Art.

2008- The depositary of property sequestered is bound to

comply, with respect to the same, with all the obligations of a
good father of a family.

> self explanatory

Art. 2009- As to matters not provided for in this Code, judicial

sequestration shall be governed by the Rules of Court.

> suppletory rules are provided under the Rules of Court.

In case of
conflict, the Civil Code prevails.

GUARANTY AND SURETYSHIP

Nature and Extent:

Art. 2047- By guaranty a person, called the guarantor, binds

himself to the creditor to fulfill the obligation of the principal
debtor, in case the latter should fail to do so. [definition of the
contract of guaranty]

If a person binds himself solidarily with the principal

debtor, the provision of Se.4, Chapter 3, Title 1 of this Book shall
be observed. In such case the contract is called suretyship.
[definition of the contract of suretyship].

➢ Take note: classification of guaranty:

A. GUARANTY in the broad sense which

could be:

1. PERSONAL: which could be:

a. Personal- and this may be in the form

of guaranty [in the strict sense of the
word] or;

b. Suretyship- where the surety binds

himself
solidarily.

2. REAL- where the guaranty is PROPERTY

45
 1. If real property is given, the contract
may be:

a. real mortgage;
b. antichresis

2. If personal property is given- the

3. guaranty
may be in the form of:

a. pledge ;
b. chattel mortgage

B. AS TO ITS ORIGIN:

Kinds:

1. Legal- imposed by virtue of operation of law

2. Conventional- imposed by virtue of a
contract
3. Judicial – one which is required by the Court
to guaranty the eventual right of one of the
parties.

C. AS TO CONSIDERATION:

1. Gratuitous- no price or consideration given;

2. Onerous- a guarantor receives valuable
consideration for his guaranty

D. AS TO THE PERSON GUARANTEED:

1. Single- that which is constituted solely to

guaranty or secure performance by the debtor
of the principal obligation

2. Double or sub-guaranty- that which is

constituted to secure the fulfillment by the
guarantor of a prior guaranty

E. AS TO ITS SCOPE AND EXTENT:

1. Definite- here guaranty is limited to the

principal
Obligation only or to a specific portion thereof.

2. Indefinite- guaranty includes not only the

principal
Obligation but also its accessories [ex.
Interest]
Including the judicial cost.

46
 ➢ Take note: Characteristics of the Contract:

1. It is accessory- because it depends upon

the principal obligation guaranteed by it.

2. It is subsidiary and conditional- because

it takes effect only if the principal debtor fails to
pay his obligation;

3. It is unlilateral- because it gives rise to a

duty on the part of the guarantor to pay
the obligation to the creditor and not vice
versa and it may be entered even without the
intervention of the principal debtor;

4. It is a contract which requires that the

guarantor be a separate and distinct
person from the principal debtor because
one could not guaranty for himself as this will
counter the very purpose of the contract- which
is for the creditor to proceed against the
guarantor if the principal debtor does not pay.
[ *Case: Velasquez vs. Solidbank
Corporation, 500 SCRA 119] Take note: of
the exception in the case of PLEDGE and
MORTGAGE because the pledge and/ or
mortgagee can guarantee their own debt using
their properties.

5. As to FORM, contract of guaranty must be

in writing
Thus covered by the Statutes of Fraud, being
a special
Promise to answer for the debt of another.

➢ CONCEPT OF THE CONTRACT OF INDEMNITY-

this is the contract between the debtor and the
guarantor. As distinguished from guaranty- which
is a contract between the guarantor and the
creditor. [ *Case: Vizconde vs. IAC, GR. 74321,
April 10, 1987].

➢ CONCEPT OF SURETYSHIP- it is a
contractual relation
resulting from an agreement whereby one person,
[the surety] engages to be answerable to a third
person [creditor] for the debt, default, or
miscarriage of another [principal debtor]. [ By
nature, a surety is “an insurer of the debt, such
that his liability is primary and that he could be

47
sued by the creditor independently of the principal
debtor notwithstanding that he has not benefited
from the contract at all.

• THINGS TO REMEMBER UNDER THIS

CONTRACT:

▪ Nature of undertaking:

1. Liability of the surety is contractual

and accessory but DIRECT. That is, he
is primarily liable and as equally bound
with the principal debtor and regardless
whether or not the principal is financially
able or not because their liabilities is
interwoven and inseparable with each
other. [*Case: Garon vs. Project
Movers Realty Development
Corporation, 520 SCRA 317]. Take
note: In this connection, it is not for the
creditor to see to it that the principal
debtor pays, but for the surety to see to
it that the principal debtor pays
otherwise, the surety is liable. [ Case:
Paramount Insurance Corp. vs. CA,
310 SCRA 377].

2. Liability is limited by the terms of the

contract. The extent of a surety’s
liability is determined only by the terms
and clauses of the contract. It could not
be extended nor presumed. [ PNB vs. CA,
198 SCRA 767]. A surety however is
not released by the change in the contract
which does not make the obligation
more onerous. [Case: Intra Strata
Assurance Corp. vs. Republic, 557
SCRA 363].

3. Liability arises only if principal debtor is

held liable. It means that while the
liability of the surety is solidary with that
of the principal debtor, the SURETY does
not incur liability unless and until the
principal debtor is held liable. [Case:
Empire Insurance Co. vs. NLRC, 294
SCRA 263]. Take note however, that so
long the principal debtor is made liable,
a surety may be sued by the creditor
independently of the former [Case: *

48
Gateway Electronics Corp. vs.
Asianbank Corp. 574 SCRA 698], and
that “demand” nor “notice of default of
the debtor” need not be given him
before he could be sued because he is
made privy to all proceedings affecting
the principal debtor [ Case: Finman
General Assurance Corp. vs. Salik, 188
SCRA 740]. Take note: also that,
where there is no principal debtor who is
liable, there can be no surety hence a
surety bond is VOID or a supersedeas
bond in an ejectment case is likewise VOID
when it signed only by the surety but
not the principal debtor or obligor, [
Case: Singson vs. Babida, 79 SCRA
111].

• Take note: An accommodation

party (one who signs his name on
an instrument as maker, drawer or
indorser without receiving value
therefore and for the purpose of
lending his name) has the same
liability as that of the SURETY.
[Case: * Tomas Ang vs.
Associated Bank and Antonio
Ang Eng Liong, GR. No.
146511, Sept. 5, 2007.

4. Surety is not entitled to exhaustion of

the properties of the principal debtor,
being an original promisor and considering
his liability which is primary and
solidary.

5. Surety’s undertaking is to the

creditor, not to the debtor. Thus, his
undertaking is for the principal debtor to
pay because it is only when the latter
pays that he is relieved of his
responsibility, unless otherwise expressly
provided, [ Case: Arranz vs.Manila
Fidelity & Surety Co. Inc., 101 Phil.
272]

6. Surety is not entitled to notice of

principal’s default.

7. Surety is not exonerated by neglect of

creditor to sue principal. Delay in suing
the principal does not also exonerate the
surety.

49
 > Take note: Suretyship is a continuing contract,
i.e., until the
principal obligation is fully paid or
satisfied. [ Case: Ongkiko vs. BPI
Express Card Corp., 486 SCRA 206].

➢ Distinction between a Guarantor and a

surety:

1. G- subsidiarily liable [his is a collateral

undertaking].
S- primary liable; charged as an
original promisor.

2. G- pays if debtor CANNOT

S- pays if debtor DOES NOT

3. G- insurer of the debtor’s solvency

S- insurer of the debt.

4. G- discharged by the mere indulgence

of the
creditor of the principal and not
usually liable
unless notified of the default of the
principal
[ Case: Corp. vs. V. P. Eusebio
Construction Inc., 434 SCRA
202].

S- not discharged by the mere

indulgence of the creditor of the
principal or by want of notice of the
default of the principal no matter how
much he is injured.

• Take note: the essence of the obligation of

the
surety is to pay the creditor
without
qualification, if the principal
debtor does
not pay. [ Case: *Lirag Textile
Mills. Inc.
vs. SSS, SSS, 153 SCRA
338].

> Query: Is a solidary debtor a guarantor of his co-

debtors? Answer: NO. Because he himself is a
principal debtor, [ Case: Escano vs. Ortigas, 526
SCRA 26]. Take note: however of the ruling in

50
 the [*Case of Diamond Builders Conglomeration
vs. Country Bankers Insurance Corporation, 540
SCRA 194] * where the surety pays the creditor
directly and the obligation is extinguished even when
he has no privity of contract with the creditor.

➢ Take note: where a guarantor binds himself

solidarily without losing his character as a
guarantor. This is a possible scenario. All that is
guarded is to “determine the intention of the
guarantor at the outset”. If he binds himself
solidarily liable with the principal debtor [though
he is a guarantor] then the creditor can go against
him directly, without necessarily losing his
character as a guarantor and still he has a right to
seek reimbursement like any guarantor. This is so
because of the term “joint and severally”. This is by
express provision or agreement because ordinarily,
even if it is a contract of guaranty, if the
guarantor makes himself “jointly and severally
liable”, he is considered as surety. Hence, be
careful of the terms of the contract.

Case: Palmares vs. CA, 288 SCRA 422] , where

the SC declares that “when a person signs as a
co-maker and binds himself solidarily liable with
the debtor, he could not be considered as a
guarantor but as a SURETY if the debtor
defaults in the payment because here he
becomes an insurer of debt. Take note: TERM and
TERMINOLOGY NOT CONTROLLING, instead what is
controlling is the INTENTION.

➢ Query: What about a surety, is he a solidary

debtor? Answer: Almost the same as the
solidary debtor except that he himself is a
principal debtor.

> Take note: Distinction between Guaranty and

Indorsement:

1. G- nature is to secure or for security

I- it is primarily that of transfer

2. G- liability of the guarantor is more

extensive
I- indorser is discharged when the bill or the
note
Is not presented upon maturity and
due notice of
dishonor is given.

51
 3. G- warrants the solvency of the promisor,
whether
the latter is solvent or not.
I - the indorser does not, he only warrants
his
indorsement[ to his immediate indorsee].

4. G - cannot be sued as a promisor

I- as an indorser, he can be sued

> Take note: Distinction between a Guaranty

and Warranty:

1. G- is a contract where a person is bound

to another
for the fulfillment of the promise of
another or a
third party [principal debtor]
W- it is an undertaking that the title,
quality and
quantity of the subject matter of a
contract is
what it has been represented to be.

Art. 2048 - A guaranty is gratuitous, unless there is a

stipulation to the contrary.

➢ Take note: the cause of the contract of

guaranty as well as the contract of suretyship is
the same as the cause of the principal obligation.

Art. 2049- A married woman may guarantee an obligation

without her husband’s consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.

➢ talks about the limitation of the extent a married

woman can
be a guarantor. In this case, she will be binding
her paraphernal property.

Art. 2050- If a guaranty is entered into without the

knowledge or consent, or against the will of the principal
debtor, the provisions of Art. 1236 and 1237 [rules of payment]
shall apply.

> talks about the UNILATERAL character of the

contract. That is, for the benefit of the creditor
and not for the benefit of the principal debtor
who is not a party to the contract of guaranty.

52
 Hence, the creditor has the right to take all
measures to secure the payment of the debt even
WITHOUT the knowledge of the principal debtor.
Take note: the right of the guarantor in this case is
the same with the right of a third person who paid
against or without the consent of the debtor. The
Rules on Payment Apply and these are:

1) Art. 1236- the creditor is not bound to

accept the payment or performance of a third
person who has no interest in the fulfillment
of the obligation, unless there is a stipulation
to the contrary.

Whoever pays for another may demand

from the debtor, what he has paid, except that if
he has paid without the knowledge or against
the will of the debtor, he can recover only in
so far as the payment has been beneficial
to the debtor.

2) Art. 1237- Whoever pays on behalf of the

debtor without the knowledge or against the will
of the latter, cannot compel the creditor to
subrogate him in his rights, such as those
arising from mortgage, guaranty or
penalty.

Art. 2051- A guaranty may be conventional, legal or judicial,

gratuitous or by onerous title.

It may also be constituted, not only in favor of the

principal debtor but also in favor of the guarantor, with the
latter’s consent, or without his knowledge, or even over his
objection.

➢ Talks of the different kinds of guaranty

➢ Take note of the nature of Sub-guaranty- an
obligation to guaranty the obligation of a guarantor.

Art. 2052- A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to

guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.

➢ It emphasizes that a contract of guaranty is an

accessory contract.

53
Art. 2053- A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.

➢ It talks about “continuing guaranty or suretyship.

That is, one which is not limited to a single
transaction but contemplates future course of
dealings or transaction.
➢ No claim until the debt is liquidated because a
contract of guaranty is SUBSIDIARY.

Art. 2054 - A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount
and the onerous nature of the conditions.

Should he have bound himself for more, his obligations

shall be reduced to the limits of that of the debtor. [if he
does, his liability is reduced to the limits of that of the principal].

➢ this is owing to the fact that a contract of

guaranty is a subsidiary and accessory contract.

➢ Example: X borrowed from Y P100,000.00 with Z

as the guarantor. If X could not pay, Z is liable
only for the amount of P100,000. Thus, for
example if X did not constitute a mortgage on his
debt, Z could not add a mortgage apart from his
guaranty of P100,000. He can however guaranty
the payment of X’s debt in the amount of
P50,000.00 only.

➢ Take note: [Case of Pacific Banking

Corporation vs. IAC, GR 72275, Nov. 13,
1991] where this provision is expounded and
where SC ruled “ while the undertaking was signed
as “Guarantor’s undertaking”, it is in substance a
contract of surety.

➢ Take note further: the measure of the

guarantor’s or surety’s obligation is not, the
measure of the principal’s obligation because a
creditor may recover more from a principal
debtor who is bound by his contract with him.

➢ Rule if a person has two debts, one where he

is a sole debtor and the other, he is a
solidary co-debtor: the debt where he is a sole

54
 debtor is more onerous, hence, his obligation on
the latter must be satisfied first.

➢ Rule if the debt is increased: If debt is

increased without the guarantor’s consent, the
latter is released from liability.

➢ Liability of the Guarantor for Interest Due:

He is liable
even if in thus paying, the liability becomes
more than of the principal obligation. Reason: the
increased liability is not because of the contract
but because of the default and the necessity of
judicial collection.

> Take note: Effect of a Penal Clause in an

obligation: if a surety bond has a penal clause[ in
case of violation of a condition in the contract], the
penalty may be demanded even if its value is more
than the amount of the principal obligation: Reason:
because of the violation of the condition. [Case:
General Insurance and Surety Corp. vs.
Republic, GR. 13873, Jan. 31, 1963].

Art. 2055- A guaranty is not presumed, it must be

express[refers solely and exclusively to the obligation of the
guarantor because it is he alone who binds himself by his acceptance,
in so far as the creditor is concerned, this requirement is not needed
because he binds himself to nothing] and cannot extend to more
than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only of

the principal obligation, but also all its accessories, including
the judicial costs, provided with respect to the latter, that the
guarantor shall be only liable for those costs incurred after he
has been judicially required to pay.

➢ refers to the FORM of the contract of guaranty,

i.e., MUST
not only be expressed but also be reduced to
writing. This contract (not suretyship) falls within
the Statute of Frauds since it contains a special
promise to answer for the debt, default or
miscarriage of another. Take note: An ORAL
GUARANTY is unenforceable, [ NOT VOID].
Query: What about if the contract is oral, can this
fact or defense be waived by the guarantor?
Answer: YES, because it is well known that the
defense of the Statute of Fraud is waivable.

➢ Take note: Kinds of Guaranty According to

Period or

55
 Condition:

1. with a term- (express or implied

2. with a condition – ( suspensive or
resolutory)
3. simple or indefinite- ( no period is
specified; no
amount is fixed) Take note that here: all
the
consequences of the 2nd paragraph are
enforceable.

*Take note: If the surety binds itself for a

limited
period, it cannot be held liable beyond the
period.

➢ Rule of Construction: Being a special obligation,

it must be
strictly enforced against the creditor and in favor
of the guarantor and is not to be extended
beyond its terms or specified limits. Thus, if there
are doubts on its terms and conditions, it should
be resolved in favor of the guarantor or surety.[
Case: PNB vs. CA, 198 SCRA 767]. Reason:
this is premised that a contract of guaranty is
gratuitous. But if it is for compensation, as for
example in the case of surety companies, the rule
is, where there is ambiguities, it must be
interpreted against the surety company. [
Exception to the Rule on STRICTISSIMI
JURIS, which refers to accommodation surety or
that which acts for free or without motive of
pecuniary gain].

➢ Take note: Guaranty does not cover previous

obligations
or arrangements made by the principal debtor,
prior to the constitution of the guaranty. A contract
of guaranty or suretyship is PROSPECTIVE not
retroactive, unless the contrary is stipulated
upon. [ Case: Pastoral vs. Mutual Security
Insurance Corp. vs. Dy Eng Geok, 104 Phil.
806]

Art. 2056- One who is obliged to furnish a guarantor shall

present a person who possesses integrity, capacity to bind
himself and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where the obligation is to
be complied with. [ means, the court of the place of performance
(loci solutionis) has jurisdiction over the guarantor].

56
 ➢ refers to the qualifications of the guarantor which
must exist at the time of the perfection of the
contract.

➢ Take note: that the creditor can WAIVE the

requirements, for generally right is waivable.

Art. 2057- If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated a
specified person should be the guarantor.

➢ refers to the subsequent loss of the required

qualifications.

> Take note: subsequent loss of integrity or

insolvency
generally does not end the guaranty; it will
only give right
to the creditor to demand substitution of the
guarantor but
this right may be waived and dependent
on who chose
the guarantor.

➢ Rules:

1. specified person stipulated as guarantor

[presumably chosen by the creditor and
debtor] substitution may not be demanded
because the selection of the guarantor is a
term or condition of the agreement and as
a party , the creditor is bound by it.

2. guarantor selected by the principal

debtor- the
latter answers for the integrity, capacity
and solvency
of the former because such qualifications
must be
possessed not only at the moment
guaranty is given
but until the extinguishment of the debt.

2. guarantor personally designated by the

creditor-

57
 responsibility is upon the latter after all the
guarantor was selected by him.

➢ Query: If a guarantor dies, are the heirs still

liable?. Answer: YES to the extent of the value of
the inheritance because the obligation is not purely
personal and therefore, transmissible. Query: Why
not personal?. Answer: because all the creditor
is interested is the recovery of the money
regardless of the giver. [Case: Estate of Hemady
vs. Luzon Surety & Insurance Co., 53 O.G.
2786] Thus, the action must be against the estate
of the deceased guarantor.

ASSIGNED CASES:

1. Tupaz vs. CA, 475 SCRA 398

2. American Home Insurance Company of New York vs. F.F. Cruz

and Co., GR No. 174926, August 10, 2011

3. Bitanga vs. Pyramid Construction Engineering Corp. 563

SCRA 544

4. JN Development Corp. vs. Phil. Export and Foreign Loan

Guarantee Corp. 468 SCRA 555

5. Gateway Electronics Corp. Asian Bank Corp. GR No. 172041,

December 18, 2008

6. Toh vs. Solid Bank Corporation, 408 SCRA 544

7. Security Bank and Trust Company v. Cuenca, 341 S 341 S

781

8. Ang vs. Associated Bank, GR 146511, Sept. 5, 2007

9. Stronghold Insurance Co., Inc. vs. Republic Asahi Glass Corp.

492 S 179

10. Palmares vs. CA and M.B. Lending Corp. 282 S 422

EFFECTS OF GUARANTY

58
Art. 2058- 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 the legal remedies against
the debtor.

> refers to the effects of the contract of guaranty

between the creditor and the guarantor premised on the
nature of the contract as accessory and subsidiary. In
sum, they are:

1. the guarantor is entitled to the benefit of

excussion (or benefit of exhaustion) of the debtor’s
property except in cases provided for under Art.
2059 and provided the guarantor follows Art. 2060;

2. a compromise between the creditor and the

principal debtor benefits but not prejudice the
guarantor. (Art. 2063)

3. If there should be several guarantors, they are in

general entitled to the benefit of division, (Art.
2065).

> Benefit of Exhaustion- the right of the guarantor to

have all the properties of the principal debtor and all legal
remedies against him first exhausted before he can be
compelled to pay the creditor. [Case: Tupaz vs. CA, 475
SCRA 398]. Take not that: this is NOT applicable to
suretyship.

> Requisites before this benefit could be availed:

1. the guarantor sets up this defense before

judgment is rendered against him.

2. he has not pledged or mortgaged his own

property to the
creditor for the satisfaction of the principal
obligation, because a mortgagor is not entitled to
the this benefit.

3. he does not fall under the cases provided for

under Art.
2059.

4. he complies with Art. 2060

> Query: if a debtor is declared insolvent in an

insolvency proceeding, does it necessarily follow that he
could no longer pay?. Answer: NO, because he might
have some properties available to the creditor. Take
note: One good evidence is a Writ of Execution is served
upon the debtor and it was not satisfied.

59
 > Take note: it is required that the creditor notifies the
guarantor of the debtor’s inability to pay, because LACK
OF NOTICE will prejudice him unless there is waiver on his
part. No notice, guarantor is not liable, unlike in the case
of a surety.

> Query: In a suit against the debtor, can you implead

the guarantor. Answer: YES. But he is still entitled to the
benefit of exhaustion.

Art. 2059- This excussion shall not take place:

1. if the guarantor has expressly renounced it;

2. if he has bound himself solidarily with the debtor;
3. in case of insolvency of the debtor;
4. when he has absconded, or cannot be sued within the
Philippines unless he has left a manager or
representative;
5. If it may be presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation. [ useless already]

> refers to the exceptions when the benefit of

exhaustion could not be availed of by the guarantor. [
ACRONYM: R(renounce), U (useless), S (solidarily liable),
I ( insolvency ) and A (abscond), in short RUSIA. [ Case:
Imperial Insurance vs. de los Angeles, 111 SCRA 24].

> Take note of the additional instances: 1) if the

guaranty is in judicial bond; 2) if Art. 2060 is not
complied with and 3) if the principal obligation is a
natural, voidable or unenforceable obligation i. e., there is
still guaranty but the principal debtor is no longer liable.

Art. 2060- In order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor
upon the latter’s demand for payment from him, and point out
to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the debt.

> refers to the necessity of ACTUAL DEMAND TO PAY

which must be made after judgment is made against the
debtor. Take note: The fact that the debtor is sued
together with the guarantor does not mean, demand to
pay was already made. [ Case: Baylon vs. CA, 312
SCRA 502].

> Take note: also of the obligation of the guarantor to

point out the available properties of the debtor within the
Philippines. Those levied or attached properties are not
included.

60
Art. 2061- The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor resulting
from such negligence.

>refers to the obligation of the creditor to exhaust the

properties of the debtor first, otherwise he suffers the loss.

Art. 2062- In every action by the creditor, which must be

against the principal debtor alone, except in cases provided
under Art. 2059, the former shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he
may, if he so desire, set up such defenses as are granted him by
law. The benefit of excussion mentioned in Art. 2058 shall
always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.

> refers to a suit against debtor in Court.

> Take note: As a general rule, the suit may be brought

only against the debtor. But there is nothing wrong, if
both the debtor and the guarantor may be both sued.
Only that, this will not EXEMPT the creditor from exhausting
the properties of the debtor first. And, the suit against
both of them does not operate as a NOTICE TO PAY to the
guarantor. [This is an INNOVATION under the New
Civil Code because under the Old Code, the debtor
and the guarantor should be sued jointly.]

> Query: Is there a need for the guarantor to appear: NO

NEED. If ever he appears, all he does is to set up his
defense of “benefit of exhaustion”.

> Query: Can a writ of execution be issued against the

guarantor should the debtor lose in the case? Answer: NO,
unless the debtor does not pay and all available properties
are already exhausted. Except: when guarantor could
not avail of the benefit as in cases provided for under Art.
2059.

> Query: Is there a need for hearing before a writ of

execution be issued against the guarantor?. Answer: YES.
Notice and hearing are requirements for due process.

Art. 2063- A compromise between the creditor and the

principal debtor benefits the guarantor but does not prejudice

61
him. That which is entered into between the guarantor and
the creditor benefits but does not prejudice the principal
debtor.

> refers to a COMPROMISE - a contract whereby the

parties, by making reciprocal concessions, avoid litigation or
put an end to one already commenced.

> Take note: the compromise may be entered into

between the CREDITOR and the PRINCIPAL DEBTOR.
Or, between the GUARANTOR and the CREDITOR. In
the former, the guarantor should not be prejudiced while
in the latter, the principal debtor should not be prejudiced.

Art. 2064- The guarantor of a guarantor shall enjoy the benefit

of excussion, both with respect to the guarantor and to the
principal debtor.

> this refers to SUB- GUARANTY.

> Take note: a sub guarantor can also avail the benefit
of excussion: Reason: because he is of same footing as
that of the guarantor.

Art. 2065- Should there be several guarantors of only one

debtor and for the same debt, the obligation to answer for the
same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively
bound to pay, unless solidarity has been expressly stipulated.

The benefit of division against the co-guarantors ceases in

the same cases and for the same reasons as the benefit of
excussion against the principal debtor.

> refers to the benefit of division. But take note: the

benefit of excussion shall not be denied to the several
guarantors whose liability is JOINT unless solidarity is
stipulated.

> Take note: The benefit of division is not applicable in

these cases:

1. there are two or more debtors of one debt, even if

they are bound solidarily, each with different
guarantors.
2. there are two or more guarantors of same debtor
but not only for same debt.

62
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR:

Art. 2066- The guarantor who pays for a debtor must be

indemnified by the latter:

The indemnity comprises:

1. The total amount of the debt [ full payment is required but

he could not have himself reimbursed more than what is due
even if he paid such amount]
2. The legal interests thereon from the time payment
was made known to the debtor, even it did not earn
interest for the creditor;
3. The expenses incurred by the guarantor after having
notified by the debtor that payment had been
demanded of him;
4. Damages, if they are due.

> take note that this Article is premised on the nature of

the contract of guaranty which is a, Contract of
Indemnity.

> Take note of the exceptions to indemnity or

reimbursement:

1. where the guaranty is constituted without the

knowledge or against the will of the principal
debtor- here the guarantor can recover only up to
the extent the debtor is benefited.

2. payment by a third person who does not intend

to be reimbursed by the debtor- which now becomes a
DONATION, which of course should be accepted.
Effect: payment is nonetheless valid to a creditor who
accepted it.

3. the right to demand is subject to waiver.

> ACRONYM of those to be reimbursed: TIED

Art. 2067- The guarantor who pays is subrogated by virtue

thereof to all the rights which the creditor had against the
debtor.

If the guarantor has compromised with the creditor, he

cannot demand from the debtor more than what he has really
paid.

63
 > refers to the benefit of SUBROGATION- whereby it
transfers to the person subrogated, the credit with all the
rights thereto appertaining, either against the debtor or
against third persons, be they guarantors or possessors of
mortgages, subject to the stipulation on conventional
subrogation.

> Take note: the benefit of subrogation results by

operation of law from the act of payment and there is no
necessity on the part of the guarantor to ask the
creditor to expressly assign his right of action. Reason:
this right is based on the principle of natural justice.

> Query: Is this right applicable to a surety? Answer:

No, because he is a principal by himself. No subrogation in
surety.

Art. 2068- If the guarantor should pay without notifying the

debtor, the latter may enforce against him all the defenses
which he could set up against the creditor at the time the
payment was made.

> refers to the debtor’s right to set up defenses against

guarantor if the latter pays the creditor without his
consent. Example: Payment, Prescription or all other
modes extinguishing and obligation.

Art. 2069- If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the period
unless the payment has been ratified by the debtor.

> refers to advance payment which is not necessary. Take

note: ratification may be express or implied.

> Take note: [ Case: JN Development Corp. vs. Phil.

Export and Foreign Loan Guarantee Corp. , 468 SCRA
555]

Art. 2070- If the guarantor has paid without notifying the

debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatsoever
against the debtor, but only against the creditor. Nevertheless,
in case of gratuitous guaranty, if the guarantor was prevented
by a fortuitous event from advising the debtor of the payment,
the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid. [ the last paragraph is an
exception].

64
 > refers to payment by both the guarantor and the
principal debtor:

> in so far as gratuitous guaranty is concerned, this is

favored by law because guarantor is not paid hence it
would be unjust if he will not be reimbursed, thus, the
guarantor can still recover.

> Take note: General Rule: Before the guarantor pays the
creditor, he must first notify the debtor. If he does not give
notice and the debtor repeats payment, guarantor’s only
remedy is to go against the creditor and not from the
debtor even if the creditor becomes insolvent. The
EXCEPTIONS are:

1. the creditor becomes insolvent (?).

2. the guarantor was prevented by fortuitous event
to advice the debtor of the payment
3. the guaranty is gratuitous

> Reason for this article: to prevent the guarantor from

impairing the rights of the principal debtor.

Art. 2071- The guarantor, even before having paid, may proceed
against the principal debtor: [ means no payment made yet by the
guarantor]

1. when he is sued for payment;

2. in case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve him from
the guaranty within a specified period and this period
has expired.
4. when the debt has become demandable, by reason of the
expiration of the period of payment;
5. after the lapse of ten(10) years, when the principal
obligation has no fixed period of maturity, unless it be
of such nature that it cannot be extinguished within a
period longer than ten years;
6. if there are reasonable grounds to fear that the
principal debtor intends to abscond;
7. if the principal debtor is in imminent danger of
becoming insolvent.

In all these cases, the action of the guarantor is to obtain

release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor.

> Purpose of this Article: to enable the guarantor to

take measures for the protection of his interest.

65
 > refers to the rights of the guarantor before
payment:

1. to obtain release from the guaranty from the

debtor;
2. to demand security.

> Query: is it necessary to obtain the creditor’s consent.

Answer: YES

> Take note: here, the guarantor has not paid yet hence
could not demand reimbursement, thus, his remedy is to
obtain release from the guaranty or to obtain security that
shall protect him from proceedings that the creditor might
have against him.

> Take note: The action for release must be against the
principal debtor and not against the creditor.

> Take note: Nature of the remedies available:

ALTERNATIVE depending upon the choice of the guarantor
and the guarantor who brings an action under this Article
must choose the remedy and apply for it specifically.

> Take note: this article applies also to a SURETY.

> Take note: Distinctions between Art. 2066 and 2071

1. 2066- the guarantor asked for the enforcement of

his right after he has paid the creditor;

2071- the guarantor has not paid yet but his

already
ensuring his right.

2. 2066- gives a right of action after payment

2171- provides a protective remedy before

payment

3. 2066- this is an enforcement of substantive

right

2071- this is in the nature of a preliminary

remedy

4. 2066-gives a right of action , which, without the

provisions
of the other, might be worthless. Guarantor does
not seek release from the creditor.

2071- seeks to obtain from the debtor release

from guaranty.

66
Art. 2072- If one, at the request of another, becomes
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.

> refers to a case where a third person is called to guaranty

the debt of an absentee at the request of another.

➢ Said person may sue:

1. the person who requested him to be a guarantor

2. the debtor

EFFECTS OF GUARANTY AS BETWEEN CO- GUARANTORS:

Art. 2073- When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is
proportionately owing him.

If any of the guarantors should be insolvent, his share

shall be borne by the others, including the payer in the same
proportion.

The provisions of this article shall not be applicable

unless the payment has been made in virtue of a judicial demand
or unless the principal debtor is insolvent.

> Take note: this article is applicable only where there is

payment and PAYMENT was made:

1. in virtue of a judicial demand

2. or, because the principal debtor is insolvent.

• Without these two requirements, a guarantor

who pays may proceed directly against his
co- guarantors for their respective shares,
with the latter spending for travel and other
expenses in going after the principal debtor.

Art. 2074- In case of the preceding article, the co-guarantors

may set up against the one who paid, the same defenses which
could have pertains to the principal debtor against the creditor,
and which are not purely personal to the debtor

➢ self explanatory

67
Art. 2075- A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.

➢ take note: this is applicable only if his (sub

guarantor’s) guarantor is insolvent.

EXTINGUISHMENT OF GUARANTY

Art. 2076- The obligation of the guarantor is extinguished at the

same time as that of the debtor, and for the same causes as
all other obligations.

> this article affirms the nature of the contract of

guaranty as being accessory and subsidiary because if the
principal obligation is extinguished, guaranty is also
extinguished.

> The grounds for extinguishing an obligation also applies

in guaranty:

Causes:

1. Novation
2. Compensation
3. Merger
4. Remission
5. Payment and
6. Loss.

* It is also extinguished by: annulment,

rescission, fulfillment of a resolutory
condition and prescription.

* Take note: however that a guaranty may be

released
without the extinguishment of the principal
obligation as when the creditor releases the
guarantor.

> Take note: Death of the principal debtor is not a

defense a surety can use to wipe out its monetary
obligation under a performance bond. If at all the
obligation is chargeable to the decedent’s estate. Reason:
Because a surety’s liability to the creditor or promise to the
principal is direct and primary, [ Case: Stronghold
Insurance Co., Inc. vs. Asahi Glass Corporation].

68
 > Take note: also of the effect of alteration of the
contract:

* if it is a material alteration as when it makes the

contract more onerous, like 1) varying the terms of
the contract , 2) period is extended, 3) assignment of
credit or change in the object , WITHOUT THE
CONSENT OF THE GUARANTOR, the guaranty is
extinguished. Query: What about if the interest rate
is increased, will it extinguish the guaranty. Answer:
NO. this is not material alteration. The guarantor is
bound to pay the original rate of interest.

Art. 2077- If the creditor voluntarily accepts immovable or other

property in payment of the debt, even if he should afterwards
lose the same through eviction, the guarantor is released.

> talks about dation in payment or dacion en pago. And

this refers to immovable or other (personal) property. This
in effect is novation of the obligation.

> Query: What is the effect of novation in this case:

Answer: revives the principal obligation but NOT the
guaranty because here, the creditor took the risk.

Art. 2078- A release made by the creditor in favor of one of

the guarantors, without the consent of the others, benefits all
to the extent of the share of the guarantor to whom it has
been granted.

> talks about the effect of the release of a guarantor

without the consent of his co-guarantors.

> to apply this article, be guided by the benefit of

division, where practically the guarantors’ obligation
is joint. Hence, if one of them is insolvent, the others
bear his share. The rule applies when one is released, the
others will be benefited. Example: If A, B and C are
guarantors for a debt of P30,000.00 and A is released
without the consent of B and C , A and B will be liable to
pay only P20,000 or P10,000 each as the case may be. If
A and B are released, C will be liable to pay P10,000.00
only, no more no less. But if A is released with the
consent of B and C, then B and C will be liable still for
P30,000.00, with each of them paying P15,000.00 each.

Art. 2079- An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to

69
demand payment after the debt has become due does not of
itself constitute an extension of time.

> talks about the effect of an extension of time given to the

debtor without the consent of the guarantor.

> Effect: it releases the guarantor, because if not, what

if in the interim the debtor becomes insolvent, then the
guarantor will be prejudiced. Query: What about if the
creditor merely fails to demand payment. Answer: This
does not constitute an implied extension. So, the recourse
of the guarantor is to pay and be immediately subrogated
to the rights of the creditor against the debtor.

> Query: What happens if a surety signs a promissory

note issued by a debtor in favor of a creditor and the
debtor assigns to the latter all payments he would receive
from a third person, without the consent of the surety, and in
the process, the creditor releases the third person? The
surety is extinguished and the creditor should take the
blame- this will also release the debtor if done without his
consent. [ Case: Toh vs. Solid Bank Corporation, 408
SCRA 544].* in this case, creditor’s act is detrimental to
the debtor.

> Query: Can the guarantor waives the extension.

Answer: YES. As this is not contrary to law and public
policy.

Art. 2080- The guarantors, even though they be solidary, are

released from their obligation whenever by some act [also
includes inaction] of the creditor they cannot be subrogated to the
rights, mortgages and preferences of the latter.

> talks of an erring creditor who because of his fault, he

could not be subrogated to his rights by the guarantor in
case the latter pays instead of the debtor. Example: the
creditor releases or fails to register a mortgage in his
favor or remits the same. EFFECT: Even if the guarantor
does not pay, the guaranty is released. [ discussed and
ruled in the Toh Case also].

> Take note: This article could be availed of by the

guarantor only when he is sued for payment NOT BEFORE
he is sued or where there is no case for payment filed yet
against him NOR after rendition of judgment. [ Case:
Municipality of Gasan vs. Marasigan, 63 Phil. 510]

Art. 2081- The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent

70
in the debt; but not those that are purely personal to the
debtor.

> talks about the available defenses to the guarantor to

free himself from his obligation.

> Query: What are these defenses:

Answer:

1. inherent in the principal obligation

a. prescription
b. res judicata
c. payment
d. illegality of cause

2. defenses which are ordinarily personal to the

principal debtor, but are inherent to the debt.

* any one of the vices of consent [ force,

intimidation, mistake, violence and undue
influence

3. defenses of the guarantor himself

a. vitiated consent on his part

b. compensation between the debtor and the
creditor
c. remission of the principal obligation or of the
guaranty
d. merger of the person of debtor and creditor

* Take note: b, c, and d, are the modes of

extinguishing an obligation. Here the principal
obligation is extinguished and so is the guaranty
being an accessory contract.

LEGAL AND JUDICIAL BONDS

Art. 2082- The bondsman who is to be offered in virtue of a

provision of law or of a judicial order shall have the
qualifications prescribed in Art. 2056 and in special laws.

> refers to the qualification of the bondsman which is the

same with that of the guarantor. [integrity, capacity to bind
himself and sufficiency of property].

> BOND- is an undertaking that is sufficiently secured,

and not cash or currency; it stands as a guaranty for a

71
 principal obligation, which exists independently of said
obligation, the latter being merely an accessory obligation.
Take note: All bonds to include “judicial bonds” are
contractual in nature.

> JUDICIAL BOND- constitutes merely a special class of

contracts of guaranty, characterized by the fact that they
are issued “in virtue of a judicial order”.

> Take note: the surety/bondsman must sign on the

bond itself, otherwise, it will not bind him.

Art. 2083- If the person bound to give a bond in the cases of

the preceding article, should not be able to do so, a pledge
or mortgage considered sufficient to cover his obligation shall
be admitted in lieu thereof.

> self explanatory

> Take note however: of the action to be taken if a

surety’s performance of the bond is rendered impossible by
fortuitous event, or of the act of the oblige, or of the law: *
It is surety’s duty to inform the Court of the happening of
the event so that it may take action or decree in the
discharge of the surety, otherwise he shall be made liable
for his negligence to take action, hence will not be
discharged. [Case: People vs. Otiak Omal and Luzon
Surety Co. Inc., L-14457, June 30, 1961]

Art. 2084- A judicial bondsman cannot demand the exhaustion

of the property of the principal debtor.

A sub-surety in the same case, cannot demand the

exhaustion of the property of the debtor or of the surety.

> refers to the fact that a judicial bondsman is not entitled

to the benefit of exhaustion of the property of the debtor.
Reason: he is not a mere guarantor but a surety who is
primarily and solidarily liable with the principal debtor.

> take note: Unlike in guaranty, the negligence of the

creditor of not collecting from the debtor does not relieve
a judicial bondman.

72
PLEDGE

>already repealed by RA No. 11057(in its repealing

clause) otherwise known as PERSONAL PROPERTY SECURITY
ACT [PPSA] was enacted on August 17, 2018.

INTRODUCTION:

This law expressly repealed, amended or modified, among others,

the provisions of the Chattel Mortgage Law (Act No. 1508) (specifically,
Sections 1-16), the provisions of the Civil Code of the Philippines
(Republic Act No. 386) (“Civil Code”) on mortgage and pledge
(specifically, Articles 2085-2123, 2127, 2140-2141, 2241, 2243 and
2246-2247), and the registration of chattel mortgages under the
Property Registration Decree (Presidential Decree No. 1529) (specifically,
Sections 114-116). The full implementation of this law is
conditioned on the issuance of its implementing rules and regulations
and the establishment of a NEW REGISTRY (where the security
interest created under this law will be registered ). Once the registry is
established, the creation of a valid security interest over personal
property under Philippine law will be entirely governed by the PPSA and
the PPSA Rules, except interests in aircraft which are subject to the
Civil Aviation Authority Act of 2008 (Republic Act No. 9497) and
interests in ships which will continue to be governed by the Ship
Mortgage Decree of 1978 (Presidential Decree No. 1521). In this
connection, the implementing rules and regulations of the PPSA (“PPSA
Rules”) were published last November 18, 2019 and have become
effective on December 3, 2019. Verily, the PPSA Rules directed the
Land Registration Authority to establish the registry within six months
from the publication of the PPSA Rules.

Purposes:

1. to strengthen the secured transactions legal framework in

the Philippines
2. to provide for the creation, perfection, determination of
priority, establishment of a centralized notice registry, and
enforcement of security interests in personal property
(tangible and intangible), except aircraft and ships.

Coverage:

>All secured transactions (i.e., a collateral is given

consisting of tangible property, [personal property, equipment,
inventory and personal property to in its generic sense, to secure
payment and the performance of an obligation] when the debt
should be paid first. Also, under this Act, priority right is given to a
buyer of accounts receivable and to a lessor under an operating lease
for not less than one(1) year. The creditors herein have what you
call a SECURITY INTEREST which in itself is a property right.

73
 >Security interest defined: it is a property right in collateral
that secures payment or other performance of other obligation,
regardless of whether the parties have denominated it as a security
interest and regardless of the type of asset, the status of the grantor
or secured creditor or the nature of the secured obligation;
including the right pf a buyer of accounts receivable and a lessor
under an operating lease of less than one(1) year.

>TAKE NOTE: The essential requisites for a transaction to

be considered SECURED TRANSCATION must comply with the
following MEANS OF PERFECTION.

1. Registration of the Notice with the LRA

2. Possession of the collateral by the secured creditor.
3. Control of the investment property and deposit
account.

>TAKE NOTE HOWEVER: that in ordinary pledge, the general

provisions still remain.

Creation of Security Interest:

It may be created by:

1.a security agreement

2. an operating lease for not less than one year, or
3.the sale of an account receivable (unless otherwise stipulated by
the parties in the document of sale).

As provided under the PPSA Rules, parties are free to enter into any
form of security arrangements over movable property as long as the
security arrangement is not inconsistent with the PPSA or the PPSA Rules.
Notably, it should be noted that, PPSA Rules apply also to other
functional equivalents of security interest, including fiduciary transfers of
title; financial lease; assignment or transfer receivables; and sale with
retention of title.

74
 >Take note: that, unless provided by the PPSA, the PPSA Rules,
or upon agreement of the parties, a security interest will continue in the
collateral notwithstanding the sale, lease, license, exchange, or other
disposition of the collateral.

HOW SECURITY INTEREST IS PERFECTED:

After a security interest has been created, it may be perfected by:

1. registration of a notice with the registry

2. possession of the collateral by the secured creditor, whether
actual or constructive and,
3. control of investment property and deposit account.

>Take note: On perfection, a security interest becomes effective

against third parties.

> Take note: A security interest in any tangible asset may be

perfected by registration (i.e., by filing a notice with the registry) or
possession (whether actual or constructive). While a security interest in
investment property or deposit account may be perfected by registration
or control (i.e., through (i) the creation of a security interest in favor of
the deposit-taking institution or intermediary, (ii) the conclusion of a
control agreement (which must be executed under oath and must include
the date and time of execution), or (iii) for investment property that is an
electronic security but not held with an intermediary, the notation of the
security interest in the books of the issuer).

WHEN A SECURITY INTEREST IS EXTINGUISHED:

A security interest is extinguished when all secured obligations have

been discharged and there are no outstanding commitments to extend
the credit secured by the security interest.

NATURE AND CONTENTS OF SECURITY AGREEMENT:

>The security agreement must be contained in a written contract

signed by the parties and must identify the collateral and the secured
obligation. The description of the collateral is considered sufficient
(whether it is specific or general) if it reasonably identifies the collateral.
For example, a description such as “all personal property” of the grantor
is sufficient. The security agreement must provide for the language to be
used in agreements and notices.

>The security agreement may provide for the creation of a security

interest in a future property or after-acquired asset, but it is created
only when the grantor acquires rights in it or the power to
encumber it.

>The security agreement may also provide that a security interest

in a tangible asset that is transformed into a product extends to the

75
product (but limited to the value of the encumbered asset before it
became part of the product).

>It may likewise provide that a security interest in a tangible asset

extends to its replacement (but limited to the value of the encumbered
asset before it was replaced).

Priority of Security Interest

PPSA rules provide that when there are several secured

creditors over same collateral the priority of security interests and liens
in the same collateral will be determined according to time of
registration of a notice or perfection by other means, without
regard to the order of creation of the security interest and liens or
(except as expressly stipulated in the PPSA Rules) to the mode of
perfection.

>Take note: should the grantor has become insolvent, the

security interest perfected before the commencement of insolvency
proceedings in respect of the grantor will remain perfected and retain the
priority it had before the commencement of the proceedings, subject to
applicable insolvency law.

MODES OF ENFORCEMENT OF SECURITY INTEREST: (by a

secured creditor)

1. judicial process or
2. extra-judicial process, including (a) the sale of the secured
assets through public or private disposition or (b)
retention of collateral.

Taking Possession of the Collateral

>Take note: when the collateral is not in the possession of the

secured creditor, when there is default in the payment, the secured
creditor may take possession of the collateral without undergoing judicial
process [if there is stipulation to this effect] but possession must be
without breach of the peace [which includes entering the private
residence of the grantor without permission, resorting to physical violence
or intimidation, or being accompanied by a law enforcement officer when
taking possession or confronting the grantor].

>Take note: when the secured creditor cannot take possession of

the collateral without breach of the peace, the secured creditor may do
the following:

76
1. The secured creditor will be entitled to an expedited hearing
upon application with the court for an order granting the secured
creditor possession of the collateral.

2. The secured creditor must provide the debtor, grantor, and, if

the collateral is a fixture, any real estate mortgagee, a copy of the
application with supporting documents and evidence.

3. The secured creditor is entitled to an order granting possession

of the collateral upon the court finding that a default has occurred
under the security agreement and that the secured creditor has a
right to take possession of the collateral.

77
>Under the following special cases, upon default, the secured creditor
may take possession of the collateral without judicial process by:

78
 1. instructing the account debtor of an accounts receivable to make
payment to the secured creditor, and apply such payment to the
satisfaction of the obligation secured by the security interest after
deducting the secured creditor’s reasonable collection expenses;

2. in a negotiable document where the security interest is perfected

by possession, proceeding as to the negotiable document or goods
covered by the negotiable document;

3. in a deposit account maintained by the secured creditor, applying

the balance of the deposit account to the obligation secured by the
deposit account; and

4. in other cases of a security interest in a deposit account

perfected by a control agreement, instructing the deposit-taking
institution to pay the balance of the deposit account to the secured
creditor’s account by providing (i) a copy of the security agreement
and (ii) the secured party’s affidavit, stating that a default has
occurred and that the secured party is entitled to enforce the
security interest non-judicially.

Disposition of Collateral

After default, a secured creditor may (upon prior notice to the

grantor, other secured creditors, and any other person from whom the
secured creditor received notification of a claim of interest in the
collateral) sell or otherwise dispose of the collateral, publicly or
privately, in its present condition or following any commercially
reasonable preparation or processing. A disposition is commercially
reasonable if the secured creditor disposes of the collateral in conformity
with commercial practices among dealers in that type of property.
[Section 7.09 of the PPSA Rules].

Retention of Collateral

Also, after default, a secured creditor may also propose to the

debtor and grantor to take all or part of the collateral in total or partial
satisfaction of the secured obligation by sending a proposal to the
grantor, other secured creditors, and any other person from whom the
secured creditor received notification of a claim.

>Take note: The secured creditor may retain the collateral in case
of: (i) a proposal for the acquisition of the collateral in full satisfaction of
the secured obligation, without objection from any of the addressees of
the proposal; or (ii) a proposal for the acquisition of the collateral in
partial satisfaction of the secured obligation, but only if the secured
creditor received the written affirmative consent of the addressees of the
proposal.

79
Registry during the Transitional Period

Under the PPSA Rules, the Land Registration Authority (“LRA”),

within six months from the publication of the PPSA Rules, will establish
and administer the centralized, nationwide registry. The registry must
provide electronic means for registration and search of notices. The LRA
will issue the necessary guidelines on the use and management of the
registry.

During the Transitional Period, the registration of the security

agreement with the LRA will be in accordance with the Chattel Mortgage
Law. The LRA will also determine a system of provisional registration of
such agreements during such Transitional Period.

END OF LECTURE ON PPSA

CONTINUATION OF LECTURE ON CREDIT TRANSACTIONS

MORTGAGE

> it came from the latin word, MORTUUM UADIUM. The word
“mort” means dead and the term “gage” means pledge.
Literally, mortgage means a dead or unproductive pledge.

> it is a CONTRACT in which the debtor guarantees to the

creditor the fulfillment of a principal obligation, subjecting for
the faithful compliance therewith a real property [or real rights
over immovable property], in case of non-fulfillment of said
obligation at the time stipulated.

Art. 2124- only the following property may be the object of a

contract of mortgage: [ actually this refers to real mortgage]

1. immovables;
2. alienable real rights in accordance with the laws,
imposed upon immovables.

Nevertheless, movables may be the object of a chattel

mortgage.

> refers to the object or subject matter of a mortgage.

> Take note: CHARACTERISTICS OF A REAL

MORTGAGE:

80
 1. it is a real right
2. it is an accessory contract
3. it is indivisible

[ ex: if X and Y obtained a loan giving as a

security 1 hectare land worth P500,000.
Supposing the land was partitioned and X paid
his share of P250,000. Is the mortgage
extinguished. Answer: NO. because the
mortgage itself is indivisible.

4. it is inseparable as in the case of a house and lot.

Take note however that these days, a house may
be mortgaged separately from the land. Take note:
the mortgage adheres to the property, regardless of
who its owner may subsequently be. [ Case:
Soriano vs. Galit, 411 SCRA 631]

5. it is a real property [in itself], (Art. 415 par.10).

6. it is a limitation on ownership
7. it can secure all kinds of obligation
8. The property cannot be appropriated [ because
mortgage does not transfer ownership]
9. the mortgage is a lien.

> KINDS OF MORTGAGE

1. Voluntary- one which is agreed upon by the

parties or constituted by the will of the owner of
the property on which it is created.
2. Legal- one required by law to be executed in favor
of certain persons. [ those required by law to be
registered or a bond will be given]
3. Equitable-one which, although it lacks the proper
formalities or other requisites of a mortgage
required by law, nevertheless reveals the intention
of the parties to burden real property as security
for a debt, and contains nothing impossible or
contrary to law[ where the property high in price
is sold for a very low price].

> Take note: of its distinctions with the contract of

pledge; pacto de retro sale; or a chattel mortgage.

*> Take note: a mortgagee usually does not possess the

land mortgaged. Or even if he is in possession thereof, he
could not acquire the property because his possession is
not in the concept of an owner. Moreover, even if the
debt is not paid upon maturity, the mortgagee cannot
appropriate the property for himself. Any stipulation to the
contrary is void. [ Case: Rosa Naval et.al. vs. Genaro
Homeres, CA, L-19482-R, May 30, 1959]

81
 > Take note: mortgage can be constituted to secure
future advancement is valid. Ex: a stipulation which
says “ for the payment of loan in the amount of P20,000
and such other loans or other advances obtained or still to
be obtained by the mortgagors as the makers”. [ Case:
Mojica vs. CA, GR 94247, September 11, 1991]

> Take note: Future property cannot be the object of

mortgage because the mortgagor cannot legally mortgage
what he does not own yet. [ Case: Dilag vs. Heirs of
Resurreccion, 70 Phil. 650]. Take note however that a
“stipulation subjecting to the mortgage lien, properties (such
as improvements) which the mortgagor may subsequently
acquire, install or use in connection with a real property
already mortgaged to the mortgagor is VALID. REASON:
because of the possibility of acquiring or building it on the
property mortgaged. Ex: in a mortgage of a parcel of land
without improvement thereon was mortgaged and it was
stipulated thereon that even buildings to be subsequently
built is included in the mortgage. [ Case: People’s Bank
and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84]

> Take note: While a mortgage of a land necessarily

includes, in the absence of a stipulation, the improvements
thereon, a building by itself may be mortgaged apart from
the land on which it is built. [Remember Art. 415, on the
inclusion of buildings]

Art. 2125- In addition to the requisites stated in Art. 2085, it

is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in
the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a

mortgage have no other right than to demand the execution
and the recording of the document in which the mortgage is
formalized.

> refers to the import of registration. This is an essential

requisite of mortgage to bind third persons. Take note : if
not registered it is still valid between the contracting
parties. Take note further: the right to attack a mortgage
may be lost by a waiver of defects and objections, or by
unreasonable delay to act amounting to ratification. [ Case:
San Juan vs. CA, 363 SCRA 450].

> take note: Rules where:

1) MORTGAGE is in a private document

82
 * No valid mortgage is constituted when done in
a private
document, therefore is not registered, hence
the creditor can recover the debt and has the
right to compel the debtor to execute mortgage
in a public document. [Case: Hechanova vs.
Adil, 144 SCRA 450].

2) WHERE MORTGAGE IS NOT REGISTERED.

* still binding between the parties but not to

third persons. Hence, an Order of foreclosure
could not be refused on the ground that the
mortgage is not registered, provided however
that no innocent third person is affected.

3) WHERE MORTGAGE IS REGISTERED UNDER

ACT 3344

* the registration of a mortgage over a real

property under Act 3344 is without prejudice to
the better right of third persons. Thus, an
unregistered pacto de retro sale over a house is
superior to a recorded mortgage over the same
house of a later date. Reason: A mortgagor
could not validly mortgage which he does not
own anymore.

*> DOCTRINE OF MORTGAGE IN GOOD FAITH

* Means that, a mortgagee has a right to rely in

good faith on the Certificate of Title of the
mortgagor of a property given as security and in the
absence of any sign that might arouse suspicion, has
no obligation to undertake further investigation.

• Take note: that inorder for this doctrine

to apply, there must be a showing that the
mortgagor has already transferred the title
to his name and that after he obtains title, he
mortgaged it to another who relied on his
title.

• Take note: this doctrine is not applicable if

the property is still in the name of the real
owner of the property. And, in a situation
where the mortgagee has actual knowledge
of the status of the mortgagor, i.e., he knows
him to be a mortgagee [of an owner] only,
yet he acted as if he owns the property. [
Case: Bank of Commerce vs. San Pablo,

83
 Jr., 522 SCRA 713] and [ Abad vs.
Guimba, 465 SCRA 356].

• Take note: when the purchaser or

mortgagee is a bank or any financial
institution, this doctrine does not apply in
view of the general care and diligence
required of a mortgagee bank. [ Case:
Premiere Development Bank vs. CA, 453
SCRA 630].

• Take note: effect of the invalidity of

mortgage on the principal obligation. IT IS
STILL VALID. Reason: Mortgage is an
accessory contract, therefore the controlling
factor is the principal obligation.

Art. 2126- The mortgage directly and immediately subjects the

property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted.

> refers to the fact that a mortgage creates a real right.

And so, it is enforceable against the whole world. All
subsequent transferees should therefore be bound by the
mortgage. Take note however, that this article is applicable
only if the MORTGAGE is registered.

> Query: Can a mortgaged property be sold by its

owner? Answer: YES. And so therefore if he sells the
property, his buyer is bound by the mortgage. [ Case:
Bonnevie vs. CA, 125 SCRA 122]; [ Asuncion vs.
Evangelista, 316 SCRA 848].

> Query: Can the owner of the property under

expropriation mortgage the property. Answer: YES. Unless
and until the expropriation proceeding is terminated,
ownership remains with the registered owner.

Art. 2128- The mortgage credit [ right of the mortgagee] may be

alienated or assigned to a third person, in whole or in part,
with the formalities required by law.

> refers to non prohibition as to the alienation of the

mortgagee’s right to alienate, not the property.

> Query: Is there a need that the transfer be registered.

Answer: NO. It is still valid between the parties and it is
inseparable to the property mortgaged. Registration is

84
 needed only to effect third persons. [ Case: Republic vs.
Lim, 462 SCRA 265]

Art. 2129- The creditor may claim from a third person in

possession of the mortgaged property, the payment of the
part of the credit secured by the property which said third
person possesses, in terms and with the formalities which the
law establishes.

> this is an offshoot of the preceding article. It merely

means that since the mortgagee’s right is a real right, the
transferee is bound by the real estate mortgage and the
right to pay the obligation never ceased.

> Query: Can the third person foreclose the property if

the mortgagee who transferred its right did not pay the
debt. Answer: YES, but there is a need that a prior
demand must be made first and if debt is not paid, that
is the only time that foreclosure becomes proper.

Art. 2130- A stipulation forbidding the owner from alienating

the immovable mortgaged shall be void.

> refers to the stipulation forbidding the owner of the

property to alienate his property during the pendency of
the mortgage which is VOID. Reason: contrary to
express provision of law and public policy.

> Query: What about a stipulation granting the RIGHT

OF FIRST REFUSAL [ stipulation granting the mortgagee
the right to buy the property should the mortgagor
decides to sell it], is this valid. Answer: YES. Query: is
it necessary to get mortgagee’s consent. Answer: By
implication YES because jurisprudence states that, “if there
is a stipulation regarding the right of first refusal, he has
to notify the mortgagee of his intention to sell otherwise,
the contract entered by him with third person is
RESCISSIBLE. Hence, the BUYER should be BEWARE of this
right of first refusal, especially if the mortgage is registered”
[ Case: Litonjua vs. L & R Corp. 320 SCRA 405].

> Query: Is it necessary for mortgagor to get the

consent of the mortgagee if he decides to sell the
mortgaged property. Answer: YES, if there is a stipulation
to this effect, NO, if there is none especially where the
property is registered under the Torrens System. Although
the general rule is NO NEED to get mortgagee’s
consent. In relation to this- take note of the ruling where
the property is registered under the Spanish Mortgage
Law, when the stipulation may be disregarded by the

85
 mortgagor [ Case: Philippine Industrial Co. vs. El
Hogar Filipino, 43 Phil. 336].

> RULE ON A SECOND MORTGAGE: Ordinarily, it is

VALID. What about if it is prohibited in the contract itself,
and the penalty is for the first mortgagee to be given the
right to immediately foreclose the property, what is the
effect of the violation. Answer: the violation does not
give to the first mortgagee the right to treat the second
mortgage as null and void.

Art. 2131- The form, extent and consequences of a mortgage,

both as to its constitution, modification and extinguishment,
and as to other matters not included in this Chapter, shall be
governed by the provisions of the Mortgage Law and of the
Land Registration Law.

> refers to the suppletory laws that may aid the Courts in
deciding mortgage cases.

> In relation to this, take note: of TIPO or UPSET PRICE,

[fixed price for which the property will be sold at a public
auction, which is VOID] and contrary to Sec. 3 Rule 68
of the Rules of Court, which provides that the property
mortgaged should be sold to the highest bidder in an
auction.

> Take note of the following:

1. FORECLOSURE- remedy available to the

mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to
secure which the mortgage was given. It denotes
the procedure adopted by the mortgagee to
terminate the rights of the mortgagor on the
property and includes the sale itself. [ DBP vs.
Zaragoza, 84 Phil. 668 ]

a) Nature: 1) it is valid when the debtor is

in default in the payment of the obligation. And,
the right could not be exercised by any person
other than the creditor-mortgagee or his
assigns. [ Case: Borromeo vs. CA, 553 SCRA,
269] b) as a general rule, demand to pay is
made first, before foreclosure. c) must be
limited to the amount mentioned in the
document.

b) Kinds:

1. Judicial- action is brought with the

Court for the Court to order the

86
 foreclosure of the property and is
governed by Sec. 1 Rule 4 of the
Rules of Court. By nature, this is an
action quasi in rem or enforceable
against a specific property of the
defendant .

PROCEDURE:

a. a complaint is filed. After notice

and hearing, the Court orders
the mortgagor to pay the
mortgage debt with interest
and charges within a period
of not less than 90 days but
not more than 120 days
from the entry of judgment.

b. if the mortgagor does not pay,

the Court upon motion shall
order the property to be sold
to the highest bidder at a public
auction.

c. The Court confirms the Sale or

if not warranted, then the
Court may choose not to
confirm the sale. The Court
retains control of the
proceedings. Order of
Confirmation is an
interlocutory order.

d. *After confirmation, judgment

is rendered. If not satisfied,
a party can appeal the
judgment. Annulment of
Judgment is NOT an available
remedy. [ Case: Agbada vs.
Inter- Urban Developers,
Inc. , 389 SCRA 430]

e. If no appeal is made, then the

property shall be sold applying
the proceeds to the following:
1) cost of the sale; 2) amount
due to the mortgagee; 3) claims
of junior encumbrances or
those holding subsequent
mortgagees in the order of their
priority and 4) if there is an
excess, then give it to the
mortgagor or his assigns. If
there is a deficiency, then

87
 the mortgagee can recover
it from the mortgagor.

f. Issuance of a Certificate of
Sale. If this is not issued, the
title is not passed to the
vendee. [Case: Sayson vs.
Luna, 433 SCRA 502]

2. EXTRA-JUDICIAL FORECLOSURE
under Act 3135- [precedes from the right
of the mortgagee to foreclose the property
as incorporated in the contract such as
when mortgagee in the DEED OF REAL
ESTATE MORTGAGE was already
mentioned to have a special power of
attorney to sell the property in case of
non payment of the mortgage. [Case:
Paguyo vs. Gatbunton, 523 SCRA
156]. * THIS IS APPLICABLE ONLY
IN REAL ESTATE MORTGAGES].

SALIENT FEATURES:

1. there must be notice [re: of the

sale], posting and publication
thereof are mandatory.
Otherwise, it will invalidate the
notice or makes the sale
voidable and if there is a total
lack of notice, publication or
posting, the sale may be voided.
Notice of Sale must be published
in a newspaper of general
circulation [for the consumption of
many once a week for three
consecutive weeks] and posted
in three public places and not
necessarily where the property
is located . [Case: Tamayo, Jr.
vs. Heirs of G. Dominguez, 498
SCRA 342]; [ San Jose vs. CA,
255 SCRA 450; and [ Spouses
Suico vs. PNB, 531 SCRA 514].
* take note of the rulings in these
c ases.

No need to give notice to mortgagee or assigns. The action for extra

judicial foreclosure survives the mortgagor.

88
3. After notice, there must be a
public sale which should be held in
the place where the property is
situated. No postponements unless
the scheduled date is declared a
public holiday otherwise a
REPUBLICATION is necessary.

4. Proceeds of the sale should be

applied properly. If there is excess,
it shall be given to the mortgagor.
[Case: LCK Industries Inc. vs.
Planters Development Bank, 538
SCRA 634]. Take note that:
Under Act No. 3135, unlike in
judicial foreclosure, this act does
not give the mortgagee the right
to recover the deficiency [of the
mortgage debt] neither does it
expressly or impliedly prohibit
such recovery. Jurisprudence
however states that deficiency
may be recovered. [Suico
Rattan and Buri Interiors vs. CA,
490 SCRA 560]; [ Case: DBP vs.
Licuanan, 516 SCRA 644]. Take
note: If the third person is the
mortgagor, he could not recover
the deficiency, his action must be
against the [his] debtor and this is
when the original mortgagor
transfers his mortgage credit to a
third person.

5. Redemption of the Property sold

within one (1) year from sale. If
registered land, then the 1yr. period
is reckoned from the date the sale
was registered. * Take note: in case
of juridical persons, they have the
right to redeem the property but
not after the registration of the
certificate of foreclosure sale
which in no case shall be more
than three(3) months after
foreclosure, which ever is earlier,
as provided for under Sec. 47 of
the General Banking Law of
2000]

6. An aggrieved party [debtor or

mortgagor] petition for the sale to
be set aside/annulled and if a writ
of possession is already issued, to

89
 have it cancelled on the following
grounds: a) fraud, collusion, accident,
mutual mistake, breach of trust or
misconduct by the purchaser; and b)
sale has not been fairly and regularly
conducted and 3) inadequacy of
price such that it shocks the
conscience of the Court. [Case:
GSIS vs. CA, 266 SCRA 187]

7. Prescriptive period for

recovery of deficiency is ten (10)
years from the right of action
accrues - this is adopted from
Art. 1144(2), because the right to
recover deficiency in a mortgage is
tantamount to an action to enforce
a written contract or a promissory
note.

> Take note of the following Terms and Concepts:

1. A mortgagee may institute a PERSONAL ACTION

for [Collection o f Sum of Money] or a REAL
ACTION [ for Foreclosure of Mortgage] against
the mortgagor. This is his choice. But these two
remedies are ALTERNATIVE, not cumulative or
successive.

2. Take note: what is extinguished during

foreclosure is not the loan but the mortgage lien.
Remember again that, a mortgage is just a
security.

3. Actions available to mortgagee where the

mortgagor is dead:

a. to waive the mortgage and claim the entire

debt from the estate of the mortgagor as an
ordinary claim.
b. To foreclose the mortgage judicially and
prove any deficiency as an ordinary claim.
c. To rely on the mortgage exclusively,
foreclosing the same at anytime before it is
barred by prescription without right to file a
claim for deficiency [ Case: Maglague vs.
Planters Development Bank, 307 SCRA
156].

3. Retroactivity of foreclosure to date of

registration of mortgage. Thus, as between a lis
pendens or an adverse claim annotated earlier than

90
entries on the foreclosure of the mortgage or
certificate of sale, the foreclosure and certificate
prevail because of the retroactivity. What matters is,
the mortgage is registered ahead of the adverse
claim. [ Case: Phil. Veteran’s Bank vs. Monillas,
550 SCRA 251]

4. CONCEPT OF REDEMPTION- transaction by

which a mortgagor reacquires or buys back the
property which may have passed under the
mortgage or divests the property of the lien which
the mortgage might have created. This is allowed
in favor of banking institutions and in extra
judicial foreclosure of property.

KINDS:

1. EQUITY OF REDEMPTION- or the right of

the mortgagor in case of judicial foreclosure
to redeem the mortgaged property after his
default in the performance of the conditions of
the mortgage but before the judicial sale is
confirmed by the Court. This is done by
paying the debt within the 90 day period
after the judgment becomes final in
accordance with Rule 68 or even after the
foreclosure sale but before confirmation.
Reason: after confirmation of sale, the
previous owner loses whatever right he has
over the property as it now becomes the
property of the purchaser in an auction. [Case:
Raymundo vs. Sunico, 25 Phil. 365]. Take
note: where the foreclosure is judicially
effected, no equivalent right of redemption
exists. [ Case: Limpin vs. IAC, 166 SCRA
1987]. Take note further: that if the
mortgage credit is acquired by a second
mortgagee,[third party] his right is secondary to
the first mortgagee. Query: Is there a need
for physical possession of the property?.
Answer: NO, this can be levied upon by a writ
of execution.

2. RIGHT OF REDEMPTION- right of a

mortgagor in case of an extra judicial
foreclosure to redeem the mortgaged property
within a certain period [within a term of
one(1) year from and after the date of the sale
or from date of registration for registered
properties] and after it was sold for the
satisfaction of the mortgage debt. By nature,
this right is an ABSOLUTE PRIVILEGE given to
the redemptioner. Take note: the exercise

91
 of the right of redemption is an implied
admission of the regularity of the foreclosure
sale and estops the mortgagor from impugning
its validity on that ground. [Case: Aclon vs.
CA, 387 SCRA 415].

Take note:

1. Actions to be taken to obtain possession

of the mortgaged property for
foreclosure purposes:

a. bring civil action to recover [

Action for Recovery of
Possession; unlawful detainer]
b. Replevin for chattel mortgage

2. Query: If a mortgagor desires to

redeem his property after the same has
been sold at an auction, how much will he
pay. Answer: the amount of the loan at
the time the sale was made and not the
price the property was sold. Because,
there is the possibility that there is
deficiency during the sale.

3. Query: Can right of redemption be

exercised in judicial foreclosure. Answer:
NO, except only where the mortgagee is
the PNB or a banking institution. Note:
what can be exercised in judicial
foreclosure is EQUITY OF REDEMPTION.

> REQUISITES FOR VALID REDEMPTION:

1. The redemption must be made within

one year from the date of registration of
sale.

2. Payment of the purchase price of the

property plus 1% interest per month plus
taxes if any or when already paid.

3. Written notice of the redemption must

be served on the officer who made the
sale and the duplicate filed with the
Office of the Register of Deeds.

4. In judicial foreclosure, the general rule is that the mortgagor

cannot exercise the right of redemption except only when the
mortgagee is a banking institution. Note: because in judicial
foreclosure, what can be exercised is EQUITY OF REDEMPTION.

92
 5. the mortgagor or his assignee is
required to tender payment within the
prescribed time to make the redemption
valid.

> PERSONS ENTITLED TO EXERCISE THE

RIGHT OF REDEMPTION:

1. mortgagor and his privy

2. his successor in interest.

> Concept of Writ of Possession- generally

an order issued by the Court whereby the
sheriff is commanded to place in possession
a real or personal property to the person
entitled thereto such as when the property
is extra judicially foreclosed. The issuance
of the writ is a ministerial function of the Court
[ Case: Mendoza vs. Salinas, 514 SCRA
414]

> Take note: Questions regarding the legality/

validity of the mortgage or its foreclosure is not
a legal ground for refusing the issuance of a
writ of possession. Injunction to prohibit the
issuance of the writ is entirely out of place.
[ Case: Metropolitan Bank and Trust Co. vs.
Tan, 555 SCRA 502 ]; Samson vs. Rivera,
428 SCRA 7595] Thus, the mere filing of a
Motion for the issuance of a writ of possession,
filed after the lapse of redemption will suffice.
If within the redemption period, a bond will be
filed. [ Case: Maluwat vs. Metropolitan Bank
and Trust Co. 532 SCRA 124].

ANTICHRESIS

Art. 2132- By the contract of antichresis the creditor acquires

the right to receive the fruits of an immovable of his debtor,
with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit.

➢ refers to the nature of the contract of

antichresis.

➢ Characteristics:

93
 1. it is an accessory contract because it secures
a principal obligation.

2. It is a formal contract- because it must be

in specified form to be valid, i.e., it must be in
writing.

➢ Take note: this contract requires the delivery

of the property given as security to the
creditor. This is so not for the purpose of validity
but in order for the creditor to receive the fruits.
Take note further: that the contract does not
cover the immovable but the FRUITS ONLY.

➢ Parties:

1. antichretic creditor- who could not acquire

the property by prescription because he does
not possess the property in the concept of
an owner but a mere holder only. [ Case:
Ramirez vs. CA, GR 38185, Sept. 24, 1986]

2. antichretic debtor- who remains the owner

of the property.

➢ DISTINGUISH WITH:

1. MORTGAGE

A- property is delivered to the creditor

M- the debtor retains possession of the
property

A- creditor acquires only the right to

receive the fruits of the property. It
does not produce a real right.
M- the creditor does not have the right to
receive the fruits but creates a real right
over the property which is enforceable
against the whole world.

A- the creditor unless there is a

stipulation to the contrary is obliged
to pay tax and other charges upon the
estate;
M- the creditor has no such obligation.

A- the creditor applies the fruits to the

payment of interest, if owing and then to
the principal.

94
 M- no such obligation in mortgage

2. PLEDGE

A- refers to real property

P- refers to personal property

A- perfected by mere consent [but it is

necessary that the property be
delivered for the creditor to
appropriate the fruits.
P- perfected by the delivery of the thing
pledged

A- is a consensual contract
P - is a real contract

Art. 2133- the actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application.

> self explanatory. This forestalls the use of antichresis

for purposes of USURY.

Art. 2134- The amount of the principal and the interest shall
be specified in writing; otherwise, the contract of antichresis
shall be void.

> This is mandatory provision otherwise the contract is

VOID.

Art. 2135- The creditor, unless there is a stipulation to the

contrary, is obliged to pay the taxes and charges upon the
estate.

He is also bound to bear the expenses necessary for the

preservation and repair.

The sums spent for the purposes stated in this article shall
be deducted from the fruits.

> refers to the obligations of the antichretic creditor

> Rule if the fruits are insufficient: Still the creditor is

obliged to
pay the expenses above- because this is implied from
the 2nd paragraph of Art. 2136.[ hence, the creditor can

95
 compel the debtor to enter into another contract of
antichresis until the expenses above mentioned are fully
satisfied, after all, the obligation to pay these expenses
are actually for the account of the debtor- since they are
chargeable to the fruits].

Art. 2136- The debtor cannot reacquire the enjoyment of the

immovable without first having totally paid what he owes the
creditor.

But the latter, inorder to exempt himself from the

obligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the enjoyment
of the property, except when there is a stipulation to the
contrary.

> refers to what creditor can do to exempt himself from

the payment of taxes and necessary repairs. Take note:
the antichretic creditor has the right to be reimbursed for
his expenses for machinery and other improvements upon
the land and for the sums paid for taxes.

Art. 2137- The creditor does not acquire the ownership of the
real estate for the non payment of the debt within the period
agreed upon. [ Case: Trillana vs. Manansala, 96 Phil. 865]

Every stipulation to the contrary shall be void. But the

creditor may petition the Court for the payment of the debt or
the sale of the property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.

> Take note: this provision has been repealed by

RA 11057, because under this ACT, creditor can now sell
[see procedure] the property once a secured transaction
is not paid. In effect, precarium is no longer prohibited.

> Take note: this article practically prohibits pactum

commissorium hence the express prohibition [repealed when
transaction is secured].

> Take note: Remedies available to the creditor:

1. to bring an action for specific performance

2. to petition for the sale of the real property as in
a foreclosure of mortgages under Rule 68 of the
Rules of Court.

Art. 2138- The contracting parties may stipulate that the

interest upon the debt be compensated with the fruits of the

96
property which is the object of the antichresis, provided that if
the value of the fruits should exceed the amount of interest
allowed by the laws against usury, the excess shall be applied to
the principal.

> take note: excess of the fruits shall be applied to the

principal.

Art. 2139- The last paragraph of Art. 2085, and Articles of

2089 to 2091 are applicable to this contract.

CHATTEL MORTGAGE: [Take note: Articles 1-16 of the Chattel

Mortgage Law is repealed by RA11057] by express provision[
see repealing clause]

>General provisions on Chattel Mortgage however

remains.

CONCURRENCE AND PREFERENCE OF CREDIT [ Art. 2236-2251]

Concurrence of Credit defined- implies the possession of two or

more creditors of equal rights or privileges over the same property or
all of the property of a debtor.

Preference of Credit defined- is the right held by the creditor to

be preferred in the payment of his claim above the others, [i.e., to
be paid first] out of the debtor’s assets.

> Take note of the rule on electronic transactions:

[Sec. 13, RA 8792 or the Electronic Commerce Act

* electronic transactions made through networking

among banks, linkages thereof with other entities or
net work and vice versa shall be deemed
consummated upon the actual dispensing of cash
or the debit of one account and corresponding
credit to another, whether the transaction is
initiated by the depositor or by an authorized
collecting party. The obligation of one bank, entity
or person similarly to another arising therefrom shall
be absolute and shall not be subjected to the process
of preference of credit. The foregoing however is
applicable only to transactions utilizing
automated teller machine (ATM) switching
network.

97
 > Nature and effect:

1. it does not create interest on the property

only a right on the part of one creditor to be paid
first over the other creditors. The preferred creditor
however has no priority right to sell the
property of the debtor, all he has is the priority
right to be paid first from the proceeds of the
sale of the property.

2. The right can be effective only when claimed

and asserted otherwise, it is waived.

3. applicable only when there are two or more

creditors and the debtor has insufficient property
to pay all his creditors.

4.applicable only when all credits are due.

5. It is different from lien over the property for it

applies only to a claim [right to be paid first] over a
property unlike liens, where they impose a charge
over a property.

Art. 2236- the debtor is liable with all his property, present and
future for the fulfillment of his obligations subject to the
exemptions provided by law.

>self explanatory. Just take note of the exempted

properties 1.) under Art. 152 of the Family Code,
[FAMILY HOME] and related provisions under it; 2.)
those properties exempt from execution under Sec.
13, Rule 39 of the Rules of Court; 3.) provision on
future property under the Insolvency Law and 4.)
those properties under custodia legis which are
exempt from attachment or execution.

Art. 2237- Insolvency shall be governed by special laws in so

far as they are not inconsistent with this Code.

> take note: that in the event of bankruptcy or

liquidation of employer’s business, the unpaid wages and
monetary claims of the employees or workers should be
paid first, consistent to the provisions of the Labor Code.

Art. 2238- So long as the conjugal partnership or absolute

community subsists, its property shall not be among the assets
to be taken possession of by the assignee for the payment of

98
the insolvent debtor’s obligations, except in so far as the latter
have redounded to the benefit of the family. [ If it is the
husband who is insolvent, the administration of the conjugal
partnership or absolute community, may, by order of the Court,
be transferred to the wife or a third person other than the
assignee. The second sentence is no longer applicable under the
Family Code because under the latter the administration of the
absolute community property is joint], bracketing mine.

> Take note: for this to apply, two requisites must be

complied with:

1. subsistence of the conjugal partnership or the

absolute community;

2. the obligation of the insolvent spouse have not

redounded to the benefit of the family.

* Take note: the second sentence: no longer

applicable because under the Family Code,
administration of the conjugal partnership or absolute
community is joint between the spouses, unless one
is particularly designated as such.

Art. 2239- If there is property other than that mentioned in the

preceding article, owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or interest therein
shall be among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor’s obligation.

➢ refers to the right of the assignee over the share

of the insolvent debtor to an undivided asset he co
–owned with others.

Art. 2240- Property held by the insolvent debtor as a trustee of

an express or implied trust, shall be excluded from the
insolvency proceedings.

➢ self explanatory

CLASSIFICATIONS OF CREDITS:

Art. 2241-repealed

Art. 2242- With reference to specific immovable property and

real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute as encumbrance on

99
the immovable or real right. [ also considered as SPECIAL
PREFERRED CREDIT]

1. Taxes due on the land and building;

2. For the unpaid price of the real property sold, upon the
immovable sold.

3. Claims of laborers, masons, mechanics and other

workmen, as well as of architects, engineers and
contractors engaged in the construction,
reconstruction or repair of buildings, canals or other
works, upon said buildings, canal or other works.

4. Claims of furnishers of materials used in the

construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or
other works.

5. Mortgage credits recorded in the Registry of Property,

upon the real estate mortgaged;

6. Expenses for the preservation or improvement of real

property when the law authorizes reimbursement, upon
the immovables preserved or improved.

7. Credits annotated in the Registry of Property, in

virtue of a judicial order, by attachments or executions,
upon the property affected and only as to later credits.
[ here there is preference among the attachments or the
executions according to the order of the time they were levied
upon the property. The pro-rata rule in Art. 2249 does not
apply.]

8. Claims of co-heirs for warranty in the partition of the

immovable among them, upon the real property thus
divided.

9. Claims of donors of real property for pecuniary charges

or other conditions imposed upon the donee, upon the
immovable donated.

10. Credits of insurers, upon the property insured, for

the insurance premium for two years.

> Take note: The enumeration does not indicate

which among those enumerated is preferred.
With the exception of No. 1, each of those
enumerated merely concur with each other.

> Take note [Case: de Barretto vs. Villanueva, 1

SCRA 288] where SC said, “ recorded mortgage

100
 credit is superior to an unrecorded unpaid vendor’s
lien”. Same way that prior unrecorded mortgage
cannot prevail over registered mortgage of a later
date. Take note however that: this is applicable
between TWO MORTGAGES. But not where it involves
an unrecorded pacto de retro sale of a prior date
and a recorded mortgage where the FORMER
PREVAILS, because you could not mortgage a
property which you have already sold.

> Concept of Refectionary Credit- indebtedness

incurred in the repair or reconstruction of something
previously made, such as repair or construction being
made necessary by the deterioration or destruction of
the thing as it formerly existed. It also includes
expenses for materials used on new constructions.

Art. 2244- With reference to other property, real and

personal, of the debtor, the following claims or credits shall be
preferred in the order named: [known as ORDINARY PREFERRED
CREDITS]

>TAKE NOTE: This article is also repealed by RA 11057. The

Act stresses that secured transactions must ne preferred.

1. Proper funeral expenses for the debtor, or children

under his or her parental authority who have no
property of their own, when approved by the Court;

2. Credits for services rendered the insolvent by

employees, laborers or household helpers for one year
preceding the commencement of the proceedings in
insolvency;

3. Expenses during the last illness of the debtor or of his

or her spouse and children under his or her parental
authority, if they have no property of their own;

4. Compensation due the laborers or their dependents

under laws providing for indemnity for damages in
cases of labor accident, or illness resulting from the
nature of the employment.

5. credits and advancements made to the debtor for

support of himself or herself, and family, during the lat
year preceding the insolvency.;

6. support during the insolvency proceedings and, for

three months thereafter

7. fines and civil indemnification arising from a criminal

offense;

101
8. legal expenses, and expenses incurred in the
administration of the insolvent’s estate for the common
interest of creditors, when properly authorized and
approved by the court;

9. taxes and assessment due the national government other

than those mentioned in Arts. 2241 No. 1 ; and 2242
No.1

10. taxes and assessments due any province, other than

those referred to in Arts. 2241 No.1; and 2242 No.1;

11. taxes and assessments due any city or municipality,

other than those indicated in Arts. 2241 No.1 and 2242
No.1;

12. Damages for death or personal injuries caused by

quasi-delict;

13. Gifts due to public and private institutions of charity

or beneficence;

14.Credits which, without special privilege appear in a)

public instrument; or b) in the final judgment, if they have
been the subject of litigation. These credits shall have
preference among themselves in the order of priority of
the dates of the instruments and of the judgments
respectively.

➢ the enumeration here is controlling because the

article does not only enumerates preferred credits
but also gives their “order of preference”. This
applies to the “free property of the insolvent”.

➢ Take note: here if the value of the insolvent’s

specific property is of greater value than the sum
of the tax liens and other preferred credit, the
surplus is considered “residual” therefore
considered as “free property”. But if the value of
the specific property is Lesser, then the
unsatisfied balance of the tax liens shall be
treated as an ordinary preferred credit under Art.
2244, hence to be paid in the order preference
provided therein. This explains why in Art. 2244, tax
liens are ranked No. 9,10 and 11.

> Take note: To enforce the provisions on

preference of credits, there must be judicial
proceedings. [ Case: DBP vs. NLRC, 229 SCRA
350]. Take note however that: foreclosing bank
creditor cannot he held liable for unpaid wages and

102
 the like. Employees of the mortgagor should go
against their claim in a proceeding in bankruptcy on
their employer. [ Case: DBP vs. NLRC, 186 SCRA
841).

Art. 2245- Credits of any other kind or class, or by any other

right or title not comprised in the four preceding articles, shall
enjoy no preference.

> refers to the other kinds of credits.

➢ Take note: Insolvency Proceedings involving

Banks:

* Take note: In proceedings involving

receivership and liquidation of a bank, any act
of the Monetary Board of the Central Bank
is final and executory, which the Court
cannot set aside, restrained or enjoined EXCEPT
only, “upon convincing proof that the action
is plainly arbitrary and made in bad faith. [
Case: Central Bank vs. dela Cruz, 191 SCRA
346] .

• the depositor or creditor of a bank declared

insolvent is not to file a separate action
against the bank, instead its remedy is to
intervene in the judicial proceedings for
liquidation instituted by the Bank thru the
Solicitor General. [ Case: Manalo vs. CA,
366 SCRA 752].

> Take note: Bank deposits could not be

considered as preferred credits. They are considered
as simple loans. Hence, depositors do not enjoy
priority rights. Instead what applies on them is the
principle on equity saying “ assets of an insolvent
bank are to be distributed ratably among general
creditors of the bank”. [ Case: Central Bank of the
Phils. Vs. Morfe, 96 SCRA 96].

ORDER OF PREFERENCE OF CREDITS

>TAKE NOTE: Art. 2246 and 2247 are now repealed by

RA 11057. Secured transactions are preferred.

Art. 2248- Those credits which enjoy preference in relation to

specific real property or real rights, exclude all others to the

103
extent of the value of the immovable or real right to which the
preference refers.

Art. 2249- If there are two or more credits with respect to the
same specific real property or real right , they shall be satisfied
pro rata, after payment of duties, taxes and assessments upon
the immovable property or real right.

Art. 2250- The excess, if any, after the payment of the credits
which enjoy preference with respect to specific property, real
or personal, shall be added to the free property which the
debtor may have, for the payment of the other credits.

> Take note: these are the guiding rules on preference

of credit.

> Take note likewise of the TWO TIER ORDER OF

PREFERENCE, which means, the first- tier, includes
only taxes, duties and fees due on specific movable or
immovable property. ALL OTHERS, special
preferred(non tax) credit stand on the second- tier, to
be satisfied “pari passu” and pro-rata, out of any residual
value of the specific property to which such other credit
relates.

> PRO-RATA RULE- division according to share, interest,

or liability of each creditor. Take note: this is NOT
APPLICABLE to credits annotated in the Registry of
Property in virtue of a judicial order, by attachment
or execution.

Art. 2251- Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
following rules:

1) in the order established in Art. 2244;

2) common credits referred to Under Art. 2245 shall be paid

pro rata regardless of dates.

➢ Take note: For easier computation, take the

value of the remaining specific property of the
insolvent and immediately deduct those liabilities
owing to it, giving preference to tax and unpaid
liabilities relating to the said property. Example a
car worth P200,000 but the total indebtedness is
P250,000. Deduct Tax and unpaid liability. Tax is
P10,000. unpaid liabilities relating to the car is
P150,000. [ P50K for repair; P50K for maintenance;

104
 P50K for insurance]; Hence: P200,000- 10,000=
P190,000.00. Divide the P190K among the
unpaid liabilities relating to the car:

Example:

Unpaid liability (P150K)

_______________ x P190,000 =
P114K for the
(200k-10K for tax)
repair
Total Indebtedness
for the car (P250K)

* Apply same formula for the maintenance

and insurance.

* If there are other properties then, then get

their value to pay off other credits (liabilities)
pro-rata.

ASSIGNMENT OF CREDIT [ a consensual contract]

Art. 1624- An assignment of credits and other incorporeal

rights shall be perfected in accordance with the provisions of
Art. 1475.1[on consensual contract]

Assignment of Credit- process of transferring the

right of the assignor to the assignee who is allowed to
proceed against the debtor, either onerously or
gratuitously. [in case of donation]

➢ Take note: in case of gratuitous assignment as in

the case of donation- it must conform with the
formalities of donation like, there must be an
acceptance.

Art. 1625- the assignment of credit, right or action shall produce

no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.

➢ Take note:

1
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of
law governing the forms of the contract.

105
 • transfer of personal property to affect third
persons must be in a public instrument,
(notarized document).
• transfer of real property to affect third
persons must be REGISTERED.

Art. 1626- The debtor who, [before having knowledge of the

assignment, pays his creditor ] shall be released from the
obligation.

➢ Take note: Debtor is bound by the assignment of

credit only from the time he has knowledge of it,
otherwise he will be released of the obligation. [
Case: Sison v. Yap Tico, 37 Phil. 534]

Query: Before a debt may be assigned, is there a need

for the consent of the debtor? NO. Reason: Because his
knowledge will only affect the validity of his payment. If he
pays before knowing of the assignment, he will be released
from the obligation. [ Case: South City Homes, Inc.,
Fortune Motors, Palawan Lumber Manufacturing vs.
BA Finance Corp., GR 135462, Dec. 7, 2001]

Art. 1627- The assignment of a credit includes all the accessory

rights, such as a guaranty, mortgage, pledge or preference.

- self explanatory

Art. 1628- The vendor in good faith shall be responsible for the
existence and legality of the credits at the time of sale,
unless it shall have been sold as doubtful; but not for the
solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and
of common knowledge. [GENERAL RULE]

➢ WARRANTIES IN ASSIGNMENT OF CREDIT

1. objective- the credit itself

2. subjective- solvency of the debtor

Art. 1629- In case the assignor in good faith should have made
himself responsible for the solvency of the debtor, and the
contracting parties should have agreed upon the duration of the
liability, it shall last for one(1) year only, from the time of the
assignment if the period had already expired.

If the credit should be payable within a term or a period

which has not yet expired, the liability shall cease one (1) year
after the maturity.

106
 ➢ Duration:

a. if there is time agreed upon- the time

prevails
b. if no time is fixed or agreed upon then
the rule is:

1. if debt is already due: ONE

YEAR from assignment

2. if debt is not yet due: ONE

YEAR from
maturity

Art. 1630- One who sells an inheritance without enumeration of

the things of which it is composed, shall only be answerable for
his character as an heir.

➢ this refers to present inheritance because normally,

one cannot sell his future inheritance. At most,
what could be disposed of is one’s right to
future inheritance. Query: Can an heir sell his
inheritance pending partition. YES.

➢ Take note: No sale of future inheritance without

specification, otherwise what was sold only is his
hereditary rights.

Art. 1631- One who sells for a lump sum the whole of certain
rights, rents or products, shall comply by answering the
legitimacy of the whole in general; but he shall not be obliged to
warrant each of the various parts of which it may be composed,
except in the case of eviction from whole or part of the greater
value.

➢ Take note: of the need to warrant the legitimacy

of the whole of the rights, rents and products.

Art. 1632- Should the vendor profited by some of the fruits or

received anything from the inheritance sold, shall pay the
vendee thereof, if the contrary has not been stipulated.

➢ self explanatory

Art. 1633- The vendee shall, on his part, reimburse the vendor for
all that the latter may have paid for the debts of and charges on

107
the estate and satisfy the credits he may have against the same,
unless there is an agreement to the contrary.

➢ self explanatory

Art. 1634- When a credit or other incorporeal right in litigation is

sold, the debtor shall have a right to extinguish it by reimbursing
the assignee for the price the latter paid therefor, the judicial
costs incurred by him, and the interest on the price from the day
on which the same was paid.

A credit or other incorporeal right shall be considered in

litigation from the time the complaint concerning the same is
answered.

The debtor may exercise his right within thirty days from the
date the assignee demands payment from him. (judicial or extra
judicial)

➢ self explanatory

Art. 1635- From the provisions of the preceding article shall be

excepted the assignments or sales made: [ KNOWN AS
INSTANCES OF LEGAL REDEMPTION]

1) To a co-heir or co-owner of the right assigned;

[reason: co-ownership is not favored]

2) To a creditor in payment of his credit;

[reason: assignment is presumed valid]

3) To the possessor of a tenement or piece of land

which is subject to the right in litigation assigned.
[reason: he can litigate anyway]

➢ Take note: These are the instances were legal

redemption is present.

ACT NO. 2137- THE WAREHOUSE RECEIPTS LAW

[ Enacted February 5, 1912]

THINGS TO REMEMBER UNDER THIS LAW:

108