CREDIT TRANSACTIONS REVIEW

Introduction and Framework

BAILOR the one who lends a thing;

Need not be the owner but must have
possessory interest in the SM

Lessee (1643, 1650)

Usufructuary (562)

The bailor is not required to be the owner but he must

have legal possession.

BAILEE the one who borrows the thing

BAR 2007
The parties to a bailment are:
A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters a and B
Answer: E
PART ONE: Contracts of Loan
LOAN
Concept 1933

By the contract of loan, one of the parties delivers

to another, either something not consumable so
that the latter may use the same for a certain time
and return it, in which case the contract is called a
commodatum; or money or other consumable
thing, upon the condition that the same kind and
quality shall be paid, in which case the contract is
simply called a loan or mutuum.

Role of delivery
1934 delivery of the subject matter is required
for perfection of the contract.
Producers vs. CA (2003 case)
FACTS: Vives was asked by his friend Sanchez to help her
friend Doronilla, in incorporating his business, the Sterela
Marketing and Services (Sterela), by depositing in a bank a
certain amount of money in the bank account of Sterela.
Angeles assured Vives that he could withdraw his money
from said account within a months time. Vives issued a check
in the amount of P200,000.00 in favor of Sterela.
Upon
learning that Sterela was no longer holding office in the
address previously given to him, Vives went to the Bank to
verify if their money was still intact. He learned that the money
in the account had been withdrawn by Doronilla, and that only
P90,000.00 remained therein.
Vives instituted an action for recovery of sum of money.
Topical Outline

CREDIT TRANSACTIONS, IN GENERAL

Concept

Include all transactions involving the purchase

or loan of goods, services or money in the
present with a promise to pay or deliver in the
future

Parties

ISSUE: Whether or not the transaction between Doronilla and

Vives was one of simple loan
RULING: The transaction between Vives and Doronilla was a
commodatum and not a mutuum.
Article 1933 of the Civil Code seems to imply that if the
subject of the contract is a consumable thing, such as money,
the contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a
consumable thing.
Article 1936 of the Civil Code provides: Consumable
goods may be the subject of commodatum if the purpose
of the contract is not the consumption of the object, as
when it is merely for exhibition.
The rule is that the intention of the parties thereto shall be
accorded primordial consideration in determining the actual
character of a contract. In case of doubt, the contemporaneous
and subsequent acts of the parties shall be considered in such
determination.
In this case, the evidence shows that Vives agreed to
deposit his money in the savings account of Sterela specifically
for the purpose of making it appear that said firm had
sufficient capitalization for incorporation, with the promise that
the amount shall be returned within thirty (30) days. Vives
merely accommodated Doronilla by lending his money
without consideration, as a favor to his good friend Sanchez. It

was however clear to the parties to the transaction that the

money would not be removed from Sterelas savings
account and would be returned to private respondent after
30 days.

Loss due to
GENERALLY: YES GENERALLY: NO,
fortuitous event
unless exceptions
Respect the
period

YES. Unless (a)

urgent need; (b) act
of ingratitude under
765; precarium

Extraordinary expenses expenses not expected, expenses

not on a regular basis
Loss due to fortuitous event

EXCEPTIONS:P-W-D-L

COMMODATUM

Concept

Contract where bailor delivers to bailee a nonconsumable thing so that bailee may use it for
a certain time and return the identical thing

Lease v. Commodatum
If there is consideration in money for the use of
the SM - contract is NOT commodatum but is a
contract of lease

PURPOSE- uses for purpose different from the

agreed one
DELAY - keeps it longer than the period stipulated
or after the accomplishment of the purpose
WITH APPRAISAL - SM was delivered with
appraisal of its value unless there is a stipulation
exempting the bailee from loss in case of
fortuitous event

LENDING TO 3RD PERSON- lends or leases the

SM to a 3rd person not a member of his household

Q: In this case, is the house maid a member of the

household?
A: No, it does not extend to the house maid. It refers to
family members based on the premise that a commodatum
is based on
trust

DOES NOT SAVE - being able to save the SM

borrowed or his own thing, he saves the latter

Right to Possession of SM

1951 Bailee cannot retain the SM unless bailor

failed to warn him of hidden defects and he suffers
damages as a consequence
Bailee has no right to retain except there are hidden
defects known to the bailor and the bailor did not inform the
bailee
Example of hidden defect: a car with no brake
ARTICLE 1933 By the contract of loan, one of the parties
delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it,
in which case the contract is called a commodatum; or
money or other consumable thing, upon the condtion that
the same amount of the same kind and quality shall be paid,
in which case the contract is simply called a loan or mutuum
ARTICLE 1947 The bailor may demand the thing at will,
and the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
Parties Obligations

Ordinary
expenses for
use and
preservation
Extraordinary
expenses not
due to his fault
while using
Extraordinary
expenses for
preservation
Not ordinary,
not
extraordinary
expenses

Bailor

Bailee
YES

YES 50%

YES 50%

YES If with notice

OR even if without if
notice will cause
delay
NO
YES

1952- Bailor cannot escape expenses by simply

abandoning the SM to the bailee

Simple abandonment will not exculpate bailor from

damages
BAR 2005

A left his adventure van to B before he left to work

abroad. The parties agreed that B can use the van for 1
year. A did not tell B that the vans brakes are faulty. B had
the brakes repaired and the van tuned up, spending
P15,000. B discovered that the van consumed too much
fuel. Hence, he leased the van to C. Two months later, A
returned and asked B to return the van. However, the van
was damaged while B was using it, without his fault
(a)
(b)
(c)

Who shall bear the P15,000 spent for van repair?

Who shall bear the cost of the vans fuel?
Does A have the right to get the van before the lapse
of one year?
ANSWER
(a)
Breaks (extraordinary) A
Tuneup (ordinary) B
(b) Fuel (ordinary) B
(c) A cannot demand return before the period unless he
has urgent need of the van
SIMPLE LOAN
Concept

Lender delivers to borrower money or other

consumable upon the condition that the latter shall pay the
same amount of the same kind and quality

The Debtor

Has ownership of money received or other fungible

thing

Must pay the creditor an equal amount of the same

kind and quality

Is liable for loss of money or thing

The debtor must pay an equal amount, unless there is a

contrary stipulation.
In commodautm, ownership is retained by the bailor
and the loss is borne by the bailor.

INTEREST

GENERAL RULE: 1956 no interest shall be due

unless it has been expressly stipulated in writing and is
lawful
As to being lawful, such is not applicable for now
because the Usury Law has been legally suspended.
Exceptions
Indemnity for damages debtor in delay must
pay legal interest even if there is no stipulation

Interest accruing from unpaid interest interest

due shall earn interest from the time it is judicially
demanded although the obligation may be silent on
this point (2212)

UPDATE as to Legal Interest:

The Supreme Court has recently promulgated a decision
modifying the rule on interest rates awarded in the form of
actual and compensatory damages.
In a decision penned by Justice Peralta, the Supreme Court
in Nacar vs. Gallery Frames, G.R. No. 189871 (13 August
2013), laid down a uniform rate of six percent (6%) for the
award of interest in the form of actual and compensatory
damages. The foregoing rate shall take effect on 01 July
2013.
The Supreme Courts pronouncement in Nacar vs. Gallery
Frames modified the previous guidelines laid down in
Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No.
97412 (12 July 1994). Previously, in Eastern Shipping
Lines, Inc. vs. Court of Appeals, the Supreme Court held
that for loans and forbearance of money, in the absence
of stipulation, the rate of interest shall be twelve percent
(12%) while for obligations not constituting a loan or
forbearance of money, the rate of interest shall be six
percent (6%). When the judgment of the court becomes
final and executory, the rate of interest shall be twelve
percent (12%) since it is akin to a forbearance of money.
Now, with Nacar vs. Gallery Frames, the interest rate,
regardless of the source of the obligation, is pegged at
a uniform rate of six percent (6%).
The Supreme Court further held in Nacar vs. Gallery
Frames that for judgments which became final and
executory prior to 01 July 2013, they shall not be disturbed
and shall continue to apply the rates provided for therein.
BAR 2002

Carlo sues Dino for

(a) collection on a promissory note for

a loan, with NO agreement on interest on which
Dino defaulted

With respect to the amount covered by a

promissory note, an interest of 12% per annum may
be imposed since it is a forbearance of money
With respect to damages, it is 6% from the time of
final demand until finality of judgment and 12% of the
amount from final judgment until the debt is fully paid

(b) damages caused by Dino on Carlos

priceless painting on which Dino accidentally
spilled acid while transporting it.

The court finds Dino liable for both obligations.

What rates of interests may the court impose?

ANSWER

INTEREST

Contracting parties may stipulate freely on any

adjustment in the interest rate on a loan or forbearance of
money.

However, the law does not authorize increase of

interest rate by one party without the other partys
consent.

Any change of interest must be mutually agreed by

the parties

BAR 2001

A obtained a P300,000 housing loan from X Bank at

18% per annum interest. The promissory note provides
that X reserves the right to increase the interest within the
limits allowed by law. X Bank increased the interest to
48% per annum. When A questioned the increase in
court, X argued that the usury law is already legally
suspended. Will the action prosper? Why?
ANSWER

The action will prosper. While it is true that

interest ceilings set by the Usury law are no longer in
force, the court may still reduce interests which are
unconscionable.

Contracting parties may stipulate freely on any

adjustment in the interest rate on a loan or
forbearance of money.

However, the law does not authorize increase of

interest rate by one party without the other partys
consent.

So, if the bank increased to interest rate to 30%, it must

still be mutually agreed upon.

Any change of interest must be mutually agreed

by the parties

INTEREST

1960 - If debtor pays interest when there is no

stipulation therefor, the provisions on solutio indebiti
or natural obligations will apply (debtor may recover)
KINDS OF INTEREST

SIMPLE paid for the principal at a certain rate

fixed or stipulated by the parties

COMPOUND that which is imposed upon

interest due and unpaid. The accrued interest is added
to the principal sum and the whole (principal and
interest) is treated as the new principal upon which
the interest for the new period is calculated

LAWFUL that which the law allows or does not

prohibit, the maximum rate of interest prescribed by
law

UNLAWFUL OR USURIOUS that which is paid or

stipulated to be paid beyond the maximum fixed by
law
COMMODATUM vs. MUTUUM

BASIS

COMMODATUM

MUTUUM

SUBJECT
MATTER

Non-consumable Money or consumable

NATURE

Essentially
gratuitous

Gratuitous or onerous

PURPOSE

Use or temporaryFor consumption

possession

Qualifications of a guarantor
1. Person who possesses INTEGRITY
KIND
OFReal or personal Personal property
2. Has the CAPACITY TO BIND himself
PROPERTY
3. Has SUFFICIENT PROPERTY to answer for the
INVOLVED
obligation he guarantees (2056)
RISK OF LOSS Lender or bailorTransfer of ownership to
retains ownership borrower
Grounds for disqualification
1. Insolvency OR
TIME
OFEnd
of
periodEnd of period
2. Conviction of a crime involving dishonesty
PAYMENT
unless
urgent
need,
acts
of
NOTE: If creditor did not choose the guarantor, he may
ingratitude
or
demand a replacement guarantor (2056)
precarium
CHARACTER OFPurely personal
Not personal
If debtor chose the guarantor, the creditor can ask for a
THE CONTRACT
replacement. The creditor has a right to ask for a replacement
which he may or may not exercise.
BAR 2004
If it was the creditor who chose the guarantor, he cannot
Distinguish briefly but clearly between mutuum
ask for a replacement and must suffer the consequences
and commodatum
thereof.
PART TWO: U N S E C U R E D L O A N S
2 Kinds of Unsecured Loans
1. guaranty
2. suretyship
Differentiate this from a secured loan a secured loan
is assured of payment. If full payment is not certain, a
particular property is secured in case non-payment of such
loan.
GUARANTY

By guaranty, a person called the guarantor,

binds himself to the creditor to fulfill the
obligation of the principal debtor in case the
latter should fail to do so (2047)
SURETYSHIP

Relationship where one person undertakes to

ensure the performance of an obligation of
another person
SIMILARITY between guaranty and suretyship

Both promise or undertake to answer for a

debt, default or miscarriage of another person
Both are accessory contracts.
DIFFERENCE between guaranty and suretyship
GUARANTOR

SURETY

Liability depends on
He assumes liability as a
independent agreement
regular party to the
to pay the principals
contract
obligation should he fail
to do so
Obligation is secondary
Obligation is primary
Undertaking is to pay if
Undertaking is to pay if
principal debtor cannot
principal debtor does not
pay
pay
An insurer of the
Insurer of a debt
solvency of the debtor
Entitled to excussion
No excussion
Main distinctions of guaranty & suretyship:
Extent of liability & presence or absence of excussion
Take note that in a guaranty, the principal debtor cannot
pay. This means that the principal debtor is unable to pay
for he has no assets to pay his liability. In surety, there is no
need to establish that the principal debtor cannot pay his
debt.
There can be a guaranty of:
1. A voidable contract
2. An unenforceable contract
3. A natural obligation
4. Future debts
5. Conditional obligations

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.
If guaranty is without the knowledge or consent or against
the will of the debtor (2050)
Guarantor:

can only recover in so far as payment was

beneficial to the debtor

cannot compel subrogation to the creditors

rights
ARTICLE 2050 If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of Article 1236 and 1237 shall apply.
ARTICLE 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfilment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the knowledge
or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.
ARTICLE 1237 Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty or penalty.
If a there is a guarantor and pays in behalf of the debtor
but against the will of the debtor, only the principal amount can
be collected from the said debtor.
Dynamics of guaranty

Effects of guaranty
1. Between the creditor and guarantor
2. Between the debtor and guarantor
3. Between the co-guarantors
1. Between Creditor and Guarantor: BENEFIT OF
EXCUSSION

The guarantor cannot be compelled to pay the

creditor unless the latter has exhausted all the

property of the debtor and has resorted to all

legal remedies against the debtor (2058)
The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and has resorted to all
legal remedies against the debtor (2058)
Illustration (2064)

CREDITOR

DEBTOR

Exussion

If debtor did not know that there was a guarantor and the
guarantor paid the debt, the guarantor can collect only in so far
that the debtor was benefited. As such, the guarantor can only
collect the total amount of the debt.
Rights of the Guarantor Who Paid
Subrogated to all rights of the creditor

In case of compromise cannot collect more than

what he paid

If he pays before due date, cannot collect earlier

than due date unless payment was ratified by the
debtor

Guarantor
Exussion
Sub-Guarantor

ARTICLE 2064 The guarantor of a guarantor shall enjoy the

benefit of excussion, both with respect to the guarantor and
to the principal debtor
How excussion is used

When the debtor is sued, the guarantor must be

notified of the action so that he may set up
excussion as a defense (2062)

Remember permissive joinder of parties in Civil

Procedure. In accordance with due process, the guarantor
must be informed that he is sued and that right to excussion
must first be exercised.cfs

Guarantor points out to the creditor available

property of the debtor within the Philippines
(2060)
After guarantor points to debtor's property and
creditor neglects to exhaust the properties he
shall suffer the loss to the extent of the value of
the properties (2061)

Excussion shall not take place

Guarantor has expressly renounced it

Guarantor has bound himself solidarily with the

debtor

Case: The title of the contract was Contract of

Guaranty. But in the contract, it was stipulated that the
guarantor bound himself solidarily. Thus, this falls under
exception # 2 wherein excussion shall not take place.

Insolvency by the debtor

Debtor has absconded, or cannot be sued within

the Philippines unless he has left a manager or
representative

If it may be presumed that an execution on the

property of the principal debtor would not result
in the satisfaction of the obligation

2. Between the debtor and guarantor: INDEMNITY

- collect, reimburse, indemnify
Debtor & Guarantor not a loan or forbearance
Debtor & Creditor loan or forbearance
Indemnity

total amount of the debt

legal interests from time payment was

demanded till payment

expenses by guarantor after

demanding payment from debtor

damages, if they are due

Guarantor pays without notice to the debtor

2068 - Debtor may set up all defenses debtor can

set up against the creditor

Defenses minority, extinguishment etc.

Repeat Payment Rule

Guarantor pays without notifying debtor
Debtor repeats payment

RULE: guarantor has no remedy against the

debtor but only against the creditor

EXCEPTION: debtor must reimburse if

gratuitous guaranty;

guarantor was prevented by fortuitous

event from notifying debtor; and

creditor becomes insolvent

Conditions must be cumulative. All conditions must be

present so as to fall within the exception. Absence of one, the
guarantor cannot recover from the principal debtor but instead
recover from the creditor.
Guarantor of an absent 3rd person (2072)

A person requests another to guarantee a debt

Debt belongs to an absent third person
Guarantor pays the debt
Guarantor may collect either from the person
requesting or the absent debtor

In this case, there is double relief.

Guarantor may ask for release or additional security
(alternative)

when guarantor is sued for payment

principal debtor is insolvent
debtor bound himself to relieve him from the
guaranty and the period has expired
debt has become demandable due to
expiration of period for payment
principal obligation has no fixed period
and after the lapse of 10 years
reasonable grounds to fear absconding
of debtor
when the debtor is in imminent danger of
being insolvent

Among co-guarantors
2073

There are 2 or more guarantors of the same

debtor
same debt
one of the co-guarantors pays
payment is made by judicial demand OR
principal debtor is insolvent

General rule: If there are 2 or more guarantors, they divide

equally, unless there is contrary stipulation

Novation without guarantors consent which

materially affects the obligation
Extension of period to pay without guarantors
consent (2079)

Take note that it is possible that the guaranty is

extinguished before the principal obligation is paid. It is
possible that the guaranty is extinguished and yet the principal
obligation still stands.

Concurring vs. Sub-guaranty

Insolvent co-guarantor

Example of novation: There was an increase in interest.

This is a novation which materially affects the obligation of the
guarantor. Hence, that may cause the extinguishment of the
guarantee.
In other case, the interest rate was decreased. There was
novation because there was a change.
When we talk about materially affects, it is to the
disadvantage of the guarantor. Just because there is novation,
it does not mean that the guaranty is extinguished. It must be
established that the novation is now to his disadvantage. If
there is decrease in interest rate, then, there is no problem.
He remains to be a guarantor.
Extension of period to pay without guarantors consent
you must not think of any other qualification. You do not have
to consider if advantageous or disadvantageous to the
guarantor. The longer the period to pay, the greater the
probability of the debtor becoming insolvent, which then makes
the guarantor liable.
If the period is extended, it is
advantageous to the debtor but disadvantageous to the
guarantor.
When there is extension, the guaranty is
extinguished unless there is consent from the guarantor.
PART THREE: Secured Loans - PLEDGE

G1 pays
G2 is insolvent
G1 and G3 pay P300,000 each

CONCEPT

It is a contract by virtue of which the debtor

delivers to the creditor or to a third person a movable
or document evidencing incorporeal rights for the
purpose of securing the fulfillment of a principal
obligation with the understanding that when the
obligation is fulfilled the thing shall be returned with
all its fruits and accessions.
It is possible that the pledgor is not the debtor.

Insolvent guarantor has a sub-guarantor

Security/Mortgage is a good evidence of existence of a

principal obligation
ESSENTIAL REQUISITES, 2085

constituted to secure the fulfillment of a

principal obligation

G1 pays
G2 is insolvent
G1, SG2 and G3 pay P200,000 each
Co-guarantor is released by creditor
If WITH consent of co-guarantors, they will bear
the share of released guarantor
If WITHOUT the consent of co-guarantors, they
will NOT bear the share of the released coguarantor
Insolvency is just one form of defense. Other forms of
defense minority, extinguished obligation.
If the obligation is extinguished, it is a defense which
can be claimed by all co-guarantors. But minority is
personal in character and can only be claimed by the minor.
EXTINGUISHMENT OF GUARANTEE
Grounds
Payment of principal obligation

pledgor is the absolute owner of the thing

(Cavite v. Lim)

The pledgor must be the absolute owner of the thing. If he

is not the owner of the thing at the time the thing was pledged
but he eventually became the owner thereof, still, it is not a
valid pledge.

pledgor has the free disposal of their

property or are legally authorized to do so

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.
ESSENTIAL REQUISITES

the property must be placed in the

possession of the creditor (2093)

In pledge, the delivery of the movable is essential. In

chattel mortgage, what is essential is the registration in the
Chattel Mortgage Registry.

the description of the thing and the

date of the pledge must be in a public instrument to
bind 3rd persons (2096)

No Double Pledge

A property already pledged cannot be pledged

again while the first pledge is still subsisting
(Mission de San Vicente v. Reyes, 19 Phil 524)
There can be no double pledge because you cannot
deliver to 2 separate individuals one object.
PARTIES

PLEDGOR the debtor or a third person who

pledges the subject matter to secure the loan of the
debtor; he must be the owner and must have free
disposal of the property or at least must be
authorized to dispose
PLEDGEE - creditor

NOTE: The pledgor may or may not be the

debtor (2083, 2nd paragraph)

Take care of the thing with the diligence of a good

father of a family, subject to reimbursement (2099)

Cannot deposit the thing with a 3rd person and is

bound by his agents acts (2100)

Liable for loss and deterioration (2099)

To use the thing to preserve it (2099)

Example: warming up the car

To retain possession of the thing until fulfillment

of the obligation (2098)

Reimbursement for expenses to preserve the

thing (2099)

May file actions to recover it from or defend it

against 3rd persons (2103)

In case of fear of destruction or impairment

without the fault of the pledgee, may cause the sale in
a public auction (2108)

of

If he is deceived as to substance or quality of the

thing may ask for replacement OR demand immediate
payment (2109)

PLEDGOR

Future property cannot be pledged (Gen.

Insurance v. Masakayan, 54 SCRA 120)

The pledgor can still sell the thing. The pledge does not
lose
ownership over the thing. He must ask permission
from the mortgagee/pledge.

A mortgagee has the right to rely upon the title

and does not have to inquire further, unless
mortgagee is a banking institution (GSIS v. CA,
287 SCRA 204)

But in case of banking institutions, it is not enough that

it relies upon the title. It must conduct credit investigations.

A co-owner may pledge his portion of the thing

(PNB v. CA, 98 SCRA 207)

Rights and Obligations

May dispose of the thing, with the consent of the

pledgee and with the thing still subject to the pledge
and in the possession of the pledgee (2097)

GENERAL RULE: indivisible

Debtor who pays part of the debt cannot ask for

proportionate extinguishment of the pledge

Obligations
To appropriate fruits, income, dividends or
interest of thing with those which are owing him,
and if none, to apply it to the principal (2102)

In case of unauthorized use or misuse by

pledgee, may ask judicial or extrajudicial deposit of
thing (2104)

Loss or Impairment

If the pledgee is negligent - may ask for deposit

with 3rd person (2106)

EXCEPTION: where several things are given in

pledge and each thing guarantees only a
determinate portion of the credit

PLEDGEE

Must advise the pledgee of hidden flaws of the

thing otherwise shall be liable for damages (2101)

This has a counterpart in commodatum if there is

damage,
the bailee can retain the thing and the bailor
cannot abandon.

NATURE (2089)

Remember this because there is a counter part in the right

a pledgor.

2095 - incorporeal rights, evidenced by

negotiable instruments, bills of lading, shares of
stocks, bonds, warehouse receipts and similar
documents. The instrument must be delivered to
the pledgee and properly indorsed.

Liable for loss and deterioration (2099)

Rights

Cannot deposit the thing with a 3rd person and is

bound by his agents acts (2100)

A pledge executed before a person becomes

the owner is VOID (vda de bautista v. marcos, 3
SCRA 434)

SUBJECT MATTER

2094 - all movables which are within the

commerce of man provided they are susceptible of
possession

If without fault of pledgee - may demand return of

thing and offer a replacement (inferior to right to sell
by pledgee) (2107)
The right to sell is superior to the right to retun.

Extinguishment of Pledge

If the thing pledged is returned by pledgee to the

pledgor (2110)
If the thing is delivered to the pledgor and in which the
pledgor has possession thereof, the pledge is deemed
extinguished.

A statement in writing by the pledgee that he

renounces or abandons his pledge (2111)

Extinguishment of the pledge does not necessarily

mean that the principal obligation is fulfilled
When the debtor defaults
Obligation is due and unpaid
Sale of thing at a public auction
Notice to the pledgor and owner stating the
amount for which the sale is to be held
Sale must be conducted by a notary public
After the sale, pledgee must advise the pledgor
of the results
Public Auction

Pledgor - may bid and if he offers the same

terms as highest bidder, he is preferred (2113)

Pledgee - may bid but not if he is the only

bidder (2113, 2nd par.)

General Rule: Pledgee can participate in the public

auction but
not if he is the loan bidder

all bids shall offer to pay the purchase price at

once (2114)

Deficiency - pledgee cannot collect the balance

(2115)

Excess - debtor is not entitled to the excess

unless the contrary is provided (2115)

It is different in Chattel Mortgage. The creditor can get

the balance and the debtor can get the excess.

Can the creditor appropriate the thing to himself in case

of non-payment?
NO. Creditor cannot appropriate the thing
pledged to himself or dispose of them. Any
stipulation to the contrary is VOID (2088).

Such
stipulation
commissorium

is

called

pactum

Pactum commissorium is prohibited

Elements of Pactum
There should be a pledge, mortgage, or
antichresis of property by way of security for
the payment of the principal obligation;

There should be stipulation for an automatic

appropriation by the creditor of the property in
the event of non-payment of the obligation

There is pactum
Stipulation that the thing shall be considered in
full payment of the debt without further action
(Northern Motors v. Herrera)

Stipulation in a pacto de retro sale that

ownership over the thing will automatically
pass to the vendee in case there is no
redemption (Lanuza v. De Leon)

Case: It is not pactum commissorium if ordered by the

court
Exception to Pactum
After 2 auction sales and there are no bidders,
pledgee may appropriate the thing to himself
BUT he must give an acquittance of the entire
claim (2112)

BAR 2004

ABC loaned to MNO P40,000 for which the latter

pledged 400 shares of stocks in XYZ Corp. The parties
agreed that if pledgor failed to pay the loan with 10%
yearly interest within four years, the pledgee is
authorized to foreclose on the shares. MNO delivered
possession of shares to ABC with understanding that
the shares will be returned to MNO upon payment of
loan. However, the loan was not paid on time.

A month after 4 years, may the shares be deemed

owned by ABC?

ANSWER

NO. The shares of stocks cannot be deemed

owned by ABC. The pledge has to be foreclosed.
Under the law, the creditor cannot appropriate the
things given by way of pledge. Even if the parties
agreed that ABC will automatically own the shares
upon MNOs default, that constitutes pactum
commissorium, which is a void agreement.
BAR 2001

To secure a loan from a rural bank, A assigned her

leasehold rights over a public market stall in favor of
the bank. The deed of assignment provides that in
case of default in the loan payment, the bank shall
have the right to sell Puritas rights over the stall as
her attorney in fact and to apply the proceeds to the
payment of the loan.
Was the assignment of rights a mortgage or
cession?
Assuming it is a mortgage, does the
provision giving the bank the power to sell the stall
constitute pactum commissorium?
ANSWER

The assignment was a mortgage not a cession of

the leasehold rights.
A cession would have
transferred ownership to the bank. However, the grant
of authority to the bank to sell the stall is proof that no
such ownership was transferred and that a mere
encumbrance was constituted. There would have
been no need for the authority if there was cession.

No. The clause does not constitute pactum

commissorium. It is pactum when non-payment of
loan automatically vests to the bank ownership of the
encumbered property. In this case, the bank merely
has the right to sell the rights to the stall and to apply
the proceeds to the loan.

BAR 1999

X borrowed money from Y and gave a piece of

land as security by way of mortgage. It was expressly
agreed in the mortgage contract that upon nonpayment of the loan, the land will already belong to Y.
If X defaulted in the payment of loan, will Y now own
the land? Why?
ANSWER

No. Y would not become the owner of the land.

The stipulation is in the nature of pactum
commissorium, which is prohibited by law. The
property should be sold at a public auction and the
proceeds thereof paid to Y.
BAR 1999

Suppose in the preceeding question, the

agreement is that if X failed to pay the loan, the debt
shall be paid with the land mortgaged by X to Y. Would
your answer be the same? Explain.
ANSWER

No, my answer would not be the same. This is a

valid stipulation and does not constitute pactum
commissorium.
In pactum, the acquisition is
automatic without need of further action. In the
second situation, another act is required to be
performed, namely, the conveyance of property as
payment (dacion en pago).
was

Pactum commissorium at the time of that the obligation

secured, it was already stipulated

Dacion en pago after the fact

Legal Pledges

Provisions on possession, care and sale of the

thing pledged cover legal pledges (2121)

Art. 546 right of possessor in good faith to

refund of necessary expenses before he returns the
thing

Art. 1707 lien on goods manufactured or work

done by laborer until his wages are paid

Art. 1731 right to retain by a worker who

executed work on a movable

Art. 1914 right of an agent to retain the thing

until he is reimbursed advances and damages

Art. 1994 right of retention of a depositary

until he is paid his fees

Art. 2004 right of a hotelkeeper to retain

properties of the guest until his bills are paid

Essential requisites in Chattel Mortgage:

Article 2085 + registration/recording of the Chattel
Mortgage
in the Chattel Mortgage Registry
BAR 2003

X constructed a house on Ys land. X executed a

CM over the house in favor of Y. X purchased the lot
from Y. X then executed a real mortgage over the
property in favor of A bank. When A was able to
foreclose the mortgage, Y demanded that A satisfy the
debt of X and to honor the CM between X and Y. Is this
demand against A valid and sustainable? Why?
ANSWER

Ys demand is not valid. The CM is void because it

was not registered with the CM Registry. Hence, A
Bank does not have any obligation to Y.
Effect of Registration
Registration is binding notice to other creditors of
its existence and creates a real right or a lien
which follows the chattel whenever it goes

Pawnshop Regulation Act

Capitalization P100,000

Citizenship 70% Filipino

Amount of loan not less than 30% of the

propertys value unless pawner manifests in writing
desire to loan a smaller amount

Redemption within 90 days from maturity of

obligation
Notify owner of sale on or before end of 90-day
period

Under control of licensed auctioneer

Subject Matter

Always personal or movable property

Covers only property described in the CM and not

like or substituted property thereafter acquired by the
mortgagor and placed in the same depositary as the
property originally mortgaged (Sec. 7, par 4 Act 1508)

Description of the property must be such to

enable parties to identify the same after a reasonable
investigation and inquiry (Saldana v. Phil Guaranty,
106 Phil 919)

Notice once in at least two daily newspapers in

the city of operation

PART FOUR: Secured Loans CHATTEL MORTGAGE

Concept
2140 by a chattel mortgage, personal property
is recorded in the Chattel Mortgage Register as
a security for the performance of an obligation.

If the movable, instead of being recorded is

delivered to the creditor or a third person, the
contract is a pledge, not a chattel mortgage.

Essential Requisites

Mortgage of Motor Vehicle

Under the Revised Motor Vehicle Law, when the
subject matter of a chattel mortgage is a vehicle,
the CM must not only be registered with the CM
registry must also with the Land Transportation
Office or LTFRB in cases of public utility vehicles
in order to BIND THIRD PERSONS (Borlough v.
Fortune)

Public auction in place of business or public

place within territorial limits where the pawnshop
operates

Art. 2085
constituted to secure the fulfillment of a
principal obligation
pledgor is the absolute owner of the thing

persons constituting the pledge have

the free disposal of their property or are legally
authorized to do so

personal property must be recorded in

the chattel mortgage registry (2140)

The lien of a chattel mortgagee over the property

is superior to the levy made by an assignee of the
unsecured judgment creditor of the chattel
mortgagor (Northern v. Coquia, 68 SCRA 374)

Interest in business

Shares of stocks in a corporation

Machinery installed in a leased land treated by the

parties as personal property
House intended to be demolished

Affidavit of Good Faith

An oath in a contract of CM wherein the parties

severally swear that the mortgage is made for the
purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that
the same is a just and valid obligation and not one
entered into for the purpose of fraud (Section 5,
Chattel Mortgage Law)
Absence of Affidavit of Good Faith

Absence only vitiates the mortgage as to 3rd

persons without notice like creditors and subsequent
encumbrancers (PRC v. Jarque, 61 Phil 229)
The counterpart of affidavit of good faith in pledge is
description
Period to foreclose the CM

After 30 days from the time the condition is

broken

The 30-day period is the minimum period with

at least 10 days notice to the mortgagor and
posting of public notice of time, place and purpose
of the sale (Cabral v. Evangelista, 28 SCRA 1000)

CM in
favor of
A dated
June 1,
2000

Extrajudicial Foreclosure

CM in
favor of
B dated
July 1,
2000

Attachment by
judgment creditor C on
July 15, 2000

1st Mortgagee - Creditor A he can foreclose the

chattel mortgage in case of default

2nd Mortgagee Creditor B he can redeem the

property by paying A the mortgage debt. He can now
appropriate the property to himself
This is not pactum commissorium because this is not an
automatic appropriation.

Replevin

Action which must be initiated by the creditor if

he cannot obtain possession of the property for
purposes of sale on foreclosure (Filinvest v. CA)

Proceeds of the Sale

Costs and expenses of keeping and sale

demand or obligation secured by the CM

subsequent mortgagees

mortgagor

Right of Redemption
Available in extrajudicial foreclosure

Done by paying the mortgagee the amount due

on such mortgage and the costs and expenses
incurred by such breach of condition before the
sale thereof OR
If after the sale, done by paying the winning
bidder the purchase price and all costs within
one year from date of registration of certificate
of sale

Attaching Creditor Creditor C he can redeem the

property by paying A the mortgage debt. He acquires
the right to foreclose and not the right to own the
property

Debtor can also redeem the property by paying

the mortgage debt and get the property back

Right to Deficiency
Mortgagee can recover deficiency

Exception: when the chattel mortgage was

instituted to secure the purchase of a property on
installment (Recto Law)

In Chattel Mortgage, the debtor has a right to get the

balance except if the Recto law (purchase of personal property
on installment) is applicable. The counterpart of the Recto law
in real property is the Maceda law.
Right to Excess
Since there is no express prohibition under the
law, the chattel mortgagor is presumed to have
the right to the excess of the purchase price over
the debt
Criminal Cases in Chattel Mortgage
Article 319 of the RPC

knowingly
removing
any
personal
property mortgage under the Chattel
Mortgage Law to any province or city other
than the one where it was located at the time
of execution of mortgage without the
WRITTEN consent of the mortgagee

selling or pledging personal property

already mortgaged without the consent of the
mortgagee written at the back of the
mortgage and duly recorded with the Chattel
Mortgage Registry

Who Can Redeem

Mortgagor

Person holding subsequent mortgage

Subsequent attaching creditor

Subsequent attaching creditor after the mortgage

Rights of Parties

CM
Pledge
Registration is requiredRegistration is not required for
for validity
validity
Delivery is not essentialDelivery is essential for validity
for validity
Act No. 1508 rules theArticle 2112 governs the sale
sale
Creditor can sue forCreditor
cannot
sue
for
balance, except if salebalance
on installment (Recto
Law)

10

Debtor gets excess

validity of the mortgage or convert an invalid

mortgage into a valid one (Samanilla v. Cajucom,
107 Phil 432) In this case, the mortgagor was not the
owner but he nevertheless had the mortgage
recorded. The duty of the Register of Deeds as to the
recording of the mortgage is merely ministerial. So, in
this case, the registration did not make the mortgage
valid.

Debtor does not get excess

unless there is a stipulation to
the contrary

BAR 1999

Distinguish a chattel mortgage from a contract

of pledge
PART FIVE: Secured Loans REAL MORTGAGE
CONCEPT

A contract whereby the debtor secures to the

creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable
property or real rights over immovable property
which obligation shall be satisfied with the
proceeds of the sale of said property or rights in
case said obligation is not complied with at the time
stipulated.
SUBJECT MATTER

Immovables
Alienable real rights in accordance
with the laws imposed upon immovables
Includes natural accessions, improvements,
growing fruits, rents or income not yet received
when the obligation becomes due
Includes insurance proceeds or proceeds of
expropriation for public use WHETHER THE SM IS
IN THE HANDS OF THE OWNER OR A 3RD PERSON
May include AFTER-ACQUIRED PROPERTIES
this is allowed when the real property are
perishable or subject to inevitable wear and tear.
The purpose here is to maintain the original value
of the securities given (Mendoza v. CA, June 25,
2001)

Coverage: Dragnet Clause

A clause which subsumes all debts of past or
future origin.

The mortgage may secure future loans or

advancements. e.g. for the payment of loan of
P20,000 and such other loans or advances
already obtained or still to be obtained
(Quintanilla v. CA, 279 SCRA 397 [1997])

Even if the Real Estate Mortgage is not registered, it is still

a valid Real Estate Mortgage
Effect of Registration
Registration is merely ministerial and does not
validate an invalid RM (Agriculture v. Yusay, 107
Phil 791)
Unregistered Sale vs. Recorded Mortgage
If prior to the mortgage, the SM was sold to
another person, the sale prevails (even if it is
unregistered) over the registered mortgage. The
original owner has parted with ownership and at
the time of mortgage he no longer had ownership
and free disposal of the thing (State Investment v.
CA, 254 SCRA 368 [1996])
Example: A sold the property to B. The sale was not
recorded. After the sale, A mortgaged the property to C. The
Real Estate Mortgage was recorded. The mortgage is not
valid because the mortgagor must be the absolute owner. In
this case, there was a valid sale and ownership has already
transferred to B.
Kinds of Real Mortgage

Voluntary one which is agreed to between the

parties or constituted by will of the owner of the
property

Equitable one which, although it lacks the

formalities of a mortgage shows the intention of the
parties to make the property as security for the debt

Legal one required by law to be executed in

favor of certain persons
E.g. a person bound to give a bond but cant
execute a bond may execute a real mortgage over
his property covering his obligation

The mortgagor is the absolute owner of the

thing mortgaged

Effects of Mortgage
Creates a real right- until discharged, it follows
the property wherever it goes and subsists
notwithstanding change of ownership. If the
mortgagor sells the property , the SM remains
subject to the fulfillment of the obligation secured
by it (Bonnevie v. CA, 125 SCRA 122)

That the persons constituting the mortgage

have the free disposal of the property or are legally
authorized to do so

The Real Estate Mortgage creates a real right. Until the

main obligation is paid, it will still exist despite change in
ownership.

Mortgage must be in a public document. No

valid mortgage is constituted where the deed of
mortgage is in a mere private document
(Hechanova v. Adil, 144 SCRA 450)

Illustration

Essential Requisites, 2085

Constituted to secure the fulfillment of a

principal obligation

Real mortgage in
favor of A on May
1, 2000
Sale in favor of B
June 1, 2000,
with As consent

Requisites for Real Estate Mortgage:

Article 2085 + must be in a public document
Minimum Requirement for Validity: Public Document
If mortgage is in a public document but is not
recorded - mortgage is nonetheless binding on
the parties (2125)
If the mortgage is in a private document, the
mortgage is void and the mortgagee may
demand reduction of mortgage in a public
instrument (notarized)
Effect of Non-Registration

Registration only operates as a notice of the

mortgage to others but does NOT add to the

Auction
sale
foreclosing the RM of
A, with C as the
highest bidder

Who has a preferential right? The buyer who buys

the property from debtor/owner after the mortgage OR
the winning bidder during foreclosure?

The winning bidder has a preferential right but

subject to the new owners equitable right of
redemption (Santiago v. Dionisio, 92 Phil 485)

11

Effects of Mortgage
Creates merely an encumbrance it does
involve the transfer, cession or conveyance of
property but only constitutes a lien. What is
lost is the free disposal and sale of the SM
(Medida v. CA, 208 SCRA 887)
It merely creates an encumbrance. The owner still has
the right to freely dispose the property for such right is not
curtailed.

will nto have 1 year to redeem. According to RA 8791, the

equity of redemption is until but not after the registration of
certification of foreclosure sale and this should not be more
than 3 months after the foreclosure. So, there are 2 periods of
time whichever is earlier.
RIGHT OF REDEMPTION

The right of the mortgagor

to redeem the
mortgaged property within a certain period after it was
sold for the satisfaction of the debt
Right of Redemption = Extrajudicial Foreclosure

2128 the mortgage credit may be alienated or

assigned to a 3rd person in whole or in part
(right is transferable)

GENERAL RULE: extrajudicial foreclosure within

one year (365 days) from registration of certificate of
sale

2130 a stipulation forbidding the owner from

alienating the SM shall be VOID

EXCEPTION: in judicial foreclosure where the

mortgagee is PNB or a banking institution within
one year from registration of the foreclosure sale

Effects of an Invalid Mortgage

The principal obligation subsists

What is lost is merely the right to foreclose

The mortgage deed remains as evidence of

personal obligation of the debtor (DBP v. CA, 249
SCRA 331)

When the principal obligation is not fulfilled

Mortgagee chooses between filing a collection
case or foreclosing the mortgage

Foreclosure may either be extrajudicial OR

judicial

BAR 1999

Are the right of redemption and the equity of

redemption given by law to mortgagor the same?
Explain.

EXTRAJUDICIAL FORECLOSURE
File application with executive judge who has
jurisdiction over the property, through Clerk of Court

Redemption

Equity of Redemption

Right of Redemption

Post notice of sale or publish notice of sale once a week

for at least 3 consec weeks in a newspaper of gen circ

EQUITY OF REDEMPTION

Right of the mortgagor to redeem the property

after his default in the performance of the
conditions of the mortgage BUT before the
confirmation of the auction sale of the mortgaged
property

Clerk of Court issues receipt and certificate of payment

Equity of Redemption = Judicial Foreclosure

(E Equity = do not combine with another E
Extrajudicial)
Equity of Redemption; When available

General Rule: Only in judicial foreclosure 90120 days from receipt of judgment in favor of the
creditor OR before the confirmation of the sale at
the discretion of the court

When we talk about judicial foreclosure, there is a full

blown action filed before a court. That is why, there has to
be a finding of liability by the court. It is not from the release
of the order of payment but from the receipt of the order.
It is possible that the 90-120 days have lapsed and
there was sale and yet you can still redeem using equity of
redemption before the court confirms the sale, but this is
purely discretionary on the part of the court.

Exception: in extrajudicial foreclosure where

the mortgagor is a juridical entity - until but not
after the registration of certificate of foreclosure
sale which shall not be more than 3 months after
foreclosure, WHICHEVER IS EARLIER (RA 8791)

It is possible to have equity of redemption in

extrajudicial. But that is only the term. This happens when
the mortgagor is a juridical entity.
In extrajudicial foreclosure, the advantage of the
mortgagor is that he has one year to redeem from
registration of sale. However, if the mortgagor is a juridical
entity (do we include partnership? No definite answer , it

Application is raffled among sheriffs

Sale must have at least 2 bidders, if not, sale is

postponed. If still no 2 bidders, proceed.

Certificate of sale is approved by Exec Judge or Vice Exec

Judge in formers absence. Cert is issued to winning
bidder
3 months
1-Yr Right of
Redemption
If redemption period expires, Clerk archives records
Redemption in Extrajudicial Foreclosure

If mortgagor is NOT a juridical entity - Right of

Redemption Within 1 year from date of
registration of certificate of sale

If mortgagor is a juridical entity - Equity of

Redemption until but not after the registration of
certificate of foreclosure sale which shall not be
more than 3 months after foreclosure,
WHICHEVER IS EARLIER (RA 8791)

Technically, we call the 3-month period not right of

redemption but equity of redemption.
Extrajudicial foreclosure -> right of redemption -> 1 year
But if the mortgagor is a juridical entity -> 3 months or
whichever is earlier.
Officially, it is not a right of
redemption
but an equity of redemption.
How to Validly Redeem

12

Must be made within the period

Payment of purchase price plus 1% interest per

month with taxes thereon from date of registration
of sale until date of redemption. Payment is to
redemptioner or sale officer

Written notice of redemption must be served on

officer who made the sale and a duplicate with
Register of Deeds (Rosales v. Yboa, 120 SCRA 869)

Judicial Foreclosure
File an action with RTC which has jurisdiction over
location of SM
Court shall order payment of debt within 90-120 days
from entry of judgment (debtors receipt of judgment,
Herrera v. Arellano, 97 Phil 776)
Equity of Redemption

Equity of Redemption

If no payment, the court orders sale of SM to the

Highest bidder in a public auction
The court calls parties for confirmation of sale
Equity of Redemption

Equity of Redemption

Execution of judgment
Application of proceeds
Execution of sheriffs certificate

Registration of certified true copy of the final order of

the court confirming the sale

If mortgagee is PNB or
mortgagees,
a banking institution, 1-yr
right of redemption starts
winning
bidders name

For ordinary
title shall now be
consolidated in

Q: What is hearing for confirmation of sale?

A: This is a hearing where the parties will appear and the
mortgagor will try his best to assail the validity of the auction
the sale. He will question the legality of the sale.
Case: Equity of redemption in judicial foreclosure will not
stop on the 120th day. It is possible that even after the sale,
there can be redemption as long as there is no confirmation
of the sale yet.
If you exercised the equity of redemption before the
confirmation of the sale, the amount of the debt (not the
purchase price) is to be paid. So, it is still an equity of
redemption.
Redemption in Judicial Foreclosure
Equity of redemption 90-120 days from entry
of judgment or at any time before the sale is
confirmed upon the discretion of the court
(Salazar v. De Torres, 108 Phil 209)

Right of Redemption 1 year from registration

of order confirming the sale if the mortgagee is
PNB or a banking institution

Who Can Redeem?

Mortgagor or one who is in privity of title with
mortgagor
Successor-in-interest

One to whom debtor has transferred

his right

One to whom debtor has conveyed his

interest in the SM
One who succeeds to the interest of the
debtor
One or more joint debtors who were joint
owners of the SM
Wife
as
regards
her
husbands
homestead
Compulsory heir

In Case of Deficiency
Can recover within 10 years from time the right of
action accrues

May recover even during period of redemption

Incorporated in deficiency judgment in a judicial

foreclosure
PART SIX: Secured Loans ANTICHRESIS

Concept
2132- by the contract of antichresis the creditor
acquires the right to receive fruits if an immovable
of his debtor, with the obligation to apply them to
the payment of interest, if owing and thereafter to
the principal of his credit
Case: Medel vs. CA You can still bring the creditor to the
court
even if the usury law is suspended.
Role of Delivery
Delivery is only required in order that the creditor
may receive the fruits and not for validity of the
antichresis.
Obligations of the Antichretic Creditor
Must pay taxes and charges upon the estate

Bound to pay expenses

preservation and repair

necessary

for

Sums spent for these purposes are deducted from

the fruits

How to avoid obligation to pay taxes, charges, and

necessary expenses

Compel the debtor to enter again upon enjoyment

of the property except when there is a stipulation
to the contrary

Requirement for Validity (in addition to Article 2085)

The amount of the principal and interest shall be
specified in writing; otherwise the contract of
antichresis shall be VOID (2134).
Effect of Antichresis
No transfer of ownership upon debtors default

In case of non-payment, creditor may petition the

court for payment of debt and foreclosure (under
the Rules of Court)

Petition the court = judicial foreclosure

BAR 2007
A contract of antichresis is always:
(a) a written contract
(b) a contract with a stipulation that debt will be
paid through receipt of the fruits of an immovable
(c) involves the payment of interest, if owing
(d) all of the above;
(e) letters a and b
ANSWER: D
If there is no if owing in (c), the answer could be (e)
Pledge, Mortgage and Antichresis

13

Innocent mortgagees for value, like innocent

purchasers for value are protected by law

Mortgage by using a forged special power of

atty is VOID

Mortgage by an impostor is VOID

Q: Can a Real Estate Mortgage and Antichresis cover 1

subject matter?
It is hard but not impossible.
Antichresis
Real property

Pledge
Movable property

Perfected by mere consent Perfected by delivery

Consensual contract

Antichresis
SM is delivered to
creditor

Real contract

RM
theDebtor
usually
retains
possession over SM

Creditor has right to receiveCreditor has real right over

fruits but does not have realthe SM but does not have
right
the right over the fruits
Creditor has
pay taxes
Creditor has
get fruits and
the interest
principal
Real property

obligation toNo obligation to pay taxes

obligation toNo obligation to apply fruits
apply them to
then to the
Real property

14

Pledge
Subject Matter

Chattel Mortgage

Real Mortgage

Movables Incorporeal Movables Incorporeal Immovables

rights
rights
Alienable real rights

Antichresis
Fruits of real property

Added Requisite forDelivery of SM to

Validity
pledgee

Registration in CM
Registry

Public Instrument

Principal and interest

must be in writing

Pactum applicable

YES

YES

YES

YES

Essence

Pledgee retains
possession until
payment

CM follows the
property

RM creates a real right

and encumbrance

Cr editor enjoys fruits

until payment of debt
and interest

Default options

Art. 2112

Act 1508

Act 1508 or Rules of

Court

Rules of Court

PART SEVEN: DEPOSIT

Concept

1962 A deposit is constituted from the moment

a person receives a thing belonging to another, with
the obligation of safely keeping it and returning the
same.

If the safekeeping of the thing is not the principal

purpose of the contract, there is NO deposit but some
other contract. The contract may either be lease,
commodatum or agency.

JUDICIAL DEPOSIT 2005-2008

Judicial Deposit/Sequestration

2005 takes place when an attachment or seizure

of property in litigation is ordered by the court

2006 movable or immovable may be the SM of

sequestration

Bank deposit is not a contract of deposit but a contract

of loan

Judicial Deposit

Primary purpose: to maintain status quo

during the pendency of litigation or to insure the
rights of parties to property.

Role of Delivery

1963 An agreement to constitute a deposit is

binding but the deposit is NOT perfected until the
delivery of the thing

This is not necessarilyl physical possession but taking

within the the control of the court.

Subject Matter

General Rule - Only movable things may be the

object of a deposit (1966)

Examples of Judicial Deposit

Rule 57 (Preliminary attachment) attachment

by sheriff upon filing of complaint

Rule 59 (Receivership) - a receiver may be

appointed by the court to administer and
preserve the property in litigation

Rule 60 (Replevin) - personal property may be

seized by sheriffs in suits of replevin or
manual delivery of personal property

Rule 127 attachment in criminal cases

Judicial deposit may cover immovable or

movable (2005-2996)

Nature of Deposit

Essentially gratuitous except when there is an

agreement to the contrary OR unless the depositary is
engaged in the business of storing goods (1965)
Form

1969 A contract of deposit may be entered into

orally or in writing
Basis

Deposit

PURPOSE

Safekeeping Use of thing

Consumption

NATURE

Gratuitous or Gratuitous
onerous

Gratuitous or
onerous

OBJECT

Extrajudicial:
movables
DEMANDABILITY Depositor
can demand
thing at will

Commodatum Mutuum

Movables and Money or

immovables
fungible thing
Return only
after period

Pay within
period

Judicial Deposit

2008 depositary must comply with the

obligations of a good father of family

2007- obligation of depositary subsists until

the end of controversy which gave rise to the
sequestration, unless the court orders.
EXTRAJUDICIAL DEPOSIT

VOLUNTARY DEPOSIT
Concept

1968 - One wherein the delivery is made by the

will of the depositor or by two or more persons
each of whom believes himself entitled to the thing
deposited
In this case, you can choose who will be the depositary

MAIN
DISTINCTION
WITH
NECESSARY
DEPOSIT: Depositor has complete freedom in
choosing the depositary.

Obligations of the Depositary

To keep the thing safely and to return it, when

required, to the depositor or to his heirs or
successors or to the person who may have been
designated in the contract (1972) (safekeeping)

15

Degree of care required degree of care one

would exercise over his own property
Must return the SM together with all accessions,
accessories and products. (1983)
Cannot deposit the SM with a 3rd person .
If deposit with 3rd person is allowed, depositary
is liable for loss if deposited with 3rd person who is
manifestly careless or unfit. (1973)

May change the way of the deposit if:

under the circumstances he may reasonably
presume that the depositor would consent to the
change if he knew the facts of the situation.
Before change he must notify the depositor and
wait for his decision, unless delay would cause
danger.(1974)

Depositary holding certificates, bonds, securities

or instruments which earn interest:
must collect interest when they become due
take steps so that value of securities is preserved
(1975)

If SM delivered closed and sealed:

must return it in the same condition
liable for damages should the seal be broken
through his fault.
fault on the part of the depositary is presumed
unless there is proof to the contrary (1981)

Obligations of the Depositary: Loss by Fortuitous Event

(1979)

GENERAL RULE: Not liable

EXCEPTIONS:
Stipulated
Uses without owners permission
Delays in return
Allows others to use it even though he himself is
authorized
Obligations of the Depositary: Loss by Force Majeure
(1990)

Loss by force majeure or government order and

receives a thing or money in lieu of the thing, he
must deliver to the depositary the thing or money
he received (1990)
Rights of the Depositary

1984 cannot demand that depositor proves his

ownership BUT

If he discovers that the SM was stolen and who

the true owner is, he must inform the true owner
of the deposit

If owner does not claim within 1 month from

notice, depositor may return SM to depositary
without incurring liability

May retain the SM in pledge until full payment of

what may be due him by reason of deposit (1994)
Use of the Subject Matter

GENERAL RULE- cannot use without express

permission of depositor. He shall be liable for
damages

EXCEPTION to preserve the thing. (1977)

If allowed to use the contract is no longer a

deposit but becomes a commodatum, except
where safekeeping is still the principal purpose.
The permission shall not be presumed.

Depositors Incapacity

Depositary shall be subject to all obligations of a

depositary and may be compelled to return the thing
BY the guardian or administrator of the incapacitated
person (1970)

compel payment of amount that depositary was

enriched.(1971)
If property is in the hands of a 3rd person who
acquired SM in good faith, depositor may sue
the 3rd person
Obligations of the Depositor

Must reimburse depositary for expenses he

may have incurred for the preservation of the thing
if gratuitous deposit (1992)

Must reimburse depositary for any loss arising

from the character of the SM, unless the depositor
was not aware of or was not expected to know the
dangerous character of the SM or unless he
notified the depositary of the same or depositary
was aware of it (1993)
Extinguishment of Voluntary Deposit

Death of depositary extinguishes the deposit

in gratuitous deposit but not in deposit for
compensation

1995
Upon loss or destruction of the thing
deposited
In case of gratuitous deposit, upon the death
of either the depositor or the depositary
Other causes (novation, merger, expiration of
the term, fulfillment of resolutory condition)
NECESSARY DEPOSIT
Concept

A deposit is necessary when:

It is made in compliance with a legal obligation
(1996)

It takes place on the occasion of any calamity,

such as fire, storm, flood, pillage, shipwreck or
other similar events (1996)

Travellers in hotels or inns deposit effects

(1998)

Made by passengers of common carriers

(1745)

Necessary Deposit To comply with a legal obligation

Judicial deposit of SM the possession of

which is disputed by two or more persons under
Art. 538

If the two possessors are identical as to dates

of possession and both can present title

Thing must be placed in judicial deposit

Deposit of SM of pledge when there is

unauthorized use by the pledge

When constituted to guarantee contracts with

the government arising from an obligation which is
administrative in character.

Example: When entering into a contract with a DPWH,

it is required that a guarantee contract is constituted.
Property is necessarily deposited which may be proceeded
against in case construction does not follow specifications.
BAR 2007

A deposit made in compliance with a legal

obligation is:
(a) an extrajudicial deposit
(b) a voluntary deposit
(c) a necessary deposit
(d) a deposit with a warehouseman
(e) letters a and b
ANSWER: C

Incapacity of Depositary

Depositor shall only have an action to recover the

SM while in possession of the depositary or to

Necessary Deposit On the occasion of calamity

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When during a fire, flood, storm, or other calamity

a property is saved from destruction by another
person without the knowledge of the owner, the
latter is bound to pay the former just
compensation (2168)

Possession passes by accident from one person

to another and the law imposes on the recipient
the obligations of a bailee

Primary purpose: to save the property

Necessary Deposit Travellers

The keepers of hotels on inns shall be

responsible as depositaries for effects deposited by
guests provided:
Notice was given to them about the effects
Guests have taken precautions prescribed
regarding their safekeeping (1998)

Liable for vehicles, animals and articles placed in

the annexes of the hotel (1999)

Liable for loss or injury through:

Acts of servants or employees of the keeper
Acts of strangers
Acts of robbers UNATTENDED by use of arms or
irresistible force
NOT liable for loss or injury through:
Force majeure
Acts of robbers with arms or using irresistible
force
Acts of guests, his family, servants or visitors
Character of the SM

2003 hotel-keeper cannot free himself from

responsibility by posting notices to the effect that he
is not liable for articles brought in by guests

Void stipulations stipulations which diminish or

suppress liability of keepers

2004 may validly retain articles as security for

credits of guests
Judicial Deposit

vs. Extrajudicial Deposit

ORIGIN: will of the court

PURPOSE: to secure the
right of a party to recover
Movable or immovable
Always remunerated
Held in behalf
prevailing party

of

the

ORIGIN: will of the parties

PURPOSE: safekeeping
Movable
May be gratuitous or
onerous
Held in behalf of depositor

PART EIGHT: CONCURRENCE AND PREFERENCE OF

CREDITS
PRINCIPLES

Assets of a debtor can be used to satisfy

obligations with creditors.

However, there are certain properties which are

exempted from satisfying liabilities.

Note, however, that even if these properties are

deemed exempted, these assets shall NOT be
exempt from execution issued upon a judgment
recovered for its price or upon a judgment of
foreclosure of a mortgage thereon

Exempted Properties

Art. 153 - Family Home generally exempted

unless for:
Non-payment of taxes
Debts incurred prior to the constitution of family
home
Debts secured by mortgages on the premise
before or after such constitution; and

Debts due to laborers, mechanics, architects,

builders, material men and others who have
rendered service or furnished material for the
construction of the building (155)

Art. 205 Right to receive

support as well as any money or property obtained
as such support shall not be levied upon on
attachment or execution

Section 13 Exempted Properties

Judgment obligors family home or the
homestead in which he resides
Ordinary tools and implements personally
used by him in his trade, employment or
livelihood;
3 horses or 3 cows or 3 carabaos or other
beasts of burden necessarily used by him in
his ordinary occupation;
His necessary clothing and articles for
ordinary personal use, EXCLUDING jewelry;
Household furnitures and utensils necessary
for housekeeping with a value not exceeding
P100,000;
Provisions for individual or family use
sufficient for 4 months
Professional libraries of judges, lawyers,
physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers and other
professionals not exceeding P300,000 in
value;
1 fishing boat and accessories not exceeding
the total value of P100,000 owned by a
fisherman and by the lawful use of which he
earns his livelihood;
Salaries, wages, earnings of the debtor for his
personal services within the 4 months
preceeding the levy necessary to support his
family;
Lettered gravestones;
Moneys, benefits, privileges, or annuities
accruing or growing out of life insurance;
(except endowment)
Right to receive legal support or money or
property obtained as such support or any
pension or gratuity from the government;
Properties especially exempted by law;
Properties
belonging
to
the
absolute
community or conjugal partnership except
insofar as the debt has redounded to the
benefit of the family (2238);
Property held by debtor as trustee of an
express or implied trust (2239)
Concurrence vs. Preference

Concurrence implies the possession of two

or more creditors of equal rights or privileges
over the SAME property or all of the property
of the debtor

Preference right held by creditor to be

preferred in the payment of his claim above
others out of the debtors assets

The provisions on concurrence and preference

will only apply if the liabilities of the debtor are
more than his assets

Do not apply the provisions on concurrence and

preference if assets are sufficient to pay liabilities.
General Categories of Credit

Special Preferred 2241 & 2242

Ordinary Preferred 2244

Common Credits - 2245

SPECIAL PREFERRED

Envisions a situation where a particular

property which is either movable or
immovable is subject to certain obligations

17

These special preferred credits or obligations

have to be satisfied using the proceeds from the
sale of said property

Illustration

A owns a vehicle. The price of the vehicle is not

yet paid. The vehicle is also the subject of a chattel
mortgage in favor of the financial institution where A
obtained a loan for the price. A also has unpaid repair
expenses.

IDENTIFY THE OBLIGATIONS WITH RESPECT TO

THE CAR: unpaid purchase price, chattel mortgage,
unpaid repair expenses

Special Preferred Credits on Movables 2241

Duties, taxes and fees due on the movable

Claims arising from misappropriation, breach of

trust, or malfeasance by public officials
committed in the performance of their duties on
the movables, money or securities obtained by
them

Claims for the unpaid price of movables sold

Credits guaranteed with a pledge of the movables

Credits for repairs, safekeeping, preservation of

the property

Claims for laborers wages

on the goods
manufactured or work done

Expenses of salvage

Credits between the landlord and tenant

Credits for transportation upon goods carried

Credits for lodging and supplies usually

furnished to travellers by hotelkeepers on
movables belonging to the guests

Credits for seeds and expenses for cultivation

and harvest

Credits for rent for 1 year upon personal property

of the lessee

Claims in favor of the depositor if depositary has

wrongfully sold the thing deposited
Special Preferred Credits on Immovables, 2242

Taxes due upon the land or building

Unpaid price of immovable

Claims of laborers, masons and other workmen

engaged in construction

Claims of furnishers of materials used in

construction
Mortgage credits recorded in Registry of Property
Expenses for preservation, improvement
Credits annotated in the Registry of Property
Claims of co-heirs for warranty in the partition
Claims of donors
Credits of insurers upon property insured

ORDINARY PREFERRED

Envisions a situation where a particular credit is

not secured by any particular movable or
immovable.

HOWEVER, this credit happens to be one of those

enumerated as ordinary preferred. Hence, the
credit will enjoy preference over properties which
are not encumbered, including the free portion of
the debtor's property.

Ordinary Preferred, 2244: Hierarchical Application

Credits for services rendered the insolvent by

employees, laborers, household helpers

Proper funeral expenses for the debtor, children

under his parental authority

Expenses during last illness of debtor, spouse

and children under his parental authority

Compensation due to laborers or dependents

under laws providing for indemnity for damages
in cases of labor accident or illness arising from
nature of employment
Ordinary Preferred, 2244

Credits and advancements made to debtor for

support of himself and family

Support during insolvency proceedings and

for 3 months thereafter
Fines and civil indemnification arising from
criminal offense
Legal
expenses
for
administration
of
insolvents estate
Taxes due the national government
Taxes due any province
Taxes due any city or municipality
Damages for death or personal injuries caused
by quasi-delict
Gifts due to private and public institutions of
charity
Credits without privilege which appear in a
public instrument or by final judgment if they
have been the subject if litigation

SUMMARY

STEP 1: Special Preferred Credits must be

paid from the value of the movable or immovable.
Taxes enjoy priority while the rest of the credits are
paid proportionally.
Case: DBP vs. CA By virtue of this case, claim of
laborer is # 1 based on Article 101 of the Labor Code. This
mus be read in connection with Article 2244 of the Civil
Code which puts the claim on the #2. (Read the case to
verify but I do not have the citation )

STEP 2: Ordinary Preferred Credits are then

paid in the order of priority as they are
enumerated. The assets used to pay ordinary
preferred credits are those which are free from
encumbrances under 2241 and 2242 and the free
portion under 2241 and 2242.

STEP 3: The non-preferred credits are now

paid with whatever free portion remains.

Example: P 2M value of property. Pay first taxes valued at

P 200,000.
Then, P 1.8M must be used to pay
proportionately those in #2 to 13 in Article 2241.
INSOLVENCY LAW
Concept

Insolvency generally denotes the state of a

person whose liabilities are more than his
assets.

Used interchangeably with bankruptcy.

Insolvency law deals with voluntary and

involuntary insolvency and suspension of
payments.
Suspension of Payments

Sec. 2 The debtor who, possessing sufficient

property to cover all his debts, be it an individual
person, sociedad or corporation foresees the
impossibility of meeting them when they
respectively fall due, may petition that he be
declared in the state of SUSPENSION OF
PAYMENTS by the court or the judge thereof in
vacation, of the province or city in which he has
resided for 6 months next preceeding the filing of
his petition.
Voluntary Insolvency

Debtor files petition for voluntary insolvency

with the RTC (debt must be >P1,000)

Court issues an order declaring debtor

insolvent

Order is published

Creditors meet to elect the assignee in

insolvency

Debtors properties are conveyed by the clerk

of court to the assignee

Debtors assets are liquidated and debts are

paid

Composition, or an agreement where creditors

agree to receive less than the amount due
them

Discharge of the debtor on his application

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Objection, if any to the discharge

Appeal to the Supreme Court in extreme cases

Effects of Order Declaring Insolvency

All the assets of the debtor not exempt from

execution are taken possession by the sheriff or
until the appointment of a receiver or assignee

Forbids the payment of the debtor of any debts

due to him and the delivery to the debtor or to
any person for him of any property belonging to
him and the transfer of any property by him

All civil proceedings pending

insolvent debtor shall be stayed

Mortgages or pledges, attachments or executions

on property of the debtor duly recorded and not
dissolved are NOT affected by the order

against

the

Involuntary Insolvency

Initiated by a petition filed by at least 3 creditors

whose credits accrue in the Philippines with an
aggregate amount of not less than P1,000.

The petition must set forth one or more acts of

insolvency.

Acts of Insolvency

Such person is about to depart or has departed

from the country with intent to defraud his
creditors;

That being absent from the country, he remains

absent;

That he conceals himself to avoid the service of

legal process to delay or defraud creditors;

He conceals or is removing any of his property to

avoid its being attached or taken on legal
process;

He has suffered his property to remain under

attachment or legal process for 3 days for the
purpose of hindering or delaying or defrauding
his creditors;

He has confessed or offered to allow judgment in

favor of any creditor or claimant for the purpose
of hindering or delaying or defrauding any
creditor or claimant;

He has willfully suffered judgment to be taken

against him for default for the purpose of
hindering or delaying or defrauding his creditors;

He has suffered or procured his property to be

taken or legal process with intent to give a
preference to one or more of his creditors and
thereby hinder, delay or defraud any of his
creditors;

He has made any assignment, gift, sale,

conveyance or transfer of his estate, property,
rights or credits with intent to delay, defraud or
hinder his creditors;

He has, in contemplation of insolvency, made any

payment, grant, sale, conveyance or transfer of
his estate, property, rights or credits with intent
to delay, defraud or hinder his creditors;

That being a merchant or tradesman he has

generally defaulted in the payment of his current
obligations for a period of 30 days;

That for a period of 30 days he has failed after

demand, to pay any moneys deposited with him
or received by him in a fiduciary capacity; and

An execution having been issued against him on

final judgment for money, he was found to be
without sufficient property subject to execution to
satisfy judgment.

Debtor must not be guilty

of any act of insolvency
Debt must be > P 1,000
Bond is not required
An adjudication of
insolvency may be
granted ex parte
Petition is filed with RTC
of province or city where
debtor had resided for 6
months
Declaration of insolvency
is made upon filing of
voluntary insolvency

Debtor must be guilty of

any act of insolvency
Debt must be P 1,000 or
above
Bond is required
Adjudication of
insolvency granted only
after hearing
Length of residence is
immaterial
Declaration of insolvency
is made after hearing

Suspension of Payment vs. Insolvency

Purpose is to suspend or Purpose is to discharge
delay payment in debts
debtor from payment of
debts
Debtor
has
sufficient Debtor does not have
property to pay his debts
sufficient property to pay
his debts
Amount of indebtedness Creditors receive less
is not affected
than their credits OR may
not receive anything at all
in case of preferred
credits
Number of creditors is In voluntary: 1 creditor
immaterial
In involuntary: 3 or more
creditors
BAR 2007

An assignee in a proceeding under the

Insolvency Law does not have the duty to:
(a)
suing
to
recover
the
properties of the estate of the insolvent debtor
(b)
selling the property of the
insolvent debtor
(c)
ensuring
that
a
debtor
corporation operates the business effectively
and efficiently while proceedings are pending
(d) collecting and discharging debts owed to the
insolvent debtor
ANSWER: C
BAR 2007

In order to obtain approval of the proposed

settlement of the debtor in an insolvency
proceeding:
(a)
the court must initiate the proposal
(b)
2/3 of the number of creditors must
agree to the proposal
(c)
3/5 of the number of creditors must
agree to the settlement
(d)
1/3 of the total debts must be
representative of the approving creditors
(e)
letters a and b
ANSWER: B
Note: The 2/3 creditors who agree to the proposal must
represent at least 3/5 of the liabilities of the debtor.

Voluntary Insolvency vs. Involuntary Insolvency

One creditor is sufficient
At least 3 creditors must
file the petition
Insolvent debtor files the
Three or more creditors
petition
who meet the
requirements file the
petition

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A long life may not be enough,

but a good life is good enough

20