CREDIT TRANSACTIONS l Judge Adviento l For the exclusive use of EH 407 A.Y.

2015-2016

Held: The contract executed by the petitioner in favor of the bank albeit
CONTRACTS OF SECURITY
denominated as a "Continuing Guaranty," is a contract of surety. Thus,
BASIS AND RATIONALE the non-registration of the chattel mortgage did not release him from
his obligation.
Basis and rationale
Security is something given, deposited or serving as a means to ensure The terms of the contract categorically obligates petitioner as "surety"
the fulfillment or enforcement of an obligation or of protecting some to induce the bank to extend credit to the spouses. The use of the term
interest or property. "guarantee" does not ipso facto mean that the contract is one of
guaranty. The interpretation of a contract is not limited to the title alone
but to the contents and intention of the parties.
KINDS OF SECURITY CONTRACTS
A contract of surety is an accessory promise by which a person binds
PERSONAL SECURITY himself for another already bound, and agrees with the creditor to
PERSONAL SECURITY satisfy the obligation if the debtor does not. A contract of guaranty, on
Unsecured transactions, or supported only by a promise. the other hand, is a collateral undertaking to pay the debt of another in
case the latter does not pay the debt.
Kinds of personal security
Simply put, a surety is distinguished from a guaranty in that a guarantor
A. Guaranty – a contract whereby a guarantor binds himself to the is the insurer of the solvency of the debtor and thus binds himself to
creditor to fulfil the obligation of the principal debtor in case the pay if the principal is unable to pay while a surety is the insurer of the
latter fails to do so. debt, and he obligates himself to pay if the principal does not pay.
B. Suretyship – a contract whereby a surety binds himself solidarily
Ongkiko v. BPI Express Card
with the principal debtor.
Re: Instance when a suretyship is deemed a continuing one
TN: The reference in Art. 2047 to solidary obligations does not mean that
suretyship is withdrawn from the applicable provisions governing guaranty. The suretyship agreement is a continuing one because by executing an
undertaking, surety solidarily obliged himself to pay all the liabilities
Guarantor Surety incurred under the credit card account, whether under the principal,
Subsidiary liability Primary liability renewal, or extension card issued, regardless of the charges or novation
Pays if the debtor cannot pay Pays if the debtor does not pay in the terms and conditions in the issuance and use of the credit card.
Insurer of the debtor’s solvency Insurer of the debt Thus, surety is bound by the liabilities of the principal until it has been
fully paid.
Pacific Banking Corporation
Machetti v. Hospicio
Re: Nature of Undertaking denominated as “Guarantor’s Undertaking”
Re: Guaranty and suretyship, distinction between the two
agreeing to be bound jointly and severally
Facts: Machetti undertook to construct a building for Hospicio de San
Facts: The wife applied for a credit card. The bank required that a person
Jose. In accordance with the latter’s requirement, a surety company
secure her obligation as a credit card holder. Her husband signed a
guaranteed compliance with the terms and conditions of the contract.
“Guarantor’s Undertaking”, but binding himself jointly and severally.
Hospicio sued Machetti for failure to meet the standard required in the
construction. Machetti was declared insolvent. Hospicio now goes after
Held: The undertaking signed by the husband, although denominated
the surety company alone.
"Guarantor's Undertaking," was in substance a contract of surety. As
distinguished from a contract of guaranty where the guarantor binds
Held: While a surety undertakes to pay if the principal does not pay, the
himself to the creditor to fulfill the obligation of the principal debtor only
guarantor only binds himself to pay if the principal cannot pay. The one
in case the latter should fail to do so, in a contract of suretyship, the
is the insurer of the debt, the other an insurer of the solvency of the
surety binds himself solidarily with the principal debtor.
debtor. This latter liability is what the Fidelity and Surety Company
assumed in the present case.
It is true that under Article 2054 of the Civil Code, a guarantor may bind
himself for less, but not for more than the principal debtor, both as
It appears affirmatively that the contract is the guarantor's separate
regards the amount and the onerous nature of the conditions. The credit
undertaking in which the principal does not join, that its rests on a
limit granted to Celia Regala was P2, 000.00 per month.
separate consideration and that although it is written in continuation of
the contract for the construction of the building, it is a collateral
However, the husband’s liability should not be limited to that extent. As
undertaking separate and distinct from the latter.
surety of his wife, he expressly bound himself up to the extent of the
wife’s indebtedness, likewise expressly waiving any "discharge in case
The Fidelity and Surety Company having bound itself to pay only the
of any change or novation of the terms and conditions in connection
event its principal, Machetti, cannot pay, it follows that it cannot be
with the issuance of the Pacificard credit card. The husband in fact,
compelled to pay until it is shown that Machetti is unable to pay. Such
made his commitment as a surety a continuing one, binding upon
ability may be proven by the return of a writ of execution unsatisfied or
himself until all the liabilities of Celia Regala have been fully paid.
by other means, but is not sufficiently established by the mere fact that
he has been declared insolvent in insolvency proceedings under our
E Zobel Inc. v. CA
statutes, in which the extent of the insolvent's inability to pay is not
Re: Nature of “Continuing Guaranty” obligation as surety
determined until the final liquidation of his estate.
Facts: Spouses obtained a loan from a bank. The loan was secured by
both a personal and real security – a Continuing Guaranty and Chattel What is the best proof of the principal debtor’s inability to pay?
Mortgage. When the spouses defaulted, the bank went after the A return of a writ of execution unsatisfied.
guarantor. The guarantor refused to pay, arguing that he was already
released from his obligation when the bank failed to register the chattel
mortgage which deprived him to be subrogated to the rights of the bank
should he pay the obligation.

1|U N I V E R S I T Y O F S A N C A R L O S S L G APELLIDO l ADLAWON l CADAMPOG l FLORO l GONZALES l IBANEZ

CREDIT TRANSACTIONS l Judge Adviento l For the exclusive use of EH 407 A.Y. 2015-2016
REAL SECURITY
REAL SECURITY
Secured transactions, or supported by a collateral or an encumbrance
of property.
Judge: This does not mean that the property is given for the payment of the
obligation, because then, that would be a dacion en pago. Here, in case of default,
the creditor can sell the property and apply the proceeds to the obligation. The
creditor does not automatically become the owner of the property in case of
default because that is prohibited – pactum commissorium.
Kinds of real security
A. Pledge – A contract wherein the debtor delivers to the creditor or
to a third person a movable or document for the purpose of
securing fulfilment of a principal obligation with the understanding
that when the obligation is fulfilled, the thing delivered shall be
returned with all its fruits and accessions.
B. Real estate mortgage – A contract whereby the debtor secures to
the creditor the fulfillment of a principal obligation, specially
subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not complied
with at the time stipulated.
C. Chattel mortgage – A contract by virtue of which personal property
is recorded in the Chattel Mortgage Register as a security for the
performance of an obligation.
D. Antichresis – A contract whereby the creditor acquires the right to
receive the fruits of an immovable of the debtor, with the obligation
to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit.
GUARANTY
CHAPTER 1 – NATURE AND EXTENT OF GUARANTY
CHARACTERISTICS OF GUARANTY
Relevant provisions
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.
Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.
Q. What are the characteristics of guaranty?
A. It is a subsidiary contract
B. It is a consensual contract
C. It is a unilateral contract
D. It is a generally gratuitous contract
E. It is a contract between the guarantor and the creditor
SUBSIDIARY CONTRACT
It takes effect only when the principal debtor fails in his obligation.
Ong v. Philippine Commercial Bank
A contract of guaranty gives rise to a subsidiary obligation on the part
of the guarantor. It is only after the creditor has proceeded against the
properties of the principal debtor and the debt remains unsatisfied that
a guarantor can be held liable to answer for any unpaid amount. This is
the principle of excussion.
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Castellvi v. Sellner
Re: Difference between guarantor and surety
A surety and a guarantor are alike in that each promises to answer for
the debt or default of another. However, they are unlike in that the
surety assumes liability as a regular party to the undertaking, while the
liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an
original promissory while the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary, while the obligation
of the guarantor is secondary.
It is perfectly clear that the obligation assumed by defendant was simply
that of a guarantor. The letter of Mr. Sellner recites that if the promissory
note is not paid at maturity, then, within fifteen days after notice of such
default and upon surrender to him of the three thousand shares of
Keystone Mining Company stock, he will assume responsibility.
Sellner is not bound with the principals by the same instrument executed
at the same time and on the same consideration, but his responsibility
is a secondary one found in an independent collateral agreement,
Neither is Sellner jointly and severally liable with the principal debtors.
Judge: However, take note that it does not mean that if the undertaking is
contained in the same document containing the principal obligation, that the
undertaking is automatically that of a surety. There can be instances when you
have a principal obligation secured by an ordinary guaranty only. What is important
is that the undertaking is clearly specified whether it is of an ordinary guarantor
or that of a surety.
Escano v. Ortigas
Re: Solidary guarantor v. solidary co-debtor
Judge: Even if a person binds himself solidary with the principal debtor,
and therefore governed by the rules of solidary obligation, it does not
erase the fact that he is a guarantor.
If you are a surety and you pay the obligation, you can recover the
entire amount from the debtor. Unlike in the rules of solidary obligation
where a solidary debtor can recover only the portion paid which is the
share of the co-debtor. In here, the solidary guarantor can recover the
entire amount from the debtor, in the sense that he was not obligated
in the original obligation. He is just a solidary guarantor.
But we are more interested in this statement:“The solidary guarantor
has an action for counter bond while a solidary debtor is limited only to
an action contribution by the other co-debtor”
Ex. X owes you 1M. I bind myself solidary with X as a solidary guarantor.
Take note that I am not a principal debtor, it is X who is the principal
debtor. I am just a solidary guarantor.
What is my right? To recover the full amount that if ever I am to be
made to pay the obligation.
How will I be assured that I will be reimbursed?
I will require X to put up another security that I can go after in case I
will not be reimbursed. So you have a main guaranty which I made in
favor of X, and a sub-guaranty made by X in my favor, in case I will not
be reimbursed. This is a counter bond or indemnity agreement.
Solidary guarantor Solidary co-debtor
May recover the entire payment Can recover only the
from the debtor co-debtor’s share
Released by extension
Not released by extension
of the period
Has action for counterbond and
No action except for
reimbursement, besides
contribution
subrogation
Bound under a principal
Obligation is accessory
obligation
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Piczon v. Piczon
Re: Liability where company president signed as guarantor
Under the terms of the contract, Esteban Piczon expressly bound himself
only as guarantor, and there are no circumstances in the record from
which it can be deduced that his liability could be that of a surety. A
guaranty must be express, (Article 2055, Civil Code) and it would be
violative of the law to consider a party to be bound as a surety when
the very word used in the agreement is "guarantor."
Judge: The mere fact that you are the President and at the same time a majority
stockholder, does not automatically make you a surety, if you merely signed as a
guarantor. Also, there is this principle in corporation law called Doctrine of
Separate Entity which means that the debt of the corporation is not the debt of its
officers or stockholders.
Palmares v. CA
Re: Solidary guarantor does not lose his character as such vis-à-vis the
debtor
The undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. It
has not been shown, that respondent corporation agreed to proceed
against petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is that wherein one lends
his credit by joining in the principal debtor's obligation, so as to render
himself directly and primarily responsible with him, and without
reference to the solvency of the principal.
Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the
principal debtor, must necessarily fail for being incongruent with the
judicial pronouncements adverted to above.
GRATUITOUS CONTRACT
A guaranty is gratuitous, unless there is a stipulation to the contrary.
(Art. 2048)
A. Gratuitous contract – the guarantor does not receive any price or
remuneration for acting as such.
B. Onerous – the guarantor receives a valuable consideration for his
guaranty.
Severino v. Severino
Re: Dismissal of complaint by virtue of a compromise agreement where
payment of balance was guaranteed
A guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. The
compromise and dismissal of a lawsuit is recognized in law as a valuable
consideration, and the dismissal of the action which Felicitas Villanueva
and Fabiola Severino had instituted against Guillermo Severino was an
adequate consideration to support the promise on the part of Guillermo
Severino to pay the sum of money stipulated in the contract which is
the subject of this action.
The promise of the appellant Echaus as guarantor is therefore binding.
It is never necessary that the guarantor or surety should receive any
part of the benefit, if such there be, accruing to his principal. But the
true consideration of this contract was the detriment suffered by the
plaintiffs in the former action in dismissing that proceeding, and it is
immaterial that no benefit may have accrued either to the principal or
his guarantor.
CONSENSUAL CONTRACT
A guaranty is a consensual contract and therefore perfected upon mere
consent and agreement of the parties.
Debtor’s consent is not required
The contract is between the creditor and the guarantor, and therefore
the debtor’s consent is not required to constitute a guaranty.
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KINDS OF GUARANTY
Relevant provisions
Art. 2049. A married woman may guarantee an obligation without the husband’s
consent, but shall not thereby bind the conjugal partnership, except in cases
provided by law.
Art. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by
onerous title. It may also be constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the latter’s consent, or without his
knowledge, or even over his objection.
Art. 2054. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the
conditions. Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
KINDS OF GUARANTY
By its origin
A. Conventional – constituted by contract
B. Legal – required by substantive or procedural law
C. Judicial – required by a court from a litigant
By its extent
A. Unlimited – cover the principal obligation, accessories and cost
incurred after the guarantor has been judicially asked to pay.
If the guaranty is given without the knowledge or consent of the debtor,
Articles 1236 and 1237 apply.
A guarantor can recover from the debtor what the former had to pay the
creditor, even if the guaranty was without the debtor’s consent or against
his will, but the recovery will only be to the extent that the debtor had been
benefited.
B. Limited – excluding accessory obligation
De Guzman v. Santos
Re: Suit to recover from principal debtor who did not consent to the
guaranty; Consent of the principal debtor not required
Facts: The principal debtor refused to reimburse the guarantor of the
amount paid by the latter because he never gave his consent to the
undertaking.
Held: A guarantor can recover from the debtor what the former had to
pay the creditor, even if the guaranty was without the debtor’s consent
or against his will, but the recovery will only be to the extent that the
debtor had been benefited.
According to this legal provision, it is evident that the defendant is
bound to pay to the plaintiff what the latter had advanced to
Candelaria, and this is more so because it appears that although Lucero
executed the bond without his, knowledge, nevertheless he did not
object thereto or repudiate the same at any time.
And it cannot be logically deduced that the defendant did not have
knowledge of the bond, firstly, because his properties were attached
and attachment could not have been levied without his knowledge, and
secondly, because said properties were returned to him and in
receiving them, he was necessarily apprised of the fact that a bond
had been filed to discharge the attachment.
Judge: If the principal debtor did not give his consent to the guaranty and the
guarantor is entitled to recover from him, what provisions in the Civil Code do
we apply?
It is found in the general provisions in the Civil Code. In obligations and
Contracts, a third person may pay the obligations of a debtor. The third person
may even pay the debtor without the consent and upon objection by the debtor.
But if the third person thus pay he is entitled only to the beneficial
reimbursement. He can recover only to the extent that the principal debtor was
benefited.
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By the person guaranteed
A. Guaranty proper
B. Sub-guaranty – to guarantee the guarantor’s solvency
By the liability of the guarantor
A. Normal or ordinary – simple guaranty, guaranty proper; subsidiary
B. Solidary – suretyship
Machetti v. Hospicio
Supra. See discussion above.
PNB v. Luzon Surety
Re: Alteration as a ground for release
Facts: Villarosa applied for a crop loan from PNB. A chattel mortgage
was executed to guarantee said loan. For failure to pay, the bank sought
to collect against Villarosa and 3 bondsmen, Luzon Surety being one of
them. There was a question as to the liability of Luzon Surety for the
increases to the credit line of Villarosa and the interests sought.
As a surety, said bonding company is charged as an original promissory
and is an insurer of the debt. While it is an accepted rule in our
jurisdiction that an alteration of the contract is a ground for release, this
alteration must be material. A cursory examination of the record shows
that the alterations in the form of increases were made with the full
consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage
explicitly provided for this increase(s), viz:
The Mortgagee may increase or decrease the amount of the loan as well
as the installment as it may deem convenient and this contract, Exhibit
"B", was precisely referred to and mentioned in the Surety Bond itself.
Ong v. PCIB
Re: Principle of excussion applicable only to guaranty
A contract of guaranty gives rise to a subsidiary obligation on the part
of the guarantor. It is only after the creditor has proceeded against the
properties of the principal debtor and the debt remains unsatisfied that
a guarantor can be held liable to answer for any unpaid amount. This is
the principle of excussion.
In a suretyship contract, however, the benefit of excussion is not
available as the surety is principally liable for the payment of the debt.
As the surety insures the debt itself, he obligates himself to pay the debt
if the principal debtor will not pay, regardless of whether or not the latter
is financially capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is solvent and
is able to pay or no prior demand is made on the principal debtor. A
surety is directly, equally and absolutely bound with the principal debtor
for the payment of the debt and is deemed as an original promissor and
debtor from the beginning.
Thus, respondent bank as creditor may proceed against the sureties
despite the execution of the MOA which provided for the suspension of
payment and filing of collection suits against BMC. Respondent bank’s
right to collect payment from the surety exists independently of its right
to proceed directly against the principal debtor. In fact, the creditor bank
may go against the surety alone without prior demand for payment on
the principal debtor.
Judge:
Q. What if the debtor is declared in a state of suspension of payments because it
is a distressed corporation that no cases can be filed against him. Can the creditor
collect from the debtor?
No. The proceedings on these cases are suspended. So, if the cases against the
debtor are suspended, the creditor cannot collect.
Q. If the obligation is secured by a guaranty, can the creditor go after the
guarantor since it cannot proceed against the principal debtor since there is a
suspension of payment?
No, the creditor cannot because we still apply the basic rule that the creditor has
to collect from the principal debtor before it can go after the guarantor.
4|U N I V E R S I T Y O F S A N C A R L O S S L G
Q. What if the obligation is secured by a suretyship undertaking. Can the creditor
go against the surety?
Yes, the creditor can go against the surety. Going back to the principle that the
surety is the insurer of the debt, so for as long as the debt is not paid, the surety
is liable. So, if the debtor is put in a state of suspension of payments, by all means
the creditor can go after the surety.
International Finance v. Imperial
Re: A guarantor bound jointly and severally
When qualified by the term “jointly and severally,” the use of the word
“guarantor” actually refers to a “surety”. Likewise, the phrase in the
Agreement “as primary obligor and not merely as surety” stresses that
ITM is being placed on the same level as PPIC. Those words emphasize
the nature of their liability, which the law characterizes as a suretyship.
The Court stresses that a suretyship is merely an accessory or a
collateral to a principal obligation. Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct,
primary and absolute; or equivalent to that of a regular party to the
undertaking. A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in
the obligations constituted by the latter.
Judge: If a person finds himself solidarily liable with the principal debtor or if a
person secures as a surety the obligations of an agent to sell certain jewelries and
turn over the proceeds to the principal and the agent fails to account for the
proceeds or return the item to the principal (the agent can be held liable for
estafa). Can the surety be held liable criminally as well?
No. Surety's liability is only civil, even if a person binds himself as a surety in a
performance of an obligations under agency and the agent fails to comply with his
undertaking. The surety is merely civilly liable.
ELEMENTS OF GUARANTY
ELEMENTS OF GUARANTY
A. Parties
B. Subject matter and conditions
C. Form
D. Cause
Relevant provisions
Art. 2056. One who is obliged to furnish a guarantor shall present a person who
possesses integrity, capacity to bind himself, and sufficient property to answer
for the obligation which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is to be complied with.
Art. 2057. If the guarantor should be convicted in first instance of a crime
involving dishonesty or should become insolvent, the creditor may demand
another who has all the qualifications required in the preceding article. The case
is excepted where the creditor has required and stipulated that a specified person
should be the guarantor.
PARTIES TO A GUARANTY
If proposed by the debtor:
1. He must be capable of contracting obligations.
2. He must have sufficient property to answer for the debt
guaranteed.
3. He must possess integrity.
TN: The guaranty is for the benefit of the creditor that is why if the guarantor is
chosen by the debtor, he must prove that he has all the qualifications required.
He must have sufficient property to answer for the debt guaranteed
Q. When is solvency of the guarantor required?
At the point that the contract is constituted.
Q. Can a law student act as guarantor?
Yes. If the law student possesses sufficient property not exempt from execution.
If the law student only has his law library as property, he does not possess
sufficient property because a person’s personal library is exempt from execution.
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Q. What happens if he becomes insolvent after the constitution of the guaranty
and before of the extinguishment of the principal obligation of the guaranty?
The creditor can require that another guaranty be constituted. He can require the
debtor to provide another guaranty.
Q. In relation to an obligation with a period, what is the remedy of the creditor if
the debtor fails to provide another guarantor?
He can consider the principal obligation to be demandable at once. Because the
effect if the debtor fails to provide a security in relation to that obligation with a
period – the debtor loses the right to enjoy the benefit of the use of the period,
therefore the obligation becomes due and demandable.
He must possess integrity
Integrity is a matter of opinion and is required only at the time of the
perfection of the contract. Its subsequent disappearance makes it
optional for the creditor to demand another guarantor.
Q. When must this integrity be possessed by the guarantor? I am the guarantor.
If after the constitution of the guaranty, I am convicted of estafa. What will the
creditor do?
The creditor can demand for another security. Because conviction of the guarantor
of a crime involving dishonesty has the same effect as insolvency.
Q. If the guarantor, during the pendency of the obligation was convicted of less
physical injuries, can the creditor demand that the debtor provide another
guarantor?
No. Conviction of just any crime does not entitle the creditor to demand another
guarantor. The conviction must involve crimes involving dishonesty (i.e. estafa,
perjury, etc.)`
If proposed by the creditor:
If the guarantor was chosen by the creditor, he can dispense with the
qualifications. After all, the guaranty is provided for his benefit.
TN: The consent of the creditor is required before the guarantor may be bound.
Texas Co. v. Alonzo
Re: Rule where there is merely an offer of guaranty
If a security is requested by the creditor, the latter’s consent is necessary
before the guarantor or surety may be bound.
Here, the execution of the bond was requested by Texas Co. by virtue
of the Additional Security Clause in the agency contract. In such clause,
it is apparent that before a bond is accepted by Texas, it has to be in
such form and amount and with such sureties as shall be satisfactory
hereto. Hence, must be approved by the creditor. A request for bond is
not inference of approval thereto.
Where there is merely an offer of, or proposition for a guaranty, in the
sense that it requires action by the creditor before the obligation
becomes fixed, it does not become a binding obligation until it is
accepted and, unless there is a waiver of notice of such acceptance
given to the guarantor.
Judge:
Q. Why was Alonzo absolved from his undertaking as a surety?
Because there was no acceptance by Texas of the guaranty made by Alonzo for
the contract.
Q. Can’t it be inferred that when Alonzo signed the undertaking that the contract
of suretyship was already perfected?
No. acceptance should not be inferred but must be made in a specified form.
Q. What is the effect on the suretyship as a contract if Texas did not manifest its
satisfaction of Alonzo offer to the undertaking?
The contract of suretyship will not be valid because there was no consent. So even
if Alonzo consented to act as a surety, Texas did not however manifest its consent
to the offer of Alonzo. Thus, there is no consensual contract of surety that was
constituted.
5|U N I V E R S I T Y O F S A N C A R L O S S L G
Phil. Pryce Assurance v. CA
Re: Effect if principal has not paid the premium
Facts: Phil. Pryce Assurance Corp. was sued by Gegroco, Inc. for the
two surety bonds Pryce executed in behalf of its principal Sagum General
Merchandise. Pryce averred in its defense that the checks of Sagum
General Mechandise which were to pay for the premiums bounced and
were dishonored hence there is no contract to speak of.
Judge: Usually in the case of a surety company who puts up a bond in favor of a
debtor, it will require the debtor to pay a premium. Here, the checks issued by the
debtor to the surety for the premium payments were dishonored. Thus, the surety
claims that it is not bound as a surety.
Issue: Whether the bond accepted by creditor Gegroco is valid and
enforceable against the surety, although the premium has not been paid
by debtor Sagum to surety Pryce.
Held: Irrespective of payment or non-payment of the premium for the
bond executed by surety and accepted the creditor, such bond is
enforceable against such surety.
The Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and
delivered to the obligor. No contract of suretyship or bonding shall be
valid and binding unless and until the premium therefor has been paid,
except where the creditor has accepted the bond, in which case the
bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the debtor to the surety.
Judge:
Q. X owes you 1M but you required X to put up a security for the payment of the
obligation. X approaches me to act as the surety. I said I will agree provided he
pays me a consideration for acting as his surety. So X agreed to pay me a tiny
compensation of 50K. So I signed the suretyship agreement and I sent it to you
and you accepted. The check was then dishonored. Plus, X defaulted. So you now
demanded payment of the obligation from me. Was the surety valid considering
that I was not paid?
A. Yes it is still valid. Payment of valuable consideration to the guarantor to act as
one is not essential to the validity of the guaranty for as long as the creditor
accepted the surety. The causa in a security undertaking is the same causa that
supports the principal obligation. It is not essential of the security undertaking in
a contract of guaranty that a guarantor must receive the agreed compensation
before he is bound as long as there is consent already between the guarantor and
the creditor. The contract is already perfected and the surety is already bound in
his undertaking.
SUBJECT MATTER AND CONDITIONS
The principal obligation must be valid as guaranty cannot exist without
a valid obligation. Thus, when the principal obligation was not perfected,
the guaranty is void.
TN: Voidable, unenforceable or natural obligations may be guaranteed, as they
are considered valid obligations.
Relevant provisions
Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a
guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation.
Art. 2053. A guaranty may also be given as security for future debts, the amount
of which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured.
Municipality of Gasan v. Marasigna
Re: Debts may be guaranteed
The fishing privilege contract entered into by the plaintiff Municipality
and Marasigan was cancelled. This being so, neither Marasigan nor his
sureties were bound to comply with the terms of their respective
contracts of fishing privilege and suretyship. This is so, particularly with
respect to sureties, because suretyship cannot exist without a valid
obligation, the obligation arising from a cancelled contract not being a
valid obligation.
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Judge:
Q: But didn’t the municipality reinstate the contract?
Yes, but reinstatement does not carry with it the revival of the guaranty. Thus,
when the contract was cancelled, the surety’s life ended. The revival of the
principal obligation does not mean revival of the accessory obligation. To revive
the accessory, it must be express.
Q: Can an accessory contract survive the death of the principal contract?
No, because the accessory contract is dependent on the principal contract.
Future debts of unknown amount
May be guaranteed, but there can be no action against the guarantor
until the debt is liquidated.
Judge: Can future obligations be secured by guaranty?
Yes. But the obligations of the guarantor arises only once the debts are liquidated.
The debts are already liquidated the moment the amount of the debts are
determined or is determinable
Selegna Management v. UCPB
Re: When debt is considered liquidated
A debt is liquidated when the amount is known or is determinable by
inspection of the terms and conditions of the relevant promissory notes
and related documentation. Failure to furnish a debtor a detailed
statement of account does not ipso facto result in an unliquidated
obligation.
Petitioners executed a Promissory Note, in which they stated that their
principal obligation was in the amount of P103,909,710.82, subject to
an interest rate of 21.75% percent per annum. Pursuant to the parties’
Credit Agreement, petitioners likewise know that any delay in the
payment of the principal obligation will subject them to a penalty charge
of one percent per month, computed from the due date until the
obligation is paid in full.
It is in fact clear from the agreement of the parties that when the
payment is accelerated due to an event of default, the penalty charge
shall be based on the total principal amount outstanding, to be
computed from the date of acceleration until the obligation is paid in
full. Their Credit Agreement even provides for the application of
payments. Thus, it appears from the agreements that the amount of
total obligation is known or, at the very least, determinable.
RCBC v. ARRO
Re: Comprehensive Surety Agreement to over existing and future
debts
The comprehensive surety agreement was jointly executed by Residoro
Chua and Enrique Go, Sr., president and general manager, respectively
of DIACOR to cover existing as well as future obligations which DIACOR
may incur with the petitioner bank, subject only to the proviso that their
liability shall not exceed at any one time the aggregate principal sum of
P100,000.00.
The agreement was obviously executed to induce petitioner to grant any
application for a loan DIACOR may desire to obtain from petitioner bank.
The guaranty is a continuing one which shall remain in full force and
effect until the bank is notified of its termination.
At the time the loan of P100,000.00 was obtained from petitioner bank
by DIACOR, the comprehensive surety agreement was admittedly in full
force and effect. The loan was therefore covered by the said agreement,
and private respondent Chua, even if he did not sign the promissory
note, is liable by virtue of the surety agreement.
Dino v. CA
Re: When guaranty is construed as continuing
Under the Civil Code, a guaranty may be given to secure even future
debts, the amount of which may not be known at the time the guaranty
is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship.
6|U N I V E R S I T Y O F S A N C A R L O S S L G
A continuing guaranty is one which is not limited to a single transaction,
but which contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security
with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the
guarantor becomes liable. Otherwise stated, a continuing guaranty is
one which covers all transactions, including those arising in the future,
which are within the description or contemplation of the contract, of
guaranty, until the expiration or termination thereof.
A guaranty shall be construed as continuing when by the terms thereof
it is evident that the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely or until a certain
period, especially if the right to recall the guaranty is expressly reserved.
Hence, where the contract of guaranty states that the same is to secure
advances to be made "from time to time" the guaranty will be construed
to be a continuing one.
In other jurisdictions, it has been held that the use of particular words
and expressions such as payment of "any debt," "any indebtedness,"
"any deficiency," or "any sum," or the guaranty of "any transaction" or
money to be furnished the principal debtor "at any time," or "on such
time" that the principal debtor may require, have been construed to
indicate a continuing guaranty.
Willex Plastic Industries v. CA
Re: Retrospective application of guaranty
Facts: Inter-Resin Industrial (IRI) and Willex Plastic Industries Corp.
(WPIC) executed a “continuing guaranty” in favor of Investment &
Underwriting Corp. of the Phils. (IUCP), jointly and severally
guaranteeing payment of sums obtained and to be obtained from IRI
from IUCP. For failure of IRI and WPIC to pay what IUCP had paid to
Manila bank under IUCP and IRI’s “continuing surety agreements,”
IUCP, thru its successor Atrium Capital Corp. (ACC), filed a case against
them before the Manila RTC.
Held: WPIC, as guarantee, is bound by the same consideration that
makes the contract effective between principal parties thereto. In this
case, the “continuing guaranty” would cover sums obtained and/or to
be obtained by IRI from Interbank. Hence, the contract of suretyship in
this case has both retrospective and prospective application.
Furthermore, since the “continuing guaranty” embodies an express
remuneration of the right of excussion, WPIC can be proceeded against
without first exhausting all the properties of IRI.
Judge: Can a guaranty have a retroactive effect?
Yes, if stipulated by the parties being their intention.
FORM OF A GUARANTY
A guaranty is governed by the Statute of Frauds since it is a “special
promise to answer for the debt, default or miscarriage of another.” Thus,
to be enforceable, a contract of guaranty must be in writing.
Judge: Is there a particular form to constitute guaranty?
No, there is no particular form because it is a consensual contract. However, for it
to be enforceable, it has to be reduced in writing.
Macondray and Co. v. Pinon
Re: Written undertaking to guarantee payment of another person’s
obligation
Kangleon’s very letter constitutes his undertaking of guaranty. Contracts
shall be obligatory in whatever form they may have been entered into,
provided all the essential elements for their validity is present. A contract
of guaranty is not a formal contract and shall be valid in whatever form
it may be, provided that it complies with the Statute of Frauds.
Judge: There is no particular form required for as long as you can determine from
the gist of the letter that the person signing it undertakes to secure the obligation
of the principal debtors. Here, Kang Leon was held liable even if he did not promise
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to pay in case of failure of payment but due to the letter having the paragraph “
I pledge payment” which the SC considers as sufficient guarantor's undertaking
on his part.
Wise & Co. v. Tanglao
Re: Guaranty and suretyship must be expressed and not presumed
Facts: PWCI obtained a preliminary attachment of David’s property. To
avoid execution of said attachment, David obtained a SPA from his
lawyer Tanglao, authorizing him to sign for his lawyer as guarantor for
himself in his indebtedness to plaintiff and to mortgage his lawyer’s lot
to guarantee said obligation.
Held: Under the SPA, Tanglao empowered David to enter into a contract
of suretyship and a contract of mortgage of the property described in
the document. David, however, used said SPA only to mortgage the
property and did not enter into a contract of suretyship.
Nothing is stated in the compromise agreement to the effect that
Tanglao became David’s surety for the payment of the judgment debt.
Neither is this inferable from any of the clauses thereof, even if this
inference might be made, it would be insufficient to create an obligation
of suretyship which under the law must be expressed and cannot be
presumed. Even if there is no particular form required for a guaranty to
be effective, it must be expressly entered into. It cannot be merely
presumed by the mere fact of offering an SPA.
Solon v. Solon
Re: The terms of the contract of suretyship determine the surety’s
liability and cannot extend to more than what is stipulated therein.
When Solon bound himself as surety, he limited himself to giving as
security, by way of mortgage, a specific land and no other. It is not
possible that the creditor could have ever contemplated bringing an
action against Solon to obtain possession not only of the land expressly
mortgaged to it, but also of any other land belonging to for the purpose
of collecting its credit against the debtor.
The contract of suretyship does not admit of the interpretation that
could make Solon liable for the amount greater than P5, 000. Thus, the
creditor cannot require him to pay the principal debtor’s indebtedness,
should the latter fail to do, with the land other than that he had
mortgaged.
This is so because the clauses of a contract of suretyship determine the
extent of the liability of the surety because said liability should not be
extended farther than the clear terms of the contract of guarantee by
mere implications.
Relevant provision
Art. 2055. A guaranty is not presumed. It must be express and cannot extend to
more than what is stipulated therein.
CAUSE
The cause of a contract of guaranty is the same as that of the principal
obligation.
Severino v. Severino
A guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. In other
words, the same cause that supports the principal obligation.
7|U N I V E R S I T Y O F S A N C A R L O S S L G
CHAPTER 2– EFFECTS OF GUARANTY
Sec 1. Effects of Guaranty between Guarantor & Creditor
OBLIGATIONS OF THE CREDITOR AND GUARANTOR
OBLIGATION OF THE CREDITOR
To pay the guarantor the compensation stipulated.
Judge: In a contract of guaranty, the guarantor may not receive valuable
consideration for his undertaking because the consideration for guaranty is the
same consideration as the principal obligation.
But if guaranty is compensated, then the guarantor is entitled to the same valuable
consideration. Who will pay the guarantor? Usually the debtor. But if it’s the
creditor who undertakes to pay the compensation for the guarantor, then that is
the obligation of the creditor in relation to the contract of guaranty.
OBLIGATION OF THE GUARANTOR
To pay or perform the obligation if the debtor fails to do so.
Judge: What is the main obligation of the guarantor? To pay the obligation. This
does not only entail payment of a sum of money. Payment is the performance in
any manner of an obligation.
WHAT IS TO BE PAID
WHAT IS TO BE PAID
Q. Can the guarantor secure or bind himself to pay more than
the obligation of a debtor?
GR: The guarantor can bind himself for less, but not for more than the
principal debtor.
Example.
I owe X 100,000. You act as my guarantor. And you say that you bind
yourself to secure my obligation for 200,000 because you just want to.
Then, I defaulted in my payment. Will you pay 200,000 to X?
No. Because your obligation cannot be more than the obligation of the
principal debtor. You can bind yourself for less, but you cannot bind
yourself for more.
XPNs:
Instances where the obligation of the guarantor is more than the
obligation of the principal debtor:
1. When the guaranty is penal in nature
2. When the guarantor is in default
Relevant provision
Art. 2054. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the
conditions. Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
General Insurance and Surety Corp. vs. Republic
Re: When the guaranty is penal in nature
Facts: By the terms of the bond the surety guaranteed to the
government "compliance by the Central Luzon Educational Foundation
with all obligations, including the payment of the salaries of its teachers
and employees, past, present and future and the payment of all other
obligations incurred by, or in behalf of said school in the sum of
P10,000.00.
Held: There is nothing against public policy in forfeiting the bond for
the full amount. The bond is penal in nature. Art. 1226 of the Code
states that in obligations with a penal clause, the penalty shall
substitute for the indemnity for damages and the payment of interest
in case of noncompliance, it there is no stipulation to the contrary, and
the party to whom payment is to be made is entitled to recover the
sum stipulate without need of proving damages because one of the
primary purposes of penalty clause is to avoid such necessity.
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Judge: The government collected P 10,000 from the bonding company when the
debtor’s obligation was only P1,000. When the bond was put up, the school already
owed two of its employees their salaries. Here, the amount paid by the guarantor
is more than the debtor’s obligation because the bond put up by him is penal in
nature.
PNB v. Luzon Surety
Re: When surety is liable for interest
If a surety upon demand fails to pay, he can be held liable for interest,
even if in thus paying, the liability becomes more than that in the
principal obligation. The increased liability is not because of the contract
but because of the default and the necessity of judicial collection. It
should be noted, however, that the interest runs from the time the
complaint is filed, not from the time the debt becomes due and
demandable.
Judge: This is especially true in suretyship undertakings. In suretyship
undertakings, the surety is bound principally with the principal debtor and the
nature of liability is similar to that of solidary debtor. From the moment demand is
made by the creditor from the surety, the surety is already in default. (Default-
judicial or extrajudicial demand). Upon default, the consequence is the liability to
pay interest.
Ex. If the obligation is 100,000 and demand is made upon the surety to pay and
the surety fails to pay, he is considered in default. He may be held liable to pay
more than the amount of principal obligation because of his own default.
WHEN TO PAY
WHEN TO PAY
Ideally, the guarantor pays when the obligation is due.
Q. Can the guarantor pay prior to the due date?
Yes, if the creditor accepts.
Q. Can the guarantor then proceed against the debtor for
reimbursement?
No. If the guarantor pays before the obligation is due, he cannot
immediately seek reimbursement from the principal debtor. This is
because as far as the debtor is concerned, his obligation is not yet due
and demandable. But if the debtor confirms and ratifies the payment,
then he is liable now to reimburse the guarantor.
Relevant provision
Art. 2069. If the debt was for a period and the guarantor paid it before it became
due, he cannot demand reimbursement from the debtor, until the expiration of
the period, unless the payment has been ratified by the debtor.
DUTY TO NOTIFY PAYMENT
DUTY TO NOTIFY PAYMENT
The guarantor has to notify the debtor of the payment, otherwise the
debtor may set up against the guarantor all defenses available against
the creditor.
Q. When does guarantor notify the debtor?
Before payment. Otherwise, if after, the debtor may set up defenses.
Examples of defenses by debtor: I have paid. My obligation has been
extinguished by prescription or I was given an extension, but of course
you know that extension and payment without the consent of the
guarantor releases him of his undertaking. So, ideally, guarantor must
notify the debtor prior to payment because the debtor may set up
defenses against him. Therefore, the guarantor cannot seek
reimbursement from him anymore.
If the guarantor pays and does not notify the debtor and later on debtor
pays without knowing that the guarantor has paid, the guarantor should
seek reimbursement from the creditor.
8|U N I V E R S I T Y O F S A N C A R L O S S L G
Rule if notice is prevented by fortuitous event
If the guaranty is gratuitous and notice to the debtor is prevented by
fortuitous event, the debtor must reimburse the guarantor, if the
creditor is insolvent.
PRIVILEGES OF THE GUARANTOR
Privileges given to the guarantor
1. Benefit of exhaustion/excussion
2. Benefit of division
BENEFIT OF EXHAUSTION
It is the right available to the guarantor to demand that the creditor first
exhaust the properties of the debtor, which are within the Philippines
and which are not exempt from execution. And if still, the creditor
cannot collect, that’s the time that guarantor is liable.
Hence, creditor should:
A. First exhaust the properties of the debtor
B. Resort to all legal remedies against the debtor
C. Notify the guarantor of the debtor’s inability to pay.
Judge: But the law says that the suit must be filed by the creditor against the
debtor alone. Once he files the case against the debtor alone, he must ask the
court to notify the guarantor. When the creditor files a case against the debtor,
then he should later on ask for the amendment of the pleading in order to implead
the guarantor as additional defendant. That is why what is actually practiced is to
file a case against both the principal debtor and the guarantor jointly in the same
case.
What must the guarantor do if he is impleaded?
Invoke the benefit of exhaustion and he must point to the creditor properties of
the debtor within the Philippines which are not exempt from execution.
If the case is decided against both the debtor and the guarantor, will the judgment
be executed simultaneously against both?
No. Judgment against the guarantor will be suspended. It will not be enforced or
executed yet, until and unless all of the debtor’s properties are exhausted.
Machetti vs Hospicio de San Jose
Re: How inability to pay is proved
Fidelity & Surety Co. having bound itself to pay only in the event it’s
principal, Machetti cannot pay, it follows that it cannot be compelled to
pay until it is shown that Machetti is unable to pay.
Such inability to pay may be proven by the return of a writ of execution
unsatisfied or by other means, but it is not sufficiently established by
the mere fact that Machetti has been declared insolvent in an insolvency
proceeding in which the extent of the insolvent’s liability to pay is not
determined until the final liquidation of his estate.
Judge: One way of proving the inability to pay by the debtor is by the return of
the writ of execution which is unsatisfied or by other means. Of course, prior to
that he must already point to the creditor leviable properties of the debtor.
Q. The guarantor pointed out to the creditor leviable properties of the debtor but
the creditor failed to levy. Subsequently, the debtor became insolvent, can the
creditor collect the entire amount from the guarantor?
No. The guarantor’s obligation would be extinguished to the extent of the value of
the property which was not levied upon by the creditor due to his fault.
Q. Is it required that the surety or guarantor be afforded with the right to be heard
before he may be held liable?
Yes. Whether the undertaking is an ordinary guaranty or suretyship, the Court said
that due process should be accorded to the guarantor, especially the surety.
Towers Assurance Corp. v. Ororama Supermarket
Re: Effect of a writ of execution against surety who was not impleaded
Under Sec. 17, in order that the judgment creditor might recover from
the surety on the counterbond, it is necessary:
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(1) That the execution be first issued against the principal debtor and
that such execution was returned unsatisfied in whole or in part;
(2) That the creditor made demand upon the surety for the
satisfaction of the judgment, and
(3) That the surety be given notice and a summary hearing in the
same action as to his liability for the judgment under his
counterbond.
The first requisite mentioned above is not applicable to this case
because Towers Assurance Corporation assumed a solidary li ability for
the fulfillment of the judgment. A surety is not entitled to the exhaustion
of the properties of the principal debtor.
But certainly the surety is entitled to be heard before an execution can
be issued against him since he is not a party in the case involving his
principal. Notice and hearing constitute the essence of procedural due
process.
Judge: A case was filed for collection against the debtor who failed to pay. The
trial court ordered the surety to pay. The SC said, you cannot immediately hold
the surety liable. The surety must go to court and must be afforded the opportunity
to be heard. But this ruling was modified a year after in the case of Finman.
Finman General Assurance Corp vs Salik
Re: Where surety was impleaded but declared in default
The court effectively ruled that there’s no need to implead the surety
because of the nature of his relationship with the debtor. Therefore, by
impleading the debtor, it already means that the surety is also charged
with knowledge of such case.
Judge: But if you read the case of Finman, the surety there was actually
impleaded, only that he did not file an answer. The surety was actually afforded
the right to be heard only that he did not file an answer together with the principal
debtor, hence they were declared in default.
When should the benefit of excussion be invoked?
It should be invoked the moment demand to pay is made upon the
guarantor.
Judge: If a case is filed, the guarantor must invoke the privilege before the
judgment is rendered by the trial court. If invoked on appeal, then it is too late
already.
When the benefit of exhaustion is not available
1. If it is waived by the guarantor
2. If the guarantor solidarily binds himself to the debtor because his
obligation is direct and primary
3. If the debtor is insolvent, there is no need for declaration of
insolvency
4. When the debtor cannot be sued because he has absconded
5. When it may be presumed that execution will not result in the
satisfaction of the judgment credit
6. If guarantor failed to point out leviable properties of the debtor
Bitanga v. Pyramid
Re: Effect if guarantor failed to point the leviable properties of the debtor
Petitioner still failed to point out to the properties of the debtor sufficient
to cover its debt. Such failure on petitioner’s part forecloses his right to
set up the defense of excussion.
Judge: This emphasizes the requirement that it is not enough for the guarantor
to invoke the benefit of excussion. He must point out to the creditor the leviable
properties of the debtor. Here, since the guarantor failed to point leviable
properties of the debtor, he is prevented from invoking the privilege of exhaustion.
Tupaz v. CA
Re: Waiver of the benefit of excussion
Petitioner Tupaz here waived the benefit of exhaustion when he agreed
that his liability in the guaranty shall be direct and immediate without
any need whatsoever on the part of the bank to take any steps to
exhaust any legal remedies. That is a waiver of the benefit of
9|U N I V E R S I T Y O F S A N C A R L O S S L G
exhaustion. The creditor may not prove that it cannot collect from the
debtor before it can go after the guarantor.
J.N. Devt Corp v. Phil Export and Foreign Loan Guarantee Corp
Re: Effect when debtor invokes non-exhaustion by the guarantor
Facts: JN obtained a loan from PRB. It was secured by Phil Guarantee.
When JN failed to pay the obligation, Phil Guarantee was notified by
PRB. Then, Phil Guarantee notified JN. No action was taken by JN. Phil
Guarantee voluntarily paid the obligation and then sought
reimbursement from JN.
JN’s defense: Why did you not invoke the benefit of exhaustion? Since
you did not invoke, we are not liable to reimburse you.
Held: The benefit of exhaustion is a benefit granted to the guarantor
which the guarantor can waive. Payment by the guarantor without
invoking the privilege is a manifestation of his waiver. It should be the
guarantor who invokes the privilege and not the debtor in order to avoid
reimbursement.
Judge: The privilege of exhaustion is for the benefit of the guarantor. Being a
mere privilege therefore, it is waivable. The debtor cannot invoke the same for the
purpose of evading liability.
BENEFIT OF DIVISION
When there are several guarantors for one and the same debtor and
debt, the obligation to answer for the same is divided among all of them.
The creditor may only claim from each debtor his corresponding share,
unless solidarity has been expressly stipulated.
Judge: There are two or more guarantors securing the same obligation, each
guarantor is liable only to the extent of his share in the obligation. He cannot be
made to pay the entire obligation because the obligation is divided among them.
Requisites:
1. There are several guarantors
2. They guaranteed only one debtor
3. There is only one debt
When is division not available?
It’s not available for the same reason that the benefit of exhaustion is
not available.
1. If it is waived by the guarantor
2. If the guarantor solidarily binds himself to the debtor because his
obligation is direct and primary
3. If the debtor is insolvent, there is no need for declaration of
insolvency
4. When the debtor cannot be sued because he has absconded
5. When it may be presumed that execution will not result in the
satisfaction of the judgment credit
Mira Hermanos vs Manila Tobacconists
Re: Benefit of division; when rule applies
Facts: Both bonding companies (Provident and Manila Compania)
secured different amounts of the obligation of Manila Tobacconists.
First, P3,000 for Provident. The second was P2,000 for Manila Compania.
The obligation of Manila Tobacconists was around P2,000+.
The court said Provident and Manila Compania should not share 60-40,
because both companies secured different obligations. Since the total
amount of the obligation of the debtor did not exceed the amount of
P3,000, only Provident is liable. It cannot invoke the benefit of division.
Judge: Division applies if each and all guarantors secure the entire debt; but not
if each guarantors answers for a separate portion.
De Guzman v. Santos
Re: Effect if one of the two guarantors paid half of the judgment debt.
Supra. See discussion above.
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DEFENSES OF THE GUARANTOR
DEFENSES OF THE GUARANTOR
Defenses which pertain to the debtor
The guarantor may set up against the creditor all defenses which pertain
to the principal debtor and are inherent in the debt; but not those purely
personal to the debtor.
Defenses purely personal: Minority, incapacity and other vices of consent which
the principal debtor may waive; unless the guarantor was ignorant of the vice.
The surety may invoke fraud, violence, prior payment, res judicata,
prescription and others of the same class.
Defenses peculiar to guaranty
Merger, novation, extension of time, etc., which invalidates the contract
between the creditor and the surety.
Sec 2. Effects of Guaranty between Debtor and Guarantor
RIGHTS OF THE GUARANTOR BEFORE PAYMENT
BEFORE PAYMENT
1. To receive compensation, unless no compensation is agreed upon
by the parties
2. To demand relief from the guaranty against the action of the
creditor
3. To demand security against the danger of the debtor’s insolvency
Instances when the guarantor may proceed against the
principal debtor, even before payment
1. When he is sued for 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 the period has expired
4. When the debt has become demandable by reason of the
expiration of the period of payment
5. After the lapse of 10 years, when the principal obligation has no
fixed period for its maturity
6. If there are reasonable grounds to fear that the principal debtor
intends to abscond
7. If the principal debtor is in imminent danger of becoming insolvent
In all these cases, the action of the guarantor is to obtain release from
the guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the
debtor
Judge: Before payment by the guarantor, he is entitled to receive compensation
and he can also demand relief from the guaranty. When? When he sued for
payment in case of insolvency of the debtor in the instances enumerated above.
Q. If you are the creditor, would you consent to relieve the guarantor of his
undertaking? No, you would not agree because you agreed to extend the loan to
the debtor because of his security. The law says that the rights of the creditor
should not be prejudiced. What’s the middle ground?
If you are the guarantor, ask for an indemnity contract from the debtor, which is
also asking for another guarantor, and that is already a sub-guaranty. To assure
the guarantor that if he pays, then you can go after the sub-guarantor or against
the indemnity bond.
Q. Can the surety also invoke this right?
Yes. This is also available to the surety despite being solidarily liable.
Manila Surety v. Batu Construction
Re: Right of surety to invoke provisions of Art. 2071
In suretyship, the surety becomes liable to the creditor without the
benefit of the principal debtor's exclusion of his properties, for he may
10 | U N I V E R S I T Y O F S A N C A R L O S S L G
be sued independently. So, he is an insurer of the debt and as such. he
has assumed or undertaken a responsibility or obligation greater or more
onerous than that of guarantor.
Such being the case, the provisions of article 2071, under guaranty, are
applicable and available to a surety. The reference in article 2047 to, the
provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code,
on solidary or several obligations, does not mean that suretyship which
is a solidary obligation is withdrawn from the applicable provisions
governing guaranty.
RIGHTS OF THE GUARANTOR AFTER PAYMENT
AFTER PAYMENT
1. To seek reimbursement from the principal debtor
2. To be subrogated to the rights of the creditor
Personal action for reimbursement
The guarantor must be indemnified of the following:
a) The amount he paid
b) Legal interest from the time the payment was made known to the
debtor
c) Expenses incurred after having notified the debtor that payment
had been demanded of him
d) Damages when circumstances show
Action in subrogation of the creditor
The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
Subrogation transfers to the person subrogated, the credit with all rights
thereto appertaining, either against the debtor or third persons, be they
guarantors or possessors of mortgages, subject to stipulation in a
conventional agreement.
TN: If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
Judge: If the guarantor has paid, he has the right to seek for reimbursement from
the debtor. If the principal obligation is also secured by another security
undertaking such as mortgage, and the guaranty was constituted with the consent
of the debtor, then the guarantor is subrogated to the rights of the creditor. If,
however, the guaranty was constituted without the consent of the debtor, the
guarantor is entitled only to beneficial reimbursement.
Q. If you are the guarantor who has paid the obligation, will you seek
reimbursement or pursue subrogatory action such as foreclosure of the mortgage?
It depends. If the debtor is solvent, seek reimbursement. If the debtor is insolvent,
and you step into rights of the creditor as a mortgagee, by all means foreclose the
mortgage. Because if you seek for reimbursement, you cannot recover since the
debtor is insolvent. But you are a secured creditor in so far as the property subject
of the mortgage is concerned. If there are other preferred creditors with respect
to this particular property, you divide the proceeds from the sale proportionately.
But if you are the only preferred creditor, then you can be assured of full
reimbursement of the amount that you paid.
PAYMENT WITHOUT CONSENT / AGAINST DEBTOR’S WILL
RULES
1. If the guarantor should pay without notifying the debtor, the latter
may enforce against him all the defenses which he could have set
up against the creditor at the time the payment was made.
Reason: The liability of the guarantor being merely subsidiary, he should
really wait till after the debtor has tried to comply. The guarantor should not,
thru his own fault or negligence, be allowed to jeopardize the rights of the
debtor. By paying, the guarantor deprives the debtor of the opportunity to
set up defenses against the creditor.
2. If the guarantor has paid without notifying the debtor, and the
latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only
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against the creditor. Nevertheless, in case of a gratuitous guaranty,
if the guarantor was prevented by a fortuitous event from advising
the debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.
Example: A owes B P100, 000 with C as guarantor. C paid the debt to B
when it fell due but C did this without notifying A. Not being aware of the
payment by C, A repeated the payment.
Q: Can C recover from A?
A: No. C cannot recover from A. C has no remedy whatever against A, the
debtor. C’s only remedy is to recover from B, the creditor.
Q: Supposing the guaranty was gratuitous, and suppose the only reason C
was not able to notify A was because of a fortuitous event, what are C’s
rights?
A: C must still recover from B. But if B, the creditor is insolvent, then A, the
debtor shall reimburse C for the amount paid.
3. If one, at the request of another, becomes a guarantor for the debt
of a third person who is not present, the guarantor who satisfies
the debt may sue either the person so requesting or the debtor for
reimbursement.
Sec 3. Effects of Guaranty as between Co-Guarantors
EFFECTS OF GUARANTY BETWEEN CO-GUARANTORS
Rule in case a co-guarantor pays the entire obligation
GR: If one guarantor pays the entire obligation, he cannot seek reimbursement
from the other co-guarantors because he waives the right of division.
XPNs:
1. If payment was made by virtue of a judicial demand
2. If the principal debtor is insolvent
CONTRIBUTION
When there are two or more guarantors of the same debtor and for the
same debt, one among them who has paid may demand of each of the
others the share which is proportionally owing from him. Provided, the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent.
Example:
A, B and C are D's guarantors. D was insolvent and A had to pay the
whole debt. Later, A can demand from B and C 1/3 of the debt from
each. This is so because A's share is supposed to be also 1/3. Of course,
each of them can demand proportional reimbursement from the
principal debtor.
Judge: In what instance may a co-guarantor seek reimbursement from others?
a) If he paid the entire obligation by virtue of a court order
b) If the principal debtor has become insolvent
If a co-guarantor voluntarily pays the entire obligation even without a court order
or without the principal debtor being insolvent, he cannot seek reimbursement
form the other co-guarantors. That means he waived the benefit of division. Just
like the benefit of excussion or exhaustion, the benefit of division is waivable.
IN CASE OF INSOLVENCY OF ONE CO-GUARANTOR
If any of the guarantors should be insolvent, his share shall be borne
by the others, includi ng the payer, in the same proportion.
Example:
A, B and C are D's guarantors of a debt of P300, 000 in favor of E. Since
D was insolvent, A paid P300, 000 to E.
Q: What if B is insolvent, how much can A demand from C?
A: P150, 000. A cannot demand the extra P100, 000 (share of B) from
C because in that way, C would have a greater burden. The law
provides that the insolvent guarantor's share must be borne by the
others (including the payer A) proportionally.
11 | U N I V E R S I T Y O F S A N C A R L O S S L G
DEFENSES OF CO-GUARANTORS
The co-guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal debtor against
the creditor, and which are not purely personal to the debtor.
CHAPTER 3– EXTINGUISHMENT OF GUARANTY
MODES OF EXTINGUISHMENT OF GUARANTY
Q. How may a guaranty be extinguished?
1. Negligence of the creditor
2. Extension of payment
3. Payment of the principal debt by the debtor
4. Accidental loss of the thing due before default
5. Remission of debt
6. Merger
7. Compensation
8. Novation
9. Death
10. Failure to send notice of default
NEGLIGENCE OF THE CREDITOR
NEGLIGENCE OF THE CREDITOR
Two instances of negligence by the creditor which releases
the guaranty from the obligation
1. The creditor who is negligent in exhausting the property
pointed out shall suffer the loss, to the extent of said property,
for the insolvency of the debtor resulting from such negligence.
Judge: Here, the guarantor invokes the benefit of excussion and pointed to
the creditor the alienable properties of the debtor which are not exempt from
execution. However, through negligence, the creditor did not exhaust the
debtor’s properties to apply to the payment of the debtor.
Later on the debtor becomes insolvent and therefore the creditor could not
recover the full credit owing to each to the extent the value of the property
which he did not levy. The guarantor is released from the guaranty. If he
failed to levy upon the property, the value of which is more than enough to
recover the entire obligation, the guaranty is totally extinguished.
2. The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preference of
the latter. (Art. 2080)
E. Zobel v. CA
Re: Effect if there is impossibility of subrogation
Facts: Spouses obtained a loan from a bank. The loan was secured by
both a personal and real security – a Continuing Guaranty and Chattel
Mortgage. When the spouses defaulted, the bank went after the
guarantor. The guarantor refused to pay, arguing that he was already
released from his obligation when the bank failed to register the chattel
mortgage which deprived him to be subrogated to the rights of the bank
should he pay the obligation.
Held: The contract executed by the petitioner in favor of the bank albeit
denominated as a "Continuing Guaranty," is a contract of surety. Thus,
the non-registration of the chattel mortgage did not release him from
his obligation.
Having thus established that petitioner is a surety, Article 2080 of the
Civil Code, relied upon by petitioner, finds no application to the case at
bar, for Article 2080 applies only where the liability is a guarantor.
But even assuming that Article 2080 is applicable, the bank’s failure to
register the chattel mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed in favor of the bank,
petitioner bound itself to the contract irrespective of the existence of
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any collateral. It even released the bank from any fault or negligence
that may impair the contract.
EXTENSION OF PAYMENT
EXTENSION OF PAYMENT
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of time referred
to herein.
Requisites
A. Debt has become due
B. Creditor grants an extension of time to the debtor
C. The extension is without the consent of guarantor
Note:
The extension must be an express stipulation. The extension of the term
must be based on some new agreement between the creditor and the
principal debtor by virtue of which the creditor deprives himself of his
claim. But if automatic extension is expressly provided in the contract,
the discharge by extension is not applicable.
Rule if debt is to be paid on installments
GR: Each installment is considered as a separate and distinct obligation
such that an extension in one installment does not result to an extension
of all installments.
XPN: If there is an acceleration clause. Default of one installment makes
the entire obligation due and demandable. Thus, if one installment is
extended, the entire obligation is likewise extended.
Villa v. Garcia Bosque
Re: Effect of extension of one installment
If the debts are several, or consist of separate installments, the
extension of one does not release the guaranty for the others, unless
default in the extended one automatically makes all the rest due and
payable.
Where a surety is liable for different payments, such as installments of
rent, or upon a series of promissory notes, an extension of time as to
one or more will not affect the liability of the surety for the others.
Radio Corp v. Roa
Re: Effect of acceleration clause
The contract contained an acceleration clause to the effect that upon
failure to pay any installment when due, the other installments ipso facto
become due and payable. Thus, the whole unpaid balance automatically
becomes due and payable upon failure to pay one installment. In which
case, the act of the plaintiff in extending the payment of the installment,
without the consent of the guarantors, constituted in fact an extension
of the payment of the whole amount of the indebtedness.
Phil. Gen Insurance v. Mutuc
Re: Effect of consenting to the extension of time of payment
In a surety bond, the sureties bound themselves to be liable in case of
extension or renewal of the bond, without the necessity of executing
another indemnity agreement for the purpose and without the necessity
of their being notified of such extension or renewal.
Here, the sureties are still bound even if the time of payment was
extended thrice, because of the simple fact that they consented to the
extension.
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Prudential v. CA
Re: Effect on accommodation party
Where the creditor bank is the payee of a note and assignee of a deed
of assignment, its extension of the period of payment would release the
accommodation party.
The PNB, in authorizing the third payment to the Company after the
promissory note became due, in effect, extended the term of the
payment of the note without the consent of the accommodation makers
who stand as sureties to the accommodated party and to all other
parties who are not holders in due course or who do not derive their
right from the same, including PNB.
True, if the Bank had not been the assignee, then the petitioners would
be obliged to pay the Bank as their creditor on the promissory note,
irrespective of whether or not the deed of assignment had been violated.
However, the assignee and the creditor in this case are one and the
same – the Bank itself.
When the Bank violated the deed of assignment, it prejudiced itself
because its very violation was the reason why it was not paid on time in
its capacity as creditor in the promissory note. It would be unfair to
make the petitioners now answer for the debt or to foreclose on their
property. The petitioners who are the accommodation parties/sureties
are absolved from liability on the promissory note and under the
mortgage contract. The PNB is ordered to release the real estate
mortgage constituted on the property of the petitioners.
Shannon v. Phil Lumber
Re: Mere failure to demand
The mere failure on the part of the creditor to demand payment after
the debt has become due does not constitute an extension which would
extinguish the guaranty.
It is a recognized doctrine in the matter of suretyship that with respect
to the surety, the creditor is under no obligation to display any
diligence in the enforcement of his rights as a creditor. His mere
inaction, indulgence, passiveness, or delay in proceeding against the
principal debtor, or the fact that he did not enforce the guaranty or
apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires
diligence and promptness on the part of the creditor.
Conchingyan v. R&B Surety
Re: Undertaking to hold in abeyance any action
PNB's undertaking under the Trust Agreement "to hold in abeyance any
action to enforce its claims" against the surety did not extend the
maturity of the surety’s obligation under the Surety Bond.
Mere delay or negligence in proceeding against the principal will not
discharge a surety unless there is between the creditor and the principal
debtor a valid and binding agreement therefor, one which tends to
prejudice the surety or to deprive it of the power of obtaining indemnity
by presenting a legal objection for the time, to the prosecution of an
action on the original security.
PAYMENT OF THE PRINCIPAL DEBT BY THE DEBTOR
PAYMENT OF THE PRINCIPAL DEBT BY THE DEBTOR
Dacion en pago – when payment of a sum money, is paid by giving a
thing, you cannot anymore go after the guarantor, because there was
an extinguishment of principal obligation, it does not revive even if the
thing is subsequently lost by eviction unless the obligation is
facultative.
Cosignation – In case of consignation, the guarantor is released by
the consent of the creditor to the withdrawal of the consignation.
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Judge: If the creditor accepts a determinate thing as payment for the obligation
(dacion en pago), and later on the thing is lost by fortuitous event, can the creditor MERGER OF PARTIES
collect from the guarantor?
MERGER OF PARTIES
No, from the moment the creditor accepted the thing, the obligation was
extinguished because the moment he accepted the thing he became owner of the
thing (res perit domino – owner bears the risk of loss)
Between creditor and debtor
Extinguishes accessory obligation of guaranty because the principal
Hongkong Shanghai Bank v. Aldanese obligation is extinguished.
Re: Payment of the principal debt by the debtor Judge: He is now the creditor of his own obligation and he cannot collect guaranty
from the guarantor if he is the debtor. He does not pay himself as a creditor.
The principal debtor having paid an amount on account of the debt, the
surety is under obligation to pay the balance up to the amount secured Between creditor and guarantor
by the bond executed by him. Does not extinguish principal obligation, but the guaranty is
extinguished.
Where in a bond the debtor and surety have bound themselves Judge: The guarantor is now the creditor, the guaranty is extinguished since if the
solidarily, but limiting the liability of the surety to a lesser amount than debtor cannot pay, he cannot demand payment from himself as guarantor.
that due from the principal debtor, any such payment as the latter may
have made on account of such obligation must be applied first to the Between debtor and guarantor
unsecured portion of the debt, for, as regards the principal debtor, the The guaranty is extinguished, because the debtor cannot be his own
obligation is more onerous as to the amount not secured. guarantor.
Judge: But the sub-guarantor if any, is not released. Other securities, pledges,
ACCIDENTAL LOSS OF THE THING DUE BEFORE DEFAULT mortgages are not affected.

ACCIDENTAL LOSS BEFORE DEFAULT COMPENSATION

Review Arts 1262 – 1269
COMPENSATION
Q. If the obligation consists in delivery of a determinate thing and it was Review Arts. 1278-1290
secured by a guarantee, and it is lost due to fortuitous event, before the
period arrives for the debtor to perform, what happens to the obligation? Compensation takes place when two persons, in their own right, are
Is the obligation of the debtor converted to a monetary obligation to pay creditors and debtors of each other. Legal compensation takes place
the thing? by operation of law.

No, it is extinguished by a fortuitous event. Therefore, if the obligation
of the debtor is extinguished, the guaranty is also extinguished.
REMISSION OF DEBT
REMISSION OF DEBT
Review Arts 1270 – 1274
A. If there is a condonation of a joint obligation, the guaranty
discharged is only up to that specific condoned obligation
B. If in favor of the debtor, it releases the guarantor
C. If in favor of one co-guarantor, without the consent of the
others, it benefits the latter to the extent of the share of the one
released. If they consent, they are not released.
Judge:
Q. If the debtor has an obligation of 100,000 and the creditor has an obligation to
debtor of 50,000 and then debtor fails to pay on demand, can the guarantor claim
compensation?
Yes, the guarantor can invoke compensation, but only to the extent of P50, 000.
In which case, the guarantor can only collect P50, 000 from the debtor as
reimbursement.
Q. If debtor owes creditor 1 million, creditor owes guarantor 400,000 and debtor
defaults payment of the obligation. Can the guarantor invoke legal compensation?
Yes. Guarantor may invoke compensation between himself and creditor. Here,
however, the guarantor can collect from the debtor the entire 1 million as
reimbursement.
NOVATION

Judge: NOVATION
Q. P1 million obligation, and the creditor condones 400,000 pesos. The balance Review Arts. 1291-1304
would be 600,000. And when the debtor fails to pay on the due date, can the
creditor collect 1 million from the guarantor? Two types of novation:
No, because the remission benefits the guarantor 1. Extinguishes the principal obligation
2. Modifies the principal obligation
Q. If the guarantor obtained a remission of the debt up to the extent of 400,000,
how much can the guarantor obtain from the debtor as reimbursement?
a) If less burdensome – guaranty subsists
b) If more burdensome and guarantor did not consent –
The guarantor cannot ask 1 million from the debtor, only up to 600,000 pesos guaranty extinguished
because through his own effort the obligation was condoned up to 400,000. The
guarantor never imparted with any amount to get the remission so he can’t ask When the principal obligation is extinguished
for the entire 1 million from the debtor. All he paid was 600,000 pesos and only
that can he get from the debtor as reimbursement.
The original obligation is extinguished, so the guaranty will be also be
extinguished.
However, the principal obligation still stands as 1 million pesos because it was
only the guaranty condoned, not the principal obligation When the principal obligation is modified
If less burdensome, the guaranty subsists. If more burdensome, the
Distinguish what was condoned. The Guaranty or the Principal Obligation. guaranty is extinguished, if the guarantor did not consent. If the debt is
merely increased, the guarantor is liable for the original debt only.

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DEATH
DEATH OF THE PARTIES
A. Death of the guarantor – does not extinguish the guaranty (See De
Guzman v. Santos – where the estate of the deceased guarantor
was made to pay the obligation)
B. Death of the debtor – does not extinguish the guaranty
Stronghold Insurance v. Republic Asahi
Re: Death of debtor does not extinguish the suretyship
Surety Company’s liability under the performance bond it issues is
solidary. The death of the principal obligor does not, as a rule, extinguish
the obligation and the solidary nature of that liability.
The surety’s 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.
Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor will not
work to convert, decrease or nullify the substantive right of the solidary
creditor. Evidently, despite the death of the principal debtor, respondent
may still sue petitioner alone, in accordance with the solidary nature of
the latter’s liability under the performance bond.
FAILRE TO SEND NOTICE OF DEFAULT
FAILURE TO SEND NOTICE OF DEFAULT
General Insurance and Surety Corp v. Republic
A stipulation in the bond expressly states that "when the bond expires
on a certain date, it will be cancelled 10 days after the expiration, unless
the surety is notified of any existing obligation thereunder, or unless the
surety renews or extends it in writing for another term."
The giving notice of existing obligation was a condition precedent to
further liability of the surety and that in default of such notice, liability
on the bond automatically ceased.
PLEDGE, MORTGAGE AND ANTICHRESIS
CHAP 1. PROVISIONS COMMON TO PLEDGE & MORTGAGE
COMMON CHARACTERISTICS
COMMON CHARACTERISTICS
A. They must be constituted to secure fulfillment of a principal
obligation
B. Constituted only by the absolute owner of the thing pledged or
mortgaged
C. 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.
D. Thing pledged or mortgaged may be alienated at the instance of
the creditor
E. Pledge or mortgage are indivisible
F. A promise to constitute pledge or mortgage gives rise to personal
action only
Judge: Both pledge and mortgage are real security undertakings unlike guaranty
and suretyship which are personal security undertakings. In pledge, unlike in
suretyship and guaranty wherein a third person other than the debtor secures the
14 | U N I V E R S I T Y O F S A N C A R L O S S L G
debt, property is put up or offered as security for the security of obligation. In real
estate mortgage, real property is offered as security.
In chattel mortgage, personal property or chattel remains with the mortgager
property. Unlike pledge wherein the personal property is delivered to the creditor
or the third person.
THEY MUST BE CONSTITUTED TO SECURE FULFILLMENT OF A
PRINCIPAL OBLIGATION
A. They may secure all kinds of obligations, pure or conditional.
B. The principal obligation may be future, but the security obligation
does not come into existence until the principal does.
C. The principal obligation may be natural. Voidable or unenforceable,
provided the fact is known to the pledgor or mortgagor.
Mojica v. CA
Re: Mortgage given to secure future advancements
Mortgages given to secure future advancements are valid and legal
contracts. The amounts named in said contract 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. A mortgage given to secure advancements is a
continuing security and is not discharged by repayment of the amount
named in the mortgage, until the full amount of the advancements are
paid.
CONSTITUTED ONLY BY THE ABSOLUTE OWNER OF THE THING
PLEDGED OR MORTGAGED
A pledge or mortgage must be constituted by the absolute owner of
the thing pledged mortgaged because of the possibility that it will be
sold to satisfy payment of the principal obligation. You cannot dispose
of something you never own.
Vda de Bautista v. Marcos
Re: Mortgage constituted before issuance of patent to the mortgagor
Issue: Whether or not a mortgagee may foreclose a mortgage on a piece
of land covered by a free patent where the mortgage was executed
before the patent was issued.
Held: No. It is an essential requisite for the validity of a mortgage that
the mortgagor be the absolute owner of the thing mortgaged. Thus, a
mortgage executed before the issuance of a patent to the mortgagor is
void and ineffective, since the land was still part of the public domain
when the deed of mortgage was constituted. The mortgagor was not
yet the owner of the land mortgaged and could not, for that reason,
encumber the same.
Judge: The mortgagor here was not the registered owner because the property
was mortgaged prior to the issuance of a free patent in her name. Therefore, the
court did not consider her to be the absolute owner of the property at the time
she mortgaged the property. Even if she had it registered after, it will not validate
a void contract.
PNB v. CA
Re: Mortgage by surviving spouse of conjugal property
The subject lots belonged to the conjugal partnership of the spouses.
When the husband died, his one-half share in said lot was transmitted
to his heirs and a co-ownership was established between them. Hence,
the wife, could not have validly mortgage the whole lot to PNB.
Under Art. 2085 one of the essential requisites to a contract of pledge
and mortgage is that the pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged. Each co-owner shall have the full
ownership of his part of the fruits and benefits pertaining thereto, and
he may therefore, alienate, assign or mortgage it, and even substitute
another person in its enjoyment, except when personal rights are
involved.
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Thus, PNB had only acquired ½ of the entire property for this was all
the wife had in her power to convey. The other half being as it still is,
the willful share of the plaintiffs inheritance from their father.
Judge: Surviving spouse mortgage the entire property even if the other
heirs are still alive. Therefore, the mortgage is void to the extent of the
shares of the heirs.
DBP v. CA
Re: Property not owned by mortgagor at the time of the mortgage
Facts: Spouses obtained a loan from DBP, secured by several real estate
mortgage. At the time of the mortgage, the properties were still the
subject of a free patent application.
Held: The law specifically requires that the pledgor or mortgagor be the
absolute owner of the thing pledged or mortgaged. Thus, since the
disputed property was not owned by the Spouses when they mortgaged
it with DBP, the contract of mortgage and all the subsequent legal
consequences as regards the lots are null and void.
FREE DISPOSAL OR LEGAL AUTHORITY OF PERSON
CONSTITUTING THE PLEDGE OR MORTGAGE
A. If the property is encumbered – there can be no “free disposal”.
Thus, even if absolute owner, he cannot constitute a pledge or
mortgage over said property.
B. A third person can constitute a mortgage as long as he is duly
authorized by the absolute owner thereof.
Judge: If the mortgagor was legally authorized that the properties that
would be subjected to the mortgaged was listed in the SPA and the property
mortgaged was not among those in the list, that person is not legally
authorized in that particular property. The mortgage is void. If there is a
foreclosure, the same is void. If the property was already awarded to the
highest bidder, he cannot acquire title over the property.
THINGS PLEDGED OR MORTGAGED MAY BE ALIENATED AT THE
INSTANCE OF THE CREDITOR
In cases of obligations secured by a mortgage or pledge, the non-
payment of the debtor authorizes the creditor to alienate the thing
mortgaged or pledged to satisfy the principal obligation. Ownership is
transferred to the highest bidder, and the proceeds of the sale will be
used to satisfy the payment of the obligation.
Q. If the property pledged or mortgaged may be alienated if the principal
debtor defaults, can a third party pledger/mortgagor invoke benefit of
exhaustion?
No, the benefit of exhaustion only pertains to guarantors.
Southern motors v. Barbosa
Re: Exhaustion applies only to personal guaranty
The right of guarantors, under Article 2058 of the Civil Code to demand
exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the
payment of the principal obligation.
Pactum commissorium
Automatic appropriation of the property secured to the creditor without
foreclosure during default of the debtor.
Judge: A stipulation that in case of default, the property immediately becomes
property of the creditor. This is prohibited for being against public policy. Take
note however, that only said provision is void. It does not invalidate the entire
pledge or mortgage contract.
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Francisco Dev’t Corp v. CA
Facts: Francisco Realty granted a loan of 7.5 million to respondent
spouses, in consideration of which the latter executed a promissory
note, a deed of mortgage and an undated deed of sale of the mortgage
property. The promissory note provided that “upon failure of the
mortgagor to pay the interest without prior agreement with the
mortgagee, full possession of the property will be transmitted and the
deed of sale will be registered.”
Held: The stipulation in the promissory notes providing that, upon failure
of respondent spouse to pay interest, ownership of the property would
be automatically transferred to petitioner Francisco Realty and the deed
of sale in its favor would be registered, are in substance a pactum
commissorium.
They embody the two elements of pactum commissorium.
1. That there should be a pledge or mortgage wherein a property is
pledged or mortgaged by way of security for the payment of the
principal obligation.
2. That there should be a stipulation for an automatic appropriation
by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated
period.
The subject transaction being void, the registration of the deed of sale
by virtue of which petitioner Francisco Realty was able to obtain a TCT
must also be declared void.
Instances of pactum commissorium
1. A provision that states “in case the mortgagor fails to redeem the
mortgage, the principal obligation secured shall be considered
payment of the land”.
2. A stipulation in the promissory note which provides that “upon
failure of the makers of the note to pay interest, ownership of the
property will be automatically transferred to the creditor and the
deed of sale in its favor will be registered”.
3. Stipulation in a memorandum of agreement with dacion en pago
that “failure of the debtor to pay the debt will give the creditor the
right to enforce the dacion en pago transferring to him ownership
of the property.”
Judge: How to determine if pactum commissorium? If there is no other act to be
performed by the pledger/mortgagor and the creditor to transfer the property to
the creditor.
Not pactum commissorium
1. If in the stipulation, the mortgagor still has to transfer ownership.
2. A stipulation that the creditor still has to buy the subject property
mortgaged. That is not automatic appropriation.
3. A stipulation where failure entitles the lender to the sale of the
house, not to make effect the deed of sale that they signed. There
is still a subsequent act to be performed on the part of the
mortgagor.
4. A promise to assign. Still has to assign the property mortgaged.
TN: In all these cases, there is still some other act to be performed by
the pledger/mortgagor and the creditor. Thus, not considered automatic
appropriation.
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PLEDGE OR MORTGAGE ARE INDIVISIBLE
The pledge and mortgage are indivisible even if the principal debt is
divided.
Relevant provision
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.
Q. A P5M loan was secured by a mortgage over four parcels of land.
P3M was paid. The value of each parcel of land is about 1m. Can the
debtor who is also the mortgagor demand that the mortgage be partially
released as regards the 2 parcels of land because the remaining parcels
are enough to satisfy for the balance of the obligation?
No, because that mortgage, although covering several parcels of land,
was delivered indivisible. It cannot be released for as long as the entire
obligation is not paid.
Q. If the debtor dies, survived by heirs, so heir 1 pays a share in a debt
to the creditor, can he ask the creditor for release on the part of the
mortgage in so far as the share of the party is concerned?
No, because of the indivisibility of the mortgage.
Q. Creditor dies and is survived by heirs 1, 2 and 3 and heir 1 receives
his share in the credit because he was paid partial payment from the
debtor. Can the debtor compel for the partial release of the mortgage?
No. The entire mortgage subsists for as long as the entire obligation is
not paid.
Dayrit v. CA
Re: Rule where debt is divisible or debtors are not solidarily liable
While it is true that the obligation is merely joint and each of the
defendants is obliged to pay only his/her 1/3 share of the joint
obligation, the undisputed fact remains that the intent and purpose of
the loan and mortgage agreement was to secure the entire loan of
150,000 that the respondent extended to the defendants.
When several things are mortgaged or pledged, each thing for a
determinate portion of a debt, the pledges or mortgages are considered
separate from each other. But when several things are given to secure
the same debt it is entirely, all of them are liable for the debt, and the
creditor does not have to divide his actions by distributing the debt
among the various things pledged or mortgaged.
Even when only a part of the debt remains unpaid, all the things are still
liable for such balance. Hence, a mortgage voluntarily constituted by the
debtor on two or more parcels of land is one and indivisible, and the
mortgagee has the right to have either or both parcels, jointly or singly,
sold to satisfy his claim. In case the mortgaged properties are a house
and lot, it cannot be claimed that the lot and the house should be sold
separately and not together.
Yu v. PCI Bank
Re: Separate foreclosure of mortgaged properties
Issue: Whether or not a real estate mortgage over several properties
located in different locality can be separately foreclosed in different
places.
Held: The indivisibility of the real estate mortgage is not violated by
conducting two separate foreclosure proceedings on mortgaged
properties located in different provinces as long as each parcel of land
is answerable for the entire debt.
Besides, the rule on indivisibility of the real estate mortgage cannot be
equated with the venue of foreclosure proceedings on mortgaged
properties located in different provinces since these are two unrelated
concepts.
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The rule on indivisibility of a real estate mortgage is provided for in
Article 2089 of the Civil Code, which provides that “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.”
The debtor cannot ask for the release of any portion of the mortgaged
property or of one or some of the several lots mortgaged unless and
until the loan thus secured has been fully paid, notwithstanding the fact
that there has been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt cannot ask for
the proportionate extinguishment of the mortgage as long as the debt
is not completely satisfied
In essence, indivisibility means that the mortgage obligation cannot be
divided among the different lots, that is, each and every parcel under
mortgage answers for the totality of the debt.
Effect of partial payment
GR: Partial payment does not entitle the debtor to partial discharge.
XPN: When the pledge or mortgage covers several things, each
guaranteeing only a determinate portion of the credit.
When indivisibility of mortgage does not apply
Indivisibility of the mortgage does not apply if properties are specifically
assigned to a certain portion of the obligation. Like this particular parcel
of land secures 100k, another land secures 100k.
A PROMISE TO CONSTITUTE PLEDGE OR MORTGAGE GIVES
RISE TO PERSONAL ACTION ONLY
Personal action only
Is a promise to constitute a pledge or mortgage valid?
Yes, but the same gives rise to a personal action only. In other words,
there is no right to foreclose, but only the right to compel the
constitution of the pledge or mortgage.
Example: Debtor promised to deliver a thing to the creditor in pledge to
secure payment of his 20k debt, but has not delivered the thing
promised. Debtor failed to pay upon maturity. Can the creditor sell the
thing?
No. Creditor cannot sell the thing in a public sale as a pledge because
pledge is a real contract. The delivery of the thing perfects the contract
of pledge. Here, there was no contract of pledge. In which case, the
only action available to the creditor is a personal action to compel the
constitution of the pledge.
CHAPTER 2 – PLEDGE
CONCEPT
CONCEPT
Pledge is an accessory, real, unilateral contract by virtue of which the
debtor delivers to the creditor or a third person movable property as
security for the performance of a specific obligation upon the fulfillment
of which the thing must be returned with its accessions and accessories.
Judge: We are talking here of voluntary pledge, so there must be delivery of the
thing either to the creditor or to a third person by common agreement. Contract
of pledge is a real contract not a consensual contract, thus delivery is a necessary
requisite.
REQUISITES
Common to pledge and mortgage
A. It must be constituted to secure the fulfillment of a principal
obligation
B. The pledgor must be the absolute owner of the thing pledged
C. The person constituting the pledge must have free disposal of the
property, or in the absence thereof, be legally authorized for the
purpose
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D. The possession of the thing pledged (movable) is delivered to the
pledgee
TN: Actual delivery, not merely symbolic. However, it may include
constructive delivery (e.g. keys of a warehouse where the goods are stored-
depending on the peculiar circumstances)
To affect third persons:
E. Pledge must be in a public instrument
F. Description of the thing pledged
G. Date of the pledge
Calibo v. CA
Re: Requisites of Pledge
Facts: A tractor owned by private respondent was offered by Mike
Abella, his son, as security in the payment of his rents in arrears with
petitioner who took possession thereof. This tractor became the subject
of a suit for replevin with private respondent alleging that the pledge
was made without his knowledge and consent. Petitioner, on the other
hand, alleged that the tractor was validly pledged to him by respondent’s
son to answer for his financial obligations. In the alternative, petitioner
asserted that the tractor was left with him in the concept of an
innkeeper, on deposit. The trial court rendered judgment in favor of
private respondent. The same was affirmed on appeal by the CA, hence,
this recourse.
Held: In a contract of pledge, the creditor is given the right to retain his
debtor’s movable property in his possession, or that of a third person to
whom it has been delivered. It does not apply where, as in this case,
the lessee is not the owner of the property. In deposit, a person receives
an object belonging to another with the obligation of safely keeping it
and of returning the same. There is no deposit where the principal
purpose for receiving the object is not for safekeeping.
In a contract of pledge, the creditor is given the right to retain his
debtor’s movable property in his possession, or in that of a third person
to whom it has been delivered, until the debt is paid. For the contract
to be valid, it is necessary that:
1. The pledge is constituted to secure the fulfillment of a principal
obligation
2. The pledgor be the absolute owner of the thing pledged
3. The person constituting the pledge has the free disposal of his
property, and in the absence thereof, that he be legally authorized
for the purpose.
In this case, the second requisite is absent the pledge is void.
CLASSES OF PLEDGE
A. Voluntary pledge – created by will of the parties
B. Legal pledge – created by operation of law
Judge: i.e. in deposit, the depositary has the right to retain the goods
previously deposited until after the depositor has paid the depositary’s claims
and in fact the depositary can sell them in public auction within 30 days from
demand of payment
Also, necessary deposits constituted in hotels, that’s why it is also the right
of the hotel to retain the personal effects of the guest for unpaid lodging and
unpaid services availed at the hotel.
ELEMENTS
ELEMENTS OF PLEDGE
A. Parties
B. Object
C. Consideration
D. Form
PARTIES
Parties to a contract of pledge are: Pledgee and Pledgor.
If the pledgor is a third person and not principal debtor
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He has the rights of a guarantor:
a) Reimbursement
b) Subrogated to the rights of the creditor
OBJECT
The object must be:
A. Movable property
B. Within the commerce of man
C. Susceptible of possession
It may be money, goods or credits and includes their fruits, interest,
and earnings.
If a warehouse receipt is pledged
The pledgor retains ownership and bears the risk of the loss of the
goods represented by the receipt.
Betita v. Guanzon
Re: Effect where carabaos pledged not actually delivered to the
creditor
The alleged pledge is ineffective, because the plaintiff pledgee never
had actual possession of the property within the meaning the Civil Code.
In order to constitute the contract of pledge, the pledge must be placed
in the possession of the creditor or of a third person appointed by
common consent. This requisite is most essential and is characteristic of
a pledge, without which the contract cannot be regarded as entered into
or completed, because, precisely, in this delivery lies the security of the
pledge.
It is, of course, evident that the delivery of possession implies a change
in the actual possession of the property pledged and that a mere
symbolic delivery is not sufficient.
In the present case the animals in question were in the possession of
Tiburcia Buhayan and Simon Jacinto before the alleged pledge was
entered into and apparently remained with them until the execution was
levied, and there was no actual delivery of possession to the plaintiff
himself. There was therefore in reality no change in possession.
Incorporeal rights
Incorporeal Rights may be pledged if presented by documents which
must be delivered or indorsed if negotiable, to the creditor.
Examples of incorporeal rights are stocks. You cannot see stocks but
ownership thereof is evidence by stocks certificate. Another example is
the right to collect a credit evidenced by a promissory note or a
warehouse receipt.
Judge: Ordinarily, if you indorse a negotiable PN and deliver it to the transferee,
there is transfer of rights. BUT here, you deliver the PN only by way of pledge, it
is not a payment of an obligation, otherwise that would have been dacion en pago.
This is pledge only where the pledgee does not acquire any title over the thing
pledged. He only has the right to sell in case of default in the payment of the
principal obligation.
Lopez v. CA
Re: Effect of stock assignment
Issue: Where a party "sells, assigns and transfers" and delivers shares
of stock to another, duly endorsed in blank, in consideration of a
contingent obligation of the former to the latter, and, the obligations
having arisen, the latter causes the shares of stock to be transferred in
its name, what is the juridical nature of the transaction – a dation in
payment or a pledge?
Held: The SC held that considering that the indemnity agreement
connoted a continuing obligation of petitioner towards the surety while
the stock assignment indicates a complete discharge of the same
obligation, the existence of the indemnity agreement is inconsistent with
the theory of an absolute sale for and in consideration of the same
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undertaking of the surety, and strong and cogent reasons exist to
conclude that the surety and petitioner intended the stock assignment
as a pledge; that the assignment of stock is not a dation in payment
since the obligation of the petitioner towards the surety has not matured
at the time the same was executed; and that there was no novation of
the obligation by substitution of debtor since it was not established nor
shown that petitioner would be released from responsibility.
The facts and circumstances leading to the execution of the stock
assignment and the admission of Lopez prove that it is in fact a pledge.
The appellate court is correct in ruling that the following requirements
of a contract of pledge have been satisfied:
(1) That it be constituted to secure the fulfillment of a principal
obligation
(2) That the pledgor be the absolute owner of the thing pledged
(3) That the person constituting the pledge has the free disposal
of the property and in the absence thereof that he be legally
authorized for the purpose.
In case of doubt as to whether a transaction is pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests.
CONSIDERATION
A. As to the pledgor
If there is no valuable consideration – liberality
If there is a valuable consideration – the agreed compensation
B. As to the pledgee
The consideration of the principal credit supports the pledge.
FORM
No particular form is required as between the parties, for as long as
there is a delivery of the thing to the pledgee or to a third person.
However, in order to bind third persons –
The pledge must be a public instrument (notarized) giving the
description of the thing pledged and the date.
Betita v. Guanzon
Re: Effect of pledge not in a public instrument
Facts: Flor obtained a judgment against Tiburcia Buhayan. Under this
judgment, the sheriff levied on execution the carabaos in question which
were found in the possession of one Simon Jacinto but registered in the
name of Tiburcia Buhayan. The plaintiff, Betita, a third party, alleges
that the carabaos had been mortgaged to him and as evidence thereof
presented a document.
Issue: Whether the mere filing of a private document with the sheriff
after the levy of execution can create a lien of pledge superior to the
attachment.
Held: No. Even granting that there was delivery or transfer of possession
of the carabaos, the same would not bind Betita because the same was
embodied in a private document, and not in a public instrument which
the law requires to affect third persons.
Union Bank v. Juniat
Re: Pledge must appear in a public instrument to have a binding effect
on third parties
The unnotarized chattel mortgage executed by Juniat, for and in behalf
of Wingyan and Winwood, in favor of petitioner does not bind
Nonwoven. However, it must be pointed out that petitioner’s primary
cause of action is for a sum of money with prayer for the issuance of
ex-parte writs of attachment and replevin against Juniat, Winwood,
18 | U N I V E R S I T Y O F S A N C A R L O S S L G
Wingyan and the person in possession of the motorized sewing
machines and equipment.
Thus, the fact that the chattel mortgage executed in favor of petitioner
was not notarized does not affect petitioner’s cause of action. Petitioner
only needed to show that the loan of Juniat, Wingyan and Winwood
remains unpaid and that it is entitled to the issuance of the writs prayed
for. Considering that writs of attachment and replevin were issued by
the RTC, Nonwoven had to prove that it has a better right of possession
or ownership over the attached properties. This it failed to do.
However, under Article 2096 of the Civil Code, “(a) 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.” Hence,
just like the chattel mortgage executed in favor of petitioner, the pledge
executed by Juniat in favor of Nonwoven cannot bind petitioner.
EFFECTS AS TO THE PLEDGEE
RIGHTS OF THE PLEDGEE
Q. What are the rights of the pledgee?
1. Retention of the thing
2. Reimbursement
3. Compensation of fruits with what is due the creditor
4. Actions of recovery and defense
5. Preference of credit
6. Sale of the security
7. Collect credits pledged
RETENTION OF THE THING
The pledgee has the right retain the thing in his possession, until the
debt is paid, with the corresponding obligation to take care of it as a
good father of a family.
Use of the thing
Pledgee may use the thing pledged only if authorized or if its
preservation so requires. Otherwise, the pledgor may ask for the deposit
of the thing.
Deposit of the thing
The pledgee cannot deposit the thing pledged with a third person, unless
so authorized.
REIMBURSEMENT
The pledgee has the right to receive reimbursement for:
1. The necessary expenses incurred for the preservation of the thing
pledged
2. Damages he suffered because of the defective nature of the thing
which was not communicated to him by the pledgor.
COMPENSATION OF FRUITS WITH WHAT IS DUE THE
CREDITOR
Fruits and interests which the pledgee receives out of the things pledged
may be applied to compensate for what the pledgor owes him by reason
of the pledge.
If there is nothing to offset or if there is an excess after the offset, the
remainder shall be applied to the payment of the principal obligation.
GR: The pledge shall extend to the interest and earnings of the right
pledged.
XPN: If there is a stipulation to the contrary.
Offspring of animals
Offsprings of animals pledged belong to the pledgor, unless there is a
contrary stipulation.
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ACTIONS OF RECOVERY AND DEFENSE
The creditor may institute or bring actions belonging to the owner in
order to defend and recover the thing pledged.
Example: If the thing pledged is stolen, pledgee can file an action for
recovery.
PREFERENCE OF CREDIT
See Art. 2241 No. 4
SALE OF THE SECURITY
Two kinds of sale
1. Precautionary sale – if, without fault of the pledgee, the thing runs
the risk of destruction, impairment or diminution in value, he may
cause it to be sold in public sale, even before the maturity of the
obligation.
Except: If the pledgor demand its return, offering another in its
stead, of the same kind and not of inferior value.
TN: The proceeds will be applied to the principal debt, and the
excess will be returned to the pledgor.
2. Foreclosure sale – if the credit is not paid in due time. It happens
if the principal debtor has defaulted in payment.
Judge: If the proceeds are more than the debt there is no obligation to
return the excess unless there is contrary stipulation; However if there is
deficiency, there is no right to collect irrespective of contrary stipulation.
Modes of foreclosure sale
1. Judicial foreclosure – file a case in court for collection and prayer
to allow the sale of the thing pledged by reason of debtor’s failure
to pay.
2. Extrajudicial foreclosure – the creditor may go to the notary public
for sale of the thing pledged. It should be a public sale through a
public auction.
Procedure:
a) At public auction (the owner may bid)
b) With notice to the debtor and pledgor, stating the amount
for which the thing will be sold.
c) The pledgor or owner may bid at the sale and must be
preferred if he offers the same as that of the highest bidder.
d) The pledgee may bid as well, but his offer is void if he is the
only bidder.
e) The bids must be for payment at once, if a bid is accepted,
it operates as payment to the pledgee in so far as the debtor
or pledgor is concerned.
f) If in the first auction the thing is not sold, and a second
auction was conducted and yet still there was no sale, the
creditor may appropriate the thing pledged for himself. In
which case, the principal obligation is extinguished.
Paray v. Rodriguez
The subject sale of pledged shares was an extrajudicial sale, specifically
a notarial sale, as distinguished from a judicial sale as typified by an
execution sale. 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.
Under the Civil Code, it is the pledgee, and not the pledgor, who is given
the right to choose which of the items should be sold if two or more
things are pledged. No similar option is given to pledgors under the Civil
Code. Moreover, there is nothing in the Civil Code provisions governing
the extrajudicial sale of pledged properties that prohibits the pledgee of
several different pledge contracts from auctioning all of the pledged
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properties on a single occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with a single purchase price.
The relative insignificance of ascertaining the definite apportionments of
the sale price to the individual shares lies in the fact that once a pledged
item is sold at auction, neither the pledgee nor the pledgor can recover
whatever deficiency or excess there may be between the purchase price
and the amount of the principal obligation.
There is no doubt that if the principal obligation is satisfied, the pledges
should be terminated as well. Article 2098 of the Civil Code provides that
the right of the creditor to retain possession of the pledged item exists
only until the debt is paid. Article 2105 of the Civil Code further clarifies
that the debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its
interest.
Rule if two or more things are pledged
If two or more things are pledged, the pledgee may choose which will
be sold, unless the contrary is stipulated. But he can sell only as many
things as are needed for the payment of the debt.
Options of the Pledgee
To collect credit pledged if they fall due before redemption.
Rules with respect to excess or deficiency
Q. If there was a successful public sale conducted and the claim of the
pledgee is 100k and the proceeds of the sale is only 75k. Can the
pledgee recover the deficiency?
No, since the thing pledged was only a security. It was not delivered as
a payment of the obligation. Thus, no recovery can be had against the
pledgor should there be a deficiency. This is true even if there is a
contrary stipulation.
Q. If the claim of the pledgee is 200k, the proceeds, 280k, more than
the claim. Can the pledgor demand for the return of the excess?
Generally, no. There is no obligation to return the excess, except if there
is an express stipulation that in case of excess or surplus of the sale, the
pledgee must return the excess.
Summary
TN: These rules apply only to foreclosure sales and not to precautionary sales.
A. In case of deficiency – no recovery regardless of the stipulation
B. In case of excess – no return of the excess, unless there is a
stipulation
In other words, there can be recovery of the excess if there is an express
stipulation, but never a recovery in deficiency.
COLLECT CREDIT PLEDGED
These are incorporeal rights, intangible assets like dividends.
If the promissory notes mature before the maturity of the obligation, he
may collect. If he collects the credit, pledgee must apply the proceeds
to satisfy the obligation and return the surplus to the pledgor.
Judge: If he should collect a credit before maturity and he applies the proceeds
to the payment of the principal obligation and there is a surplus, he is obligated to
return the surplus. The rule is not the same in case of foreclosure sale because
there is no obligation to return the surplus, unless otherwise provided. It is only in
foreclosure sale where there is no obligation to return the surplus nor right to
collect the obligation.
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OBLIGATIONS OF THE PLEDGEE
Q. What are the obligations of the pledgee?
1. To preserve the thing pledged (preservation)
2. To return the thing upon termination of the principal obligation
(restitution)
PRESERVATION
Degree of diligence
The degree of diligence required of a pledgee is ordinary diligence –
“Good father of a family”. He must not use the thing pledged unless
authorized or if its preservation so requires. Otherwise, the pledgor may
ask that it be deposited.
Judge: In relation to the obligation to preserve the thing, if what is delivered in
pledge is a pawn ticket, but there is period to redeem the pawned item, (if in
default, the pawned item will be auctioned), it is your obligation as a pledgee to
renew the pawn. If you renew the pawn, you have to pay in advance the interest
right? So that is an expense that you can claim from the pledgor.
Liability of acts of agents/employees
Pledgor is bound by the acts of his agents especially if damage to thing
is by reason of the agent’s negligence.
Deposit of the thing pledged
The pledgor cannot deposit the thing pledged with a third person, unless
there is a stipulation authorizing it.
In case of danger to the thing pledged / danger of loss through
negligence of pledgee
If through the willful acts or negligence of the pledgee, the thing is in
danger of loss or impairment, the pledgor may require its deposit with
a third person.
In case of fear of destruction or impairment of the thing
If there are reasonable grounds to fear the destruction or impairment of
the thing pledged without the fault of the pledgee the pledgor may
demand its return, upon offering another thing in pledge of the same
kind and not of inferior quality. Unless the pledgee causes the same to
be publicly sold.
Judge: The right of precautionary sale by the pledgee versus the right to
substitute by the pledgor. These are conflicting rights, however, pledgee shall
prevail.
RESTITUTION
Q. When must the pledgee return the thing?
Upon the termination of the principal obligation.
Sarmineto v. Javellana
Re: When must the thing pledged be returned
Facts: The defendant loaned the plaintiffs and to guarantee this loan,
the plaintiffs pledged a large medal with a diamond in the center and
surrounded with 10 diamonds and other jewelry.
Held: Although it is not expressly stated, the debtor may demand the
restitution of the thing pledged upon the payment of the debt, because
it is essential in the contract of pledge that upon the payment of the
principal obligation the pledgor shall have the right to demand the return
of the goods pledged.
The duty of the creditor to return the thing pledged in case the principal
obligation is fulfilled is essential in all contracts of pledge. This
constitutes, precisely, the consideration of the debtor in this accessory
contract, so that if this obligation of the creditor to return to thing
pledged, and the right of the debtor to demand the return thereof, are
eliminated, the contract would not be a contract of pledge. It would be
a donation.
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If the right of the plaintiffs to recover the thing pledged is covered by a
written contract, the time for the prescription of this action is ten years,
according to section 43 of the Code of Civil Procedure.
Effect of return of the thing to pledgor
The return of the thing pledged to the pledgor or owner extinguishes
the pledge, but not the principal obligation.
Q. What is the effect of a contrary stipulation?
A stipulation to the contrary is void.
Presumption if thing is in possession of the pledgor
If subsequent to the perfection of the pledge, the pledgor or another
person who derives title from him is in possession of the thing pledged,
it is presumed prima facie that the pledgee returned it.
Judge: If prior to the extinguishment of the principal obligation, the thing pledged
finds its way to the pledgor, the presumption is that the pledgee voluntarily
returned the thing to the pledgor. The same presumption apply if the thing is found
in the possession of a third person after the constitution of the pledge.
Q. What is the effect if the pledgee does not return the thing?
The pledgee will be holding the thing now as a depositary for and in
behalf of the pledgor. In which case, his obligation is now that of the
depositary.
EFFECTS AS TO THE PLEDGOR
RIGHTS OF THE PLEDGOR
Q. What are the rights of the pledgor?
A. Right to remains the owner of the thing pledged
B. Right to demand deposit of the thing
C. Right to substitute another thing
D. Entitled to bid and to preference at foreclosure sale
E. Right to the return the thing
RIGHT TO REMAIN THE OWNER OF THE THING PLEDGED
The pledgor remains the owner of the thing pledged, until its sale or
unless the thing is expropriated.
Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof. Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from, or defend it against
a third person.
Judge: Because he is still the owner of the thing pledged, he bears the risk of
loss. If the pledgee uses the thing without authority and which is not necessary
for the preservation of the thing, then the pledgor can demand that the thing be
deposited with another person.
RIGHT TO DEMAND DEPOSIT OF THE THING
He may demand the deposit of the thing, if endangered by fault or
negligence of the pledgee or used by the pledgee.
Art. 2106. If through the negligence or wilful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.
Art. 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be used by the creditor
but only for that purpose.
RIGHT TO SUBSTITUTE ANOTHER THING
He may substitute another thing if endangered without the fault of
pledgee, provided it is of the same kind and not of inferior quality.
Art. 2107. If there are reasonable grounds to fear the destruction or impairment
of the thing pledged, without the fault of the pledgee, the pledgor may demand
the return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality, and without prejudice
to the right of the pledgee under the provisions of the following article.
APELLIDO l ADLAWON l CADAMPOG l FLORO l GONZALES l IBANEZ
CREDIT TRANSACTIONS l Judge Adviento l For the exclusive use of EH 407 A.Y. 2015-2016
Judge: If there is reasonable ground to fear a loss, or destruction of diminution
of the value of the thing, the pledgor has the right to demand the return of the
thing but with the corresponding obligation to deliver another thing. But there is
also a corresponding right on the part of the pledgee which is to sell the thing
pledged.
So there are two conflicting rights here. Both rights cannot be reconciled. If one
demands return, then one cannot sell. If you sell, then you cannot return. So both
cannot exercise their respective rights at the same time.
Q. The question is whose right is now preferred?
Pledgee’s right to precautionary sale (to sell) is preferred.
TO BID AND TO PREFERENCE AT FORECLOSURE SALE
The pledgor is entitled to bid and to preference at the foreclosure sale.
His bid would be preferred if his bid is equal to that of the highest bidder.
Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover,
have a better right if he should offer the same terms as the highest bidder.
RIGHT TO THE RETURN THE THING
He has the right to the return of the thing pledged upon extinction of
the principal obligation.
Art. 2098. The contract of pledge gives a right to the creditor to retain the thing
in his possession or in that of a third person to whom it has been delivered, until
the debt is paid.
Q. What are the rights of pledgor who is not the principal
debtor?
If the pledgor is not the principal debtor, he has the same rights as a
guarantor under Arts 2066-70 (reimbursement, subrogation) and Arts.
2077 to 2081 (release by novation, extension, impossibility of
subrogation and use of defenses of the principal debtor). But he is not
entitled to the benefit of exhaustion.
Southern Motors v. Barbosa
Re: Rights of a pledgor who is not the principal debtor
The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal
debtor, exists only when a pledge or a mortgage has not been given as
special security for the payment of the principal obligation. Guarantees,
without any such pledge or mortgage, are governed by Title XV of said
Code, whereas pledges and mortgages fall under Title XVI of the same
Code, in which the following provisions, among others, are found:
Art. 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.
Art. 2126. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.
OBLIGATIONS OF THE PLEDGOR
OBLIGATIONS OF THE PLEDGOR
To notify the pledgee of flaws
He must notify the pledgee of flaws of the thing known to him.
Otherwise, he answers for damages like the bailor (borrower) in
commodatum.
Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in
the case under Article 1951.
Why?
If the pledgee suffers damage because of the defective nature of the
thing, the pledgor can be held liable for the damage caused. The pledgor
must know of the defect of the thing. This is different from the contract
of the sale, which knowledge of the defect is immaterial.
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EXTINGUISHMENT OF THE PLEDGE
MODES OF EXTINGUISHING PLEDGE
MODES OF EXTINGUISHING PLEDGE
A. Extinction of the principal obligation
B. Destruction or loss of the thing pledged
C. By return of the pledgee
D. By renunciation by the pledgee or abandonment of the pledge
E. By redemption of the party having any right in or to the thing
pledged
F. Other causes
Extinction of the principal obligation
The extinguishment of the principal obligation extinguishes the pledge
because pledge is an accessory contract.
Destruction or loss of the thing pledged
Destruction or the loss of the thing subject of the pledge regardless of
who is the author of the loss. If the loss is because of the fault of the
pledgee, the pledge is still extinguished; but liable for damages.
Renunciation by the pledgee
This is similar to condonation. Condonation is a gratuitous abandonment
by the creditor of his claim against the debtor.
Q. What is required in order to effect renunciation?
Notify the pledgor in writing. Acceptance is not required, unlike
condonation which requires acceptance, renunciation of a pledge as
special provision of a law, there is no requirement of acceptance.
Q. Is there a need to return the thing upon renunciation to the pledgor?
No. It is not required that the pledgee return the thing to the pledgor.
Q. If the pledgee does not return, and the thing remains in his
possession after notifying the pledgor of his renunciation and then the
obligation matures and the debtor fails to pay the obligation. Can the
sell the thing?
No, because after he renounces the pledge, but prior to return of the
thing to the pledgor, he holds the thing as a depositary for the pledgor
and not as a pledgee anymore.
By redemption
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.
TN: There is no right of redemption in case of a foreclosure sale in
pledge, after the foreclosure sale. There is only right of redemption in
case of mortgage of real property (REM).
Q. What is redemption here in pledge?
Redemption here is paying the principal obligation so that the thing
should not be sold in a public sale in case of default.
LEGAL PLEDGE
LEGAL PLEDGE (RIGHT OF RETENTION)
GOVERNING RULES
These pledges are governed by the rules of conventional pledge as to:
A. Possession
B. Care and preservation
C. Sale of the thing pledged
1. The sale may be made only after demand of the sum due
2. Within one month after such demand. If no sale takes place
within such period, the debtor may require the return of the
thing retained, unless delay is justified
APELLIDO l ADLAWON l CADAMPOG l FLORO l GONZALES l IBANEZ
CREDIT TRANSACTIONS l Judge Adviento l For the exclusive use of EH 407 A.Y. 2015-2016

3. The excess of the price over the debt must be returned to the
debtor

CASES OF RETENTION
Examples of legal pledges:
1. Possessor in good faith –for necessary and useful expenses.
2. Usufructuary – for taxes and extraordinary expenses
3. Agent – for expenses advanced and damages caused by the
agency.
4. Mechanics lien – the person who executes work on a movable for
the payment thereof.
5. Depositary – for expenses by reason of the deposit.
6. Hotel keeper – for credits for lodging and supplies furnished to
travellers.

Judge: It is not enough that in legal pledge the creditor retains possession of the
thing, because there is no transfer of ownership. So what does the creditor do to
demand the debtor to pay the obligation?
a. In case of hotel keeper, send a demand to the guest.
b. Depositary to depositor.
c. In case of a mechanics lien, send the demand to the owner of the thing.

Note that the sale must be made within 30 days, not after. So don’t confuse this
with the rule in deposit, where the depositary knows that the thing is stolen and
know who the owner is and there is a suspension of delivery within 30 days and
return is made after 30 days if there is no demand to return from the owner. Here
in pledge, the sale has to be made within 30 days.

Q. What happens when there is no sale made within 30 days?

The creditor must return the movable to the respective owner.

Q. If the movables previously sequestered are returned to the debtor, does the
creditor still have the cause of action against the creditor?
Example, you stayed in Golden Valley hotel and you haven’t paid the room rates,
so the hotel sequestered your personal effects, sends a notice to you care of USC
Law in a registered mail.

So the hotel must sell the personal effects within 30 days if you do not pay. If after
30 days, no sale was made, the obligation of the hotel is to return the personal
effects to you.

Q. Can the hotel still can go after you?

Yes. Only the legal pledge is extinguished, but not the principal obligation to pay
the room rates.

LAWS GOVERNING PAWNSHOPS

LAWS GOVERNING PAWNSHOPS

Art. 2123. With regard to pawnshops and other establishments, which
are engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the
provisions of this Title.

22 | U N I V E R S I T Y O F S A N C A R L O S S L G APELLIDO l ADLAWON l CADAMPOG l FLORO l GONZALES l IBANEZ