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San Beda College of Law182

MEMORYAIDIN CIVIL LAW

CREDIT TRANSACTIONS

All transactions involving thepurchase or loan of goods, services,or money in the present with apromise to pay or deliver in thefuture

Contracts of securityTypes:1. Secured transactions or contracts of

real security - supported by acollateral or an encumbrance ofproperty

2. Unsecured transactions or contracts

of personal security- supported onlyby a promise or personalcommitment of another such as aguarantor or surety

Security

Something given,deposited, or serving as a means toensure fulfilment or enforcement ofan obligation or of protecting someinterest in property

Types of Securitya. personal when an individual

becomes surety or guarantorb. real or property when a

mortgage, pledge, antichresis,charge or lien or other deviceused to have property held, outof which the person to be madesecure can be compensated forloss

Bailment

The delivery of propertyof one person to another in trust for

a specific purpose, with a contract,express or implied, that the trustshall be faithfully executed and theproperty returned or duly accountedfor when the special purpose isaccomplished or kept until the bailorclaims it.

Parties:1. bailor - the giver; one who delivers

property

2. bailee- the recipient; one whoreceives the custody or possession ofthe thing thus delivered

LOAN (Articles 1933 1961)

A contract wherein oneof the parties delivers to another,either something not consumable sothat the latter may use the same fora certain time and return it ormoney or other consumable thing,upon the condition that the sameamount of the same kind and qualityshall be paid. (Art 1933)

Characteristics:1. Real Contract delivery ofthe thing loaned is necessary for theperfection of the contractNOTE: An accepted promise to makea future loan is a consensualcontract, and therefore binding uponthe parties but it is only afterdelivery, will the real contract ofloan arise. (Art 1934)

2. Unilateral Contract - once the

subject matter has been delivered,it creates obligations on the part ofonly one of the parties (i.e.borrower).

Kinds:1. Commodatum when the bailor(lender) delivers to the bailee(borrower) a non-consumable thingso that the latter may use it for acertain time and return the identicalthing.

Kinds of commodatum:a. Ordinary Commodatum use bythe borrower of the thing is for acertain period of time

b. Precarium - one whereby thebailor may demand the thingloaned at will and it exists in thefollowing cases:

i. neither the duration norpurpose of the contract isstipulated

CIVIL LAW COMMITTEE

CHAIRPERSON: Romuald Padilla ASST.CHAIRPERSON: Vida Bocar, Joyce Vidad EDP : Alnaiza Hassiman, Dorothy GayonSUBJECT HEADS: Christopher Rey Marasigan (Persons and Family Relations), Alejandro Casabar(Property), Ma.RhodoraFerrer(Wills and Succession), Ian Dominic Pua(Obligations and Contracts), Sha Elijah Dumama(Sales and Lease),John StephenQuiambao(PAT), Christopher Cabigao(Credit Transactions), Ligaya Alipao(Torts and Damages), AnthonyPurganan(LTD),Ma. Ricasion Tugadi (Conflicts of Law)

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ii. the use of the thing ismerely tolerated by theowner

2. Simple loan or mutuum where thelender delivers to the borrowermoney or other consumable thingupon the condition that the lattershall pay the same amount of thesame kind and quality.

Commodatum MutuumKey: COPS-LOTR

1. ObjectNon-consumable Consumable

2. CauseGratuitous May or may not be

gratuitous

3. PurposeUse or temporary

possessionConsumption

4. Subject MatterReal or personal

propertyOnly personalproperty

5. Ownership of the thingRetained by the

bailorPasses to the debtor

6. Thing to be returnedExact thing loaned Equal amount of the

same kind andquality

7. Who bears risk of lossBailor Debtor

8. When to returnIn case of urgentneed, even beforethe expiration of theterm

Only after theexpiration of theterm

Loan CreditDelivery by one party

and the receipt ofother party of agiven sum of moneyor other consumablething upon anagreement, expressor implied, to repaythe same.

Ability of a person to

borrow money orthings by virtue ofthe trust orconfidence reposedby the lender that hewill pay what hepromised.

Loan Credit1. Interest taken at Interest is taken in

the expiration of thecredit

advance

2. Always on adouble name paper(two signaturesappear with bothparties held liablefor payment)

Always on a singlename paper (i.e.promissory note withno indorse-mentother than themaker)

COMMODATUM (Articles 1935 1952)

Nature:

1. PURPOSE: Bailee in commodatumacquires the temporary use of thething but not its fruits (unlessstipulated as an incidental part ofthe contract).(Art 1935)

Use must be temporary,otherwise the contract may be adeposit.

2. CAUSE: Essentially gratuitous; itceases to be a commodatum if anycompensation is to be paid by theborrower who acquires the use, insuch case there arises a leasecontract.

Similar to a donation in that itconfers a benefit to therecipient. The presumption is

that the bailor has loaned thething for having no needtherefor.

3. SUBJECT MATTER: Generally non-consumable whether real or personalbut if the consumable goods are notfor consumption as when they aremerely for exhibition, consumablegoods may be the subject of thecommodatum. (Art 1936)

4. Bailor need not be the owner of the

thing owned (Art. 1938) since by theloan, ownership does not pass to theborrower.

A mere lessee or usufructuarymay lend but the borrower orbailee himself may not lend norlease the thing loaned to him toa third person (Art 1932[2])

5. Purely Personal (Art 1939):

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Death of either party terminatesthe contract unless bystipulation, the commodatum istransmitted to the heirs of either

or both parties. Bailee can neither lend nor lease

the object of the contract to athird person.

NOTE:Use of the thing loanedmay extend to members of thebailees household except:

a. contrary stipulation;b. nature of the thing

forbids such use

Obligations of the Bailee: (Arts 1941 1945)

1. To pay for the ordinaryexpenses for the use andpreservation of the thing loaned.(Art 1941)2. To be liable for the loss of thething even if it should be through afortuitous event in the followingcases: (KLAS D)

a. when he keeps it longerthan the period stipulated, or

after the accomplishment of itsuseb. when he lends or leasesit to third persons who are notmembers of his householdc. when the thing loanedhas been delivered withappraisal of its valued. when, being able tosave either of the thingborrowed or his own things, hechose to save the latter; ore. when the baileedevoted the thing for anypurpose different from that forwhich it has been loaned (Art1942)

3. To be liable for the deterioration ofthing loaned (a) if expresslystipulated; (b) if guilty of fault ornegligence; or (c) if he devotes thething to any purpose different fromthat for which it has been loaned

4. To pay for extraordinary expensesarising from the actual use of thething by the bailee, which shall beborne equally by both the bailor and

the bailee, even though the baileeacted without fault, unless there is astipulation to the contrary (Art 1949par 2)

5. To return the thing loaned

The bailee has no right to retainthe thing loaned as security forclaims he has against the bailoreven for extraordinary expensesexcept for a claim for damagessuffered because of the flaws ofthe thing loaned.

NOTES: However, the bailees right

extends no further thanretention of the thing loaneduntil he is reimbursed for thedamages suffered by him.

He cannot lawfully sell thething to satisfy such damageswithout courts approval.

In case there are two ormore bailees, theirobligation shall be solidary.

Obligations of the bailor (Art 1946 Art1952):

1. To respect the duration of theloan

GENERAL RULE: Allow the baileethe use of the thing loaned for theduration of the period stipulated oruntil the accomplishment of thepurpose for which the commodatumwas instituted.

EXCEPTIONS:a. In case of urgent need inwhich case bailee may demandits return or temporary use;b. The bailor may demandimmediate return of the thing ifthe bailee commits any act ofingratitude specified in Art. 765.

2. To refund to the baileeextraordinary expenses for thepreservation of the thing loaned,provided the bailee brings the same

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to the knowledge of the bailorbefore incurring them, except whenthey are so urgent that the reply tothe notification cannot be awaited

without danger.

3. To be liable to the bailee fordamages for known hidden flaws. Requisites:

a. There is flaw or defect inthe thing loaned;b. The flaw or defect ishidden;c. The bailor is awarethereof;d. He does not advise thebailee of the same; and

e. The bailee suffers damagesby reason of said flaw or defect

NOTES:

If the above requisites concur,

the bailee has the right ofretention for damages.

The bailor cannot exempt

himself from the payment of

expenses or damages byabandoning the thing to thebailee.

SIMPLE LOAN OR MUTUUM (Art 1953 1961)

A contract whereby one partydelivers to another, money or otherconsumable thing with theunderstanding that the same amountof the same kind and quality shall bepaid. (Art. 1953)

NOTES: The mere issuance of the checks

does not result in the perfection ofthe contract of loan. The Civil Codeprovides that the delivery of bills ofexchange and mercantiledocuments, such as checks, shallproduce the effect of payment onlywhen they have been encashed(Gerales vs. CA 218 SCRA 638). It isonly after the checks have produced

the effect of payment that thecontract of loan may be deemedperfected.

The obligation is to pay and not to

return because the consumption ofthe thing loaned is the distinguishingcharacter of the contract of mutuumfrom that of commodatum.

No estafa is committed by a personwho refuses to pay his debt or deniesits existence.

Simple Loan/Mutuum Rent

1. Delivery of moneyor some consumablething with a promise

to pay an equivalentof the same kind andquality

Delivery of some non-consumable thing inorder that the other

may use it during acertain period andreturn it to theformer.

2. There is a transferof ownership of thething delivered

There is no transferof ownership of thething delivered

3. Relationshipbetween the partiesis that of obligor-obligee

Relationship is thatof a landlord andtenant

4. Creditor receivespayment for his loan

Owner of theproperty rentedreceivescompensation orprice either inmoney, provisions,chattels, or labor

from the occupantthereof in return forits use (Tolentino vsGonzales, 50 Phil 5581927)

Loan Sale

1. Realcontract

Consensual contract

2. Gene

Bilateral andreciprocal

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rallyunilater

albecauseonlyborrowerhasobl

igations

NOTE: If the property is sold, but thereal intent is only to give the object assecurityfor a debt as when the priceis comparatively small there really is acontract of loan with an equitablemortgage.

Commodatum/Mutuum

Barter

1. Subject matter ismoney or fungiblethings

Subject matter isnon-fungible, (nonconsumable) things

2. In commodatum,the bailee is boundto return theidentical thingborrowed when thetime has expired orpurpose served

The thing withequivalent value isgiven in return forwhat has beenreceived

3. Mutuum may be

gratuitous andcommodatum isalways gratuitous

Onerous, actually a

mutual sale

Form of Payment (Art 1955):1. If the thing loaned is money -payment must be made in the

currency stipulated, if it is possible;otherwise it is payable in thecurrency which is legal tender in thePhilippines and in case of

extraordinary inflation or deflation,the basisi of payment shall be thevalue of the currency at the time ofthe creation of the obligation2. If what was loaned is a fungiblething other than money - theborrower is under obligation to paythe lender another thing of the samekind, quality and quantity. In case itis impossible to do so, the borrowershall pay its value at the time of theperfection of the loan.

Interest The compensation allowed by law or

fixed by the parties for the loan orforbearance of money, goods orcredits

Requisites for Demandability: (ELI)1. must be expressly stipulated

Exceptions:a. indemnity for damagesb. interest accruing from

unpaid interest2. must be lawful3. must be in writing

Compound Interest

GENERAL RULE: Unpaid interest shallnot earn interest.

EXCEPTIONS:1. when judicially demanded2. when there is an express

stipulation (must be in writing inview of Art. 1956)

Guidelines for the application ofproper interest rates

1. If there is stipulation: that rateshall be applied2. The following are the rules of thumb

for the application/imposition ofinterest rates:

a) When an obligation,regardless of its source, i.e.,law, contracts, quasi-contracts,delicts or quasi-delicts isbreached, the contravenor canbe held liable for damages.

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b) With regardparticularly to an award ofinterest in the concept of actualand compensatory damages, the

rate of interest, as well as theaccrual thereof, is imposed, asfollows:i. When the obligation

breached consists of payment of a sum of money(loan or forbearance ofmoney), the interest shall bethat which is stipulated oragreed upon by the parties.In absence of an agreement,the rate shall be the legalrate (i.e. 12% per annum)

computed from default.NOTE: The interest due shallitself earn legal interestfrom the time it is judiciallydemanded

ii. In other cases, the rate ofinterest shall be six percent(6%) per annum.NOTE: No interest, however,shall be adjudged onunliquidated claims ordamages except when oruntil the demand can be

established with reasonablecertainty. When the demandcannot be established, theinterest shall begin to runonly from the date of thejudgment of the court ismade.

iii. When the judgment of thecourt awarding a sum ofmoney becomes final andexecutory, the rate of legalinterest, whether the casefalls under paragraph i or iiabove, shall be 12% perannum from such finalityuntil its satisfaction, thisinterim period being deemedto be by then an equivalentto a forbearance of credit.(Eastern Shipping Lines vs.CA, July 12, 1994)

NOTES:

Central Bank Circular No. 416 fixing

the rate of interest at 12% perannum deals with loans, forbearanceof any money, goods or credits and

judgments involving such loans, orforbearance in the absence ofexpress agreement to such rate

Interest as indemnity for damages ispayable only in case of default ornon-performance of the contract. Asthey are distinct claims, they may bedemanded separately. (SentinelInsurance Co., Inc. vs CA, 182 SCRA517)

Central Bank Circular No. 905 (Dec.10, 1982) removed the Usury Law

ceiling on interest rates for securedand unsecured loans, regardless ofmaturity.

Validity of unconscionable interest ratein a loan

Supreme Court in Sps. Solangonvs. Jose Salazar, G.R. No. 125944, June29, 2001, said that since the usury lawhad been repealed by CB Cir. No. 905there is no more maximum rate ofinterest and the rate will just depend onthe mutual agreement of the parties

(citing Lim Law vs. Olympic Sawmill Co.,129 SCRA 439). But the Supreme Courtsaid that nothing in said circular grantslenders carta blanche authority to raiseinterest rates to level which will eitherenslave their borrowers or lead to ahemorrhaging of their assets (citing

Almeda vs. CA, 256 SCRS 292). In Medelvs. CA, 299 SCRA 481, it was ruled thatwhile stipulated interest of 5.5% permonth on a loan is usurious pursuant toCB Circular No. 905, the same must beequitably reduced for being iniquitous,

unconscionable and exorbitant. It iscontrary to morals, (contra bonosmores). It was reduced to 12% perannum in consonant with justice and fairplay.

DEPOSIT (Articles 1962 2009)

A contract constituted from themoment a person receives a thingbelonging to another, with the

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obligation of safely keeping it and ofreturning the same.

Characteristics:

1. Real Contract - contract isperfected by the delivery of thesubject matter.

2. Unilateral (gratutitous deposit) -only the depositary has anobligation.

3. Bilateral (onerous deposit) -gives rise to obligations on thepart of both the depositary anddepositor.

Deposit Mutuum1. Purpose

Principal purpose issafekeeping orcustody

Principal purpose isconsumption

2. When to ReturnDepositor candemand the return ofthe subject matter atwill

The lender must waituntil the expirationof the period grantedto the debtor

3. Subject MatterSubject matter maybe movable orimmovable property

Subject matter isonly money or otherfungible thing

4. RelationshipRelationship is that

of lender (creditor)and borrower(debtor).

Relationship is that

of depositor anddepositary.

5. CompensationThere can becompensation ofcredits.

NO compensation ofthings deposited witheach other (exceptby mutualagreement).

Deposit Commodatum

1. Purpose is

Safekeeping

1. Purpose is the

transfer of the use

2. May be gratuitous 2. Essentially andalways gratuitous

3. Movable/corporealthings only in case ofextrajudicial deposit

3. Both movable andimmovable may bethe object

Kinds of Deposit:

1. Judicial (Sequestration) takes placewhen an attachment or seizure ofproperty in litigation is ordered.

2. Extra-judiciala. Voluntary one wherein the

delivery is made by the will ofthe depositor or by two or morepersons each of whom believeshimself entitled to the thingdeposited. (Arts 1968 1995)

b. Necessary one made incompliance with a legalobligation, or on the occasion ofany calamity, or by travellers inhotels and inns (Arts 1996 -2004), or by travellers with

common carriers (Art 1734 1735).

NOTE: The chief differencebetween a voluntary deposit and anecessary deposit is that in theformer, the depositor has acomplete freedom in choosing thedepositary, whereas in the latter,there is lack of free choice in thedepositor.

Judicial Extra-judicial1. Creation

Will of the court Will of the partiesor contract

2. PurposeSecurity or to insurethe right of a partyto property or torecover in case offavorable judgment

Custody andsafekeeping

3. Subject MatterMovables orimmovables,but generallyimmovables

Movables only

4. CauseAlways onerous May be compen-

sated or not, butgenerally gratuitous

5. When must the thing be returnedUpon order of thecourt or whenlitigation is ended

Upon demand ofdepositor

6. In whose behalf it is held

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Person who has aright

Depositor or thirdperson designated

GENERAL RULE: Contract of deposit is

gratuitous (Art 1965)EXCEPTIONS:

1. when there is contrarystipulation

2. depositary is engaged in businessof storing goods

3. property saved from destructionwithout knowledge of the owner

NOTES:

Article 1966 does not embrace

incorporeal property, such as rightsand actions, for it follows the personof the owner, wherever he goes.

A contract for the rent of safetydeposit boxes is not an ordinarycontract of lease of things but aspecial kind of deposit; hence, it isnot to be strictly governed by theprovisions on deposit. The relationbetween a bank and its customer isthat of a bailor and bailee. (CA Agrovs CA, 219 SCRA 426)

Obligations of the Depositary (Art 1972

1991):1. To keep the thing safely (Art1972)

Exercise over the thingdeposited the same diligence ashe would exercise over hisproperty

2. To return the thing (Art 1972)

Person to whom the thing mustbe returned:

a. Depositor, to his heirs andsuccessors, or the person whomay have been designated in thecontract

b. If the depositary is capacitated -he is subject to all theobligations of a depositarywhether or not the depositor iscapacitated. If the depositor isincapacitated, the depositarymust return the property to thelegal representative of theincapacitated or to the depositor

himself if he should acquirecapacity (Art 1970).

c. If the depositor is capacitatedand the depositary is

incapacitated - the latter doesnot incur the obligation of adepositary but he is liable:

i..to return the thingdeposited while still in hispossession;

ii.to pay the depositor theamount which he may havebenefited himself with thething or its price subject tothe right of any third personwho acquired the thing ingood faith (Art 1971)

Time of return:a. Upon demand even though aspecified period or time for suchreturn may have been fixedexcept when the thing isjudicially attached while in thedepositarys possession or shouldhe have been notified of theopposition of a third person tothe return or the removal of thething deposited. (Art 1998)b. If deposit gratuitous, the

depositary may return the thingdeposited notwithstanding that aperiod has been fixed for thedeposit if justifiable reasonsexists for its return.c. If the deposit is for avaluable consideration, thedepositary has no right to returnthe thing deposited before theexpiration of the timedesignated even if he shouldsuffer inconvenience as aconsequence.(Art 1989)

What to return: product,accessories, and accessions ofthe thing deposited (Art 1983)

3. Not to deposit the thing with athird person unless authorized byexpress stipulation (Art 1973)

The depositor is liable for theloss of the thing deposited underArticle 1973 if:

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a. hetransfers the deposit with a thirdperson without authorityalthough there is no negligence

on his part and the third person;b. hedeposits the thing with a thirdperson who is manifestly carelessor unfit although authorizedeven in the absence of negligence; orc. the thingis lost through the negligence ofhis employees whether the latterare manifestly careless or not.

4. If the thing deposited shouldearn interest (Art 1975):

a. to collect interest and thecapital itself as it fall dueb. to take steps to preserveits value and rightscorresponding to it

5.Not to commingle things depositedif so stipulated (Art 1976)6. Not to make use of the thingdeposited unless authorized (Art1977)

GENERAL RULE: Deposit is forsafekeeping of the subject matterand not for use. The unauthorized

use by the depositary would makehim liable for damages.

EXCEPTIONS:1. When the preservation of the

thing deposited requires its use2. When authorized by the

depositor

NOTE: The permission to use is NOTpresumed except when such use isnecessary for the preservation of thething deposited.

Effect if permission to use is given(Art 1978):

1. If thing deposited isnon-consumable, the contractloses the character of a depositand acquires that of acommodatum despite the factthat the parties may havedenominated it as a deposit,unless safekeeping is still theprincipal purpose.

2. If thing deposited consists ofmoney/consumable things, thecontract is converted into asimple loan or mutuum unless

safekeeping is still the principalpurpose in which case it is calledan irregular deposit. Example:bank deposits are irregulardeposits in nature but governedby law on loans.

7. When the thing deposited isdelivered sealed and closed :

a. to return the thingdeposited in the same conditionb. to pay for damages shouldthe seal or lock be brokenthrough his fault, which is

presumed unless provedotherwisec. to keep the secret of thedeposit when the seal or lock isbroken with or without his fault(Art 1981)NOTE: The depositary isauthorized to open the thingdeposited which is closed andsealed when (Art 1982):

i. there is presumedauthority (i.e. when the keyhas been delivered to him or

the instructions of thedepositor cannot be donewithout opening it)ii. necessity

8. To change the way of thedeposit if under the circumstances,the depositary may reasonablypresume that the depositor wouldconsent to the change if he knew ofthe facts of the situation, provided,that the former notifies thedepositor thereof and wait for hisdecision, unless delay would causedanger9. To pay interest on sumsconverted to personal use if thedeposit consists of money (Art 1983)

10. To be liable for loss throughfortuitous event (SUDA): (Art 1979):

ifstipulatedb. if he uses the thingwithout the depositor'spermissionc. if he delays its return

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d. if he allows others to useit, even though he himself mayhave been authorized to use thesame

NOTES:

Fixed, savings, and current depositsof money in banks and similarinstitutions shall be governed by theprovisions concerning simple loan.(Art 1980)

The general rule is that a bank cancompensate or set off the deposit inits hands for the payment of anyindebtedness to it on the part of thedepositor. In true deposit,compensation is not allowed.

Irregular deposit Mutuum

1. The consumablething deposited maybe demanded at willby the depositor

1. Lender is boundby the provisions ofthe contract andcannot demandrestitution until thetime for payment, asprovided in thecontract, has arisen

2. The only benefit is

that which accruesto the depositor

2. Essential cause for

the transaction is thenecessity of theborrower

3. The irregulardepositor has apreference overother creditors withrespect to the thingdeposited

3. Common creditorsenjoy no preferencein the distribution ofthe debtorsproperty

Rule when there are two or moredepositors (Art 1985):

1. If thing deposited is divisibleand depositors are not solidary:Each depositor can demand only hisproportionate share thereto.2. If obligation is solidary or ifthing is not divisible: Rules on activesolidarity shall apply, i.e. each oneof the solidary depositors may dowhatever may be useful to theothers but not anything which maybe prejudicial to the latter, (Art.

1212) and the depositary may returnthe thing to anyone of the solidarydepositors unless a demand, judicialor extrajudicial, for its return has

been made by one of them in whichcase, delivery should be made to him(Art. 1214).3. Return to one of depositorsstipulated. The depositary is boundto return it only to the persondesignated although he has not madeany demand for its return.

NOTES:

The depositary may retain the thingin pledge until full payment of whatmay be due him by reason of the

deposit (Art 1994).

The depositors heir who in good

faith may have sold the thing whichhe did not know was deposited, shallonly be bound to return the price hemay have received or to assign hisright of action against the buyer incase the price has not been paid him(Art 1991).

Obligations of the Depositor (Art 1992 1995):

1. To pay expenses for preservationa. If the deposit is gratuitous, the

depositor is obliged toreimburse the depositary forexpenses incurred for thepreservation of the thingdeposited (Art 1992)

b. If the deposit is for valuableconsideration, expenses forpreservation are borne by thedepositary unless there is acontrary stipulation

2. To pay loses incurred by the

depositary due to the character ofthe thing deposited

GENERAL RULE: The depositor shallreimburse the depositary for any lossarising from the character of the thingdeposited.

EXCEPTIONS:1. at the time of the deposit, the

depositor was not aware of thedangerous character of the thing

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2. when depositor was not expectedto know the dangerous characterof the thing

3. when the depositor notified the

depository of the same4. the depositary was aware of it

without advice from the depositor

Extinguishment of Voluntary Deposit(Art 1995)1. Loss or destruction of the thing

deposited2. In case of gratuitous deposit, upon

the death of either the depositor orthe depositary

3. Other causes, such as return of thething, novation, merger, expiration

of the term fulfilment of theresolutory condition, etc (Art 1231)

Necessary Deposits1. Made in compliance with a legal

obligation2. Made on the occasion of any

calamity such as fire, storm, flood,pillage, shipwreck or other similarevents (deposito miserable)

3. Made by travellers in hotels and innsor by travellers with common carrier

Deposit by Travellers in hotels andinns:

The keepers of hotels or inns shall beresponsible as depositaries for thedeposit of effects made by travellers

provided:a. Notice was given to themor to their employees of theeffects brought by the guest;andb. The guests take theprecautions which said hotel-keepers or their substitutesadvised relative to the care andvigilance of their effects.

NOTES:

Liability extends to vehicles, animals

and articles which have beenintroduced or placed in the annexesof the hotel.

Liability shall EXCLUDE losses which

proceed from force majeure. Theact of a thief or robber is notdeemed force majeure unless done

with the use of arms or irresistibleforce.

The hotel-keeper cannot free

himself from the responsibility byposting notices to the effect that heis not liable for the articles broughtby the guest. Any stipulation to sucheffect shall be void.

Notice is necessary only for suingcivil liability but not in criminalliability.

GUARANTY (Articles 2047 2084)

A contract whereby a person(guarantor) binds himself to thecreditor to fulfil the obligation ofthe principal debtor in case thelatter fail to do so.

Classification of Guaranty:1. In the Broad sense:

a. Personal - the guaranty is thecredit given by the person whoguarantees the fulfilment of the

principal obligation.b. Real - the guaranty is the

property, movable orimmovable.

2. As to its Origina. Conventional - agreed upon by

the parties.b. Legal - one imposed by virtue of

a provision of a law.c. Judicial - one which is required

by a court to guarantee theeventual right of one of theparties in a case.

3. As to Considerationa. Gratuitous - the guarantor does

not receive any price orremuneration for acting as such.

b. Onerous - the guarantor receivesvaluable consideration.

4. As to the Person guaranteed

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a. Single - one constituted solely toguarantee or secureperformance by the debtor ofthe principal obligation.

b. Double or sub-guaranty - oneconstituted to secure thefulfilment by the guarantor of aprior guaranty.

5. As to Scope and Extenta. Definite - the guaranty is limited

to the principal obligation only,or to a specific portion thereof.

b. Indefinite or simple - one whichnot only includes the principalobligation but also all itsaccessories including judicialcosts

SURETYSHIP

A contract whereby a person (surety)binds himself solidarily with theprincipal debtor

A relation which exists where oneperson (principal) has undertaken anobligation and another person(surety) is also under a direct andprimary obligation or other duty tothe obligee, who is entitled to butone performance, and as between

the two who are bound, the secondrather than the first should perform(Agro Conglomerates, Inc. vs. CA,348 SCRA 450)

NOTES:

The reference in Article 2047 to

solidary obligations does not meanthat suretyship is withdrawn fromthe applicable provisions governingguaranty. A surety is almost thesame as a solidary debtor, exceptthat he himself is a principal debtor.

In suretyship, there is but onecontract, and the surety is bound bythe same agreement which binds theprincipal. A surety is usually boundwith the principal by the sameinstrument, executed at the sametime and upon the sameconsideration (Palmares vs CA, 288SCRA 422)

It is not for the obligee to see to itthat the principal debtor pays the

debt or fulfill the contract, but forthe surety to see to it that theprincipal debtor pays or performs(Paramount Insurance Corp vs CA,

310 SCRA 377)

Nature of Suretys undertaking:1. Liability is contractual and

accessory but directNOTE: He directly, primarily andequally binds himself with theprincipal as original promisor,although he possesses no direct orpersonal interest over the lattersobligation, nor does he receive anybenefits therefrom. (PNB vs CA, 198SCRA 767)

2. Liability limited by the terms of thecontract.NOTE: It cannot be extended byimplication beyond the terms of thecontract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principaldebtor is held liable.NOTES:

The creditor may sue separately

or together the principal debtorand the surety. Where there areseveral sureties, the obligee mayproceed against any one ofthem.

In the absence of collusion, the

surety is bound by a judgmentagainst the principal eventhough he was not a party to theproceedings. The nature of itsundertaking makes it privy to allproceedings against its principal(Finman General AssuranceCorp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefit

of exhaustionNOTE: He assumes a solidary liabilityfor the fulfilment of the principalobligation (Towers Assurance Corpvs. Ororama Supermart, 80 SCRA262) as an original promissory anddebtor from the beginning.

5. Undertaking is to creditor and notto debtor.NOTE: The surety makes nocovenant or agreement with the

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principal that it will fulfil theobligation guaranteed for the benefitof the principal. Such a promise isnot implied by law either; and this is

true even where under the contractthe creditor is given the right to suethe principal, or the latter and thesurety at the same time. (Arranz vs.Manila Fidelity & Surety Co., Inc.,101 Phil. 272)

6. Surety is not entitled to notice ofprincipals defaultNOTE: The creditor owes no duty ofactive diligence to take care of theinterest of the surety and the suretyis bound to take notice of theprincipals default and to perform

the obligation. He cannot complainthat the creditor has not notifiedhim in the absence of a specialagreement to that effect. (Palmaresvs CA, 288 SCRA 422)

7. Prior demand by the creditor uponprincipal is not requiredNOTE: As soon as the principal is indefault, the surety likewise is indefault.

8. Surety is not exonerated by neglectof creditor to sue principal

Characteristics of Guaranty andSuretyship:1. Accessory - It is indispensable

condition for its existence that theremust be a principal obligation.NOTES:

Guaranty may be constituted to

guarantee the performance of avoidable or unenforceablecontract. It may also guaranteea natural obligation. (Art 2052)

The guarantor cannot bind

himself for more than theprincipal debtor and even if hedoes, his liability shall bereduced to the limits of that ofthe debtor.

2. Subsidiary and Conditional - takeseffect only in case the principaldebtor fails in his obligation.

NOTES:

The guarantor cannot bind

himself for more than theprincipal debtor and even if hedoes, his liability shall be

reduced to the limits of that ofthe debtor. But a guarantor maybind himself for less than that ofthe principal (Art 2054)

A guaranty may be given assecurity for future debts, theamount of which is not yetknown; there can be no claimagainst the guarantor until thedebt is liquidated. A conditionalobligation may also be secured.(Art 2053)

3. Unilateral - may be entered evenw/o the intervention of the principaldebtor, in which case Art. 1236 and1237 shall apply and it gives rise onlyto a duty on the part of theguarantor in relation to the creditorand not vice versa.

4. Nominate5. Consensual6. It is a contract between the

guarantor/surety and creditor.

NOTES:

Acceptance of guaranty bycreditor and notice thereof toguarantor:

In declaring that guarantymust be express, the lawrefers solely and exclusivelyto the obligation of theguarantor because it is healone who binds himself byhis acceptance. With respectto the creditor, no suchrequirement is neededbecause he binds himself tonothing.

However, when there is

merely an offer of aguaranty, or merely aconditional guaranty, in thesense that it requires actionby the creditor before theobligation becomes fixed, itdoes not become bindinguntil it is accepted and until

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notice of such acceptance bythe creditor is given to, oracquired by, the guarantor,or until he has notice or

knowledge that the creditorhas performed the conditionand intends to act upon theguaranty. But in any case, the creditoris not precluded fromwaiving the requirement ofnotice.

The consideration of theguaranty is the same as theconsideration of the principalobligation.

The creditor may proceedagainst the guarantor althoughhe has no right of action againstthe principal debtor.

7. Not presumed. It mustbe expressed and reduced in writing.NOTE: A power of attorney to loanmoney does not authorize the agentto make the principal liable as asurety for the payment of the debtof a third person. (BPI vs. Coster, 47Phil. 594)8. Falls under the Statute

of Frauds since it is a specialpromise to answer for the debt,default or miscarriage of another.9. Strictly interpretedagainst the creditor and in favor ofthe guarantor/surety and is not to beextended beyond its terms orspecified limits. (Magdalena Estates,Inc. vs Rodriguez, 18 SCRA 967) Therule of strictissimi juris commonlypertains to an accommodation suretybecause the latter acts withoutmotive of pecuniary gain and hence,

should be protected against unjustpecuniary impoverishment byimposing on the principal, dutiesakin to those of a fiduciary.

NOTES:

The rule will apply only after ithas been definitely ascertainedthat the contract is one ofsuretyship or guaranty. It cannotbe used as an aid in determining

whether a partys undertaking isthat of a surety or guarantor.(Palmares vs CA, 288 SCRA 292)

It does not apply in case of

compensated sureties.10. It is a contract whichrequires that the guarantor must bea person distinct form the debtorbecause a person cannot be the

personal guarantor of himself.NOTE: However, in a real guaranty,like pledge and mortgage, a personmay guarantee his own obligationwith his personal or real properties.

Guaranty Suretyship

1. Liability dependsupon an independentagreement to pay theobligation if primarydebtor fails to do so

1. Surety assumesliability as regularparty to theundertaking

2. Collateral under-taking

2. Surety is anoriginal promisor

3. Guarantor issecondarily liable

3. Surety isprimarily liable

4. Guarantor bindshimself to pay if

the principalCANNOT PAY

4. Surety undertakesto pay if the principal

DOES NOT PAY

5. Insurer ofsolvency of debtor

5. Insurer of thedebt

6. Guarantor canavail of the benefitof excussion anddivision in casecreditor proceedsagainst him

6. Surety cannotavail of the benefit ofexcussion and division

Indorsement Guaranty

1. Primarily of transfer

1. Contract of security

2. Unless the note ispromptly presentedfor payment atmaturity and duenotice of dishonorgiven to the indorserwithin a reasonabletime he will be

2. Failure in either orboth of theseparticulars does notgenerally work as anabsolute discharge ofa guarantorsliability, but his isdischarged only to

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discharged abso-lutely from allliability thereon,whether he hassuffered any actual

damage or not

the extent of the losswhich he may havesuffered inconsequence thereof

3. Indorser does notwarrant the solvency.He is answerable on astrict compliancewith the law by theholder, whether thepromisor is solvent ornot

3. Guarantorwarrants the solvencyof the promisor

4. Indorser can besued as promisor

4. Guarantor cannot besued as promisor

Guaranty WarrantyA contract by which aperson is bound toanother for thefulfilment of apromise orengagement of athird party

An undertaking thatthe title, quality, orquantity of thesubject matter of thecontract is what ithas been representedto be, and relates tosome agreementmade ordinarily bythe party who makesthe warranty

NOTES:

A guaranty is gratuitous, unless

there is a stipulation to the contrary.The cause of the contract is thesame cause which supports theobligation as to the principal debtor.

The peculiar nature of a

guaranty or surety agreement is thatis is regarded as valid despite theabsence of any direct considerationreceived by the guarantor or suretyeither from the principal debtor orfrom the creditor; a consideration

moving to the principal alone willsuffice.

It is never necessary that theguarantor or surety should receiveany part or benefit, if such there be,accruing to the principal. (WillexPlastic Industries Corp. vs. CA, 256SCRA 478)

Double or sub-guaranty (Art 2051 2ndpar) One constituted to guarantee the

obligation of a guarantor

Continuing guaranty (Art 2053)

One which is not limited to a singletransaction but which contemplatesa future course of dealings, coveringa series of transactions generally foran indefinite time or until revoked.

NOTES:

Prospective in operation (Dio vs CA,216 SCRA 9)

Construed as continuing when by theterms thereof it is evident that theobject is to give a standing credit tothe principal debtor to be used fromtime to time either indefinitely oruntil a certain period, especially ifthe right to recall the guaranty isexpressly reserved (Dio vs CA, 216SCRA 9)

Future debts may also refer todebts existing at the time of theconstitution of the guaranty but theamount thereof is unknown and not

to debts not yet incurred andexisting at that time.

Exception to the concept ofcontinuing guaranty is chattelmortgage. A chattel mortgage canonly cover obligations existing at thetime the mortgage is constituted andnot those contracted subsequent tothe execution thereof (The BelgianCatholic Missionaries, Inc. vs.Magallanes Press, Inc., 49 Phil 647).An exception to this is in case of

stocks in department stores, drugstores, etc. (Torres vs. Limjap, 56Phil 141).

Extent of Guarantors liability: (Art2055)1. Where the guaranty definite: It is

limited in whole or in part to theprincipal debt, to the exclusion ofaccessories.

2. Where guaranty indefinite or simple:It shall comprise not only the

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principal obligation, but also all itsaccessories, including the judicialcosts, provided with respect to thelatter, that the guarantor shall only

be liable for those costs incurredafter he has been judicially requiredto pay.

Qualifications of a guarantor: (Arts2056-2057)

1. possesses integrity2. capacity to bind himself3. has sufficient property to answer

for the obligation which heguarantees

NOTES:

The qualifications need only bepresent at the time of the perfectionof the contract.

The subsequent loss of the integrity

or property or superveningincapacity of the guarantor wouldnot operate to exonerate theguarantor or the eventual liability hehas contracted, and the contract ofguaranty continues.

However, the creditor may demandanother guarantor with the proper

qualifications. But he may waive it ifhe chooses and hold the guarantor tohis bargain.

Benefit of Excussion (Art 2058)

The right by which the guarantorcannot be compelled to pay thecreditor unless the latter hasexhausted all the properties of theprincipal debtor, and has resorted toall of the legal remedies against suchdebtor.

NOTE:

Not applicable to a contract ofsuretyship (Arts 2047, par. 2;2059[2])

Cannot even begin to take placebefore judgment has been obtainedagainst the debtor (Baylon vs CA,312 SCRA 502)

When Guarantor is not entitled to thebenefit of excussion: (PAIRS)

1. If it may be presumed that anexecution on the property of the

principal debtor would not result inthe satisfaction of the obligation

Not necessary that the debtor bejudicially declared insolvent orbankrupt

2. When he has absconded, orcannot be sued within thePhilippines unless he has left amanager or representative3. In case of insolvency of thedebtor

Must be actual

4. If the guarantor has expresslyrenounced it5. If he has bound himselfsolidarilywith the debtor

Other grounds: (BIPS)6. If he is a judicial bondsman orsub-surety7. If he fails to interpose it as adefense before judgment is renderedagainst him8. If the guarantor does not set upthe benefit against the creditor upon

the latters demand for paymentfrom him, and point out to thecreditor available property to thedebtor within Philippine territory,sufficient to cover the amount of thedebt (Art 2060)

Demand can be made only after

judgment on the debt

Demand must be actual; joiningthe guarantor in the suit againstthe principal debtor is not thedemand intended by law

9. Where the pledge or mortgagehas been given by him as specialsecurity

Benefit of Division (Art 2065)

Should there be several

guarantors of only one debtor andfor the same debt, the obligation toanswer for the same is dividedamong all.

Liability: Joint

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NOTES:

The creditor can claim from theguarantors only the shares they are

respectively bound to pay exceptwhen solidarity is stipulated or ifany of the circumstancesenumerated in Article 2059 shouldtake place.

The right of contribution ofguarantors who pays requires thatthe payment must have been made(a) in virtue of a judicial demand, or(b) because the principal debtor isinsolvent (Art 2073).

If any of the guarantors should be

insolvent, his share shall be borne bythe others including the payingguarantor in the same jointproportion following the rule insolidary obligations.

The above rule shall not beapplicable unless the payment hasbeen made in virtue of a judicialdemand or unless the principaldebtor is insolvent.

The right to contribution orreimbursement from his co-guarantors is acquired ipso jure byvirtue of said payment without theneed of obtaining from the creditorany prior cession of rights to suchguarantor.

The co-guarantors may set upagainst the one who paid, the samedefenses which have pertained tothe principal debtor against thecreditor and which are not purelypersonal to the debtor. (Art 2074)

Procedure when creditor sues: (Art.

2062) The creditor must sue the principalalone; the guarantor cannot be suedwith his principal, much less aloneexcept in Art. 2059.

1. Notice to guarantor of the action The guarantor must be NOTIFIEDso that he may appear, if he sodesires, and set up defenses hemay want to offer.

If the guarantor appears, he is

still given the benefit ofexhaustion even if judgmentshould be rendered against him

and principal debtor. Hisvoluntary appearance does notconstitute a renunciation of hisright to excussion (see Art.2059(1)).

Guarantor cannot set up thedefenses if he does not appearand it may no longer be possiblefor him to question the validityof the judgment renderedagainst the debtor.

2. A guarantor is entitled to be heardbefore and execution can be issuedagainst him where he is not a partyin the case involving his principal(procedural due process).

Guarantors Right of Indemnity orReimbursement (Art 2066)

GENERAL RULE: Guaranty is a contractof indemnity. The guarantor who makespayment is entitled to be reimbursed bythe principal debtor.

NOTE: The indemnity consists of: (DIED)

1. Total amount of the debt noright to demand reimbursementuntil he has actually paid thedebt, unless by the terms of thecontract, he is given the rightbefore making payment. Hecannot collect more than whathe has paid.

2. Legal interest thereon from thetime the payment was madeknown (notice of payment ineffect a demand so that if thedebtor does not pay

immediately, he incurs in delay)to the debtor, even though it didnot earn interest for thecreditor. Guarantors right tolegal interest is granted by lawby virtue of the payment he hasmade.

3. Expenses incurred by theguarantor after having notifiedthe debtor that payment hasbeen demanded of him by the

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creditor; only those expensesthat the guarantor has to satisfyin accordance with law as aconsequence of the guaranty

(Art. 2055) not those whichdepend upon his will or own actsor his fault for these are hisexclusive personal responsibilityand it is not just that they beshouldered by the debtor.

4. Damages if they are due inaccordancewith law. General rules ondamages apply.

EXCEPTIONS:1. Where the guaranty is

constituted without theknowledge or against the will ofthe principal debtor, theguarantor can recover onlyinsofar as the payment had beenbeneficial to the debtor (Art.2050).2. Payment by a thirdperson who does not intend tobe reimbursed by the debtor isdeemed to be a donation, which,however, requires the debtorsconsent. But the payment is in

any case valid as to the creditorwho has accepted it (Art. 1238).3. Waiver of the right todemand reimbursement.

Guarantors right to Subrogation(ART.2067) Subrogation transfers to the person

subrogated, the credit with all therights thereto appertaining eitheragainst the debtor or against thirdpersons, be they guarantors orpossessors of mortgages, subject tostipulation in conventionalsubrogation.

NOTE: This right of subrogation isnecessary to enable the guarantor toenforce the indemnity given in Art.2066.

It arises by operation of law uponpayment by the guarantor. It is notnecessary that the creditor cede to

the guarantor the formers rightsagainst the debtor.

It is not a contractual right. Theright of guarantor who has paid a

debt to subrogation does not standupon contract but upon theprinciples of natural justice.

The guarantor is subrogated byvirtue of the payment to the rightsof the creditor, not those of thedebtor.

Guarantor cannot exercise theright of redemption of hisprincipal (Urrutia & Co vsMorena and Reyes, 28 Phil 261)

Effect of Payment by Guarantor1. Without notice to debtor: (Art

2068)

The debtor may interposeagainst the guarantor thosedefenses which he could haveset up against the creditor at thetime the payment was made,e.g. the debtor can set upagainst the guarantor thedefense of previousextinguishment of the obligationby payment.

2. Before Maturity (Art 2069)

Not entitled to reimbursement

unless the payment was madewith the consent or has beenratified by the debtor

Effect of Repeat Payment by debtor:(Art 2070)

GENERAL RULE: Before guarantor paysthe creditor, he must first notify thedebtor (Art. 2068). If he fails to give

such notice and the debtor repeatspayment, the guarantor can only collectfrom the creditor and guarantor has nocause of action against the debtor forthe return of the amount paid byguarantor even if the creditor shouldbecome insolvent.

EXCEPTION: The guarantor can stillclaim reimbursement from the debtor in

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spite of lack of notice if the followingconditions are present: (PIG)

a. guarantor was preventedby fortuitous event to advise the

debtor of the payment; andb. the creditor becomesinsolvent;c. the guaranty isgratuitous.

Right of Guarantor to proceed againstdebtor before payment

GENERAL RULE: Guarantor has nocause of action against debtor until afterthe former has paid the obligation

EXCEPTION: Article 2071

NOTES: Article 2071 is applicable and

available to the surety. (ManilaSurety & Fidelity Co., Inc. vs BatuConstruction & Co., 101 Phil 494)

Remedy of guarantor:(a) obtain release from the

guaranty; or(b) demand a security that shall

protect him from anyproceedings by the creditor, andagainst the danger of insolvency

of the debtor

Art. 2066 Art. 2071Provides for theenforcement of therights of theguarantor/suretyagainst the debtorafterhe has paid thedebt

Provides for hisprotection before hehas paid but after hehas become liable

Gives a right ofaction afterpayment

Protective remedybefore payment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE2)1. Release in favor of one of the

guarantors, without the consent ofthe others, benefits all to the extentof the share of the guarantor towhom it has been granted (Art2078);

2. If the creditor voluntarily acceptsimmovable or other properties inpayment of the debt, even if heshould afterwards lose the same

through eviction or conveyance ofproperty (Art 2077);

3. Whenever by some act of thecreditor, the guarantors even though

they are solidarily liable cannot besubrogated to the rights, mortgagesand preferences of the former (Art2080);

4. For the same causes as all otherobligations (Art 1231);

5. When the principal obligation isextinguished;

6. Extension granted to the debtor bythe creditor without the consent ofthe guarantor (Art 2079)

BOND

An undertaking that issufficiently secured, and not cash orcurrency

Bondsman (Art 2082)

A surety offered in virtueof a provision of law or a judicialorder. He must have thequalifications required of aguarantor and in special laws likethe Rules of Court.

NOTES:

Judicial bonds constitute merely aspecial class of contracts of guarantyby the fact that they are given invirtue of a judicial order.

If the person required to give a legalor judicial bond should not be ableto do so, a pledge or mortgagesufficient to cover the obligationshall admitted in lieu thereof (Art2083)

A judicial bondsman and the sub-surety are NOT entitled to thebenefit of excussion because theyare not mere guarantors, butsureties whose liability is primaryand solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESISI. Common Elements of Pledge,Mortgage, and Antichresis (Articles2085 2092)

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A. Essential Requisites (SOD) (Art2085)

1. Secures the fulfillment of a principalobligation;

2. Pledgor, mortgagor, antichreticdebtor must be the absolute ownerof the thing pledged or mortgaged;and

The reason being that inanticipation of a possibleforeclosure sale in case ofdefault which is still a sale, therule is that the seller must bethe owner of the thing sold(Cavite Development Bank vs.Lim, 324 SCRA 346)

3. Pledgor, mortgagor, antichretic

debtor must have free disposal oftheir property, or be legallyauthorized for such purpose.

NOTES:

Third persons can pledge ormortgage their own property tosecure the principal obligation.

It is not necessarily void simply

because the accommodation pledgoror mortgagor did not benefit fromthe same. So long as valid consent

was given, the fact that the loan wasgiven solely for the benefit of theprincipal debtor would not invalidatethe mortgage (GSIS vs CA, 170 SCRA533)

The accommodation pledgor ormortgagor, without expresslyassuming personal liability for suchdebt, is not liable for the payment ofany deficiency, should the propertynot be sufficient to cover the debt(Bank of America vs. AmericanRealty Corporation, 321 SCRA 659).

The accommodation pledgor ormortgagor is not solidarily boundwith the principal obligor but hisliability extents only to the propertypledged or mortgaged. Should therebe any deficiency, the creditor hasrecourse on the principal debtor whoremains to be primarily bound.

The law grants to the

accommodation pledgor or

mortgagor the same rights as aguarantor and he cannot beprejudiced by any waiver of defenseby the principal debtor.

B. Prohibition against PactumCommissorium (Art 2088; 2137)

Pactum Commissorium

Stipulation whereby the thingpledged or mortgaged, or underantichresis shall automaticallybecome the property of the creditorin the event of non-payment of thedebt within the term fixed.

Requisites:

1. There should be a pledge, mortgage,or antichresis of property by way ofsecurity for the payment of theprincipal obligation; and

2. There should be a stipulation for anautomatic appropriation by thecreditor of the property in event ofnonpayment of the obligation withinthe stipulated period.

GENERAL RULE: Pactum Commissoriumis forbidden by law and is declared nulland void.

EXCEPTION: The pledgee mayappropriate the thing pledged if afterthe first and second auctions, the thingis not sold. (Art 2112)

NOTE: The security contract remainsvalid; only the prohibited stipulation isvoid.C. Capability to secure all kinds of

obligations, i.e. pure or conditional (Art 2091)

D.

Indivisibility(Art 2089)GENERAL RULE: A pledge, mortgage,or antichresis is indivisible, even thoughthe debt may be divided among thesuccessors in interest of the debtor or ofthe creditor.

Their indivisibility is not affected bythe fact that the debtors are jointlyor not solidarily liable.

Consequences of indivisibility:

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1. Single thing Every portion of theproperty pledged or mortgaged isanswerable for the whole obligation

2. Several things All of the several

things pledged or mortgaged areliable for the totality of the debt

3. Debtors heir/creditors heir -Neither the debtors heir who haspaid part of the debt cannot ask forproportionate extinguishment, norcreditors heir who received hisshare of the debt return the pledgeor cancel the mortgage as long asthe debt is not completelysatisfied.

EXCEPTIONS:

1. Where each one of

several things guarantees adeterminate portion of thecredit2. Where only a portion of the loan was released3. Where there was failureof consideration.4. Where there is nodebtor-creditor relationship

NOTES:

The mere embodiment of a real

estate mortgage and a chattelmortgage in one document does nothave the effect of fusing bothsecurities into an indivisible whole.

The mortgagee, therefore, maylegally foreclose the real estatemortgage extrajudicially and waivethe chattel mortgage foreclosure,and maintain instead a personalaction for the recovery of the unpaidbalance of the credit (Phil. Bank ofCommerce vs. Macadaeg, 109 Phil981)

E. When the principal obligationbecomes due, the things in whichthe pledge, mortgage, or antichresis consists may bealienated for the payment to thecreditor. (Art. 2087)

NOTES:

If the debtor fails to comply with theobligation at the time it falls due,

the creditor is merely entitled tomove for the sale of the thingpledged or mortgaged in order tocollect the amount of his claim from

the proceeds. If he wishes to secure a title to the

mortgaged property, he can buy it inthe foreclosure sale (Montevirgin vs.CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichreticdebtor retains ownership of thething given as a security

PLEDGE (Arts 2093 2123)

A contract wherein the debtor

delivers to the creditor or to a thirdperson a movable or documentevidencing incorporeal rights for thepurpose of securing fulfilment of aprincipal obligation with theunderstanding that when theobligation is fulfilled, the thingdelivered shall be returned with allits fruits and accessions.

Special Requisites (in addition tothe common essential requisites):

1. Possession of the thing pledgedmust be transferred to the creditoror a third person by agreement (Art2093);2. It can only cover movableproperty and incorporeal rightsevidenced by documents of title andthe instruments proving the rightpledged shall be delivered to thecreditor, and if negotiable must beendorsed (Art 2094); and3. The description of the thingpledged and the date must appear in

a public instrument to bind thirdpersons, but not for the validity ofthe contract (Art 2096).

Kinds:1. Conventional /Voluntary created by contract2. Legal created by operation oflaw (examples: Art. 546, 1731 and1914 NCC)

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NOTES:

The provisions of possession, careand sale of the thing as well as onthe termination of the pledge

governing conventional pledges areapplicable to pledges created byoperation of law (Art 2121)

Unlike, however, in conventionalpledge where the debtor is notentitled to the excess unless it isotherwise agreed, in legal pledge,the remainder of the price of thesale after payment of the debt andexpenses, shall be delivered to thedebtor.

In legal pledge, there is no definite

period for the payment of theprincipal obligation. The pledgeemust make a demand for thepayment of the amount due him;otherwise he cannot exercise theright of sale at public auction (Art2122)

Characteristics:1. Real

contract it is perfected by thedelivery of the thing pledged by thedebtor who is called thepledgorto

the creditor who is called thepledgee, or to a third person bycommon agreement;

2. Accessory contract it has no independentexistence of its own;

3. Unilateral contract it creates an obligationsolely on the part of the creditor toreturn the thing subject thereofupon the fulfilment of the principalobligation; and

4. Subsidiar

y contract the obligation incurreddoes not arise until the fulfilmentof the principal obligation which issecured.

Consideration in pledge:

Insofar as the pledgor is concerned,the cause is the principal obligation.

If the pledgor is not the debtor, thecause is the compensation stipulated

for the pledge or the mere liberalityof the pledgor.

Extent of pledge: Unless stipulated

otherwise, pledge extends to the fruits,interests or earnings of the thing.

Rights and Obligations of a PledgorRights Obligations

1. Todemandreturnin caseofreasonableground

s tofeardestruction orimpairmentof thethingwithout thepledgeesfault,subject

to theduty ofreplacement(Art2107)

2. To bidand bepreferred atthepublicauction(Art

2113)3. Toalienate thethingpledgedprovided thepledgeeconsents to

1. Toadvise

thepledgeeo

ftheflawsof

thething(A

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thesale(Art2097)

4. To ask

thatthethingpledged bedeposited(Arts2104 &2106)

rt21

01)

2. Nottodema

ndthereturn

ofthethingu

ntilafterful

lpaym

entofthedeb

t,includingi

nterestdueth

ereonandexp

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enses

incurredfor

itspreservati

on(Art2105)

Rights of the PledgeeKEY: D SBC BA2R2OPS2

1. Option to demandreplacement orimmediate payment ofthe debt in case ofdeception as tosubstance or quality (Art2109)

2. To sell at public auctionin case of reasonable

grounds to feardestruction orimpairment of the thingwithout his fault (Art

2108)3. To bring actions

pertaining to the owner(Art 2103)

4. To choose which of several things pledgedshall be sold

5. To bid at the publicauction (Art 2113)

6. To appropriate the thingin case of failure of the2nd public auction (Art2112)

7. To apply said fruits,interests or earnings tothe interest, if any, thento the principal of thecredit (Art 2102)

8. To retain excess valuereceived in the publicsale (Art 2115)

9. To retain the thing untilafter full payment of thedebt (Art 2098)

10. To be reimbursed for theexpenses made for the

preservation of the thingpledged (Art 2099)

11. To object to thealienation of the thing

12. To possess the thing (Art2098)

13. To sell at public auctionin case of non-paymentof debt at maturity (Art2112)

To choose which of the several thingspledged shall be sold (Art 2119)

14. Option to demandreplacement orimmediate payment ofthe debt in case ofdeception as tosubstance or quality (Art2109)

15. To sell at public auctionin case of reasonablegrounds to feardestruction orimpairment of the thing

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without his fault (Art2108)

16. To bring actionspertaining to the owner

(Art 2103)17. To choose which of

several things pledgedshall be sold

18. To bid at the publicauction (Art 2113)

19. To appropriate the thingin case of failure of the2nd public auction (Art2112)

20. To apply said fruits,interests or earnings tothe interest, if any, then

to the principal of thecredit (Art 2102)

21. To retain excess valuereceived

in the public sale (Art 2115)22. To retain the thing until

after full payment of thedebt (Art 2098)

23. To be reimbursed for theexpenses made for thepreservation of the thingpledged (Art 2099)

24. To object to the

alienation of the thing25. To possess the thing (Art

2098)26. To sell at public auction

in case of non-paymentof debt at maturity (Art2112)

27. To choose which of theseveral things pledgedshall be sold (Art 2119)

Obligations of the PledgeeKEY: CUDA3

1. Take care of the thingwith the diligence of agood father of a family(Art 2099)

2. Not to use thing unlessauthorized or by theowner or its preservationrequires its use (Art2104)

3. Not to deposit the thingwith a 3rd person unlessso stipulated (Art 2100)

4. Responsibility for acts of

agents and employees asregards the thing (Art2100)

5. To advise pledgor ofdanger to the thing (Art2107)

6. To advise pledgor of theresult of the publicauction (Art 2116)

RIGHT OF PLEDGOR TO SUBSTITUTETHING PLEDGED (ART.2107)

Requisites:

1. The pledgor has reasonablegrounds to fear the destructionor impairment of the thinpledged

2. There is no fault on the part ofthe pledgee

3. The pledgor is offering in placeof the thing, another thing inpledge which is of the same kindand quality as the former

4. The pledge does not choose toexercise his right to cause thething pledged to be sold at

public auctionNOTE: The pledgees right to have thething pledged sold at public sale grantedunder the Article 2108 is superior to thatgiven to the pledgor to substitute thething pledged under Article 2107.

Prohibition against double pledge

Property which has beenlawfully pledged to one creditorcannot be pledged to another as longas the first one subsists.

NOTE: Possession of a creditor of thething pledged is an essential requisite ofpledge.Extinguishment of Pledge (CRAPS)1. For the same causes as all other

obligations (Art 1231)2. Return of the thing pledged by the

pledgee to the pledgor (Art 2110)3. Statement in writing by the

pledgee that he renounces orabandons the pledge (Art 2111)

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4. Payment of the debt (Art 2105)5. Sale of thing pledged at public

auction (Art 2115)NOTE: The possession by the debtor or

owner of the thing pledged subsequentto the perfection of the pledge gives riseto a prima facie presumption that thething has been returned and, therefore,that the pledge has been extinguishedbut not the principal obligation itself.(Art 2110)

Requirements for sale of thing pledgedat public auction: (Art 2112)1. The debt is due and unpaid2. Sale must be at a public auction3. there must be notice to the pledgor

and owner, stating the amount due4. Sale must be with the intervention

of a notary public

Effect of sale of the thing pledged: (Art2115)1. The sale of the thing pledged shall

extinguish the principal obligation,whether or not the proceeds of thesale are equal to the amount of theprincipal obligation, interest andexpenses in a proper case

2. If the price of the sale is more than

the amount due the creditor, thedebtor is not entitled to the excessunless the contrary is provided

3. If the price of the sale is less, thecreditor is not entitled to recoverthe deficiency even if there is astipulation to that effect

REAL ESTATE MORTGAGE(Articles 2124-2131)

A contract whereby thedebtor secures to the creditor thefulfilment of a principal obligation,specially subjecting to such securityimmovable property or real rightsover immovable property in case theprincipal obligation is not compliedwith at the time stipulated.

Characteristics of the contract:1. Real2. Accessor y

3. Subsidiary4. Unilateral it creates only an obligation

on the part of the creditor whomust free the property from theencumbrance once theobligation is fulfilled.

NOTES:

As an accessory contract, its

consideration is that of the principalcontract from which it receives life.

A mortgage does not involve a

transfer, cession or conveyance ofproperty but only constitutes a lienthereon. Until discharged, it followsthe property wherever it goes andsubsists notwithstanding changes ofownership.

A mortgage gives the mortgagee no

right or claim to the possession ofthe property, and therefore, a meremortgagee has no right to eject anoccupant of the property mortgagedunless the mortgage should containsome provision to that effect. The

only right of a mortgagee in case ofnon-payment of a debt secured bymortgage would be to foreclose themortgage and have the encumberedproperty sold to satisfy theoutstanding indebtedness. If thepossession is transferred to themortgagee, it must not expressly befor purpose of applying the fruits tothe interest then to the principal ofthe credit, for then it would be anantichresis.

It is not an essential requisite that

the principal of the mortgage creditbears interest, or that the interestas compensation for the use of theprincipal and enjoyment of its fruitsbe in the form of a certain percentthereof.

Special Requisites (in addition tothe common essential requisites):1. It can cover only immovableproperty and alienable real rights

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imposed upon immovables (Art2124);2. It must appear in a publicinstrument (Art. 2125); and

3. Registration in the registry ofproperty is necessary to bind thirdpersons, but not for the validity ofthe contract (Art 2125). An order for foreclosure cannot

be refused on the ground thatthe mortgage had not beenregistered provided no innocentthird parties are involved.

NOTE: Where a mortgage is not valid orfalse, the principal obligation which itguarantees is not rendered null and void.What is lost only is the right to foreclose

the mortgage as a special remedy forsatisfying or settling the indebtednesswhich is the principal obligation but themortgage deed remains as evidence orproof of a personal obligation of thedebtor and the amount due to thecreditor may be enforced in an ordinarypersonal action.

Kinds:1. Voluntary agreed to by theparties or constituted by the will ofthe owner of the property on which

it is created2. Legal one required by law to beexecuted in favour of certain persons

The persons in whose favour thelaw establishes a mortgage haveno other right than to demandthe execution and the recordingof the document in which themortgage is formalized (Art 2125par 2)

3. Equitable one which, althoughlacking the formalities of a

mortgage, shows the intention of theparties to make the property asecurity for a debt

PLEDGE REAL MORTGAGE1. Constituted onmovables

1. Constituted onimmovables

2. Property isdelivered to pledgeeor by commonconsent to a thirdperson

2. Delivery is notnecessary

3. Not valid againstthird persons unless adescription of thething pledged anddate of pledge

appear in a publicinstrument

3. Not valid againstthird persons unlessregistered

Extent of Mortgage:

Absent express stipulation to thecontrary, the mortgage includes theaccessions, improvements, growingfruits and income of the propertynot yet received when the obligationbecomes due and to the amount ofthe indemnity granted or owing tothe proprietor from the insurers ofthe property mortgaged, or in virtueof expropriation for public use (Art2127)

Object of Mortgage:

Future property cannot be an objectof a contract of mortgage (Art2085[2]) However, a stipulationsubjecting to the mortgage lien,properties (improvements) which themortgagor may subsequently acquireinstall, or use in connection withreal property

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