Aleezah Gertrude Regado

CREDIT TRANSACTIONS 2 D TRANSCRIPT

SYNDICATED LOAN AGREEMENT Syndicated Loan Agreement

Parties  it’s a loan by a group of banks.

Multiple lenders (acting through Borrower USUAL BANKING PRACTICE  “Single borrower’s limit”
a common agent) (Ayala Corporation)
Consent is manifested by their signatures  bank has a limited amount to lend X.
Consideration
P 600,000,000 Rationale: bank does not want to assume the entire risk of a loan,
banks will band together, and they will lend the required funds.

Basic Structure Recitals or Premises

 Parties (who are the lenders, who are the borrowers  It provide the context of the transactions. Why is the borrower
 Premises –provide context of the loan transaction borrowing or why are the lenders lending the funds. What’s
 Recitals –“whereas clauses” : provide the context of the purpose of the transaction?
transaction  It’s just like in your Consti it will be the preamble. Useless but
 Terms and Conditions sometimes useful. This will provide thecontext.
 Definition of terms  Normally it’s not needed but in case of litigation it will provide
 Interest period the context of the transaction

Terms

Drawdowns
 Loan proceeds will be released or will be taken by the
borrower
 Example : 600 M loan, every drawdown 100M is released by
one lender to borrower.
“lenders may for any cause or reason without notice to borrower
terminate this agreement to lend”
 Meaning : at any point before the release of loan
 The lender may choose not to proceed
 This is for the purpose of an opt out
 the terms of the contract will be the loan, the principal plus
interest, the payment and penalties and other provisions.
 Php 6 Million – repayment date 5 yrs with interest of
11.somethings
 Payable quarterly
*** So you see here the lenders. They’re not just banks. They’re
insurance companies and a retirement fund.
Definitions
 Normally in a contract, we have a separate section defining
important terms in the contract. But sometimes you just
define as you go along.

Commitment
LOAN FORM
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 This is the amount committed by the lenders to lend to the
borrowers.
 Sometimes just by committing to lend, the borrower pays a
corresponding fee which you call a commitment fee.
 It’s a transaction wherein the bank requires the borrower to
pay because the bank agreed to lend. Not even actually
lending, just committing.
Why would there be a commitment fee?
 Because remember perfection of the loan happens upon
release of the proceeds. So there is a period wherein the bank
will make available the funds, and that availability of the
funds will not necessarily coincide with the release of the
funds.
 So there is that period wherein to the mind of the bank, the
bank should be earning on its money that is now parked
because it has to be released to the borrower at anytime
during the commitment period.
 That period wherein the funds may be released.
So in certain market conditions, there is a requirement to
pay a commitment fee. Or, let’s say you have a syndicated
bank here, just because they are participating they will also
charge you another participating fee. Because they agreed
to be a part of this consortium of lenders
Interest Rate
 Here you have an interest rate that is fixed. It’s very high
actually that time, 11.3135% per annum.
Amount and Terms
 Here the lenders commit up to P600 Million. And it says the
lenders agree to allow a drawdown.
What’s a drawdown?
 It’s a fancier way of saying release of the loan proceeds.
 When the borrower gets the money, it’s what you call a
drawdown.
 Drawdown date = date of release of the proceeds
 For every drawdown, the borrower issues a promissory note
 There’s this additional document : PN : incorporating the
terms and conditions of the loan agreement
Qualification.
Here there is a commitment to lend but there’s a qualification.
 “The lenders may, for any reason and without notice to the
borrower, terminate this Agreement to lend”
 So it’s just like saying we are agreeing to lend now but prior to
the actual release, the perfection of the loan, we could
terminate this agreement and we will have no liability.
Is that valid?
 This is not the case of a purely potestative suspensive
condition dependent on the sole will of the debtor.
 Because from the get go, there is a commitment to lend.
 But the bank is just saying, yes we are committing to lend
now, but tomorrow, we can say that we’re backing out and we
will have no liability.
 More like a resolutory condition
 unilateral right to terminate. It’s not even a suspensive
condition, it is just a right to terminate.
Representations and Warranties
 Boiler-plate provisions for any big transaction.
 Lender/Borrower –makes warranties (corporate existence,
having necessary licenses and permits, stockholders
approval)
Events of default
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 Its stated to pay a monetary obligation on due date =
payment default
Now, this is what happens
Day 1 Lender agreed to lend P600 Million
Day 2 Lender released proceeds resulting to perfection of
Loan Contract
Under this agreement and this is usually what happens in a loan
transaction.
 There is a loan contract when the lender releases the loan,
the borrower will issue a promissory note in exchange.
 So, this will evidence the release of the loan proceeds as well
as the commitment to pay the obligation.
Meaning, the loan received in accordance with the terms of
the loan agreement.
So you have two documentations of the loan:
(1) the loan contract and
(2) for each draw down you have a promissory note.
Interest
 There’s a default penalty of 12% per annum on top of the
interest so it’s possible for you to agree on a penalty in case of
default. So you have an interest and then a penalty.
Repayment Date
 Of course when you have a loan, you have a Repayment date.
 I think the term of the loan is 5 years so you there will be a
repayment of the principal on the 5th year.
Prepayment
 When you do loan transaction this is what you look at.
 When you have a prepayment cost, it allows the borrower to
prepay at anytime following certain conditions.
Normally, right now, when you do transactions like this and you see
this, you can ask it to be waived because it’s a borrower’s market
right. You can ask that there should be no prepayment penalty and
you should be allowed to prepay anytime. In fact, for a consumer’s
loan like housing loans, you’re allowed to prepay anytime without
penalty.
 There was a time like this one, wherein if you prepay, you
have to pay the bank x amount.
 Why? Because the bank committed the funds for a given
term. Now, they have to find other investment avenues
 Therefore, the borrower should compensate them. Because in
the mean time they will have to find where they will bring the
money now, which will not earn anything until they find a new
investment avenue.
If you don’t need funds, will you borrow? Do you have benefits if you
borrow?—Vetting your reputation in the financial market. To deem
yourself as credit worthy
Conclusiveness of Lender’s Books
 The computation of the lender is conclusive unless there is
manifest error.
 Some people question this as it is a unilateral imposition. [No!
You have to show that there’s error. If there’s no error then it
should be conclusive.]
Use of Proceeds
 The loans shall be used exclusively to finance the borrower’s
working capital requirements.
 Who’s the borrower here? Ayala Corporation.
 So it should be used only for business.
Why do you have to stipulate that? Anyway, ownership transfers
from the borrower, why is it necessary to stipulate the use?
 Because the lender will be concerned with payment and the
borrower might be using it for risky transactions and might
end up using the money.
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 So it’s the form of control of the lender to make sure that the
loan proceeds will be used for a purpose that will insure the
payment.
 Otherwise, there is a greater risk of default if there is no
control that is why you have to control it.

Example:

 Let’s say if I borrowed supposedly for business and then after

borrowing, I use it to buy expensive cars, which are pretty
useless, then there is a greater risk of default because it’s a
form of a control.
 If you look at it, it’s not really necessary but it’s for the
purpose of insuring the payment.
 Legally, it’s not required because ownership passes to the
borrower.
 Therefore, borrower will have full discretion on how to use
the money.
 But to control the risk of default, the lender can impose a
specific use.

Take note:

 There could be no offsetting so if you’re going to take the

bank even if there’s another transaction wherein the bank
owes, there’s a stipulation that there shall be no offsetting.

Will that be enforceable?

 Yes and besides if it’s invalid, the validating will be on the

borrower.

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Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

CREDIT TRANSACTIONS Agreement Follow such agreement

of - Will the interest earn interest?
Wrap up payment - GR:
of interest There shall be no compounding of
LOAN
interest
 There’s interest only when the parties agreed in writing - Except
 It can also occur by virtue of damages (interest by virtue of 1 when there is judicial demand
(filing of complaint in court)
damages)
2 agreed upon in writing that there
Loan/Forbearance of Not-loan or
shall be compounding of interest
money forbearance of
money
Mutuum (loan) / Interest  there is a stipulated rate (of course you follow it)
Forbearrance (estorres
case) –allowed use of  In case of default (12% pa) , it shall continue to be the basis
funds for the mean time of accrual of interest based on damages
Interest Legal interest rate 6% 6% pa
(prior to July 1,2013 12% - Basis What if the contract is not a loan/forbearance of money, example
pa) Civil code sale?
- Basis interest Article
fixed by BSP 2209 Syndicated Loan agreement
- If parties agreed
Parties
for an interest
rate, it will be Multiple lenders (acting through Borrower
followed a common agent) (Ayala Corporation)
Judgment It will continue to be the 6% but the basis Consent is manifested by their signatures
(Final and legal rate of 6% will be interest Consideration
executory) for P 600,000,000
loan/forbearance
of money
(estorres v.  Here you see here a form of a contract
supanagan)
- It is now Title:
a
 what the contract is : Syndicated loan agreement
monetary
obligation What is a syndicated loan agreement?
- No longer
based on  Group of banks lending to one borrower
2209
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CREDIT TRANSACTIONS 2 D TRANSCRIPT

 Why do we have that one? Certain lenders don’t want to be
fully exposed, sometimes there is a legal limitation (single
borrowers limitation)
 It’s just like making an investment, you don’t want to put
your money in one single venture
 You can provide a section for definitions
 Importance : common understanding of the terms used in the
contract and to avoid ambiguity
 Use only one term all throughout
o Advance- amount to be lent to the borrower

Parties Stages
Day 1 Signing :
 Lenders : banks, insurance companies and investment house you have a contract to lend and borrow
and a retirement fund lending , trust department of a bank , Day 2 Drawdown
investment house you have a perfect contract of loan
 Therefore you have multiple lenders and a single borrower release of loan by the lender
 Single borrower: Ayala Corporation  When the lender releases a loan, the borrower
 Third party : Insular investment as an agent of lenders (like a must issue a promissory note
representative of all the lenders handling certain  Each drawdown = another promissory note
administrative matters like notices, distribution of  Tax due on the note : Documentary stamp tax on
communication) the promissory note
Day 3 : Payment
Date

 Better if there’s only one date appearing in the document,
above or at the bottom
 Either the date of signing or the date of notarization
 If you have different dates, rules may apply
 For example BIR example, will assess based on the earlier
date
Whereas clauses/Recitals
 P600,000 divided based on a schedule, each lender only agreed
to lend up to a certain amount
Interest payment date
 Quarterly, on the last day of the quarter
 Express 3 months and not quarter.
 Otherwise it may be construed differently.

 Will provide the premises for the context of the transaction Interest rate
 In this case: the borrower needs loan of P600,000 to finance  11.3135% -- fixed rate, meaning there is no adjustment all
its working capital requirement throughout the loan.
 In a certain case, the court was able to decide what type of
contract is involved based on the whereas clauses: it provides Repayment date
a context of the transaction
 Due date
Definition  Payment of loan in full : 5 years from the initial borrowing

 You can either define as you go along (example: while you AMOUNT AND TERMS
write a contract, provide so)
 Lenders confirm their obligation to lend P600 M
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 Qualification:
 lenders may for any cause or reason terminate the agreement
without notice and without prejudice to any obligation already
incurred by the borrower
Availability of the loan
 Provides that how the law should be made available. It’s like
a ritual.
 Lenders will make available the funds at their respective
offices
 But what actually happens, they place an account and the
proceeds will be sent to that account
 Each release of the proceeds = promissory note
 How do you borrow? There is (a) a notice of borrowing,
and(b) a certificate issued with each borrowing, (c) a
certificate confirming the representations and warranties,
and other sets of documents. Then the bank can release in
tranches depending on the agreement.
 So in a contract of loan you have 2 documents (1) Loan (2)
Promissory note
When you see a loan contract
 You insert special provisions
 But there’s this boiler plate provisions, which means its
particularly the same
 Only special stipulations are added
Prepayment
 When you do loan transaction this is what you look at.
 When you have a prepayment cost, it allows the borrower to
prepay at anytime following certain conditions.
In oblicon : you can’t force pre-payment because there is benefit of
term
Here, the following conditions are:
1. There should be prior notice, the payment must be given on
an interest payment date,
2. it must be in multiples of so many millions.
3. But there is a kicker, aside from paying accrued interest
there must be a payment of a prepayment penalty.
 If you are the lender you will insist I the pre-payment penalty
 You basically lose the benefit of the interest that will accrue
during the remaining of the term and you have already
committed funds
 If you are the borrower, you negotiate for the removal of this
because you want to pay anytime without any penalty
 Here the borrower allowed a pre-payment
 There must be prior notice and payment is given pro-rata to
lenders, it shall be made on an interest payment date
WHY? -- simplicity of administering the loan
 Normally, right now, when you do transactions like this and
you see this, you can ask it to be waived because it’s a
borrower’s market right.
 You can ask that there should be no prepayment penalty and
you should be allowed to prepay anytime. In fact, for a
consumer’s loan like housing loans, you’re allowed to prepay
anytime without penalty.
 There was a time like this one, wherein if you prepay, you
have to pay the bank x amount.
 Why? Because the bank committed the funds for a given
term. Now, they have to find other investment avenues
 Therefore, the borrower should compensate them. Because in
the mean time they will have to find where they will bring the
money now, which will not earn anything until they find a new
investment avenue.
 If you don’t need funds, will you borrow? Do you have benefits
if you borrow?—Vetting your reputation in the financial
market. To deem yourself as credit worthy
Conclusiveness of Lender’s Books
 The computation of the lender is conclusive unless there is
manifest error.
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 So if you can show that there’s error there may be a
correction, otherwise it would amount to unjust enrichment
 Some people question this as it is a unilateral imposition. [No!
You have to show that there’s error. If there’s no error then it
should be conclusive.]
Use of Proceeds
 The loans shall be used exclusively to finance the borrower’s
working capital requirements.
 Who’s the borrower here? Ayala Corporation.
 So it should be used only for business.
Why do you have to stipulate that? Anyway, ownership transfers
from the borrower, why is it necessary to stipulate the use?
 Because the lender will be concerned with payment and the
borrower might be using it for risky transactions and might
end up using the money.
 So it’s the form of control of the lender to make sure that the
loan proceeds will be used for a purpose that will insure the
payment.
 Otherwise, there is a greater risk of default if there is no
control that is why you have to control it.
Example:
 Let’s say if I borrowed supposedly for business and then after
borrowing, I use it to buy expensive cars, which are pretty
useless, then there is a greater risk of default because it’s a
form of a control.
 If you look at it, it’s not really necessary but it’s for the
purpose of insuring the payment.
 Legally, it’s not required because ownership passes to the
borrower.
 Therefore, borrower will have full discretion on how to use
the money.
 But to control the risk of default, the lender can impose a
specific use.
Funding and Yield Protection
 It’s simply this, if the lender lends you P600 Million
 All payment due to lenders, must meet such amount, even if
there’s a change in law, taxation scheme or any adverse
circumstance
 When you practice, you have to learn to write this lengthy, the
terms matter
 The payment shall always be in full regardless of anything
that may be imposed by the government
 EXCLUDING (taxes imposed on the overall income of the
lenders) –that for be the account of the borrower
 Corporate income tax—for the account of the lender
 The borrower should pay P600 Million plus the interest. Let’s
say for the interest, the lender wants to get 1% per month or
P6 Million and it’s valid.
o The funding and yield protection, what does it say?
 That this 1% per month should be received by the lender
without any deduction whatsoever.
 It should be received completely by the lender. Whatever
taxes that need to be paid based on the payment of the
interest should be paid by the borrower.
 So if there will be an additional 0.1% to be paid, the amount
should be grossed up in such a way that upon payment of the
interest, the P6 Million would be the net amount to be
received by the lender.
 It’s just like saying we will receive the amount of P6 Million
completely without deduction.
(b) amount to be paid to lender should be grossed up, the lender will
still receive 1 million
 whatever happens, the lender should receive fixed amount
without any deduction
 Except : Lender –shoulders tax on its overall income

(d) borrower’s obligation under this section shall survive the
repayment of the loan –it shall be for the account of the borrower
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
What will be the taxes imposed?
 Let’s say I think for banks lending it’s the gross proceeds tax
that’s imposed on the interest and then this is how we
negotiate, this is accepted by the bank.
 You cannot pass on the tax imposed on the overall income of
the bank.
 So for income tax purposes, let’s say withholding, it should be
part of this.
 That’s how you negotiate. But generally, if you’re part, on the
side of the bank, you use this clause saying basically that we
have to receive P6 Million exclusive of all deductions.
 The net interest proceeds should be P6 million a month.
 That’s why they’re called a syndicate of tax, they’re like
gangsters.
 They impose a lot of fees on you. If you look at that provision,
if there is a change in law, that will require the lender to pay
some form of tax to the government.
 This rate should be grossed up to cover that extra imposition
so that in the end, the lender will get 1% of P600 Million.
 If there’s an imposition that will result to a deduction of 0.1%,
again this amount should be grossed up so that it will be 1.1%.
 So when this is deducted 1% will still go to the bank, P6
Million still.
Change of circumstance : law, rule, etc
 Increase the cost of lenders in obtaining the loan /cost of
compliance
 Borrower shall either pre-pay the loan pursuant to the
prepayment cause or shoulder the cost
 Based on Solid bank case
Representations and Warranties
 Boiler-plate provisions for any big transaction.
 Lender/Borrower –makes warranties (corporate existence,
having necessary licenses and permits, stockholders
approval)
 Looking at the bottom there is a representation –affirm the
fact that a corporation is a validly existing corporation :
check the business permit, check the SEC
 Confirm representation and warranty : check board
resolution allowing the borrowing/ stock holders consent
Enforceability and validity
 Check corporate existence
 Check if there are no laws that will be violated by the
contract
No breach
 When the borrower executes the loan agreement, the
borrower will not breach any loan/corporate rules
 How do you know? –certificate : Ask corporate officers to
certfify
No default
- Ask finance guy/ executive officer of the company
THREATENED ACTION or LITIGATION:
 Again you will rely, on the in house counsel that these are
the only cases pending right now.
 Of course sometimes you actually don't have to say there are
no pending or threatened litigation affecting the transaction
or involving any asset of borrower. Sometimes you can just
disclose.
 There's no way a big corporation will have no legal case.
Somehow it will have case involving its properties.
MATERIAL AND ADVERSE.
 You look at Item H- pending or threatened litigation.
- "There are no pending or threatened legal actions before any
court or tribunal against or affecting the borrower or any of
its assets"-- this is important, the clause after that one --
"WHICH IF ADVERSELY DETERMINED MAY MATERIALLY
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
AND ADVERSELY AFFECT THE FINANCIAL CONDITION
OR OPERATION OF THE BORROWER."
 Because sometimes there will be default, but that default
may not be material and adverse to the business of the
borrower.
Example: Let's say borrower has credit cards for all key officers.
Then one day, he forgot to pay by inadvertence. That's a default.
But let's say it's only worth P10K, even if the credit card company
wins, it's not material and adverse because it's only P10K.
FINANCIAL STATEMENTS: again you have to rely on a counter
representation or certification by the relevant finance officer.
Ranking
- Promissory note 1, promissory note 2, promissory note 3
- Preference of promissory note
- Example when one is notarized, it shall be prioritized
Positive covenants—certain undertakings that should be fulfilled by
the borrower during the subsistence of the loan
 Obligation to do
o A reiteration of how the proceeds would be used
o Periodically submit reports to the lenders
o Borrower shall ensure that it continues with its
corporate existence, would have necessary government
permits and approvals
o How do you prove that? –General information sheet
submitted by the corporation, audited financial
statements
o Undertaking to pay and discharge taxes and other
charges
Debt-to-equity ratio
 Based on the financial/ accounting standards
 These are controls of the bank for the lenders
 If the borrower exceeds this financial ratios, there is default =
a violation of the provision of the contract
Negative covenant –reverse. It is the borrower saying that the
borrower will not encumber any other asset in favor of other
creditors unless the benefit of such encumbrance is also given to the
lender
o In effect you are saying: Borrower shall not secure any
indebtedness. None of the properties must be secured
by any other security arrangement
o Undertaking of the debtor not to encumber any of his
assets
o Unless benefit of encumbrance is extended
proportionately to the other creditors
o EXEMPTIONS—encumbrance already existing at time
of loan and disclosed to the lenders in writing
o Statutory liens should be excluded
 Periodically the borrower shall inform the lender that there is no
default through a certificate
Sale or Lease of assets
 Consent of borrower must be given
 All/ Some of the assets
Dividends
 Borrower shall not pay dividends to its stockholders (other
than dividends payable solely in shares of its capital stock
following an event of default)
 Ayala : public corporation, so you must insert this provision
 But there can be dividend declaration on the form of shares,
there’s no cash coming out from the company, only shares
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
Events of default
(1) Its stated to pay a monetary obligation on due date =
payment default
Grace period
 2 days: not really a grace period (for administrative lapses)
 Given only because of failure to pay due to inadvertence , for
those lapses, not for the purpose of raising funds
 There is no automatic default
(2) If borrowers fails to perform any other term, obligation or
covenant in the loan, Longer period of 5 calendar days :
(3) Error in the representation of borrower
(4) Cross default
Cross default provision
 You default in one contract with the narrower so the
borrower defaults in one contract, he is also deemed in
default in this contract
 Borrower in default in one contract, he is also in default of
the loan agreement.
 If debtor defaults in a transaction A, even if there is no
default in transaction B, B can go after the debtor
 The purpose of cross default is to place them on equal
footing. They can both run after the debtor especially if the
debtor is in a precarious financial condition
Remedy of borrower in a cross default
 You can at least put a threshold depending on the capacity of
borrower.
 Example threshold 10 M dollars –default in credit card
 Meaning : if it’s this amount, we can readily absorb. It shall not
amount to default
 If you can’t provide an amount, qualify what kind of default
you are talking about : what affects MATERIALLY AND
ADVERSELY AFFECT your ability to fulfill your obligation
 But it’s better to have an amount so there may be an amount
to qualify
(h) default based on the assessment of lenders
 change in the circumstance of the borrower, change
according to interpretation of the borrowers, would
reasonably affect their ability to comply
 There may be an issue here because it’s the lender who
determines
 But generally as long as the lenders would use a standard to
determine such, it shall pass any judicial scrutiny
Attachment/Garnishment
 Default event contemplates: an asset of a borrower is
attached
 Attached –placed under custody of court subject to the result
of dispute /judgment
 Levy—enforce upon execution, the assets of the losing party
 Borrower’s concern – just like a cross-default provision, there
must be a qualification (materially and adversely affect
obligation)
EFFECT OF DEFAULT
Acceleration clause
 Commitment—terminated
 Entire amount of loan, due and payable
 Borrower loses the benefit of the period
 Borrower will pre-pay
 Be careful with a penalty, in oblicon, such penalty substitute
interest
 Place : it shall be in addition of the interest
Indemnity clause
 Anything : for the account of the lender
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 contractual transfer of risk between two contractual parties
generally to prevent loss or compensate for a loss which may
occur as a result of a specified event
SECTION 9.01- Miscellaneous provisions
Right of Set-Off- "
 Borrower grant the lenders a general lien"The BORROWER
hereby gives the LENDERS a general lien upon, and/or right
of setoff, and/or right to hold and/or apply to the loan
obligations...any amount or property in the possession, control
or custody of the lenders."
 This is about legal compensation If you're the lender, you
have money in your possession.
 The relationship between borrower and lender is debtor
creditor and vice versa. Technically you can have offsetting,
if there is another transaction.
 There was a case before when somehow money passed
through the bank. Somehow it was remitted through one
bank. The lender and borrower had a transaction. In another
transaction, the money was remitted through the bank, which
was not even a depository bank. I think the bank there, offset
or compensated the obligations because the borrower was in
default. The Court said it was not allowed.
 Remember that Citybank Case?To avoid those issues, there
is this provision: that ANY property or funds of the borrower
coming to the possession or control of the lenders can be
made subject to compensation.
Right of Sell and Transfer of properties
 power of attorney to sell
Interest several
 indicates that lenders are joint and not solidary
VENUE
 know where a case would be filed
 Example there’s multiple parties with different locations
 Stipulate a venue of any action
 It should be exclusive
 Or you may specify : arbitration
 Provide the governing law and the institution which shall
administer the administration
9.15 All lenders waive preference in Article 2244 (14) of the Civil
Code
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:
(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)
 Should any of the lenders be minded to have their
promissory note notarized, there shall be no one to be
prioritized
 Will discuss this in the concurrence and preference of credits
OPINION OF COUNSEL OF BORROWER
How do you check the veracity of the warranties?
 You cover yourself by a certificate to affirm a fact under
oath
 Specify that you are rendering an opinion only based on
Philippine law
 Oblicon provision : Art. 1341. A mere expression of an opinion
does not signify fraud, unless made by an expert and the
other party has relied on the former's special knowledge. (n)
OPINION OF COUNSEL OF LENDER
 Signature of lenders representative are genuine
 All matters and facts : true
 It’s just the counsel, confirming the proper execution of the
loan contract
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

APPLICATION OF PAYMENTS ACCOMODATION PARTY

 When you receive payment, there is a sequence of what you
pay first. - Does not receive any proceeds of the loan
(1) COST (penalties and interest and then principal)That's why
Accomodation mortgagor
you have that presumption, if there is a payment of a later
installment, the earlier installment is paid.
(2) INTEREST SEVERAL- this is just a reiteration that the
lenders,,they are not solidarily obliged in this contract LOAN
- That's pretty much it. L--------------- B
- The only issues are the default provissions as well as certain ------------------ Indemnity agreement or Security
undertakings such as the negative covenants.
- SO if you are the borrower make sure that they will not
interfere with your business operations. GUARANTY
L--------------- G
--------------
“solidarily guarantees payment of an obligation”

 Guarantor is transformed as a surety

Guaranty—lender cannot go directly to the guarantor; guarantor
(Carodan v. China Banking corporation insures only the solvency of the borrower .

- Provision of law states that when a guarantor binds himself You have something between : SURETY
solidarily liable Provisions on solidary obligations must apply
- Lender can only go after the surety if debtors fails to pay
- That is not necessarily true
obligation on due date. Non-payment is a condition. Surety
- Surety cannot be a solidary debtor, there must be a default
insures payment
first
- You use this doctrine When you have a guaranty or any collateral contract (mortgage or
- Rosalina along with the principal debtors Barbara and pledge)
Rebecca is still liable as a surety for the deficiency amount
- There was an agreement: surety agreement –changes could - Parties : Lender and Guarantor
be made to the principal obligation without notice or consent
Principal contract must exist before the contract of guaranty.
of the surety = pre-consent or pre-approval of changes in the
Because if it is otherwise, the guaranty contract would be void
principal obligation
because there is lack of cause.
- This is one way of extinguishing a guaranty/surety = both
agree to materially alter as to increase the burden on the CONTRACT OF GUARANTY IS ESSENTIALLY GRATUITOUS
surety/guarantor
- The surety & guarantor can claim extinction of surety or  : There is still indemnity when the debtor pays.
guarantee.. Way out –stipulate that surety/guarantor  The only meaning of gratuitous is that by default, a
consents to any change even without notice to them guarantor does not get a fee for acting as a guarantor.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
 Of course, the parties can stipulate otherwise, or an onerous
guaranty may inferred based on circumstance. What is that
circumstance? --- Insurance.
WHO CAN BE A GUARANTOR
- He must have legal capacity
- Corporation : they must secure the consent of the board of
trustees IF :: it is in the usual course of business
- Consent of SH 2/3 of the outstanding capital stock of the
corporatiob: not in the usual course of business/ not its
primary purpose under the Articles of Incorporation
MARRIED PERSONS
- Consent of the spouse is needed. Without it, it is void
- Void : depends on : whether or not it will be enforced against
the conjugal assets
- It is void against the conjugal asset
- Special kind of void: because it constitutes as transfer and
continuing offer which can be cured by the other spouse
giving consent
- Consider whether or not it redounded to the benefit of the
corporation as SH who loaned to the President
- This is not the benefit contemplated by loan
- Jurisprudence: If the husband contracted merely as a surety,
it does not fall to a contract beneficial to the family. There
must be a direct benefit.
BANK CANNOT EXTEND A GUARANTY
- Bank cannot guaranty
- But there is such a thing as bank guaranty; it is not the
guaranty contemplated by the Civil Code
- For example a letter of credit : valid
Seller------------------- Buyer
- Seller may require a bank guaranty
- Bank : agrees to lend to Buyer in extend for payment,
payment will be the proceeds of the loan payable to Seller ;
- which may be required to submit certain documents : like a
proof of payment
FORMAT FOR A GUARANTY
- Statute of Frauds Article 1403
- Exception : when there is partial performance
- What is the consequence if Borrrower does not consent?
- It’s like a payment by 3rd party without the consent fo the
debtor . Guarantor can only recover to the extent that the
borrower was benefited
- Article 1302. It is presumed that there is legal subrogation:
- (3) When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter's
share. (1210a)
- If Borrower was informed and he does not reply = Implied
consent, there will be subrogation.
Article 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)
Valid contract = You have all the essential elements of a contract
Article 2053. A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (1825a)
- There must be a principal obligation, which is the loan first
on day 1 and then either also on day 1 or 2, there is a
guaranty for the loan and the future loans.
- This is what is contemplated by Art. 2053. This is similar to
what you call in practical terms, a credit agreement with a
bank, or a credit line. The bank agrees to lend you up to a
certain amount on day 1. You can draw from that line at
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
anytime after day 1. So on day 1, you can now have a
guaranty.
- There is no loan obligation yet as of day 1, but there is a valid
principal obligation. The amount will be known only upon the
release of the proceeds, say day 3. You have a valid principal
obligation at the time of the constitution of the guaranty.
- Dragnet clause : Security covers present and future
obligations. It is an all-encomapassing statement.
- Example : mortgage. One principal obligation must exist.
Article 2054. A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor. (1826)
- GR: Simple/ Indefinite guaranty : Principal + interest +
penalties + judicial costs
2055 (2) 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 judicial required
to pay
Judicial demand  Filing of complaint
- To stop the accrual of cost
EXAMPLE
- On due date : P15,000,000.
- Guarantor limited liability to 5 m
- Lender wanted a real estate mortgage
- G paid P20,000,000
- INVALID : Guarantor cannot be held liable for more than
what is required in the obligation
JSP: That’s the provision of law, but there are instances when the
guarantor pays more.
- It can be done if you separate a contract from the guaranty
- You cannot place it in the contract of guaranty because the
court may nullify it.
- Example : Contract : Should lender be required to go after the
guarantor, G has to sell property to L at a 5 million discount
- Yes this is like a triggered suspensive condition
Article 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)
- Integrity =
- Can GMA be a guaranty
- *** Once the creditor accepted (x) change your mind
- Not every choice is a waiver = you must have knowledge
- You can question : before acceptance
Article 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)
Grounds
1. Convicted : Crime involving dishonesty
2. Insolvent
- Creditor may demand replacement
EX: Creditor specified the guarantor at the stipulation
 Court of First instance : where the case was filed : TC:
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
BENEFIT OF EXCUSSION
If B has asset, like an account receivable
L must first exhaust the assets, for example :
- Receivable = Accion Subrogatoria
WHERE THERE’S NO EXCUSSION
1. Guarantor expressly renounces it
2. Guarantor binds himself solidary with the debtor
3. In case of insolvency of the debtor
4. Absconded or cannot be sued within the Philippines unless
he left a manager or representative
- Debtor absconded , but can be sued in PH = benefit of
excussion will remain
- Manager or representative = someone who has authority to
receive summons that will bind Borrower
- Sec 50 Rule 40 of ROC
- Sec 40 Rule 14 : summons can be served by publication if
borrowers whereabouts is unknown
5. Excussion would be a mere futile exercise
- Guarantor must point out to the assets available
INSOLVENCY = assets are less than liabibilities
It does not necessarily mean no assets : how is it determined is a
court matter
STEPS :
1. Lender should sue first the borrower . If judgment cannot be
executed in any asset of the borrower
2. Lender can now go after the guarantor
It’s possible for A to sue 2 persons <allowed>
In the case of guaranty, you are not allowed to do that
Guarantor can appear/intervene in the case and raise expenses with
respect to the guaranty, but it does not divest him/impair the benefit
of excussion
Lender’s problem: litigation against the borrower: Guarantor cannot
be included. There is still a benefit of excussion
- G not a party, G may hide the assets, squander the assets,to
make himself judgment proof
- That’s why guaranty is a weak security
GUARANTOR MAY HAVE A SUB-GUARANTOR
G1: benefit of excussion at the level of principal debtor and at a level
of a principal guarantor
Article 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
IT IS POSSIBLE TO HAVE MORE THAN 1 GUARANTORS
- This guarantors will have benefit of division
- They are liable in equal shares = benefit of division
- A reiteration of default rule about joint debtors
Cross reference:
Article 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid may
demand of each of the others the share which is proportionally owing
from him.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent. (1844a)
- Applies when there is judicial demand or the principal debtor
is insolvent ; meaning there is no more benefit of excussion
OTHERS WILL SHOULDER SHARE OF G2
 Benefit of guarantors ceases with the same manner as the
benefit of excusssion
- Article 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;
- (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)
 Debtor = Co-guarantor
 Article 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)
 Notice : made before payment
 Indem nity { 2066} and Giving Notice before Paym ent
 { 2067-2070}
 A. Nature of I ndemnity and Im portance of Giving Notice
 There is a guarantor, debtor defaulted, the assets are zero, the
guarantor paid; what’s the right of the guarantor? He can claim
indemnity from debtor. Even without indemnity undertaking,
there will be that indemnity. And we said, if guaranty bydefault
is gratuitous, it doesn’t mean that there is no obligation to pay
indemnity. There will still be an obligation to indemnify, unless
gratuitous nature of guaranty refers only to payment of fee of
guarantor.
 What will the indemnity consist of? One of which is interest.
Even if there is no stipulation, and even if parties don’t agree.
Why is there requirement to pay interest? And from what
moment?
 From notification of payment, not payment of debt. If there is
no interest, acquire the same amount paid. But law says there’s
legal interest. 6% because it is a forbearance of money.
When guarantor notified the debtor, the notice placed the debtor in
the position to stop the accrual of interest! You pay interest the
moment you receive notice, if you don’t want to pay interest, pay
immediately! So if debtor will raise notice, debtor assumes certain
risks. Debtor has to pay interest. This is just like in consignation. Why
the creditor assumes the cause of a valid consignation is because in
consignation, there is notice given in every turn and so there is an
opportunity to stop the cost. That’s the reason behind this rule.
 B. Benefit of Giving Notice
 If the guarantor pays, what should the guarantor do? Notify
debtor first!!! Benefit? Notice is for good measure. Without
notice will he be entitled to indemnity? YES still. But whats the
risk?There may be double payment. Debtor can raise defenses
like if there was already partial payment or offsetting of the
debt. The notice is meant to foreclose any defense that can be
raised by debtor! Debtor will have the burden to raise
- BASIS FOR DAMAGES IN OBLIGATIONS : WHEN DEBTOR
IS GUILTY OF FRAUD, OR ANYTHING THAT
CONTRAVENES TENOR OF OBLIGATION : ACTUAL
DAMAGES.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

LOAN
L B
Indemnity Agreement

G
MONEY
- You don’t have any incentive to have compromise
- They cannot put that they cannot agree : split
- Article 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)
- 2067 works both ways
- In this case: the remedy is that they enter into a separate
and distinct contract for the incentive
- IT MUST BE RELATED BUT INDEPENDENT TO THE
PRINCIPAL OBLIGATION

CARODAN : Guarantor only calls for the

QUIZ: depends

- Coverage : loan and guaranty

- Whether we discuss it or not
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

GUARANTOR PAYS (7) If the principal debtor is in imminent danger of becoming

insolvent.
- Liable for the whole amount
- Legal interest
- Expenses: to notify the debtor - Purpose : enable guarantor to (1) Ask for security (2) Ask to
- :::: defended against/satisfying claim of the creditor be discharged from the guarantee
- Damages - Consent : Lender
- Subrogation

NOTICE \
EXTINCTION OF GUARANTY
- Material to purpose of avoiding/ pre-empting defenses that
may arise
BEFORE PAYING : GUARANTOR DOES NOT HAVE THE RIGHT TO
ASK FOR INDEMNITY
Exception : Article 2071
Article 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot
be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor
intends to abscond;
- Extinguishment of the Principal obligation
- Creditor gives extension to the term without informing the
guarantor : this also includes the shortening of the period ---
there is adverse impact on the liability of guarantor
>>> any material alteration
- CAUSE OF THE EXTINGUISHMENT OF OBLIGATION IN
GENERAL
- Let’s say the amount is P10,000,00, parties agreed to increase
it to P25,000,000 : there is material alteration, thereby
extinguishing the guaranty.
- In the surety agreement I gave you, it covers all forms of
modification of obligation, so if you are working for the
creditor, that is something you watch out for.
- Guaranty is also extinguished : when some act of the creditor,
guaranty could not be subrogated to the rights of the
creditor
- Example : Debtor and Creditor (P10M) secured by mortgage,
and is secured by a guaranty. Creditor through some act
discharged the mortgage
- The guaranty : extinguished. No longer any right to
subrogate to the rights of the mortgagee. (automatic
extinction of the guaranty)
- What if it’s a surety undertaking? Will you have the same
result? Based on jurisprudence, it will not extinguish the
surety. Article 2080 only applies to guaranty
- Why? Surety , it’s liability is a kin to a solidary debtor.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
- Defenses of guarantor : (1) Defenses that could be exercised
by debtor (2) Defenses of guaranty itself, like benefit of
exhaustion.
LEGAL AND JUDICIAL BONDS
 Just take note: we’re actually dealing with surety
 No right of exhaustion
 Bonds in the course of litigation, like a bond to support an
attachment or bonds needed for a writ to be issued by the
court
LOOK AT YOUR FORMS
 If you’re the surety you check what? –(1) Check principal
obligation (2) Make sure that you don’t have to go back to the
principal obligation (ex: surety covers all renewals, novation,
etc/ any changes deemed to have been approved)
 In an indemnity agreement, they can agree on any modification
TITLE XVI
PLEDGE, MORTGAGE AND ANTICHRESIS
 LET’S SAY YOU HAVE A LOAN :
Day 1: you enter loan (P10,000,000 loan) Borrower obliged to
pay on a given due date the principal and the interest
Day 2 : Pledgee or mortgagor be the absolute owner of the
thing pledged or mortgaged (legal and beneficial title
- Valid pledge : law enforces some requirements
- Who can be a pledger : Self/ 3P
- Unlike guaranty : it must be a third party
 Parties : (1) Creditor (2) Mortgagor (Debtor himself/3P)
 First requirement : Security arrangement::: there must be a
principal obligation
 Second requirement : Pledgor or Mortgagor should be the
absolute owner of the thing pledged or mortgaged (Legal
possession x Beneficial title)
 Beneficial title – trustor/beneficiary & Trustee
 Beneficial = trustee_
 GR: Lender can rely on the title TCT
 EX: Bank : who must exercise greater diligence
 Stocks : (1) Stock certificate (2) Check with the corporate
secretary : Stock and transfer books = Mortgagee in GF
 Title of absolute ownership : must be at the time they entered
into a contract of pledge/mortgage.
Third requirement : Persons constituting pledge or mortgage : free
disposal of their property
 Corp : Board approval . If not in usual course of business: SH
Approval
 Person : (1) Spousal consent
 Restrictions (1) Civil interdiction (2) Receivership (3)
Garnishment (4) Injunction
 3P : SPA needed
PURPOSE OF PLEDGE :
 Borrower defaults –what are the remedies?
 Foreclose
 Action for collection –amounts to abandonment of pledge
 Later on you understand, this only applies to pledge, value is
considerably less
 Mortgage –huge value : mortgagee can always recover any
deficiency unless there is agreement to the contrary
 If you have a mortgage or pledge, creditor can go after the
properties directly, unlike guarantee: personal undertaking
 Pledge or mortgage creates a lien, attached to the property
itself
 There’s no need to foreclose, you can go directly to the
foreclosure of the property
 GR: mortgage indivisible = whole ; unless the parties agree
otherwise
 Ex; SC case: Lender released only half, mortgage must only
be half
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
IN BOTH PLEDGES OR MORTGAGE
- Law prohibits automatic appropriation
- Pactum commissorium
- Automatic appropriation by the creditor of the thing
pledged or mortgaged upon the failure of the debtor to pay
the principal obligation
- What happens: instead of foreclosure : transfer the property
in their name
- Parties could not agree: default = automatic ownership
- What constitutes as automatic appropriation?
- Ex: Stipulation : upon default pledgee can cause transfer
ownership to pledgees name  pactum commissorium
- Pledgor pledged, 1M SMC Shares :
- Pactum commissorium?
- Ex 2: for the purpose of voting/collecting shares
- Ex 3: Pledgee shall have option to buy  danger where court
can sell to himself
- Ex 4: Pledgee as atty-in-fact of pledger can sell
- None : pactum commissorium
- TEST IF THERE IS EXISTS PACTUM COMMISSORIUM
is whether or not there is no need for extra step to be taken
by creditor
CONTRACT OF LEASE
- Lessor leases in exchange for rent
- Lessee assumes certain obligations (intruders, peaceful
possession etc)
- Should penalty be due –they have an obligation –penalty –
lessee gets land
- Not pactum commissiorium because THIS IS NOT A
PLEDGE OR MORTGAGE
MORTGAGE PROPERTY =encumbered where in fact it’s only a
second contract ; mortgage, you can have a registered one and an
unregistered one.
That does not apply to pledge? Why? Because you have to deliver
certificate of stock. No second pledge
PROVISIONS
CHAPTER 1
Provisions Common to Pledge and Mortgage
Article 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)
Article 2086. The provisions of article 2052 are applicable to a pledge
or mortgage. (n)
Article 2087. It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the pledge
or mortgage consists may be alienated for the payment to the
creditor. (1858)
Article 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void. (1859a)
Article 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.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
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 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)
Article 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable. (n)
Article 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)
Article 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)
LET’S NOW GO TO PLEDGE
 Real contract : perfected upon delivery
 Pledged property needs to be placed in the possession of the
creditor by agreement of the parties.
 Example : you have a pledge, pledgor, pledgee.
Day 1: Pledge
Day 2: Delivery
- Perfected pledge day 2. But there’s a valid contract on day 1
 Object : Personal property ; provided that they are susceptible
of possession because you have to deliver
 Parties: Pledgor and pledgee
 Example : You pledge TCT of Condo  status? (pledge of real
property)
 Valid as between the parties
 Negotiable or non-negotiable instruments may be pledged, if
negotiable must be endorsed.
 Shares of stocks, bonds warehouse receipts or similar
documents (anything that represents ownership of property)
Incorporeal rights may be pledged
 But there must be –proof to be delivered : example certificate
IS THERE FORMAL REQUIREMENT FOR PLEDGE?
- None as between the parties
- To be enforceable against 3P : Public document
- Pay documentary stamp tax
- Notarized : (x) binding to buyer unless he has actual
knowledge.
- Stocks : You have to furnish club the copy of pledge :
generally not required
- ARTICLE 2097
- How do you transfer title : possessed by the pledgor?
- Sales: Constructive delivery .
- Does it really matter if there is transfer of ownership? Yes.
As a creditor you want to limit the person you are dealing
with
Pledge secures payment of an obligation, pledgee has right to retain
object as long as principal obligation susbsist?
IF PROPERTY LOSS: pledgee liable : law assumes fault. He has the
obligation to return the thing pledged. He is liable unless he proves
that it is caused by a fortuitous event.
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
Law provides that pledgee cannot deposit thing pledged to 3P unless
there is stipulation authorizing him.
- Loops: X – may be an agent, therefore not a third person
Pledgor is also liable for hidden defects, like that one in commodatum
Article 2102. If the pledge earns or produces fruits, income, dividends,
or interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or insofar as
the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
- Creditor can refuse : appropriation –principal
- Pledgor can make it an additional security
MISUSE OF PROPERTY
- Pledgor can get the possession (x) the extinction of pledge
- May have somebody designated for the possession of subject
property
- Debtor has the same remedy if the pledgee through
negligence, or willful act, thing is in danger of being lost or
impaired
- In these cases, there is a breach by pledgee
- Obligation not to use and take care of the thing
- Recourse of pledgor, get property deposited in somebody else.
SHARES OF STOCK
- If you are a creditor, why would you ask for shares > principal
obligation : you want some buffer in case of foreclosure.
- P15M : decrease of value of shares  P12 M
- Remedy : (1) debtor can ask creditor for a substitution of
property of equal value (2) cause sale : be sold in a public
auction, proceeds shall serve as a security
- Who’s right prevails? ---under the law, it is the creditors.
Let’s say you have an obligation of P10,000,000 (principal obligation)
then there’s a pledge of shares worth P15,000,000 , if let’s say on due
date, shares are only worth P9,000,000 and pledgor defaults.Pledgee
forecloses and realizes only P9,000,000 = proceeds. You now have a
deficiency of P1,,000,000. We said that the creditor cannot recover.
That’s a peculiar rule with respect to mortgage.
- If you foreclose,, regardless of result it results to extinction of
obligation. That is an absolute rule
WHAT IF IT’S THE OTHER WAY AROUND?
Let’s say on due date, it’s valued at P12,000,000. You have an excess
of P2,000,000 who gets the P2,000,000.
- Here law has a different rule. Parties can agree otherwise.
- You are working for debtor, you place that the creditor
cannot get the excess.
 Sale through public auction may occur –to preserve value of
property which experienced a sudden drop of value. In this
case, pledgee can recover the value. This is not a foreclosure,
therefore it does not extinguish the contract.
 I’m just showing you how you can stress the limits of this
provisions
If somehow, pledgor ends up possessing the property, there is a
presumption – extinguishment
What’s another way of extinguishing pledge without extinguishing
principal obligation? –creditor sues for specific performance.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
LET’S NOW GO TO FORECLOSURE
- Let’s assume you have a lender, there’s a loan payable by
borrower, there’s default and there is pledge.
- How should lender proceeds? Foreclose pledged shares
- Law provides; notarial sale as the default rule
- I sale default rule because parties can agree on different
modes.
- Is a private sale allowed? Negotiated sale? –YES
1st step: Lender goes to Notary public.
2nd step : Notice : pledgor/ 3p : amount, place, time, and other
particulars of sale. Take note, there’s no publication. Public sale:
because it is the notary public. Bidding rules, etc.
3rd step:Public sale No valid sale if only pledgee is the bidder
4th step : Notice of the result of sale. –purpose : afford them the
chance to question any deficiency of the auction ; creditor wants
noticed to be delayed
** law does not provide minimum period for notice
 Take note : anyone interested to property can just pay the
principal obligation and get the property BEFORE there is
public sale
 In a public sale, if pledgor bids, if bid of pledgor = winning
bidder, pledgor preferred. Law wants to preserve ownership :
relevant person
- Let’s say the pledge here, you have 2 blocks, PLDT (Php
10,000,000) and Globe, 2 (P25,000,000) useless service
providers. Loan is worth P20,000,000.
- How can lender foreclose? Can you foreclose it together?
YES. Any excess will go to you as lender, unless there’s
stipulation to the contrary. You get the bonus
- Basis: Pledge indefeasible, it secures one obligation.
- It’s only an option of lender not to foreclose both,. Well, that
doesn’t happen.
PROVISIONS:
CHAPTER 2
Pledge
Article 2093. In addition to the requisites prescribed in article
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)
Article 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
Article 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)
Article 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)
Article 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)
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
Article 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)
Article 2099. The creditor shall take care of the thing pledged
with the diligence of a good father of a family; he has a right to
the reimbursement of the expenses made for its preservation, and
is liable for its loss or deterioration, in conformity with the
provisions of this Code. (1867)
Article 2100. The pledgee cannot deposit the thing pledged with
a third person, unless there is a stipulation authorizing him to do
so.
The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged. (n)
Article 2101. The pledgor has the same responsibility as a bailor
in commodatum in the case under article 1951. (n)
Article 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing
him, or insofar as the amount may exceed that which is due, he
shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of
the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
Article 2103. Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to
the owner of the thing pledged in order to recover it from, or
defend it against a third person. (1869)
Article 2104. The creditor cannot use the thing pledged, without
the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it be
judicially or extrajudicially deposited. When the preservation of
the thing pledged requires its use, it must be used by the creditor
but only for that purpose. (1870a)
Article 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
(1871)
Article 2106. If through the negligence or wilful act of the
pledgee, the thing pledged is in danger of being lost or impaired,
the pledgor may require that it be deposited with a third person.
(n)
Article 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the fault
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
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)
Article 2108. If, without the fault of the pledgee, there is danger
of destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged. (n)
Article 2109. If the creditor is deceived on the substance or
quality of the thing pledged, he may either claim another thing in
its stead, or demand immediate payment of the principal
obligation. (n)
Article 2110. If the thing pledged is returned by the pledgee to
the pledgor or owner, the pledge is extinguished. Any stipulation
to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the pledgor
or owner after the constitution of the pledge. (n)
Article 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish the
pledge. For this purpose, neither the acceptance by the pledgor or
owner, nor the return of the thing pledged is necessary, the
pledgee becoming a depositary. (n)
Article 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the
thing pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if
at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged to
give an acquittance for his entire claim. (1872a)
Article 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)
Article 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee is
deemed to have been received the purchase price, as far as the
pledgor or owner is concerned. (n)
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

Article 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than
said amount, the debtor shall not be entitled to the excess, unless
it is otherwise agreed. If the price of the sale is less, neither shall
the creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary. (n)
Article 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
Article 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)
Article 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his claim,
and deliver the surplus, should there be any, to the pledgor. (n)
Article 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)
Article 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)
Article 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)

Article 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a stipulation
to the contrary. He may demand the sale of only as many of the
things as are necessary for the payment of the debt. (n)
ARTICLE 2120. If a third party secures an obligation by pledging
his own movable property under the provisions of article 2085 he
shall have the same rights as a guarantor under articles 2066 to
2070, and articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor. (n)