07 Memory Aid Credit Transactions

CIVIL LAW
G ENER AL P RI NCI PLES

Credit Transactions
All transactions involving the purchase or loan of goods,
services, or money with a promise to pay or deliver in the
future; Contracts of security.
Security
Something given, deposited, or serving as a means to
ensure enforcement of an obligation or of protecting some
interest in property.
Types of Contracts of Security:
1. Secured transactions/contracts of real security
transactions supported by a collateral or an
encumbrance of property.
2. Unsecured transactions/contracts of personal security
transactions supported only by a promise, or
commitment of another such as a guarantor or surety.
Bailment
The delivery of property of one person to another in trust
for a specific purpose, with a contract, express or implied,
that the trust shall be faithfully executed and the property
returned or duly accounted for when the special purpose
is accomplished or kept until the bailor claims it.
May be created by contract or by operation of law (De
Leon, Comments and Cases on Credit Transactions, 2010
ed., p. 3)
Parties in Bailment:
1. Bailor one who delivers the possession or custody of
the thing bailed.
2. Bailee one who receives the custody or possession of
the thing thus delivered,
Kinds of Contractual Bailment:
1. For sole benefit of bailee
a. Commodatum
b. Gratuitous simple loan/mutuum
2. For sole benefit of bailor
EXECUTIVE COMMITTEE
IAN MICHEL GEONANGA overall
chairperson, JOSE ANGELO DAVID
chairperson for academics, RUTH
ABIGAIL ACERO chairperson for
hotel
operations,
ALBERTO
RECALDE, JR. vice-chairperson for
operations,
MARIA
CARMELA
HAUTEA
vice-chairperson
for
secretariat,
MARK
EMMANUEL
ABILO vice-chairperson for finance,
RYAN LIGGAYU vice-chairperson for
electronic
data
processing,
JOMARC PHILIP DIMAPILIS vicechairperson for logistics
CREDIT TRANSACTIONS
a. Gratuitous deposit
b. Mandatum
3. For benefit of both parties
a. Deposit for compensation
b. Involuntary deposit
c. Pledge
d. Bailments for hire arises when goods are left with
the bailee for some use or service by him and is
always for some compensation
Kinds of Bailment for Hire:
i. Hire of thing
ii. Hire of service
iii. Hire for carriage of goods
iv. Hire for custody
L O AN
(A RTS . 1933 1961)
Contract of Loan
A contract wherein one of the parties delivers to another,
either something not consumable so that the latter may
use the same for a certain time and return it or money or
other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid.
Characteristics:
1. Real contract delivery of the thing loaned is necessary
for the perfection of the contract
Reason: Delivery is necessary in view of the purpose of
the contract which is to transfer either the use or the
ownership of the thing loaned.
Note: An accepted promise to make a future loan is a
consensual contract, and therefore binding upon the
parties but it is only after delivery of the subject matter,
will the real contract of loan arise (Art. 1934).
The non-fulfillment of an accepted promise will give rise
to an action for damages only (Tolentino, Civil Code of
the Philippines Vol.5, 1992 ed., p. 443).
SUBJECT COMMITTEE
JHOY PALLONES subject chair, MICAELA
KRISTINA GALVEZ assistant subject chair, PIA
ISABEL CO edp, FRANCIA ROMLINA
RODRIGUEZ persons and family relations,
JENNETH CAE CAINDAY property, IRENE
ALCOBILLA wills and succession, JOSE
AMELITO BELARMINO II and ROWNEYLIN SIA
obligations and contracts, SAMANTHA
GRACE MANALO sales and lease, LAUREN
GAIL DIVINO partnership, agency and trusts,
MABEL BUTED credit transactions, JULIUS
CEASAR BALBUENA torts and damages,
KATHLEEN VALERIO land titles and deeds,
ILLAC BOHOL conflict of laws
MEMBERS
Phoebe
Alhambra,
Diana
Bartolome,
Jesus
Paolo
Borlagdan, Darniel Bustamante,
Jamela Jane Caringal, Ma.
Criselda
Correa,
Reynaldo
Dalisay, Kristine Lara Defensor,
Carel Brendth Dela Cruz, Regine
Estillore, Anne Clarisse Guzman,
Aziel Guzman, Martin Michael
Hatol,
Maria
Emma
Gille
Mercado,
Richmond
Montevirgen, Astrid Ong, Ruth
Ann Ong, Rodel James Pulma,
Dan Bernard Sabilala, Jeth Lester
Tan, Maria Anne Cyra Uy
CREDIT TRANSACTIONS
2. Unilateral contract once the subject matter has been
delivered, it creates obligations on the part of only one
of the parties (i.e. borrower).
Cause or Consideration:
1. As to borrower the acquisition of the thing
2. As to lender the right to demand its return or its
equivalent
Loan and Credit Distinguished
Loan
Credit
Delivery by one party
and the receipt of other Ability of a person to
party of a given sum of borrow money or things
money
or
other by virtue of the trust or
consumable thing upon confidence reposed by
an agreement, express the lender that he will
or implied, to repay the pay what he may
same amount of the promise
within
a
same kind and quality, specified period.
with or without interest.
Note: The concession of credit necessarily involves the
granting of loans up to the limit of the amount fixed in the
credit (People vs. Concepcion, G.R. No. L-18535,
August 15, 1922).
Loan and Discounting of Paper Distinguished
Loan
Discounting of Paper
Interest taken at the Interest is deducted in
expiration of the credit
advance
Less expensive than More expensive than
discounting
obtaining loan
Always on a single
Always on a double
name paper (one on
name paper (one on
which
no
other
which 2 signatures
indorsement, other than
appear with both parties
the signature of the
liable for payment)
maker appears)
The discount does not
Loan must be paid back
have to be repaid
Kinds of Loan:
1. Commodatum when the bailor delivers to the bailee a
non-consumable thing so that the latter may use it for a
certain time and return the identical thing
2. Simple loan (mutuum) lender delivers to the borrower
money or other consumable thing upon the condition
that the latter shall return the same amount of the same
kind and quality.
Consumables are those things which cannot be used in
a manner appropriate to their nature without their being
consumed (Art.418).
380 SAN BEDA COLLEGE OF LAW
2013 CENTRALIZED BAR OPERATIONS
CIVIL LAW
Commodatum and Mutuum Distinguished (OCPSOTLR)
Commodatum
Mutuum
Object
Non-consumable/NonConsumable/Fungible
fungible
Correlate with Art. 418
Exception: Art. 1936
Cause
Generally gratuitous for
Essentially gratuitous
there may be stipulation
of interest
Purpose
Use or temporary
Consumption
possession
Subject Matter
Any property
Personal property
Ownership of the thing
Retained by bailor
Passes to the debtor
Thing to be returned
Equal amount of the
Exact thing loaned
same kind and quality
Who bears risk of loss
Bailor
Debtor /bailee
When to return
In case of urgent need
and commission of any
Upon expiration of the
acts of ingratitude, even
term only
before the expiration of
the term
C OMMODATUM
(A RTS . 1935 1952)
Commodatum
Distinguished
and Other
Types
of
Contracts
Other Type of
Contracts
Principal purpose is the In
DEPOSIT,
the
gratuitous use of the principal purpose is the
thing by the borrower.
safekeeping of the thing
Other Type of
Commodatum
Contracts
In LEASE, it is always
Essentially gratuitous
for a price.
Bailee acquires a mere
use of the thing, but
In USUFRUCT, the
acquires no rights over
usufructuary acquires
the fruits thereof in the
the right over the fruits.
absence of stipulation
to that effect.
Commodatum
CIVIL LAW
Nature
General Rule: Bailee acquires the temporary use of the
thing but not its fruits since the bailor remains the owner
(Art. 1935).
Exception: When there is a stipulation to make use of the
fruits of the thing loaned (Art. 1940). Provided, that the
use of the fruits is merely incidental; otherwise, it is
usufruct.
Note: If the bailee is not entitled to the use of the thing,
the contract is deposit.
Contract Akin to Donation
Both confer benefit to the recipient. The presumption is
that the bailor has loaned the thing for having no need
therefore (Art. 1946).
Kinds of Commodatum:
1. Ordinary Commodatum use of the thing by the bailee
is for a certain period of time
2. Precarium one whereby the bailor may demand the
thing loaned at will; if any of the following is present:
a. The duration and purpose of the contract is not
stipulated.
b. The use of the thing is merely tolerated by the owner
(Art. 1947).
Cause
Essentially gratuitous; BUT:
1. If any compensation is to be paid by the borrower there
arises a lease contract;
2. If the consideration is to render some service, an
innominate contract will result.
Subject Matter:
General Rule: Non-consumable goods, whether movable
or immovable property (Arts. 1936-1937).
Exception: Consumable goods may be the subject matter
of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition (Art. 1936).
If consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is
commodatum and not mutuum (Producers Bank of the
Phils. vs. CA, G.R. No. 115324, February 19, 2003).
Bailor Need not be the Owner of the Thing Loaned:
(Art. 1938)
It is sufficient that the bailor has:
CREDIT TRANSACTIONS
1. Possessory interest; or
2. The right to use which he may assert against the bailee
or 3rd persons but not the rightful owner.
Commodatum is Purely Personal (Art. 1939)
1. The death of either party terminates the contract. Art.
1939 constitutes an exception to the general rule that
all rights acquired in virtue of an obligation are
transmissible (Art. 1178).
Exception: When there is a contrary stipulation.
2. The bailee can neither lend nor lease the object of the
contract to a third person.
Exception: Members of the household may make use
of the thing loaned.
Exception to the Exception:
1. There is a contrary stipulation; or
2. Nature of the thing forbids such use
OBLIGATIONS OF THE BAILEE (Arts. 1941 to 1945)
Principal Obligations:
1. Take care of the thing with diligence of a good father of
a family (Arts. 1163, 1169,1170 and 1173).
2. Return the IDENTICAL thing loaned upon expiration of
the term or upon the accomplishment of the purpose
(Art. 1933).
Other Obligations: (OLDEO)
1. Pay for the ordinary expenses for the use and
preservation of the thing loaned (Art. 1941).
2. Liability for loss due to fortuitous event (Art. 1942).
General Rule: He is not liable because ownership
remains with the bailor.
Exceptions: Liable for loss even if it should be through
a fortuitous event in the following cases: (KLAS-D)
a. When he keeps it longer than the period stipulated, or
after the accomplishment of its use;
Reason: Delay (Art. 1165, 1169, and 1170).
b. When he lends or leases it to third persons who are
not members of his household;
Reason: Commodatum is purely personal (Art.
1939).
c. When the thing loaned has been delivered with
appraisal of its value unless there is a stipulation
exempting the bailee from responsibility in case of
fortuitous event.
SAN BEDA COLLEGE OF LAW 381

CREDIT TRANSACTIONS
Reason: The law presumes that the parties intended
that the borrower shall be liable for the loss of the
thing even if it is due to a fortuitous event for
otherwise they would not have appraised the thing
(Republic vs. Bagtas, G.R. No. L-17474 October 25,
1962).
d. When, being able to save either the thing borrowed or
his own things, he chose to save the latter
.Reason: The bailee shows his ingratitude after the
thing is gratuitously loaned to him.
e. When the bailee devoted the thing for a different use
from that agreed upon.
Reason: The bailee acted in bad faith.
3. Liability for deterioration due to the use of the thing
General Rule: Bailee is not liable (Art. 1943).
Exceptions:
a. If expressly stipulated
b. If guilty of fault or negligence (Article 1170)
c. If he devotes the thing to any purpose different from
that for which it has been loaned (Article 1942 (1));
d. If he uses the thing beyond the period stipulated
4. Pay for extraordinary expenses arising from the actual
use of the thing, even though the bailee acted without
fault. In which case, the bailor and the bailee shall bear
the expenses equally (Art. 1949 (2)).
Exception: If there is a stipulation for different
apportionment
Note: The bailee has no right to retain the thing loaned
as security on the ground that the bailor owes him
something, even though it may be by reason of
expenses (Art. 1944) EXCEPT for damages suffered by
the bailee because of the hidden flaws of the thing
known to the bailor (Art. 1951).
Compensation shall not be proper when one of the
debts arises from a depositum or from the obligations of
a depositary or a bailee in commodatum (Art. 1287).
The right of retention ceases when the bailee is
reimbursed.
The bailee cannot lawfully sell the thing to satisfy the
damages.
Retention or adverse claim of bailee cannot ripen into
title by ordinary acquisitive prescription.
CIVIL LAW
5. To pay for the expenses other than those under Arts.
1941 and 1949 for the purpose of making use of the
thing (Art. 1950) (e.g. ordinary expenses for the
preservation and expenses for ostentation).
Note: In case there are two or more bailees, their
obligation shall be solidary (Art. 1945). This is an
exception by express provision of law to the general rule
that the concurrence of two or more parties in the same
obligation gives rise only to a joint obligation (Arts. 1207,
1208).
Reason: To effectively safeguard the rights of the bailor.
OBLIGATIONS OF THE BAILOR
(Arts. 1946 to 1952)
1. To respect the duration of the loan because the bailor is
bound by the terms of the contract of commodatum
which is for a certain time.
General Rule: He cannot demand return before
expiration of the period or accomplishment of the use.
Exceptions:
a. In case of urgent need of the thing, he may demand
its return or temporary use.
Reason: Commodatum is essentially gratuitous (Art.
1946).
Effect: If for temporary use, contract of commodatum
is suspended while the thing is in the possession of
the bailor.
b. If the bailee commits any act of ingratitude specified
in Art. 765 (Art. 1948).
Acts of ingratitude under Art. 765:
i. If the bailee should commit some offenses against
the person, honor or property of the bailor, or of his
wife or children under his parental authority;
ii. If the bailee imputes to the bailor any criminal
offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the
act has been committed against the baliee himself,
his wife or children under his authority; and
iii. If the bailee unduly refuses the bailor support when
the bailee is legally or morally bound to give
support to the bailor.
Reason: Similarity of commodatum with donation.
iv. Precarium (Art. 1947)
v. If the loan is for an illegal or immoral use
(Tolentino, Civil Code of the Philippines Vol.5, 1992
ed., p. 448).
CIVIL LAW
Reason: The contract is void (Art. 1409 (1) and
(7)).
2. Refund to the bailee extraordinary expenses incurred
for the preservation of the thing, provided that the bailee
brings the same to the knowledge of the bailor before
incurring them, except when the reply to the notification
cannot be awaited without danger (Art. 1949 (1)).
Note: This will not apply if the extraordinary expenses
arise on the occasion of the actual use of the thing by
the bailee. In which case, a different rule applies.
Please refer to discussion on Obligations of the Bailee.
3. To be liable to the bailee for damages for known hidden
flaws (Article 1951).
Requisites: (FHANS)
a. Existence of flaw or defect;
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. Bailee is not aware thereof; and
e. The bailee suffers damages by reason of said flaw
or defect.
If the above requisites concur, the bailee has the right of
retention for damages.
The bailor is made liable for his bad faith.
The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the
bailee.
Reason: The expenses or damages may exceed the
value of the thing loaned (Art. 1952).
M UTUUM
(A RTS . 1953 1955)
Contract of Mutuum
A contract whereby one of the parties delivers to another
money or other consumable thing with the understanding
that the same amount of the same kind and quality shall
be paid (Art. 1933).
It involves the return of the equivalent amount only and
not the identical thing because the borrower acquires
ownership of the money or other consumable thing loaned
(Art. 1978).
A loan of money may be payable in kind (Art. 1958).
CREDIT TRANSACTIONS
Subject Matter:
General Rule: Consumable/fungible goods
Exception: Consumable goods may be the subject matter
of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition (Art. 1936).
Fungible and Non-Fungible:
1. Fungible those which belong to common genus which
includes several species of the same kind (e.g. grain,
wine, oil)
2. Non-fungible those that are specifically determined
and cannot be substituted by others (e.g. specific land,
building, particular house)
Note: Mere issuance of checks to the debtor does not
perfect the contract of loan. It is only after the checks
have been cashed by the debtor that the contract may be
deemed perfected (Art. 1249).
The destruction of the thing loaned does not extinguish
ones obligation to pay because his obligation is not to
return the thing loaned but to pay a generic thing.
No estafa is committed by a person who refuses to pay
his debt or denies its existence.
Reason: The borrower effectively acquires ownership.
Mutuum and Rent Distinguished
Mutuum
Rent
Delivery of some nonDelivery of money or
consumable thing in
some consumable thing
order that the other may
with a promise to repay
use it during a certain
an equivalent of the
period and return it to
same kind and quality
the former
There is a transfer of There is no transfer of
ownership of the thing ownership of the thing
delivered.
delivered.
Relationship between
Relationship is that of a
the parties is that of
landlord and tenant
obligor-obligee
Landlord
receives
Creditor
receives compensation either in
payment for his loan.
money,
provisions,
chattels, or labor.
Loan and Sale Distinguished
Loan
Sale
Real contract
Consensual contract
Generally
unilateral
because only the
Bilateral and reciprocal
borrower
has
obligations

CREDIT TRANSACTIONS
Note: If the property is sold, but the real intent is only to
give the object as security for a debt as when the price
is comparatively small there really is a contract of loan
with an equitable mortgage (Art. 1602).
Barter
A contract whereby one person transfers ownership of
nonfungible things to another with the obligation on the
part of the latter to give things of the same kind, quality
and quantity (Art. 1954).
Commodatum / Mutuum and Barter Distinguished
Commodatum/
Barter
Mutuum
In mutuum, the subject Subject matter is nonmatter is money or fungible,
(non
fungible things
consumable) things
In commodatum, the The
thing
with
bailee is bound to equivalent value is
return the identical thing given in return for what
borrowed
has been received
Mutuum
may
be
gratuitous
and Always onerous, and is
commodatum
is actually a mutual sale
essentially gratuitous
Form of Payment:
1. If thing loaned is money, payment must be made in the
currency stipulated, otherwise that which is legal tender
in the Philippines and in case of extraordinary inflation
or deflation, payment shall be in the value of the
currency at the time of the creation of the obligation
(Art. 1249, 1250 and 1955 (1)).
2. If thing loaned is other than money, payment of another
thing of the same kind, quality and quantity. In case it is
impossible to do so, the borrower shall pay its value at
the time of the perfection of the loan (Art. 1955 (2)).
I NTEREST
(A RTS . 1956 1961)
Guidelines for the Proper Application of Interest:
1. No interest shall be due unless it has been expressly
stipulated in writing (Article 1956).
If stipulated, the interest must be paid from the time it
falls due. The interest however, does not run:
a. During the effectivity of the moratorium law, which
has the effect of suspending the collection of payment
of the principal obligation, which carries the
accessory obligation in the payment of interest;
b. In case of insolvency of the bank, when the Banko
Sentral prohibits the bank from doing business; and
CIVIL LAW
c. Despite defective consignation, from the time of the
offer and tender of payment (Tolentino, Civil Code of
the Philippines Vol.5, 1992 ed., p. 452).
Requisites for Demandability of Interest: (ELW)
a. Must be expressly stipulated
Exceptions:
i. Indemnity for damages (Art. 2209)
ii. Interest accruing from unpaid interest (Art. 2212)
Compound Interest
General Rule: Unpaid interest shall not earn interest.
Exceptions:
i. When judicially demanded
ii. When there is an express stipulation (must be in
writing)
b. Be lawful
c. The agreement must be in writing
2. If a particular rate of interest has been expressly
stipulated by the parties that interest, not the legal rate
of interest, shall be applied (stipulated rate of interest).
3. If the exact rate of interest is not mentioned, the legal
rate of 6% or 12% shall be payable and computed from
date of default. The legal rate depends upon whether it
is a loan or forbearance of money or not.
Note: Central Bank Circular No. 416 fixing the rate of
interest at 12% per annum deals with:
a. Loans;
b. Forbearance of any money, goods or credits; and
c. Judgments involving such loans or forbearance in the
absence of express agreement to such rate.
If the obligation arises from other sources such as
contract of sale, damages arising from injury to persons
and loss of property, which does not involve a loan,
what is applicable is the rate of 6% annually as provided
in Art. 2209 (Terminal Facilities and Services Corp. vs.
PPA, G.R. No. 135639, February 27, 2002).
The obligation consisting in the payment of sum of
money referred to in Art. 2209 is not confined to a loan
or forbearance of money but has been applied by SC in
cases involving default in the payment of price or
consideration under a contract of sale and an action for
damages for injury to persons and loss of property and
an action for damages arising from unpaid insurance
claims (Castelo vs. CA, G.R. No. 96372 May 22, 1995).
CIVIL LAW
4. When an obligation, regardless of its source, is
breached, the contravenor can be held liable for
damages.
Interest as indemnity for damages is payable only in
case of default or non-performance of the contract. As
they are distinct claims, they may be demanded
separately (Sentinel Insurance vs. CA, G.R. No. L52482, February 23, 1990).
5. With regard to an award of interest in the concept of
damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
a. When the obligation breached consists of payment of
a sum of money, in the absence of an agreement, the
rate shall be the legal rate computed from delay (By
virtue of Central Bank Circulars No. 416 and No. 905,
the legal rate is increased from 6% to 12%).
Note: The interest due shall itself earn legal interest
from the time it is judicially demanded.
b. In other cases, the rate of interest shall be six percent
(6%) per annum.
Note: No interest shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty. When
the demand cannot be established, the interest shall
begin to run only from the date of the judgment of the
court.
c. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit
(Eastern Shipping Lines vs. CA, G.R. No. 97412, July
12, 1994).
Formula in computing interest for loan or
forbearance of money:
TOTAL AMOUNT DUE = [principal + interest + interest
on interest] partial payments made
Interest = principal x stipulated interest x number of
years from due date until finality of judgment
Interest on interest = Interest computed as of the filing
of the complaint x 12% x no. of years until finality of
judgment
Note: Total amount due as of the date of the finality of
judgment will earn an interest of 12% per annum until
fully paid (Cuyco vs. Cuyco, G.R. No. 168736, April 19,
2006).
CREDIT TRANSACTIONS
Should the vendee opt to purchase a subdivision lot via
the installment payment system, he is, in effect, paying
interest on the cash price, whether the fact and rate of
such interest payment are disclosed in the contract or
not (Relucio vs. Bullante- Garfin. 187 SCRA 405, 1990).
Note: No increase in interest rate unless it is expressly
stipulated (PNB v. CA, G.R. No. 88880, April 30, 1991).
Art. 1957
The form of contract is not conclusive. Parol evidence
may be admitted to show that a written document though
legal in form was in fact a cloak or device to cover usury
(Briones vs. Cammayo, G.R. No. L-23559 October 4,
1971).
A usurious contract shall be considered void only with
respect to the interest involved.
Surcharges and penalties agreed to be paid by debtor
partake the nature of liquidated damages and shall be
reduced if iniquitous and unconscionable (Art. 2227).
Payment of interest is separate and distinct from that of
surcharges and penalties. A penalty stipulation is not
necessarily preclusive of interest if there is an agreement
to that effect (Digutan vs. CA, 376 SCRA 560, 2002).
Note: Usury is now legally non-existent. The interest
chargeable depends upon the agreement between the
lender and the borrower (Liam Law vs. Olympic Sawmill
Co., G.R. No. L-30771, May 28, 1984).
Validity of Unconscionable Interest Rate in a Loan
The Supreme Court said that nothing in said circular
suspending the Usury Law grants lenders authority to
raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets
(Almeda vs. CA, G.R. No. 113412, April 17, 1996).
In Medel vs. Court of Appeals, (G.R. No. 131622,
November 27, 1998) it was ruled that while stipulated
interest of 5.5% per month on a loan is not usurious
pursuant to Central Bank Circular No. 905, the same must
be equitably reduced for being iniquitous, unconscionable
and exorbitant. It is contrary to morals. It was reduced to
12% per annum in consonant with justice and fair play.
When the agreed rate is iniquitous and unconscionable,
the courts may reduce the same as reason and equity
demand. (Imperial vs. Jaucian, G.R. No. 149004, April 14,
2004). The interest may also be reduced if the principal
obligation has been partially performed.

CREDIT TRANSACTIONS
Recovery of Unstipulated Interest (Art. 1960)
1. If paid by mistake, the debtor may recover as in the
case of solutio indebiti or undue payment.
2. If voluntarily paid, there would be no recovery as in the
case of natural obligations.
The presence of escalation clause without the
corresponding de- escalation clause in the event of a
reduction of interest as ordered by law makes the clause
one-sided as to make it unreasonable. Any increase in the
interest rate pursuant to an escalation clause must be the
result of an agreement between the two parties. Increases
unilaterally imposed by a bank are in violation of the
principle of mutuality of contracts. A contract containing a
condition which makes its fulfillment dependent upon the
uncontrolled will of one of the contracting parties is void
(PNB vs. CA, G.R. No. 109563, July 9, 1996, 72 SCAD
39; Equitable PCI Bank et. al. vs. Ng Sheung Ngor et. al.,
G.R. No. 171545, December 19, 2007).
D EPOSI T
(A RTS . 1962 2009)
Contract of Deposit
A contract constituted from the moment a person receives
a thing belonging to another, with the obligation of safely
keeping it and of returning the same (Art. 1962).
Principal Purpose (Art. 1962)
SAFEKEEPING. If the safekeeping is not the principal
purpose it may be either:
1. Commodatum,
2. Lease or
3. Agency.
The depositor need not be the owner of the thing
deposited because the purpose of the contract is
safekeeping and not transfer of ownership. The depositary
cannot dispute the title of the depositor (Art. 1984(1)). The
depositary is in estoppel (Art. 1436).
A contract of deposit may be made orally or in writing (Art.
1969).
Characteristics:
1. Real contract perfected by the delivery of the subject
matter.
An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the
thing (Art. 1963).
CIVIL LAW
Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the
object of the obligation (Art. 1316).
2. Unilateral when gratuitous because only the
depositary has an obligation
3. Bilateral if with compensation because it gives rise to
obligations on the part of both the depositary and
depositor
Deposit and Mutuum Distinguished
Deposit
Mutuum
Purpose
For safekeeping or
Consumption
custody
When to Return
Depositor can demand Period
must
be
return anytime
respected by the lender
Subject Matter
Movable/corporeal
things only in case of
extrajudicial deposit
Fungible things
Any property in case of
judicial deposit
Relationship
Depositor and
Lender and borrower
depositary
Deposit
Mutuum
Compensation
Generally
gratuitous
(except by mutual May be gratuitous, or
agreement
or with a stipulation to pay
depositary is engaged interest
in storing goods)
Deposit and Commodatum Distinguished
Deposit
Commodatum
Purpose
Purpose is the transfer
Purpose is safekeeping
of the use
When to Return
The borrower can use
The depositary can
the thing for the period
always be required to
stipulated, and can be
return the thing at any
required to return only
time.
in case of urgent need.
CIVIL LAW
Deposit
Commodatum
Subject Matter
Movable/corporeal
things only in case of
Both movable and
extrajudicial deposit
immovable may be the
object.
Any property in case of
judicial deposit
Compensation
Essentially and always
May be gratuitous
gratuitous
Kinds of Deposit: (Art.1964)
1. Judicial (Sequestration) takes place when an
attachment or seizure of property in litigation is ordered
2. Extra-judicial
a. Voluntary delivery is made by the will of the
depositor or by two or more persons each of whom
believes himself entitled to the thing deposited (Arts.
1968 to 1995).
b. Necessary made in compliance with:
i. A legal obligation, or
ii. On occasion of any calamity, or
iii. By travelers in hotels and inns, o
iv. By travelers with common carriers.
Judicial and Extra-judicial Deposit Distinguished
Judicial
Extra-Judicial
Creation
Will of the parties or
Will of the court
contract
Purpose
Insures the right of a
party to property or to Custody
and
recover in case of safekeeping
favorable judgment
Subject Matter
Generally immovable
Movables only
Judicial
Extra-Judicial
Cause
Always onerous
Generally gratuitous
When must the thing be returned
Upon order of the court
Upon
demand
of
or when litigation is
depositor
ended
In whose behalf it is held
Person who has a right
Depositor
When Deposit is Not Gratuitous (Art.1965)
1. When there is a stipulation;
2. Depositary is engaged in business of storing goods;
3. Property saved from destruction without knowledge of
the owner.
CREDIT TRANSACTIONS
Effect of Incapacity of the Depositary or Depositor:
1. If the depositary is capacitated, he is subject to all the
obligations of a depositary whether the depositor is
capacitated or not (Art. 1970). Under the law, persons
who are capable cannot allege the incapacity of those
with whom they contracted (Art. 1397).
2. If the depositary is incapacitated, he does not incur the
obligation of a depositary. However, he is liable to:
a. Return the thing deposited while still in his
possession; or
b. Pay the depositor the amount by which he may have
benefited himself with the thing or its price subject to
the right of any third person who acquired the thing in
good faith, in which case the depositor may only bring
an action against him for its recovery.
OBLIGATIONS OF THE DEPOSITARY
1. To keep the thing safely (Art. 1972)
Rules:
He is liable if the loss occurs through his fault or
negligence even if the thing is insured.
The loss of the thing while in his possession ordinarily
raises the presumption of fault on his part.
The required degree of care is greater when:
a. Stipulated;
b. It is the depositary who voluntarily offered to keep the
thing;
c. The deposit is compensated; or
d. The deposit produces benefit to the depositary
(Tolentino, Civil Code of the Philippines Vol 5., 1992
ed., p. 460).
2. To return the thing (Art. 1972)
Person to whom the thing must be returned:
a. Depositor, to his heirs and successors, or the person
who may have been designated in the contract;
Note: If two or more persons each claiming to be
entitled to a thing, the depositary can file an action to
compel the depositors to settle their conflicting claims
among themselves in the nature of an interpleader
(Sec. 1, Rule 62, Rules of Court).
b. Guardian or administrator of the person who made
the deposit if the latter is incapacitated at the time of
deposit or the latter himself should he acquire
capacity (Art. 1970);
c. Legal representative of the depositor should the latter
subsequently lose his capacity during the deposit
(Art. 1986).

CREDIT TRANSACTIONS
Time of return:
General Rule: Upon demand even though a
specified period or time for such return may have
been fixed.
Exceptions:
a. When the thing is judicially attached while in the
depositarys possession;
b. Should he have been notified of the opposition of a
third person to the return or removal of the thing
deposited; in such instance, the depositary must
immediately inform the depositor of the attachment or
opposition (Art. 1988); or
c. If deposit is gratuitous, the depositary may return the
thing deposited notwithstanding that a period has
been fixed for the deposit if justifiable reasons exists
for its return. If the depositor refuses to receive it, the
depositary may secure its consignation from the court
(Art. 1989).
Note: If the deposit is for a valuable consideration,
period must be followed even if the depositary suffers
inconvenience as a consequence (Art 1989).
What to return:
a. The thing deposited with all its products, accessories,
and accessions (Art. 1983)
b. If by force majeure or government order, the
depositary loses the thing, and receives money or
another thing in its place, he shall deliver the sum or
other thing to the depositor (Art. 1990).
Where to return:
a. If there is a stipulation, at the place agreed upon by
the parties
b. If there is no stipulation, at the place where the thing
deposited might be even if it should not be the same
place where the deposit was made provided there
was no malice on the part of depositary (Art. 1987).
3. Not to deposit the thing with a third person unless
authorized by express stipulation (Art. 1973)
Reason: Deposit is founded on trust and confidence.
The depositor is liable for the loss under the
following instances:
a. He transfers the deposit with a third person without
authority, although there is no negligence on his part
and the third person;
b. He deposits the thing with a third person who is
manifestly careless or unfit, although authorized,
even in the absence of negligence; or
CIVIL LAW
c. The thing is lost through the negligence of his
employees whether the latter are manifestly careless
or not.
4. To change the way of the deposit if under the
circumstances, the depositary may reasonably presume
that the depositor would consent to the change if he
knew of the facts of the situation, provided, that the
former notifies the depositor thereof and wait for his
decision, unless delay would cause danger (Art. 1974).
5. If the thing deposited should earn interest (Art. 1975)
a. To collect interest and the capital itself as they fall
due; and
b. To take steps to preserve its value and rights with
regard to it.
In CA Agro Industrial Development Corp. vs. CA, G.R.
No. 90027, March 3, 1993, the Court ruled that Art.
1975 cannot apply to a depositary of certificates, bonds,
securities or instruments which earn interest if such
documents are kept in a rented safety deposit box.
A contract for the rent of safety deposit boxes is a
special kind of deposit. Hence, it is not to be strictly
governed by the provisions on deposit. It is a contract
of bailment for hire and mutual benefit. The relation
between the bank and its customer is that of a bailor
and bailee. It cannot also be characterized as an
ordinary contract of lease because full and absolute
control of the safety deposit boxes was not given to the
joint renters
6. Not to commingle things of the same kind and quality
deposited if so stipulated (Art. 1976).
Depositary can only commingle if the articles are of the
same kind and quality and there is no contrary
stipulation.
If commingling is allowed, each depositor shall be
entitled to each portion of the entire mass as the
amount deposited by him bears to the whole.
If the articles deposited which belong to the differed
depositors are not of the same kind and quality, it is the
duty of the depositary to keep them separate or at least
identifiable (De Leon, Comments and Cases on Credit
Transactions, 2010 ed., p. 125).
7. Not to make use of the thing deposited unless
authorized (Art. 1977).
General Rule: Deposit is not for use of the thing. Use
by the depositary would make him liable for damages.
CIVIL LAW
Exceptions:
a. When the preservation of the thing deposited requires
its use, but it must be used only for that purpose; or
b. When expressly permitted by the depositor (the
permission shall not be presumed and its existence
must be proved), provided that safekeeping is still the
principal purpose of the contract
If the principal purpose of the contract is no longer
safekeeping:
a. The contract becomes a commodatum if the thing
deposited is non-consumable.
b. The contract is converted into a simple loan or
mutuum if the thing deposited consists of consumable
things.
8. To be liable for loss through fortuitous event: (SUDAFN)
a. If stipulated
b. If he uses the thing without the depositor's permission
c. If he delays its return
d. If he allows others to use it, even though he himself
may have been authorized to use the same
e. If there is fraud or negligence on his part (Art. 1170)
9. Liability when the thing deposited is delivered closed
and sealed (Art. 1981)
a. To return the thing deposited in the same condition
(par. 1);
b. To pay for damages should the seal or lock be broken
through his fault, which is presumed unless proven
otherwise (par. 2); and
c. To keep the secret of the deposit when the seal or
lock is broken with or without his fault (par. 3).
Note: The depositary is authorized to open the thing
deposited which is closed and sealed when (Art.
1982):
i. There is presumed authority; or
ii. There is necessity to do so as when the
instructions of the depositor as regards the deposit
cannot be executed without opening the box or
receptacle.
10. To pay interest on sums converted to personal use
from the day of conversion if the deposit consists of
money (Art. 1983 and 1896).
Note: Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan (Art. 1980).
A bank can compensate or set off the deposit in its
hands for the payment of any indebtedness to it on the
CREDIT TRANSACTIONS
part of the depositor. In true deposit, such
compensation or set-off is not allowed.
Irregular Deposit and Mutuum Distinguished
Irregular Deposit
Mutuum
The lender cannot
The consumable thing
demand restitution until
deposited may be
the time for payment, as
demanded at will by the
provided in the contract,
depositor.
has arisen.
Irregular Deposit
Mutuum
Essential cause for the
The only benefit is that
transaction
is
the
which accrues to the
necessity
of
the
depositor.
borrower.
The irregular depositor
Common
creditors
has a preference over
enjoy no preference in
other creditors with
the distribution of the
respect to the thing
debtors property.
deposited.
11. To advise the true owner that a deposit has been
made should he discover that the thing deposited was
stolen from the owner (Art. 1984)
Note: If the owner despite such information does not
claim it within the period of 1 month, the depositary
shall be relieved from all responsibility by returning the
same to the depositor.
If the depositary has reasonable grounds to believe
that the thing has not been lawfully acquired by the
depositor, the former may return the same. (Art. 1984).
Rule When There are Two or More Depositors:
1. Thing deposited is divisible and depositors are not
solidary: Each depositor can demand only his
proportionate share thereto.
2. Obligation is solidary or the thing is not divisible: Rules
on active solidarity shall apply, i.e. each one of the
solidary depositors may do whatever may be useful to
the others but not anything which may be prejudicial to
the latter (Art. 1212), and the depositary may return the
thing to anyone of the solidary depositors unless a
demand, judicial or extrajudicial, for its return has been
made by one of them in which case, delivery should be
made to him (Art. 1214).
3. Return to one of depositors stipulated: The depositary is
bound to return it only to the person designated
although he has not made any demand for its return.

CREDIT TRANSACTIONS
CIVIL LAW
The depositary may retain the thing in pledge until full

payment of what may be due him by reason of the deposit
(Art. 1994). This is one of pledge created by operation of
law.
A deposit is extinguished:
1. Upon the loss or destruction of the thing deposited;
2. In case of gratuitous deposit, upon the death of either
the depositor or the depositary (Art. 1995)
The depositors heir who in good faith may have sold the
thing which he did not know was deposited, shall only be
bound to return the price he may have received or to
assign his right of action against the buyer in case the
price has not been paid him (Art. 1991). The law meant
depositarys, as shown in Article 1178, old Civil Code
(Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p.
468).
Note: A deposit for compensation is not extinguished by

the death of either party because, unlike a gratuitous
deposit, an onerous deposit is not personal in nature (De
Leon, Comments and Cases on Credit Transactions, 2010
ed., p. 145).
OBLIGATIONS OF THE DEPOSITOR

1. To pay expenses for preservation if the deposit is
gratuitous (Art. 1992) (contemplates ordinary and
extraordinary necessary expenses)
Note: If the deposit is for valuable consideration,
expenses for preservation are borne by the depositary
unless there is a contrary stipulation.
2. To pay losses incurred by the depositary due to the
character of the thing deposited
General Rule: The depositor shall reimburse the
depositary for any loss arising from the character of the
thing deposited.
Exceptions:
a. At the time of the deposit, the depositor was not
aware of the dangerous character of the thing;
b. When depositor was not expected to know the
dangerous character of the thing;
c. When the depositor notified the depository of the
same; or
d. The depositary was aware of it without advice from
the depositor.
EXTINGUISHMENT OF VOLUNTARY DEPOSIT
Same as the causes for extinguishment of obligations in
Art. 1231 of the New Civil Code: (NoCoMeRePaLo
PreReFulAn)
1. Novation
2. Compensation
3. Merger
4. Remission
5. Payment
6. Loss
7. Prescription
8. Rescission
9. Fulfillment of resolutory condition
10. Annulment
NECESSARY DEPOSITS
Examples of necessary deposit in compliance with a legal
obligation:
1. The judicial deposit of a thing the possession of which is
being disputed in a litigation by two or more persons
(Art. 538).
2. The deposit with a bank or public institution of public
bonds or instruments of credit payable to order or
bearer given in usufruct when the usufructuary does not
give proper security for their conservation (Art. 586).
3. The deposit of a thing pledged when the creditor uses
the same without the authority of the owner or misuses
it in any other way (Art. 2104)
4. Those required in suits as provided in the Rules of
Court; and
5. Those constituted to guarantee contracts with the
government (The deposit arises from an obligation of
public or administrative character.)
Note: A deposit made in compliance with law is governed
by the provisions of such law and in default thereof, by the
rules on voluntary deposit (Art. 1997 (1)).
DEPOSIT BY TRAVELERS IN HOTELS AND INNS:
The keepers of hotels or inns shall be responsible as
depositaries for the deposit of effects made by travelers
provided:
1. Notice was given to them or to their employees of the
effects brought by the guest; and
2. The guests take the precautions which said hotelkeepers or their substitutes advised relative to the care
and vigilance of their effects (Art. 1998).
This also applies to the passengers baggage which is in
his personal custody (Art. 1754).
Travellers refer to transients and not to boarders.
Liability extends to vehicles, animals and articles which
have been introduced or placed in the annexes of the
hotel (Art. 1999).
CIVIL LAW
CREDIT TRANSACTIONS
When Hotel-Keeper Liable: When the loss or injury is

caused:
1. By his servants or employees as well as by strangers
provided that the notice has been given and proper
precautions taken; and
2. By the act of a thief or robber done without the use of
arms and irresistible force, for in this case, the hotel
keeper is apparently negligent.
Nature and Purpose of Judicial Deposit:

The deposit is judicial because it is auxiliary to a case
pending in court.
The purpose is to maintain the status quo during the
pendency of the litigation or to insure the right of the
parties to the property in case of favorable judgment.
When hotel-keeper NOT liable: When the loss or injury

is caused by:
1. Force majeure, theft by a stranger with the use of arms
or irresistible force;
2. The acts of guests, his family, servants or visitors; or
3. The character of the things brought into the hotel.
Contract of Guaranty
A contract whereby a person called the guarantor binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter fail to do so (Art. 2047
(1)).
Classification of Guaranty:
1. In the broad sense:
a. Personal the guaranty is the credit given by the
guarantor
b. Real the guaranty is the property, movable or
immovable
2. As to its origin
a. Conventional agreed upon by the parties
b. Legal imposed by virtue of a provision of law
c. Judicial one which is required by a court to
guarantee the eventual right of one of the parties in a
case
3. As to consideration
a. Gratuitous the guarantor does not receive anything
for acting as such
b. Onerous the guarantor receives valuable
consideration
4. As to the person guaranteed
a. Single one constituted solely to guarantee or secure
performance by the debtor of the principal obligation
b. Double or sub-guaranty one constituted to secure
the fulfillment by the guarantor of a prior guaranty
5. As to scope and extent
a. Definite the guaranty is limited to the principal
obligation only, or to a specific portion thereof
b. Indefinite or simple one which not only includes the
principal obligation but also all its accessories
including judicial costs
c. Specific
d. Continuing
Under Art. 2003, the hotel-keeper cannot free himself from

the responsibility by posting notices to the effect that he is
not liable for the articles brought by the guest. Any
stipulation to such effect shall be void.
Art. 2003 is an expression of public policy because the
hotel business is imbued with public interest. The award of
damages was not only contractual but also tortuous (YHT
Realty Corp. vs. CA, G.R. No. 126780, February 11,
2005).
Notice is necessary only for suing civil liability but not in
criminal liability.
Right of Retention by Hotel-Keepers:
The hotel-keeper has a right to remain the things brought
into the hotel by the guest, as a security for credits on
account of lodging, and suppliers usually furnished to
hotel guests (Art. 2004).
JUDICIAL DEPOSIT
Judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered
(Art. 2005).
Movable as well as immovable property may be the object
of sequestration (Art. 2006).
The depositary of property or objects sequestrated cannot
be relieved of his responsibility until the controversy which
gave rise thereto has come to an end, unless the court so
orders (Art. 2007).
G U AR ANTY
Suretyship
A contract whereby one person engages to be answerable
for the debt, default or miscarriage of the principal.
The depositary of property sequestrated is bound to

comply, with respect to the same, with all the obligations
of a good father of a family (Art. 2008).
The contract of suretyship must be in writing to be

enforceable (Art. 1403, No. 2(b)).
As to matters not provided in the Civil Code, judicial

sequestration shall be governed by the Rules of Court.
If a person binds himself solidarily with the principal

debtor, the contract is called suretyship and the guarantor
is called a surety. In a solidary obligation, a solidary

CREDIT TRANSACTIONS
debtor is himself a principal debtor. Hence, a solidary
debtor cannot be considered a guarantor of his co-debtor.
Whenever applicable, the provisions on guaranty (Arts.
2047 to 2048) also apply to suretyship.
However, it is also possible for a guarantor to bind himself
solidarily with the principal debtor without affecting the
nature of the contract.
Nature of Suretyships Undertaking:
1. Liability is contractual and accessory but direct.
He directly, primarily and equally binds himself with the
principal as original promisor, although he possesses
no direct or personal interest over the latters obligation,
nor does he receive any benefits therefrom (PNB vs.
CA, G.R. No. 33174, July 4, 1991).
2. Liability is limited by terms of contract.
A contract of surety is not presumed; it cannot extend to
more than what is stipulated.
Creditors, however, may recover from the surety as part
of their damages, interest at the legal rate, even if the
surety would thereby become liable to pay more than
the amount stipulated.
Reason: NOT by reason of contract, but by reason of
its failure to pay when demanded, and for having
compelled the plaintiff to resort to the courts to obtain
payment (Tolentino, Civil Code of the Philippines Vol.5,
1992 ed., p. 506).
3. Liability arises only if principal debtor is held liable.
Note: The creditor may sue separately or together, the
principal debtor and any of the sureties.
In the absence of collusion, the surety is bound by a
judgment against the principal even though he was not
a party to the proceedings. The nature of its undertaking
makes it privy to all proceedings against its principal
(Finman General Assurance Corp. vs. Salik, G.R. No.
84084, August 20, 1990).
4. Surety is not entitled to the benefit of exhaustion.
Reason: Surety assumes a solidary liability for the
fulfillment of the principal obligation.
5. Undertaking is to the creditor and not to debtor.
6. Surety is not entitled to notice of principals default
7. Prior demand by the creditor upon principal is not
required.
Note: As soon as the principal is in default, the surety
likewise is in default.
CIVIL LAW
8. Surety is not exonerated by neglect of creditor to sue
principal.
Characteristics of Guaranty/Suretyship:
1. Accessory it cannot exist by itself and an
indispensable condition for its constitution is the
existence of a valid principal obligation.
Note: Guaranty may be constituted to guarantee the
performance of a voidable or unenforceable contract. It
may also guarantee a natural obligation (Art. 2052).
However, it must be considered binding only if the
guarantor knew the defective character of the principal
obligation (Tolentino, Civil Code of the Philippines Vol.5,
1992 ed., p. 504).
2. Subsidiary and conditional takes effect only when the
principal debtor fails in his obligation, subject to
limitation.
Note:The guarantor cannot bind himself for more than
the principal debtor and even if he does, his liability
shall be reduced to the limits of that of the debtor. But a
guarantor may bind himself for less than that of the
principal (Art. 2054).
A guaranty may 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 (Magdalena
Estates Inc. vs. Rodriguez, G.R. No. L-18411,
December 17, 1966).
3. Unilateral
It gives rise only to a duty on the part of the guarantor in
relation to the creditor and not vice versa although after
its fulfillment, the principal debtor becomes liable to
indemnify the guarantor and it may be entered even
without the intervention of the principal debtor, in which
case Arts. 1236 and 1237 shall apply and it gives rise
only to a duty on the part of the guarantor in relation to
the creditor and not vice versa.
4. Nominate
5. Consensual
6. It is a contract between the guarantor/surety and
creditor.
Note: The contract exists 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.
In declaring that guaranty must be express, the law
refers solely and exclusively to the obligation of the
guarantor because it is he alone who binds himself by
CIVIL LAW
his acceptance. With respect to the creditor, no such
requirement is needed because he binds himself to
nothing.
However, when there is merely an offer of a guaranty,
or merely a conditional guaranty, in the sense that it
requires action by the creditor before the obligation
becomes fixed, it does not become binding until it is (1)
accepted and (2) until notice of such acceptance by the
creditor is given to, or acquired by, the guarantor, or
until he has notice or knowledge that the creditor has
performed the condition and intends to act upon the
guaranty.
But in any case, the creditor is not precluded from
waiving the requirement of notice.
The consideration of the guaranty is the same as the
consideration of the principal obligation.
The creditor may proceed against the guarantor
although he has no right of action against the principal
debtor.
7. Falls under the Statute of Frauds it is not presumed
and must be in writing to be unenforceable (Art. 1403,
(2) (b)).
8. General Rule: Strictly interpreted against the creditor
and in favor of the guarantor/surety and is not to be
extended beyond its terms or specified limit (Magdalena
Estates Inc. vs. Rodriguez, G.R. No. L-18411,
December 17, 1966).
The rule of strictissimi juris commonly pertains to an
accommodation surety because the latter acts without
motive of pecuniary gain and hence, should be
protected against unjust pecuniary impoverishment by
imposing on the principal, duties akin to those of a
fiduciary.
Exception: In case of compensated sureties
9. General Rule: Guarantor must not be the principal
debtor.
Exception: In a real guaranty, like pledge and
mortgage, a person may guarantee his own obligation
with his personal or real properties.
CREDIT TRANSACTIONS
Guaranty and Suretyship Distinguished
Guaranty
Suretyship
Liability depends on an
Surety assumes liability
independent agreement
as regular party to the
to pay the obligation if
undertaking.
primary debtor fails to
do so.
Surety is an original
Collateral undertaking
promisor.
Guarantor
is Surety is primarily
secondarily liable.
liable.
Guarantor binds himself Surety undertakes to
to pay if the principal pay if the principal
CANNOT PAY.
DOES NOT PAY.
Insurer of solvency of
Insurer of the debt
debtor
Guarantor can avail of
Surety cannot avail of
the benefit of excussion
the benefit of excussion
and division in case
and division.
creditor
proceeds
against him.
Not bound to take
notice of the non- Held to know every
performance of his default of his principal
principal
Often discharged by the Not discharged by mere
mere indulgence of the indulgence of
the
creditor or want of creditor or by want of
notice of default
notice of default
Indorsement and Guaranty Distinguished
Indorsement
Guaranty
Primarily of transfer
Contract of security
Failure in either or both
Unless the note is of these particulars
promptly presented for does not generally work
payment at maturity and as
an
absolute
due notice of dishonor discharge
of
a
given to the indorser guarantors liability, but
within a reasonable is discharged only to
time, he will be the extent of the loss
discharged absolutely which he may have
from all liability thereon. suffered
in
consequence thereof.
Indorser does not
warrant the solvency.
He is answerable on a Guarantor warrants the
strict compliance with solvency
of
the
the law by the holder, promisor.
whether the promisor is
solvent or not.
Indorser can be sued as Guarantor cannot be
promisor.
sued as promisor.

CREDIT TRANSACTIONS
Guaranty and Warranty Distinguished
Guaranty
Warranty
An undertaking that the
title, quality, or quantity
A contract by which a of the subject matter of
person is bound to the contract is what it
another
for
the has been represented
fulfillment of a promise to be, and relates to
or engagement of a some agreement made
third party
ordinarily by the party
who
makes
the
warranty
Note: A guaranty is gratuitous, unless there is a
stipulation to the contrary (Art. 2048). The cause of the
contract is the same cause which supports the obligation
as to the principal debtor.
A married woman may guarantee an obligation without the
husbands consent, but shall not thereby bind the conjugal
partnership, except in cases provided by law (Art. 2049),
i.e. when the guaranty has redounded to the benefit of the
family.
The peculiar nature of a guaranty or surety agreement is
that it is regarded as valid despite the absence of any
direct consideration received by the guarantor or surety
either from the principal debtor or from the creditor; a
consideration moving to the principal alone will suffice.
Double or Sub-Guaranty
One constituted to guarantee the obligation of a
guarantor.
In case of insolvency of the guarantor for whom he bound
himself, the sub-guarantor is responsible to the coguarantors in the same terms as the guarantor (Art. 2075).
Continuing Guaranty or Suretyship
Not limited to a single transaction but contemplates a
future course of dealings, covering a series of transactions
generally for an indefinite time or until revoked.
Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and
commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions
with a particular company, commonly requires the
projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need
to execute a separate surety contract or bond for each
CIVIL LAW
financing or credit accommodation extended to the
principal debtor (Atok Finance Corp. vs. Court of Appeals,
G.R. No. 80078, May 18, 1993).
Exception to the concept of continuing guaranty is a
chattel mortgage. A chattel mortgage can only cover
obligations existing at the time the mortgage is constituted
and not those contracted subsequent to the execution
thereof (Belgian Catholic Missionaries, Inc. vs.
Magallanes Press Inc., et al., G.R. No. 25729, November
24, 1926).
Extent of Guarantors Liability: (Art. 2055)
1. Where the guaranty is definite: It is limited in whole or in
part to the principal debt, to the exclusion of
accessories.
2. Where guaranty is indefinite or simple: It shall comprise
not only the principal obligation, but also all its
accessories, including the judicial costs, provided with
respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been
judicially required to pay.
Qualifications of a Guarantor (Arts. 2056 to 2057)
1. Possesses integrity
2. Capacity to bind himself
3. Has sufficient property to answer for the obligation
which he guarantees
General Rule: The qualifications need only be present at
the time of the perfection of the contract.
Exception: When the guarantor is selected by the
principal debtor because the latter answers for the
solvency of the former. In this case the guarantor must
possess the qualifications prescribed not only at the
moment the guaranty is given but also until the
extinguishment of the debt.
Reason: Remember that a guaranty is for the benefit of
the creditor not the debtor.
Effect of Subsequent Loss of Required Qualifications:
The subsequent loss of the integrity or property or
supervening incapacity of the guarantor would not operate
to exonerate the guarantor or the eventual liability he has
contracted, and the contract of guaranty continues.
HOWEVER, the creditor may demand another guarantor
with the proper qualifications. But he may waive it if he
chooses and hold the guarantor to his bargain.
Benefit of Excussion (Art. 2058)
Right in which the guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the
CIVIL LAW
CREDIT TRANSACTIONS
properties of the principal debtor, and has resorted to all

of the legal remedies against such debtor.
11. Where the pledge or mortgage has been given by him

as special security.
How Exercised: (Art. 2060)

1. Demand for payment upon the guarantor only after
judgment upon the debt; and
2. Point out the available property (not in litigation or
encumbered) of the debtor within the Philippines.
Benefit of Division (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.
Effect of Failure of the Creditor to Exhaust and Resort

to all Legal Remedies: He shall suffer the loss but only to
the extent of the value of the said property for the
insolvency of the debtor (Art. 2061).
This is not applicable to a contract of suretyship (Arts.
2047, par. 2; 2059(2)).
This cannot even begin to take place before judgment has
been obtained against the debtor (Baylon vs. CA. G.R.
No. 109941, August 17, 1999).
When Guarantor is Not Entitled to the Benefit of
Excussion: (PAIRS N BIPS)
1. If it may be presumed that an execution on the property
of the principal debtor would not result in the
satisfaction of the obligation
It is not necessary, however, that the debtor be judicially
declared insolvent or bankrupt.
2. When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or
representative
3. In case of insolvency of the debtor
4. Insolvency must be actual; it must be proven by
unsatisfied writ of execution.
5. The guarantor has expressly renounced it
6. If he has bound himself solidarily with the debtor
7. When the debt is a natural obligation or an
unenforceable obligation.
Reason: Because in these cases, the creditor has no
action against the principal debtor (Tolentino, Civil Code
of the Philippines, Vol.5, 1992 ed., p. 514).
8. If he is a judicial bondsman or sub-surety.
9. If he fails to interpose it as a defense before judgment is
rendered against him
10. If the guarantor does not set up the benefit against the
creditor upon the latters demand for payment from him.
Note: Demand must be actual; joining the guarantor in
the suit against the principal debtor is not the demand
intended by law.
General Rule: Joint Liability

Exceptions:
1. When solidarity is stipulated; or
2. If any of the circumstances enumerated in Art. 2059
should take place
Right to Contribution of Guarantor who Pays if there
is a Solidary Liability (Art. 2073)
General Rule:
May demand of each of the others the share which is
proportionally owing from him, provided any of the
following conditions are met:
1. Payment has been made by virtue of a judicial demand
or
2. Principal debtor is insolvent
Accrual/Basis of Right: Acquired ipso jure by virtue of
said payment without any prior cession of rights to such
guarantor.
Exceptions:
1. The insolvent guarantor cannot be made to pay. In such
case, his share shall be borne by the others including
the paying guarantor in the same joint proportion.
2. When co-guarantors have defenses against the one
who paid the same which have pertained to the
principal debtor against the creditor and which are not
purely personal to the debtor (Art. 2074).
Procedure When Creditor Sues:
The guarantor cannot be sued with his principal, much
less alone except in Art. 2059.
1. Notice to guarantor of the action
The guarantor must be NOTIFIED.
If the guarantor appears, he is still given the benefit of
exhaustion even if judgment should be rendered against
him and the principal debtor. Voluntary appearance
does not constitute a renunciation of his right to
excussion (See Art. 2059(1)).
Guarantor cannot set up the defenses if he does not
appear and it may no longer be possible for him to
question the validity of the judgment.

CREDIT TRANSACTIONS
2. A guarantor is entitled to be heard before execution can
be issued against him where he is not a party in the
case involving his principal (procedural due process).
Remedies of Paying Guarantor:
1. Right of Indemnity or Reimbursement
2. Right of Subrogation
Guarantors Right of Indemnity or Reimbursement
General Rule: Guaranty is a contract of indemnity. The
guarantor who makes payment is entitled to be
reimbursed by the principal debtor.
Exceptions:
1. Where the guaranty is constituted without the
knowledge or against the will of the principal debtor, the
guarantor can recover only insofar as the payment had
been beneficial to the debtor (Art. 2050).
2. Payment by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation,
which, however, requires the debtors consent. But the
payment is in any case valid as to the creditor who has
accepted it (Art. 1238).
3. Waiver of the right to demand reimbursement.
Under Art. 2066, the indemnity consists of: (DIED)
1. Total amount of the debt
2. Legal interest thereon from the time the payment was
made known to the debtor (notice of payment is in effect
a demand so that if the debtor does not pay
immediately, he incurs in delay), even though it did not
earn interest for the creditor. Guarantors right to legal
interest is granted by law by virtue of the payment he
has made.
3. Expenses incurred by the guarantor after having notified
the debtor that payment has been demanded of him by
the creditor; only those expenses that the guarantor has
to satisfy in accordance with law as a consequence of
the guaranty (Art. 2055) and not those which depend
upon his will or own acts or his fault for these are his
exclusive personal responsibility and it is not just that
they be shouldered by the debtor.
4. Damages if they are due in accordance with law.
General rules on damages apply.
Guarantor has no right to demand reimbursement until he
has actually paid the debt.
Exceptions (Art. 2071): (SIB-D-TRI)
1. When he is sued for payment;
2. Insolvency of the principal debtor;
3. Debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has
expired;
CIVIL LAW
4. Debt becomes demandable;
5. Lapse of ten (10) years, when there's no fixed period for
its maturity;
6. Reasonable grounds to fear that the principal will
abscond; or
7. The debtor is in imminent danger of becoming insolvent
Note: Art. 2071 is applicable and available to the surety
(Manila Surety & Fidelity Co., Inc. vs. Batu Construction &
Co., G.R. No. L-9353, May 21, 1957).
Effect of Payment by Guarantor:
1. Without notice to debtor (Art. 2068): The debtor may
interpose against the guarantor those defenses which
he could have set up against the creditor at the time the
payment was made, e.g. the debtor can set up against
the guarantor the defense of previous extinguishment of
the obligation by payment.
2. Before maturity (Art. 2069): Not entitled to
reimbursement until the expiration of the period, unless
the payment was made with the consent or has been
ratified by the debtor (Ratification may be express or
implied.)
Effect of Repeat Payment by Debtor (Art. 2070):
General Rule: Before guarantor pays the creditor, he
must first notify the debtor, otherwise the latter may set up
defenses he could have set up against the creditor (Art.
2068). If he fails to give such notice and the debtor
repeats payment, the guarantor can only collect from the
creditor and guarantor has no cause of action against the
debtor for the return of the amount paid by guarantor even
if the creditor should become insolvent.
Exception: The guarantor can still claim reimbursement
from the debtor in spite of lack of notice if the following
conditions are present: (PIG)
1. Guarantor was prevented by fortuitous event to advise
the debtor of the payment;
2. The creditor becomes insolvent; and
3. The guaranty is gratuitous.
Guarantors Right to Subrogation
Subrogation 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 stipulation in
conventional subrogation.
Note: This right of subrogation is necessary to enable the
guarantor to enforce the indemnity given in Art. 2066.
CIVIL LAW
CREDIT TRANSACTIONS
It arises by operation of law upon payment by the

guarantor. It is not necessary that the creditor cede to the
guarantor the formers rights against the debtor.
It is not a contractual right. The right of guarantor who has
paid a debt to subrogation does not stand upon contract
but upon the principles of natural justice.
The guarantor is subrogated by virtue of the payment to
the rights of the creditor, not those of the debtor.
Guarantor cannot exercise the right of redemption of his
principal (Urrutia & Co. vs. Moreno, et al., G.R. No. 8147,
October 26, 1914).
If the guarantor paid a smaller amount by virtue of a
compromise, he cannot demand more than what he
actually paid.
afterwards lose the same through eviction or

conveyance of property;
Effect of eviction: Revival of principal obligation, not
the guaranty
3. Whenever by some act of the creditor, the guarantors,
even though they are solidarily liable, cannot be
subrogated to the rights, mortgages and preferences of
the former;
4. For the same causes as all other obligations under Art.
1231;
5. When principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without
the consent of the guarantor.
Note: Mere failure on the part of the creditor to demand
payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
Remedies of Guarantor:
(Remedies are ALTERNATIVE)
1. Obtain release from the guaranty (can only be
exercised against the principal debtor).
Reason: The creditor cannot be compelled to release
the guarantor before payment of his obligation to the
creditor
Such delay, however, extinguishes the guaranty:

1. When the delay is for such length of time as to allow
prescription of the action to enforce payment
2. When upon maturity, the guarantor requires the creditor
to enforce payment against the debtor, but the creditor
fails to act and the debtor subsequently becomes
insolvent (Tolentino, Civil Code of the Philippines Vol.5,
1992 ed., p. 529).
2. Demand a security that shall protect him from any

proceedings by the creditor, and against the danger of
insolvency of the debtor.
Guarantor is Released in the Following Instances:

1. Creditor did not collect from third persons
2. Obligations payable in installments
Article 2066 and Article 2071 Distinguished

Art. 2066
Art. 2071
Provides
for
the
enforcement of the Provides
for
his
rights
of
the protection before he has
guarantor/surety
paid but after he has
against the debtor after become liable
he has paid the debt
Gives a right of action Protective
remedy
after payment
before payment.
Substantive right
Preliminary remedy
Guarantor of Third Person at Request of Another (Art.
2072): Guarantor may demand payment from:
1. Person who requested him to be a guarantor;
2. Debtor.
(RA2CE2)
Causes of Extinguishment of Guaranty:

a. Release 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
b. If the creditor voluntarily accepts immovable or other
properties in payment of the debt, even if he should
General Rule: Extension of time as to one or more will

not affect the liability of the surety for the others.
Exception: If the whole unpaid balance has become
automatically due (under an acceleration clause) for
failure to pay an installment, the act of the creditor of
extending the payment without the guarantors consent,
discharges the guarantor (Radio Corp. of the Phils. vs.
Roa, G.R. No. 42829 September 30, 1935).
3. Consent to extension is NOT waived in advance by the
guarantor.
4. Extension granted by creditor on bond
5. Extension granted to first-tier obligors cannot prejudice
second-tier parties
Bond
An undertaking that is sufficiently secured and not cash or
currency.
Bondsman
A surety offered in virtue of a provision of law or a judicial
order. He must have the qualifications required of a

CREDIT TRANSACTIONS
CIVIL LAW
guarantor (Art. 2056) and in special laws like the Rules of

Court (Secs. 12 and 13, Rule 114).
Reason for 2nd and 3rd requisites: In anticipation

of a foreclosure sale
Note: Judicial bonds constitute merely a special class of

contracts of guaranty by the fact that they are given in
virtue of a judicial order.
d. When the principal obligation becomes due, the

subject matter of the pledge or mortgage may be
alienated for the payment to the creditor (Art. 2087).
If the person required to give a legal or judicial bond

should not be able to do so, a pledge or mortgage
sufficient to cover the obligation shall be admitted in lieu
thereof (Art. 2083).
Note: If a third person secures an obligation by

pledging his own movable property under the
provisions of Article 2085, he shall have the same
rights as guarantor under Articles 2066 to 2070, and
Articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor (Art. 2120).
A judicial bondsman and the sub-surety are NOT entitled

to the benefit of excussion because they are sureties
whose liability is primary and solidary (Art. 2084).
P LEDGE
AND
M ORTG AG E
Common Elements of Pledge and Mortgage (Arts.

2085 to 2092)
1. Essential Requisites (Art. 2085): (SODA)
a. Secures the fulfillment of a principal obligation;
b. Pledgor and mortgagor must be the absolute owner
of the thing pledged or mortgaged; third persons can
pledge or mortgage their own property to secure the
principal obligation.
General Rule: The rule is applicable to lands
registered under the Torrens system.
Exception: If the certificate of title was already in the
name of the forger or imposter when the land was
sold or mortgaged to an innocent purchaser or
mortgagee, there being nothing to excite suspicion,
the vendee or mortgagee has the right to rely on what
appeared in the certificate of title of the vendor or
mortgagor and acquires an enforceable right
(Tolentino, Civil Code of the Philippines Vol.5, 1992
ed., p. 534).
Note: Future property cannot be pledged or
mortgaged (Dilag vs. Heirs of Resurreccion, 76 Phil.
650, 1946).
A mortgage of the conjugal property by one of the
spouses is valid only as to one-half () of the entire
property (PNB vs. Court of Appeals, G.R. No. L34404 June 25, 1980).
c. Pledgor and mortgagor must have free disposal of
their property, or be legally authorized for such
purpose.
The accommodation pledgor or mortgagor is not

solidarily bound with the principal obligor but his
liability extends only to the property pledged or
mortgaged. Should there be any deficiency; the
creditor has recourse on the principal debtor who
remains to be primarily bound.
A pledge or mortgage, being merely an accessory
agreement, its invalidity does not affect the principal
contract of loan. While void, it can still be considered
as an instrument evidencing an indebtedness (PNB
vs. Banatao, G.R. No. 149221, April 7, 2009).
2. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void (Art. 2088).
Pactum Commissorium Stipulation whereby the thing
used as security shall automatically become the
property of the creditor in the event of non-payment of
the principal obligation in due time.
By such a stipulation, the creditor would be able to
acquire ownership of the property given as security
without need of public sale or foreclosure required by
law.
General Rule: Pactum commissorium is forbidden by
law and any stipulation to that effect is declared null and
void.
Reason: The amount of the loan is ordinarily less than
the real value of the thing pledged or mortgaged.
Exception: The pledgee may appropriate the thing
pledged if after the first and second auctions, the thing
is not sold (Art. 2112). The creditor shall be obliged to
give an acquittance for his entire claim. This act shall be
considered as full payment of the claim.
CIVIL LAW
Note: Only the prohibited stipulation is void and shall
not affect the validity of the principal obligation.
Requisites:
1. There should be a pledge, mortgage or antichresis of
property.
2. There is a stipulation for an automatic appropriation
by the creditor of the property in the event of
nonpayment of principal obligation (A. Francisco
Realty and Development Corp. vs. CA, G.R. No.
125055, October 30, 1998).
Exceptions:
In the following cases, the Court ruled that there is
still pactum commissorium even though there is no
contract of pledge, mortgage of antichresis:
a. An agreement whereby property held in trust was
ceded to the trustee upon failure of the beneficiary
to pay his debt to the former as secured by the said
property (Nakpil vs. IAC, G.R. No. 74449 August
20, 1993).
b. In pacto de retro sales but found actually to be
equitable mortgages, stipulation therein that the
ownership of the property would automatically
pass to the vendee in case no redemption was
effected within the stipulated period.
c. Mortgagees act of registering the mortgaged
property in his own name upon the mortgagors
failure to redeem the property (Reyes vs. Sierra,
G.R. No. L-28658, October 18, 1979).
3. Capability to secure all kinds of obligations (i.e. pure or
conditional, voidable, unenforceable and natural) (Arts.
2052 and 2091).
4. Indivisibility (Art. 2089)
A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest
of the debtor or of the creditor.
Their indivisibility is not affected by the fact that the
debtors are jointly or not solidarily liable.
CREDIT TRANSACTIONS
Exceptions:
a. Where each one of several things guarantees a
determinate portion of the credit
b. Where only a portion of the loan was released
c. Where there was failure of consideration
d. Where there is no debtor-creditor relationship as
when a third party is the pledgor or mortgagor
Note: The mortgagee may legally foreclose the real
estate mortgage extrajudicially and waive the chattel
mortgage foreclosure, and maintain instead a
personal action for the recovery of the unpaid balance
of the credit (Phil. Bank of Commerce vs. Macadaeg,
G.R. No L-14174, October 31, 1960).
5. Possession of a mortgagee or pledgee is not in the
concept of an owner, thus, the subject property cannot
be acquired through prescriptive prescription, UNLESS,
they renounce their status as such.
6. Pledgor and mortgagor retain ownership of the thing
given as a security.
7. A promise to constitute a pledge or mortgage, if
accepted, gives rise only to a personal right binding
upon the parties and creates no real right in the
property (Art. 2092).
Note: What exists is only a right of action to compel the
fulfillment of the promise but there is no pledge or
mortgage yet.
Criminal Responsibility of Pledgor or Mortgagor
Under the Revised Penal Code, estafa is committed by a
person who, pretending to be the owner of any real
property, shall convey, sell, encumber or mortgage the
same or knowing that the real property is encumbered
shall dispose of the same as unencumbered. (Art. 316
(1,2) thereof.)
The act of the owner of a personal property of wrongfully
taking the same from its lawful possessor, to the prejudice
of the latter or any third person is punishable.
The mere embodiment of a real mortgage and a chattel

mortgage in one document does not have the effect of
fusing both securities into an indivisible whole; both
remain distinct agreements.
P LEDGE
(A RTS . 2093 2123)
General Rule: Neither the debtors heir who has paid

part of the debt can ask for proportionate
extinguishment, nor creditors heir who received his
share of the debt return the pledge or cancel the
mortgage as long as the debt is not completely
satisfied.
Contract of Pledge
A contract wherein the debtor delivers to the creditor or to
a third person a movable or document evidencing
incorporeal rights for the purpose of securing fulfillment of
a principal obligation with the understanding that when the
obligation is fulfilled, the thing delivered shall be returned
with all its fruits and accessions.

CREDIT TRANSACTIONS
Special Requisites:
(in addition to the common essential requisites):
1. Possession of the thing pledged must be transferred to
the creditor or a third person by agreement (Art. 2093)
Absent delivery, the creditor acquires no right to the
property because pledge is merely a lien and
possession is indispensable to the right of a lien.
Whether or not a symbolic or constructive delivery is
sufficient to validate a pledge would depend on the
peculiar nature of the thing pledged (De Leon, Hector
S., Comments and Cases on Credit Transactions, 2010
ed., p. 319).
2. Subject Matter: All movables which are within the
commerce of men, provided they are susceptible of
possession (Art. 2094) and incorporeal rights evidenced
by documents of title, in which case, the instruments
proving the right pledged shall be delivered to the
creditor, and if negotiable must be endorsed (Art. 2095)
3. The description of the thing pledged and the date must
appear in a public instrument to bind third persons, but
not for the validity of the contract (Art. 2096).
Reason: to forestall fraud because a debtor might
attempt to conceal his property by simulating a pledge.
Kinds:
1. Conventional / Voluntary created by contract
2. Legal created by operation of law (Examples: Arts.
546, 612, 1731, 1914, 1994 and 2004)
Characteristics:
1. Real contract it is perfected by the delivery of the
thing pledged
2. Accessory contract it has no independent existence of
its own
3. Unilateral contract obligation is solely on the part of
the creditor to return the thing subject thereof upon the
fulfillment of the principal obligation; and
4. Subsidiary contract the obligation incurred does not
arise until the fulfillment of the principal obligation which
is secured.
CIVIL LAW
Requisites:
a. Pledgor has reasonable grounds to fear the
destruction or impairment of the thing pledged;
b. No fault on the part of the pledge
c. Pledgor offers another thing which is of the same kind
and quality as the former
d. Pledgee does not choose to exercise his right to
cause the thing to be sold at public auction (Art.
2108)
e. Pledgee advised the pledgor without delay
Note: The pledgees right to have the thing sold at
public sale granted under Art. 2108 is superior to the
right granted under Art. 2107.
2. To bid and be preferred at the public auction (Art. 2113)
3. To alienate the thing pledged provided the pledgee
consents to the sale (Art. 2097)
4. To ask that the thing pledged be deposited in one of the
following cases:
a. If the creditor uses the thing without authority or
misuses the thing, he may deposit the thing judicially
or extrajudicially (Art. 2104).
b. If the thing is in danger of being lost or impaired
because of negligence or willful act of the pledgee, he
may deposit the thing with a third person (Art. 2106).
OBLIGATIONS OF THE PLEDGOR
1. To advise the pledgee of the flaws of the thing (Arts.
2101 and 1951).
Note: Failure to do so, the pledgor may be held liable
for damages.
2. Not to demand the return of the thing until after full
payment of the debt, including interest due thereon and
expenses incurred for its preservation (Art. 2105).
Exception: Pledgor is allowed to substitute the thing
pledged which is in danger of destruction or impairment
with another thing of the same kind and quality (Art.
2107).
Extent of pledge: Unless stipulated otherwise, pledge

extends to the fruits, interests or earnings of the thing.
RIGHTS OF THE PLEDGEE (D-SBC2-BA2R3OPS)

1. Option to demand replacement or immediate payment
of the debt in case of deception as to substance or
quality (Art. 2109)
Note: Remedies are alternative.
RIGHTS OF THE PLEDGOR

1. To demand return in case of reasonable grounds to fear
destruction or impairment of the thing without the
pledgees fault, subject to the duty of replacement (Art.
2107)
2. To sell at public auction in case of reasonable grounds

to fear destruction or impairment of the thing without his
fault (Art. 2108)
Note: The proceeds shall be a security for the principal
obligation.
CIVIL LAW
3. To bring actions pertaining to the owner or to defend it
against third persons
4. To choose which of several things pledged shall be sold
5. To collect and receive amount due on credit pledged
6. To bid at the public auction, unless he is the only bidder
7. To appropriate the thing in case of failure of the second
public auction
8. To apply said fruits, interests or earnings to the interest,
if any, then to the principal of the credit
9. To retain excess value received in the public sale
10. To retain the thing until after full payment of the debt
11. To be reimbursed for the expenses made for the
preservation of the thing pledged
12. To object to the alienation of the thing
13. To possess the thing
14. To sell at public auction in case of non-payment of
debt at maturity
OBLIGATIONS OF THE PLEDGEE (CUDA3R)
1. Take care of the thing with the diligence of a good
father of a family and be liable for the loss or
deterioration of such (Art. 2099).
2. Not to use thing unless authorized by the owner or its
preservation requires its use.
3. Not to deposit the thing with a third person unless so
stipulated.
4. Responsibility for acts of agents and employees as
regards the thing.
5. To advise pledgor of danger to the thing
6. To advise pledgor of the result of the public auction
7. To return the thing upon payment of debt
Prohibition Against Double Pledge:
Property which has been lawfully pledged to one creditor
cannot be pledged to another as long as the first one
subsists.
Right of Third Person to Satisfy Obligation:
A third person who has any right in or interest to the thing
pledged may pay the debt as soon as it becomes due and
demandable and the creditor cannot refuse to accept
payment (Art. 2117; De Leon, Hector S., Comments and
Cases on Credit Transactions, 2010 ed., p. 365).
EXTINGUISHMENT OF PLEDGE: (CRAPSA)
1. The same causes as all other obligations
2. Return of the thing pledged by the pledgee to the
pledgor
It is presumed that the accessory obligation of pledge
has been remitted when the thing pledged, after its
delivery to the creditor, is found in possession of the
debtor, or of a third person who owns the thing (Art.
1274).
CREDIT TRANSACTIONS
The possession by the debtor or owner of the thing
pledged subsequent to the perfection of the pledge
gives rise to a prima facie presumption that the thing
has been returned and, therefore, that the pledge has
been extinguished but not the principal obligation itself
(Art. 2110).
3. Statement in writing by the pledgee that he renounces
or abandons the pledge (Art. 2111)
The principal debt however is not affected by the waiver
of the pledge. But the waiver of the principal obligation
carries with it that of the pledge (Art. 1273).
Neither is the acceptance by the pledgor or owner nor
the return of the thing pledged is necessary.
4. Payment of the debt
5. Sale of thing pledged at public auction
6. Appropriation under Art. 2112
REQUIREMENTS FOR SALE OF THING PLEDGED AT
PUBLIC AUCTION
1. The debt is due and unpaid;
2. Sale must be at a public auction;
3. There must be notice to the pledgor and owner, stating
the amount due; and
4. Sale must be with the intervention of a notary public.
Effect of Sale of the Thing Pledged: (Art. 2115)
1. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the
sale are equal to the amount of the principal obligation,
interest and expenses in a proper case.
Note: When an obligation is covered by many
securities, for instance a pledge and a mortgage,
foreclosure of the mortgage ahead of the pledge
extinguishes the obligation.
Reason: Accessory nature of pledge
2. If the price of the sale is more than the amount due the
creditor, the debtor is not entitled to the excess unless
the contrary is provided.
3. If the price of the sale is less, the creditor is not entitled
to recover the deficiency in all cases even if there is a
stipulation to that effect.
Reason: By electing to sell the thing pledged instead of
suing on the principal obligation, the creditor waives any
other remedy and must abide by the results of the sale.

CREDIT TRANSACTIONS
LEGAL PLEDGE
The provisions on the possession, care, and sale of the
thing pledged governing conventional pledges are
applicable to pledges created by operation of law.
In legal pledge, there is no definite period for the payment
of the principal obligation. The pledgee must make a
demand for the payment of the amount due him;
otherwise he cannot exercise the right of sale at public
auction (Art. 2122).
The public auction shall take place within one month after
such demand. If, without just grounds, the creditor does
not cause the public sale to be held within such period,
the debtor may require the return of the thing (Art. 2122).
The remainder of the price pertains to the debtor, unlike in
conventional pledge.
Chattel Mortgage and Pledge Distinguished
Chattel Mortgage
Pledge
Delivery of the personal
property
to
the Delivery of the thing
mortgagee
is
not pledged is necessary
necessary.
Chattel Mortgage
Pledge
Registration in the
Registration
not
Chattel
Mortgage
necessary to be valid
Registry is necessary
for its validity.
The procedure for sale
The procedure for sale
is found under Section
is found under Art. 2112
14 of Act No. 1508, as
of the Civil Code.
amended.
Debtor is not entitled to
If property is foreclosed,
excess
unless
the excess over the
otherwise agreed or
amount due goes to the
except in case of legal
debtor.
pledge.
If there is deficiency
If there is deficiency,
after
foreclosure,
creditor is not entitled to
creditor is entitled to
recover notwithstanding
recover the deficiency
any stipulation to the
from the debtor, except
contrary.
under Art. 1484.
Distinction between Pledge and Chattel Mortgage in
Article 1484
Pledge
Mortgage
Pledge
may
constituted over
personal property
Chattel mortgage may

be
be constituted only over
any
the personal property
sold in installments
Pledgee may cause the The vendor-mortgagee
CIVIL LAW
sale under Art. 2112
when the pledgor failed
to satisfy the principal
obligation
If there is deficiency,
creditor not entitled to
recover notwithstanding
any stipulation to the
contrary
may foreclose the

chattel mortgage on the
thing sold, if one has
been constituted, should
the vendee's failure to
pay cover two or more
installments
If there deficiency, there
can be no action against
the purchaser to recover
any unpaid balance.
Any agreement to the
contrary is void.
R E AL M ORTG AGE
(A RTS . 2024 2131)
Contract of Real Mortgage
A contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation, specially subjecting to
such security immovable property or real rights over
immovable property in case the principal obligation is not
complied with at the time stipulated.
As an accessory contract, its consideration is the same as
that of the principal contract from which it receives life.
A mortgage does not involve a transfer, cession or
conveyance of property but only constitutes a lien
thereon.
A mortgage gives the mortgagee no right or claim to the
possession of the property, and therefore, a mere
mortgagee has no right to eject an occupant of the
property mortgaged unless the mortgage should contain
some provision to that effect.
It is a real, accessory, subsidiary and unilateral contract.
Special Requisites:
1. It can cover only immovable property and alienable real
rights imposed upon immovable.
2. It must appear in a public instrument.
3. Registration in the registry of property is necessary to
bind third persons, but not for the validity of the
contract.
The persons in whose favor the law establishes a
mortgage has the right to demand the execution and the
recording of the document in which the mortgage is
formalized.
CIVIL LAW
Order of foreclosure cannot be refused on the ground
that the mortgage was not registered provided no
innocent third parties are involved.
Kinds:
1. Voluntary agreed to 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
3. Equitable one which, although lacking the formalities
of a mortgage, shows the intention of the parties to
make the property a security for a debt (See Art. 1602)
Pledge and Real Mortgage Distinguished
Pledge
Real Mortgage
Constituted
on Constituted
on
movables
immovables
Property is delivered to
pledgee or by common Delivery
is
not
consent to a third necessary
person
Not valid against third
persons unless a
Not valid against third
description of the thing
persons
unless
pledged and date of
registered
pledge appear in a
public instrument
Note: Absent express stipulation to the contrary, the
mortgage includes the accessions, improvements,
growing fruits and income of the property not yet received
when the obligation becomes due and to the amount of
the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of
expropriation for public use (Art. 2127).
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 (Art 2126).
A registered mortgage creates a real right, a lien
inseparable from the property mortgaged, which is
enforceable against the whole world.
The mortgage credit may be alienated or assigned to a
third person, in whole or in part, with the formalities
required by law (Art. 2128). In this case, the assignee may
foreclose the mortgage in case of non-payment by the
debtor.
Future property cannot be an object of a contract of
mortgage. (Art. 2085(2)). However, a stipulation
subjecting to the mortgage lien, properties and
improvements (after-acquired properties) added to a
CREDIT TRANSACTIONS
property already mortgaged which the mortgagor may
subsequently acquire, install, or use in connection with
real property already mortgaged belonging to the
mortgagor is valid (Peoples Bank and Trust Co. vs.
Dahican Lumber Co., G.R. No. L-17463, May 16, 1967).
Blanket or Dragnet Clause
One which is specifically phrased to subsume all debts of
past or future origins. Mortgages of this character enable
the parties to provide continuous dealings, the nature or
extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of
executing a new security on each new transaction.
Mortgages given to secure future advancements are valid
and legal contracts and the amounts named as
consideration therein do not limit the amount for which the
mortgage may stand as security if from the four corners of
the instrument, the intent to secure future and
other indebtedness can be gathered (Prudential Bank vs.
Don A. Alviar, et. al., G.R. No. 150197, July 28, 2005;
Cuyco vs. Cuyco, GR. No. 168736, April 19, 2006).
Provisions of this nature are carefully scrutinized and
strictly construed particularly when the mortgage contract
is one of adhesion.
Purpose: Operates as convenience and accommodation
to borrowers as it makes available additional funds without
the parties having to execute additional security
documents
Nature: A mortgage with a dragnet clause is an offer by
the mortgagor to the bank to provide the security of the
mortgage for advances of and when they were made.
Exception:
It can be said that the offer was not accepted by the
bank when a subsequent advance was made because of
new security. A mortgage containing a dragnet clause
will not be extended to cover future advances unless the
document evidencing the subsequent advance refers to
the mortgage as providing security therefor. In which
case, the security specifically executed for subsequent
loans must first be exhausted before the mortgaged
property can be resorted to (Prudential Bank vs. Alviar,
supra).
Special Rights:
1. Mortgagor To alienate the mortgaged property but the
mortgage shall remain attached to the property
A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void (Art. 2130) being
contrary to public policy inasmuch as the transmission
of property should not be unduly impeded.

CREDIT TRANSACTIONS
In a sale with assumption of mortgage, the alienation
needs the consent of the mortgagee.
2. Mortgagee To 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 (Art. 2129)
It is necessary that prior demand for payment must
have been made on the debtor and the latter failed to
pay (Bank of the Phil. vs. V. Concepcion E. Hijos, G.R.
No. 27701, July 21, 1928).
Foreclosure
Remedy available to the mortgagee by which he subjects
the mortgaged property to the satisfaction of the obligation
to secure that for which the mortgage was given
Validity and Effect:
1. When the principal obligation is not paid when due, the
mortgagee has the right to foreclose the mortgage and
to have the property seized and sold, and to apply the
proceeds thereof to the payment of principal obligation.
2. Foreclosure is also valid when the debtor has violated
the terms and conditions of the mortgage contract.
3. The power to foreclose resides on the mortgagee.
4. In case of deficiency, the debtor is required to pay the
same even after foreclosure.
5. The rule governing public notice of foreclosure must be
strictly complied with and slight deviations will invalidate
the sale or render it voidable.
Kinds of Foreclosure:
1. Judicial ordinary action for foreclosure under Rule 68
of the Rules of Court
2. Extrajudicial when mortgagee is given a special power
of attorney to sell the mortgaged property by public
auction, under Act No. 3135
Judicial and Extrajudicial Foreclosure Distinguished
Extrajudicial
Judicial Foreclosure
Foreclosure
There
is
court
No court intervention
intervention.
Decisions
are Not appealable, it is
appealable.
immediately executory.
Order of court cuts off Foreclosure does not
all rights of the parties cut off rights of all
impleaded.
parties involved.
There is equity of
redemption except on
There is right of
banks which provides
redemption.
for
a
right
of
redemption.
CIVIL LAW
Period of redemption
starts from the finality
of the judgment until
order of confirmation.
No need for a special
power of attorney in
the
contract
of
mortgage
Governed by Rule 68
of the Rules of Court
Period to redeem start

from
date
of
registration
of
certificate of sale.
Special power of
attorney in favor of
mortgagee is needed
in the contract.
Governed by Art. 3135
Note: A foreclosure sale retroacts to the date of

registration of the mortgage and that a person who takes
a mortgage in good faith and for valuable consideration,
the record showing clear title to the mortgagor, will be
protected against equitable claims on the title in favor of
third persons, of which he had no actual or constructive
notice (St. Dominic Corporation vs. IAC, G.R. No. 70623,
June 30, 1987).
Mere inadequacy of the price obtained at the sheriffs sale
will not be sufficient to set aside the sale unless the price
is so inadequate as to shock the conscience of the court
taking into consideration the peculiar circumstances
attendant thereto (Sulit vs. CA, G.R. No. 119247,
February 17, 1997).
Should there remain a balance due to the mortgagee after
applying the proceeds of the sale, the mortgagee is
entitled to recover the deficiency (Rule 68 of the Rules of
Court). This rule DOES NOT apply to extra-judicial
foreclosure real mortgage.
Application of proceeds of sale:
a. Costs of sale
b. Amount due the mortgagee
c. Claims of junior encumbrancers or persons holding
subsequent mortgages in the order of their priority
d. The balance, if any, shall be paid to the mortgagor or
his duly authorized agent, or to the person entitled to it.
The action to recover a deficiency after foreclosure
prescribes after 10 years from the time the right of action
accrues (Arts. 1142 and 1144).
A proceeding for judicial foreclosure of mortgage is an
action quasi in rem. It is based on a personal claim
against a specific property of the defendant.
Stipulation of Upset Price or TIPO
It is a stipulation in a mortgage of real property of
minimum price at which the property shall be sold, to
become operative in the event of a foreclosure sale at
public auction. It is null and void for the property must be
CIVIL LAW
sold to the highest bidder. Parties cannot, by agreement,
contravene the law and interfere with the lawful procedure
of the courts (BPI vs. Yulo, G.R. No. 9358, September 24,
1915).
Extrajudicial Foreclosure of Real Property (Act. No.
3135)
The sale is made under a special power inserted in or
attached to any real estate mortgage (Sec. 1).
If there has been no authority to foreclose, the remedy
should be judicial foreclosure.
The law covers only real estate mortgages. It is intended
merely to regulate the extrajudicial sale of the property
mortgaged.
The authority to sell is not extinguished by the death of
the mortgagor (or mortgagee) as it is an essential and
inseparable part of a bilateral agreement (Perez vs. PNB.
G.R. No. L-21813, July 30, 1966)
No sale can be legally made outside the province in which
the property sold is situated; and in case the place within
said province in which the sale is to be made is the
subject of stipulation, such sale shall be made in the said
place in the municipal building of the municipality in which
the property or part thereof is situated.
Procedure for Extrajudicial Foreclosure of Both Real
Estate Mortgage under Act No. 3135 and Chattel
Mortgage under Act No. 1508 (A.M. No. 99-10-05-0,
January 15, 2000, further amended on August 7, 2001):
1. Filing of application before the Executive Judge through
the Clerk of Court
2. Clerk of Court will examine whether the requirement of
the law have been complied with, that is, whether the
notice of sale has been posted for not less than 20 days
in at least three (3) public places of the municipality or
city where the property is situated, and if the same is
worth more than P400.00, that such notice has been
published once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in the city
or municipality.
3. The certificate of sale must be approved by the
Executive Judge.
4. In extrajudicial foreclosure of real mortgages in different
locations covering a single indebtedness, only one filing
fee corresponding to such debt shall be collected.
5. The Clerk of Court shall issue certificate of payment
indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the
description of the real estates and their respective
locations.
CREDIT TRANSACTIONS
6. The notice of sale shall be published in a newspaper of
general circulation pursuant to Section 1, PD No. 1079.
7. The application shall be raffled among all sheriffs.
8. After the redemption period has expired, the Clerk of
Court shall archive the records.
9. An auction sale may be had with just one (1)
participating bidder. The name/s of the bidder/s shall be
reported to the Sheriff or the Notary Public, who
conducted the sale to the Clerk of Court before the
issuance of the certificate of sale (As amended by the
January 30, 2001 Resolution, paragraph 5 of A. M. No.
99-10-05-0; Sps. Certeza and Villamayor and
Villamayor vs. Phil. Savings Bank, G. R. No. 190078,
March 5, 2010).
Note:The mortgagor and mortgagee have no right to
waive the posting and publication requirements under Act.
No. 3135. Notices are given to secure bidders and prevent
a sacrifice of the property. Clearly, the statutory
requirements of posting and publication are mandated,
not for the mortgagors benefit, but for the public or third
persons. Failure to comply with the statutory requirements
as to publication of notice of auction sale constitutes a
jurisdictional defect which invalidates the sale. Lack of
republication of notice of foreclosure sale made
subsequently after the original date renders such sale void
(PNB vs. Nepomuceno Productions Inc., G.R. No.
139479, December 27, 2002).
Sec. 3 of Act. 3135 does not require personal or any
particular notice on the mortgagor much less on his
successors-in-interest where there is no contractual
stipulation thereof. Hence, the lack of such notice is not a
ground to set aside a foreclosure sale.
Neither does Sec. 3 require posting of notice of sale on
the mortgaged property and the certificate of posting is
not required, much less considered indispensable, for the
validity of a foreclosure sale.
Redemption
It is the transaction by which the mortgagor reacquires or
buys back the property which may have passed under the
mortgage, or divests the property of the lien which the
mortgage may have created.
Note: A sale by the mortgagor to a third party of the
mortgaged property during the period for redemption
transfers only to said third person the right to redeem the
property and the right to possess, use and enjoy the same
during said period.
Where the sale with assumption of mortgage was not
registered and made without the consent of the
mortgagee, the buyer, thereof, was not validly substituted

CREDIT TRANSACTIONS
as debtor and, hence, had no right to redeem (Bonnevie
vs. CA. G.R. No. L-4910, October 24, 1983).
Kinds of Redemption:
1. Equity of redemption right of mortgagor to redeem the
mortgaged property after his default in the performance
of the conditions of the mortgage within the 90-120 day
period from the date of the service of the order of
foreclosure or even thereafter but before the
confirmation of the sale. Applies to judicial foreclosure
of real mortgage and chattel mortgage foreclosure.
Note: Redemption of the banking institutions is allowed
within one year from confirmation of sale.
2. Right of redemption right of mortgagor to redeem the
mortgaged property within one year from the date of
registration of the certificate of sale. Applies only to
extrajudicial foreclosure of real mortgage.
Note: The right of redemption, as long as within the
period prescribed, may be exercised regardless of
whether or not the mortgagee has subsequently
conveyed the property to some other party (Sta. Ignacia
Rural Bank, Inc. vs. CA. GR No. 97872. March 1, 1994).
Requisites of a Valid Exercise of Right of Redemption:
1. Must be made within 12 months from the date of the
registration of the sale in the Office of the Registry of
Property;
2. Payment of the purchase price of the property involved,
plus 1% interest per month thereon, together with the
amounts of assessments of taxes thereon, if any, paid
by the purchaser after the sale with the same rate of
interest; and
3. Writ of notice of the redemption must be served on the
officer who made the sale and a duplicate filed with the
Registry of Property of the province (Rosales vs. Uboa,
G.R. No. 109972, April 29, 1996)
Period of Redemption:
1. Extra-judicial (Act No. 3135)
a. Natural person one year from registration of the
certificate of sale with Registry of Deeds
b. Juridical person same rule as natural person
c. Juridical person (mortgagor) and bank (mortgagee)
three months after foreclosure or before registration
of certificate of foreclosure whichever is earlier (Sec.
47, of General Banking Law)
2. Judicial before confirmation of the sale by the court
except when the mortgagee is a banking institution
redemption will then be one year from the registration
of sale (Sec. 25, P.D. 694) (De Leon, Comments and
Cases on Credit Transactions,2006 ed., p. 418)
CIVIL LAW
Note: Allowing redemption after the lapse of the statutory
period, when the buyer at the foreclosure sale does not
object but even consents to the redemption, will uphold
the policy of the law which is to aid rather than defeat the
right of redemption (Ramirez vs. CA, G.R. No. 98147,
March 5, 1993).
Amount of the Redemption Price:
1. Mortgagee is not a bank (Act No. 3135, in relation to
Sec. 28, Rule 39 of Rules of Court)
a. Purchase price of the property;
b. 1% interest per month on the purchase price; and
c. Taxes paid and amount of purchasers prior lien, if
any, with the same rate of interest computed from the
date of registration of sale, up to the time of
redemption
2. Mortgagee is a bank (GBL 2000)
a. Amount due under the mortgage deed;
b. Interest; and
c. Cost and expenses
Note: Redemption price in this case is reduced by the
income received from the property.
Right to Possession of Third Persons as Purchaser:
1. Writ of Possession an order whereby a sheriff is
commanded to place a person in possession of real or
personal property
2. Before expiration of redemption period ex parte
application plus posting of a bond
3. After lapse of redemption period Purchaser is not
obliged to bring a separate suit for possession. He must
invoke the aid of the courts and ask a writ of
possession.
The suspension of the implementation of the writ of
possession is not allowed after redemption period.
The purchaser is entitled to writ of possession despite
the fact that there is a lessee unless the lessee is
registered with the Register of Deeds or he has actual
knowledge thereof (Ibasco vs. Caguioa. G.R. No. L63861, August 19, 1986).
If mortgagor refuses to surrender property, the remedy
is to file an ordinary action for the recovery of
possession in order that the mortgagor may be given
the opportunity to be heard.
CIVIL LAW
A NTI CHRESIS
(A RTS . 2132 2139)
Contract of Antichresis
A contract whereby the creditor acquires the right to
receive the fruits of an immovable of the debtor, with the
obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit (Art.
2132).
Also called mortgage / mortgagee in possession.
Mortgagee in Possession
One who has lawfully acquired actual or constructive
possession of the premises mortgaged to him, standing
upon his rights as mortgagee and not claiming under
another title for the purpose of enforcing his security upon
such property or making its income to pay his debt.
An antichresis is also indivisible in nature.
There is also a third-party antichretic.
Characteristics:
1. Accessory contract it secures the performance of a
principal obligation.
2. Formal contract it must be in a specified form to be
valid (Art. 2134)
Special Requisites:
1. It can cover only the fruits of an immovable property;
2. Delivery of the immovable is necessary for the creditor
to receive the fruits and not that the contract shall be
binding;
3. Amount of principal and interest must be specified in
writing (Art. 2134); and
4. Express agreement that debtor will give possession of
the property to creditor and that the latter will apply the
fruits to the interest, if any, then to the principal of his
credit.
In the absence of this requisite, the contract shall be
deemed to be one of mortgage.
Note: The obligation to pay interest is not the essence of
the contract of antichresis, there being nothing in the
Code to show that antichresis is only applicable to
securing the payment of interest-bearing loans. On the
contrary, antichresis is susceptible of guaranteeing all
kinds of obligations, whether pure or conditional in nature.
CREDIT TRANSACTIONS
Antichresis and Pledge Distinguished
Antichresis
Pledge
Refers to personal
Refers to real property
property
Perfected by delivery of
Perfected by mere
The thing pledged (Real
consent (Consensual)
contract)
Debtor loses control of the subject matter of the
contract.
Antichresis and Real Mortgage Distinguished
Antichresis
Real Mortgage
Debtor usually retains
Property is delivered to
possession of the
creditor.
property.
Creditor acquires only Creditor does not have
the right to receive the any right to receive the
fruits of the property; fruits; but the mortgage
hence, it does not creates a real right over
produce a real right.
the property.
The creditor, unless
there is stipulation to
the contrary, is obliged The creditor has no
to pay the taxes and such obligation.
charges upon the
estate.
It is expressly stipulated
that the creditor given
possession of the
There is no such
property shall apply all
obligation on part of
the fruits thereof to the
mortgagee.
payment of interest, if
owing, and thereafter to
the principal.
The subject matter of both is real property.
RIGHTS OF ANTICHRETIC CREDITOR
1. The right to the fruits and income of the thing
Note: 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 (Art. 2133).
2. To retain the thing until the debt is paid
Note: The property delivered stands as a security for
the payment of the obligation of the debtor in
antichresis. Hence, the debtor cannot demand its return
until the debt is totally paid.
3. To have the thing sold upon non-payment at maturity
4. Preference to the proceeds of the sale of the thing
(Tolentino, Civil Code of the Philippines, Vol.5, 1992
ed., p. 567).

CREDIT TRANSACTIONS
OBLIGATIONS OF ANTICHRETIC CREDITOR
1. To pay taxes and charges on the estate if there has
been no stipulation to the contrary, and to bear the
expenses necessary for preservation and repair
The sums spent shall be deducted from the fruits.
Creditor may avoid said obligation by compelling debtor
to reacquire enjoyment of the property, unless there is a
stipulation to the contrary
2. To apply all the fruits, after receiving them, to the
payment of interest, if owing, and thereafter to the
principal
3. To render an account of the fruits to the debtor
Remedies of Creditor in Case of Non-Payment of Debt
1. Action for specific performance; or
2. Petition for the sale of the real property as in a
foreclosure of mortgages under Rule 68 of the Rules of
Court (Art. 2137).
Note:
The parties, however, may agree on an extrajudicial
foreclosure in the same manner as they are allowed in
contracts of mortgage and pledge (Tavera vs. El Hogar
Filipino, Inc. G.R. No. L-45963, October 12, 1939).
A stipulation authorizing the antichretic creditor to
appropriate the property upon the non-payment of the
debt within the agreed period is void (Art. 2088).
The creditor in antichresis and his successors-in-interest
cannot ordinarily acquire by prescription (Valencia vs.
Alcala, 42 Phil. 177, 1921). Possession of the antichretic
creditor is not in the concept of an owner which is required
for the purpose of acquisitive prescription.
C H ATTEL M ORTG AGE

(A RTS . 2140 2141)
Contract of Chattel Mortgage
A contract by virtue of which personal property is recorded
in the Chattel Mortgage Register as a security for the
performance of an obligation (Art. 2140).
Characteristics:
1. Accessory contract it is for the purpose of securing
the performance of a principal obligation
2. Formal contract registration in the Chattel Mortgage
Register is indispensable for its validity
CIVIL LAW
3. Unilateral contract it produces only obligations on the
part of the creditor to free the thing from the
encumbrance upon fulfillment of the obligation
Special Requisites:
1. It can cover only personal or movable property in
general; however, the parties may treat as personal
property that which by its nature would be real property.
Note: A real property may be considered as a personal
property for purposes of executing a chattel mortgage
thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby,
and once the parties so agreed, they are already
estopped from claiming otherwise (Makati Leasing and
Financial Corporation vs. Wearever Textile Mills, Inc.,
G.R. No. L-58469, May 16, 1983).
2. Registration of the mortgage with the Chattel Mortgage
Register where the mortgagor resides; if property is
located in a different province, registration in both
provinces required.
3. Description of the property as would enable the parties
or other persons to identify the same after reasonable
investigation and inquiry.
4. Accompanied by an affidavit of good faith to bind third
persons, but not for the validity of the contract.
5. It can cover only obligations existing at the time the
mortgage is constituted.
Note: A mortgage containing a stipulation in regard to
future advances in the credit will take effect only from
the date the same are made and not from the date of
the mortgage (Jaca vs. Davao Lumber Co., G.R. No. L30849, March 29, 1982).
Effect of Registration: Creates a Real Right
The registration of the chattel mortgage is an effective and
binding notice to other creditors of its existence and
creates a real right or a lien which, being recorded, follows
the chattel wherever it goes. The registration gives the
mortgagee symbolical possession (Northern Motors, Inc.
vs. Coquia. G.R. No. L-40018, December 15, 1975).
Registration adds nothing to the instrument, considered as
a source of title and affects nobody's rights except as a
specie of notice (Standard Oil Co. of New York vs.
Jaramillo, G.R. No. L-20329 March 16, 1923).
Effect of Failure to Register Chattel Mortgage in the
Chattel Mortgage Registry
Article 2140 makes the recording in the Chattel Mortgage
Register an essential requisite but if the instrument is not
recorded, the mortgage is nevertheless binding between
the parties. But the person in whose favor the law
CIVIL LAW
establishes a mortgage has no other right than to demand
the execution and the recording of the document.
Affidavit of Good Faith
Oath in a contract of chattel mortgage wherein the parties
"severally swear that the mortgage is made for the
purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that the
same is a just and valid obligation and one not entered
into for the purpose of fraud (Sec. 5, Chattel Mortgage
Law).
Note: The debt referred to in the law is current, not an
obligation that is merely contemplated.
Effect of Absence:
The special affidavit is required only for the purpose of
transforming an already valid mortgage into preferred
mortgage. Thus, it is not necessary for the validity of the
chattel mortgage itself but only to give it a preferred
status. In other words, its absence vitiates the mortgage
only as against third persons without notice like creditors
and subsequent encumbrances.
Foreclosure of Chattel Mortgage
Foreclosure sale in chattel mortgage is by public auction
under Act No. 1508, but the parties may stipulate that it be
by private sale.
The mortgagee may, after thirty (30) days from the time of
the condition broken, cause the mortgaged property to be
sold at public auction by a public officer. The 30-day
period is also a grace period for the mortgagor to
discharge the mortgage obligation. After the sale of the
chattel at public auction, the right of redemption is no
longer available to the mortgagor (Cabral vs. Evangelista,
G.R. No. L-26860, July 30, 1969).
Application of Proceeds of Sale:
1. Costs and expenses of keeping and sale
2. Payment of the obligation secured by the mortgage
3. Claims of persons holding subsequent mortgages in
their order
4. The balance, if any, shall be paid to the mortgagor or
person holding under him.
CREDIT TRANSACTIONS
Only equity of redemption is available to the mortgagor;
the latter can no longer redeem after the confirmation of
the foreclosure sale.
Right of Redemption:
When the condition of a chattel mortgage is broken, the
following may redeem:
1. Mortgagor
2. Person holding a subsequent mortgage
3. Subsequent attaching creditor
An attaching creditor who so redeems shall be subrogated
to the rights of the mortgagee and entitled to foreclose the
mortgage.
The right of redemption is made before the foreclosure
sale and by paying or delivering to the mortgagee the
amount due on such mortgage and the costs, and
expenses incurred by such breach of condition before the
sale thereof (Sec. 13, Act No. 1508). After the foreclosure
sale, the right of redemption no longer exists.
Right to Possession of Foreclosed Property in Chattel
Mortgage:
When default occurs and the creditor desires to foreclose,
the creditor has the right to take the property as a
preliminary step for its sale.
Note: Where the debtor refuses to yield the property, the
creditors remedy is to institute an action either to effect
judicial foreclosure directly or to secure possession
(REPLEVIN) as a preliminary to the sale contemplated in
Section 14 or Act No.1508.
C ONCURRENCE AN D
P REFERENCE OF C REDI TS
(A RTS . 2236 2251)
Concurrence of Credits
Possession by two or more creditors of equal rights or
privileges over the same property or all of the property of
the debtor
Note: The creditor may maintain an action for the

deficiency, except if the chattel mortgage is constituted on
the personal property sold as security for the purchase of
such personal property payable in installments (Art. 1484,
Recto Law).
Preference of Credits
Right held by a creditor to be preferred in the payment of
his claim above others out of the debtors assets. It is the
right to be paid first.
The action for deficiency may be brought within ten (10)

years from the time the cause of action accrues.
Nature and Effect of Preference:

General Rule: Debtors are obliged to pay their creditors
when the debt becomes due and demandable.

CREDIT TRANSACTIONS
CIVIL LAW
Exception: There should be no rules as to who should be

paid first. Preference applies ONLY when there are 2 or
more creditors with separate claims against a debtor who
has insufficient property to answer for all his obligations.
Since it is an exception to the general rule, the law as to
preferences is strictly construed.
1. Does not create an interest in property: Preference
simply creates a right to be paid first from the proceeds
of the sale of property of the debtor. It does not create a
lien on the property itself, but merely a preference in the
application of the proceeds of the property after it is
sold.
2. The creditor does not have the right to take the property
and sell it as against another creditor: Preference
applies after a sale, and it is a question of application of
the proceeds after it is sold.
3. It must be asserted: If the right claimed is not asserted
and maintained, it is lost. If property has not been
seized, it is open to seizure by another.
4. It must be maintained: Where a creditor released his
levy, leaving the property in possession of the debtor,
thereby indicating that he did not intend to press his
claim further as to that specific property, he is deemed
to have abandoned his claim of preference.
Serrano vs. Central Bank of the Phils., G.R. No. L-30511

February 14, 1980; Banco Filipino Savings and Mortgage
Bank vs. National Labor Relations Commission, G.R. No.
L-51299 December 29, 1982). Fixed, savings, and current
deposits of money in banks and similar institutions are
considered simple loans (Art. 1980, Civil Code). As such,
they are not preferred credits.
Rules on Preference Applicable When:

1. There are two or more creditors
2. With separate and distinct claims
3. Against the same debtor
4. Who has insufficient property
Exempt Property:
1. Present property those provided under Arts. 155 and
205 of the Family Code, Sec. 13, Rule 39 of the Rules
of Court, and Sec. 118 of the Public Land Act
2. Future property a debtor, who obtains a discharge
from his debts on account of his insolvency, is not liable
for the unsatisfied claims of his creditors with said
property subject to certain exceptions expressly
provided by law (Sec. 68, 69, The Insolvency Law [Act
No. 1956]).
3. Property under legal custody and those owned by
municipal corporations necessary for governmental
purposes.
There must be a proceeding such as an insolvency

proceeding wherein the creditors can file their claims. The
right becomes significant only after the properties of the
debtor have been inventoried and liquidated, and the
claims of the various creditors have been established.
Prior to the proceedings, the debtor has no way of
ascertaining who the creditors are, and has no liquidated
property out of which he can pay them.
A preferred creditor's third party claim to the proceeds of a
foreclosure sale by the mortgagee is not the proceeding
contemplated by law for the enforcement of preferences
under Article 2241 and 2244 unless the claimant is
enforcing a credit for taxes that enjoy absolute priority
(Development Bank of the Philippines vs. Court of
Appeals, G.R. No. 126200, 16 August 2001).
A final judgment obtained by a bank depositor for the
payment of his time deposit in a savings bank prior to the
institution of liquidation proceedings but after the bank
was declared insolvent would not make the claim a
preferred claim against the bank (Central Bank of the
Phils. vs. Morfe, G.R. No. L-20119 June 30, 1967;
Preference of Credit and Lien Distinguished

Preference Of Credit
Lien
Applies only to claims
Creates a charge on a
which do not attach to
particular property
specific properties
Note: Lien DOES NOT, in its general sense import a right
of retention, though this right usually accompanies the lien
when the subject is personal property in possession of the
lien-holder (Grao vs. Paredes, G.R. No. L-27019 March
4, 1927).
Liability of Debtors Property for his Obligations
General Rule: Debtor is liable with all his property,
present and future, for the fulfillment of his obligations
(Art. 2236).
Note: Art. 2238 If one of the spouses is insolvent, the

assets of the conjugal partnership of gains (CPG) or
absolute community (AC) do not pass to the assignee in
insolvency elected by the creditors or appointed by the
court.
Reason: The conjugal partnership of gains or absolute
community is distinct from the individual spouses.
The exemption applies provided that:
1. The CPG or AC subsists; and
2. The obligations of the insolvent spouse have not
redounded to the benefit of the family.
CIVIL LAW
Note: The insolvency of the husband does not have the
effect of dissolving the conjugal partnership or the
absolute community.
If there is co-ownership and one of the co-owners is an
insolvent debtor, his undivided share or interest in the
property shall be possessed by the assignee in
insolvency proceedings because it is part of his assets.
General Categories of Credit
I. Special Preferred Credits
A. With reference to specific movable property under
Art. 2241:
1. Duties, taxes and fees due to the government
Note: The tax must be due on the movable.
2. Claims from misappropriation, breach of trust,
malfeasance of public officer.
Note: The acquisition must have been in
performance of official functions and the property
must still be in the hands of the public official. If it is
sold to a purchaser for value and in good faith,
there can be no more claim on the said movable.
3. Claims for the unpaid price of movable sold
Note: Claim is limited to the value of the movable.
The property must be in the possession of the
debtor.
If debtor has sold the property and the price has
been unpaid, lien may be enforced on the price.
The right is not lost by the immobilization of the
thing by destination, provided that it has not lost its
form, substance and identity.
The right is also not lost when the thing, together
with other property, was sold for a lump sum,
provided that the price thereof can be determined
proportionally.
In Torres et. al. vs. Genato, 7 Phil 204:
a. The money claimed must be due to him as the
selling price of the property from which it
proceeds;
b. The property must be capable of identification
and must be identified as the same property
whose selling price is unpaid; and
c. The property must be found in the possession of
the debtor.
4. Credits guaranteed with pledge or mortgage
Note: If pledge, it must be embodied in a public
instrument. If chattel mortgage, it must be
registered with the Chattel Mortgage Registry.
CREDIT TRANSACTIONS
5. Credits for the making, repair, safekeeping or
preservation of the property
6. Claims for laborers wages on the work done on the
property
7. Expenses of salvage upon the goods salvaged
8. Credits between the landlord and tenant from their
contract on the share of each in the fruits or harvest
9. Price of the contract of transportation and incidental
expenses on the goods carried, until their delivery
and 30 days thereafter
10. Credits for lodging and supplies furnished to
travellers by hotel keepers on the movables
belonging to the
Note: This applies so long as movables are in the
hotel. This does not apply to money loaned to
guests
11. Expenses for cultivation and harvest upon the
fruits harvested
12. Rent for 1 year upon the property of the lessee
existing on the immovable leased and on the fruits
of the same, but not on money or instruments of
credit
13. Claims of the depositor if depositary has
wrongfully sold the thing deposited, upon the price
of sale
Note: Under the last par. of Art. 2241, if the
movable is wrongfully taken, the preferred creditor
may demand it w/in 30 days through an accion
subrogatoria, exercising the right of the debtor
granted him under Art. 559 to recover property
wrongfully taken from him. It applies only when the
right of ownership in such property continues in the
debtor. As such, the remedy under Art. 2241 is not
applicable to cases where the debtor has parted
with his ownership of the property in question, as
where he has sold the property (Pea vs. Mitchell,
G.R. No. L-3764, January 15, 1908).
B. With reference to specific immovable property under
Art. 2242:
1. Taxes due upon land or building
Note: This pertains to real property taxes. Thus,
capital gains tax is NOT covered because it is a tax
on income and not on the property itself.
2. Unpaid price of the real property
Note: No registration of the sale is required.
3. Claims of laborers and other workmen engaged in
the construction, re-construction or repair of
buildings, canals and other works
4. Claims of furnishers of materials used in works
mentioned in No. 3
5. Mortgage credits

CREDIT TRANSACTIONS
Note: Mortgage MUST have been registered in the
Registry of Property. A recorded mortgage credit is
superior to an unrecorded unpaid vendors lien (De
Barretto vs. Villanueva, GR No. L-14938, January
28, 1961).
6. Expenses for the preservation and improvement of
real property when the law authorizes
reimbursement
7. Credits annotated in the Registry of Property by
virtue of judicial order, attachment or execution
8. Claims of co-heirs for warranty in the partition of
the property
9. Claims of donors for pecuniary charges or other
conditions imposed by him upon the done
10. Claims of insurers for insurance premium for 2
years
Nature of Claims or Credits in Articles 2241 and
2242:
1. Nature of claim: Arts. 2241 and 2242 shall be
considered as mortgages or pledges of personal
and real property.
2. With the exception of the taxes due to the State
(No. 1), Arts. 2241 and 2242 merely enumerate the
preferred claims on specific properties. They do not
give the order of preference or priority of payment.
3. As to credits mentioned in No. 7 of Art. 2242, there
is preference among them according to the order of
time.
Reason: To allow the contrary would be absurd.
The preference of a credit annotated by an
attachment or execution could be defeated by
simply obtaining a writ of attachment or execution,
no matter how much later (Manabat vs. Laguna
Federation of Facomas, Inc. G.R. No. L-23888.
March 18, 1967). To determine the order of priority
among several credits of this kind, their dates
should be the basis. The first one to be registered
will be prioritized over the others.
C. Ordinary Preferred Credits under Art. 2244 as
amended by Art. 110 of the Labor Code. They are
enumerated as follows, and they shall be preferred in
the order named:
1. Credits for services rendered by laborers
Note: Art. 110 of the Labor Code removed the oneyear limitation found in No. 2 of Art. 2244.
Art. 110 of the Labor Code also moved up the
claims for unpaid wages (and other monetary
CIVIL LAW
claims) of laborers or workers of insolvent to first
priority.
According to the SC, bankruptcy or liquidation
proceedings are necessary for the operation of the
preference accorded to workers under Art. 110 of
the Labor Code (Development Bank of the
Philippines vs. NLRC, G. R. No. 82763-64, March
19, 1990).
2. Funeral expenses for the debtor, or his children
under parental authority who have no own property,
upon court approval
3. Expenses during the last illness of debtor or of
his/her spouse and children under parental
authority, if they have no own property
4. Compensation due the laborers or their dependents
under laws providing for indemnity
5. Credits and advancements made to the debtor for
support of himself, and his family, during the last
year preceding the insolvency
6. Support during the insolvency proceedings and for
3 months thereafter
7. Fines and civil indemnifications arising from
criminal offense
8. Legal expenses and expenses incurred in the valid
administration of the insolvents estate
9. Taxes and assessments due the national
government other than those mentioned in Arts.
2241(1) and 2242(1)
10. Taxes and assessments due any province other
than those referred to in Arts. 2241(1) and 2242(1)
11. Taxes and assessments due any city or
municipality other than those indicated in Arts.
2241(1) and 2242(1)
12. Damages for death or physical injuries caused by
quasi-delict
13. Gifts due to charitable public and private
institutions
14. Credits which, without special privilege, appear in
(a) a public instrument; or (b) in a final judgment, if
they have been the subject of litigation
Note: These credits shall have preference among
them in the order of priority of the dates of the
instruments and of the judgments.
The order of preference is first, in favor of credits
evidenced by a final judgment (should they have
been the subject of litigation), and secondly, in
favor of credits evidenced by a public instrument,
the preference among the two kinds of credits
being determined by priority of dates (Rizal Surety
and Insurance Co. vs. Dela Paz, 50 O.G. No. 6,
2501, May 26, 1954).
CIVIL LAW
Art. 2244, particularly par. (14)(a) thereof, is not
applicable to obligations of the State as it is a
recognized doctrine that the State is always
solvent.
Nature of Claims or Credits in Art. 2244
In contrast with Arts. 2241 and 2242, Art. 2244
creates no liens on determinate property which
follow such property. What Art. 2244 creates are
simply rights in favor of certain creditors to have the
cash and other assets of the insolvent applied in a
certain sequence or order of priority.
D. Common Credits any other claims or credits other
than those mentioned in Arts. 2241, 2242 and 2244.
There is no order of preference among common
creditors; they share whatever is left in proportion to
their credit, regardless of date.
Note: Ordinary Preferred and Common Credits cover
only free property of the debtor, or those not subjected
to Special Preferred Credit.
Refectionary Credit
Indebtedness incurred in the repair or reconstruction of
something previously made, such repair or reconstruction
being made necessary by the deterioration or destruction
of the thing as it formerly existed (Director of Public works
vs. Sing Juco, G.R. No. L-30181, July 12, 1929) They
include new constructions (Luzon Lumber & Hardware Co.
vs. Quiambao & RFC, G.R. No. L-5638, March 30, 1954).
How to Apply the Rules in Preference and
Concurrence of Credits:
Step 1: Classify credits into the following categories:
1. Special Preferred Credits listed in Arts. 2241 and 2242;
2. Ordinary Preferred Credits under Art. 2244; and
3. Common Credits under Art. 2245.
Step 2: Determine or make an inventory of the assets or
properties of the insolvent.
Step 3: Segregate specific immovables and/or movables
mentioned under Arts. 2241 and 2242, respectively.
Step 4:
1. Sell movables and determine if the proceeds are
sufficient to cover the special preferred credit in Art.
2241; exclude all other credits to the extent of the value
of the movable to which preference refers. Pay No. 1
credit in Art. 2241, and if two or more credits in Art.
2241 concur; apply proceeds of sale pro rata, (pari
passu) to the credits applying Arts. 2246 and 2247.
2. For immovables and real rights Sell immovable and
real right and determine if proceeds of sale are
CREDIT TRANSACTIONS
sufficient to cover the special preferred credits in Art.
2242. Exclude all other credits to the extent of the value
of immovables and real rights to which preference
refers. Pay No. 1 in Art. 2242, if two or more credits
mentioned in Art. 2242 concur; apply proceeds of sale
pro rata, (pari passu) to the credits applying Arts. 2248
and 2249.
Step 5:
1. If proceeds of sale from specific movable and
immovable are insufficient, the balance of said special
preferred credits become common credits under Art.
2245.
2. If proceeds of sale from specific movable and
immovables exceed the total special preferred credits
(there is excess in proceeds), such excess becomes
part of the free property of the debtor, to be added to
other assets in order to satisfy the ordinary preferred
credits under Art. 2250 and then the common credits
under Art. 2245.
Step 6: With the excess cash sale of assets covered in
Art. 2241 and 2242, if any, sell other assets of debtor and
satisfy the ordinary preferred credits by applying proceeds
of sale in accordance with the order of preference of
credits established in Art. 2244 (Art. 2251 (1)). Rule on
preference applies.
Step 7: After applying the proceeds of sale of all
properties under Step 6, apply any balance of the
proceeds of the sale to common credits in accordance
with the rule provided in Art 2251. Rule on concurrence
applies, they are paid pro rata regardless of dates (Article
2251 (2)).
Q U ASI C ONTR ACTS

(A RTS . 2142 2176)
Quasi-Contract
A quasi-contract is that juridical relation resulting from a
lawful, voluntary, and unilateral act, and which has for its
purpose the payment of indemnity to the end that no one
shall be unjustly enriched or benefited at the expense of
another (Art. 2142).
Two Principal Kinds:
1. Negotiorum gestio (unauthorized management)
2. Solutio indebiti (undue payment)
Negotiorum Gestio
It arises when a person, without the express or implied
authority of, or opposition from, the owner of a business or
property which is neglected or abandoned, takes charge
of the agency or management thereof (Art. 2144).

CREDIT TRANSACTIONS
The ratification of the management by the owner of the
business produces the effects of an express agency, even
if the business may not have been successful (Art. 2149).
Requisites of Negotiorum Gestio:
1. No meeting of the minds;
2. Taking charge of anothers business or property
3. The property or business must have been abandoned
or neglected (otherwise, the rule on unauthorized
contracts would apply)
4. The officious manager must not have been expressly or
implicitly authorized (otherwise, the rule on agency
would apply)
5. The officious manager (gestor) must have voluntarily
taken charge (that is, there must be no vitiation of
consent, such as error in thinking that he owned the
property or the business) (Paras, Civil Code of the
Philippines Vol. 5, 2008 ed., p. 1156).
Negotiorum Gestio and Implied Agency Distinguished
Negotiorum Gestio
Implied Agency
The agent is actually
authorized to assume
Gestor should never the agency by virtue of
have been authorized in the acts of the owner or
any manner
by virtue of his silence,
inaction, or his failure to
repudiate the agency
Business or property Neglect
should be neglected or abandonment
abandoned
necessary
is
or
not
Note: So long as the owner does not know that another is

acting on his behalf without authority, negotiorum gestio
exists, but once he becomes aware of such fact and still
he does not repudiate the acts of the agent, the quasicontract ceases to exist. It has become an implied agency
(Jurado, 2009).
Responsibilities of the Officious Manager:
1. Continue taking charge of the agency or management
until the termination of the affairs and its incidents, but
he may require the owner, if the
2. Latter is in a position to do so, to substitute the officious
manager (Art. 2144)
3. Perform his duties with all the diligence of a good father
of a family, and pay the damages which through his
fault or negligence may be suffered by the owner of the
property or business under management, but the courts
may however, increase or moderate the indemnity
according to the circumstances of each case (Art. 2145)
4. Be liable for the acts of his delegate is he delegated to
another person all of some of his duties, without
CIVIL LAW
prejudice to the direct obligation of the delegate toward
the owner of the business (Art. 2146)
5. Be personally liable for contracts which he has entered
into with third persons, even though he acted in the
name of the owner, and there shall be no right of action
between the owner and third persons except:
a. When the owner has expressly or tacitly ratified the
management, or
b. When the contract refers to things pertaining to the
owner of the business (Art. 2152)
Note: The responsibility of two or more officious
managers shall be solidary, unless the management
was assumed to save the things or business from
imminent danger (Art. 2146)
6. The officious manager shall be liable for any fortuitous
event:
a. If he undertakes risky operations which the owner
was not accustomed to embark upon;
b. If he has preferred his own interest to that of the
owner
c. If he fails to return the property or business after
demand by the owner;
d. If he assumed the management in bad faith (Art.
2147)
e. Except when the management was assumed to save
the property or business from imminent danger
i. If he is manifestly unfit to carry the management;
ii. If by his intervention he prevented a more
competent person from taking up the management
(Art. 2148)
Responsibilities of the Owner:
1. Be liable for obligations incurred in his interest and shall
reimburse the officious manager for the necessary and
useful expenses and for the
2. Damages which the latter may have suffered in the
performance of his duties
a. When such owner has enjoyed the advantages of the
officious management although it may not have been
expressly ratified by him;
b. When the management had for its purpose the
prevention of an imminent and manifest loss,
although no benefit may have been derived (Art.
2150)
c. When, even though he did not derive any benefit and
there has been no imminent and manifest danger to
the property or business
i. The officious manager has acted in good faith; and
ii. The property or business is intact, ready to be
returned to the owner (Art. 2151)
3. Be liable for contracts which the officious manager has
entered into with third persons when
CIVIL LAW
a. Such owner has expressly or tacitly ratified the
management; or
b. The contract refers to things pertaining to the owner
of the business (Art. 2152)
When Management is Extinguished:
1. When the owner repudiates it or puts an end thereto
2. When the officious manager withdraws from the
management, subject to the provisions of Art. 2144
3. By the death, civil interdiction, insanity or insolvency of
the owner or officious manager (Art. 2153)
Solutio Indebiti
This takes place when something is received when there
is no right to demand it, and it was duly delivered thru
mistake.
It is presumed that there was a mistake in the payment if
something which had never been due or had already been
paid was delivered; but he from whom the return is
claimed may prove that the delivery was made out of
liberality or for any other just cause (Art. 2163).
Payment by reason of a mistake in the construction or
application of a doubtful or difficult question of law may
come within the scope of solutio indebiti (Art 2155).
.
Note: Whether the question is doubtful or difficult or not
must be determined by the actual knowledge of law of the
person who made the payment.
If the payer was in doubt whether the debt was due, he
may recover if he proves that it was not due (Art 2156).
Requisites of Solutio Indebiti:
1. Payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the
person who received the payment; and
2. Payment is made through mistake, and not through
liberality or some other cause (Velez vs. Balzarza, G.R.
No. L-48389 July 27, 1942).
Responsibilities of Payee:
1. Obligated to return what he has received (Art. 2163)
2. A payee in bad faith accepting an undue payment shall
pay legal interest if a sum of money is involved or shall
be liable for fruits received or which should have been
received if the thing produces fruits. He shall further be
answerable for any loss or impairment of the thing from
any cause and for damages to the person who
delivered the thing until it is recovered (Art. 2159).
3. He who in good faith accepts an undue payment of a
thing certain and determinate shall only be responsible
for the impairment or loss of the same or its accessories
and accessions insofar as he has thereby been
benefited. If he has alienated it, he shall return the price
CREDIT TRANSACTIONS
or assign the action to collect the sum (Art. 2160). He
shall be exempt from the obligation to restore who,
believing in good faith that the payment was being
made of a legitimate and subsisting claim, destroyed
the document, or allowed the action to prescribe, or
gave up the pledges, or cancelled the guaranties for his
right. He who paid unduly may proceed only against the
true debtor or guarantors with regard to whom the
action is still effective (Art. 2162).
The responsibility of two or more payees, when there
has been payment of what is not due, is solidary (Art.
2157).
Right of a Third Person:
When the property delivered or money paid belongs to a
third person, the payee shall comply with the provisions of
Article 1984 (Art. 2158). If, in spite of such information, he
does not claim the property or money paid within one
month, the payee shall be relived of all responsibility by
returning the thing to the payor (Vitug, 2008).
Other Quasi-Contracts:
1. When, without the knowledge of the person obliged to
give support, the support was given by a stranger,
unless it appears that he gave it out of piety and without
intention of being repaid (Art. 2164)
Requisites:
a. Support has been furnished a dependent of one
bound to give support but who fails to do so;
b. The support was supplied by a stranger;
c. The same was given without the knowledge of the
person charged with the duty; and
d. It must not have been given without the expectation
of recovering it (Ramirez and De Marcaida vs.
Redfern, L-26062 December 31, 1926)
2. When funeral expense are borne by a third person,
without the knowledge of the relatives obliged to give
support to the deceased (Art. 2165)
3. When the person obliged to support an orphan, or an
insane or an indigent person unduly refuses to give
support to the latter, a third person furnishes the
support (Art. 2166)
4. When through an accident or cause, a person is injured
or becomes seriously ill, and he is treated or helped
while he is not in a condition to give consent to a
contract, he shall be liable to pay for the services of the
physician or other person aiding him, unless the service
has been rendered out of pure generosity (Art. 2167).
5. When during a fire, flood, storm, or other calamity,
property is saved from destruction by another person
without the knowledge of the owner (Art. 2168)
6. When the government, upon failure of any person to
comply with health or safety regulations concerning

CREDIT TRANSACTIONS
property, undertakes to do the necessary work, even
over his objection (Art. 2169)
7. When by accident or other fortuitous event, movables
separately pertaining to two or more persons are
commingled or confused, the rules on co-ownership
shall apply (Art. 2170).
8. When a person has found a lost personal property (Arts.
719, 720, and 2171)
9. When a possessor in good faith has incurred necessary
and useful expenses (Arts. 546 and 2172)
10. When a third person, without the knowledge of the
debtor, pays the debt (Arts. 1236, 1237 and 2173)
11. When in a small community a majority of the
inhabitants of age decide upon a measure for protection
against unlawlessness, fire, flood, storm or other
calamity, any one who objects to the plan and refuses
to contribute to the expenses but is benefited by the
project as executed shall be liable to pay his share of
said expenses (Art. 2174).
12. When a third person was constrained to pay the taxes
of another (Art. 2175)
Note: The foregoing provisions are mere illustrations of
other specific cases of quasi-contracts; the enumeration
has no preclusive effect on possible other instances
(Vitug, 2008).
CIVIL LAW

07 Memory Aid Credit Transactions

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

07 Memory Aid Credit Transactions

Uploaded by

Copyright:

Available Formats

CIVIL LAW

G ENER AL P RI NCI PLES

380 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 381

382 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 383

384 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 385

386 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 387

388 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 389

The depositary may retain the thing in pledge until full

Note: A deposit for compensation is not extinguished by

OBLIGATIONS OF THE DEPOSITOR

390 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

When Hotel-Keeper Liable: When the loss or injury is

Nature and Purpose of Judicial Deposit:

When hotel-keeper NOT liable: When the loss or injury

Under Art. 2003, the hotel-keeper cannot free himself from

The depositary of property sequestrated is bound to

The contract of suretyship must be in writing to be

As to matters not provided in the Civil Code, judicial

If a person binds himself solidarily with the principal

SAN BEDA COLLEGE OF LAW 391

392 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

SAN BEDA COLLEGE OF LAW 393

394 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

properties of the principal debtor, and has resorted to all

11. Where the pledge or mortgage has been given by him

How Exercised: (Art. 2060)

Benefit of Division (Art. 2065)

Effect of Failure of the Creditor to Exhaust and Resort

General Rule: Joint Liability

SAN BEDA COLLEGE OF LAW 395

396 SAN BEDA COLLEGE OF LAW

2013 CENTRALIZED BAR OPERATIONS

It arises by operation of law upon payment by the

afterwards lose the same through eviction or

Such delay, however, extinguishes the guaranty:

2. Demand a security that shall protect him from any

Guarantor is Released in the Following Instances:

Article 2066 and Article 2071 Distinguished

Causes of Extinguishment of Guaranty:

General Rule: Extension of time as to one or more will

SAN BEDA COLLEGE OF LAW 397

guarantor (Art. 2056) and in special laws like the Rules of

Reason for 2nd and 3rd requisites: In anticipation

Note: Judicial bonds constitute merely a special class of

d. When the principal obligation becomes due, the

If the person required to give a legal or judicial bond

Note: If a third person secures an obligation by

A judicial bondsman and the sub-surety are NOT entitled

Common Elements of Pledge and Mortgage (Arts.

398 SAN BEDA COLLEGE OF LAW