Q. What requisites are common to Real Estate Mortgage, Chattel Mortgage and Pledge?

A. The mortgage must be constituted to secure the fulfillment of a principal obligation.

B. The mortgagor must be the absolute owner of the thing mortgaged.
C. The mortgagor must have free disposal of the property.

Q. What is pledge and mortgage? Distinguish.

PLEDGE MORTGAGE (Real)

An accessory contract whereby a debtor delivers to
It is a contract whereby the debtor secures to
the creditor or a third person a movable or personal
the creditor the fulfillment of a principal
property, or document evidencing incorporeal
obligation, specially subjecting to such security,
rights, to secure the fulfillment of a principal
immovable property or real rights over
obligation with the condition that when the
immovable property, in case the principal
obligation is satisfied, the thing delivered shall be
obligation is not paid or complied with at the
returned to the pledgor with all its fruits and
time stipulated.
accessions, if any.
movable or personal property, or document immovable property or real rights over
evidencing incorporeal rights immovable property

Q. What are the similarities of pledge and mortgage?

1. Both are accessory contracts;

2. Both pledgor and mortgagor must be the absolute owner of the property; Both pledgor and
mortgagor must have the free disposal of their property or be authorized to do so; and

3. In both, the thing proffered as security may be sold at public auction, when the principal
obligation becomes due and no payment is made by the debtor.

Q. Are the contracts of pledge, mortgage indivisible?

GR: A pledge and mortgage is indivisible.

Note: Indivisibility may be waived. Indivisibility only applies to the contracting parties.

XPNs:

1. Where each one of several things guarantees determinate portion of the credit
2. Where only a portion of the loan was released
3. Where there was failure of consideration

Q. What are the obligations that can be secured by pledge and mortgage?

1. Valid obligations
2. Voidable obligations
 3. Unenforceable obligations
4. Natural obligations
5. Conditional obligations

Q. What rules are common to pledge and mortgage?

1. Constituted to secure the fulfillment of a valid principal obligation.

2. Pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged.
3. They must have the free disposal of their property, and in the absence thereof, that they be
legally authorized for such purpose.
4. Debtor retains ownership of the thing given as a security.

Q. May property acquirable in the future be mortgaged?

No. Where the mortgagor mortgaged a property and in the contract he agreed to mortgage
additional properties which he may acquire in the future, there was no valid mortgage as to the latter
because he was not yet the owner of the properties at the time of the mortgage

Q. Is mortgage constituted to secure future advances valid?

Yes. It is a continuing security and not discharged by repayment of the amount named in the
mortgage, until the full amount of the advances is paid. A chattel mortgage can only cover
obligations existing at the time the mortgage is constituted and not to obligations subsequent to the
execution of the mortgage

Q. Is a third person who pledged and mortgaged his property liable for any deficiency?

GR: No.

XPN: If the third party pledgor or mortgagor expressly agreed to be bound solidarily with the
principal debtor.

Q. What is the right of an owner of personal property pledged without authority?

He may invoke Art. 559, NCC. The defense that pawnshop owner acquired ownership of the thing
in good faith is not available.

Note: Art. 559 – The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired
it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price
paid therefore.
ACCOMMODATION MORTGAGE

Q. Who is an accommodation mortgagor?

He is a third person who is not a party to a principal obligation and secures the latter by mortgaging
or pledging his own property.

Q. What is the extent of the liability of an accommodation mortgagor?

It extends up to the loan value of their mortgaged property and not to the entire loan itself.

PACTUM COMMISSORIUM

Q. What is pactum commissorium?

It is a stipulation whereby the thing pledged or mortgaged or subject of antichresis shall

automatically become the property of the creditor in the event of non‐payment of the debt within
the term fixed. Such stipulation is null and void.

Q. What are the elements of pactum commissorium?

There is a pledge or mortgage of a property by way of security; and

There is an express stipulation for the automatic appropriation by the creditor of the property in
case of non‐payment

Note: What are prohibited are those stipulations executed or made simultaneously with the original
contract, and not those subsequently entered into.

Q. What is pledge?

A contract where debtor delivers to creditor or 3rd person a movable or document evidencing
incorporeal right for the purpose of securing fulfillment of a principal obligation with the
understanding that when the obligation is fulfilled, the thing delivered shall be returned w/ all its
fruits and accessions.

Q. What are the kinds of pledge?

1. Conventional ‐ by agreement of parties

2. Legal ‐ by operation of law

Note: A thing lawfully pledged to one creditor, cannot be pledged to another as long as the 1st
pledge subsists.

Q. What are the essential requisites for a contract of pledge?

1. Constituted to secure the fulfillment of a principal obligation;

2. Pledgor is the absolute owner of the thing pledged;
3. Persons constituting the pledge have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose. (Art. 2085, NCC)

Note: A contract of pledge not appearing in a public instrument does not affect its validity. It is
valid between the parties.

Q. What kind of possession is required in pledge?

The mere taking of the property is not enough. There must be continuous possession of the thing.
However, the pledgee is allowed to temporarily entrust the physical possession of the thing pledged
to the pledgor without invalidating the contract. But here, the pledgor would be in possession as a
mere trustee and his possession is subject to the order of the pledgee.

Q. Pablo owns a tractor which he left with his son Mike for safekeeping. Mike then offered
the said tractor to Calibo as security for the payment of his debt. When Pablo came back
and learned that the tractor was in the custody of Calibo, he demanded its return. Calibo,
however, refused. Calibo alleged that the tractor was pledged to him, and in the alternative,
the tractor was left with him in the concept of deposit and he may validly hold on to it until
Mike pays his obligation. Is Calibo correct?

No. There is no valid pledge because Mike is not the absolute owner of the property pledged. He
who is not the owner or proprietor of the property pledged or mortgaged to guarantee the
fulfillment of a principal obligation, cannot legally constitute such a guaranty as may validly bind the
property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right
whatsoever in the property pledged or mortgaged. There is likewise no valid deposit, in this case,
where the principal purpose for receiving the object is not safekeeping. (Calibo Jr. v. CA, G.R. No.
120528, Jan. 29, 2001)

Q. Is constructive or symbolic delivery of the thing sufficient to constitute pledge?

GR: No.

XPN: If the pledge consists of goods stored in a warehouse for purposes, of showing the pledgee’s
control over the goods, the delivery to him of the keys to the warehouse is sufficient delivery of
possession (constructive/symbolic delivery).

The type of delivery will depend upon the nature and peculiar circumstances of each case

Note: Constructive or symbolic delivery does not confer physical possession of the thing, but by
construction of law, is equivalent to acts of real delivery.

Q. What is the rationale behind the requirement that the pledge cannot take effect against
third persons if the thing is not described and the date does not appear in a public
instrument?
To forestall fraud because a debtor may attempt to conceal his property from his creditors when he
sees it in danger of execution by simulating a pledge thereof with an accomplice (Tec Bi & Co. v.
Chartered Bank of India, No. 9802, Feb. 5, 1916/March 31, 1917).

Q. What is a double pledge?

A double pledge is when the same thing or property subject of a first pledge will be the subject of
another pledge.

Q. Can there be a valid double pledge?

No. A property already pledged cannot be pledged while the first pledge is subsisting (Mission de
San Vicente v. Reyes, No. 5508, Aug. 14, 1911).

Q. Can incorporeal rights evidenced by proper document be pledged?

Yes (Art. 2095, NCC). It is, however, required that the actual instrument be delivered to the pledge.
More, if the instrument is a negotiable document, it must be indorsed.

Q. Who are the parties in a contract of pledge?

1. Pledgor – the debtor; the one who delivers the thing pledged to the creditor

2. Pledgee – the creditor; the one who receives the thing pledged

Q. What are the rights of a pledgee?

1. Retain the thing until debt is paid. (Art. 2018, NCC)

2. To be reimbursed for the expenses made for the preservation of the thing pledged. (Art. 2099,
NCC)
3. Creditor may bring any action pertaining to the pledgor in order to recover it from or defend it
against a 3rd person

Q. What are the obligations of a pledgee?

1. Take care of the thing pledged with the diligence of a good father of a family. (Art. 2099,
NCC)

Note: Pledgee is liable for the loss or deterioration of the thing by reason of fraud,
negligence, delay, or violation of the terms of the contract.

2. GR: Pledgee cannot deposit the thing pledged to a 3rd person.

XPN: Unless there is stipulation to the contract (Art. 2100, NCC)

 Note: Pledgee is liable for the loss or deterioration of the thing pledged caused by the acts
or negligence of the agents or employees of the pledgee.

3. Apply the fruits, income, dividends, or interests produced or earned by the property, to
interests or expenses first, then to the principal. (Art. 2102, NCC)

4. GR: Cannot use the thing pledged without authority.

XPNs:

a. If the pledgor had given him authority or permission to use it;

b. If the use of the thing is necessary for its preservation but only for that purpose.

5. Return the thing pledged to the pledgor when the principal obligation is fulfilled or satisfied it.

Q. Does the debtor continue to be the owner of the thing in case the same is expropriated
by the State?

No. Ownership is transferred to the expropriating authority.

Note: The creditor may bring actions pertaining to the owner of the thing pledged in order to
recover it from, or defend it against a third person (Art. 2103, NCC).

Q. Can the debtor ask for the return of the thing pledged against the will of the creditor?

GR: No.

XPNs:

1. If the debtor has paid the debt and its interest, with expenses in a proper case (Art. 2105,
NCC).
2. If the thing is in danger of destruction or impairment provided, the pledgor offers an
acceptable substitute for it which is of the same kind and not of inferior quality and without
prejudice to the application of Art. 2108 whenever warranted.

Q. Can the pledgee cause the sale of the thing pledged in public auction where the
obligation is not yet due?

Yes, if without the fault of the pledge, there is danger of destruction, impairment or diminution in
value of the thing pledged. The proceeds of the auction shall be security for the principal obligation
in the same manner as the thing originally pledged (Art. 2108, NCC).

Q. What are the rights of the creditor who is deceived on the substance or quality of the
thing pledged?
To demand:

1. from the pledgor an acceptable substitute of the thing; or

2. the immediate payment of the principal obligation (Art. 2109, NCC).

Note: The remedies are alternative and not cumulative. Only one may be chosen. The law used
the conjunctive “or”. Either one is more convenient than annulment.

Q. What is the effect of the return of the thing pledged to the pledgor by the pledgee?

The pledge shall be extinguished. Any stipulation to the contrary shall be void (Art. 2110, NCC).

Q. What is the presumption when the thing is found in the possession of the pledgor
subsequent to the perfection of the pledge?

There is prima facie presumption that the thing pledged has been returned by the pledgee to the
pledgor or owner, in any of the following circumstances:

1. If the thing is found in the possession of the pledgor or owner after the pledge had been
perfected; or

2. If the thing is found in the possession of a third person who received it from the pledgor or
owner after the perfection of the pledge (2nd par., Art. 2110, NCC).

Note: It is presumed that the accessory obligation of pledge has been remitted when the thing
pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third
person who owns the thing (Art. 1274, NCC).

Q. What is the right of the pledgee when the debt has not been satisfied in due time?

The pledgee has the right to proceed with the sale of the thing at a public auction to raise funds for
payment of the obligation (Art. 2112, NCC).

Q. What are the requisites of public sale?

1. The obligation must be due and unpaid;

2. The sale of the thing must be at a public auction;
3. There must be notice to the pledgor and owner stating the amount for which the sale is to
be held; and
4. The sale must be conducted by a Notary Public.

Q. What is deed of acquittance?

It is a document of the release or discharge of the pledgor from the entire obligation including
interests and expenses. This shall be executed by the pledgee after appropriating the thing in case a
no sale was made in a second auction.
Q. May the pledgor participate in the public auction?

Yes. Moreover, he shall have a better right if he offers the same terms as the highest bidder [Art.
2113 (1), NCC].

Q. Who can bid in the public auction?

1. The public
2. Pledgor/owner/debtor –

shall be preferred if same terms as the highest bidder is offered

3. Pledgee/creditor – he must not be the only one bidder, otherwise, his bid is invalid and void

Q. Can checks be accepted as payment as purchase price in a public sale?

No, they are not legal tenders. (CFI v. CA, No. L‐ 4191, April 30, 1952).

Note: The same rule applies to promissory notes, bill of exchange and other negotiable instruments
because they produce the effect of payment only when they have been encashed.

Payment in cash must be made at once.

Q. May a third person pay the pledgor’s debt?

Yes, if he has any interest in the fulfillment of the principal obligation (Art. 2117, NCC).

Q. What is the rule when two or more things are pledged?

Q. What is the rule when two or more things are pledged?

Q. What is the restriction on the right of the pledgee under the 1st sentence of Art. 2119?

He may only demand the sale of only as many of the things as are necessary for the payment of the
debt (2nd sentence, Art. 2119, NCC).

Q. What are the rights of the pledgor?

1. Right to dispose the thing pledged, provided there is consent of the pledgee (Art. 2097,
NCC)
2. Right to ask that the thing pledged be deposited (Art. 2104 and Art. 2106, NCC)
3. Right to substitute thing pledged (Art. 2107, NCC)

Q. Does the pledgor have the right to demand the return of the thing pledged against the
will of the creditor?
No. He cannot ask for its return until the obligation is fully paid including interest due thereon and
expenses incurred for its preservation (Art. 2105, NCC)

Q. What are the requisites before the pledgor may substitute the thing pledged with another
thing?

1. Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged;

2. No fault on the part of the pledge

3. Pledgor is offering in place of the thing, another thing in pledge which is of the same kind and
quality as the former;

4. Pledgee does not choose to exercise his right to cause the thing pledged to be sold at public
auction (Art. 2107, NCC)

Q. How is a contract of pledge perfected?

A contract of pledge is perfected when the thing pledged is placed in the actual possession of or
delivered to the pledgee or a third person designated by the parties by common consent. (Art. 2093,
NCC)

Note: If Art. 2093 is not complied with, the pledge is void.

Q. Four carabaos were pledged by T to E. T is the registered owner of the carabaos. The
carabaos were actually in the possession of J. E never took possession of the carabaos.
There is nothing in the contract which stated that J was by common consent made the
depositary of the carabaos in E’s behalf. Is there a lawfully constituted pledge?

None. The delivery of possession of the property pledged requires actual possession and a mere
symbolic delivery is not sufficient. (Betita v Ganzon, 49 Phil. 87)

Q. What is the effect when possession or delivery of the thing pledged was not made?

An agreement to constitute a pledge only gives rise to a personal action between the contracting
parties. Unless the movable given as a security by way of pledge be delivered to and placed in the
possession of the creditor or of a third person designated by common agreement, the creditor
acquires no right to the property because pledge is merely a lien and possession is indispensable to
the right of a lien.

Q. What is the effect if the pledgee fails to take the property pledged into his possession?

If a pledgee fails or neglects to take the property pledged into his possession, he is presumed to have
waived the right granted him by the contract. (U.S. v. Terrel, 2 Phil. 222)

Q. What are the requisites to bind third persons in a contract of pledge?

To bind third persons, the pledge must be embodied in a public instrument where the following
entries must appear ‐ A description of the thing pledged; and Statement of date when the pledge was
executed. (Art. 2096, NCC)

Q. A is indebted to B. A pledges his diamond ring to B. The ring is delivered to B, but in the
public instrument executed, there is no description of the ring, and the date of the pledge
does not appear. If A sells the ring to C, does C have to respect the pledge in favor of B?

No. C does not have to respect the pledge since as to him, the pledge is not effective and valid.

Q. What is the reason behind the requisites?

The purpose of the requirements is to forestall fraud, because a debtor may attempt to conceal his
property from his creditors when he sees it in danger of execution by simulating a pledge thereof
with an accomplice.

Q. What is the effect if no public instrument is made?

When the contract of pledge is not recorded in a public instrument, it is void as against third
persons; the buyer of the thing pledged is a third person. The fact that the person claiming as
pledgee has taken actual physical possession of the thing sold will not prevent the pledge from being
declared void insofar as the innocent stranger is concerned.

Q. What is the effect of an undated contract of pledge?

An undated instrument of pledge cannot ripen into a valid pledge.

Q. When may a pledgee foreclose the thing pledged?

When there is no payment of the debt on time, the object of the pledge may be alienated for the
purpose of satisfying the claims of the pledgee.

Q. What is the procedure for the public sale of a thing pledged?

1. The obligation must be due and unpaid

2. The sale of the thing pledged must be at public auction
3. There must be notice to the pledgor and owner, stating the amount for which the sale is to be
held
4. The sale must be conducted by Notary Public.

Q. What is a pledge created by operation of law?

Pledge by operation of law or Legal Pledges are those constituted or created by operation of law.
This refers to the right of retention.

Q. What rules apply to legal pledge?

1. The rules governing conventional pledge applies.

2. There is no definite period for the payment of the principal obligation. The pledge must,
therefore, make a demand for the payment of the amount due him. Without such demand, he
cannot exercise the right of sale at public auction. (De Leon)

Q. What are the instances of legal pledges where there is right of retention?

1. Art. 546 – Right of the possessor in good faith to retain the thing until refunded of necessary
expenses.
2. Art. 1707 – Lien on the goods manufactured or work done by a laborer until his wages had
been paid.
3. Art. 1731 – Right to retain of a worker who executed work upon a movable until he is paid.
4. Art. 1914 – Right of an agent to retain the thing subject of the agency until reimbursed of his
advances and damages (Arts. 1912 and 1913, NCC).

5. Art. 1994 – Right of retention of a depositary until full payment of what is due him by reason of
the deposit.

6. Art. 2004 – Right of the hotel‐keeper to retain things of the guest which are brought into the
hotel, until his hotel bills had been paid.

Q: What must the pledgee do before he may cause sale of the thing pledged?

A: The pledgee must first make a demand of the amount for which the thing is retained. After the
demand, the pledgee must proceed with the sale of the thing within thirty (30) days. Otherwise, the
pledgor can require of him the return of the thing retained.

Q: To whom will the remainder of the price pertain?

A: The remainder of the price of sale shall be delivered to the obligor. (Art. 2121)

Q: What are the instances when the pledgor may demand that the thing pledged be
deposited judicially or extrajudicially?

1. Creditor uses the thing without authority

2. Creditor misuses the thing
3. The thing is in danger of being lost or impaired due to the negligence or willful acts of the
pledgee.

Q. What are the effects of sale of the thing pledged?

1. Extinguish the principal obligation even if the proceeds of the sale do not satisfy the whole
amount of the obligation.
2. If proceeds from the sale exceed the amount due, the debtor is not entitled to the excess, the
excess goes to the pledgee. This is to compensate him for the eventuality where the purchase
 price is lesser than the amount of the debt, wherein he cannot receive any deficiency unless
there is a contrary agreement or in case of legal pledge, the pledgor is entitled to the excess
3. If the proceeds of the sale is less than the amount due, the creditor has no right to recover
the deficiency and the pledgor is not liable for the deficiency even if there is a stipulation
that he be so liable. Such stipulation is void.

Q: What is the meaning of the right of the mortgagee or pledgee to foreclose?

A: If the debtor failed to pay on maturity date, the thing pledged or mortgaged may be sold at public
auction as provided by law so that the proceeds may be used for payment of the obligation.

Q: Distinguish contract of pledge from chattel mortgage.

CHATTEL MORTGAGE PLEDGE

Delivery
Delivery is not necessary Delivery is necessary
Registration
Registration in the Chattel Mortgage register is Registration in the Registry Property is not
necessary for its validity necessary.
Law governing the sale
Procedure for the sale of the thing given as security is
Art. 2112, NCC
governed by Sec. 14, Act No. 1508
Excess
If the property is sold, the debtor is not
If the property is foreclosed, the excess goes to the
entitled to the excess unless otherwise
debtor
agreed.
Recovery of deficiency
The creditor is entitled to recover the deficiency from The creditor is not entitled to recover the
the debtor except if the chattel mortgage is a security deficiency notwithstanding any stipulation to
for the purchase of property in installments the contrary.
Possession
Possession remains with the debtor Possession is vested in the creditor
Contract
Formal contract Real contract
Recording in a public instrument
Must be in a public instrument containing
Must be recorded in a public instrument to bind third
description of the thing pledged and the date
persons
thereof to bind third persons

Q: Distinguish contract of pledge from real estate mortgage.

PLEDGE REAL ESTATE MORTGAGE
Real contract Consensual contract
Subject matter is personal property Subject matter is real property
Possession of the thing mortgaged
Possession of the thing pledged is vested in the creditor
remains with the debtor
Pledgee has the right to receive the fruits of the thing
pledged, with the obligation of applying the same to the
Mortgagee does not possess such right
interest of the debt, if owing, and the balance, if any, to the
principal
Sale at public auction of the thing pledged is always
Sale may be judicial or extrajudicial
extrajudicial
Description of the thing and the date of pledge must Must be registered, otherwise, it is not
appear in a public instrument otherwise, it is not valid as to valid against third persons although
third person binding between the parties

Not a real right

Real right and real property by itself

REAL MORTGAGE

Q: What is real estate mortgage (REM)?

A: It is a contract whereby the debtor secures to the creditor the fulfillment of the principal
obligation, specially subjecting to such security immovable property or real rights over immovable
property in case the principal obligation is not fulfilled at the time stipulated

Note: Registration is necessary to bind third persons but not for the validity of the contract.

Being an accessory contract, its consideration is one and the same as that of the principal obligation.

Q: What are the requisites for valid constitution of a real mortgage?

1. It covers only immovable property and alienable real rights imposed upon immovables

2. It must appear in a public instrument

3. Registration in the registry of property is necessary to bind 3rd persons

What are the kinds of real mortgages?

1. Conventional mortgages – constituted voluntarily by the contracting parties.

2. Legal mortgage – required by law.
 3. Equitable mortgage – intention of the parties is to make the immovable as a security for the
performance of the obligation but the formalities of a real mortgage are not complied with.

Q: Distinguish contract of real estate mortgage from contract of sale with right of
repurchase.

REAL ESTATE MORTGAGE

SALE WITH RIGHT OF REPURCHASE
Accessory contract Principal and independent contract
There is no transfer of title and possession of the There is transfer of title and possession of the
property property, although conditional
Creditor has no right to the fruits of the property The vendee a retro is entitled to the fruits even
during the pendency of the mortgage during the period of redemption

If the debtor fails to pay his debt, the creditor

cannot appropriate the property mortgaged nor As soon as there is a consolidation of title in the
dispose of it vendee a retro, he may dispose of it as an absolute
owner

Q: What are the things that are deemed included in the mortgage?

1. Natural accessions
2. Improvements
3. Growing fruits
4. Rents
5. Income
6. Insurance proceeds
7. Expropriation price (Art. 2127, NCC)

Q. When does the mortgage lien attach in case of new or future improvements?

On the date of the registration of the mortgage

Q: What is dragnet clause?

It is a mortgage provision which is specifically phrased to subsume all debts of past or future origin.
Such clauses are “carefully scrutinized and strictly construed”. The mortgage contract is also one of
adhesion

Q: Is the amount stated in the contract controlling in case of mortgage securing future
advancements?
No. The amount named in the contract does not limit the amount for which the mortgage stand as a
security, if, from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.

Q: Petitioner obtained a loan of P20K from defendant Rural Bank of Kawit. The loan was
secured by a REM over a parcel of land. The mortgage contract states that the mortgage
will cover the payment of the loan of P20K and such other loans or other advances already
obtained or to be obtained by the mortgagors from the bank. The loan of P20k was fully
paid. Thereafter they again obtained a loan of P18K, secured by the same mortgage. The
spouses defaulted. The bank extra judicially foreclosed the mortgage. Was the foreclosure
sale valid?

Yes. It has long been settled that mortgages given to secure future advancements are valid and legal
contracts; that the amounts named as consideration 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 advancement is a
continuing security and is not discharged by repayment of the amount named in the mortgage, until
the full amount of the advancements is paid

Q: May a mortgage credit be alienated or assigned to a third person?

Yes, in whole or in part, with the formalities required by law

Q: Is a stipulation forbidding the owner from alienating the immovable mortgaged valid?

No. The prohibition to alienate is contrary to public good inasmuch as the transmission of property
should not be unduly impeded

Q: What are the laws that govern contract of real mortgage?

1. New Civil Code

2. Mortgage Law
3. Property Registration Decree (PD 1529) 4. Sec. 194, as amended by Act No. 3344,

4. Revised Administrative Code (Phil. Bank of Commerce v. De Vera, G.R. No. L‐ 18816, Dec. 29,
1962)

5. R.A. 4882 – law governing aliens who become mortgagees.

FORECLOSURE

What is foreclosure?

It is a remedy available to the mortgagee in which he subjects the mortgaged property to the
satisfaction of the obligation.

What are the kinds of foreclosure?

 1. Judicial – governed by Rule 68, Rules of Court
2. Extrajudicial – mortgagee is given a SPA to sell the mortgaged property (Act No. 3135)

Q: Does an action for foreclosure of mortgage survive the death of mortgagor?

Yes, because the claim is not pure money claim but an action to enforce a mortgage lien. Being so,
the judgment rendered therein may be enforced by a writ of execution. The action may be
prosecuted by the interested person against the executor or administrator independently of the
testate or intestate proceedings of the settlement of the mortgagor’s estate “for the reason that such
claims cannot in any just sense be considered claims against the estate, but the right to subject
specific property to the claim arises from the contract of the debtor whereby he has during life set
aside certain property for its payment, and such property does not, except in so far as its value may
exceed the debt, belong to the estate”

Q: What are the options or remedies of the mortgagee in case of death of the debtor?

1. To waive the mortgage and claim the entire debt from the estate of the mortgagor as an
ordinary claim;
2. To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; or
3. To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by
prescription, without right to file claim for any deficiency

Q: When is judicial foreclosure considered completed?

A foreclosure sale is not complete until it is confirmed and before such confirmation, the court
retains control of the proceedings by exercising sound discretion in regard to it either granting or
withholding confirmation as the rights and interests of the parties and the ends of justice may
require

Q: What is the significance of confirmation in judicial foreclosure?

Confirmation cuts off all the rights and interests of the mortgagor and of the mortgagee and persons
holding under him, and with them the equity of redemption in the property and vests them in the
purchaser. Confirmation retroacts to the date of the sale. It is a final order, not interlocutory

Q: What are the effects of confirmation of sale?

There can be no redemption of the property. Such confirmation retroacts to the date of the auction
sale. After the confirmation, the previous owners lose any right they may have had over the
property, which rights in turn vested on the Purchaser of the property

Q: What is the basis of extrajudicial foreclosure?

An extrajudicial foreclosure may only be effected if in the mortgage contract covering a real estate, a
clause is incorporated therein giving the mortgagee the power, upon default of the debtor, to
foreclose the mortgage by an extrajudicial sale of the mortgage property
The authority to sell may be done in a separate document but annexed to the contract of mortgage.
The authority is not extinguished by the death of the mortgagor or mortgagee as it is an essential and
inseparable part of a bilateral agreement

Q: How is extrajudicial foreclosure initiated?

By filing a petition with the office of the sheriff. It may also be initiated through a Notary Public
commissioned in the place where the property is situated.

Note: Notice containing the place and date is required before an auction sale is made in extrajudicial
foreclosure

REDEMPTION

Q: What is redemption?

Transaction by which the mortgagor reacquires or buys back the property which may have passed
under the mortgage or divests the property of the lien which the mortgage may have created.

Q: What are the kinds of redemption?

1. Equity of redemption – right of mortgagor to redeem the mortgaged property after his default in
the performance of the conditions of the mortgage but before the sale of the mortgaged property or
confirmation of sale. It applies in case of judicial foreclosure.

2. Right of redemption – right of the mortgagor to redeem the mortgaged property within one year
from the date of registration of the certificate of sale. It applies in case of extrajudicial foreclosure.

What are the requisites for valid right of redemption?

1. Must be made within one year from the time of the registration of the sale.
2. Payment of the purchase price of the

property plus 1% interest per month together with the taxes thereon, if any, paid by the purchaser
with the same rate of interest computed from the date of registration of the sale; and

3. Written notice of the redemption must be served on the officer who made the sale and a duplicate
filed with the proper Register of Deeds

CHATTEL MORTGAGE

Q: What is chattel mortgage?

It is a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.

Q: What are the characteristics of chattel mortgage?

 1. It is a formal contract because it must be embodied in a public instrument and recorded in
the Chattel Mortgage Register;
2. It is an accessory contract because its existence depends upon an existing valid principal
obligation;
3. It is a unilateral contract because the obligation is only on the part of the creditor to free the
chattel from encumbrance upon the payment of the principal obligation;
4. It does not convey dominion but is only a security (In re: Du Tec Chuan, No. 11156, March
28, 1916);
5. It creates a real right or a lien which is being recorded and follows the chattel wherever it
goes

Q: What are the requisites in a chattel mortgage?

1. GR: It covers only movable property

XPN: When the parties treat as personalty that which is according to its nature realty.
2. Registration with the Chattel Mortgage Register.
3. Description of the property.
4. Accompanied by an affidavit of good faith to bind 3rd persons.

Note: The absence of an affidavit of good faith does not affect the validity of the contract.

Q: What are the laws that govern chattel mortgages?

1. Chattel Mortgage Law (Act No. 1508) 2. Provisions of the Civil Code on pledge
Note: In case of conflict between nos. 1 and 2, the former shall prevail.
3. Revised Administrative Code
4. Revised Penal Code (Art. 319)
5. Other special laws (i.e. Motor vehicle law)
6. Ship Mortgage Decree of 1978 (P.D. No. 1521)

Q: What may be the subject matter of chattel mortgage?

1. Shares of stock in a corporation;

2. Interest in business;
3. Machinery and house of mixed materials treated by parties as personal property and
no innocent third person will be prejudiced thereby (Makati Leasing and Finance
Corp. v. Weaver Textile Mills, Inc., No. L‐58469, May, 16, 1983);
4. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard
in order to be effective as to third persons;
5. Motor vehicles, the mortgage of which had been registered both with the Land
Transportation Commission and the Chattel Mortgage Registry in order to affect
third persons;
6. House which is intended to be demolished; or
7. Growing crops and large cattle (pars. 2 and 3, Sec. 7, Act No. 1508).

Note: Section 7 of the Chattel Mortgage Law does not demand specific description of every
chattel mortgaged in the deed of mortgage, but only requires that the description of the
 mortgaged property be such as to enable the parties to the mortgage or any other person to
identify the same after a reasonable investigation and inquiry

Q: What is affidavit of good faith?

It is an oath in a contract of chattel mortgage wherein the parties “severally swear that the mortgage
is made for the purpose of securing the obligation specified in the conditions thereof and for no
other purposes and that the same is a just and valid obligation and one not entered into for the
purpose of fraud.”

Note: The absence of the affidavit vitiates the mortgage only as against third persons without notice
like creditors and subsequent encumbrances.

CHATTEL MORTGAGE REAL ESTATE MORTGAGE

Subject matter
Personal property Real property
Requirement of registration
Essential for the validity of this contract Merely for the purpose of binding third persons

Procedure for the foreclosure of a chattel mortgage is different from the procedure of foreclosure
for real estate mortgage

Q: What is the legal significance of registration?

It is tantamount to the symbolic delivery of the mortgage to the mortgagee, which is equivalent to
actual delivery (

Q. What is the difference in registration of real mortgage and chattel mortgage?

A deed of real estate mortgage is considered registered once recorded in the entry book. However,
chattel mortgage must be registered not only in the entry book but also in the Chattel Mortgage
Register.

Q. What is the effect if the chattel mortgage is not registered in the chattel mortgage
register?

It is still binding between the parties but it will not be binding to innocent third parties.

Q: When should the registration of the chattel mortgage be made?

The law is silent on the time or period when registration should be made. The Court of Appeals has
held though that “the law is substantially and sufficiently complied with where the registration is
made by the mortgagee before the mortgagor has complied with his principal obligation and no right
of innocent third persons is prejudiced (
Q. Should the foreclosure sale in chattel mortgage be done in public auction?

Act No. 1508 provides for the foreclosure sale in chattel mortgage be done by public auction.
However, the parties are free to stipulate that the foreclosure be done by private sale.

Q: In case of foreclosure sale in chattel mortgage, may the creditor recover deficiency if the
redemption price is less than the debt secured?

GR: CR may recover deficiency.

XPN: when the chattel mortgage is used to secure the purchase of personal property in installments
(Recto Law).

Q: What is the effect of an increase in mortgage credit?

If the parties to a chattel mortgage take an oath that the debt, honestly due and owing from the
mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to
be thereafter contracted (11 C.J. 448). A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date of the mortgage. The increase in the
mortgage credit becomes a new mortgage

Q: How is chattel mortgage foreclosed?

Public sale
Private sale
GR: If there is an express stipulation in the contract.
XPN: Fraud or duress

Q: What is the procedure in foreclosure of a chattel mortgage?

The mortgagee may, after thirty (30) days from the time of the default or from the time the
condition is violated, cause the mortgaged property to be sold at public auction by a public officer
(Sec. 14, Act No. 1508)

The 30‐day period to foreclose a chattel mortgage is the minimum period after violation of the
mortgage condition for the mortgage. The creditor has at least ten (10) days notice served to the
mortgagor . The notice of time, place and purpose of such sale, is posted

After the sale of the chattel at public auction, the right of redemption is no longer available to the
mortgagor.

Q. What are the legal consequences of establishing a chattel mortgage over a building
erected not by the owner of the land?

A building is immovable or real property whether it is erected by the owner of the land, by a
usufructuary, or by a lessee. It may be treated as a movable by the parties to a chattel mortgage but
such is binding only between them and not on third parties. As far as third parties are concerned, the
chattel mortgage does not exist.

NEGOTIABLE INSTRUMENTS LAW

FORMS AND INTERPRETATION

Q: What are the elements of a negotiable instrument?

1. In writing and signed by the maker or drawer

2. Contains an unconditional promise or order to pay a sum certain in money
3. Payable on demand, or at a fixed or determinable future time
4. Payable to order or to bearer (so called badges of negotiability)
5. If addressed to a drawee, he must be named or otherwise indicated with reasonable certainty.
(Sec. 1)

Note: A negotiable instrument need not follow the exact language of NIL, as long as the terms are
sufficient which clearly indicate an intention to conform to the requirements of the law. (Sec. 10)
No. 5 applies only to bills of exchange. A promissory note has no drawee.

A. REQUISITES OF NEGOTIABILITY

Q: What are the factors to determine the negotiability of the instrument?

1. Words that appear on the face of negotiable instrument

2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole of the instruments

B. KINDS OF NEGOTIABLE INTRUMENTS

1. Promissory notes (PN) – An unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer.(Sec. 184)
2. Bill of exchange (BOE) – An unconditional order in writing addressed by one person to
another signed by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer. (Sec. 126)

Q: Distinguish promissory note from a bill of exchange.

PROMISSORY NOTE BILL OF EXCHANGE

Promise to pay Order to pay
As to number of parties 2 original parties 3 parties
As to liability of parties Maker is primarily liable Drawer is secondarily liable
As to number of Only 1 presentment (for
2 presentments (for acceptance and for
presentments needed payment) is needed
payment) are generally needed

II. COMPLETION AND DELIVERY

A. INSERTION OF DATE

Q: Is the date essential to make an instrument negotiable?

The date is not essential (Sec. 6 [a]). If dated, such date is deemed a prima facie proof that it is the
true date of the making, drawing, acceptance or indorsement of the instrument. (Sec. 11)

Q: When is date important?

Date is important to determine maturity, as when:

1. Where the instrument is payable within a specified period after date, or after sight.
2. When the instrument is payable on demand, date is necessary to determine whether the
instrument was presented within a reasonable time from issue, or from the last negotiation.
3. When the instrument is an interest‐ bearing one, to determine when the interest starts to run.

Q: When may date be inserted?

1. Where an instrument expressed to be payable at a fixed period after date is issued undated,
or
2. Where the acceptance of an instrument payable at a fixed period after sight is undated

Note: Any holder may insert therein the true date of issue or acceptance, and the instrument shall
be payable accordingly. (Sec.13)

Q: What is the effect of insertion of wrong date?

It does not avoid the instrument in the hands of a subsequent holder in due course. In the hands of
a holder in due course, the date inserted, even if wrong, is to be regarded as the true date (Sec. 13).

Note: With respect to the person who inserted the wrong date, however, the instrument is avoided.

B. COMPLETION OF BLANKS

Q: Who has the authority to fill up the blanks in an incomplete but delivered instrument?
The holder has a prima facie authority to complete it. A signature on a blank paper delivered by the
person making the signature in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. (Sec. 14)

Q: What is meant by material particular?

Any particular proper to be inserted in a negotiable instrument to make it complete.

Q: What are the various situations involving negotiable instruments?

1. Incomplete instrument

a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration

b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration

2. Complete instrument

a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration

b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration

C. INCOMPLETE BUT DELIVERED INSTRUMENTS

Q: When is an instrument incomplete?

When it is wanting in any material particular.

Q. When may a prior party be bound by an incomplete but delivered instrument?

If it is filled up strictly in accordance with the authority given and within a reasonable time. But if
any such instrument, after completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time. (Sec. 14)

Q. Lorenzo signed several blank checks instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found out about the transaction, he directed the
drawee bank to dishonor the check. When Evelyn encashed the check, it was dishonored. Is
Lorenzo liable to Evelyn?

Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was prima facie authority on the part of Nicky to fill‐ up
any of the material particulars thereof. Having done so, and when it is first completed before it is
negotiated to a holder in due course like Evelyn, it is valid for all purposes, and she may enforce it
within a reasonable time, as if it had been filled up strictly in accordance with the authority given.

D. INCOMPLETE AND UNDELIVERED INSTRUMENTS

Q: What is the rule when an instrument is incomplete and undelivered?

Not valid against the party whose signature was placed before delivery, whether the holder is a
holder in due course or not. With respect, however, to a holder in due course, non‐delivery must be
proved because as to him, there is a prima facie presumption of delivery.

Reason: Delivery is essential to validity. (Sec. 15)

Q: What about the party whose signature was placed after delivery?

Valid against the party whose signature was placed after delivery like an indorser because the
indorser warrants the instrument to be genuine and in all respect what it purports to be.

Q: Can a Holder in due course hold a maker for instruments which are incomplete and
undelivered supposing that the note was stolen, filled‐up, and was subsequently negotiated?

No. the law is specific that the instrument is not a valid contract in the hands of any holder. The
phrase “any holder” includes a holder in due course.

E. COMPLETE BUT UNDELIVERED

Q: What is the effect if an instrument is undelivered?

It is incomplete and revocable until delivery of the instrument for the purpose of giving it effect.
(Sec. 16)

Q: What is delivery?

Delivery refers to the transfer of possession, actual or constructive, from one person to another
(Sec. 191), with the intent to transfer title to payee and recognize him as holder thereof.

Q: When is an instrument issued?

The instrument is deemed issued the first delivery of the instrument, complete in form, to a person
who takes it as holder. (Sec. 191)
Q: Can a creditor bank who was the payee in a check fraudulently obtained by a third
person who subsequently encashed it sue the drawer‐ debtor, third person, and drawee bank
for the amount of the check?

No, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to
him. Without the initial delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument.

Q. What is the effect if the instrument is in the possession of a holder in due course?

Valid delivery is conclusively presumed. (Sec. 16)

Q: What if the instrument is in the possession of a party other than a holder in due course?

Possession of such party constitutes prima facie presumption of delivery but subject to rebuttal.

Q: When is delivery made conditional or for a special purpose? Provide examples.

It depends upon whom the instrument is delivered. If the instrument lands in the hands of a holder
in due course (one who does not know of the conditional delivery or of its special purpose), the
instrument will be as if there is no condition.

To a holder not in due course, prior parties are not bound by the instrument.

Note: The law contemplates that the condition is orally or verbally conveyed to the holder upon
delivery, because of the rule that the negotiability is determined only upon the face of the
instrument.

Q: Who are immediate parties?

Persons having knowledge of the conditions or limitations placed upon the delivery of an
instrument. It means privity, and not proximity.

Q: Who are remote parties?

Persons without knowledge as to the conditions or limitations placed upon the delivery of an
instrument, even if he is the next party physically.

F. COMPLETE AND DELIVERED INSTRUMENTS

Q: What are the rules when an instrument is complete and delivered?

1. Without forgery and alteration, all parties are bound.

2. With forged indorsement and/or alteration
a. Order instruments
i. Order promissory note
 o - Prior parties not bound. Forged signature is wholly inoperative (Sec.
23); unless estoppel sets in with regard prior parties (cut‐off rule).
o - Subsequent parties bound.
ii. Order bill of exchange
- Drawer’s account cannot be charged by the Drawee;
- Drawer has no cause of action against collecting bank, since the duty of the
latter is only to payee; - Drawee can recover from collecting bank;
- Drawer not liable to the collecting bank. Collecting bank bears loss (can
recover from person it paid) - Payee can recover from: Drawer and Collecting
bank, but not from Drawee unless with acceptance of the bill;

b. Bearer instruments

i. Bearer promissory note

o - Prior parties liable;
o - Forged signatory not liable to party not holder in due course.
ii. Bearer bill of exchange

- Drawee bank liable.

IV. SIGNATURE

Q. Who are the persons liable on an instrument?

GR: Only persons whose signatures appear on an instrument are liable thereon. (Sec. 18)

XPN:

1. Person signs in trade or assumed name (Sec. 18 [2]) – Party who signed must have intended to be
bound by his signature.
2. Principal is liable if a duly authorized agent signs in his own behalf disclosing the name of the
principal and adding words to show he is merely signing in a representative capacity. (Sec. 19) –
Authority may be given orally or in writing (SPA, only an evidence of authority of an agent to third
parties)
3. In case of forgery (Sec. 23)
4. Acceptor makes his acceptance of a bill on a separate paper (Sec. 134)
5. Person makes a written promise to accept the bill before it is drawn (Sec. 135)

Q: Is a person signing in trade name liable?

Yes. As a general rule, only persons whose signatures appear on an instrument are liable thereon.
But one who signs in a trade or assumed name is liable as if he signed his own name (Sec. 18 [2]). It
is necessary, however, that the party who signed intended to be bound by his signature.

Q: What is meant by procuration?

A: Procuration is the act by which a principal gives power to another to act in his place as he could
himself (Fink v. Scott, 143 S.E. 305)

Q: What is the effect of a signature by procuration?

A: It operates as notice that the agent has but a limited authority to sign and the principal is bound
only in case the agent in so signing acted within the actual limits of his authority. (Sec. 21)

D. FORGERY

Q: What is forgery?
A: Forgery is the counterfeit making or fraudulent alteration of any writing.

Q: When is there forgery?

A: Signature is affixed by one who does not claim to act as an agent and who has no authority to
bind the person whose signature he has forged.

Q: When is there want of authority?

A: Signature is affixed by one who purports to be an agent but has no authority to bind the alleged
principal.

Q: What is the effect when there is forgery?

GR: It does NOT render the instrument void. The signature is wholly inoperative, and no right to
retain the instrument, or to give a discharge thereof, or to enforce payment thereof against any party
to it, is acquired through or under such signature. (Cut‐off rule)

XPN:

1. If the party against whom it is sought to enforce such right is precluded from setting up
forgery or want of authority. (Sec. 23)
2. Where the forged signature is not necessary to the holder’s title, in which case, the forgery
may be disregarded (Sec. 48)

Q: Can a payee sue the collecting bank for the amount of the checks when it made payment
of the same under a forged endorsement in favor of the forger?

A: Yes, since the signature of the payee was forged to make it appear that he had made an
indorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual.
The collecting bank grossly erred in making payment by virtue of said forged signature. The
collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain
that the payee’s endorsement was genuine before cashing the check. (
Q: Who are precluded from setting up the defense of forgery?

1. Those who admit/warrant the genuineness of the signature: indorsers, persons negotiating
by delivery and acceptor; (Sec 56)
2. Those who by their acts, silence, or negligence, are estopped from claiming forgery;
3. A holder of a bearer instrument who subsequently negotiates such instrument with a prior
forged indorsement (forged indorsement is not necessary to his title it being a bearer
instrument).

Q: What are the rights of the parties in cases of forged instruments?

1. Where note payable to order:

1. Party whose signature was forged is not liable to a holder, even a HIDC
2. Indorsement is wholly inoperative.

2. Where note payable to bearer:

1. The party whose indorsement is forged is liable to a HIDC, but not to one who is not a
HIDC
Reason: it can be negotiated by mere delivery
2. The only defense available is want of delivery but this defense can be raised only against a
holder not in due course.

3. Where bill payable to order: The party whose indorsement is forged is not liable to any holder
even a HIDC. The forged indorsement is wholly inoperative.

Q. A client indorsed a check with a forged indorsement. The collecting bank indorsed the
check with the drawee bank. What are the liabilities of the parties?

The collecting bank is bound by its warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.

The drawee bank is under strict liability to pay the check to the order of the payee. Payment under a
forged indorsement is not to the drawer's order. Since the drawee bank did not pay a holder or other
person entitled to receive payment, it has no right to reimbursement from the drawer

Q: What is the remedy of the drawee bank?

The drawee bank may not debit the account of the drawer but may generally pass liability back
through the collection chain to the party who took from the forger and, of course, to the forger
himself, if available. If the forgery is that of the payee's or holder's indorsement, the collecting bank
is held liable, without prejudice to the latter proceeding against the forger. Since a forged
indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The
former must necessarily return the money paid by the latter because it was paid wrongfully.
Q. What is the liability of the drawee bank and the drawer for the amount paid on checks
with forged indorsements, if the same was due to the negligence of both the drawee bank
and the drawer?

The loss occasioned by such negligence should be divided equally between the drawer/depositor
and the drawee.

Q: Can a drawer‐depositor who entrusted his check books, credit cards, passbooks, bank
statements and cancelled checks to his secretary and who had introduced the secretary to
the bank for purposes of reconciliation of his accounts hold the drawee bank liable for the
amounts withdrawn by the secretary by forging his signature on the checks?

No, he is precluded from setting up the forgery due to his own negligence in entrusting to his
secretary his credit cards and check book including the verification of his statements of account. (

Q. Can a drawer, from whom checks were stolen but failed to report the same to the
authorities or the drawee bank, recover the value of the checks paid by the drawee bank on
the forged checks which was stolen from the drawer?

No, the drawer cannot recover. He is the one which stands to be blamed for its
negligence/predicament.

Q: How is forgery proven and who has the burden of proof?

A: Forgery, as any other mechanism of fraud must be proven clearly and convincingly, and the
burden of proof lies on the party alleging forgery

Discuss the legal consequences when a bank honors a forged check.

1. When drawer's signature is forged – Drawee‐bank by accepting the check cannot set up the
defense of forgery, because by accepting the instrument, the drawee bank admits the genuineness of
signature of drawer (BPI Family Bank v. Buenaventura, G.R. No. 148196, Sept. 30, 2005; Sec. 23,
NIL).

Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the
drawee‐bank is against the party responsible for the forgery. Otherwise, drawee‐bank bears the loss.
A drawee‐bank paying on a forged check must be considered as paying out of its funds and cannot
charge the amount to the drawer (Samsung Construction Co. Phils, v. Far East Bank, G.R. No.
129015, Aug. 13, 2004). If the drawee‐bank has charged drawer's account, the latter can recover such
amount from the drawee‐bank

However, the drawer may be precluded or estopped from setting up the defense of forgery as
against the drawee‐bank, when it is shown that the drawer himself had been guilty of gross
negligence as to have facilitated the forgery
2. Drawee bank versus collecting bank– When the signature of the drawer is forged, as between the
drawee‐bank and collecting bank, the drawee‐bank sustains the loss, since the collecting bank does
not guarantee the signature of the drawer. The payment of the check by the drawee bank constitutes
the proximate negligence since it has the duty to know the signature of its client‐drawer.

3. Forged payee's signature – When drawee‐bank pays the forged check, it must be considered as
paying out of its funds and cannot charge the amount so paid to the account of the depositor. In
such case, the bank becomes liable since its primary duty is to verify the authenticity of the payee's
signature

4. Forged endorsement – Drawer's account cannot be charged, and if charged, he can recover from
the drawee‐bank

Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to
the payee

Drawee‐bank can recover from the collecting bank because even if the indorsement on the check
deposited by the bank's client is forged, collecting bank is bound by its warranties as an indorser and
cannot set up defense of forgery as against drawee bank

Q: What are the kinds of fraud relating to a negotiable instrument?

1. Fraud in the execution or fraud in factum – A person, without negligence, has signed an
instrument which was in fact a negotiable one, but was deceived as to the character of the
instrument and without knowledge of it (real defense).

2. Fraud in the inducement or simple fraud

– Relates to the quantity, quality, value or character of the consideration of the instrument.
Deceit is not in the character of the instrument but in its amount or terms (personal
defense).

Q: The drawer’s signature was forged. There is, however, a provision in the monthly bank
statement that if the drawer’s signature was forged, the drawer should report it within 10
days from receipt of the statement to the drawee. The drawer, however failed to do so. What
will be its effect insofar as the drawer’s right is concerned?

A: The failure of the drawer to report the forgery within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude the drawer from questioning the mistake of the
drawee bank despite the provision.

Q: If forgery was committed by an employee of the drawer whose signature was forged,
does the relationship amount to estoppel such that the drawer is precluded in recovering
from the drawee bank?
A: The bare fact that the forgery was committed by an employee of the party whose signature was
forged can not necessarily imply that such party’s negligence was the cause of the forgery in the
absence of some circumstances raising estoppel against the drawer.

VII. NEGOTIATION

Q: When is an instrument negotiated?

A: An instrument is negotiated when it is transferred from one person to another in such a manner
as to constitute the transferee the holder thereof. (Sec. 30)

Note: A holder is the payee or indorser of a bill or note, who is in possession of it, or the bearer
thereof. (Sec. 191)

Q: What are the methods of transferring a negotiable instrument?

1. Issue – first delivery of the instrument complete in form to a person who takes it as a holder.
2. Negotiation – an instrument is negotiated when it is transferred from one person to another
in such a manner as to constitute the transferee the holder thereof.
3. Assignment – absent any express prohibition against assignment or transfer written on the
face of a non‐ negotiable instrument, the same may be assigned or transferred.

B. MODES OF NEGOTIATION

Q: What are the methods of negotiation?

If payable to bearer‐ it is negotiated by delivery

If payable to order‐ it is negotiated by the indorsement of the holder completed by delivery. (Sec.
30)

Q: What is the effect, if any, if a bearer instrument is negotiated by indorsement and

delivery?

: A bearer instrument, even when indorsed specially, may nevertheless be further negotiated by
delivery, but the person indorsing specially shall be liable as endorser to only such holders as make
title through his endorsement (once a bearer instrument, always a bearer instrument). (Sec. 40)

Note: This rule does not apply to an instrument originally payable to order but is converted into
bearer instrument because the only or last indorsement is an indorsement in blank.

Q: Earl Louie makes a promissory note payable to bearer and delivers the same to Joana.
Joana, however, endorses it to Ana in this manner:

"Payable to Ana. Signed: Joana."

Later, Ana, without indorsing the promissory note, transfers and delivers the same to
Batista. The note is subsequently dishonored by Earl Louie. May Batista proceed against
Earl Louie for the note?

A: Yes. Earl Louie is liable to Batista under the promissory note. The note made by Earl Louie is a
bearer instrument. Despite special indorsement made by Joana thereon, the note remained a bearer
Instrument and can be negotiated by mere delivery. When Ana delivered and transferred the note to
Batista, the latter became a holder thereof. As such holder, Batista can proceed against Earl Louie.

A. HOLDER IN DUE COURSE

What constitutes payment in due course?

A: When made:
1. At or after the maturity of the instrument
2. To the holder thereof, in good faith and without notice that his title is defective (Sec. 88)

Who is a holder in due course (HIDC)?

A: He who takes a negotiable instrument:

1. That is complete and regular upon its face;

Note: Absence of the required documentary stamp will not make the instrument
incomplete. (It is not a requisite of negotiability under Sec. 1 and it is not a material
particular under Sec. 125)

2. Became the holder before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;

Note: if the instruments is payable on demand, the date of maturity is determined by the
date of presentment, which must be made within a reasonable time after its issue, if it is a
note, or after the last negotiation thereof, if it is a bill of exchange. (Secs. 71 and 143[a])

Where transferee receives notice of any infirmity in the instrument of defect in the title of
the person negotiating the same before he had paid the full amount agreed to be paid, he will
be deemed a holder in due course only to the extent of the amount paid by him. (Sec. 54)

3. Took it in good faith and for value;

4. At the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. (Sec. 52)

Note: Knowledge of the agent is constructive knowledge to the principal.

Q: Who is deemed to be a HIDC?

GR: Every holder is deemed prima facie to be a holder in due course;

XPN: When it is shown that the title of any person who has negotiated the instrument was
defective. (Sec.59)

What are the rights of a HNIDC?

A: The rights similar to an assignee. The other rights are:

1. He may receive payment and if the payment is in due course, the instrument is discharged

2. He is entitled to the instrument but holds it subject to the same defenses as if it were non‐
negotiable

3. He may sue on the instrument in his own name. (Sec. 5)

What are the rights of a holder through a HIDC?

A: He has all the rights of a HIDC from whom he derives his title in respect of all parties prior to
such holder, provided he is not himself a party to any fraud or illegality affecting the instrument.
(Sec. 58)

Q: How does the “shelter principle” embodied in the Negotiable Instruments Law operate
to give the rights of a HIDC to a holder who does not have the status of a HIDC? Briefly
explain.

A: Under the shelter principle, a person who does not qualify as a holder in due course can,
nonetheless, acquire the rights and privileges of a holder in due course if he derives his title to the
instrument through a holder in due course. However, a person who previously held the instrument
cannot improve his position by later reacquiring it from a holder in due course if the former holder
was a party to fraud or illegal activity affecting the instrument or had notice of a claim or defense
against the instrument

B. DEFENSES AGAINST THE HOLDER

Q: What are the defenses against the Holder?

1. Real Defenses – those that are available against all parties, both immediate and remote,
including holders in due course.
2. Personal Defenses –defenses which are not available against a holder in due course. Those
which grow out of the agreement or conduct of a particular person in regard to the
instrument which renders it inequitable or him, though holding the legal title, to enforce it
against the party sought to be made liable.

REAL DEFENSES PERSONAL DEFENSES

Minority ( available only to the minor) Failure or Absence of Consideration
Forgery Illegal Consideration
Non-Delivery of incomplete Instrument Non-delivery of Complete Instrument
Material Alteration Conditional Delivery of Complete Instrument
 Ultra Vires Act of a Corporation Fraud in Inducement
Fraud in Factum or in Esse Contractus Filling up black not within authority
Illegality- if declared void for any purpose Duress or Intimidation
Vicious Force or Violence Filling up blank beyond reasonable time
Want of Authority Transfer in Breach of Faith
Prescription Mistake
Discharge in Insolvency Insertion of Wrong Date
Ante-Dating or Post-dating for illegal or
fraudulent purpose.

An individual can be held legally liable for the crime of estafa for issuing bouncing checks. Estafa
and bouncing checks law have similarities, but they also have their own distinctions. It is essential to
know both concepts as they will help you determine which one to file when a crime is committed.
Batas Pambansa BLG. 22 defines law on issuance of a check without sufficient funds.

BATAS PAMBANSA BLG. 22

AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A CHECK
WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER PURPOSES.

Section 1. Checks without sufficient funds. - Any person who makes or draws and issues any
check to apply on account or for value, knowing at the time of issue that he does not have sufficient
funds in or credit with the drawee bank for the payment of such check in full upon its presentment,
which check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or
would have been dishonored for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment, shall be punished by imprisonment of not less than thirty days
but not more than one (1) year or by a fine of not less than but not more than double the amount of
the check which fine shall in no case exceed Two Hundred Thousand Pesos, or both such fine and
imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who, having sufficient funds in or credit with
the drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to
maintain a credit to cover the full amount of the check if presented within a period of ninety (90)
days from the date appearing thereon, for which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act.

Sec. 2. Evidence of knowledge of insufficient funds. - The making, drawing and issuance of a
check payment of which is refused by the drawee because of insufficient funds in or credit with such
bank, when presented within ninety (90) days from the date of the check, shall be prima facie
evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the
holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of
such check within (5) banking days after receiving notice that such check has not been paid by the
drawee.
Sec. 3. Duty of drawee; rules of evidence. - It shall be the duty of the drawee of any check, when
refusing to pay the same to the holder thereof upon presentment, to cause to be written, printed, or
stamped in plain language thereon, or attached thereto, the reason for drawee's dishonor or refusal
to pay the same: Provided, That where there are no sufficient funds in or credit with such drawee
bank, such fact shall always be explicitly stated in the notice of dishonor or refusal. In all
prosecutions under this Act, the introduction in evidence of any unpaid and dishonored check,
having the drawee's refusal to pay stamped or written thereon or attached thereto, with the reason
therefor as aforesaid, shall be prima facie evidence of the making or issuance of said check, and the
due presentment to the drawee for payment and the dishonor thereof, and that the same was
properly dishonored for the reason written, stamped or attached by the drawee on such dishonored
check.

Notwithstanding receipt of an order to stop payment, the drawee shall state in the notice that there
were no sufficient funds in or credit with such bank for the payment in full of such check, if such be
the fact.

Sec. 4. Credit construed. - The word "credit" as used herein shall be construed to mean an
arrangement or understanding with the bank for the payment of such check.

Sec. 5. Liability under the Revised Penal Code. - Prosecution under this Act shall be without
prejudice to any liability for violation of any provision of the Revised Penal Code.