Manila Law College

Credit Transactions
Atty. Kitem D. Kadatuan Jr.
I. Credit Transactions
Title XI of the Civil Code begins the subject known in law courses as “credit
transactions.” “Credit” in this connection refers to belief or trust by a person in another’s ability
to comply with an obligation; and “credit transactions” refers to the contracts or agreements
based on said trust or credit.1
a. What is Bailment?
b. Parties in Bailment

A. Principal Contracts in Credit Transactions:

1. Loan (Article 1933)

Kinds of Loan:
a. Commodatum
b. Mutuum
i. Interest (Article 1965) (Monetary vs Compensatory Interest)

2. Deposit (Article 1962)

Kinds of Deposit:
a. Extra-Judicial Deposit
i. Voluntary (Article 1968)
ii. Necessary (Articles 1996, 1998, 1736)
b. Judicial Deposit (Article 2005)

B. Accessory Contracts in Credit Transactions:

Personal Guaranty
1. Guaranty (Article 2047)
a. Guaranty in the Strict Sense
b. Suretyship
Real Guaranty
2. Pledge (Article 2140)

1
Civil Code – Justice Edgardo L. Paras
 - A contract wherein the pledgor delivers to the pledgee or to a third person a
movable for the purpose of securing the fulfillment of a principal obligation.2

3. Real Mortgage
- A contract whereby the debtor called the mortgagor executes a contract in favor
of the creditor called mortgagee for the purpose of securing the fulfillment of a
principal obligation.3

4. Chattel Mortgage (Article 2140)

5. Antichresis (Article 2132)

C. Preference and concurrence of credit

Concurrence of Credits
– It is the possession, during the same period, by two or more creditors rights over
the property of the debtor.
Preference of Credit
- It is the possession of a better right by the creditor over other creditors over the
property of the debtor.

II. Loan

A. Commodatum
1. Producers Bank vs CA, G.R. No. 115324, February 19, 2003 –
Distinguish Mutuum from Commodatum
Mutuum Commodatum
As to type of contract Generally gratuitous or with gratuitous
stipulation to pay interest
As to object on the part of Money or other consumable Generally a non-consumable
bailor thing thing, but it may involve a
consumable thing when the
intent is not to use but only for
exhibition.
As to cause on the part of Pure liberality if gratuitous, Pure liberality
bailor Payment of interest
As to transfer of ownership Ownership transfers to the Ownership is retained by the
bailee bailor

2
De Leon, Credit Transaction
3
De Leon, Credit Transaction
 As to nature of the propertyOnly personal property Only real or personal property
As to who bears the loss The bailee even if it should be Generally the bailor,
through a fortuitous event exception article 1942.
because consumable things
are generic.
As to when the cause and/or Generally only upon the Generally only upon the
object is demandable expiration of the period expiration of the period
stipulated except when there is stipulated except
an acceleration clause 1. when the contract is a
precarium
2. when there is urgent
need of a thing
3. when the bailee
commits any acts of
ingratitude

2. Garcia vs Thio, G.R. No. 154878, March 16, 2007 –

Classification of Contract as to perfection – Articles 1315 – 1316
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the
object of the contract. Delivery is the act by which the res or substance thereof is placed within
the actual or constructive possession or control of another.
3. BPI Investment vs CA, G.R. No. 133632. February 15, 2002 –

Article 1934, Perfected Consensual Contract

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.
4. Pajuyo vs CA, G.R. No. 146364. June 3, 2004 –

Articles 1946, 1947 – Precarium,

Article 1937 - Immovable property may be the object of Commodatum
Article 1933 – Lease vs Commodatum
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it. An essential feature
of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing
loaned until after 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.
Lease Commodatum
As to perfection Consensual contract Real Contract
As to type of contract Onerous Gratuitous
As to who bears the loss Generally the lessor Generally the bailor
As to implied renewal If at the end of the contract the None
lessee should continue
enjoying the thing leased for
fifteen days with the
acquiescence of the lessor,
and unless a notice to the
contrary by either party has
previously been given, it is
understood that there is an
implied new lease, not for the
period of the original contract,
but for the time established in
articles 1682 and 1687. The
other terms of the original
contract shall be revived.
As to allowing use by third Generally allowed unless Generally not allowed unless
persons there is express prohibition the third person is a member
(Article 1648) of the bailee’s household
except when there is a
stipulation to the contrary or
the nature of the thing forbids
such use. (Article 1939)
As to assignment of the object Generally not allowed unless Not allowed as commodatum
contract there is a stipulation to the is purely personal in character
contrary (Article 1649) (Article 1939)

* Recitation on Articles 1933-1952 of the Civil Code with emphasis on Articles 1933,
1939, 1942

 See also Article 1174 relate to Article 1942, Article 1165 relate to article 1942(2)

B. Mutuum

1. Tan vs Villapaz, G.R. No. 160892, November 22, 2005 –

Form required in a contract of simple loan

The existence of a contract of loan cannot be denied merely because it is not reduced in writing.
Surely, there can be a verbal loan. Contracts are binding between the parties, whether oral or
written. The law is explicit that contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present

2. Serrano vs Central Bank, G.R. No. L-30511 February 14, 1980 –

Article 1980 - Bank deposits

Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
and are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn interests with
respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a
depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank
to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising
from depositary's failure to return the subject matter of the deposit

3. Sun Life vs Kit, G.R. No. 183272, October 15, 2014 –

Article 1956 – Interest

There are two kinds of interest – monetary and compensatory.

"Monetary interest refers to the compensation set by the parties for the use or forbearance of
money." No such interest shall be due unless it has been expressly stipulated in writing. "On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law
or by the courts." The interest mentioned in Articles 2209 and 221228of the Civil Code applies to
compensatory interest.

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this
case, the subject interest was not one which was agreed upon by the parties in writing.

4. Abella vs Abella, G.R. No. 195166, July 8, 2015

Interest rate, Unconscionable Interest

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan, the willingness of the parties to enter into a
relation involving an unconscionable interest rate is inconsequential to the validity of the stipulated
rate:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law,
in principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public
or private morals.
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals,
and the law."

5. Yam vs Mali, G.R. No. L-50550-52 October 31, 1979

Ownership passes to the buyer

Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph

(b), of the Revised Penal Code as follows:

Art. 315. Swindling (Estafa). — Any person who shall defraud another by any of
the means mentioned herein below shall be punished by:

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another, money, goods,

or any other personal property received by the offender in trust or on commission,
or for administration, or under any other obligation involving the duty to make
delivery of or to return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or other
property.

In order that a person can be convicted under the abovequoted provision, it must be proven that he
has the obligation to deliver or return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly stated in criminal complaints, the
related civil complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

Art. 1933. — By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

 Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in
simple loam ownership passes to the borrower.

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.

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum, the borrower acquires ownership of the money, goods or personal
property borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248,
Civil Code) and his act will not be considered misappropriation thereof.

* Recitation on Articles 1953-1961 of the Civil Code with emphasis on Articles 1953,
and Article 1956

C. Interest

1. Almeda vs CA, G.R. No. 113412, April 17, 1996

Interest Principles - Sec. 1 of Central Bank (Bangko Sentral) Circ. 905, Series of
1982, Escalation Clause
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not
authorize the bank, or any lending institution for that matter, to progressively increase interest rates
on borrowings to an extent which would have made it virtually impossible for debtors to comply
with their own obligations. True, escalation clauses in credit agreements are perfectly valid and do
not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing agreements between parties, which
agreements — while they may be the law between the contracting parties — implicitly incorporate
provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted
by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent
bank carte blanche authority to raise interest rates to levels which would either enslave its
borrowers or lead to a hemorrhaging of their assets.
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an increase in interest
rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981
and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount
of P40,142,518.00 in settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above,
not only the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards upon which
the increases are anchored.
2. Vitug vs Abuda, G.R. No. 201264, January 11, 2016
Autonomy of Contracts, Guidelines in Rates of Interests
Parties are free to stipulate interest rates in their loan contracts in view of the suspension of
the implementation of the Usury Law ceiling on interest effective January 1, 1983.

The freedom to stipulate interest rates is granted under the assumption that we have a perfectly
competitive market for loans where a borrower has many options from whom to borrow. It
assumes that parties are on equal footing during bargaining and that neither of the parties has a
relatively greater bargaining power to command a higher or lower interest rate. It assumes that
the parties are equally in control of the interest rate and equally have options to accept or deny
the other party's proposals. In other words, the freedom is granted based on the premise that
parties arrive at interest rates that they are willing but are not compelled to take either by force of
another person or by force of circumstances.

However, the premise is not always true. There are imperfections in the loan market. One party
may have more bargaining power than the other. A borrower may be in need of funds more than
a lender is in need of lending them. In that case, the lender has more commanding power to set
the price of borrowing than the borrower has the freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections resulting
from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety,
and welfare

Art. 1306. The 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 stipulating interest rates, parties must ensure that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore, void for
being against public morals. The lifting of the ceiling on interest rates may not be read as
"grant[ing] lenders carte blanche[authority] to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets."

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid.
In Castro v. Tan

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary
power to equitably reduce it if it is later found to be iniquitous or unconscionable.112 Courts
approximate what the prevailing market rate would have been under the circumstances had the
parties had equal bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become

unconscionable in light of the context in which they were imposed or applied. In Medel v. Court
of Appeals, this Court ruled that the stipulated interest of 5.5% or 66% per annum was
unconscionable and contrary to morals. It was declared void. This court reduced the interest rate
to 1% per month or 12% per annum.

This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable,
thus justifying the need to reduce the interest rates to 12% per annum.

On the other hand, despite rulings that interest rates of 3% and 5% per month are
unconscionable, this court in Toledo v. Hydenu found that the interest rate of 6% to 7% per
month was not unconscionable. This court noted circumstances that differentiated that case
from Medel and found that the borrower in Toledo was not in dire need of money when she
obtained a loan; this implied that the interest rates were agreed upon by the parties on equal
footing. This court also found that it was the borrower in Toledo who was guilty of inequitable
acts.

III. Deposit

A. Extra-Judicial Deposit

I. Voluntary Deposit

1. Lui Enterprises vs Zuellig Pharma Corp., G.R. No. 193494, March

12, 2014

Article 1968, Interpleader, Deposit in case of conflicting claims

 In case of conflicting claims, a party may file a complaint for interpleader and deposit the
property or consign the same with the court.

II. Necessary Deposit

1. Apostol vs CA, G.R. No. 125375, June 17, 2004

Article 538, Article 1996, Deposit Made in Compliance with a Legal

Obligation

In ejectment cases, the only issue to be determined by the Court is the fact of prior physical
and material possession over the subject property. Under Article 538 of the New Civil Code
(NCC), it is provided that:

Article 538. Possession as a fact cannot be recognized at the same time in two different
personalities except in cases of co-possession. Should a question arise regarding the fact of
possession, the present possessor shall be preferred, if there are two possessors, the one longer in
possession; if the dates of the possession are the same, the one who presents a title; and if all these
conditions are equal, the thing shall be placed in judicial deposit pending determination of its
possession or ownership through proper proceedings.

2. Durban Apartments vs Pioneer Insurance, G.R. No. 179419,

January 12, 2011

Article 1962, Article 1998, Contract of Necessary Deposit, When

Perfected, Deposit made by travelers in hotels or inns

In this case, respondent substantiated the allegations in its complaint, i.e., a contract of
necessary deposit existed between the insured See and petitioner. On this score, we find no error
in the following disquisition of the appellate court:

[The] records also reveal that upon arrival at the City Garden Hotel, See gave notice
to the doorman and parking attendant of the said hotel, x x x Justimbaste, about his
Vitara when he entrusted its ignition key to the latter. x x x Justimbaste issued a
valet parking customer claim stub to See, parked the Vitara at the Equitable PCI
Bank parking area, and placed the ignition key inside a safety key box while See
proceeded to the hotel lobby to check in. The Equitable PCI Bank parking area
became an annex of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the evening after
banking hours.

Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and
a necessary deposit made by persons in hotels or inns:
 Art. 1962. A deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and returning
the same. If the safekeeping of the thing delivered is not the principal purpose of
the contract, there is no deposit but some other contract.

Art. 1998. The deposit of effects made by 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.

Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for
safekeeping with petitioner, through the latters employee, Justimbaste. In turn, Justimbaste issued
a claim stub to See. Thus, the contract of deposit was perfected from Sees delivery, when he handed
over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely
keeping and returning it. Ultimately, petitioner is liable for the loss of Sees vehicle.

3. Sulpicio Lines vs Sesante, G.R. No. 172682, July 27, 2016

Article 1754, Deposit made by travelers in common carriers

The petitioner denies liability because Sesante's belongings had remained in his custody
all throughout the voyage until the sinking, and he had not notified the petitioner or its employees
about such belongings. Hence, absent such notice, liability did not attach to the petitioner.

Is notification required before the common carrier becomes liable for lost belongings that
remained in the custody of the passenger?

We answer in the negative.

The rule that the common carrier is always responsible for the passenger's baggage during
the voyage needs to be emphasized. Article 1754 of the Civil Code does not exempt the common
carrier from liability in case of loss, but only highlights the degree of care required of it depending
on who has the custody of the belongings. Hence, the law requires the common carrier to observe
the same diligence as the hotel keepers in case the baggage remains with the passenger; otherwise,
extraordinary diligence must be exercised. Furthermore, the liability of the common carrier
attaches even if the loss or damage to the belongings resulted from the acts of the common carrier's
employees, the only exception being where such loss or damages is due to force majeure.

4. YHT Realty Corp. vs Anicia Payam, G.R. No. 126780. February 17,
2005

Article 2000-2004, waiver of liability in deposits.

 The issue of whether the Undertaking For The Use of Safety Deposit Box executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:
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.
Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business like the
common carriers 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.
B. Judicial Deposit or Sequestration

1. The question raised is whether or not property which has been levied upon in a
garnishment proceedings by one court, may be subject to the jurisdiction of another
court (where the property is found) in an independent suit impugning the legality
of said garnishment — the property garnished allegedly being exempt from
execution.
The garnishment of property to satisfy a writ of execution “operates as an
attachment and fastens upon the property a lien which the property is brought under
the jurisdiction of the court issuing the writ. It is brought into custodia legis, under
the sole control of such court. Property is in the custody of the court when it has
been seized by an officer either under a writ of attachment on mesne process or
under a writ of execution. A court which has control of such property, exercises
exclusive jurisdiction over same. No court, except one having supervisory control
or superior jurisdiction in the premises has a right to interfere with and change that
possession. (National Power Corporation v. De Veyra, et al., L-15763).

C. Distinguish

1. Extra-judicial vs Judicial Deposit

2. Deposit vs Commodatum

Deposit Commodatum
As to purpose Safekeeping Use
As to nature of Movable except when it Movable and Immovable
property is Judicial deposit
As to right to use The depositary cannot The bailee and the
make use of the thing members of the bailee's
deposited without the household may make use of
express permission of the thing loaned, unless
the depositor. there is a stipulation to the
contrary, or unless the
However, when the nature of the thing forbids
preservation of the thing such use.
deposited requires its use,
it must be used but only
for that purpose.
As to liability for The depositary is liable The bailee is liable for the
fortuitous event for the loss of the thing loss of the thing, even if it
through a fortuitous should be through a
event: fortuitous event:

(1) If it is so (1) If he devotes

stipulated; the thing to any
purpose different
(2) If he uses the from that for which
thing without the it has been loaned;
depositor's
permission; (2) If he keeps it
longer than the
(3) If he delays period stipulated,
its return; or after the
accomplishment of
(4) If he allows the use for which
others to use it, the commodatum
even though he has been
himself may have constituted;
been authorized
to use the same. (3) If the thing
loaned has been
delivered with
appraisal of its
value, unless there
is a stipulation
exempting the
bailee from
responsibility in
case of a fortuitous
event;

(4) If he lends or
leases the thing to a
 third person, who is
not a member of
his household;

(5) If, being able to

save either the
thing borrowed or
his own thing, he
chose to save the
latter.

As to type of contractMay be gratuitous or with Gratuitous

stipulation for payment
for safekeeping.
As to when A deposit its extinguished: Commodatum is
extinguished extinguished:
(1) Upon the loss
or destruction of (1) The death of either
the thing the bailor or the
deposited; bailee extinguishes
the contract
(2) In case of a
gratuitous deposit, (2) Return of the thing
upon the death of
loaned upon arrival
either the
depositor or the of the stipulated
depositary. period.

(3) When there is no

stipulated period for
the return or the use
is merely tolerated
then upon return of
the thing loaned.

3. Deposit vs Sale and Barter

Deposit Sale or Barter

As to Purpose Safekeeping Profit or Exchange
As to Ownership Retained by the depositor Transferred
As to Type of Contract May be gratuitous or Always onerous
onerous
As to When perfected Upon delivery By mere consent
 Recitation on articles: 1968-2009, with emphasis on 586, 2104, 2168, and those
stated in the cases.

IV. Aleatory Contracts

Vitug vs CA, G.R. No. 82027 March 29, 1990

Article 2010, When aleatory contract fulfilled?

Under Article 2010 of the Code:

ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind
themselves to give or to do something in consideration of what the other shall give
or do upon the happening of an event which is uncertain, or which is to occur at an
indeterminate time.

Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the
happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time."
A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value of
currency, and insurance have been held to fall under the first category, while a contract for life
annuity or pension under Article 2021, et sequentia, has been categorized under the second.

V. Guaranty

A. Guaranty in the strict sense

1. Games Inc vs Allied Bank, G.R. No. 181426, July 13, 2015

ART. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

While a surety undertakes to pay if the principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The former is the insurer of the debt, the latter an
insurer of the solvency of the debtor. We further expounded on the nature of a contract of
guaranty (vis-à-vis a contract of surety) in E. Zobel, Inc. v. Court of Appeals, thus:

A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A
contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in
case the latter does not pay the debt.

Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument, executed at the same time, and on the
same consideration. He is an original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he will not be discharged, either by
the mere indulgence of the creditor to the principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby. On the other hand, the contract of
guaranty is the guarantor’s own separate undertaking, in which the principal does not join. It is
usually entered into before or after that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal. The original contract of his
principal is not his contract, and he is not bound to take notice of its nonperformance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal. (Citations omitted.)

2. Bitanga vs Pyramid Construction, G.R. No. 173526, August 28, 2008

 Benefit of Excussion, Article 2058, 2059, 2060

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays
for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor. This is what is otherwise known as the
benefit of excussion.

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up
against the creditor upon the latters 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.

The afore-quoted provision imposes a condition for the invocation of the defense
of excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to
make use of the benefit of excussion, he must set it up against the creditor upon the latters
demand for payment and point out to the creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt.

It must be stressed that despite having been served a demand letter at his office, petitioner
still failed to point out to the respondent properties of Macrogen Realty sufficient to cover its
debt as required under Article 2060 of the Civil Code. Such failure on petitioners part forecloses
his right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only property of Macrogen Realty
which he found was its deposit of P20,242.23 with the Planters Bank.

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from
interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx

(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.

B. Suretyship

3. CCC Insurance Corporation vs Kawasaki Steel Corp. G.R. No. 156162, June 22,
2015

The statutory definition of suretyship is found in Article 2047 of the Civil Code, thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (Emphasis
supplied.)

Jurisprudence also defines a contract of suretyship as "an agreement where a party called the surety
guarantees the performance by another party called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee. Specifically, suretyship is a contractual
relation resulting from an agreement whereby one person, the surety, engages to be answerable for
the debt, default or miscarriage of another, known as the principal." The Court expounds that "a
surety's liability is joint and several, limited to the amount of the bond, and determined strictly by
the terms of contract of suretyship in relation to the principal contract between the obligor and the
obligee. It bears stressing, however, that although the contract of suretyship is secondary to the
principal contract, the surety's liability to the obligee is nevertheless direct, primary, and absolute."

 Article 2047, Distinction of Surety vs Guaranty.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that
the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees that the creditor, after proceeding against the
principal, may proceed against the guarantor if the principal is unable to pay. A surety binds
himself to perform if the principal does not, without regard to his ability to do so. A guarantor,
on the other hand, does not contract that the principal will pay, but simply that he is able to do
so. In other words, a surety undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the principal debtor.

 Article 2066, Rights of a Guarantor applicable to Surety

The rights of a guarantor who pays for the debt of the debtor are governed by the following
provisions of the Civil Code:

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.

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.

Although the foregoing provisions only speak of a guarantor, they also apply to a surety, as the
Court held in Escaño v. Ortigas, Jr.:

What is the source of this right to full reimbursement by the surety? We find the right under
Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must
be indemnified by the latter," such indemnity comprising of, among others, "the total amount of
the debt." Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who
pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor."

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions
should not extend to sureties, especially in light of the qualifier in Article 2047 that the
provisions on joint and several obligations should apply to sureties. We reject that argument, and
instead adopt Dr. Tolentino's observation that "[t]he reference in the second paragraph of [Article
2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several
obligations, however, does not mean that suretyship is withdrawn from the applicable provisions
governing guaranty." For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors, for both
classes of obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. x x
x. (Citations omitted.)

Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification and
subrogation will arise only after it has paid its obligations to Kawasaki as the debtor-obligee.
In Autocorp Group v. Intra Strata Assurance Corporation, the Court ruled that:

The benefit of subrogation, an extinctive subjective novation by a change of creditor, which

"transfers to the person subrogated, the credit and all the rights thereto appertaining, either
against the debtor or against third persons," is granted by the Article 2067 of the Civil Code only
to the "guarantor (or surety) who pays."(Emphases supplied, citations omitted.)

 Article 2079, Rights of a Guarantor applicable to Surety

The Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., and later in the case of
Security Bank, held that Article 2079 of the Civil Code, which pertinently provides that "[a]n
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty," equally applies to both contracts of guaranty and suretyship. The rationale therefor
was explained by the Court as follows:

The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the surety's consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditor's remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period.

4. PCIC vs Petroleum, G.R. No. 180898, April 12, 2012

 Article 2047, Extent of liability of surety, Kind of Contract

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee. Although the contract of a surety is secondary only to a
valid principal obligation, the surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor does it receive any benefit
therefrom. This was explained in the case of Stronghold Insurance Company, Inc. v. Republic-
Asahi Glass Corporation, where it was written:
 The suretys obligation is not an original and direct one for the performance
of his own act, but merely accessory or collateral to the obligation contracted by
the principal. Nevertheless, although the contract of a surety is in essence secondary
only to a valid principal obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in other words, he is directly
and equally bound with the principal.

Corollary, when PDSC communicated to FCC that it was terminating the contract, PCICs
liability, as surety, arose. The claim of PDSC against PCIC occurred from the failure of FCC to
perform its obligation under the building contract. As mandated by Article 2047 of the Civil Code,
to wit:

Article 2047. By guaranty, a person, called the guarantor, binds himself to

the creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case, the
contract is called a suretyship.

Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. A surety is considered in law as being
the same party as the debtor in relation to whatever is adjudged touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable.

* Recitation on Articles 2047-2084. See Articles 2054, 2055, 2058, 2059, 2060, 2064, 2065, 2067,
2070, 2071, 2079, 2081
 VI. Pledge and Mortgage

A. Distinguish Pledge from Mortgage

B. Provisions Common to Pledge and Mortgage

1. Manlapat vs CA, G.R. No. 125585, June 8, 2005

 Requisites essential to the contracts of pledge and mortgage

For a person to validly constitute a valid mortgage on real estate, he must be the absolute
owner thereof as required by Article 2085 of the New Civil Code. The mortgagor must be the
owner, otherwise the mortgage is void.

In a contract of mortgage, the mortgagor remains to be the owner of the property although
the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien,
encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him
no right or claim to the possession of the property.

In this kind of contract, the property mortgaged is merely delivered to the mortgagee to
secure the fulfillment of the principal obligation. Such delivery does not empower the mortgagee
to convey any portion thereof in favor of another person as the right to dispose is an attribute of
ownership.

The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the
mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor
cause the impairment of the security in any manner without violating the foregoing rule. The
mortgagee only owns the mortgage credit, not the property itself.

2. Godofredo vs CA, G.R. No. 146997. April 26, 2005

 Requisites essential to the contracts of pledge and mortgage

As to the first essential requisite of a mortgage, it is undisputed that the mortgage was
executed on May 15, 1989 as security for a loan obtained by Oakland from Genato.
As to the second and third requisites, we need to discuss the difference between a
contract of sale and a contract to sell.
In a contract of sale, title to the property passes to the vendee upon the delivery of the thing
sold; in a contract to sell, ownership is, by agreement, reserved by the vendor and is not to pass to
the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property and
cannot recover it unless and until the contract is resolved or rescinded; in a contract to sell, title is
retained by the vendor until full payment of the price.[8]
 In the contract between petitioners and Oakland, aside from the fact that it was
denominated as a contract to sell, the intention of Oakland not to transfer ownership to petitioners
until full payment of the purchase price was very clear. Acts of ownership over the property were
expressly withheld by Oakland from petitioner. All that was granted to them by the occupancy
permit was the right to possess it.

VII. Pledge

1. Ramos vs PNB, G.R. No. 178218, December 14, 2011

 Sale of thing pledged

Article 2115 of the Civil Code expressly provides that 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. As we adverted to in Sayo, it is
the foreclosure of the thing pledged that results in the satisfaction of the loan liabilities to the
pledgee of the pledgors. Thus, prior to the actual foreclosure of the thing pleged, the
sugar quedan financing loan in this case is yet to be settled.

2. Garcia vs Villa, G.R. No. 158891, June 27, 2012

 Pactum Commissorium

The following are the elements of pactum commissorium:

(1) There should be a property mortgaged by way of security for the payment of the principal
obligation; and

(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 stipulated period.

3. Bonifacio vs Rodriguez, G.R. No. 132287, January 24, 2006

 Auction

Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due
time, is to proceed before a Notary Public to the sale of the thing pledged.

VIII. Mortgage

1. Godofredo vs CA, G.R. No. 146997, April 26, 2005

 Contract to sell and Mortgage

In their memorandum, petitioners cite our ruling in State

 Investment House, Inc. v. Court of Appeals to the effect that an unregistered sale is
preferred over a registered mortgage over the same property. The citation is misplaced.
This Court in that case explained the rationale behind the rule:
The unrecorded sale between respondents-spouses and SOLID is preferred for the reason
that if the original owner xxx had parted with his ownership of the thing sold then he no longer
had ownership and free disposal of that thing as to be able to mortgage it again.
State Investment House is completely inapplicable to the case at bar. A contract of sale and
a contract to sell are worlds apart. State Investment House clearly pertained to a contract of sale,
not to a contract to sell which was what Oakland and petitioners had. In State Investment House,
ownership had passed completely to the buyers and therefore, the former owner no longer had any
legal right to mortgage the property, notwithstanding the fact that the new owner-buyers had not
registered the sale. In the case before us, Oakland retained absolute ownership over the property
under the contract to sell and therefore had every right to mortgage it.
In sum, we rule that Genatos registered mortgage was superior to petitioners contract to
sell, subject to any liabilities Oakland may have incurred in favor of petitioners by irresponsibly
mortgaging the property to Genato despite its commitments to petitioners under their contract to
sell.
2. Philippine Trust Co. vs Siua, G.R. No. L-29736, February 28, 1929

 Liability for deficiency in case property mortgaged is not enough to satisfy the debt.

It is admitted by the appellee that this feature of the judgment must be eliminated, since
the defendant did not assume personal liability for the debt but only mortgaged his property in
security therefor.

From what has been said it follows that that portion of the dispositive part of the appealed judgment
which purports to make the defendant liable for any deficiency must be eliminated.

3. Ramos vs PNB, G.R. No. 178218, December 14, 2011

 Dragnet Clause

As a general rule, a mortgage liability is usually limited to the amount mentioned

in the contract. However, the amounts named as consideration in a contract of mortgage do
not limit the amount for which the mortgage may stand as security if, from the four
corners of the instrument, the intent to secure future and other indebtedness can be
gathered. This stipulation is valid and binding between the parties and is known as the
"blanket mortgage clause" (also known as the "dragnet clause)."

In the present case, the mortgage contract indisputably provides that the subject
properties serve as security, not only for the payment of the subject loan, but also for "such
other loans or advances already obtained, or still to be obtained." The cross-collateral
stipulation in the mortgage contract between the parties is thus simply a variety of a dragnet
clause. After agreeing to such stipulation, the petitioners cannot insist that the subject
properties be released from mortgage since the security covers not only the subject
loan but the two other loans as well.

4. Litonjua vs L & R Corp, G.R. No. 130722. December 9, 1999

 Pactum de non alienado
Stipulations forbidding the owner from alienating the immovable mortgaged are expressly
declared void by law.

* Recitation on Articles 2085-2131. See Articles 2085, 2088, 2093, 2104, 2110, 2112, 2130,