07 Memory Aid Credit Transactions

CIVIL LAW

CREDIT TRANSACTIO TRANSACTIONS NS

a. Gratuitous deposit b. Mandatum

G ENERAL P RINCIPLES

For benefit of both parties a. Deposit for compensation b. Involuntary deposit c. Pledge d. Bailments for hire – hire  –   arises when goods are left with the bailee for some use or service by him and is always for some compensation

3.

Credit Transactions  All transactions involving the purchase or loan of goods, services, or money with a promise to pay or deliver in the future; Contracts of security. Security Something given, deposited, or serving as a means to ensure enforcement of an obligation or of protecting some interest in property. Types of Contracts of Security: 1. Secured transactions/contracts of real security  – transactions supported by a collateral or an encumbrance of property. security – 2. Unsecured transactions/contracts of personal security – transactions supported only by a promise, or commitment of another such as a guarantor or surety. Bailment The delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor claims it. May be created by contract or by operation of law (De Leon, Comments and Cases on Credit Transactions, 2010 ed., p. 3) Parties in Bailment: 1. Bailor – Bailor  – one  one who delivers the possession or custody of the thing bailed. 2. Bailee – Bailee – one  one who receives the custody or possession of the thing thus delivered, Kinds of Contractual Bailment: 1. For sole benefit of bailee a. Commodatum b. Gratuitous simple loan/mutuum 2. For sole benefit of bailor EXECUTIVE COMMITTEE

IAN MICHEL GEONANGA overall chairperson, JOSE ANGELO DAVID chairperson for academics, RUTH ABIGAIL ACERO chairperson for hotel operations, ALBERTO RECALDE, JR. vice-chairperson for operations, MARIA CARMELA HAUTEA vice-chairperson for secretariat, MARK EMMANUEL ABILO vice-chairperson for finance, RYAN LIGGAYU vice-chairperson for electronic data processing, JOMARC PHILIP DIMAPILIS vicechairperson for logistics

Kinds of Bailment for Hire: i. Hire of thing ii. Hire of service iii. Hire for carriage of goods iv. Hire for custody

L OAN A R T S . 1933  – 1 9 6 1 Contract of Loan  A contract con tract wherein one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. Characteristics: 1. Real contract – contract – delivery  delivery of the thing loaned is necessary for the perfection of the contract Reason: Delivery Reason: Delivery is necessary in view of the purpose of the contract which is to transfer either the use or the ownership of the thing loaned. Note: An Note: An accepted promise to make a future loan is a consensual contract, and therefore binding upon the parties but it is only after delivery of the subject matter, will the real contract of loan arise  Art.  (Art. 1934). 1934). The non-fulfillment of an accepted promise will give rise to an action for damages only (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 443).

SUBJECT COMMITTEE

MEMBERS

JHOY PALLONES subject chair, MICAELA KRISTINA GALVEZ assistant subject chair, PIA ISABEL CO edp, FRANCIA ROMLINA RODRIGUEZ persons and family relations, JENNETH CAE CAINDAY property, IRENE ALCOBILLA wills and succession, JOSE AMELITO BELARMINO II and ROWNEYLIN SIA obligations and contracts, SAMANTHA GRACE MANALO sales and lease, LAUREN GAIL DIVINO partnership, agency and trusts, MABEL BUTED credit transactions, JULIUS CEASAR BALBUENA torts and damages, KATHLEEN VALERIO land titles and deeds, ILLAC BOHOL conflict of laws

Phoebe Alhambra, Diana Bartolome, Jesus Paolo Borlagdan, Darniel Bustamante, Jamela Jane Caringal, Ma. Criselda Correa, Reynaldo Dalisay, Kristine Lara Defensor, Carel Brendth Dela Cruz, Regine Estillore, Anne Clarisse Guzman, Aziel Guzman, Martin Michael Hatol, Maria Emma Gille Mercado, Richmond Montevirgen, Astrid Ong, Ruth Ann Ong, Rodel James Pulma, Dan Bernard Sabilala, Jeth Lester Tan, Maria Anne Cyra Uy

CREDIT TRANSACTIO TRANSACTIONS NS

2. Unilateral contract – contract  – once  once the subject matter has been delivered, it creates obligations on the part of only one of the parties (i.e. borrower). Cause or Consideration: 1. As 1.  As to borrower – borrower – the  the acquisition of the thing 2. As 2.  As to lender  –   –  the right to demand its return or its equivalent Loan and Credit Distinguished Loan Credit Delivery by one party and the receipt of other  Ability of a person to party of a given sum of borrow money or things money or other by virtue of the trust or consumable thing upon confidence reposed by an agreement, express the lender that he will or implied, to repay the pay what he may same amount of the promise within a same kind and quality, specified period. with or without interest. Note: The concession of “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit” “credit” (People vs. Concepcion, G.R. No. L-18535, L-18535,  August 15, 1922). 1922). Loan and Discounting of Paper Distinguished Loan Discounting of Paper Interest taken at the Interest is deducted in expiration of the credit advance Less expensive than More expensive than discounting obtaining loan  Always on a single  Always on a double name paper (one on name paper (one on which no other which 2 signatures indorsement, other than appear with both parties the signature of the liable for payment) maker appears) The discount does not Loan must be paid back have to be repaid Kinds of Loan: 1. Commodatum – Commodatum – when  when the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing 2. Simple loan (mutuum) – (mutuum) – lender  lender delivers to the borrower money or other consumable thing upon the condition that the latter shall return the same amount of the same kind and quality. Consumables are those things which cannot be used in a manner appropriate to their nature without their being consumed (Art.418). (Art.418).

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Commodatum and Mutuum Distinguished (OCPSOTLR) Commodatum Mutuum Object Non-consumable/NonConsumable/Fungible fungible Correlate with Art. with Art. 418 Exception: Art. Exception: Art. 1936 Cause Generally gratuitous for Essentially gratuitous there may be stipulation of interest Purpose Use or temporary Consumption possession Subject Matter  Any property Personal property Ownership of the thing Retained by bailor Passes to the debtor Thing to be returned Equal amount of the Exact thing loaned same kind and quality Who bears risk of loss Bailor

Debtor /bailee

When to return In case of urgent need and commission of any Upon expiration of the acts of ingratitude, even term only before the expiration of the term

C OMMODATUM ( A R T S . 1935  – 1952) Commodatum Distinguished

and

Other

Types

of

Contracts

Other Type of Contracts Principal purpose is the In DEPOSIT, the gratuitous use of the principal purpose is the thing by the borrower. safekeeping of the thing Other Type of Commodatum Contracts In LEASE, it is always Essentially gratuitous for a price. Bailee acquires a mere use of the thing, but In USUFRUCT, the acquires no rights over usufructuary acquires the fruits thereof in the the right over the fruits. absence of stipulation to that effect. Commodatum

CIVIL LAW

Nature General Rule:  Rule:  Bailee acquires the temporary use of the thing but not its fruits since the bailor remains the owner (Art. 1935). 1935). Exception: When Exception: When there is a stipulation to make use of the fruits of the thing loaned  loaned  (Art. 1940). 1940). Provided, that the use of the fruits is merely incidental; otherwise, it is usufruct. usufruct.

CREDIT TRANSACTIONS

1. Possessory interest; or 2. The right to use which he may assert against the bailee or 3rd persons but not the rightful owner. Commodatum is Purely Personal (Art. 1939) 1. The death of either party terminates the contract. Art. contract.  Art. 1939 constitutes 1939 constitutes an exception to the general rule that all rights acquired in virtue of an obligation are transmissible (Art. 1178). 1178). Exception: When Exception: When there is a contrary stipulation.

Note: If the bailee is not entitled to the use of the thing, the contract is deposit. Contract Akin to Donation Both confer benefit to the recipient. The presumption is that the bailor has loaned the thing for having no need therefore (Art. 1946). 1946). Kinds of Commodatum: 1. Ordinary Commodatum – Commodatum – use  use of the thing by the bailee is for a certain period of time 2. Precarium  –   –  one whereby the bailor may demand the thing loaned at will; if any of the following is present: a. The duration and purpose of the contract is not stipulated. b. The use of the thing is merely tolerated by the owner (Art. 1947). 1947). Cause Essentially gratuitous; BUT: 1. If any compensation is to be paid by the borrower there arises a lease contract; 2. If the consideration is to render some service, an innominate contract will result. Subject Matter: General Rule: Non-consumable Rule: Non-consumable goods, whether movable or immovable property  Arts.  (Arts. 1936-1937 ). ). Exception: Consumable Exception: Consumable goods may be the subject matter of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition ( Art.  Art. 1936 ). ). If consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is commodatum and not mutuum (Producers (Producers Bank of the Phils. vs. CA, G.R. No. 115324, February 19, 2003). 2003). Bailor Need not be the Owner of the Thing Loaned: (Art. 1938) It is sufficient that the bailor has:

2. The bailee can neither lend nor lease the object of the contract to a third person. Exception: Members Exception: Members of the household may make use of the thing loaned. Exception to the Exception: 1. There is a contrary stipulation; or 2. Nature of the thing forbids such use OBLIGATIONS OF THE BAILEE (Arts. 1941 to 1945) Principal Obligations: 1. Take care of the thing with diligence of a good father of a family (Arts. 1163, 1169,1170 and 1173). 2. Return the IDENTICAL thing loaned upon expiration of the term or upon the accomplishment of the purpose (Art. 1933). Other Obligations: (OLDEO) 1. Pay for the ordinary expenses for the use and preservation of the thing loaned (Art. 1941). 2. Liability for loss due to fortuitous event (Art. 1942). General Rule:  Rule:  He is not liable because ownership remains with the bailor. Exceptions: Liable for loss even if it should be through a fortuitous event in the following cases: (KLAS-D) a. When he keeps it longer than the period stipulated, or after the accomplishment of its use; Reason: Delay Reason: Delay (Art. 1165, 1169, and 1170). b. When he lends or leases it to third persons who are not members of his household; Reason:  Reason:  Commodatum is purely personal (Art. 1939). c. When the thing loaned has been delivered with appraisal of its value unless there is a stipulation exempting the bailee from responsibility in case of fortuitous event.

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CREDIT TRANSACTIONS

Reason: The law presumes that the parties intended that the borrower shall be liable for the loss of the thing even if it is due to a fortuitous event for otherwise they would not have appraised the thing (Republic vs. Bagtas, G.R. No. L-17474 October 25, 1962). d. When, being able to save either the thing borrowed or his own things, he chose to save the latter .Reason: The bailee shows his ingratitude after the thing is gratuitously loaned to him. e. When the bailee devoted the thing for a different use from that agreed upon. Reason: The bailee acted in bad faith. 3. Liability for deterioration due to the use of the thing General Rule: Bailee is not liable (Art. 1943). Exceptions: a. If expressly stipulated b. If guilty of fault or negligence (Article 1170) c. If he devotes the thing to any purpose different from that for which it has been loaned (Article 1942 (1)); d. If he uses the thing beyond the period stipulated 4. Pay for extraordinary expenses arising from the actual use of the thing, even though the bailee acted without fault. In which case, the bailor and the bailee shall bear the expenses equally (Art. 1949 (2)). Exception:  If there is a stipulation for different apportionment Note: The bailee has no right to retain the thing loaned as security on the ground that the bailor owes him something, even though it may be by reason of expenses (Art. 1944) EXCEPT for damages suffered by the bailee because of the hidden flaws of the thing known to the bailor (Art. 1951). Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or a bailee in commodatum (Art. 1287). The right of retention ceases when the bailee is reimbursed. The bailee cannot lawfully sell the thing to satisfy the damages. Retention or adverse claim of bailee cannot ripen into title by ordinary acquisitive prescription.

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5. To pay for the expenses other than those under Arts. 1941 and 1949 for the purpose of making use of the thing (Art. 1950) (e.g. ordinary expenses for the preservation and expenses for ostentation). Note:  In case there are two or more bailees, their obligation shall be solidary (Art. 1945 ). This is an exception by express provision of law to the general rule that the concurrence of two or more parties in the same obligation gives rise only to a joint obligation (Arts. 1207, 1208). Reason: To effectively safeguard the rights of the bailor. OBLIGATIONS OF THE BAILOR (Arts. 1946 to 1952) 1. To respect the duration of the loan because the bailor is bound by the terms of the contract of commodatum which is for a certain time. General Rule: He cannot demand return before expiration of the period or accomplishment of the use. Exceptions: a. In case of urgent need of the thing, he may demand its return or temporary use. Reason:  Commodatum is essentially gratuitous (Art. 1946). Effect: If for temporary use, contract of commodatum is suspended while the thing is in the possession of the bailor. b. If the bailee commits any act of ingratitude specified in Art. 765 (Art. 1948). Acts of ingratitude under Art. 765: i. If the bailee should commit some offenses against the person, honor or property of the bailor, or of his wife or children under his parental authority; ii. If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the baliee himself, his wife or children under his authority; and iii. If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor. Reason: Similarity of commodatum with donation. iv. Precarium (Art. 1947) v. If the loan is for an illegal or immoral use (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 448 ).

CIVIL LAW

Reason: The contract is void ( Art. 1409 (1) and (7)). 2. Refund to the bailee extraordinary expenses incurred for the preservation of the thing, provided that the bailee brings the same to the knowledge of the bailor before incurring them, except when the reply to the notification cannot be awaited without danger (Art. 1949 (1)). Note:  This will not apply if the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee. In which case, a different rule applies. Please refer to discussion on Obligations of the Bailee. 3. To be liable to the bailee for damages for known hidden flaws (Article 1951). Requisites: (FHANS) a. Existence of f law or defect; b. The flaw or defect is hidden; c. The bailor is aware thereof; d. Bailee is not aware thereof; and e. The bailee suffers damages by reason of said flaw or defect. If the above requisites concur, the bailee has the right of retention for damages. The bailor is made liable for his bad faith. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. Reason:  The expenses or damages may exceed the value of the thing loaned (Art. 1952).

M UTUUM (A RTS . 1953  – 1955) Contract of Mutuum  A contract whereby one of the parties delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid ( Art. 1933). It involves the return of the equivalent amount only and not the identical thing because the borrower acquires ownership of the money or other consumable thing loaned (Art. 1978).  A loan of money may be payable in kind (Art. 1958).

CREDIT TRANSACTIONS

Subject Matter: General Rule: Consumable/fungible goods Exception: Consumable goods may be the subject matter of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition (Art. 1936). Fungible and Non-Fungible: 1. Fungible – those which belong to common genus which includes several species of the same kind (e.g. grain, wine, oil ) 2. Non-fungible  –  those that are specifically determined and cannot be substituted by others (e.g. specific land, building, particular house) Note: Mere issuance of checks to the debtor does not perfect the contract of loan. It is only after the checks have been cashed by the debtor that the contract may be deemed perfected (Art. 1249). The destruction of the thing loaned does not extinguish one’s obligation to pay because his obligation is not to return the thing loaned but to pay a generic thing. No estafa is committed by a person who refuses to pay his debt or denies its existence. Reason: The borrower effectively acquires ownership. Mutuum and Rent Distinguished Mutuum Rent Delivery of some nonDelivery of money or consumable thing in some consumable thing order that the other may with a promise to repay use it during a certain an equivalent of the period and return it to same kind and quality the former There is a transfer of There is no transfer of ownership of the thing ownership of the thing delivered. delivered. Relationship between Relationship is that of a the parties is that of landlord and tenant obligor-obligee Landlord receives Creditor receives compensation either in payment for his loan. money, provisions, chattels, or labor. Loan and Sale Distinguished Loan Sale Real contract Consensual contract Generally unilateral because only the Bilateral and reciprocal borrower has obligations

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CREDIT TRANSACTIONS

Note: If the property is “sold”, but the real intent is only to give the object as security for a debt – as when the “price” is comparatively small – there really is a contract of loan with an “equitable mortgage” (Art. 1602). Barter  A contract whereby one person transfers ownership of non –fungible things to another with the obligation on the part of the latter to give things of the same kind, quality and quantity (Art. 1954). Commodatum / Mutuum and Barter Distinguished Commodatum/ Barter Mutuum In mutuum, the subject Subject matter is nonmatter is money or fungible, (non fungible things consumable) things In commodatum, the The thing with bailee is bound to equivalent value is return the identical thing given in return for what borrowed has been received Mutuum may be gratuitous and  Always onerous, and is commodatum is actually a mutual sale essentially gratuitous Form of Payment: 1. If thing loaned is money, payment must be made in the currency stipulated, otherwise that which is legal tender in the Philippines and in case of extraordinary inflation or deflation, payment shall be in the value of the currency at the time of the creation of the obligation (Art. 1249, 1250 and 1955 (1)). 2. If thing loaned is other than money, payment of another thing of the same kind, quality and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan (Art. 1955 (2)).

I NTEREST ( A RTS . 1956  – 1961) Guidelines for the Proper Application of Interest: 1. No interest shall be due unless it has been expressly stipulated in writing (Article 1956). If stipulated, the interest must be paid from the time it falls due. The interest however, does not run: a. During the effectivity of the moratorium law, which has the effect of suspending the collection of payment of the principal obligation, which carries the accessory obligation in the payment of interest; b. In case of insolvency of the bank, when the Banko Sentral prohibits the bank from doing business; and

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c. Despite defective consignation, from the time of the offer and tender of payment (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 452). Requisites for Demandability of Interest: (ELW) a. Must be expressly stipulated Exceptions: i. Indemnity for damages (Art. 2209) ii. Interest accruing from unpaid interest (Art. 2212) Compound Interest General Rule: Unpaid interest shall not earn interest. Exceptions: i. When judicially demanded ii. When there is an express stipulation (must be in writing) b. Be lawful c. The agreement must be in writing 2. If a particular rate of interest has been expressly stipulated by the parties that interest, not the legal rate of interest, shall be applied (stipulated rate of interest ). 3. If the exact rate of interest is not mentioned, the legal rate of 6% or 12% shall be payable and computed from date of default. The legal rate depends upon whether it is a loan or forbearance of money or not. Note: Central Bank Circular No. 416   fixing the rate of interest at 12% per annum deals with: a. Loans; b. Forbearance of any money, goods or credits; and c. Judgments involving such loans or forbearance in the absence of express agreement to such rate. If the obligation arises from other sources such as contract of sale, damages arising from injury to persons and loss of property, which does not involve a loan, what is applicable is the rate of 6% annually as provided in Art. 2209 (Terminal Facilities and Services Corp. vs. PPA, G.R. No. 135639, February 27, 2002). The obligation consisting in the payment of sum of money referred to in Art. 2209 is not confined to a loan or forbearance of money but has been applied by SC in cases involving default in the payment of price or consideration under a contract of sale and an action for damages for injury to persons and loss of property and an action for damages arising from unpaid insurance claims (Castelo vs. CA, G.R. No. 96372 May 22, 1995).

CIVIL LAW

4. When an obligation, regardless of its source, is breached, the contravenor can be held liable for damages. Interest as indemnity for damages is payable only in case of default or non-performance of the contract. As they are distinct claims, they may be demanded separately (Sentinel Insurance vs. CA, G.R. No. L52482, February 23, 1990). 5. With regard to an award of interest in the concept of damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: a. When the obligation breached consists of payment of a sum of money, in the absence of an agreement, the rate shall be the legal rate computed from delay (By virtue of Central Bank Circulars No. 416 and No. 905, the legal rate is increased from 6% to 12%). Note: The interest due shall itself earn legal interest from the time it is judicially demanded. b. In other cases, the rate of interest shall be six percent (6%) per annum. Note:  No interest shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. When the demand cannot be established, the interest shall begin to run only from the date of the judgment of the court. c. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit (Eastern Shipping Lines vs. CA, G.R. No. 97412, July 12, 1994). Formula in computing interest for loan or forbearance of money: TOTAL AMOUNT DUE = [principal + interest + interest on interest] – partial payments made Interest = principal x stipulated interest x number of years from due date until finality of judgment Interest on interest = Interest computed as of the filing of the complaint x 12% x no. of years until finality of  judgment Note: Total amount due as of the date of the finality of  judgment will earn an interest of 12% per annum until fully paid (Cuyco vs. Cuyco, G.R. No. 168736, April 19, 2006).

CREDIT TRANSACTIONS

Should the vendee opt to purchase a subdivision lot via the installment payment system, he is, in effect, paying interest on the cash price, whether the fact and rate of such interest payment are disclosed in the contract or not (Relucio vs. Bullante- Garfin. 187 SCRA 405, 1990). Note: No increase in interest rate unless it is expressly stipulated (PNB v. CA, G.R. No. 88880, April 30, 1991). Art. 1957 The form of contract is not conclusive. Parol evidence may be admitted to show that a written document though legal in form was in fact a cloak or device to cover usury (Briones vs. Cammayo, G.R. No. L-23559 October 4, 1971).  A usurious contract shall be considered void only with respect to the interest involved. Surcharges and penalties agreed to be paid by debtor partake the nature of liquidated damages and shall be reduced if iniquitous and unconscionable (Art. 2227). Payment of interest is separate and distinct from that of surcharges and penalties. A penalty stipulation is not necessarily preclusive of interest if there is an agreement to that effect (Digutan vs. CA, 376 SCRA 560, 2002). Note: Usury is now legally non-existent. The interest chargeable depends upon the agreement between the lender and the borrower (Liam Law vs. Olympic Sawmill Co., G.R. No. L-30771, May 28, 1984). Validity of Unconscionable Interest Rate in a Loan The Supreme Court said that nothing in said circular suspending the Usury Law grants lenders authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets (Almeda vs. CA, G.R. No. 113412, April 17, 1996). In Medel vs. Court of Appeals, (G.R. No. 131622, November 27, 1998 ) it was ruled that while stipulated interest of 5.5% per month on a loan is not usurious pursuant to Central Bank Circular No. 905 , the same must be equitably reduced for being iniquitous, unconscionable and exorbitant. It is contrary to morals. It was reduced to 12% per annum in consonant with justice and fair play. When the agreed rate is iniquitous and unconscionable, the courts may reduce the same as reason and equity demand. (Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004). The interest may also be reduced if the principal obligation has been partially performed.

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CREDIT TRANSACTIONS

Recovery of Unstipulated Interest (Art. 1960) 1. If paid by mistake, the debtor may recover as in the case of solutio indebiti  or undue payment. 2. If voluntarily paid, there would be no recovery as in the case of natural obligations. The presence of escalation clause without the corresponding de- escalation clause in the event of a reduction of interest as ordered by law makes the clause one-sided as to make it unreasonable. Any increase in the interest rate pursuant to an escalation clause must be the result of an agreement between the two parties. Increases unilaterally imposed by a bank are in violation of the principle of mutuality of contracts. A contract containing a condition which makes its fulfillment dependent upon the uncontrolled will of one of the contracting parties is void (PNB vs. CA, G.R. No. 109563, July 9, 1996, 72 SCAD 39; Equitable PCI Bank et. al. vs. Ng Sheung Ngor et. al., G.R. No. 171545, December 19, 2007).

D EPOSIT (A RTS . 1962  – 2009) Contract of Deposit  A contract constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same (Art. 1962). Principal Purpose (Art. 1962) SAFEKEEPING. If the safekeeping is not the principal purpose it may be either: 1. Commodatum, 2. Lease or 3. Agency. The depositor need not be the owner of the thing deposited because the purpose of the contract is safekeeping and not transfer of ownership. The depositary cannot dispute the title of the depositor (Art. 1984(1)). The depositary is in estoppel (Art. 1436).

CIVIL LAW

Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation (Art. 1316). 2. Unilateral  –  when gratuitous because only the depositary has an obligation 3. Bilateral – if with compensation because it gives rise to obligations on the part of both the depositary and depositor Deposit and Mutuum Distinguished Deposit

Mutuum

Purpose For safekeeping or Consumption custody When to Return Depositor can demand Period must be return anytime respected by the lender Subject Matter Movable/corporeal things only in case of extrajudicial deposit Fungible things  Any property in case of  judicial deposit Relationship Depositor and Lender and borrower depositary Deposit Mutuum Compensation Generally gratuitous (except by mutual May be gratuitous, or agreement or with a stipulation to pay depositary is engaged interest in storing goods)

Deposit and Commodatum Distinguished

 A contract of deposit may be made orally or in writing (Art. 1969).

Deposit

Characteristics: 1. Real contract – perfected by the delivery of the subject matter.  An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing (Art. 1963).

Purpose is safekeeping

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Commodatum Purpose Purpose is the transfer of the use

When to Return The borrower can use The depositary can the thing for the period always be required to stipulated, and can be return the thing at any required to return only time. in case of urgent need.

CIVIL LAW

Deposit

Commodatum Subject Matter Movable/corporeal things only in case of Both movable and extrajudicial deposit immovable may be the object.  Any property in case of  judicial deposit Compensation May be gratuitous

Essentially and always gratuitous

Kinds of Deposit: (Art.1964) 1. Judicial (Sequestration)  –  takes place when an attachment or seizure of property in litigation is ordered 2. Extra-judicial a. Voluntary  –  delivery is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited (Arts. 1968 to 1995). b. Necessary – made in compliance with: i.  A legal obligation, or ii. On occasion of any calamity, or  iii. By travelers in hotels and inns, o iv. By travelers with common carriers. Judicial and Extra-judicial Deposit Distinguished Judicial Extra-Judicial Creation Will of the parties or Will of the court contract Purpose Insures the right of a party to property or to Custody and recover in case of safekeeping favorable judgment Subject Matter Generally immovable Movables only Judicial Extra-Judicial Cause  Always onerous Generally gratuitous When must the thing be returned Upon order of the court Upon demand of or when litigation is depositor ended In whose behalf it is held Person who has a right Depositor When Deposit is Not Gratuitous (Art.1965) 1. When there is a stipulation; 2. Depositary is engaged in business of storing goods; 3. Property saved from destruction without knowledge of the owner.

CREDIT TRANSACTIONS

Effect of Incapacity of the Depositary or Depositor: 1. If the depositary is capacitated, he is subject to all the obligations of a depositary whether the depositor is capacitated or not (Art. 1970). Under the law, “persons who are capable cannot allege the incapacity of those with whom they contracted” ( Art. 1397 ). 2. If the depositary is incapacitated, he does not incur the obligation of a depositary. However, he is liable to: a. Return the thing deposited while still in his possession; or b. Pay the depositor the amount by which he may have benefited himself with the thing or its price subject to the right of any third person who acquired the thing in good faith, in which case the depositor may only bring an action against him for its recovery. OBLIGATIONS OF THE DEPOSITARY 1. To keep the thing safely (Art. 1972) Rules: He is liable if the loss occurs through his fault or negligence even if the thing is insured. The loss of the thing while in his possession ordinarily raises the presumption of fault on his part. The required degree of care is greater when: a. Stipulated; b. It is the depositary who voluntarily offered to keep the thing; c. The deposit is compensated; or d. The deposit produces benefit to the depositary (Tolentino, Civil Code of the Philippines Vol 5., 1992 ed., p. 460 ). 2. To return the thing (Art. 1972) Person to whom the thing must be returned: a. Depositor, to his heirs and successors, or the person who may have been designated in the contract; Note:  If two or more persons each claiming to be entitled to a thing, the depositary can file an action to compel the depositors to settle their conflicting claims among themselves in the nature of an interpleader (Sec. 1, Rule 62, Rules of Court). b. Guardian or administrator of the person who made the deposit if the latter is incapacitated at the time of deposit or the latter himself should he acquire capacity (Art. 1970); c. Legal representative of the depositor should the latter subsequently lose his capacity during the deposit ( Art. 1986 ).

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Time of return: General Rule:  Upon demand even though a specified period or time for such return may have been fixed. Exceptions: a. When the thing is judicially attached while in the depositary’s possession; b. Should he have been notified of the opposition of a third person to the return or removal of the thing deposited; in such instance, the depositary must immediately inform the depositor of the attachment or opposition (Art. 1988); or c. If deposit is gratuitous, the depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if justifiable reasons exists for its return. If the depositor refuses to receive it, the depositary may secure its consignation from the court (Art. 1989). Note:  If the deposit is for a valuable consideration, period must be followed even if the depositary suffers inconvenience as a consequence (Art 1989). What to return: a. The thing deposited with all its products, accessories, and accessions (Art. 1983) b. If by force majeure or government order, the depositary loses the thing, and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor (Art. 1990). Where to return: a. If there is a stipulation, at the place agreed upon by the parties b. If there is no stipulation, at the place where the thing deposited might be even if it should not be the same place where the deposit was made provided there was no malice on the part of depositary (Art. 1987). 3. Not to deposit the thing with a third person unless authorized by express stipulation (Art. 1973) Reason: Deposit is founded on trust and confidence. The depositor is liable for the loss under the following instances: a. He transfers the deposit with a third person without authority, although there is no negligence on his part and the third person; b. He deposits the thing with a third person who is manifestly careless or unfit, although authorized, even in the absence of negligence; or

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c. The thing is lost through the negligence of his employees whether the latter are manifestly careless or not. 4. To change the way of the deposit if under the circumstances, the depositary may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation, provided, that the former notifies the depositor thereof and wait for his decision, unless delay would cause danger ( Art. 1974). 5. If the thing deposited should earn interest (Art. 1975) a. To collect interest and the capital itself as they fall due; and b. To take steps to preserve its value and rights with regard to it. In CA Agro Industrial Development Corp. vs. CA, G.R. No. 90027, March 3, 1993, the Court ruled that  Art. 1975  cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box.  A contract for the rent of safety deposit boxes is a special kind of deposit. Hence, it is not to be strictly governed by the provisions on deposit. It is a contract of bailment for hire and mutual benefit. The relation between the bank and its customer is that of a bailor and bailee. It cannot also be characterized as an ordinary contract of lease because full and absolute control of the safety deposit boxes was not given to the  joint renters 6. Not to commingle things of the same kind and quality deposited if so stipulated (Art. 1976). Depositary can only commingle if the articles are of the same kind and quality and there is no contrary stipulation. If commingling is allowed, each depositor shall be entitled to each portion of the entire mass as the amount deposited by him bears to the whole. If the articles deposited which belong to the differed depositors are not of the same kind and quality, it is the duty of the depositary to keep them separate or at least identifiable (De Leon, Comments and Cases on Credit Transactions, 2010 ed., p. 125). 7. Not to make use of the thing deposited unless authorized (Art. 1977). General Rule: Deposit is not for use of the thing. Use by the depositary would make him liable for damages.

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Exceptions: a. When the preservation of the thing deposited requires its use, but it must be used only for that purpose; or b. When expressly permitted by the depositor (the permission shall not be presumed and its existence must be proved), provided that safekeeping is still the principal purpose of the contract If the principal purpose of the contract is no longer safekeeping: a. The contract becomes a commodatum if the thing deposited is non-consumable. b. The contract is converted into a simple loan or mutuum if the thing deposited consists of consumable things. 8. To be liable for loss through fortuitous event: (SUDAFN) a. If stipulated b. If he uses the thing without the depositor's permission c. If he delays its return d. If he allows others to use it, even though he himself may have been authorized to use the same e. If there is f raud or negligence on his part (Art. 1170) 9. Liability when the thing deposited is delivered closed and sealed (Art. 1981) a. To return the thing deposited in the same condition (par. 1); b. To pay for damages should the seal or lock be broken through his fault, which is presumed unless proven otherwise (par. 2); and c. To keep the secret of the deposit when the seal or lock is broken with or without his fault (par. 3). Note: The depositary is authorized to open the thing deposited which is closed and sealed when (Art. 1982): i. There is presumed authority; or ii. There is necessity to do so as when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. 10. To pay interest on sums converted to personal use from the day of conversion if the deposit consists of money (Art. 1983 and 1896). Note: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan (Art. 1980).  A bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the

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part of the depositor. In true deposit, compensation or set-off is not allowed.

such

Irregular Deposit and Mutuum Distinguished Irregular Deposit Mutuum The lender cannot The consumable thing demand restitution until deposited may be the time for payment, as demanded at will by the provided in the contract, depositor. has arisen. Irregular Deposit

Mutuum Essential cause for the The only benefit is that transaction is the which accrues to the necessity of the depositor. borrower. The irregular depositor Common creditors has a preference over enjoy no preference in other creditors with the distribution of the respect to the thing debtor’s property. deposited. 11.To advise the true owner that a deposit has been made should he discover that the thing deposited was stolen from the owner (Art. 1984) Note: If the owner despite such information does not claim it within the period of 1 month, the depositary shall be relieved from all responsibility by returning the same to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (Art. 1984). Rule When There are Two or More Depositors: 1. Thing deposited is divisible and depositors are not solidary: Each depositor can demand only his proportionate share thereto. 2. Obligation is solidary or the thing is not divisible: Rules on active solidarity shall apply, i.e. each one of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter ( Art. 1212 ), and the depositary may return the thing to anyone of the solidary depositors unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case, delivery should be made to him (Art. 1214). 3. Return to one of depositors stipulated: The depositary is bound to return it only to the person designated although he has not made any demand for its return.

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The depositary may retain the thing in pledge until full payment of what may be due him by reason of the deposit ( Art. 1994). This is one of pledge created by operation of law.

A deposit is extinguished: 1. Upon the loss or destruction of the thing deposited; 2. In case of gratuitous deposit, upon the death of either the depositor or the depositary (Art. 1995)

The depositor’s heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him (Art. 1991). The law meant ‘depositary’s,’ as shown in Article 1178, old Civil Code (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 468 ).

Note: A deposit for compensation is not extinguished by the death of either party because, unlike a gratuitous deposit, an onerous deposit is not personal in nature (De Leon, Comments and Cases on Credit Transactions, 2010 ed., p. 145).

OBLIGATIONS OF THE DEPOSITOR 1. To pay expenses for preservation if the deposit is gratuitous (Art. 1992)  (contemplates ordinary and extraordinary necessary expenses) Note: If the deposit is for valuable consideration, expenses for preservation are borne by the depositary unless there is a contrary stipulation. 2. To pay losses incurred by the depositary due to the character of the thing deposited General Rule:  The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited. Exceptions: a. At the time of the deposit, the depositor was not aware of the dangerous character of the thing; b. When depositor was not expected to know the dangerous character of the thing; c. When the depositor notified the depository of the same; or d. The depositary was aware of it without advice from the depositor. EXTINGUISHMENT OF VOLUNTARY DEPOSIT Same as the causes for extinguishment of obligations in  Art. 1231  of the New Civil Code: (NoCoMeRePaLo PreReFulAn) 1. Novation 2. Compensation 3. Merger 4. Remission 5. Payment 6. Loss 7. Prescription 8. Rescission 9. Fulfillment of resolutory condition 10.Annulment

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NECESSARY DEPOSITS Examples of necessary deposit in compliance with a legal obligation: 1. The judicial deposit of a thing the possession of which is being disputed in a litigation by two or more persons (Art. 538). 2. The deposit with a bank or public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservation (Art. 586). 3. The deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way (Art. 2104) 4. Those required in suits as provided in the Rules of Court; and 5. Those constituted to guarantee contracts with the government (The deposit arises from an obligation of public or administrative character.) Note: A deposit made in compliance with law is governed by the provisions of such law and in default thereof, by the rules on voluntary deposit (Art. 1997 (1)). DEPOSIT BY TRAVELERS IN HOTELS AND INNS: The keepers of hotels or inns shall be responsible as depositaries for the deposit of effects made by travelers provided: 1. Notice was given to them or to their employees of the effects brought by the guest; and 2. The guests take the precautions which said hotelkeepers or their substitutes advised relative to the care and vigilance of their effects (Art. 1998). This also applies to the passenger’s baggage which is in his personal custody (Art. 1754). Travellers refer to transients and not to boarders. Liability extends to vehicles, animals and articles which have been introduced or placed in the annexes of the hotel (Art. 1999).

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

Nature and Purpose of Judicial Deposit: The deposit is judicial because it is auxiliary to a case pending in court. The purpose is to maintain the status quo during the pendency of the litigation or to insure the right of the parties to the property in case of favorable judgment.

When hotel-keeper NOT liable: When the loss or injury is caused by: 1. Force majeure, theft by a stranger with the use of arms or irresistible force; 2. The acts of guests, his family, servants or visitors; or 3. The character of the things brought into the hotel.

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

Under Art. 2003, the hotel-keeper cannot free himself from the responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation to such effect shall be void.  Art. 2003  is an expression of public policy because the hotel business is imbued with public interest. The award of damages was not only contractual but also tortuous (YHT Realty Corp. vs. CA, G.R. No. 126780, February 11, 2005). Notice is necessary only for suing civil liability but not in criminal liability. Right of Retention by Hotel-Keepers: The hotel-keeper has a right to remain the things brought into the hotel by the guest, as a security for credits on account of lodging, and suppliers usually furnished to hotel guests (Art. 2004). JUDICIAL DEPOSIT Judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered (Art. 2005). Movable as well as immovable property may be the object of sequestration (Art. 2006). The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders (Art. 2007). The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family (Art. 2008).  As to matters not provided in the Civil Code, judicial sequestration shall be governed by the Rules of Court.

G UARANTY

Suretyship  A contract whereby one person engages to be answerable for the debt, default or miscarriage of the principal. The contract of suretyship must be in writing to be enforceable (Art. 1403, No. 2(b)). If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety. In a solidary obligation, a solidary

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debtor is himself a principal debtor. Hence, a solidary debtor cannot be considered a guarantor of his co-debtor. Whenever applicable, the provisions on guaranty (Arts. 2047 to 2048) also apply to suretyship. However, it is also possible for a guarantor to bind himself solidarily with the principal debtor without affecting the nature of the contract. Nature of Suretyship’s Undertaking: 1. Liability is contractual and accessory but direct. He directly, primarily and equally binds himself with the principal as original promisor, although he possesses no direct or personal interest over the latter’s obligation, nor does he receive any benefits therefrom (PNB vs. CA, G.R. No. 33174, July 4, 1991). 2. Liability is limited by terms of contract.  A contract of surety is not presumed; it cannot extend to more than what is stipulated. Creditors, however, may recover from the surety as part of their damages, interest at the legal rate, even if the surety would thereby become liable to pay more than the amount stipulated. Reason:  NOT by reason of contract, but by reason of its failure to pay when demanded, and for having compelled the plaintiff to resort to the courts to obtain payment (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 506). 3. Liability arises only if principal debtor is held liable. Note: The creditor may sue separately or together, the principal debtor and any of the sureties. In the absence of collusion, the surety is bound by a  judgment against the principal even though he was not a party to the proceedings. The nature of its undertaking makes it privy to all proceedings against its principal (Finman General Assurance Corp. vs. Salik, G.R. No. 84084, August 20, 1990 ). 4. Surety is not entitled to the benefit of exhaustion. Reason: Surety assumes a solidary liability for the fulfillment of the principal obligation. 5. Undertaking is to the creditor and not to debtor. 6. Surety is not entitled to notice of principal’s default 7. Prior demand by the creditor upon principal is not required. Note: As soon as the principal is in default, the surety likewise is in default.

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8. Surety is not exonerated by neglect of creditor to sue principal. Characteristics of Guaranty/Suretyship: 1. Accessory  –  it cannot exist by itself and an indispensable condition for its constitution is the existence of a valid principal obligation. Note:  Guaranty may be constituted to guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation (Art. 2052). However, it must be considered binding only if the guarantor knew the defective character of the principal obligation (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 504). 2. Subsidiary and conditional – takes effect only when the principal debtor fails in his obligation, subject to limitation. Note:The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But a guarantor may bind himself for less than that of the principal (Art. 2054).  A guaranty may be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured (Magdalena Estates Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966 ). 3. Unilateral It gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa although after its fulfillment, the principal debtor becomes liable to indemnify the guarantor and it may be entered even without the intervention of the principal debtor, in which case  Arts. 1236   and 1237 shall apply and it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa. 4. Nominate 5. Consensual 6. It is a contract between the guarantor/surety and creditor. Note: The contract exists for the benefit of the creditor and not for the benefit of the principal debtor who is not a party to the contract of guaranty. In declaring that guaranty must be express, the law refers solely and exclusively to the obligation of the guarantor because it is he alone who binds himself by

CIVIL LAW

his acceptance. With respect to the creditor, no such requirement is needed because he binds himself to nothing. However, when there is merely an offer of a guaranty, or merely a conditional guaranty, in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become binding until it is (1) accepted and (2) until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty. But in any case, the creditor is not precluded from waiving the requirement of notice. The consideration of the guaranty is the same as the consideration of the principal obligation. The creditor may proceed against the guarantor although he has no right of action against the principal debtor. 7. Falls under the Statute of Frauds –  it is not presumed and must be in writing to be unenforceable (Art. 1403, (2) (b)). 8. General Rule:  Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended beyond its terms or specified limit (Magdalena Estates Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966 ). The rule of strictissimi juris  commonly pertains to an accommodation surety because the latter acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to those of a fiduciary. Exception: In case of compensated sureties 9. General Rule:  Guarantor must not be the principal debtor. Exception: In a real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his personal or real properties.

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Guaranty and Suretyship Distinguished Guaranty Suretyship Liability depends on an Surety assumes liability independent agreement as regular party to the to pay the obligation if undertaking. primary debtor fails to do so. Surety is an original Collateral undertaking promisor. Guarantor is Surety is primarily secondarily liable. liable. Guarantor binds himself Surety undertakes to to pay if the principal pay if the principal CANNOT PAY. DOES NOT PAY. Insurer of solvency of Insurer of the debt debtor Guarantor can avail of Surety cannot avail of the benefit of excussion the benefit of excussion and division in case and division. creditor proceeds against him. Not bound to take notice of the non- Held to know every performance of his default of his principal principal Often discharged by the Not discharged by mere mere indulgence of the indulgence of the creditor or want of creditor or by want of notice of default notice of default Indorsement and Guaranty Distinguished Indorsement Guaranty Primarily of transfer Contract of security Failure in either or both Unless the note is of these particulars promptly presented for does not generally work payment at maturity and as an absolute due notice of dishonor discharge of a given to the indorser guarantor’s liability, but within a reasonable is discharged only to time, he will be the extent of the loss discharged absolutely which he may have from all liability thereon. suffered in consequence thereof. Indorser does not warrant the solvency. He is answerable on a Guarantor warrants the strict compliance with solvency of the the law by the holder, promisor. whether the promisor is solvent or not. Indorser can be sued as Guarantor cannot be promisor. sued as promisor.

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Guaranty and Warranty Distinguished Guaranty Warranty  An undertaking that the title, quality, or quantity  A contract by which a of the subject matter of person is bound to the contract is what it another for the has been represented fulfillment of a promise to be, and relates to or engagement of a some agreement made third party ordinarily by the party who makes the warranty Note:  A guaranty is gratuitous, unless there is a stipulation to the contrary (Art. 2048). The cause of the contract is the same cause which supports the obligation as to the principal debtor.  A married woman may guarantee an obligation without the husband’s consent, but shall not thereby bind the conjugal partnership, except in cases provided by law (Art. 2049), i.e. when the guaranty has redounded to the benefit of the family. The peculiar nature of a guaranty or surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either from the principal debtor or from the creditor; a consideration moving to the principal alone will suffice. Double or Sub-Guaranty One constituted to guarantee the obligation of a guarantor. In case of insolvency of the guarantor for whom he bound himself, the sub-guarantor is responsible to the coguarantors in the same terms as the guarantor (Art. 2075). Continuing Guaranty or Suretyship Not limited to a single transaction but contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked. Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each

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financing or credit accommodation extended to the principal debtor ( Atok Finance Corp. vs. Court of Appeals, G.R. No. 80078, May 18, 1993). Exception to the concept of continuing guaranty is a chattel mortgage. A chattel mortgage can only cover obligations existing at the time the mortgage is constituted and not those contracted subsequent to the execution thereof (Belgian Catholic Missionaries, Inc. vs. Magallanes Press Inc., et al., G.R. No. 25729, November 24, 1926 ). Extent of Guarantor’s Liability: (Art. 2055) 1. Where the guaranty is definite: It is limited in whole or in part to the principal debt, to the exclusion of accessories. 2. Where guaranty is indefinite or simple: It shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been  judicially required to pay. Qualifications of a Guarantor (Arts. 2056 to 2057) 1. Possesses integrity 2. Capacity to bind himself 3. Has sufficient property to answer for the obligation which he guarantees General Rule: The qualifications need only be present at the time of the perfection of the contract. Exception:  When the guarantor is selected by the principal debtor because the latter answers for the solvency of the former. In this case the guarantor must possess the qualifications prescribed not only at the moment the guaranty is given but also until the extinguishment of the debt. Reason:  Remember that a guaranty is for the benefit of the creditor not the debtor. Effect of Subsequent Loss of Required Qualifications: The subsequent loss of the integrity or property or supervening incapacity of the guarantor would not operate to exonerate the guarantor or the eventual liability he has contracted, and the contract of guaranty continues. HOWEVER, the creditor may demand another guarantor with the proper qualifications. But he may waive it if he chooses and hold the guarantor to his bargain. Benefit of Excussion (Art. 2058) Right in which the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the

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properties of the principal debtor, and has resorted to all of the legal remedies against such debtor.

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

How Exercised: (Art. 2060) 1. Demand for payment upon the guarantor only after  judgment upon the debt; and 2. Point out the available property (not in litigation or encumbered) of the debtor within the Philippines.

Benefit of Division (Art. 2065) Should there be several guarantors of only one debtor and for the same debt; the obligation to answer for the same is divided among all. General Rule: Joint Liability

Effect of Failure of the Creditor to Exhaust and Resort to all Legal Remedies: He shall suffer the loss but only to the extent of the value of the said property for the insolvency of the debtor (Art. 2061). This is not applicable to a contract of suretyship (Arts. 2047, par. 2; 2059(2)). This cannot even begin to take place before judgment has been obtained against the debtor (Baylon vs. CA. G.R. No. 109941, August 17, 1999). When Guarantor is Not Entitled to the Benefit of Excussion: (PAIRS N’ BIPS) 1. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation It is not necessary, however, that the debtor be judicially declared insolvent or bankrupt.

2. When he has absconded, or cannot be sued within Philippines unless he has left a manager representative 3. In case of insolvency of the debtor 4. Insolvency must be actual; it must be proven unsatisfied writ of execution. 5. The guarantor has expressly r enounced it 6. If he has bound himself solidarily with the debtor 7. When the debt is a natural obligation or unenforceable obligation.

the or

by

an

Reason:  Because in these cases, the creditor has no action against the principal debtor (Tolentino, Civil Code of the Philippines, Vol.5, 1992 ed., p. 514). 8. If he is a judicial bondsman or sub-surety. 9. If he fails to interpose it as a defense before judgment is rendered against him 10.If the guarantor does not set up the benefit against the creditor upon the latter’s demand for payment from him. Note: Demand must be actual; joining the guarantor in the suit against the principal debtor is not the demand intended by law.

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

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2. A guarantor is entitled to be heard before execution can be issued against him where he is not a party in the case involving his principal (procedural due process). Remedies of Paying Guarantor: 1. Right of Indemnity or Reimbursement 2. Right of Subrogation Guarantor’s Right of Indemnity or Reimbursement General Rule:  Guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be reimbursed by the principal debtor. Exceptions: 1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor  (Art. 2050 ). 2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it ( Art. 1238 ). 3. Waiver of the right to demand reimbursement. Under Art. 2066 , the indemnity consists of: (DIED) 1. Total amount of the debt 2. Legal interest thereon from the time the payment was made known to the debtor (notice of payment is in effect a demand so that if the debtor does not pay immediately, he incurs in delay), even though it did not earn interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of the payment he has made. 3. Expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor; only those expenses that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (Art. 2055)  and not those which depend upon his will or own acts or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor. 4. Damages if they are due in accordance with law. General rules on damages apply. Guarantor has no right to demand reimbursement until he has actually paid the debt. Exceptions (Art. 2071): (SIB-D-TRI) 1. When he is sued for payment; 2. Insolvency of the principal debtor; 3. Debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;

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4. Debt becomes demandable; 5. Lapse of ten (10) years, when there's no fixed period for its maturity; 6. Reasonable grounds to fear that the principal will abscond; or 7. The debtor is in imminent danger of becoming insolvent Note:  Art. 2071 is applicable and available to the surety (Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co., G.R. No. L-9353, May 21, 1957). Effect of Payment by Guarantor: 1. Without notice to debtor (Art. 2068): The debtor may interpose against the guarantor those defenses which he could have set up against the creditor at the time the payment was made, e.g. the debtor can set up against the guarantor the defense of previous extinguishment of the obligation by payment. 2. Before maturity (Art. 2069): Not entitled to reimbursement until the expiration of the period, unless the payment was made with the consent or has been ratified by the debtor (Ratification may be express or implied.) Effect of Repeat Payment by Debtor (Art. 2070): General Rule:  Before guarantor pays the creditor, he must first notify the debtor, otherwise the latter may set up defenses he could have set up against the creditor (Art. 2068). If he fails to give such notice and the debtor repeats payment, the guarantor can only collect from the creditor and guarantor has no cause of action against the debtor for the return of the amount paid by guarantor even if the creditor should become insolvent. Exception:  The guarantor can still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present: (PIG) 1. Guarantor was prevented by fortuitous event to advise the debtor of the payment; 2. The creditor becomes insolvent; and 3. The guaranty is gratuitous. Guarantor’s Right to Subrogation Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation. Note: This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Art. 2066.

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

afterwards lose the same through eviction or conveyance of property; Effect of eviction: Revival of principal obligation, not the guaranty 3. Whenever by some act of the creditor, the guarantors, even though they are solidarily liable, cannot be subrogated to the rights, mortgages and preferences of the former; 4. For the same causes as all other obligations under Art. 1231; 5. When principal obligation is extinguished; 6. Extension granted to the debtor by the creditor without the consent of the guarantor. Note: Mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein.

Remedies of Guarantor: (Remedies are ALTERNATIVE) 1. Obtain release from the guaranty (can only be exercised against the principal debtor). Reason: The creditor cannot be compelled to release the guarantor before payment of his obligation to the creditor

Such delay, however, extinguishes the guaranty: 1. When the delay is for such length of time as to allow prescription of the action to enforce payment 2. When upon maturity, the guarantor requires the creditor to enforce payment against the debtor, but the creditor fails to act and the debtor subsequently becomes insolvent (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 529).

2. Demand a security that shall protect him from any proceedings by the creditor, and against the danger of insolvency of the debtor.

Guarantor is Released in the Following Instances: 1. Creditor did not collect from third persons 2. Obligations payable in installments

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

Causes of Extinguishment of Guaranty: a. Release in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted b. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if he should

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

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guarantor (Art. 2056) and in special laws like the Rules of Court (Secs. 12 and 13, Rule 114).

Reason for 2nd and 3rd requisites:  In anticipation of a foreclosure sale

Note: Judicial bonds constitute merely a special class of contracts of guaranty by the fact that they are given “in virtue of a judicial order.

d. When the principal obligation becomes due, the subject matter of the pledge or mortgage may be alienated for the payment to the creditor (Art. 2087).

If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage sufficient to cover the obligation shall be admitted in lieu thereof (Art. 2083).

Note: If a third person secures an obligation by pledging his own movable property under the provisions of Article 2085, he shall have the same rights as guarantor under Articles 2066 to 2070, and  Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor (Art. 2120).

 A judicial bondsman and the sub-surety are NOT entitled to the benefit of excussion because they are sureties whose liability is primary and solidary (Art. 2084).

P LEDGE

AND

M ORTGAGE

Common Elements of Pledge and Mortgage ( Arts. 2085 to 2092 ) 1. Essential Requisites ( Art. 2085 ): (SODA) a. Secures the fulfillment of a principal obligation; b. Pledgor and mortgagor must be the absolute owner of the thing pledged or mortgaged; third persons can pledge or mortgage their own property to secure the principal obligation. General Rule: The rule is applicable to lands registered under the Torrens system. Exception: If the certificate of title was already in the name of the forger or imposter when the land was sold or mortgaged to an innocent purchaser or mortgagee, there being nothing to excite suspicion, the vendee or mortgagee has the right to rely on what appeared in the certificate of title of the vendor or mortgagor and acquires an enforceable right (Tolentino, Civil Code of the Philippines Vol.5, 1992 ed., p. 534). Note: Future property cannot be pledged or mortgaged (Dilag vs. Heirs of Resurreccion, 76 Phil. 650, 1946).  A mortgage of the conjugal property by one of the spouses is valid only as to one-half (½) of the entire property (PNB vs. Court of Appeals, G.R. No. L34404 June 25, 1980). c. Pledgor and mortgagor must have free disposal of their property, or be legally authorized for such purpose.

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The accommodation pledgor or mortgagor is not solidarily bound with the principal obligor but his liability extends only to the property pledged or mortgaged. Should there be any deficiency; the creditor has recourse on the principal debtor who remains to be primarily bound.  A pledge or mortgage, being merely an accessory agreement, its invalidity does not affect the principal contract of loan. While void, it can still be considered as an instrument evidencing an indebtedness (PNB vs. Banatao, G.R. No. 149221, April 7, 2009). 2. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void (Art. 2088). Pactum Commissorium Stipulation whereby the thing used as security shall automatically become the property of the creditor in the event of non-payment of the principal obligation in due time. By such a stipulation, the creditor would be able to acquire ownership of the property given as security without need of public sale or foreclosure required by law. General Rule: Pactum commissorium  is forbidden by law and any stipulation to that effect is declared null and void. Reason: The amount of the loan is ordinarily less than the real value of the thing pledged or mortgaged. Exception:  The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold (Art. 2112). The creditor shall be obliged to give an acquittance for his entire claim. This act shall be considered as full payment of the claim.

CIVIL LAW

Note:  Only the prohibited stipulation is void and shall not affect the validity of the principal obligation. Requisites: 1. There should be a pledge, mortgage or antichresis of property. 2. There is a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment of principal obligation (A. Francisco Realty and Development Corp. vs. CA, G.R. No. 125055, October 30, 1998). Exceptions: In the following cases, the Court ruled that there is still  pactum commissorium  even though there is no contract of pledge, mortgage of antichresis: a. An agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the former as secured by the said property (Nakpil vs. IAC, G.R. No. 74449 August 20, 1993). b. In pacto de retro sales but found actually to be equitable mortgages, stipulation therein that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period. c. Mortgagee’s act of registering the mortgaged property in his own name upon the mortgagor’s failure to redeem the property (Reyes vs. Sierra, G.R. No. L-28658, October 18, 1979). 3. Capability to secure all kinds of obligations (i.e. pure or conditional, voidable, unenforceable and natural) (Arts. 2052 and 2091). 4. Indivisibility (Art. 2089)  A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable.

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Exceptions: a. Where each one of several things guarantees a determinate portion of the credit b. Where only a portion of the loan was released c. Where there was failure of consideration d. Where there is no debtor-creditor relationship as when a third party is the pledgor or mortgagor Note:  The mortgagee may legally foreclose the real estate mortgage extrajudicially and waive the chattel mortgage foreclosure, and maintain instead a personal action for the recovery of the unpaid balance of the credit (Phil. Bank of Commerce vs. Macadaeg, G.R. No L-14174, October 31, 1960 ). 5. Possession of a mortgagee or pledgee is not in the concept of an owner, thus, the subject property cannot be acquired through prescriptive prescription, UNLESS, they renounce their status as such. 6. Pledgor and mortgagor retain ownership of the thing given as a security. 7. A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal right binding upon the parties and creates no real right in the property (Art. 2092). Note: What exists is only a right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet. Criminal Responsibility of Pledgor or Mortgagor Under the Revised Penal Code, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same or knowing that the real property is encumbered shall dispose of the same as unencumbered.  (Art. 316 (1,2) thereof.) The act of the owner of a personal property of wrongfully taking the same from its lawful possessor, to the prejudice of the latter or any third person is punishable.

The mere embodiment of a real mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole; both remain distinct agreements.

P LEDGE (A RTS . 2093  – 2123)

General Rule: Neither the debtor’s heir who has paid part of the debt can ask for proportionate extinguishment, nor creditor’s heir who received his share of the debt return the pledge or cancel the mortgage as long as the debt is not completely satisfied.

Contract of Pledge  A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

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Special Requisites: (in addition to the common essential requisites): 1. Possession of the thing pledged must be transferred to the creditor or a third person by agreement (Art. 2093)  Absent delivery, the creditor acquires no right to the property because pledge is merely a lien and possession is indispensable to the right of a lien. Whether or not a symbolic or constructive delivery is sufficient to validate a pledge would depend on the peculiar nature of the thing pledged (De Leon, Hector S., Comments and Cases on Credit Transactions, 2010 ed., p. 319). 2. Subject Matter: All movables which are within the commerce of men, provided they are susceptible of possession (Art. 2094) and incorporeal rights evidenced by documents of title, in which case, the instruments proving the right pledged shall be delivered to the creditor, and if negotiable must be endorsed (Art. 2095) 3. The description of the thing pledged and the date must appear in a public instrument to bind third persons, but not for the validity of the contract (Art. 2096). Reason:  to forestall fraud because a debtor might attempt to conceal his property by simulating a pledge. Kinds: 1. Conventional / Voluntary – created by contract 2. Legal  –  created by operation of law ( Examples:  Arts. 546, 612, 1731, 1914, 1994 and 2004) Characteristics: 1. Real contract  –  it is perfected by the delivery of the thing pledged 2. Accessory contract – it has no independent existence of its own 3. Unilateral contract –  obligation is solely on the part of the creditor to return the thing subject thereof upon the fulfillment of the principal obligation; and 4. Subsidiary contract  –  the obligation incurred does not arise until the fulfillment of the principal obligation which is secured.

CIVIL LAW

Requisites: a. Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged; b. No fault on the part of the pledge c. Pledgor offers another thing which is of the same kind and quality as the former d. Pledgee does not choose to exercise his right to cause the thing to be sold at public auction (Art. 2108) e. Pledgee advised the pledgor without delay Note: The pledgee’s right to have the thing sold at public sale granted under Art. 2108   is superior to the right granted under Art. 2107 . 2. To bid and be preferred at the public auction (Art. 2113) 3. To alienate the thing pledged provided the pledgee consents to the sale (Art. 2097) 4. To ask that the thing pledged be deposited in one of the following cases: a. If the creditor uses the thing without authority or misuses the thing, he may deposit the thing judicially or extrajudicially (Art. 2104). b. If the thing is in danger of being lost or impaired because of negligence or willful act of the pledgee, he may deposit the thing with a third person (Art. 2106). OBLIGATIONS OF THE PLEDGOR 1. To advise the pledgee of the flaws of the thing (Arts. 2101 and 1951). Note: Failure to do so, the pledgor may be held liable for damages. 2. Not to demand the return of the thing until after full payment of the debt, including interest due thereon and expenses incurred for its preservation (Art. 2105). Exception:  Pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same kind and quality (Art. 2107).

Extent of pledge:  Unless stipulated otherwise, pledge extends to the fruits, interests or earnings of the thing.

RIGHTS OF THE PLEDGEE (D-SBC 2-BA2R3OPS) 1. Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality (Art. 2109) Note: Remedies are alternative.

RIGHTS OF THE PLEDGOR 1. To demand return in case of reasonable grounds to fear destruction or impairment of the thing without the pledgee’s fault, subject to the duty of replacement (Art. 2107)

2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art. 2108) Note: The proceeds shall be a security for the principal obligation.

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3. To bring actions pertaining to the owner or to defend it against third persons 4. To choose which of several things pledged shall be sold 5. To collect and receive amount due on credit pledged 6. To bid at the public auction, unless he is the only bidder 7. To appropriate the thing in case of failure of the second public auction 8. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit 9. To r etain excess value received in the public sale 10.To r etain the thing until after full payment of the debt 11.To be r eimbursed for the expenses made for the preservation of the thing pledged 12.To object to the alienation of the thing 13.To possess the thing 14.To sell at public auction in case of non-payment of debt at maturity OBLIGATIONS OF THE PLEDGEE (CUDA 3R) 1. Take care of the thing with the diligence of a good father of a family and be liable for the loss or deterioration of such (Art. 2099). 2. Not to use thing unless authorized by the owner or its preservation requires its use. 3. Not to deposit the thing with a third person unless so stipulated. 4. Responsibility for acts of agents and employees as regards the thing. 5. To advise pledgor of danger to the thing 6. To advise pledgor of the result of the public auction 7. To r eturn the thing upon payment of debt Prohibition Against Double Pledge: Property which has been lawfully pledged to one creditor cannot be pledged to another as long as the first one subsists. Right of Third Person to Satisfy Obligation:  A third person who has any right in or interest to the thing pledged may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept  payment (Art. 2117; De Leon, Hector S., Comments and Cases on Credit Transactions, 2010 ed., p. 365). EXTINGUISHMENT OF PLEDGE: (CRAPSA) 1. The same causes as all other obligations 2. Return of the thing pledged by the pledgee to the pledgor It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in possession of the debtor, or of a third person who owns the thing (Art. 1274).

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The possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been extinguished but not the principal obligation itself (Art. 2110). 3. Statement in writing by the pledgee that he renounces or abandons the pledge (Art. 2111) The principal debt however is not affected by the waiver of the pledge. But the waiver of the principal obligation carries with it that of the pledge (Art. 1273). Neither is the acceptance by the pledgor or owner nor the return of the thing pledged is necessary. 4. Payment of the debt 5. Sale of thing pledged at public auction 6. Appropriation under Art. 2112  REQUIREMENTS FOR SALE OF THING PLEDGED AT PUBLIC AUCTION 1. The debt is due and unpaid; 2. Sale must be at a public auction; 3. There must be notice to the pledgor and owner, stating the amount due; and 4. Sale must be with the intervention of a notary public. Effect of Sale of the Thing Pledged: (Art. 2115) 1. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. Note:  When an obligation is covered by many securities, for instance a pledge and a mortgage, foreclosure of the mortgage ahead of the pledge extinguishes the obligation. Reason: Accessory nature of pledge 2. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided. 3. If the price of the sale is less, the creditor is not entitled to recover the deficiency in all cases even if there is a stipulation to that effect. Reason: By electing to sell the thing pledged instead of suing on the principal obligation, the creditor waives any other remedy and must abide by the results of the sale.

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

Chattel mortgage may be be constituted only over any the personal property sold in installments

Pledgee may cause the The vendor-mortgagee

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sale under  Art. 2112  may foreclose the when the pledgor failed chattel mortgage on the to satisfy the principal thing sold, if one has obligation been constituted, should the vendee's failure to pay cover two or more installments If there deficiency, there If there is deficiency, can be no action against creditor not entitled to the purchaser to recover recover notwithstanding any unpaid balance. any stipulation to the  Any agreement to the contrary contrary is void.

R EAL M ORTGAGE ( A RTS . 2024  – 2131) Contract of Real Mortgage  A contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated.  As an accessory contract, its consideration is the same as that of the principal contract from which it receives life.  A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon.  A mortgage gives the mortgagee no right or claim to the possession of the property, and therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged unless the mortgage should contain some provision to that effect. It is a real, accessory, subsidiary and unilateral contract. Special Requisites: 1. It can cover only immovable property and alienable real rights imposed upon immovable. 2. It must appear in a public instrument. 3. Registration in the registry of property is necessary to bind third persons, but not for the validity of the contract. The persons in whose favor the law establishes a mortgage has the right to demand the execution and the recording of the document in which the mortgage is formalized.

CIVIL LAW

Order of foreclosure cannot be refused on the ground that the mortgage was not registered provided no innocent third parties are involved. Kinds: 1. Voluntary  –  agreed to by the parties or constituted by the will of the owner of the property on which it is created 2. Legal – one required by law 3. Equitable – one which, although lacking the formalities of a mortgage, shows the intention of the parties to make the property a security for a debt (See Art. 1602) Pledge and Real Mortgage Distinguished Pledge Real Mortgage Constituted on Constituted on movables immovables Property is delivered to pledgee or by common Delivery is not consent to a third necessary person Not valid against third persons unless a Not valid against third description of the thing persons unless pledged and date of registered pledge appear in a public instrument Note:  Absent express stipulation to the contrary, the mortgage includes the accessions, improvements, growing fruits and income of the property not yet received when the obligation becomes due and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use (Art. 2127). The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Art 2126).  A registered mortgage creates a real right, a lien inseparable from the property mortgaged, which is enforceable against the whole world. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law (Art. 2128). In this case, the assignee may foreclose the mortgage in case of non-payment by the debtor. Future property cannot be an object of a contract of mortgage. (Art. 2085(2)).  However, a stipulation subjecting to the mortgage lien, properties and improvements (after-acquired properties)  added to a

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property already mortgaged which the mortgagor may subsequently acquire, install, or use in connection with real property already mortgaged belonging to the mortgagor is valid (People’s Bank and Trust Co. vs. Dahican Lumber Co., G.R. No. L-17463, May 16, 1967 ). Blanket or Dragnet Clause One which is specifically phrased to subsume all debts of past or future origins. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. Mortgages given to secure future advancements are valid and legal contracts and the amounts named as consideration therein do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered (Prudential Bank vs. Don A. Alviar, et. al., G.R. No. 150197, July 28, 2005; Cuyco vs. Cuyco, GR. No. 168736, April 19, 2006 ). Provisions of this nature are carefully scrutinized and strictly construed particularly when the mortgage contract is one of adhesion. Purpose: Operates as convenience and accommodation to borrowers as it makes available additional funds without the parties having to execute additional security documents Nature: A mortgage with a dragnet clause is an “offer” by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Exception: It can be said that the “offer” was not accepted by the bank when a subsequent advance was made because of new security. A mortgage containing a “dragnet clause” will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. In which case, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to (Prudential Bank vs. Alviar, supra). Special Rights: 1. Mortgagor – To alienate the mortgaged property but the mortgage shall remain attached to the property  A stipulation forbidding the owner from alienating the immovable mortgaged shall be void  (Art. 2130 ) being contrary to public policy inasmuch as the transmission of property should not be unduly impeded.

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

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Period of redemption starts from the finality of the judgment until order of confirmation. No need for a special power of attorney in the contract of mortgage Governed by Rule 68 of the Rules of Court

Period to redeem start from date of registration of certificate of sale. Special power of attorney in favor of mortgagee is needed in the contract. Governed by Art. 3135

Note:  A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes a mortgage in good faith and for valuable consideration, the record showing clear title to the mortgagor, will be protected against equitable claims on the title in favor of third persons, of which he had no actual or constructive notice (St. Dominic Corporation vs. IAC, G.R. No. 70623, June 30, 1987 ). Mere inadequacy of the price obtained at the sheriff’s sale will not be sufficient to set aside the sale unless “the price is so inadequate as to shock the conscience of the court” taking into consideration the peculiar circumstances attendant thereto (Sulit vs. CA, G.R. No. 119247, February 17, 1997 ). Should there remain a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency (Rule 68 of the Rules of Court ). This rule DOES NOT apply to extra-judicial foreclosure real mortgage.  Application of proceeds of sale: a. Costs of sale b. Amount due the mortgagee c. Claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority d. The balance, if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it. The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action accrues (Arts. 1142 and 1144).  A proceeding for judicial foreclosure of mortgage is an action quasi in rem. It is based on a personal claim against a specific property of the defendant. Stipulation of Upset Price or “TIPO” It is a stipulation in a mortgage of real property of minimum price at which the property shall be sold, to become operative in the event of a foreclosure sale at public auction. It is null and void for the property must be

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sold to the highest bidder. Parties cannot, by agreement, contravene the law and interfere with the lawful procedure of the courts (BPI vs. Yulo, G.R. No. 9358, September 24, 1915). Extrajudicial Foreclosure of Real Property (Act. No. 3135) The sale is made under a special power inserted in or attached to any real estate mortgage (Sec. 1). If there has been no authority to foreclose, the remedy should be judicial foreclosure. The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale of the property mortgaged. The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an essential and inseparable part of a bilateral agreement (Perez vs. PNB. G.R. No. L-21813, July 30, 1966) No sale can be legally made outside the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in the said place in the municipal building of the municipality in which the property or part thereof is situated. Procedure for Extrajudicial Foreclosure of Both Real Estate Mortgage under Act No. 3135 and Chattel Mortgage under Act No. 1508 (A.M. No. 99-10-05-0, January 15, 2000, further amended on August 7, 2001): 1. Filing of application before the Executive Judge through the Clerk of Court 2. Clerk of Court will examine whether the requirement of the law have been complied with, that is, whether the notice of sale has been posted for not less than 20 days in at least three (3) public places of the municipality or city where the property is situated, and if the same is worth more than P400.00, that such notice has been published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the city or municipality. 3. The certificate of sale must be approved by the Executive Judge. 4. In extrajudicial foreclosure of real mortgages in different locations covering a single indebtedness, only one filing fee corresponding to such debt shall be collected. 5. The Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and their respective locations.

CREDIT TRANSACTIONS

6. The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1, PD No. 1079. 7. The application shall be raffled among all sheriffs. 8. After the redemption period has expired, the Clerk of Court shall archive the records. 9. An auction sale may be had with just one (1) participating bidder. The name/s of the bidder/s shall be reported to the Sheriff or the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale (As amended by the January 30, 2001 Resolution, paragraph 5 of A. M. No. 99-10-05-0; Sps. Certeza and Villamayor and Villamayor vs. Phil. Savings Bank, G. R. No. 190078, March 5, 2010). Note:The mortgagor and mortgagee have no right to waive the posting and publication requirements under Act. No. 3135. Notices are given to secure bidders and prevent a sacrifice of the property. Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor’s benefit, but for the public or third persons. Failure to comply with the statutory requirements as to publication of notice of auction sale constitutes a  jurisdictional defect which invalidates the sale. Lack of republication of notice of foreclosure sale made subsequently after the original date renders such sale void (PNB vs. Nepomuceno Productions Inc., G.R. No. 139479, December 27, 2002 ). Sec. 3 of Act. 3135   does not require personal or any particular notice on the mortgagor much less on his successors-in-interest where there is no contractual stipulation thereof. Hence, the lack of such notice is not a ground to set aside a foreclosure sale. Neither does Sec. 3  require posting of notice of sale on the mortgaged property and the certificate of posting is not required, much less considered indispensable, for the validity of a foreclosure sale. Redemption It is the transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage, or divests the property of the lien which the mortgage may have created. Note:  A sale by the mortgagor to a third party of the mortgaged property during the period for redemption transfers only to said third person the right to redeem the property and the right to possess, use and enjoy the same during said period. Where the sale with assumption of mortgage was not registered and made without the consent of the mortgagee, the buyer, thereof, was not validly substituted

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CREDIT TRANSACTIONS

as debtor and, hence, had no right to redeem (Bonnevie vs. CA. G.R. No. L-4910, October 24, 1983). Kinds of Redemption: 1. Equity of redemption – right of mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage within the 90-120 day period from the date of the service of the order of foreclosure or even thereafter but before the confirmation of the sale. Applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure. Note: Redemption of the banking institutions is allowed within one year from confirmation of sale. 2. Right of redemption – right of mortgagor to redeem the mortgaged property within one year from the date of registration of the certificate of sale. Applies only to extrajudicial foreclosure of real mortgage. Note:  The right of redemption, as long as within the period prescribed, may be exercised regardless of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank, Inc. vs. CA. GR No. 97872. March 1, 1994). Requisites of a Valid Exercise of Right of Redemption: 1. Must be made within 12 months from the date of the registration of the sale in the Office of the Registry of Property; 2. Payment of the purchase price of the property involved, plus 1% interest per month thereon, together with the amounts of assessments of taxes thereon, if any, paid by the purchaser after the sale with the same rate of interest; and 3. Writ of notice of the redemption must be served on the officer who made the sale and a duplicate filed with the Registry of Property of the province (Rosales vs. Uboa, G.R. No. 109972, April 29, 1996) Period of Redemption: 1. Extra-judicial (Act No. 3135) a. Natural person  –  one year from registration of the certificate of sale with Registry of Deeds b. Juridical person – same rule as natural person c. Juridical person (mortgagor) and bank (mortgagee)  – three months after foreclosure or before registration of certificate of foreclosure whichever is earlier (Sec. 47, of General Banking Law) 2. Judicial  –  before confirmation of the sale by the court except when the mortgagee is a banking institution redemption will then be one year from the registration of sale (Sec. 25, P.D. 694) (De Leon, Comments and Cases on Credit Transactions,2006 ed., p. 418)

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Note: Allowing redemption after the lapse of the statutory period, when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the right of redemption (Ramirez vs. CA, G.R. No. 98147, March 5, 1993). Amount of the Redemption Price: 1. Mortgagee is not a bank  (Act No. 3135, in relation to Sec. 28, Rule 39 of Rules of Court ) a. Purchase price of the property; b. 1% interest per month on the purchase price; and c. Taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed from the date of registration of sale, up to the time of redemption 2. Mortgagee is a bank (GBL 2000 ) a. Amount due under the mortgage deed; b. Interest; and c. Cost and expenses Note: Redemption price in this case is reduced by the income received from the property. Right to Possession of Third Persons as Purchaser: 1. Writ of Possession  –  an order whereby a sheriff is commanded to place a person in possession of real or personal property 2. Before expiration of redemption period  –  ex parte application plus posting of a bond 3. After lapse of redemption period  –  Purchaser is not obliged to bring a separate suit for possession. He must invoke the aid of the courts and ask a writ of possession. The suspension of the implementation of the writ of possession is not allowed after redemption period. The purchaser is entitled to writ of possession despite the fact that there is a lessee unless the lessee is registered with the Register of Deeds or he has actual knowledge thereof (Ibasco vs. Caguioa. G.R. No. L63861, August 19, 1986). If mortgagor refuses to surrender property, the remedy is to file an ordinary action for the recovery of possession in order that the mortgagor may be given the opportunity to be heard.

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A NTICHRESIS (A RTS . 2132  – 2139) Contract of Antichresis  A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit (Art. 2132).  Also called mortgage / mortgagee in possession. Mortgagee in Possession One who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title for the purpose of enforcing his security upon such property or making its income to pay his debt.  An antichresis is also indivisible in nature. There is also a third-party antichretic. Characteristics: 1. Accessory contract –  it secures the performance of a principal obligation. 2. Formal contract –  it must be in a specified form to be valid (Art. 2134) Special Requisites: 1. It can cover only the fruits of an immovable property; 2. Delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be binding; 3. Amount of principal and interest must be specified in writing (Art. 2134); and 4. Express agreement that debtor will give possession of the property to creditor and that the latter will apply the fruits to the interest, if any, then to the principal of his credit. In the absence of this requisite, the contract shall be deemed to be one of mortgage. Note: The obligation to pay interest is not the essence of the contract of antichresis, there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, whether pure or conditional in nature.

CREDIT TRANSACTIONS

Antichresis and Pledge Distinguished Antichresis Pledge Refers to personal Refers to real property property Perfected by delivery of Perfected by mere The thing pledged (Real consent (Consensual) contract) Debtor loses control of the subject matter of the contract. Antichresis and Real Mortgage Distinguished Antichresis Real Mortgage Debtor usually retains Property is delivered to possession of the creditor. property. Creditor acquires only Creditor does not have the right to receive the any right to receive the fruits of the property; fruits; but the mortgage hence, it does not creates a real right over produce a real right. the property. The creditor, unless there is stipulation to the contrary, is obliged The creditor has no to pay the taxes and such obligation. charges upon the estate. It is expressly stipulated that the creditor given possession of the There is no such property shall apply all obligation on part of the fruits thereof to the mortgagee. payment of interest, if owing, and thereafter to the principal. The subject matter of both is real property. RIGHTS OF ANTICHRETIC CREDITOR 1. The right to the fruits and income of the thing Note: The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application (Art. 2133). 2. To retain the thing until the debt is paid Note: The property delivered stands as a security for the payment of the obligation of the debtor in antichresis. Hence, the debtor cannot demand its return until the debt is totally paid. 3. To have the thing sold upon non-payment at maturity 4. Preference to the proceeds of the sale of the thing (Tolentino, Civil Code of the Philippines, Vol.5, 1992 ed., p. 567).

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OBLIGATIONS OF ANTICHRETIC CREDITOR 1. To pay taxes and charges on the estate if there has been no stipulation to the contrary, and to bear the expenses necessary for preservation and repair The sums spent shall be deducted from the fruits. Creditor may avoid said obligation by compelling debtor to reacquire enjoyment of the property, unless there is a stipulation to the contrary 2. To apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the principal 3. To render an account of the fruits to the debtor

Remedies of Creditor in Case of Non-Payment of Debt 1. Action for specific performance; or 2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court (Art. 2137). Note: The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera vs. El Hogar Filipino, Inc. G.R. No. L-45963, October 12, 1939).  A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the debt within the agreed period is void (Art. 2088). The creditor in antichresis and his successors-in-interest cannot ordinarily acquire by prescription (Valencia vs.  Alcala, 42 Phil. 177, 1921). Possession of the antichretic creditor is not in the concept of an owner which is required for the purpose of acquisitive prescription.

C HATTEL M ORTGAGE ( A RTS . 2140  – 2141) Contract of Chattel Mortgage  A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation (Art. 2140). Characteristics: 1. Accessory contract –  it is for the purpose of securing the performance of a principal obligation 2. Formal contract  –  registration in the Chattel Mortgage Register is indispensable for its validity

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3. Unilateral contract – it produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation Special Requisites: 1. It can cover only personal or movable property in general; however, the parties may treat as personal property that which by its nature would be real property. Note: A real property may be considered as a personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, and once the parties so agreed, they are already estopped from claiming otherwise (Makati Leasing and Financial Corporation vs. Wearever Textile Mills, Inc., G.R. No. L-58469, May 16, 1983). 2. Registration of the mortgage with the Chattel Mortgage Register where the mortgagor resides; if property is located in a different province, registration in both provinces required. 3. Description of the property as would enable the parties or other persons to identify the same after reasonable investigation and inquiry. 4. Accompanied by an affidavit of good faith to bind third persons, but not for the validity of the contract. 5. It can cover only obligations existing at the time the mortgage is constituted. Note:  A mortgage containing a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (Jaca vs. Davao Lumber Co., G.R. No. L30849, March 29, 1982). Effect of Registration: Creates a Real Right The registration of the chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or a lien which, being recorded, follows the chattel wherever it goes. The registration gives the mortgagee symbolical possession (Northern Motors, Inc. vs. Coquia. G.R. No. L-40018, December 15, 1975 ). Registration adds nothing to the instrument, considered as a source of title and affects nobody's rights except as a specie of notice (Standard Oil Co. of New York vs. Jaramillo, G.R. No. L-20329 March 16, 1923). Effect of Failure to Register Chattel Mortgage in the Chattel Mortgage Registry  Article 2140   makes the recording in the Chattel Mortgage Register an essential requisite but if the instrument is not recorded, the mortgage is nevertheless binding between the parties. But the person in whose favor the law

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establishes a mortgage has no other right than to demand the execution and the recording of the document. Affidavit of Good Faith Oath in a contract of chattel mortgage wherein the parties "severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud” (Sec. 5, Chattel Mortgage Law). Note: The debt referred to in the law is current, not an obligation that is merely contemplated. Effect of Absence: The special affidavit is required only for the purpose of transforming an already valid mortgage into “preferred mortgage.” Thus, it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. In other words, its absence vitiates the mortgage only as against third persons without notice like creditors and subsequent encumbrances. Foreclosure of Chattel Mortgage Foreclosure sale in chattel mortgage is by public auction under Act No. 1508, but the parties may stipulate that it be by private sale. The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer. The 30-day period is also a grace period for the mortgagor to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor (Cabral vs. Evangelista, G.R. No. L-26860, July 30, 1969). Application of Proceeds of Sale: 1. Costs and expenses of keeping and sale 2. Payment of the obligation secured by the mortgage 3. Claims of persons holding subsequent mortgages in their order 4. The balance, if any, shall be paid to the mortgagor or person holding under him.

CREDIT TRANSACTIONS

Only equity of redemption is available to the mortgagor; the latter can no longer redeem after the confirmation of the foreclosure sale. Right of Redemption: When the condition of a chattel mortgage is broken, the following may redeem: 1. Mortgagor 2. Person holding a subsequent mortgage 3. Subsequent attaching creditor  An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage. The right of redemption is made before the foreclosure sale and by paying or delivering to the mortgagee the amount due on such mortgage and the costs, and expenses incurred by such breach of condition before the sale thereof (Sec. 13, Act No. 1508). After the foreclosure sale, the right of redemption no longer exists. Right to Possession of Foreclosed Property in Chattel Mortgage: When default occurs and the creditor desires to foreclose, the creditor has the right to take the property as a preliminary step for its sale. Note: Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action either to effect  judicial foreclosure directly or to secure possession (REPLEVIN) as a preliminary to the sale contemplated in Section 14 or Act No.1508.

C ONCURRENCE AND P REFERENCE OF C REDITS (A R TS . 2236  – 2251) Concurrence of Credits Possession by two or more creditors of equal rights or privileges over the same property or all of the property of the debtor

Note:  The creditor may maintain an action for the deficiency, except if the chattel mortgage is constituted on the personal property sold as security for the purchase of such personal property payable in installments (Art. 1484, Recto Law).

Preference of Credits Right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets. It is the right to be paid first.

The action for deficiency may be brought within ten (10) years from the time the cause of action accrues.

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

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

Serrano vs. Central Bank of the Phils., G.R. No. L-30511 February 14, 1980; Banco Filipino Savings and Mortgage Bank vs. National Labor Relations Commission, G.R. No. L-51299 December 29, 1982 ). Fixed, savings, and current deposits of money in banks and similar institutions are considered simple loans (Art. 1980, Civil Code). As such, they are not preferred credits.

Rules on Preference Applicable When: 1. There are two or more creditors 2. With separate and distinct claims 3. Against the same debtor 4. Who has insufficient property

Exempt Property: 1. Present property – those provided under Arts. 155 and 205   of the Family Code, Sec. 13, Rule 39 of the Rules of  Court, and Sec. 118 of the Public Land Act 2. Future property  –  a debtor, who obtains a discharge from his debts on account of his insolvency, is not liable for the unsatisfied claims of his creditors with said property subject to certain exceptions expressly provided by law (Sec. 68, 69, The Insolvency Law [Act No. 1956] ). 3. Property under legal custody and those owned by municipal corporations necessary for governmental purposes.

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

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

Note: Art. 2238  –  If one of the spouses is insolvent, the assets of the conjugal partnership of gains (CPG) or absolute community (AC) do not pass to the assignee in insolvency elected by the creditors or appointed by the court. Reason:  The conjugal partnership of gains or absolute community is distinct from the individual spouses. The exemption applies provided that: 1. The CPG or AC subsists; and 2. The obligations of the insolvent spouse have not redounded to the benefit of the family.

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Note: The insolvency of the husband does not have the effect of dissolving the conjugal partnership or the absolute community. If there is co-ownership and one of the co-owners is an insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets. General Categories of Credit I. Special Preferred Credits  A.With reference to specific movable property under  Art. 2241: 1. Duties, taxes and fees due to the government Note: The tax must be due on the movable. 2. Claims from misappropriation, breach of trust, malfeasance of public officer. Note: The acquisition must have been in performance of official functions and the property must still be in the hands of the public official. If it is sold to a purchaser for value and in good faith, there can be no more claim on the said movable. 3. Claims for the unpaid price of movable sold Note: Claim is limited to the value of the movable. The property must be in the possession of the debtor. If debtor has sold the property and the price has been unpaid, lien may be enforced on the price. The right is not lost by the immobilization of the thing by destination, provided that it has not lost its form, substance and identity. The right is also not lost when the thing, together with other property, was sold for a lump sum, provided that the price thereof can be determined proportionally. In Torres et. al. vs. Genato, 7 Phil 204: a. The money claimed must be due to him as the selling price of the property from which it proceeds; b. The property must be capable of identification and must be identified as the same property whose selling price is unpaid; and c. The property must be found in the possession of the debtor. 4. Credits guaranteed with pledge or mortgage Note: If pledge, it must be embodied in a public instrument. If chattel mortgage, it must be registered with the Chattel Mortgage Registry.

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5. Credits for the making, repair, safekeeping or preservation of the property 6. Claims for laborer’s wages on the work done on the property 7. Expenses of salvage upon the goods salvaged 8. Credits between the landlord and tenant from their contract on the share of each in the fruits or harvest 9. Price of the contract of transportation and incidental expenses on the goods carried, until their delivery and 30 days thereafter 10. Credits for lodging and supplies furnished to travellers by hotel keepers on the movables belonging to the Note: This applies so long as movables are in the hotel. This does not apply to money loaned to guests 11. Expenses for cultivation and harvest upon the fruits harvested 12. Rent for 1 year upon the property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit 13. Claims of the depositor if depositary has wrongfully sold the thing deposited, upon the price of sale Note:  Under the last par. of  Art. 2241, if the movable is wrongfully taken, the preferred creditor may demand it w/in 30 days through an accion subrogatoria, exercising the right of the debtor granted him under  Art. 559  to recover property wrongfully taken from him. It applies only when the right of ownership in such property continues in the debtor. As such, the remedy under Art. 2241 is not applicable to cases where the debtor has parted with his ownership of the property in question, as where he has sold the property (Peña vs. Mitchell, G.R. No. L-3764, January 15, 1908 ). B.With reference to specific immovable property under  Art. 2242 : 1. Taxes due upon land or building Note:  This pertains to real property taxes. Thus, capital gains tax is NOT covered because it is a tax on income and not on the property itself. 2. Unpaid price of the real property Note: No registration of the sale is required. 3. Claims of laborers and other workmen engaged in the construction, re-construction or repair of buildings, canals and other works 4. Claims of furnishers of materials used in works mentioned in No. 3 5. Mortgage credits

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CREDIT TRANSACTIONS

Note: Mortgage MUST have been registered in the Registry of Property. A recorded mortgage credit is superior to an unrecorded unpaid vendor’s lien (De Barretto vs. Villanueva, GR No. L-14938, January 28, 1961). 6. Expenses for the preservation and improvement of real property when the law authorizes reimbursement 7. Credits annotated in the Registry of Property by virtue of judicial order, attachment or execution 8. Claims of co-heirs for warranty in the partition of the property 9. Claims of donors for pecuniary charges or other conditions imposed by him upon the done 10. Claims of insurers for insurance premium for 2 years Nature of Claims or Credits in Articles 2241 and 2242: 1. Nature of claim:  Arts. 2241  and 2242   shall be considered as mortgages or pledges of personal and real property. 2. With the exception of the taxes due to the State (No. 1), Arts. 2241 and 2242 merely enumerate the preferred claims on specific properties. They do not give the order of preference or priority of payment. 3. As to credits mentioned in No. 7 of Art. 2242 , there is preference among them according to the order of time. Reason: To allow the contrary would be absurd. The preference of a credit annotated by an attachment or execution could be defeated by simply obtaining a writ of attachment or execution, no matter how much later (Manabat vs. Laguna Federation of Facomas, Inc. G.R. No. L-23888. March 18, 1967 ). To determine the order of priority among several credits of this kind, their dates should be the basis. The first one to be registered will be prioritized over the others. C. Ordinary Preferred Credits under  Art. 2244 as amended by  Art. 110 of the Labor Code. They are enumerated as follows, and they shall be preferred in the order named: 1. Credits for services rendered by laborers Note: Art. 110 of the Labor Code removed the oneyear limitation found in No. 2 of Art. 2244.  Art. 110 of the Labor Code  also moved up the claims for unpaid wages (and other monetary

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CIVIL LAW

claims) of laborers or workers of insolvent to first priority.  According to the SC, bankruptcy or liquidation proceedings are necessary for the operation of the preference accorded to workers under Art. 110 of the Labor Code (Development Bank of the Philippines vs. NLRC, G. R. No. 82763-64, March 19, 1990 ). 2. Funeral expenses for the debtor, or his children under parental authority who have no own property, upon court approval 3. Expenses during the last illness of debtor or of his/her spouse and children under parental authority, if they have no own property 4. Compensation due the laborers or their dependents under laws providing for indemnity 5. Credits and advancements made to the debtor for support of himself, and his family, during the last year preceding the insolvency 6. Support during the insolvency proceedings and for 3 months thereafter 7. Fines and civil indemnifications arising from criminal offense 8. Legal expenses and expenses incurred in the valid administration of the insolvent’s estate 9. Taxes and assessments due the national government other than those mentioned in  Arts. 2241(1) and 2242(1) 10. Taxes and assessments due any province other than those referred to in Arts. 2241(1) and 2242(1) 11. Taxes and assessments due any city or municipality other than those indicated in  Arts. 2241(1) and 2242(1) 12. Damages for death or physical injuries caused by quasi-delict 13. Gifts due to charitable public and private institutions 14. Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation Note: These credits shall have preference among them in the order of priority of the dates of the instruments and of the judgments. The order of preference is first, in favor of credits evidenced by a final judgment (should they have been the subject of litigation), and secondly, in favor of credits evidenced by a public instrument, the preference among the two kinds of credits being determined by priority of dates (Rizal Surety and Insurance Co. vs. Dela Paz, 50 O.G. No. 6, 2501, May 26, 1954).

CIVIL LAW

 Art. 2244, particularly  par. (14)(a)  thereof, is not applicable to obligations of the State as it is a recognized doctrine that the State is always solvent. Nature of Claims or Credits in Art. 2244 In contrast with  Arts. 2241 and  2242, Art. 2244 creates no liens on determinate property which follow such property. What  Art. 2244  creates are simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority. D. Common Credits  –  any other claims or credits other than those mentioned in  Arts. 2241, 2242 and 2244. There is no order of preference among common creditors; they share whatever is left in proportion to their credit, regardless of date. Note:  Ordinary Preferred and Common Credits cover only “free property” of the debtor, or those not subjected to Special Preferred Credit. Refectionary Credit Indebtedness incurred in the repair or reconstruction of something previously made, such repair or reconstruction being made necessary by the deterioration or destruction of the thing as it formerly existed (Director of Public works vs. Sing Juco, G.R. No. L-30181, July 12, 1929) They include new constructions (Luzon Lumber & Hardware Co. vs. Quiambao & RFC, G.R. No. L-5638, March 30, 1954). How to Apply the Rules in Preference and Concurrence of Credits: Step 1: Classify credits into the following categories: 1. Special Preferred Credits listed in Arts. 2241 and 2242; 2. Ordinary Preferred Credits under Art. 2244; and 3. Common Credits under Art. 2245. Step 2: Determine or make an inventory of the assets or properties of the insolvent. Step 3:  Segregate specific immovables and/or movables mentioned under Arts. 2241 and 2242, respectively. Step 4: 1. Sell movables and determine if the proceeds are sufficient to cover the special preferred credit in  Art. 2241; exclude all other credits to the extent of the value of the movable to which preference refers. Pay No. 1 credit in  Art. 2241, and if two or more credits in  Art. 2241  concur; apply proceeds of sale pro rata,  (pari  passu) to the credits applying Arts. 2246 and 2247. 2. For immovables and real rights –  Sell immovable and real right and determine if proceeds of sale are

CREDIT TRANSACTIONS

sufficient to cover the special preferred credits in Art. 2242 . Exclude all other credits to the extent of the value of immovables and real rights to which preference refers. Pay No. 1 in  Art. 2242 , if two or more credits mentioned in Art. 2242   concur; apply proceeds of sale pro rata, ( pari passu) to the credits applying Arts. 2248 and 2249. Step 5: 1. If proceeds of sale from specific movable and immovable are insufficient, the balance of said special preferred credits become common credits under  Art. 2245. 2. If proceeds of sale from specific movable and immovables exceed the total special preferred credits (there is excess in proceeds), such excess becomes part of the free property of the debtor, to be added to other assets in order to satisfy the ordinary preferred credits under  Art. 2250   and then the common credits under Art. 2245 . Step 6:  With the excess cash sale of assets covered in  Art. 2241 and 2242 , if any, sell other assets of debtor and satisfy the ordinary preferred credits by applying proceeds of sale in accordance with the order of preference of credits established in  Art. 2244 ( Art. 2251 (1)). Rule on preference applies. Step 7:  After applying the proceeds of sale of all properties under Step 6, apply any balance of the proceeds of the sale to common credits in accordance with the rule provided in Art 2251. Rule on concurrence applies, they are paid pro rata regardless of dates  (Article 2251 (2)).

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

SAN BEDA COLLEGE OF LAW 413 2013 CENTRALIZED BAR OPERATIONS

CREDIT TRANSACTIONS

The ratification of the management by the owner of the business produces the effects of an express agency, even if the business may not have been successful (Art. 2149). Requisites of Negotiorum Gestio: 1. No meeting of the minds; 2. Taking charge of another’s business or property 3. The property or business must have been abandoned or neglected (otherwise, the rule on unauthorized contracts would apply) 4. The officious manager must not have been expressly or implicitly authorized (otherwise, the rule on agency would apply) 5. The officious manager (gestor) must have voluntarily taken charge (that is, there must be no vitiation of consent, such as error in thinking that he owned the property or the business) (Paras, Civil Code of the Philippines Vol. 5, 2008 ed., p. 1156). Negotiorum Gestio and Implied Agency Distinguished Negotiorum Gestio

Implied Agency

The agent is actually authorized to assume Gestor should never the agency by virtue of have been authorized in the acts of the owner or any manner by virtue of his silence, inaction, or his failure to repudiate the agency Business or property Neglect should be neglected or abandonment abandoned necessary

is

or not

Note: So long as the owner does not know that another is acting on his behalf without authority, negotiorum gestio exists, but once he becomes aware of such fact and still he does not repudiate the acts of the agent, the quasicontract ceases to exist. It has become an implied agency (Jurado, 2009). Responsibilities of the Officious Manager: 1. Continue taking charge of the agency or management until the termination of the affairs and its incidents, but he may require the owner, if the 2. Latter is in a position to do so, to substitute the officious manager (Art. 2144) 3. Perform his duties with all the diligence of a good father of a family, and pay the damages which through his fault or negligence may be suffered by the owner of the property or business under management, but the courts may however, increase or moderate the indemnity according to the circumstances of each case (Art. 2145) 4. Be liable for the acts of his delegate is he delegated to another person all of some of his duties, without

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CIVIL LAW

prejudice to the direct obligation of the delegate toward the owner of the business (Art. 2146) 5. Be personally liable for contracts which he has entered into with third persons, even though he acted in the name of the owner, and there shall be no right of action between the owner and third persons except: a. When the owner has expressly or tacitly ratified the management, or b. When the contract refers to things pertaining to the owner of the business (Art. 2152) Note:  The responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the things or business from imminent danger (Art. 2146) 6. The officious manager shall be liable for any fortuitous event: a. If he undertakes risky operations which the owner was not accustomed to embark upon; b. If he has preferred his own interest to that of the owner c. If he fails to return the property or business after demand by the owner; d. If he assumed the management in bad faith (Art. 2147) e. Except when the management was assumed to save the property or business from imminent danger – i. If he is manifestly unfit to carry the management; ii. If by his intervention he prevented a more competent person from taking up the management (Art. 2148) Responsibilities of the Owner: 1. Be liable for obligations incurred in his interest and shall reimburse the officious manager for the necessary and useful expenses and for the 2. Damages which the latter may have suffered in the performance of his duties a. When such owner has enjoyed the advantages of the officious management although it may not have been expressly ratified by him; b. When the management had for its purpose the prevention of an imminent and manifest loss, although no benefit may have been derived (Art. 2150) c. When, even though he did not derive any benefit and there has been no imminent and manifest danger to the property or business i. The officious manager has acted in good faith; and ii. The property or business is intact, ready to be returned to the owner (Art. 2151) 3. Be liable for contracts which the officious manager has entered into with third persons when

CIVIL LAW

a. Such owner has expressly or tacitly ratified the management; or b. The contract refers to things pertaining to the owner of the business (Art. 2152) When Management is Extinguished: 1. When the owner repudiates it or puts an end thereto 2. When the officious manager withdraws from the management, subject to the provisions of Art. 2144 3. By the death, civil interdiction, insanity or insolvency of the owner or officious manager (Art. 2153) Solutio Indebiti This takes place when something is received when there is no right to demand it, and it was duly delivered thru mistake. It is presumed that there was a mistake in the payment if something which had never been due or had already been paid was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause (Art. 2163). Payment by reason of a mistake in the construction or application of a doubtful or difficult question of law may come within the scope of solutio indebiti (Art 2155). . Note: Whether the question is “doubtful or difficult” or not must be determined by the actual knowledge of law of the person who made the payment. If the payer was in doubt whether the debt was due, he may recover if he proves that it was not due (Art 2156). Requisites of Solutio Indebiti: 1. Payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and 2. Payment is made through mistake, and not through liberality or some other cause (Velez vs. Balzarza, G.R. No. L-48389 July 27, 1942). Responsibilities of Payee: 1. Obligated to return what he has received (Art. 2163) 2. A payee in bad faith accepting an undue payment shall pay legal interest if a sum of money is involved or shall be liable for fruits received or which should have been received if the thing produces fruits. He shall further be answerable for any loss or impairment of the thing from any cause and for damages to the person who delivered the thing until it is recovered (Art. 2159). 3. He who in good faith accepts an undue payment of a thing certain and determinate shall only be responsible for the impairment or loss of the same or its accessories and accessions insofar as he has thereby been benefited. If he has alienated it, he shall return the price

CREDIT TRANSACTIONS

or assign the action to collect the sum (Art. 2160). He shall be exempt from the obligation to restore who, believing in good faith that the payment was being made of a legitimate and subsisting claim, destroyed the document, or allowed the action to prescribe, or gave up the pledges, or cancelled the guaranties for his right. He who paid unduly may proceed only against the true debtor or guarantors with regard to whom the action is still effective (Art. 2162). The responsibility of two or more payees, when there has been payment of what is not due, is solidary (Art. 2157). Right of a Third Person: When the property delivered or money paid belongs to a third person, the payee shall comply with the provisions of  Article 1984 (Art. 2158). If, in spite of such information, he does not claim the property or money paid within one month, the payee shall be relived of all responsibility by returning the thing to the payor (Vitug, 2008). Other Quasi-Contracts: 1. When, without the knowledge of the person obliged to give support, the support was given by a stranger, unless it appears that he gave it out of piety and without intention of being repaid (Art. 2164) Requisites: a. Support has been furnished a dependent of one bound to give support but who fails to do so; b. The support was supplied by a stranger; c. The same was given without the knowledge of the person charged with the duty; and d. It must not have been given without the expectation of recovering it (Ramirez and De Marcaida vs. Redfern, L-26062 December 31, 1926) 2. When funeral expense are borne by a third person, without the knowledge of the relatives obliged to give support to the deceased (Art. 2165) 3. When the person obliged to support an orphan, or an insane or an indigent person unduly refuses to give support to the latter, a third person furnishes the support (Art. 2166) 4. When through an accident or cause, a person is injured or becomes seriously ill, and he is treated or helped while he is not in a condition to give consent to a contract, he shall be liable to pay for the services of the physician or other person aiding him, unless the service has been rendered out of pure generosity (Art. 2167). 5. When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner (Art. 2168) 6. When the government, upon failure of any person to comply with health or safety regulations concerning

SAN BEDA COLLEGE OF LAW 415 2013 CENTRALIZED BAR OPERATIONS