CREDIT TRANSACTIONS

Ateneo de Davao
Bar Review 2010
 STORY NUMBER 1

 Lyn borrowed Tony’s house for a 2-week

vacation. Lyn refuses to return the house after
two weeks. Thereafter, the house was partly
wrecked by an earthquake. Who is liable for the
damage?
 STORY NUMBER 2
 Rica borrowed P100,000 from Rico, payable
for 10 months, with an interest of 15% a
month.

 Rica defaulted in paying. She alleges that she

should not be obligated to pay the interest
since it is usurious. Is Rica correct?
 STORY NUMBER 3
 Matibay, Inc. obtained a P100 Million loan from
Mabuhay Bank. The loan was covered by a real
mortgage over Matibay’s building. Matibay failed
to pay the loan. Mabuhay sought to foreclose the
mortgage the mortgage by judicial action. The
building was sold to Masipag, Inc. Six months
after the registration of the certificate of sale,
Matibay asks you if it can still redeem the
building. Advise Matibay.
 TOPICS
Loan
Deposit
Guaranty and Suretyship
Pledge
Chattel Mortgage
Real Mortgage
Antichresis
Preference and concurrence of credits
 TOPICS
 Usury Law
 Warehouse Receipt Law
 Insolvency Law
 Financing Company Act
 Pawnshop Regulation Act
 Consumer Act of the Philippines
 Truth in Lending Act
 Ship Mortgage Decree of 1978
 Chattel Mortgage Law
 Extrajudicial Foreclosure of Real Mortgage
 Topical Outline

Unsecured Secured Deposit Concurrence and

Loan/Credit Preference of
Credits
Transactions
Guaranty Pledge

Chattel
Suretyship
Mortgage
Secured
Real
Mortgage
Unsecured

Antichresis
Credit Transactions
In General
Concept
Include all transactions involving
the purchase or loan of goods,
services or money in the present
with a promise to pay or deliver in
the future
 Types
 Secured transactions or contracts of real
security- supported by collateral or an
encumbrance of property

 Unsecured transactions or contracts of personal

security - supported only by a promise to pay or
the personal commitment of another such as a
guarantor or surety
Bailment

 Delivery of property of one person to another in

trust for a specific purpose, with a contract,
express or implied, that the trust shall be
faithfully executed and the property returned or
duly accounted for when the special purpose is
accomplished or kept until the bailor claims it
PARTIES
 BAILOR – the one who lends a thing;
 Need not be the owner but must have possessory interest in the
SM
 Lessee (1643, 1650)
 Usufructuary (562)

 BAILEE – the one who borrows the thing

 Bar 2007
The parties to a bailment are:
A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters a and B

Answer: E
LOAN
What is a contract of loan?

 By the contract of loan, one of the parties delivers to

another, either something not consumable so that the
latter may use the same for a certain time and return it,
in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition
that the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum
(1933).
Role of delivery

 1934 – delivery of the subject matter is

required for perfection of the contract.
 Ordinary
Commodatum
Loan Precarium
Mutuum or
Simple Loan
COMMODATUM
What is commodatum?

 Contract where bailor delivers to bailee a

non-consumable thing so that bailee may
use it for a certain time and return the
identical thing
Lease v. Commodatum

 If there is consideration in money for the use of

the SM - contract is NOT commodatum but is a
contract of lease
 Commodatum

Ordinary Precarium
(1933) (1947)

Tolerated use Duration not

stipulated
 Parties’ Obligations
Bailor (one who lends) Bailee (borrower)

Ordinary expenses for use YES

and preservation (change
oil, anti-termite)

Extraordinary expenses not YES 50% YES 50%

due to his fault while using
(faulty breaks)

Extraordinary expenses for YES If with notice OR

preservation (house even if without if notice
painting, plumbing system) will cause delay
Parties’ Obligations
BAILOR BAILEE

Not ordinary, not NO YES

extraordinary expenses (mag
wheels, interior decoration)

Loss due to fortuitous event GENERALLY:YES GENERALLY: NO, unless

exceptions

Respect the period YES. Unless (a) urgent need;

(b) act of ingratitude under
765; © precarium
 Loss due to fortuitous event
 EXCEPTIONS:

 PURPOSE- uses for purpose different from the agreed one

 DELAY - keeps it longer than the period stipulated or after
the accomplishment of the purpose
 WITH APPRAISAL - SM was delivered with appraisal of
its value unless there is a stipulation exempting the bailee
from loss in case of fortuitous event
 Loss due to fortuitous event

 LENDING TO 3RD PERSON- lends or leases the SM to a 3rd

person not a member of his household

 DOES NOT SAVE - being able to save the SM borrowed or

his own thing, he saves the latter
 Right to Possession of SM

 1951 – Bailee cannot retain the SM unless bailor failed to warn him
of hidden defects and he suffers damages as a consequence

 1952- Bailor cannot escape expenses by simply abandoning the

SM to the bailee
 Bar 2005
 A left his adventure van to B before he left to work
abroad. The parties agreed that B can use the van for 1
year. A did not tell B that the van’s brakes are faulty. B
had the brakes repaired and the van tuned up, spending
P15,000. B discovered that the van consumed too much
fuel. Hence, he leased the van to C. Two months later, A
returned and asked B to return the van. However, the
van was damaged while B was using it, without his fault
 Bar 2005
(a) Who shall bear the P15,000 spent for van
repair?

(b) Who shall bear the cost of the van’s fuel?

(c) Does A have the right to get the van before the
lapse of one year?
 ANSWER
(a) Breaks (extraordinary) – A
Tuneup (ordinary) – B

(b) Fuel (ordinary) – B

(c) A cannot demand return before the period

unless he has urgent need of the van
SIMPLE LOAN
Concept

 Lender delivers to borrower money or

other consumable upon the condition
that the latter shall pay the same amount of
the same kind and quality
The Debtor

 Has ownership of money received or other fungible thing

 Must pay the creditor an equal amount of the same kind and
quality

 Is liable for loss of money or thing

INTEREST

 GENERAL RULE: 1956 – no interest shall

be due unless it has been expressly
stipulated in writing and is lawful
EXCEPTIONS
 Indemnity for damages – debtor in delay must pay legal interest even
if there is no stipulation

 Interest accruing from unpaid interest – interest due shall earn

interest from the time it is judicially demanded although the
obligation may be silent on this point (2212)
Indemnity for Damages
 6% per annum – transactions other than loans/forbearance of
money

 e.g. Monetary award arising from a contract for a piece of

work, unpaid purchase price (Cristina Garments v. CA)
Example
 A purchased a car from B

 The price shall be paid in 30 days

 A delayed paying for one year

 A will be liable for 6% interest per annum for the delay in

paying the price
Indemnity for Damages
 12% per annum – delay in paying loans,
forbearance of money, judgments involving
loans or forbearance in absence of
stipulation computed from date of default
(CB Circular 416)
Example
 A obtained a P1,000 loan from B payable in 30
days

 A delayed in paying for one year

 A will be liable for 12% interest since she delayed

in paying the loan
Interest accruing from unpaid interest

 A borrowed P5,000 from B

 Loan has 12% annual interest

 A fails to pay P5,000 and the interest

Interest accruing from unpaid interest
 One year after due date, there is a judicial demand
for payment of P5,000 and 12% annual interest
within 30 days from judgment

 A pays 1 month after the 30-day period

 The 12% interest will earn 12% annual legal

interest (forbearance already) or 1% for each month
of delay
Interest accruing from unpaid interest
ORIGINAL LOAN = P5,000 + 12% (per annum)
= P5,000 + P600
= P5,600

FORBEARANCE = 12% per annum or 1% a month of delay

from judicial order
= P5,600 + 1% (P56.00)
= P6,160
 Bar 2002
 Carlo sues Dino for

 (a) collection on a promissory note for a loan, with NO agreement on interest

on which Dino defaulted

 (b) damages caused by Dino on Carlos’ priceless painting on which Dino

accidentally spilled acid while transporting it.

 The court finds Dino liable for both obligations. What rates of interests may the
court impose?
 Answer
 With respect to the amount covered by a promissory note, an
interest of 12% per annum may be imposed since it arose
from a contract of loan

 With respect to damages, it is 6% from the time of final

demand until finality of judgment and 12% of the amount
from final judgment until the debt is fully paid
INTEREST
 Contracting parties may stipulate freely on any adjustment in
the interest rate on a loan or forbearance of money.

 However, the law does not authorize increase of interest rate

by one party without the other party’s consent.

 Any change of interest must be mutually agreed by the

parties
 Bar 2001
 A obtained a P300,000 housing loan from X Bank at 18% per
annum interest. The promissory note provides that X
reserves the right to increase the interest within the limits
allowed by law. X Bank increased the interest to 48% per
annum. When A questioned the increase in court, X argued
that the usury law is already legally suspended. Will the
action prosper?Why?
 Answer
 The action will prosper. While it is true that interest ceilings set by the Usury
law are no longer in force, the court may still reduce interests which are
unconscionable.

 Contracting parties may stipulate freely on any adjustment in the interest rate
on a loan or forbearance of money.

 However, the law does not authorize increase of interest rate by one party
without the other party’s consent.

 Any change of interest must be mutually agreed by the parties

INTEREST
 1960 - If debtor pays interest when there is no
stipulation therefor, the provisions on solutio indebiti
or natural obligations will apply (debtor may recover)
KINDS OF INTEREST
 SIMPLE – paid for the principal at a
certain rate fixed or stipulated by the
parties
KINDS OF INTEREST
 COMPOUND – that which is imposed upon
interest due and unpaid. The accrued interest is
added to the principal sum and the whole
(principal and interest) is treated as the new
principal upon which the interest for the new
period is calculated
KINDS OF INTEREST
 LAWFUL – that which the law allows or does not
prohibit, the maximum rate of interest prescribed by
law

 UNLAWFUL OR USURIOUS – that which is paid or

stipulated to be paid beyond the maximum fixed by
law
Commodatum v. Mutuum
Comparison
BASIS COMMODATUM MUTUUM
SUBJECT MATTER Non-consumable Money or consumable

NATURE Essentially gratuitous Gratuitous or onerous

PURPOSE Use or temporary possession For consumption

KIND OF PROPERTY Real or personal Personal property

INVOLVED
 Comparison
BASIS COMMODATUM MUTUUM
RISK OF LOSS Lender or bailor retains Transfer of ownership to
ownership borrower

TIME OF PAYMENT End of period unless urgent End of period

need, acts of ingratitude or
precarium

CHARACTER OF THE Purely personal Not personal

CONTRACT
 Bar 2004
 Distinguish briefly but clearly between mutuum
and commodatum
UNSECURED LOANS
Guaranty
 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 (2047)
Suretyship

 Relationship where one person undertakes to

ensure the performance of an obligation of
another person
 Similarity between Guaranty
and Suretyship

 Both promise or undertake to answer for

a debt, default or miscarriage of another
person
 Comparison
Guarantor Surety

Liability depends on He assumes liability as a regular

independent agreement to pay party to the contract
the principal’s obligation
should he fail to do so

Obligation is secondary Obligation is primary

 Guarantor Surety
Undertaking is to pay if Undertaking is to pay if
principal debtor cannot principal debtor does
pay not pay.
An insurer of the solvency Insurer of a debt
of the debtor
Entitled to excussion No excussion
There can be guaranty of:
 A voidable contract

 An unenforceable contract

 A natural obligation

 Future debts

 Conditional obligations
 Qualifications of a Guarantor
 Person who possesses integrity

 Has the capacity to bind himself

 Has sufficient property to answer for the obligation he guarantees

(2056)
Grounds for disqualification
Insolvency OR
Conviction of a crime involving dishonesty

NOTE: If creditor did not choose the guarantor, he may demand a

replacement guarantor (2056)
 2050
 If guaranty is without the knowledge or consent or against the will
of the debtor

 guarantor can only recover in so far as payment was beneficial to the

debtor

 cannot compel subrogation to the creditor’s rights

Dynamics of a Guaranty

Creditor Debtor

Guarantor Guarantor
1 2
Effects of guaranty
 Between the creditor and guarantor

 Between the debtor and guarantor

 Between the co-guarantors

Between Creditor and Guarantor:
BENEFIT OF EXCUSSION
 The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and has resorted to all
legal remedies against the debtor (2058)
 The guarantor of a guarantor or the sub-
guarantor enjoys this with respect to the
properties of the debtor and the guarantor
(2064)
Illustration (2064)

Creditor Debtor
EXCUSSION
Guarantor

EXCUSSION
Sub-
Guarantor
How excussion is used

 When the debtor is sued, the guarantor

must be notified of the action so that he may
set up excussion as a defense (2062)
How excussion is used
 Guarantor points out to the creditor available property of the
debtor within the Philippines (2060)

 After guarantor points to debtor's property and creditor

neglects to exhaust the properties he shall suffer the loss to the
extent of the value of the properties (2061)
 Excussion Shall Not Take Place

 Guarantor has expressly renounced it

 Guarantor has bound himself solidarily with the

debtor

 Insolvency by the debtor

 Excussion Shall Not Take Place

 Debtor has absconded, or cannot be sued within the

Philippines unless he has left a manager or
representative

 If it may be presumed that an execution on the property

of the principal debtor would not result in the
satisfaction of the obligation
Between the debtor and guarantor:
INDEMNITY
 Indemnity
 total amount of the debt
 legal interests from time payment was
demanded till payment
 expenses by guarantor after demanding
payment from debtor
 damages, if they are due
 Rights of the Guarantor
Who Paid
 Subrogated to all rights of the creditor

 In case of compromise cannot collect more than what he paid

 If he pays before due date, cannot collect earlier than due date
unless payment was ratified by the debtor
Guarantor pays
without notice to the debtor

 2068 - Debtor may set up all defenses debtor can set up

against the creditor

 Defenses – minority, extinguishment etc.

Repeat Payment Rule

 Guarantor pays without notifying debtor

 Debtor repeats payment

 RULE: guarantor has no remedy against the

debtor but only against the creditor
Repeat Payment Rule

 EXCEPTION: debtor must reimburse if

◦ gratuitous guaranty;
◦ guarantor was prevented by fortuitous
event from notifying debtor; and
◦ creditor becomes insolvent
 Guarantor of an absent 3rd person
(2072)
 A person requests another to guarantee a debt
 Debt belongs to an absent third person
 Guarantor pays the debt
 Guarantor may collect either from the person
requesting or the absent debtor
Guarantor May Ask for Release or Additional
Security

 when guarantor is sued for payment

 principal debtor is insolvent

 debtor bound himself to relieve him from the

guaranty and the period has expired
Guarantor May Ask for Release or Additional
Security

 debt has become demandable due to

expiration of period for payment

 principal obligation has no fixed period and

after the lapse of 10 years
 Guarantor May Ask for Release or
Additional Security

 reasonable grounds to fear absconding of debtor

 when the debtor is in imminent danger of being

insolvent
Among Co-Guarantors
 2073
 There are 2 or more guarantors of the same debtor

 same debt

 one of the co-guarantors pays

 payment is made by judicial demand OR

 principal debtor is insolvent

 Concurring v. Sub Guaranty

Debtor

CONCURRING

Guarantor A Guarantor B
S
U
B

Sub Sub Sub

Guarantor A1 Guarantor A2 Guarantor B
 Insolvent Co-Guarantor

DEBT
P600,000

G1 – G2 – G3 –
P200,000 P200,000 P200,000

G1 pays
G2 is insolvent
G1 and G3 pay P300,000 each
 Insolvent Guarantor
has a sub-guarantor
Debt
P600,000

G1 G2 G3
P200,000 P200,000 P200,000

G1 pays
SG2 G2 is insolvent
G1, SG2 and G3
pay P200,000 each
Co-guarantor is released by creditor
 If WITH consent of co-guarantors, they will bear the share of
released guarantor

 If WITHOUT the consent of co-guarantors, they will NOT

bear the share of the released co-guarantor
EXTINGUISHMENT OF GUARANTY
Grounds
 Payment of principal obligation

 Novation without guarantor’s consent which

materially affects the obligation

 Extension of period to pay without guarantor’s

consent (2079)
Illustration
 If debtor and creditor agree to increase the interest rate –
extinguishes guaranty since disadvantageous to the guarantor

 If debtor and creditor agree to decrease the interest rate-

guaranty subsists since this does not affect guarantor’s
liability

 If debtor and creditor agree on an extension of time to pay-

guaranty is extinguished

 If debtor and creditor agree on lower interest but extended

period- extinguishes guaranty
 Topical Outline

Unsecured Secured Deposit Concurrence and

Loan/Credit Preference of
Credits
Transactions
Guaranty Pledge

Chattel
Suretyship
Mortgage
Secured
Real
Mortgage
Unsecured

Antichresis
PLEDGE
Concept

 It is a contract by virtue of which the debtor delivers

to the creditor or to a third person a movable or
document evidencing incorporeal rights for the
purpose of securing the fulfillment of a principal
obligation with the understanding that when the
obligation is fulfilled the thing shall be returned with
all its fruits and accessions.
How does pledge work?
 A borrows P10,000 from B

 A delivers his cellular phone to B as pledge

 B continues to have possession over the cellular phone

until A pays P10,000

 A can have the phone back once he pays B P10,000

 If A cannot pay, B can auction the phone

Essential Requisites, 2085

 constituted to secure the fulfillment of a

principal obligation

 pledgor is the absolute owner of the thing

(Cavite v. Lim)

 pledgor has the free disposal of their property

or are legally authorized to do so
Essential Requisites
 the property must be placed in the
possession of the creditor (2093)

 the description of the thing and the

date of the pledge must be in a public
instrument to bind 3rd persons (2096)
 No Double Pledge
 A property already pledged cannot be
pledged again while the first pledge is still
subsisting (Mission de San Vicente v. Reyes, 19
Phil 524)

 RATIO: Delivery is essential for validity.

One cannot deliver a thing twice
Parties

 PLEDGOR – the debtor or a third person who

pledges the subject matter to secure the loan
of the debtor; he must be the owner and must
have free disposal of the property or at least
must be authorized to dispose

 PLEDGEE - creditor
Parties

 NOTE: The pledgor may be the debtor OR a

third person (2083, 2nd paragraph)

 A pledge executed before a person becomes

the owner is VOID (Vda de Bautista v. Marcos,
3 SCRA 434)
Subject Matter

 2094 - all movables which are within the

commerce of man provided they are
susceptible of possession

 2095 - incorporeal rights, evidenced by

negotiable instruments, bills of lading,
shares of stocks, bonds, warehouse receipts
and similar documents. The instrument
must be delivered to the pledgee and
properly indorsed.
Subject Matter
 Future property cannot be pledged (Gen. Insurance v.
Masakayan, 54 SCRA 120)

 A mortgagee has the right to rely upon the title and

does not have to inquire further, unless mortgagee is
a banking institution (GSIS v. CA, 287 SCRA 204)

 A co-owner may pledge his portion of the thing

(PNB v. CA, 98 SCRA 207)
Nature (2089)

 GENERAL RULE: indivisible

 Debtor who pays part of the debt cannot ask for

proportionate extinguishment of the pledge

 EXCEPTION: where several things are given in

pledge and each thing guarantees only a determinate
portion of the credit
Illustration
 A pledges his car (P400,000) and his necklace (P50,000)
to secure his P500,000 debt

 A pays P400,000

 He cannot say that his car should be released since he has

paid part of the loan

 The pledge over the car and the necklace is INDIVISIBLE

PLEDGEE
Obligations

To appropriate fruits, income,

dividends or interest of thing with
those which are owing him, and if
none, to apply it to the principal
(2102)
Obligations

Take care of the thing with the

diligence of a good father of a family,
subject to reimbursement (2099)
Obligations

Cannot deposit the thing with a 3rd

person and is bound by his agents’ acts
(2100)

Liable for loss and deterioration

(2099)
Rights
 To use the thing to preserve it (2099)

 To retain possession of the thing until

fulfillment of the obligation (2098)

 Reimbursement for expenses to preserve

the thing (2099)
Rights

 May file actions to recover it from or defend it

against 3rd persons (2103)

 In case of fear of destruction or impairment

without the fault of the pledgee, may cause the
sale in a public auction (2108)
Rights

If he is deceived as to substance or

quality of the thing

 may ask for replacement OR

demand immediate payment (2109)

PLEDGOR
Rights and Obligations

 May dispose of the thing, with the consent

of the pledgee and with the thing still
subject to the pledge and in the possession of
the pledgee (2097)

 Must advise the pledgee of hidden flaws

of the thing otherwise shall be liable for
damages (2101)
Rights and Obligations

 In case of unauthorized use or misuse by pledgee,

may ask judicial or extrajudicial deposit of thing
(2104)
Loss or impairment

 If the pledgee is negligent - may ask for

deposit with 3rd person (2106)

 If without fault of pledgee - may demand

return of thing and offer a replacement
(inferior to right to sell by pledgee) (2107)
Extinguishment of Pledge
 If the thing pledged is returned by pledgee
to the pledgor (2110)

 A statement in writing by the pledgee that

he renounces or abandons his pledge
(2111)
When the debtor defaults
 Obligation is due and unpaid

 Sale of thing at a public auction

 Notice to the pledgor and owner stating the amount for

which the sale is to be held

 Sale must be conducted by a notary public

 After the sale, pledgee must advise the pledgor of the results
Public Auction
 Pledgor - may bid and if he offers the same
terms as highest bidder, he is preferred (2113)

 Pledgee - may bid but not if he is the only

bidder (2113, 2nd par.)

 all bids shall offer to pay the purchase price at

once (2114)
Public Auction
 Deficiency - pledgee cannot collect the
balance (2115)

 Excess - debtor is not entitled to the excess

unless the contrary is provided (2115)
 Can the creditor appropriate the thing
to himself in case of non-payment?
 NO. creditor cannot appropriate the thing
pledged to himself or dispose of them. Any
stipulation to the contrary isVOID (2088).

 Such stipulation is called pactum

commissorium
Elements of Pactum
 There should be a pledge, mortgage, or
antichresis of property by way of security for the
payment of the principal obligation;

 there should be stipulation for an automatic

appropriation by the creditor of the property in
the event of non-payment of the obligation
There is pactum

 Stipulation that the thing shall be considered in full

payment of the debt without further action (Northern
Motors v. Herrera)

 Stipulation in a pacto de retro sale that ownership over

the thing will automatically pass to the vendee in case
there is no redemption (Lanuza v. De Leon)
Exception to Pactum

 After 2 auction sales and there are no

bidders, pledgee may appropriate the thing
to himself BUT

 he must give an acquittance of the entire

claim (2112)
 Bar 2010
 Rosario obtained a loan of P100,000.00 from Jennifer, and
pledged her diamond ring. The contract signed by the parties
stipulated that if Rosario is unable to redeem the ring on due
date, she will execute a document in favor of Jennifer
providing that the ring shall automatically be considered full
payment of the loan.
 Is the contract valid? Explain. (3%)
 Will your answer to [a] be the same if the contract stipulates
that upon failure of Rosario to redeem the ring on due date,
Jennifer may immediately sell the ring and appropriate the
entire proceeds thereof for herself as full payment of the loan?
Reasons. (3%)
Suggested Answer
 No, the contract is not valid. It is in the nature of
pactum commissorium.

 The elements of pactum commissorium are present

here, namely, there was a pledge of a ring and
there was a stipulation of automatic appropriation
of the thing in favor of the creditor in case the
debt is not paid.
Suggested Answer

 My answer would not be the same. In the second

scenario, there was no automatic appropriation of
the pledged thing in favor of the creditor but
merely giving the creditor the right to dispose of
the ring and to use the proceeds to pay the
obligation.
 Bar 2004
 ABC loaned to MNO P40,000 for which the latter
pledged 400 shares of stocks in XYZ Corp. The parties
agreed that if pledgor failed to pay the loan with 10%
yearly interest within four years, the pledgee is
authorized to foreclose on the shares. MNO delivered
possession of shares to ABC with understanding that the
shares will be returned to MNO upon payment of loan.
However, the loan was not paid on time.

 A month after 4 years, may the shares be deemed owned

by ABC?
 Answer
 NO. The shares of stocks cannot be deemed
owned by ABC. The pledge has to be foreclosed.
Under the law, the creditor cannot appropriate
the things given by way of pledge. Even if the
parties agreed that ABC will automatically own
the shares upon MNO’s default, that constitutes
pactum commissorium, which is a void agreement.
 Bar 2001
 To secure a loan from a rural bank, A assigned her leasehold
rights over a public market stall in favor of the bank. The
deed of assignment provides that in case of default in the loan
payment, the bank shall have the right to sell Purita’s rights
over the stall as her attorney in fact and to apply the proceeds
to the payment of the loan.

 Was the assignment of rights a mortgage or cession?

Assuming it is a mortgage, does the provision giving the bank
the power to sell the stall constitute pactum commissorium?
 Answer
 The assignment was a mortgage not a cession of
the leasehold rights. A cession would have
transferred ownership to the bank. However, the
grant of authority to the bank to sell the stall is
proof that no such ownership was transferred and
that a mere encumbrance was constituted. There
would have been no need for the authority if
there was cession.
 Answer
 No. The clause does not constitute pactum
commissorium. It is pactum when non-payment
of loan automatically vests to the bank ownership
of the encumbered property. In this case, the
bank merely has the right to sell the rights to the
stall and to apply the proceeds to the loan.
 Bar 1999
 X borrowed money from Y and gave a piece
of land as security by way of mortgage. It
was expressly agreed in the mortgage
contract that upon non-payment of the loan,
the land will already belong to Y. If X
defaulted in the payment of loan, will Y now
own the land?Why?
 Answer
 No. Y would not become the owner of
the land. The stipulation is in the
nature of pactum commissorium, which is
prohibited by law. The property should
be sold at a public auction and the
proceeds thereof paid toY.
 Bar 1999
 Suppose in the preceeding question, the
agreement is that if X failed to pay the loan,
the debt shall be paid with the land
mortgaged by X to Y. Would your answer be
the same? Explain.
 Answer
 No, my answer would not be the same. This
is a valid stipulation and does not constitute
pactum commissorium. In pactum, the
acquisition is automatic without need of
further action. In the second situation,
another act is required to be performed,
namely, the conveyance of property as
payment (dacion en pago).
Legal Pledges
Provisions on possession, care and
sale of the thing pledged cover legal
pledges (2121)
Legal Pledges
 Art. 546 – right of possessor in good faith to
refund of necessary expenses before he returns
the thing

 Art. 1707 – lien on goods manufactured or work

done by laborer until his wages are paid

 Art. 1731 – right to retain by a worker who

executed work on a movable
Legal Pledges
 Art. 1914 – right of an agent to retain the thing
until he is reimbursed advances and damages

 Art. 1994 – right of retention of a depositary

until he is paid his fees

 Art. 2004 – right of a hotelkeeper to retain

properties of the guest until his bills are paid
Pawnshop Regulation Act
 Capitalization – P100,000

 Citizenship – 70% Filipino

 Amount of loan – not less than 30% of the property’s value

unless pawner manifests in writing desire to loan a smaller
amount

 Redemption – within 90 days from maturity of obligation

Pawnshop Regulation Act
 Notify owner of sale on or before end of 90-day period

 Public auction in place of business or public place within

territorial limits where the pawnshop operates

 Under control of licensed auctioneer

 Notice once in at least two daily newspapers in the city

of operation
CHATTEL MORTGAGE
Concept

 2140 – by a chattel mortgage, personal property is

recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.

 If the movable, instead of being recorded is delivered

to the creditor or a third person, the contract is a
pledge, not a chattel mortgage.
Essential Requisites

 Art. 2085
constituted to secure the fulfillment of
a principal obligation
pledgor is the absolute owner of the
thing
Essential Requisites
 persons constituting the pledge have the free
disposal of their property or are legally
authorized to do so

 personal property must be recorded in

the chattel mortgage registry (2140)
 Bar 2003
 X constructed a house on Y’s land. X
executed a CM over the house in favor of Y.
X purchased the lot from Y. X then executed
a real mortgage over the property in favor
of A bank. When A was able to foreclose the
mortgage, Y demanded that A satisfy the
debt of X and to honor the CM between X
and Y. Is this demand against A valid and
sustainable? Why?
 Answer
 Y’s demand is not valid. The CM is void
because it was not registered with the CM
Registry. Hence, A Bank does not have any
obligation toY.
Effect of Registration
 Binding notice to other creditors of its existence
and creates a real right or a lien which follows the
chattel whenever it goes

 The lien of a chattel mortgagee over the property

is superior to the levy made by an assignee of the
unsecured judgment creditor of the chattel
mortgagor (Northern v. Coquia, 68 SCRA 374)
Mortgage of motor vehicle

 Under the Revised Motor Vehicle Law, when the

subject matter of a chattel mortgage is a vehicle,
the CM must not only be registered with the
CM registry must also with the Land
Transportation Office or LTFRB in cases of
public utility vehicles in order to BIND THIRD
PERSONS (Borlough v. Fortune)
 Subject Matter

 Always personal or movable property

 Covers only property described in the CM and not like or

substituted property thereafter acquired by the mortgagor
and placed in the same depositary as the property
originally mortgaged (Sec. 7, par 4 Act 1508)
 Subject Matter

 Description of the property must be such to

enable parties to identify the same after a
reasonable investigation and inquiry (Saldana
v. Phil Guaranty, 106 Phil 919)
Subject Matter
 Interest in business

 Shares of stocks in a corporation

 Machinery installed in a leased land treated by the

parties as personal property

 House intended to be demolished

Affidavit of Good Faith
 An oath in a contract of CM 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 not
one entered into for the purpose of fraud (Section 5,
Chattel Mortgage Law)
Absence of Affidavit of Good Faith
 Absence only vitiates the mortgage as to 3rd
persons without notice like creditors and
subsequent encumbrancers (PRC v. Jarque, 61
Phil 229)
 Bar 2009

 Armando, a resident of Manila, borrowed P3-million from

Bernardo, offering as security his 500 shares of stock worth
P1.5-million in Xerxes Corporation, and his 2007 BMW sedan,
valued at P2-million. The mortgage on the shares of stock was
registered in the Office of the Register of Deeds of Makati City
where Xerxes Corporation has its principal office. The mortgage
on the car was registered in the Office of the Register of Deeds
of Manila. Armando executed a single Affidavit of Good
Faith, covering both mortgages.
 Bar 2009
 Armando defaulted on the payment of his obligation;
thus, Bernardo foreclosed on the two chattel mortgages.
Armando filed suit to nullify the foreclosure and the
mortgages, raising the following issues:

 The execution of only one Affidavit of Good Faith for

both mortgages invalidated the two mortgages; (2%)
 Suggested Answer
 The fact that there was only one affidavit of good
faith covering the two mortgages will not invalidate
the mortgages.

 According to jurisprudence, the absence of an

affidavit of good faith will not affect the validity of
the mortgage between the parties but will only
vitiate the mortgage as to 3rd persons without notice
like creditors and subsequent encumbrancers.
Period to foreclose the CM
 After 30 days from the time the condition is
broken

 The 30-day period is the minimum period with

at least 10 days’ notice to the mortgagor and
posting of public notice of time, place and
purpose of the sale (Cabral v. Evangelista, 28
SCRA 1000)
Extrajudicial Foreclosure
File application with executive judge who
has jurisdiction over the SM, through the
clerk of court

Clerk of court issues official receipt

and certificate of payment of fees

Publication of notice of sale in a

newspaper of general circulation

Application is raffled among sheriffs

Extrajudicial Foreclosure
Sale is conducted. If no 2 bidders,
postpone the sale. If still no 2 bidders
during 2nd sale then proceed with sale

Executive Judge issues certificate of

sale to winning bidder

If no redemption within one year from

registration of certificate of sale, clerk
of court archives the records
Replevin

 Action which must be initiated by the

creditor if he cannot obtain possession of
the property for purposes of sale on
foreclosure (Filinvest v. CA)
Proceeds of the Sale
 Costs and expenses of keeping and sale

 demand or obligation secured by the CM

 subsequent mortgagees

 mortgagor
Right of Redemption
 Available in extrajudicial foreclosure

 Done by paying the mortgagee the amount due on

such mortgage and the costs and expenses incurred
by such breach of condition before the sale thereof
OR

 If after the sale, done by paying the winning bidder

the purchase price and all costs within one year from
date of registration of certificate of sale
Who Can Redeem
 Mortgagor

 Person holding subsequent mortgage

 Subsequent attaching creditor

 Rights of Parties
CM in favor
of A dated
June 1, 2000

CM in favor
of B dated
July 1, 2000

Attachment by judgment creditor

C on July 15, 2000
Rights of Parties

 1st Mortgagee - Creditor A – he can foreclose the

chattel mortgage in case of default

 2nd Mortgagee – Creditor B – he can redeem the

property by paying A the mortgage debt. He can
now appropriate the property to himself
Rights of Parties

 Attaching Creditor – Creditor C he can redeem the

property by paying A the mortgage debt. He
acquires the right to foreclose and not the right to
own the property

 Debtor can also redeem the property by paying the

mortgage debt and get the property back
Right to Deficiency
 Mortgagee can recover deficiency

 Exception: when the chattel mortgage was

instituted to secure the purchase of a property on
installment (Recto Law)
Right to Excess
 Since there is no express prohibition under
the law, the chattel mortgagor is presumed
to have the right to the excess of the
purchase price over the debt
 Bar 2009

 Armando, a resident of Manila, borrowed P3-million from

Bernardo, offering as security his 500 shares of stock worth
P1.5-million in Xerxes Corporation, and his 2007 BMW sedan,
valued at P2-million. The mortgage on the shares of stock was
registered in the Office of the Register of Deeds of Makati City
where Xerxes Corporation has its principal office. The mortgage
on the car was registered in the Office of the Register of Deeds
of Manila. Armando executed a single Affidavit of Good
Faith, covering both mortgages.
 Bar 2009

 Assume that Bernardo extrajudicially foreclosed on the

mortgages, and both the car and the shares of stock were sold at
public auction. If the proceeds from such public sale should be
P1-million short of Armando’s total obligation, can Bernardo
recover the deficiency? Why or why not? (2%)
Suggested Answer
 Bernardo can recover the deficiency.

 Under the Civil Code, in case of chattel

mortgage, there is no express prohibition against
collecting the balance or deficiency in case the
proceeds of the auction do not satisfy the whole
obligation. The only exception is in case of sale of
movables on installments. This exception is not
applicable in the instant case. Hence, Bernardo
can recover the balance or deficiency.
 Criminal Offenses in Chattel Mortgage
 Article 319 of the RPC

 knowingly removing any personal property mortgage under the

Chattel Mortgage Law to any province or city other than the one
where it was located at the time of execution of mortgage
without the WRITTEN consent of the mortgagee

 selling or pledging personal property already mortgaged without

the consent of the mortgagee written at the back of the mortgage
and duly recorded with the Chattel Mortgage Registry
 CM Pledge
Registration is required for Registration is not required
validity for validity
Delivery is not essential for validity Delivery is essential for validity

Act No. 1508 rules the sale Article 2112 governs the sale

Creditor can sue for balance, except Creditor cannot sue for balance
if sale on installment (Recto Law)

Debtor gets excess Debtor does not get excess unless

there is a stipulation to the contrary
 Bar 1999
 Distinguish a chattel mortgage from a contract of
pledge
 Topical Outline

Unsecured Secured Deposit Concurrence and

Loan/Credit Preference of
Credits
Transactions
Guaranty Pledge

Chattel
Suretyship
Mortgage
Secured
Real
Mortgage
Unsecured

Antichresis
 Topical Outline

Unsecured Secured Deposit Concurrence and

Loan/Credit Preference of
Credits
Transactions
Guaranty Pledge

Chattel
Suretyship
Mortgage
Secured
Real
Mortgage
Unsecured

Antichresis
REAL MORTGAGE
What is real 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
which obligation shall be satisfied with the proceeds
of the sale of said property or rights in case said
obligation is not complied with at the time
stipulated.
 Subject Matter

 Immovables

 Alienable real rights in accordance with the

laws imposed upon immovables
 Subject Matter
 Includes natural accessions, improvements,
growing fruits, rents or income not yet
received when the obligation becomes due
Subject Matter

 Includes insurance proceeds or proceeds of

expropriation for public use WHETHER
THE SM IS IN THE HANDS OF THE
OWNER OR A 3RD PERSON
 Subject Matter
 May include AFTER-ACQUIRED PROPERTIES – this is
allowed when the real property are perishable or subject to
inevitable wear and tear. The purpose here is to maintain the
original value of the securities given (Mendoza v. CA, June 25,
2001)
 Coverage: Dragnet Clause
 A clause which subsumes all debts of past or future origin.

 The mortgage may secure future loans or advancements. e.g.

for the payment of loan of P20,000 and such other loans or
advances already obtained or still to be obtained (Quintanilla v.
CA, 279 SCRA 397 [1997])
 Essential Requisites, 2085
 Constituted to secure the fulfillment
of a principal obligation

 The mortgagor is the absolute owner

of the thing mortgaged
 Essential Requisites, 2085
 That the persons constituting the mortgage have the free
disposal of the property or are legally authorized to do so

 Mortgage must be in a public document. No valid

mortgage is constituted where the deed of mortgage is in a
mere private document (Hechanova v.Adil, 144 SCRA 450)
 Minimum Requirement for
Validity: Public Document

 If mortgage is in a public document but is not

recorded - mortgage is nonetheless binding on the
parties (2125)

 If the mortgage is in a private document, the

mortgage is void and the mortgagee may demand
reduction of mortgage in a public instrument
(notarized)
 Effect of Non-Registration
 Registration only operates as a notice of
the mortgage to others but does NOT
add to the validity of the mortgage or
convert an invalid mortgage into a valid
one (Samanilla v. Cajucom, 107 Phil 432)
 Effect of Registration
 Registration is merely ministerial and
does not validate an invalid RM
(Agriculture v.Yusay, 107 Phil 791)
 Unregistered Sale v. Recorded
Mortgage
 If prior to the mortgage, the SM was sold to another person,
the sale prevails (even if it is unregistered) over the registered
mortgage. The original owner has parted with ownership and
at the time of mortgage he no longer had ownership and free
disposal of the thing (State Investment v. CA, 254 SCRA 368
[1996])
 Kinds of Real Mortgage
 Voluntary – one which is agreed to
between the parties or constituted
by will of the owner of the property
 Kinds of Real Mortgage
 Equitable – one which, although it lacks
the formalities of a mortgage shows the
intention of the parties to make the
property as security for the debt
 Kinds of Real Mortgage
 Legal – one required by law to be executed in
favor of certain persons
 E.g. a person bound to give a bond but
can’t execute a bond may execute a real
mortgage over his property covering his
obligation
 Effects of Mortgage
 Creates a real right- until discharged, it
follows the property wherever it goes and
subsists notwithstanding change of ownership.
If the mortgagor sells the property , the SM
remains subject to the fulfillment of the
obligation secured by it (Bonnevie v. CA, 125
SCRA 122)
 Illustration

Real mortgage in
favor of A on May
1, 2000

Sale in favor of B
June 1, 2000, with
A’s consent

Auction sale foreclosing

the RM of A, with C as
the highest bidder
 Illustration
 Who has a preferential right? The buyer who buys the property
from debtor/owner after the mortgage OR the winning
bidder during foreclosure?

 The winning bidder has a preferential right but subject to the

new owner’s equitable right of redemption (Santiago v. Dionisio,
92 Phil 485)
 Effects of Mortgage
 Creates merely an encumbrance – it does
involve the transfer, cession or conveyance of
property but only constitutes a lien. What is
lost is the free disposal and sale of the SM
(Medida v. CA, 208 SCRA 887)
 Effects of Mortgage
 2128 – the mortgage credit may be
alienated or assigned to a 3rd person in
whole or in part

 2130 – a stipulation forbidding the owner from

alienating the SM shall be VOID
 Effects of an invalid mortgage
 The principal obligation subsists

 What is lost is merely the right to foreclose

 The mortgage deed remains as evidence of personal obligation

of the debtor (DBP v. CA, 249 SCRA 331)
 When the principal obligation is
not fulfilled
 Mortgagee chooses between filing a
collection case or foreclosing the
mortgage

 Foreclosure may either be extrajudicial

OR judicial
 REDEMPTION
Equity of Redemption

Right of Redemption
 EQUITY OF REDEMPTION
 Right of the mortgagor to redeem the
property after his default in the
performance of the conditions of the
mortgage BUT before the confirmation
of the auction sale of the mortgaged
property
 EQUITY OF REDEMPTION; When
available
 General Rule: Only in judicial foreclosure – 90-
120 days from receipt of judgment in favor of the
creditor OR before the confirmation of the sale at
the discretion of the court
EQUITY OF REDEMPTION; When
available
 Exception: in extrajudicial foreclosure where the mortgagor
is a juridical entity - until but not after the registration of
certificate of foreclosure sale which shall not be more than 3
months after foreclosure, WHICHEVER IS EARLIER (RA
8791)
 RIGHT OF REDEMPTION
 The right of the mortgagor to redeem
the mortgaged property within a
certain period after it was sold for the
satisfaction of the debt
RIGHT OF REDEMPTION: When
available
 GENERAL RULE: extrajudicial foreclosure within one year
from registration of certificate of sale

 EXCEPTION: in judicial foreclosure where the mortgagee is

PNB or a banking institution – within one year from
registration of the foreclosure sale
 Bar 1999
 Are the right of redemption and the equity
of redemption given by law to mortgagor
the same? Explain.
 Extrajudicial Foreclosure
File application with executive judge who has
jurisdiction over the property, through Clerk of Court

Post notice of sale or publish notice

of sale once a week for at least
3 consec weeks in a newspaper of gen circ

Clerk of Court issues receipt and certificate of

payment
 Extrajudicial Foreclosure
Application is raffled among sheriffs.

Sale must have at least 2 bidders, if

not, sale is postponed. If still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice

Exec Judge in former’s absence.
Cert is issued to winning bidder

3 months 1-yr Right of Redemption

If redemption period expires, Clerk archives records

Redemption in
Extrajudicial Foreclosure

 If mortgagor is NOT a juridical entity - Right of

Redemption – Within 1 year from date of
registration of certificate of sale

 If mortgagor is a juridical entity - Equity of

Redemption – until but not after the registration of
certificate of foreclosure sale which shall not be
more than 3 months after foreclosure,
WHICHEVER IS EARLIER (RA 8791)
 How to validly redeem
 Must be made within the period

 Payment of purchase price plus 1% interest per month

with taxes thereon from date of registration of sale until date
of redemption. Payment is to redemptioner or sale officer

 Written notice of redemption must be served on officer who

made the sale and a duplicate with Register of Deeds (Rosales
v.Yboa, 120 SCRA 869)
 Judicial Foreclosure
File an action with RTC which has jurisdiction over
location of SM

Court shall order payment of debt

within 90-120 days from entry of judgment
(debtor’s receipt of judgment,
Herrera v. Arellano, 97 Phil 776)

EQUITY OF EQUITY OF
REDEMPTION REDEMPTION

If no payment, the court orders sale of SM to the

Highest bidder in a public auction
 Judicial Foreclosure
The court calls parties for confirmation of sale

EQUITY OF EQUITY OF
REDEMPTION REDEMPTION
Execution of judgment

Application of proceeds
 Judicial Foreclosure

Execution of sheriffs’ certificate

Registration of certified true copy of the final order of

the court confirming the sale

If mortgagee is PNB or For ordinary mortgagees, title

a banking institution, 1-yr shall now be consolidated
right of redemption starts In winning bidder’s name
Redemption in
Judicial Foreclosure

 Equity of redemption – 90-120 days from entry

of judgment or at any time before the sale is
confirmed upon the discretion of the court
(Salazar v. De Torres, 108 Phil 209)

 Right of Redemption – 1 year from registration

of order confirming the sale if the mortgagee is
PNB or a banking institution
Who can Redeem?
 Mortgagor or one who is in privity of title with
mortgagor
 Successor-in-interest
 One to whom debtor has transferred his right
 One to whom debtor has conveyed his interest in the
SM
 One who succeeds to the interest of the debtor
 One or more joint debtors who were joint owners of
the SM
 Wife as regards her husband’s homestead
 Compulsory heir
In case of Deficiency
 Can recover within 10 years from time
the right of action accrues

 May recover even during period of

redemption

 Incorporated in deficiency judgment in a

judicial foreclosure
 Rents, Earnings and Income
 Judgment obligor shall be entitled to receive
rents, earnings or income pending
redemption NOT the purchaser (Section 32,
Rule 39)
ANTICHRESIS
 CONCEPT
 2132- by the contract of antichresis the
creditor acquires the right to receive fruits if an
immovable of his debtor, with the obligation to
apply them to the payment of interest, if owing
and thereafter to the principal of his credit
 Role of Delivery
Delivery is only required in order
that the creditor may receive the
fruits and not for validity of the
antichresis.
 Obligations of the
Antichretic Creditor
 Must pay taxes and charges upon the estate

 Bound to pay expenses necessary for preservation and repair

 Sums spent for these purposes are deducted from the fruits
 How to avoid obligation to pay taxes,
charges and necessary expenses

 Compel the debtor to enter again upon

enjoyment of the property except when
there is a stipulation to the contrary
 Requirement for Validity
 The amount of the principal and
interest shall be specified in writing;
otherwise the contract of antichresis
shall be VOID (2134).
 Effect of Antichresis
 No transfer of ownership upon debtor’s
default

 In case of non-payment, creditor may petition

the court for payment of debt and foreclosure
(under the Rules of Court)
 Bar 2007

 A contract of antichresis is always:

(a) a written contract

(b) a contract with a stipulation that debt will be paid through
receipt of the fruits of an immovable
© involves the payment of interest, if owing
(d) all of the above;
(e) letters a and b

ANSWER: D
 Pledge Mortgage & Antichresis

 Innocent mortgagees for value, like innocent purchasers for

value are protected by law

 Mortgage by using a forged special power of atty is VOID

 Mortgage by an impostor is VOID

 Antichresis Pledge
Real property Movable property

Perfected by mere consent Perfected by delivery

Consensual contract Real contract

 Antichresis RM
SM is delivered to the creditor Debtor usually retains possession
over SM

Creditor has right to receive fruits but Creditor has real right over the SM but
does not have real right does not have the right over the fruits

Creditor has obligation to pay taxes No obligation to pay taxes

Creditor has obligation to get fruits and No obligation to apply fruits

apply them to the interest then to the
principal

Real property Real property

TYPE OF SUBJECT ADDED IS PACTUM ESSENCE
SECURITY MATTER REQUISITE APPLICABLE
FOR
VALIDITY
Pledge Movable Delivery of YES Pledgee
Incorporeal SM to retains
rights pledgee possession
until debt is
paid

Chattel Movable
Mortgage
 Pledge Chattel Real Antichresis
Mortgage Mortgage

Subject Movables Movables Immovables Fruits of real

Matter Incorporeal Incorporeal Alienable property
rights rights real rights

Added Delivery of Registration Public Principal

Requisite SM to in CM Instrument and interest
for Validity pledgee Registry must be in
writing
 Pledge Chattel Real Antichresis
Mortgage Mortgage

Pactum YES YES YES YES

applicable
Essence Pledgee CM follows RM creates a Creditor
retains the property real right and enjoys fruits
possession encumbrance until
until payment of
payment debt and
interest
Default Art. 2112 Act 1508 Act 1508 or Rules of
options Rules of Court
Court
 Topical Outline

Unsecured Secured Deposit Concurrence and

Loan/Credit Preference of
Credits
Transactions
Guaranty Pledge

Chattel
Suretyship
Mortgage
Secured
Real
Mortgage
Unsecured

Antichresis
DEPOSIT
Concept
 1962 – A deposit is constituted from the moment a
person receives a thing belonging to another, with
the obligation of safely keeping it and returning the
same.

 If the safekeeping of the thing is not the principal

purpose of the contract, there is NO deposit but
some other contract. The contract may either be
lease, commodatum or agency.
Role of Delivery

 1963 – An agreement to constitute a

deposit is binding but the deposit is
NOT perfected until the delivery of
the thing
Subject Matter

 General Rule - Only movable things may

be the object of a deposit (1966)

 Judicial deposit – may cover immovable or

movable (2005-2996)
Nature of a Deposit

 Essentially gratuitous – except when there

is an agreement to the contrary OR unless
the depositary is engaged in the business of
storing goods (1965)
Form

 1969 – A contract of deposit may be

entered into orally or in writing
Basis Deposit Commodatum Mutuum

PURPOSE Safekeeping Use of thing Consumption

NATURE Gratuitous or onerous Gratuitous Gratuitous or onerous

OBJECT Extra-judicial: Movables and Money or fungible

movables immovables thing

DEMANDABILITY Depositor can demand Return only after Pay within period
thing at will period
 Voluntary
Extrajudicial

Deposit Necessary

Judicial
JUDICIAL DEPOSIT
2005-2008
Judicial Deposit/Sequestration

 2005 – takes place when an attachment or

seizure of property in litigation is ordered by
the court

 2006 – movable or immovable may be the SM

of sequestration
Judicial Deposit

 Primary purpose: to maintain status quo

during the pendency of litigation or to
insure the rights of parties to property.
Examples of Judicial Deposit
 Rule 57 (Preliminary attachment) – attachment by sheriff
upon filing of complaint

 Rule 59 (Receivership) - a receiver may be appointed by the

court to administer and preserve the property in litigation

 Rule 60 (Replevin) - personal property may be seized by

sheriffs in suits of replevin or manual delivery of personal
property

 Rule 127 – attachment in criminal cases

 Judicial Deposit

 2008 – depositary must comply with the obligations of

a good father of family

 2007- obligation of depositary subsists until the end of

controversy which gave rise to the sequestration, unless
the court orders.
Extrajudicial Deposit
Voluntary Deposit
Concept

 1968 - One wherein the delivery is made by

the will of the depositor or by two or more
persons each of whom believes himself entitled
to the thing deposited

 MAIN DISTINCTION WITH NECESSARY

DEPOSIT: Depositor has complete freedom in
choosing the depositary.
Obligations of the Depositary

 To keep the thing safely and to return it, when

required, to the depositor or to his heirs or
successors or to the person who may have been
designated in the contract (1972)

 Degree of care required – degree of care one

would exercise over his own property
Obligations of the Depositary

 Must return the SM together with all accessions,

accessories and products. (1983)

 Cannot deposit the SM with a 3rd person .

 If deposit with 3rd person is allowed, depositary is

liable for loss if deposited with 3rd person who is
manifestly careless or unfit. (1973)
Obligations of the Depositary

 May change the way of the deposit if:

 under the circumstances he may reasonably

presume that the depositor would consent to the
change if he knew the facts of the situation.

 Before change he must notify the depositor and

wait for his decision, unless delay would cause
danger.(1974)
Obligations of the Depositary

 Depositary holding certificates, bonds,

securities or instruments which earn interest:

 must collect interest when they become due

 take steps so that value of securities is
preserved (1975)
Obligations of the Depositary

 If SM delivered closed and sealed:


 must return it in the same condition
 liable for damages should the seal be broken
through his fault.
 fault on the part of the depositary is presumed
unless there is proof to the contrary (1981)
Obligations of the Depositary: Loss by
Fortuitous Event (1979)
 GENERAL RULE: Not liable
 EXCEPTIONS:
 Stipulated
 Uses without owner’s permission
 Delays in return
 Allows others to use it even though he
himself is authorized
Obligations of the Depositary: Loss by
Force Majeure (1990)
 Loss by force majeure or government order
and receives a thing or money in lieu of the
thing, he must deliver to the depositary the
thing or money he received (1990)
Rights of the Depositary

 1984 – cannot demand that depositor proves

his ownership BUT
 If he discovers that the SM was stolen and
who the true owner is, he must inform the
true owner of the deposit
 If owner does not claim within 1 month from
notice, depositor may return SM to
depositary without incurring liability
Rights of the Depositary

 May retain the SM in pledge until full

payment of what may be due him by
reason of deposit (1994)
Use of the Subject Matter

 GENERAL RULE- cannot use without express

permission of depositor. He shall be liable for
damages

 EXCEPTION – to preserve the thing. (1977)

Use of the Subject Matter

 If allowed to use – the contract is no longer a

deposit but becomes a commodatum, except
where safekeeping is still the principal
purpose. The permission shall not be
presumed.
Depositor’s Incapacity

 Depositary shall be subject to all obligations of a

depositary and may be compelled to return the
thing BY the guardian or administrator of the
incapacitated person (1970)
Incapacity of depositary

 Depositor shall only have an action to recover the

SM while in possession of the depositary or to
compel payment of amount that depositary was
enriched.(1971)

 If property is in the hands of a 3rd person who

acquired SM in good faith, depositor may sue the
3rd person
Obligations of the Depositor

 Must reimburse depositary for expenses

he may have incurred for the preservation
of the thing if gratuitous deposit (1992)
Obligations of the Depositor

 Must reimburse depositary for any loss arising

from the character of the SM, unless the
depositor was not aware of or was not
expected to know the dangerous character of
the SM or unless he notified the depositary of
the same or depositary was aware of it (1993)
Extinguishment of
Voluntary Deposit

 Death of depositary extinguishes the

deposit in gratuitous deposit but not in
deposit for compensation
Extinguishment of
Voluntary Deposit
 1995
 Upon loss or destruction of the thing
deposited
 In case of gratuitous deposit, upon the death
of either the depositor or the depositary
 Other causes (novation, merger, expiration
of the term, fulfillment of resolutory
condition)
Necessary Deposit
Concept
 A deposit is necessary when:
 It is made in compliance with a legal obligation (1996)

 It takes place on the occasion of any calamity, such as fire,

storm, flood, pillage, shipwreck or other similar events
(1996)

 Travellers in hotels or inns deposit effects (1998)

 Made by passengers of common carriers (1745)

Necessary deposit- To comply with a
legal obligation
 Judicial deposit of SM the possession of
which is disputed by two or more persons
under Art. 538

 If the two possessors are identical as to dates of

possession and both can present title

 Thing must be placed in judicial deposit

Necessary Deposit: To comply with a
legal obligation
 Deposit of SM of pledge when there is
unauthorized use by the pledgee

 When constituted to guarantee contracts with

the government arising from an obligation
which is administrative in character.
 Bar 2007
 A deposit made in compliance with a legal
obligation is:
(a) an extrajudicial deposit
(b) a voluntary deposit
© a necessary deposit
(d) a deposit with a warehouseman
(e) letters a and b
ANSWER: C
Necessary Deposit – On the occasion
of a calamity
 When during a fire, flood, storm, or other calamity a property is
saved from destruction by another person without the
knowledge of the owner, the latter is bound to pay the former
just compensation (2168)

 Possession passes by accident from one person to another and the

law imposes on the recipient the obligations of a bailee

 Primary purpose: to save the property

Necessary Deposit - Travellers
 The keepers of hotels on inns shall be responsible as depositaries
for effects deposited by guests provided:
 Notice was given to them about the effects
 Guests have taken precautions prescribed regarding their safekeeping
(1998)

 Liable for vehicles, animals and articles placed in the annexes of

the hotel (1999)
Necessary Deposit - Travellers
 Liable for loss or injury through:
Acts of servants or employees of the
keeper
Acts of strangers
Acts of robbers UNATTENDED by use
of arms or irresistible force
Necessary Deposit - Travellers
 NOT liable for loss or injury through:
 Force majeure
 Acts of robbers with arms or using
irresistible force
 Acts of guests, his family, servants or visitors
 Character of the SM
Necessary Deposit - Travellers
 2003 – hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he
is not liable for articles brought in by guests

 Void stipulations – stipulations which diminish or

suppress liability of keepers

 2004 – may validly retain articles as security for

credits of guests
 Judicial Deposit
ORIGIN: will of the ORIGIN: will of the
court parties
PURPOSE: to secure the
right of a party to recover
Movable or immovable
Always remunerated
Held in behalf of
prevailing party
v. Extrajudicial Deposit
PURPOSE: safekeeping
movable
May be gratuitous or
onerous
Held in behalf of depositor
CONCURRENCE AND PREFERENCE OF
CREDITS
Principles
 Assets of a debtor can be used to satisfy obligations with
creditors.

 However, there are certain properties which are exempted from

satisfying liabilities.

 Note, however, that even if these properties are deemed

exempted, these assets shall NOT be exempt from execution
issued upon a judgment recovered for its price or upon a
judgment of foreclosure of a mortgage thereon
Exempted Properties
 Art. 153 - Family Home – generally exempted unless for:

 Non-payment of taxes
 Debts incurred prior to the constitution of family home
 Debts secured by mortgages on the premise before or
after such constitution; and
 Debts due to laborers, mechanics, architects, builders,
material men and others who have rendered service or
furnished material for the construction of the building
(155)
Exempted Properties
 Art. 205 – Right to receive support as well as any money or
property obtained as such support shall not be levied upon on
attachment or execution
Sec. 13. Exempted Properties
 Judgment obligor’s family home or the
homestead in which he resides
 Ordinary tools and implements personally
used by him in his trade, employment or
livelihood;
 3 horses or 3 cows or 3 carabaos or other
beasts of burden necessarily used by him in
his ordinary occupation;
Sec. 13. Exempted Properties
 His necessary clothing and articles for ordinary
personal use, EXCLUDING jewelry;
 Household furnitures and utensils necessary for
housekeeping with a value not exceeding
P100,000;
 Provisions for individual or family use sufficient for
4 months
Sec. 13. Exempted Properties
 Professional libraries of judges, lawyers,
physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers and other
professionals not exceeding P300,000 in value;

 1 fishing boat and accessories not exceeding the

total value of P100,000 owned by a fisherman and
by the lawful use of which he earns his livelihood;
Sec. 13. Exempted Properties
 Salaries, wages, earnings of the debtor for his
personal services within the 4 months preceeding
the levy necessary to support his family;

 Lettered gravestones;

 Moneys, benefits, privileges, or annuities accruing

or growing out of life insurance;
Sec. 13. Exempted Properties
 Right to receive legal support or money or property
obtained as such support or any pension or gratuity from
the government;

 Properties especially exempted by law;

 Properties belonging to the absolute community or

conjugal partnership except insofar as the debt has
redounded to the benefit of the family (2238);

 Property held by debtor as trustee of an express or

implied trust (2239)
Concurrence v. Preference
 Concurrence – implies the possession of two
or more creditors of equal rights or privileges
over the SAME property or all of the property
of the debtor
Concurrence v. Preference
 Preference – right held by creditor to be
preferred in the payment of his claim above
others out of the debtor’s assets
Concurrence and Preference
 The provisions on concurrence and preference
will only apply if the liabilities of the
debtor are more than his assets
General Categories of Credit
 Special Preferred – 2241 & 2242
 Ordinary Preferred – 2244
 Common Credits - 2245
SPECIAL PREFERRED
Special Preferred
 Envisions a situation where a particular property
which is either movable or immovable is subject to
certain obligations

 These special preferred credits or obligations have to

be satisfied using the proceeds from the sale of said
property
Illustration
 A owns a vehicle. The price of the vehicle is not yet
paid. The vehicle is also the subject of a chattel
mortgage in favor of the financial institution where A
obtained a loan for the price. A also has unpaid repair
expenses.

 IDENTIFY THE OBLIGATIONS WITH RESPECT

TO THE CAR: unpaid purchase price, chattel
mortgage, unpaid repair expenses
Special Preferred Credits on Movables
2241
 Duties, taxes and fees due on the movable

 Claims arising from misappropriation, breach of

trust, or malfeasance by public officials committed in
the performance of their duties on the movables,
money or securities obtained by them

 Claims for the unpaid price of movables sold

Special Preferred Credits on Movables
2241
 Credits guaranteed with a pledge of the movables

 Credits for repairs, safekeeping, preservation of the property

 Claims for laborer’s wages on the goods manufactured or work

done

 Expenses of salvage
Special Preferred Credits on Movables
2241
 Credits between the landlord and tenant

 Credits for transportation upon goods carried

 Credits for lodging and supplies usually furnished to

travellers by hotelkeepers on movables belonging to
the guests

 Credits for seeds and expenses for cultivation and

harvest
Special Preferred Credits on Movables
2241
 Credits for rent for 1 year upon personal
property of the lessee

 Claims in favor of the depositor if depositary

has wrongfully sold the thing deposited
Special Preferred Credits on
Immovables, 2242
 Taxes due upon the land or building

 Unpaid price of immovable

 Claims of laborers, masons and other workmen

engaged in construction

 Claims of furnishers of materials used in

construction

 Mortgage credits recorded in Registry of Property

Special Preferred Credits on
Immovables, 2242
 Expenses for preservation, improvement

 Credits annotated in the Registry of Property

 Claims of co-heirs for warranty in the partition

 Claims of donors

 Credits of insurers upon property insured

ORDINARY PREFERRED
Ordinary Preferred
 Envisions a situation where a particular credit is not
secured by any particular movable or immovable.

 HOWEVER, this credit happens to be one of those

enumerated as ordinary preferred. Hence, the credit
will enjoy preference over properties which are not
encumbered, including the free portion of the
debtor's property.
Ordinary Preferred, 2244 :
Hierarchical Application
 Credits for services rendered the
insolvent by employees, laborers,
household helpers

 Proper funeral expenses for the debtor,

children under his parental authority
Ordinary Preferred, 2244 :
Hierarchical Application
 Expenses during last illness of debtor, spouse
and children under his parental authority

 Compensation due to laborers or dependents

under laws providing for indemnity for damages
in cases of labor accident or illness arising from
nature of employment
Ordinary Preferred, 2244
 Credits and advancements made to debtor
for support of himself and family

 Support during insolvency proceedings

and for 3 months thereafter
Ordinary Preferred, 2244
 Fines and civil indemnification arising from
criminal offense

 Legal expenses for administration of

insolvent’s estate

 Taxes due the national government

Ordinary Preferred, 2244
 Taxes due any province
 Taxes due any city or municipality
 Damages for death or personal injuries caused by
quasi-delict
 Gifts due to private and public institutions of charity
 Credits without privilege which appear in a public
instrument or by final judgment if they have been
the subject if litigation
SUMMARY
 STEP 1: Special Preferred Credits
must be paid from the value of the
movable or immovable. Taxes enjoy
priority while the rest of the credits
are paid proportionally.
SUMMARY
 STEP 2: Ordinary Preferred
Credits are then paid in the order
of priority as they are enumerated.
The assets used to pay ordinary
preferred credits are those which
are free from encumbrances under
2241 and 2242 and the free portion
under 2241 and 2242.
SUMMARY
 STEP 3: The non-preferred credits are now paid with whatever
free portion remains.
INSOLVENCY LAW
Concept
 Insolvency generally denotes the state of a person whose
liabilities are more than his assets.

 Used interchangeably with bankruptcy.

 Insolvency law deals with voluntary and involuntary insolvency

and suspension of payments.
Suspension of Payments
 Sec. 2 – The debtor who, possessing sufficient property to cover
all his debts, be it an individual person, sociedad or corporation
foresees the impossibility of meeting them when they
respectively fall due, may petition that he be declared in the state
of SUSPENSION OF PAYMENTS by the court or the judge
thereof in vacation, of the province or city in which he has
resided for 6 months next preceeding the filing of his petition.
Voluntary Insolvency
 Debtor files petition for voluntary insolvency with the RTC
(debt must be >P1,000)

 Court issues an order declaring debtor insolvent

 Order is published

 Creditors meet to elect the assignee in insolvency

Voluntary Insolvency
 Debtor’s properties are conveyed by the clerk of court to the
assignee

 Debtor’s assets are liquidated and debts are paid

 Composition, or an agreement where creditors agree to receive

less than the amount due them
Voluntary Insolvency
 Discharge of the debtor on his application

 Objection, if any to the discharge

 Appeal to the Supreme Court in extreme cases

Effects of Order Declaring Insolvency

 All the assets of the debtor not exempt from

execution are taken possession by the sheriff or
until the appointment of a receiver or assignee

 Forbids the payment of the debtor of any debts

due to him and the delivery to the debtor or to
any person for him of any property belonging
to him and the transfer of any property by him
 Effects of Order Declaring
Insolvency
 All civil proceedings pending against the
insolvent debtor shall be stayed

 Mortgages or pledges, attachments or

executions on property of the debtor
duly recorded and not dissolved are NOT
affected by the order
Involuntary Insolvency
 Initiated by a petition filed by at least 3
creditors whose credits accrue in the
Philippines with an aggregate amount of not
less than P1,000.

 The petition must set forth one or more acts of

insolvency.
Acts of Insolvency
 Such person is about to depart or has departed
from the country with intent to defraud his
creditors;

 That being absent from the country, he

remains absent;

 That he conceals himself to avoid the service of

legal process to delay or defraud creditors;
Acts of Insolvency
 He conceals or is removing any of his property to
avoid its being attached or taken on legal process;

 He has suffered his property to remain under

attachment or legal process for 3 days for the purpose
of hindering or delaying or defrauding his creditors;

 He has confessed or offered to allow judgment in

favor of any creditor or claimant for the purpose of
hindering or delaying or defrauding any creditor or
claimant;
Acts of Insolvency
 He has willfully suffered judgment to be taken
against him for default for the purpose of
hindering or delaying or defrauding his
creditors;

 He has suffered or procured his property to be

taken or legal process with intent to give a
preference to one or more of his creditors and
thereby hinder, delay or defraud any of his
creditors;
Acts of Insolvency
 He has made any assignment, gift, sale,
conveyance or transfer of his estate, property,
rights or credits with intent to delay, defraud or
hinder his creditors;

 He has, in contemplation of insolvency, made

any payment, grant, sale, conveyance or transfer
of his estate, property, rights or credits with
intent to delay, defraud or hinder his creditors;
Acts of Insolvency
 That being a merchant or tradesman he has generally
defaulted in the payment of his current obligations for a
period of 30 days;

 That for a period of 30 days he has failed after demand, to

pay any moneys deposited with him or received by him in a
fiduciary capacity; and

 An execution having been issued against him on final

judgment for money, he was found to be without sufficient
property subject to execution to satisfy judgment.
 Voluntary Insolvency v. Involuntary Insolvency
One creditor is sufficient At least 3 creditors must file the
petition

Insolvent debtor files the Three or more creditors who

petition meet the requirements file the
petition

Debtor must not be guilty of Debtor must be guilty of any

any act of insolvency act of insolvency
Voluntary Insolvency v. Involuntary Insolvency
Debt must be >P1,000 Debt must be P1,000 or above

Bond is not required Bond is required

An adjudication of insolvency Adjudication of insolvency

may be granted ex parte granted only after hearing
Voluntary Insolvency v. Involuntary Insolvency
Petition is filed with RTC of Length of residence is
province or city where debtor immaterial
has resided for 6 months

Declaration of insolvency is Declaration of insolvency is

made upon filing of voluntary made after hearing
insolvency
Suspension of Payment v. Insolvency
Purpose is to suspend or Purpose is to discharge
delay payment of debts debtor from payment of debts

Debtor has sufficient Debtor does not have

property to pay his debts sufficient property to pay his
debts
Suspension of Payment v. Insolvency
Amount of indebtedness is Creditors receive less than
not affected their credits OR may not
receive anything at all in case
of preferred credits

Number of creditors is In voluntary: 1 creditor

immaterial Involuntary: 3 or more
creditors
 Bar 2007
• An assignee in a proceeding under the Insolvency Law does
not have the duty to:
(a) suing to recover the properties of the estate of the
insolvent debtor
(b) selling the property of the insolvent debtor
© ensuring that a debtor corporation operates the business
effectively and efficiently while proceedings are pending
(d) collecting and discharging debts owed to the insolvent
debtor
ANSWER: C
 Bar 2007
• In order to obtain approval of the proposed settlement of the
debtor in an insolvency proceeding:
(a) the court must initiate the proposal
(b) 2/3 of the number of creditors must agree to the
proposal
© 3/5 of the number of creditors must agree to the
settlement
(d) 1/3 of the total debts must be representative of the
approving creditors
(e) letters a and b
ANSWER: B
THANK YOU