CREDIT TRANSACTIONS
Professor: Atty. Vincent Z. Bolivar
Source: Pineda, Ernesto L. (2004). CREDIT TRANSACTIONS. Manila: Central Book Supply, Inc.
Contents
CREDIT TRANSACTIONS .......................................................................... 1
TITLE XI LOAN ...................................................................................... 2
CHAPTER 1COMMODATUM .......................................................... 3
SECTION 1.NATURE OF COMMODATUM ................................. 3
SECTION 2.OBLIGATIONS OF THE BAILEE ................................. 4
SECTION 3.OBLIGATIONS OF THE BAILOR ................................ 5
CHAPTER 2SIMPLE LOAN OR MUTUUM ........................................ 7
TITLE XII DEPOSIT............................................................................... 10
CHAPTER 1DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS ...... 10
CHAPTER 2VOLUNTARY DEPOSITS............................................... 11
SECTION 1.GENERAL PROVISIONS .......................................... 11
SECTION 2.OBLIGATIONS OF THE DEPOSITARY ...................... 12
SECTION 3.OBLIGATIONS OF THE DEPOSITOR........................ 16
CHAPTER 3NECESSARY DEPOSIT .................................................. 18
CHAPTER 4SEQUESTRATION OR JUDICIAL DEPOSIT .................... 19
TITLE XVGUARANTY .......................................................................... 19
CHAPTER 1NATURE AND EXTENT OF GUARANTY ........................ 19
CHAPTER 2EFFECTS OF GUARANTY ............................................. 24
SECTION 1.EFFECTS OF GUARANTY BETWEEN
THE GUARANTOR AND THE CREDITOR ...................................... 24
SECTION 2.EFFECTS OF GUARANTY BETWEEN THE
DEBTOR AND THE GUARANTOR ................................................ 26
SECTION 3.EFFECTS OF GUARANTY AS BETWEEN CO-
GUARANTORS ............................................................................ 27
CHAPTER 3EXTINGUISHMENT OF GUARANTY ............................. 28
CHAPTER 4LEGAL AND JUDICIAL BONDS ..................................... 30
TITLE XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS............................ 31
CHAPTER 1PROVISIONS COMMON TO PLEDGE AND MORTGAGE31
CHAPTER 2PLEDGE ...................................................................... 34
CHAPTER 3MORTGAGE ............................................................... 40
JUDICIAL FORECLOSURE OF MORTGAGE ................................... 44
EXTRAJUDICIAL FORECLOSURE OF MORTGAGE ......................... 46
REDEMPTION IN MORTGAGES .................................................. 48
CHAPTER 4ANTICHRESIS .............................................................. 49
CHAPTER 5CHATTEL MORTGAGE ................................................ 51
ACT NO. 1508 ............................................................................ 53
TITLE XIX. - CONCURRENCE AND PREFERENCE OF CREDITS.................. 54
CHAPTER 1GENERAL PROVISIONS ............................................... 54
CHAPTER 2CLASSIFICATION OF CREDITS ..................................... 54
CHAPTER 3ORDER OF PREFERENCE OF CREDITS ......................... 55
CREDIT TRANSACTIONS
Introductory
Credit, Concept The credit of a person means his ability to
borrow money by virtue of the confidence or trust reposed in
him by the lender that he will pay what he may promise.
Otherwise stated, it is the trust or belief reposed by a person in
another, of the latters ability to comply with an obligation.
Credit Transactions, Concept Prescinding from the above
concept of credit, the term credit transactions refers to
agreements based on the trust or belief of someone on the
ability of another person to comply with his obligation.
The term credit transactions includes all transactions
involving loans of money, goods or services extended to
another either gratuitously or onerously.
Significance of Credit Persons are able to enjoy a thing today
but pay for it later; and through the banking system, the
transfer of actual money is eliminated by cancellation of debts
and credits.
Coverage of Credit Transactions; Bar Subject Credit
transactions cover all bailment contracts (commodatum and
mutuum), contracts of deposit (voluntary and necessary),
guaranty and suretyship, pledge, mortgage (real and chattel),
antichresis, concurrence, and preference of credits all provided
in the New Civil Code.
Additionally, it covers special laws like the Usury Law,
Warehouse Receipt Law, Insolvency Law, Financing Company
Act, Pawnshop Regulation Act, Consumer Act of the Philippines,
Truth in Lending Act, Ship Mortgage Decree of 1978, Chattel
Mortgage Law, and Extra-judicial Foreclosure of Real Estate
Mortgage.
Security, Concept It is something promised or delivered to
ensure the fulfillment of an obligation.
Kinds of Credit Transactions
(A) As contracts of security:
1. Contracts of real security contracts supported by
collateral/s or burdened by an encumbrance on
property such as mortgage and pledge.
2. Contracts of personal security contracts where
performance by the principal debtor is not supported
by collateral/s but only by a promise to pay or by the
personal undertaking or commitment of another
person such as in surety or guaranty.
(B) As to their existence:
1. Principal contracts can exist alone such as
commodatum and mutuum. Their existence does not
depend on the existence of another contract.
 2. Accessory contracts depend on another contract
such as guaranty proper, suretyship, pledge,
mortgage and antichresis. These contracts depend on
the existence of a principal contract of loan.
(C) As to their consideration:
1. Onerous a contract where there is consideration
or burden imposed like interest. The interest is the
burden.
2. Gratuitous a contract whereby there is no
consideration or burden imposed like commodatum
which is essentially for free.
Bailment, Defined 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 reclaims it.
Generally, no fiduciary relationship is created by a bailment and
hence it is not accurate to refer to the transfer as in trust,
because no trustee-beneficiary relationship is created.
It is different from bail in criminal procedure which is the
security given for the release of a person in custody of the law,
furnished by him or a bondsman, to guarantee his appearance
before any court as required under the conditions hereinafter
specified. Bail may be given in the form of corporate surety,
property bond, cash deposit, or recognizance.
Personalties or Parties in Bailment
1. Bailor one who gives or delivers the property bailed.
2. Bailee one who receives the things delivered or
bailed.
Bailor is also known as comodatario or commodans. Bailee is
also known as comodante or commodatarius.
Letter of Credit Trust Receipt Transactions Arrangement,
Concept Under a letter of credit trust receipt transaction
arrangement, a bank extends to a borrower a loan covered by
the letter of credit, with the trust receipt as a security of the
loan.
Bridge Financing The essence of bridge financing loans is to
obtain funds through an interim loan, while the main loan is not
yet available.
oOo
TITLE XI LOAN
General Provisions
Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
(1740a)
________
Two kinds of contracts of loan:
1. Contract of commodatum where one of the parties (bailor)
delivers to another (bailee) something not consumable so that
the latter may use the same for a certain time and thereafter
returns it;
2. Contract of mutuum where money or other consumable
thing is delivered by the lender to the borrower subject to the
condition that the same amount of the same kind and quality
shall be paid. This is called simple loan.
Consumable and Non-Consumable Things, Concepts a thing
is consumable when it cannot be used in a manner appropriate
to its nature without being consumed.
On the other hand, a non-consumable thing is a movable thing
which can be used in a manner appropriate to its nature
without it being consumed. (nature of the thing)
Fungible and Non-Fungible Things, Concepts
1. Fungible thing one where the parties have agreed to allow
the substitution of the thing given or delivered with an
equivalent thing.
2. Non-fungible thing one where the parties have the
intention of having the same identical thing returned after the
intended use. (intention of the parties)
Kinds of Commodatum
1. Precarium the bailor may demand the thing loaned at will
under the conditions set forth in Article 1947. The use of the
thing by the bailee depends on the pleasure of the bailor.
2. Ordinary Commodatum the bailor cannot just demand the
return of the thing at will because there is a period agreed
upon which must be respected.
1
Distinctions between Commodatum and Mutuum
2
Distinctions between Loan and Deposit
Credit distinguished from Loan - The credit of an individual
means his ability to borrow money by virtue of the confidence
or trust reposed by the lender unto him that he will pay what
he may promise. A loan means the delivery by one party and
the receipt by the other party of a given sum of money, upon
an agreement, express or implied, to repay the sum loaned,
with or without interest.
Loan distinguished from Discount (1) In a discount, interest is
deducted in advance, while in a loan, interest is taken at the
expiration of a credit; (2) a discount is always on double-name
paper; a loan is generally on a single-name paper.
1 See Page 7
2 See Page 8
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Loan distinguished from Rent or Lease In a contract of rent
the owner of the property does not lose his ownership. He
simply loses his control over the property rented during the
period of the contract. In the contract of loan the thing
loaned becomes the property of the obligor. In the contract of
rent the relation between the contractors is that of a landlord
and tenant. In a contract of loan of money, goods, chattels or
credits, the relation between the parties is that of obligor and
obligee.
Deposit with Interest is Loan An instrument acknowledging
receipt of a sum of money as a deposit returnable two months
after notice with interest is evidence of a contract of loan and
not of deposit.
Loan with Stipulation of Sale of Land, In case of Non-Payment;
Effect An agreement for a loan with the stipulation that if the
loan is not paid, a parcel of land would be deemed sold to the
lender for the amount of the loan is valid. There is no pacto
comisorio.
________
Art. 1934. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon parties, but the
commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract. (n)
________
Commodatum and Mutuum are Real Contracts; Where
Perfected These two contracts cannot be perfected by mere
consent because they are not consensual agreements. They are
contracts which require the delivery of the objects of the
obligations. In brief, no delivery, no contract.
Article 1316 expressly provides
Art. 1316. Real contracts, such as deposit, pledge and
Commodatum, are not perfected until the delivery of the
object of the obligation. (n)
While mutuum is not mentioned, it has the same character as
commodatum.
Mutuum is also a real contract which cannot be perfected until
the delivery of the object of the contract.
Legal Effect of Promise to Deliver A promise to deliver
something by way of commodatum or mutuum if accepted is
binding upon the promissor and promisee because contracts
are obligatory when all the essential requisites for their validity
are present (Art. 1356).
The accepted promise, however, does not constitute the real
contract of loan which requires delivery of the object for its
perfection.
Article 1934 is akin to Article 1479 concerning an accepted
promise to buy and sell which is reciprocally demandable
Art. 1479. A promise to buy and sell a determinate thing for
a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price. (1451a)
________
CHAPTER 1COMMODATUM
SECTION 1.NATURE OF COMMODATUM
Art. 1935. The bailee in commodatum acquires the used of the
thing loaned but not its fruits; if any compensation is to be paid
by him who acquires the use, the contract ceases to be a
commodatum. (1941a)
________
Characteristics of Commodatum
1. It is essentially gratuitous;
2. Its purpose is to transfer the temporary use of the thing
loaned to the bailee;
3. The use of thing is for a certain time;
4. It is a real contract because it requires delivery of the object
for its perfection;
5. It is a principal contract because its existence does not
depend upon another contract;
6. It is a unilateral contract because after the object had been
delivered by the bailor (lender), it creates obligations to be
performed by the bailee alone (borrower); and
7. It is purely personal because of the trust and belief reposed
on the bailee.
Fruits of the Property under Commodatum The fruits of the
property shall pertain to the bailor or owner. The bailee does
not enjoy the fruits (Art. 1935). Usufruct will result if the bailee
is authorized to enjoy the fruits of the property.
However, under Article 1940, if there is a stipulation in the
contract allowing the bailee to enjoy the fruits of the thing
loaned, the stipulation shall be valid.
________
Art. 1936. Consumable goods may be the subject of
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
(n)
________
Subject of Commodatum Under Article 1933, the subject
matter of commodatum must be non-consumable because the
thing must be returned. What has been consumed cannot be
returned.
However, consumable goods may be the object of
commodatum if the purpose is not to consume them such as
when they were loaned merely for ad ostentationem or
exhibition purposes. After the affair, the same and identical
goods shall be returned to the lender or bailor.
________
Art. 1937. Movable or immovable property may be the object
of commodatum. (n)
________
Object of Commodatum Both immovable and movable
property may be the subject matter of commodatum.
________
Art. 1938. The bailor in commodatum need not be the owner of
the thing loaned. (n)
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 ________
Art. 1939. Commodatum is purely personal in character.
Consequently:
(1) The death of either the bailor or the bailee extinguishes the
contract;
(2) The bailee can neither lend nor lease the object of the
contract to a third person. However, the members of the
bailee's household may make use of the thing loaned, unless
there is a stipulation to the contrary, or unless the nature of the
thing forbids such use. (n)
________
The present Article superseded the old rule by making
commodatum a purely personal contract. Thus, the rights and
obligations arising from commodatum are extinguished by the
death of either the bailor or bailee.
Being personal to the borrower or bailee, the use of the object
cannot be ceded to a third person. Excepted from this
prohibition are the members of the household of the bailee
subject to the following conditions: (1) there is no agreement or
stipulation to the contrary, and (2) the nature of the object
forbids such use.
The members of the household of the bailee are not considered
third persons.
Article 1939 is an exception to the broader rule that all rights
acquired in virtue of an obligation are transmissible (Art. 1178).
The Article prohibits transmission of the use of the thing to
third persons subject, however, to the exception above stated.
________
Art. 1940. A stipulation that the bailee may make use of the
fruits of the thing loaned is valid. (n)
________
When Bailee May Use Fruits of Thing Loaned The general
rule is that the bailee is not entitled to the use or enjoyment of
the fruits of the thing loaned. The fruits belong to the owner
(Art. 441). However, if there is a stipulation to that effect, the
bailee may make use of the fruits of the thing.
It is understood that the enjoyment of the fruits must only be
incidental to the use of the thing. It should not be the main
cause, otherwise, the contract is not a commodatum but a
usufruct. The stipulation will not impair the essence of
commodatum because the actual cause or consideration
therefor is still the liberality of the bailor or lender.
________
SECTION 2.OBLIGATIONS OF THE BAILEE
Art. 1941. The bailee is obliged to pay for the ordinary expenses
for the use and preservation of the thing loaned. (1743a)
________
Article Applies Only to Ordinary Expenses If the expenses
incurred by the bailee are extraordinary, the bailor must
reimburse the bailee provided that before incurring them, he
first informs the bailee about it.
If the extraordinary expenses are incurred during the actual use
of the thing, the bailee and the bailor shall equally bear the
expenses unless there is a stipulation to the contrary (Art.
1949).
________
Art. 1942. The bailee is liable for the loss of the thing, even if it
should be through a fortuitous event:
(1) If he devotes the thing to any purpose different from that
for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted;
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exemption the bailee from
responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a
member of his household;
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter. (1744a and 1745)
________
Obligations to Pay for Ordinary Expenses The ordinary
expenses for the use and preservation of the thing loaned must
be shouldered by the bailee (borrower) because he is under
obligation to return the identical thing to the bailor.
Consequently, it is understood that he should take good care of
the thing with the diligence of a good father of a family as
mandated by Article 1163.
Liability of Bailee For Loss of the Thing Loaned Even by Reason
of Fortuitous Event The Article is an exception to the general
rule that no person shall be responsible for those events which
could not be foreseen, or which, though forseen, were
inevitable (Art. 1174).
Meaning of the Term Loss it is understood that the thing is
lost when it perishes, or goes out of commerce, or disappears
in such a way that its existence is unknown or cannot be
recovered.
Rationale Behind the Imposition of Liability upon the Bailee
for the Loss Caused by Fortuitous Event In all the six (6)
situations in Article 1942, the bailee has committed imporper
conduct. To punish him for such act/s of impropriety or bad
faith, he is made liable for the loss even if the acts he had
committed are not the proximate cause of the loss. It is enough
that he laid the basis for the operation of the loss.
The reasons behind the imposition of liability on the bailee in
spite of the presence of a fortuitous event are as follows
First paragraph He is in bad faith. He deviated the purpose for
which the thing was borrowed.
Second paragraph He is guilty of mora or default. Article
1165, (third paragraph also renders him liable due to delay.
Third paragraph The law presumes that the parties, due to
the appraisal, have intended that the bailee (borrower) shall be
4|P LATON
liable for the loss due to fortuitous event. That appears to be
the reason for the appraisal of the value of the thing before its
delivery.
Fourth paragraph The bailee violated the pure personal
character of the commodatum. He abused the trust reposed in
him by the bailor (lender).
Fifth paragraph In preferring to save his own property than
the thing loaned, he committed an act tantamount to
ingratitude considering that the loan is gratuitous. The bailee
did not mind the liberality of the bailor (lender) when he chose
to save his own property.
________
Art. 1943. The bailee does not answer for the deterioration of
the thing loaned due only to the use thereof and without his
fault. (1746)
________
No Liability for Deterioration of the Thing in the Absence of
Fault Deterioration is the lowering of the value or character
of a thing. It normally occurs by reason of ordinary wear and
tear. Such depreciation is borne by the bailor (lender) being the
owner of the thing. However, if the deterioration is caused by
the fault or negligence of the bailee, he is responsible for it.
________
Art. 1944. The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even though it may
be by reason of expenses. However, the bailee has a right of
retention for damages mentioned in Article 1951. (1747a)
________
Generally, Bailee (Borrower) has No Right of Retention,
Exception As a general rule, the bailee (borrower) cannot
retain the thing loaned to him on the ground that the bailor
(lender) owes him something including claims for extraordinary
expenses incurred by him (bailee).
Excepted from the rule are claims for damages which the bailee
suffered by reason of the hidden defects or flaws of the thing
loaned, of which he was not warned or advised by the bailor
(lender). However, his right is only to retain the thing until he is
finally reimbursed. He has no right to sell the thing to satisfy his
claims for damages.
Rationale Behind the Article bailment implies a trust that as
soon as the time has expired, or the purpose accomplished, the
bailed property must be restored to the bailor.
Article 1287 also provides
Art. 1287. Compensation shall not be proper when one of
the debts arises from a depositum or from the obligations of
a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of Article 301.
(1200a)
Retention in Violation of the Law Cannot Ripen into Just
Title
________
Art. 1945. When there are two or more bailees to whom a thing
is loaned in the same contract, they are liable solidarily. (1748a)
________
Solidary Obligation, Concept each one of the debtors is
obliged to pay the entire obligation, and where each one of the
creditors has the right to demand from any of the debtors, the
payment or fulfillment of the entire obligation (Art. 1207).
(a) Passive solidarity which is the solidarity on the part of the
debtors;
(b) Active solidarity which is the solidarity on the part of the
creditors.
Solidary Liability of Two or More Bailees (Borrowers); Reason
Solidarity is provided to safeguard effectively the rights of the
bailor (lender) over the thing loaned. In case of loss of the
thing, he can fully enforce his right against any one or some of
the bailees depending upon his convenience.
Article 1945 constitutes as an exception to the general rule of
joint obligations where there are two or more debtors, who
concur in one and same obligation under Article 1207 and
1208.
________
SECTION 3.OBLIGATIONS OF THE BAILOR
Art. 1946. The bailor cannot demand the return of the thing
loaned till after the expiration of the period stipulated, or after
the accomplishment of the use for which the commodatum has
been constituted. However, if in the meantime, he should have
urgent need of the thing, he may demand its return or
temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession
of the bailor. (1749a)
________
When the Return of the Thing Loaned May be Demanded
The return of the thing loaned may be demanded by the bailor
only
1. After the expiration of the period stipulated; or
2. After the accomplishment of the use for which the
commodatum has been constituted.
The parties are mutually bound by the terms of their contract
of commodatum (Art. 1934). However, in precarium, the bailor
(lender) may demand the thing loaned at will. This incidentally
is the same rule in deposit under Article 1988.
Exception to the Rule An exception to the rule of no
demand arises when the bailor in the meantime, has an urgent
need of the thing loaned, in which case, he may demand its (a)
return, or (b) its temporary use.
In case of temporary use, the commodatum is not extinguished
but merely suspended while the possession of the thing loaned
remains in the bailor (lender). After the urgent need of the
bailor (lender) has been gratified, he must return the thing to
the bailee (borrower) so its use may resume for the remainder
5|P LATON
of the stipulated time or period or until the purpose of the loan
had been accomplished.
However, if the period had already expired, the bailee
(borrower) can no longer demand the return of the thing. It
must be noted, the contract is gratuitous. Damages are not
recoverable by the bailee (borrower) in the absence of bad
faith on the part of the bailor (lender).
When Loan is For Unlawful Purposes the contract is void. The
bailor (lender) may immediately recover the thing before any
illegal act is committed and provided he is innocent or in good
faith.
________
Art. 1947. The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following
cases:
(1) If neither the duration of the contract nor the use to which
the thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
(1750a)
________
Precarium This is a specie of commodatum where the bailee
(borrower) is bound to return the thing upon the demand of
the bailor (lender) in any of the following circumstances
1. If the duration of the contract had not been
stipulated;
2. If the use to which the thing loaned should be
devoted had not been also stipulated; and
3. If the use of thing is merely by tolerance of the
owner.
Word Owner, Inaccurate because the bailor (lender) need
not be the owner of the thing (Art. 1938).
________
Art. 1948. The bailor may demand the immediate return of the
thing if the bailee commits any act of ingratitude specified in
Article 765. (n)
________
Applicability Article 1948 applies to ordinary commodatum.
In precarium (Art. 1947), the bailor (lender) can always demand
the immediate return of the thing at will or pleasure of the
bailor (lender).
Immediate Demand by Bailor (Lender) Due to Bailees
(Borrowers) Act of Ingratitude If the bailee has committed
acts of ingratitude specified in Article 765, the bailor may
immediately demand the return of the thing loaned even if the
period stipulated for its use has not yet expired.
________
Art. 1949. The bailor shall refund the extraordinary expenses
during the contract for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge of the
bailor before incurring them, except when they are so urgent
that the reply to the notification cannot be awaited without
danger.
If the extraordinary expenses arise on the occasion of the
actual use of the thing by the bailee, even though he acted
without fault, they shall be borne equally by both the bailor and
the bailee, unless there is a stipulation to the contrary. (1751a)
________
Ordinary and Extraordinary Expenses; Rule On the refund of
expenses incurred by the bailee (borrower), the following rules
shall apply
1. Ordinary expenses for the use and preservation of the thing
shall be paid or shouldered by the bailee or borrower (Art.
1941), because he is under the strict obligation of returning the
thing at the proper time and in good condition.
2. Extraordinary expenses shall be borne by the bailor (lender).
The bailor shall fully refund to the bailee the extraordinary
expenses incurred by the latter provided the bailor has been
notified before the expenses were incurred. However, the
requirement of a notice is dispensed with, when there is
urgency in the repair or preservation of the thing loaned which
means that the delay will cause imminent danger to the
property.
3. If extraordinary expenses are incurred by the bailee on the
occasion of the actual use of the thing, such expenses shall be
divided equally between the bailor and bailee.
Reason For Equal Sharing The bailee pays one-half because
of the benefit derived from the use of the thing loaned to him,
and the bailor pays the other half because he is the owner and
the thing will be returned to him.
________
Art. 1950. If, for the purpose of making use of the thing, the
bailee incurs expenses other than those referred to in Articles
1941 and 1949, he is not entitled to reimbursement. (n)
________
Incurring of Other Expenses The bailee (borrower) is not
entitled to the refund of the other expenses outside of those
covered by Articles 1941 and 1949 incurred for the purpose of
making use of the thing. This is to prevent the bailee (borrower)
from incurring expenses which are not useful to the bailor
(lender). Hence, he should not be compelled to make
reimbursement to the bailee.
________
Art. 1951. The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable
to the latter for the damages which he may suffer by reason
thereof. (1752)
________
Failure to Advise Bailee of Defects of Flaws of the Thing
Loaned; Tortious Act If the bailor (lender) is aware of any
defects or flaws of the thing loaned and omitted to timely
advise the bailee, and by reason thereof, the latter suffered
damages, there is tort or quasi-delict, for which the bailor
(lender) is liable (Art. 2176). The omission constituted
negligence. While there is a pre-existing contract between the
parties, the gross violation of the contract is by itself a tort or
quasi-delict.
Rule When Bailor (Lender) Not Aware of the Flaws of the
Thing Loaned Article 1951 applies only if the bailor is aware
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of the existing flaws or hidden defects which are unknown to
the bailee (borrower). The bailor is deemed to have acted in
bad faith. If the bailor (lender) is not aware of the flaws, he
cannot be made liable for the resulting danger because
commodatum is essentially gratuitous and not onerous.
Liberality must be reciprocated with liberality.
Reason for Article 1951 When a person lends a thing, he
ought to confer a benefit, and not to do mischief. If he does not
reveal the flaws, he is liable for his bad faith.
Where Both Parties are Aware of the Flaws or Defects If both
the bailor and bailee (borrower) are aware of the flaws or
defects in the thing loaned, the bailee (borrower) is deemed to
have assumed the risk. The bailor is not liable for the damages
suffered by the bailee by reason thereof.
May the Bailee Retain the Thing Loaned for Damages he
Suffered? Yes. (See Article 1944, second sentence).
________
Art. 1952. The bailor cannot exempt himself from the payment
of expenses or damages by abandoning the thing to the bailee.
(n)
________
Abandonment of the Thing Cannot Exempt Bailor (Lender)
From Payment of Expenses and Damages This Article is one
instance where the renunciation of ones right over the
property is not sufficient to satisfy an obligation for expenses
incurred, unlike in case of co-ownership (Art. 488), and in
easement of party wall (Art. 662, par. 2)
________
CHAPTER 2SIMPLE LOAN OR MUTUUM
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and
quality. (1753a)
________
Mutuum, Defined a contract whereby one of the parties
called the lender delivers to another called the borrower, Distinctions between Loan and Barter
money or other consumable thing with the condition or
agreement that the same amount of the same kind and
quantity shall be paid (Art. 1933).
What is the Cause in a Loan?
(a) As to the borrower, the acquisition of the thing;
(b) As to the lender, the right to demand the return of the thing
loaned or its equivalent to demand the return of the thing
loaned or its equivalent.
Ownership over the Thing is Transferred In a contract of
loan, the borrower becomes the owner of the thing or property
delivered to him. What will be paid therefore is not the same or
identical thing delivered. The borrower is bound to pay (not
return) to the lender only the equivalent of the thing. If the
obligation is to return the same or identical thing, the contract
would be a contract of commodatum.
A loan of money, nevertheless, may by agreement be payable
in kind (Art. 1958).
3
Mutuum distinguished from Rent
Fungible Thing When the movable thing delivered in loan is
not to be returned to the bailor, but may be substituted or
replaced with another equivalent thing, it is a fungible thing.
Fungible things are usually determined by number, weight or
measure.
If the thing delivered is intended to be returned and
irreplaceable after the purpose of the loan had been
accomplished, the thing is non-fungible.
The present Article speaks of fungible things. Mutuum is a
contract of consumption unlike commodatum which is a
contract of use of a thing.
________
Art. 1954. A contract whereby one person transfers the
ownership of non-fungible things to another with the obligation
on the part of the latter to give things of the same kind,
quantity, and quality shall be considered a barter. (n)
________
Definition of Barter Under 1638, barter is defined as a
contract where one of the parties binds himself to give one
thing to another in consideration of the latters promise to give
another thing.
Transfer of Ownership of Non-Fungible Things Replaceable
with Things of the Same Kind, Quantity and Quality; Effect
The present Article speaks of a barter or exchange. The transfer
of ownership of non-fungible things to a party with obligation
on his part to give things of the same kind, quantity and quality
to another party is considered barter.
As a rule, non-fungible things are irreplaceable. They must be
returned to the lender after the purpose of loan had been
accomplished. The present Article is an exception. The non-
fungible things may be replaced by agreement of the parties.
However, the contract ceased to be a loan. It becomes a barter.
4
________
Art. 1955. The obligation of a person who borrows money shall
be governed by the provisions of Articles 1249 and 1250 of this
Code.
If what was loaned is a fungible thing other than money, the
debtor owes another thing of the same kind, quantity and
quality, even if it should change in value. In case it is impossible
to deliver the same kind, its value at the time of the perfection
of the loan shall be paid. (1754a)
________
Governing Rules on Payment of Loan The subject matter of
simple loan may either be money or consumable thing. The
rules of payment shall be as follows
(a) If it is money, the obligation of the debtor or borrower shall
be governed by the following Articles
3 See Page 33
4 See Page 35
7|P LATON
 Art. 1249. The payment of debts in money shall be made in
the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in
the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or
when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance. (1170)
Art. 1250. In case an extraordinary inflation or deflation of
the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement
to the contrary. (n)
(b) If it is other consumable or fungible thing, the debtor or
borrower shall pay another thing of the same kind, quantity
and quality, even if it should change in value. If this cannot be
done, the value of the thing at the time of its perfection
(delivery) shall be the basis of the payment of the loan.
Note that the value of the thing shall be its value at the time of
the perfection (delivery) of the contract and not at the time of
payment of the loan.
________
Art. 1956. No interest shall be due unless it has been expressly
stipulated in writing. (1755a)
________
Applicability The Article applies only to interest for use of
money. It is not applicable to interest as indemnity for
damages.
Meaning of Interest Interest is nothing more than the
compensation agreed to be paid by the borrower for the use of
the money lent to him by the lender.
Classes of Interest Interests are classified as follows
(a) Simple that interest which is paid for the use of the
principal at a certain rate stipulated in writing by the parties.
(b) Compound that interest which is imposed upon the
accrued interest, that is, interest due and unpaid. The accrued
interest is added to the principal and the resulting sum
(principal and accrued interest) is treated as a new principal
upon which the interest for the next period is based.
(c) Legal that interest which the law directs to be paid in the
absence of any agreement as to the rate. It is fixed at 6% per
annum.
No liability For Interest Without Written Agreement The
present Article has strictly required a written commitment on
the part of the debtor to pay interest to make him liable.
Right to Interest, Basis The right to interest arises only by
reason of the contract (stipulation in writing) or by reason of
delay or failure to pay principal on which interest is demanded.
If the obligation consists of the payment of a sum of money,
and the debtor incurs delay, the indemnity for damages shall be
the payment of legal interest.
Reckoning Period for Payment of Interest of Unliquidated
Claims No interest shall be adjudged on unliquidated claims
unless the same can be established with reasonable certainty,
and where the pleadings in the trial court did not spell out said
amounts with certitude, the legal interest thereon shall run
only from the promulgation of judgment of said court, it being
at that stage that the quantification of damages may be
deemed to have been reasonable ascertained.
Actual Base for Computation The actual base for the
computation of such legal interest shall be the amount as
finally adjudged by the Supreme Court.
Interest on Damages This kind of interest need not be in
writing. Article 1956 applies only to interest for use of money
and not to interest imposed as items of damages.
The interest on the damages awarded should be computed
from the time of the finality of the decision, and not from the
filing of the complaint against the accused.
Interest Recoverable in case of Delay in Payment of Money
Obligations
Art. 2209. If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six per cent per
annum. (1108)
Floating Rate of Interest; Void A stipulation for a floating rate
of interest in a letter of credit in which there is no reference
rate set either by it or by the Central Bank, leaving the
determination thereof to the sole will and control of the lender
bank is invalid.
Legal Rate of Interest from 6% to 12% Where Applicable The
Supreme Court held that the 12% interest applies only to
forbearances of money, goods and credits and court judgments
thereon, but not on court judgments for damages which do not
involve a loan in which cases the legal rate of interest remains
at 6% per annum.
Can There be Interest in Equitable Mortgage? No, because the
same is not stipulated in writing.
Compound Interest is Not Automatic A lender cannot just be
entitled to compound interest. There must first be a stipulation
for payment of interest and this interest may earn interest only
when it is judicially demanded, although the obligation is silent
upon this point (Art. 2212). This is called compound interest.
________
Art. 1957. Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury shall
be void. The borrower may recover in accordance with the laws
on usury. (n)
________
Usurious Loans Cannot Hide Behind Legal Forms The form of
the contract is not conclusive for the law will not permit a
8|P LATON
usurious loan to hide itself behind a legal form. Parol evidence
is admissible to show that a document though legal in form was
in fact a device to cover usury.
Usury Law, Legally Non-Existent The Usury Law by virtue of
CB Circular No. 905 adopted on December 22, 1982, has
become legally non-existent. The Circular has expressly
removed the interest ceilings prescribed by the Usury Law.
May the Borrower Recover Interests He Paid in a Usurious
Transaction? In usurious loans, the entire obligation does not
become void because of an agreement for usurious interest
the unpaid principal debt still stands and remains valid but the
stipulation as to the usurious interest is void, and the debt is to
be considered without stipulations as to the interest.
The amount paid as interest under a usurious agreement is
recoverable by the debtor, since the payment is deemed to
have been made under restraint, rather than voluntary.
Must the Principal Debt Still be Paid in Usurious Transactions?
Yes. Under the Usury Law, notwithstanding stipulations of
usurious interest, the debtor must still pay the principal debt.
Courts May Simply Reduce Unreasonable Interests Even if
the ceilings on interests imposed by the Usury Law had been
suspended by the CB Circular No. 905, nonetheless, lenders
cannot charge unreasonable and unconscionable interests. The
courts may reduce the same. In brief, the lender may recover
both the principal and reasonable interest.
Rule That "Principal" May be Recovered by the Usurer with
Legal Rate of Interest From Demand, Abandoned.
CB Circular No. 905 Has No Retroactive Effect It is an
elementary rule of contracts that the laws in force at the time
the contract was made and entered into, governed it.
________
Art. 1958. In the determination of the interest, if it is payable in
kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment. (n)
________
How to Determine Interest, When Payable In Kind If the
interest by stipulation is payable in kind, the products or goods
to be paid as interest must be appraised to determine their
value in money. The basis is the current price of the products or
goods at the time and place of payment.
________
Art. 1959. Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new
interest. (n)
________
Accrued Interest, Meaning Interest due and remaining
unpaid is termed "accrued interest".
Compound Interest This is the interest on the accrued
interest.
Accrued Interest Not to Earn Compound Interest, Exceptions
The general rule is that the accrued interest shall not earn
interest (compound interest) except: (a) when there is a written
stipulation to that effect (Art. 1959), or (b) when judicial
demand has been made upon the borrower.
Rationale Behind the General Rule Against Compound
Interests If there is no rule against compound interest, debts
would accumulate with rapidity beyond all ordinary calculation
and endurance. It would tend also to inflame the avarice and
harden the heart of the creditor. Some allowance must be
made for the indolence of mankind.
________
Art. 1960. If the borrower pays interest when there has been
no stipulation therefor, the provisions of this Code concerning
solutio indebiti, or natural obligations, shall be applied, as the
case may be. (n)
________
Application of Solutio Indebiti and Natural Obligation The
Article applies when the borrower pays interest for the money
loaned to him without any written stipulation for payment of
interest. In the absence of such written stipulation, he cannot
be compelled to pay interest because under such situation, no
interest is due.
If the borrower paid interest by mistake, he can recover what
he had paid under the principle of solutio indebiti (Art. 2154).
No one shall be enriched at the expense of another.
If the borrower agreed orally to pay the interest (the
percentage of which is reasonable) but the agreement was not
reduced into writing and legally therefore, no interest is due,
nevertheless, the borrower paid the interest as he considered
the payment thereof as a moral obligation on his part, the
payment is valid as performance of a natural obligation (Art.
1423).
In the foregoing situations, the rules governing solutio indebiti
or natural obligation shall apply.
________
Art. 1961. Usurious contracts shall be governed by the Usury
Law and other special laws, so far as they are not inconsistent
with this Code. (n)
________
Aim of the Usury Law Act No. 2655 (Usury Law) was enacted
on February 24, 1916. It was passed to curb usury, since that
taking of excessive interest for the loan of money has been
regarded with abhorrence from the earliest time.
Under P.D. No. 1684, the Central Bank was empowered to
prescribe the maximum rates of interest for loans and
forbearances.
Forbearance, Meaning The term forbearance, as used in the
Usury Law, signifies the contractual obligation of the creditor to
forbear during a given period to require the debtor, payment of
an existing debt then due and payable. Such forbearance of
giving time for the payment of a debt is, in substance, a loan. In
the absence of any loan or forbearance, there can be no basis
for usury.
9|P LATON
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date
the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, 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, INC. v. CA)
Back Rentals, Equivalent to Loan or Forbearance; Twelve
(12%) Percent Interest Imposable Back rentals being
equivalent to loan or forbearance of money, the interest due
thereon is twelve (12%) percent per annum from the time of
extra-judicial demand.
Did CB Circular No. 905 Repeal/Amend The Usury Law? No. It
merely suspended its effectivity. If the Central Bank restores
the ceilings on interest rates, the Usury Law would again be
applicable.
If Interest Agreed Upon is Unconscionable, The Court May
5
Reduce The Same Under Article 21, New Civil Code
If Borrower Does Not Question The Interest Rate, Same Will
Stand If the borrower does not put in issue the
unreasonableness of the interest rate which he has agreed to
pay, the court will not extend him any help because the Usury
Law is presently ineffective.
It is necessary, however, that the borrower has agreed to the
payment of the interest. The lender cannot just unilaterally
increase the rate of interests to an iniquitous level.
When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
oOo
TITLE XII DEPOSIT
CHAPTER 1DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract. (1758a)
________
5 See Medel v. CA, 299 SCRA 481
Deposit, Definition Deposit is a contract where by a person
(called depositor) delivers a thing to another (called depositary)
for he principal purpose of safekeeping it with the obligation of
returning it when demanded.
Characteristics of Contract of Deposit
1. It is a real contract because it can only be perfected
by the delivery of the contract. XPN: An agreement to
constitute a future deposit is a consensual contract
and is binding.
2. Only movable things or personal property can be the
object of a contract of deposit. XPN: Judicial deposit
is provided by law even if the subject matter is land.
3. It is principally intended for safekeeping of the thing
deposited.
4. It is generally gratuitous, unless there is a contrary
agreement or the depositary is engaged in the
business of storing goods such as a warehouseman.
5. Generally, the depositary cannot use the thing
deposited except with permission of the depositor or
when the preservation of the thing requires its use
but only for said purpose.
When money is deposited in a bank as deposit; Effect
When money is placed in a bank for safekeeping, same money
must be returned.
Commercial deposits, Eliminated
Classes of deposits
a) Judicial deposit (or sequestration) one which is
brought about by the attachment or seizure of a
property by order of the court.
b) Extra-judicial depositwhich could either be
voluntary or necessary.
a. Voluntary one made by the will of the
depositor with the consent of the
depositary.
b. Necessary one made in compliance with a
legal obligation, or on occasion of a
calamity.
6
Deposit distinguished from Commodatum
7
Deposit distinguished from Mutuum
8
Deposit distinguished from Agency
Deposit distinguished from Lease In deposit, the principal
purpose is the safekeeping of the thing deposited and its return
upon demand. In lease, the principal purpose is the use of the
thing with compensation called rentals. Return may be
demanded upon the termination of the lease contract.
Deposit distinguished from Sale The ownership of the thing is
not transferred to the depositary, but in sale the object of the
contract is transferred to the buyer.
Nature of advance payment in sale; Not deposit proper A so
called deposit of an advance payment in the case of sale is not
the deposit contemplated under Article 1962. It is advance
6 See Page 55
7 See Page 55
8 See Page 56
10 | P LATON
payment, and ownership is transferred to the seller once it is
given.
________
Art. 1963. An agreement to constitute a deposit is binding, but
the deposit itself is not perfected until the delivery of the thing.
(n)
________
Contract to make a future deposit The present Article applies
only to voluntary deposits because there must be an
agreement, and not to necessary or involuntary deposits. In the
latter deposits, there is no agreement between the parties to
create the contract.
________
Art. 1964. A deposit may be constituted judicially or
extrajudicially. (1759)
________
Constitution of deposits, Classes
1. Judicial constitution when there is a court order.
2. Extra-judicial constitution when it is created under
Article 1968 (voluntary) and under Article 1996
(necessary).
________
Art. 1965. A deposit is a gratuitous contract, except when there
is an agreement to the contrary, or unless the depositary is
engaged in the business of storing goods. (1760a)
________
Deposit is generally a gratuitous contract; Exception
a) If the parties have agreed that compensation be paid;
and
b) The depositary is engaged in the business of storing
goods.
Deposit should be considered as a loan if there is a stipulation
for payment of interest. The reason is that interest can only
arise from a contract of loan.
________
Art. 1966. Only movable things may be the object of a deposit.
(1761)
________
Applicability Only to extra-judicial deposit wherein only
movables may be the object whether the deposit is voluntary
or necessary.
Judicial deposits, however, may cover either immovable or
movable property, the aim of which being to protect the rights
and interests of the concerned party or parties in the litigation.
Movable things Tangible things which can be transported
from one place to another without being destroyed. They do
include intangible or incorporeal things like rights and actions
which may be the subject of assignment. Immovable things
cannot be held physically for safekeeping.
________
Art. 1967. An extrajudicial deposit is either voluntary or
necessary. (1762)
________
Extra-judicial deposits, Classes Voluntary deposit is defined in
Article 1968 while necessary deposit under Article 1996.
________
CHAPTER 2VOLUNTARY DEPOSITS
SECTION 1.GENERAL PROVISIONS
Art. 1968. A voluntary deposit is that wherein the delivery is
made by the will of the depositor. A deposit may also be made
by two or more persons each of whom believes himself entitled
to the thing deposited with a third person, who shall deliver it
in a proper case to the one to whom it belongs. (1763)
________
Voluntary deposit Concept It is a contract or juridical relation
where a thing is delivered at the will of a person (depositor) to
another (depositary) for the purpose of safekeeping by the
latter coupled with the obligation of returning it upon demand.
There is freedom of action. The depositor is free to choose the
depositary.
Depositor need not be the owner of the thing
GR: Depositor be the owner of the thing deposited.
XPN:
1. Article 1968, second sentence: A deposit may also be
made by two or more persons each of whom believes
himself entitled to the thing deposited with a third
person, who shall deliver it in a proper case to the one
to whom it belongs.
2. Article 1984, first paragraph: The depositary cannot
demand that the depositor prove his ownership of the
thing deposited. Note: Ownership of the thing
deposited is not transferred to the depositary. Hence,
the depositor need not be the owner.
Second sentence is in the nature of an interpleader The
deposit in the second sentence is made by two or more
persons.
Section 1, Rule 62 of the Revised Rules of Court provides the
formal rule on Interpleader
Section 1. When interpleader proper. Whenever conflicting claims upon
the same subject matter are or may be made against a person who
claims no interest whatever in the subject matter, or an interest which
in whole or in part is not disputed by the claimants, he may bring an
action against the conflicting claimants to compel them to interplead
and litigate their several claims among themselves.
________
Art. 1969. A contract of deposit may be entered into orally or in
writing. (n)
________
Form of the contract of deposit Either orally or in writing or
partly oral and partly in writing. There are no formalities
required, except the delivery of the thing, to make the contract
valid and enforceable.
________
11 | P LATON
Art. 1970. If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall be
subject to all the obligations of a depositary, and may be
compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by the
latter himself if he should acquire capacity. (1764)
________
Incapacitated person, Concept A person is considered
incapacitated if he cannot give consent to the contract such as
minors, insane, demented persons, deaf-mutes who do not
know how to write. Capacity to act may also be modified by
other circumstances like civil interdiction, insolvency, etc.
Voidable contract Where one of the parties is incapable of
giving consent to a contract, the contract is voidable.
However, the deposit is still recognized. The capacitated person
who accepts the deposit made by an incapacitated shall be
subject to all the obligations of a depositary as provided under
Articles 1972 to 1991 as if there is a regular contract of deposit.
Moreover, if the depositary refuses to return the thing
deposited, he can be compelled to return it by the legal
representative of the incapacitated person or by the latter
himself if he becomes capacitated. The depositary here cannot
allege for his benefit and advantage, so as to frustrate the
return of the thing, the incapacity of the incapacitated
depositor.
________
Art. 1971. If the deposit has been made by a capacitated person
with another who is not, the depositor shall only have an action
to recover the thing deposited while it is still in the possession
of the depositary, or to compel the latter to pay him the
amount by which he may have enriched or benefited himself
with the thing or its price. However, if a third person who
acquired the thing acted in bad faith, the depositor may bring
an action against him for its recovery. (1765a)
________
Rule in Article 1971 is the opposite of the Rule in Article 1970
In the present article, it is the depositor who is capacitated
while the depositary is the incapacitated one.
The depositor may only recover the thing deposited if it is still
in the possession of the incapacitated depositary. If the thing is
already disposed of in favor of a third persons who acted in
good faith whose rights cannot be disturbed, the only remedy
of the depositor is to collect the amount by which the
incapacitated depositary had been enriched or benefited.
However, if the third person acted in bad faith, that is, he is
aware of the flaw in the possession of the incapacitated
depositary, the depositor can recover the thing from him with
damages.
________
SECTION 2.OBLIGATIONS OF THE DEPOSITARY
Art. 1972. The depositary is obliged to keep the thing safely and
to return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in
the contract. His responsibility, with regard to the safekeeping
and the loss of the thing, shall be governed by the provisions of
Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe. (1766a)
________
Depositary principal obligations
1. To keep the thing safely;
2. To return the thing deposited when required, to the
depositor or his heirs and successors in interest.
Law to govern the safekeeping of the thing The law on
Obligations and Contracts.
1. Diligence of a good father of a family in the
performance of his obligations to protect and
preserve the thing deposited, unless a higher degree
of diligence is stipulated by the parties.
2. If the thing is lost, the depositary is liable if the loss is
due to his own fault. But not when the loss is due to
fortuitous event or force majeure.
3. Whenever a thing in the possession of the debtor is
lost, the presumption is that he is at fault, unless
there is proof to the contrary.
Exceptions to the rule that the depositary is not liable when
loss of the thing is due to fortuitous event
1. If it is so stipulated;
2. If he uses the thing without the depositors
permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself
may have been authorized to use the same. (Art.
1979)
The owner-depositor bears the lost as long as the depositary is
not at fault. Res perit domino.
Standard of care or diligence Greater care or diligence is
required if the deposit is for a compensation than when it is for
free.
Is a guardian a depositary of the wards property? No.
________
Art. 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is liable
for the loss if he deposited the thing with a person who is
manifestly careless or unfit. The depositary is responsible for
the negligence of his employees. (n)
________
Depositary prohibited from depositing the thing with a third
person; Exception Deposit is founded on trust and
confidence. XPN: If there is a stipulation to the contrary. The
stipulation will be the law between the parties. XPN to the
XPN: If the thing is deposited with a person manifestly careless
and unfit.
The depositary is also liable if the loss or damage to the
property is caused through the negligence of the depositarys
employees (imputed or vicarious liability of employers).
12 | P LATON
 ________
Art. 1974. The depositary may change the way of the deposit if
under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts
of the situation. However, before the depositary may make
such change, he shall notify the depositor thereof and wait for
his decision, unless delay would cause danger. (n)
________
Way or manner of deposit cannot be changed by depositary;
Exception when he may reasonably presume that the
depositor would agree to the modification. Even then,
however, the law requires that notice be sent to the depositor
and to await the latters decision before any change be made,
unless time is of the essence to avoid danger.
________
Art. 1975. The depositary holding certificates, bonds, securities
or instruments which earn interest shall be bound to collect the
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes. (n)
________
Collection of principal and interests when due by depositary
If the thing deposited generates interests like bonds, securities,
etc., the depositary who has the obligation to preserve the
thing, must collect the interest as well as the principal when
they become due. He must see to it that the securities and the
rights corresponding to them preserve their value.
Rent of safety deposit boxes; Character a contract of rent of
safety deposit boxes is not an ordinary contract of lease of
things but a special kind of deposit. It is not strictly governed by
the provisions on deposit.
The rent of the safety deposit box is not an ordinary contract of lease as
defined in Article 1643 of the Civil Code. However, We do not fully
subscribe to the view that the same is a contract of deposit that is to be
strictly governed by the provisions in the Civil Code on deposit; the
contract is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given
to the joint renters. The guard key of the box remained with the bank;
without this key, neither of the renters could open the box. On the
other hand, the bank could not likewise open the box without the
renter's key. x x x
The prevailing rule is that the relation between a bank renting out safe-
deposit boxes and its customer with respect to the contents of the box
is that of a bailor and bailee, the bailment being for hire and mutual
benefit. (CA AGRO-INDUSTRIAL DEVELOPMENT CORP. v. CA)
________
Art. 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall own
or have a proportionate interest in the mass. (n)
________
Commingling of grains or articles of same kind and quality is
generally allowed; Exception when there is a prohibition.
The different depositors shall own a proportionate share in the
mass of the things deposited.
Impliedly, if the grains, etc., are not of the same kind and
quality, the depositary must keep them separately.
________
Art. 1977. The depositary cannot make use of the thing
deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
(1767a)
________
Depositary prohibited from using thing deposited Without
the permission of the depositor, the depositary cannot use the
thing deposited. If he does so, he will be liable for damages as
may be determined by the court.
If expressly allowed, the contract ceases to be a deposit and
becomes a loan or commodatum.
The depositor cannot dispose of the thing deposited for the ise
of another person specially so when the purpose for which the
thing was deposited would be frustrated by the allowance of
the use thereof.
________
Art. 1978. When the depositary has permission to use the thing
deposited, the contract loses the concept of a deposit and
becomes a loan or commodatum, except where safekeeping is
still the principal purpose of the contract.
The permission shall not be presumed, and its existence must
be proved. (1768a)
________
Article refers to an irregular deposit; Permission to use
property; Effect If the depositary is permitted to make use of
the thing deposited, the deposit ceases to be one. It is
converted to a contract of loan unless the principal reason for
the contract is still the safekeeping of the property. In such a
situation, the use of the thing is merely secondary. But the
contract is still a deposit, however, it is called irregular deposit.
Permission to use thing not presumed the burden of proof to
establish that permission to use the thing was granted is on the
depositary. When the use of the thing is necessary to preserve
it, the depositary may use the same but only for such purpose.
He is not liable for damages. In case of controversy, the
depositary must prove that the use was necessary to preserve
the thing deposited in order to avoid any liability for damages.
________
Art. 1979. The depositary is liable for the loss of the thing
through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
13 | P LATON
(4) If he allows others to use it, even though he himself may
have been authorized to use the same. (n)
________
When depositary is liable for loss of thing due to fortuitous
event Fortuitous event is an unforeseen happening arising
from acts of God such as storms, earthquakes, lightning, etc.
GR: An obligor (depositary) is not liable for non-fulfillment of an
obligation by reason of a fortuitous event or force majeure.
(Art. 1174)
XPN: Article 1979. Under any of the above circumstances, the
depositary is rendered responsible for the loss of the thing
deposited. Loss, which is generally total, includes partial
destruction or depreciation of the value of the thing deposited.
________
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan. (n)
________
Deposit in banks are considered simple loans Fixed, savings,
and current deposits of money in banks and similar institutions
are not true deposits. They are considered simple loans.
________
Art. 1981. When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition, and
he shall be liable for damages should the seal or lock be broken
through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of
the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the deposit.
(1769a)
________
Art. 1982. When it becomes necessary to open a locked box or
receptacle, the depositary is presumed authorized to do so, if
the key has been delivered to him; or when the instructions of
the depositor as regards the deposit cannot be executed
without opening the box or receptacle. (n)
________
Closed and sealed deposit the same must be returned in the
same condition by the depositary. If the seal or lock be broken
due to the fault of the depositary, he shall be liable for
damages suffered by the depositor by reason of such breaking.
It is presumed that the depositary is at fault, unless the
contrary is proved.
Value of the thing deposited; Estimate of [depositor] is prima
facie evidence If there is a controversy on the value of the
thing deposited which is delivered closed and sealed, the
statement of the depositor shall be accepted as prima facie
evidence of the value if the forcible opening of the box or
receptacle is imputable to the depositary, unless there is a
clear, strong and convincing evidence to the contrary. The court
may now decide according to the weight or credibility of the
evidence adduced by the parties.
When breaking of seal or lock is not due to depositarys fault
he still has the duty to keep secret the contents thereof.
If in the keeping of the sealed or locked deposit, the depositor
has some instructions which could not be performed by the
depositary without opening the box or receptacle, the latter is
presumed to be authorized to do so. If the depositor has left
the key to the box or receptacle to the depositary, there is a
presumption of authority to open the same. If there is no such
intention, there is no reason to leave the key to the depositary.
________
Art. 1983. The thing deposited shall be returned with all its
products, accessories and accessions.
Should the deposit consist of money, the provisions relative to
agents in article 1896 shall be applied to the depositary. (1770)
________
Other things to be returned in contract of depositWhen the
depositary returns the thing in deposit, he must also return all
its products, accessories and accessions. The depositors
ownership over the thing carries with it the right to the fruits
and all accessions thereto
Art. 441. To the owner belongs:
(1) The natural fruits;
(2) The industrial fruits;
(3) The civil fruits.
When the deposit consists of moneythe first paragraph of
the Article does not cover deposit of money but other fungible
things. If the deposit consists of money it is Article 1896 which
is applicable. The word agent should be read as depositary.
Art. 1896. The agent owes interest on the sums he has applied to his
own use from the day on which he did so, and on those which he still
owes after the extinguishment of the agency.
The money deposited must be returned together with interest
for the use thereof. The imposition of interest is a form of
penalty there being no agreement to pay interest at the outset,
otherwise, the contract will be a mutuum.
________
Art. 1984. The depositary cannot demand that the depositor
prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen
and who its true owner is, he must advise the latter of the
deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be
relieved of all responsibility by returning the thing deposited 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. (1771a)
________
14 | P LATON

Depositor cannot be required by depositary to prove his
ownershipthe depositary may not accept a thing for the
purpose of safekeeping. He is under no obligation to do so.
However, once he accepts a thing for deposit and actual
possession is placed in his hands, he cannot demand that the
depositor proves his ownership over the thing. The reasons
behind this rule are
1. It is not necessary because there is no transfer of
ownership in contract of deposit;
2. A bailee (depositary) is stopped from asserting title to
the thing received as against the bailor (Art. 1436);
3. To require proof of ownership, the depositary, on the
pretext that he needs to know the nature and mode
of acquisition of the thing by the depositor, may be
able to retain the thing until the issue is settled. Fraud
may thus be committed against the depositor.
When thing appears to be unlawfully acquired; Duty of
depositaryif the depositary has learned or received reliable
information that the thing he accepted in deposit is not lawfully
acquired by the depositor, he may return the thing to the
depositor to avoid possible liability.
When thing is a stolen propertyif the identity of the true
owner cannot be ascertained, the depositary may return the
thing to the depositor; if the true owner is identified, the
depositary must advise the latter of the deposit so that he may
take the necessary precautions or actions to retrieve it. The
depositary is not authorized to return the thing
unceremoniously to the alleged owner without the knowledge
of the depositor. HIS DUTY IS MERELY TO ADVISE THE OWNER
OF THE DEPOSIT. If the depositor insists on his ownership as
against the true owner, the depositary may file an interpleader
suit against both of them to avoid responsibility.
Failure of the owner to claim thing within 30 days from
advisementthe depositary shall be relieved from
responsibility by returning the thing to the depositor.
If before the lapse of the 30 days, the depositor must have
learned of the advice made, is now demanding the immediate
return of the thing, may the depositary retain the thing until
the lapse of 1 month from the advice? YES but inform the
depositor of the legal reason for the retention.
________
Art. 1985. When there are two or more depositors, if they are
not solidary, and the thing admits of division, each one cannot
demand more than his share.
When there is solidarity or the thing does not admit of division,
the provisions of Articles 1212 and 1214 shall govern. However,
if there is a stipulation that the thing should be returned to one
of the depositors, the depositary shall return it only to the
person designated. (1772a)
________
Respective rights of two or more depositors
1. If joint depositorseach one may only demand the
return of his proportionate share in the divisible
thing/s deposited.
2. If solidary depositorsand the thing deposited is no
capable of division, being indivisible in law, the
depositary may return the thing to anyone of the
solidary depositors.
Art. 1212. Each one of the solidary creditors may do whatever may be
useful to the others, but not anything which may be prejudicial to the
latter. (1141a)
Art. 1214. The debtor may pay any one of the solidary creditors; but if
any demand, judicial or extrajudicial, has been made by one of them,
payment should be made to him. (1142a)
Stipulation to return thing to one of the depositorsthe
depositary shall return the thing only to said designated
depositor, unless subsequently the agreement has been duly
modified with the consent of all the parties concerned.
________
Art. 1986. If the depositor should lose his capacity to contract
after having made the deposit, the thing cannot be returned
except to the persons who may have the administration of his
property and rights. (1773)
________
Applicabilitythe Article applies only after the deposit had
already been made and that the depositor was capacitated at
the time of the making of the deposit but became incapacitated
before the return of the thing to him.
If the depositor is already incapacitated at the time of the
making of the deposit, Article 1970 applies.
To whom should depositary return the thing?the depositary
shall not deliver or return the thing to anyone except to the
person who has the administration of the depositors property
and rights. As the depositor is still alive, the administrator may
be a guardian appointed by the court, or the spouse who is
given the power of administration by the court or the
representative in case the depositor is declared an absentee.
________
Art. 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take
the thing deposited to such place; but the expenses for
transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
same place where the deposit was made, provided that there
was no malice on the part of the depositary. (1774)
________
In what place shall the thing be returned?
1. Place designated in the contract of deposit;
2. If no place is designated, in the place where the
things may be, even if this place is different from the
place of deposit but there must be no bad faith on
the part of the depositary in changing the place.
Expenses for transportationshall be borne by the depositor
unless the depositary acted with malice in changing the place of
returning or retrieval.
________
Art. 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period or
time for such return may have been fixed.
15 | P LATON

This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he
have been notified of the opposition of a third person to the
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
attachment or opposition. (1775)
________
Time to return thing deposited; Reasonupon demand
whether or not a period is fixed for the returnbecause the
term or period if agreed upon, is for the benefit of the
depositor. XPN: If the deposit is for compensation, the
depositary must still be paid for his services.
Return upon demand rule is subject to exceptions
GR: The depositary shall return the thing deposited upon
demand by the depositor.
XPN:
1. When the thing in the possession of the depositary is
subjected to a writ of attachment in which event it is
placed in custodial egis and therefore under the
control of the court;
2. When there is an opposition to the return of the thing
to the depositor and the depositary is duly notified
thereof;
3. When there is an opposition to the removal of the
thing deposited and the depositary is duly notified
thereof;
4. When the thing is stolen and the period of thirty days
from notice to the true owner for him to claim it had
not yet elapsed, the depositary cannot return the
thing to the depositor. This is to protect the true
owner.
Note: Depositary must immediately notify the depositors of the
attachment or opposition so that he can timely take steps to
protect his rights and interests. Should the depositary return
the thing despite the attachment, opposition, non-lapse of 30
day period, he may be held liable for damages caused to the
offended party.
________
Art. 1989. Unless the deposit is for a valuable consideration, the
depositary who may have justifiable reasons for not keeping
the thing deposited may, even before the time designated,
return it to the depositor; and if the latter should refuse to
receive it, the depositary may secure its consignation from the
court. (1776a)
________
ApplicabilityThis Article applies only if the deposit is
gratuitous.
Remedy of depositary in case of depositors refusal to accept
the thingmay resort to judicial consignation to be relieved
from responsibility if despite the tender to deliver back the
thing, the depositor unjustifiably refused to accept the same.
Rule when deposit is for valuable considerationunless the
reason for not continuing with the deposit constitutes a force
majeure, he cannot just return the thing until the arrival of the
period designated in the contract. Otherwise, he will be liable
for damages for breach of contract.
________
Art. 1990. If the depositary by force majeure or government
order loses the thing and receives money or another thing in its
place, he shall deliver the sum or other thing to the depositor.
(1777a)
________
No liability for loss due to force majeure or government
order
GR: If the thing deposited is lost or confiscated by the
government, the depositary is not liable for failure to return the
thing upon demand of the depositor.
XPN: If the depositary had received money or an equivalent
thing for the property, he must deliver the same to the
depositor, for that belongs to the latter as it is merely the
substitute for the property deposited.
________
Art. 1991. The [depositarys] 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. (1778)
________
ApplicabilityThe article applies only when the depositary has
died and left heir/s who took possession of the thing in the
concept of an owner and sold it in good faith to a third person.
Heir/s must be in god faiththe heirs must have already
succeeded to the estate of the deceased depositary. This
means, there was already a partition where the thing deposited
was adjudicated to certain particular heir/s. These heir/s sold
the thing in good faith, not knowing that the thing did not
belong to their predecessor-in-interest it being merely a
deposited property which must be returned to the depositor.
Duty of the heir/sthe heir/s must return the purchase price
received to the depositor. If the buyer has not yet paid the
price, the right of action must be assigned to the depositor so
he can pursue the appropriate action for collection or
cancellation of the contract.
Right of depositor if heir/s are in bad faith
1. The depositor may sue them for recovery of the price
with damages
2. He may seek the annulment of the contract of sale on
the basis of fraud (Art. 1388)
3. He may file a criminal case for estafa for the
appropriation of the thing under deposit.
________
SECTION 3.OBLIGATIONS OF THE DEPOSITOR
Art. 1992. If the deposit is gratuitous, the depositor is obliged
to reimburse the depositary for the expenses he may have
incurred for the preservation of the thing deposited. (1779a)
________
16 | P LATON
Does the depositor have to reimburse the depositary for the
latters expenses to preserve the property?it depends. If for
compensation, the depositor is not required to pay the
depositary for the latters expenses for the preservation of the
property. (Reason: expenses are included in the compensation
paid to the depositary; necessary expense)
If the deposit is gratuitous, the depositor must reimburse the
depositary for the latters expenses incurred for the
preservation of the thing deposited. (Reason: even if the thing
is not deposited with the depositary, the depositor would still
spend, as the good father of the family for the necessary
expenses to maintain and preserve the thing he owns)
Other expenses not includeduseful and luxurious expenses
are not included within the coverage of the Article. The
depositor is, therefore, under no obligation to reimburse the
depositary for useful or luxurious expenses the latter incurred.
________
Art. 1993. The depositor shall reimburse the depositary for any
loss arising from the character of the thing deposited, unless at
the time of the constitution of the deposit the former was not
aware of, or was not expected to know the dangerous
character of the thing, or unless he notified the depositary of
the same, or the latter was aware of it without advice from the
depositor. (n)
________
Depositor liable for losses or damages suffered by depositary;
Exceptions
GR: If the depositary suffers loss or damages arising from the
character of the thing deposited, the depositor is liable therefor
and must reimburse the depositary for such loss or damages.
XPN: At the time of the constitution of the deposit:
1. The depositor was not aware of such character;
2. The depositor was not expected to know such
dangerous character of the thing;
3. The depositor has notified the depositary of such
character; and
4. The depositary was independently aware of it without
need of advice from the depositor.
________
Art. 1994. The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
deposit. (1780)
________
Obligations of the depositor
1. To reimburse the depositary for necessary expenses
incurred by the latter (Art. 1992);
2. To pay the compensation agreed upon as
consideration for the deposit (Art. 1965);
3. To indemnify the depositary for any loss or damages
arising from the character of the thing deposited (Art.
1993).
Right of depositary to retain thing in pledgeif the depositary
has not been paid by the depositor for what may be due to him,
until he is fully reimbursed.
The deposit may be gratuitous (#s 1 and 3) or for compensation
(#s 2 and 3). When it is gratuitous, the depositary is entitled to
the reimbursement of necessary expenses incurred for the
preservation of the thing. If it is for compensation and the
agreed consideration has not been paid, the depositary has the
right to retain the thing.
Pledge is created by operation of lawsuch pledge is also
known as legal pledge.
Art. 2121. Pledges created by operation of law, such as those referred
to in Articles 546, 1731, and 1994, are governed by the foregoing
articles on the possession, care and sale of the thing as well as on the
termination of the pledge. However, after payment of the debt and
expenses, the remainder of the price of the sale shall be delivered to
the obligor. (n)
May the depositary sell the thing retained in pledge? Yes.
Art. 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale. The proceeds of the
auction shall be a security for the principal obligation in the same
manner as the thing originally pledged. (n)
After payment of the expenses, the remainder of the price of
the sale, if any, shall be delivered to the obligor.
Depositarys right to retain is similar to that referring to an
agent
Art. 1914. The agent may retain in pledge the things which are the
object of the agency until the principal effects the reimbursement and
pays the indemnity set forth in the two preceding articles. (1730)
________
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
________
Grounds for extinguishment of deposit mentioned in the
article are not limitativethere are other causes for
termination of deposit, such as:
1. Expiration of the period agreed upon;
2. Demand at the will of the depositor;
3. Mutual withdrawal from the contract;
4. Fulfillment of the purpose of the deposit; and
5. Fulfillment of the resolutory condition agreed upon.
Loss or destruction of the thingthere is nothing more to
return. Hence, the deposit is extinguished. Nevertheless, if the
depositary is at fault, or is rendered liable despite fortuitous
event or force majeure (Art, 1979), he shall pay for the value of
the thing to the depositor.
Death of either party; Effectsif the deposit is gratuitous, the
death of either party extinguishes the contract. But, if the
deposit is for a compensation (onerous) the death of the either
party shall not extinguish the contract because the rights and
liabilities arising therefrom are transmissible to their respective
heirs unless there is a contrary agreement (Art. 1178)
________
17 | P LATON
 CHAPTER 3NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar events.
(1781a)
________
Voluntary deposit distinguished from necessary (involuntary)
depositA voluntary deposit is that kind where the delivery of
the thing is made by the will of the depositor. The depositor has
freedom to choose the depositary. A necessary (involuntary)
deposit is one wherein the deposit is not made by the will of
the depositor but created by force of the law or on occasion of
a calamity.
1. Those made in compliance with a legal obligation;
and
Illustrations:
Art. 538. Possession as a fact cannot be recognized at the same time in
two different personalities except in the cases of co-possession. Should
a question arise regarding the fact of possession, the present possessor
shall be preferred; if there are two possessors, the one longer in
possession; if the dates of the possession are the same, the one who
presents a title; and if all these conditions are equal, the thing shall be
placed in judicial deposit pending determination of its possession or
ownership through proper proceedings. (445)
Art. 586. Should the usufructuary fail to give security in the cases in
which he is bound to give it, the owner may demand that the
immovables be placed under administration, that the movables be sold,
that the public bonds, instruments of credit payable to order or to
bearer be converted into registered certificates or deposited in a bank
or public institution, and that the capital or sums in cash and the
proceeds of the sale of the movable property be invested in safe
securities. x x x
Art. 1754. The provisions of Articles 1733 to 1753 shall apply to the
passenger's baggage which is not in his personal custody or in that of
his employee. As to other baggage, the rules in Articles 1998 and 2000
to 2003 concerning the responsibility of hotel-keepers shall be
applicable.
Art. 2104. The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse the
thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only for that
purpose. (1870a)
Cash deposits placed as bond by certain officers before they
assume their positions, as well as cash deposits for purchase of
licensed firearms are other instances of voluntary deposits
made in compliance with the law.
2. Those which take place on the occasion of any
calamity.
Illustrations:
If a property of a person is saved by another on the occasion of
conflagration, the property shall be considered as a necessary
deposit in the hands of the latter. The owner is the depositor
and the savior is the depositary.
Same rules apply in cases of other disasters like storm, floods,
shipwreck, pillage and similar other misfortunes. Pillage is the
act of plundering, specially in war.
________
Art. 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be
regulated by the provisions concerning voluntary deposit and
by Article 2168. (1782)
________
Governing rules
1. The deposit made in compliance with a legal
obligation shall be governed by the law establishing
it. If said law is deficient, the rules on involuntary
deposit shall apply (Arts. 1968 to 1971).
2. The deposit made on the occasion of a calamity shall
be governed by the provisions concerning voluntary
deposit (Arts. 1968 to 1971). In addition, Article 2168
shall apply specially in the payment of compensation
to the rescuer of the property.
Art. 2168. When during a fire, flood, storm, or other calamity, property
is saved from destruction by another person without the knowledge of
the owner, the latter is bound to pay the former just compensation.
________
Art. 1998. The deposit of effects made by the travellers in
hotels or inns shall also be regarded as necessary. The keepers
of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees,
of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or
their substitutes advised relative to the care and vigilance of
their effects. (1783)
________
Deposit of travelers (guests) effects; NatureThe deposit of
their effects in hotels or inns is also regarded as necessary
deposit (under paragraph 1).
________
Art. 1999. The hotel-keeper is liable for the vehicles, animals
and articles which have been introduced or placed in the
annexes of the hotel. (n)
________
Liability of hotel-keeper for vehicles, animals and articles
The protection and safety of these vehicles is also within the
responsibility of the hotel-keeper.
The Revised Penal Code provides for the subsidiary liability of
inn-keepers.
________
Art. 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotels or inns as well as strangers; but not that
which may proceed from any force majeure. The fact that
travellers are constrained to rely on the vigilance of the keeper
18 | P LATON
of the hotels or inns shall be considered in determining the
degree of care required of him. (1784a)
________
Responsibility of hotel-keepersliable for damages arising
from the loss of, or, injury to, the personal effects of hotel
guests caused by:
1. The negligence of its servants or employees; and
2. Loss or damage due to strangers.
There is no liability when the loss is due to force majeure which
refers to inevitable or unforeseen events caused by man like
war. Neither is there liability if the loss is due to fortuitous
event which refers to acts of God like typhoons, lightning and
earthquake.
________
Art. 2001. The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force. (n)
________
Theft or robbery committed in a hotel room, not a force
majeurethe hotel-keeper is liable. However, if the thief or
robber used arms (like knife, or gun) and irresistible force, this
act is deemed a force majeure by reason of which the hotel-
keeper is rendered free from liability.
The Article will not apply, however, when the theft or robbery
was committed by an employee of the hotel-keeper, for then, it
is Article 2000 which applies making the hotel-keeper liable for
the loss.
________
Art. 2002. The hotel-keeper is not liable for compensation if the
loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arises from the character of the things
brought into the hotel. (n)
________
Losses not chargeable to hotel-keeper
GR: Losses suffered by the hotel guests are chargeable to the
hotel-keeper.
XPN: When the losses are due to the following causes:
1. Acts of the guest himself;
2. Acts of the guests family;
3. Acts of the guests servants or visitors; or
4. Character of the things of the guests subject to the
conditions mentioned in Article 1993.
________
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void. (n)
________
Posting of exculpatory notices; Effectscannot free the hotel-
keeper from responsibility for losses or damages suffered by
the guest or traveler.
Agreement suppressing or diminishing liability; Effectvoid.
This is similar to the responsibility of common carriers which
cannot be eliminated or diminished by stipulation or posting of
notices, etc.
________
Art. 2004. The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel
guests. (n)
________
ApplicabilityThe Article applies only when the debtor is a
guest of the hotel, that is, one who is registered or one allowed
to stay as guest.
The right of retention does not apply if the debtor is not a guest
of the hotel as understood by the term traveler.
Right to return given to hotel-keeper; Requisitessee
Chuidian v. Hotel Inter-Continental, 22 CAR (2s) 736.
Right to sell, debatableThe right of retention of the hotel-
keeper is in the nature of a pledge created by operation of law
and thus the hotel-keeper is allowed to sell the thing or
belonging retained under Article 2121.
Effect of obtaining food or accommodation in a hotel or inn
without paymentestafa under the Revised Penal Code.
________
CHAPTER 4SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 2005. A judicial deposit or sequestration takes place when
an attachment or seizure of property in litigation is ordered.
(1785)
________
Art. 2006. Movable as well as immovable property may be the
object of sequestration. (1786)
________
Art. 2007. 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. (1787a)
________
Art. 2008. 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. (1788)
________
Art. 2009. As to matters not provided for in this Code, judicial
sequestration shall be governed by the Rules of Court. (1789)
oOo
TITLE XVGUARANTY
CHAPTER 1NATURE AND EXTENT OF GUARANTY
Guaranty, DefinitionA contract of guaranty is one where a
person (guarantor) binds himself to another (creditor) to fulfill
19 | P LATON
the obligation of the principal debtor in case the latter should liable
fail to do so.
A suretyship is an undertaking that the debt shall be paid; a
If the guarantor binds himself to be solidarily liable with the
guaranty, an undertaking that the debtor shall pay.
principal debtor, the contract is one of suretyship. Guaranty
cannot exist without a valid obligation.
Kinds of guaranty
________
1. General classification:
a. Personal guarantyan individual personally
Art. 2047. By guaranty a person, called the guarantor, binds
assumes the fulfillment of the principal
himself to the creditor to fulfill the obligation of the principal
obligation of the debtor (E.g., guaranty
debtor in case the latter should fail to do so.
proper; suretyship).
If a person binds himself solidarily with the principal debtor, the
b. Real guarantya property (immovable or
provisions of Section 4, Chapter 3, Title I of this Book shall be
movable) is formally committed to answer
observed. In such case the contract is called a suretyship.
for the principal obligation of the debtor
(1822a)
(E.g., real estate mortgage; antichresis;
________
pledge; chattel mortgage).
2. As to manner of creation:
Two contracts referred to in the articleThe first paragraph
a. Conventional or voluntaryconstituted by
refers to contract of guaranty, while the second refers to the
agreement of the guarantor and the debtor.
contract of suretyship.
b. Legalcreated by provision of law.
c. Judicialordered by a court in a pending
Characteristics of guaranty
case.
1. It is a consensual contract, perfected by mere
3. As to consideration:
consent;
a. Gratuitousthe guarantor receives no
2. It is an accessory contract, the existence of which
valuable consideration because it is entered
depends upon an existing valid principal contract like
into for free.
loan;
b. Onerousthe guarantor by stipulation is
3. It is a conditional contract, as it will operate only
paid a valuable consideration for his
when the principal debtor fails to fulfill his
guaranty of the obligation of the debtor.
obligations. Payment by the debtor extinguishes the
4. As to its scope:
contract of guaranty;
a. Definitethe guaranty is confined or
4. It is a unilateral contract because only the guarantor
limited to the principal obligation only or
has to obligation to indemnify the creditor in case of
over a specific part thereof.
failure of the principal debtor to perform his
b. Indefinite (or simple)covers or comprises
prestation;
not only the principal obligation but also its
5. It is a subsidiary contract as the guarantor becomes
accessories including costs incurred after
liable to the creditor only when the principal debtor
the guarantor had been required to pay by
fails to pay his obligation.
the court.
Nature of surety contractmerely an accessory contract and
Requisites for enforcement of suretys liability
must be interpreted with its principal contract.
a) Application for damages must be filed before trial or
entry of judgment;
Similarity between guarantor and suretyboth promise or
b) Due notice must be given the other party and his
undertake to answer for the debt, default or miscarriage of
surety; and
another person.
c) There must be a proper hearing, and the award of
damages, if any, must be included in the final
GUARANTY SURETY judgment.
His liability depends upon an He assumes liability as a
independent agreement to regular party to the contract Surety is released if creditor and principal debtor varied the
pay the obligation of the terms of contract without his (surety) consentan essential
principal if he fails to do so alteration in the terms without the consent of the surety
Obligation is secondary Obligation is primary extinguishes the latters obligation.

Undertaking is to pay if the
principal debtor defaults
He is an insurer of the
solvency of the principal
debtor
He is entitled to excussion,
that is, the exhaustion of
properties of the principal
debtor before he may be held
Undertaking is to pay if the
principal debtor does not pay.
Hence, obligation is more
onerous
He is an insurer of a debt
He is not entitled to the
benefit of excussion
Surety, insurer of the debtin suretyship, the surety becomes
liable to the creditor without the benefit of excussion because
the surety may be sued independently of the principal debtor.
He has assumed or undertakes a responsibility or obligation
greater or more onerous than that of a guarantor.
Demand to principal debtor unnecessary to charge suretya
surety is considered as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the
latter.
Benefit of excussion, not applicable to surety
20 | P LATON
Indemnity against loss and indemnity against liability,
distinguishedin the former, the indemnitor becomes liable
when the person to be indemnified arises irrespective of
whether he has suffered actual loss. Where the suretyship
agreement provides that the surety would become liable
irrespective of whether or not the non-payment has actually
been made by the company, the agreement is an indemnity
against liability.
Guaranty and warranty, distinguished
GUARANTY WARRANTY
A contract by which a person An undertaking that the title,
is bound to another for the quality or quantity of the
fulfillment of a promise or subject matter of a contract is
engagement of a third party what it has been represented
to be
________
Art. 2048. A guaranty is gratuitous, unless there is a stipulation
to the contrary. (n)
________
General character of guarantyAs a rule, it is a gratuitous
contract. It becomes onerous only when there is a stipulation to
the contrary.
Consideration in a contract of guarantyinsofar as the
creditor and guarantor are concerned, the cause of the contract
is the same cause which supports the obligation as to the
principal debtor.
A guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties
thereto.
The guarantor or surety is liable, although he possess no direct
or personal interest over the obligation nor does he receive any
benefit therefrom.
________
Art. 2049. A married woman may guarantee an obligation
without the husband's consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law. (n)
________
Wife as guarantor; consent of husband not required
however, she cannot bind the conjugal partnership (or absolute
community of property) without the consent of the husband,
except in cases allowed by law.
She may, however, administer and dispose of her own exclusive
or separate properties. If she is appointed sole administratrix of
the property of the husband, she may bind the property of the
latter except to sell unless with a court authority.
The conjugal partnership is liable for all debts and obligations
contracted during the marriage by the designated
administrator-spouse for the benefit of the conjugal
partnership of gains, or by both spouses or by one of them with
the consent of the other.
With regard to the payment of debts of the spouses
Art. 122. The payment of personal debts contracted by the husband or
the wife before or during the marriage shall not be charged to the
conjugal properties partnership except insofar as they redounded to
the benefit of the family.
Neither shall the fines and pecuniary indemnities imposed upon them
be charged to the partnership.
However, the payment of personal debts contracted by either spouse
before the marriage, that of fines and indemnities imposed upon them,
as well as the support of illegitimate children of either spouse, may be
enforced against the partnership assets after the responsibilities
enumerated in the preceding Article have been covered, if the spouse
who is bound should have no exclusive property or if it should be
insufficient; but at the time of the liquidation of the partnership, such
spouse shall be charged for what has been paid for the purpose above-
mentioned. (163a)
________
Art. 2050. If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the
provisions of Articles 1236 and 1237 shall apply. (n)
________
Effect of guaranty without consent of principal debtor
guaranty may be constituted without the knowledge or consent
of the principal debtor or even against his will. It must be noted
that a guaranty is for the benefit of the creditor and not of the
debtor. The debtor is not a party to the guaranty contract.
However, the guarantor may recover from the debtor what he
paid to the creditor ONLY to the extent of the benefit enjoyed
by the debtor.
Moreover, the guaranty is not binding until accepted by the
creditor.
Applicability of Articles 1236 and 1237
Art. 1236. The creditor is not bound to accept payment or performance
by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will of
the debtor, he can recover only insofar as the payment has been
beneficial to the debtor. (1158a)
Art. 1237. Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter, cannot compel the creditor
to subrogate him in his rights, such as those arising from a mortgage,
guaranty, or penalty. (1159a)
Effect of guaranty with consent of debtorthe guarantor is
subrogated by virtue thereof to all the rights which the creditor
may have against the debtor.
________
Art. 2051. A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal
debtor, but also in favor of the other guarantor, with the
latter's consent, or without his knowledge, or even over his
objection. (1823)
________
21 | P LATON
Guaranty, kinds according to creation(See Page 19)
Sub-guaranty; consent of guarantor not needed (even against
his opposition or objection)joint or solidary debtors are not
the same as sub-guarantors. The sub-guarantors assume the
obligation of the guarantors, while the guarantors assume the
obligation of the principal debtor.
________
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may
also guarantee a natural obligation. (1824a)
________
Requisites for guarantyfor guaranty to exist, there must be a
valid obligation between a debtor and a creditor.
No guaranty for void contractsbeing merely an accessory
contract, for its existence a guaranty must depend upon the
existence of a valid principal obligation.
Guaranty of voidable, unenforceable contracts and natural
obligations; reasons
1. Voidable contractconsidered valid until it is duly
annulled in a judicial proceeding; it enjoys the
presumption of validity.
2. Unenforceable contractnot void; it is subject to
ratification unlike a void contract which cannot be
ratified because in the eyes of the law, it is non-
existent.
3. Natural obligationan obligation which is not civil
and therefore cannot be enforced in court. It does
not grant the creditor a right of action to compel its
performance. However, the debtor offers a guaranty
for his natural obligation, he thereby implicitly
recognizes the obligation. The obligation is thus
transformed from the level of natural into a civil
obligation. A factual basis is now created for the
allowance of a valid guaranty.
Conditional obligationsthey are valid subject only to the
fulfillment of the condition imposed.
________
Art. 2053. A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured. (1825a)
________
Coverage; continuing guarantyone which covers all
transactions, including those arising in the future, which are
within the description or contemplation of the contract of
guaranty until the expiration or termination thereof.
It is prospective in its operation and is generally intended to
provide security with respect to future transactions.
May future debts be secured by a guaranty if exact amount is
not yet known?Yes. Future debts may be secured by a
guaranty even if the exact amount is not yet known. However,
the guarantor cannot be sued until the debt is liquidated, which
means, the amount of the debt is already determined or fixed.
Future debts may also refer to debts existing at the time of the
constitution of the guaranty but the amount thereof is
unknown. (Atok Finance Corp. v. CA, 222 SCRA 232)
Test of continuing guarantywhen by the terms thereof it is
evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely
or until a certain period, especially if the right to recall the
guaranty is expressly reserved.
Debt when considered liquidatedwhen it is for a price fixed
in the contract.
Contracts of surety generally prospective in effect like laws
unless the parties have intended them to be retrospective.
Conditional obligations may also be secured by guaranty
unlike a pure obligation, a conditional obligation is not
demandable at once. Its enforceability or extinction will depend
upon the fulfillment of the stipulated condition.
If the principal obligation is subject to a suspensive condition,
the guarantor shall be liable only to the creditor after the
happening or fulfillment of the condition.
If it is subject to a resolutory condition, the happening of the
condition will extinguish the principal obligation as well as the
accessory contract of guaranty. Consequently, the creditor has
no cause of action against the guarantor.
Doubts on the terms and conditions of suretyshould be
resolved in favor of the surety.
Failure to fulfill condition subsequent; effectwill nullify the
guaranty if the said condition is not fulfilled.
________
Art. 2054. A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount
and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor. (1826)
________
Limit of suretys liabilitylimited to the amount of the bond.
Limit of guarantors liabilitycannot go beyond the obligation
of the principal debtor even if he agreed to do so. Reason: the
contract of guaranty is merely accessory. It is unfair to make
the guarantor liable for more than the obligation of the
principal debtor.
The limitation on the liability of the guarantor applies both to
the (a) amount and (b) onerous character of the obligation.
Article 2054 must be distinguished from Article 2085in
Article 2085, a third person who is not a party to the principal
may secure the latter by pledging or mortgaging his own
property.
A person who mortgages his property to guaranty anothers
debt, without expressly assuming personal liability for such
22 | P LATON
debt, cannot be compelled to pay the deficiency remaining,
after the mortgage has been foreclosed.
However, in judicial foreclosure, the mortgagor is liable for
deficiency.
A guaranty which goes beyond the obligation of the debtor is
not void; remedythe same shall merely be reduced to the
extent or limit of the debtors obligation.
Situations when guarantor may lawfully be required to pay
more than the original obligation of principal debtorif upon
demand, a guarantor fails to pay the obligation, he can be held
liable for interest because of the default and the necessity of
judicial collection.
Penalty clause may also increase liability of surety
________
Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall compromise 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. (1827a)
________
In what form should a contract of guaranty be made?to be
enforceable, it must be expressed and in writing, because it is a
special promise to answer for the debt, default or miscarriage
of another. However, it need not be in a public instrument.
An oral guaranty is unenforceable.
Guaranty is not presumedit requires the expression of the
consent of the guarantor in order to be bound.
Coverage of guarantors liability when guaranty is definite
the obligation of the debtor is confined or limited in whole or in
part to the principal debt, to the exclusion of the accessories.
Coverage of indefinite (simple) guarantycomprehensive; it
shall compromise not only the principal obligation, but also its
accessories, including the judicial costs, provided with respect
to the latter, the guarantor shall only be liable for those costs
incurred after he has been judicially required to pay. Reason:
the guarantor, in entering into the contract, could have fixed
the limits of his responsibility solely to the strict terms of the
principal obligation and if he did not do so, it must be
presumed that he wanted to be bound to the extent so
established.
Doubts in the provision of contract of guaranty generally
resolved in favor of suretybecause it is a special obligation.
XPN: in cases of compensated sureties.
Demand or notice of principals default not required to fix
sureties liability
Release of guarantor or surety from obligationby any of the
modes of extinguishing an obligation whenever applicable.
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (1156a)
The guarantor may also be released if the principal obligation is
mutually changed or modified by the creditor and debtor
without the knowledge or consent of the former. (material
alteration of the contract)
________
Art. 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is to
be complied with. (1828a)
________
Qualifications of guarantor
a) He must be a person of integrity where honesty and
truthfulness are essential elements;
b) He has full legal capacity whereby he can do acts with
legal or binding effects;
c) He has sufficient property to answer for the
obligation of the debtor he is guaranteeing.
The creditor may, however, waive these qualifications which
are intended for his protection. The qualifications need be
present only at the time of the perfection of the contract. If one
or more qualifications are impaired due to supervening events,
the creditor may demand for another qualified guarantor.
It is his right, not his duty, to ask for a replacement.
Venue of action in guarantyplace where the obligation is to
be complied with (locus solutionis), in consonance with the
principle that the accessory follows the principal.
________
Art. 2057. If the guarantor should be convicted in first instance
of a crime involving dishonesty or should become insolvent, the
creditor may demand another who has all the qualifications
required in the preceding article. The case is excepted where
the creditor has required and stipulated that a specified person
should be the guarantor. (1829a)
________
When creditor may demand a substitute guarantor
a) When the original guarantor is convicted of a crime
involving dishonesty like estafa and misappropriation;
b) When the original guarantor becomes insolvent
which means one whose assets at their present fair
value are insufficient to pay his debts;
When the creditor was the one who selected the guarantor
himself who falls short of the qualifications, he cannot compel
the principal debtor to furnish him a substitute guarantor. The
obligation shall remain but without a guaranty unless the
23 | P LATON
parties agree to solve the problem in some other acceptable
ways.
Effect of subsequent impairment or loss of required
qualificationswill not generally end the guaranty. The
creditor is given the right to demand substitution of guarantor.
Effect of guarantors deathhis heirs are still liable, to the
extent of the value of the inheritance because the obligation is
not purely personal, and is therefore transmissible. It is not
personal because all the creditor is interested in is the recovery
of the money, regardless of its giver.
Effect of debtors debthis obligation will survive (his estate
will be answerable). If the estate has no sufficient assets, the
guarantor shall be liable.
________
CHAPTER 2EFFECTS OF GUARANTY
SECTION 1.EFFECTS OF GUARANTY BETWEEN
THE GUARANTOR AND THE CREDITOR
Art. 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor. (1830a)
________
Benefit of exhaustion or excussion granted to guarantor;
Meaningit refers to the right of the guarantor to be free from
execution of his own properties until the creditor shall have
first exhausted all the properties of the principal debtor and has
resorted to all legal remedies against the latter (i.e., accion
pauliana).
The liability of the guarantor is only subsidiary and his guaranty
is only an accessory contract.
Requisites of benefit of exhaustion or excussionthe
following must be complied with before a guarantor may
invoke the right of exhaustion or excussion:
1. He must set up the right of excussion against the
creditor upon the latters demand for payment from
him;
2. He must point out to the creditor the available
property of the debtor (not exempted from execution
found within the Philippine territory, Art. 2060).
Note: It is understood of course that the guarantor does not fall
in any of the situations in Article 2059 (where excussion cannot
take place) and that he has not pledged or mortgaged his own
property to the creditor to secure the principal obligation
because if he did so, excussion cannot be involved for not being
available to a pledgor or mortgagor.
Article 2058 not applicable to contract of suretyshipbecause
a surety binds himself solidarily with the principal debtor.
Q: May a complaint be filed against the debtor and guarantor
simultaneously in one case before the exhaustion of all the
properties of the debtor?
A: Yes.
Declaration of insolvency, effectJust because the debtor has
been declared insolvent in an insolvency proceeding does not
necessarily mean that he cannot pay, for part of the debtors
assets may still be available to the creditor.
________
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation. (1831a)
________
Instances where guarantor cannot invoke right of excussion
1. When guarantor falls under any of the five (5)
instances mentioned in Article 2059;
2. When the guarantor fails to comply with any of the
two (2) conditions in Article 2060;
3. When the guarantor pledged or mortgaged his own
property to the creditor as special security for the
fulfillment of the debtors obligation;
4. When the guarantor fails to interpose the right as a
defense before judgment is rendered against him by
the court;
5. When the guarantor is a judicial bondsman or a sub-
surety because liability here is primary and solidary
(Art. 2084).
Reasons behind the instances under Article 2059 where
benefit of excussion is not available to guarantor
1. Renunciation of rightthe benefit of excussion is a
personal right. Its express waiver is valid.
2. Assumption of solidary liabilitywhen the guarantor
binds himself solidarily with the debtor, he becomes a
surety with primary and direct liability.
3. Insolvency of the debtorif the debtor becomes
insolvent, the liability of the guarantor automatically
arises because the debtor could not fulfill the
obligation anymore. This insolvency must be
established by evidence like an unsatisfied writ of
execution.
4. Debtor absconded or cannot be sued in the
Philippinesthe creditor is not required by law to
search for his debtor who has absconded or cannot
be sued in the Philippines. Because, the debtor
cannot ay the obligation, the guarantor is now subject
to he creditors demand.
5. Execution against the debtor would be fruitlessif it
clearly appears that execution against the property of
the debtor would be useless (such as when the
property levied upon is without value), the creditor
may go immediately after the guarantor.
________
Art. 2060. In order that the guarantor may make use of the
benefit of exclusion, he must set it up against the creditor upon
the latter's demand for payment from him, and point out to the
creditor available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt. (1832)
________
24 | P LATON
Basic requirements before benefit of excussion may be
invoked-- the following must be complied with before the
benefit of excussion may be invoked by the guarantor:
1. He must set up the right of excussion against the
creditor upon the latters demand for payment from
him;
2. He must point out to the creditor the available
property of the debtor found in the Philippines and
sufficient to cover the amount of the debt.
When a demand can be made?It is only after a judgment has
been rendered against the principal debtor and which could not
be satisfied may the creditor demand payment from the
guarantor. Just because the guarantor was sued at the same
time as the debtor does not mean that the creditor has already
made the demand on the guarantor.
________
Art. 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent
in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
resulting from such negligence. (1833a)
________
Applicabilitywhen the guarantor has complied with the
conditions of Article 2060 whereby he pointed out to the
creditor available property of the debtor but the creditor was
negligent in exhausting the said property and thereafter, the
principal debtor became insolvent.
Effect if creditors negligencehe shall suffer the loss to the
extent of the value of the pointed property which was not
exhausted by the creditor. The guarantor shall remain liable,
however, for the remaining obligation after deducting the value
of the loss caused by the negligence of the creditor.
________
Art. 2062. In every action by the creditor, which must be
against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court to
notify the guarantor of the action. The guarantor may appear
so that he may, if he so desire, set up such defenses as are
granted him by law. The benefit of excussion mentioned in
Article 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the
guarantor in case of appearance by the latter. (1834a)
________
GR: Only the principal debtor should be sued alone.
XPN: If the benefit of excussion is not available to the guarantor
under Article 2059, he can be sued jointly with the debtor.
Even if they lose together in the suit, the guarantor, not being a
surety, is still entitled to the benefit of excussion. Before
execution can be implemented against him, the creditor must
first establish that the debtor cannot pay and the best proof for
this is an unsatisfied writ of execution.
On the other hand, a surety may be sued independently of the
principal debtor without prior exhaustion or excussion of the
debtors properties.
Notice to guarantor; reasonif the guarantor desires to set up
defenses as are granted by law, he may have the opportunity to
do so. He may or may not appear in the case and present
evidence. . The consequences of his appearance or non-
appearance are as follows:
1. If he does not appear and judgment is rendered
against the debtor, he cannot set up defenses which
he could have set up had he appeared; moreover, he
cannot question the decision anymore.
2. If he appears such as by filing an answer in
intervention, he may lose or may win the case. If he
losses, he is still entitled to the benefit of excussion.
There is no waiver of the right of excussion by his
appearance in the case.
________
Art. 2063. A compromise between the creditor and the
principal debtor benefits the guarantor but does not prejudice
him. That which is entered into between the guarantor and the
creditor benefits but does not prejudice the principal debtor.
(1835a)
________
Compromise, concepta contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end
to one already commenced.
Effect of compromise
1. Between creditor and principal debtorif
compromise is beneficial to the guarantor, it is valid;
if not, it is not binding upon him.
2. Between creditor and guarantorIf compromise is
beneficial to the principal debtor, it is binding upon
the latter. If not, it is not binding. To be binding, it
must benefit both guarantor and the debtor.
________
Art. 2064. The guarantor of a guarantor shall enjoy the benefit
of excussion, both with respect to the guarantor and to the
principal debtor. (1836)
________
Sub-guarantor is entitled to right of excussiona sub-
guarantor is a guarantor. He stands in the same footing as the
guarantor whom he guarantees with respect to the principal
debtor. As such, he has to enjoy the benefit of excussion both
with respect to the (a) guarantor and (b) principal debtor. His
liability is only subsidiary.
________
Art. 2065. Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer for the
same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively
bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of
excussion against the principal debtor. (1837)
________
Benefit of divisionUnder this law, a co-guarantor is entitled
to claim for a division of liability among his co-guarantors, and
to pay only his aliquot part of the debt when the principal
debtor fails to pay the same.
25 | P LATON

Applicability
1. There are several guarantors;
2. They guaranteed only one debtor; and
3. There is only one debt.
Liability of two or more co-guarantorsonly joint and not
solidary. Each one is liable only for his individual share in the
debt.
However, if several guarantors have agreed with the creditor
that they are liable solidarily, anyone of them may be
compelled by the creditor to pay the entire obligation when the
principal debtor fails to pay.
Benefit of division, when to be claimedJust like the benefit
of excussion, the benefit of division must be claimed at the
time demand for payment is made upon the guarantors as
provided in Article 2060 of the Code.
Cessation of benefit of divisionthis right shall cease or
terminate for the same causes and reasons as the benefit of
excussion against the principal debtor.
________
SECTION 2.EFFECTS OF GUARANTY BETWEEN THE
DEBTOR AND THE GUARANTOR
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him;
(4) Damages, if they are due. (1838a)
________
Applicabilitywhen the guarantor had actually paid the
obligation of the debtor.
GR: The guarantor must first pay the obligation before he can
exact indemnification from the principal debtor.
XPN: If the debtor had bound himself to pay the guarantor as
soon as the latter shall have become bound and liable whether
or not he has actually paid the creditor, the guarantor may
already be indemnified by the debtor.
Coverage of indemnity
1. Total amount of the debtthe actual amount which
he paid to the creditor. He cannot collect more than
what he had actually paid, and the losses and
damages he had actually incurred. The principal
obligation includes the interest due.
2. Legal interestfrom the time the guarantor has
notified the debtor of the payment, the former is
entitled to legal interest of 6 percent per annum on
the amount paid. Basis: the default of the debtor in
the payment and the necessary judicial collection by
the guarantor. Note: granted by law and is different
from any interest which the creditor may have
imposed in the debtor.
3. Expenses incurred by the guarantormust be related
to the contract of guaranty and limited to those
incurred after the guarantor has notified the principal
debtor that the payment had been demanded of him.
If incurred and attributable to the fault or negligence
of the guarantor, cannot be reimbursed.
4. Damages, when duea matter of evidence. The
general rule on Damages will be applicable.
Right to indemnificationmay be waived by the guarantor. It
may also prescribe within 10 years. It may also cease by reason
of other modes of extinguishing obligations.
________
Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
(1839)
________
Right of subrogationthis results by operation of law from the
act of payment and there is no necessity for the guarantor to
ask the creditor to expressly assign his rights of action. (Benefit
of subrogation based on natural justice and is not contractual).
Subrogation is the transfer of the credit of the creditor arising
in a transaction, to a third person with all the rights appearing
thereto, either against the debtor or against third persons.
The subrogation under this article is a legal subrogation as it is
he law which creates it.
The debtor cannot oppose the subrogation as long as the
guaranty was contracted with his knowledge and consent. The
debtors obligation subsists. There is just a change in the person
of the creditor of the principal debtor.
Compromise with creditorsif the guarantor compromised
with the creditor by paying only a lesser amount, he cannot
demand more than what he had actually paid by way of
compromise.
________
Art. 2068. If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the defenses
which he could have set up against the creditor at the time the
payment was made. (1840)
________
Payment without notice to debtorit is possible that the
debtor has some special reasons which bar the collection of the
obligation such as remission, prescription, performance, etc.
Should the guarantor pay prematurely without notifying the
debtor, the latter may set up defenses against him which could
have been raised against the creditor at the time of payment.
The remedy of the guarantor is now to go after the creditor for
the recovery of the amount paid, if there is still a legal basis for
the claim. If the guarantor suffers it is due to his own fault.
________
26 | P LATON

Art. 2069. If the debt was for a period and the guarantor paid it
before it became due, he cannot demand reimbursement of
the debtor until the expiration of the period unless the
payment has been ratified by the debtor. (1841a)
________
Payment before maturity effecthe cannot seek
reimbursement from the debtor until the expiration of the
period stipulated. The guarantor must wait. For being
subsidiary in character, the guaranty is not enforceable until
the debt has become due. XPN: If the premature payment was
ratified by the debtor.
________
Art. 2070. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment, repeats
the payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the guarantor was prevented by a
fortuitous event from advising the debtor of the payment, and
the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid. (1842a)
________
Repeat payment by principal debtor; effectnot aware of the
payment made by the guarantor, the guarantor can only go
after the creditor. XPN: if the guaranty is
1. A gratuitous one, and
2. The guarantor, due to fortuitous event was prevented
from advising the debtor of the payment, and
3. The creditor becomes insolvent.
Here the debtor must reimburse the guarantor for what the
latter had paid.
However, if the creditor is insolvent, the remedy of the
guarantor is still against the creditor and not against the
principal debtor. The creditor cannot be allowed to enrich
himself.
________
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such nature
that it cannot be extinguished except within a period longer
than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor. (1834a)
________
Action of guarantor against the debtor not for
reimbursementrather, the action is either for:
1. A demand for release from the guaranty, or
2. A demand for sufficient security that will protect him
from the creditors complaint and from the danger of
insolvency of the debtor.
Distinctions between Article 2066 and Article 2071
ARTICLE 2066 ARTICLE 2071
Gives the surety a right of Gives a protective remedy
action after payment before payment
Gives the surety a substantive Gives a preliminary remedy
right
When the suretys rights under Article 2066 become available,
he is past a point where a preliminary protective remedy is of
any value to him. The surety may get reimbursement if he has
satisfied the principal obligation.
________
Art. 2072. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement. (n)
________
Applicabilitywhere a person becomes a guarantor at the
request of another for the debt of a third person who is not
present, and the guarantor has actually paid the debt to the
creditor.
Remedy of guarantorUnder the above situation, the
guarantor has the option of suing either:
1. The requesting party, or
2. The principal debtor.
Basis: No person shall be enriched at the expense of another. It
has the characteristics of a quasi-contract.
________
SECTION 3.EFFECTS OF GUARANTY AS BETWEEN CO-
GUARANTORS
Art. 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has
paid may demand of each of the others the share which is
proportionately owing from him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same
proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or
unless the principal debtor is insolvent. (1844a)
________
Applicabilitywhen one guarantor has paid the obligation of
the principal debtor and is seeking contribution from his co-
guarantors. The payment, however, must be made by reason of
a judicial demand, or insolvency of the principal debtor.
(Benefit of contribution).
27 | P LATON
Juridical tie between co-guarantorsjointly and not solidarily
liable. (Complements Article 2065 on benefit of division)
Article 2073 distinguished from Article 2065
ARTICLE 2073 ARTICLE 2065
Benefit of contribution Benefit of division
The controversy is between It is between the co-
and among several co- guarantors and the creditor
guarantors who is claiming payment from
all or one or some of the
several co-guarantors
There is already payment of There is no payment yet, but
the debt, that is why, the there is merely a claim
paying co-guarantor is seeking pressed against one or more
the contribution of the co- co-guarantors.
guarantors
Benefit of contribution; right to seek contributiononly to the
proportionate share of each in the debt which is divided among
all.
If one co-guarantor, due to his insolvency, cannot pay his share,
the same shall be shouldered by all including the paying
guarantor, in the same proportion. The former (insolvent),
however, shall be liable to the others.
Basis of paying guarantors right to contributionby virtue of
the payment he made, acquires by operation of law the right of
contribution. He need not get any prior consent of the creditor.
It is ipso jure.
Effect of payment outside of the restriction(not by virtue of
a judicial demand or by reason of the insolvency of the principal
debtor), the paying co-guarantor cannot directly seek
reimbursement from the others. He has to pursue first the
claim against the principal debtor alone.
Article 2073 applies to suretyA solidary accommodation
maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to
the creditor. He may also demand reimbursement from his co-
accommodation maker, without directing his actions against
the debtor provided that:
a) He made the payment by virtue of a judicial demand,
or
b) The principal debtor is insolvent.
________
Art. 2074. In the case of the preceding article, the co-
guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal debtor
against the creditor, and which are not purely personal to the
debtor. (1845)
________
Defenses of co-guarantorsIf the co-guarantors have defenses
which would have pertained to the principal debtor against the
creditor at the time of payment, these may be set up against
the paying co-guarantor. Instances of such defenses are
payment already made by the debtor, remission, prescription,
etc. Such defenses are available to the co-guarantors as against
the paying guarantor because they are not purely personal to
the principal debtor. They are transmissible defenses being
inherent in the obligation, the effect of which is to nullify the
obligation or render the same ineffective.
However, if the defense is purely personal, it cannot be set up
by the other co-guarantors as against the paying co-guarantor
being intransmissible (e.g., minority of the principal debtor).
________
Art. 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor. (1846)
________
Liability of sub-guarantorA sub-guarantor guarantees a
guarantor. If the principal debtor cannot pay, the guarantor is
obliged to pay. If the guarantor cannot pay, the sub-guarantor
pays because he guarantees the solvency of the guarantor.
In case of insolvency of the guarantor for whom the sub-
guarantor has bond himself, the latter is responsible to the
other co-guarantors in the same terms as the guarantor whom
he guaranteed.
________
CHAPTER 3EXTINGUISHMENT OF GUARANTY
Art. 2076. The obligation of the guarantor is extinguished at the
same time as that of the debtor, and for the same causes as all
other obligations. (1847)
________
Grounds for extinguishment of guarantysame causes which
extinguishes obligations:
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code.
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards lose the
same through eviction, the guarantor is released. (1849)
Art. 2078. A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to the extent
of the share of the guarantor to whom it has been granted. (1850)
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extention of time
referred to herein. (1851a)
Art. 2080. The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor they cannot
be subrogated to the rights, mortgages, and preference of the latter.
(1852)
Release of guaranty is simultaneous with the discharge of the
debtorwhen the debtor is discharge from responsibility by
28 | P LATON
the creditor, the guaranty is at the same time automatically
released.
Kinds of extinguishment
1. Directthis is the extinguishment of the guaranty
independently of the principal obligation without the
knowledge and consent of the guarantor.
2. Indirectthis is the extinguishment which arises from
the extinction of the principal obligation. The
Accessory follows the principal.
Alterations of changes in the contract which do not affect the
contract of guaranty
1. When the interest rates are increased without the
consent of the guarantor, the principal obligation
shall subsist at the original rate of interest.
2. Assignment of the suretyship by the creditor to
another person without the consent of the surety did
not release the latter.
3. A change or part performance of the contract which
did not render the obligation more onerous cannot
release the surety.
To release the guarantor, there must be some change imposing
or added burden on the party promising or which takes away
some obligation already imposed, changing the legal effect of
the original contract and not merely the form thereof.
________
Art. 2077. If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
released. (1849)
________
Voluntary acceptance of property as payment by the creditor;
effect
GR: Payment is effected through moneymedium of exchange.
XPN: The parties may agree that instead of money, property is
offered in lieu thereof like in dation in payment.
If the creditor accepts payment in the form of property
whether immovable of movable, there is novation on the
subject matter. This extinguishes the old obligation and also the
guaranty, in effect.
Effect if the creditor is evicted from the property(property
which he accepted as payment), the principal obligation, in the
absence of any contrary agreement, is revived. This renewal,
nevertheless, will not revive the guaranty. The action of the
creditor against the principal debtor is for the eviction and this
is different from what was guaranteed by the guarantor. The
only remedy of the creditor is to proceed against the debtor
alone.
The creditor must suffer for he has taken the risk of accepting
the property without full precaution.
________
Art. 2078. A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to
the extent of the share of the guarantor to whom it has been
granted. (1850)
________
Effect of release of one guarantorif the creditor releases one
guarantor without the consent of the other co-guarantors, the
latter will be benefited to the extent of the share of the
released co-guarantor.
________
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
(1851a)
________
Extension, conceptthe extension referred to in the Article
refers to the lengthening of the period or term agreed upon for
the performance of the debtors obligation.
GR: Effect of grant of extension of period to the principal
debtor
a) With the consent of the guarantorthe guaranty is
not extinguished. The right to object is a personal
right. It can be waived. The waiver is not contrary to
law of public policy.
b) Without the consent of the guarantoran extension
of time granted to the principal debtor without the
consent of the guarantor extinguishes the guaranty.
XPN: Where an extension was granted to the debtor by the
creditor without the knowledge and consent of the
accommodation party, the extension does not release the latter
from his obligation because, although he is like a surety, he is
primarily liable to a holder in due course.
Reason for the first sentencethe extension would deprive
the surety of his right to pay the creditor and to be immediately
subrogated to the creditors remedy against the debtor upon
the original maturity date. The surety is entitled to protect
himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period.
Reason for the second sentencethe guarantor after all would
not be prejudiced since his recourse would be to avail of the
right granted him under Article 2071.
Mere delay or neglect of creditor in collecting the debt;
effectsthe extension of term must be based on some new
agreement between the creditor and the principal debtor by
virtue of which the creditor deprives himself of his claim. The
mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of time referred to herein.
Rule when obligation is payable in installmentswhere a
borrower agreed to an acceleration clause, that is, in case of
failure to pay one installment, his entire obligation will become
due and demandable, the extension of time granted to one
overdue installment, will release the guarantor. Reason: the
extension referred to the whole or entire obligation.
29 | P LATON
 ________
Art. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter. (1852)
________
Applicabilitydoes not apply where the liability is as a surety,
not as a guarantor.
Release due to failure of subrogationUnder Article 2067, the
guarantor who pays the debt of the principal debtor is entitled
to the benefit of subrogation which arises by operation of
law. It is necessary to enable the guarantor to enforce the items
of indemnification granted him by law. This benefit of
subrogation is not a contractual right but is premised in
natural justice.
If by reason of some act of the creditor the guarantor cannot be
subrogated to the rights, mortgages and preferences of the said
creditor (e.g., cancellation of mortgage), the guarantors are
released from their obligation. Reason: To prevent connivance
or collusion between the creditor and debtor in order not to
prejudice the guarantors. XPN: If the failure or impossibility of
subrogation is due to reasons attributable to the guarantors
themselves, they cannot be released from their responsibility.
Negligence of creditor resulting in failure of subrogation;
effect(e.g., when he failed to register a deed of real estate
mortgage thus allowing a third person to lawfully levy on the
property mortgaged), the guarantors are released from
responsibility.
Time to invoke benefit of Articleonly during the proceeding
against him for payment of the debt. It cannot be invoked
before or after the judgment had been rendered.
________
Art. 2081. The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent
in the debt; but not those that are personal to the debtor.
(1853)
________
Defenses which cannot be set up against the creditorall
defenses inherent in the debt (such as previous payment,
prescription, illegality of the cause, fraud and other vices of
consent) pertaining to the principal debtor may be set up by
the guarantor against the creditor. Such defenses if sufficiently
established will release the guarantor from responsibility.
Defenses which are purely personal to the debtor will not be
available to the guarantor, such as the defense of minority of
the principal debtor. It pertains personally to him alone.
Some defenses not personally pertaining to the debtor
1. Condonation
2. Consignation
3. Loss of the thing (before the debtor has incurred in
delay)
4. Confusion or merger of rights
a. Between the persons of the guarantor and
creditor, the principal debtor remains liable
for the principal debt because only the
guaranty is involved in the confusion or
merger of rights.
b. Between the persons of the creditor and
debtor, the debt is extinguished as well as
the contract of guaranty.
5. Compensationthe guarantor can recover from the
principal debtor the amount compensated because
compensation has the same effect as actual payment
of the obligation by the guarantor.
Death of principal debtorcannot be used as a defense
against the creditor. The obligation of the debtor is a
transmissible one. The estate or his heirs will answer for it.
________
CHAPTER 4LEGAL AND JUDICIAL BONDS
Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the
qualifications prescribed in Article 2056 and in special laws.
(1854a)
________
Applicabilitythe bondsman must be one required to be
furnished by (1) provision of law or (2) judicial order.
Bond, meaningwhen required by law or judicial order, an
undertaking that is sufficiently secured, and not cash or
currency.
Nature of bondsexist only in consequence of a meeting of
minds between the parties on the subject matter and
consideration. They are contractual in nature unlike guaranty
which can be legal, that is, mandated by law instanced by that
required of a usufructuary under Article 583 (2):
Art. 583. The usufructuary, before entering upon the enjoyment of the
property, is obliged:
xxx
(2) To give security, binding himself to fulfill the obligations imposed
upon him in accordance with this Chapter. (491)
Judicial bondsconstitute merely a special class of contracts of
guaranty characterized by the fact that they are given in virtue
of a judicial order.
Qualifications of a bondsmansame as the qualifications of a
guarantor under Article 2056; if there is a special law providing
for other qualifications, the same must also be observed.
Sec. 12. Qualifications of sureties in property bond. The qualifications
of sureties in a property bond shall be as follows:
(a) Each must be a resident owner of real estate within the Philippines;
(b) Where there is only one surety, his real estate must be worth at
least the amount of undertaking;
(c) If there are two or more sureties, each may justify in an amount less
than that expressed in the undertaking but the aggregate of the
justified sums must be equivalent to the whole amount of the bail
demanded.
In all cases, every surety must be worth the amount specified in his own
undertaking over and above all just debts, obligations and properties
exempt from execution. (Rule 114, Revised Rules of Court)
Form of surety bondsit is necessary that they should be
signed not only by the sureties themselves but also by all the
principal obligors; otherwise, they are void, there being no
principal obligation upon which their existence have to depend.
30 | P LATON
A guaranty is valid in whatever form it may be provided it
complies with the Statute of Frauds. Once the principal contract
is perfected, the guaranty becomes effective. No notice of
acceptance by the creditor to the guarantor is necessary for its
validity.
________
Art. 2083. If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof. (1855)
________
Mortgage or pledge may be substituted for the bond
requiredif found to be sufficient to cover his obligation.
________
Art. 2084. A judicial bondsman cannot demand the exhaustion
of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion
of the property of the debtor of the surety.
________
Benefit of excussion not available to bondsman and sub-
surety
Notice of hearing to suretya bondsman or surety must be
given an opportunity to be heard, otherwise, the writ of
execution issued against him is void.
Approval of the bondhearing on the approval of the bond
may be dispensed with, provided the judge is satisfied that the
surety is solvent.
oOo
TITLE XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS
CHAPTER 1PROVISIONS COMMON TO PLEDGE AND
MORTGAGE
Art. 2085. The following requisites are essential to the contracts
of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own
property. (1857)
________
Concept of pledgePledge is an accessory contract whereby a
debtor delivers to the creditor or to a third person a movable or
personal property, or document evidencing incorporeal rights,
to secure the fulfillment of a principal obligation with the
condition that when the obligation is satisfied, the thing
delivered shall be returned to the pledgor with all its fruits and
accessions, if any.
Concept of real mortgage (or real estate mortgage)Real
estate mortgage is 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
paid or complied with at the time stipulated.
A real mortgage is a right held by a creditor to have the realty
seized and sold for the satisfaction of the debt in default of
payment.
A mortgage is a contract entered into in order to secure the
fulfillment of a principal obligation, and constituted by
recording the document in which it appears with the proper
Registry of Property, although even if it is not recorded, the
mortgage is nevertheless binding between the parties.
Purpose of pledge and mortgageto secure the fulfillment of a
principal obligation which ordinarily is a contract of loan.
First requisite of the articleit is the nature of the contract
that they are merely accessory contracts. They cannot exist
without an existing valid principal obligation.
Effect of invalidity of pledge or mortgagedoes not make the
principal obligation void.
Effect of invalidity of principal obligationthe pledge or
mortgage being merely an accessory thereto is also void.
Cause or consideration of the contracts of pledge and
mortgage
1. If the pledgor or mortgagor is the debtor himself, the
cause or consideration of the pledge or mortgage is
the principal obligation itself.
2. If the pledgor or mortgagor is not the debtor himself,
but a third person, the cause or consideration is the
compensation agreed upon for the execution of the
pledge or mortgage or the plain liberality of the
pledgor or mortgagor.
Second requisite of the articlea pledge is void, if the thing
pledged does not belong to the pledgor. A real estate mortgage
is void if the mortgagor has no title to the land he mortgaged.
The accessory contract of chattel mortgage has no legal effect
whatsoever where the mortgagor is not the absolute owner of
the property mortgaged, ownership of the mortgagor being an
essential requirement of a valid mortgage contract. The
manifestation of ownership are control and enjoyment over the
thing owned.
Similarities of pledge and mortgage
1. Both contracts are constituted to secure a principal
obligation; hence, they are only accessory contracts;
2. Both pledgor and mortgagor must be absolute
owners of the property pledged or mortgaged;
3. Both pledgor and mortgagor must have the free
disposal of their property or be authorized to do so;
4. In both, the thing proffered as security may be sold at
public auction when the principal obligation becomes
due and no payment is made by the debtor.
Distinctions between pledge and mortgage
31 | P LATON
 PLEDGE MORTGAGE Possession of propertymortgage could not be the basis of
possession. A mortgage is merely a lien and title of the property
Object is movable property Object is immovable property
does not pass to the mortgagee unless the mortgage should
provided it is susceptible of
contain some special provision to that effect.
possession
Property must be delivered. It Delivery is not necessary Will the voiding of a Torrens title subject of mortgage cancel
is a real contract the mortgage lien thereon?No. The land is still liable for the
Description of thing and date Must be registered, mortgage lien of the innocent mortgagee for value. The true
of pledge must appear in a otherwise, not valid against owner of the land may sue the person responsible for the
public instrument. Otherwise, third persons although fraudulent registration or make a claim against the assurance
it is not valid as to third binding between the fund.
persons contracting parties
A mortgage made to secure future advances is a continuing
Not a real right Real right and real property security and is not discharged by repayment of the amount
by itself named in the mortgage, until the full amount of the advances
are paid.
May property acquirable in the future be mortgaged?No.
because he was not yet the owner of the properties at the time A third person who pledged or mortgaged his property is not
of the mortgage. liable for any deficiencyXPN: If the third party pledgor or
mortgagor expressly agreed to be bound solidarily with the
Formalities in a pledge or real estate mortgagein order to principal debtor.
constitute a valid pledge, property must be described with
reasonable certainty and must be delivered to the pledgor. Right of an owner of personal property pledged without
Similarly, to constitute a valid mortgage, the realty must be authority
described therein. A mortgage of general undescribed property
is not valid. Art. 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof may recover it from the person in
The object of the contract must be certain. It must also be
possession of the same.
determinate as to its kind.
If the possessor of a movable lost or which the owner has been
Where the subject matter of the contract is land, it must be unlawfully deprived, has acquired it in good faith at a public sale, the
sufficiently described to allow its proper identification without owner cannot obtain its return without reimbursing the price paid
need of entering into a new contract between the parties. therefor. (464a)
Otherwise, the contract is void.
Nature of assignment of rights to guarantee an obligation of a
Innocent mortgagees for value, like innocent buyers for value, debtora mortgage and not an absolute conveyance of title
protected by law which confers ownership on the assignee.

Just as an innocent purchaser for value may rely on what
appears on the certificate of title, a mortgagee has a right to
rely on what appears on the title presented to him, and in the
absence of anything to excite suspicion, he is under no
obligation to look beyond the certificate and investigate the
title of the mortgagor appearing on the face of the said
certificate. (Cabuhat v. CA, 366 SCRA 176)
Rule when the mortgage is executed by an impostorthe
mortgage is a nullity. However, where the Torrens title was in
the name of the impostor or forger and the mortgagee acted in
good faith, the mortgage is valid. Reason: To rule otherwise is
to undermine the efficacy and conclusiveness of certificates of
title.
The rule that persons dealing with registered lands can rely
solely on the certificate of title does not apply to banks.
While the innocent mortgagee is not expected to conduct an
exhaustive investigation on the history of the mortgagors title,
in the case of banking institution, a mortgagee must exercise
due diligence before entering into said contract. Judicial notice
is taken of the standard practice for banks, before approving a
loan, to send representatives to the premises on the land
offered as collateral and to investigate who are the real owners
thereof. (DBP v. CA, 331 SCRA 267)
Third persons; accommodation mortgagorthird persons who
are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property. They are known
as accommodation mortgagor.
Liability of accommodation mortgagorsonly up to the loan
value of their mortgaged property and not to the entire loan
itself.
________
Art. 2086. The provisions of Article 2052 are applicable to a
pledge or mortgage. (n)
________
Article 2052 made applicable to pledge and mortgage--
________
Art. 2087. It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor. (1858)
________
Right of the mortgagee to foreclose (accion hipotecaria)the
term alienate means to transfer or convey property to
another. However, the term alienate in the Article does not

32 | P LATON
mean that upon failure of the debtor to pay, the property will
automatically belong to the debtor. Such thing, even if
stipulated, will be void being a pactum commissorium.
If the debtor failed to pay on maturity date, the thing pledged
or mortgaged may be sold at public auction.
________
Art. 2088. 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. (1859a)
________

Nature of foreclosure salealthough essentially a forced
sale, is still a sale in accordance with Article 1458 of the Civil
Code, under which the mortgagor in default, the forced seller,
becomes obliged to transfer the ownership of the thing sold to
the highest bidder, who, in turn, is obliged to pay therefor the
bid price in money or its equivalent, and the rule that the seller
must be the owner of the thing sold also applies.
Kinds of foreclosure of real estate mortgage
1. Judicialby the court in a judicial proceeding for the
purpose.
2. Extrajudicialoutside of court authorized under Act
No. 3135. The mortgagor in the contract may appoint
the mortgagee as is attorney-in-fact to cause the
foreclosure of the mortgage either through a sheriff
or a notary public, in case the debtor fails to pay the
obligation on time.
Right of junior mortgageewhen the proceeds of the sale are
just enough to pay the obligation due to the first mortgagee,
the second (junior) mortgagee may only repurchase the
property from the first mortgagee there being no excess from
the proceeds of the sale.
Is it necessary for the pledgee (or mortgagee) to sue the
pledgor (or mortgagor) to enforce his credit?No.
Equity of redemption distinguished from right of
redemption
Pactum commissirium, conceptan agreement in a contract of
loan whereby the property pledged or mortgaged to secure the
payment thereof, will automatically become the property of
the creditor upon the failure of the debtor to pay the obligation
on the time stipulated.
Elements of pactum commissorium
1. There is a pledged, mortgage, or antichresis of a
property by way of security for the payment of a
principal obligation; and
2. There is an express stipulation for an automatic
appropriation by the creditor of the property in case
of nonpayment of the principal obligation by the
debtor within the period stipulated upon.
Reason why pactum commissorium is prohibitedbeing
contrary to good morals and public policy; specifically, the
amount of the loan obtained from the creditor is usually much
less than the actual value of the thing pledged or mortgaged.
Two acts prohibited of the creditor under Article 2088
1. The creditor cannot appropriate to himself the things
given to him by way of pledge or mortgage.
2. The creditor cannot dispose of the things pledged or
mortgaged.
Pledgor or mortgagor bears risk of lossbecause ownership is
not transferred to the pledgee or mortgagee. Res perit domino.
________

EQUITY OF REDEMPTION
The right of the mortgagor to
redeem the mortgaged
property after his default in
the performance of the
conditions of the mortgage
but before the sale of the
property or the confirmation
of the sale
Applies in judicial foreclosure
Simply the right of the
mortgagor to extinguish the
mortgage and retain
ownership of the property by
paying the secured debt
within the 90-days period
after the judgment became
final
RIGHT OF REDEMPTION
The right of the mortgagor to
repurchase the property even
after the confirmation of the
sale, in case of foreclosure by
banks, within one year from
the registration of the sale
Applies only in extrajudicial
foreclosure, foreclosure by
certain banks or banking
institutions, and sale in
execution
In relation to a mortgage
understood in the sense of a
prerogative to reacquire
mortgaged property after
registration of the foreclosure
saleexists only in the case of
the extrajudicial foreclosure
of the mortgage
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.
Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge
or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice
of the other heirs who have not been paid.
From these provisions is expected the case in which, there
being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.
(1860)
Art. 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable. (n)
________

Nature of action to redeemin personam, so much so that a Indivisibility of pledge or mortgagethus, it cannot be divided
judgment therein is binding only upon the parties properly into parts. In other words, each parcel of land answers for the
impleaded and duly heard or given an opportunity to be heard. totality of the indebtedness.

33 | P LATON

Heirs of debtor or creditora debtors heir who has paid a part
of the debt cannot demand a proportionate extinction of the
pledge or mortgage as long as the debt has not been fully paid.
Corollarily, the creditors heirs who received his share of the
debt cannot return the thing pledged or cancel the mortgage to
the prejudice of the unpaid heirs.
Rule when several things are pledged or mortgaged, each
thing for a determinate portion of the debtthe pledges or
mortgages are considered separate from each other.
Indivisibility of a pledge or mortgage may be waivedby
express stipulation by the parties. It does not involve any
principle of public order.
Indivisibility applies only to contracting parties
Embodiment of real estate mortgage and chattel mortgage in
one document; effectdoes not fuse both securities into an
indivisible whole.
________
Art. 2091. The contract of pledge or mortgage may secure all
kinds of obligations, be they pure or subject to a suspensive or
resolutory condition. (1861)
________
What obligations may a pledge or mortgage secure?all kinds
of obligations may be secured as long as they are not void.
________
Art. 2092. A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting parties,
without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some
burden, or by misrepresenting himself to be the owner of the
same. (1862)
________
Promise to constitute a pledge or mortgage; effectsif
accepted, merely gives rise to a personal action between the
contracting parties. It creates no real rights. The action is only
to compel the promissory to execute the pledge or mortgage.
Criminal liability may arise in fulfilling the promise
Art. 316. Other forms of swindling. The penalty of arresto mayor in
its minimum and medium period and a fine of not less than the value of
the damage caused and not more than three times such value, shall be
imposed upon:
1. Any person who, pretending to be owner of any real property, shall
convey, sell, encumber or mortgage the same.
2. Any person, who, knowing that real property is encumbered, shall
dispose of the same, although such encumbrance be not recorded.
________
CHAPTER 2PLEDGE
Art. 2093. In addition to the requisites prescribed in Article
2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement. (1863)
________
Basic requirements of pledge
1. It is constituted to secure the fulfillment of a principal
obligation;
2. Pledgor is the absolute owner of the thing pledged;
3. Person constituting the pledge (who may be the
pledgor himself or a third person) has the free
disposal of the thing, and in the absence thereof, that
he be legally authorized to make the pledge.
Additional requisitethe thing pledged must be placed in the
actual possession of the pledge or of a third person designated
by the parties by common consent.
Another requisite of pledge is that it must be reduced into a
public instrument where the thing must be particularly
described and the date of the pledge indicated to bind third
persons.
Continuous possession requiredhowever, the pledge is
allowed to temporarily entrust the physical possession of the
thing pledged to the pledgor (as a trustee) without invalidating
the contract.
Constructive or symbolic delivery is not sufficient to constitute
a pledge; exceptionwhere the subject of a pledge consists of
goods stored in a warehouse for purposes of showing the
pledgees control over the goods, the delivery to him of the
keys to the warehouse is sufficient delivery of possession.
________
Art. 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
________
9
Object of pledgeonly personal property may be the object of
pledge. Pledge is confined to personalty and cannot be engaged
or made a lien on realty.
Not all personal properties may be pledged but only those
which are within the commerce of man and susceptible of
possession.
No double pledgeA property pledged cannot be pledged
again while the first pledge is still subsisting.
________
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The
9Art. 416. The following things are deemed to be personal property:
(1) Those movables susceptible of appropriation which are not included in the
preceding article;
(2) Real property which by any special provision of law is considered as
personal property;
(3) Forces of nature which are brought under control by science; and
(4) In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed. (335a)
Art. 417. The following are also considered as personal property:
(1) Obligations and actions which have for their object movables or
demandable sums; and
(2) Shares of stock of agricultural, commercial and industrial entities,
although they may have real estate. (336a)
34 | P LATON
instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed. (n)
________
Pledge of incorporeal rights evidenced by proper document
may be pledgedit is required that the actual instrument (like
promissory notes, bills of lading, shares of stocks, quedans,
warehouse receipts) be delivered to the pledgee.
________
Art. 2096. A pledge shall not take effect against third persons if
a description of the thing pledged and the date of the pledge
do not appear in a public instrument. (1865a)
________
Pledge must be embodied in a public instrument to affect
third personswhere the following entries must appear:
1. A description of the thing pledged; and
2. Statement of date when the pledge was executed.
Unless these matters are reflected in the contract of pledge,
innocent third persons who may have transacted with the
pledgor involving the thing may validly claim a better right than
the pledgee even if the latter has already taken possession
thereof.
Rationale behind the requirementto forestall fraud, because
a debtor may attempt to conceal his property from his creditors
when e sees it in danger of execution by simulating a pledge
thereof with an accomplice.
Effect of undated contract of pledgecannot ripen into a valid
pledge.
________
Art. 2097. With the consent of the pledgee, the thing pledged
may be alienated by the pledgor or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession. (n)
________
May a pledgor alienate the thing while the pledge is
subsisting?the pledgor doe not transfer ownership to the
pledgee by reason of the contract of pledge. Consequently, he
remains the owner of the thing. His right to dispose of it (jus
dispondendi) is not lost. However, there is a restriction in the
alienation thereof. He must first secure the consent of the
pledgee.
Reckoning time as to when ownership is transferred to
vendeeif the pledgee ha consented to the alienation of the
things by the pledgor, as soon as the pledgee has given his
consent, the ownership is transferred to the vendee subject to
the right of the pledgee to continue to physically possess the
thing and to sell it if the principal obligation is not paid on time.
What really happens is a case of novation in the person of the
debtor which process is known as delegacion.
________
Art. 2098. The contract of pledge gives a right to the creditor to
retain the thing in his possession or in that of a third person to
whom it has been delivered, until the debt is paid. (1866a)
________
Right of retention
If the creditor wants the original pledge to apply to the new
debt, he should so demand at the time the later obligation is
entered into. It cannot be fairly presumed that the debtor
consents to the new pledge.
________
Art. 2099. The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and
is liable for its loss or deterioration, in conformity with the
provisions of this Code. (1867)
________
Duty of pledgee to take care of the thing pledgedwhile the
thing pledge remains in the possession of the pledgee, he is
required to take care of the thing with the diligence of a good
father of a family. So if the thing is lost or has deteriorated in
value by reason of the negligence of the pledgee, the latter is
responsible for the injury caused.
However, if the loss or deterioration is due to fortuitous event,
the pledgee is not liable unless
1. There is delay,
2. A contrary agreement, or
3. When the nature of the obligation requires the
assumption of risk, and also
4. In cases expressly provided by law.
Rule on deteriorationinsofar as the duty to preserve the
good condition of the pledged thing is concerned, the pledgee
stands on the same footing as an obligor. He is obliged to
protect the thing. In case of loss or deterioration of the thing
10
pledged Article 1189, paragraph 1, 2, 3 are applicable.
________
Art. 2100. The pledgee cannot deposit the thing pledged with a
third person, unless there is a stipulation authorizing him to do
so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged. (n)
________
Pledged thing cannot be deposited with a third person;
exceptionwhile the pledgee may retain the thing pledged
during the existence of the contract, he is, however, prohibited
from depositing it with a third person. This is to protect the
pledgor or owner of the thing from possible loss or
deterioration of the thing pledged while in the hands of the
depositary who is not a privy to the pledge.
10Art. 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during
the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor; x x x
35 | P LATON
Exception: Deposit is allowed with the consent of the pledgor.
Thus, he cannot blame the pledgee if something goes wrong
with the thing while under deposit with a third person.
Responsibility of pledgee for acts of is agents and
employeesif the thing is lost, destroyed or suffered
deterioration by reason of the acts or negligence of the agents
or employees of the pledgee, the latter is responsible therefor
under the principle of imputed or vicarious liability in the law
on torts.
________
Art. 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under Article 1951. (n)
________
11
Applicability of Article 1951 to pledgeif the pledgor knows
if the dangerous condition or flaws of the thing pledged
without informing the pledgee about it, the former is liable for
the damages suffered by the latter by reason thereof.
However, if the defect is apparent, the pledgor is not liable. The
pledgee should be cautious and vigilant enough to protect
himself. He is presumed to have taken ordinary care of is
concerns.
________
Art. 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing
him, or insofar as the amount may exceed that which is due, he
shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of
the right pledged.
In case of a pledge of animals, their offspring shall pertain to
the pledgor or owner of animals pledged, but shall be subject
to the pledge, if there is no stipulation to the contrary. (1868a)
________
Setting off fruits or interestsfruits and interest which the
pledgee receives out of the things pledged, may be applied to
compensate for what the pledgor owes him by reason of te
pledge. If there is nothing to offset or if there is an excess after
the offset, the remainder shall be applied to the payment of the
principal obligation.
Rule on extent or scope of pledge; exceptionthe pledge is
not confined to the very thing pledged. It extends to the
interests and earnings of the thing or right pledged, unless
there is a contrary stipulation by the parties.
As regards pledged animals, their offspring shall belong to the
pledgor or owner because the young of animals are considered
natural fruits. However, they are subject to the pledge, unless
there is a contrary stipulation. The parties may validly agree not
to include them in the pledge. (See also Art. 2127)
Future advancements may be secured by pledgethe
contracting parties to a pledge will also stand as security for any
11Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not
advise the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof. (1752)
future advancements (or renewals thereof) that the pledgor
may procure from the pledgee.
________
Art. 2103. Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from, or
defend it against a third person. (1869)
________
Expropriationin expropriation, the pledgor ceases to be the
owner. The pledge is terminated. The price paid for the
expropriated property shall be applied to the payment of the
principal obligation, the interests and other expenses due to
the pledgee. If there is any excess, the same shall be delivered
to the pledgor.
Legal subrogationthe pledgee is under obligation to protect
the thing pledged. The Article subrogates him to the right of the
pledgor to bring such legal actions in court or to defend it
against third persons.
________
Art. 2104. The creditor cannot use the thing pledged, without
the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it be
judicially or extrajudicially deposited. When the preservation of
the thing pledged requires its use, it must be used by the
creditor but only for that purpose. (1870a)
________
Obligation not to use or misuse the thingwhile the pledgee
has the right to possess the thing pledged, e is not allowed,
however, to use it, much less, to misuse it. Otherwise, the
owner may demand the deposit of the thing judicially or extra-
judicially. Moreover, the pledgee may be liable for the damages
or injury caused.
Exceptions
1. If the pledgor had given him authority or permission
to use it; and
2. If the use of the thing is necessary for its
preservation. There are things which may deteriorate
if left in total disuse like things propelled by engines.
________
Art. 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
(1871)
________
Return of the pledge, when demandablethe thing pledged
cannot be returned to the pledgor against the will of the
pledgee, unless there is full payment of the obligation as well as
the corresponding interest and expenses incurred by the
pledgee occasional by the pledge.
The pledgor, however, is allowed to seek the return of the thing
if it is in danger of destruction or impairment provided he offers
an acceptable substitute for it.
________
36 | P LATON
Art. 2106. If through the negligence or wilful act of the pledgee,
the thing pledged is in danger of being lost or impaired, the
pledgor may require that it be deposited with a third person.
(n)
________
When pledged thing is in danger of being lost or impaired;
rulein Article 2104, the owner of the thing pledged may
demand that it be judicially or extra-judicially deposited in
cases of (a) use of the thing without permission by the pledgee;
and (b) when the pledgee is misusing the thing. Thus, if the
pledgee is permitted to use a pledge watch in certain occasions,
but is being seen wearing it while swimming on the beach, the
deposit of the thing with someone may be asked.
The present Article also justifies the deposit of the thing
pledged with a third person but grounded on
a) Negligence, or
b) Willful act of the pledgee which act will imminently
bring about the loss or impairment of the thing
pledged.
________
Art. 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality,
and without prejudice to the right of the pledgee under the
provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of
any danger to the thing pledged. (n)
________
Right of pledgor to demand return of the thing pledgedas a
rule, until there is full satisfaction of the debt, the pledgor
cannot demand the return of the thing he pledged.
The Article allows the return of the thing to the pledgor before
the fulfillment of the obligation only if there are reasonable
grounds to fear that the ting pledged would destroyed or
impaired (without fault on the part of the pledgee) provided
the pledgor offers another thing as substitute which is of the
same kind and not of inferior quality. This is without prejudice
to the application of Article 2108 whenever warranted.
If there is fault on the part of he pledgee, Articles 2104 and
2106 shall apply.
________
Art. 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.
(n)
________
Auction sale where obligation is not due yeteven if the
obligation has not matured yet, but there is a danger that the
thing would be destroyed, impaired or its value diminished, the
pledgee, who is not at fault, is granted the right to sell the
thing at a public sale. If the pledgor, under the situation would
like to substitute the thing pledged with another acceptable
thing, the pledgees right to sell is given preference by Article
2107.
Proceeds of sale; statusthe proceeds of the sale shall pertain
to the pledgor because he has not incurred default on the
payment of its obligation. The proceeds shall be held by the
pledgee as security for the principal obligation in the same
manner as the thing originally pledged was possessed.
________
Art. 2109. If the creditor is deceived on the substance or quality
of the thing pledged, he may either claim another thing in its
stead, or demand immediate payment of the principal
obligation. (n)
________
Deception or misrepresentation on the substance and quality
of the thing pledgedif the pledgor deceived the pledgee on
the substance or quality of the thing pledged, the contract is
voidable. There is fraud in the execution of the contract.
Instead of annulment, the law gives the pledgee the option to
pursue any one of the following remedies:
a) To demand from the pledgor an acceptable substance
of the thing; or
b) To demand the immediate payment of the principal
obligation.
The remedies are alternative not cumulative. Only one may be
chosen. The law used the conjunctive or. Either one is more
convenient than annulment.
________
Art. 2110. If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to
the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge. (n)
________
Return of the thing pledged to pledgor by pledgee; effectit is
the essence of pledge that its object be in the actual possession
of the pledgee. Consequently, if the pledgee has returned it to
the pledgor, the pledge is extinguished. The rule will be the
same even if the parties have voluntarily agreed that the pledge
shall continue despite the return of the thing.
Presumption when thing is found in the possession of the
pledgorthere is a prima facie presumption that the thing
pledged has been returned by the pledgee to the pledgor or
owner, in any of the following circumstances
a) If the thing is found in the possession of the pledgor
or owner after the pledge had been perfected;
b) If the thing is found in the possession of a third
person who received it from the pledgor or owner
after the perfection of the pledge.
If the presumption is not rebutted, the presumption prevails
and becomes an unrebutted evidence.
37 | P LATON

It is presumed that the accessory obligation of pledge has been
remitted when the thing pledged, after its delivery to the
creditor, is found in the possession of the debtor, or of a third
person who owns the thing.
Note that what is presumed remitted is the pledge and not the
principal obligation.
________
Art. 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish
the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary. (n)
________
Requisite of renunciation or abandonmenta pledge is a
personal right of the pledgee. It may be renounced or waived.
The renunciation or waiver thereof is not contrary to law,
public order, public policy, morals and good customs. However,
to be effective, the law requires that it be in writing in order to
effectuate the extinction of pledge. Oral waiver or renunciation
12
is not valid. Article 1356 must be complied with.
Is acceptance by the pledgor or owner necessary?No. This is
not a case of donation where acceptance is mandatory to make
the donation valid.
Suppose the thing was not returned, is there extinction of the
pledge?No. Even if the thing was not returned, as long as
there is an effective renunciation, abandonment, or waiver, the
pledge is already extinguished. The pledgee is now considered
as a depositor. Accordingly, the law on deposit will apply to
them.
13
Other grounds for extinguishment of a pledge
________
Art. 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of
the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall
be held; and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he shall
be obliged to give an acquittance for his entire claim. (1872a)
________
12 Art. 1356. Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases, the
right of the parties stated in the following article cannot be exercised. (1278a)
13 Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere
in this Code. (1156a)
Right of pledgee when debt had not been satisfied in due
timewhen there is no payment of the debt on time, the
object of a pledge may be alienated for the purpose of
satisfying the claims of the pledge.
The pledgee has the right to proceed with the sale of the thing
at a public auction to raise the funds for payment of the
obligation.
Procedure
a) The obligation must be due and unpaid;
b) The sale of the thing pledged must be at a public
auction;
c) There must be notice to the pledgor and owner
stating the amount for which the sale is to be held;
14
d) The sale must be conducted by Notary Public.
Pactum commissorium, when allowedif at the first auction,
the thing is not sold (such as when there are no participating
bidders), there will be another setting for the second auction
following the same formalities. If there is still no auction sale
effected, the pledgee is now allowed to appropriate the thing
pledged. The act of appropriation ipso jure transfers the
ownership of the thing to the pledgee.
Acquittancethe pledgee after appropriating the thing shall
execute a deed of acquittance in favor of the pledgor which is a
document of his release or discharge from the entire obligation
including interests and expenses.
Excess or surplusif there is any excess out of the proceeds of
the auction sale after deducting the amounts of the obligation
and other liabilities of the pledgor, the latter is NOT ENTITLED
to the said excess or surplus unless there is a contrary
agreement in the contract of pledge.
Inversely, if there is any deficiency, the debtor is NOT LIABLE for
payment of such deficiency, even if there is a stipulation to that
effect. The stipulation will be void.
If the creditor, instead of electing to sell the thing pledged,
sued the pledgor in an ordinary action, the pledgee may
recover the deficiency from the debtor.
________
Art. 2113. At the public auction, the pledgor or owner may bid.
He shall, moreover, have a better right if he should offer the
same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is
the only bidder. (n)
________
Who can bid?the public, the pledgor and pledgee may bid.
The highest bidder wins. If the pledgee bids, and he made an
offer without any competition, his bid is not valid. The sale is
void. This is to prevent fraud on the part of the pledgee who
may maneuver the bidding in such a way that no bidder may
come so he bids alone. He will surely be the winner.
If the pledgor bids, he shall be preferred if h offers the same
terms as the highest bidder in deference to him as the original
14A sheriff is not authorized to foreclose a pledge. The foreclosure of a
personal property does not involve public interest.
38 | P LATON
owner of the thing over which he may have some attachment
of sentimental value.
________
Art. 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee
is deemed to have been received the purchase price, as far as
the pledgor or owner is concerned. (n)
________
All bid offers must be in cashchecks cannot be accepted as
payment for the purchase price. They are not legal tenders.
They produce the effect of payment only after they have been
encashed. Same rule applies to promissory notes, bills of
exchange and other negotiable instruments. Payment must be
made at once or on the spot which means in cash.
________
Art. 2115. 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. If the price of the sale is more than
said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary. (n)
________
Effect of sale of thing pledgedthe sale of the thing pledged
extinguishes the principal obligation. The extinction is
automatic regardless of whether or not the proceeds realized
from the public auction sale are more or less than the amounts
of the principal obligation and other incidental expenses.
Excess goes to pledgeeif the price of the sale is more than
the amount of the debt, the excess will go to the pledgee. This
is to compensate him for the eventuality where the purchase
price is lesser than the amount of the debt, wherein he cannot
15
receive any deficiency unless there is a contrary agreement.
Pledgee cannot recover deficiency under the Article; it
conflicts with Chattel Mortgage Lawthis is akin to paragraph
3, Article 1484 (Recto Law). It has been held, however, that
Article 2115 which prohibits a deficiency judgment in a case
where a pledge is foreclosed, does not apply to a chattel
mortgage because Section 14 of Act No. 1508 allows the
mortgagee to recover the deficiency.
ExceptionArticle 1484 (par. 3) involving the foreclosure of a
chattel mortgage which was constituted to secure a sale of
personalty payable in installments does not allow recovery of
deficiency.
________
Art. 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
________
Duty of pledgeeif the pledgor is not present at the auction
sale when the thing pledged is auctioned off, it is the duty of
the pledgee to advise the pledgor or owner of the thing
pledged about the result of the auction sale. This is to give him
15Under Article 2118 and 2121, the pledgor is entitled to the excess or
remainder.
a last chance to protect himself if there is any irregularity in the
sale.
________
Art. 2117. Any third person who has any right in or to the thing
pledged may satisfy the principal obligation as soon as the
latter becomes due and demandable.(n)
________
May a third person pay the pledgors debt?Yes, if he has any
interest in the fulfillment of the principal obligation (e.g., the
third person became a done of the thing pledged).
Payment may be effected when the debt becomes due.
Reason why personal interest is required
Art. 1236. The creditor is not bound to accept payment or performance
by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will of
the debtor, he can recover only insofar as the payment has been
beneficial to the debtor. (1158a)
________
Art. 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his
claim, and deliver the surplus, should there be any, to the
pledgor. (n)
________
Rule when what has been pledged is a creditthe pledgee is
granted the prerogative to collect the credit when it becomes
due, and before it is redeemed by the pledgor. (Read with
Article 2099)
________
Art. 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the
debt. (n)
________
When two or more things are pledged; rulein case of
foreclosure of the pledge, and the value of the several things
pledged are worth more than the amount of the obligation
which is the usual experience, the pledgee has the option to
choose which one or some should be sold to satisfy the
obligation, unless by agreement, he is deprived of that right.
It is understood, however, that if the pledge is legal pledge,
before the pledgee could sell the things, he must first make a
demand and comply with Article 2112.
Restrictionthe pledgee may, however, cause the sale of only
as many of the several things as are necessary to satisfy the
debt. He cannot exercise the right to sell indiscriminately.
________
Art. 2120. If a third party secures an obligation by pledging his
own movable property under the provisions of Article 2085 he
shall have the same rights as a guarantor under Articles 2066 to
39 | P LATON
2070, and Articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor. (n)
________
Third party pledgor; rightsthe right enjoyed by a guarantor
under
1. Articles 2066 to 2070; and
2. Articles 2077 to 2981.
Waiver of defense by debtorif the principal debtor waives
any available defense which will bar the payment of the
obligation such as rescission, previous payment, etc., cannot
prejudice the third party pledgor. This is to avoid fraud or
injustice to the latter.
________
Art. 2121. Pledges created by operation of law, such as those
referred to in Articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing
as well as on the termination of the pledge. However, after
payment of the debt and expenses, the remainder of the price
of the sale shall be delivered to the obligor. (n)
________
Article speaks of legal pledge where there is a right of
retentionlegal pledges are those constituted or created by
operation of law. The provisions on the foregoing Articles
(Article 2093 to 2120) shall govern the matters of
a) Possession (Art. 2098);
b) Care (Art. 2099);
c) Sale;
d) Termination of the legal pledge (Art. 2110 and 2111).
Exceptionif there is excess or surplus after the payment of
the debt and allowable expenses, the same shall be delivered
to the pledgor.
Note that in voluntary (or conventional) pledge, the pledgor as
a rule is not entitled to the excess, unless there is a contrary
agreement.
Instances of legal pledges where there is right of retention
a) Art. 546the right of the possessor in good faith to
retain the thing until refunded of necessary expenses.
b) Art. 1707the lien on the goods manufactured or
work done by a laborer until his wages had been paid.
c) Art. 1731the right to retain of a worker who
executed work upon a movable until he is paid.
d) Art. 1912the right of an agent to retain the thing
subject of the agency until reimbursed of his
advances and damages (Articles 1912 and 1913).
e) Art. 1994the right of retention of a depositary until
full payment of what is due him by reason of the
deposit.
f) Art. 2004the right of the hotel-keeper to retain
things of the guest which are brought into the hotel,
until his hotel bill had been paid.
________
Art. 2122. A thing under a pledge by operation of law may be
sold only after demand of the amount for which the thing is
retained. 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. (n)
________
Demand required first before legal pledgee may cause sale
the reason for this is that a legal pledge unlike a voluntary
pledge, has no specific period of performance or payment.
After demand, the pledgee must proceed with the sale of the
thing/s pledged within thirty (30) days. Otherwise, the debtor
can require him the return of the thing being retained.
Rationale behind Articles 2121 and 2122because the old
Code is silent on how the thing/s pledged should be disposed of
in cases of retention exercised by the creditor in accordance
with law.
________
Art. 2123. With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be
observed, and subsidiarily, the provisions of this Title. (1873a)
________
Pawnshopsthe law governing pawnshops is P.D. No. 114.
Other establishments engaged in giving loans secured by
pledgesshall be governed by special laws concerning them.
Civil Code (Title XVI) applies subsidiarilyif the special laws
concerned are insufficient.
________
CHAPTER 3MORTGAGE
Art. 2124. Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage. (1874a)
________
Mortgage, definedReal estate mortgage (as distinguished
from chattel mortgage) is 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 paid or complied with at the time stipulated.
A mortgage is a real right constituted to secure an obligation
upon real property or rights therein to satisfy with the proceeds
of the sale thereof such obligation when the same becomes
due and has not been paid or fulfilled, the mortgagors default
does not operate to vest in the mortgagee the ownership of the
encumbered property, for any such effect is against public
policy.
Object of real mortgage
a) Immovables, and
b) Alienable real rights imposed upon immovables
Note: In chattel mortgage, the object is personal property.
Kinds of Real mortgages
40 | P LATON
 1. Conventional mortgageconstituted voluntarily by
the contracting parties.
2. Legal mortgagerequired by law to secure
performance or payment to be executed in favor of
certain persons.
3. Equitable mortgagethe intention of the parties is to
make an immovable merely as a security for the
performance of an obligation but the formalities of a
real mortgage are not complied with.
Characteristics of real mortgage
1. Accessory contractit can only exist if there is a
principal obligation, which it secures.
2. Indivisibleeven though the debt is divided among
the debtors or their successors in interest of the
debtor, or the credit among the creditors or
successors in interest.
3. Inseparablethe mortgage attaches to the property
regardless of who will be its subsequent owner or
possessor.
As the mortgage is inseparable from the mortgaged
property, being a right in rem and a lien on the
property, it cannot be substituted with a surety bond.
In that case, the right in rem would be converted into
a right in personam.
4. Subsidiaryonce the obligation has been paid or
satisfied, the property must be released from the
encumbrance imposed. The mortgage is answerable
only if the principal obligation is not paid.
5. Real rightwhen the mortgage is duly registered or
when the purchaser knows of its existence, it is
binding upon the latter.
6. Real propertyby analogy.
7. Comprehensiveit can secure all kinds of obligations
which are not void.
May future property be the object of real mortgage?
Generally, no.
XPN: By stipulation, in cases where the original properties
mortgaged are perishable or subject to inevitable wear and tear
or were intended to be sold or used but with the understanding
that they would be replaced with others to be thereafter
acquired by the mortgagor.
Cause or consideration in real mortgagethe principal
contract, without which it cannot exist as an independent
contract.
Waiver of security, effecta mortgage creditor may elect to
waive his security and bring, instead, an ordinary action to
recover the indebtedness with the right to execute a judgment
thereon on all the properties of the debtor, including the
subject matter of the mortgage, subject to the qualification that
if he fails in the remedy by him elected, he cannot pursue
further the remedy he has waived.
________
Art. 2125. In addition to the requisites stated in Article 2085, it
is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded
in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage
have no other right than to demand the execution and the
recording of the document in which the mortgage is formalized.
(1875a)
________
Additional requisite for valid constitution of real mortgage
the present Article requires indispensably that the mortgage be
in a public instrument and be recorded in the appropriate
Registry of Property. This is to bind third persons who may
chance to deal on the property. OTHERWISE, it is only binding
between the parties to the contract.
Registration, however, does not validate an otherwise invalid
mortgage.
The mere fact that a mortgage was registered does not stop
any interested party from questioning it that it has no force and
effect due to some reasons. Registration cannot be invoked to
shield or protect fraud.
Registration of mortgage, a matter of rightReason: It would
be too dangerous to the rights of the mortgagee to deny
registration of his mortgage because his rights can easily be
defeated by a transfer or conveyance of the mortgaged
property to an innocent third person.
If the purpose of registration is merely to give notice, the
questions regarding the effect or invalidity of instruments are
expected to be decided after, not before, registration. It must
follow as a necessary consequence that registration must first
be allowed and its validity or effect litigated afterwards.
Application:
1. Between an unrecorded equitable mortgage
(reflected in a deed of sale with pacto de retro) and a
subsequent but recorded second mortgage over the
same property, the latter shall prevail specially so
when the second mortgagee acted in good faith.
2. However, if the first transaction is a sale but not
recorded, and the second transaction is one of
mortgage which is recorded, the former prevails. The
mortgagor had nothing more to mortgage after the
sale.
Right of legal mortgageesto demand the execution of a
formal deed of mortgage and its recording with the Registry of
Deeds.
Invalidity of mortgage; effectthe principal obligation which it
guarantees is not affected at all. What is merely impaired is the
mortgagees right to foreclosure.
Even then, the deed of real mortgage remains useful as
evidence to prove the personal obligation of the debtor to the
creditor in an ordinary personal action for collection.
________
Art. 2126. The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted. (1876)
________
41 | P LATON
Mortgage is a real right and inseparablewhoever is the
possessor of the property mortgaged, when the obligation
matures, and there is failure to pay on the part of the debtor,
the mortgage is subject to foreclosure. The mortgage follows
the property until it is discharged.
Alternative action available to mortgageeA mortgage
creditor may institute against the mortgage debtor EITHER (not
both):
1. A personal action for debt, or
2. A real action to foreclose the mortgage.
Nature of remedy of judicial foreclosurean action quasi in
rem based on a personal claim sought to be enforced against a
specific property of the defendant.
Its purpose is to have the property seized and sold by court
order to the end that, the proceeds thereof be applied to the
payment of plaintiffs claim. The order to sell will be issued
upon motion if the mortgagor fails to pay the judgment debt
within a period not less than 90 days and not more than 120
16
days.
Application:
1. If a third person has purchased the property and the
mortgage was foreclosed, the purchaser cannot be
held liable for any deficiency, unless he assumed the
personal liability of the original debtor.
2. If the creditor has not given his consent to the
transfer of the property and debt to another, the
debtor remains personally liable to the former. The
attempted novation is not binding upon the creditor
because he did not give his consent. And because of
the nature of the mortgage, the same may still be
foreclosed.
Right of mortgagee in case of non-payment of the debt
1. Foreclose the mortgage, and
2. Have the encumbered property sold to satisfy the
outstanding indebtedness.
Reason for allowing second or subsequent mortgagethe
mortgagor remains as the absolute owner of the property.
Sale with assumption of mortgagethe assumption by the
buyer is a condition to the sellers consent so that without the
approval of the mortgagee, no sale is perfected. The seller
remains the owner and mortgagor of the property.
A third person who bought the mortgaged property after the
mortgage had been foreclosed without the consent of the
mortgagee, bought only the mortgagors right of redemption.
The buyer had no right to intervene in the proceeding for the
issuance of a writ of possession of the mortgaged property.
________
Art. 2127. The mortgage extends to the natural accessions, to
the improvements, growing fruits, and the rents or income 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, with the declarations,
amplifications and limitations established by law, whether the
16 This period does not apply to extra-judicial foreclosure.
estate remains in the possession of the mortgagor, or it passes
into the hands of a third person. (1877)
________
Things which are deemed included in a mortgagenot limited
to the immovable property offered and accepted as security for
the principal obligation but extends to all its natural accessions
(not industrial), improvements, growing fruits, rents and
income, insurance proceeds and expropriation price, in case
there is an expropriation instituted by the state or other
authorized governmental authorities or corporations.
Basis of the lawthe ownership of such accession, accessories
and improvements subsequently introduced into the property
also belongs to the mortgagor being the owner of the principal.
XPN: An express stipulation excepting or excluding them from
the coverage of the mortgage contract.
When does the mortgage lien attach?when a mortgage is
made to include new or future improvements on registered
land, the mortgage lien attaches and vests as of the date of
registration of mortgage.
Mortgage securing future advancementsit is not improper as
it is valid and binding between the parties when the intent of
the contracting parties is manifest.
Dragnet clauseto subsume all debts of past or future
origin; being a contract of adhesion, the mortgage is to be
strictly construed against the party who prepared the
agreement.
Specified amount in contract not necessarily controlling
basis: intention of the parties.
Mortgage in the character of continuing securitya mortgage
given to secure future advancements is a continuing security
and is not discharged by the repayment of the amount named
in the mortgage, until the full amount of the advancements are
paid.
Growing fruitsto be included in the mortgage, it must not
have been harvested yet at the commencement of the
mortgage.
________
Art. 2128. The mortgage credit may be alienated or assigned to
a third person, in whole or in part, with the formalities required
by law. (1878)
________
Alienation or assignment of mortgage credit, allowableA
mortgage is a real right. It directly subjects the mortgaged
property to the fulfillment of the principal obligation. Being a
right, it may be alienated or assigned by its owner (mortgagor)
in favor of a third person. While the mortgage is indivisible, it
may be assigned in part because the assignment is between the
creditor and a third person, who is not a privy to the contract.
Alienation means transfer or conveyance of ones property to
another person.
Assignment means the mode of transferring gratuitously or
onerously some right of an assignor to an assignee, who by
42 | P LATON
virtue thereof, is allowed to proceed against the debtor for the
enforcement of the right.
1. If gratuitous, it must follow the formalities of a
donation. If what is involved is a real property, Article
749 must be complied with.
2. If onerous, it may follow the rules on sales whenever
applicable.
2. As to matters not included in Chapter 3, the
Mortgage Law and the Property Registration Decree
(P.D. No. 1529) superseding the Land Registration Act
(Act No. 496) shall govern.
The Revised Administrative Code, particularly Section 194 as
amended by Act No. 3344 shall also apply.

Assignment of credit; requisites R.A. No. 4882 is the law governing aliens who become
mortgagees.
Art. 1625. An assignment of a credit, right or action shall produce no
effect as against third person, unless it appears in a public instrument, Three types of forced sale
or the instrument is recorded in the Registry of Property in case the a) An extrajudicial foreclosure sale (Act No. 3135);
assignment involves real property. (1526)
b) A judicial foreclosure sale (Rule 68 of the Rules of
Court); and
Definition of assignment of creditThe alienation or
c) An ordinary execution sale (Rule 39 of the Rules of
assignment of a mortgage, even if not registered is valid
Court).
between the parties because registration is only asserted to
prejudice or bind third persons. There is a valid transfer of
Foreclosure of real mortgageforeclosure is the remedy
ownership to the assignee even if the alienation or assignment
available by law to the mortgagee by which he subjects the
is not recorded with the Registry of Property.
mortgaged property to the satisfaction of the obligation for
________
which the mortgage was given. It denotes the procedure
adopted by the mortgagee to terminate the rights of the
Art. 2129. The creditor may claim from a third person in
mortgagor on the property and includes the sale itself.
possession of the mortgaged property, the payment of the part
of the credit secured by the property which said third person
Basis and time of foreclosurein a real estate mortgage, when
possesses, in the terms and with the formalities which the law
the principal obligation is not paid when due, the mortgagee
establishes. (1879)
has the right to foreclose the mortgage and to have the
________
property seized and sold with a view to applying the proceeds
to the payment of the principal obligation.
Liability of possessor of mortgaged propertyThe purchaser
does not assume liability for the entire debt but only to the
Effect of foreclosure on a different datevoid.
extent of the value of the mortgaged property in his possession.
It is, however, required that the creditor must have first made a
Effect of foreclosure: Release from obligation; exception
prior demand to the debtor and the latter failed to pay.
once the proceeds have been applied to the payment of the
________
obligation, the debtor cannot anymore be required to pay,
unless, of course there is a deficiency between the amount of
Art. 2130. A stipulation forbidding the owner from alienating
the loan and the foreclosure sale price, because the obligation
the immovable mortgaged shall be void. (n)
has already been extinguished.
________
Prematurity of foreclosurewhere the debtors have not yet
RationaleThe prohibition to alienate is contrary to public
defaulted on the payment of either the principal or the interest
good inasmuch as the transmission of property should not be
of their loans.
unduly impeded. Since, the owner may dispose of the property
(without prejudice to any criminal liability under Article 316 of
Mortgage subsists until discharged regardless of change of
the Revised Penal Code), the buyer, nevertheless, shall respect
ownershipall subsequent purchases of the property must
the encumbrance (which is a real right) on the property. He is
respect the mortgage, whether the transfer to them be with or
answerable to the claim of the mortgagee under Article 2129.
without the consent of the mortgagee.
A mortgage, which is just an encumbrance on realty, does not
Remedy of aggrieved party in a foreclosureunlike an action,
extinguish the title of the debtor who does not lose his principal
an extrajudicial foreclosure of real estate mortgage is initiated
attribute as owner, that is the right to dispose of his property
by filing a PETITION not with any court of justice but with the
(jus disponendi).
office of the sheriff.
________
The general rule that mere inadequacy of price is not sufficient
Art. 2131. The form, extent and consequences of a mortgage,
to set aside a foreclosure sale is based on the theory that the
both as to its constitution, modification and extinguishment,
lesser the price the easier it will be for the owner to effect the
and as to other matters not included in this Chapter, shall be
redemption.
governed by the provisions of the Mortgage Law and of the
Land Registration Law. (1880a)
Writ of possessionthe issuance of an order granting the writ
________
of possession is in essence of rendition of judgment within the
purview of Section 2, Rule 19 of the Rules of Court.
Laws that govern contract of real mortgage
1. As to matters included in Chapter 3 (Articles 2126 to
After the consolidation of title in the buyers name, the failure
2131) of the Civil Code governs;
of the mortgagor to redeem, the writ of possession becomes a

43 | P LATON
matter of right. Its issuance to a purchaser in an extrajudicial
foreclosure is merely a ministerial function.
________
JUDICIAL FORECLOSURE OF MORTGAGE
RULE 68
FORECLOSURE OF REAL ESTATE MORTGAGE
Section 1. Complaint in action for foreclosure.
In an action for the foreclosure of a mortgage or other encumbrance
upon real estate, the complaint shall set forth the date and due
execution of the mortgage; its assignments, if any; the names and
residences of the mortgagor and the mortgagee; a description of the
mortgaged property; a statement of the date of the note or other
documentary evidence of the obligation secured by the mortgage, the
amount claimed to be unpaid thereon; and the names and residences
of all persons having or claiming an interest in the property subordinate
in right to that of the holder of the mortgage, all of whom shall be
made defendants in the action.
Sec. 2. Judgment on foreclosure for payment or sale.
If upon the trial in such action the court shall find the facts set forth in
the complaint to be true, it shall ascertain the amount due to the
plaintiff upon the mortgage debt or obligation, including interest and
other charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid to
the court or to the judgment obligee within a period of not less than
ninety (90) days nor more than one hundred twenty (120) days from
the entry of judgment, and that in default of such payment the
property shall be sold at public auction to satisfy the judgment.
Sec. 3. Sale of mortgaged property; effect.
When the defendant, after being directed to do so as provided in the
next preceding section, fails to pay the amount of the judgment within
the period specified therein, the court, upon motion, shall order the
property to be sold in the manner and under the provisions of Rule 39
and other regulations governing sales of real estate under execution.
Such sale shall not affect the rights of persons holding prior
encumbrances upon the property or a part thereof, and when
confirmed by an order of the court, also upon motion, it shall operate
to divest the rights in the property of all the parties to the action and to
vest their rights in the purchaser, subject to such rights of redemption
as may be allowed by law.
Upon the finality of the order of confirmation or upon the expiration of
the period of redemption when allowed by law, the purchaser at the
auction sale or last redemptioner, if any, shall be entitled to the
possession of the property unless a third party is actually holding the
same adversely to the judgment obligor. The said purchaser or last
redemptioner may secure a writ of possession, upon motion, from the
court which ordered the foreclosure.
Sec. 4. Disposition of proceeds of sale.
The amount realized from the foreclosure sale of the mortgaged
property shall, after deducting the costs of the sale, be paid to the
person foreclosing the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due, the same shall be
paid to junior encumbrancers in the order of their priority, to be
ascertained by the court, or if there be no such encumbrancers or there
be a balance or residue after payment to them, then to the mortgagor
or his duly authorized agent, or to the person entitled to it.
Sec. 5. How sale to proceed in case the debt is not all due.
If the debt for which the mortgage or encumbrance was held is not all
due as provided in the judgment, as soon as a sufficient portion of the
property has been sold to pay the total amount and the costs due, the
sale shall terminate; and afterwards, as often as more becomes due for
principal or interest and other valid charges, the court may, on motion,
order more to be sold. But if the property cannot be sold in portions
without prejudice to the parties, the whole shall be ordered to be sold
in the first instance, and the entire debt and costs shall be paid, if the
proceeds of the sale be sufficient therefor, there being a rebate of
interest where such rebate is proper.
Sec. 6. Deficiency judgment.
If upon the sale of any real property as provided in the next preceding
section there be a balance due to the plaintiff after applying the
proceeds of the sale, the court, upon motion, shall render judgment
against the defendant for any such balance for which, by the record of
the case, he may be personally liable to the plaintiff, upon which
execution may issue immediately if the balance is all due at the time of
the rendition of the judgment; otherwise, the plaintiff shall be entitled
to execution at such time as the balance remaining becomes due under
the terms of the original contract, which time shall be stated in the
judgment.
Sec. 7. Registration.
A certified copy of the final order of the court confirming the sale shall
be registered in the registry of deeds. If no right of redemption exists,
the certificate of title in the name of the mortgagor shall be cancelled,
and a new one issued in the name of the purchaser.
Where a right of redemption exists, the certificate of title in the name
of the mortgagor shall not be cancelled, but the certificate of sale and
the order confirming the sale shall be registered and a brief
memorandum thereof made by the registrar of deeds upon the
certificate of title. In the event the property is redeemed, the deed of
redemption shall be registered with the registry of deeds, and a brief
memorandum thereof shall be made by the registrar of deeds on said
certificate of title.
If the property is not redeemed, the final deed of sale executed by the
sheriff in favor of the purchaser at the foreclosure sale shall be
registered with the registry of deeds; whereupon the certificate of title
in the name of the mortgagor shall be cancelled and a new one issued
in the name of the purchaser.
Sec. 8. Applicability of other provisions.
The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable
to the judicial foreclosure of real estate mortgages under this Rule
insofar as the former are not inconsistent with or may serve to
supplement the provisions of the latter.
Nature of judicial foreclosurean action quasi in rem. It is
based on a personal claim against a specific property of the
defendant. Its purpose is to have the property seized and sold
by court to the end that the proceeds thereof be applied to the
payment of plaintiffs claim.
An action for foreclosure of mortgage survives death of
mortgagorbecause the claim is not a pure money claim but
an action to enforce a mortgage lien. Being so, the judgment
rendered therein may be enforced by a writ of execution. The
action may be prosecuted by the interested person against the
executor or administrator independently of the testate or
intestate proceedings of the settlement of the mortgagors
estate for the reason that such claims cannot in any just sense
be considered claims against the estate, but the right to subject
specific property to the claim arises from the contract of the
debtor whereby he has during life set aside certain property for
its payment, and such property does not, except in so far as its
value may exceed the debt, belong to the estate.
44 | P LATON
Option or remedies of mortgagee in case of death of the
debtor
1. To waive the mortgage and claim the entire debt
from the estate of the mortgagor as an ordinary
claim;
2. To foreclose the mortgage judicially and prove any
deficiency as an ordinary claim; and
3. To rely on the mortgage exclusively, foreclosing the
same at any time before it is barred by prescription,
without right to file claim for any deficiency.
Venue in foreclosure proceedings
Section 1. Venue of real actions.Actions affecting title to or
possession of real property, or interest therein, shall be commenced
and tried in the proper court which has jurisdiction over the area
wherein the real property involved, or a portion thereof, is situated.
x x x (Rule 4, Rules of Court)
Parties cannot change procedure of judicial foreclosure
When judicial foreclosure is considered completeduntil the
sheriffs certificate is executed, acknowledged and recorded. In
the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee. The mortgagor is liable
for additional interest properly chargeable on the balance of
the mortgage indebtedness during the period from the notice
of sale to actual sale. This principle is applicable to extrajudicial
foreclosures.
A foreclosure sale is not complete until it is confirmed and
before such confirmation, the court retains control of the
proceedings by exercising sound discretion in regard to it either
granting or withholding confirmation as the rights and interests
of the parties and the ends of justice may require.
Confirmation in judicial foreclosurecuts off all the rights and
interests of the mortgagor and of the mortgagee and persons
holding under him, and with them the equity of redemption in
the property and vests them in the purchaser. Confirmation
retroacts to the date of the sale. It is final order, not
interlocutory.
Exception: If the property has been mortgaged in favor of a
bank, banking or credit institutions (Sec. 78, R.A. No. 337), the
redemption must be made within one year after the sale.
Note: Only foreclosure of mortgages to banking institutions and
those made extrajudicially are subject to legal redemption by
express provision of the statute.
Requirement in confirmation
1. Notice, and
2. Hearing.
at which they may have an opportunity to show cause why
the sale should not be confirmed and also to inform them of
the time when their right of redemption is cut off.
Effects of confirmation of salethe previous owners lose any
right they may have had over the property, which rights are in
turn vested on the purchaser of the property.
Applicability of Articles 1539 and 1540 in judicial sales
Art. 1539. The obligation to deliver the thing sold includes that of
placing in the control of the vendee all that is mentioned in the
contract, in conformity with the following rules:
If the sale of real estate should be made with a statement of its area, at
the rate of a certain price for a unit of measure or number, the vendor
shall be obliged to deliver to the vendee, if the latter should demand it,
all that may have been stated in the contract; but, should this be not
possible, the vendee may choose between a proportional reduction of
the price and the rescission of the contract, provided that, in the latter
case, the lack in the area be not less than one-tenth of that stated.
The same shall be done, even when the area is the same, if any part of
the immovable is not of the quality specified in the contract.
The rescission, in this case, shall only take place at the will of the
vendee, when the inferior value of the thing sold exceeds one-tenth of
the price agreed upon.
Nevertheless, if the vendee would not have bought the immovable had
he known of its smaller area of inferior quality, he may rescind the sale.
(1469a)
Art. 1540. If, in the case of the preceding article, there is a greater area
or number in the immovable than that stated in the contract, the
vendee may accept the area included in the contract and reject the
rest. If he accepts the whole area, he must pay for the same at the
contract rate. (1470a)
Art. 1541. The provisions of the two preceding articles shall apply to
judicial sales. (n)
Recovery of deficiency
Judicial foreclosure Extrajudicial foreclosure
(Rule 68) (Act No. 3135)
The mortgagee has the right The mortgagee has no right to
to claim for deficiency in case recover deficiency after the
such deficiency exits public auction sale, unless
there is a stipulation to that
effect.
However, if the mortgagor is a third person and not the debtor
himself, he is not liable for any deficiency in the absence of a
contrary stipulation. Consequently, the action for recovery of
deficiency should be filed only against the principal debtor.
Deficiency judgment, conceptwhen the deficiency is
embodied in the judgment in a judicial foreclosure proceeding,
it is called deficiency judgment.
When to file action for recovery of deficiency10 YEARS from
the time the action has accrued.
Waiver of mortgagethe mortgagee ay waive the right to
foreclose his mortgage and maintain instead a personal action
for recovery of the indebtedness. In either case, he is entitled
to obtain a deficiency judgment for whatever sum might be due
after the liquidation of the property covered by the mortgage.
The abandonment of security is recognized also by Rule 86 of
the Revised Rules of Court.
Restrictionthe remedy of the mortgage is NOT CUMULATIVE
BUT ALTERNATIVE.
Foreclosure, retroactive in effect
45 | P LATON
 ________ petition, collect the fees specified in paragraph eleven of section one
hundred and fourteen of Act Numbered Four hundred and ninety-six,
EXTRAJUDICIAL FORECLOSURE OF MORTGAGE as amended by Act Numbered Twenty-eight hundred and sixty-six, and
the court shall, upon approval of the bond, order that a writ of
possession issue, addressed to the sheriff of the province in which the
ACT NO. 3135
property is situated, who shall execute said order immediately.
AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS
INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES
Section 8. The debtor may, in the proceedings in which possession was
requested, but not later than thirty days after the purchaser was given
Section 1. When a sale is made under a special power inserted in or
possession, petition that the sale be set aside and the writ of
attached to any real-estate mortgage hereafter made as security for the
possession cancelled, specifying the damages suffered by him, because
payment of money or the fulfillment of any other obligation, the
the mortgage was not violated or the sale was not made in accordance
provisions of the following election shall govern as to the manner in
with the provisions hereof, and the court shall take cognizance of this
which the sale and redemption shall be effected, whether or not
petition in accordance with the summary procedure provided for in
provision for the same is made in the power.
section one hundred and twelve of Act Numbered Four hundred and
ninety-six; and if it finds the complaint of the debtor justified, it shall
Sec. 2. Said sale cannot be made legally outside of the province in
dispose in his favor of all or part of the bond furnished by the person
which the property sold is situated; and in case the place within said
who obtained possession. Either of the parties may appeal from the
province in which the sale is to be made is subject to stipulation, such
order of the judge in accordance with section fourteen of Act
sale shall be made in said place or in the municipal building of the
Numbered Four hundred and ninety-six; but the order of possession
municipality in which the property or part thereof is situated.
shall continue in effect during the pendency of the appeal.
Sec. 3. Notice shall be given by posting notices of the sale for not less
Section 9. When the property is redeemed after the purchaser has been
than twenty days in at least three public places of the municipality or
given possession, the redeemer shall be entitled to deduct from the
city where the property is situated, and if such property is worth more
price of redemption any rentals that said purchaser may have collected
than four hundred pesos, such notice shall also be published once a
in case the property or any part thereof was rented; if the purchaser
week for at least three consecutive weeks in a newspaper of general
occupied the property as his own dwelling, it being town property, or
circulation in the municipality or city.17
used it gainfully, it being rural property, the redeemer may deduct from
the price the interest of one per centum per month provided for in
Sec. 4. The sale shall be made at public auction, between the hours or
section four hundred and sixty-five of the Code of Civil Procedure20.
nine in the morning and four in the afternoon; and shall be under the
direction of the sheriff of the province, the justice or auxiliary justice of
Sec. 10. This Act shall take effect on its approval.
the peace of the municipality in which such sale has to be made, or a
notary public of said municipality, who shall be entitled to collect a fee
Approved: March 6, 1924 (Act No. 3135)
of five pesos each day of actual work performed, in addition to his
Approved: December 7, 1933 (Act No. 4118)
expenses.
A.M. No. 99-10-05-0
Sec. 5. At any sale, the creditor, trustee, or other persons authorized to
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE
act for the creditor, may participate in the bidding and purchase under
the same conditions as any other bidder, unless the contrary has been
In line with the responsibility of an Executive Judge under
expressly provided in the mortgage or trust deed under which the sale
Administrative Order No. 6, dated June 30, 1975, for the management
is made.
of courts within his administrative area, included in which is the task of
supervising directly the work of the Clerk of Court, who is also the Ex-
Section 6. In all cases in which an extrajudicial sale is made under the
Office Sheriff, and his staff, and the issuance of commissions to notaries
special power hereinbefore referred to, the debtor, his successors in
public and enforcement of their duties under the law, the following
interest or any judicial creditor or judgment creditor of said debtor, or
procedures are hereby prescribed in extrajudicial foreclosure of
any person having a lien on the property subsequent to the mortgage
mortgages:
or deed of trust under which the property is sold, may redeem the
same at any time within the term of one year from and after the date
1. All applications for extra-judicial foreclosure of mortgage whether
of the sale; and such redemption shall be governed by the provisions of
under the direction of the sheriff or a notary public, pursuant to Act
sections18 four hundred and sixty-four to four hundred and sixty-six,
3135, as amended by Act 4118, and Act 1508, as amended, shall be
inclusive, of the Code of Civil Procedure, in so far as these are not
filed with the Executive Judge, through the Clerk of court who is also
inconsistent with the provisions of this Act.
the Ex-Officio Sheriff.
Section 7. In any sale made under the provisions of this Act, the
2. Upon receipt of an application for extra-judicial foreclosure of
purchaser may petition the Court of First Instance19 of the province or
mortgage, it shall be the duty of the Clerk of Court to:
place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an
a) receive and docket said application and to stamp thereon the
amount equivalent to the use of the property for a period of twelve
corresponding file number, date and time of filing;
months, to indemnify the debtor in case it be shown that the sale was
made without violating the mortgage or without complying with the
b) collect the filing fees therefore pursuant to rule 141, Section 7(c), as
requirements of this Act. Such petition shall be made under oath and
amended by A.M. No. 00-2-01-SC, and issue the corresponding official
filed in form of an ex parte motion in the registration or cadastral
receipt;
proceedings if the property is registered, or in special proceedings in
the case of property registered under the Mortgage Law or under
c) examine, in case of real estate mortgage foreclosure, whether the
section one hundred and ninety-four of the Administrative Code, or of
applicant has complied with all the requirements before the public
any other real property encumbered with a mortgage duly registered in
auction is conducted under the direction of the sheriff or a notary
the office of any register of deeds in accordance with any existing law,
public, pursuant to Sec. 4 of Act 3135, as amended;
and in each case the clerk of the court shall, upon the filing of such
d) sign and issue the certificate of sale, subject to the approval of the
17 This does not require a period of three full weeks. (Bonnevie v. CA, 125 SCRA Executive Judge, or in his absence, the Vice-Executive Judge. No
122)
18 Now, embodied in Sections 29-31 and 35 of the Rules of Court.
19 Now, Regional Trial Court. 20 Now, found in Section 30, Rules of Court.
46 | P LATON
certificate of sale shall be issued in favor of the highest bidder until all
fees provided for in the aforementioned sections and in Rule 141,
Section 9(1), as amended by A.M. No. 00-2-01-SC, shall have been
paid; Provided, that in no case shall the amount payable under Rule
141, Section 9(1), as amended, exceed P100,000.00;
e) after the certificate of sale has been issued to the highest bidder,
keep the complete records, while awaiting any redemption within a
period of one (1) year from date of registration of the certificate of sale
with the Register of Deeds concerned, after which, the records shall be
archived. Notwithstanding the foregoing provision, juridical persons
whose property is sold pursuant to an extra-judicial foreclosure, shall
have the right to redeem the property until, but not after, the
registration of the certificate of foreclosure sale which in no case shall
be more than three (3) months after foreclosure, whichever is earlier,
as provided in Section 47 of Republic Act No. 8791 (as amended, Res. Of
August 7, 2001).
Where the application concerns the extrajudicial foreclosure of
mortgages of real estates and/or chattels in different locations covering
one indebtedness, only one filing fee corresponding to such
indebtedness shall be collected. The collecting Clerk of Court shall,
apart from the official receipt of the fees, issue a certificate of payment
indicating the amount of indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the real estates and/or chattels
mortgaged and their respective locations, which certificate shall serve
the purpose of having the application docketed with the Clerks of Court
of the places where the other properties are located and of allowing
the extrajudicial foreclosures to proceed thereat.
3. The notices of auction sale in extrajudicial foreclosure for publication
by the sheriff or by a notary public shall be published in a newspaper of
general circulation pursuant to Section 1, Presidential Decree No. 1079,
dated January 2, 1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.
4. The Executive Judge shall, with the assistance of the Clerk of Court,
raffle applications for extrajudicial foreclosure of mortgage under the
direction of the sheriff among all sheriffs, including those assigned to
the Office of the Clerk of Court and Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff or the
notary public who conducted the sale to the Clerk of Court before the
issuance of the certificate of sale.
This Resolution amends or modifies accordingly Administrative Order
No. 3 issued by then Chief Justice Enrique M. Fernando on 19 October
1984 and Administrative Circular No. 3-98 issued by the Chief Justice
Andres R. Narvasa on 5 February 1998.
The Court Administrator may issue the necessary guidelines for the
effective enforcement of this Resolution.
The Clerk of Court shall cause the publication of this Resolution in a
nuewspaper of general circulation not later than August 14, 2001 and
furnish copies thereof to the Integrated Bar of the Philippines.
This Resolution shall take effect on the 1st day of September of the
year 2001.
Promulgated this 7th day of August 2001 in the City of Manila.
Extrajudicial foreclosure of mortgage; governing law
Subject matter of Act No. 3135 as amendedcovers only real
estate mortgages just like the rules on foreclosure of
mortgages under the Revised Rules of Court (Rule 68).
Basis of extrajudicial foreclosureif in the mortgage contract
covering a real estate mortgage, a clause is incorporated
therein giving the mortgagee the power, upon default of the
debtor, to foreclose the mortgage by an extrajudicial sale of the
mortgaged property.
The authority to sell may be done in a separate document but
annexed to the contract of mortgage. The authority is not
extinguished by the death of the mortgagor or mortgagee as it
is an essential and inseparable part of a bilateral agreement.
How foreclosure is initiatedunlike an action, an extrajudicial
foreclosure of real estate mortgage is initiated by filing a
PETITION not with any court of justice but with the office of the
sheriff.
It may also be initiated through a Notary Public commissioned
in the place where the property is situated.
It is a special law that governs particularly extrajudicial
foreclosure only. It necessarily excludes the application of the
General Banking Act (R.A. No. 337, as amended)
Foreclosure by the PNBgoverned by this law in relation to
Sections 29, 30 and 34 of Rule 39 and not by the PNB Charter.
Notice to the public is required before auction sale is held
See Sec. 3 of Act No. 3135, as amended.
Requisites of notice of sheriffs saleto be valid, must contain:
1. The correct number of the certificate of title, and
2. The correct description of the real property to be
sold.
Under normal conditions, the failure to advertise a mortgage
foreclosure sale in compliance with statutory requirements
constitutes a jurisdictional defect invalidating the sale, and a
substantial error or omission in a notice of sale will render the
notice insufficient and vitiate the sale.
When publication not requiredif the property to be sold in
an auction is not more than
1. P50,000.00 (?)
2. P100,000.00Rural and thrift bank
3. P250,000.00Cooperative bank
Purpose of notice of saleto inform the public of the nature
and condition of the property sold, and of the time, place and
terms of the sale. Notices are given for the purpose of securing
bidders and to prevent a sacrifice of the property.
If this object is attained, immaterial of the errors and mistakes
will not affect the sufficiency of the notice.
Personal notice to the mortgagor is not required; exception
when it is stipulated by the parties that notice be given to the
mortgagor or his heirs.
Posting of noticesin at least 3 public places in the city or
municipality where the property is situated, to wit:
1. Sheriffs office,
2. Assessors office
3. Register of Deeds
Foreclosure by a rural bank, posting of notices, mandatory
Newspaper of general circulation, conceptit is enough that it
is published for the dissemination of local news and general
47 | P LATON
information, that it has a bona fide subscription list of paying
subscribers, and that it is published at regular intervals.
If mortgage is the winning bidder, he need not pay the price in
cashin case of surplus in the purchase price, the mortgagee
must account for the proceeds as if the price were paid in cash,
and in an action against the mortgagee to recover the surplus,
the latter cannot raise the defense that no actual cash was
received.
Redemption of property sold at public auction, within 1
yearSee Sec. 6 of Act No. 3135, as amended.
Reckoning point of redemptionin cases of registered land is
from the date of registration of the certificate of sale since it is
only from that date that the same takes effect as conveyance.
Applicability of Rule 39, Revised Rules of Court to extrajudicial
foreclosuresonly on the manner of redemption and
computation of interest.
To foreclose or not to foreclose, is the prerogative of
mortgagee
Stipulation fixing upset price or Tipo is voidi.e., the
minimum price at which the property shall be sold, to become
operative in the event of foreclosure sale at public auction.
________
REDEMPTION IN MORTGAGES
Redemption, meaninga transaction by which the mortgagor
reacquires or buys back the property which ay have passed
under the mortgage or divest the property of the lien which the
mortgage may have created.
The right of the debtor, and sometimes of a debtors creditors,
to repurchase from a buyer at a forced sale property of the
debtor that was seized and sold in satisfaction of a judgment or
other claim against the debtor, which right usually is limited to
forced sale of real property.
Pactum commissoriuma stipulation that the ownership of
the property would automatically pass to the vendee in case no
redemption is effected within a stipulation period is void for
being a pactum commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of
foreclosure.
Nature of redemptiona mere statutory privilege; hence, it
must be exercised in the mode and within the period
prescribed by the statute.
However, an action to redeem by the mortgage debtor is a real
action.
Requisites of redemption
1. The redemption must be exercised within 1 year from
the date of the registration of the certificate of sale;
2. There must be payment of the purchase price of the
property plus 1% interest per month thereon
together with the amounts of assessments or taxes
thereon, if any, paid by the purchaser after the sale,
with the same rate of interest computed from the
date of registration of the sale up to the time of
redemption; and
3. Written notice of the redemption must be served on
the officer who made the same and a duplicate filed
with the proper Register of Deeds.
The general rule in judicial foreclosure is that the mortgagor
cannot exercise the right of redemption after the sale has been
confirmed by an order of the court.
Time when to exercise right of redemptionin all cases of
extrajudicial sale, the mortgagor may redeem the property at
any time within the term of one year from and after the date of
registration of the certificate of sale with the appropriate
Registry of Deeds. The rule is different in case of judicial
foreclosure.
However, the mortgagor of titled real estate acquired under
the Public Land Act but foreclosed by a rural bank may redeem
said property within two years from the registration of the
sheriffs certificate of sale, and if said mortgagor fails to
exercise such right, he or his heirs may still repurchase the land
within five years from the expiration of the two-year
redemption period.
Effect of the exercise of right of redemptionelimination from
his title thereto of the lien created by the levy or attachment or
judgment or registration of the mortgage thereon. It does not
give to the mortgagor a new title, but merely restores to him,
the title freed of the encumbrance of the lien foreclosed.
Effect of failure to exercise right of redemptionthe debtor
loses his right over the property. The purchaser will not have
the absolute right to a writ of possession which is the final
process to carry out or consummate the extrajudicial
foreclosure. The purchaser is entitled as a matter of right to
consolidate title and to possess the property.
Kinds of redemption in foreclosures
1. Right of redemptionthe right of the mortgagor to
redeem the mortgaged property within a certain
period after it has been sold for the satisfaction of the
mortgaged debt.
It applies to extrajudicial foreclosures under Act No.
3135 and to foreclosures by banks and other lending
institutions.
2. Equity of redemptionthe right of a mortgagor in a
judicial foreclosure to redeem the mortgaged
property after his default in the performance of the
conditions of the mortgage but before the sale of the
mortgaged property or confirmation of the sale by
the court.
Simply the right of the mortgagor to extinguish the
mortgage and retain ownership of the property by
paying the secured debt WITHIN 90 DYAS after the
judgment became final.
Time to exercise equity of redemptionbefore but not after
the sale has been confirmed by the court.
Reckoning timefrom the date of the service of such order
(the order requiring the debtor to pay the judgment within 90
48 | P LATON
days which period is mandatory, otherwise the order directing
the sale shall be void). In case of appeal, the reckoning point
should be from the date of the entry of judgment because the
rule, it seems cannot be complied with literally.
Ninety day period is substantive rightgranted to the
mortgage debtor as the last opportunity to pay the debt and
save his mortgaged property from final disposition at the
foreclosure sale.
What the second mortgagee acquiresonly the equity of
redemption vested in the mortgagor, and his rights are strictly
subordinate to the superior lien of the first mortgagee.
belong to the judgment obligor until the expiration of the
period of redemption.
Surplus in purchase pricethey are constructively, at least,
real property and belong to the mortgagor or his assigns.
Mortgage, a trustee for the surplus pricea senior mortgage,
realizing more than the amount of his debt on a foreclosure
sale, is regarded as a trustee for the benefit of junior
encumbrancers.
________
CHAPTER 4ANTICHRESIS

Payment in check, effectthe redemption is not rendered
invalid, but the sheriff undoubtedly places himself in a position
where he can be held liable to the purchaser at a public auction
if any damage has been suffered by the ;latter as a result of the
medium by which payment was made. Article 1249 is not
applicable.
Art. 2132. By the contract of antichresis the creditor acquires
the right to receive the fruits of an immovable of his debtor,
with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit.
(1881)
________

Purchase pricethe amount payable is no longer the judgment Characteristics of antichresis

debt but the purchase price at the auction sale. 1. It is a formal contract. The amount of the principal
and of the interest agreed upon must be specified in
Exceptionredemption of properties mortgaged with the writing. Otherwise, the antichretic contract is void.
Philippine National Bank and the Development Bank of the 2. It is an accessory contract. It cannot exist without a
Philippines and foreclosed either judicially or extrajudicially are valid principal obligation.
governed by special laws which provide for the payment of all 3. It deals only with immovable property.
the amounts owed by the debtor. 4. The creditor has the right to receive the fruits of the
immovable.
General Banking Act provides for a different rule 5. It is a real right, if registered.
6. It is a real contract because it requires the delivery of
SECTION 47. Foreclosure of Real Estate Mortgage. In the event of the property to the creditor in order that the creditor
foreclosure, whether judicially or extrajudicially, of any mortgage on may enjoy the fruits.
real estate which is security for any loan or other credit 7. It can guarantee all kinds of valid obligations.
accommodation granted, the mortgagor or debtor whose real property
has been sold for the full or partial payment of his obligation shall have
the right within one year after the sale of the real estate, to redeem the Nature of rights and duties of the antichretic creditorsimilar
property by paying the amount due under the mortgage deed, with to those of the mortgagee in possession under the equity
interest thereon at the rate specified in the mortgage, and all the costs jurisdiction of England and America.
and expenses incurred by the bank or institution from the sale and
custody of said property less the income derived therefrom. However, Definition of antichresisby the contract of antichresis the
the purchaser at the auction sale concerned whether in a judicial or creditor acquires the right to receive the fruits of an immovable
extrajudicial foreclosure shall have the right to enter upon and take of his debtor, with the obligation to apply them to the payment
possession of such property immediately after the date of the
of the interest, if owing, and thereafter to the principal of his
confirmation of the auction sale and administer the same in accordance
with law. Any petition in court to enjoin or restrain the conduct of credit.
foreclosure proceedings instituted pursuant to this provision shall be
given due course only upon the filing by the petitioner of a bond in an Distinctions between antichresis and pledge
amount fixed by the court conditioned that he will pay all the damages ANTICHRESIS PLEDGE
which the bank may suffer by the enjoining or the restraint of the
foreclosure proceeding. Object is immovable property Object is personal property
Perfected by mere consent. Object must be delivered to
Notwithstanding Act 3135, juridical persons whose property is being However, delivery is required pledgee or third person
sold pursuant to an extrajudicial foreclosure, shall have the right to
only to allow creditors to designated by common
redeem the property in accordance with this provision until, but not
after, the registration of the certificate of foreclosure sale with the
receive the fruits and income consent of the parties
applicable Register of Deeds which in no case shall be more than three Principal and interest must be Principal and interest need
(3) months after foreclosure, whichever is earlier. Owners of property specified in writing. not be specified in writing.
that has been sold in a foreclosure sale prior to the effectivity of this Otherwise, contract is void Oral evidence may be allowed
Act shall retain their redemption rights until their expiration. (78a)
to prove the same
Rents, earnings and income of property pending redemption;
ruleSection 32, Rule 39 which explicitly provides that the Antichresis and mortgage, distinguished
purchaser or redemptioner shall not be entitled to receive the ANTICHRESIS MORTGAGE
rents, earnings or income of the property sold on execution, or The creditor acquires the right The mortgagee does not have
the value of the use and occupation thereof when such to receive the fruits of the the right to receive the fruits
property is in the possession of a tenant. Such rents, etc. shall property of the debtor which

49 | P LATON
is under antichresis
Property is delivered to the
creditor
Creditor pays the taxes and
charges upon the estate
unless there is a contrary
stipulation
Creditor applies the fruits of
the property for payment of
interest and principal of the
credit
of the property mortgaged
The property is generally not
delivered to the mortgagee.
The mortgagor retains the
possession
Mortgagee has no obligation
to pay taxes upon the estate
Mortgagee has no obligation
to receive the fruits and to
apply the value thereof to the
payment of the obligation
Both the amount of the principal and interest to be charged
must be specified in the written contract. Otherwise, the
contract of antichresis is void.
________
Art. 2135. The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon the
estate.
He is also bound to bear the expenses necessary for its
preservation and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits. (1882)
________

Rights of antichretic creditor Obligations of antichretic creditor

1. To receive the fruits and income of the property;
2. To retain the property until the debt is fully paid;
3. To have the property sold upon non-payment of the
debt when due; and
4. Right of preference to the proceeds of the sale of the
property.
Prescription, not available to creditorprescription as a mode
of acquiring ownership is not available to the creditor because
his possession of the property is not in the concept of an owner
but that of a mere holder during the existence of the contract.
________
Art. 2133. The actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application. (n)
________
How to determine the amount of paymentthe actual market
value of the fruits harvested or collected at the time of the
payment of the interest and/or principal. Mutuum has an
analogous provision (See Art. 1958).
The reason is to prevent the use of the contract of antichresis
for circumventing the provisions of the Usury Law which placed
a limit or ceiling on the interests to be charged on loans
(suspended).
Creditor must render an accountingthe mortgagee in
possession, as antichretic creditor, of the mortgaged land is
obliged to account to the debtor for the fruits thereof less the
expenses incurred.
________
Art. 2134. The amount of the principal and of the interest shall
be specified in writing; otherwise, the contract of antichresis
shall be void. (n)
________
Form of contract of antichresis, for its validity
Art. 1356. Contracts shall be obligatory, in whatever form they may
have been entered into, provided all the essential requisites for their
validity are present. However, when the law requires that a contract be
in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties stated in the
following article cannot be exercised. (1278a)
1. To pay the taxes and charges assessable against the
property like real estate taxes and others;
2. To bear the necessary expenses for the preservation
of the property;
3. To bear the expenses necessary for the repair of the
property; and
4. To apply the fruits received for payment of the
outstanding interests, if any, and thereafter of the
principal.
Some expenses of the creditor are mere advancesthe
expenses (nos. 1, 2 and 3) incurred by the antichretic creditor
shall be deducted from the fruits of the property. Ultimately, it
is the owner of the property who shoulders the same.
________
Art. 2136. The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the
creditor.
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel
the debtor to enter again upon the enjoyment of the property,
except when there is a stipulation to the contrary. (1883)
________
When can the antichretic debtor reacquire the possession of
his property?after having fully paid his obligations to the
creditor. Until there is full payment of the obligation, the
property shall stand as security therefor.
Exemption of creditor from the obligations imposed by
preceding articlethe second paragraph of Article 2136 should
have been included in Article 2135 where it is essentially
relevant.
To be exempted from the obligations imposed in the preceding
paragraph, the creditor may compel the debtor to reenter into
the property. Exception: if there is a contrary agreement
stipulating that the debtor is not subject to compulsion, the
creditor shall continue his possession of the property.
________
Art. 2137. The creditor does not acquire the ownership of the
real estate for non-payment of the debt within the period
agreed upon.

50 | P LATON
Every stipulation to the contrary shall be void. But the creditor credit of the mortgagors unsecured creditor. The mortgagee is
may petition the court for the payment of the debt or the sale not obligated to file an independent action for the
of the real property. In this case, the Rules of Court on the enforcement of his credit.
foreclosure of mortgages shall apply. (1884a)
________ In a chattel mortgage, may the chattels be sold in a private
sale?Yes, if there is an agreement between the parties.
Pactum commissorium, prohibitedthe only right accorded by Section 14 of the Chattel Mortgage Law indicates how the
the law to the creditor is the enjoyment of the fruits of the chattel mortgage should be foreclosed, nevertheless, it is valid
property, the value of which will be applied for the payment of for the parties to stipulate that if the debtor violated the
the obligations of the debtor in the following order-interest, conditions of the mortgage, the creditor may sell, at a private
first and thereafter the principal, which agreement is more for sale and without prior notice, the mortgaged property for the
the benefit of the creditor. purpose of applying the proceeds of the sale to the payment of
the debt. Said stipulation is not contrary to law or public order.
If the parties have agreed that the immovable shall become the
property of the creditor in case of non-payment of the debtors Characteristics of chattel mortgage
obligation at the stipulated time, said agreement is pactum 1. It is a formal contract because it must be embodied
commissorium and is void. in a public instrument and recorded in the Chattel
Mortgage Register;
Remedy of creditor in case of non-payment of his credit 2. It is an accessory contract because its existence
1. File an action for collection; or depends upon an existing valid principal obligation;
2. File a petition for the public sale of the property. The 3. It is a unilateral contract because the obligation is
rules on foreclosure of mortgage shall apply. only on the part of the creditor to free the chattel
________ from encumbrance upon payment of the principal
obligation;
Art. 2138. The contracting parties may stipulate that the 4. It does not convey dominion but is only a security;
interest upon the debt be compensated with the fruits of the 5. It creates a real right (derecho real, jus in re or jus ad
property which is the object of the antichresis, provided that if rem) or a lien which is being recorded and follows
the value of the fruits should exceed the amount of interest the chattel wherever it goes.
allowed by the laws against usury, the excess shall be applied to
the principal. (1885a) Distinctions between chattel mortgage and pledge
________ CHATTEL MORTGAGE PLEDGE
As to delivery of property
Interest to be set off or compensated by fruitsthis Article is
not necessary anymore. Delivery of the property is not Delivery of the property is
________ necessary necessary
As to registration
Art. 2139. The last paragraph of Article 2085, and Articles 2089
to 2091 are applicable to this contract. (1886a) Registration with the Chattel Registration is not required
________ Mortgage Register is required for its validity
for its validity
Applicability of provisions governing pledge and mortgage to As to procedure of sale
antichresisSee last paragraph of Article 2085; and Articles
Section 14, Act No. 1508 Article 2112 applies
2089 to 2091.
applies
________
As to excess in case of foreclosure
CHAPTER 5CHATTEL MORTGAGE Excess over the amount due Excess pertains to the creditor
pertains to the debtor (pledgee) unless it is
Art. 2140. By a chattel mortgage, personal property is recorded (mortgagor) otherwise agreed
in the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable, instead of being As to recovery of deficiency in case of foreclosure
recorded, is delivered to the creditor or a third person, the Creditor (mortgagee) is Creditor (pledgee) is not
contract is a pledge and not a chattel mortgage. (n) entitled to recover deficiency, entitled to recover deficiency
________ except if the chattel mortgage in all events even if there is a
is constituted as a security for stipulation to that effect
Chattel mortgage, definitionA contract by virtue of which a the purchase of personal between the parties (Art.
personal property is recorded in the Chattel Mortgage Register property payable in 2115)
as a security for the performance of an obligation. installments (Article 1484 [3])

The registration in the Chattel Mortgage Register makes the

If there is no registration, there is no chattel mortgage. But, if
chattel mortgage valid between the parties and effective
there is delivery, the contract becomes a pledge. So if there is
against third persons. It is a requisite for the validity of the
no registration and there is no delivery, it follows legally there
mortgage. Actual delivery is not necessary.
is neither a chattel mortgage nor a pledge.
________
Essence of chattel mortgagethe mortgaged chattels should
answer for the mortgaged credit and not for the judgment

51 | P LATON
Art. 2141. The provisions of this Code on pledge, insofar as they
are not in conflict with the Chattel Mortgage Law shall be
applicable to chattel mortgages. (n)
________
Laws that govern chattel mortgages
a) Chattel Mortgage Law (Act No. 1508);
b) Provisions of the Civil Code on pledge. In case of
conflict however, with the Chattel Mortgage Law, the
latter shall prevail;
c) Revised Administrative Code;
d) Revised Penal Code (Art. 319);
e) Other Special Laws like the Motor Vehicles Law, LTO,
etc.
With regard to the mortgages of vessels, the governing law is
the Ship Mortgage Decree of 1978 (P.D. No. 1521).
Manner of constituting a chattel mortgagethe registration of
a personal property in the Chattel Mortgage Register in the
Office of the Registry of Property as security for the
performance of a principal obligation.
If the personal property is situated in a province, different from
the province where the mortgagor resides, the registration
must be done with the Registry of Deeds of both provinces. If
cities are involved, then in the registers of both cities.
Difference in registration of real mortgage and chattel
mortgagea deed of real mortgage is considered registered
once recorded in the Entry Book.
However, a chattel mortgage must be recorded:
1. Not only in the Entry Book;
2. But also in the Chattel Mortgage Register.
Effect of non-registration of chattel mortgageif a chattel
mortgage is not registered with the Chattel Mortgage Register,
it is nevertheless, binding between the parties.
A real estate mortgage if not recorded with the Registry of
Property, is nevertheless binding between the parties (Art.
2125).
Object of chattel mortgagepersonal property which must be
sufficiently described to enable the parties or other interested
persons to identify the same after a reasonable investigation
and inquiry. Minute and detailed description is not required.
The following are some extraordinary properties which are
considered as proper objects of chattel mortgage
1. An interest in business;
2. Shares of stocks in a corporation;
3. Machinery installed in a leased land treated by the
parties as personal property;
4. A house intended to be demolished;
5. A house of strong materials (which is actually a real
property) may be considered as personal property for
purposes of constituting a chattel mortgage or as long
as the contracting parties so agree and no innocent
third party is prejudiced. This is anchored on estoppel.
Vesselsthe registration of the mortgage must be done in the
Office of the Philippine Coast Guard of the port of
documentation of such vessel to be effective as against third
persons.
Motor vehiclesin order to affect third persons should not
only be registered in the Chattel Mortgage Registry, but also
with the Land Transportation Office (LTO) as required by said
law.
Extent of chattel mortgageSee last paragraph of Sec. 7 of the
Chattel Mortgage Law.
When after-acquired property be included
A stipulation in the chattel mortgage, extending its scope and effect to
after-acquired property, is valid and binding where the after-acquired
property is in renewal of, or in substitution for, goods on hand when
the mortgage was executed, or is purchased with the proceeds of the
sale of such goods on hand when the mortgage was executed, or is
purchased with the proceeds of the sale of such goods. A mortgage
may, by express stipulations, be drawn to cover goods put in stock in
place of others sold out from time to time. A mortgage may be made to
include future acquisitions of goods to be added to the original stock
mortgaged, but the mortgage must expressly provide that such future
acquisitions shall be held as included in the mortgage. Where a
mortgage covering the stock in trade, furniture, and fixtures in the
mortgagor's store provides that "all goods, stock in trade, furniture, and
fixtures hereafter purchased by the mortgagor shall be included in and
covered by the mortgage," the mortgage covers all after-acquired
property of the classes mentioned, and, upon foreclosure, such
property may be taken and sold by the mortgagee the same as the
property in possession of the mortgagor at the time the mortgage was
executed.
Legal significance of registrationtantamount to the
symbolical delivery of the chattel to the mortgagee, which is
equivalent to actual delivery.
Registration 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.
It is a requisite for its validity.
Time or period when registration is to be madethe law is
silent on the time or period when registration should be made.
As held by the Court of Appeals, the law is substantially and
sufficiently complied with where the registration is made by the
mortgagee before the mortgagor has complied with his
principal obligation and no right of innocent third persons is
prejudiced.
Economic purpose of Chattel Mortgage Lawto promote
business and trade and to give impetus to the countrys
economic development. It has greatly facilitated sales of goods
and merchandise.
Effect of an increase in mortgage credita mortgage that
contains a stipulation in regard to future advances in the credit
will take effect only from the date of the mortgage. The
increase in the mortgage becomes a new mortgage.
Effect of obtaining a personal judgment on the mortgage
lienthe mortgage lien is deemed abandoned when the
creditor sued the debtor and obtained a personal judgment.
Period to foreclose chattel mortgagethirty days from the
time the condition has been broken.
52 | P LATON

The 30-day period to foreclose a chattel mortgage is the
minimum period after violation of the mortgage condition for
the mortgage creditor to cause the sale at public auction of the
mortgaged chattel with at least 10 days notice to the
mortgagor and posting of public notice of time, place, and
purpose of such sale, and is given a period of grace 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.
Affidavit of good faith, conceptan oath of the contracting
parties where they 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 just and valid obligation and one not entered into for the
purpose of fraud. (Sec. 5, Chattel Mortgage Law)
Purpose of affidavit of good faithtransforming an already
valid mortgage into preferred mortgage.
Chattel mortgagee has a superior right to mortgagors
judgment creditor
Application of proceeds of public salein the following order:
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; and
4. The balance, if any, shall be paid to the mortgagor or
person holding under him.
Remedy of mortgagee when possession of chattel cannot be
obtained for purposes of public sale; replevinthe
appropriate action to recover possession preliminary to the
extrajudicial foreclosure of a chattel mortgage.
________
ACT NO. 1508
AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR
THE REGISTRATION OF THE MORTGAGES SO EXECUTED
Section 1. The short title of this Act shall be "The Chattel Mortgage Law."
Sec. 2. All personal property shall be subject to mortgage, agreeably to the
provisions of this Act, and a mortgage executed in pursuance thereof shall be
termed chattel mortgage.
Sec. 3. Chattel mortgage defined. A chattel mortgage is a conditional sale 21 of
personal property as security for the payment of a debt, or the performance of
some other obligation specified therein, the condition being that the sale shall
be void upon the seller paying to the purchaser a sum of money or doing some
other act named. If the condition is performed according to its terms the
mortgage and sale immediately become void, and the mortgagee is thereby
divested of his title.
Sec. 4. Validity. A chattel mortgage shall not be valid against any person except
the mortgagor, his executors or administrators, unless the possession of the
property is delivered to and retained by the mortgagee or unless the mortgage is
recorded in the office of the register of deeds of the province in which the
mortgagor resides at the time of making the same, or, if he resides without the
Philippine Islands, in the province in which the property is situated: Provided,
however, That if the property is situated in a different province from that in which
the mortgagor resides, the mortgage shall be recorded in the office of the register
of deeds of both the province in which the mortgagor resides and that in which
the property is situated, and for the purposes of this Act the city of Manila shall
be deemed to be a province.
21 The Code Commission considered this as inaccurate. See Article 2140
Sec. 5. Form. A chattel mortgage shall be deemed to be sufficient when made
substantially in accordance with the following form, and shall be signed by the
person or persons executing the same, in the presence of two witnesses, who
shall sign the mortgage as witnesses to the execution thereof, and each
mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or
attorney, shall make and subscribe an affidavit in substance as hereinafter set
forth, which affidavit, signed by the parties to the mortgage as above stated, and
the certificate of the oath signed by the authority administering the same, shall be
appended to such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT. (omitted)
FORM OF OATH. (omitted)
FORM OF CERTIFICATE OF OATH. (omitted)
Sec. 6. Corporations. When a corporation is a party to such mortgage the
affidavit required may be made and subscribed by a director, trustee, cashier,
treasurer, or manager thereof, or by a person authorized on the part of such
corporation to make or to receive such mortgage. When a partnership is a party
to the mortgage the affidavit may be made and subscribed by one member
thereof.
Sec. 7. Descriptions of property. The description of the mortgaged property
shall be such as to enable the parties to the mortgage, or any other person, after
reasonable inquiry and investigation, to identify the same.
If the property mortgaged be large cattle," as defined by section one of Act
Numbered Eleven and forty-seven22, and the amendments thereof, the
description of said property in the mortgage shall contain the brands, class, sex,
age, knots of radiated hair commonly known as remolinos, or cowlicks, and other
marks of ownership as described and set forth in the certificate of ownership of
said animal or animals, together with the number and place of issue of such
certificates of ownership.
If growing crops be mortgaged the mortgage may contain an agreement
stipulating that the mortgagor binds himself properly to tend, care for and protect
the crop while growing, and faithfully and without delay to harvest the same, and
that in default of the performance of such duties the mortgage may enter upon
the premises, take all the necessary measures for the protection of said crop, and
retain possession thereof and sell the same, and from the proceeds of such sale
pay all expenses incurred in caring for, harvesting, and selling the crop and the
amount of the indebtedness or obligation secured by the mortgage, and the
surplus thereof, if any shall be paid to the mortgagor or those entitled to the
same.
A chattel mortgage shall be deemed to cover only the property described
therein and not like or substituted property thereafter acquired by the
mortgagor and placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding.
Sec. 8. Failure of mortgagee to discharge the mortgage. If the mortgagee,
assign, administrator, executor, or either of them, after performance of the
condition before or after the breach thereof, or after tender of the performance
of the condition, at or after the time fixed for the performance, does not within
ten days after being requested thereto by any person entitled to redeem,
discharge the mortgage in the manner provided by law, the person entitled to
redeem may recover of the person whose duty it is to discharge the same twenty
pesos for his neglect and all damages occasioned thereby in an action in any court
having jurisdiction of the subject-matter thereof.
Sec. 9-12. (Repealed by Art. 367, Revised Penal Code)
Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or
person holding a subsequent mortgage, or a subsequent attaching creditor may
redeem the same by paying or delivering to the mortgagee the amount due on
such mortgage and the reasonable costs and expenses incurred by such breach
of condition before the sale thereof. An attaching creditor who so redeems shall
be subrogated to the rights of the mortgagee and entitled to foreclose the
mortgage in the same manner that the mortgagee could foreclose it by the
terms of this Act.
Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of
proceeds. The mortgagee, his executor, administrator, or assign, may, after
thirty days from the time of condition broken, cause the mortgaged property, or
any part thereof, to be sold at public auction by a public officer at a public place in
the municipality where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and purpose of such sale has
been posted at two or more public places in such municipality, and the
mortgagee, his executor, administrator, or assign, shall notify the mortgagor or
person holding under him and the persons holding subsequent mortgages of the
22 Now 511 of the Administrative Code.
53 | P LATON
time and place of sale, either by notice in writing directed to him or left at his
abode, if within the municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days thereafter, make in writing a
return of his doings and file the same in the office of the register of deeds where
the mortgage is recorded, and the register of deeds shall record the same. The
fees of the officer for selling the property shall be the same as in the case of sale
on execution as provided in Act Numbered One hundred and ninety 23, and the
amendments thereto, and the fees of the register of deeds for registering the
officer's return shall be taxed as a part of the costs of sale, which the officer shall
pay to the register of deeds. The return shall particularly describe the articles
sold, and state the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The proceeds of such sale
shall be applied to the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the mortgages, shall be
paid to the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required by
section sixteen of Act Numbered Eleven hundred and forty-seven24 shall be issued
by the treasurer of the municipality where the sale was held to the purchaser
thereof.
Sec. 15. (Superseded by Sections 115 and 116 of the Property Registration Decree)
Sec. 16. This Act shall take effect on August first, nineteen hundred and six.
Enacted, July 2, 1906
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TITLE XIX. - CONCURRENCE AND PREFERENCE OF CREDITS
25
CHAPTER 1GENERAL PROVISIONS
Art. 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the
exemptions provided by law. (1911a)
________
Art. 2237. Insolvency shall be governed by special laws insofar
as they are not inconsistent with this Code. (n)
________
Art. 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets
to be taken possession of by the assignee for the payment of
the insolvent debtor's obligations, except insofar as the latter
have redounded to the benefit of the family. If it is the husband
who is insolvent, the administration of the conjugal partnership
of absolute community may, by order of the court, be
transferred to the wife or to a third person other than the
assignee. (n)
________
Art. 2239. If there is property, other than that mentioned in the
preceding article, owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or interest therein
shall be among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor's obligations.
(n)
________
Art. 2240. Property held by the insolvent debtor as a trustee of
an express or implied trust, shall be excluded from the
insolvency proceedings. (n)
________
23 Now Rule 141, section 7 of the Rules of Court.
24 Now Section 523 of the Administrative Code.
25 See PowerPoint presentation of Atty. Vincent Bolivar.
CHAPTER 2CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any
subdivision thereof;
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance
of their duties, on the movables, money or securities obtained
by them;
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor,
up to the value of the same; and if the movable has been resold
by the debtor and the price is still unpaid, the lien may be
enforced on the price; this right is not lost by the
immobilization of the thing by destination, provided it has not
lost its form, substance and identity; neither is the right lost by
the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things
pledged are in the hands of the creditor, or those guaranteed
by a chattel mortgage, upon the things pledged or mortgaged,
up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation
of personal property, on the movable thus made, repaired, kept
or possessed;
(6) Claims for laborers' wages, on the goods manufactured or
the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from
the contract of tenancy on shares, on the share of each in the
fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the
price of the contract and incidental expenses, until their
delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to
travellers by hotel keepers, on the movables belonging to the
guest as long as such movables are in the hotel, but not for
money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal 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 in favor of the depositor if the depositary has
wrongfully sold the thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the creditor
may demand them from any possessor, within thirty days from
the unlawful seizure. (1922a)
54 | P LATON
 ________
Art. 2242. With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute an encumbrance
on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen,
as well as of architects, engineers and contractors, engaged in
the construction, reconstruction or repair of buildings, canals or
other works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works,
upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon
the real estate mortgaged;
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon the
immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property
affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or
other conditions imposed upon the donee, upon the
immovable donated;
(10) Credits of insurers, upon the property insured, for the
insurance premium for two years. (1923a)
________
Art. 2243. The claims or credits enumerated in the two
preceding articles shall be considered as mortgages or pledges
of real or personal property, or liens within the purview of legal
provisions governing insolvency. Taxes mentioned in No. 1,
Article 2241, and No. 1, Article 2242, shall first be satisfied. (n)
________
Art. 2244. With reference to other property, real and personal,
of the debtor, the following claims or credits shall be preferred
in the order named:
(1) Proper funeral expenses for the debtor, or children under
his or her parental authority who have no property of their
own, when approved by the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they
have no property of their own;
(4) Compensation due the laborers or their dependents under
laws providing for indemnity for damages in cases of labor
accident, or illness resulting from the nature of the
employment;
(5) Credits and advancements made to the debtor for support
of himself or herself, and family, during the last year preceding
the insolvency;
(6) Support during the insolvency proceedings, and for three
months thereafter;
(7) Fines and civil indemnification arising from a criminal
offense;
(8) Legal expenses, and expenses incurred in the administration
of the insolvent's estate for the common interest of the
creditors, when properly authorized and approved by the court;
(9) Taxes and assessments due the national government, other
than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other than those
referred to in Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other
than those indicated in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-
delict;
(13) Gifts due to public and private institutions of charity or
beneficence;
(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. These credits shall have preference
among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)
________
Art. 2245. Credits of any other kind or class, or by any other
right or title not comprised in the four preceding articles, shall
enjoy no preference. (1925)
________
CHAPTER 3ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those credits which enjoy preference with respect to
specific movables, exclude all others to the extent of the value
of the personal property to which the preference refers.
________
Art. 2247. If there are two or more credits with respect to the
same specific movable property, they shall be satisfied pro rata,
after the payment of duties, taxes and fees due the State or any
subdivision thereof. (1926a)
________
Art. 2248. Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the
extent of the value of the immovable or real right to which the
preference refers.
________
55 | P LATON
Art. 2249. If there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied
pro rata, after the payment of the taxes and assessments upon
the immovable property or real right. (1927a)
________

Art. 2250. The excess, if any, after the payment of the credits
which enjoy preference with respect to specific property, real
or personal, shall be added to the free property which the
debtor may have, for the payment of the other credits. (1928a)
________

Art. 2251. Those credits which do not enjoy any preference

with respect to specific property, and those which enjoy
preference, as to the amount not paid, shall be satisfied
according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro

rata regardless of dates. (1929a)

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56 | P LATON