Aleezah Gertrude Regado

CREDIT TRANSACTIONS 2 D TRANSCRIPT

SYNDICATED LOAN AGREEMENT  bank has a limited amount to lend X.

Parties Rationale: bank does not want to assume the entire risk of a loan, banks will
band together, and they will lend the required funds.
Multiple lenders (acting through a Borrower
common agent) (Ayala Corporation) Recitals or Premises
Consent is manifested by their signatures
Consideration  It provide the context of the transactions. Why is the borrower borrowing or
P 600,000,000 why are the lenders lending the funds. What’s the purpose of the
transaction?
 It’s just like in your Consti it will be the preamble. Useless but sometimes
Basic Structure
useful. This will provide thecontext.
 Parties (who are the lenders, who are the borrowers  Normally it’s not needed but in case of litigation it will provide the context
 Premises –provide context of the loan transaction of the transaction
 Recitals –“whereas clauses” : provide the context of transaction
Terms
 Terms and Conditions
 Definition of terms  the terms of the contract will be the loan, the principal plus interest, the
 Interest period payment and penalties and other provisions.
 Php 6 Million – repayment date 5 yrs with interest of 11.somethings
 Payable quarterly
Drawdowns
*** So you see here the lenders. They’re not just banks. They’re insurance
 Loan proceeds will be released or will be taken by the borrower companies and a retirement fund.
 Example : 600 M loan, every drawdown 100M is released by one lender to
Definitions
borrower.
 Normally in a contract, we have a separate section defining important terms
“lenders may for any cause or reason without notice to borrower terminate this
in the contract. But sometimes you just define as you go along.
agreement to lend”

 Meaning : at any point before the release of loan

 The lender may choose not to proceed Commitment
 This is for the purpose of an opt out  This is the amount committed by the lenders to lend to the borrowers.
 Sometimes just by committing to lend, the borrower pays a corresponding
fee which you call a commitment fee.
 It’s a transaction wherein the bank requires the borrower to pay because the
bank agreed to lend. Not even actually lending, just committing.
LOAN FORM Why would there be a commitment fee?
 Because remember perfection of the loan happens upon release of the
Syndicated Loan Agreement proceeds. So there is a period wherein the bank will make available the
funds, and that availability of the funds will not necessarily coincide with
 it’s a loan by a group of banks.
the release of the funds.
USUAL BANKING PRACTICE  “Single borrower’s limit”
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
 So there is that period wherein to the mind of the bank, the bank should be
earning on its money that is now parked because it has to be released to the
borrower at anytime during the commitment period.
 That period wherein the funds may be released.
So in certain market conditions, there is a requirement to
pay a commitment fee. Or, let’s say you have a syndicated
bank here, just because they are participating they will also
charge you another participating fee. Because they agreed
to be a part of this consortium of lenders
Interest Rate
 Here you have an interest rate that is fixed. It’s very high actually that time,
11.3135% per annum.
Amount and Terms
 Here the lenders commit up to P600 Million. And it says the lenders agree
to allow a drawdown.
What’s a drawdown?
 It’s a fancier way of saying release of the loan proceeds.
 When the borrower gets the money, it’s what you call a drawdown.
 Drawdown date = date of release of the proceeds
 For every drawdown, the borrower issues a promissory note
 There’s this additional document : PN : incorporating the terms and
conditions of the loan agreement
Qualification.
Here there is a commitment to lend but there’s a qualification.
 “The lenders may, for any reason and without notice to the borrower,
terminate this Agreement to lend”
 So it’s just like saying we are agreeing to lend now but prior to the actual
release, the perfection of the loan, we could terminate this agreement and
we will have no liability.
Is that valid?
 This is not the case of a purely potestative suspensive condition dependent
on the sole will of the debtor.
 Because from the get go, there is a commitment to lend.
 But the bank is just saying, yes we are committing to lend now, but
tomorrow, we can say that we’re backing out and we will have no
liability.
 More like a resolutory condition
 unilateral right to terminate. It’s not even a suspensive condition, it is just a
right to terminate.
Representations and Warranties
 Boiler-plate provisions for any big transaction.
 Lender/Borrower –makes warranties (corporate existence, having
necessary licenses and permits, stockholders approval)
Events of default
 Its stated to pay a monetary obligation on due date = payment default
Now, this is what happens
Day 1 Lender agreed to lend P600 Million
Day 2 Lender released proceeds resulting to perfection of
Loan Contract
Under this agreement and this is usually what happens in a loan transaction.
 There is a loan contract when the lender releases the loan, the borrower
will issue a promissory note in exchange.
 So, this will evidence the release of the loan proceeds as well as the
commitment to pay the obligation.
Meaning, the loan received in accordance with the terms of
the loan agreement.
So you have two documentations of the loan:
(1) the loan contract and
(2) for each draw down you have a promissory note.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

Interest
 There’s a default penalty of 12% per annum on top of the interest so it’s
possible for you to agree on a penalty in case of default. So you have an
interest and then a penalty.
Repayment Date
 Of course when you have a loan, you have a Repayment date.
 I think the term of the loan is 5 years so you there will be a repayment of
the principal on the 5th year.
Prepayment
 When you do loan transaction this is what you look at.
 When you have a prepayment cost, it allows the borrower to prepay at
anytime following certain conditions.
Normally, right now, when you do transactions like this and you see this, you can
ask it to be waived because it’s a borrower’s market right. You can ask that there
should be no prepayment penalty and you should be allowed to prepay anytime. In
fact, for a consumer’s loan like housing loans, you’re allowed to prepay anytime
without penalty.
 There was a time like this one, wherein if you prepay, you have to pay the
bank x amount.
 Why? Because the bank committed the funds for a given term. Now, they
have to find other investment avenues
 Therefore, the borrower should compensate them. Because in the mean time
they will have to find where they will bring the money now, which will not
earn anything until they find a new investment avenue.
If you don’t need funds, will you borrow? Do you have benefits if you borrow?—
Vetting your reputation in the financial market. To deem yourself as credit worthy
Why do you have to stipulate that? Anyway, ownership transfers from the
borrower, why is it necessary to stipulate the use?
 Because the lender will be concerned with payment and the borrower might
be using it for risky transactions and might end up using the money.
 So it’s the form of control of the lender to make sure that the loan
proceeds will be used for a purpose that will insure the payment.
 Otherwise, there is a greater risk of default if there is no control that is
why you have to control it.
Example:
 Let’s say if I borrowed supposedly for business and then after borrowing, I
use it to buy expensive cars, which are pretty useless, then there is a
greater risk of default because it’s a form of a control.
 If you look at it, it’s not really necessary but it’s for the purpose of
insuring the payment.
 Legally, it’s not required because ownership passes to the borrower.
 Therefore, borrower will have full discretion on how to use the money.
 But to control the risk of default, the lender can impose a specific use.
Take note:
 There could be no offsetting so if you’re going to take the bank even if
there’s another transaction wherein the bank owes, there’s a stipulation
that there shall be no offsetting.
Will that be enforceable?
 Yes and besides if it’s invalid, the validating will be on the borrower.

Conclusiveness of Lender’s Books

 The computation of the lender is conclusive unless there is manifest error.
COPY PASTE PAGE
 Some people question this as it is a unilateral imposition. [No! You have to
show that there’s error. If there’s no error then it should be conclusive.]

Use of Proceeds

 The loans shall be used exclusively to finance the borrower’s working

capital requirements.
 Who’s the borrower here? Ayala Corporation.
 So it should be used only for business.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

CREDIT TRANSACTIONS  In case of default (12% pa) , it shall continue to be the basis of accrual of
interest based on damages
Wrap up
What if the contract is not a loan/forbearance of money, example sale?
LOAN
Syndicated Loan agreement
 There’s interest only when the parties agreed in writing
 It can also occur by virtue of damages (interest by virtue of damages) Parties
Loan/Forbearance of money Not-loan or
Multiple lenders (acting through a Borrower
forbearance of money
common agent) (Ayala Corporation)
Mutuum (loan) /
Forbearrance (estorres case) – Consent is manifested by their signatures
allowed use of funds for the Consideration
mean time P 600,000,000
Interest Legal interest rate 6% (prior 6% pa
to July 1,2013 12% pa) - Basis Civil
- Basis interest fixed code  Here you see here a form of a contract
by BSP Article
Title:
- If parties agreed for 2209
an interest rate, it  what the contract is : Syndicated loan agreement
will be followed
Judgment It will continue to be the legal 6% but the basis will What is a syndicated loan agreement?
(Final and rate of 6% be interest for
executory) loan/forbearance of  Group of banks lending to one borrower
money (estorres v.  Why do we have that one? Certain lenders don’t want to be fully exposed,
supanagan) sometimes there is a legal limitation (single borrowers limitation)
- It is now a  It’s just like making an investment, you don’t want to put your money in
monetary one single venture
obligation
- No longer Parties
based on
2209  Lenders : banks, insurance companies and investment house and a
Agreement Follow such agreement retirement fund lending , trust department of a bank , investment house
of payment - Will the interest earn interest?  Therefore you have multiple lenders and a single borrower
of interest - GR:  Single borrower: Ayala Corporation
There shall be no compounding of interest  Third party : Insular investment as an agent of lenders (like a
- Except representative of all the lenders handling certain administrative matters
1 when there is judicial demand (filing of like notices, distribution of communication)
complaint in court)
2 agreed upon in writing that there shall be Date
compounding of interest
 Better if there’s only one date appearing in the document, above or at the
bottom
Interest  there is a stipulated rate (of course you follow it)  Either the date of signing or the date of notarization
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

 If you have different dates, rules may apply Interest rate

 For example BIR example, will assess based on the earlier date
 11.3135% -- fixed rate, meaning there is no adjustment all throughout the
Whereas clauses/Recitals loan.

 Will provide the premises for the context of the transaction Repayment date
 In this case: the borrower needs loan of P600,000 to finance its working
capital requirement  Due date
 In a certain case, the court was able to decide what type of contract is  Payment of loan in full : 5 years from the initial borrowing
involved based on the whereas clauses: it provides a context of the
AMOUNT AND TERMS
transaction
 Lenders confirm their obligation to lend P600 M
Definition
 Qualification:
 You can either define as you go along (example: while you write a  lenders may for any cause or reason terminate the agreement without notice
contract, provide so) and without prejudice to any obligation already incurred by the borrower
 You can provide a section for definitions
Availability of the loan
 Importance : common understanding of the terms used in the contract and
to avoid ambiguity  Provides that how the law should be made available. It’s like a ritual.
 Use only one term all throughout  Lenders will make available the funds at their respective offices
o Advance- amount to be lent to the borrower  But what actually happens, they place an account and the proceeds will be
sent to that account
Stages  Each release of the proceeds = promissory note
Day 1 Signing :  How do you borrow? There is (a) a notice of borrowing, and(b) a
you have a contract to lend and borrow
certificate issued with each borrowing, (c) a certificate confirming the
Day 2 Drawdown
representations and warranties, and other sets of documents. Then the
you have a perfect contract of loan
release of loan by the lender bank can release in tranches depending on the agreement.
 When the lender releases a loan, the borrower must issue a  So in a contract of loan you have 2 documents (1) Loan (2) Promissory
promissory note note
 Each drawdown = another promissory note
 Tax due on the note : Documentary stamp tax on the When you see a loan contract
promissory note
 You insert special provisions
Day 3 : Payment
 But there’s this boiler plate provisions, which means its particularly the
same
 P600,000 divided based on a schedule, each lender only agreed to lend up to a  Only special stipulations are added
certain amount
Prepayment
Interest payment date
 When you do loan transaction this is what you look at.
 Quarterly, on the last day of the quarter
 When you have a prepayment cost, it allows the borrower to prepay at
 Express 3 months and not quarter.
anytime following certain conditions.
 Otherwise it may be construed differently.
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
In oblicon : you can’t force pre-payment because there is benefit of term
Here, the following conditions are:
1. There should be prior notice, the payment must be given on an interest
payment date,
2. it must be in multiples of so many millions.
3. But there is a kicker, aside from paying accrued interest there must be a
payment of a prepayment penalty.
 If you are the lender you will insist I the pre-payment penalty
 You basically lose the benefit of the interest that will accrue during the
remaining of the term and you have already committed funds
 If you are the borrower, you negotiate for the removal of this because
you want to pay anytime without any penalty
 Here the borrower allowed a pre-payment
 There must be prior notice and payment is given pro-rata to lenders, it shall
be made on an interest payment date
WHY? -- simplicity of administering the loan
 Normally, right now, when you do transactions like this and you see this,
you can ask it to be waived because it’s a borrower’s market right.
 You can ask that there should be no prepayment penalty and you should be
allowed to prepay anytime. In fact, for a consumer’s loan like housing
loans, you’re allowed to prepay anytime without penalty.
 There was a time like this one, wherein if you prepay, you have to pay the
bank x amount.
 Why? Because the bank committed the funds for a given term. Now, they
have to find other investment avenues
 Therefore, the borrower should compensate them. Because in the mean time
they will have to find where they will bring the money now, which will not
earn anything until they find a new investment avenue.
 If you don’t need funds, will you borrow? Do you have benefits if you
borrow?—Vetting your reputation in the financial market. To deem yourself
as credit worthy
Conclusiveness of Lender’s Books
 The computation of the lender is conclusive unless there is manifest error.
 So if you can show that there’s error there may be a correction, otherwise it
would amount to unjust enrichment
 Some people question this as it is a unilateral imposition. [No! You have to
show that there’s error. If there’s no error then it should be conclusive.]
Use of Proceeds
 The loans shall be used exclusively to finance the borrower’s working
capital requirements.
 Who’s the borrower here? Ayala Corporation.
 So it should be used only for business.
Why do you have to stipulate that? Anyway, ownership transfers from the
borrower, why is it necessary to stipulate the use?
 Because the lender will be concerned with payment and the borrower might
be using it for risky transactions and might end up using the money.
 So it’s the form of control of the lender to make sure that the loan
proceeds will be used for a purpose that will insure the payment.
 Otherwise, there is a greater risk of default if there is no control that is
why you have to control it.
Example:
 Let’s say if I borrowed supposedly for business and then after borrowing, I
use it to buy expensive cars, which are pretty useless, then there is a
greater risk of default because it’s a form of a control.
 If you look at it, it’s not really necessary but it’s for the purpose of
insuring the payment.
 Legally, it’s not required because ownership passes to the borrower.
 Therefore, borrower will have full discretion on how to use the money.
 But to control the risk of default, the lender can impose a specific use.
Funding and Yield Protection
 It’s simply this, if the lender lends you P600 Million
 All payment due to lenders, must meet such amount, even if there’s a
change in law, taxation scheme or any adverse circumstance
 When you practice, you have to learn to write this lengthy, the terms matter
 The payment shall always be in full regardless of anything that may be
imposed by the government
 EXCLUDING (taxes imposed on the overall income of the lenders) –that
for be the account of the borrower
 Corporate income tax—for the account of the lender
 The borrower should pay P600 Million plus the interest. Let’s say for the
interest, the lender wants to get 1% per month or P6 Million and it’s valid.
o The funding and yield protection, what does it say?
 That this 1% per month should be received by the lender without any
deduction whatsoever.
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
 It should be received completely by the lender. Whatever taxes that need to
be paid based on the payment of the interest should be paid by the
borrower.
 So if there will be an additional 0.1% to be paid, the amount should be
grossed up in such a way that upon payment of the interest, the P6 Million
would be the net amount to be received by the lender.
 It’s just like saying we will receive the amount of P6 Million completely
without deduction.
(b) amount to be paid to lender should be grossed up, the lender will still
receive 1 million
 whatever happens, the lender should receive fixed amount without any
deduction
 Except : Lender –shoulders tax on its overall income

(d) borrower’s obligation under this section shall survive the repayment of the
loan –it shall be for the account of the borrower
What will be the taxes imposed?
 Let’s say I think for banks lending it’s the gross proceeds tax that’s
imposed on the interest and then this is how we negotiate, this is accepted
by the bank.
 You cannot pass on the tax imposed on the overall income of the bank.
 So for income tax purposes, let’s say withholding, it should be part of this.
 That’s how you negotiate. But generally, if you’re part, on the side of the
bank, you use this clause saying basically that we have to receive P6
Million exclusive of all deductions.
 The net interest proceeds should be P6 million a month.
 That’s why they’re called a syndicate of tax, they’re like gangsters.
 They impose a lot of fees on you. If you look at that provision, if there is a
change in law, that will require the lender to pay some form of tax to the
government.
 This rate should be grossed up to cover that extra imposition so that in the
end, the lender will get 1% of P600 Million.
 If there’s an imposition that will result to a deduction of 0.1%, again this
amount should be grossed up so that it will be 1.1%.
 So when this is deducted 1% will still go to the bank, P6 Million still.
Change of circumstance : law, rule, etc
 Increase the cost of lenders in obtaining the loan /cost of compliance
 Borrower shall either pre-pay the loan pursuant to the prepayment cause or
shoulder the cost
 Based on Solid bank case
Representations and Warranties
 Boiler-plate provisions for any big transaction.
 Lender/Borrower –makes warranties (corporate existence, having
necessary licenses and permits, stockholders approval)
 Looking at the bottom there is a representation –affirm the fact that a
corporation is a validly existing corporation : check the business permit,
check the SEC
 Confirm representation and warranty : check board resolution allowing the
borrowing/ stock holders consent
Enforceability and validity
 Check corporate existence
 Check if there are no laws that will be violated by the contract
No breach
 When the borrower executes the loan agreement, the borrower will not
breach any loan/corporate rules
 How do you know? –certificate : Ask corporate officers to certfify
No default
- Ask finance guy/ executive officer of the company
THREATENED ACTION or LITIGATION:
 Again you will rely, on the in house counsel that these are the only cases
pending right now.
 Of course sometimes you actually don't have to say there are no pending
or threatened litigation affecting the transaction or involving any asset of
borrower. Sometimes you can just disclose.
 There's no way a big corporation will have no legal case. Somehow it will
have case involving its properties.
MATERIAL AND ADVERSE.
 You look at Item H- pending or threatened litigation.
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
- "There are no pending or threatened legal actions before any court or
tribunal against or affecting the borrower or any of its assets"-- this is
important, the clause after that one -- "WHICH IF ADVERSELY
DETERMINED MAY MATERIALLY AND ADVERSELY AFFECT
THE FINANCIAL CONDITION OR OPERATION OF THE
BORROWER."
 Because sometimes there will be default, but that default may not be
material and adverse to the business of the borrower.
Example: Let's say borrower has credit cards for all key officers.
Then one day, he forgot to pay by inadvertence. That's a default.
But let's say it's only worth P10K, even if the credit card company
wins, it's not material and adverse because it's only P10K.
FINANCIAL STATEMENTS: again you have to rely on a counter
representation or certification by the relevant finance officer.
Ranking
- Promissory note 1, promissory note 2, promissory note 3
- Preference of promissory note
- Example when one is notarized, it shall be prioritized
Positive covenants—certain undertakings that should be fulfilled by the borrower
during the subsistence of the loan
 Obligation to do
o A reiteration of how the proceeds would be used
o Periodically submit reports to the lenders
o Borrower shall ensure that it continues with its corporate existence,
would have necessary government permits and approvals
o How do you prove that? –General information sheet submitted by
the corporation, audited financial statements
o Undertaking to pay and discharge taxes and other charges
Debt-to-equity ratio
 Based on the financial/ accounting standards
 These are controls of the bank for the lenders
 If the borrower exceeds this financial ratios, there is default = a violation
of the provision of the contract
Negative covenant –reverse. It is the borrower saying that the borrower will not
encumber any other asset in favor of other creditors unless the benefit of such
encumbrance is also given to the lender
o In effect you are saying: Borrower shall not secure any
indebtedness. None of the properties must be secured by any other
security arrangement
o Undertaking of the debtor not to encumber any of his assets
o Unless benefit of encumbrance is extended proportionately to the
other creditors
o EXEMPTIONS—encumbrance already existing at time of loan and
disclosed to the lenders in writing
o Statutory liens should be excluded
 Periodically the borrower shall inform the lender that there is no default
through a certificate
Sale or Lease of assets
 Consent of borrower must be given
 All/ Some of the assets
Dividends
 Borrower shall not pay dividends to its stockholders (other than dividends
payable solely in shares of its capital stock following an event of default)
 Ayala : public corporation, so you must insert this provision
 But there can be dividend declaration on the form of shares, there’s no
cash coming out from the company, only shares
Events of default
(1) Its stated to pay a monetary obligation on due date = payment default
Grace period
 2 days: not really a grace period (for administrative lapses)
 Given only because of failure to pay due to inadvertence , for those lapses,
not for the purpose of raising funds
 There is no automatic default
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
(2) If borrowers fails to perform any other term, obligation or covenant in
the loan, Longer period of 5 calendar days :
(3) Error in the representation of borrower
(4) Cross default
Cross default provision
 You default in one contract with the narrower so the borrower defaults in
one contract, he is also deemed in default in this contract
 Borrower in default in one contract, he is also in default of the loan
agreement.
 If debtor defaults in a transaction A, even if there is no default in
transaction B, B can go after the debtor
 The purpose of cross default is to place them on equal footing. They can
both run after the debtor especially if the debtor is in a precarious financial
condition
Remedy of borrower in a cross default
 You can at least put a threshold depending on the capacity of borrower.
 Example threshold 10 M dollars –default in credit card
 Meaning : if it’s this amount, we can readily absorb. It shall not amount to
default
 If you can’t provide an amount, qualify what kind of default you are talking
about : what affects MATERIALLY AND ADVERSELY AFFECT your
ability to fulfill your obligation
 But it’s better to have an amount so there may be an amount to qualify
(h) default based on the assessment of lenders
 change in the circumstance of the borrower, change according to
interpretation of the borrowers, would reasonably affect their ability to
comply
 There may be an issue here because it’s the lender who determines
 But generally as long as the lenders would use a standard to determine
such, it shall pass any judicial scrutiny
Attachment/Garnishment
 Default event contemplates: an asset of a borrower is attached
 Attached –placed under custody of court subject to the result of dispute
/judgment
 Levy—enforce upon execution, the assets of the losing party
 Borrower’s concern – just like a cross-default provision, there must be a
qualification (materially and adversely affect obligation)
EFFECT OF DEFAULT
Acceleration clause
 Commitment—terminated
 Entire amount of loan, due and payable
 Borrower loses the benefit of the period
 Borrower will pre-pay
 Be careful with a penalty, in oblicon, such penalty substitute interest
 Place : it shall be in addition of the interest
Indemnity clause
 Anything : for the account of the lender
 contractual transfer of risk between two contractual parties generally to
prevent loss or compensate for a loss which may occur as a result of a
specified event
SECTION 9.01- Miscellaneous provisions
Right of Set-Off- "
 Borrower grant the lenders a general lien"The BORROWER hereby gives
the LENDERS a general lien upon, and/or right of setoff, and/or right to
hold and/or apply to the loan obligations...any amount or property in the
possession, control or custody of the lenders."
 This is about legal compensation If you're the lender, you have money in
your possession.
 The relationship between borrower and lender is debtor creditor and vice
versa. Technically you can have offsetting, if there is another transaction.
 There was a case before when somehow money passed through the bank.
Somehow it was remitted through one bank. The lender and borrower had
a transaction. In another transaction, the money was remitted through the
bank, which was not even a depository bank. I think the bank there, offset
or compensated the obligations because the borrower was in default. The
Court said it was not allowed.
 Remember that Citybank Case?To avoid those issues, there is this
provision: that ANY property or funds of the borrower coming to the
possession or control of the lenders can be made subject to compensation.
Right of Sell and Transfer of properties
 power of attorney to sell
Interest several
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
 indicates that lenders are joint and not solidary
VENUE
 know where a case would be filed
 Example there’s multiple parties with different locations
 Stipulate a venue of any action
 It should be exclusive
 Or you may specify : arbitration
 Provide the governing law and the institution which shall administer the
administration
9.15 All lenders waive preference in Article 2244 (14) of the Civil Code
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:
(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)
 Should any of the lenders be minded to have their promissory note
notarized, there shall be no one to be prioritized
 Will discuss this in the concurrence and preference of credits
OPINION OF COUNSEL OF BORROWER
How do you check the veracity of the warranties?
 You cover yourself by a certificate to affirm a fact under oath
 Specify that you are rendering an opinion only based on Philippine law
 Oblicon provision : Art. 1341. A mere expression of an opinion does not
signify fraud, unless made by an expert and the other party has relied on
the former's special knowledge. (n)
OPINION OF COUNSEL OF LENDER
 Signature of lenders representative are genuine
 All matters and facts : true
 It’s just the counsel, confirming the proper execution of the loan contract
APPLICATION OF PAYMENTS
 When you receive payment, there is a sequence of what you pay first.
(1) COST (penalties and interest and then principal)That's why you have
that presumption, if there is a payment of a later installment, the earlier
installment is paid.
(2) INTEREST SEVERAL- this is just a reiteration that the lenders,,they are
not solidarily obliged in this contract
- That's pretty much it.
- The only issues are the default provissions as well as certain undertakings
such as the negative covenants.
- SO if you are the borrower make sure that they will not interfere with your
business operations.
“solidarily guarantees payment of an obligation”
 Guarantor is transformed as a surety
(Carodan v. China Banking corporation
- Provision of law states that when a guarantor binds himself solidarily
liable Provisions on solidary obligations must apply
- That is not necessarily true
- Surety cannot be a solidary debtor, there must be a default first
- You use this doctrine
- Rosalina along with the principal debtors Barbara and Rebecca is still
liable as a surety for the deficiency amount
- There was an agreement: surety agreement –changes could be made to the
principal obligation without notice or consent of the surety = pre-consent
or pre-approval of changes in the principal obligation
- This is one way of extinguishing a guaranty/surety = both agree to
materially alter as to increase the burden on the surety/guarantor
- The surety & guarantor can claim extinction of surety or guarantee.. Way
out –stipulate that surety/guarantor consents to any change even without
notice to them
ACCOMODATION PARTY
- Does not receive any proceeds of the loan
Accomodation mortgagor
LOAN
L--------------- B
------------------ Indemnity agreement or Security
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
GUARANTY
L--------------- G
--------------
Guaranty—lender cannot go directly to the guarantor; guarantor insures only the
solvency of the borrower .
You have something between : SURETY
- Lender can only go after the surety if debtors fails to pay obligation on due
date. Non-payment is a condition. Surety insures payment
When you have a guaranty or any collateral contract (mortgage or pledge)
- Parties : Lender and Guarantor
Principal contract must exist before the contract of guaranty. Because if it is
otherwise, the guaranty contract would be void because there is lack of cause.
CONTRACT OF GUARANTY IS ESSENTIALLY GRATUITOUS
 : There is still indemnity when the debtor pays.
 The only meaning of gratuitous is that by default, a guarantor does not get
a fee for acting as a guarantor.
 Of course, the parties can stipulate otherwise, or an onerous guaranty may
inferred based on circumstance. What is that circumstance? --- Insurance.
WHO CAN BE A GUARANTOR
- He must have legal capacity
- Corporation : they must secure the consent of the board of trustees IF :: it
is in the usual course of business
- Consent of SH 2/3 of the outstanding capital stock of the corporatiob: not
in the usual course of business/ not its primary purpose under the Articles
of Incorporation
MARRIED PERSONS
- Consent of the spouse is needed. Without it, it is void
- Void : depends on : whether or not it will be enforced against the conjugal
assets
- It is void against the conjugal asset
- Special kind of void: because it constitutes as transfer and continuing offer
which can be cured by the other spouse giving consent
- Consider whether or not it redounded to the benefit of the corporation as
SH who loaned to the President
- This is not the benefit contemplated by loan
- Jurisprudence: If the husband contracted merely as a surety, it does not fall
to a contract beneficial to the family. There must be a direct benefit.
BANK CANNOT EXTEND A GUARANTY
- Bank cannot guaranty
- But there is such a thing as bank guaranty; it is not the guaranty
contemplated by the Civil Code
- For example a letter of credit : valid
Seller------------------- Buyer
- Seller may require a bank guaranty
- Bank : agrees to lend to Buyer in extend for payment, payment will be the
proceeds of the loan payable to Seller ;
- which may be required to submit certain documents : like a proof of
payment
FORMAT FOR A GUARANTY
- Statute of Frauds Article 1403
- Exception : when there is partial performance
- What is the consequence if Borrrower does not consent?
- It’s like a payment by 3rd party without the consent fo the debtor .
Guarantor can only recover to the extent that the borrower was benefited
- Article 1302. It is presumed that there is legal subrogation:
- (3) When, even without the knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter's share. (1210a)
- If Borrower was informed and he does not reply = Implied consent, there
will be subrogation.
Article 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)
Valid contract = You have all the essential elements of a contract
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
Article 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)
- There must be a principal obligation, which is the loan first on day 1 and
then either also on day 1 or 2, there is a guaranty for the loan and the
future loans.
- This is what is contemplated by Art. 2053. This is similar to what you call
in practical terms, a credit agreement with a bank, or a credit line. The
bank agrees to lend you up to a certain amount on day 1. You can draw
from that line at anytime after day 1. So on day 1, you can now have a
guaranty.
- There is no loan obligation yet as of day 1, but there is a valid principal
obligation. The amount will be known only upon the release of the
proceeds, say day 3. You have a valid principal obligation at the time of
the constitution of the guaranty.
- Dragnet clause : Security covers present and future obligations. It is
an all-encomapassing statement.
- Example : mortgage. One principal obligation must exist.
Article 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)
- GR: Simple/ Indefinite guaranty : Principal + interest + penalties +
judicial costs
2055 (2) 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 judicial required to pay
Judicial demand  Filing of complaint
- To stop the accrual of cost
EXAMPLE
- On due date : P15,000,000.
- Guarantor limited liability to 5 m
- Lender wanted a real estate mortgage
- G paid P20,000,000
- INVALID : Guarantor cannot be held liable for more than what is
required in the obligation
JSP: That’s the provision of law, but there are instances when the guarantor
pays more.
- It can be done if you separate a contract from the guaranty
- You cannot place it in the contract of guaranty because the court may
nullify it.
- Example : Contract : Should lender be required to go after the
guarantor, G has to sell property to L at a 5 million discount
- Yes this is like a triggered suspensive condition
Article 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)
- Integrity =
- Can GMA be a guaranty
- *** Once the creditor accepted (x) change your mind
- Not every choice is a waiver = you must have knowledge
- You can question : before acceptance
Article 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)
Grounds
1. Convicted : Crime involving dishonesty
2. Insolvent
- Creditor may demand replacement
EX: Creditor specified the guarantor at the stipulation
 Court of First instance : where the case was filed : TC:
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

BENEFIT OF EXCUSSION In the case of guaranty, you are not allowed to do that

If B has asset, like an account receivable Guarantor can appear/intervene in the case and raise expenses with respect to the
guaranty, but it does not divest him/impair the benefit of excussion
L must first exhaust the assets, for example :

- Receivable = Accion Subrogatoria

Lender’s problem: litigation against the borrower: Guarantor cannot be included.
WHERE THERE’S NO EXCUSSION There is still a benefit of excussion
1. Guarantor expressly renounces it - G not a party, G may hide the assets, squander the assets,to make himself
2. Guarantor binds himself solidary with the debtor judgment proof
3. In case of insolvency of the debtor - That’s why guaranty is a weak security
4. Absconded or cannot be sued within the Philippines unless he left a
manager or representative GUARANTOR MAY HAVE A SUB-GUARANTOR
- Debtor absconded , but can be sued in PH = benefit of excussion will
remain G1: benefit of excussion at the level of principal debtor and at a level of a principal
- Manager or representative = someone who has authority to receive guarantor
summons that will bind Borrower
Article 2065. Should there be several guarantors of only one debtor and for the same
- Sec 50 Rule 40 of ROC
debt, the obligation to answer for the same is divided among all. The creditor cannot
- Sec 40 Rule 14 : summons can be served by publication if borrowers
claim from the guarantors except the shares which they are respectively bound to
whereabouts is unknown
pay, unless solidarity has been expressly stipulated
5. Excussion would be a mere futile exercise
IT IS POSSIBLE TO HAVE MORE THAN 1 GUARANTORS

- This guarantors will have benefit of division

- They are liable in equal shares = benefit of division
- A reiteration of default rule about joint debtors

- Guarantor must point out to the assets available Cross reference:

INSOLVENCY = assets are less than liabibilities Article 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
It does not necessarily mean no assets : how is it determined is a court matter share which is proportionally owing from him.

STEPS : If any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion.
1. Lender should sue first the borrower . If judgment cannot be executed
in any asset of the borrower The provisions of this article shall not be applicable, unless the payment has been
2. Lender can now go after the guarantor made by virtue of a judicial demand or unless the principal debtor is insolvent.
(1844a)

- Applies when there is judicial demand or the principal debtor is insolvent ;

It’s possible for A to sue 2 persons <allowed> meaning there is no more benefit of excussion
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
OTHERS WILL SHOULDER SHARE OF G2
 Benefit of guarantors ceases with the same manner as the benefit of
excusssion
- Article 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)
 Debtor = Co-guarantor
 Article 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)
 Notice : made before payment
 Indem nity { 2066} and Giving Notice before Paym ent
 { 2067-2070}
 A. Nature of I ndemnity and Im portance of Giving Notice
 There is a guarantor, debtor defaulted, the assets are zero, the guarantor paid;
what’s the right of the guarantor? He can claim indemnity from debtor. Even
without indemnity undertaking, there will be that indemnity. And we said, if
guaranty bydefault is gratuitous, it doesn’t mean that there is no obligation to
pay indemnity. There will still be an obligation to indemnify, unless
gratuitous nature of guaranty refers only to payment of fee of guarantor.
 What will the indemnity consist of? One of which is interest. Even if there is
no stipulation, and even if parties don’t agree. Why is there requirement to
pay interest? And from what moment?
 From notification of payment, not payment of debt. If there is no interest,
acquire the same amount paid. But law says there’s legal interest. 6%
because it is a forbearance of money.
When guarantor notified the debtor, the notice placed the debtor in the position to
stop the accrual of interest! You pay interest the moment you receive notice, if you
don’t want to pay interest, pay immediately! So if debtor will raise notice, debtor
assumes certain risks. Debtor has to pay interest. This is just like in consignation.
Why the creditor assumes the cause of a valid consignation is because in
consignation, there is notice given in every turn and so there is an opportunity to
stop the cost. That’s the reason behind this rule.
 B. Benefit of Giving Notice
 If the guarantor pays, what should the guarantor do? Notify debtor first!!!
Benefit? Notice is for good measure. Without notice will he be entitled to
indemnity? YES still. But whats the risk?There may be double payment.
Debtor can raise defenses like if there was already partial payment or
offsetting of the debt. The notice is meant to foreclose any defense that can
be raised by debtor! Debtor will have the burden to raise
- BASIS FOR DAMAGES IN OBLIGATIONS : WHEN DEBTOR IS
GUILTY OF FRAUD, OR ANYTHING THAT CONTRAVENES
TENOR OF OBLIGATION : ACTUAL DAMAGES.
LOAN
L B
Indemnity Agreement
G
MONEY
- You don’t have any incentive to have compromise
- They cannot put that they cannot agree : split
- Article 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)
- 2067 works both ways
- In this case: the remedy is that they enter into a separate and distinct
contract for the incentive
- IT MUST BE RELATED BUT INDEPENDENT TO THE
PRINCIPAL OBLIGATION
CARODAN : Guarantor only calls for the
QUIZ: depends
- Coverage : loan and guaranty
- Whether we discuss it or not
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT

GUARANTOR PAYS - Consent : Lender

- Liable for the whole amount

- Legal interest
- Expenses: to notify the debtor EXTINCTION OF GUARANTY
- :::: defended against/satisfying claim of the creditor
- Extinguishment of the Principal obligation
- Damages
- Creditor gives extension to the term without informing the guarantor : this
- Subrogation
also includes the shortening of the period ---there is adverse impact on the
NOTICE \ liability of guarantor
>>> any material alteration
- Material to purpose of avoiding/ pre-empting defenses that may arise - CAUSE OF THE EXTINGUISHMENT OF OBLIGATION IN
GENERAL
BEFORE PAYING : GUARANTOR DOES NOT HAVE THE RIGHT TO ASK - Let’s say the amount is P10,000,00, parties agreed to increase it to
FOR INDEMNITY P25,000,000 : there is material alteration, thereby extinguishing the
guaranty.
Exception : Article 2071
- In the surety agreement I gave you, it covers all forms of modification of
Article 2071. The guarantor, even before having paid, may proceed against the obligation, so if you are working for the creditor, that is something you
principal debtor: watch out for.
- Guaranty is also extinguished : when some act of the creditor, guaranty
(1) When he is sued for the payment; could not be subrogated to the rights of the creditor
- Example : Debtor and Creditor (P10M) secured by mortgage, and is
(2) In case of insolvency of the principal debtor; secured by a guaranty. Creditor through some act discharged the mortgage
- The guaranty : extinguished. No longer any right to subrogate to the rights
(3) When the debtor has bound himself to relieve him from the guaranty within a of the mortgagee. (automatic extinction of the guaranty)
specified period, and this period has expired; - What if it’s a surety undertaking? Will you have the same result? Based on
jurisprudence, it will not extinguish the surety. Article 2080 only applies
(4) When the debt has become demandable, by reason of the expiration of the period to guaranty
for payment; - Why? Surety , it’s liability is a kin to a solidary debtor.
- Defenses of guarantor : (1) Defenses that could be exercised by debtor (2)
(5) After the lapse of ten years, when the principal obligation has no fixed period for Defenses of guaranty itself, like benefit of exhaustion.
its maturity, unless it be of such nature that it cannot be extinguished except within a
LEGAL AND JUDICIAL BONDS
period longer than ten years;
 Just take note: we’re actually dealing with surety
(6) If there are reasonable grounds to fear that the principal debtor intends to  No right of exhaustion
abscond;  Bonds in the course of litigation, like a bond to support an attachment or
bonds needed for a writ to be issued by the court
(7) If the principal debtor is in imminent danger of becoming insolvent.
LOOK AT YOUR FORMS

- Purpose : enable guarantor to (1) Ask for security (2) Ask to be discharged  If you’re the surety you check what? –(1) Check principal obligation (2)
from the guarantee Make sure that you don’t have to go back to the principal obligation (ex:
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
surety covers all renewals, novation, etc/ any changes deemed to have been
approved)
 In an indemnity agreement, they can agree on any modification
TITLE XVI
PLEDGE, MORTGAGE AND ANTICHRESIS
 LET’S SAY YOU HAVE A LOAN :
Day 1: you enter loan (P10,000,000 loan) Borrower obliged to pay on a
given due date the principal and the interest
Day 2 : Pledgee or mortgagor be the absolute owner of the thing pledged or
mortgaged (legal and beneficial title
- Valid pledge : law enforces some requirements
- Who can be a pledger : Self/ 3P
- Unlike guaranty : it must be a third party
 Parties : (1) Creditor (2) Mortgagor (Debtor himself/3P)
 First requirement : Security arrangement::: there must be a principal
obligation
 Second requirement : Pledgor or Mortgagor should be the absolute owner of
the thing pledged or mortgaged (Legal possession x Beneficial title)
 Beneficial title – trustor/beneficiary & Trustee
 Beneficial = trustee_
 GR: Lender can rely on the title TCT
 EX: Bank : who must exercise greater diligence
 Stocks : (1) Stock certificate (2) Check with the corporate secretary : Stock
and transfer books = Mortgagee in GF
 Title of absolute ownership : must be at the time they entered into a contract
of pledge/mortgage.
Third requirement : Persons constituting pledge or mortgage : free disposal of their
property
 Corp : Board approval . If not in usual course of business: SH Approval
 Person : (1) Spousal consent
 Restrictions (1) Civil interdiction (2) Receivership (3) Garnishment (4)
Injunction
 3P : SPA needed
PURPOSE OF PLEDGE :
 Borrower defaults –what are the remedies?
 Foreclose
 Action for collection –amounts to abandonment of pledge
 Later on you understand, this only applies to pledge, value is considerably
less
 Mortgage –huge value : mortgagee can always recover any deficiency
unless there is agreement to the contrary
 If you have a mortgage or pledge, creditor can go after the properties
directly, unlike guarantee: personal undertaking
 Pledge or mortgage creates a lien, attached to the property itself
 There’s no need to foreclose, you can go directly to the foreclosure of the
property
 GR: mortgage indivisible = whole ; unless the parties agree otherwise
 Ex; SC case: Lender released only half, mortgage must only be half
IN BOTH PLEDGES OR MORTGAGE
- Law prohibits automatic appropriation
- Pactum commissorium
- Automatic appropriation by the creditor of the thing pledged or
mortgaged upon the failure of the debtor to pay the principal obligation
- What happens: instead of foreclosure : transfer the property in their name
- Parties could not agree: default = automatic ownership
- What constitutes as automatic appropriation?
- Ex: Stipulation : upon default pledgee can cause transfer ownership to
pledgees name  pactum commissorium
- Pledgor pledged, 1M SMC Shares :
- Pactum commissorium?
- Ex 2: for the purpose of voting/collecting shares
- Ex 3: Pledgee shall have option to buy  danger where court can sell to
himself
- Ex 4: Pledgee as atty-in-fact of pledger can sell
- None : pactum commissorium
- TEST IF THERE IS EXISTS PACTUM COMMISSORIUM is
whether or not there is no need for extra step to be taken by creditor
CONTRACT OF LEASE
- Lessor leases in exchange for rent
- Lessee assumes certain obligations (intruders, peaceful possession etc)
- Should penalty be due –they have an obligation –penalty –lessee gets land
- Not pactum commissiorium because THIS IS NOT A PLEDGE OR
MORTGAGE
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
MORTGAGE PROPERTY =encumbered where in fact it’s only a second contract ;
mortgage, you can have a registered one and an unregistered one.
That does not apply to pledge? Why? Because you have to deliver certificate of
stock. No second pledge
PROVISIONS
CHAPTER 1
Provisions Common to Pledge and Mortgage
Article 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)
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage.
(n)
Article 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)
Article 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)
Article 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 excepted 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)
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact
that the debtors are not solidarily liable. (n)
Article 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)
Article 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)
LET’S NOW GO TO PLEDGE
 Real contract : perfected upon delivery
 Pledged property needs to be placed in the possession of the creditor by
agreement of the parties.
 Example : you have a pledge, pledgor, pledgee.
Day 1: Pledge
Day 2: Delivery
- Perfected pledge day 2. But there’s a valid contract on day 1
 Object : Personal property ; provided that they are susceptible of possession
because you have to deliver
 Parties: Pledgor and pledgee
 Example : You pledge TCT of Condo  status? (pledge of real property)
 Valid as between the parties
 Negotiable or non-negotiable instruments may be pledged, if negotiable must
be endorsed.
 Shares of stocks, bonds warehouse receipts or similar documents (anything
that represents ownership of property) Incorporeal rights may be pledged
Aleezah Gertrude Regado
CREDIT TRANSACTIONS 2 D TRANSCRIPT
 But there must be –proof to be delivered : example certificate
IS THERE FORMAL REQUIREMENT FOR PLEDGE?
- None as between the parties
- To be enforceable against 3P : Public document
- Pay documentary stamp tax
- Notarized : (x) binding to buyer unless he has actual knowledge.
- Stocks : You have to furnish club the copy of pledge : generally not
required
- ARTICLE 2097
- How do you transfer title : possessed by the pledgor?
- Sales: Constructive delivery .
- Does it really matter if there is transfer of ownership? Yes. As a creditor
you want to limit the person you are dealing with
Pledge secures payment of an obligation, pledgee has right to retain object as long as
principal obligation susbsist?
IF PROPERTY LOSS: pledgee liable : law assumes fault. He has the obligation to
return the thing pledged. He is liable unless he proves that it is caused by a
fortuitous event.
Law provides that pledgee cannot deposit thing pledged to 3P unless there is
stipulation authorizing him.
- Loops: X – may be an agent, therefore not a third person
Pledgor is also liable for hidden defects, like that one in commodatum
Article 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)
- Creditor can refuse : appropriation –principal
- Pledgor can make it an additional security
MISUSE OF PROPERTY
- Pledgor can get the possession (x) the extinction of pledge
- May have somebody designated for the possession of subject property
- Debtor has the same remedy if the pledgee through negligence, or willful
act, thing is in danger of being lost or impaired
- In these cases, there is a breach by pledgee
- Obligation not to use and take care of the thing
- Recourse of pledgor, get property deposited in somebody else.
SHARES OF STOCK
- If you are a creditor, why would you ask for shares > principal obligation :
you want some buffer in case of foreclosure.
- P15M : decrease of value of shares  P12 M
- Remedy : (1) debtor can ask creditor for a substitution of property of equal
value (2) cause sale : be sold in a public auction, proceeds shall serve as a
security
- Who’s right prevails? ---under the law, it is the creditors.
Let’s say you have an obligation of P10,000,000 (principal obligation) then there’s a
pledge of shares worth P15,000,000 , if let’s say on due date, shares are only worth
P9,000,000 and pledgor defaults.Pledgee forecloses and realizes only P9,000,000 =
proceeds. You now have a deficiency of P1,,000,000. We said that the creditor
cannot recover. That’s a peculiar rule with respect to mortgage.
- If you foreclose,, regardless of result it results to extinction of obligation.
That is an absolute rule
WHAT IF IT’S THE OTHER WAY AROUND?
Let’s say on due date, it’s valued at P12,000,000. You have an excess of P2,000,000
who gets the P2,000,000.
- Here law has a different rule. Parties can agree otherwise.
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- You are working for debtor, you place that the creditor cannot get the
excess.
 Sale through public auction may occur –to preserve value of property which
experienced a sudden drop of value. In this case, pledgee can recover the
value. This is not a foreclosure, therefore it does not extinguish the contract.
 I’m just showing you how you can stress the limits of this provisions
If somehow, pledgor ends up possessing the property, there is a presumption –
extinguishment
What’s another way of extinguishing pledge without extinguishing principal
obligation? –creditor sues for specific performance.
LET’S NOW GO TO FORECLOSURE
- Let’s assume you have a lender, there’s a loan payable by borrower,
there’s default and there is pledge.
- How should lender proceeds? Foreclose pledged shares
- Law provides; notarial sale as the default rule
- I sale default rule because parties can agree on different modes.
- Is a private sale allowed? Negotiated sale? –YES
1st step: Lender goes to Notary public.
2nd step : Notice : pledgor/ 3p : amount, place, time, and other particulars of sale.
Take note, there’s no publication. Public sale: because it is the notary public.
Bidding rules, etc.
3rd step:Public sale No valid sale if only pledgee is the bidder
4th step : Notice of the result of sale. –purpose : afford them the chance to question
any deficiency of the auction ; creditor wants noticed to be delayed
** law does not provide minimum period for notice
 Take note : anyone interested to property can just pay the principal
obligation and get the property BEFORE there is public sale
 In a public sale, if pledgor bids, if bid of pledgor = winning bidder, pledgor
preferred. Law wants to preserve ownership : relevant person
- Let’s say the pledge here, you have 2 blocks, PLDT (Php 10,000,000) and
Globe, 2 (P25,000,000) useless service providers. Loan is worth
P20,000,000.
- How can lender foreclose? Can you foreclose it together? YES. Any
excess will go to you as lender, unless there’s stipulation to the contrary.
You get the bonus
- Basis: Pledge indefeasible, it secures one obligation.
- It’s only an option of lender not to foreclose both,. Well, that doesn’t
happen.
PROVISIONS:
CHAPTER 2
Pledge
Article 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)
Article 2094. All movables which are within commerce may be pledged,
provided they are susceptible of possession. (1864)
Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar documents may
also be pledged. The instrument proving the right pledged shall be delivered to
the creditor, and if negotiable, must be indorsed. (n)
Article 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)
Article 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
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CREDIT TRANSACTIONS 2 D TRANSCRIPT
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)
Article 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)
Article 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)
Article 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)
Article 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under article 1951. (n)
Article 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)
Article 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)
Article 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)
Article 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)
Article 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)
Article 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)
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Article 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)
Article 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)

Article 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)
Article 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)

Article 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)
Article 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)

Article 2116. After the public auction, the pledgee shall promptly advise the
Article 2111. A statement in writing by the pledgee that he renounces or pledgor or owner of the result thereof. (n)
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)
Article 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)
Article 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 Article 2118. If a credit which has been pledged becomes due before it is
public sale is to be held. If at the first auction the thing is not sold, a second redeemed, the pledgee may collect and receive the amount due. He shall apply
one with the same formalities shall be held; and if at the second auction there the same to the payment of his claim, and deliver the surplus, should there be
is no sale either, the creditor may appropriate the thing pledged. In this case he any, to the pledgor. (n)
shall be obliged to give an acquittance for his entire claim. (1872a)
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Article 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) ARTICLE 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 2070, and
articles 2077 to 2081. He is not prejudiced by any waiver of defense by the
principal obligor. (n)

Article 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 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)

Article 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)