency of the obligation, it
stands to reason that in case of loss of the property,
the loss should be borne by the pledgor.
(3) Subject to the right of the pledgee under article
2108, pledgor is allowed to substitute the thing
which is in danger of destruction or impairment
without any fault on the part of the pledgee with
another thing of the same kind and quality [2107].
(4) May require that the thing be deposited with a
3rd person, if through the negligence or willful
act of the pledgee the thing is in danger of being
lost or impaired [2106].
PERFECTION – ARTS. 2093, 2096
REQUISITES FOR PERFECTION
(1) The thing pledged is placed in the possession of
the creditor or a third person [2093]
(2) For the pledge to take effect as against third
persons, a description of the thing pledged and
the date of the pledge should appear in a public
instrument [2096]
FORECLOSURE ARTS. 2112, 2115
REQUIREMENTS IN SALE OF THE THING PLEDGED BY A
CREDITOR, IF CREDIT IS NOT PAID ON TIME (ART 2112)
(1) Debt is due and unpaid.
(2) Sale must be at a public auction.
(3) Notice to the pledgor and owner, stating the
amount due.
(4) Sale must be made with the intervention of a
notary public.
(5) If at the first auction the thing is not sold, a
second one with the same formalities shall be
held.
(6) If at the second auction, there is no sale either,
the creditor may appropriate the thing pledged
but he shall give an acquittance (release) for his
entire claim.
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BAR OPERATIONS COMMISSION
EFFECT OF THE SALE OF THE THING PLEDGED [Art 2115]
(1) Extinguishes the principal obligation, whether the
proceeds of the sale is more or less than the
amount due.
(2) If the price of sale is more than amount due, the
debtor is not entitled to the excess unless the
contrary is provided.
(3) If the price of sale is less, the creditor is not
entitled to recover the deficiency. A contrary
stipulation is void.
PLEDGE BY OPERATION OF LAW – ART. 2121-
2122
LEGAL PLEDGES/PLEDGE BY OPERATION OF LAW [Art.
2121]
(1) Necessary expenses shall be refunded to every
possessor, but only a possessor in good faith may
retain the thing until he has been reimbursed.
(a) Useful expenses shall be refunded only to the
possessor in good faith with the same right of
retention, the person who has defeated him in
the possession having the option of refunding
the amount of the expenses or of paying the
increase in value which the thing may have
acquired and by reason thereof [Art. 546]
(2) He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid.
This is called the mechanic’s lien. [Art. 1731]
(3) The agent may retain the things which are the
objects of agency until the principal effects the
reimbursement and pays the indemnity. This is
called the agent’s lien. [Art. 1914]
(4) The laborer’s wages shall be a lien on the goods
manufactured or the work done. [Art. 1707]
Note:
(1) In legal pledges, the remainder of the price of the
sale shall be delivered to the obligor.
(2) Public auction of legal pledges may only be
executed after demand of the amount for which
the thing is retained. It shall take place within one
month after the demand, otherwise the pledgor
may demand the return of the thing pledged,
provided s/he is able to show that the creditor did
not cause the public sale without justifiable
grounds. [Article 2122]
DISTINGUISHED FROM CHATTEL MORTGAGE –
ARTS. 2140, 1484
Chattel Mortgager Pledge
Delivery of Personal Property
Not required Delivery is required for the
validity of the pledge
Registration in the Chattel Mortgage Register
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Chattel Mortgager Pledge property, but ownership of the property is not

parted with. It merely restricts the mortgagor’s
Necessary for validity of Not necessary; jus disponendi over the property. The mortgagor
the CM against third Public document is may still sell the property, and any stipulation to
persons enough to bind third the contrary is void [Art. 2130]
persons (4) Mortgage extends to the natural accessions, to
the improvements of growing fruits and the rents
Right to Excess of Proceeds of Sale or income NOT YET RECEIVED when the
The excess goes to the The excess goes to the obligation becomes DUE, including indemnity
debtor/ mortgagor pledgee/creditor, unless from insurance, and/or amount received from
otherwise stipulated expropriation for public use [Art. 2127]
(a) Applies only when the accessions and
Right to Recover Deficiency accessories subsequently introduced belongs
Creditor/ mortgagee can Creditor/ mortgagee is to the mortgagor.
recover from the debtor/ not entitled to recover any (b) To exclude them, there must be an express
mortgagor, except if deficiency after the stipulation, or the fruits must be collected
covered by Recto Law property is sold, before the obligation becomes due.
notwithstanding contrary (c) Third persons who introduce improvements
stipulation upon the mortgaged property may remove
them at any time
Note: The provisions of the Civil Code on pledge,
insofar as they are not in conflict with the Chattel The consideration of the accessory contract of real
Mortgage Law shall be applicable to chattel estate mortgage is the same as that of the principal
mortgages [Art. 2141] contract. [Central Bank v. CA, 139 SCRA 46]

Real Mortgage
DEFINITION AND CHARACTERISTICS
Mortgage is a contract whereby the debtor secures to
the creditor the fulfillment of a principal obligation,
immediately making immovable property or real
rights answerable to the principal obligation in case
it is not complied with at the time stipulated.
OBJECTS OF REAL MORTGAGE [Art. 2124]
(1) Immovables
(2) Alienable real rights over immovables.
(a) Future property cannot be an object of
mortgage; however, a stipulation subjecting to
the mortgage improvements which the
mortgagor may subsequently acquire, install
or use in connection with real property already
mortgaged belonging to the mortgagor is
valid.
CHARACTERISTICS
(1) As a general rule, the mortgagor retains
possession of the property. He may deliver said
property to the mortgagee without altering the
nature of the contract of mortgage.
(2) It is not an essential requisite that the principal of
the credit bears interest, or that the interest as
compensation for the use of the principal and the
enjoyment of its fruits be in the form of a certain
percentage thereof.
(3) Mortgage creates an encumbrance over the
KINDS
(1) Voluntary – constituted by the will of the owner of
the property on which it is created
(2) Legal – required by law to be executed in favor of
certain persons:
(a) Persons in whose favor the law establishes a
mortgage have no other right than to demand
the execution and recording of the document
in which the mortgage is formalized [Article
2125]
(b) The bondsman who is to be offered in virtue of
a provision of law or of a judicial order shall
have the qualifications prescribed in Art 2056
(integrity, capacity to bind himself, and
sufficient property to answer for the
obligation), and in other laws [Article 2082]
(c) If the person bound to give a bond should not
be able to do so, a pledge or mortgage
considered sufficient to recover his obligation
shall be admitted in lieu thereof [Article 2083]
(3) Equitable – One which, although lacking the
proper formalities of a mortgage, shows the
intention of the parties to make the property a
security for the debt.
(a) lien created through equitable mortgage
ought not to be defeated by requiring
compliance with formalities necessary to the
validity of a voluntary real estate mortgage.
Ex.: Pacto de retro
(b) provisions governing equitable mortgage:

PAGE 292
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Arts. 1365, 1450, 1454, 1602, 1603, 1604 and
1607.
PRINCIPLE OF INDIVISIBILITY OF PLEDGE/MORTGAGE
[ART. 2089 TO 2090]
(a) Dayrit v. CA: A mortgage directly and immediately
subjects the property upon which it is imposed. It
is indivisible even though the debt may be
divided, and such indivisibility is likewise
unaffected by the fact that the debtors are not
solidarity liable.
(b) Central Bank v. CA: Where only a portion of the
loan is released, the mortgage becomes
enforceable only as to the proportionate value of
the loan
Indivisibility applies only as to pledgors/mortgagors
who are themselves debtors in the principal
obligation, and not to accommodation pledgors/
mortgagors
"When several things are pledged or mortgaged,
each thing for a determinate portion of the debt, the
pledges or mortgage, are considered separate from
each other. But when the several things are given to
secure the same debt in its entirety, all of them are
liable for the debt, and the creditor does not have to
divide his action by distributing the debt among the
various things pledged or mortgaged. Even when
only a part of the debt remains unpaid, all the things
are still liable for such balance." [Tolentino]
The question is whether or not the written
instrument in controversy was a mortgage OR a
conditional sale. The correct test, where it can be
applied, is the continued existence of a debt or
liability between the parties. If such exists, the
conveyance may be held to be merely a security for
the debt or an indemnity against the liability. (Reyes
v. Sierra, 93 SCRA 473)
ESSENTIAL REQUISITES
ESSENTIAL REQUISITES COMMON TO PLEDGE AND
MORTGAGE
(1) Constituted to secure the fulfillment of a principal
obligation.
(2) Pledgor or mortgagor must be the absolute
owner of the thing pledged or mortgaged.
(3) The persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized
for the purpose.
Note: Third persons who are not parties to the
principal obligation may secure the latter by
pledging or mortgaging their own property. [Art.
2085]
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BAR OPERATIONS COMMISSION
(4) Cannot exist without a valid obligation.
(5) Debtor retains the ownership of the thing given
as a security.
(6) When the principal obligation becomes due, the
thing pledged or mortgaged may be alienated for
the payment to the creditor. [Art. 2087]
(7) Must be recorded in the Registry of Property in
order to be validly constituted.
Note: The mortgage would still be binding
between the parties even if the instrument is not
recorded.
FORECLOSURE
FORECLOSURE OF MORTGAGE
It is the remedy available to the mortgagee by which
he subjects the mortgaged property to the
satisfaction of the obligation secured by the
mortgage.
(a) In General: An action for foreclosure of a
mortgage is limited to the amount mentioned in
the mortgage, EXCEPT when the mortgage
contract intends to secure future loans or
advancements
(b) BLANKET mortgage/DRAGNET– mortgage that
subsumes all debts of past or future origin
(c) Mortgage may be used as a “continuing security”
which secures future advancements and is not
discharged by the repayment of the amount in
the mortgage
(d) Alienation or assignment of mortgage credit is
valid even if it is not registered
Acceleration Clause, or the stipulation stating that on
the occasion of the mortgagor’s default, the whole
sum remaining unpaid automatically becomes due
and demandable, is ALLOWED
KINDS OF FORECLOSURE
(1) Judicial Foreclosure
(2) Extrajudicial Foreclosure
JUDICIAL FORECLOSURE
Rule 68, ROC:
(a) May be availed of by bringing an action in the
proper court which has jurisdiction over the area
wherein the real or personal (in case of chattel
mortgage) property involved or a portion thereof
is situated.
(b) If the court finds the complaint to be well-
founded, it shall order the mortgagor to pay the
amount due with interest and other charges
within a period of not less than 90 days nor more
than 120 days from the entry of judgment. If the
mortgagor fails to pay at the time directed, the
court, upon motion, shall order the property to be
sold to the highest bidder at a public auction.
(c) Upon confirmation of the sale by the court, it
UP COLLEGE OF LAW CREDIT TRANSACTIONS
shall operate to divest the rights of all parties to
the action and to vest their rights to the
purchaser subject to such rights of redemption as
may be allowed by law.
(d) Before the confirmation, the court retains control
of the proceedings
(e) Execution of judgment subject to APPEAL but not
annulment
(f) The foreclosure of the property is completed only
when the sheriff’s certificate is executed,
acknowledged and recorded
The Proceeds of the Sale shall be applied to the
Payment of the:
(a) Costs of the sale;
(b) Amount due the mortgagee;
(c) Claims of junior encumbrancers or persons
holding subsequent mortgages in the order of
their priority; and
(d) Balance, if any shall be paid to the mortgagor.
Nature of Judicial Foreclosure Proceedings
(1) Quasi in rem action. Hence, jurisdiction may be
acquired through publication.
(2) Foreclosure is only the result or incident of the
failure to pay debt.
(3) Survives death of mortgagor.
EXTRAJUDICIAL FORECLOSURE [ACT NO. 3135]
(1) Applies to mortgages where the authority to
foreclose is granted to the mortgagee.
(2) Authority is not extinguished by death of
mortgagor or mortgagee. This is an agency
coupled with interest.
(3) Public sale should be made after proper notice to
the public, otherwise it is a jurisdictional defect
which could render the sale voidable.
(4) There is no need to notify the mortgagor, where
there is no contractual stipulation therefor.
Proper notice consists of:
(a) posting notice in three public places and/or
(b) publication in newspaper of general
circulation
Purpose of notice is to obtain the best bid for the
foreclosed property
(5) Surplus proceeds of foreclosure sale belong to
the mortgagor.
(6) Debtor (who must be a NATURAL PERSON) has
the right to redeem the property sold within 1 year
from and after the date of sale.
(a) If the mortgagee is a bank and the debtor is a
juridical person, then there is no right of
redemption. However, it may redeem the
property BEFORE the registration of the TCT
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BAR OPERATIONS COMMISSION
to the buyer, which is similar to the equity of
redemption. The TCT must be registered
within THREE MONTHS after the foreclosure.
(b) The mortgagor can only legally transfer the
right to redeem and the use of the property
during the period of redemption.
(7) Remedy of party aggrieved by foreclosure is a
petition to set aside sale and the cancellation of
writ of possession. However, if the mortgagee is a
bank, the mortgagor is required to post a bond
equal to the value of the mortgagee’s claim.
(8) Republication of the notice of sale is necessary for
the validity of the postponed extrajudicial sale
(9) In foreclosure of real estate mortgage under Act
3135, the buyer at auction may petition the land
registration court for a writ of possession pending
the one-year period of redemption of the
foreclosed property.
Nature of Power of Foreclosure by Extrajudicial Sale
(1) Conferred for mortgagee’s protection.
(2) An ancillary stipulation.
(3) A prerogative of the mortgagee.
Note:
(a) Both should be distinguished from execution sale
governed by Rule 39, ROC.
(b) Foreclosure retroacts to the date of registration of
mortgage.
(c) A stipulation of upset price, or the minimum price
at which the property shall be sold to become
operative in the event of a foreclosure sale at
public auction, is null and void.
Right of mortgagee to recover deficiency
(1) Mortgagee is entitled to recover deficiency.
(2) If the deficiency is embodied in a judgment, it is
referred to as deficiency judgment.
(3) Action for recovery of deficiency may be filed even
during redemption period.
(4) Action to recover prescribes after 10 years from
the time the right of action accrues.
Effect of inadequacy of price in foreclosure sale
(1) Where there is right to redeem, inadequacy of
price is immaterial because the judgment debtor
may redeem the property.
(a) Exception: Where the price is so inadequate as
to shock the conscience of the court, taking
into consideration the peculiar circumstances.
(2) Property may be sold for less than its fair market
value, upon the theory that the lesser the price
the easier it is for the owner to redeem.
(3) The value of the mortgaged property has no
bearing on the bid price at the public auction,
provided that the public auction was regularly
and honestly conducted.
UP COLLEGE OF LAW CREDIT TRANSACTIONS
A suit for the recovery of the deficiency after the
foreclosure of a mortgage is in the nature of a
mortgage action because its purpose is precisely to
enforce the mortgage contract. [Caltex v. IAC, 176
SCRA 741]
Waiver of security by creditor
(1) Mortgagee may waive the right to foreclose his
mortgage and maintain a personal action for
recovery of the indebtedness.
(2) Mortgagee cannot have both remedies. This is
because he only has one cause of action, the non-
payment of the mortgage debt.
Redemption
(1) It is a transaction by which the mortgagor
reacquires the property which may have passed
under the mortgage or divests the property of the
lien which the mortgage may have created
(2) Kinds:
(a) Equity of redemption: in judicial foreclosure of
real estate mortgage under the ROC, it is the
right of the mortgagor to redeem the
mortgaged property by paying the secured
debt within the 120 day period from entry of
judgment or after the foreclosure sale, but
before the sale of the mortgaged property or
confirmation of sale
(i) formal offer to redeem preserves the right of
redemption, e.g., by filing an action to
enforce the right to redeem
(b) Right of redemption: in extrajudicial
foreclosure of real estate mortgage, the right
of the mortgagor to redeem the property
within a certain period after it was sold for the
satisfaction of the debt.
(ii) For natural persons – one year from the
registration of the TCT
(iii) For juridical persons – three months from
the foreclosure
(iv) Formal offer to redeem must be with
tender of redemption price to preserve
right of redemption
Note: There is no right of redemption in pledge and
chattel mortgage.
Medida v. CA: The rule up to now is that the right of a
purchaser at a foreclosure sale is merely inchoate
until after the period of redemption has expired
without the right being exercised. The title to land
sold under mortgage foreclosure remains, in the
mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's
deed
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BAR OPERATIONS COMMISSION
Antichresis
DEFINITION AND CHARACTERISTICS
Antichresis is a contract whereby the creditor
acquires the right to receive the fruits of an
immovable of the debtor, with the obligation to
apply then to the payment of the interest, if owing,
and thereafter to the principal of the credit [Art 2132]
CHARACTERISTICS
(1) Accessory contract – it secures the performance
of a principal obligation
(2) Formal contract – it must be in a specified form
to be valid [Art. 2134]
SPECIAL REQUISITES:
(1) It can cover only the fruits of an immovable
property
(2) Delivery of the immovable is necessary for the
creditor to receive the fruits, not to make the
contract binding
(3) Amount of principal and interest must be
specified in writing [Art. 2134]
(4) Express agreement that debtor will give
possession of the property to creditor and that
the latter will apply the fruits to the interest, if
any, then to the principal of his credit
NOTE: The obligation to pay interest is not the
essence of the contract of antichresis; there being
nothing in the Code to show that antichresis is only
applicable to securing the payment of interest-
bearing loans. On the contrary, antichresis is
susceptible of guaranteeing all kinds of obligations,
pure or conditional
OBLIGATIONS OF ANTICHRETIC CREDITOR
(1) To pay taxes and charges on the estate, including
necessary expenses [Art. 2135].
Creditor may avoid said obligation by:
(a) compelling the debtor to reacquire enjoyment
of the property
(b) by stipulation to the contrary
(2) To apply all the fruits, after receiving them, to the
payment of interest, if owing, and thereafter to
the principal
(3) To render an account of the fruits to the debtor
(4) To bear the expenses necessary for its
preservation and repair
REMEDIES OF CREDITOR IN CASE OF NON-PAYMENT OF
DEBT
(1) Action for specific performance
(2) Petition for the sale of the real property as in a
foreclosure of mortgage under Rule 68 of the
UP COLLEGE OF LAW CREDIT TRANSACTIONS
Rules of Court [Art. 2137]
(a) The parties, however, may agree on an
extrajudicial foreclosure in the same manner
as they are allowed in contracts of mortgage
and pledge [Tavera v. El Hogar Filipino, Inc. 68
Phil 712]
(b) A stipulation authorizing the antichretic
creditor to appropriate the property upon the
non-payment of the debt within the agreed
period is void [Art. 2088]
Chattel Mortgage
DEFINITION AND CHARACTERISTICS
Chattel Mortgage is a conditional sale of personal
property as security for the payment of a debt, or the
performance of some other obligation specified
therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum of
money or doing some other act named. If the
condition is performed according to its terms, the
mortgage and sale immediately become void, and
the mortgagee is thereby divested of his title.
[Section 3, Act 1508]
CHARACTERISTICS
(1) It is an accessory contract because it secures
performance of a principal obligation
(2) It is a formal contract because it requires
registration in the Chattel Mortgage Register for
its validity (but only as against third persons)
(3) It is a unilateral contract because it produces only
obligations on the part of the creditor to free the
thing from the encumbrance on fulfillment of the
obligation.
(4) The excess of the proceeds of the sale goes to the
debtor/mortgagor
(5) Creditor/mortgagee can recover deficiency from
the debtor/mortgagor, except if covered by the
Recto Law
REGISTRATION
PERIOD WITHIN WHICH REGISTRATION SHOULD BE MADE
The law is substantially and sufficiently complied
with where the registration is made by the
mortgagee before the mortgagor has complied with
his principal obligation and no right of innocent third
persons is prejudiced.
EFFECT OF REGISTRATION
(1) Creates real rights
(2) Adds nothing to mortgage
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REGISTRATION OF ASSIGNMENT OF MORTGAGE NOT
REQUIRED
(a) A chattel mortgage may be alienated or assigned
to a third person
(b) The debtor is protected if he pays his creditor
without actual knowledge that the debt has been
assigned
(c) Affidavit of good faith is required.
AFFIDAVIT OF GOOD FAITH is an oath in a
contract of chattel mortgage wherein the parties
“severally swear that the mortgage is made for
the purpose of securing the obligation specified in
the conditions thereof and for no other purposes
and that the same is a just and valid obligation
and one not entered into for the purpose of
fraud.”
Effect of Absence: Mortgage is vitiated only as against
third persons without notice.
VENUE OF REGISTRATION
(a) If he resides in the Philippines, in the office of the
register of deeds of the province in which the
mortgagor resides at the time of the making of
the chattel mortgage
(b) If he does not reside in the Philippines, in the
province in which the property is situated
(c) If the property is situated in a province different
from that in which the mortgagor resides, the
mortgage shall be recorded in both provinces.
[Sec. 4, Act 1508]
When a corporation is a party to a chattel mortgage,
the affidavit may be made and subscribed by a
director, trustee, cashier, treasurer, or manager
thereof, or by a person authorized to make or receive
such mortgage.
When a partnership is a party, the affidavit may be
made and subscribed by one member thereof.
VALIDITY OF CHATTEL MORTGAGE
Chattel mortgage shall not be valid against any
person except the mortgagor, his executors or
administrators unless:
(1) The possession of the property is delivered to and
retained by the mortgagee or
(2) The mortgage is recorded. (Sec. 4, Act 1508)
FORMAL REQUISITES
(a) It should substantially comply with the form
prescribed by law
(b) It should be signed by the person/s executing the
same in the presence of two witnesses who shall
sign the mortgage as witnesses to the execution
thereof and
UP COLLEGE OF LAW CREDIT TRANSACTIONS
(c) Each mortgagor and mortgagee or, in the
absence of the mortgagee, his agent or attorney,
shall make and subscribe an affidavit in the form
prescribed by law, which affidavit, signed by the
parties to the mortgage and the two witnesses
and the certificate of the oath signed by the
person authorized to administer an oath shall be
appended to such mortgage and recorded
therewith. [Sec. 5, Act 1508]
DESCRIPTION OF PROPERTY
The mortgaged property should be described such
as to enable the parties to the mortgage, or any
other person, after reasonable inquiry and
investigation, to identify the same.
Large cattle as chattel mortgage
The description in the mortgage shall contain the
brands, class, sex, age, knots of radiated hair
commonly known as remolinos or cowlicks, and
other marks of ownership as described and set forth
in the certificate of ownership of said animal/s,
together with the number and place of issue of such
certificates of ownership.
Growing crops as chattel mortgage
The mortgage may contain an agreement stipulating
that the mortgagor binds himself properly to tend,
care for and protect the crop while growing, and
faithfully and without delay to harvest the same, and
that in default of the performance of such duties, the
mortgagee may enter upon the premises, take all the
necessary measures for the protection of said crop,
and retain possession thereof and sell the same, and
from the proceeds of such sale pay all expenses
incurred in caring for, harvesting, and selling the
crop and the amount of the indebtedness or
obligation secured by the mortgage, and the surplus,
if any, shall be paid to the mortgagor or those
entitled to the same.
PROPERTY COVERED BY CM
It is deemed to cover only the property described
therein and not like or substituted property
thereafter acquired by the mortgagor and placed in
the same depository as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding. [Sec. 8, Act 1508]
Breaches
Failure of mortgagee to discharge the mortgage
If the mortgagee, assign, administrator, executor, or
either of them,
(1) after performance of the condition before or after
the breach thereof, or
(2) after tender of the performance of the condition,
at or after the time fixed for the performance,
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does not within ten days after being requested
thereto by any person entitled to redeem, discharge
the mortgage in the manner provided by law, the
person entitled to redeem may recover of the person
whose duty it is to discharge the same, twenty pesos
for his neglect and all damages occasioned thereby
in an action in any court having jurisdiction of the
subject-matter thereof. [Sec. 8]
When the condition of the chattel mortgage is
broken, a mortgagor or person holding a subsequent
mortgage, or a subsequent attaching creditor may
redeem the same by paying or delivering to the
mortgagee the amount due on such mortgage and
the reasonable costs and expenses incurred by such
breach of condition before the sale thereof. An
attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same
manner that the mortgagee could foreclose it
Foreclosure
The mortgagee, his executor, administrator or assign
may cause the mortgaged property or any part
thereof to be sold at a public auction by a public
officer:
(1) After 30 days from the time of condition broken
(2) At a public place in the municipality where the
mortgagor resides, or where the property is
situated
(3) Provided at least 10 day-notice of the time, place,
and purpose of such sale has been posted at 2 or
more public places in such municipality, and
(4) The mortgagee, his executor, administrator, or
assign shall notify the mortgagor or person
holding under him and the persons holding
subsequent mortgages of the time and place of
sale at least 10 days previous to the sale:
(a) either by notice in writing directed to him or
left at his abode, if within the municipality, or
(b) sent by mail if he does not reside in such
municipality
DISPOSITION OF PROCEEDS
The proceeds of the sale shall be applied to the
payment:
(1) first, to the costs and expenses of mortgage
(2) the residue shall be paid to persons holding
subsequent mortgages in their order
(3) the balance, after paying the mortgages, shall be
paid to the mortgagor or person holding under
him on demand
Quasi-Contracts
A quasi-contract is that juridical relation resulting
UP COLLEGE OF LAW CREDIT TRANSACTIONS
from a lawful, voluntary and unilateral act, and
which has for its purpose the payment of indemnity
to the end that no one shall be unjustly enriched or
benefited at the expense of another [Art. 2142]
NEGOTIORUM GESTIO
(UNAUTHORIZED MANAGEMENT)
This takes place when a person voluntarily takes
charge of another’s abandoned business or property
without the owner’s authority [Art. 2144].
Reimbursement must be made to the gestor (i.e. one
who carried out the business) for necessary and
useful expenses, as a rule.
THE OBLIGATION DOES NOT ARISE:
(1) When the property or business is not neglected or
abandoned;
(2) If in fact the manager has been tacitly authorized
by the owner.
In the first case, the provisions of Articles 1317, 1403,
No. 1, and 1404 regarding unauthorized contracts
shall govern.
In the second case, the rules on agency in Title X of
this Book shall be applicable. [Art. 2144]
OBLIGATIONS OF A GESTOR
(1) Perform his duties with all the diligence of a good
father of a family
(2) Pay the damages which through his fault and
negligence may be suffered by the owner of the
property/business under his management [Art.
2145]
(3) Be liable for the acts of the persons to whom he
delegated all or some of his duties. This is
without prejudice to the direct obligation of the
delegate to the owner of the business. [Art. 2146]
(4) Be liable for any fortuitous event under the
following conditions:
(a) If he undertakes risky operations which the
owner was not accustomed to embark upon
(b) If he has preferred his own interest to that of
the owner
(c) If he fails to return the property or business
after demand of the owner
(d) If he assumed management in bad faith [Art.
2147]
(e) If he is manifestly unfit to carry on the
management
(f) If by his intervention he prevented a more
competent person from taking up the
management. [Art. 2148]
Note: The gestor shall not be liable for “e” and “f”
if the management was assumed to save the
property or business from imminent danger.
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BAR OPERATIONS COMMISSION
(5) Be personally liable for contracts which he
entered into with third persons, even though he
acted in the name of the owner, and there shall
be no right of action between the owner and third
persons.
The gestor shall not be personally liable for such
contracts, provided:
(a) The owner has expressly or tacitly ratified the
management, or
(b) When the contract refers to things pertaining
to the owner of the business. [Art. 2152]
Note: The responsibility of two or more gestors
shall be solidary, unless the management was
assumed to save the thing or business from
imminent danger.
OBLIGATIONS OF THE OWNER OF THE PROPERTY OR
BUSINESS
Although the management was not expressly
ratified, the owner who enjoys the advantages of the
same shall:
(a) Be liable for the obligations incurred in his
interest
(b) Reimburse the gestor for the necessary and
useful expenses and for the damages the latter
may have suffered in the performance of his
duties
The above obligations shall be incumbent upon the
owner if the management had for its purpose the
prevention of an imminent and manifest loss,
although no benefit may have been derived. [Art.
2150]
If the owner did not derive any benefit and there was
no imminent and manifest danger to the property or
business, the owner would still be liable for the
abovementioned obligations and expenses,
provided:
(a) The gestor has acted in good faith; AND
(b) The property or business is intact, ready to be
returned to the owner. [Art. 2151]
EFFECT OF RATIFICATION
The ratification of the management by the owner of
the business produces the effects of an express
agency, even if the business may not have been
successful. [Art. 2149]
EXTINGUISHMENT OF MANAGEMENT
(1) When the owner repudiates or puts an end
thereto
(2) When the gestor withdraws from the
management, subject to [Art. 2144]
UP COLLEGE OF LAW CREDIT TRANSACTIONS
(3) By the death, civil interdiction, insanity or
insolvency of the owner or the gestor. [Art. 2153]
SOLUTIO INDEBITI (UNDUE PAYMENT)
This takes place when something is received when
there is no right to demand it, and it was unduly
delivered through mistake. The recipient has the
duty to return it [Art. 2154].
This situation covers payment by reason of a mistake
in the construction or application of a doubtful or
difficult question of law [Art. 2155]
WHEN DEBT NOT YET DUE
If the payer was in doubt whether the debt was due,
he may recover if he proves that it was not due. [Art.
2156]
RESPONSIBILITY OF TWO OR MORE PAYEES
When there has been payment of what is not due,
their responsibility is solidary.
WHEN MONEY OR THING DELIVERED IS OWNED BY THIRD
PERSON
The payee cannot demand that the payor prove his
ownership of the thing delivered.
Nevertheless, should he discover that the thing has
been stolen and who its true owner is, he must
advise the latter.
If the owner, in spite of such information, does not
claim it within the period of one month, the payee
shall be relieved of all responsibility by returning the
thing deposited to the payor.
If the payee has reasonable grounds to believe that
the thing has not been lawfully acquired by the
payor, the former may return the same. [Art. 2158]
LIABILITY OF PAYEE
If in bad faith, he shall be liable:
(1) For legal interest if a sum of money is involved, or
(2) For the fruits received or which should have been
received if the thing produces fruits
AND
(3) For any loss or impairment of the thing for any
cause, and
(4) For damages to the person who delivered the
thing, until it is recovered. [Art. 2159]
If in good faith, he shall be liable:
(1) For the impairment or loss of the thing certain
and determinable or its accessories and
accessions insofar as he has thereby been
benefited.
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BAR OPERATIONS COMMISSION
(2) For the return of the price or assign the action to
collect the sum if he has alienated the same. [Art.
2160]
EXEMPTION FROM THE OBLIGATION TO RESTORE THE
PAYMENT UNDULY MADE
A person who, believing in good faith that the
payment was being made of a legitimate and
subsisting claim,
(1) destroyed the document, or
(2) allowed the action to prescribe, or
(3) gave up the pledges, or
(4) cancelled the guaranties for his right shall be
exempt from the obligation to restore.
The person who paid unduly may proceed only
against the true debtor or the guarantors with regard
to whom the action is still effective. [Art. 2162]
PRESUMPTION OF PAYMENT BY MISTAKE, DEFENSE
The presumption arises if something which had
never been due or had already been paid was
delivered; but he from whom the return is claimed
may prove that the delivery was made out of
liberality or for any other just cause.
OTHER QUASI-CONTRACTS
(1) When, without the knowledge of the person
obliged to give support, it is given by a stranger,
the latter shall have a right to claim the same
from the former, unless it appears that he gave it
out of piety and without intention of being repaid.
[Art. 2164]
(2) When funeral expenses are borne by a third
person, without the knowledge of those relatives
who were obliged to give support to the
deceased, said relatives shall reimburse the third
person, should the latter claim reimbursement.
[Art. 2165]
(3) When the person obliged to support an orphan,
or an insane or other indigent person unjustly
refuses to give support to the latter, any third
person may furnish support to the needy
individual, with right of reimbursement from the
person obliged to give support. The provisions of
this article apply when the father or mother of a
child under eighteen years of age unjustly refuses
to support him. [Art. 2166]
(4) When through an accident or other cause a
person is injured or becomes seriously ill, and he
is treated or helped while he is not in a condition
to give consent to a contract, he shall be liable to
pay for the services of the physician or other
person aiding him, unless the service has been
rendered out of pure generosity. [Art. 2167]
(5) When during a fire, flood, storm, or other
calamity, property is saved from destruction by
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another person without the knowledge of the
owner, the latter is bound to pay the former just
compensation. [Art. 2168]
(6) When the government, upon the failure of any
person to comply with health or safety
regulations concerning property, undertakes to
do the necessary work, even over his objection, he
shall be liable to pay the expenses. [Art. 2169]
(7) When by accident or other fortuitous event,
movables separately pertaining to two or more
persons are commingled or confused, the rules
on co-ownership shall be applicable. [Art. 2170]
(8) The rights and obligations of the finder of lost
personal property shall be governed by Articles
719 and 720. [Art. 2171]
(9) The right of every possessor in good faith to
reimbursement for necessary and useful
expenses is governed by Article 546. [Art. 2172]
(10) When a third person, without the knowledge of
the debtor, pays the debt, the rights of the former
are governed by Articles 1236 and 1237. [Art. 2173]
(11) When in a small community a nationality of the
inhabitants of age decide upon a measure for
protection against lawlessness, fire, flood, storm
or other calamity, any one who objects to the plan
and refuses to contribute to the expenses but is
benefited by the project as executed shall be
liable to pay his share of said expenses. [Art. 2174]
(12) Any person who is constrained to pay the taxes
of another shall be entitled to reimbursement
from the latter. [Art. 2175]
Concurrence and Preference
of Credits
MEANING OF CONCURRENCE AND PREFERENCE
Concurrence of Credit implies possession by two or
more creditors of equal right or privileges over the
same property or all of the property of a debtor.
Preference of Credit is the right held by a creditor to
be preferred in the payment of his claim above
others out of the debtor’s assets.
PREFERRED CREDITS ON SPECIFIC MOVABLES
[ART. 2241]
With reference to specific movable property of the
debtor, the following claims or liens shall be
preferred:
(1) Duties, taxes and fees due thereon to the State or
any subdivision thereof;
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(2) Claims arising from misappropriation, breach of
trust, or malfeasance by public officials
committed in the performance of their duties, on
the movables, money or securities obtained by
them;
(3) Claims for the unpaid price of movables sold, on
said movables, so long as they are in the
possession of the debtor, up to the value of the
same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may
be enforced on the price; this right is not lost by
the immobilization of the thing by destination,
provided it has not lost its form, substance and
identity; neither is the right lost by the sale of the
thing together with other property for a lump
sum, when the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon
the things pledged or mortgaged, up to the value
thereof;
(5) Credits for the making, repair, safekeeping or
preservation of personal property, on the
movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods
manufactured or the work done;
(7) For expenses of salvage, upon the goods
salvaged;
(8) Credits between the landlord and the tenant,
arising from the contract of tenancy on shares, on
the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and for
thirty days thereafter;
(10) Credits for lodging and supplies usually
furnished to travelers by hotel keepers, on the
movables belonging to the guest as long as such
movables are in the hotel, but not for money
loaned to the guests;
(11) Credits for seeds and expenses for cultivation and
harvest advanced to the debtor, upon the fruits
harvested;
(12) Credits for rent for one year, upon the personal
property of the lessee existing on the immovable
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leased and on the fruits of the same, but not on
money or instruments of credit;
(13) Claims in favor of the depositor if the depositary
has wrongfully sold the thing deposited, upon the
price of the sale.
In the foregoing cases, if the movables to which the
lien or preference attaches have been wrongfully
taken, the creditor may demand them from any
possessor, within thirty days from the unlawful
seizure.
PREFERRED CREDITS ON SPECIFIC
IMMOVABLES AND REAL RIGHTS [ART. 2242]
With reference to specific immovable property and
real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real
right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon
the immovable sold;
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
contractors, engaged in the construction,
reconstruction or repair of buildings, canals or
other works, upon said buildings, canals or other
works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of
real property when the law authorizes
reimbursement, upon the immovable preserved
or improved;
(7) Credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments or
executions, upon the property affected, and only
as to later credits;
(8) Claims of co-heirs for warranty in the partition of
an immovable among them, upon the real
property thus divided;
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(9) Claims of donors or real property for pecuniary
charges or other conditions imposed upon the
donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured,
for the insurance premium for two years.
PREFERRED CREDITS ON OTHER PROPERTY,
REAL AND PERSONAL [ART. 2244]
With reference to other property, real and personal,
of the debtor, the following claims or credits shall be
preferred in the order named:
i. Proper funeral expenses for the debtor, or
children under his or her parental authority who
have no property of their own, when approved by
the court;
ii. Credits for services rendered the insolvent by
employees, laborers, or household helpers for one
year preceding the commencement of the
proceedings in insolvency;
iii. Expenses during the last illness of the debtor or
of his or her spouse and children under his or her
parental authority, if they have no property of
their own;
iv. Compensation due the laborers or their
dependents under laws providing for indemnity
for damages in cases of labor accident, or illness
resulting from the nature of the employment;
v. Credits and advancements made to the debtor
for support of himself or herself, and family,
during the last year preceding the insolvency;
vi. Support during the insolvency proceedings, and
for three months thereafter;
vii. Fines and civil indemnification arising from a
criminal offense;
viii. Legal expenses, and expenses incurred in the
administration of the insolvent's estate for the
common interest of the creditors, when properly
authorized and approved by the court;
ix. Taxes and assessments due the national
government, other than those mentioned in
Articles 2241, No. 1, and 2242, No. 1;
x. Taxes and assessments due any province, other
than those referred to in Articles 2241, No. 1, and
2242, No. 1;
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xi. Taxes and assessments due any city or
municipality, other than those indicated in Articles
2241, No. 1, and 2242, No. 1;
xii. Damages for death or personal injuries caused by
a quasi-delict;
xiii. Gifts due to public and private institutions of
charity or beneficence;
xiv. Credits which, without special privilege, appear in
(a) a public instrument; or (b) in a final judgment,
if they have been the subject of litigation. These
credits shall have preference among themselves
in the order of priority of the dates of the
instruments and of the judgments, respectively.
EXEMPT PROPERTY
(1) Present property:
(a) Family home. [Arts. 152, 153 and 155, CC]
(b) Right to receive support, as well as money or
property obtained by such support, shall not
be levied upon on attachment or execution.
[Art. 205, CC]
(c) Sec. 13, Rule 39, ROC.
(d) Sec 118, Public Land Act. [CA 141, as
amended]
(2) Future property:
A debtor who obtains a discharge from his debts
on account of insolvency, is not liable for the
unsatisfied claims of his creditors with said
property. [Sec. 68 and 69, Insolvency Law, Act
1956]
(3) Property in custodia legis and of public dominion.
thereof [Art. 2247]
(3) Those credits which enjoy preference in relation
to specific real property or real rights exclude all
others to the extent of the value of the
immovable or real right to which the preference
refers [Art. 2248].
(4) If there are 2 or more credits with respect to the
same specific real property or real rights, they shall
be satisfied pro rata, after the payment of the
taxes and assessment of the taxes and
assessments upon the immovable property or
real right [Art. 2249].
(5) The excess, if any, after the payment of the
credits which enjoy preference with respect to
specific property, real or personal, shall be
added to the free property which the debtor may
have, for the payment of other credits [Art.
2250].
(6) Those credits which do not enjoy any preference
with respect to specific property, and those
which enjoy preference, as to the amount not
paid, shall be satisfied according to the
following rules:
(a) Order established by Art 2244
(b) Common credits referred to in Art 2245 shall
be paid pro rata regardless of dates [Art.
2251].

CLASSIFICATION OF CREDITS
(1) Special preferred credits. [Art. 2241 and 2242, CC]
(a) Considered as mortgages or pledges of real or
personal property or liens within the purview
of legal provisions governing insolvency.
(b) Taxes due to the State shall first be satisfied.
(2) Ordinary preferred credits [Art. 2244] – Preferred
in the order given by law.
(3) Common credits [Art. 2245] – Credits of any other
kind or class, or by any other right or title not
comprised in Arts. 2241- 2244 shall enjoy no
preference.

ORDER OF PREFERENCE OF CREDITS

(1) Credits which enjoy preference with respect to
specific movables exclude all others to the extent
of the value of the personal property to which the
preference refers [Art. 2246].
(2) If there are 2 or more credits with respect to the
same specific movable property, they shall be
satisfied pro rata, after the payment of duties,
taxes and fees due the State or any subdivision

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