Fides Damasco | UP Law C2013 1

CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera

Contents
Weeks 1 to 4........................................................................ 2
1. Concept of Credit and Debt.......................................... 2
2. Issues and Problems Relating to Credit ....................... 2
3. Concept of Credit Transactions .................................... 2
4. General Provisions on Loan ......................................... 2
5. Commodatum .............................................................. 3
6. Simple Loan ................................................................. 4
7. Interest ......................................................................... 6
8. Concept of Deposit....................................................... 9
9. Voluntary Deposit ......................................................... 9
10. Necessary Deposit ................................................... 13
11. Judicial Deposit ........................................................ 14

Weeks 5 to 6 (Special Reports) ....................................... 15

12. Merchants and Commercial Transactions ................ 15
13. Letters of Credit ....................................................... 15
14. Trust Receipts Law .................................................. 15
15. Truth in Lending Act ................................................. 17
16. The Usury Law ......................................................... 18
17. The Warehouse Receipts Law and the General
Bonded Warehouse Act ................................................. 21

Weeks 7 to 12.................................................................... 30
18. Concept of Security Transactions ............................ 30
19. Guaranty .................................................................. 30
20. Surety....................................................................... 36
21. Pledge and Mortgage, Common Provisions ............. 38
22. Pledge ...................................................................... 40
23. Real Estate Mortgage .............................................. 43
24. Chattel Mortgage...................................................... 50
25. Antichresis ............................................................... 55

Weeks 13 to 16.................................................................. 56
26. Concurrence and Preference of Credits ................... 56
27. Rehabilitation and Insolvency .................................. 59
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera

The credit of an individual means his ability to borrow money

Weeks 1 to 4 by virtue of the confidence or trust reposed by a lender that he
will pay what he may promise.
1. Concept of Credit and Debt The concession of a ―credit‖ necessarily involves the granting of
Credit – sum credited on the books of a company to a person who ―loans‖ up to the limit of the amount fixed in the ―credit.‖
appears to be entitled to it; presupposes a creditor-debtor Loan Discount
relationship and may be said to imply ability to make a promised Generally on single name paper; Generally on double name
payment. interest is taken at the expiration paper; interest is deducted in
Debt – money, goods or services which a creditor owes. of the period advance

2. Issues and Problems Relating to

4. General Provisions on Loan,
Credit Articles 1156, 1305, 1306, 1933 and 1934, Civil Code

Art. 1156. An obligation is a juridical necessity to give, to do or not

3. Concept of Credit Transactions to do. (n)
Credit Transactions include all transactions involving the purchase Art. 1305. A contract is a meeting of minds between two persons
or loan of goods, services, or money in the present with a promise to whereby one binds himself, with respect to the other, to give
pay or deliver in the future. something or to render some service. (1254a)
Secured transactions or contracts of real security – supported Art. 1306. The contracting parties may establish such stipulations,
by collateral or an encumbrance of property. clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public
Unsecured transactions or contracts of personal security –
order, or public policy. (1255a)
fulfillment by the principal debtor is secured or supported only by a
promise to pay or the personal commitment of another such as a
guarantor or surety. Loan is governed by the rules as to the requisites and validity of
contracts in general.
Credit transactions are made up of:
Art. 1933. By the contract of loan, one of the parties delivers to
1. Bailment contracts another, either something not consumable so that the latter may use
2. Usury the same for a certain time and return it, in which case the contract
3. Guaranty and Suretyship is called a commodatum; or money or other consumable thing, upon
4. Mortgage the condition that the same amount of the same kind and quality
5. Antichresis shall be paid, in which case the contract is simply called a loan or
6. Concurrence and Preference of Credits mutuum.
Security – something given, deposited, or serving as a means to Commodatum is essentially gratuitous.
ensure the fulfillment or enforcement of an obligation or of protecting
some interest in property. Simple loan may be gratuitous or with a stipulation to pay interest.
Bailment (Fr. bailer, to deliver) – the delivery of property of one In commodatum the bailor retains the ownership of the thing loaned,
person to another in trust for a specific purpose, with a contract, while in simple loan, ownership passes to the borrower. (1740a)
express or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special purpose is Characteristics
accomplished or kept until the bailor reclaims it.
1. Real – delivery of the thing loaned is necessary for the
Parties to a bailment perfection of the contract
2. Unilateral – once the subject matter is delivered, it creates
1. Bailor (Sp. Comodatario)
obligations on the part of only the borrower
2. Bailee (Sp. Comodante)
Cause or consideration
Kinds of Contractual Bailment
1. As to the borrower, acquisition of the thing
A. Gratuitous Bailments
2. As to the lender, the right to demand its return or its
1. For the sole benefit of the bailor;
equivalent
a. Gratuitous deposit (Art. 1965)
b. Mandatum – where the mandatory undertakes to do Kinds of Loan
some act with respect to the property; as simply to
carry it, or keep it, or otherwise to do something with 1. Commodatum – bailor delivers to the bailee a non-
respect to it gratuitously. consumable thing so that the latter may use it for a certain
2. For the sole benefit of the bailee; and time and return the identical thing
a. Commodatum 2. Simple loan or mutuum – lender delivers to the borrower
b. Gratuitous simple loan or mutuum (Art. 1933) money or other consumable thing upon the condition that
B. Mutual-Benefit Bailments the latter shall pay the same amount of the same kind and
3. For the benefit of both parties quality.
a. Deposit for a compensation (Art. 1965)
Consumable – a thing is consumed when used in a manner
i. involuntary deposit (Arts. 1996[2], 1997 par. 2)
appropriate to its purpose or nature (Art. 418)
ii. Pledge (Arts. 2085, 2903)
iii. Bailments for hire (locatio et conductio) – Commodatum Mutuum
goods are left with the bailee for some use or Subject Ordinarily not Money or other
service by him and always for some Matter consumable consumable thing
compensation Ownership Retained by the lender Transferred to the
1. Hire of things – temporary use borrower
2. Hire of service – delivered for some work Nature Purely personal -
or labor Essentially gratuitous May be gratuitous or
3. Hire for carriage of goods – purpose is to onerous
carry from place to place Return or Return the same thing Pay the same amount of
4. Hire of custody – delivered for storage Payment loaned the same kind and
quality
Case:
Nature of Real or personal Personal property
People v. Concepcion, Property property
44 Phil 126. Purpose of Use or temporary Consumption
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera

Loan possession Parties may stipulate that commodatum is transmitted to the heirs of
Demand Before the expiration of Lender may not demand either or both parties (Art. 1306). In case of two or more bailees, the
the term in case of before the expiration of death of one does not extinguish the contract in the absence of a
urgent need the term stipulation to the contrary.
Loss of the Borne by the bailor Borne by the bailee
Thing Use of thing by bailee’s household allowed except
Liability Criminal (Estafa) Civil liability only 1. Contrary stipulation
2. Nature of the thing forbids such use
Kinds of Commodatum
1. Ordinary commodatum (Art. 1933) Art. 1940. A stipulation that the bailee may make use of the fruits of
2. Precarium – where the bailor may demand the thing the thing loaned is valid. (n)
loaned at will (Art. 1947)
Extent of right of use
Art. 1934. An accepted promise to deliver something by way of Right to use is limited to the thing loaned but not to its fruits unless
commodatum or simple loan is binding upon parties, but the there is a stipulation.
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract. (n) Enjoyment of fruits must be incidental to the use of the thing.
Otherwise, the contract may be a usufruct (Art. 562).
A contract to loan is a consensual contract subject to rules on delay
(Art. 1169) and liability for damages. SECTION 2. - Obligations of the Bailee
Art. 1941. The bailee is obliged to pay for the ordinary expenses for
5. Commodatum, the use and preservation of the thing loaned. (1743a)
Articles 1935 to 1952, Civil Code
Logical for the bailee acquires the use of the thing and is obliged to
CHAPTER 1 return the same thing (Art. 1933). The bailee must take good care of
COMMODATUM the thing with the diligence of a good father of a family (Art. 1163).
SECTION 1 - Nature of Commodatum See Art. 1949 for extraordinary expenses.
Art. 1935. The bailee in commodatum acquires the use of the thing
loaned but not its fruits; if any compensation is to be paid by him Art. 1942. The bailee is liable for the loss of the thing, even if it
who acquires the use, the contract ceases to be a commodatum. should be through a fortuitous event:
(1941a) (1) If he devotes the thing to any purpose different from that for
which it has been loaned;
Compensation (2) If he keeps it longer than the period stipulated, or after the
Similar to a donation in that it confers a benefit to the recipient; the accomplishment of the use for which the commodatum has been
presumption is that the bailor has no need for the thing loaned. constituted;
Commodatum is essentially gratuitous. Any compensation converts (3) If the thing loaned has been delivered with appraisal of its value,
it to a lease (Arts. 1642-44). unless there is a stipulation exemption the bailee from responsibility
in case of a fortuitous event;
Purpose (4) If he lends or leases the thing to a third person, who is not a
member of his household;
The purpose in a commodatum is use for a certain time. If the bailee (5) If, being able to save either the thing borrowed or his own thing,
is not entitled to the use of the thing, the contract may be a deposit he chose to save the latter. (1744a and 1745)
(Art. 1962)
The bailee is not liable for loss or damage due to a fortuitous event
Art. 1936. Consumable goods may be the subject of commodatum if because the ownership is retained by the bailor.
the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition. (n) This provision punishes the bailee for improper acts although they
may not have been the proximate cause of the delay:
Art. 1937. Movable or immovable property may be the object of
commodatum. (n) 1. Bad faith
2. Delay
Subject matter 3. Appraisal gives rise to the presumption that the parties
intended the bailee to be liable for the loss of the thing
Generally non-consumable things, whether real or personal. If the 4. Purely personal nature of a commodatum
intention of the parties is to have the consumable goods loaned 5. Ingratitude
returned at the end of the period, the loan is a commodatum and not
a mutuum. Art. 1943. The bailee does not answer for the deterioration of the
thing loaned due only to the use thereof and without his fault. (1746)
Art. 1938. The bailor in commodatum need not be the owner of the
thing loaned. (n) Use entails ordinary wear and tear. Hence, in the absence of a
contrary stipulation, the depreciation caused by the reasonable and
Since ownership is not transferred in a commodatum, it is sufficient natural use of the thing is borne by the bailor.
that the bailor has such possessory interest in the subject matter or
right to its use. (eg. Lessee, usufructuary) When bailee is liable
1. Guilty of fault or negligence (Art. 1170)
Art. 1939. Commodatum is purely personal in character. 2. Devotes the thing to any purpose different from that for
Consequently: which it has been loaned (Art. 1942[1]).
(1) The death of either the bailor or the bailee extinguishes the
contract; Art. 1944. The bailee cannot retain the thing loaned on the ground
(2) The bailee can neither lend nor lease the object of the contract to that the bailor owes him something, even though it may be by
a third person. However, the members of the bailee's household reason of expenses. However, the bailee has a right of retention for
may make use of the thing loaned, unless there is a stipulation to the damages mentioned in Art. 1951. (1747a)
contrary, or unless the nature of the thing forbids such use. (n)
The bailee has no right to retain the thing loaned as security for
The bailor in commodatum has in view the character, credit and claims by reason of expenses (ordinary or extraordinary) because
conduct of the bailee. the ownership remained with the bailor and the bailee was only
granted temporary use.
Death

Compensation shall not be proper when one of the debts arises from
a depositum or from the obligations of a depositary or of a bailee in
commodatum. (Art. 1287)
Effect of adverse possession
In adverse possession of this kind, the bailee is considered to hold
the same in trust does not have the effect of ripening into title as in
ordinary acquisitive prescription.
Right recognized
Retention until reimbursement, the bailee cannot sell the thing
loaned to satisfy said damages.
Art. 1945. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily. (1748a)
The presumption is that the bailor takes into account the personal
integrity and responsibility of all the bailees and would not have
constituted the commodatum if there were only one bailee. This is
an exception to the general rule that concurrence of parties in the
same obligation gives rise only to a joint obligation (Arts.1207-8).
SECTION 3. - Obligations of the Bailor
Art. 1946. The bailor cannot demand the return of the thing loaned
till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent
need of the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum
is suspended while the thing is in the possession of the bailor.
(1749a)
Obligation to respect duration of loan
The primary obligation of a bailor is to allow the bailee the use of the
thing loaned:
1. For the duration of the period stipulated, or
2. Until the accomplishment of the purpose for which the
commodatum was constituted (Art. 1933)
Return may be temporary or permanent, and based on these
grounds:
1. Urgent need of the thing
2. Ingratitude (Art. 1948)
Art. 1947. The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the
thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)
Precarium – a contract by which the owner of the thing, at the
request of another person, gives the latter the thing for use as long
as the owner shall please.
The use of the term ―owner‖ is inaccurate, since the bailor need not
be the owner of the thing loaned (Art. 1938).
Art. 1948. The bailor may demand the immediate return of the thing
if the bailee commits any act of ingratitude specified in Art. 765. (n)
Art. 765 under donation is applicable because commodatum is
essentially gratuitous. Acts of ingratitude make the bailee unworthy
of the trust reposed upon him by the bailor:
1. Commit an offense against the person, the honor, or the
property of the bailor, his wife or children under his
parental authority
2. Imputes to the bailor any criminal offense or moral
turpitude unless the crime or act has been committed
against the bailee, his wife or children under his parental
authority
3. Unduly refuses the bailor support when the bailee is
legally or morally bound to give support
This applies to ordinary commodatum. For precarium, the return of
the thing loaned may be demanded at will.
Fides Damasco | UP Law C2013 4
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Art. 1949. The bailor shall refund the extraordinary expenses during
the contract for the preservation of the thing loaned, provided the
bailee brings the same to the knowledge of the bailor before
incurring them, except when they are so urgent that the reply to the
notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use
of the thing by the bailee, even though he acted without fault, they
shall be borne equally by both the bailor and the bailee, unless there
is a stipulation to the contrary. (1751a)
Obligation to refund extraordinary expenses
1. Extraordinary expenses for the preservation of the thing
loaned – borne by the bailor as he profits by said
expenses. Notice is required unless they are so urgent.
2. Extraordinary expenses arising from actual use of the
thing loaned – borne by bailor and bailee alike on a 50-50
basis as an equitable solution
The parties may stipulate for a different apportionment or that they
shall be borne by bailor or bailee only.
Art. 1950. If, for the purpose of making use of the thing, the bailee
incurs expenses other than those referred to in Articles 1941 and
1949, he is not entitled to reimbursement. (n)
No obligation to assume all other expenses
Expenses not necessary for the use and preservation of the thing
(eg. ostentation) are borne by the bailee. Ordinary expenses for the
use and preservation of the thing are borne by the bailee (Art. 1941,
1949).
Art. 1951. The bailor who, knowing the flaws of the thing loaned,
does not advise the bailee of the same, shall be liable to the latter
for the damages which he may suffer by reason thereof. (1752)
Liability to pay damages for known hidden flaws
Requisites:
1. Flaw or defect in the thing loaned
2. Flaw or defect is hidden
3. Bailor is aware thereof
4. Bailor does not advise the bailee of the same
5. Bailee suffers damages by reason of the said flaw
Liability arises from bad faith. The bailee is given the right of
retention until he is paid damages (Art. 1944). Where flaw is
unknown to the bailor, he is not liable because commodatum is
gratuitous.
Art. 1952. The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the bailee. (n)
No right of abandonment for expenses and damages
It would be unfair to allow the bailor to just abandon the thing
because expenses or damages may exceed the value of the thing
loaned.
6. Simple Loan,
Articles 1953 to 1955, 1980
CHAPTER 2
SIMPLE LOAN OR MUTUUM
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality. (1753a)
Loan involves the return of the equivalent only and not the identical
thing because the borrower acquires ownership (Art. 1978) although
a loan of money may be payable in kind (Art. 1958).
Obligation to pay
May include the accessory duty to pay interest (Art. 1956). This is
the consideration for the obligation of the lender to furnish the loan.
Fungible things – usually dealt with by number, weight, or measure
so that any given unit or portion is treated an equivalent to any other
unit or portion.

Distinction between consumability and fungibility
Consumability depends on the nature of the thing; fungibility, on the
intention of the parties. The New Civil Code uses the classification of
movable property into consumable and non-consumable (Art. 418),
discarding the old classification of fungible and non-fungible.
Art. 1954. A contract whereby one person transfers the ownership of
non-fungible things to another with the obligation on the part of the
latter to give things of the same kind, quantity, and quality shall be
considered a barter. (n)
Commodatum Mutuum Barter
Subject Non- Money or other Non-fungible
Matter consumable fungible thing (non-
thing consumable)
thing
Return Identical thing Same amount of Equivalent thing
borrowed the same kind to what has
and quality been received
Nature Gratuitous May be Onerous
gratuitous
Art. 1955. The obligation of a person who borrows money shall be
governed by the provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor
owes another thing of the same kind, quantity and quality, even if it
should change in value. In case it is impossible to deliver the same
kind, its value at the time of the perfection of the loan shall be paid.
(1754a)
Form of payment
1. Loan of money – in the currency stipulated, legal tender
in the Philippines (Art. 1249) and in case of extraordinary
inflation or deflation, value based at the time of the
creation of the obligation (Art. 1250).
a. Notes and coins issued by CB
b. Check is not legal tender; cannot constitute valid
tender of payment
2. Loan of a fungible thing – another thing of the same
kind, quality, and quantity. If impossible, the value of the
thing at the time of the perfection of the contract.
Art. 1980. Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions
concerning simple loan. (n)
Relation between bank and depositor
1. Contract of loan – Deposits of money in banks are really
loans to the bank because it can use the same for its
ordinary transactions and the banking business.
a. Deposits earn interest;
b. There is an obligation to return the amount
deposited; not the same money that was deposited.
2. Creditor-debtor relationship – The bank agrees to pay
the depositor on demand
a. Failure to honor a deposit is breach of bank’s
obligation as debtor and not breach of trust
punishable under Art. 315 of the RPC. (Guingona, Jr.
v. City Fiscal)
b. Payment of a bank of the amount of a deposit’s
check is not a loan but payment by the bank.
c. A bank can compensate the deposit in its hands for
the payment of any indebtedness to it by the
depositor (Gullas v. PNB). In a real deposit,
compensation is not allowed (Art. 1287).
d. Impressed with public interest, banks are charged
with the highest degree of case, more than that of a
good father of a family. A bank should exercise
extraordinary diligence to negate its liability to its
depositors (Solid Bank v. Tan).
e. Suspension of a bank by order of the Central Bank
cannot excuse it from its obligations to depositors
(Overseas Bank v. CA) but it shall not be liable to pay
interest in the period of suspension (Integrated
Realty v. PNB).
Cases:
Fides Damasco | UP Law C2013 5
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Republic v. Bagtas,
6 SCRA 262.
A contract of commodatum is essentially gratuitous. If the
breeding fee is to be considered compensation, then the contract
would be lease of the bull. Under Art. 1671, the lessee would be
subject to the responsibilities of a possessor in bad faith, because
she had continued possession after the expiry of the contract. And
even if the contract be commodatum, the appellant is still liable,
because under Art. 1942, a bailee in commodatum is liable for
loss, though it be due to fortuitous events, under several
conditions.
Producers Bank of the Philippines v. Court of Appeals,
G.R. No. 115324, February 19, 2003.
Art. 1933 seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be mutuum.
However, this is subject to Art. 1936. Thus, if consumable goods
are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to
have the very same goods returned at the end of the period
agreed upon, the loan is commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded
primordial consideration in determining the actual character of a
contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.
Garcia v. Thio,
G.R. No. 154878, March 16, 2007.
A loan is a real contract, not consensual, and as such is
perfected only upon the delivery of the object of the contract.
Upon delivery of the object of the contract of loan, the debtor
acquires ownership of such money or loan proceeds and is bound to
pay the creditor an equal amount.
While there can be no stipulated interest due to the agreement as to
interest being verbal, there can be legal interest pursuant to Art.
2209.
Pajuyo v. Court of Appeals,
G.R. No. 146364, June 3, 2004.
The bailor cannot demand the return of the thing loaned until
after the expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is
constituted. If the bailor should have urgent need of the thing, he
may demand its return for temporary use. If the use of the thing is
merely tolerated by the bailor, he can demand the return of the thing
at will, in which case, the contractual relation is called a precarium.
Under the Civil Code, precarium is a kind of commodatum. The
accommodation accorded came with the obligation to keep the
property in good condition. It is not essentially gratuitous, and
different from commodatum. This relationship based on tolerance is
one akin to a landlord-tenant relationship where the withdrawal of
permission would result in the termination of the lease.
Even in commodatum, the bailee still has the duty to turn over
possession of the property to the bailor. The obligation to deliver
or to return the thing attaches to contracts for safekeeping,
commission, administration and commodatum. These contracts
certainly involve the obligation to deliver or return the thing received.
Quintos v. Beck,
69 Phil. 108.
The contract entered into between the parties is one of
commodatum, because under it the plaintiff gratuitously granted the
use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to
return the furniture to the plaintiff, upon the latter’s demand. The
obligation voluntarily assumed by the defendant to return upon
demand means that he should return all of them to the plaintiff
at the latter’s residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of
the plaintiff, retaining for his benefit the three gas heaters and the
four electric lamps.
The bailee was not entitled to place the furniture on deposit;
nor was the bailor under a duty to accept the offer of return,
because the defendant wanted to retain part of the thing loaned.
Saura Import & Export Co., Inc. v. Development Bank of the
Philippines,
44 SCRA 445.

There was a perfected consensual contract to loan, as recognized in
Art. 1934, where there is undoubtedly offer and acceptance: the
application of Saura for a loan approved by resolution and the
corresponding mortgage was executed and registered.
However, the mutual desistance or ―mutuo disenso‖ by both
parties precludes the recovery of damages for the breach of the
promise to loan. Since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.
BPI Investment Corporation v. Court of Appeals & ALS
Management & Development Corporation,
G.R. No. 133632, February 15, 2002.
A loan contract is not a consensual contract but a real contract.
It is perfected only upon the delivery of the object of the contract.
The contract in Bonnevie is a perfected consensual contract under
Art. 1934, which is an accepted promise to deliver something by way
of a simple loan. A contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each part is the consideration
for that of the other.
A perfected consensual contract can give rise to an action for
damages. However, said contract does not constitute the real
contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on
the part of the borrower.
People v. Puig & Porras,
G.R. No. 173654-765, August 28, 2008.
Cashiers, bookkeepers and other employees of a bank who come
into possession of the monies deposited therein enjoy the
confidence reposed in them by their employer. Banks, on the other
hand, where monies are deposited, are considered owners thereof.
The relationship between banks and depositors has been held
to be that of creditor and debtor.
Banks acquire ownership of the money deposited by its clients and
the employees who are entrusted with the possession of the money
of the bank due to the confidence reposed on them occupy positions
of confidence. So even without particular reference to the bank as
owner of the deposits, as long as there is an allegation of grave
abuse of confidence to the damage and prejudice of the bank is
sufficient to make out a case of qualified theft.
BPI Family Bank v. Franco & Court of Appeals,
G.R. No. 123498, November 23, 2007.
The deposit of money in banks is governed by the Civil Code
provisions on simple loan or mutuum. As there is a debtor-creditor
relationship between a bank and its depositor, the bank
ultimately acquired ownership of the deposits, but such
ownership is coupled with a corresponding obligation to pay
him an equal amount on demand.
Money bears no earmarks of peculiar ownership; its primary function
is to pass from hand to hand as a medium of exchange without other
evidence of its title. Money which has passed through various
transactions in the general course of banking business, even if of
traceable origin, is no exception. Art. 559 which allows recovery of
the possession by one who has lost a movable or has been
unlawfully deprived, as it pertains to a specific or determinate thing,
is inapplicable to cases of money deposits.
Pantaleon v. American Express International, Inc.,
G.R. No. 174269, August 25, 2010.
The relationship between a credit card provider and its card
holders is that of creditor-debtor, with the card company as the
creditor extending loans and credit to the card holder, who as debtor
is obliged to repay the debtor. This relationship takes exception to
the general rule that as between a bank and its depositors, the bank
is deemed the debtor while the depositor is considered the creditor.
The requisites of mora solvendi are (1) obligation is demandable and
liquidated; (2) debtor delays performance and (3) the creditor
judicially or extrajudicially requires the debtor’s performance. The
requisites of mora accipiendi on the other hand are (1) offer of
performance by the debtor, (2) the offer must be to comply with the
prestation as it should be performed and (3) the creditor refuses the
performance without just cause.
7. Interest,
Articles 1956 to 1961, 2209, 2212, 2213, 1169 Civil Code, Central
Bank Circular No. 416
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Art. 1956. No interest shall be due unless it has been expressly
stipulated in writing. (1755a)
Requisites for recovery of interest
1. Payment of interest must be expressly stipulated (Tan v.
Valduhueza)
2. In writing
3. Interest must be lawful (Arts. 1957, 1961)
Interest may be paid either as compensation for the use of money
(monetary interest) referred to in Art. 1956 or imposed by law or by
courts as penalty or indemnity for damages (compensatory
interest) under Arts. 2209, 2212 for breach of contractual
obligations (Garcia v. Thio).
Existence of stipulation to pay interest
1. If rate is stipulated, that interest, not the legal rate of
interest, shall be applied.
2. If no exact rate is mentioned, the legal rate of 12% shall
be payable.
3. No increase in interest shall be due unless stipulated.
4. Sales invoices or slips without the signature of the obligor
do not constitute the express stipulation required by Art.
1956. In case of delay, no interest except legal interest
(6%) under Art. 2209
5. It is only in contracts of loan where interest may be
stipulated or demanded (Soncuya v. Azarraga).
6. Receipt of interest payment for the loan that has already
matured does not ipso facto result in the renewal or
extension of the loan.
7. Purchase through installment payment system is in effect
payment of interest on the cash price, whether the fact
and rate of such interest payment are disclosed in the
contract or not.
Art. 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum. (1108)
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point. (1109a)
Art. 2213. Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with
reasonably certainty.
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. (1100a)
CBP CIRCULAR NO. 416-74
July 29, 1974
By virtue of the authority granted to it under Section 1 of Act No.
2655, as amended, otherwise known as the "Usury Law", the
Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has
prescribed that the rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be
twelve per cent (12%) per annum.
This Circular shall take effect immediately.
(SGD.) G. S. LICAROS
Governor

Liability for interest even in the absence of stipulation
Art. 1956 is subject to two exceptions:
1. Indemnity for damages – debtor in delay is liable to pay
legal interest (6%/12%) even in the absence of stipulation.
a. Art. 2209 –
i. payment of penalty interest at the rate agreed
upon,
ii. if there is no stipulation for penalty, at the rate
equal to the regular monetary interest
iii. if there is no stipulation for monetary interest,
then payment of legal interest
1. 6% annually
2. 12% per annum in case of loans or
forbearances of money under CB Circular
No. 416
b. Art. 2213 – interest cannot be recovered upon
unliquidated claims or damages except when the
demand can be established with reasonable
certainty. Interest is at the rate of 6% per annum
should be from the date the judgment of the court is
made.
c. CB Circular No. 416 rate of 12% per annum applies
to 1) loans, 2) forbearance of any money, goods or
credits, and 3) judgments involving such loans or
forbearance. If it arises from other sources, Art. 2209
rate of 6% annually applies.
d. When the judgment of the court awarding the sum of
money becomes final and executory, the rate of legal
interest regardless of whether or not the obligation
involves a loan or forbearance of money shall be
12% per annum from such finality until its
satisfaction—the interim period being deemed an
equivalent to a forbearance of credit (Prudential
Guarantee and Assurance v. CA)
e. Interest that forms part of the consideration and
interest as indemnity for damages are distinct claims
and may be demanded separately. Interest as
indemnity for damages is payable only in case of
default or non-performance. Under 1169, the rate of
interest is 12% per annum computed from date of
default (i.e. from judicial or extrajudicial demand).
2. Interest accruing from unpaid interest – Art. 2212 and
Sec. 5 of the Usury law provide that interest shall earn
interest from the time it is judicially demanded although
the obligation may be silent on this point apply only where
interest has been stipulated by the parties. Where no
interest had been stipulated by the parties, no accrued
conventional interest could further earn interest upon
judicial demand.
Liability for surcharges and penalties
Surcharges and penalties paid in case of default are in the nature of
liquidated damages. These shall be equitably reduced if they are
iniquitous or unconscionable (Art. 2227)
The essence for the payment of the interest often referred to as cost
of money is separate and distinct from that of surcharges and
penalties. A penalty is not necessary preclusive of interest.
Art. 1957. Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury shall be
void. The borrower may recover in accordance with the laws on
usury. (n)
Usurious contracts declared void
1. Form of contract not conclusive – parol evidence is
admissible to show that a written document, though legal
in form was in fact a cloak to cover usury
2. Contract void only as to interest involved – It is only
the stipulation on usurious interest which should be
treated void so that the loan becomes without stipulation
as to interest. The nullity of the stipulation does not affect
the lender’s right to receive back the principal amount.
3. Right of debtor – the amount paid as interest under a
usurious agreement is recoverable as payment is deemed
to have been made under restraint, rather than voluntarily
(First Metro v. Este Del Sol)
Interest rates are no longer subject to any ceiling. (CB Circular
No. 905)
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Contracts disguised to cover usurious loans
1. Credit sale of property at exorbitant price to loan applicant
2. Purchase of lender’s property at an exorbitant price to be
taken from loan
3. Price of sale with right to repurchase clearly inadequate
4. Pretended lease by borrower at usurious rental
5. Rent free by lender of borrower’s property in addition to
interest on loans
6. Date for repayment of loan with interest antedates actual
transaction
7. Payment by borrower for lender’s services as additional
compensation for loan.
Art. 1958. In the determination of the interest, if it is payable in kind,
its value shall be appraised at the current price of the products or
goods at the time and place of payment. (n)
Intended to make usury harder to perpetrate.
Art. 1959. Without prejudice to the provisions of Art. 2212, interest
due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest. (n)
Accrued interest shall not earn interest except
1. When judicially demanded (Art. 2212)
2. When there is express stipulation that interest due shall be
added to principal obligation and the resulting amount
shall earn interest (compounding interest allowed by
Usury Law) (Mambulao Lumber v. PNB)
Compounding of monetary interest, and penalty charge (also called
penalty or compensatory interest) is allowed. In view of Art. 1956,
the stipulation to compound interest must be in writing.
Art. 1960. If the borrower pays interest when there has been no
stipulation therefor, the provisions of this Code concerning solutio
indebiti, or natural obligations, shall be applied, as the case may be.
(n)
Recovery of unstipulated interest paid
1. Unstipulated, paid by mistake – may be recovered as in
solutio indebiti (Art. 2154)
2. Unstipulated or stipulated but not in writing, voluntarily
paid – cannot be recovered as in natural obligations (Art.
1423)
Art. 1961. Usurious contracts shall be governed by the Usury Law
and other special laws, so far as they are not inconsistent with this
Code. (n)
Usury is now legally non-existent. The rate of interest now
depends upon the agreement of the parties. CB Circular 905
removed the interest ceiling provided by the Usury Law. However, it
does not grant lenders carte blanche authority to raise interest rates
to levels which will enslave borrowers. When the agreed rate is
found to be iniquitous and unconscionable, the courts may reduce
the same as reason and equity demand (Imperial v. Juacian).
Cases:
Frias v. San Diego-Sison,
G.R. No. 155223, April 4, 2007.
A simple loan may be gratuitous or with a stipulation to pay
interest. The payment of regular interest constitutes the price or
cost of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since
the debtor continues to use such principal amount. In State
Investment v. CA, it was held that for a debtor to continue in
possession of the principal of the loan and to continue to use
the same after maturity of the loan without payment of the
monetary interest would constitute unjust enrichment on the
part of the debtor at the expense of the creditor.
Ligutan v. Court of Appeals,
G.R. No. 138677, February 12, 2002.
Interest must commence not on the date of filing of the
complaint but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to

render the obligor in default when the obligation or the law so
provides.
A penalty clause is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an
obligation. It functions to strengthen the coercive force of the
obligation and to provide for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach.
Although a court may not at liberty ignore the freedom of the parties
to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied with.
The question of whether a penalty is reasonable or iniquitous would
depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application
of which, by and large, is addressed to the sound discretion of the
court. The stipulated penalty might likewise be reduced when a
partial or irregular performance is made by the debtor. The
stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor, when
the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it.
Government Service Insurance System v. Court of Appeals,
G.R. No. L-52478, October 30, 1986.
The Usury Law applies only to interest by way of compensation for
the use or forbearance of money. It would be contrary to human
experience and to ordinary practice for the mortgagee to impose
less onerous conditions on an increased loan by the deletion of
compound interest exacted on a lesser loan.
In the Bachrach case, the Supreme Court ruled that the Civil Code
permits the agreement upon a penalty apart from the interest.
Should there be such an agreement, the penalty does not
include the interest, and as such the two are different and
distinct things which may be demanded separately. Reiterating
the same principle in the later case of Equitable Banking Corp.,
where it was held that the stipulation about payment of such
additional rate partakes of the nature of a penalty clause, which is
sanctioned by law.
Eastern Shipping Lines v. Court of Appeals,
G.R. No. 97412, July 12, 1994.
The judgments spoken of and referred to are judgments in litigations
involving loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to do with, nor
involving loans or forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank Circular No. 416.
TWO CONCEPTS ON PAYMENT OF INTEREST
1 Interest for the use or loan or forbearance of money, goods
or credit
No interest for use or
forbearance
If no stipulation on payment of
interest * No interest shall be due unless
it has been expressly stipulated in
writing (CC1956)
If there is express stipulation
(which must be in writing to be Interest shall be 12% per annum
valid CC1956) for payment of (Sec. 2, Monetary Board Circular
interests, but no rate 905, 10 Dec 1982)
mentioned
If there is stipulation in writing Such interest stipulated shall not
and rate of interest is agreed be subject to ceiling prescribed
upon (including commissions, under the Usury Law (Sec. 1,
premiums, fees and other Monetary Board Circular 905, 10
charges) Dec 1982)
2 Interest as damages for breach or default in payment of
loan or forbearance of money, goods, credit
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In case of DEFAULT, loan or
forbearance shall earn legal
No stipulation as to interest for interest, at rate of 12% per
use of money annum from date of judicial or
extrajudicial demand, subject to
Art 1169 (delay/mora)
Loan + stipulated interest, shall
earn 12% per annum from date of
judicial demand
If rate of interest stipulated,
* Interest due shall earn legal
e.g. 24% per annum interest from the time it is judicially
demanded, although the obligation
may be silent upon this point (Art
2212)
3 If obligation NOT consisting of a loan or forbearance of
money, goods or credit is breached, e.g. obligation to give,
to do, not to do
o Interest may be imposed at the discretion of court
at the rate of 6% per annum.
o No interest adjudged on unliquidated claims or
damages, until demand can be established with
reasonable certainty.
o After thus established with reasonable certainty,
interest of 6% per annum shall begin to run from the
date of judicial or extrajudicial demand.
But if obligation cannot be established with reasonable certainty at
time of demand, 6% per annum interest shall begin to run only from
date of judgment – on amount finally adjudged by court.
When judgment of court awarding money becomes final and
executory, money judgment is A, B and C (above) shall earn 12%
per annum from finality of judgment until full payment – money
judgment shall be considered as forbearance of credit.
Siga-an v. Villanueva,
G.R. No. 173227, January 20, 2009.
Interest is a compensation fixed by the parties for the use or
forbearance of money (monetary interest). Interest may also be
imposed by law or by courts as penalty or indemnity for damages
(compensatory interest). The right to interest arises only by virtue
of a contract or by virtue of damages for delay or failure to pay
the principal loan on which interest is demanded.
Art. 1956 referring to monetary interest, specifically mandates that
no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of the
two conditions is required for the payment of monetary interest.
Thus, the collection of interest without any stipulation therefor in
writing is prohibited by law. However, there are instances in which
an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Art. 2209
states that if the obligation consists in the payment of a sum of
money, and the debtor incurs delay, a legal interest of 12% per
annum may be imposed as indemnity for damages if no stipulation
on the payment of interest was agreed upon. Likewise, Art. 2212
provides that interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent on this
point. The interest under these two instances may be imposed only
as a penalty or damages for breach of contractual obligations. It
cannot be charged as a compensation for the use or forbearance of
money. Arts. 2209 and 2212 apply only to compensatory interest
and not to monetary interest.
The principle of solutio indebiti applies in case of erroneous
payment of undue interest. Under Art. 1960, if the borrower of loan
pays interest when there has been no stipulation therefor, the
provisions concerning solutio indebiti shall be applied. Art. 2154
provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor
becomes the creditor who then has the right to demand the return of
payment made by mistake, and the person who has no right to
receive such payment becomes obligated to return the same. The
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quasi-contract of solutio indebiti harks back to the ancient principle
that no one shall enrich himself unjustly at the expense of another. It
applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person
who received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause.
8. Concept of Deposit,
Articles 1962 to 1967, Civil Code
Title XII. - DEPOSIT
CHAPTER 1
DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
3. Where property saved from destruction without knowledge
of the owner (Art. 1996[2], 1997 par. 2)
Art. 1966. Only movable things may be the object of a deposit.
(1761)
Refers to extrajudicial deposit, whether voluntary or necessary.
Judicial deposit may cover movable or immovable property, its
purpose being to protect the rights of parties to a suit.
Rights and actions, being incorporeal, are not susceptible of
custody in the tangible sense that deposit is understood. Only
the deeds and documents in which those rights are contained can
be the object of deposit.

Art. 1962. A deposit is constituted from the moment a person Art. 1967. An extrajudicial deposit is either voluntary or necessary.
receives a thing belonging to another, with the obligation of safely (1762)
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. (1758a) 9. Voluntary Deposit,
Articles 1968 to 1995, Civil Code
Deposit (Ro. depositum) whether civil or commercial is regulated by
Title XII, Book IV. It is essential that the depositary is not the owner CHAPTER 2
of the thing deposited. VOLUNTARY DEPOSIT

Commodatum Mutuum Deposit SECTION 1. - General Provisions

Principal Transfer of the Consumption Mere
Art. 1968. A voluntary deposit is that wherein the delivery is made
Purpose use safekeeping
by the will of the depositor. A deposit may also be made by two or
or custody
more persons each of whom believes himself entitled to the thing
Return Bailor must wait Lender must Depositor
deposited with a third person, who shall deliver it in a proper case to
until expiration or wait until the may demand
the one to whom it belongs. (1763)
accomplishment. expiration of for the return
In precarium, at the period at will
will. granted Ordinarily there are only two persons involved. Sometimes, the
Subject Non-consumable Money or Movable or depositary may be a third person with the obligation to deliver to the
Matter thing other immovable one to which it belongs (as in an interpleader).
consumable property Voluntary – free choice of depositary.
thing Necessary – lack of free choice in the depositor
Compensati Essentially May be May be
on gratuitous gratuitous gratuitous Art. 1969. A contract of deposit may be entered into orally or in
writing. (n)

Art. 1963. An agreement to constitute a deposit is binding, but the Except for the delivery of the thing, there are no formalities required
deposit itself is not perfected until the delivery of the thing. (n) for the existence of the contract following the general rule that
contract are obligatory in whatever form they may have been
Where there has been no delivery, there is merely an agreement to entered into provided all the essential requisites for their validity are
deposit. Analogous to Art. 1934, a contract of future deposit is present (Art. 1356).
consensual.
Art. 1970. If a person having capacity to contract accepts a deposit
Art. 1964. A deposit may be constituted judicially or extrajudicially. made by one who is incapacitated, the former shall be subject to all
(1759) the obligations of a depositary, and may be compelled to return the
thing by the guardian, or administrator, of the person who made the
Creation of deposit - A deposit may be constituted by deposit, or by the latter himself if he should acquire capacity. (1764)
1. virtue of a court order or
Persons who are capable cannot allege the incapacity of those with
2. by law or
whom they contract (Art. 1397)
3. by the will of the parties.
Kinds of deposit Art. 1971. If the deposit has been made by a capacitated person
with another who is not, the depositor shall only have an action to
1. Judicial – attachment or seizure of property in litigation is recover the thing deposited while it is still in the possession of the
ordered (Art. 2005-2008) depositary, or to compel the latter to pay him the amount by which
2. Extrajudicial (Art. 1967) he may have enriched or benefited himself with the thing or its price.
a. Voluntary – delivery is made by the will of the However, if a third person who acquired the thing acted in bad faith,
depositor or by two or more persons each of whom the depositor may bring an action against him for its recovery.
believes himself entitled to the thing deposited (Arts. (1765a)
1965-1995)
b. Necessary The incapacitated depositary does not incur the obligation of a
i. Made in compliance with a legal obligation or depositary. He is liable to:
ii. On occasion of any calamity or
iii. By travelers in hotels and inns (Arts. 1996-2004) 1. Return the thing deposited while still in his possession
or 2. Pay the depositor the amount by which may have
iv. By travelers with common carriers (Arts. 1734- benefited himself with the thing or its price subject to the
1735) right of any third person who acquired the thing in good
faith.
Art. 1965. A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in SECTION 2. - Obligations of the Depositary
the business of storing goods. (1760a)
Art. 1972. The depositary is obliged to keep the thing safely and to
Deposit generally gratuitous except: return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
1. Where there is contrary stipulation (Art. 1306) contract. His responsibility, with regard to the safekeeping and the
2. Where depositary engaged in business of storing goods loss of the thing, shall be governed by the provisions of Title I of this
Book.
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If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
(1766a)
Obligation to keep the thing deposited and return it
1. Degree of care – the depositary must exercise over the
thing deposited the same diligence as he would over his
own property. But he cannot excuse himself from liability if
such care is less than that required by the circumstances.
2. Rules applicable – care and delivery is governed by the
rules on obligations (Art. 1163)
a. Liable for loss through his fault or negligence (Art.
1170) even if the thing is insured (Art. 2207)
b. Loss of thing while in his possession raises a
presumption of fault on his part (Art. 1265)
c. The required degree of care is greater if the deposit
is for compensation.
3. Return before specified term – Thing must be returned to
depositor upon demand despite a stipulated term.
Art. 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If deposit
with a third person is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is manifestly careless or
unfit. The depositary is responsible for the negligence of his
employees. (n)
Obligation not to transfer deposit
1. Liability for loss – Depositary is liable if he transfers the
deposit:
a. with a third person without authority although there is
no negligence
b. with a third person who is manifestly careless or unfit
although authorized, even without negligence
c. the thing is lost through the negligence of his
employees whether the latter are manifestly careless
or not
2. Exemption from liability – If the loss is without
negligence of the third person with whom he was allowed
to deposit the thing if such third person is not ―manifestly
careless or unfit.‖
Art. 1974. The depositary may change the way of the deposit if
under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts of the
situation. However, before the depositary may make such change,
he shall notify the depositor thereof and wait for his decision, unless
delay would cause danger. (n)
Obligation not to change the way of deposit
Unless the depositor is notified and agrees to the change except
when delay would cause danger.
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary
in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes. (n)
Obligation to collect interest on choses in action deposited
If the thing should earn interest, the depositary must:
Art. 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the same kind
and quality, in which case the various depositors shall own or have a
proportionate interest in the mass. (n)
Obligation not to commingle things deposited if so stipulated
Depositary is permitted to commingle grain and other articles of the
same kind and quality and depositors shall own the entire mass in
common (Sec. 23, Warehouse Receipt Law).
Art. 1977. The depositary cannot make use of the thing deposited
without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires its
use, it must be used but only for that purpose. (1767a)
Obligation not to use unless authorized
Unauthorized use makes the depositary liable for damages. But
when the use is necessary for preservation, use may be made even
without the express permission of the depositor.
Art. 1978. When the depositary has permission to use the thing
deposited, the contract loses the concept of a deposit and becomes
a loan or commodatum, except where safekeeping is still the
principal purpose of the contract.
The permission shall not be presumed, and its existence must be
proved. (1768a)
Effect if permission to use is given
1. Thing deposited, non-consumable – commodatum unless
the principal purpose is safekeeping
2. Thing deposited, money or other consumable thing –
simple loan or mutuum, but if safekeeping is still the
principal purpose, it is an irregular deposit.
Irregular deposit Mutuum
Return Consumable thing may Cannot be demanded
be demanded at will until the time for payment
Benefit Benefit accrues to Loan with interest is for
depositor only the benefit of both
parties
Preference Irregular depositor has Common creditors enjoy
preference over other no preference in the
creditor with respect to distribution (Art. 2245)
the thing deposited (Art.
2241[13])
Permission to use not presumed
The burden is on the depositary to prove that permission has been
given.
Art. 1979. The depositary is liable for the loss of the thing through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have
been authorized to use the same. (n)
Similar to Art. 1942, qualifying the general rule that the depositary is
not liable for loss through a fortuitous event without his fault.

1. Collect the interest as it becomes due Art. 1980. Fixed, savings, and current deposits of money in banks
2. Take necessary steps to preserve its value and the rights and similar institutions shall be governed by the provisions
corresponding to it. concerning simple loan. (n)
The depositary is bound to collect not only the interest but also the
capital itself when it is due. Relation between bank and depositor

Contract for rent of safety deposit boxes is not an ordinary
contract of lease of things but a special kind of deposit; hence, it is
not to be strictly governed by the provisions on deposit. The banks
perform the service of accepting in custody funds, documents and
other valuable objects and renting safety deposit boxes as
depositaries or as agents (Sec. 72, General Banking Act).
1. Contract of loan – Deposits of money in banks are really
loans to the bank because it can use the same for its
ordinary transactions and the banking business.
a. Deposits earn interest;
b. There is an obligation to return the amount
deposited; not the same money that was deposited.
2. Creditor-debtor relationship – The bank agrees to pay
the depositor on demand

a. Failure to honor a deposit is breach of bank’s
obligation as debtor and not breach of trust
punishable under Art. 315 of the RPC. (Guingona, Jr.
v. City Fiscal)
b. Payment of a bank of the amount of a deposit’s
check is not a loan but payment by the bank.
c. A bank can compensate the deposit in its hands for
the payment of any indebtedness to it by the
depositor (Gullas v. PNB). In a real deposit,
compensation is not allowed (Art. 1287).
d. Impressed with public interest, banks are charged
with the highest degree of case, more than that of a
good father of a family. A bank should exercise
extraordinary diligence to negate its liability to its
depositors (Solid Bank v. Tan).
e. Suspension of a bank by order of the Central Bank
cannot excuse it from its obligations to depositors
(Overseas Bank v. CA) but it shall not be liable to pay
interest in the period of suspension (Integrated
Realty v. PNB).
Art. 1981. When the thing deposited is delivered closed and sealed,
the depositary must return it in the same condition, and he shall be
liable for damages should the seal or lock be broken through his
fault.
Fault on the part of the depositary is presumed, unless there is proof
to the contrary.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputable
to the depositary, should there be no proof to the contrary. However,
the courts may pass upon the credibility of the depositor with respect
to the value claimed by him.
When the seal or lock is broken, with or without the depositary's
fault, he shall keep the secret of the deposit. (1769a)
Art. 1982. When it becomes necessary to open a locked box or
receptacle, the depositary is presumed authorized to do so, if the
key has been delivered to him; or when the instructions of the
depositor as regards the deposit cannot be executed without
opening the box or receptacle. (n)
Where the thing delivered is locked and sealed
1. Obligations of depositary
a. Return the thing deposited in the same condition
b. Pay the damages should the seal or lock be broken
through his fault (which is presumed unless proved
otherwise)
c. Keep the secret of the deposit when the seal or lock
is broken, with or without his fault
2. Reason for rule – the depositor having constituted the
deposit in reliance upon the depositary’s fidelity, the most
elementary sense of delicacy should move the depositary
to respect the secrets which the depositor decides to keep
and guard. Statement of the depositor as to the value is
prima facie evidence only.
3. When depositary justified to open
a. Presumed authority
b. Necessity
Art. 1983. The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consist of money, the provisions relative to
agents in Art. 1896 shall be applied to the depositary. (1770)
Obligation to return products, accessories and accessions
Depositary must return the thing itself, products, accessories and
accessions, which are a consequence of ownership.
Obligation to pay interest on sums converted to personal use
If what is deposited is money without the right to use, there is no
liability to pay interest. However, in case of delay or unauthorized
use, the depositary is liable to pay interest as indemnity.
Art. 1984. The depositary cannot demand that the depositor prove
his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and
who its true owner is, he must advise the latter of the deposit.
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If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all
responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing
has not been lawfully acquired by the depositor, the former may
return the same. (1771a)
Where third person appears to be owner
To be relieved of liability, the depositary must:
1. If discovered that thing is stolen, notify the true owner
2. If the owner does not claim it within one month, return the
thing to the deposit
3. If there are reasonable grounds to believe that the thing
has not been lawfully acquired, return the thing.
For paragraph 2, two conditions must exist:
1. The thing deposited must have been stolen;
2. The depositary knows who its true owner is.
Effect of failure of owner to claim within one month
The period for one month is for the protection of the depositary. If
within 30 days the depositor demands its return, Art. 1984 is not
clear whether the depositary will be held liable for conversion if he
refuses to return the thing to the depositor.
Art. 1985. When there are two or more depositors, if they are not
solidary, and the thing admits of division, each one cannot demand
more than his share.
When there is solidarity or the thing does not admit of division, the
provisions of Articles 1212 and 1214 shall govern. However, if there
is a stipulation that the thing should be returned to one of the
depositors, the depositary shall return it only to the person
designated. (1772a)
Right of two or more depositors
1. Thing deposited divisible and depositors not solidary –
each one can demand only his share
2. Obligation solidary or thing deposited not indivisible –
each one of the solidary depositors may do whatever may
be useful to the others, but not anything which may be
prejudicial to the latter (Art. 1212) and the depositary may
return to any one of the solidary depositors; but if any
demand, judicial or extrajudicial, has been made by one of
them, return should be made to him (Art.1214).
3. Return to one of depositors stipulated – return should be
made only to the person designated although he has not
made a demand for its return.
Art. 1986. If the depositor should lose his capacity to contract after
having made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights.
(1773)
Person to whom return must be made
1. Return when required must be made to the depositor, his
heir or successors or to the person designated in the
contract (Art. 1972).
2. If depositor becomes incapacitated, to his guardian or
administrator, legal representative (Art. 1986), the person
who made the deposit or the depositor himself should he
acquire capacity (Art. 1970).
Art. 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take the
thing deposited to such place; but the expenses for transportation
shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the same
place where the deposit was made, provided that there was no
malice on the part of the depositary. (1774)
Place of return
1. At the place agreed upon by the parties (expenses borne
by depositor); or
2. In the absence of stipulation, at the place where the thing
deposited might be.

This follows the general rule of law regarding the place of payment
(Art. 1251).
Art. 1988. The thing deposited must be returned to the depositor
upon demand, even though a specified period or time for such return
may have been fixed.
This provision shall not apply when the thing is judicially attached
while in the depositary's possession, or should he have been notified
of the opposition of a third person to the return or the removal of the
thing deposited. In these cases, the depositary must immediately
inform the depositor of the attachment or opposition. (1775)
Time of return
Depositor can demand at will, even when a period is stipulated
because this period is for the benefit of the depositor and can be
waived.
If the deposit is for compensation, the depositary is entitled to
compensation corresponding to the entire period.
When depositary not obliged to return thing deposited
1. Disobeying the judicial order of attachment
2. Refusal to return upon opposition of another is prone to
abuse and mischief. The depositor should consign the
thing in court through an action of interpleaded (JBL
Reyes).
Art. 1989. Unless the deposit is for a valuable consideration, the
depositary who may have justifiable reasons for not keeping the
thing deposited may, even before the time designated, return it to
the depositor; and if the latter should refuse to receive it, the
depositary may secure its consignation from the court. (1776a)
Right of depositary to return thing deposited
1. Deposit gratuitous – May return even if period is fixed if (a)
deposit is gratuitous, and (b) justifiable reason. If depositor
refuses, depositary can consign to the court.
2. Deposit for a valuable consideration – depositary is bound
by the period designated and has no right to return before;
restitution before expiration constitutes a breach of
obligation.
Art. 1990. If the depositary by force majeure or government order
loses the thing and receives money or another thing in its place, he
shall deliver the sum or other thing to the depositor. (1777a)
Liability for loss by force majeure or government order
Not liable but if in place of the thing he receives money or another
thing, he has the duty to deliver. Else, unjust enrichment.
Art. 1991. The depositary's heir who in good faith may have sold the
thing which he did not know was deposited, shall only be bound to
return the price he may have received or to assign his right of action
against the buyer in case the price has not been paid him. (1778)
Alienation in good faith by depositary’s heir
If sold by depositary’s heir in good faith, the obligation is to return
the price received or assign the right to collect the same.
If sold by depositary’s heir in bad faith, he is liable for damages and
constitutes estafa.
SECTION 3. - Obligations of the Depositor
Art. 1992. If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have incurred for
the preservation of the thing deposited. (1779a)
Obligation to pay expenses of preservation
1. Deposit gratuitous – based on equity. Otherwise,
depositor would be unjustly enriching himself at the
expense of the depositary. Different rule from
commodatum, Reimbursement covers ordinary or
extraordinary (necessary expenses) Useful expenses or
for luxury not covered.
2. Deposit for compensation – expenses of preservation are
borne by depositary because they are deemed included in
the compensation.
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Art. 1993. The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the time
of the constitution of the deposit the former was not aware of, or was
not expected to know the dangerous character of the thing, or unless
he notified the depositary of the same, or the latter was aware of it
without advice from the depositor. (n)
Obligation to pay losses incurred due to character of thing
deposited
Depositor must reimburse for loss except:
1. The depositor was not aware of the dangerous character
of the thing
2. The depositor was not expected to know the dangerous
character of the thing
3. Unless the depositor notified the depositary
4. The depositary was aware of it without advice from the
depositor.
Art. 1994. The depositary may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit. (1780)
Depositary’s right of retention
This is a pledge created by law (Art. 2121) and the thing serves as
security for payment of what may be due (Art. 1965, 1992, 1993),
similar to that granted to an agent (Art. 1914)
Compare to commodatum (Art. 1944, 1951).
Art. 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
Causes for extinguishment
Not exclusive, includes:
1. Return of the thing
2. Novation
3. Merger
4. Expiration of the term
5. Fulfillment of a resolutory condition, etc. (Art. 1231)
Effect of death or depositor or depositary
1. Deposit gratuitous – death of either extinguishes the
deposit in the sense that depositary is not obliged to
continue with the contract
2. Deposit for compensation – death of either does not
extinguish the deposit because it is not personal in nature
(art. 1411). Rights are transmissible to heirs (Art. 1178)
Cases:
Bank of the Philippine Islands v. Intermediate Appellate Court,
164 SCRA 630.
The document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return
it later to Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intend to sell the US
dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been
entered into at all.
Since the mere safekeeping of the greenbacks, without selling them
to the Central Bank within one business day from receipt, is a
transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited
transactions. Hence, pursuant to Art. 5, it is void, having been
executed against the provisions of a mandatory/prohibitory law.
More importantly, it affords neither of the parties a cause of action
against the other. "When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no cause
of action against each other..." (Art. 1411) The only remedy is one
on behalf of the State to prosecute the parties for violating the law.
Bishop of Jaro v. De la Pena,
26 Phil. 144.
Although the Civil Code states that "a person obliged to give
something is also bound to preserve it with the diligence pertaining

to a good father of a family" (Art. 1094), it also provides, following
the principle of the Roman law, major casus est, cui humana
infirmitas resistere non potest, that "no one shall be liable for events
which could not be foreseen, or which having been foreseen were
inevitable, with the exception of the cases expressly mentioned in
the law or those in which the obligation so declares." (Art. 1105.)
United State vs. Thomas (82 U. S., 337), said: "Trustees are only
bound to exercise the same care and solicitude with regard to
the trust property which they would exercise with regard to
their own. Equity will not exact more of them. They are not liable for
a loss by theft without their fault. But this exemption ceases when
they mix the trust-money with their own, whereby it loses its identity,
and they become mere debtors."
Trent, dissent. This money was then clothed with all the immunities
and protection with which the law seeks to invest trust funds. But
when De la Peña mixed this trust fund with his own and
deposited the whole in the bank to his personal account or
credit, he by this act stamped on the said fund his own private
marks and unclothed it of all the protection it had.
Triple-V Food Services, Inc. v. Filipino Merchants Insurance
Company, Inc.,
G.R. No. 160544, February 21, 2005.
In a contract of deposit, a person receives an object belonging to
another with the obligation of safely keeping it and returning the
same. A deposit may be constituted even without any consideration.
It is not necessary that the depositary receives a fee before it
becomes obligated to keep the item entrusted for safekeeping
ant to return it later to the depositor.
The parking claim stub’s exclusionary stipulation as a shield from
any responsibility for any loss or damage to vehicles or to valuables
contained therein. It is essentially a contract of adhesion that the
Court will set aside when proved to be one-sided.
Valet parking is a restaurant’s enticement to its customers and is an
added attraction to the business because customers are somehow
assured that their vehicles are kept in safely in a space, instead of
parking elsewhere at their own risk.
CA Agro-Industrial Development Corporation v. Court of
Appeals,
219 SCRA 426.
A contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a bailment
for hire. The contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Art. 1643. However, it is not
the same as a contract of deposit that is to be strictly governed by
the provisions in the Civil Code on deposit; the contract in the case
at bar is a special kind of deposit. It cannot be characterized as
an ordinary contract of lease under Art. 1643 because the full and
absolute possession and control of the safety deposit box was not
given to the joint renters. The guard key of the box remained with
the respondent Bank; without this key, neither of the renters could
open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said
key had a duplicate which was made so that both renters could have
access to the box.
There is some support for the view that the relationship in
question might be more properly characterized as that of
landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written, in
whole or in part. But there is apparently no jurisdiction in which any
rule other than that applicable to bailments governs questions of the
liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes.
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building and
loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and
rent safety deposit boxes for the safeguarding of such effects.
The banks shall perform the services permitted under subsections
(a), (b) and (c) of this section as depositories or as agents. . . .
The primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds,
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of
deposit may be entered into orally or in writing and, pursuant to Art.
1306, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order or public
policy. Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. In the absence of any
stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. Hence, any stipulation
exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy.
10. Necessary Deposit,
Art. 1996 to 2004, Civil Code
CHAPTER 3
NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire,
storm, flood, pillage, shipwreck, or other similar events. (1781a)
Art. 1997. The deposit referred to in No. 1 of the preceding Art. shall
be governed by the provisions of the law establishing it, and in case
of its deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding Art. shall be
regulated by the provisions concerning voluntary deposit and by Art.
2168. (1782)
When deposit is necessary
1. When free choice of the depositor is absent
2. Travellers in hotels or inns
3. Passengers with common carriers
Necessary deposit in compliance with a legal obligation
1. Judicial deposit of a thing the possession of which is
disputed in a litigation by two or more persons (Art. 538)
2. Deposit with a bank of public bonds given in usufructuary
when the usufructuary does not give proper security for
their conservation (Art. 586)
3. Deposit of a pledge where the creditor uses or misuses
the thing without authority (Art. 2104)
4. Required in suits by the Rules of Court
5. Deposits constituted to guarantee contracts with
government.
These are governed primarily by provisions for such law, and in
default thereof, by the rules of voluntary deposit.
Necessary deposit made on the occasion of any calamity
1. Deposit created by accident or fortuitous event
a. The law imposes on the recipient the obligations of a
bailee.
b. The more immediate object is to save the property
rather than safekeeping.
c. This quasi-bailment is called involuntary bailment or
involuntary deposit, ―deposito miserable.‖
d. There must be a causal relation between the calamity
and the constitution of the deposit.
2. Governing rules
a. Provisions of voluntary deposit
b. Art. 2168 on the payment of just compensation
(quasi-contract)
Art. 1998. The deposit of effects made by the travelers in hotels or
inns shall also be regarded as necessary. The keepers of hotels or
inns shall be responsible for them as depositaries, provided that
notice was given to them, or to their employees, of the effects
brought by the guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects. (1783)
Art. 1999. The hotel-keeper is liable for the vehicles, animals and
articles which have been introduced or placed in the annexes of the
hotel. (n)

Deposit by travelers in hotels and inns
Elements:
1. The hotel or inn had been previously informed about the
effects
2. The guest has taken precautions prescribed regarding
their safekeeping
Extent of liability of keepers of hotels and inns
Not limited to ―baggage‖ but include those lost and damaged in hotel
annexes such as vehicles in the hotels garage.
The responsibility extends to all those who offer lodging for a
compensation of whatever character (Manresa).
Terms explained
1. Travellers and guests are synonymous. Non-transients
are governed by the rules on lease
2. Hotel-keeper and inn-keeper are synonymous.
a. Hotel – a building of many rooms chiefly for overnight
accommodation of transients
b. Inn – a public house for the lodging of travelers for
compensation and until capacity is reached
c. Motel - an establishment which provides lodging and
parking and in which rooms are usually accessible
from an outdoor parking area
Art. 2000. The responsibility referred to in the two preceding articles
shall include the loss of, or injury to the personal property of the
guests caused by the servants or employees of the keepers of
hotels or inns as well as strangers; but not that which may proceed
from any force majeure. The fact that travelers are constrained to
rely on the vigilance of the keeper of the hotels or inns shall be
considered in determining the degree of care required of him.
(1784a)
Art. 2001. The act of a thief or robber, who has entered the hotel is
not deemed force majeure, unless it is done with the use of arms or
through an irresistible force. (n)
Art. 2002. The hotel-keeper is not liable for compensation if the loss
is due to the acts of the guest, his family, servants or visitors, or if
the loss arises from the character of the things brought into the
hotel. (n)
When hotelkeeper liable regardless of amount of care exercised,
when the loss or injury is caused by:
1. Servants and employees as well as strangers (Art. 2000)
provided that notice was given and precautions were
taken (Art. 1998)
2. The act of thief or robber done without use of arms or
irresistible force. Hotel-keeper is apparently negligent.
When hotelkeeper not liable when the loss or injury is caused by:
1. Force majeure (Art. 2000), theft or robbery by a stranger
with the use of arms or irresistible force (Art. 2001) unless
guilty of fault or negligence (Art. 1170, 1174)
2. Acts of guests, his family, servants or visitors (Art. 2202)
3. Character of the things brought into the hotel
Art. 2003. 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. Any stipulation between the hotel-keeper and
the guest whereby the responsibility of the former as set forth in
articles 1998 to 2001 is suppressed or diminished shall be void. (n)
Exemption or dimunition of liability
Similar to common carriers (Art. 1760), stipulation is deemed
contrary to law, morals and public policy (Art. 1306)
1. Practically volunteer as depositaries and should be
subject to extraordinary degree of responsibility
2. Supervision and control of their inns and the premises
thereof.
3. It is not necessary that the effects be delivered to
employees; it is enough that they are within the inn (De los
Santos v. Tan Khey).
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Art. 2004. 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
lodging, and supplies usually furnished to hotel guests. (n)
Hotelkeeper’s right to retain
Pledge created by operation of law (Art. 2121-2122). Also, obtaining
food or accommodation without paying constitutes estafa (Art. 315,
Sec. 2e).
Case:
YHT Realty Corporation v. Court of Appeals,
G.R. No. 126780, February 17, 2005.
In case of loss of any item deposited in the safety deposit box, it is
inevitable to conclude that the management had at least a hand in
the consummation of the taking, unless the reason for the loss is
force majeure. The New Civil Code is explicit that the responsibility
of the hotel-keeper shall extend to loss of, or injury to, the personal
property of the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers, except as it
may proceed from any force majeure. It is the loss through force
majeure that may spare the hotel-keeper from liability.
Mere close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the instant case
is the very safety of McLoughlin's deposit. Petitioners would have
exercised due diligence required of them. Failure to do so warrants
the conclusion that the management had been remiss in complying
with the obligations imposed upon hotel-keepers under the law.
The hotel business like the common carrier's business is imbued
with public interest. Catering to the public, hotelkeepers are bound to
provide not only lodging for hotel guests and security to their
persons and belongings. The twin duty constitutes the essence of
the business. The law in turn does not allow such duty to the public
to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms imposed by
hotel keepers on guests for their signature.
Art. 2002 presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to the
occurrence of the loss. A depositary is not responsible for the loss of
goods by theft, unless his actionable negligence contributes to the
loss.
11. Judicial Deposit,
Articles 2005 to 2009, Civil Code
CHAPTER 4
SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 2005. A judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered. (1785)
Art. 2006. Movable as well as immovable property may be the
object of sequestration. (1786)
Art. 2007. The depositary of property or objects sequestrated cannot
be relieved of his responsibility until the controversy which gave rise
thereto has come to an end, unless the court so orders. (1787a)
Art. 2008. The depositary of property sequestrated is bound to
comply, with respect to the same, with all the obligations of a good
father of a family. (1788)
When judicial deposit takes place
1. Attachment by sheriff (Rule 57)
2. Receivership (Rule 59)
3. Replevin or manual delivery (Rule 60)
Nature and purpose of judicial deposit
It is auxiliary to a case pending in court. Its purpose is to maintain
status quo and to insure the rights of the parties to the property in
case of a favorable judgment.
Obligation of depositary of sequestered property
Depositary is appointed by the court; has to take care of the property
with the diligence of a good father of a family.
Judicial and extrajudicial deposits distinguished
Judicial Extrajudicial
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Cause or origin Will of the court Will of the parties Section 1. Short Title. This Decree shall be known as the Trust
Purpose Security and to Custody and Receipts Law.
secure the right of a safekeeping of the
Section 2. Declaration of Policy. It is hereby declared to be the
party to recover thing
policy of the state (a) to encourage and promote the use of trust
Subject Matter Movable or Movable
receipts as an additional and convenient aid to commerce and trade;
immovable
(b) to provide for the regulation of trust receipts transactions in order
Remuneration Always onerous May be onerous but
to assure the protection of the rights and enforcement of obligations
generally gratuitous of the parties involved therein; and (c) to declare the misuse and/or
In whose behalf it is Person who, by Depositor of third misappropriation of goods or proceeds realized from the sale of
held judgment, has a person designated goods, documents or instruments released under trust receipts as a
right criminal offense punishable under Art. Three hundred and fifteen of
the Revised Penal Code.

Art. 2009. As to matters not provided for in this Code, judicial
sequestration shall be governed by the Rules of Court. (1789)
Applicable law
Law on judicial deposit is remedial in nature:
1. Preliminary attachment (Rule 57)
2. Receivership (Rule 59)
3. Replevin (Rule 60)
4. Attachment in criminal cases (Rule 127)
Weeks 5 to 6 (Special Reports)
12. Merchants and Commercial
Transactions,
Articles 1-63, Code of Commerce
13. Letters of Credit,
Articles 567-572, Code of Commerce
Case:
Transfield Philippines, Inc. v. Luzon Hydro Corporation
Australia, et al.,
G.R. No. 446717, November 22, 2004.
The principle of independent contract in letters of credit can be
invoked by the issuing banks and beneficiaries. The banks were
mere custodians of the funds and as such, they were obligated to
transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims.
The credit itself is independent of the underlying transaction and that
as long as the beneficiary complied with the credit, it was of no
moment that he had not complied with the underlying contract.
14. Trust Receipts Law
PRESIDENTIAL DECREE No. 115 January 29, 1973
PROVIDING FOR THE REGULATION OF TRUST RECEIPTS
TRANSACTIONS
WHEREAS, the utilization of trust receipts, as a convenient business
device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and
domestic business practices, particularly in commercial banking
transactions;
WHEREAS, there is no specific law in the Philippines that governs
trust receipt transactions, especially the rights and obligations of the
parties involved therein and the enforcement of the said rights in
case of default or violation of the terms of the trust receipt
agreement;
WHEREAS, the recommendations contained in the report on the
financial system which have been accepted, with certain
modifications by the monetary authorities included, among others,
the enactment of a law regulating the trust receipt transactions;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines, by virtue of the powers vested in me by the Constitution,
as Commander-in-Chief of all the Armed Forces of the Philippines,
and pursuant to Proclamation No. 1081, dated September 21, 1972,
and General Order No. 1, dated September 22, 1972, as amended,
and in order to effect the desired changes and reforms in the social,
economic, and political structure of our society, do hereby order and
decree and make as part of the law of the land the following:
Section 3. Definition of terms. As used in this Decree, unless the
context otherwise requires, the term
(a) "Document" shall mean written or printed evidence of title to
goods.
(b) "Entrustee" shall refer to the person having or taking possession
of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the
purpose or purposes specified in the trust receipt agreement.
(c) "Entruster" shall refer to the person holding title over the goods,
documents, or instruments subject of a trust receipt transaction, and
any successor in interest of such person.
(d) "Goods" shall include chattels and personal property other than:
money, things in action, or things so affixed to land as to become a
part thereof.
(e) "Instrument" means any negotiable instrument as defined in the
Negotiable Instrument Law; any certificate of stock, or bond or
debenture for the payment of money issued by a public or private
corporation, or any certificate of deposit, participation certificate or
receipt, any credit or investment instrument of a sort marketed in the
ordinary course of business or finance, whereby the entrustee, after
the issuance of the trust receipt, appears by virtue of possession
and the face of the instrument to be the owner. "Instrument" shall not
include a document as defined in this Decree.
(f) "Purchase" means taking by sale, conditional sale, lease,
mortgage, or pledge, legal or equitable.
(g) "Purchaser" means any person taking by purchase.
(h) "Security Interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the entruster
and includes title, whether or not expressed to be absolute,
whenever such title is in substance taken or retained for security
only.
(i) "Person" means, as the case may be, an individual, trustee,
receiver, or other fiduciary, partnership, corporation, business trust
or other association, and two more persons having a joint or
common interest.
(j) "Trust Receipt" shall refer to the written or printed document
signed by the entrustee in favor of the entruster containing terms
and conditions substantially complying with the provisions of this
Decree. No further formality of execution or authentication shall be
necessary to the validity of a trust receipt.
(k) "Value" means any consideration sufficient to support a simple
contract.
Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the entrustee binds himself
to hold the designated goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the

entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving
delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the
business of selling goods, documents or instruments for profit who,
at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or other interest
as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
Section 5. Form of trust receipts; contents. A trust receipt need
not be in any particular form, but every such receipt must
substantially contain (a) a description of the goods, documents or
instruments subject of the trust receipt; (2) the total invoice value of
the goods and the amount of the draft to be paid by the entrustee;
(3) an undertaking or a commitment of the entrustee (a) to hold in
trust for the entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in the
trust receipt; and (c) to turn over the proceeds of the sale of the
goods, documents or instruments to the entruster to the extent of the
amount owing to the entruster or as appears in the trust receipt or to
return the goods, documents or instruments in the event of their non-
sale within the period specified therein.
The trust receipt may contain other terms and conditions agreed
upon by the parties in addition to those hereinabove enumerated
provided that such terms and conditions shall not be contrary to the
provisions of this Decree, any existing laws, public policy or morals,
public order or good customs.
Section 6. Currency in which a trust receipt may be
denominated. A trust receipt may be denominated in the Philippine
currency or any foreign currency acceptable and eligible as part of
international reserves of the Philippines, the provisions of existing
law, executive orders, rules and regulations to the contrary
notwithstanding: Provided, however, That in the case of trust
receipts denominated in foreign currency, payment shall be made in
its equivalent in Philippine currency computed at the prevailing
exchange rate on the date the proceeds of sale of the goods,
documents or instruments held in trust by the entrustee are turned
over to the entruster or on such other date as may be stipulated in
the trust receipt or other agreements executed between the
entruster and the entrustee.
Section 7. Rights of the entruster. The entruster shall be entitled
to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the
extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in
case of non-sale, and to the enforcement of all other rights conferred
on him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust
receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents
or instruments may, on or after default, give notice to the entrustee
of the intention to sell, and may, not less than five days after serving
or sending of such notice, sell the goods, documents or instruments
at public or private sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any such sale, whether public
or private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction
of the entrustee's indebtedness to the entruster. The entrustee shall
receive any surplus but shall be liable to the entruster for any
deficiency. Notice of sale shall be deemed sufficiently given if in
writing, and either personally served on the entrustee or sent by
post-paid ordinary mail to the entrustee's last known business
address.
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Section 8. Entruster not responsible on sale by entrustee. The
entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the terms
of the trust receipt transaction be responsible as principal or as
vendor under any sale or contract to sell made by the entrustee.
Section 9. Obligations of the entrustee. The entrustee shall (1)
hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the entruster to the extent of
the amount owing to the entruster or as appears on the trust receipt;
(3) insure the goods for their total value against loss from fire, theft,
pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and capable of
identification as property of the entruster; (5) return the goods,
documents or instruments in the event of non-sale or upon demand
of the entruster; and (6) observe all other terms and conditions of the
trust receipt not contrary to the provisions of this Decree.
Section 10. Liability of entrustee for loss. The risk of loss shall be
borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence of
the entrustee, shall not extinguish his obligation to the entruster for
the value thereof.
Section 11. Rights of purchaser for value and in good faith. Any
purchaser of goods from an entrustee with right to sell, or of
documents or instruments through their customary form of transfer,
who buys the goods, documents, or instruments for value and in
good faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.
Section 12. Validity of entruster's security interest as against
creditors. The entruster's security interest in goods, documents, or
instruments pursuant to the written terms of a trust receipt shall be
valid as against all creditors of the entrustee for the duration of the
trust receipt agreement.
Section 13. Penalty clause. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Art. Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
Section 14. Cases not covered by this Decree. Cases not
provided for in this Decree shall be governed by the applicable
provisions of existing laws.
Section 15. Separability clause. If any provision or section of this
Decree or the application thereof to any person or circumstance is
held invalid, the other provisions or sections hereof and the
application of such provisions or sections to other persons or
circumstances shall not be affected thereby.
Section 16. Repealing clause. All Acts inconsistent with this
Decree are hereby repealed.
Section 17. This Decree shall take effect immediately.
Done in the City of Manila, this 29th day of January, in the year of
Our Lord, nineteen hundred and seventy-three.
Case:
Colinares & Veloso v. Court of Appeals,
G.R. No. 90828, September 5, 2000.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust
receipt transaction as any transaction by and between a person
referred to as the entruster, and another person referred to as
the entrustee, whereby the entruster who owns or holds
absolute title or security interest over certain specified goods,
documents or instruments, releases the same to the

possession of the entrustee upon the latter’s execution and
delivery to the entruster of a signed document called a ―trust receipt‖
wherein the entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.
There are two possible situations in a trust receipt transaction. The
first is covered by the provision which refers to money received
under the obligation involving the duty to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation
to ―return‖ it (devolvera) to the owner.
The bank acquires a ―security interest‖ in the goods as holder of a
security title for the advances it had made to the entrustee. The
ownership of the merchandise continues to be vested in the
person who had advanced payment until he has been paid in
full, or if the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the importer or by his
representative or successor in interest. To secure that the bank shall
be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay for them;
hence, the importer has never owned the goods and is not able to
deliver possession. In a certain manner, trust receipts partake of the
nature of a conditional sale where the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price.
Failure of the entrustee to turn over the proceeds of the sale of the
goods, covered by the trust receipt to the entruster or to return said
goods if they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Art. 315 (1) of
the Revised Penal Code, without need of proving intent to defraud.
The Trust Receipts Law does not seek to enforce payment of
the loan; rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner.
15. Truth in Lending Act
REPUBLIC ACT NO. 9474
AN ACT GOVERNING THE ESTABLISHMENT, OPERATION AND
REGULATION OF LENDING COMPANIES
Section 1. Title. - This Act shall be known as the ""Lending
Company Regulation Act of 2007"".
Sec. 2. Declaration of Policy. - It is hereby declared the policy of
the State to regulate the establishment of lending companies and to
place their operation on a sound, efficient and stable condition to
derive the optimum advantages from them as an additional source of
credit; to prevent and mitigate, as far as practicable, practices
prejudicial to public interest; and to lay down the minimum
requirements and standards under which they may be established
and do business.
Sec. 3. Definition of Terms. - For purposes of implementing this
Act, the following definitions shall apply:
(a) Lending Company shall refer to a corporation engaged in
granting loans from its own capital funds or from funds sourced from
not more than nineteen (19) persons. It shall not be deemed to
include banking institutions, investment houses, savings and loan
associations, financing companies, pawnshops, insurance
companies, cooperatives and other credit institutions already
regulated by law. The term shall be synonymous with lending
investors.
(b) Debtor shall refer to a borrower or person granted a loan by the
lending company.
(c) Quasi-Bank shall refer to a non-bank financial institution
authorized by the BSP to engage in quasi-banking functions and to
borrow funds from more than nineteen (19) lenders through the
issuance, endorsement or assignment with recourse or acceptance
of deposit substitutes as defined in Sec. 95 of Republic Act No. 7653
(the "New Central Bank Act":) for purposes of relending or
purchasing of receivables and other obligations.
(d) Subsidiary shall refer to a corporation more than fifty percent
(50%) of the voting stock of which is owned by a bank or quasi-bank.
(e) Affiliate shall refer to a corporation, the voting stock of which, to
the extent of fifty percent (50%) or less, is owned by a bank or quasi-
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bank which is related or linked to such institution through common
stockholders or such other factors as may be determined by the
Monetary Board of the BSP.
(f) SEC shall refer to the Securities and Exchange Commission.
(g) BSP shall refer to the Bangko Sentral ng Pilipinas.
Sec. 4. Form of Organization. - A lending company shall be
established only as a corporation: Provided That existing lending
investors organized as single proprietorships or partnerships shall
be disallowed from engaging in the business of granting loans to the
public one year after the date of effectivity of this Act.
No lending company shall conduct business unless granted an
authority to operate by the Sec.
Sec. 5. Capital. - The minimum paid in capital of any lending
company which may be established after the effectivity of this Act
shall be One million pesos (P1,000,000.00): Provided, however,
That lending companies established and in operation prior thereto
shall comply with the minimum capitalization required under the
provisions of this Sec. within such time as may be prescribed by the
SEC which time shall, in no case, be less than three years from the
date of effectivity of this Act and: Provided, further, That the SEC
may prescribe a higher minimum capitalization if warranted by
circumstances.
Sec. 6. Citizenship Requirements. - Upon the effectivity of this Act,
at least a majority of the voting capital stock shall be owned by
citizens of the Philippines.
The percentage of foreign-owned voting stock in any lending
company existing prior to the effectivity of this Act, if such
percentage is in excess of forty-nine percent (49%) of the voting
stock, shall not be increased but may be reduced and, once
reduced, shall not be increased thereafter beyond forty-nine percent
(49%) of the voting stock of the lending company. The percentage of
foreign-owned voting stocks in any lending company shall be
determined by the citizenship of the individual stockholders. In the
case of corporations owning shares in a lending company, the
citizenship of the individual owners of voting stock in such
corporations shall be the basis in the computation of the percentage.
No foreign national may be allowed to own stock unless the country
of which he is a national accords reciprocal rights to Filipinos.
Sec. 7. Amount and Charges on Loans. - A lending company may
grant loans in such amounts and reasonable interest rates and
charges as may be agreed upon between the lending company and
the debtor: Provided, That the agreement shall be in compliance
with the provisions of Republic Act No. 3765, otherwise known as
the "Truth in Lending Act" and Republic Act 7394, otherwise known
as the "Consumer Act of the Philippines": Provided, further, That the
Monetary Board, in consultation with the SEC and the industry, may
prescribe such interest rate as may be warranted by prevailing
economic and social conditions.
Sec. 8. Maintenance of Books of Accounts and Records. - Every
lending company shall maintain books of accounts and records as
may be required by the SEC and prescribed by the Bureau of
Internal Revenue and other government agencies. In case a lending
company engages in other businesses, it shall maintain separate
books of accounts for these businesses.
The Manual of Accounts prescribed by the BSP for lending investors
shall continue to be adopted by lending companies for uniform
recording and reporting of their operations, until a new Manual of
Accounts shall have been prescribed by the Sec.
It shall issue the appropriate instruments and documents to the
parties concerned to evidence its lending and borrowing
transactions.
Sec. 9. Authority of the SEC. - The SEC is hereby authorized to:
(a) Create a new division or bureau within its control to regulate and
supervise the operations and activities of lending companies in the
country;
(b) Issue rules and regulations to implement the provisions
contained herein;
(c) Issue rules and regulations on, among other things, minimum
capitalization, uses of funds received, method of marketing and
distribution, maturity of funds received, restrictions or outright
prohibition of purchases or sales of receivables with or without
recourse basis;
(d) Require from lending companies reports of condition and such
other reports necessary to determine compliance with the provisions
of this Act;

(e) Exercise visitorial powers whenever deemed necessary; and
(f) Impose such administrative sanctions including suspension or
revocation of the lending company's authority to operate and the
imposition of fines for violations of this Act and regulations issued by
the SEC in pursuance thereto.
Sec. 10. Implementing Rules and Regulations. Within three
months after the approval of this Act, the SEC shall promulgate the
necessary rules and regulations implementing the provisions of this
Act.
Sec. 11. Delineation of Authority between SEC and the BSP. -
Lending companies shall be under the supervision and regulation of
the SEC: Provided, however, That lending companies which are
subsidiaries and affiliates of banks and quasi-banks shall be subject
to BSP supervision and examination in accordance with Republic
Act No. 7653: Provider further, That the Monetary Board, after being
satisfied that there is reasonable ground to believe that a lending
company is being used as a conduit by a bank, quasi-bank or their
subsidiary/affiliate to circumvent or violate BSP rules and
regulations, may order an examination of the lending company's
books and accounts.
Sec. 12. Penalty. - A fine of not less than Ten Thousand Pesos
(P10,000.00) and not more than Fifty thousand pesos(P50,000.00)
or imprisonment of not less than six months but not more than ten
(10) years or both, at the discretion of the court, shall be imposed
upon:
1. Any person who shall engage in the business of a lending
company without a validly subsisting authority to operate from the
Sec.
2. The president, treasurer and other officers of the corporation,
including the managing officer thereof, who shall knowingly and
willingly:
a. Engage in the business of a lending company without a validly
subsisting authority to operate from the SEC;
b. Hold themselves out to be a lending company, either through
advertisement in whatever form, whether in its stationery,
commercial paper, or other document, or through other
representations without authority;
c. Make use of a trade or firm name containing the words "lending
company" or "lending investor" or any other designation that would
give the public the impression that it is engaged in the business of a
lending company as defined in this Act without authority; and
d. Violate the provisions of this Act.
3. Any officer, employee, or agent of a lending company who shall:
a. Knowingly and willingly make any statement in any application,
report, or document required to be filed under this Act, which
statement is false or misleading with respect to any material fact;
and
b. Overvalue or aid in overvaluing any security for the purpose of
influencing in any way the action of the company in any loan, or
discounting line.
4. Any officer, employee or examiner of the SEC directly charged
with the implementation of this Act or of other government agencies
who shall commit, connive, aid, or assist in the commission of acts
enumerated under Subsections 1 and 2 of this Sec. .
Sec. 13. Matters not Covered by this Act. The provisions of
Republic Act No. 3765, otherwise known as the "Truth in Lending
Act", Republic Act No. 7394 or the "Consumer Act of the Philippines"
and other existing laws, insofar as they are not in conflict with any
provision of this Act, shall apply in matters not otherwise specifically
provided in this Act.
Sec. 14. Repealing Clause. - All laws, executive orders, letters of
instruction, rules and regulations, or provisions thereof which are
inconsistent with the provisions of this Act are hereby repealed,
amended or modified accordingly.
Sec. 15. Separability Clause. - If any portion hereof shall be held
invalid or unconstitutional, such invalidity or unconstitutionality shall
not affect the other provisions which shall remain in full force and
effect.
Sec. 16. Effectivity. - This Act shall take effect fifteen (15) days
after its publication in at least two national newspapers of general
circulation. May 22, 2007
Case:
Fides Damasco | UP Law C2013 18
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
United Coconut Planters Bank v. Samuel & Beluso,
G.R. No. 159912, August 17, 2007.
The interest rate provisions are illegal not only because of the CC
provision on mutuality of contracts but also because it’s violative of
the Truth in Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is a form of deception which
We cannot countenance.
As to failure of Beluso to explicitly allege violation of Truth in
Lending Act and prescription of 1 year: Allegations in complaint
are much more controlling than its title. It can be inferred from the
allegation of ―unilateral imposition of increased interest rates‖
Truth in Lending gives rise to both criminal and civil liabilities.
Rationale for requiring the disclosure statement to be given prior to
consummation: Protect users of credit from a lack of awareness of
the true cost thereof, proceeding from the experience that banks are
able to conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned amount and the
like. Fully appreciate the true cost of loan, give full consent to the
contract, and properly evaluate their options in arriving at business
decisions.
16. The Usury Law
Rate of interest no longer subject to any ceiling prescribed
under the Usury Law
Rate of interest shall not be subject to any ceiling prescribed under
the Usury Law (Sec. 1, Resolution No. 224 of the Monetary Board of
CB). In the absence of stipulation, 12% interest per annum (Sec.2).
Legality of Central Bank Circular No. 905
CBCN 905 is of doubtful legality for being in excess of authority. The
Usury Law authorizes the Monetary Board to ―prescribe maximum
rate,‖ not to abolish ceilings.
Usury – contracting for or receiving something in excess of the
amount allowed by law for the loan or forbearance of money, goods
and credits.
Usury, purely a statutory creation
In the absence of statute, any rate of interest may be charged.
Elements of usury
1. A loan or forbearance
2. An understanding between the parties that the loan shall
or may be returned
3. An unlawful intent to take more than the legal rate for the
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
The court will disregard the form and look only to its substance.
Usury Law applies to loans and forbearances of money.
Loan within the purview of the Usury Law is mutuum.
Forbearance – the contractual relation of creditor to forbear during a
given period to require the debtor, payment if an existing debt then
due and payable.
Where there is no loan or forbearance, there can be no usury.
Purpose, theory and nature of the Usury Law
1. For the protection of borrowers from the imposition of
unscrupulous lenders
2. Puts lenders in the same category with persons under
legal disability to contract (based on the inequality of the
relations that the borrower’s necessities deprive him of the
freedom in contracting)
3. Both remedial and penal.
Construction of the law
1. In general – duty of the court to ascertain the purpose and
intent of legislature (protection of borrowers)
2. Liberal or strict construction – laws that guard against
unreasonable rates of interest are liberally construed, but
penal provisions are strictly construed and any doubt is
resolved in favor of the person sought to be penalized
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3. Prospective or retroactive operation – in the absence of b. Unsecured loan – 14% per annum
clear legislative intent for retroactivity, then prospective c. Prescribed by Monetary Board
only.
a. Contracts previously non-usurious – cannot be Multi-tiered interest rates
rendered usurious by a subsequent law. MB allowed to prescribe higher maximum rates for loans of low
b. Contracts previously usurious – legislature has the priority.
power to validate any and all parts of pre-existing
usurious contracts. Section 2 and Section 3 distinguished

ACT NO. 2655 - AN ACT FIXING RATES OF INTEREST UPON Section 2 Section 3
LOANS AND DECLARING THE EFFECT OF RECEIVING OR The taking or receiving of Mere demanding or agreeing to
TAKING USURIOUS RATES AND FOR OTHER PURPOSES usurious interest penalized charge excessive interest
punishable
Section 1. The rate of interest for the loan or forbearance of any Loan secured by a registered Loan not so secured or
money goods, or credits and the rate allowed in judgments, in the real estate unsecured
absence of express contract as to such rate of interest, shall be six 12% per annum 14% per annum
per centum per annum or such rate as may be prescribed by the Commissions, premiums, fines These are not considered
Monetary Board of the Central Bank of the Philippines for that and penalties included as
purpose in accordance with the authority hereby granted. interest
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the Validity of stipulation to pay penalty in case obligation not
maximum rate or rates of interest for the loan or renewal thereof or fulfilled
the forbearance of any money, goods or credits, and to change such
rate or rates whenever warranted by prevailing economic and social A stipulation to pay lawful interest with stipulation that the obligation
conditions. shall bear a higher rate interest upon default is valid and is regarded
as penalty. These are distinct and separately demandable.
In the exercise of the authority herein granted, the Monetary Board
may prescribe higher maximum rates for loans of low priority, such Attorney’s fees to cover costs of collection not interest
as consumer loans or renewals thereof as well as such loans made
by pawnshops finance companies and other similar credit institutions Valid because it is not compensation for the use of money, but to
although the rates prescribed for these institutions need not safeguard the lender against future loss or damage by being
necessarily be uniform. The Monetary Board is also authorized to compelled to retain counsel. But whether a creditor can enforce
prescribe different maximum rate or rates for different types of payment of attorney’s fees not actually incurred is questionable
borrowings, including deposits and deposit substitutes, or loans of (Andreas v. Green).
financial intermediaries. Where attorney’s fees stipulated excessive
Sec. 2. No person or corporation shall directly or indirectly take or Conformably to Arts. 1227 and 1229, the courts have the power to
receive in money or other property, real or personal, or choses in determine the reasonableness based on quantum meruit and to
action, a higher rate of interest or greater sum or value, including reduce the amount thereof if excessive or unconscionable (New
commissions, premiums, fines and penalties, for the loan or renewal Sampaguita v. PNB).
thereof or forbearance of money, goods, or credits, where such loan
or renewal or forbearance is secured in whole or in part by a Determination of existence of usury
mortgage upon real estate the title to which is duly registered, or by
any document conveying such real estate or an interest therein, than 1. Corrupt agreement must be present – If usurious on its
twelve per centum per annum or the maximum rate prescribed by face, res ipsa loquitur. If not, then there must be an
the Monetary Board and in force at the time the loan or renewal intention to knowingly contract for or take usurious interest
thereof or forbearance is granted: Provided, That the rate of interest 2. Where consideration of loan is property or services of
under this section or the maximum rate of interest that may be uncertain value – Valid unless contract on its face is
prescribed by the Monetary Board under this section may likewise usurious
apply to loans secured by other types of security as may be 3. Form of contract not conclusive – The law will not permit a
specified by the Monetary Board. usurious loan to hide itself behind a legal form. Parol
evidence is admissible
Sec. 3. No person or corporation shall directly or indirectly demand,
take, receive or agree to charge in money or other property, real or Usury Law not applicable in ordinary contracts when entered into
personal, a higher rate or greater sum or value for the loan or in good faith. It only applies to contracts of loan, forbearance to
forbearance of money, goods, or credits where such loan or collect money due.
forbearance is not secured as provided in Section two hereof, than Effect where principal not absolutely payable
fourteen per centum per annum or the maximum rate or rates
prescribed by the Monetary Board and in force at the time the loan It is essential to constitute usury that the principal sum be payable
or forbearance is granted. absolutely and at all events.

Interest – compensation allowed by law or fixed by the parties for Sec. 4. No pawnbroker or pawnbroker's agent shall directly or
the loan or forbearance of money, goods or credits. indirectly stipulate, charge, demand, take or receive any higher rate
or greater sum or value for any loan or forbearance than two and
Kinds of interest one-half per centum per month when the sum lent is less than one
1. Simple interest – paid for the principal at a certain rate hundred pesos; two per centum per month when the sum lent is one
fixed or stipulated by the parties (Art. 2209) hundred pesos or more, but not exceeding five hundred pesos; and
2. Compound interest – imposed upon interest due and fourteen per centum per annum when it is more than the amount last
unpaid (Art. 1959, 2212) mentioned; or the maximum rate or rates prescribed by the
3. Legal interest – that which the law directs to be charged in Monetary Board and in force at the time the loan or forbearance is
the absence of any agreement as to the rate between the granted. A pawnbroker or pawnbroker's agent shall be considered
parties (Art. 2209) such, for the benefits of this Act, only if he be duly licensed and has
4. Lawful interest – that which the law allows and does not an establishment open to the public.
prohibit; rate of interest within maximum prescribed (Secs. It shall be unlawful for a pawnbroker or pawnbroker's agent to divide
2, 3) the pawn offered by a person into two or more fractions in order to
5. Unlawful or usurious interest - paid or stipulated to be paid collect greater interest than the permitted by this section.
beyond the maximum prescribed by law
It shall also be unlawful for a pawnbroker or pawnbroker's agent to
Interest rates require the pawner to pay an additional charge as insurance
1. Legal rate – 12% per annum premium for the safekeeping and conservation of the Art. pawned.
2. Maximum rate
a. Loans secured in whole or in part by a mortgage – Interest that can be charged by a pawnshop
12% per annum 1. 2½% per month on sum lent not more than P2,000.00

2. 18% per annum on sum lent more than P2,000.00 (CBCN
722)
3. Maximum service charge of P5.00, in no case to exceed
1%of the principal loan (Sec. 10, PD 114)
Pawnbrokers are allowed to impose higher rates to allow the
generation of profits.
Dividing pawn in several fractions not allowed in order to earn
higher interest.
Sec. 4-a. The Monetary Board may eliminate, exempt from, or
suspend the effectivity of, interest rate ceilings on certain types of
loans or renewals thereof or forbearances of money, goods, or
credit, whenever warranted by prevailing economic and social
conditions.
Sec. 4-b. In the exercise of its authority to fix the maximum rate or
rates of interest under this Act, the Monetary Board shall be guided
by the following:
1. The existing economic conditions in the country and the general
requirements of the national economy;
2. The supply of and demand for credit;
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board may adopt.
Sec. 5. In computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be
reckoned, except by agreement: Provided, That whenever
compound interest is agreed upon, the effective rate of interest
charged by the creditor shall not exceed the equivalent of the
maximum rate prescribed by the Monetary Board, or, in default
thereof, whenever the debt is judicially claimed, in which last case it
shall draw six per centum per annum interest or such rate as may be
prescribed by the Monetary Board. No person or corporation shall
require interest to be paid in advance for a period of more than one
year: Provided, however, That whenever interest is paid in advance,
the effective rate of interest charged by the creditor shall not exceed
the equivalent of the maximum rate prescribed by the Monetary
Board.
When compound interest allowed
1. There is an express written stipulation to that effect (Art.
1959)
2. In default thereof, upon judicial demand though the
obligation is silent thereon (Art. 2212).
Demandability of compound interest
1. Agreement to charge interest on interest – accrued
interest is not considered interest upon the original debt
but on a new principal
2. Judicial demand to pay debt with interest stipulated in
contract – not applicable where no interest is stipulated in
the contract
Right of creditor to charge advance interest
1. One year or less – permissible under Sec. 5
2. More than one year – apparently prohibited under Sec. 5
Sec. 6. Any person or corporation who, for any such loan or renewal
thereof or forbearance, shall have paid or delivered a higher rate or
greater sum or value than is hereinbefore allowed to be taken or
received, may recover the whole interest, commissions, premiums
penalties and surcharges paid or delivered with costs and attorneys'
fees in such sum as may be allowed by the court in an action
against the person or corporation who took or received them if such
action is brought within two years after such payment or delivery:
Provided, however, That the creditor shall not be obliged to return
the interest, commissions and premiums for a period of not more
than one year collected by him in advance when the debtor shall
have paid the obligation before it is due, provided such interest, and
commissions and premiums do not exceed the rates fixed in this Act.
Borrower’s right to recover usurious interest paid
Borrower’s right to recover costs and attorney’s fees
Borrower can recover usurious interest paid with costs and
attorney’s fees.
The court has discretion to fix the amount of fees, but it has no
discretion to deny the allowance. When the action to recover interest
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is established, reasonable attorney’s fees and costs are awarded as
a matter of course.
Right under the Civil Code
Art. 1413 provides for recovery of interest in excess of that allowed
by the Usury law, Sec. 6 allows recovery of the whole interest. In
Angel Jose Merchandising v. Chelda Enterprises, the Court allowed
recovery of the entire interest with interest thereon from date of
payment.
Pari delicto not applicable in usury cases
Lender considered criminal, borrower considered the injured party.
The application of pari delicto would run counter to the avowed
public policy to discourage usury.
Action to recover must be brought within 2 years of payment.
Where interest added to principal but not paid
1. Right of recovery of interest only for borrowed who shall
have paid or delivered
2. Right of recovery of attorney’s fees only if interest has
actually been taken or received
Sec. 7. All covenants and stipulations contained in conveyances,
mortgages, bonds, bills, notes, and other contracts or evidences of
debts, and all deposits of goods or other things, whereupon or
whereby there shall be stipulated, charged, demanded, reserved,
secured, taken, or received, directly or indirectly, a higher rate or
greater sum or value for the loan or renewal or forbearance of
money, goods, or credits than is hereinbefore allowed, shall be void:
Provided, however, That no merely clerical error in the computation
of interest, made without intent to evade any of the provisions of this
Act, shall render a contract void: Provided, further, That parties to a
loan agreement, the proceeds of which may be availed of partially or
fully at some future time, may stipulate that the rate of interest
agreed upon at the time the loan agreement is entered into, which
rate shall not exceed the maximum allowed by law, shall prevail
notwithstanding subsequent changes in the maximum rates that may
be made by the Monetary Board: And Provided, finally, That nothing
herein contained shall be construed to prevent the purchase by an
innocent purchaser of a negotiable mercantile paper, usurious or
otherwise, for valuable consideration before maturity, when there
has been no intention on the part of said purchaser to evade the
provisions of this Act and said purchase was not a part of the
original usurious transaction. In any case, however, the maker of
said note shall have the right to recover from said original holder the
whole interest paid by him thereon and, in case of litigation, also the
costs and such attorney's fees as may be allowed by the court.
Usurious loan void only with respect to interest
It results from the very context of the law that the use of the word
―void‖ did not intend complete nullity but merely a nullity with respect
to the agreed interest (Lopez v. El Hogar Filipino).
Mere clerical error in computation of interest shall not render a
contract void.
Usurer’s right to recover principal loaned
A usurious loan is void but the usurer can recover the principal by
judicial action (Go Chioco v. Martinez). Otherwise, the borrower will
be unjustly enriched at the expense of the lender.
1. Nullity of the accessory obligation does not carry with it
that of the principal obligation
2. In a contract of loan, the cause is the right to demand the
return or its equivalent. If at all, payment of interest may
be considered a motive that is separable from its causa
3. The prestation to pay interest is separable from that to pay
the principal debt
4. Unjust enrichment.
The creditor has no right to legal interest or damages (PCIB v.
Grino)
Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods, or credits may stipulate that the rate
of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the
Monetary Board; Provided, That such stipulation shall be valid only if
there is also a stipulation in the agreement that the rate of interest
agreed upon shall be reduced in the event that the applicable

maximum rate of interest is reduced by law or by the Monetary
Board; Provided, further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.
Escalation clause in a loan agreement
1. Escalation clause must not be solely potestative
a. Valid but must be based on reasonable and valid
grounds (Almeda v. CA)
b. Must be agreed upon by the parties, else violative of
principle of mutuality of contracts (Art. 1308)
2. De-escalation clause also stipulated – Escalation clause
can only be valid if it also includes a de-escalation clause
3. Increase or reduction of interest effected by law or by MB
– ―a law‖ in the escalation clause does not include CBC
because it is not strictly a statute or the law
Interest to be based on the prevailing market rate valid as long
as there is a reference rate upon which to peg such variable interest
rates.
Sec. 8. All loans under which payment is to be made in agricultural
products or seed or in any other kind of commodities shall also be
null and void unless they provide that such products or seed or other
commodities shall 6e appraised at the time when the obligation falls
due at the current local market price: Provided, That unless
otherwise stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence of not less
than two witnesses, any contract advancing money to be repaid later
in agricultural products or seed or any other kind of commodities
shall be understood to be a loan, and any person or corporation
having paid otherwise shall be entitled in case action is brought
within two years after such payment or delivery to recover all the
products or seed delivered as interest, or the value thereof, together
with the costs and attorney's fees in such sum as may be allowed by
the court. Nothing contained in this section shall be construed to
prevent the lender from taking interest for the money lent, provided
such interest be not in excess of the rates herein fixed.
Determination of interest where loan of money is payable in
kind
The means of ascertaining whether the payment exceeds the rate
allowed by law is to reduce the medium of payment to its equivalent
in pesos ―at the time the obligation fall due at the current local
market price.‖
Sec. 9. The person or corporation sued shall file its answer in writing
under oath to any complaint brought or filed against said person or
corporation before a competent court to recover the money or other
personal or real property, seeds or agricultural products, charged or
received in violation of the provisions of this Act. The lack of taking
an oath to an answer to a complaint will mean the admission of the
facts contained in the latter.
Sec. 9-a. The Monetary Board shall promulgate such rules and
regulations as may be necessary to implement effectively the
provisions of this Act.
Effect of failure of defendant to make denial of usury under oath
is that usury is deemed admitted (Sec. 1, Rule 9). But that the
contract is indeed of a loan has to proved. This is applicable only to
actions brought to recover money charged or received in violation of
the Usury Law.
This is in the nature of a procedural rule subject to waiver.
Presumptions and burden of proof
1. Generally, usury is not presumed. But the same will be
presumed if the contract is usurious on its face.
2. Lender’s evidence may be sufficiently establish usury so
as to relieve the borrower of the burden of proof
3. Where there is no allegation or evidence to exact usurious
interest, the contract of loan cannot be considered a
usurious contract.
Sec. 10. Without prejudice to the proper civil action violation of this
Act and the implementing rules and regulations promulgated by the
Monetary Board shall be subject to criminal prosecution and the
guilty person shall, upon conviction, be sentenced to a fine of not
less than fifty pesos nor more than five hundred pesos, or to
imprisonment for not less than thirty days nor more than one year, or
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both, in the discretion of the court, and to return the entire sum
received as interest from the party aggrieved, and in the case of
non-payment, to suffer subsidiary imprisonment at the rate of one
day for every two pesos: Provided, That in case of corporations,
associations, societies, or companies the manager, administrator or
gerent or the person who has charge of the management or
administration of the business shall be criminally responsible for any
violation of this Act.
Prescription of criminal action 4 years after its commission
(Ramos v. Buyson Lampa). In a series of crimes, the prescription
runs from the occurrence of each offense (People v. Fuentes).
Sec. 11. All Acts and parts of Acts inconsistent with the provisions of
this Act are hereby repealed.
Sec. 12. This Act shall take effect on the first day of May, nineteen
hundred and sixteen.
ENACTED, February 24,1916
Case:
Carpo v. Chua & Dy Ng,
G.R. Nos. 150773 & 153599, September 30, 2005.
There is no need to unsettle the principle affirmed in Medel and like
cases. From that perspective, it is apparent that the stipulated
interest in the subject loan is excessive, iniquitous, unconscionable
and exorbitant. Pursuant to the freedom of contract principle
embodied in Art. 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. In the ordinary course,
the codal provision may be invoked to annul the excessive stipulated
interest.
The obligations in the loan contract are divisible in the sense that the
former can still stand without the latter. Art. 1273 attests to this: "The
renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in
force." Art. 1420 of the New Civil Code provides in this regard: "In
case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced." In simple loan with
stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Art. 1350), is not
illegal. The illegality lies only as to the prestation to pay the
stipulated interest; hence, being separable, the latter only
should be deemed void, since it is the only one that is illegal.
17. The Warehouse Receipts Law
and the General Bonded Warehouse
Act
Scope of the law
It covers all warehouses, whether public or private, bonded or not.
Purpose of the law
1. Regulate the status, rights and liabilities of a warehousing
contract
2. Protect those who acquire negotiable warehouse receipts
by negotiation
3. Render title, possession of property in warehouses more
easily convertible
4. Facilitate use of warehouse receipts as documents of title
5. Place a greater responsibility on the warehouseman
ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW
I — THE ISSUE OF WAREHOUSE RECEIPTS
Section 1. Persons who may issue receipts. — Warehouse
receipts may be issued by any warehouseman.
Who may issue warehouse receipt
Only a warehouseman and his duly authorized officer can issue
warehouse receipts, receipt not issued by a warehouseman is not a
warehouse receipt even though in the form of a warehouse receipt.
Warehouse – the building or place where goods are deposited and
stored for profit.

Sec. 2. Form of receipts; essential terms. — Warehouse receipts
need not be in any particular form but every such receipt must
embody within its written or printed terms:
(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered to the
bearer, to a specified person or to a specified person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing them,
(g) The signature of the warehouseman which may be made by his
authorized agent,
(h) If the receipt is issued for goods of which the warehouseman is
owner, either solely or jointly or in common with others, the fact of
such ownership, and
(i) A statement of the amount of advances made and of liabilities
incurred for which the warehouseman claims a lien. If the precise
amount of such advances made or of such liabilities incurred is, at
the time of the issue of, unknown to the warehouseman or to his
agent who issues it, a statement of the fact that advances have been
made or liabilities incurred and the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby for all
damages caused by the omission from a negotiable receipt of any of
the terms herein required.
Warehouse receipt
1. A written acknowledgement by a warehouseman that he
has received and holds certain goods therein described in
store for the person to whom it is issued
2. A simple written contract between the owner of the goods
and the warehouseman to pay the compensation for that
service
3. Bilateral contract; symbolical representation of the
property
4. Not negotiable within the meaning of the Negotiable
Instruments Law
Form and contents of the receipt
No special form, but these are required:
1. Location of warehouse – for the benefit of holders
especially in case of warehouseman with more than one
warehouse
2. Date of issue of receipt - prima facie date of when the
contract of deposit was perfected
3. Consecutive number of receipt – to identify each receipt
with the goods for which it was issued
4. Person to whom goods are deliverable – prima facie
evidence of lawful entitlement to the possession of the
goods
5. Rate of storage charges – consideration for the contract.
In default, customary or reasonable compensation for
services
6. Description of goods or packages – identification so
that the identical thing delivered be returned upon the
return of the warehouse receipt
7. Signature of warehouseman – best evidence of the
receipt of goods
8. Warehouseman’s ownership or interest in goods – to
prevent abuse where warehouseman issues receipts for
his own goods
9. Statement of advances made and liabilities incurred –
preserve the lien of the warehouseman over the goods
Effect or omission of any of the essential terms
1. Validity of receipt not affected
2. Warehouseman liable for damages (to those injured by his
omission (Wordson v. Davenport)
3. Negotiability of receipt not affected
4. Contract converted to ordinary deposit – law permissive
and directory (Gonzales v. Go Tiong and Luzon Surety)
Sec. 3. Form of receipts. — What terms may be inserted. — A
warehouseman may insert in a receipt issued by him any other
terms and conditions provided that such terms and conditions shall
not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care
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in the safe-keeping of the goods entrusted to him which is
reasonably careful man would exercise in regard to similar goods of
his own.
Terms that cannot be included in a warehouse receipt
1. Cannot contravene Art. 1306
2. Exemption from liability from misdelivery
3. Exemption from liability for negligence
Sec. 4. Definition of non-negotiable receipt. — A receipt in which
it is stated that the goods received will be delivered to the depositor
or to any other specified person, is a non-negotiable receipt.
Sec. 5. Definition of negotiable receipt. — A receipt in which it is
stated that the goods received will be delivered to the bearer or to
the order of any person named in such receipt is a negotiable
receipt.
No provision shall be inserted in a negotiable receipt that it is non-
negotiable. Such provision, if inserted shall be void.
Meaning if ―negotiable‖ under the Act
Only in the sense that in the passage of warehouse receipts through
the channels of commerce, the law regards the property which they
describe as following them (Vanett v. Reilly-Hertz Automobile Co).
Sec. 6. Duplicate receipts must be so marked. — When more
than one negotiable receipt is issued for the same goods, the word
"duplicate" shall be plainly placed upon the face of every such
receipt, except the first one issued. A warehouseman shall be liable
for all damages caused by his failure so to do to anyone who
purchased the subsequent receipt for value supposing it to be an
original, even though the purchase be after the delivery of the goods
by the warehouseman to the holder of the original receipt.
Sec. 7. Failure to mark "non-negotiable." — A non-negotiable
receipt shall have plainly placed upon its face by the warehouseman
issuing it "non-negotiable," or "not negotiable." In case of the
warehouseman's failure so to do, a holder of the receipt who
purchased it for value supposing it to be negotiable, may, at his
option, treat such receipt as imposing upon the warehouseman the
same liabilities he would have incurred had the receipt been
negotiable.
This section shall not apply, however, to letters, memoranda, or
written acknowledgment of an informal character.
Application
Sec. 6 refers only to negotiable receipts; Sec. 7 refers only to non-
negotiable receipts.
Effect of failure to mark ―negotiable‖ or ―non-negotiable‖
1. Negotiable – Failure to mark it does not render it non-
negotiable if it contains words of negotiability
2. Non-negotiable – will be considered negotiable provided
the holder purchased it for value believing it to be
negotiable
Negotiability of warehouse receipts enlarged
Any receipt not marked non-negotiable will be considered negotiable
provided the holder purchased it for value believing it to be
negotiable.
Construction of warehouse receipts
Tendency is towards a liberal construction of the law in favor of bona
fide holders of such receipts. But the rule does not apply to actions
against any party to the transactions other than a warehouseman.
II — OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON
THEIR RECEIPTS
Sec. 8. Obligation of warehousemen to deliver. — A
warehouseman, in the absence of some lawful excuse provided by
this Act, is bound to deliver the goods upon a demand made either
by the holder of a receipt for the goods or by the depositor; if such
demand is accompanied with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such
indorsements as would be necessary for the negotiation of the
receipt; and

(c) A readiness and willingness to sign, when the goods are
delivered, an acknowledgment that they have been delivered, if such
signature is requested by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in
compliance with a demand by the holder or depositor so
accompanied, the burden shall be upon the warehouseman to
establish the existence of a lawful excuse for such refusal.
Principal obligations of the warehouseman
Essentially a depositary with respect to the goods received and
stored by him
1. Take care of the goods entrusted to his safekeeping (Sec.
21)
2. Deliver them to the holder of the receipt or the depositor
provided Sec. 8 is complied with
Necessity of demand
Demand required unless evidently useless (Art. 1169[3]), in which
case it can be dispensed with.
Offer to satisfy warehouseman’s lien
Warehouseman can refuse to deliver to enforce lien (Sec. 31) which
is lost upon surrender of the goods (Sec. 29[a]). Offer to satisfy is
required, but formal tender is not required when vain or useless.
Offer to surrender and sign negotiable receipt required for the
protection of the warehouseman because the receipt represents the
property (Sec. 11). Warehouseman is criminally liable if he delivers
without receipt (Sec. 54).
1. Negotiable – demand to deliver be accompanied by offer
to surrender
2. Non-negotiable – may be entitled to delivery without
surrender of the receipt
Lawful excuses for refusal to deliver goods (Sec. 10, 16, 18, 21,
31, 36) But existence of a lawful excuse is an affirmative defense
which the warehouseman must prove.
Sec. 9. Justification of warehouseman in delivering. — A
warehouseman is justified in delivering the goods, subject to the
provisions of the three following sections, to one who is:
(a) The person lawfully entitled to the possession of the goods, or
his agent;
(b) A person who is either himself entitled to delivery by the terms of
a non-negotiable receipt issued for the goods, or who has written
authority from the person so entitled either indorsed upon the receipt
or written upon another paper; or
(c) A person in possession of a negotiable receipt by the terms of
which the goods are deliverable to him or order, or to bearer, or
which has been indorsed to him or in blank by the person to whom
delivery was promised by the terms of the receipt or by his mediate
or immediate indorser.
Persons to whom goods must be delivered
1. Person lawfully entitled to possession of goods or his
agent
2. Person entitled to delivery under a non-negotiable receipt
or with written authority
3. Person in possession of a negotiable receipt
Sec. 10. Warehouseman's liability for misdelivery. — Where a
warehouseman delivers the goods to one who is not in fact lawfully
entitled to the possession of them, the warehouseman shall be liable
as for conversion to all having a right of property or possession in
the goods if he delivered the goods otherwise than as authorized by
subdivisions (b) and (c) of the preceding section, and though he
delivered the goods as authorized by said subdivisions, he shall be
so liable, if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to
a right of property or possession in the goods, not to make such
deliver; or
(b) Had information that the delivery about to be made was to one
not lawfully entitled to the possession of the goods.
Warehouseman’s liability for misdelivery
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
1. Liability similar to a bank paying for a forged check – the
duty rests on the warehouseman to devise means by
which deception can be avoided
2. Liability as for conversion –unauthorized assumption or
exercise of right of ownership over goods belonging to
another
Sec. 11. Negotiable receipt must be cancelled when goods
delivered. — Except as provided in section thirty-six, where a
warehouseman delivers goods for which he had issued a negotiable
receipt, the negotiation of which would transfer the right to the
possession of the goods, and fails to take up and cancel the receipt,
he shall be liable to anyone who purchases for value in good faith
such receipt, for failure to deliver the goods to him, whether such
purchaser acquired title to the receipt before or after the delivery of
the goods by the warehouseman.
Sec. 12. Negotiable receipts must be cancelled or marked when
part of goods delivered. — Except as provided in section thirty-six,
where a warehouseman delivers part of the goods for which he had
issued a negotiable receipt and fails either to take up and cancel
such receipt or to place plainly upon it a statement of what goods or
packages have been delivered, he shall be liable to anyone who
purchases for value in good faith such receipt, for failure to deliver
all the goods specified in the receipt, whether such purchaser
acquired title to the receipt before or after the delivery of any portion
of the goods by the warehouseman.
Cancellation of receipts on delivery of goods
Not applicable to non-negotiable receipts because there is no
necessity for surrender or cancellation prior to delivery.
Sec. 13. Altered receipts. — The alteration of a receipt shall not
excuse the warehouseman who issued it from any liability if such
alteration was:
(a) Immaterial,
(b) Authorized, or
(c) Made without fraudulent intent.
If the alteration was authorized, the warehouseman shall be liable
according to the terms of the receipt as altered. If the alteration was
unauthorized but made without fraudulent intent, the warehouseman
shall be liable according to the terms of the receipt as they were
before alteration.
Material and fraudulent alteration of a receipt shall not excuse the
warehouseman who issued it from liability to deliver according to the
terms of the receipt as originally issued, the goods for which it was
issued but shall excuse him from any other liability to the person
who made the alteration and to any person who took with notice of
the alteration. Any purchaser of the receipt for value without notice
of the alteration shall acquire the same rights against the
warehouseman which such purchaser would have acquired if the
receipt had not been altered at the time of purchase.
Effects of alteration on liability of warehouseman
1. Alteration immaterial – warehouseman liable on the
altered receipt according to its original tenor
2. Alteration material – if authorized, warehouseman liable
according to terms of the receipt altered
3. Material alteration innocently made – though
unauthorized, warehouseman liable according to its
original tenor
4. Material alteration fraudulently made – liable according to
original tenor to purchaser for value without notice, and
even to the alterer and subsequent purchasers with notice
(as regards the last two, liability limited to delivery)
Bona fide owner acquires no right to the goods under a negotiable
receipt which has been lost, stolen or endorsement forged
Sec. 14. Lost or destroyed receipts. — Where a negotiable receipt
has been lost or destroyed, a court of competent jurisdiction may
order the delivery of the goods upon satisfactory proof of such loss
or destruction and upon the giving of a bond with sufficient sureties
to be approved by the court to protect the warehouseman from any
liability or expense, which he or any person injured by such delivery
may incur by reason of the original receipt remaining outstanding.
The court may also in its discretion order the payment of the
warehouseman's reasonable costs and counsel fees.

The delivery of the goods under an order of the court as provided in
this section, shall not relieve the warehouseman from liability to a
person to whom the negotiable receipt has been or shall be
negotiated for value without notice of the proceedings or of the
delivery of the goods.
Liability of warehouseman in case of lost or destroyed receipts
Under Sec. 8 and 11, the warehouseman is not liable for non-
delivery without the surrender of the receipt.
Court may order delivery only:
1. Upon proof of the loss or destruction of the receipt
2. Upon the giving of a bond with sufficient sureties to be
approved by the court.
Sec. 15. Effect of duplicate receipts. — A receipt upon the face of
which the word "duplicate" is plainly placed is a representation and
warranty by the warehouseman that such receipt is an accurate
copy of an original receipt properly issued and uncancelled at the
date of the issue of the duplicate, but shall impose upon him no
other liability.
Liability of warehouseman as to duplicate is only as to breach of
this warranty
Warehouseman warrants:
1. Duplicate is an accurate copy
2. Original receipt is uncancelled at the date of the issue of
the duplicate
Sec. 16. Warehouseman cannot set up title in himself. — No title
or right to the possession of the goods, on the part of the
warehouseman, unless such title or right is derived directly or
indirectly from a transfer made by the depositor at the time of or
subsequent to the deposit for storage, or from the warehouseman's
lien, shall excuse the warehouseman from liability for refusing to
deliver the goods according to the terms of the receipt.
Ownership not a defense for refusal to deliver
Based on the doctrine of estoppel
1. Directly or indirectly from a transfer made by depositor at
the time of the deposit for storage or subsequent thereto
2. From the warehouseman’s lien
Sec. 17. Interpleader of adverse claimants. — If more than one
person claims the title or possession of the goods, the
warehouseman may, either as a defense to an action brought
against him for non-delivery of the goods or as an original suit,
whichever is appropriate, require all known claimants to interplead.
Sec. 18. Warehouseman has reasonable time to determine
validity of claims. — If someone other than the depositor or person
claiming under him has a claim to the title or possession of goods,
and the warehouseman has information of such claim, the
warehouseman shall be excused from liability for refusing to deliver
the goods, either to the depositor or person claiming under him or to
the adverse claimant until the warehouseman has had a reasonable
time to ascertain the validity of the adverse claim or to bring legal
proceedings to compel claimants to interplead.
Duty of warehouseman where there are several claimants
1. Warehouseman must determine within a reasonable time
the validity of the conflicting claims (Sec. 18) and
2. Deliver to the person entitled to the possession
But he is not excused from liability in case he makes a mistake (Sec.
10), so instead, he should file an interpleader (Rule 62) so he would
be relieved from liability in delivering the goods to the person the
court finds to be with a better right.
Liability of warehouseman to rightful claimant
1. No interpleader – liable for refusal to deliver
2. No interpleader and no investigation – at the lapse of a
reasonable time, warehouseman is guilty of conversion
Not applicable to cases where warehouseman makes a claim to the
goods.
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Sec. 19. Adverse title is no defense except as above provided.
— Except as provided in the two preceding sections and in sections
nine and thirty-six, no right or title of a third person shall be a
defense to an action brought by the depositor or person claiming
under him against the warehouseman for failure to deliver the goods
according to the terms of the receipt.
Adverse title of third person not a defense for refusal to deliver
1. Cannot set up title in himself (Sec. 16)
2. Cannot set up an adverse title in another for failure to
deliver on demand
Sec. 20. Liability for non-existence or misdescription of goods.
— A warehouseman shall be liable to the holder of a receipt for
damages caused by the non-existence of the goods or by the failure
of the goods to correspond with the description thereof in the receipt
at the time of its issue. If, however, the goods are described in a
receipt merely by a statement of marks or labels upon them or upon
packages containing them or by a statement that the goods are said
to be goods of a certain kind or that the packages containing the
goods are said to contain goods of a certain kind or by words of like
purport, such statements, if true, shall not make liable the
warehouseman issuing the receipt, although the goods are not of the
kind which the marks or labels upon them indicate or of the kind they
were said to be by the depositor.
Liability of warehouseman for non-existence or misdescription
of goods
Warehouseman under obligation to return the identical thing,
estopped against holder.
Anyone at all familiar with the business of a warehouseman knows
that he could not transact business if he were required to examine
the contents of each package, barrel or box of merchandise which
was delivered and so packed at to cover and conceal the real nature
of the goods (Dean v. Driggs).
Sec. 21. Liability for care of goods. — A warehouseman shall be
liable for any loss or injury to the goods caused by his failure to
exercise such care in regard to them as reasonably careful owner of
similar goods would exercise, but he shall not be liable, in the
absence of an agreement to the contrary, for any loss or injury to the
goods which could not have been avoided by the exercise of such
care.
Liability of warehouseman for loss due to lack of care
Diligence of a good father of a family (Art. 1163) – care a
reasonably careful owner would exercise over similar goods of his
own.
1. Warehouseman not liable for loss or injury to the goods
which could not have been avoided by the exercise of
such care
2. Ordinary or reasonable care depends upon the
circumstances
a. Character or value of the property
b. Character and location of warehouse
3. Liability may be limited to an agreed value in case of loss,
but not for negligence (Sec. 3)
Sec. 22. Goods must be kept separate. — Except as provided in
the following section, a warehouseman shall keep the goods so far
separate from goods of other depositors and from other goods of the
same depositor for which a separate receipt has been issued, as to
permit at all times the identification and redelivery of the goods
deposited.
Sec. 23. Fungible goods may be commingled if warehouseman
authorized. — If authorized by agreement or by custom, a
warehouseman may mingle fungible goods with other goods of the
same kind and grade. In such case, the various depositors of the
mingled goods shall own the entire mass in common and each
depositor shall be entitled to such portion thereof as the amount
deposited by him bears to the whole.
Sec. 24. Liability of warehouseman to depositors of
commingled goods. — The warehouseman shall be severally liable
to each depositor for the care and redelivery of his share of such
mass to the same extent and under the same circumstances as if
the goods had been kept separate.

Commingling of deposited goods
Intended for the benefit of holders of the receipts. Under Art. 1976,
unless there is stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality.
1. General rule is not to commingle (Sec. 22)
2. In fungible goods (Sec. 58), warehouseman may
commingle if authorized by agreement or custom (Sec. 23)
3. Different owners become co-owners of the whole mass
(Sec. 24)
Sec. 25. Attachment or levy upon goods for which a negotiable
receipt has been issued. — If goods are delivered to a
warehouseman by the owner or by a person whose act in conveying
the title to them to a purchaser in good faith for value would bind the
owner, and a negotiable receipt is issued for them, they cannot
thereafter, while in the possession of the warehouseman, be
attached by garnishment or otherwise, or be levied upon under an
execution unless the receipt be first surrendered to the
warehouseman or its negotiation enjoined. The warehouseman shall
in no case be compelled to deliver up the actual possession of the
goods until the receipt is surrendered to him or impounded by the
court.
Attachment or levy of negotiable receipt only if:
1. Document be first surrendered
2. Negotiation is enjoined
3. Document is impounded by the court
Delivery of goods covered by an outstanding negotiable receipt
cannot be done without surrender of receipt or impounding by the
court – to protect warehouseman who could be made liable to
purchasers for value (Art. 1519, Sec. 25).
Sec. 25 does not apply when depositor not owner. The rights of
attaching creditors cannot be defeated by the issuance of a
negotiable receipt of title thereafter.
Sec. 26. Creditor's remedies to reach negotiable receipts. — A
creditor whose debtor is the owner of a negotiable receipt shall be
entitled to such aid from courts of appropriate jurisdiction, by
injunction and otherwise, in attaching such receipt or in satisfying the
claim by means thereof as is allowed at law or in equity in these
islands in regard to property which can not readily be attached or
levied upon by ordinary legal process.
Remedies of creditor or owner of negotiable receipt is to attach
the negotiable receipt and not the property (Art. 1520, Sec. 26, 32,
35). This gives courts full power to aid by injunction.
Sec. 27. What claims are included in the warehouseman's lien.
— Subject to the provisions of section thirty, a warehouseman shall
have a lien on goods deposited or on the proceeds thereof in his
hands, for all lawful charges for storage and preservation of the
goods; also for all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing, coopering and other
charges and expenses in relation to such goods, also for all
reasonable charges and expenses for notice, and advertisements of
sale, and for sale of the goods where default had been made in
satisfying the warehouseman's lien.
Extent of warehouseman’s lien
Security for payment and exists for the benefit of warehouseman
(Sec. 58, not for casual bailee).
Sec. 28. Against what property the lien may be enforced. —
Subject to the provisions of section thirty, a warehouseman's lien
may be enforced:
(a) Against all goods, whenever deposited, belonging to the person
who is liable as debtor for the claims in regard to which the lien is
asserted, and
(b) Against all goods belonging to others which have been deposited
at any time by the person who is liable as debtor for the claims in
regard to which the lien is asserted if such person had been so
entrusted with the possession of goods that a pledge of the same by
him at the time of the deposit to one who took the goods in good
faith for value would have been valid.
Goods subject to lien
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
1. Goods belonging to depositor or his principal – subject
a. Goods of depositor
b. Against goods of other persons stored by depositor
2. Goods stored in fraud of true owner’s rights – not subject
Sec. 29. How the lien may be lost. — A warehouseman loses his
lien upon goods:
(a) By surrendering possession thereof, or
(b) By refusing to deliver the goods when a demand is made with
which he is bound to comply under the provisions of this Act.
Loss and waiver of lien upon goods
1. By surrendering – presumed that the lien has been
waived or abandoned where the warehouseman permits a
depositor to remove the goods
a. Involuntarily parting with possession does not result
in loss of lien
b. After surrender, lien cannot be enforced on goods
covered by another receipt
2. Wrongfully refusing to deliver goods upon demand under
Sec. 8
Note that the obligation to pay the warehousing fees and charges
which continues to be a personal liability.
Valid reasons for refusing to deliver goods
1. Holder of the receipt does not satisfy the conditions of
Sec. 8
2. Warehouseman has legal title under Sec. 18
a. Title or right being derived directly or indirectly from a
transfer made by the depositor at the time of or
subsequent to the deposit for storage
b. From a warehouseman’s lien
3. Warehouseman has legally set up the title or right of third
persons as lawful defense
a. Third person has requested warehouseman not to
make delivery (Sec. 10) file interpleader instead
(Sec. 17)
b. Information that return would be made to one not
lawfully entitled, reasonable time to ascertain (Sec.
18)
c. Goods have been sold to third persons to satisfy a
warehouseman’s lien or perishable or hazardous
nature
4. Warehouseman’s lien (Sec. 31)
5. Failure was not due to fault of the warehouseman (prior to
demand and refusal)
a. Stolen
b. Destroyed by fire, flood, etc. without any negligence
on his part
c. Taken by mistake by a third person without the
knowledge or implied assent of the warehouseman
Sec. 30. Negotiable receipt must state charges for which the
lien is claimed. — If a negotiable receipt is issued for goods, the
warehouseman shall have no lien thereon except for charges for
storage of goods subsequent to the date of the receipt unless the
receipt expressly enumerated other charges for which a lien is
claimed. In such case, there shall be a lien for the charges
enumerated so far as they are within the terms of section twenty-
seven although the amount of the charges so enumerated is not
stated in the receipt.
Lien where receipt negotiable
Lien exists only for charges for storage and preservation and other
charges enumerated in the receipt as long as written with the terms
of Sec. 27. As to claims not specified, warehouseman shares pro
rata after deducting the charges for storage.
Sec. 31. Warehouseman need not deliver until lien is satisfied.
— A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until
the lien is satisfied.
Sec. 32. Warehouseman's lien does not preclude other
remedies. — Whether a warehouseman has or has not a lien upon
the goods, he is entitled to all remedies allowed by law to a creditor
against a debtor for the collection from the depositor of all charges

and advances which the depositor has expressly or impliedly
contracted with the warehouseman to pay.
Sec. 33. Satisfaction of lien by sale. — A warehouseman's lien for
a claim which has become due may be satisfied as follows:
(a) An itemized statement of the warehouseman's claim, showing
the sum due at the time of the notice and the date or dates when it
becomes due,
(b) A brief description of the goods against which the lien exists,
(c) A demand that the amount of the claim as stated in the notice of
such further claim as shall accrue, shall be paid on or before a day
mentioned, not less than ten days from the delivery of the notice if it
is personally delivered, or from the time when the notice shall reach
its destination, according to the due course of post, if the notice is
sent by mail,
(d) A statement that unless the claim is paid within the time
specified, the goods will be advertised for sale and sold by auction at
a specified time and place.
In accordance with the terms of a notice so given, a sale of the
goods by auction may be had to satisfy any valid claim of the
warehouseman for which he has a lien on the goods. The sale shall
be had in the place where the lien was acquired, or, if such place is
manifestly unsuitable for the purpose of the claim specified in the
notice to the depositor has elapsed, and advertisement of the sale,
describing the goods to be sold, and stating the name of the owner
or person on whose account the goods are held, and the time and
place of the sale, shall be published once a week for two
consecutive weeks in a newspaper published in the place where
such sale is to be held. The sale shall not be held less than fifteen
days from the time of the first publication. If there is no newspaper
published in such place, the advertisement shall be posted at least
ten days before such sale in not less than six conspicuous places
therein.
From the proceeds of such sale, the warehouseman shall satisfy his
lien including the reasonable charges of notice, advertisement and
sale. The balance, if any, of such proceeds shall be held by the
warehouseman and delivered on demand to the person to whom he
would have been bound to deliver or justified in delivering goods.
At any time before the goods are so sold, any person claiming a
right of property or possession therein may pay the warehouseman
the amount necessary to satisfy his lien and to pay the reasonable
expenses and liabilities incurred in serving notices and advertising
and preparing for the sale up to the time of such payment. The
warehouseman shall deliver the goods to the person making
payment if he is a person entitled, under the provision of this Act, to
the possession of the goods on payment of charges thereon.
Otherwise, the warehouseman shall retain the possession of the
goods according to the terms of the original contract of deposit.
Sec. 34. Perishable and hazardous goods. — If goods are of a
perishable nature, or by keeping will deteriorate greatly in value, or,
by their order, leakage, inflammability, or explosive nature, will be
liable to injure other property , the warehouseman may give such
notice to the owner or to the person in whose names the goods are
stored, as is reasonable and possible under the circumstances, to
satisfy the lien upon such goods and to remove them from the
warehouse and in the event of the failure of such person to satisfy
the lien and to receive the goods within the time so specified, the
warehouseman may sell the goods at public or private sale without
advertising. If the warehouseman, after a reasonable effort, is
unable to sell such goods, he may dispose of them in any lawful
manner and shall incur no liability by reason thereof.
The proceeds of any sale made under the terms of this section shall
be disposed of in the same way as the proceeds of sales made
under the terms of the preceding section.
Sec. 35. Other methods of enforcing lien. — The remedy for
enforcing a lien herein provided does not preclude any other
remedies allowed by law for the enforcement of a lien against
personal property nor bar the right to recover so much of the
warehouseman's claim as shall not be paid by the proceeds of the
sale of the property.
Sec. 36. Effect of sale. — After goods have been lawfully sold to
satisfy a warehouseman's lien, or have been lawfully sold or
disposed of because of their perishable or hazardous nature, the
warehouseman shall not thereafter be liable for failure to deliver the
goods to the depositor or owner of the goods or to a holder of the
receipt given for the goods when they were deposited, even if such
receipt be negotiable.
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Enforcement of warehouseman’s lien
1. Refusing to deliver until lien is satisfied
2. Causing the extrajudicial sale and applying the proceeds
3. Filing a civil action for the collection of unpaid charges or
by way of counterclaim
Effect of sale of goods
1. Warehouseman not liable for non-delivery even if receipt
be negotiated (Sec. 36)
2. Where sale made without publication and before time
specified, sale is void and purchases acquires no title
(Eastern Paper Mills v. Republic Warehousing)
Acts for which warehouseman is liable
1. Failure to stamp duplicate on a negotiable receipt (Sec. 6)
2. Failure to place non-negotiable or not negotiable in a non-
negotiable receipt (Sec. 7)
3. Misdelivery of goods (Sec. 10)
4. Failure to effect cancellation of a negotiable receipt upon
delivery of goods (Sec. 11)
5. Issuing receipt for non-existing goods or misdescribed
goods (Sec. 20)
6. Failure to take care of goods (Sec. 21)
7. Failure to give notice in case of sale of goods to satisfy his
lien (Sec. 33) or because the goods are perishable or
hazardous (Sec. 34)
III — NEGOTIATION AND TRANSFER OF RECEIPTS
Sec. 37. Negotiation of negotiable receipt of delivery. — A
negotiable receipt may be negotiated by delivery:
(a) Where, by terms of the receipt, the warehouseman undertakes to
deliver the goods to the bearer, or
(b) Where, by the terms of the receipt, the warehouseman
undertakes to deliver the goods to the order of a specified person,
and such person or a subsequent indorsee of the receipt has
indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are
deliverable to bearer or where a negotiable receipt has been
indorsed in blank or to bearer, any holder may indorse the same to
himself or to any other specified person, and, in such case, the
receipt shall thereafter be negotiated only by the indorsement of
such indorsee.
Negotiation of negotiable receipt same as negotiation of
promissory notes and bills of exchange under the Negotiable
Instruments Law.
1. Negotiable by delivery of the goods are deliverable to
bearer are indorsed in blank or to the bearer by the person
to whose order the goods are deliverable
2. If specially indorsed, it becomes an order receipt and
negotiation can only be effected by indorsement of the
indorsee
Sec. 38. Negotiation of negotiable receipt by indorsement. — A
negotiable receipt may be negotiated by the indorsement of the
person to whose order the goods are, by the terms of the receipt,
deliverable. Such indorsement may be in blank, to bearer or to a
specified person. If indorsed to a specified person, it may be again
negotiated by the indorsement of such person in blank, to bearer or
to another specified person. Subsequent negotiation may be made
in like manner.
Negotiation of negotiable receipt by indorsement
1. If indorsed in blank or to bearer, document becomes
negotiable by delivery
2. If indorsed to a specified person, may be negotiated again
by such person in blank, to bearer or to another specified
person
Sec. 39. Transfer of receipt. — A receipt which is not in such form
that it can be negotiated by delivery may be transferred by the
holder by delivery to a purchaser or donee.
A non-negotiable receipt cannot be negotiated, and the indorsement
of such a receipt gives the transferee no additional right.

Transfer of non-negotiable receipt See Secs 42, 43 for the right of
a person to whom an order receipt is transferred by delivery without
indorsement.
Although not negotiable, receipt can be transferred or assigned by
delivery.
Advantages of a negotiable warehouse receipt
1. Protects a purchaser for value and in good faith (Sec. 41)
2. Goods cannot be garnished or levied upon without
surrender, impounding or enjoinment (Sec. 25)
3. Holder acquires direct obligation of warehouseman to hold
possession of goods without notice (Sec. 41)
4. Goods covered not subject to seller’s lien or stoppage in
transitu (Sec. 49)
Sec. 40. Who may negotiate a receipt. — A negotiable receipt may
be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt
has been entrusted by the owner, if, by the terms of the receipt, the
warehouseman undertakes to deliver the goods to the order of the
person to whom the possession or custody of the receipt has been
entrusted, or if, at the time of such entrusting, the receipt is in such
form that it may be negotiated by delivery.
Sec. 41. Rights of person to whom a receipt has been
negotiated. — A person to whom a negotiable receipt has been
duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to
him had or had ability to convey to a purchaser in good faith for
value, and also such title to the goods as the depositor or person to
whose order the goods were to be delivered by the terms of the
receipt had or had ability to convey to a purchaser in good faith for
value, and
(b) The direct obligation of the warehouseman to hold possession of
the goods for him according to the terms of the receipt as fully as if
the warehouseman and contracted directly with him.
Rights of person to whom receipt has been negotiated
Applies to (1) delivery in case of receipt to bearer, or (2)
indorsement and delivery in case of receipt to order.
1. Title of the person negotiating the receipt over the goods
covered
2. Title of the person to whose order by terms of the receipt
to goods were to be delivered
3. Direct obligation of the warehouseman to hold possession
of the goods for him.
One who purchases from thief acquires no title for thief had no title
over goods, but he acquires good title if owner is estopped. (Art.
1513)
Sec. 42. Rights of person to whom receipt has been transferred.
— A person to whom a receipt has been transferred but not
negotiated acquires thereby, as against the transferor, the title of the
goods subject to the terms of any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right
to notify the warehouseman of the transfer to him of such receipt
and thereby to acquire the direct obligation of the warehouseman to
hold possession of the goods for him according to the terms of the
receipt.
Prior to the notification of the warehouseman by the transferor or
transferee of a non-negotiable receipt, the title of the transferee to
the goods and the right to acquire the obligation of the
warehouseman may be defeated by the levy of an attachment or
execution upon the goods by a creditor of the transferor or by a
notification to the warehouseman by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the goods by
the transferor.
Rights of person to whom receipt has been transferred
1. Title to the goods as against the transferor
2. Right to notify warehouseman of the transfer
3. Right to acquire the obligation of the warehouseman to
hold the goods for him.
Attachment of goods covered by receipt
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
1. Receipt non-negotiable – Transfer does not effect the
delivery of goods
2. Receipt negotiable – cannot be attached or levied until
surrender, impounding, or enjoinment
Sec. 43. Transfer of negotiable receipt without indorsement. —
Where a negotiable receipt is transferred for value by delivery and
the indorsement of the transferor is essential for negotiation, the
transferee acquires a right against the transferor to compel him to
indorse the receipt unless a contrary intention appears. The
negotiation shall take effect as of the time when the indorsement is
actually made.
Rights of transferee of a negotiable receipt when an order receipt
was delivered without indorsement
1. Right to the goods as against the transferor (Sec. 42)
2. Right to compel transferor to indorse the receipt except if
intention is merely to transfer
Rule where receipt subsequently indorsed
Negotiation is complete only at the time of indorsement. So if
purchaser was aware of the defect at such time, he cannot be
considered in good faith even when he had no notice at the time he
bought the receipt (Art. 1515, Sec. 43).
Ownership of goods covered by receipt negotiated or
transferred
1. Indorsee or transferee – should be regarded as owner of
the goods covered thereof
2. Indorser or transferor – when transaction is not sale but
mortgage or pledge, ownership is retained
3. Innocent third persons – indorsee-pledgee of a warehouse
receipt is considered the owner of the goods covered by it
whenever necessary for their protection
Sec. 44. Warranties of a sale of receipt. — A person who, for
value, negotiates or transfers a receipt by indorsement or delivery,
including one who assigns for value a claim secured by a receipt,
unless a contrary intention appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity
or worth of the receipt, and
(d) That he has a right to transfer the title to the goods and that the
goods are merchantable or fit for a particular purpose whenever
such warranties would have been implied, if the contract of the
parties had been to transfer without a receipt of the goods
represented thereby.
Warranties on sale of receipt
It is the duty of every indorsee to know that all previous
indorsements are genuine, otherwise, he will acquire a valid title to
the instruments.
Sec. 45. Indorser not a guarantor. — The indorsement of a receipt
shall not make the indorser liable for any failure on the part of the
warehouseman or previous indorsers of the receipt to fulfill their
respective obligations.
Liability of person negotiating or transferring receipt
Indorsement of negotiable instrument has double effect: (1)
conveyance of the instrument and (2) contract of guaranty.
Indorsement of warehouse receipt has only conveyance as an
effect.
Sec. 46. No warranty implied from accepting payment of a debt.
— A mortgagee, pledgee, or holder for security of a receipt who, in
good faith, demands or receives payment of the debt for which such
receipt is security, whether from a party to a draft drawn for such
debt or from any other person, shall not, by so doing, be deemed to
represent or to warrant the genuineness of such receipt or the
quantity or quality of the goods therein described.
Sec. 47. When negotiation not impaired by fraud, mistake or
duress. — The validity of the negotiation of a receipt is not impaired
by the fact that such negotiation was a breach of duty on the part of
the person making the negotiation or by the fact that the owner of
the receipt was induced by fraud, mistake or duress or to entrust the

possession or custody of the receipt to such person, if the person to
whom the receipt was negotiated or a person to whom the receipt
was subsequently negotiated paid value therefor, without notice of
the breach of duty, or fraud, mistake or duress.
Validity of negotiation as against real owner
1. Receipt acquired from owner’s agent – bona fide
purchaser acquires title when purchased from agent within
actual or apparent scope of his authority
2. Lost or stolen receipt – bona fide transferee acquires no
title from the thief or finder
Sec. 48. Subsequent negotiation. — Where a person having sold,
mortgaged, or pledged goods which are in warehouse and for which
a negotiable receipt has been issued, or having sold, mortgaged, or
pledged the negotiable receipt representing such goods, continues
in possession of the negotiable receipt, the subsequent negotiation
thereof by the person under any sale or other disposition thereof to
any person receiving the same in good faith, for value and without
notice of the previous sale, mortgage or pledge, shall have the same
effect as if the first purchaser of the goods or receipt had expressly
authorized the subsequent negotiation.
Effect of subsequent negotiation by seller
Subsequent purchaser must have taken the receipt in good faith and
for value in order to acquire a better right.
Sec. 49. Negotiation defeats vendor's lien. — Where a negotiable
receipt has been issued for goods, no seller's lien or right of
stoppage in transitu shall defeat the rights of any purchaser for value
in good faith to whom such receipt has been negotiated, whether
such negotiation be prior or subsequent to the notification to the
warehouseman who issued such receipt of the seller's claim to a lien
or right of stoppage in transitu. Nor shall the warehouseman be
obliged to deliver or justified in delivering the goods to an unpaid
seller unless the receipt is first surrendered for cancellation.
Indorsee’s right superior to vendor’s lien
Warehouseman not obliged to deliver goods to an unpaid seller
without surrender of receipt (sec. 49, 54).
IV — CRIMINAL OFFENSES
Sec. 50. Issue of receipt for goods not received. — A
warehouseman, or an officer, agent, or servant of a warehouseman
who issues or aids in issuing a receipt knowing that the goods for
which such receipt is issued have not been actually received by
such warehouseman, or are not under his actual control at the time
of issuing such receipt, shall be guilty of a crime, and, upon
conviction, shall be punished for each offense by imprisonment not
exceeding five years, or by a fine not exceeding ten thousand pesos,
or both.
Possession of goods by warehouseman
It is an offense to issue receipt unless the property is actually in
storage – in warehouseman’s possession, stored in his warehouse,
under his care and control at the time the receipt is issued.
Sec. 51. Issue of receipt containing false statement. — A
warehouseman, or any officer, agent or servant of a warehouseman
who fraudulently issues or aids in fraudulently issuing a receipt for
goods knowing that it contains any false statement, shall be guilty of
a crime, and upon conviction, shall be punished for each offense by
imprisonment not exceeding one year, or by a fine not exceeding
two thousand pesos, or by both.
Sec. 52. Issue of duplicate receipt not so marked. — A
warehouse, or any officer, agent, or servant of a warehouseman
who issues or aids in issuing a duplicate or additional negotiable
receipt for goods knowing that a former negotiable receipt for the
same goods or any part of them is outstanding and uncancelled,
without plainly placing upon the face thereof the word "duplicate"
except in the case of a lost or destroyed receipt after proceedings
are provided for in section fourteen, shall be guilty of a crime, and,
upon conviction, shall be punished for each offense by imprisonment
not exceeding five years, or by a fine not exceeding ten thousand
pesos, or by both.
Sec. 53. Issue for warehouseman's goods or receipts which do
not state that fact. — Where they are deposited with or held by a
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warehouseman goods of which he is owner, either solely or jointly or
in common with others, such warehouseman, or any of his officers,
agents, or servants who, knowing this ownership, issues or aids in
issuing a negotiable receipt for such goods which does not state
such ownership, shall be guilty of a crime, and, upon conviction,
shall be punished for each offense by imprisonment not exceeding
one year, or by a fine not exceeding two thousand pesos, or by both.
Sec. 54. Delivery of goods without obtaining negotiable receipt.
— A warehouseman, or any officer, agent, or servant of a
warehouseman, who delivers goods out of the possession of such
warehouseman, knowing that a negotiable receipt the negotiation of
which would transfer the right to the possession of such goods is
outstanding and uncancelled, without obtaining the possession of
such receipt at or before the time of such delivery, shall, except in
the cases provided for in sections fourteen and thirty-six, be found
guilty of a crime, and, upon conviction, shall be punished for each
offense by imprisonment not exceeding one year, or by a fine not
exceeding two thousand pesos, or by both.
Sec. 55. Negotiation of receipt for mortgaged goods. — Any
person who deposits goods to which he has no title, or upon which
there is a lien or mortgage, and who takes for such goods a
negotiable receipt which he afterwards negotiates for value with
intent to deceive and without disclosing his want of title or the
existence of the lien or mortgage, shall be guilty of a crime, and,
upon conviction, shall be punished for each offense by imprisonment
not exceeding one year, or by a fine not exceeding two thousand
pesos, or by both.
Offenses criminally punishable by the Act Secs. 50-55
Ingredients of offense punished by Section 54
1. Delivery of goods out of the possession of the
warehouseman
2. Person causing delivery has knowledge that a negotiable
receipt for goods is outstanding and uncancelled
3. Person causing the delivery does so without obtaining
possession of the receipt at or before the time of delivery
Nature of criminal responsibility under Section 54
1. Violation by the warehouseman himself – no violation if
accused had nothing to do with the withdrawal of goods in
question
2. Violation by some other person – persons other than the
warehouseman may be held liable for violations thereof
(individual, not attributive)
3. Possibility that right to goods sold has been transferred to
a third person – not necessary that the right of possession
to such stored goods has been transferred to a third
person
V — INTERPRETATION
Sec. 56. Case not provided for in Act. — Any case not provided
for in this Act shall be governed by the provisions of existing
legislation, or in default thereof, by the rule of the law merchant.
History and meaning of law merchant
Originated in the unwritten customs of merchants in different
commercial countries and consists of usages of trade in different
departments of commerce proved in court and ratified by legal
decisions.
Sec. 57. Name of Act. — This Act may be cited as the Warehouse
Receipts Act.
Sec. 58. Definitions. — (a) In this Act, unless the content or subject
matter otherwise requires:
"Action" includes counterclaim, set-off, and suits in equity as
provided by law in these islands.
"Delivery" means voluntary transfer of possession from one person
to another.
"Fungible goods" means goods of which any unit is, from its nature
by mercantile custom, treated as the equivalent of any other unit.
"Goods" means chattels or merchandise in storage or which has
been or is about to be stored.
"Holder" of a receipt means a person who has both actual
possession of such receipt and a right of property therein.
"Order" means an order by indorsement on the receipt.
"Owner" does not include mortgagee.
"Person" includes a corporation or partnership or two or more

persons having a joint or common interest.
To "purchase" includes to take as mortgagee or as pledgee.
"Receipt" means a warehouse receipt.
"Value" is any consideration sufficient to support a simple contract.
An antecedent or pre-existing obligation, whether for money or not,
constitutes value where a receipt is taken either in satisfaction
thereof or as security therefor.
"Warehouseman" means a person lawfully engaged in the business
of storing goods for profit.
(b) A thing is done "in good faith" within the meaning of this Act
when it is in fact done honestly, whether it be done negligently or
not.
Sec. 59. Application of Act. — The provisions of this Act do not
apply to receipts made and delivered prior to the taking effect
hereof.
Sec. 60. Repeals. — All acts and laws and parts thereof
inconsistent with this Act are hereby repealed.
Sec. 61. Time when Act takes effect. — This Act shall take effect
ninety days after its publication in the Official Gazette of the
Philippines shall have been completed.
Enacted: February 5, 1912
Case:
Philippine National Bank v. Se, et al.,
G.R. No. 119231, April 18, 1996.
The unconditional presentment of the receipts for payment
carried with it the admissions of the existence and validity of
the terms, conditions and stipulations written on the face of the
warehouse receipts, including the unqualified recognition of the
payment of the warehouseman’s lien for storage fees and
preservation expenses. Petitioner is in estoppel in disclaiming
liability for the payment of storage fees due the private respondents
as warehouseman while claiming to be entitled to the sugar stocks
covered by the subject Warehouse Receipts on the basis of which it
anchors its claim for payment or delivery of the sugar stocks.
While the PNB is entitled to the stocks of sugar as the endorsee of
the quedans, delivery to it shall be effected only upon payment of
the storage fees. Imperative is the right of the warehouseman to
demand payment of his lien at this juncture, because, in accordance
with Section 29 of the Warehouse Receipts Law, the warehouseman
loses his lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman
surrenders the possession of the goods without requiring payment of
his lien, because a warehouseman’s lien is possessory in nature.
ACT NO. 3893 - AN ACT TO REGULATE THE BUSINESS OF
RECEIVING RICE FOR STORAGE, GIVING THE DIRECTOR OF
COMMERCE AND INDUSTRY THE DUTY TO ENFORCE IF,
PROVIDING PENALTIES FOR VIOLATION OF THE PROVISIONS,
EXEMPTING COOPERATIVE MARKETING ASSOCIATIONS OF
RICE PRODUCERS FROM APPLICATION THEREOF,
REPEALING ACT NUMBERED THIRTY-FOUR HUNDRED AND
SIXTY-NINE AND FOR OTHER PURPOSES
Section 1. This Act shall be known by the short title of "BONDED
WAREHOUSE ACT."
Sec. 2. As used in this Act, the term "warehouse" shall be deemed
to mean every building, structure, or other protected enclosure in
which rice is kept for storage. The term "rice" shall be deemed to
mean either palay in bundles, or in grains, or clean rice, or both.
"Person" including corporation or partnership or two or more persons
having joint or common interest; "warehouseman" means a person
engaged in the business receiving rice for storage; and "receipt"
means any receipt issued by a warehouseman for rice delivered to
him. For the purpose of this Act, the business of receiving rice for
storage shall include (1) any contract or transaction wherein the
warehouseman is obligated to return the very same rice delivered to
him or pay its value;(2) any contract or transaction wherein the rice
delivered is to be milled for and on account of the owner thereof; (3)
any contract or transaction wherein the rice delivered is commingled
with the rice delivered by or belonging to other persons and the
warehouseman is obligated to return the rice of the same kind or pay
its value.
Sec. 3. No person shall engage in the business of receiving rice for
storage without first securing a license therefore from the Director of
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the Bureau of Commerce and Industry. Said license shall be annual
and shall expire on the thirty-first day of December.
Sec. 4. Any person applying for a license to engage in the business
of receiving rice for storage shall set forth in the application the place
or places where the business and warehouse are to be established
or located and the maximum quantity of rice to be received. The
application shall be accompanied by a cash bond or a bond secured
by real estate or signed by a duly authorized bonding company, the
amount of which shall be fixed by the Director of the Bureau of
Commerce and Industry at not less than thirty-three and one third
percent of the market value of the maximum quantity or rice to be
received. Said bond shall be so conditioned as to respond for the
market value of the rice actually delivered and received at any time
the warehouseman is unable to return the rice or to pay its value.
The bond shall be approved by the Director of the Bureau of
Commerce and Industry before issuing a license under this Act, to
satisfy himself concerning the sufficiency of such bond, and to
determine whether the warehouse for which such license is applied
for is suitable for the proper storage of rice.
Sec. 5. Whenever the Director of the Bureau of Commerce and
Industry shall determine that a bond approved by him, is or any
cause, has become insufficient, he may require an additional bond
or bonds to be given by the warehouseman concerned, conforming
with the requirements of the preceding section, and unless the same
be given within the time fixed by a written demand therefor the
license of such warehouse may be suspended or revoked.
Sec. 6. Every person licensed under this Act to engage in the
business of receiving rice for storage shall insure the rice so
received and stored against fire.
Sec. 7. Any person injured by the breach of any obligation to secure
which a bond is given, under the provisions of this Act, shall be
entitled to sue on the bond in his own name in any court of
competent jurisdiction to recover the damages he may have
sustained by such breach. Nothing contained herein shall except
any property of assets of any warehouseman from being sued on in
case the bond given is not sufficient to respond for the full market
value of the rice received by such warehouseman.
Sec. 8. Every warehouseman licensed under this Act shall receive
for storage, so far as his license and the capacity of his warehouse
permit, any rice, of the kind customarily stored therein by him, which
may be tendered to him in a suitable condition for warehousing, in
the usual manner and in the ordinary and usual course of business,
without making any discrimination between persons desiring to avail
themselves of warehouse facilities.
Sec. 9. Every warehouseman licensed under this Act shall keep a
complete record of the rice received by him, of the receipts issued
therefor of the withdrawals, of the liquidations and of all receipts
returned to and cancelled by him. He shall make reports to the
Director of Bureau of Commerce and Industry concerning his
warehouse and the conditions, contents, operations, and business
thereof in such form and at such time as the said Director may
require, and shall conduct said warehouse in all other respects in
compliance with this Act and the rules and regulations made in
accordance therewith.
Sec. 10. The Director of Bureau of Commerce and Industry shall
from time to time make such rules and regulations as he may deem
necessary for the efficient execution of the provisions of this Act.
Sec. 11. Any person engaging in the business of receiving rice for
storage in violation of Section three of this Act shall be deemed
guilty of misdemeanor, and upon conviction thereof shall be
punished by imprisonment of not less than one month or by a fine of
not more than five thousand pesos, or both, in the discretion of the
court.
Sec. 12. Any warehouseman licensed under this Act receiving a
quantity of rice greater than that specified in his application and
license, shall, upon conviction, be fined double the market value of
the rice so received in excess of the quantity of rice he is authorized
to receive.
Sec. 13. Any person entering into connivance or combination with
any warehouseman that is not licensed under this Act, with the
purpose of evading the provisions of section three of this Act, shall
be deemed guilty of misdemeanor, and upon conviction thereof,
shall be fined not more than two hundred pesos or imprisonment for
not more than one months, or both, in the discretion of the court.
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Sec. 14. The Director of the Bureau of Commerce and Industry may, succeeding fiscal year and thereafter, shall be included in the
regular budget.
after opportunity for hearing has been afforded to the license
concerned, suspend or revoke any license issued to any Section 5. This Act shall take effect upon its approval.
warehouseman, conducting a warehouse under this Act, for any
violation or failure to comply with any provision of this Act or of the Approved: June 12, 1948
rules and regulations made by virtue thereof.
Sec. 15. This Act shall not be applicable to cooperative marketing
associations of rice producers organized under Act Numbered Three
Thousand Four Hundred and Twenty-five known as the "Cooperative Weeks 7 to 12
Marketing Law," provided such associations shall not receive, for
storage, rice from non-members which is greater in quantity than
one-half of the total quantity of rice received from members, at any
time.
18. Concept of Security
Sec. 16. If any clause, sentence, or paragraph, or part of this Act Transactions
shall, for any reason, be adjusted by any court of competent Classification of security transactions
jurisdiction to be invalid, such judgment shall not affect, impair, or
invalidate the remainder thereof, but shall be confined in his 1. Security in the broad sense
operation to the clause, sentence, paragraph or part thereof directly a. Personal – guaranty in the strict sense; credit is given
involved in the controversy in which such judgment shall have been by person who guarantees the fulfillment of the
rendered. principal obligation
b. Real – guaranty is property, movable (chattel
Sec. 17. This Act shall take effect on January First, nineteen mortgage, Art. 2140 or pledge, Art. 2093) or
hundred and thirty-two. immovable (real mortgage, Art. 2124 or antichresis
Art. 2132) property
2. As to origin
a. Conventional – by agreement of the parties (Art.
REPUBLIC ACT NO. 247 - AN ACT TO AMEND ACT NUMBERED 2051, par. 1)
THIRTY-EIGHT HUNDRED AND NINETY-THREE, ENTITLED b. Legal – by provision of law
"BONDED WAREHOUSE ACT," EXTENDING THE SCOPE AND c. Judicial – one required by a court to guarantee the
PURVIEW THEREOF, PROVIDING ANNUAL LICENSE FEE, eventual right of one of the parties in a case
LIMITING THE USE OF THE WORD "BONDED," PROVIDING 3. As to consideration
PENALTIES FOR VIOLATION THEREOF, AND APPROPRIATING a. Gratuitous – no price or remuneration for acting as
FUNDS NEEDED THEREFOR, AND FOR OTHER PURPOSES such (Art. 2048)
b. Onerous – guarantor receives valuable consideration
Section 1. Act Numbered Thirty-eight hundred and ninety-three, for his guaranty
known as the "Bonded Warehouse Act," is hereby amended by c. Single – solely to guarantee or secure performance
substituting the word "rice," in each and every section or provision by the debtor of the principal obligation
thereof, with the word "commodity," so as to include within the scope d. Double or sub-guaranty – to secure the fulfillment by
and purview of said Act all that is embraced by this word according the guarantor of a prior guaranty
to the following definition: e. Definite – limited to principal obligation only or to a
specific portion thereof
As used in this Act and for the purposes hereof, the word
f. Indefinite or simple – includes not only the principal
"commodity" shall mean any farm, agricultural or horticultural
obligation but also all its accessories including
product; animal and animal husbandry or livestock, dairy or poultry
judicial costs
product; water, marine or fish product; mineral, chemical, drug or
medicinal product; forestry product; and any raw, processed,
manufactured or finished product or by-product, good, article, or 19. Guaranty,
merchandise, either of domestic or of foreign production or origin, Articles 2047 to 2081, Civil Code
which may be traded or dealt in openly and legally.
Title XV. – GUARANTY
The said Act Numbered Thirty-eight hundred and ninety-three, as CHAPTER 1
hereby amended, shall henceforth be known and cited as the NATURE AND EXTENT OF GUARANTY
"General Bonded Warehouse Act," and it shall be referred to
hereunder as "this Act." Art. 2047. By guaranty a person, called the guarantor, binds himself
to the creditor to fulfill the obligation of the principal debtor in case
Section 2. Every person engaged in the business of receiving the latter should fail to do so.
commodity for storage defined in section two of the said Act
Numbered Thirty-eight hundred and ninety-three, as amended, shall If a person binds himself solidarily with the principal debtor, the
pay an annual license fee of fifty pesos for the first one thousand provisions of Section 4, Chapter 3, Title I of this Book shall be
square meters of protected enclosure or one thousand cubic meters observed. In such case the contract is called a suretyship. (1822a)
of storage space, or any fraction of such enclosure or space, and
two and one-half centavos for each additional square meter or cubic Definition of guaranty
meter.
1. Contract between guarantor and creditor
Section 3. The word "bonded" shall not be used, partly or wholly, as 2. In the broad sense includes pledge and mortgage
trade name or business name of any person, firm, corporation, because the purpose of guaranty maybe accomplished by
partnership, joint-stock company, or association owning, maintaining securing the fulfillment of an obligation through personal
or operating any warehouse which is neither licensed under this Act guaranty of a third person but also by furnishing to the
nor established under Chapter thirty-nine, Art. XIII, sections thirteen creditor for his security, property with authority to collect
hundred and two and thirteen hundred and four, of the the debt (Manresa)
Administrative Code of 1917 as amended or to name, designate, or
advertise such warehouse. Governing Law

Any person violating the provision of this section shall, upon Classification of guaranty for commercial and civil abolished; now
conviction, be punished with imprisonment for not more than five governed primarily by Title XV, Book IV
years or with a fine of not more than five thousand pesos, or with Characteristics of the contract
both such fine and imprisonment, in the discretion of the court.
1. Accessory – dependent on a principal obligation
Section 4. For salaries and expenses, during the fiscal year 1948- 2. Subsidiary and conditional – takes effect only when the
1949, of additional personnel of the Bureau of Commerce needed in debtor fails in his obligation (Art. 2053, 2058, 2063, 2065)
the proper execution and enforcement of this Act, there is hereby 3. Unilateral
appropriated, out of any funds in the National Treasury not otherwise a. Duty only on the part of the guarantor in relation to
appropriated, the amount of ten thousand pesos which, in the creditor
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b. May be entered into without intervention of the debtor proceeding against the principal at any time. He may pay
(Art. 2050) and be subrogated in all his rights.
4. Requires that guarantor must be a person distinct from
the debtor – consistent with the purpose which is for the Guaranty Suretyship
guarantor to proceed against the third party if debtor Independent agreement to pay Regular party to the undertaking
defaults (Velasquez v. Solidbank Corp.) the obligation if primary debtor
fails to do so
Law applicable to contract of suretyship Collateral undertaking Original promissor
Secondarily or subsidiarily liable Primarily liable
1. A relation which exists where one person has undertaken
Not bound to take notice of the Held to know every default of his
an obligation and another person is also under a direct
non-performance of his principal principal
and primary obligation of or other duty to a third person
Discharged by the mere Not discharged by either mere
who is entitled to but one performance
indulgence of the principal; not indulgence or neglect and want
2. Contractual relation resulting from an agreement whereby
liable unless notified of default of notice
one person engages to be answerable for the debt, default
Undertakes to pay if the Undertakes to pay if the
or miscarriage of another
principal cannot or is unable to principal does not pay
a. Art. 2047 points to Art. 1207 to 1222 on joint and
pay Insurer of debt itself
solidary obligations
Insurer of the solvency of the
b. Provisions of the Civil Code on guaranty, other than
debtor
the benefit of excussion, are applicable and available
to the surety (Autocorp. Group v. Intra Strata
Terminology used by the parties – not conclusive that the contract
Assurance Corp.).
of one of guaranty. If the promissor says ―I guarantee payment,‖ ―I
Common law guaranty and suretyship will see you paid,‖ or ―I will pay if he does not pay,‖ the promise
standing alone is collateral or subsidiary yet may be adjudged
Civil law surety = common law guaranty original or an independent one (Reiss v. Memije).
Civil law co-debtors in solidum = common law suretyship
Guaranty Indorsement
Where party binds himself solidarily with principal debtor Security Transfer
It is possible to bind himself solidarily without affecting the nature of Liability more extensive, If not promptly presented and no
the contract, in which case action can be brought outright against discharged only up to the extent due notice within reasonable
the guarantor. of the loss suffered in time, completely discharged
consequence
But it has been held that where a party signs a promissory note as a Warrants solvency of debtor Does not warrant solvency
co-maker and binds herself solidarily, the undertaking is deemed to Cannot be sued as promissor Can be sued as promissor
be that of a surety as an insurer of the debt, not a guarantor who
warrants the insolvency of the debtor (Palmares v. CA).
Guaranty Warranty
Nature of surety’s undertaking Contract by which a person is Undertaking that the title,
bound to another for the quality, or quantity of the subject
1. Liability is contractual and accessory but direct –
fulfillment of a promise or matter of a contract is what it
direct, immediate, primary, absolute regardless whether or
engagement of a third party has been presented to be
not the principal debtor is financially capable to fulfill his
obligations. Surety is considered as being the same party
as the debtor and their liabilities are interwoven as to be
inseparable (usually bound by same agreement, same Art. 2048. A guaranty is gratuitous, unless there is a stipulation to
instrument). the contrary. (n)
2. Liability is limited by the terms of the contract –
contractual in nature and ordinarily restricted to the Guaranty generally gratuitous – Onerous only when there is a
obligation expressly assumed therein. Surety not stipulation to the contrary (Art. 1933, 1956, 1965).
presumed and cannot be extended by implication beyond Cause of contract of guaranty
the terms of the contract.
3. Liability arises only if principal debtor is held liable 1. Presence of cause which supports principal obligation –
a. In the absence of collusion, surety is bound by a same cause, sufficient that there is a consideration for the
judgment against the principal even though he was principal debtor (Pyle v. Johnson)
not a party to the proceedings. 2. Absence of direct obligation or benefit to guarantor – valid;
b. Principal debtor and surety may be sued separately consideration need not pass directly to surety or
or together. guarantor; sufficient to move principal.
c. Unless required by surety contract, demand or notice
of default is not required to fix the surety’s liability. Art. 2049. A married woman may guarantee an obligation without
d. Accommodation party liable on the instrument to a the husband's consent, but shall not thereby bind the conjugal
holder for value although he has the right to partnership, except in cases provided by law. (n)
reimbursement, the relation between them, is in
effect, that of principal and surety (People v. Married woman as guarantor – ordinarily binds only her personal
Maniego). property (Art. 145, FC); binds conjugal partnership:
e. A surety bond is void where there is no principal
debtor, undertaking requires that obligation be 1. With husband’s consent
enforceable against someone else besides the surety 2. Without husband’s consent in cases provided by law
(Manila Railroad Co. v. Alvendia)
4. Surety not entitled to exhaustion – surely assumes Art. 2050. If a guaranty is entered into without the knowledge or
solidary liability consent, or against the will of the principal debtor, the provisions of
5. Undertaking is to creditor, not to debtor – unless Articles 1236 and 1237 shall apply. (n)
otherwise expressly provided, surety makes no covenant
with the principal debtor. Promise is not implied by law. Guaranty undertaken without knowledge of debtor – unilateral
6. Surety is not entitled to notice of principal’s default – for the benefit of the creditor, not the principal debtor.
Commencement of suit is sufficient demand; surety is
bound to take notice of the principal’s default and to 1. If payment without knowledge of debtor,
perform the obligation. a. Recovery to the extent beneficial to debtor (Art.
7. Prior demand by the creditor upon principal not 1236)
required – Right to proceed against surety exists b. Guarantor cannot compel creditor to subrogate him in
independently of his right to proceed against the principal his rights (mortgage, guaranty or penalty) (Art. 1237).
where both are equally bound (Art. 1216). Proper remedy 2. If payment is made with knowledge and consent of the
is to pay and then ask for reimbursement. debtor, he is subrogated by virtue of the payment to all
8. Surety is not exonerated by neglect of creditor to sue rights of the creditor against the debtor (Art. 2067)
principal – There is nothing to prevent the creditor from

Art. 2051. A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the latter's consent, or
without his knowledge, or even over his objection. (1823)
Guaranty by reason of origin
Judicial – constituted by decree of court
Legal – by virtue of a provision of law
Conventional – by virtue of the will of the parties
Double or sub-guaranty – constituted to guarantee the obligation
of a guarantor
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation. (1824a)
Necessity of valid principal obligation
Accessory, requires a principal obligation. If principal obligation is
void, guaranty is void.
Guaranty of voidable, unenforceable and natural obligations
1. Voidable – inasmuch as contract is binding unless
annulled (Art. 1390)
2. Unenforceable – because it is not void (Art. 1403)
3. Natural – when guaranteed, implied recognition of liability
transforming the obligation to civil (Art. 1423)
Art. 2053. A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A conditional obligation
may also be secured. (1825a)
Guaranty of future debts
Continuing guaranty or suretyship - contemplates a future course of
dealings, covering a series of transactions generally for an indefinite
time or until revoked. Subsidiary so no claim until debt liquidated.
1. Secure payment of loan at maturity – loan maturity and all
other obligations which may become due or be owing
2. Secure payment of any debt subsequently incurred –
prospective in operation. Contract continuing when object
is to give a standing credit (Dino v. CA)
3. Secure existing unliquidated claims – Future debts may
also refer to debts existing at the time of the constitution of
the guaranty of the amount is not known.
a. No theoretical or doctrinal difficulty in saying that
surety itself is valid and binding even before the
principal obligation to be secured is thereby born
(Atok Finance Corp. v. CA)
Guaranty of conditional obligations
Suspensive condition – guarantor liable after the fulfillment of
condition
Resolutory condition – fulfillment extinguishes principal obligation
and the guaranty
Art. 2054. A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor. (1826)
Guarantor’s liability cannot exceed principal obligation
1. Subsidiary and accessory
2. Surety may pay as part of damages, interest at the legal
rate, judicial costs (Art. 2055) and attorney’s fees (Art.
2088) even without stipulation and even if he becomes
liable for an amount higher than the total in the bond.
3. Surety may be made to pay penalty
Principal’s liability may exceed guarantor’s obligation
Amount specified in the bond does not limit the extent of damages
that may be recovered from principal (Visayan Distributors v. Flores)
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Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall compromise not only the principal
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required to
pay. (1827a)
Guaranty not presumed; requires the expression of consent on the
part of the guarantor to be bound and cannot be presumed because
of the existence of a contract or principal obligation.
Reason for rule – assurance that the guarantor intended to bind
himself and he proceeded with consciousness
Guaranty covered by the Statute of Frauds – must be reduced to
writing, being ―a special promise to answer for the debt, default or
miscarriage of another.‖ (Art. 1403[2]) But need not be in a public
document to be valid (Art. 1358).
Guaranty strictly construed – against the creditor and in favor of
the debtor. Any doubt must be resolved in favor of the guarantor
(PNB v. CA)
1. Liability for obligation stipulated – not for prior debts
unless intent to be liable shown
2. Guaranty to render accounting – does not guarantee that
money due will be paid
3. Guaranty with a term subsequently cancelled – not liable
for obligations subsequently entered into
4. Liability of surety limited to a fixed period – cannot be
bound for a longer time unless renewed. Renewal valid
(Art. 1306)
5. Liability of surety to expire on maturity of principal
obligation – unfair, nullifies the purpose of contract.
Liability attaches to surety as soon as the principal
defaults
6. Liability of surety to pay in case of forfeiture of imported
goods –guarantees payment of appraised value and not
legality of import
7. Bond requires lessor to report to surety any violation of
lessee – does not cover defaults prior. Only prospective
unless intention to the contrary clearly shown.
8. Bond issued to secure defendant from possible damages
as a result of injunction – cannot be issued to satisfy any
other claim of the parties
9. Bond issued in favor of a plaintiff who filed a case for
collection – does not guarantee that the plaintiff’s cause of
action is meritorious
10. Contract requires that notice of principal’s default be given
to surety – where contract stipulates, failure to comply will
prevent recovery from surety
Strictissimi juris applicable only to accommodation surety
Without motive of pecuniary gain and should be protected against
unjust pecuniary impoverishment. Applicable only where the contract
has been ascertained a surety or guaranty.
Rule of strict construction not applicable to compensated
sureties
1. Business associations organized for the purpose of
assuming classified risks in large numbers for profit and
on an impersonal basis
2. Secured from all possible loss by adequate counterbonds
or indemnity agreements
3. They are in fact insurers
Extent of guarantor’s liability
1. Where guaranty definite – limited in whole or in part to the
principal debt, to the exclusion of accessories
2. Where guaranty indefinite – comprises the principal
obligation, all its accessories, (including the judicial costs
after being judicially required to pay)
a. Guarantor could have limited his liability and if he did
not, it is presumed that he wanted to be bound to the
extent established.
Acceptance of guaranty by creditor and notice thereof to
guarantor
Creditor not required because he binds himself to nothing.

1. When necessary – conditional guaranty does not become
fixed until it is accepted by creditor
a. Need not be express or in writing, may be acts
amounting to acceptance
b. Guarantor entitled to notice to know the nature and
extent of his liability
2. When not necessary – direct or unconditional promise of
guaranty, all that is necessary is for the promisee
(guarantor) to act upon it
Art. 2056. One who is obliged to furnish a guarantor shall present a
person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees.
The guarantor shall be subject to the jurisdiction of the court of the
place where this obligation is to be complied with. (1828a)
Art. 2057. If the guarantor should be convicted in first instance of a
crime involving dishonesty or should become insolvent, the creditor
may demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be the
guarantor. (1829a)
Qualifications of guarantor
1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he
guarantees
Jurisdiction follows principle that the accessory follows the principal.
Effect of subsequent loss of required qualifications
Qualifications need only be present at the time of the perfection of
the contract. Subsequently, the creditor can:
1. Demand another guarantor with proper qualification
a. Dishonesty – conviction required
b. Insolvency – judicial declaration not required
2. Waive and hold the guarantor to his bargain
Selection of guarantor
1. Specified person stipulated as guarantor – substitution
may not be demanded
2. Guarantor selected by the principal debtor – debtor
answers for the integrity, capacity and solvency until
extinguishment of debt
3. Guarantor personally designated by the creditor –
responsibility of the selection borne by the creditor
CHAPTER 2
EFFECTS OF GUARANTY
SECTION 1. - Effects of Guaranty
Between the Guarantor and the Creditor
Art. 2058. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and
has resorted to all the legal remedies against the debtor. (1830a)
Right of guarantor to benefit of excussion or exhaustion
1. Guarantor only secondarily liable – accessory and
subsidiary; distinguished guaranty from suretyship
2. All legal remedies against debtor to be first exhausted –
benefit of excussion; not sufficient that debtor appears
insolvent
Right of creditor to secure judgment against guarantor prior to
exhaustion
Creditor may secure a judgment against the guarantor, who shall be
entitled to a deferment of execution until properties of the creditor
shall have been exhausted (Tupaz v. CA). There is nothing
procedurally objectionable in impleading guarantor as a co-
defendant.
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
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(5) If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the obligation.
(1831a)
Exceptions to benefit of excussion
1. Art. 2059
2. Art. 2060
3. Judicial bondsman or sub-surety
4. Pledge or mortgage has been given as a special security
5. Fails to interpose it as a defense before judgment is
rendered against him
Exceptions provided in Art. 2059
1. Right waived – personal right recognized, waiver must be
made in express terms
2. Liability assumed that of surety – becomes surety with
primary liability as a solidary co-debtor
3. Insolvency of debtor proven by unsatisfied writ of
execution – guarantor guarantees solvency; insolvency
must be actual and may be proven by the return of writ
unsatisfied
4. Debtor absconds or cannot be locally sued – creditor not
required to go after the debtor who is hiding and to incur
the delays and expenses incident thereto
5. Resort to all legal remedies, a useless formality
Art. 2060. In order that the guarantor may make use of the benefit of
exclusion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover
the amount of the debt. (1832)
Art. 2061. The guarantor having fulfilled all the conditions required in
the preceding article, the creditor who is negligent in exhausting the
property pointed out shall suffer the loss, to the extent of said
property, for the insolvency of the debtor resulting from such
negligence. (1833a)
Duty of creditor to make prior demand for payment from
guarantor
1. When demand made – can only be made after judgment
on the debt
2. Actual demand to be made – not mere joining of guarantor
as co-defendant
Duty of guarantor to set up benefit of excussion
Set it up, point it out – failure to do so forecloses his right to set up
the defense of excussion
1. Property located abroad – would not conform with the
purpose of guaranty
2. Property not easily available – guarantor should facilitate
its realization and the payment of the debt
Duty or creditor to resort to all legal remedies
Neglect of not exhausting, guarantor bears the loss to the extent of
value of said property.
Joinder of guarantor and principal as parties defendant
1. General Rule – not a joint contractor, cannot be sued
2. Exception – rule not required where it would merely delay
ultimate accounting of the guarantor
Art. 2062. In every action by the creditor, which must be against the
principal debtor alone, except in the cases mentioned in Art. 2059,
the former shall ask the court to notify the guarantor of the action.
The guarantor may appear so that he may, if he so desire, set up
such defenses as are granted him by law. The benefit of excussion
mentioned in Art. 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the guarantor in
case of appearance by the latter. (1834a)
Procedure when creditor sues
1. Sent against principal – creditor must sue principal alone;
guarantor only after judgment has been obtained against
principal debtor
2. Notice to guarantor of action – must be notified so that he
may appear
a. Guarantor appears – given benefit of excussion

b. Guarantor does not appear – cannot set up
excussion
3. Hearing before execution can be issued against guarantor
– entitled to be heard before an execution can be issued
against him where he is not a party
Art. 2063. A compromise between the creditor and the principal
debtor benefits the guarantor but does not prejudice him. That which
is entered into between the guarantor and the creditor benefits but
does not prejudice the principal debtor. (1835a)
Effects of compromise
Compromise – contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one already
commenced (Art. 2028).
1. Where prejudicial – binds parties only (Art. 1311); cannot
prejudice the guarantor or debtor when not party to
compromise
2. Where in the nature of a stipulation in favor of a third
person – if in the nature of stipulation pour autrui,
guarantor and debtor though not parties can benefit from a
compromise
Art. 2064. The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal
debtor. (1836)
Art. 2065. Should there be several guarantors of only one debtor
and for the same debt, the obligation to answer for the same is
divided among all. The creditor cannot claim from the guarantors
except the shares which they are respectively bound to pay, unless
solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same
cases and for the same reasons as the benefit of excussion against
the principal debtor. (1837)
Benefit of division among several guarantors
1. In whose favor applicable – several guarantors for one
debtor for one debt, not applicable to guarantors of
several debtors of one debt
2. Extent of liability of several guarantors – joint (Art. 1208),
not liable to creditors beyond their respective shares
3. Exceptions – conditions under Art. 2059 and when
solidary expressly stipulated (Art. 2047[2])
Benefit of excussion among several guarantors
For exhaustion, co-guarantors need not point out available property
of co-guarantors. But when creditor claims an insolvent co-
guarantor’s share, other co-guarantors can point out the former’s
available property.
SECTION 2. - Effects of Guaranty
Between the Debtor and the Guarantor
Art. 2066. The guarantor who pays for a debtor must be indemnified
by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor;
(3) The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him;
(4) Damages, if they are due. (1838a)
Guaranty, a contract of indemnity – guarantor has the right to
reimbursement of
1. Total amount of the debt – no right until guarantor
actually paid unless right is given to contract
2. Legal interest thereon – guarantor entitled from the time
of notice of payment to the debtor which is in effect a
demand, whether or not it earns interest
3. Expenses incurred by the guarantor – only those that
the guarantor has to satisfy in accordance with law as a
consequence of the guaranty (Art. 2055[2])
4. Damages, if they are due – in accordance with law;
general rules on damages (Arts. 2195-2235) apply
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Exceptions to right to indemnity or reimbursement
1. Constituted without the knowledge or against the will of
the debtor – only insofar as had been beneficial (Art.
2050)
2. No intention to be reimbursed (Art. 1238)
3. Waiver
Art. 2067. The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid. (1839)
Guarantor’s right to subrogation
1. Effect of subrogation – right to indemnification and
subrogation granted to guarantor applies also to surety
(Art. 2047)
2. Accrual, basis and nature of right – subrogation necessary
to enable guarantor to enforce the indemnity
a. Arises from operation of law upon payment
b. Stands not upon contract, but upon natural justice
c. Not a contractual right
d. Cannot demand more than what he has paid for
3. When right not available – when there is no right to be
reimbursed
Art. 2068. If the guarantor should pay without notifying the debtor,
the latter may enforce against him all the defenses which he could
have set up against the creditor at the time the payment was made.
(1840)
Art. 2069. If the debt was for a period and the guarantor paid it
before it became due, he cannot demand reimbursement of the
debtor until the expiration of the period unless the payment has been
ratified by the debtor. (1841a)
Effect of payment by guarantor before/after maturity
1. Obligation with a period demandable only when the day
comes, guarantor who paid before maturity not entitled to
reimbursement because there is no need to accelerate
payment
2. When demand made on guarantor during term of
guarantee, immaterial if payment is made after the term
Art. 2070. If the guarantor has paid without notifying the debtor, and
the latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from advising the
debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid. (1842a)
Effect of repeat payment by debtor
1. General rule – Notice to debtor before payment. If without
notice, remedy is to collect from creditor but no cause of
action for the return even when it becomes insolvent
2. Exception – may still claim even in spite of lack of notice
a. Creditor becomes insolvent
b. Guarantor prevented from fortuitous event from
notifying debtor
c. Guaranty is gratuitous
Art. 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot
be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor
intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.

In all these cases, the action of the guarantor is to obtain release
from the guaranty, or to demand a security that shall protect him
from any proceedings by the creditor and from the danger of
insolvency of the debtor. (1834a)
Right of guarantor to proceed against debtor before payment
Applicable to surety, purpose is to enable the guarantor to take
measures for the protection of his interest in view of the probability
that he would be called upon to pay the debt.
Remedy to which guarantor entitled – Guarantor cannot ask for
payment unless he as actually paid. The alternative remedies are:
1. Obtain a release form guaranty
2. Demand or security
Art. 2066 and 2071 distinguished
Art. 2066 Art. 2071
Enforcement of rights of Before he has paid but after he
guarantor against debtor after becomes liable
he paid Protective remedy before
Right of action before payment payment
Substantive right Preliminary remedy
No such person Release or security
Recovery by surety against indemnitor even before payment
1. Indemnity agreement for benefit of surety – if debtor
agrees to terms, obligations of the contract have the force
of law
2. Indemnity agreement may be against actual loss as well
as liability – if against loss, indemnitor liable to person only
when paid; if against liability, indemnitor liable to person
upon attachment of liability
3. Such agreement valid
Art. 2072. If one, at the request of another, becomes a guarantor for
the debt of a third person who is not present, the guarantor who
satisfies the debt may sue either the person so requesting or the
debtor for reimbursement. (n)
Guarantor of a third person at request of another has a right to
claim reimbursement after satisfying the debt either from:
1. Person who requested him to be a guarantor
2. Debtor.
SECTION 3. - Effects of Guaranty as Between Co-Guarantors
Art. 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is proportionally
owing from him.
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this Art. shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent. (1844a)
Right to contribution of guarantor who pays
1. Restrictions – applicable when
a. In virtue of a judicial demand
b. Because the principal debtor is insolvent
2. Effect of insolvency of any guarantor – follows Art.
1217[2])
3. Accrual and basis of right – Guarantor who paid becomes
ipso jure entitled to proportionate contribution or
reimbursement without need of cession from creditor
Art. 2074. In the case of the preceding article, the co-guarantors
may set up against the one who paid, the same defenses which
would have pertained to the principal debtor against the creditor, and
which are not purely personal to the debtor. (1845)
Defense available to co-guarantors: all defenses the debtor would
have against creditor but not those which are purely personal
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Art. 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor. (1846)
CHAPTER 3
EXTINGUISHMENT OF GUARANTY
Art. 2076. The obligation of the guarantor is extinguished at the
same time as that of the debtor, and for the same causes as all
other obligations. (1847)
Causes of extinguishment of guaranty
1. Accessory and subsidiary – extinguishes when the
principal obligation is extinguished:
a. Payment or performance, loss of the thing due,
condonation or remission of the debt, confusion or
merger of rights of the creditor and debtor,
compensation and novation (Art. 1231)
2. Other causes: annulment, rescission, fulfillment of a
resolutory condition, and prescription (Art. 1231)
3. Release of guarantor made by creditor (Art. 2078)
Material alteration of principal contract
1. Effect of material alteration – constitutes novation and
surety cannot be held to a new contract without its
consent
2. When alteration material – surety or guaranty will not be
released where such change does not make the obligation
more onerous (Visayan Distributors v. Flores)
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards lose
the same through eviction, the guarantor is released. (1849)
Release by conveyance of property
Eviction revives the principal obligation but not the guaranty. The
cause of action is against the debtor for eviction which is not part of
the guaranty.
Art. 2078. A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been granted.
(1850)
Release of guarantor without consent of others
Others will be prejudiced if one of the guarantors becomes insolvent.
The release benefits all to the extent of the share of the guarantor
released.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension of time
referred to herein. (1851a)
Release by extension of term granted by creditor to debtor
1. Where release without consent of guarantor –
extinguishes guaranty
a. Payments due to debtor from third persons assigned
to creditor - extinguishes
b. Where obligation payable in installments – extension
as to one will not affect surety/guaranty’s liability as
to others
c. Consent to extension waived in advance by
guarantor – valid, not contrary to law or public policy
d. Payment by guarantor after creditor’s demand
e. Extension not granted by creditor on the bond – does
not extinguish
f. Extension granted to first-tier obligors – will not
extinguish liability of second-tier obligors
2. Prejudice to guarantor and period of extension immaterial
3. Extension must be based on a new agreement – mere
failure or neglect to demand payment not deemed a
suspension
4. Diligence on the part of creditor to enforce his claim
generally not required – this is for surety. For guaranty, if
the creditor has done any act whereby the guaranty was
impaired in value, or discharged that act would have
wholly or partially released the guarantor

5. No cause of action against creditor for delay
Art. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor
they cannot be subrogated to the rights, mortgages, and preference
of the latter. (1852)
Release by guarantor cannot be subrogated
1. Fault of creditor for non-subrogation – act of one cannot
prejudice another
2. Duty of the creditor to account for his lien on principal’s
property – to retain and maintain security; impairment will
discharge the surety to the extent of lien released. This is
a trust relation with the creditor as trustee bound to
account to the surety the value of the security.
Art. 2081. The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in the
debt; but not those that are personal to the debtor. (1853)
20. Surety,
Articles 1207 to 1222, 2082 to 2084, Civil Code
SECTION 4. - Joint and Solidary Obligations
Art. 1207. The concurrence of two or more creditors or of two or
more debtors in one and the same obligation does not imply that
each one of the former has a right to demand, or that each one of
the latter is bound to render, entire compliance with the prestation.
There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires
solidarity. (1137a)
Art. 1208. If from the law, or the nature or the wording of the
obligations to which the preceding Art. refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as
many shares as there are creditors or debtors, the credits or debts
being considered distinct from one another, subject to the Rules of
Court governing the multiplicity of suits. (1138a)
Art. 1209. If the division is impossible, the right of the creditors may
be prejudiced only by their collective acts, and the debt can be
enforced only by proceeding against all the debtors. If one of the
latter should be insolvent, the others shall not be liable for his share.
(1139)
Art. 1210. The indivisibility of an obligation does not necessarily give
rise to solidarity. Nor does solidarity of itself imply indivisibility. (n)
Art. 1211. Solidarity may exist although the creditors and the
debtors may not be bound in the same manner and by the same
periods and conditions. (1140)
Art. 1212. Each one of the solidary creditors may do whatever may
be useful to the others, but not anything which may be prejudicial to
the latter. (1141a)
Art. 1213. A solidary creditor cannot assign his rights without the
consent of the others. (n)
Art. 1214. The debtor may pay any one of the solidary creditors; but
if any demand, judicial or extrajudicial, has been made by one of
them, payment should be made to him. (1142a)
Art. 1215. Novation, compensation, confusion or remission of the
debt, made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation, without prejudice to
the provisions of Art. 1219.
The creditor who may have executed any of these acts, as well as
he who collects the debt, shall be liable to the others for the share in
the obligation corresponding to them. (1143)
Art. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected. (1144a)
Art. 1217. Payment made by one of the solidary debtors
extinguishes the obligation. If two or more solidary debtors offer to
pay, the creditor may choose which offer to accept.
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He who made the payment may claim from his co-debtors only the
share which corresponds to each, with the interest for the payment
already made. If the payment is made before the debt is due, no
interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share
shall be borne by all his co-debtors, in proportion to the debt of each.
(1145a)
Art. 1218. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after
the obligation has prescribed or become illegal. (n)
Art. 1219. The remission made by the creditor of the share which
affects one of the solidary debtors does not release the latter from
his responsibility towards the co-debtors, in case the debt had been
totally paid by anyone of them before the remission was effected.
(1146a)
Art. 1220. The remission of the whole obligation, obtained by one of
the solidary debtors, does not entitle him to reimbursement from his
co-debtors. (n)
Art. 1221. If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the obligation
shall be extinguished.
If there was fault on the part of any one of them, all shall be
responsible to the creditor, for the price and the payment of
damages and interest, without prejudice to their action against the
guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has
become impossible after one of the solidary debtors has incurred in
delay through the judicial or extrajudicial demand upon him by the
creditor, the provisions of the preceding paragraph shall apply.
(1147a)
Art. 1222. A solidary debtor may, in actions filed by the creditor,
avail himself of all defenses which are derived from the nature of the
obligation and of those which are personal to him, or pertain to his
own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the
debt for which the latter are responsible. (1148a)
CHAPTER 4
LEGAL AND JUDICIAL BONDS
Art. 2082. 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 and in special laws. (1854a)
Art. 2056. One who is obliged to furnish a guarantor shall present a
person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees.
The guarantor shall be subject to the jurisdiction of the court of the
place where this obligation is to be complied with. (1828a)
Bond – undertaking that is sufficiently secured and not cash or
currency
Bondsman – a surety (Art. 2047[2]) offered in virtue of a provision
of law or a judicial order.
Qualifications of personal bondsman – same as a guarantor
under Art. 2056
1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he
guarantees
Jurisdiction follows principle that the accessory follows the principal.
Nature of bonds
1. Contractual in nature – only in consequence of a meeting
of minds under the conditions essential to a contract (Art.
1305)
2. Special class of guaranty, in virtue of a judicial or court
order
Art. 2083. If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or mortgage
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considered sufficient to cover his obligation shall be admitted in lieu IFC was justified in taking action directly against respondent. The
thereof. (1855) use of the word guarantee does not ipso facto make the
contract one of guaranty. The word is frequently employed in
Pledge or mortgage in lieu of bond business transactions to describe the intention to be bound by a
primary or an independent obligation. The very terms of a contract
Art. 2084. A judicial bondsman cannot demand the exhaustion of govern the obligations of the parties or the extent of the obligor's
the property of the principal debtor. liability. Thus, the Court has ruled in favor of suretyship, even though
contracts were denominated as a 'Guarantor's Undertaking or a
A sub-surety in the same case, cannot demand the exhaustion of 'Continuing Guaranty.
the property of the debtor of the surety.
Philippine Blooming Mills, Inc. v. Court of Appeals,
Bondsman and sub-surety not entitled to excussion because G.R. No. 142381, October 15, 2003.
they are not mere guarantors, but sureties whose liability is primary Ching is liable for credit obligations contracted by PBM against TRB
and solidary before and after the execution of the 21 July 1977 Deed of
Negligence of creditor will not release surety. It is his obligation to Suretyship. This is evident from the tenor of the deed itself, referring
see that the debtor pays or performs, not the creditor’s. to amounts PBM ―may now be indebted or may hereafter become
indebted‖ to TRB.
Cases:
The law expressly allows a suretyship for "future debts". 2053
E. Zobel, Inc. v. Court of Appeals, provides: ―A guaranty may also be given as security for future debts,
G.R. No. 113931, May 6, 1998. the amount of which is not yet known; there can be no claim against
the guarantor until the debt is liquidated.xxx‖
Continuing guaranty is a surety! Petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated Diño v. Court of Appeals: A guaranty may be given to secure even
itself as an original promissor. It bound itself jointly and severally to future debts, the amount of which may not be known at the time the
the obligation with the respondent spouses. In fact, SOLIDBANK guaranty is executed. This is the basis for contracts denominated as
need not resort to all other legal remedies or exhaust respondent continuing guaranty or suretyship. A continuing guaranty is one
spouses' properties before it can hold petitioner liable for the which is not limited to a single transaction, but which
obligation. contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked. It is
Art. 2080 does not apply where the liability is as a surety, not as a
prospective in its operation and is generally intended to provide
guarantor. Even assuming that 2080 is applicable, SOLIDBANK's security with respect to future transactions within certain limits, and
failure to register the chattel mortgage did not release petitioner from contemplates a succession of liabilities, for which, as they accrue,
the obligation. In the Continuing Guaranty executed in favor of
the guarantor becomes liable.
SOLIDBANK, petitioner bound itself to the contract irrespective of
the existence of any collateral. Continuing guaranty 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
Surety Guaranty guaranty shall be construed as continuing when by the terms thereof
Accessory promise by which a Collateral undertaking to pay the it is evident that the object is to give a standing credit to the
person binds himself for another debt of another in case the latter principal debtor to be used from time to time either indefinitely
already bound, and agrees with does not pay the debt or until a certain period; especially if the right to recall the
the creditor to satisfy the guaranty is expressly reserved. Hence, where the contract states
obligation if the debtor does not that the guaranty is to secure advances to be made "from time to
bound with his principal by the guarantor's own separate time," it will be construed to be a continuing one.
same instrument, executed at undertaking, in which the In other jurisdictions, it has been held that the use of particular
the same time, and on the same principal does not join words and expressions such as payment of "any debt," "any
consideration indebtedness," or "any sum," or the guaranty of "any transaction," or
original promissor and debtor - usually entered into before or money to be furnished the principal debtor "at any time," or "on such
from the beginning, and is held, after that of the principal, and is time" that the principal debtor may require, have been construed to
ordinarily, to know every default often supported on a separate indicate a continuing guaranty.
of his principal consideration from that
supporting the contract of the Escano & Silos v. Ortigas, JR.,
principal G. R. No. 151953, June 29, 2007.
- original contract of his principal
is not his contract, and he is not There is a difference between a solidary co-debtor and a fiador in
bound to take notice of its non- solidum (surety). The latter, outside of the liability he assumes to pay
performance the debt before the property of the principal debtor has been
not discharged, either by the often discharged by the mere exhausted, retains all the other rights, actions and benefits which
mere indulgence of the creditor indulgence of the creditor to the pertain to him by reason of the fiansa; while a solidary co-debtor has
to the principal, or by want of principal, and is usually not no other rights than those bestowed upon him in Section 4, Chapter
notice of the default of the liable unless notified of the 3, Title I, Book IV of the Civil Code.
principal, no matter how much default of the principal The Undertaking does not contain any express stipulation that the
he may be injured thereby petitioners agreed ―to bind themselves jointly and severally‖ in their
insurer of the debt, and he insurer of the solvency of the obligations to the Ortigas group, or any such terms to that effect.
obligates himself to pay if the debtor and thus binds himself to Hence, such obligation established in the Undertaking is presumed
principal does not pay pay if the principal is unable to only to be joint. Ortigas, as the party alleging that the obligation is in
pay fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to
International Finance Corporation v. Imperial Textile Mills, Inc., discharge such burden.
G.R. No. 160324, November 15, 2005.
Right of reimbursement by surety: Under Art. 2066 of the Civil
The Agreement uses ―guarantee and guarantors,‖ prompting ITM to Code, which assures that ―[t]he guarantor who pays for a debtor
base its argument on those words but the use of the two words limits must be indemnified by the latter,‖ such indemnity comprising of,
the contract to a mere guaranty. The specific stipulations in the among others, ―the total amount of the debt.‖ Further, Art. 2067 of
contract show otherwise. the Civil Code likewise establishes that ―[t]he guarantor who pays is
While referring to ITM as a guarantor, the agreement specifically subrogated by virtue thereof to all the rights which the creditor had
stated that the corporation was 'jointly and severally liable. To put against the debtor.‖
emphasis on the nature of that liability, the contract further stated Articles 2066 and 2067 explicitly pertain to guarantors, and it is Dr.
that ITM was a primary obligor, not a mere surety. Those stipulations Tolentino’s observation that ―[t]he reference in the second
meant only one thing: that at bottom, and to all legal intents and paragraph of [Art. 2047] to the provisions of Section 4, Chapter
purposes, it was a surety. 3, Title I, Book IV, on solidary or several obligations, however,
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera

does not mean that suretyship is withdrawn from the applicable Art. 2087. It is also of the essence of these contracts that when the
provisions governing guaranty.‖ For if that were not the
principal obligation becomes due, the things in which the pledge or
implication, there would be no material difference between the mortgage consists may be alienated for the payment to the creditor.
surety as defined under Art. 2047 and the joint and several debtors,
(1858)
for both classes of obligors would be governed by exactly the same
rules and limitations.
Pledge - contract by which the debtor delivers to the creditor or to a
Accordingly, the rights to indemnification and subrogation as third person a movable (Art. 2094) or document evidencing
established and granted to the guarantor by Articles 2066 and incorporeal rights (Art. 2095) for the purpose of securing a principal
2067 extend as well to sureties as defined under Art. 2047. obligation with the understanding that when the obligation is fulfilled,
These rights granted to the surety who pays materially differ from the thing will be returned with all its fruits and accessions
those granted under Art. 1217 to the solidary debtor who pays, since
Kinds of pledge
the ―indemnification‖ that pertains to the latter extends ―only [to] the
share which corresponds to each [co-debtor].‖ 1. Voluntary or conventional – created by agreement of the
parties
2. Legal – created by operation of law (Art. 2121)
Tupaz IV & Tupaz, v. Court of Appeals and Bank of the
Characteristics of the contract
Philippine Islands,
G.R. No. 145578, November 18, 2005. 1. Real – requires delivery for perfection
2. Accessory – no independent existence
Any doubt as to the import or true intent of the solidary
3. Unilateral – obligation solely on the part of the creditor to
guaranty clause should be resolved against the drafter. The
return upon fulfillment
trust receipt, together with the questioned solidary guaranty clause,
4. Subsidiary – does not arise until fulfillment of the principal
is on a form drafted and prepared solely by the petitioner; Chi’s
obligation
participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; as such, it must be strictly Cause or consideration in pledge
construed against the party responsible for its preparation.
1. Same person pledgor – same causa as the principal
In Prudential Bank v. CA, it was held that had there been more than obligation
one signatories to the trust receipt, the solidary liability would exist 2. Third person pledgor – compensation or mere liberality
between the guarantors. The clause ―we jointly and severally agree
and undertake‖ refers to the undertaking of the two (2) parties who Essential requirements of pledge and mortgage
are to sign it or to the liability existing between themselves. It does
1. Common requisites – Arts. 2085, 2087
not refer to the undertaking between either one or both of them on
2. Necessity of delivery – must be delivered to the creditor or
the one hand and the petitioner on the other with respect to the
third person by common agreement
liability described under the trust receipt.
Pledge and mortgage are purely accessory contracts and must be
Excussion is not a pre-requisite to secure judgment against a
constituted to secure fulfillment of a principal obligation. They
guarantor. The guarantor can still demand deferment of the
cannot exist without a valid obligation (voidable, unenforceable or
execution of the judgment against him until after the assets of the
natural).
principal debtor shall have been exhausted.
Constituted by the absolute owner. Otherwise, pledge or
21. Pledge and Mortgage, Common mortgage is void.

Provisions, Property pledged or mortgaged

Articles 2085 to 2092, Civil Code 1. Future property – cannot be pledged or mortgaged
2. Property acquired subsequently – void and ineffective;
CHAPTER 1 registration cannot cure it
PROVISIONS COMMON TO PLEDGE AND MORTGAGE 3. Transfer of motor vehicles registered subsequently – if
pledged or mortgaged after ownership but before
Art. 2085. The following requisites are essential to the contracts of
registration valid, for registration constitutes merely an
pledge and mortgage:
administrative proceeding
(1) That they be constituted to secure the fulfillment of a principal 4. Share in a co-ownership – limited only to the portion
obligation; allotted to him in the division upon the termination of the
(2) That the pledgor or mortgagor be the absolute owner of the thing co-ownership
pledged or mortgaged; 5. Property covered by a Torrens title – mortgagee in good
(3) That the persons constituting the pledge or mortgage have the faith relying on a Torrens title is protected (not applicable
free disposal of their property, and in the absence thereof, that they to banks)
be legally authorized for the purpose.
Pledgor or mortgagor has free disposal of the property or has
Third persons who are not parties to the principal obligation may legal authority
secure the latter by pledging or mortgaging their own property.
1. Free disposal of the property – not subject to any claim of
(1857)
a third person
Art. 2086. The provisions of Art. 2052 are applicable to a pledge or 2. Capacity to dispose of property – capacity or the authority
mortgage. (n) to make a disposition of the property

Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation. (1824a)
Necessity of valid principal obligation
Accessory, requires a principal obligation. If principal obligation is
void, guaranty is void.
Guaranty of voidable, unenforceable and natural obligations
1. Voidable – inasmuch as contract is binding unless
annulled (Art. 1390)
2. Unenforceable – because it is not void (Art. 1403)
Natural – when guaranteed, implied recognition of liability
transforming the obligation to civil (Art. 1423)
Thing pledged or mortgaged may be alienated is an inherent
element of mortgage and pledge. If the principal obligation is not
complied with, the property will be sold to satisfy the principal
obligation.
Pledgor or mortgagor may be a third person
1. Accommodation pledge or mortgage – as long as valid
consent was given, the fact that the loan was solely for the
benefit of the debtor would not invalidate the pledge or
mortgage
2. Duty of mortgagee to make proper inquiry – creditor is
required to exercise due care and prudence by making
proper inquiry where the debtor borrows money and
mortgages another person’s property to secure the loan
without the consent of the latter.

3. Where mortgage gratuitous – strictly construed;
interpreted as to effect the least transmission of right or
interest (Art. 1378)
4. Liability for deficiency – where third person pledged or
mortgaged his property to secure the debt of another, the
liability does not extend beyond the value of the property
so pledged of mortgaged.
Pledge Real Mortgage
Movables (Art. 2094) Immovables (Art. 2124)
Delivered to the creditor or to a Delivery not necessary
third person by common consent
Not valid against third person Not valid against third persons if
unless a description of the thing not registered
pledged and the date of the
pledge in private instrument
Art. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void. (1859a)
Right of creditor where debtor fails to comply with his
obligation
1. Sale of subject property with formalities required by law –
If debtor fails to comply, creditor is entitled to move for the
sale of the thing pledged or mortgaged (Art. 2087) with the
formalities required by law
2. Prohibition against appropriation of property – pledgor or
mortgagor’s default does not operate to vent in the
pledgee or mortgagee the ownership of the property
(pactum commissorium; against public policy – the amount
of the loan is usually much less than the value of the
property pledged or mortgaged)
Exception to pactum commissorium Art. 2112
Prohibition against pactum commissorium
1. Stipulation null and void – forbidden by law and declared
null and void in contracts of pledge, mortgage and
antichresis
2. Requisites
a. There should be a pledge, mortgage or antichresis by
way of security for the payment of the principal
obligation
b. There should be a stipulation for an automatic
appropriation by the creditor of the property in the
event of nonpayment of the principal obligation within
the stipulated period
3. Stipulation presupposes existence of a security contract
(Art. 2088, 2137)
4. Effect on security contract – the nullity which vitiates the
stipulation does not affect substantially the principal
contract of pledge, mortgage or antichresis (Mahoney v.
Tuason)
Prohibition refers to stipulation authorizing automatic
appropriation
1. Pledged or mortgaged property shall be considered in full
payment without further action in court.
2. Pacto de recto where ownership would automatically pass
to the vendee in case no redemption was effected within
the stipulated period
Permissible stipulations
1. Subsequent modification of original contract
2. Subsequent voluntary cession of the property
3. Promise to assign or sell
4. Authority to take possession of property upon foreclosure
Risk of loss of property pledged or mortgaged is borne by the
debtor-owner (res perit domino suo). The principal obligation is not
extinguished by the loss of the property.
Art. 2089. A pledge or mortgage is indivisible, even though the debt
may be divided among the successors in interest of the debtor or of
the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot
ask for the proportionate extinguishment of the pledge or mortgage
as long as the debt is not completely satisfied.
Fides Damasco | UP Law C2013 39
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is excepted the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of
the pledge or mortgage as the portion of the debt for which each
thing is specially answerable is satisfied. (1860)
Art. 2090. The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable. (n)
Pledge or mortgage indivisible
1. Single thing – answerable for the whole obligation as soon
as it falls due
2. Several things – all of them are liable for the totality of the
debt; debtor cannot ask for the proportionate
extinguishment of the pledge or mortgage until the debt
secured had been fully paid
3. Debtor’s heir/Creditor’s heir – neither can ask for
extinguishment until the debt is completely satisfied
Exceptions to rule of indivisibility
1. Where each one of several things guarantees
determinate portion of credit – there are as many
pledges and mortgages as there are things given in
pledge or mortgage
2. Where only a portion of loan was released – where
part of a loan is released, the pledge or mortgage
became unenforceable as to the extent of release (Central
Bank v. CA)
3. Where there was failure of consideration – when
mortgagee defeats the purpose of the loan; as if the loan
was never delivered (Rose Packing Co . v. CA)
4. Where there is no debtor-creditor relationship –
indivisibility of the pledge or mortgage only as to
contracting parties, but not to third persons who did not
take part in the constitution thereof (PNB v. Agudelo)
Foreclosure of mortgage constituted on several properties
Separate sales apply to sales on execution and not to foreclosure:
1. A mortgage is one and indivisible even if constituted on
two or more properties. The mortgagee has the right to
have the properties jointly or singly sold to satisfy his
claim.
2. Sale will not be set aside in the absence of evidence that
a better price could have been obtained if they were sold
separately.
Where real mortgage and chattel mortgage in one instrument –
does not have the effect of fusing them into an indivisible whole;
they differ in subject matter and applicable legal provisions.
Art. 2091. The contract of pledge or mortgage may secure all kinds
of obligations, be they pure or subject to a suspensive or resolutory
condition. (1861)
All kinds of obligations can be secured by pledge or mortgage
Same applies to guaranty (Art. 2052, 2053, 2086). The pledge
agreement may stipulate that it will secure future advancements or
renewals (China Banking Corp v. CA)
Art. 2092. A promise to constitute a pledge or mortgage gives rise
only to a personal action between the contracting parties, without
prejudice to the criminal responsibility incurred by him who defrauds
another, by offering in pledge or mortgage as unencumbered, things
which he knew were subject to some burden, or by misrepresenting
himself to be the owner of the same. (1862)
Promise to constitute pledge or mortgage creates no real right;
only a personal right. There is a right of action to compel the
fulfillment of the promise, but there is no pledge or mortgage yet.
Criminal responsibility of pledgor or mortgagor – estafa (Art.
316[1,2], RPC); essential that fraud and deceit be practiced upon the
vendee at the time of the sale.
Cases:

Development Bank of the Philippines v. Court of Appeals,
G.R. No. 118367 & 118342, January 5, 1998.
Although what was involved there was specific immovable property,
the ruling therein should equally apply in this case where specific
movable property is involved. As the extra-judicial foreclosure
instituted by the PNB and DBP is not the liquidation proceeding
contemplated by the CC, Remington cannot claim its pro rata share
from DBP.
Bustamante v. Rosel,
G. R. No. 126800, November 29, 1999.
The elements of pactum commissorium are:
1. There should be a property mortgaged by way of security
for the payment of the principal obligation;
2. There should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the specified
period.
The sale of the collateral is an obligation with a suspensive
condition. It is dependent on the happening of an event, without
which the obligation to sell does not arise.
All persons in need of money are liable to enter into contractual
relationships whatever the conditions if only to alleviate their
financial burden albeit temporarily. Hence, the courts are duty
bound to exercise caution in the interpretation and resolution of
contracts lest the lenders devour the borrowers like vultures do
with prey.
Ong v. Roban Lending Corporation,
G.R. No.172592, July 9, 2008.
Dacion en pago agreement is in the nature of pactum
commissorium. The agreements contain no provisions for
foreclosure proceedings nor redemption. Under the memorandum of
agreement, the failure by the petitioners to pay their debt within the
one-year period gives respondent the right to enforce the Dacion en
pago agreement transferring to it ownership of the properties.
Roban, in effect, automatically acquires ownership of the properties
upon petitioners failure to pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt. In the case at bar, the alienation
of the properties was by way of security, and not by way of satisfying
the debt. The Dacion in Payment did not extinguish petitioners
obligation to respondent. On the contrary, under the Memorandum
of Agreement executed on the same day as the Dacion in Payment,
petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year.
Manila Banking Corp. v. Teodoro & Teodoro,
G.R. No. L-53955, January 13, 1989.
An assignment of rights, receivables, titles or interest under a
contract to guarantee an obligation is in effect, a pledge or mortgage
contract to guarantee an obligation is, in effect, a pledge or
mortgage and NOT an absolute conveyance of title which confers
ownership on the assignee. In case of doubt as to whether a
transaction is a pledge (or mortgage), or a dation in payment, the
presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests.
22. Pledge,
Articles 2093 to 2123, Civil Code
CHAPTER 2
PLEDGE
Art. 2093. In addition to the requisites prescribed in Art. 2085, it is
necessary, in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a third
person by common agreement. (1863)
Transfer of possession essential in pledge
1. To constitute contract – unless delivered, there is only a
personal right because pledge is merely a lien and
possession is indispensable to the right of lien.
2. To affect third persons – Art. 2096, apart from being in a
public instrument possession must be delivered to the
pledgee.
Type of delivery depends upon nature of thing pledged
Fides Damasco | UP Law C2013 40
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
1. Actual delivery – mere symbolic delivery not sufficient
(Betita v. Ganzon [1926])
2. Constructive delivery – symbolical delivery deemed
sufficient (Banco Espanol-Filipino v. Peterson [1910]);
ultimately depends on the peculiar nature of the thing
pledged
Art. 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
Art. 2095. Incorporeal rights, evidenced by negotiable instruments,
bills of lading, shares of stock, bonds, warehouse receipts and
similar documents may also be pledged. The instrument proving the
right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed. (n)
Subject matter of pledge
1. Limited to personal property (Art. 416, 417) within
commerce of man and susceptible of possession
2. Incorporeal rights evidenced by document whether or not
negotiable
a. Non-negotiable – delivered to creditor
b. Negotiable – endorsed to creditor
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument. (1865a)
Public instrument necessary to bind third persons
1. Contents of public instrument – Even if Arts. 2085, 2093
are complied with, not effective against third persons:
a. Contained in a public instrument
b. Description of the thing pledged
c. Date of the pledge
2. Object of the requirement – to forestall fraud (i.e.
concealing property in danger of execution by simulating a
pledge)
Art. 2097. With the consent of the pledgee, the thing pledged may
be alienated by the pledgor or owner, subject to the pledge. The
ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the
latter shall continue in possession. (n)
Alienation by the pledgor of thing pledged allowed as long as the
pledgee consent to the same. This furnishes one of the cases where
ownership is transferred without actual delivery of the thing
alienated.
Art. 2098. The contract of pledge gives a right to the creditor 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. (1866a)
Right of pledgee to retain thing pledged – possession of the
pledge constitutes his security, but limited only to the fulfillment of
the principal obligation
Art. 2099. The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and is
liable for its loss or deterioration, in conformity with the provisions of
this Code. (1867)
Obligation of pledgee to take due care of thing pledged
Note that the pledgee is held responsible for loss or deterioration
only by reason of fraud, negligence, or delay or violations of the
terms of the contract and not when by fortuitous event (Arts. 1170,
1174).
Art. 2100. The pledgee cannot deposit the thing pledged with a third
person, unless there is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged. (n)
Obligation of pledgee not to deposit thing pledged with another
is necessary to protect the pledgor or owner of the thing pledged.
Responsibility of pledgee for acts of his agents or employees
because their acts are in legal effect, deemed his.

Art. 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under Art. 1951. (n)
Art. 1951. The bailor who, knowing the flaws of the thing loaned,
does not advise the bailee of the same, shall be liable to the latter
for the damages which he may suffer by reason thereof. (1752)
Responsibility of pledgee for loss of thing pledged (Liability to
pay damages for known hidden flaws)
Requisites:
1. Flaw or defect in the thing loaned
2. Flaw or defect is hidden
3. Bailor is aware thereof
4. Bailor does not advise the bailee of the same
5. Bailee suffers damages by reason of the said flaw
Liability arises from bad faith. The bailee is given the right of
retention until he is paid damages (Art. 1944). Where flaw is
unknown to the bailor, he is not liable because commodatum is
gratuitous.
Art. 2102. If the pledge earns or produces fruits, income, dividends,
or interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or insofar as
the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
Right of pledgee to compensate earnings of pledge with debt
No right to use the thing pledged or to appropriate the fruits without
the authority of the owner (Art. 2104, 1977). But pledgee can apply
fruits, income, dividends, or interest earned or produced of the ting
pledged to the payment of interest if owing and thereafter to the
principal (Art. 2132)
Art. 2103. Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it
against a third person. (1869)
Right of pledgee against third persons
Creditor can defend; right of a pledgee is a real right enforceable
against third persons if Art. 2096 has been complied with.
Art. 2104. The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse the
thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only for that
purpose. (1870a)
Obligation of pledgee not to use thing pledged – similar to rule
on deposit (Art. 1977), since pledgor parts with possession only and
not ownership. If use earns profits, the pledgee must account.
Right of pledgor to ask that thing pledged be deposited judicially
or extrajudicially
1. Unauthorized use
2. Misuse in any other way
3. Thing is in danger of being lost or impaired because of
negligence or willful act of the pledgee
Art. 2105. The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt
and its interest, with expenses in a proper case. (1871)
Exception – pledgor is allowed to substitute the thing pledged if in
danger of destruction or impairment (Art. 2107)
Art. 2106. If through the negligence or wilful act of the pledgee, the
thing pledged is in danger of being lost or impaired, the pledgor may
require that it be deposited with a third person. (n)
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Art. 2107. If there are reasonable grounds to fear the destruction or
impairment of the thing pledged, without the fault of the pledgee, the
pledgor may demand the return of the thing, upon offering another
thing in pledge, provided the latter is of the same kind as the former
and not of inferior quality, and without prejudice to the right of the
pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any
danger to the thing pledged. (n)
Right of pledgor to substitute thing pledged
Remedies available:
1. To the pledgor – demand the return of the thing pledged
upon offering another thing in pledge
2. To the pledgee – right to cause the same to be sold at
public sale (Art. 2108)
Requisites for application of Art. 2107:
1. Reasonable grounds to fear the destruction or impairment
of thing pledged
2. No fault on the part of the pledgee
3. Pledgor is offering in place of the thing, another thing in
pledge which is of a kind and quality as the former
4. Pledgee does not choose to exercise his right to cause the
thing pledged to be sold at public auction
Art. 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale. The proceeds of
the auction shall be a security for the principal obligation in the same
manner as the thing originally pledged. (n)
Right of pledgee to cause sale of thing pledged – superior to the
right of the pledgor granted in Art. 2107 ―without prejudice to the
right of the pledgee.‖
Art. 2109. If the creditor is deceived on the substance or quality of
the thing pledged, he may either claim another thing in its stead, or
demand immediate payment of the principal obligation. (n)
Right of pledgee to demand substitute or immediate payment –
alternative remedies (of evident fairness to both parties)
1. Claim another thing in pledge
2. Demand immediate payment of the principal obligation
Art. 2110. If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to the
contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee. This
same presumption exists if the thing pledged is in the possession of
a third person who has received it from the pledgor or owner after
the constitution of the pledge. (n)
Extinguishment of pledge by return of thing pledged
1. Return of thing pledged (Art. 2110)
2. Payment of the debt (Art. 2105)
3. Renunciation or abandonment of the pledge (Art. 2111)
4. Sale of the thing pledged at public auction (Art. 2115)
Presumption of extinguishment of pledge
Prima facie, may be rebutted by evidence that:
1. Return was merely for substitution (Art. 2105)
2. Temporarily entrusted to the pledgor – where the pledgor
holds the property as a trustee for the pledgee (Yuliongsui
v. PNB)
Extinguishment of the accessory obligation of pledge does not affect
the existence of the principal obligation (Art. 1274).
Art. 2111. A statement in writing by the pledgee that he renounces
or abandons the pledge is sufficient to extinguish the pledge. For
this purpose, neither the acceptance by the pledgor or owner, nor
the return of the thing pledged is necessary, the pledgee becoming a
depositary. (n)

Other causes under Art. 1231 – prescription, loss of the thing,
merger, compensation, novation, etc.
Art. 2112. The creditor to whom the credit has not been satisfied in
due time, may proceed before a Notary Public to the sale of the
thing pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction there is
no sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.
(1872a)
Right of pledgee to cause sale of thing pledged
Formalities required:
1. Debt is due and unpaid
2. Sale must be made 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
No posting of notice of sale and publication required. Extrajudicial in
character without intervention by the courts.
Right of pledgee to appropriate thing pledged - exception to the
prohibition against pacto commisorio (Art. 2088); considered full
payment of claim, not entitled to deficiency
Art. 2113. At the public auction, the pledgor or owner may bid. He
shall, moreover, have a better right if he should offer the same terms
as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the
only bidder. (n)
Right of pledgor and pledgee to bid at public sale
1. Pledgee not allowed to acquire thing pledged if he is sole
bidder
2. Pledgor preferred if he matches highest bid
Art. 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee is
deemed to have been received the purchase price, as far as the
pledgor or owner is concerned. (n)
Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said
amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary. (n)
Effects of sale of thing pledged
1. Price of sale is more than the amount due
a. Debtor not entitled
b. Unless the contrary is provided
2. Price of sale is less than the amount due
a. Creditor is not entitled
b. Contrary stipulation is void
To compel the creditor to hold an honest sale; and to encourage
creditors to lends only as much as he can realize in a public sale.
Right of debtor to excess
Under the Chattel Mortgage Law, the debtor is entitled to recover the
excess of the proceeds of the sale (Sec. 14, Act 1508)
Right of creditor to recover deficiency
If pledgee chose to cause the sale, not entitled to deficiency. He
may instead sue on the principal obligation so that he may recover
the deficiency from the debtor (Manila Surety and Fidelity Co. v.
Velayo).
Art. 2116. After the public auction, the pledgee shall promptly advise
the pledgor or owner of the result thereof. (n)
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Obligation of pledgee to advise pledgor or owner of result of
sale – to enable pledgor or owner to take steps to protect rights if
sale was not an honest one
Art. 2117. Any third person who has any right in or to the thing
pledged may satisfy the principal obligation as soon as the latter
becomes due and demandable.(n)
Right of third persons to satisfy obligation if he has any right, the
pledgor cannot refuse to accept payment
The general rule is that the creditor is not bound to accept payment
or performance from a third person who has no interest in the
fulfillment of the obligation (Art. 1236)
Art. 2118. If a credit which has been pledged becomes due before it
is redeemed, the pledgee may collect and receive the amount due.
He shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor. (n)
Right of pledgee to collect and receive amount due on credit
pledged
Not obligatory, but in view of Art. 2009, pledgee has duty to collect if
delay would endanger recovery of the credit.
Art. 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a stipulation to
the contrary. He may demand the sale of only as many of the things
as are necessary for the payment of the debt. (n)
Right of pledgee to choose which of several things shall be
sold
After sufficient property has been sold to satisfy the obligation plus
interests and expenses (Art. 2115), no more shall be sold.
Art. 2120. If a third party secures an obligation by pledging his own
movable property under the provisions of Art. 2085 he shall have the
same rights as a guarantor under Articles 2066 to 2070, and Articles
2077 to 2081. He is not prejudiced by any waiver of defense by the
principal obligor. (n)
Right of third person who pledged his own property
See Arts. 2066-2070, 2077-2081; he cannot be prejudiced by any
waiver of defense by principal debtor.
Art. 2121. Pledges created by operation of law, such as those
referred to in Articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing as
well as on the termination of the pledge. However, after payment of
the debt and expenses, the remainder of the price of the sale shall
be delivered to the obligor. (n)
Art. 2122. A thing under a pledge by operation of law may be sold
only after demand of the amount for which the thing is retained. The
public auction shall take place within one month after such demand.
If, without just grounds, the creditor does not cause the public sale to
be held within such period, the debtor may require the return of the
thing. (n)
Instances of pledges by operation of law legal pledges
1. Right of retention by possessor in good faith prior to
reimbursement for necessary and useful expenses (Art.
546)
2. Workman’s lien on movable (Art. 1731)
3. Agent’s right of retention of things object of the agency
prior to reimbursement (Art. 1914)
4. Laborer’s lien on goods manufactured or work done (Art.
1717)
5. Depositary for expenses by reason of deposit (Art. 1994)
6. Hotelkeeper’s security on account of lodging and supplies
(art. 2004)
Rules cases of pledge by operation of law
1. Rules of possession, care, sale of thing pledged, and
extinguishment governing conventional pledges apply to
legal pledges
a. But debtor is entitled to excess in legal pledges
2. There is no definite period for payment

a. Demand should be made by pledgee or else no right
to sell
b. Sale within one month or else pledgor can demand
the return
Art. 2123. With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and
subsidiarily, the provisions of this Title. (1873a)
Rules as to pawnshops and other establishments – PD 114
Case:
Paray & Espeleta v. Rodriguez, et al.,
G.R. No. 132287, January 24, 2006.
No right of redemption over pledged properties. Foreclosure of
pledge is always extrajudicial. Does the right of redemption
exist over personal property? No law or jurisprudence establishes
or affirms such right. Indeed, no such right exists.
The right to redeem property sold as security for the satisfaction of
an unpaid obligation does not exist preternaturally. Neither is it
predicated on proprietary right, which, after the sale of property on
execution, leaves the judgment debtor and vests in the purchaser.
Instead, it is a bare statutory privilege to be exercised only by the
persons named in the statute.
The right of redemption over mortgaged real property sold
extrajudicially is established by Act No. 3135, as amended. The
said law does not extend the same benefit to personal property.
Sibal v Valdez: Personal property is not subject to redemption.
Can pledged properties be sold together? There is nothing in the
Civil Code governing the extrajudicial sale of pledged properties that
prohibits the pledgee of several different pledge contracts from
auctioning all of the pledged properties on a single occasion, or from
the buyer at the auction sale in purchasing all the pledged properties
with a single purchase price. The relative insignificance of
ascertaining the definite apportionments of the sale price to the
individual shares lies in the fact that once a pledged item is sold at
auction, neither the pledgee nor the pledgor can recover whatever
deficiency or excess there may be between the purchase price and
the amount of the principal obligation.
Termination of pledge by consignation of the obligation price: If
the principal obligation is satisfied, the pledges should be terminated
as well. 2098 provides that the right of the creditor to retain
possession of the pledged item exists only until the debt is paid.
2105 further clarifies that the debtor cannot ask for the return of the
thing pledged against the will of the creditor, unless and until he has
paid the debt and its interest. At the same time, the right of the
pledgee to foreclose the pledge is also established under the Civil
Code. When the credit has not been satisfied in due time, the
creditor may proceed with the sale by public auction under the
procedure provided under 2112.
23. Real Estate Mortgage,
Articles 2124 to 2131, Civil Code,
Rule 68, Rules of Court, Act No. 3135, as amended
CHAPTER 3
MORTGAGE
Art. 2124. Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of a chattel mortgage.
(1874a)
Mortgage – contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation, specially subjecting to such
security immovable property which obligation shall be satisfied with
the proceeds of the sale of said property or rights in case the said
obligation is not complied with at the time stipulated
Characteristics of mortgage
1. Real
2. Accessory
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3. Subsidiary
4. Unilateral – obligation only on the part of the creditor who
must free the property from the encumbrance once the
obligation is fulfilled
Mortgagor-debtor generally retains possession of property
mortgaged. But it is not an essential requisite of a mortgage so a
mortgagor can deliver the property to the mortgagee, without altering
the nature of the contract.
Payment of interest on mortgage credit
Mortgage may or may not earn interest. Interest may be in the form
of fruits of the mortgaged property without altering the character of
the mortgage (Legaspi v. Celestial). In such case, mortgage shall be
subject to the obligation of an antichretic creditor (Macapinlac v.
Gutierrez Repide).
Cause or consideration in mortgage – same as of the principal
contract.
Kinds of mortgage
1. Voluntary – agreed to between the parties
2. Legal – required by law to be executed in favor of certain
persons
3. Equitable – lacks the proper formalities but reveals the
intention to burden real property as security for a debt
Subject matter of mortgage
1. Immovable (Art. 415)
2. Alienable real rights imposed upon immovable (Art. 2124)
Mortgage of building distinct from land on which it is built (Prudential
Bank v. Panis).
Future property cannot be object of mortgage – but inclusion of
future improvements on the property already belonging to the
mortgagor valid (People’s Bank and Trust v. Dahican Lumber Co.)
Art. 2125. In addition to the requisites stated in Art. 2085, it is
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no
other right than to demand the execution and the recording of the
document in which the mortgage is formalized. (1875a)
Essential requisites of mortgage
Registered mortgage presumed valid; burden of proof on the person
attacking its validity:
1. Where mortgage in a private document – no valid
mortgage is constituted
2. Where mortgage not registered – binding on the parties.
Registration only operates as a notice of the mortgage to
others but neither adds to its validity nor converts an
invalid mortgage into a valid one between the parties
(Samanilla v. Cajucom)
3. Where mortgage registered under Act 3344 – is without
prejudice to the better right of third parties.
Doctrine of mortgagee in good faith
1. Reliance in good faith on certificate of title of
mortgagor – all persons dealing with property covered by
a Torrens title are not required to go beyond what appears
on the face of the title
2. Title in name of mortgagor, not rightful owner – the
doctrine does not apply to a mortgagor merely pretending
to be the rightful owner but the title is under the name of
another person
3. Duty of mortgagee to look beyond certificate of title –
where there is nothing on the certificate of title to indicate
any cloud or vice in the ownership of the property.
Exceptions:
a. Purchaser or mortgagor has knowledge of a defect or
lack of title of the vendor or mortgagor
b. Mortgagee does not deal directly with the registered
owner of property or
c. was aware of sufficient facts to induce a reasonably
prudent man to inquire into the status of a property in
litigation

4. Greater care and diligence required of mortgagee
banks – because their business is impressed with public
interest. It extends to persons regularly engaged in
business of lending money secured by real estate
mortgages (PNB v. Militar)
Right in case of legal mortgages to compel each other to observe
the form required by law provided that the contract between them is
valid and enforceable (Arts. 1357, 1358)
Registration of mortgage
1. Mortgagee entitled to registration of mortgage as a matter
of right – once a mortgage has been signed in due form,
the mortgagee is entitled to its registration. It is the
execution, not the registration that is voluntary (Gonzales
v. Basa)
2. Proceedings for registration do not determine validity of
mortgage or its effect - registration mere ministerial act,
not a declaration by the state that the instrument is valid
3. Registration without prejudice to better right of third
parties –A registered mortgage is inferior to a buyer’s
unregistered right but superior to a contract to sell
4. Registrability of encumbrance acquired subsequent to
mortgage – when duly registered, the mortgage deed
forms part of the records for the registration of the
property mortgaged. There is no need to present the deed
itself.
5. Registrability of mortgage by surviving spouse of
undivided share of conjugal property – Mortgage of
undivided share valid but registration will not affect the
deceased spouse’s creditors or the debts of the conjugal
partnership.
6. Subsequent registration of an adverse claim – prior
registration of a lien creates a preference; the subsequent
annotation of an adverse claim cannot defeat the rights of
the mortgagee or the purchase at the auction sale whose
rights were derived from a prior mortgage.
Effect of invalidity of mortgage on principal obligation
1. Principal obligation remains valid – the only thing lost is
the right to foreclose the mortgage as a special remedy for
satisfying or settling the indebtedness which is the
principal obligation
2. Mortgage deed remains as evidence of a personal
obligation – amount due to the creditor may be enforced
in an ordinary personal action.
Art. 2126. The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security it was
constituted. (1876)
Effect of mortgage
1. Creates a real right – a registered mortgage creates a
right in rem, a real right, a lien inseparable from the
property mortgaged, which is enforceable against the
whole world
a. All subsequent purchasers must respect the
mortgage whether or not there is a consent by the
mortgagee but it has to be registered or the buyer
must know of its existence (PNB v. Mallorca)
b. The right or lien of an innocent mortgagee for value
must be respected even if the mortgagor obtained his
title through fraud.
c. Owner can mortgage property during the pendency
of an expropriation.
d. Banking institutions must exercise a greater degree
of diligence before entering into a mortgage contract
e. If property is sold in an auction sale by a second
mortgagee, the only thing left for the first mortgagee
is to collect his mortgage credit.
f. In actions for cancellation of TCT, mortgagee must
be joined as a party since it will lead to the
cancellation of the mortgage annotation also.
g. BP 877 – no lessor shall be entitled to eject lessee
upon the ground that the premises has been sold or
mortgaged to a third person except when the object
is to effect construction by the new owner.
2. Creates merely an encumbrance – does not extinguish
the title of the debtor who does not lose his principal
attribute as owner, that is, the right to dispose
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
a. A mortgage does not involve a transfer, cession or
conveyance of property but merely constitutes a lien
thereon.
b. What is delimited is not the mortgagor’s jus
disponendi, as an attribute of ownership, but merely
the rights conferred by such act of disposal (Medida
v. CA)
c. The first mortgagee has superior right over junior
mortgagees or attaching creditors (RCBC v. CA)
d. Failure to redeem does not automatically vest
ownership of the property to the mortgagee.
e. Debtor remains owner during the redemption period
and may constitute another mortgage on the
property.
f. An assignee cannot acquire a greater right that that
pertaining to assignor (Casabuena v. CA).
g. Upon payment of the mortgage debt, the mortgagee
cannot refuse to return TCT to the mortgagor (De los
Santos v. CA)
h. In a sale with assumption of mortgage, the
assumption is a condition to the seller’s consent and
cannot be perfected without the approval of the
mortgagee (Ramos v. CA)
Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet
received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the
property mortgaged, or in virtue of expropriation for public use, with
the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it
passes into the hands of a third person. (1877)
Extent of mortgage – ownership of such accessions and
accessories and improvements subsequently introduced also
belongs to the mortgagor is the owner of the principal (Castro Jr. v.
CA)
1. Natural accessions,
2. Improvements
3. Growing fruits
4. Rents or income not yet received when the obligation
becomes due
5. Insurance proceeds
6. Expropriation value.
To exclude them, there has to be an express stipulation to that
effect.
Stipulation in mortgage contract including after-acquired
properties-
1. Stipulation valid; purpose - common and logical in all
cases where the properties are perishable or subject to
inevitable wear or tear or were intended to be sold or to be
used but with understanding, express or implied, that they
shall be replaced with others to be thereafter acquired by
the mortgagor (PBTC v. Dahican Lumber)
2. Attachment of lien retroactive – attaches and vests not at
the time said improvements are constructed but on the
date of the recording and registration of deed of mortgage
(Luzon Lumber v, Quiambao)
Mortgage with ―dragnet‖ clauses to secure future
advancements
1. Stipulation necessary to secure future advancements –
The general rule is that an action to foreclose a mortgage
must be limited to the amount mentioned in the mortgage.
2. Usefulness of mortgage with a dragnet clause –
convenience and accommodation to the borrowers as it
makes available additional funds without their having to
execute additional security documents
3. Construction of mortgage with a dragnet clause –
specifically phrased to subsume all debts of past or future
origin
a. Carefully scrutinized and strictly construed
particularly when it is one of adhesion
b. Where the plain terms of the mortgage evidence the
intention of the mortgagor to secure a larger amount,
the action to foreclose may be for the larger amount
(Lim Julian v. Lutero).

4. Mortgage, a continuing security is not discharged by the
repayment of the amount named in the mortgage, until the
full amount of the advancement is paid.
Art. 2128. The mortgage credit may be alienated or assigned to a
third person, in whole or in part, with the formalities required by law.
(1878)
Alienation or assignment of mortgage credit – valid even if not
registered. Registration required only to affect third persons.
Art. 2129. The creditor may claim from a third person in possession
of the mortgaged property, the payment of the part of the credit
secured by the property which said third person possesses, in the
terms and with the formalities which the law establishes. (1879)
Right of creditor against transferee of mortgaged property –
transfer does not relieve the debtor of the obligation to pay the debt
to the mortgage creditor in the absence of novation.
1. Demand the payment of the part of the credit secured by
the said property
2. Prior demand for payment must have been made on the
debtor and the latter failed to pay.
Art. 2130. A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void. (n)
Stipulation forbidding alienation of mortgaged property (pacto
de non aleinado), contrary to public good inasmuch as transmission
of property should not be unduly impeded.
Stipulation granting right of first refusal valid and consideration
for the loan-mortgage may be said to include the consideration for
the right of first refusal. Sale in violation of right of first refusal is
rescissible.
Art. 2131. The form, extent and consequences of a mortgage, both
as to its constitution, modification and extinguishment, and as to
other matters not included in this Chapter, shall be governed by the
provisions of the Mortgage Law and of the Land Registration Law.
(1880a)
Laws governing mortgage
1. Mortgage Law
2. Land Registration Law
Foreclosure – remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction of the obligation
to secure which the mortgage was given; presupposes more than
mere demand.
Validity and effect of foreclosure
Foreclosure is the necessary consequence of non-payment of
mortgage indebtedness, can be effected only when the debt remains
unpaid at the time it is due.
1. Limited to the amount mentioned in the mortgage
document
2. May contain an acceleration clause that on occasion of
the mortgagor’s default, the whole sum remaining unpaid
automatically becomes due and payable.
3. The essence of mortgage is that a property has been
identified or set apart from the mass of property of the
debtor as security for the payment of money or the
fulfillment of an obligation.
4. Once the proceeds are applied, the debtor can no longer
be compelled to pay except if there is a deficiency.
5. Statutory provisions governing public notice in foreclosure
sales must be strictly complied with; slight deviations will
invalidate sale or render it voidable (Tambunting v. CA)
6. The only right the mortgagor can transfer after foreclosure
is the right to redeem and the use, possession and
enjoyment of the same during the period of redemption
(GSIS v. CA).
7. Mortgagee may take steps to recover mortgaged property.
8. Foreclosure proceedings have in their favor the
presumption of regularity, burden of proof on the person
attacking its validity.
Right of mortgagee to recover deficiency
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1. Mortgage merely a security, not a satisfaction of an
obligation – in judicial foreclosure, Sec. 6 grants the right
to claim for deficiency, applied also to extrajudicial
foreclosure.
2. Action for recovery of deficiency – if the deficiency is
embodied in a judgment, it is called a deficiency judgment
(Art. 2115), an independent action may also be filed for
the deficiency even during the period of redemption
3. Prescriptive period of action – within 10 years from the
time the right of action accrues as provided in Art. 1144(2)
upon an obligation created by law. This is applicable to
both real and chattel mortgage.
Nature of judicial foreclosure proceeding
1. Action quasi in rem – based on a personal claim against
a specific property of the defendant
2. Result or incident of failure to pay indebtedness – the
principal obligation is the money indebtedness and the
subjection of property only resorted to upon failure to pay
the debt.
3. Survives death of mortgagor – action to foreclose
survives death because it is not a pure money claim but
an action to enforce a mortgage lien
Stipulation of upset price in mortgage contract void
―Tipo‖ or upset price is the minimum price at which the property
shall be sold is null and void for the property must be sold to the
highest bidder.
Effect of inadequacy of price in foreclosure sale
1. General rule; exception – where there is a right to
redeem, inadequacy of price is immaterial. Inadequacy
must be so great as to shock the conscience of the court
2. At a nominal cost – reason for the grant of right to
redeem because mortgagee ordinarily bids no more than
the mortgage credit
3. Less than its fair market value – redemption price is
equivalent to the amount of the purchase price with 1%
interest per month up to the time of redemption
4. Bid price at the public auction – value of the mortgaged
property has no bearing on the bid price as long as
regularly and honestly conducted
Waiver of security by mortgagee
1. Personal action to recover indebtedness
a. Personal action for the debt
b. Real action to foreclose mortgage
2. Remedy alternative, not cumulative or successive
3. Options in case of death of debtor
a. Waive mortgage and claim entire debt from the
estate as an ordinary claim
b. Foreclose the mortgage judicially and prove
deficiency as an ordinary claim
c. Rely on the mortgage exclusively without right to file
a claim for deficiency
Foreclosure retroacts to the date of registration of mortgage
The character of being an innocent mortgagee continues up to the
date of actual foreclosure and sale at public auction.
Redemption – transaction by which the mortgagor requires or buys
back the property which may have passed under the mortgage or
divests the property of the lien which the mortgage may have been
created
Kinds of redemption
1. Equity of redemption – in case of judicial foreclosure to
redeem foreclosed property after his default but before the
confirmation of sale
2. Right of redemption – in case of extrajudicial foreclosure
to redeem the mortgaged property within a certain period
from and after it was sold for the satisfaction of the
mortgage debt.
Equity of redemption
1. Exercised before confirmation sale – right of the defendant
mortgagor to extinguish the mortgage and retain
ownership of the property paying the secured debt within
which the 90-day period after the judgment becomes final
in accordance to Rule 68

2. Acquired by second mortgagee – strictly subordinate to
the superior lien of the first mortgagee
3. Taking physical possession not necessary for levy –
because the value of equity of redemption can neither be
quantified nor equated with the actual value of the
property upon which it may be exercised (Top-Rate v.
IAC)
4. Levy by means of a writ of execution – this interest will
pass to the purchaser in the auction sale
5. Remedy of mortgagee to obtain possession (1) obtain
judicial foreclosure or (2) recover possession preliminary
to the sale
Right of redemption
1. Period within which to exercise right – one year from
and after the date of registration of the certificate of sale
with the Registry of Deeds
2. Effect of failure to exercise right – The right of
purchaser is merely inchoate until after the period of
redemption has expired without the right being exercised
(Medida v. CA)
a. If no redemption is made, purchaser becomes owner
b. One-year period directory can be extended subject to
two requisites (voluntary agreement to extend;
debtor’s commitment to pay the redemption price on
a fixed date) (DBP v. West Negros College).
3. Effect of exercise of right
a. Defeats inchoate right of the purchaser and restores
the property to the same condition as if no sale had
been made
b. Implied admission of the regularity of the foreclosure
sale and estops mortgagor from impugning validity of
sale
4. Where mortgaged property sold to a third party – Even
though the mortgagor has possession during the period of
redemption, he may not make a conveyance of the
property as said ownership belongs to the purchaser at
the foreclosure sale (Dizon v. Gaborro).
5. Where sale not registered and made without consent of
mortgagee – No consent having been secured from the
bank, the title remained in the name of the mortgagor and
the buyer was not validly constituted as debtor and had no
right to redeem
6. Where extrajudicial foreclosure effected with fraud –
consolidation of ownership to the mortgagee as highest
bidder is of no legal force and effect
RULE 68
FORECLOSURE OF REAL ESTATE MORTGAGE
Section 1. Complaint in action for foreclosure. In an action for the
foreclosure of a mortgage or other encumbrance upon real estate,
the complaint shall set forth the date and due execution of the
mortgage; its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the mortgaged
property; a statement of the date of the note or other documentary
evidence of the obligation secured by the mortgage, the amount
claimed to be unpaid thereon; and the names and residences of all
persons having or claiming an interest in the property subordinate in
right to that of the holder of the mortgage, all of whom shall be made
defendants in the action.
Sec. 2. Judgment on foreclosure for payment or sale. If upon the
trial in such action the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due to the plaintiff
upon the mortgage debt or obligation, including interest and other
charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid
to the court or to the judgment obligee within a period of not less
than ninety (90) days nor more than one hundred twenty (120) days
from the entry of judgment, and that in default of such payment the
property shall be sold at public auction to satisfy the judgment.
Sec. 3. Sale of mortgaged property; effect. When the defendant,
after being directed to do so as provided in the next preceding
section, fails to pay the amount of the judgment within the period
specified therein, the court, upon motion, shall order the property to
be sold in the manner and under the provisions of Rule 39 and other
regulations governing sales of real estate under execution. Such
sale shall not affect the rights of persons holding prior
encumbrances upon the property or a part thereof, and when
confirmed by an order of the court, also upon motion, it shall operate
to divest the rights in the property of all the parties to the action and
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to vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law.
Upon the finality of the order of confirmation or upon the expiration
of the period of redemption when allowed by law, the purchaser at
the auction sale or last redemptioner, if any, shall be entitled to the
possession of the property unless a third party is actually holding the
same adversely to the judgment obligor. The said purchaser or last
redemptioner may secure a writ of possession, upon motion, from
the court which ordered the foreclosure.
Sec. 4. Disposition of proceeds of sale. The amount realized from
the foreclosure sale of the mortgaged property shall, after deducting
the costs of the sale, be paid to the person foreclosing the mortgage,
and when there shall be any balance or residue, after paying off the
mortgage debt due, the same shall be paid to junior encumbrancers
in the order of their priority, to be ascertained by the court, or if there
be no such encumbrancers or there be a balance or residue after
payment to them, then to the mortgagor or his duly authorized agent,
or to the person entitled to it.
Sec. 5. How sale to proceed in case the debt is not all due. If the
debt for which the mortgage or encumbrance was held is not all due
as provided in the judgment, as soon as a sufficient portion of the
property has been sold to pay the total amount and the costs due,
the sale shall terminate; and afterwards, as often as more becomes
due for principal or interest and other valid charges, the court may,
on motion, order more to be sold. But if the property cannot be sold
in portions without prejudice to the parties, the whole shall be
ordered to be sold in the first instance, and the entire debt and costs
shall be paid, if the proceeds of the sale be sufficient therefor, there
being a rebate of interest where such rebate is proper.
Sec. 6. Deficiency judgment. If upon the sale of any real property
as provided in the next preceding section there be a balance due to
the plaintiff after applying the proceeds of the sale, the court, upon
motion, shall render judgment against the defendant for any such
balance for which, by the record of the case, he may be personally
liable to the plaintiff, upon which execution may issue immediately if
the balance is all due at the time of the rendition of the judgment;
otherwise, the plaintiff shall be entitled to execution at such time as
the balance remaining becomes due under the terms of the original
contract, which time shall be stated in the judgment.
Sec. 7. Registration. A certified copy of the final order of the court
confirming the sale shall be registered in the registry of deeds. If no
right of redemption exists, the certificate of title in the name of the
mortgagor shall be cancelled, and a new one issued in the name of
the purchaser.
Where a right of redemption exists, the certificate of title in the name
of the mortgagor shall not be cancelled, but the certificate of sale
and the order confirming the sale shall be registered and a brief
memorandum thereof made by the registrar of deeds upon the
certificate of title. In the event the property is redeemed, the deed of
redemption shall be registered with the registry of deeds, and a brief
memorandum thereof shall be made by the registrar of deeds on
said certificate of title.
If the property is not redeemed, the final deed of sale executed by
the sheriff in favor of the purchaser at the foreclosure sale shall be
registered with the registry of deeds; whereupon the certificate of
title in the name of the mortgagor shall be cancelled and a new one
issued in the name of the purchaser.
Sec. 8. Applicability of other provisions. The provisions of
sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial
foreclosure of real estate mortgages under this Rule insofar as the
former are not inconsistent with or may serve to supplement the
provisions of the latter.
Sec. 31. Manner of using premises pending redemption; waste
restrained. Until the expiration of the time allowed for redemption,
the court may, as in other proper cases, restrain the commission of
waste on the property by injunction, on the application of the
purchaser or the judgment obligee, with or without notice; but it is
not waste for a person in possession of the property at the time of
the sale, or entitled to possession afterwards, during the period
allowed for redemption, to continue to use it in the same manner in
which it was previously used; or to use it in the ordinary course of
husbandry; or to make the necessary repairs to buildings thereon
while he occupies the property.

Sec. 32. Rents, earnings and income of property pending
redemption. The purchaser or a redemptioner shall not be entitled
to receive the rents, earnings and income of the property sold on
execution, or the value of the use and occupation thereof when such
property is in the possession of a tenant. All rents, earnings and
income derived from the property pending redemption shall belong
to the judgment obligor until the expiration of his period of
redemption.
Sec. 34. Recovery of price if sale not effective; revival of
judgment. If the purchaser of real property sold on execution, or his
successor in interest, fails to recover the possession thereof, or is
evicted therefrom, in consequence of irregularities in the
proceedings concerning the sale, or because the judgment has been
reversed or set aside, or because the property sold was exempt
from execution, or because a third person has vindicated his claim to
the property, he may on motion in the same action or in a separate
action recover from the judgment obligee the price paid, with
interest, or so much thereof as has not been delivered to the
judgment obligor; or he may, on motion, have the original judgment
revived in his name for the whole price with interest, or so much
thereof as has been delivered to the judgment obligor. The judgment
so revived shall have the same force and effect as an original
judgment would have as of the date of the revival and no more.
Judicial foreclosure under the Rules of Court
1. Judicial action for the purpose – by bringing an action
for the purpose in the court with jurisdiction over the area
wherein the real property involved or a portion thereof is
situated (Sec. 1, Rule 4)
2. Order to mortgagor to pay mortgage debt – Court will
order the payment of the mortgage debt, interest and
other charges not less than 90 day nor more than 120
days from entry of judgment
3. Sale to highest bidder at public auction – debtor fails to
exercise equity of redemption
4. Confirmation of sale – divests the rights of all parties to
the action and vest their rights in the purchaser
5. Execution of judgment – parties to an action are not
allowed to change the procedure which it prescribed
(Piano v. Cayanong). Proper remedy is not annulment of
judgment, but an appeal from the order and confirmation.
6. Application of proceeds of the sale
a. Costs of the sale
b. Amount due to mortgagee
c. Claims of junior encumbrancers or persons holding
subsequent mortgages
d. Balance to be paid to the debtor
7. Execution of sheriff’s certificate – in the absence of a
certificate of sale, no title passes by the foreclosure
proceedings to the vendee. A sheriff’s report on the
auction sale enjoys the presumption of regularity (Sayson
v. Luna).
Equity of redemption in judicial foreclosure
1. Period for exercise – 90-day period from order of
foreclosure
2. Reckoning of ninety-day period – from the date of service
of such order/ from the date of entry of judgment (better
interpretation)
3. Where period never began to run – when order to pay is
held in abeyance, the period never begins to run
4. Period given, a substantive right – last opportunity to pay
the debt and save the property
Confirmation by court of auction sale in judicial foreclosure
1. Equity of redemption – no right of redemption except in
judicial foreclosures by bank and credit institutions
2. Procedure – right of the mortgagor to extinguish the
mortgage and retain ownership of the property by paying
the secured debt within the 120-day period from the entry
of judgment.
3. Effect and nature – Confirmation of sale cuts off all the
rights and interests of the mortgagor or mortgagee
4. Control of court over proceedings before confirmation
5. Requirement of notice and hearing – before valid
confirmation, it is necessary that a hearing be given the
interested parties at which they may have an opportunity
to show cause why the sale should not be confirmed.
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
ACT NO. 3135 – AN ACT TO REGULATE THE SALE OF
PROPERTY UNDER SPECIAL POWERS INSERTED IN OR
ANNEXED TO REAL-ESTATE MORTGAGES
SECTION 1. When a sale is made under a special power inserted in
or attached to any real-estate mortgage hereafter made as security
for the payment of money or the fulfillment of any other obligation,
the provisions of the following election shall govern as to the manner
in which the sale and redemption shall be effected, whether or not
provision for the same is made in the power.
SECTION 2. Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case the place
within said province in which the sale is to be made is subject to
stipulation, such sale shall be made in said place or in the municipal
building of the municipality in which the property or part thereof is
situated.
SECTION 3. Notice shall be given by posting notices of the sale for
not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city.
SECTION 4. The sale shall be made at public auction, between the
hours or nine in the morning and four in the afternoon; and shall be
under the direction of the sheriff of the province, the justice or
auxiliary justice of the peace of the municipality in which such sale
has to be made, or a notary public of said municipality, who shall be
entitled to collect a fee of five pesos each day of actual work
performed, in addition to his expenses.
SECTION 5. At any sale, the creditor, trustee, or other persons
authorized to act for the creditor, may participate in the bidding and
purchase under the same conditions as any other bidder, unless the
contrary has been expressly provided in the mortgage or trust deed
under which the sale is made.
SECTION 6. In all cases in which an extrajudicial sale is made under
the special power hereinbefore referred to, the debtor, his
successors in interest or any judicial creditor or judgment creditor of
said debtor, or any person having a lien on the property subsequent
to the mortgage or deed of trust under which the property is sold,
may redeem the same at any time within the term of one year from
and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to
four hundred and sixty-six, inclusive, of the Code of Civil Procedure,
in so far as these are not inconsistent with the provisions of this Act.
SECTION 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province or
place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in
an amount equivalent to the use of the property for a period of
twelve months, to indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or without complying
with the requirements of this Act. Such petition shall be made under
oath and filed in form of an ex parte motion in the registration or
cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage
Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with
a mortgage duly registered in the office of any register of deeds in
accordance with any existing law, and in each case the clerk of the
court shall, upon the filing of such petition, collect the fees specified
in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act
Numbered Twenty-eight hundred and sixty-six, and the court shall,
upon approval of the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which the property is
situated, who shall execute said order immediately.
SECTION 8. The debtor may, in the proceedings in which
possession was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale be set aside
and the writ of possession cancelled, specifying the damages
suffered by him, because the mortgage was not violated or the sale
was not made in accordance with the provisions hereof, and the
court shall take cognizance of this petition in accordance with the
summary procedure provided for in section one hundred and twelve
of Act Numbered Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or
part of the bond furnished by the person who obtained possession.
Either of the parties may appeal from the order of the judge in

accordance with section fourteen of Act Numbered Four hundred
and ninety-six; but the order of possession shall continue in effect
during the pendency of the appeal.
SECTION 9. When the property is redeemed after the purchaser has
been given possession, the redeemer shall be entitled to deduct
from the price of redemption any rentals that said purchaser may
have collected in case the property or any part thereof was rented; if
the purchaser occupied the property as his own dwelling, it being
town property, or used it gainfully, it being rural property, the
redeemer may deduct from the price the interest of one per centum
per month provided for in section four hundred and sixty-five of the
Code of Civil Procedure.
SECTION 10. This Act shall take effect on its approval.
Approved: March 6, 1924
Nature of power of foreclosure by extrajudicial sale
1. Conferred for mortgagee’s protection – not an ordinary
agency that exclusively contemplates representation
2. Ancillary stipulation – foreclosure proper when power is
inserted or attached to the mortgage contract;
determination devolves upon clerk of court
3. Prerogative of the mortgagee – to foreclose or not to
foreclose
Requisites for valid redemption
1. One year within the date of the registration of the
certificate of sale
2. Payment of purchase price of the money plus 1% interest
per month together with taxes
3. Written notice of the redemption must be served on the
officer who made the sale and a duplicate filed with the
proper Register of Deeds
4. In judicial foreclosure, no more right of redemption after
the sale is confirmed
5. Mortgagor or his assignee required to tender payment
within the prescribed period to make redemption valid or
to preserve it for future enforcement
Payment of redemption money
1. To whom made – purchaser, redemptioner or officer who
made the sale (Sec. 29, Rule 39) or sheriff (Reyes v.
Chavoso)
2. Medium of payment – check or lawful money, sheriff is
liable to purchaser in case of check
Amount payable
1. Purchase price – no linger the judgment debt, but the
purchase price at the auction sale
2. Amount fixed by the court – if bank forecloses, General
Banking Law applies ― the amount fixed by the court in
order of execution, or the amount of the mortgage deed,
as the case may be, plus interest, costs and expenses,
less the income received from the property.
3. 1% interest per month
4. Necessary expenses incurred by the purchaser/ taxes –
reasonable cost of improvement made by him to preserve
the property
5. Rentals received by purchaser
6. In case of surplus in the purchase price – not controlling if
the purchase price is unjustifiably higher that the real
amount of the mortgage obligation
Rights of persons with subordinate interest
1. Mortgagor’s equity of redemption before foreclosure –
acquires only the equity of redemption
2. Mortgagor’s right of redemption after foreclosure – passes
to second mortgagee
3. Payment of his credit from excess of proceeds of auction
sale – second mortgage entitled besides right of
repurchase to the payment of his credit from the excess of
the proceeds after covering the mortgagor’s obligation to
the first mortgagee. If there is deficiency, the purchaser
acquires the property free of the second mortgage
4. Where persons with subordinate interest not made
defendants – failure to join will not invalidate foreclosure
proceedings, provision merely directory
5. Where irregularities attended foreclosure – failure to give
notice to inferior lien holders will not invalidate the
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
foreclosure proceedings, but their unforeclosed equity of
redemption will remain.
6. Unpaid seller of property – Foreclosure of the unpaid
property does not make the mortgagee an obligor of the
unpaid seller for the purchase price (PNB v. CA)
Extrajudicial foreclosure under Act No. 3135
Construction must be equally and mutually beneficial to both parties
(PNB v. Cabatingan)
1. Express authority to sell given to mortgagee – covers
only real estate mortgages
a. PNB covered, now a private bank
2. Authority not extinguished by death of mortgagor or
mortgagee – essential and inseparable part of a bilateral
agreement (Perez v. PNB)
3. Public sale after notice – must be strictly complied with;
purpose is to inform all interested parties of the date, time
and place of the foreclosure sale
4. Public sale at different places/on different dates – the
indivisibility of a real estate mortgage is not violated by
conducting two separate foreclosure proceedings on
mortgaged properties located in different cities
5. Publication of notice of auction sale – required to give a
reasonably wide publicity so that those interested can
attend
a. Publication mandatory – failure to comply constitutes
a jurisdictional defect which invalidates the sale or at
least renders it voidable
b. Contents of notice
i. Correct number of TCT
ii. Correct technical description of the real
property sold
iii. The validity of a notice of sale is not affected by
immaterial errors not calculated to deter or
mislead bidders (K-Phil v. MBTC)
c. Object of notice – to secure bidders and to prevent
sacrifice of property; reasonably wide publicity
d. Personal notice to mortgagor not generally required –
unless there is a contrary stipulation. Lack of notice
to the mortgagor is not a ground to set aside a
foreclosure sale.
e. Notice to executing mortgagee-creditor not provided
by law – because he initiated it
f. Posting of notice on mortgaged property not required
– what is required is posting in at least 3 public
places in the city or municipality where the property is
situated
g. Certificate of posting nor required – significant only
when it becomes necessary to prove compliance with
the required notice of posting
h. Burden of proving non-compliance with notice
posting requirement upon mortgagor
i. Publication of notice of sale in news paper of general
circulation sufficient compliance – mandated not for
mortgagor’s benefit, but for the public or third
persons. Posting and publication requirements
cannot be waived
j. When newspaper of general circulation – published
for the dissemination of local news and general
information, bona fide subscription list of paying
subscribers and published at regular intervals. Most
important is that it is open to the public in general.
k. Formalities of levy not required
l. Notice to bidder of all bids offered at auction sale not
required
m. Sec. 4 requires that the sale must take place
between 9 am to 4 pm
6. Payment of cash by highest bidder – there is no need to
pay cash when bid is equivalent to the mortgage debt
7. Surplus proceeds from foreclosure sale – stands in the
same place of the land itself with respect to liens and
vested right thereon
a. Should be applied to junior encumbrances in the
order of priority
b. Senior mortgagee holding surplus is deemed a
trustee of the mortgagor
8. Redemption of property sold –
a. Natural persons - one year from or after the date of
the sale (Sec. 6) reckoned from the registration of
certificate of sale.

b. Juridical persons – right to redeem the property
until, but not after the registration of the certificate of
foreclosure sale which in no case shall be more than
3 months after foreclosure, whichever is earlier (Sec.
47, General Banking Law)
9. Remedy of party aggrieved by foreclosure – if
mortgage was not violated or the sale was not made in
accordance to the provisions (GSIS v. CA)
a. Fraud, collusion, accident, mutual mistake, breach of
trust or misconduct by purchaser
b. Sale not fairly or regularly conducted
c. Price inadequate and inadequacy so great as to
shock the conscience of the court (UCPB v. Beluso).
10. Republication – necessary for the validity of a postponed
extrajudicial foreclosure sale. No right to waive
republication requirement (DBP v. CA).
Nature of mortgagor’s right of redemption
1. Absolute privilege – exercise of which is entirely
dependent upon the will and discretion of the
redemptioner
a. No legal obligation to exercise the right of redemption
b. Filing of judicial action equivalent to formal offer;
formal offer to redeem and bona fide tender of
purchase price required only to preserve the right of
redemption for future enforcement.
2. Mere statutory privilege – must be exercised in the mode
and within the period prescribed by the statute
a. Offer must be accompanied by tender of payment
b. Right of redemption liberally construed in favor of
original owner
i. To aid rather than to defeat him
ii. To look upon redemption with favor
c. Dacion en pago = waiver of right of redemption
3. Involves title to foreclosed property – if redemption is
seasonably made, it seeks to erase from the title of the
judgment or mortgage debtor the lien created by
registration of the mortgage and sale
Persons entitled to exercise right of redemption
1. Mortgagor or one in privity of title with mortgagor
2. Successor-in-interest – person to whom mortgagor
a. Transferred right of redemption
b. Conveyed interest in property for purpose of
redemption
c. Succeeds to the interest of debtor by operation of law
d. Joint debtors who were joint owners of the property
sold
e. Joint interest in the property, spouse or heirs
3. Under the Rules of Court
a. Judgment debtor, successor-in-interest in whole or in
part of the property
b. Creditor having a lien by attachment, judgment or
mortgage on the property sold or some part thereof
subsequent to the judgment under which the property
was sold (redemptioner)
Registration of transfer or right of redemption not required
1. Where redemption is proper, the purchaser cannot refuse
to allow the same
2. Public policy demands that the original debtor-mortgagor
or his successors-in-interest should as much as possible
be allowed to redeem the foreclosed property.
Rights and obligations of mortgagee in possession – one who
has lawfully acquired actual or constructive possession of the
premises mortgaged to him, standing upon his rights as mortgagee
and not claiming under another title, for the purpose of enforcing his
security upon such property or making its income help to pay his
debt
1. Similar to those of an antichretic creditor – retain
possession until indebtedness is satisfied
2. Without right to reimbursement for useful expenses – no
other right than to demand execution and the recording of
the document in which the mortgage is formalized (Art.
2125[2]).
Vendee’s right to possession of mortgaged property sold
1. Contingent – before the expiration of the period to
redeem, contingent on the failure of the mortgagor to
redeem
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
2. Final – after the redemption period is terminated and the
right to redeem barred
Right of purchaser to writ of possession – order by a court
whereby the sheriff is commanded to place in possession of real or
personal property the person entitled thereto such as when property
is judicially foreclosed
1. Ministerial function in extrajudicial foreclosure
2. Question of validity of mortgage or foreclosure not a legal
ground for refusing the issuance of writ
3. Order of possession continues even during the pendency
of a proceeding to determine the validity of sale
4. Right to request issuance of writ of possession never
prescribes
Right before lapse of redemption period
1. Sec. 7 of Act 3135 allows the purchaser to take
possession during redemption period upon filing of ex
parte application and approval of bond
2. Question of legality of writ shall be determined under Sec.
8 and cannot be raised to oppose issuance.
3. Bond is required to protect the rights of the mortgagor so
that he may be indemnified if it be shown that foreclosure
was not justified
Right after lapse of redemption period
1. Nature of petition/motion for issuance of writ – summary
and non-litigious, merely an incident of the transfer of title
in the name of the purchaser-petitioner
2. Right of purchaser to a conveyance and to possession –
right to possession is based simply on the purchaser’s
ownership of property especially after the redemption
period has expired
3. Right of purchaser to aid of court – in effecting its delivery
because upon expiration of the period to redeem,
ownership is transferred to him
a. Upon proper application and proof of title, issuance
ministerial
b. Purchaser not obliged to bring a separate suit for
possession
c. Pendency of action questioning validity cannot bar
issuance
d. Motion for issuance of the writ can proceed
independently.
e. No bond is required of the purchaser after the
redemption period if the property is not redeemed.
4. Suspension of implementation of writ – Sheriff can only
enforce, not give a grace period or suspend writ of
possession
5. Where mortgaged property under lease – Purchaser can
be granted writ of possession even if the property is in the
possession of a lessee unless lease is registered
6. Where mortgagor refuses to surrender property sold – file
an ordinary action for recovery of possession. Due
process consideration – to give the mortgagor an
opportunity to be heard
7. Where third party in actual possession – issuance of writ
of possession not the judicial process required. Sec. 35,
Rule 39 suppletory to Act 3135 requires an ejectment suit
or reivindicatory action so that claims can be properly
heard and adjudicated.
Issuance of writ before lapse of redemption period
1. Where bond filed by purchaser – consequence of the
inchoate character of the right of the purchaser during the
redemption period
2. Remedy of mortgagor – Sec. 8 grounds
Where rights of third persons involved
1. Claimants with interest adverse to mortgagor – third party
claim or separate reivindicatory action
2. Successor-in-interest of mortgagor – no separate action
required
3. Lessee of agricultural land - Sec. 11, 12 of Code of
Agrarian Reform, superior to mortgagee of land
4. Buyer of condominium unit – Sec. 25, PD 957, annul
mortgage sale and issue condominium certificate of title to
the highest bidder.
Cases:
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Medida v. Court of Appeals,
208 SCRA 887.
A subsequent mortgage could nevertheless be legally constituted
after extrajudicial foreclosure with the subsequent mortgagee
becoming and acquiring the rights of a redemptioner, aside from his
right against the mortgagor.
Since the mortgagor remains as the absolute owner of the property
during the redemption period and has the free disposal of his
property, there would be compliance with the requisites of 2085 for
the constitution of another mortgage on the property. To hold
otherwise would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be his
last recourse, to raise funds wherewith to timely redeem his property
through another mortgage thereon.
It is only upon the expiration of the redemption period, without
the judgment debtor having made use of his right of
redemption, that the ownership of the land sold becomes
consolidated in the purchaser.
What actually is effected where redemption is seasonably exercised
by the judgment or mortgage debtor is not the recovery of ownership
of his land, which ownership he never lost, but the elimination from
his title thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon.
Huerta Alba Resort, Inc. v. Court of Appeals,
G.R. No. 128567, September 1, 2000.
What petitioner has been adjudged to have was only the equity of
redemption over subject properties.
provision mandates that in the absence of a third-party claim, the
purchaser in an execution sale need not pay his bid if it does not
exceed the amount of the judgment; otherwise, he shall pay only the
excess.
The raison de etre is that it would obviously be senseless for the
Sheriff or the Notary Public conducting the foreclosure sale to go
through the idle ceremony of receiving the money and paying it back
to the creditor, under the truism that the lawmaking body did not
contemplate such a pointless application of the law in requiring that
the creditor must bid under the same conditions as any other bidder.
It bears stressing that the rule holds true only where the amount of
the bid represents the total amount of the mortgage debt.
24. Chattel Mortgage,
Articles 2140 to 2141,
CHAPTER 5
CHATTEL MORTGAGE
Art. 2140. By a chattel mortgage, personal property is recorded in
the Chattel Mortgage Register as a security for the performance of
an obligation. If the movable, instead of being recorded, is delivered
to the creditor or a third person, the contract is a pledge and not a
chattel mortgage. (n)
Definition of chattel mortgage – contract by virtue of which
personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation
Characteristics

The right of redemption in relation to a mortgage – understood in 1. Accessory – secures the performance of a principal
the sense of a prerogative to re-acquire mortgaged property after obligation
registration of the foreclosure sale – exists only in the case of the 2. Formal – for validity, registration in the Chattel Mortgage
extrajudicial foreclosure of the mortgage. No such right is recognized Register is indispensable
in a judicial foreclosure except only where the mortgagee is the 3. Unilateral – obligation only o n the part of the creditor to
PNB or a bank or banking institution. free the thing from the encumbrance upon fulfillment of the
obligation
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to
the mortgagor the right of redemption within 1 year from the Chattel Mortgage Pledge
registration of the sheriff's certificate of foreclosure sale. Delivery is not necessary Delivery necessary
Registration in the Chattel Registration in the Registry of
Where the foreclosure is judicially effected, however, no equivalent Mortgage Register is required by Property is not required by law
right of redemption exists. The law declares that a judicial law
foreclosure sale 'when confirmed be an order of the court. . . . shall Procedure in Sec. 14 of Act. Procedure in Art. 2112
operate to divest the rights of all the parties to the action and to vest 1508
their rights in the purchaser, subject to such rights of redemption as Foreclosure, excess goes to Public sale, debtor not entitled
may be allowed by law.' Such rights exceptionally 'allowed by law' debtor unless agreed upon
(i.e., even after confirmation by an order of the court) are those Creditor allowed to recover Creditor not allowed to recover
granted by the charter of the PNB (Acts No. 2747 and 2938), and deficiency deficiency
the General Banking Act (R.A. 337). These laws confer on the
mortgagor, his successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on foreclosure — Similarities between chattel mortgage and pledge
after confirmation by the court of the foreclosure sale — which right
may be exercised within a period of 1 year, counted from the date of 1. Both are executed to secure a principal obligation
registration of the certificate of sale in the Registry of Property. 2. Constituted only on personal property
3. Indivisible
But, to repeat, no such right of redemption exists in case of judicial 4. Constitutes a lien on the property
foreclosure of a mortgage if the mortgagee is not the PNB or a bank 5. Creditor cannot appropriate the property to himself in
or banking institution. In such a case, the foreclosure sale, 'when payment of the debt
confirmed by an order of the court… shall operate to divest the 6. In case of default, property must be sold for the payment
rights of all the parties to the action and to vest their rights in the of the creditor
purchaser.' There then exists only what is known as the equity of 7. Extinguished by fulfillment of the principal obligation or by
redemption. This is simply the right of the defendant mortgagor to the destruction of property pledged or mortgaged
extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment Art. 2141. The provisions of this Code on pledge, insofar as they are
becomes final, in accordance with Rule 68, or even after the not in conflict with the Chattel Mortgage Law shall be applicable to
foreclosure sale but prior to its confirmation. chattel mortgages. (n)
Suico v. Philippine National Bank,
Offenses involving chattel mortgage
G.R. No. 170215, August 28, 2007.
1. Knowingly removing any personal property mortgaged
Notice of sale is valid. Notices are given for the purpose of
without written consent of the mortgagee
securing bidders and to prevent a sacrifice of the property. If these
2. Selling or pledging personal property already mortgaged
objects are attained, immaterial errors and mistakes will not affect
without the consent of the mortgagee (Art. 319, RPC)
the sufficiency of the notice; but if mistakes or omissions occur in the
notices of sale, which are calculated to deter or mislead bidders, to Essential element: property removed or repledged be the identical
depreciate the value of the property, or to prevent it from bringing a property pledged or mortgaged
fair price, such mistakes or omissions will be fatal to the validity of
the notice, and also to the sale made pursuant thereto. Sale is valid although no written consent was obtained, but the
mortgagor lays himself open to criminal prosecution (Servicewide
Effect of PNB’s non-payment of cash to Sheriff. Under Section Specialists v. IAC).
21 of Rule 39 is that if the amount of the loan is equal to the amount
of the bid, there is no need to pay the amount in cash. Same

Applicability of provisions on pledge only insofar as they are not
in conflict with the Chattel Mortgage Law. Debtor may maintain
action for deficiency (PNB v. Manila Investment and Construction
Co.).
Subject matter of chattel mortgage
Certain deviations have been allowed. These are mortgageable
under the Chattel Mortgage Law:
1. Shares of stock (but if owner and corporation have
different domiciles, registration required in both places)
2. Interest in business
3. Machinery treated by the parties as personal property –
based on estoppel (Davao Sawmill v. Castillo)
4. Vessels – essential to be recorded in the Philippine
Coast Guard
5. Motor vehicles – but must be registered with the LTO
6. House of mixed materials – by its very nature
7. House intended to be demolished – what is mortgaged
is actually the materials
8. House built on rented land
9. House of strong materials (Makati Leasing and Finance
v. Weaver Textiles)
Mortgage of improvements on land
1. Chattel mortgage – no conflict; Art. 416[2] personal
property includes real property which by any provision of
law is considered personalty
2. Real estate mortgage – insofar as the public is
concerned, property falling under Art. 415 are immovable
and susceptible of being registered as real estate
mortgage
No absolute criterion between personal and real property
Art. 415 and 416 not an absolute criterion
1. Property may have character different from that imputed to
it by Arts. 415 and 416
2. Parties to a contract may by agreement treat as personal
property that which by nature would be real property
3. Classification into real or personal may be said to be
doubtful
Subject matter to be described and identified
Description required is not minute but that which will enable the
parties to the mortgage or any other person to identify the same
after a reasonable investigation or inquiry (Saldana v. Phil.
Guaranty), otherwise, the mortgage is invalid.
Extent of chattel mortgage
1. Coverage extends only to property described therein –
does not apply to ―stores open to the public for retail
business where the goods are constantly sold and
substituted with new stock, such as drugstores, grocery
stores, dry goods, etc.‖
2. Stipulation including after-acquired property – valid and
binding where the after-acquired property is in renewal of,
or in substitution for, goods on hand when the mortgage
was executed.
Chattel mortgage of after-incurred obligations
Chattel mortgage and its foreclosure can only cover obligations
existing at the time the mortgage was constituted. Although a
promise may be compelled upon, the security itself does not come
into existence or arise until after a chattel mortgage agreement
covering the newly contracted debt is executed either by a fresh
chattel mortgage or by amending the old contract.
Creation of chattel mortgage
Registration required for validity; however, it has been held that
although the chattel mortgage was not registered, it is binding upon
the parties (Filipinas Marble v. IAC).
Period within which registration should be made – no specific
time. In Ledesma v. Perez, it was held that ― the law is substantially
sufficiently complied with where the registration is made by the
mortgagee before the mortgagor has complied with his principal
obligation and no right of third persons is prejudiced.‖
Effect of registration
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
1. Creates real right – effective and binding notice to other
creditors of its existence (symbolical possession)
a. Gives the mortgagee preferential right to have
physical possession inferable from Art. 319, RPC
b. Lien of a chattel mortgagee over the property is
superior to the levy made on the same by the
assignee of the unsecured judgment creditor
c. Right to rely in good faith on the certificate of title
may also be applied by analogy to personal property
2. Adds nothing to mortgage
Registration of assignment of mortgage not required
By analogy, Art. 2128 chattel mortgage credit may be alienated or
assigned to a third person, and need not be recorded.
Duty of Register of Deeds ministerial
There is no provision of law which confers upon the Register of
Deeds any judicial or quasi-judicial power to determine the nature of
any document sought to be registered as a chattel mortgage
(Standard Oil v. Jaramillo).
Affidavit of good faith – 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 not entered into for the purpose of fraud (Sec. 5)
1. Effect of absence – vitiates the mortgage only as to third
persons without notice (Lilius v. Manila Railroad); required
only for the purpose of transforming a valid mortgage into
a preferred mortgage (Cebu International Finance Corp v.
CA)
2. Where mortgage includes debt thereafter to be
contracted – will take effect only from the date the same
are made and not from the date of the mortgage (Jaca v.
Davao Lumber Co.) There can be no foreclosure on new
loans contracted after the execution of the chattel
mortgage.
Right of redemption
1. When condition is broken, the following may redeem:
a. Mortgagor
b. Person holding subsequent mortgage
c. Subsequent attaching creditor
2. The person who redeems shall be subrogated to the rights
of the mortgagee and may foreclose
3. Redemption is made by paying or delivering to the
mortgagee the amount due on such mortgage and the
costs and expenses (sec. 13)
4. There is no right to redeem personal property after
foreclosure (Lee v. Trocino)
Right acquired by second mortgagee and subsequent
purchaser
1. Before payment of debt – after execution of the
mortgage, only right of redemption remains and passes to
second mortgagee
2. After payment of debt – holder of right of redemption is
not entitled to the actual possession and delivery of the
property without first paying the mortgage debt.
Right of mortgagee to possession
1. After default – implied from right to sell
2. Before default – not entitled to possession, otherwise it is
a pledge
3. Where mortgagor refuses to surrender possession –
the remedy is either (1) effect a judicial foreclosure or (2)
secure possession preliminary to the sale
a. Mortgagee’s right of possession conditioned upon the
fact of default – creditor cannot take possession
against the will of the debtor
b. Sheriff mere agent of mortgagee – sheriff cannot
seize if the creditor cannot
c. Sheriff without authority to seize mortgaged property
in the first instance – file action for replevin first; not
necessary to ask the sheriff to seize, exercise in
futility (Northern Motors, Inc, v. Herrera)
d. Recoverable expenses against mortgagor –
Necessary expenses incurred in the prosecution;
incurred in effecting seizure of the chattel and
reasonable attorney’s fees for replevin suit (Agustin
v. CA)

4. Where right of mortgagee conceded/disputed –
mortgagor may maintain an action to recover possession
of the mortgaged chattels from the mortgagor or from any
person in whose hands he may find them. That the
defendant is not privy to the chatter mortgage is
inconsequential.
5. Where claimant is an unpaid seller – Failure of
mortgagor to pay for the goods does not revest ownership
on the seller, the mortgagee who forecloses on the unpaid
goods does not become an obligor of the seller for the
purchase price of the unpaid goods. This obligation
remains with the mortgagor vendee (PNB v. CA).
Foreclosure of chattel mortgage
1. Public sale – public auction through a public officer under
Sec. 14
a. Almost the same as the procedure in Act 3135 for
extrajudicial foreclosure of real estate mortgage
(notice and registration required).
b. Mortgagee sole bidder does not warrant conclusion
that sale attended with fraud (Pameca Wood v. CA).
2. Private sale – nothing illegal, immoral or against public
order to agree to a private sale of chattel mortgaged (Art.
1306).
Period to foreclose mortgage
1. Chattel mortgage – after 30 days from the time of the
condition broken, cause the sale through public auction
(Sec. 14) After the sale of the chattel, the right of
redemption is no longer available to the mortgagor (Cabral
v. Evangelista).
2. Real estate mortgage – for judicial foreclosure, the grace
period is not less than 90 nor more than 120 days from the
entry of judgment. In default, the property shall be sold at
public auction.
Civil action to recover credit
1. Independent action for enforcement of credit not
required – would amount to nullification of mortgagee’s
claim
2. Mortgage lien deemed abandoned by obtaining a
personal judgment – A mortgagee who sues and obtains
a personal judgment against a mortgagor upon his credit
waives thereby his right to enforce the mortgage (Movido
v. RFC), for he manifests his lack of desire to go after the
mortgaged property as security (Cerna v. CA)
Ordinary action to recover possession of chattel
In case of refusal of the mortgagor to surrender the possession of
the chattel sold by the sheriff, the remedy is an ordinary action for
recovery of possession and not writ of possession (Luna v.
Encarnaction) to give the mortgagor an opportunity to be heard.
Sec. 39 on execution sales is applicable to redemption in
extrajudicial foreclosure of real estate mortgage (IFC Service
Leasing v. Nera)
Action for replevin as a remedy
1. Nature of remedy – both principal and provisional; partly in
rem and partly in personam
2. Where right of possession is not disputed – action need
only be maintained against him who so possesses the
property
3. Where right of possession disputed – essential to have
other person involved and accordingly impleaded for a
complete determination and resolution of the controversy.
4. Matters to be established – existence of mortgage and
default by debtor; burden of proof is on the plaintiff
Right of mortgagee to recover deficiency
1. Where mortgage foreclosed – may maintain an action for
deficiency because a chattel mortgage is only given as a
security and not as payment for the debt in case of failure
of payment (Bicol Savings b. Guinhawa)
2. Where mortgage constituted as security for purchase of
property payable in installments – no deficiency judgment
can be asked; stipulation to the contrary void (Art. 1484
alternative not cumulative)
3. Where mortgaged property subsequently attached and
sold – specific performance
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CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
Application of proceeds of sale
1. Costs and expenses of keeping and sale
2. Payment of obligation secured
3. Claims of subsequent mortgages
4. Balance paid to mortgagor (Sec. 14)
The Chattel Mortgage Law (Act No. 1508, as amended)
ACT NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING
OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF
THE MORTGAGES SO EXECUTED
Section 1. The short title of this Act shall be "The Chattel Mortgage
Law."
Sec. 2. All personal property shall be subject to mortgage, agreeably
to the provisions of this Act, and a mortgage executed in pursuance
thereof shall be termed chattel mortgage.
Sec. 3. Chattel mortgage defined. — A 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.
Sec. 4. Validity. — A chattel mortgage shall not be valid against any
person except the mortgagor, his executors or administrators, unless
the possession of the property is delivered to and retained by the
mortgagee or unless the mortgage is recorded in the office of the
register of deeds of the province in which the mortgagor resides at
the time of making the same, or, if he resides without the Philippine
Islands, in the province in which the property is situated: Provided,
however, That if the property is situated in a different province from
that in which the mortgagor resides, the mortgage shall be recorded
in the office of the register of deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for
the purposes of this Act the city of Manila shall be deemed to be a
province.
Sec. 5. Form. — A chattel mortgage shall be deemed to be
sufficient when made substantially in accordance with the following
form, and shall be signed by the person or persons executing the
same, in the presence of two witnesses, who shall sign the
mortgage as witnesses to the execution thereof, and each
mortgagor and mortgagee, or, in the absence of the mortgagee, his
agent or attorney, shall make and subscribe an affidavit in substance
as hereinafter set forth, which affidavit, signed by the parties to the
mortgage as above stated, and the certificate of the oath signed by
the authority administering the same, shall be appended to such
mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by _______________,
a resident of the municipality of ______________, Province of ____________,
Philippine Islands mortgagor, to ____________, a resident of the municipality
of ___________, Province of ______________, Philippine Islands, mortgagee,
witnesseth:
"That the said mortgagor hereby conveys and mortgages to the said
mortgagee all of the following-described personal property situated in the
municipality of ______________, Province of ____________ and now in the
possession of said mortgagor, to wit:
(Here insert specific description of the property mortgaged.)
"This mortgage is given as security for the payment to the said ______,
mortgagee, of promissory notes for the sum of ____________ pesos, with (or
without, as the case may be) interest thereon at the rate of ___________ per
centum per annum, according to the terms of __________, certain promissory
notes, dated _________, and in the words and figures following (here insert
copy of the note or notes secured).
"(If the mortgage is given for the performance of some other obligation aside
from the payment of promissory notes, describe correctly but concisely the
obligation to be performed.)
"The conditions of this obligation are such that if the mortgagor, his heirs,
executors, or administrators shall well and truly perform the full obligation (or
obligations) above stated according to the terms thereof, then this obligation
shall be null and void.
"Executed at the municipality of _________, in the Province of ________, this
_____ day of 19_____
____________________
(Signature of mortgagor.)

"In the presence of
"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing mortgage is made for the purpose of
securing the obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one not entered
into for the purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally appeared
____________, the parties who signed the foregoing affidavit and made oath
to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case may be.)
Sec. 6. Corporations. — When a corporation is a party to such
mortgage the affidavit required may be made and subscribed by a
director, trustee, cashier, treasurer, or manager thereof, or by a
person authorized on the part of such corporation to make or to
receive such mortgage. When a partnership is a party to the
mortgage the affidavit may be made and subscribed by one member
thereof.
Sec. 7. Descriptions of property. — The description of the
mortgaged property shall be such as to enable the parties to the
mortgage, or any other person, after reasonable inquiry and
investigation, to identify the same.
If the property mortgaged be large cattle," as defined by section one
of Act Numbered Eleven and forty-seven, 2 and the amendments
thereof, the description of said property 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
or animals, together with the number and place of issue of such
certificates of ownership.
If growing crops be mortgaged 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 mortgage 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 thereof, if
any shall be paid to the mortgagor or those entitled to the same.
A chattel mortgage shall be 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. Failure of mortgagee to discharge the mortgage. — If the
mortgagee, assign, administrator, executor, or either of them, after
performance of the condition before or after the breach thereof, or
after tender of the performance of the condition, at or after the time
fixed for the performance, 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. 9-12. (inclusive) 3
Sec. 13. When the condition of a 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 by the terms of this Act.
Sec. 14. Sale of property at public auction; Officer's return;
Fees; Disposition of proceeds. — The mortgagee, his executor,
administrator, or assign, may, after thirty days from the time of
condition broken, cause the mortgaged property, or any part thereof,
Fides Damasco | UP Law C2013 53
CREDIT TRANSACTIONS | Atty. Stephanie Gomez-Somera
to be sold at public auction by a public officer at a public place in the
municipality where the mortgagor resides, or where the property is
situated, provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public places
in such municipality, and 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, either by notice in writing directed to him or left at his
abode, if within the municipality, or sent by mail if he does not reside
in such municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days thereafter, make
in writing a return of his doings and file the same in the office of the
register of deeds where the mortgage is recorded, and the register
of deeds shall record the same. The fees of the officer for selling the
property shall be the same as in the case of sale on execution as
provided in Act Numbered One hundred and ninety, 4 and the
amendments thereto, and the fees of the register of deeds for
registering the officer's return shall be taxed as a part of the costs of
sale, which the officer shall pay to the register of deeds. The return
shall particularly describe the articles sold, and state the amount
received for each article, and shall operate as a discharge of the lien
thereon created by the mortgage. The proceeds of such sale shall
be applied to the payment, first, of the costs and expenses of
keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid
to persons holding subsequent mortgages in their order, and the
balance, after paying the mortgages, shall be paid to the mortgagor
or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as
required by section sixteen of Act Numbered Eleven hundred and
forty-seven 5 shall be issued by the treasurer of the municipality
where the sale was held to the purchaser thereof.
Sec. 15. 6, 6a
Sec. 16. This Act shall take effect on August first, nineteen hundred
and six.
Enacted, July 2, 1906.
1. Now Municipal judge.
2. Now section 511 of the Administrative Code.
3. Repealed by Act 3815, Art. 367 approved December 8, 1930.
4. Now Rule 141, section 7 of the Rules of Court.
5. Now Section 523 of the Administrative Code.
6. Superseded by section 198 of the Administrative Code. The following is the
present text of section 198 as amended by RA 2711, approved June 18, 1960.
"SECTION 198. Registration of chattel mortgages and fees collectible in
connection therewith. — Every register of deeds shall keep a primary entry
book and a registration book for the chattel mortgages; shall certify on each
mortgage filed for record, as well as on its duplicate, the date, hour, and
minute when the same was by him received; and shall record in such books
any chattel mortgage, assignment, or discharge thereof, and any other
instruments relating to a recorded mortgage, and all such instruments shall be
presented to him in duplicate, the original to be filed and the duplicate to be
returned to the person concerned.
"The recording of a mortgage shall be effected by making an entry, which shall
be given a correlative number, setting forth the names of the mortgagee, and
the mortgagor, the sum or obligation guaranteed, date of the instrument, name
of the notary before whom it was sworn to or acknowledged, and a note that
the property mortgaged, as well as the terms and conditions of the mortgage,
is mentioned in detail in the instrument filed, giving the proper file number
thereof. The recording of other instruments relating to a recorded mortgage
shall be effected by way of annotations on the space provided therefor in the
registration book, after the same shall have been entered in the primary entry
book.
"The register of deeds shall also certify the officer's return of sale upon any
mortgage, making reference upon the record of such officer's return to the
volume and page of the record of the mortgage, and a reference of such return
on the record of the mortgage itself, and give a certified copy thereof, when
requested, upon payment of the lawful fees for such copy; and certify upon
each mortgage officer's return of sale or discharge of mortgage; and upon any
other instrument relating to such a recorded mortgage, both on the original
and on the duplicate, the date, hour, and minute when the same is received for
record and record such certificate with the return itself and keep an
alphabetical index of mortgagors and mortgagees, which record and index
shall be open to public inspection.
"Duly certified copies of such records and of filed instruments shall be
receivable as evidence in any court.
"The register of deeds shall collect the following fees for services rendered by
him under this section:
"(a) For entry or presentation of any document in the primary entry book, one
peso. Supporting papers presented together with the principal document need
not be charged any entry or presentation fee unless the party in interest

desires that they be likewise entered.
"(b) For filing and recording each chattel mortgage, including the necessary
certificates and affidavits, the fees established in the following schedule shall
be collected:
"1. When the amount of the mortgage does not exceed six thousand pesos,
three pesos and fifty centavos for the first five hundred pesos or fractional part
thereof, and one peso and fifty centavos for each additional five hundred
pesos or fractional part thereof.
"2. When the amount of the mortgage is more than six thousand pesos but
does not exceed thirty thousand pesos, twenty-four pesos for the initial
amount not exceeding eight thousand pesos, and four pesos for each
additional two thousand pesos or fractional part thereof.
"3. When the amount of the mortgage is more than thirty thousand pesos but
does not exceed one hundred thousand pesos, seventy-five pesos for the
initial amount not exceeding thirty-five thousand pesos, and seven pesos for
each additional five thousand pesos or fractional part thereof.
"4. When the amount of the mortgage is more than one hundred thousand
pesos but does not exceed five hundred thousand pesos, one hundred and
seventy-six pesos for the initial amount not exceeding one hundred ten
thousand pesos, and ten pesos for each additional ten thousand pesos or
fractional part thereof.
"5. When the amount of the mortgage is more than five hundred thousand
pesos, five hundred eighty-one pesos for the initial amount not exceeding five
hundred twenty thousand pesos, and fifteen pesos for each additional twenty
thousand pesos or fractional part thereof: Provided, however, That registration
of the mortgage in the province where the property is situated shall be
sufficient registration: And provided, further, That if the mortgage is to be
registered in more than one city or province, the register of deeds of the city or
province where the instrument is first presented for registration shall collect the
full amount of the fees due in accordance with the schedule prescribed above,
and the register of deeds of the other city or province where the same
instrument is also to be registered shall collect only a sum equivalent to twenty
per centum of the amount of fees due and paid in the first city or province, but
in no case shall the fees payable in any registry be less than the minimum
fixed in said schedule.
"(c) For recording each instrument of sale, conveyance, or transfer of the
property which is subject of a recorded mortgage, or of the assignment of
mortgage credit, the fees established in the preceding schedule shall be
collected on the basis of ten per centum of the amount of the mortgage or
unpaid balance thereof: Provided, That the latter is stated in the instrument.
"(d) For recording each notice of attachment, including the necessary index
and annotations, four pesos.
"(e) For recording each release of mortgage, including the necessary index
and references, the fees established in the schedule under paragraph (b)
above shall be collected on the basis of five per centum of the amount of the
mortgage.
"(f) For recording each release of attachment, including the proper
annotations, two pesos.
"(g) For recording each sheriff's return of sale, including the index and
references, three pesos.
"(h) For recording a power of attorney, appointment of judicial guardian,
administrator, or trustee, or any other instrument in which a person is given
power to act in behalf of another in connection with a mortgage, three pesos.
"(i) For recording each instrument or order relating to a recorded mortgage,
including the necessary index and references, for which no specific fee is
provided above, two pesos.
"(j) For certified copies of records, such fees as are allowed by law for copies
kept by the register of deeds.
"(k) For issuing a certificate relative to, or showing the existence or non-
existence of, an entry in the registration book, or a document on file, for each
such certificate containing not more than two hundred words, three pesos; if it
exceeds that number, an additional fee of fifty centavos shall be collected for
every one hundred words or fractional part thereof, in excess of the first two
hundred words."
Cases:
Acme Shoe Rubber & Plastic Corp. v. Court of Appeals,
260 SCRA 714.
Chattel mortgage must comply substantially with the prescribed
form. The execution of the oath means that the debt/obligation
secured must be current and not that is yet merely contemplated.
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage OR by
amending the old contract conformably with the form prescribed
by the Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the borrower of the
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financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the time
of constitution and during the life of the chattel mortgage sought to
be foreclosed.
People's Bank & Trust Company v. Dahican Lumber Company,
20 SCRA 84.
Even if contract was entered into under the old Civil Code, the
pertinent provisions were reproduced into New Civil Code in Art.
2127. The "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its lumber
concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July 13,
1950. In law, therefore, they must be deemed to have been
immobilized, with the result that the real estate mortgages involved
herein — which were registered as such — did not have to be
registered a second time as chattel mortgages in order to bind the
"after acquired properties" and affect third parties.
Makati Leasing & Finance Corporation v. Wearever Textile Mills,
Inc.,
122 SCRA 296.
If a house of strong materials, like what was involved in the above
Tumalad case, may be considered as personal property for
purposes of executing a chattel mortgage thereon as long as the
parties to the contract so agree and no innocent third party will be
prejudiced thereby, there is absolutely no reason why a
machinery, which is movable in its nature and becomes
immobilized only by destination or purpose, may not be
likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel
mortgage.
It must be pointed out that the characterization of the subject
machinery as chattel by the private respondent is indicative of
intention and impresses upon the property the character determined
by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be
real property, as long as no interest of third parties would be
prejudiced thereby.
Dy v. Court of Appeals,
198 SCRA 26.
The mortgagor who gave the property as security under a chattel
mortgage did not part with the ownership over the same. He had the
right to sell it although he was under the obligation to secure the
written consent of the mortgagee or he lays himself open to criminal
prosecution under the provision of Art. 319 par. 2 of the RPC. Even
if no consent was obtained from the Libra, the validity of the sale
would still not be affected.
Where a third person purchases the mortgaged property, he
automatically steps into the shoes of the original mortgagor. His right
of ownership shall be subject to the mortgage of the thing sold to
him. In the case at bar, Perfecto was fully aware of the existing
mortgage of the subject tractor to Libra. In fact, when he was
obtaining Libra's consent to the sale, he volunteered to assume the
remaining balance of the mortgage debt of Wilfredo Dy which Libra
undeniably agreed to.
Servicewide Specialist Inc. v. Court of Appeals,
320 SCRA 478.
Only notice to the debtor (Ponce) of the assignment of credit is
required. His consent is not required. In contrast, consent of the
creditor-mortgagee (Servicewide) to the alienation of the mortgaged
property is necessary in order to bind said creditor.
Art. 2141, on the other hand, states that the provisions concerning
a contract of pledge shall be applicable to a chattel mortgage,
such as the one at bar, insofar as there is no conflict with Act No.
1508, the Chattel Mortgage Law. As provided in 2097 in relation to
2141, a thing pledged may be alienated by the pledgor or owner with
the consent of the pledgee. This provision is in accordance with Act
No. 1508 which provides that a mortgagor of personal property shall
not sell or pledge such property, or any part thereof, mortgaged by
him without the consent of the mortgagee in writing on the back
of the mortgage and on the margin of the record thereof in the office
where such mortgage is recorded. Although this provision in the
chattel mortgage has been expressly repealed by Art. 367 of the
Revised Penal Code, yet under Art. 319 (2) of the same Code, the
sale of the thing mortgaged may be made provided that the
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mortgagee gives his consent and that the same is recorded. In any Delivery of property required only so that the creditor may receive
case, applying by analogy 2128 to a chattel mortgage, it appears the fruits.
that a mortgage credit may be alienated or assigned to a third
person. Since the assignee of the credit steps into the shoes of the Right of creditor to the fruits – normally covers all fruits, but the
creditor-mortgagee to whom the chattel was mortgaged, it follows parties may stipulate otherwise (Art. 1306)
that the assignees consent is necessary in order to bind him of the Obligation to pay interest not essential
alienation of the mortgaged thing by the debtor-mortgagor. This is
tantamount to a novation. As the new assignee, petitioners The principal obligation may or may not earn interest. Antichresis is
consent is necessary before respondent spouses alienation of the susceptible to guaranteeing all kinds of obligations, pure of
vehicle can be considered as binding against third persons. conditional
Servicewide is considered a third person with respect to the sale
with mortgage between respondent spouses and third party Antichresis, real mortgage and pledge compared
defendant Conrado Tecson. Antichresis Pledge Real Mortgage
Pameca Wood Treatment Plant v. Court of Appeals, Real property Personal property
310 SCRA 281. Perfected by mere Perfected by the
consent delivery of thing
Whereas, in pledge, the sale of the thing pledged extinguishes the pledged
entire principal obligation, such that the pledgor may no longer Right to receive Creates real right
recover proceeds of the sale in excess of the amount of the principal fruits
obligation, S14 of Chattel Mortgage Law expressly entitles the Express stipulation No such stipulation No such stipulation
mortgagor to the balance of the proceeds, upon satisfaction of the to apply fruits to
principal obligation and costs. principal
Creditor to pay taxes No obligation to pay
Since the Chattel Mortgage Law bars the creditor-mortgagee from taxes
retaining the excess of the sale proceeds there is a corollary Real Consensual
obligation on the part of the debtor-mortgagee to pay the Debtor loses Debtor loses Debtor retains
deficiency in case of a reduction in the price at public auction. possession possession possession
Art. 1484 does not apply here because it is specifically applicable to
sale on installments. Art. 2133. The actual market value of the fruits at the time of the
RCBC v. Royal Cargo Corp., application thereof to the interest and principal shall be the measure
G.R. No. 179756, October 2, 2009. of such application. (n)

Section 13 of the Chattel Mortgage Law allows the would-be
redemptioner thereunder to redeem the mortgaged property only
before its sale. Consider the following pronouncement in Paray:
[T]here is no law in our statute books which vests the right of
redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point. And
Section 39 of the 1997 Rules of Civil Procedure, extensively relied
upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold
on execution. (Emphasis, italics and underscoring supplied)
Unmistakably, the redemption cited in Section 13 partakes of an
equity of redemption, which is the right of the mortgagor to
redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before the
sale of the property to clear it from the encumbrance of the
mortgage. It is not the same as right of redemption which is the right
of the mortgagor to redeem the mortgaged property after registration
of the foreclosure sale and even after confirmation of the sale.
What was actually attached by respondents was Consolidated
Mines’ right or equity of redemption, an incorporeal and intangible
right, the value of which can neither be quantified nor equated with
the actual value of the properties upon which it may be exercised.
This entitles the second mortgagee to notice. The right of those
who acquire said properties should not and cannot be superior
to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of the law, in good faith,
and without the least indication of fraud.
25. Antichresis,
Articles 2132 to 2139, Civil Code
CHAPTER 4
ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor acquires the
right to receive the fruits of an immovable of his debtor, with the
obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit. (1881)
Characteristics of the contract
1. Accessory – secures the performances of a principal
obligation
2. Formal – must be in writing to be valid (Art. 2134)
Measure of application of fruits to interest and principal to
forestall usury.
Art. 2134. The amount of the principal and of the interest shall be
specified in writing; otherwise, the contract of antichresis shall be
void. (n)
Form of the contract
Even if the antichresis is void, the principal obligation remains valid.
Art. 2135. The creditor, unless there is a stipulation to the contrary,
is obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation
and repair.
The sums spent for the purposes stated in this Art. shall be
deducted from the fruits. (1882)
Obligations of the antichretic creditor are necessary
consequences of the contract because they arise from its very
nature. The sums spent will be charged against the fruits of the
property.
1. Payment of taxes and charges upon the estate – unless
there is a contrary stipulation, otherwise, will be liable to
pay indemnity for damages (Art. 1170). Any payment by
the debtor will be applied to the debt.
2. Application of the fruits of the estate – after receiving
them, to the interest if owing and thereafter the principal.
He also has to account.
Art. 2136. The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel the
debtor to enter again upon the enjoyment of the property, except
when there is a stipulation to the contrary. (1883)
Right of antichretic debtor to reacquire enjoyment of property
1. Only upon full payment of the debt or
2. If the creditor does not want to pay taxes and expenses
for preservation and repair
Art. 2137. The creditor does not acquire the ownership of the real
estate for non-payment of the debt within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may
petition the court for the payment of the debt or the sale of the real
property. In this case, the Rules of Court on the foreclosure of
mortgages shall apply. (1884a)
Remedy of creditor in case of nonpayment of debt
1. Cannot automatically appropriate (Art. 2088)
2. Action for specific performance
3. Petition for the sale of real property as foreclosure under
Rule 68
4. Parties may agree to extrajudicial foreclosure
Acquisition by creditor of property by prescription any
agreement to this effect is void. Possession of an antichretic creditor
is not in the concept of an owner.
Art. 2138. The contracting parties may stipulate that the interest
upon the debt be compensated with the fruits of the property which
is the object of the antichresis, provided that if the value of the fruits
should exceed the amount of interest allowed by the laws against
usury, the excess shall be applied to the principal. (1885a)
Interest in antichresis subject to the Usury Law
This is no longer subject to any ceiling.
Art. 2139. The last paragraph of Art. 2085, and Articles 2089 to
2091 are applicable to this contract. (1886a)
Applicability of certain articles
Pledge and mortgage provisions applicable to antichresis:
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that they
be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
Art. 2089. A pledge or mortgage is indivisible, even though the debt
may be divided among the successors in interest of the debtor or of
the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot
ask for the proportionate extinguishment of the pledge or mortgage
as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is expected the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of
the pledge or mortgage as the portion of the debt for which each
thing is specially answerable is satisfied. (1860)
Art. 2090. The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable. (n)
Art. 2091. The contract of pledge or mortgage may secure all kinds
of obligations, be they pure or subject to a suspensive or resolutory
condition. (1861)
Weeks 13 to 16
26. Concurrence and Preference of
Credits,
Articles 2241 to 2251, Civil Code
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Features of Title XIX of the Civil Code
1. Liens and mortgages with respect to specific movable and
immovable property have been increased
2. Civil Code and Insolvency Law harmonized
3. Preferred claims as to the free property have also been
augmented
Scope
Applies to all other creditor-debtor relationships
Meaning of concurrence of credit – possession of two or more
creditor of equal rights and privileges over the same property of the
debtor.
Meaning of preference of credit – right held by a creditor to be
preferred in the payment of his claim above others out of the
debtor’s assets.
Nature and effect of preference
1. Exception to the general rule; strictly construed (Roman v.
Herridge)
2. Does not create an interest in property. It simply creates a
right to be paid first; it is not a question of who takes or
sells, it is one of the application of the proceeds after the
sale. (Molina v. Somes)
3. Preference can only be made effective by being asserted
and maintained; can be lost for failure to assert and
maintain
4. Where a creditor released his levy, he cannot thereafter
assert his preference.
When rules on preference of credits applicable
1. Only where two or more creditors have separate and
distinct claims against the same debtor who has
insufficient property
2. Debtor has insufficient property to cover his debts
Preference of credit and lien distinguished
A preference applies only to claims which do not attach to specific
properties. A lien creates a charge on a particular property.
Credits must be due concurrence and preference does not take
place except when the obligations are already demandable (Jacinto
v. de Leon)
CHAPTER 1
GENERAL PROVISIONS
Art. 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the exemptions
provided by law. (1911a)
Liability of debtor’s property for his obligations
This is a form of social contract; basis for attachments and
executions and applicable to obligations secured or not secured.
Exempt property
1. Present property
a. Family home (Art. 152-155)
b. Support (Art. 205)
c. Rules of Court (Sec 13, Rule 39)
i. Family home or homestead
ii. Ordinary tools or implements used in trade,
employment or livelihood (for natural person
only)
iii. Three horses, cows or carabaos or other beasts
of burden for ordinary occupation
iv. Necessary clothing and articles for personal use
(includes jewelry)
v. Household furniture and utensils necessary for
housekeeping (not more than P100,000)
vi. Provisions for individual or family sufficient for
four months
vii. Professional libraries of judges, lawyers,
physicians, pharmacists, dentists, engineers,
surveyors, (not more than P300,000)
viii. One fishing boat and accessories (not more
than P100,000)
ix. Salaries, wages and earnings within four
months necessary for the support of family

x. Lettered gravestones
xi. Life insurance proceeds
xii. Right to receive legal support or pension or
gratuity from government
xiii. Properties specially exempted by law
d. Free patent or homestead
2. Future property – excluded when the debtor obtains a
discharge on account of insolvency
3. Property in custodial legis and of public dominion
Art. 2237. Insolvency shall be governed by special laws insofar as
they are not inconsistent with this Code. (n)
Insolvency governed by special laws
Insolvency Law has been repealed by the FRIA. Insolvency and
liquidation proceedings have only one aim – to conserve all the
remaining assets of the insolvent/liquidated person/corporation for
distribution to the creditors, after payment of taxes.
Art. 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets to be
taken possession of by the assignee for the payment of the insolvent
debtor's obligations, except insofar as the latter have redounded to
the benefit of the family. If it is the husband who is insolvent, the
administration of the conjugal partnership of absolute community
may, by order of the court, be transferred to the wife or to a third
person other than the assignee. (n)
Exemption of conjugal partnership or absolute community
property because they do not belong to the individual spouses, but
to a distinct entity:
1. Partnership or community subsists
2. Obligations of the insolvent spouse have not redounded to
the benefit of the family.
The insolvency of the husband does not have effect of dissolving the
conjugal partnership.
Art. 2239. If there is property, other than that mentioned in the
preceding article, owned by two or more persons, one of whom is
the insolvent debtor, his undivided share or interest therein shall be
among the assets to be taken possession of by the assignee for the
payment of the insolvent debtor's obligations. (n)
Art. 2240. Property held by the insolvent debtor as a trustee of an
express or implied trust, shall be excluded from the insolvency
proceedings. (n)
Rule involving property held in trust
Trustee is not the owner of the trust property although he has legal
title thereto.
CHAPTER 2
CLASSIFICATION OF CREDITS
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;
(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;
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(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 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. (1922a)
General categories of credit
1. Special preferred credits (Arts. 2241, 2242)
2. Ordinary preferred credits (Art. 2244)
3. Common credits (Art. 2245)
Preferred credits with respect to specific movable property
Arts. 2241 and 2242 do not give the order of preference, only
concurrence. With the exception of the State, these credits merely
concur.
Wrongful taking of movables to which lien attaches
Last par. of 2242 applies only when the right of ownership continues
in the debtor.
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;
(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. (1923a)
Preferred credits with respect to specific immovable property
Arts. 2241 and 2242 do not give the order of preference, only
concurrence. With the exception of the State, these credits merely
concur.
Unpaid price of real property sold – no distinction between
registered and unregistered vendor’s lien.
Credits annotated in virtue of judicial order Art. 2259 pro rata rule
does not apply to attachments or executions, the preference is
according to the order of the time they were levied upon the
property.

Refectionary credit – indebtedness incurred in the repair or
reconstruction of something previously made, such as those made
necessary by the deterioration or destruction of the thing as it
formerly existed. SC has sanctioned the inclusion of new
construction to refectionary credit (Luzon Lumber v. Quiambao).
Art. 2243. The claims or credits enumerated in the two preceding
articles shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, Art. 2241, and No.
1, Art. 2242, shall first be satisfied. (n)
Nature of claims or credits in Arts. 2241 and 2242 considered
mortgages or pledges of real or personal property
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:
(1) 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;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they have
no property of their own;
(4) 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;
(5) Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding the
insolvency;
(6) Support during the insolvency proceedings, and for three
months thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) 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;
(9) Taxes and assessments due the national government, other
than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other than those
referred to in Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other
than those indicated in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-
delict;
(13) Gifts due to public and private institutions of charity or
beneficence;
(14) 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. (1924a)
Order of preference with respect to other properties of the
debtor – these do not attach to specific properties, but simply rights
in favor of certain creditors to have cash or other assets of the
insolvent applied in a certain sequence or order of priority (Republic
v. Peralta).
Order of priority only with respect to insolvent’s ―free property‖
1. Special preferred credits – constitute liens which take
precedence insofar as they concern the property to which
the liens attach
a. Specific property involved of greater value – residual
value will form free property
b. Specific property involved of lesser value –
unsatisfied balance are treated ordinary preferred
credits
2. Ordinary preferred credits – only applicable to free
property; but taxes do not have the same overriding
preference (Art. 2241, 2242)
Preference of claims for unpaid wages and other monetary
claims
1. Category of ordinary preferred credits – Art. 110 did not
upgrade worker’s claim as absolutely preferred credits; it
did not alter Art. 2241 and 2242
a. One-year limitation removed
b. Priority moved to No. 1 of Art. 2244
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2. Necessity of bankruptcy and liquidation proceedings –
must be present before the worker’s preference may be
enforced (DBP v. Santos)
a. Civil Code scheme preserved
b. Judicial proceedings in rem required – Art. 110
requires adjudication of creditor’s claims against the
debtor’s assets to become operative
c. Reason for requirement – to bind all interested
parties
d. Invoked only upon the institution of insolvency or
liquidation proceedings
e. Liability for improper application of debtor’s assets –
where held in bad faith, directly liable for moral and
exemplary damages based on the provisions Art. 19,
21, 2219[10] and 2229.
Preference of credits evidenced by public instruments and final
judgments in the order of time of execution and not necessarily the
date of registration (Uy v. Zamora)
Statutory preference not applicable to Government
1. Object of rules on classification and priority – designed to
meet the situation where the value of a debtor’s assets is
not sufficient to enable him to meet all his maturing
obligations.
2. Art. 2244 not applicable to State – State is always solvent
a. State not subject to insolvency proceedings
b. State regarded as always solvent – inherent power of
the State to impose taxes
c. Debtor-State going out of existence with liability for
international transaction - would arise only in State
succession consequent upon conquest or annexation
3. Immaterial whether obligations of State those of borrower
or guarantor – because they do not apply at all to State
obligations
Art. 2245. Credits of any other kind or class, or by any other right or
title not comprised in the four preceding articles, shall enjoy no
preference. (1925)
Non-preferred or common credits paid pro rata regardless of
dates.
Insolvency proceedings involving banks
1. Remedy against actions of Monetary Board – final and
executory; may not be set aside or enjoined by courts
except upon convincing proof that the action plainly
arbitrary and made in bad faith (Central Bank v. De la
Cruz)
2. Remedy of depositor or creditor to recover claims –
intervene in the judicial proceedings for liquidation
instituted by the Board thru the Solicitor General
a. Separate suits will deplete bank assets to the
prejudice of other creditors
b. Burdensome on the part of the liquidator if he were to
appear before several courts
3. Deviation from required procedure – may be allowed as in
the case of plaintiffs who are admittedly living in poverty
and to refile and relitigate in liquidation court will be an
exercise in futility (Valenzuela v. Central Bank).
CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those 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. 2247. If there are two 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
thereof. (1926a)
Art. 2248. 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. 2249. If there are two 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 assessments upon the
immovable property or real right. (1927a)

Art. 2250. 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 the other credits. (1928a)
Concurrence of credits with respect to same specific property
Only taxes and assessments upon specific movable and immovable
property enjoy absolute preference. All the remaining classes of
preferred creditors under Arts. 2241 and 2242 shall be paid
concurrently and pro rata (Barretto v. Villanueva).
Two-tier order of preference
1. Taxes, duties and fees due on movable or immovable
property
2. All others are satisfied pari passu and pro rata out of any
residual value of the specific property
3. This rule does not apply to execution and attachments
which are referred to as ―later credits.‖ – priority in the
order of time.
Proceeding for payment pro rata of preferred creditors
1. Proceeding required for adjudication of claims of preferred
creditors – preferred creditors must necessarily be
convened and the import of their claims ascertained
2. Pro rata rule contemplates more than one creditor –
should not be enforced where there are not more than one
creditor (Carried Lumber Co. v. ACCFA)
Art. 2251. 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:
(1) In the order established in Art. 2244;
(2) Common credits referred to in Art. 2245 shall be paid pro rata
regardless of dates. (1929a)
Satisfaction of other credits
1. With order of preference – those not in Arts. 2241 and
2242 shall be satisfied secondarily under Art. 2244.
2. Without any order of preference – paid pro rata
Cases:
De Barretto v. Villanueva,
1 SCRA 288.
A recorded mortgage credit is superior to an unrecorded unpaid
vendor’s lien. On reconsideration: Nothing in the Civil code indicates
that the provisions on concurrence and preference of credits are
applicable only to the insolvent debtor. If those provisions are
intended only for insolvency case, then other creditor-debtor
relationships would be left without governing rules.
Concurrence and preference of credits attain significance only after
the properties of the debtor have been inventoried and liquidated
and the claims held by his various creditors have been established.
J.L. Bernardo Construction v. Court of Appeals,
G.R. No. 105827, January 31, 2000.
Fundamental tenets of due process will dictate that this statutory lien
should then only be enforced in the context of some kind of a
proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency proceedings.
Development Bank of the Philippines v. Court of Appeals,
G.R. No. 126200, August 16, 2001.
A preferred creditor’s third-party claim to the proceeds of a
foreclosure sale by the mortgagee is not the proceeding
contemplated by law for the enforcement of preferences under Art.
2241 and 2242 unless the claimant is enforcing a credit for taxes
that enjoy absolute priority. The extrajudicial foreclosure is not the
liquidation proceeding contemplated in Art. 2243.
Cordova v. Reyes et al.,
G.R. No. 146555, July 3, 2007.
When shares of stockholders have been sold and the proceeds
commingled with the other assets of the debtor, the stockholders’
status was converted into that of an ordinary creditor for the value of
the shares.
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Shares were specific or determinate movable properties, but after
they were sold the money raised from the sale became generic and
commingled with the cash and other assets. Unlike shares of stock,
money is a generic thing that cannot be pinpointed when
commingled with a mass. The only remedy in this case is to file a
claim on the whole mass as an ordinary creditor.
27. Rehabilitation and Insolvency,
Republic Act No. 10142
Cases:
Ruby Industrial Corporation v. Court of Appeals,
G.R. No. 124185-87, January 20, 1998.
Rehabilitation contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. When a
distressed company is placed under rehabilitation, the appointment
of management committee follows to avoid collusion between the
previous management and creditors it might favor, to the prejudice
of the other creditors.
All assets of the corporation under rehabilitation receivership
are held in trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over another by
the expediency of attachment, execution or otherwise.
As between the creditors, the key phrase is equality in equity.
Once the corporation threatened by bankruptcy is taken over by a
receiver, all the creditors ought to stand on equal footing. Not any
one of them should be paid ahead of the others.
Rizal Commercial Banking Corporation v. Intermediate
Appellate Court,
G.R. No. 74851, December 9, 1999.
Whenever a distressed corporation asks the SEC for rehabilitation
and suspension of payments, preferred creditors may no longer
assert such preference, but . . . stand on equal footing with other
creditors. Foreclosure shall be disallowed so as not to prejudice
other creditors, or cause discrimination among them. If foreclosure is
undertaken despite the fact that a petition, for rehabilitation has been
filed, the certificate of sale shall not be delivered pending
rehabilitation. Likewise, if this has also been done, no transfer of title
shall be effected also, within the period of rehabilitation. The
rationale behind PD 902-A, as amended to effect a feasible and
viable rehabilitation. This cannot be achieved if one creditor is
preferred over the others.
In this connection, the prohibition against foreclosure attaches as
soon as a petition for rehabilitation is filed. Were it otherwise, what is
to prevent the petitioner from delaying the creation of a Management
Committee and in the meantime dissipate all its assets? The sooner
the SEC takes over and imposes a freeze on all the assets, the
better for all concerned.
Petition for rehabilitation does not always result in the appointment
of a receiver or the creation of a management committee. The SEC
has to initially determine whether such appointment is appropriate
and necessary under the circumstances. Under Paragraph (d),
Section 6 of Presidential Decree No. 902-A, certain situations must
be shown to exist before a management committee may be created
or appointed, such as;
1. When there is imminent danger of dissipation, loss, wastage or
destruction of assets or other properties; or
2. when there is paralyzation of business operations of such
corporations or entities which may be prejudicial to the interest of
minority stockholders, parties-litigants or to the general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants;
and/or
2. protect the interest of the investing public and creditors. (Section 6
(c), P.D. 902-A.)
MWSS v. Daway
The letter of credit is not covered by the stay order (hence, MWSS
can enforce its claim) because it is solidary and primary undertaking.
As such, claims against them can be pursued separately from and
independently of the rehabilitation case (PBM v CA).
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The stay order issued in favor of the principal debtor cannot be

invoked by its surety when called upon to satisfy the solidary
obligation.
Metrobank v. ASB
The dacion en pago program and the intent of ASB to ask creditors
to waive the interests, penalties and related charges are not
compulsory in nature. They are merely proposals for the creditors
to accept. There was even an initial discussion on these proposals
and the majority of the secured creditors showed their desire to
complete dacion en pago transactions, but they must be based on
―mutually agreed upon terms.‖
The purpose of rehabilitation proceedings is to enable the company
to gain a new lease on life and thereby allows creditors to be paid
their claims from its earnings.
Sobrejuanite v. ASB
The purpose of suspension of the proceedings is to prevent a
creditor from obtaining an advantage or preference over another and
to protect and preserve the rights of party litigants as well as the
interest of the investing public or creditors. It is intended to give
enough breathing space for the management committee or
rehabilitation receiver to make business viable again, without having
to divert attention and resources to litigations in various fora. It would
enable the management committee/rehab receiver to effectively
exercise powers free from any judicial/extrajudicial interference that
might unduly hinder or prevent the ―rescue‖ of the debtor company.
Definitions of claim:
Finasia v CA: debts/demands pecuniary in nature
Arranza v BF Homes: actions involving monetary considerations
Interim rules: All claims or demands, of whatever nature or character
against a debtor or its property , whether for money or otherwise. No
distinctions or exemptions.
The FRIA has expanded the definition of claims to include all
claims and demands of whatever nature, whether for money or
otherwise.