Credit Transactions

July 28, 2017 | Author: MiGay Tan-Pelaez | Category: Interest, Loans, Lease, Credit (Finance), Property
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CREDIT TRANSACTIONS include all transactions involving the purchase or loan of goods, services or money in the present with a promise to pay or deliver in the future (contract of security) 2 TYPES OF CREDIT TRANSACTIONS: 1. secured transactions – those supported by a collateral or an encumbrance of property 2. unsecured transactions – those supported only by a promise to pay or the personal commitment of another such as a guarantor or surety SECURITY is something given, deposited or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in the property 2 TYPES OF SECURITY: 1. personal – when an individual becomes a surety or a guarantor 2. real or property – when an emcumbrance is made on property BAILMENT is 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 a special purpose is accomplished or kept until the bailor reclaims it. PARTIES IN BAILMENT 1. bailor – the giver, the party who delivers possession/custody of the thing bailed 2. bailee – the recipient, the party who receives the possession/custody of the thing delivered KINDS OF CONTRACTUAL BAILMENT W/ REFERENCE TO COMPENSATION 1. for the sole benefit of the bailor (gratuitous) e.g. gratuitous deposit, mandatum (do some act w/ respect to aQuickTime™ thing) and a TIFF (Uncompressed) decompressor are needed toof seethe this picture. 2. for the sole benefit bailee (gratuitous) e.g. commodatum, gratuitous simple loan or mutuum 3. for the benefit of both parties e.g. deposit for compensation, involuntary deposit, pledge and bailments for hire: a. hire of things – temporary use b. hire of service – for work or labor c. hire of carriage of goods – for carriage d. hire of custody – for storage

LOAN CHARACTERISTICS 1. real contract – delivery is essential for perfection of the loan (BUT a promise to lend, being consensual, is binding upon the parties) 2. unilateral contract - only the borrower has the obligation KINDS 1. commodatum – where 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 kinds of commodatum: a. ordinary commodatum – use by the bailee of the thing is for a certain period of time b. precarium – one whereby the bailor may demand the thing loaned at will; exists in cases where: i. neither the duration of the contract nor the use to which the thing loaned should be devoted has been stipulated ii. if the use of the thing is merely tolerated by the owner 2. mutuum or simple loan - where the lender delivers to the borrower money or other consumable thing upon the condition that the latter will pay the same amount of the same kind and quality (when it is consumed in a manner appropriate to its purpose) LOAN 1. delivery by one party and the receipt by the other party of a given sum of money or other consumable thing upon an agreement, express or implied 2. to repay the same amount of the same kind and quality, w/ or w/o interest

CREDIT The ability of an individual to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise w/in a specified period

—Adviser: Dean Cynthia Roxas-Del Castillo; Heads: Joy Marie Ponsaran, Eleanor Mateo; Understudies: Joy Stephanie Tajan, John Paul Lim; Subject Head: Sarah Lopez; Pledgee: Aiza Constantino—



Interest is usually taken at the expiration of a credit Always on single-name paper

Interest is deducted in advance Double name paper More expensive for the borrower because interest is calculated on the amount loaned and not the amount actually received

COMMODATUM Object Ownership of the thing Cause

Thing to be returned

Subject Matter Purpose

When to return

Who bears risk of loss


Ordinarily nonconsumable Ownership is retained by the lender Essentially gratuitous

Borrower must return the same thing loaned

MUTUUM (SIMPLE LOAN) Money or other consumable thing Ownership is transferred to the borrower Gratuitous or onerous (w/ stipulation to pay interest) Borrower need only pay the same amount of the same kind and quality Only personal property

May involve real or personal property Loan for use or Loan for temporary consumption possession Bailor may Lender may not demand the demand its return return of the before the lapse of thing loaned the term agreed before the upon expiration of the term in case of urgent need QuickTime™ and a Loss TIFFof(Uncompressed) the decompressor Borrower suffers h are needed to see t is picture.loss (even if subject matter is the suffered by the caused exclusively bailor since he is by a fortuitous the owner event and he is not therefore discharged from his duty to pay) Purely personal Not purely personal

COMMODATUM (Articles 1935-1952) 1. cause: essentially gratuitous (otherwise, if there Is compensation, it might be lease) 2. purpose: temporary use of the thing loaned but not its fruits, unless stipulated or is incidental (otherwise, if the bailee is not entitled to the use of the thing, it might be deposit) 3. subject matter: generally non-consumable goods but if the consumable goods are not for consumption, such may be the subject of the commodatum, as when merely for exhibition (Art. 1936) 4. bailor need not be the owner of the thing loaned (Art 1938) • it is sufficient that he has a possessory interest • a mere lessee or usufructuary may lend but the borrower or bailee himself may not lend not lease the thing loaned to him to a third person (Art. 1932[2]) 5. purely personal a. death of either party terminates the contract UNLESS there is stipulation to the contrary b. generally, bailee can neither lend nor lease the object to a 3rd person in the absence of some agreement to that effect c. use of the thing loaned may extend to the bailee’s household (who are not considered 3rd persons) except: 1. when there is a contrary stipulation 2. nature of the thing forbids such use 6. enjoyment of fruits – a stipulation to make use of fruits is valid, but it is never presumed. The enjoyment of the fruits must only be incidental to the use of the thing itself, for if it is the main cause, the contract may be one of usufruct.

OBLIGATIONS OF THE BAILEE (Arts 1941-1945) (COOLRD2) 1. To pay for the ordinary expenses for the use and preservation of the thing loaned (Art. 1941) 2. To pay for all other expenses other than those referred to in Art. 1941 and 1949 (refund of extraordinary expenses either in full or in half) (Art. 1950) REASON: Bailee makes use of the thing. Expenses for ostentation are to borne by the Page 191 of 297

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bailee because they are not necessary for the preservation of the thing To take good care of the thing with the diligence of a good father of a family (Art. 1163) To be liable for loss even if due to a fortuitous event: GR: the bailee is not liable for loss or damage due to a fortuitous event (Art. 1174) Reason: the bailor retains the ownership of the thing loaned Exceptions: (Art. 1942 – punishes the bailee for his improper acts although they may not be the proximate cause of the loss) a. Bad faith – if the bailee devotes the thing to any purpose different from that for which it has been loaned b. Delay - he keeps it longer than the period stipulated or after the accomplishment of the use for which the commodatum has been constituted c. Has been delivered with appraisal -the thing loaned has been delivered with appraisal of its value, UNLESS there is a stipulation exempting the bailee from responsibility in case of a fortuitous event d. Lends the subject matter to a 3rd person - he lends or leases the thing to a third person who is not a member of his household e. Ingratitude - being able to save the thing borrowed or his own thing, he chose to save the latter The bailee has NO RIGHT to retain the thing loaned as security for claims he has against the bailor, even though they may be by reason of extraordinary expenses (Art. 1944) Reasons: a. Ownership remains in bailor – the bailee acquires only the use of thing, the ownership of which remains w/ the bailor b. Only temporary use given to bailee – the bailee would be violating the bailor’s trust in him to return the thing as soon as the period stipulated expires or the purpose has been accomplished QuickTime™ and a (Uncompressed) Exception: TIFF Claim for decompressor damages suffered are needed to see this picture. because the bailor doesn’t advise bailee of the flaws known to him (Art. 1951) A bailee doesn’t answer for the deterioration of the thing loaned due only to the use thereof and without his fault Liability when there are 2 or more bailees: The presumption is that they are solidarily liable (Art. 1945)

Reason for the presumption: to safeguard effectively the right of the bailor. The law presumes that the bailor takes into account the personal integrity and responsibility of all the bailees and that, therefore, he would not have constituted the commodatum if there were only one bailee

OBLIGATIONS OF THE BAILOR (AD-READ-HA) 1. Primary obligation of the bailor: GR: To allow the bailee the use of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for w/c the commodatum was constituted Exceptions: the bailor may demand the return or its temporary use upon: a. bailor has an urgent need for the thing (Art. 1946) – the contract is suspended • Reason: the right of the bailor is based on the fact that commodatum is essentially gratuitous b. bailee commits an act of ingratitude (Art. 1948) • if the bailee should commit an offense against the person, the honor or the property of the bailor, or of the wife or children under his parental authority • 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 bailee himself, his wife, or children under his authority; and • if the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor • Reason: the person who commits any of the acts of ingratitude makes himself unworthy of the trust reposed upon him by the bailor. • 2. May demand the thing at will when the contract is precarium • PRECARIUM – a kind of commodatum where the bailor may demand the thing at will. It has been defined as a contract by which the owner of a thing, at the request of another person, gives the latter the thing for use as long as the owner shall please 3. To refund the extraordinary expenses (Art. 1949)

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 GR on reimbursement: Notice should be given by the bailee to the bailor regarding such extraordinary expenses Reason for the rule: notice is required because it is possible that the bailor may not want to incur the extraordinary expense at all. Exception: where the extraordinary expenses are so urgent that the reply to the notification cannot be awaited w/o danger. 4. if the extraordinary expenses arise from the actual use of the thing and even though bailee acted w/o fault, the expenses will be borne equally by both the bailor and the bailee (50-50) (Art. 1949, 2nd par.) • Reasons: a. the bailee pays ½ because of the benefit derived from the use of the thing loaned to him; b. the bailor pays the other ½ because he is the owner and the thing will be returned to him Exception: Stipulation to the contrary that provide for a different apportionment of such expenses or that they shall be borne by the bailee or bailor alone 5. all other expenses which are not necessary for the use and preservation of the thing must be shouldered by the borrower (bailee) 6. the depreciation caused by the reasonable and natural use of the thing is borne by the bailor (Art. 1943) Reason: The parties to the contract know that the thing borrowed cannot be used without deterioration due to ordinary wear and tear. Exceptions: a. when there is a stipulation to the contrary; b. when the bailee is guilty of fault or negligence; c. if he devotes the thing to any purpose different from that for which has been loaned

e. the bailee suffers damages by reason of the flaw or defect Exception: when the defect is not known to the bailor, he is not liable because commodatum is gratuitous. 8. The bailor has no right of abandonment for expenses and damages (Art. 1952) Reason: The expense and/or damages may exceed the value of the thing loaned


SIMPLE LOAN OR MUTUUM – contract whereby one of the parties delivers to another money or other fungible thing w/ the understanding that the same amount of the same kind and quality shall be paid. (Art. 1933)

SIMPLE LOAN Signifies the delivery of money or some other consumable thing to another w/ a promise to repay an equivalent amount of the same kind and quality There is a transfer of ownership of the thing delivered

The relation between parties is that of obligor and oblige The creditor receives payment for his loan

QuickTime™ and a (Uncompressed) decompressor 7. To pay damagesTIFF for known hidden flaws (Art. are needed to see this picture. 1951) Requisites: (the following must concur) a. there is a flaw or defect in the thing loaned b. the flaw or defect is hidden c. the bailor is aware thereof d. he does not advise the bailee of the same

RENT/LEASE One party delivers to another some nonconsumable thing in order that the latter may use it during a certain period and return it to the former The owner of the lessee or the lessor of the property does not lose his ownership. He simply loses control over the property rented during the period of the contract The relation is between landlord and tenant The owner of the property receives “compensation” or “price” either in money, provisions, chattels, or labor from the occupant thereof in return for its use

Basis of comparison




Subject matter

Money or any other fungible things/

Personal or real property (generally nonconsumable)

Nonfungible or nonconsumabl

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 personal property Obligation Pay or of bailee deliver the same kind or quality loaned to the bailee

Nature of contract

May be gratuitous

e things Return the identical thing borrowed when the time has expired or the purpose has been served Always gratuitous

The equivalent thing is given in return for what has been received Onerous

NATURE OF MUTUUM a. bilateral - borrower’ promise to pay is the consideration for the lender’s obligation to furnish the loan b. no criminal liability upon failure to pay SUBJECT MATTER a. fungible or consumable-depending on the intent of the parties, that the return of the thing is equivalent only and not the identical thing b. money c. if the transfer of ownership is on a nonfungible thing, with the obligation of the other to give things of the same kind, quantity and quality, it is a barter INTEREST GR: Interest must be expressly stipulated in writing, and it must be lawful (Art. 1956) Exceptions: 1. Indemnity for damages – the debtor in delay is liable to pay legal interest (6%/12%) as indemnity for damages even in the absence of a stipulation for the payment of interest. Interest as indemnity for damages is payable only in case of default or non-performance of contract. • Basis for computation for indemnity: a. Central Bank Circular 416 – 12% p.a. in cases of: • Loans QuickTime™ and a • Forbearance of decompressor money, goods or TIFF (Uncompressed) are needed to see this picture. credits • Judgments involving such loans or forbearance, in the absence of the express agreement as to such rate of interest • During the interim period from the date judgment until actual payment b. Art. 2209 of the Civil Code – 6% p.a. in cases of:

• • •

Other sources (e.g. sale) Damages arising from injury to persons Loss of property which does not involve a loan

2. Interest accruing from unpaid interest - interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point. DETERMINATION OF INTEREST PAYABLE IN KIND: Its value shall be appraised at the current price of the products or goods at the time and place of payment. (Art. 1958) Purpose: to make usury harder to perpetrate COMPOUNDING INTEREST (Art. 1959) GR: accrued interest (interest due and unpaid) shall not earn interest Exceptions: • When judicially demanded • When there is an express stipulation made by the parties to wit: that the interest due and unpaid shall be added to the principal obligation and the resulting total amount shall earn interest Compounding interest may be availed of only when there is a written stipulation in the contract for the payment of interest.

BARTER BARTER - A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity and quality.

DEPOSIT DEPOSIT - A deposit is constituted from the moment a person receives a thing belong to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. NOTE: it is essential that the depository is not the owner of the thing deposited

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 each of whom believes himself entitled to the thing deposited; b. necessary- made in compliance with a legal obligation, or on the occasion of any calamity, or by travelers in hotels and inns or by travelers with common carriers

CHARACTERISTICS 1. real - because it is perfected only by the delivery of the subject matter BUT an agreement to constitute a deposit is binding and enforceable, since it is merely consensual 2. unilateral - if gratuitous 3. bilateral - if with compensation Basis of comparison




Creation Purpose

Principal Purpose

Safekeeping or mere custody


Transfer of the use

Deman dability

Demand return of the thing at will

Lender must wait until expiration of period granted to debtor

May demand return at will


Nature of contract

Both movable and immovable may be the object But in extrajudicial deposit, only a movable (corporeal) thing may be the object May be gratuitous

Only money and any other fungible thing may be the object

May be gratuitous

Judicial Will of the court Security or to ensure the right of a party to the property or to recover in case of favorable judgment Generally immovables Always onerous


or only after the expiration of the period or accomplishme nt of the use of the thing subject to exceptions Both movable and immovable may be the object

Essentially and always gratuitous

CREATION OF DEPOSIT (Art. 1964) 1. By virtue of a court order; or 2. By law QuickTime™ and a (Uncompressed) decompressor 3. Not by the willTIFF of the parties are needed to see this picture. 4. It is essential that the depositary is not the owner of the property deposited (Art. 1962) KINDS OF DEPOSIT 1. judicial - when an attachment or seizure of property in litigation is ordered 2. extrajudicial (Art. 1967) a. voluntary- delivery is made by the will of the depositor or by two or more persons

Subject Matter Cause

Return thing


In whose behalf it is held

Upon order of the court/ end of litigation Person who has a right

Extrajudicial Will of the contracting parties Custody and safekeeping

Movables only May be compensated but generally gratuitious Upon demand of depositor Depositor or /3rd person designated

DEPOSIT IS GENERALLY GRATUITOUS: (Art. 1965) GR: A deposit is generally gratuitous. Exceptions: a. when there is a contrary stipulation b. where depositary is engaged in the business of storing goods c. where property is saved without knowledge of the owner SUBJECT MATTER OF DEPOSIT (Art. 1966) GR: only movable or personal property may be the object of deposit, whether voluntary or necessary. Exception: In judicial deposit, it may cover both movable and immovable property.

DEPOSITOR NEED NOT BE THE OWNER OF THE THING: GR: The depositor must be the owner of the thing deposited.

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Exceptions: It may belong to another person than the depositor. a. when two or more persons claiming to be entitled to a thing may deposit the same with a third person. In such case, the third person assumes the obligation to deliver to the one to whom it belongs. b. Interpleader – the action to compel the depositors to settle their conflicting claims. Here one of the depositors is not the owner. FORM OF CONTRACT OF DEPOSIT: GR: A contract of deposit may be entered into orally or in writing. (Art. 1969) Exception: Delivery of the thing deposited. (It is a real contract, hence, delivery is required for perfection.) Depositary capacitated Depositor incapacitated Depositary is subject to ALL the obligations of a depositary Depositary must return the property either to: a) the legal representative of the incapacitated, OR b) the depositor himself if he should acquire capacity

Basis of Comparison Demandability

Benefit Preference credit


Depositary incapacitated Depositor capacitated Depositary does not incur the obligations of a depositary Depositary, however is liable to: a) return the thing deposited while still in his possession; AND 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 3rd person who acquires the thing in good faith Irregular Mutuum deposit Demandable at Lender is will of the bound by the irregular provisions of depositor for the contract whose benefit and cannot the deposit has seek restitution QuickTime™ and a TIFF (Uncompressed) decomuntil pressor the time of been constituted are needed to see this picture. payment as provided in the contract has arisen Benefit accrues Necessity of to the depositor the borrower Depositor has Enjoy no preference over preference in other creditors the distribution

with respect to the thing deposited

of the debtor’s property.

OBLIGATIONS OF THE DEPOSITARY (SRT-CCCULC-RITT-RPT-TL-HR) 1. Two primary obligations (Art. 1972) a. safekeeping of the object; b. Return of the thing when required – even though a specified term or time for such may have been stipulated in the contract. • Degree of Care – same diligence as he would exercise over his property. • Reasons: i. Essential requisite of judicial relation which involves the depositor’s confidence in his good faith and trustworthiness; ii. The presumption that the depositor took into account the diligence which the depositary is accustomed with respect to his own property. The depositary cannot excuse himself from liability in the event of loss by claiming that he exercised the same amount of care toward the thing deposited as he would towards his own if such care is less than that required by the circumstances. 2. Obligation not to transfer deposit (Art. 1973) GR: the depositary is not allowed to deposit the thing with a third person. Reason: A deposit is founded on trust and confidence and it can be supposed that the depositor, in choosing the depositary, has taken into consideration the latter’s qualification. Exception: The depositary is authorized by express stipulation. Liabilities: Depositary is liable for loss of the thing deposited when: 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 c. The thing is lost through the negligence of his employees whether the latter are manifestly careless or not. Exemption from liability: The thing is lost without the negligence of the third person with whom he was allowed to deposit the

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 thing if such third person is not “manifestly careless or unfit.”

Exception: When there is a stipulation to the contrary.

3. Obligation not to change the way of deposit (Art. 1974) GR: Depositary may not change the way of the deposit Exception: If there are circumstances indicating that the depositor would consent to the change. This is a situation wherein the depositary would reasonably presume that the depositor would agree to the change if he knows of the facts of the situation. Requisites: a. The depositary must notify the depositor of such change and b. Must wait for the reply of the depositor to such change. Exception: If the delay of the reply would cause danger.

6. Obligation not to make use of the things deposited (Art. 1977) GR: Deposit is for safekeeping of the subject matter and not for its use. Exceptions: a. Expressly authorized by the depositor; b. Such use is necessary for its preservation but limited for the purpose only. • Effect of unauthorized use: Liability for damages • Effects of authorized use: (Art. 1978) a. If the thing deposited is non-consumable: GR: The contract loses the character of a deposit and acquires that of a commodatum despite the fact that the parties may have denominated it as a deposit. Exception: Safekeeping is still the principal purpose of the contract. b. If the thing deposited is money or other consumable thing: GR: Converts the contract into a simple loan or mutuum. Exception: Safekeeping is still the principal purpose of the contract, but it becomes an irregular deposit. Bank deposits are in the nature of irregular deposits but they are really loans governed by the law on loans.

4. Obligation to collect on the choses in action deposited (Art. 1975) • If the thing deposited should earn interest, the depositary is under the obligation to: a. Collect the interest as it becomes due; b. Take such steps as may be necessary to preserve its value and the right corresponding to it. • The depositary is bound to collect the capital, as well as the interest, when due. Contract of rent of safety deposit boxes (Art. 1975) A contract for the rent of safety deposit boxes is not an ordinary contract of lease of things, but a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit. The prevailing rule in the US is that the relation between a bank renting out safety deposit boxes and its customer with respect to the contents of the box is that of bailor and bailee. 5. Obligation not to commingle things if so stipulated (Art. 1976) QuickTime™ and a (Uncompressed) decompressor GR: The TIFF depositary ispicture.permitted to are needed to see this commingle grain or other articles of the same kind and quality. Effects: a. The various depositors of the mingled goods shall own the entire mass in common. b. Each depositor shall be entitled to such portion of the entire as the amount deposited by him bears the whole.

7. Liability for loss through fortuitous event (Art. 1979) GR: The depositary is not liable for loss through fortuitous event without his fault. Exceptions: a. If it is so stipulated; b. If he uses the thing without the depositor’s permission c. If he delays in its return; d. If he allows others to use it, even though he himself may have been authorized to use the same. Note: Liability for loss without fortuitous event: Depositary – presumed at fault (Art. 1265) - in possession 8. Relation between bank and depositor (Art. 1980) Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Page 197 of 297

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a. Contract of loan – deposits in banks are really loans because the bank can use the same for its ordinary transactions b. Relation of creditor and debtor – the relation between a depositor and a bank is that of a creditor and a debtor. 9. Obligation when the thing deposited is closed and sealed (Art. 1981) The depositary has the obligation to: a. return the thing deposited when delivered closed and sealed in the same condition; b. pay for damages should the seal or lock be broken through his fault, which is presumed unless proven otherwise; c. Keep the secret of the deposit when the seal or lock is broken, with or without his fault. 10. When depositary justified in opening closed and sealed subject matter (Art. 1982) a. The depositary is presumed authorized to do so if the key has been delivered to him; b. When the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. (Necessity) 11. Obligation to return products, accessories and accessions (Art. 1983) 12. Obligation to pay interest on sums converted for personal use (Art. 1983) 13. The depositary who receives the thing in deposit cannot require that the depositor prove his ownership over the thing (Art. 1984) 14. Where third person appears to be the owner (Art. 1984) The depositary may be relieved from liability when: a. He advised the true owner of the thing of the deposit. b. If the owner, is spite of such information, QuickTime™ and a (Uncompressed) decompressor does not TIFF claim it within the period of one are needed to see this picture. month (30 days) 15. Obligation of the depositary when there are two or more depositors. (Art. 1985) a. Divisible thing and joint depositors – each one of the depositors can demand only his share proportionate thereto. b. Indivisible thing and solidary depositors – rules on active solidarity


GR: Each one of the depositors may do whatever may be useful to the others. (Art. 1212) Exception: Anything which may be prejudicial to the other depositors. • GR: The depositary may return the thing to any one of the solidary depositors Exception: When a demand, judicial or extrajudicial, for its return has been made by one of them in which case delivery should be made to him. Return to one of the depositors stipulated • if by stipulation, the thing should be returned to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return.

16. Obligation to return to the person to whom return must be made. (Art. 1986) a. The depositary is obliged to return the thing deposited, when required, to: • The depositor; • To his heirs or successors; or • To the person who may have been designated in the contract. b. If the depositor was incapacitated at the time of making the deposit, the property must be returned to: • His guardian or administrator; • To the person who made the deposit; • To the depositor himself should he acquire capacity. c. Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative. 17. Obligation to return at the place of return (Art. 1987) – same as the general rule of law regarding the place of payment. (Art. 1251) GR: At the place agreed upon by the parties, transportation expenses shall be borne by the depositor. Exception: In the absence of stipulation, at the place where the thing deposited might be even if it should not be the same place where the original deposit was made. 18. Obligation to return upon the time of return. (Art. 1988)

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 GR: The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. Exceptions: a. When the thing is judicially attached while in the depositary’s possession b. When notified of the opposition of a third person to the return or the removal of the thing deposited. 19. Right of the depositary to return the thing deposited. (Art. 1989) NOTE: in this case, it is the depositary who is returning the deposit WITH OR WITHOUT THE DEMAND of the depositor GR: The depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if: a. The deposit is gratuitous; b. The reason is justifiable. Remedy if depositor refuses to receive the thing: The depositary may deposit the thing at the disposal of the judicial authority. Exception: When the deposit is for a valuable consideration, the depositary has no right to return the thing before the expiration of the time designated even if he should suffer inconvenience as a consequence. 20. Depositary’s liability in case of loss by force majeure or government order. (Art. 1990) Depositary is not liable in cases of loss by force majeur or by government order. However, he has the duty to deliver to the depositor money or another thing he receives in place of the thing. 21. Liability in case of alienation of the depositary’s heir. (Art. 1991) When alienation is done in GOOD FAITH: a. Return the value of the thing deposited b. Assign the right to collect from the buyer. • The heir does not need to pay the actual price of the thing deposited. When alienation is done in BAD FAITH: QuickTime™ and a (Uncompressed) decompressor a. Liable forTIFF damages; are needed to see this picture. b. Pay the actual price of the thing deposited. 22. Depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (Art. 1994) The thing retained serves as security for the payment of what may be due to the

depositary by reason of the deposit. (see Art. 1965, 1992, 1993). Note: The debt must be prior to the deposit. Irregular Deposit May be demanded at will by the irregular depositor for whose benefit the deposit has been constituted Only benefit is that which accrues to the depositor Depositor has preference over other creditors

Mutuum Lender is bound by the provision of the contract and cannot seek restitution until the time for payment, as provided in the contract has arisen If with interest, benefit if both parties No preference

OBLIGATIONS OF THE DEPOSITOR (PLD) 1. Obligation to pay preservation. (Art. 1992)



2. Obligation to pay losses incurred due to character of thing deposited. (Art. 1993) GR: The depositary must be reimbursed for loss suffered by him because of the character of the thing deposited. Exceptions: a. Depositor was not aware of the danger; b. Depositor was not expected to know the dangerous character of the thing; c. Depositor notified the depositary of such dangerous character; d. Depositary was aware of the danger without advice from the depositor. 3. Effect of death of depositor or depositary. (Art. 1995) a. Deposit gratuitous – death of either of the depositor or depositary extinguishes the deposit (personal in nature). By the word “extinguished,” the law really means that the depositary is not obliged to continue with the contract of deposit. b. Deposit for compensation – not extinguished by the death of either party. Other Matters Concerning a Depositor 1. Depositary has a right to retain the thing in pledge until full payment of what may be due him by reason of the deposit 2. A deposit is extinguished: a. upon the loss or deterioration of the thing deposited;

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 b. upon the death of the depositary, ONLY in gratuitous deposits; c. other provisions in the Civil Code (novation, merger, etc.)

When hotel-keeper not liable: a. The loss or injury is cause by force majeure, like flood, fire, theft or robbery by a stranger (not the hotel-keeper’s servant or employee) with the use of firearms or irresistible force. Exception: Unless the hotel-keeper is guilty of fault or negligence in failing to provide against the loss or injury from his cause. b. The loss is due to the acts pf the guests, his family, servants, visitors. c. The loss arises from the character of the things brought into the hotel. Exemption or diminution of liability: The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. (Art. 2003) Effect: Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former (as set forth in Art. 1998-2001) is suppressed or diminished shall be VOID. Hotel-keeper’s right to retain The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of: a. lodging; b. supplies usually furnished to hotel guests. Reason: It is given to hotel-keepers to compensate them for the liabilities imposed upon them by law. The right of retention recognized in this article is in the nature of a pledge created by operation of law.

NECESSARY DEPOSIT A deposit is necessary when: 1. It is made in compliance with a legal obligation; 2. It takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. *There must be a causal relation between the calamity and the constitution of the deposit. 3. Made by passengers with common carriers. • as to those baggage the passengers or their agents carry 4. Made by travelers in hotels or inns. (Art. 1998) Before keepers of hotels or inns may be held responsible as depositaries with regard to the effects of their guests, the following must concur: Elements: a. They have been previously informed about the effects brought by the guests; and b. The latter have taken the precautions prescribed regarding their safekeeping. Extent of liability: a. Liability in hotel rooms which come under the term “baggage” or articles such as clothing as are ordinarily used by travelers b. Include those lost or damages in hotel annexes such as vehicles in the hotel’s garage. When hotel-keeper liable: (Art. 2000 – 2002) NOTE: In the following cases, the hotelQuickTime™ and a TIFF (Uncompressed) decompressor keeper is liable REGARDLESS of the are needed to see this picture. amount of care exercised: a. The loss or injury to personal property is caused by his servants or employees as well as by strangers (Art. 2000). b. The loss is caused by the act of a thief or robber done without the use of arms and irresistible force. (Art. 2001) Reason: Hotel-keeper is apparently negligent.

In compliance with a legal obligation (governed by the law establishing it, and in case of deficiency, the rules on voluntary deposit e.g. Arts. 538, 586 and 2104) Made on the occasion of any calamity (governed by the rules on voluntary deposit and Art. 2168)

SEQUESTRATION OR JUDICIAL DEPOSIT When judicial deposit takes place: Judicial deposit takes place when an attachment or seizure of property in litigation is ordered by a court. (Art. 2005) Nature: Auxiliary to a case pending in court. Page 200 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Purpose: 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 a favorable judgment. Depositary of sequestered property: person appointed by the court. (Art. 2007) Obligations: a. To take care of the property with the diligence of a good father of the family. (Art. 2008) b. He may not be relieved of his responsibility until the litigation is ended or the court so orders. (Art. 2007) Applicable law: The law on judicial deposit is remedial or procedural in nature. Hence, the Rules of Court are applicable. (Art. 2009) Basis of Comparison Cause or origin

Judicial Deposit By will of the courts


Security; Secure the right of a party to recover in case of favorable judgment. Either movable or immovable property but generally, immovable Always remunerated (onerous)

Subject Matter


In whose behalf it is held

In behalf of the person who, by the judgment, has a right

Extra-judicial Deposit By will of the parties. Hence, there is a contract Custody; Safekeeping of the thing

Only movable property

Generally gratuitous, but may be compensated In behalf of the depositor or third person designated

QuickTime™ and a

TIFF (Uncompressed) decompressor WAREHOUSE RECEIPTS LAW are needed to see this picture.


all warehouses, whether public or private, bonded or not

Application: applies to warehouse receipts issued by a warehouseman as defined in Sec. 58(a), while the Civil Code, to other cases where receipts are not issued by a warehouseman.

The Issue of Warehouse Receipts WHO MAY ISSUE? 1. a warehouseman - a person lawfully engaged in the business of storing goods for profit 2. a duly authorized officer or agent of a warehouseman NOTE: receipts not issued by a warehouseman although in the form of warehouse receipts are not warehouse receipts FORM AND CONTENTS: need not be in particular form, but certain essential terms must be present: 1. Location of warehouse -because the warehouseman may have other warehouses 2. Date of issue and receipt - indicates prima facie the date when the contract of deposit is perfected and when the storage charges shall begin 3. Consecutive number of receipt - to identify each receipt with the goods for which it was issued 4. Person to whom goods are deliverable determines the person or persons who shall prima facie be entitled lawfully to the possession of the goods deposited 5. Rate of storage charges - consideration for the contract from the view of the warehouseman 6. Description of goods or packages - for identification 7. Signature of warehouseman - best evidence of the fact that the warehouseman has received the goods and has bound himself to assume all obligations in connection therewith 8. Warehouseman’s ownership of or interest in the goods - purpose is to prevent abuses in the past when warehouseman issued receipt on their goods 9. Statement of advances made and liabilities incurred (if present) - purpose is to preserve the lien of the warehouseman over the goods stores or the proceeds thereof in his hands NOTE: Effect of omission of any of the essential terms: a. validity and negotiability of receipt is NOT affected b. warehouseman will be liable for damages c. the contract will be converted to an ordinary deposit

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 WHAT TERMS MAY BE INSERTED? ANY other terms or condition EXCEPT: a. those contrary to this Act (e.g. exemption from liability for misdelivery in Sec. 10, not giving statutory notice in case of sale of goods in Sec. 33 and 34) b. an exemption from liability and negligence c. those contrary to law, morals, good customs, public order or public policy DEFINITIONS a. negotiable receipt - receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt b. non-negotiable receipt - receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person NOTE: 1. a provision in a negotiable receipt that it is nonnegotiable is VOID 2. a negotiable warehouse receipt is not a negotiable instrument in the same sense as in the NIL. Duplicate receipts (applies ONLY) to negotiable warehouse receipts. • Whenever more than one negotiable receipt is issued for the same goods, the word ‘DUPLICATE” shall be placed on the face of the receipt except the one 1st issued. • Effect: the warehouseman shall be liable for damages for failing to do this to anyone who purchased the subsequent receipt (1) for value, and (2) supposing it to be an original; even though the purchase be after delivery of the goods by the warehouseman to the holder of the original receipt. Failure to make “non-negotiable” (applies only to non-negotiable warehouse receipts) a. A non-negotiable receipt must contain the word: “non-negotiable” QuickTime™ and a TIFF (Uncompressed) decompressor b. Effect of failure to todo sopicture. will give a holder are needed see this who purchased it for value supposing it to be negotiable, the option treat it as negotiable CONSTRUCTION OF WAREHOUSE RECEIPTS: Liberal construction of the law in favor of bona fide holders. This has no application to actions against any party other than a warehouseman.

OBLIGATION AND RIGHTS OF A WAREHOUSEMAN UPON THEIR RECEIPTS PRINCIPAL OBLIGATIONS WAREHOUSEMAN: 1. To take care of the goods, and be liable for failure to exercise care BUT he is not liable for loss or injury which could not have been avoided UNLESS there is a stipulation to the contrary 2. To deliver the goods to the holder of the receipt or the depositor upon DEMAND accompanied with: a. an offer to satisfy the warehouseman’s lienbecause a warehouseman may refuse delivery until his lien is satisfied b. an offer to surrender the receipt- for the protection of the warehouseman and to avoid criminal liability; this is subject to waiver c. an offer to sign when the goods are delivered, an acknowledgment that they have been delivered •

BUT a warehouseman may still refuse delivery on the grounds of some lawful excuse like: 1. Sec. 10 a. He has been requested by the person lawfully entitled to the goods not to make delivery b. He has information that the delivery about to be made was not to one lawfully entitled to the goods 2. Sec. 16: He has acquired title to the goods which was delivered from: a. Transfer made by the depositor at the time of the deposit for storage or subsequent thereto b. The warehouseman’s lien 3. Sec. 18: If there are several claimants to the goods 4. Sec. 21: If goods were lost and he had no fault 5. Sec. 36: He has already lawfully sold the goods

PERSONS TO WHOM THE GOODS MUST BE DELIVERED 1. Persons lawfully entitled to the possession of the goods or its agent 2. Persons entitled to deliver under: a. a non-negotiable receipt; or b. with written authority 3. person in possession of a negotiable receipt (which was lawfully negotiated)

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 NOTE: a warehouseman does NOT have a cause of action against a person to whom he misdelivered the thing UNLESS the depositor sues him. ACTS FOR LIABLE:





1. Failure to stamp “duplicate” on copies of a negotiable receipt (Sec. 6 and 15) • When more than one negotiable receipts are issued for the same goods, the word “duplicate” must be plainly placed by the warehouseman upon the face of every such receipt except the 1st. In such case, the warehouseman warrants: a. that the duplicate is an accurate copy of the original receipt b. such original receipt is uncancelled at the date of the issue of the duplicate • NOTE: The duplicate imposes no other liability upon the warehouseman. 2. Failure to place “non-negotiable” on a nonnegotiable receipt (Sec. 7) 3. Misdelivery of the goods (Sec. 10) • To one not lawfully entitled to possession: Liable for conversion (unauthorized assumption and exercise of the right of ownership over goods belonging to another through alteration or the exclusion of the owner’s right) • To a person entitled to delivery under a nonnegotiable receipt or written authorization OR person in possession of a negotiable receipt Still liable for conversion if: a. prior to delivery, he had been requested NOT to make such delivery b. he had received notice of the adverse claim or title of a 3rd person 4. Failure to effect cancellation of a negotiable receipt upon delivery of the goods (Sec. 11) • This is applicable ONLY to negotiable receipts but NOT to a situation whereandthere was a valid QuickTime™ a TIFF (Uncompressed) decompressor are needed this picture. sale in accordance withto see Sec. 36 a. When the goods are delivered already: Failure to cancel will make him liable to any one who purchased for value in good faith such receipt b. When only some of the goods were delivered: Failure to cancel or to state plainly in the receipt that some goods were delivered will make him liable to

any one who purchased for value in good faith such receipt 5. Issuing receipt for non-existing goods or misdescribed goods (Sec. 20): • GR: a warehouseman is under obligation to deliver the identical property stored with him and if he fails to do so, he is liable. • Exception: if the description consists merely of marks or labels upon the goods or upon the packages containing them, etc., the warehouseman is NOT liable even if the goods are not of the kind as indicated in the marks or labels 6. In case of lost or destroyed receipts (Sec. 14) • Remember that a warehouseman must deliver to the one who has the receipt but if such was lost, a competent court may order the delivery of the goods only: a. upon proof of the loss or destruction of the receipt; AND b. upon giving of a bond with sufficient securities • NOTE: the warehouseman is still liable to a holder of the receipt for value without notice since the warehouseman can secure himself in the bond given. 7. Failure to take care of the goods (Sec. 12) 8. Failure to give notice in case of sales of goods to satisfy his lien (Sec. 33) or because the goods are perishable and hazardous (Sec. 34) EFFECTS OF ALTERED RECEIPTS: 1. Alteration immaterial: whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor; 2. Alteration material: but it was authorized, the warehouseman is liable according to the terms of the receipts as altered; 3. Material alteration innocently made: though unauthorized, the warehouseman is liable on the altered receipt according to its original term; 4. Material alteration fraudulently made: warehouseman is liable according to the original tenor to a: a. purchaser of the receipt for value without notice; and b. to the alterer and subsequent purchasers with notice ( BUT his Page 203 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 liability is limited only to delivery as he is excused from any other liability) * Even a fraudulent alteration cannot divest the title of the owner of stored goods and the warehouseman is liable to return them to the owner. BUT a bona fide holder acquires no right to the goods under a negotiable receipt which has been stolen or lost or which the indorsement has been forged.

WITH REGARD TO OWNERSHIP 1. Ownership is not a defense for refusal to deliver • The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of it unless such is derived: a. directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; b. from the warehouseman’s lien 2. Adverse title of a 3rd person is not a defense for refusal to deliver by a warehouseman to his bailor on demand EXCEPT: a. To persons to whom the goods must be livered (Sec. 9) b. To the person who wins in the interpleader case (Sec. 17) c. To the person he finds to be entitled to the possession after investigation (Sec. 18) d. To the buyer in case there was a valid sale of the goods (Sec. 36)

DUTY OF WAREHOUSEMAN WHEN THERE ARE SEVERAL CLAIMANTS The warehouseman may either: 1. Investigate and determine within a reasonable time the validity of the claims, and deliver to the person whom he finds is entitled to the possession of the goods Effect: He is NOT excused from liability in case he makes a mistake 2. He may bring a complaint in interpleader Effect: a. he will be relieved from liability in QuickTime™ and a (Uncompressed) decompressor delivering theTIFF goods the whom the are neededto to see this person picture. court finds to have better right; b. he is liable for refusal to deliver to the rightful claimant when it is required to have an interpleader; 3. He may not do (a) and (b) Effect: He will be liable after a lapse of a reasonable time, of conversion as of the date of the original demand for the goods.

NOTE: This does NOT apply to cases where the warehouseman himself makes a claim to the goods. COMMINGLING OF DEPOSITED GOODS • GR: A warehouseman may not mingle goods belonging to different depositors. Exception: In case of fungible goods of the same kind and grade provided: a. he is authorized by agreement b. he is authorized by custom • Effects: a. each depositor shall own the entire mass in common and entitled to his portion b. warehouseman is severally liable to each depositor for the care and redelivery of their portion as if the goods had been kept separate ATTACHMENT OR LEVY OF NEGOTIABLE RECEIPTS • A warehouseman has the obligation to hold the goods for the owner or for the person to whom the negotiable receipt has been duly negotiated. Therefore, the goods cannot be attached or levied upon under an execution UNLESS: a. the document be first surrendered; or b. the negotiation is enjoined, or c. the document is impounded by the court • The warehouseman cannot be compelled to deliver the goods until: a. the receipt is surrendered to him; b. it is impounded by the court NOTE: This provision does NOT apply if the person depositing is NOT the owner of the goods or one who has not the right to convey title to the goods binding upon the owner. REMEDY OF CREDITOR WHOSE DEBTOR OWNS A NEGOTIABLE RECEIPT Attachment of the negotiable receipt (NOT the goods) NOTE: the goods themselves cannot readily be attached or levied upon by ordinary legal process EXTENT OF WAREHOUSEMAN’S LIEN 1. lawful charges for a. storage, and b. preservation of the goods 2. lawful claims for a. money advanced b. labor c. interest d. weighing e. insurance Page 204 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 f. cooperating g. transportation 3. other charges and expenses in relation to such goods 4. reasonable charges and expenses for notice and advertisements of sale 5. sale of the goods where defaults has been made in satisfying the lien EXTENT OF THE LIEN WHEN A NEGOTIABLE RECEIPT HAS BEEN ISSUED 1. charges for storage and preservation of the goods 2. other charges expressly enumerated (from b, c, d and e above) although the amount is NOT stated NOTE: For claims not specified, the warehouseman shares pro rata with the other creditors of the depositor the balance of the proceeds of the sale for the satisfaction of the claims. GOODS SUBJECT TO LIEN 1. goods of the depositor who is liable to the warehouseman as debtor wherever such goods are deposited; 2. goods of other persons stored by the depositor who is liable to the warehouseman as debtor with authority to make a valid pledge NOTE: A warehouseman has NO lien on goods belonging to another and stored by a stranger in fraud of the true owner’s right. THE LIEN MAY BE LOST THROUGH: 1. voluntarily surrendering possession of goods constitutes a waiver or abandonment A warehouseman may NOT claim a lien on other goods of the same depositor for unpaid charges on the goods surrendered if the goods were delivered to him under different receipts. 2. wrongfully refusing to deliver the goods to a person who holds the receipt or the QuickTime™ and a TIFF (Uncompressed) decompressor depositor upon DEMAND accompanied are needed to see this picture. with: a. an offer to satisfy the warehouseman’s lien (because a warehouseman may refuse delivery until his lien is satisfied) b. an offer to surrender the receipt i. for the protection of the warehouseman and to avoid criminal liability ii. this is subject to waiver


an offer to sign when the goods are delivered, an acknowledgment that they have been delivered

REMEDIES FOR A WAREHOUSEMAN 1. Even if without lien, all remedies allowed by law to a creditor against his debtor for collection of charges; 2. By refusing to deliver the goods until his lien is satisfied; 3. All remedies allowed by law for the enforcement of a lien against personal property and recovery of any deficiency in case it exists after the sale of the property; 4. By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien PROCESS OF EXTRAJUDICIAL SALE: 1. Written notice to the person on whose account the goods are held or to persons who claim an interest in the goods containing: a. itemized statement of warehouseman’s lien showing the sum due and when it became due b. brief description of the goods c. a demand that a claim be paid on or before a day mentioned, not less than 10 days from: 1. delivery of notice if personally delivered 2. time when notice should reach its destination if sent by mail d. statement that if the claim is not paid, the goods will be advertised for sale and then sold at a specified time and place 2. After the time for payment of the claim if the notice has elapsed, the sale will be advertised stating: a. a description of the goods to be sold b. the name of the owner or person on whose account the goods were held c. time and place of the sale 3. Publication: a. if there is a newspaper published in the place of sale: once a week for 2 consecutive weeks and the sale not held less than 15 days from the time of the 1st publication b. if there is no newspaper: posted at least 10 days before the sale in not less than 6 conspicuous places in the place of sale 4. Sale itself in: a. place where the lien was acquired b. if such place is manifestly unsuitable for the purpose, at the nearest suitable place Page 205 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 5. From the proceeds of the sale: a. the warehouseman shall satisfy his lien b. including the reasonable charges of notice, advertisement and sale c. the balance shall be held by the warehouseman and delivered on demand to the person to whom he should deliver it 6. Any time before the goods are sold, any person may pay the warehouseman for his lien and the other expenses. The warehouseman shall deliver the goods to that person if he is entitled under this Act, to the possession of the goods on payment of the charges. Otherwise, the warehouseman shall retain ownership of the goods. • With regard to perishable and hazardous goods Warehouseman will give notice to owner or person in whose name the goods are stored: a. to satisfy his lien b. to remove the goods c. failure to do a &b will give the warehouseman authority to sell the goods without advertising d. if sale is not possible, he may dispose of the goods in any lawful manner without liability • Proceeds of the sale shall be disposed of in accordance with the PROCESS in the sale of the goods. • Effects of sale a. warehouseman is NOT liable for nondelivery even if the receipt was given for the goods when they were deposited be negotiated b. when the sale was made without the publication required and before the time specified by law, such sale is void and the purchaser of the goods acquires no title in them NEGOTIATION AND TRANSFER OF RECEIPTS Negotiable receipts negotiable by delivery 1. if the goods are deliverable to the bearer; or QuickTime™ and a TIFF (Uncompressed) decompressor 2. when indorsed in blank; are needed to see thisor picture. 3. person to whose order the goods are delivered or by a subsequent indorsee indorsed it to bearer


GUARANTY (2047) - By guaranty, a person called the guarantor, binds himself to the creditor, to fulfill the obligation of the principal debtor in case the latter should fail to do so. It is a contract between the guarantor and the creditor.

CHARACTERISTICS OF THE CONTRACT 1. Accessory – dependent for its existence upon the principal obligation guaranteed by it; 2. Subsidiary and conditional – takes effect only when the principal debtor fails in his obligation subject to limitation 3. Unilateral – a. It gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa b. It may be entered into even without the intervention of the principal debtor. 4. Guarantor must be a person distinct from the debtor – a person cannot be the personal guarantor of himself CLASSIFICATION OF GUARANTY 1. Guaranty in the broad sense: a. Personal – guaranty is the credit given by the person who guarantees the fulfillment of the principal obligation; or b. Real – guaranty is property, movable, or immovable i. Real mortgage (2124) or antichresis (2132) – guaranty is immovable ii. Chattel mortgage (2140) or pledge (2093) – guaranty is movable 2. As to its origin: a. Conventional – constituted by agreement of the parties (2051[1]) b. Legal – imposed by virtue of a provision of law c. Judicial – required by a court to guarantee the eventual right of one of the parties in a case. 3. As to consideration: a. Gratuitous – guarantor does not receive any price or remuneration for acting as such (2048) b. Onerous – one where the guarantor receives valuable consideration for his guaranty 4. As to person guaranteed: Page 206 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 a. Single – constituted solely to guarantee or secure performance by the debtor of the principal obligation; b. Double or sub-guaranty – constituted to secure the fulfillment by the guarantor of a prior guaranty 5. As to its scope and extent: a. Definite – where the guaranty is limited to the principal obligation only, or to a specific portion thereof; b. Indefinite or simple – where the guaranty included all the accessory obligations of the principal, e.g. costs, including judicial costs. GUARANTY GENERALLY GRATUITOUS (2048) GR: Guaranty is gratuitous Exception: When there is a stipulation to the contrary Cause of contract of guaranty

1. Guaranty is unilateral – exists for the benefit of the creditor and not for the benefit of the principal debtor 2. Creditor has every right to take all possible measures to secure payment of his credit – guaranty can be constituted even against the will of the principal debtor Rights of third persons who pay: 1. Payment without the knowledge or against the will of the debtor: a. Guarantor can recover only insofar as the payment has been beneficial to the debtor b. Guarantor cannot compel the creditor to subrogate him in his rights 2. Payment with knowledge or consent of the debtor: Subrogated to all the rights which the creditor had against the debtor GUARANTY BY REASON OF ORIGIN (2051[1])

1. Presence of cause which supports principal obligation: Cause of the contract is the same cause which supports the obligation as to the principal debtor. The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of a guarantor or surety. 2. Absence of direct consideration or benefit to guarantor: Guaranty or surety agreement is regarded valid despite the absence of any direct consideration received by the guarantor or surety, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal will suffice. MARRIED WOMAN AS GUARANTOR (2049)

1. Conventional; 2. Judicial; 3. Legal DOUBLE OR SUB-GUARANTY (2051[2]) One constituted to guarantee the obligation of a guarantor. It should not be confounded with guaranty wherein several guarantors concur.

NECESSITY OF VALID PRINCIPAL OBLIGATION (2052[1]) Guaranty is an accessory contract: It is an indispensable condition for its existence that there must be a principal obligation. Hence, if the principal obligation is void, it is also void.

GR: Married woman binds only her separate property GUARANTY OF VOIDABLE, UNENFORCEABLE, AND NATURAL OBLIGATIONS (2052[2])

Exceptions: 1. With her husband’s consent, bind the QuickTime™ and a community orTIFF conjugal partnership (Uncompressed) decompressor property are needed to see this picture. 2. Without husband’s consent, in cases provided by law, such as when the guaranty has redounded to the benefit of the family. GUARANTY UNDERTAKEN KNOWLEDGE OF DEBTOR (2050)


A guaranty may secure the performance of a: 1. Voidable contract – such contract is binging, unless it is annulled by a proper court action 2. Unenforceable contract – because such contract is not void 3. Natural obligation – the creditor may proceed against the guarantor although he has not right of action against the principal

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 debtor for the reason that the latter’s obligation is not civilly enforceable. When the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from a natural into a civil one.

GUARANTY OF FUTURE DEBTS (2053) Continuing Guaranty or Suretyship: 1. Not limited to a single transaction but which contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked. 2. It is prospective in its operation and is generally intended to provide security with respect to future transactions. 3. Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable. Reason: A contract of guaranty is subsidiary. a. To secure the payment of a loan at maturity – surety binds himself to guarantee the punctual payment of a loan at maturity and all other obligations of indebtedness which may become due or owing to the principal by the borrower. b. To secure payment if any debt to be subsequently incurred – a guaranty shall be construed as continuing when by the terms therof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. c. To secure existing unliquidated debts – refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to dents not yet incurred and existing at that time. The surety agreement itself is valid QuickTime™ and a and binding even before the principal TIFF (Uncompressed) decompressor are needed to see this picture. obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent GUARANTY OF CONDITIONAL OBLIGATIONS: A guaranty may secure all kinds of obligations, be they

pure or subject to a suspensive or resolutory condition. 1. Principal obligation subject to a suspensive condition – the guarantor is liable only after the fulfillment of the condition. 2. Principal obligation subject to a resolutory condition – the happening of the condition extinguishes both the principal obligation and the guaranty



GR: Guaranty is a subsidiary and accessory contract – 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 the guarantor may bind himself for less than that of the principal. Exceptions: 1. Interest, judicial costs, and attorney’s fees as part of damages may be recovered – creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate, judicial costs, and attorney’s fees when appropriate, even without stipulation and even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. • Reason: Surety is made to pay, not by reason of the contract, but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. Interest runs from: a. Filing of the complaint (upon judicial demand); or b. The time demand was made upon the surety until the principal obligation is fully paid (upon extrajudicial demand) 2. Penalty may be provided – a surety may be held liable for the penalty provided for in a bond for violation of the condition therein. Principal’s liability guarantor’s obligations



The amount specified in a surety bond as the surety’s obligation does not limit the extent of the damages that may be recovered from the Page 208 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 principal, the latter’s liability being governed by the obligations he assumed under his contract.

GUARANTY NOT PRESUMED (2055) Guaranty requires the expression of consent on the part of the guarantor to be bound. It cannot be presumed because of the existence of a contract or principal obligation.

unfair and unreasonable for it practically nullifies the nature of the undertaking it had assumed. Reason: The liability of the surety attaches as soon as the principal debtor defaults, and notice thereof is given the surety within a reasonable time to enable it to take steps to protect its interest. Remedy of surety: Foreclose the counterbond put up by the principal debtor (if there is any)

Reasons: 1. There be assurance that the guarantor had the true intention to bind himself; 2. To make certain that on making it, the guarantor proceeded with consciousness of what he was doing. GUARANTY COVERED BY THE STATUTE OF FRAUDS • Guaranty must not only be expressed but must so be reduced into writing. • Hence, it shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents. • It need not appear in a public document. GUARANTY STRICTLY CONSTRUED Strictly construed against the creditor in favor of the guarantor and is not be extended beyond its terms or specified limits. If there is any doubt on the terms and conditions of the guaranty or surety agreements, the doubt should be resolved in favor of the guarantor or surety. 1. Liability for obligation stipulated – guarantor is liable only for the obligation of the debtor stipulated upon, and not to obligations assumed previous to the QuickTime™ and a TIFF (Uncompressed) decompressor execution of the guaranty unless an intent to are needed to see this picture. be so liable is clearly indicated. 2. Liability of surety limited to a fixed period – the surety must only be bound in the manner and to the extent, and under the circumstances which are set forth or which may be inferred from the contract of guaranty or suretyship, and no farther. 3. Liability of surety to expire on maturity of principal obligation – such stipulation is



Contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party

An undertaking that the title, quality, or quantity of the subject matter of a contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty



Liability depends upon an independent agreement to pay the obligation if the primary debtor fails to do so

Assumes liability as a regular party to the undertaking

Engagement is a collateral undertaking

Charged as an original promisor

Secondarily liable – he contracts to pay if, by the use of due diligence, the dent cannot be paid

Primarily liable – undertakes directly for the payment without reference to the solvency of the principal, and is so responsible at once the latter makes default, without any demand by the creditor upon the principal whatsoever or any notice of default

Only binds himself to pay if the principal cannot or unable to pay

Undertakes to pay if the principal does not pay, without regard to his ability to do so

Insurer of the solvency

Insurer of the debt

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 of the debtor Does not contract that the principal will pay, but simply that he is able to do so

Pay the creditor without qualification if the principal debtor does not pay. Hence, the responsibility or obligation assumed by the surety is greater or more onerous than that of a guarantor

QUALIFICATIONS OF GUARANTOR (2056-2057) 1. He possesses integrity; 2. He has capacity to bind himself; 3. He has sufficient property to answer for the obligation which he guarantees. Exception: The creditor waives the requirements

Effect of Subsequent Loss of Required Qualifications: The qualifications need only be present at the time of the perfection of the contract. The subsequent loss of integrity or property or supervening incapacity of the guarantor would not operate to exonerate the guarantor of the eventual liability he has contracted, and the contract of guaranty continues. Remedy of creditor: Demand another guarantor with the proper qualifications Exception: Creditor may waive it if he chooses and hold the guarantor to his bargain. Article 2057: 1. Requires conviction in the first instance of a crime involving dishonesty to have the right to demand another. 2. Judicial declaration of insolvency is not necessary in order for the creditor to have a right to demand another guarantor. SELECTION OF GUARANTOR: QuickTime™ and a as guarantor: 1. Specified person stipulated TIFF (Uncompressed) decompressor are needed to see this picture. Substitution of guarantor may not be demanded Reason: The selection of the guarantor is:

a. Term of the agreement; b. As a party, the creditor is, therefore, bound thereby. 2. Guarantor selected by the principal debtor: Debtor answers for the integrity, capacity, and solvency of the guarantor.

3. Guarantor personally designated by the creditor: Responsibility of the selection should fall upon the creditor because he considered the guarantor to have the qualifications for the purpose. RIGHT OF GUARANTOR TO BENEFIT EXCUSSION OR EXHAUSTION (2058)


Reasons: 1. Guarantor only secondarily liable – the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so. If the principal debtor fulfills the obligation guaranteed, the guarantor is discharged from any responsibility. 2. All legal remedies against the debtor to be first exhausted – to warrant recourse against the guarantor for payment, it may not be sufficient that the debtor appears insolvent. Such insolvency may be simulated. Right of Creditor to Secure Judgment against Guarantor prior to Exhaustion GR: An ordinary personal guarantor (NOT a pledgor or mortgagor), may demand exhaustion of all the property of the debtor before he can be compelled to pay. Exception: The creditor may, prior thereto, secure a judgment against the guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him, until after the properties of the principal debtor shall have been exhausted, to satisfy the latter’s obligation. EXCEPTIONS TO THE BENEFIT OF EXCUSSION (2059) The guarantor is not entitled to the benefit of excussion: 1. As provided in Art. 2059: a. If the guarantor has expressly renounced it – Waiver i. Waiver is valid but it must be made in express terms. b. If he has bound himself solidarily with the debtor – liability assumed that of a surety i. Guarantor becomes primary liable as a solidary co-debtor. In effect, he renounces in the contract itself the benefit of exhaustion. c. In case of insolvency of the debtor – guarantor guarantees the solvency of the debtor Page 210 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 i. If the debtor becomes insolvent, the liability of the guarantor as the debtor cannot fulfill his obligation d. When he (debtor) has absconded, or cannot be sued within the Philippines – the creditor is not required to go after a debtor who is hiding or cannot be sued in our courts, and to incur the delays and expenses incident thereto. Exception: Debtor has left a manager or representative;


3. 4. 5.

e. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation – if such judicial action including execution would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such remedies against the debtor as the same would be but a useless formality. It is not necessary that the debtor be judicially declared insolvent. If he does not comply with Art. 2060: In order that the guarantor may make use of the benefit of excussion, he must: a. Set it up against the creditor upon the latter’s demand for payment from him; b. Point out to the creditor: i. Available property of the debtor – the guarantor should facilitate the realization of the excussion since he is the most interested in its benefit. ii. Within the Philippine territory – excussion of property located abroad would be a lengthy and extremely difficult proceeding and would not conform with the purpose of the guaranty to provide the creditor with the means of obtaining the fulfillment of the obligation. iii. Sufficient to cover the amount of the debt. If he is a judicial bondsman and subsurety (2084) Where a pledge or mortgage has been QuickTime™ and a given by himTIFF as(Uncompressed) a special security. decompressor are needed to see this picture. If he fails to interpose it as a defense before judgment is rendered against him.

DUTY OF CREDITOR TO MAKE PRIOR DEMAND FOR PAYMENT FROM GUARANTOR (2060) 1. When demand to be made – only after judgment on the debt for obviously the

exhaustion of the principal’s property cannot even begin to take place before judgment has been obtained. 2. Actual demand to be made – joining the guarantor in the suit against the principal debtor is not the demand intended by law DUTY OF THE GUARANTOR TO SET UP BENEFIT OF EXCUSSION (2060) As soon as he is required to pay, guarantor must also point out to the creditor available property (not in litigation or encumbered) of the debtor within the Philippines.

DUTY OF THE CREDITOR TO RESORT TO ALL LEGAL REMEDIES (2061) 1. After the guarantor has fulfilled the conditions required for making use of the benefit of exhaustion, it becomes the duty of the creditor to: 2. Exhaust all the property of the debtor pointed out by the guarantor; 3. If he fails to do so, he shall suffer the loss but only to the extent of the value of the said property, for the insolvency of the debtor. JOINDER OF GUARANTOR AND PRINCIPAL AS PARTIES DEFENDANT GR: The guarantor, not being a joint contractor with his principal, cannot be sued with his principal. Exception: Where it would serve merely to delay the ultimate accounting of the guarantor or if no different result would be attained if the plaintiff were forced to institute separate actions against the principal and the guarantors.

PROCEDURE WHEN CREDITOR SUES (2062) 1. Sent against the principal – as a rule, the creditor may hold the guarantor only after judgment has been obtained against the principal debtor and the latter is unable to pay. 2. Notice to guarantor of the action – guarantor must be notified so that he may appear, if he so desires, and set up defenses he may want to offer a. Guaranty appears – voluntary appearance does not constitute a renunciation of his right to excussion. b. Guaranty does not appear –

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 i. He cannot set up the defenses which, by appearing are allowed to him by law; and ii. It may no longer be possible for him to question the validity of the judgment rendered against the debtor 3. Hearing before execution can be issued against the guarantor – a guarantor is entitled to be heard before an execution can be issued against him where he is not a party in the case involving his principal. EFFECTS OF COMPROMISE (2063) Compromise – a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. 1. Compromise between creditor and principal debtor benefits the guarantor but does not prejudice him. 2. Compromise between guarantor and the creditor benefits but does not prejudice the principal debtor. SUB-GUARANTOR’S RIGHT TO EXCUSSION (2064) Sub-guarantor enjoys the benefit of excussion with respect to: 1. Principal debtor; and 2. Guarantor Reason: He stands with respect to the guarantor on the same footing as the latter does with respect to the principal debtor

BENEFIT OF DIVISION AMONG SEVERAL GUARANTORS (2065) 1. In whose favor applicable – a. Several guarantors; b. Only one debtor; c. For the same debt • Cannot be availed of if there are: QuickTime™ and a TIFF (Uncompressed) decompressor

are needed to see thisof picture. b. Two or more debtors one debt, even if they be bound solidarily, each with different guarantors; or c. Two or more guarantors of the same debtor but not only for the same debt d. If any of the circumstances enumerated in Art. 2059 should take place, as would the benefit of exhaustion of the debtor’s property.

2. Extent of liability of several guarantors – joint obligation: the obligation to answer for the debt is divided among all of them. The guarantors are not liable to the creditor beyond the shares which they are respectively bound to pay. Exceptions: When solidarily has been expressly stipulated

BENEFIT OF EXCUSSION AMONG SEVERAL GUARANTORS: In order that the guarantor may be entitled to the benefit of division, it is not required that he point out the property of his co-guarantors. Reason: Obligation of the guarantor with respect to his co-guarantors is not subsidiary but direct and does not depend as to its origin on the solvency or insolvency of the latter.

GUARANTOR’S RIGHT TO SUBROGATION (2067) 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. 1. Accrual, basis, and nature of right – right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Art. 2066 a. Arises by operation of law upon payment by the guarantor b. It is not a contractual right c. The guarantor is subrogated, by virtue of the payment, to the right of the creditor, not those of the debtor. 2. When right not available – since subrogation is the means of effectuating the right of the guarantor to be reimbursed. It cannot therefore be invoked in those cases where the guarantor has no right to be reimbursed. EFFECT OF PAYMENT BY GUARANTOR WITHOUT NOTICE TO DEBTOR (2068) If the debtor has already paid the creditor, when the guarantor pays, the debtor can set up against the guarantor the defense of previous extinguishments of the obligation by payment. Hence, guarantor must notify the debtor before making payment.

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Reason: The guarantor cannot be allowed, through his own fault or negligence to prejudice or impair the rights or interests of the debtor.



Exceptional remedies:

Debtor’s obligation with a period – demandable only when the day fixed comes. 1. The guarantor who pays before maturity is not entitled to reimbursement since there is no necessity for accelerating payment. 2. A contract of guaranty being subsidiary in character, the guarantor is not liable for the debt before it becomes due. Exception: The debtor will be liable if the payment was made: a. With his consent; or b. Subsequently ratified by him (ratification may be express or implied) RIGHT OF GUARANTOR TO PROCEED AGAINST DEBTOR BEFORE PAYMENT (2071) GR: Guarantor has no cause of action against the debtor until after the former has paid the obligation. Exceptions: 2071 enumerates instances when the guarantor may proceed against the debtor even before the payment. 1. When he is sued for the payment; 2. In case of insolvency of the principal debtor; 3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; 4. When the debt has become demandable, by reason of the expiration of the period for payment; 5. After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years; 6. If there are reasonable grounds to fear that QuickTime™ and a the principal debtor intends to abscond; TIFF (Uncompressed) decompressor are needed to see this picture. 7. If the principal debtor is in imminent danger of becoming insolvent. Purpose: To enable the guarantor to take measures for the protection of his interest in view of the probability that he would be called upon to pay the debt.

GR: The guarantor cannot demand reimbursement for indemnity because he has not paid the obligation.

1. To obtain release from the guaranty; or 2. To demand security that shall protect him from: a. Any proceedings by the creditor; and b. Against the insolvency of the debtor. Guarantor’s remedies are alternative. He has the right to choose the action to bring.

SUIT BY GUARANTOR AGAINST CREDITOR BEFORE PAYMENT The guaranty’s or surety’s action for release can only be exercised against the principal debtor and not against the creditor. Reason: Release of the guarantor imports an extinction in the obligation to the creditor; it connotes therefore, either a remission or novation by subrogation, and either operation requires the creditor’s assent for its validity.

2066 AND 2071 DISTINGUISHED 2066


(Right of Guarantor to Reimbursement after Payment)

(Right of Guarantor to Proceed against Debtor even before payment)

Provides for the enforcement of the rights of the guarantor against the debtor after he has paid the debt – gives a right of action after payment

Provides for the protection before he has paid but after he has become liable – gives a protective remedy before payment

Substantive right

Preliminary remedy

Gives a right of action, which, without the provisions of the other might be worthless

Remedy given seeks to obtain from the guarantor “release from the guaranty or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.”

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 RECOVERY OF SURETY AGAINST INDEMNITOR EVEN BEFORE PAYMENT 1. Indemnity agreement for the benefit of surety – indemnity agreement is not for the benefit of the creditor but for the benefit of the surety. 2. Indemnity agreement may be against actual loss as well as liability – such agreement is enforceable and not violative of any public policy a. Indemnity against loss – indemnitor will not be liable until the person to be indemnified makes payment or sustains loss; b. Indemnity against liability – indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. Where the principal debtors are simultaneously the same persons who executed the indemnity agreement, the position occupied by them is that of a principal debtor and indemnitor at the same, and their liability being joint and several.

GUARANTOR OF A THIRD PERSON AT REQUEST OF ANOTHER (2072) The guarantor who guarantees the debt of an absentee at the request of another has a right to claim reimbursement, after satisfying the debt from: 1. The person who requested him to be a guarantor; 2. The debtor BETWEEN CO-GUARANTORS RIGHT TO CONTRIBUTION OF GUARANTOR WHO PAYS (2073) Presumption of joint liability guarantors when there are: 1. 2. 3. Effect: share.



Two or more guarantors; QuickTime™ and a decompressor Same debtor;TIFFar(Uncompressed) e needed to see this picture. Same debt Each is bound to pay only his proportionate

When Art. 2073 Applicable: 1. When one guarantor has paid the debt to the creditor; 2. Payment by such guarantor must have been made:

a. By virtue of a judicial demand; or b. Because the principal debtor is insolvent; 3. Guarantor who paid is seeking reimbursement from each of his coguarantors the share which is proportionately owing him. Effect of Insolvency of Any Guarantor: Follows the rule on solidary obligations :The share of the insolvent guarantor shall be borne by the others including the paying guarantor in the same joint proportion. Accrual and Basis of Right: The right of reimbursement is acquired ipso jure without need of any prior cession from the creditor by the guarantor. DEFENSES AVAILABLE TO CO-GUARANTORS (2074) GR: All defenses which the debtor would have interposed against the creditor. Exception: Those which cannot be transmitted for being purely personal to the debtor. LIABILITY OF SUB-GUARANTOR IN CASE OF INSOLVENCY OF GUARANTOR (2075) Sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whom he guaranteed in case of the insolvency of the guarantor for whom he bound himself as sub-guarantor. CAUSES OF EXTINGUISHMENT OF GUARANTY (2076) (PL3CN-ARFP) GR: Guaranty being accessory, it is extinguished when principal obligation is extinguished, the causes of which are: 1. 2. 3. 4.

Payment or performance; Loss of the thing due; Condonation or remission of the debt; Confusion or merger of the rights of the creditor and debtor; 5. Compensation; and 6. Novation 7. Other causes: a. Annulment; b. Rescission; c. Fulfillment of a resolutory condition; d. Prescription Exception: The guaranty itself may be directly extinguished although the principal obligation still remains such as in the case of the release of the guarantor made by the creditor. Page 214 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Material Alteration of Principal Contract – any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety, will release the surety from liability. Such material alteration would constitute a novation or change of the principal contract, which is consequently extinguished. Upon such extinguishments, the accessory contract to guaranty is also terminator and the guarantor cannot be held liable on the new contract to which he has not given his consent. When Alteration Material – where such change will have the effect of making the obligation more onerous. Imposes a new obligation or added burden on the party promising; or 1. Takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof. RELEASE BY CONVEYANCE OF PROPERTY (2077) GR: Payment is made in money. Exception: Any substitute paid in lieu of money which is accepted by the creditor extinguishes the obligation and in consequence, the guaranty. In case of eviction: Eviction revives the principal obligation but not the guaranty. Reason: The creditor’s action against the debtor is for eviction and this is different from what the guarantor guaranteed.

RELEASE OF GUARANTOR WITHOUT CONSENT OF OTHERS (2078) Effect: The release benefits all to the extent of the share of the guarantor released. Reason: A release made by the creditor in favor of QuickTime™ and a one of the guarantors without the consent of the TIFF (Uncompressed) decompressor are needed to see this picture. others may prejudice the others should a guarantor become insolvent.

RELEASE BY EXTENSION OF TERM GRANTED BY CREDITOR TO DEBTOR (2079) Release Without Consent of Guarantor: Creditor grants an extension of time to the debtor without the consent of the guarantor.

Effect: Guarantor is discharged from his undertaking. Reason: Necessity of avoiding of prejudice to the guarantor. The debtor may become insolvent during the extension, thus depriving the guarantor of his right to reimbursement. It is unimportant whether the extension given has actually proved prejudicial or not to the guarantor or surety. Nor does it matter for how short a period the time of payment has been extended. Extension must be based on some new agreement between the creditor and the principal debtor by virtue of which the creditor deprives him of his claim. 1. Where obligation payable in installments: where a guarantor is liable for different payments: GR: An extension of time to one or more will not affect the liability of the surety for the others. Exception: When the unpaid balance has become automatically due by virtue of an acceleration clause for failure to pay an installment. Effect of exception: The act of the creditor extending the payment of said installment, without the guarantor’s consent, discharges the guarantor. Reason: The extension constitutes an extension of the payment of the whole amount of the indebtedness 2. Where consent to an extension is waived in advance by the guarantor: Such waiver is not contrary to law, nor to public policy Effect: Amounts to the surety’s consent to all the extensions granted.

RELEASE WHEN GUARANTOR CANNOT BE SUBROGATED (2080) If there can be no subrogation because of the fault of the creditor, the guarantors are thereby released, even if the guarantors are solidary. Reason: The act of one cannot prejudice another. It also avoids collusion between the creditor and the debtor or a third person. DEFENSES AVAILABLE AGAINST CREDITOR (2081)



GR: All defenses, which pertain to the principal debtor and are inherent in the debt.

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Exception: Those, which are purely personal to the debtor.

LEGAL AND JUDICIAL BONDS MEANING AND FORM OF BOND (2082) 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. Qualifications of personal bondsman: 1. He possesses integrity; 2. He has capacity to bind himself; 3. He has sufficient property to answer for the obligation which he guarantees. PLEDGE OR MORTGAGE IN LIEU OF BOND (2083) Guaranty or suretyship is a personal security. Pledge or mortgage is a property or real security. 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. BONDSMAN NOT ENTITLED TO EXCUSSION (2084) A judicial bondsman and the sub-surety are not entitled to the benefit of excussion. Reason: They are not mere guarantors, but sureties whose liability is primary and solidary. Effect of negligence of creditor: Mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability.

SURETYSHIP – a relation which exists where one person (principal) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or other duty to the obligee, who is QuickTime™ and a TIFF (Uncompressed)and decompressor entitled to but one performance, as between the are needed to see this picture. two who are bound, the second, rather than the first should perform. If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety. NATURE OF SURETY’S UNDERTAKING

1. Liability is contractual and accessory but direct: 2. Liability is limited by terms of contract 3. Liability arises only if principal debtor is held liable a. In the absence of collusion, the surety is bound by a judgment against the principal event though he was not a party to the proceedings; b. The creditor may sue, separately or together, the principal debtor and the surety; c. A demand or notice of default is not required to fix the surety’s liability Exception: Where required by the provisions of the contract of suretyship d. A surety bond is void where there is not principal debtor because such an undertaking presupposes that the obligation is to be enforceable against someone else besides the surety, and the latter can always claim that it was never his intention to be the sole person obligated thereby. NOTE: Surety is not entitled to exhaustion 4. Undertaking is to creditor, not to debtor: The surety makes no covenant or agreement with the principal that it will fulfill the obligation guaranteed for the benefit of the principal. The surety’s undertaking is that the principal shall fulfill his obligation and that the surety shall be relieved of liability when the obligation secured is performed. Exception: Unless otherwise expressly provided. NOTE: Surety is not entitled to notice of principal’s default 5. Prior demand by the creditor upon principal not required Surety is not exonerated by neglect of creditor to sue principal

STRICTISSIMI JURIS RULE APPLICABLE ONLY TO ACCOMMODATION SURETY Reason: An accommodation surety 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.

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 This rule will apply only after it has been definitely ascertained that the contract is one of suretyship or guaranty.

5. 6.





1. Compensated corporate sureties are business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis. 2. They are secured from all possible loss by adequate counter-bonds or indemnity agreements. 3. Such corporations are in fact insurers and in determining their rights and liabilities, the rules peculiar to suretyship do not apply.

PROVISIONS COMMON TO PLEDGE AND MORTGAGE (Art 2085-2123) ESSENTIAL REQUISITES TO CONTRACTS OF PLEDGE AND MORTGAGE: 1. constituted to secure the fulfillment of a principal obligation 2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged 3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose 4. cannot exist without a valid obligation 5. debtor retains the ownership of the thing given as a security 6. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor. IMPORTANT POINTS 1. future property cannot be pledged or QuickTime™ and a mortgaged TIFF (Uncompressed) decompressor are needed to see thisby picture. 2. pledge/mortgage executed one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it. 3. mortgage of a conjugal property by one of the spouses is valid only as to ½ of the entire property 4. in case of property covered by Torrens title, a mortgagee has the right to rely upon what

appears in the certificate of title and does not have to inquire further. pledgor or mortgagor has free disposal of property thing pledged or mortgaged may be alienated. creditor not required to sue to enforce his credit pledgor or mortgagor may be third person

PLEDGE Constituted on movables Property is delivered to the pledgee, or by common consent to a 3rd person Not valid against 3rd persons unless a description of the thing pledged and the date of the pledge appear in a public instrument

MORTGAGE Constituted on immovables Delivery not necessary

Not valid against 3rd persons if not registered

RIGHT OF CREDITOR WHERE DEBTOR FAILS TO COMPLY WITH HIS OBLIGATION 1. creditor is merely entitled to move for the sale of the thing pledged or mortgaged with the formalities required by law in order to collect 2. creditor cannot appropriate to himself the thing nor can he dispose of the same as owner. PROHIBITION AGAINST PACTUM COMMISSORIUM 1. stipulation is null and void - stipulation where thing or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed 2. Requisites of pactum commissorium: a. there should be a pledge or mortgage b. there should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment 3. Effect on Security Contract -nullity of the stipulation does not affect validity and efficacy of the principal contract

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 IMPORTANT POINTS 1. debtor -owner bears the risk of loss of the property 2. pledge or mortgage is indivisible EXCEPTIONS to the rule of indivisibility: a. where each one of several things guarantees determinate portion of credit b. where only portion of loan was released c. where there was failure of consideration 3. rule that real property, consisting of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages 4. the mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole 5. contract of pledge or mortgage may secure all kinds of obligation, be they pure or subject to a suspensive or resolutory condition 6. a promise to constitute pledge or mortgage creates no real right, only a personal right biding upon the parties, only right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet 7. under RPC, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same knowing that the real property is encumbered shall dispose of the same as unencumbered. It is essential that fraud or deceit be practiced upon the vendee at the time of the sale. PLEDGE: A contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. QuickTime™ and a TIFF (Uncompressed) decompressor

KINDS OF PLEDGE: are needed to see this picture. 1. Voluntary or conventional- created by agreement of the parties 2. Legal- created by operation of law CHARACTERISTICS OF PLEDGE: 1. real- perfected by delivery 2. accessory- has no independent existence of its own

3. unilateral- creates obligation solely on the part of the creditor to return the thing subject upon the fulfillment of the principal obligation 4. subsidiary- obligation incurred does not arise until the fulfillment of the principal obligation CAUSE OR CONSIDERATION IN PLEDGE 1. principal obligation – in so far as the pledgor is concerned 2. compensation stipulated for the pledge or mere liberality of the pledgor- if pledgor is not the debtor PROVISIONS APPLICABLE ONLY TO PLEDGE 1. transfer of possession to the creditor or to third person by common agreement is essential in pledge - ACTUAL DELIVERY is important - CONSTRUCTIVE delivery or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common consent of the parties was legally placed in possession. 2. all movables within commerce of men may be pledged as long as susceptible of possession 3. incorporeal right may be pledged. The instruments pledged shall be delivered to the creditor and if negotiable, must be indorsed. 4. pledge shall take effect against 3rd persons only if the ff appears in a public instrument: a. description of the thing pledged b. date of the pledge 5. thing pledged may be alienated by the pledgor or owner only if with the consent of the pledgee. Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, butt he latter shall continue in possession 6. contract of pledge gives right to the creditor to retain the thing in his possession or in that of a third person to whim it has been delivered, until the debt is paid 7. creditor : a. shall take care of the thing pledged with the diligence of a good father of a family b. has the right to the reimbursement of the expenses made for its preservation is liable for its loss or deterioration by reason of fraud, negligence, delay or violation of the

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 terms of the contract, and not due to fortuitous event c. may bring the actions which pertain to the owner of the thing in order to recover it from, or defend it against a 3rd person d. cannot use the thing without the authority of the owner, and if he should do so, or misuse the thing, the owner may ask that it be judicially or extrajudicially deposited e. may use the thing if it is necessary for the preservation of the thing f. may either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing 8. pledgee: a. cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so b. is responsible for the acts of his agents or employees with respect to the thing pledged c. has no right to use the thing or to appropriate the fruits without the authority of the owner d. may cause public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or diminution in value of the thing. The proceeds of the auction shall be a security for the principal obligation. 9. pledgor : a. has the responsibility for flaws of the thing pledged. b. cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case c. is allowed to substitute the thing which is in danger of destruction or impairment QuickTime™ withoutandany fault on the a decompressor part TIFF ofare(Uncompressed) the pledgee, with another needed to see this picture. thing of the same kind and quality d. may require that the thing be deposited with a 3rd person if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired

EXTINGUISHMENT OF PLEDGE (RRPP3A) • If the thing pledged is returned by the pledgee to the pledgor or owner, pledge is extinguished. • A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish. For this purpose, neither the acceptance by the pledgor o owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. • If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledgee. • If the thing is in the possession of 3rd person who has received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledgee • Payment of the debt • Sale of the thing pledged at public auction FORMALITIES REQUIRED IN SALE BY A CREDITOR IF CREDIT NOT PAID IN DUE TIME: 1. the debt is due and unpaid 2. the sale must be at a public auction 3. there must be notice to the pledgor and owner, stating the amount due, and 4. the sale must be made with the intervention of a notary public EFFECT OF THE SALE OF THE THING PLEDGED 1. extinguishes the principal obligation whether the price of the sale is more or less than the amount due 2. if the price is more than amount due, the debtor is not entitled to the excess unless the contrary is provided 3. if the price of the sale is less, neither is the creditor entitled to recover the deficiency. Contrary stipulation is void. LEGAL PLEDGES 1. Necessary expenses shall be refunded to every possessor, but only possessor in good faith may retain the thing until he has been reimbursed • Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (art 546)

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (art 1731) 3. The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. (art 1914) 4. The laborer’s wages shall be a lien on the goods manufactured or the work done. (art 1707) Special Laws apply to pawnshops and establishments which are engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily. MORTGAGE REAL MORTGAGE (Arts. 2124-2131) It is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. OBJECTS OF REAL MORTGAGE: 1. immovables 2. alienable real rights in accordance with the laws, imposed upon immovables * future property cannot be object of mortgage IMPORTANT POINTS 1. As a general rule, the mortgagor retains possession of the property he may deliver said property to the mortgagee without altering the nature of the contract of mortgage. 2. It is not an essential requisite that the principal of the credit bears interest, or that the interest as compensation for the use of the principal and the enjoyment of its fruits be in the form of a certain percent thereof. KINDS OF MORTGAGE: QuickTime™ and a TIFF (Uncompressed) decompressor 1. voluntary are needed to see this picture. 2. legal 3. equitable – one which, although it lacks the proper formalities of a mortgage shows the intention of the parties to make the property as a security for a debt (provisions governing equitable mortgage arts 1365, 1450, 1454, 1602, 1603, 1604 and 1607)

ESSENTIAL REQUISITES OF MORTGAGE: 1. constituted to secure the fulfillment of a principal obligation 2. mortgagor be the absolute owner of the thing pledged or mortgaged 3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose 4. cannot exist without a valid obligation 5. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor. 6. appears in a public document duly recorded in the Registry of Property to be validly constituted LEGAL MORTGAGE: the persons in whose favor the law establishes a mortgage have on other right than to demand the execution and the recording of the document in which the mortgage is formalized. INCIDENTS OF REGISTRATION OF MORTGAGE 1. Mortgagee entitled to registration of mortgage as a matter of right 2. Proceedings for registration do not determine validity of mortgage or its effect 3. Registration is without prejudice to better right of third parties 4. Mortgage deed once duly registered forms part of the records for the registration of the property mortgaged 5. Mortgage by surviving spouse of his/her undivided share of conjugal property can be registered EFFECT OF INVALIDITY OF MORTGAGE ON PRINCIPAL OBLIGATION 1. principal obligation remains valid 2. mortgage deed remains as evidence of a personal obligation EFFECT OF MORTGAGE 1. creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world 2. creates merely an encumbrance LAWS GOVERNING MORTGAGE 1. New Civil Code 2. PD 1952 3. Revised Administrative Code 4. RA 4882, as regards aliens becoming mortgages

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 FORECLOSURE OF MORTGAGE: It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given. KINDS OF FORECLOSURE 1. judicial 2. extrajudicial Both should be distinguished from execution sale governed by Rule 39 of the Rules of Court. Judicial foreclosure There is court intervention Decisions are appealable Order of the court cuts off all rights of the parties impleaded There is equity of redemption except on banks which provides for a right of redemption 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

Extrajudicial foreclosure No court intervention Not appealable, it is immediately executory Foreclosure does not cut off right of all parties involved There is right of redemption

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

NOTES ƒ 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 v. IAC, 151 SCRA 577 [1987]) ƒ Mere inadequacy of the price obtained at the sheriff’s sale will notQuickTime™ be sufficient to set aside and a TIFF (Uncompressed) decompressor the sale unless “the price is picture. so inadequate as are needed to see this to shock the conscience of the court” taking into consideration the peculiar circumstances attendant thereto (Sulit v. CA, 268 SCRA 441) ƒ The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action accrues (Arts 1142 & 1144)

JUDICIAL FORECLOSURE (governed by Rule 68 of Rules of Court) (B-PACE-PC) 1. May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof is situated 2. If the court finds the complaint to be wellfounded, it shall order the mortgagor to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment 3. If the mortgagor fails to pay at time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction. 4. Upon confirmation of the sale by the court, also upon motion, it shall operate to divest the rights of all parties to the action and to vest their rights to the purchaser subject to such rights of redemption as may be allowed by law 5. Before the confirmation, the court retains control of the proceedings; execution on judgment 6. The proceeds of the sale shall be applied to the payment of the: a. costs of the sale; b. amount due the mortgagee; c. claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and d. the balance, if any shall be paid to the mortgagor 7. Sheriff’s certificate is executed, acknowledged and recorded to complete the foreclosure NATURE OF JUDICIAL FORECLOSURE PROCEEDINGS 1. quasi in rem action 2. foreclosure is only the result or incident of the failure to pay debt 3. survives death of mortgagor EXTRAJUDICIAL FORECLOSURE (governed by Act No, 3135, as amended) 1. express authority to sell is given to the mortgagee. 2. authority is not extinguished by death of mortgagor or mortgagee 3. public sale should be made after proper notice 4. surplus proceeds of foreclosure sale belong to the mortgagor Page 221 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 5. debtor has the right to redeem the property sold within 1 year from and after the date of sale 6. remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession.

2. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment. 3. Action for recovery of deficiency may be filed even during redemption period. 4. Action to recover prescribes after 10 years from the time the right of action accrues

PROCEDURE FOR EXTRAJUDICIAL FORECLOSURE OF BOTH REAL ESTATE MORTGAGE UNDER ACT NO. 3135 AND CHATTEL MORTGAGE UNDER ACT NO. 1508 (A.M. N0. 99-10-05-0; January 15, 2000) (ARC-DINREA) 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 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 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 one 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 6. the notice of sale shall be published in a newspaper of general circulation 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. no auction sale shall be held unless there are at least 2 participating bidders, otherwise the sale shall be postponed to another date. If on QuickTime™ and a (Uncompressed) decompressor the new date TIFF there shall not be at least 2 are needed to see this picture. bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale.

NATURE OF POWER OF FORECLOSURE BY EXTRAJUDICIAL SALE 1. conferred for mortgagee’s protection 2. an ancillary stipulation 3. a prerogative of the mortgagee Note: Stipulation of upset price in mortgage contract is void

RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY 1. Mortgagee is entitled to recover deficiency

EFFECT OF INADEQUACY OF PRICE IN FORECLOSURE SALE 1. Where there is right to redeem GR: Inadequacy of price is immaterial because the judgment debtor may redeem the property Exception: the price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstances 2. Property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to redeem 3. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted WAIVER OF SECURITY BY CREDITOR 1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness 2. Mortgagee cannot have both remedies Note: Foreclosure retroacts to the date of registration of mortgage STIPULATION OF UPSET PRICE OR “TIPO” A stipulation of minimum price at which the property shall be sold to become operative in the event of a foreclosure sale at public auction is NULL and VOID REDEMPTION - It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. KINDS OF REDEMPTION 1. equity of redemption: right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the Page 222 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 mortgaged property or confirmation of sale; applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure NOTE: redemption of the banking institutions is allowed within 1 year from confirmation of sale 2. right of redemption: right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt; applies only to extrajudicial foreclosure of real mortgage NOTE: the right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank,Inc v. CA, 230 SCRA 513 [1994]) PERIOD OF REDEMPTION 1. extra-judicial (Act No. 3135) a. natural person – 1 year from registration of the certificate of sale with Registry of Deeds b. juridical person – same rule as natural person c. juridical person (mortgagee is bank) – 3 months after foreclosure or before registration of certificate of foreclosure whichever is earlier (Sec. 117 of General Banking Law) 2. Judicial – before confirmation of the sale by the court 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 v. CA, 219 SCRA 598 [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 QuickTime™ and a (Uncompressed) decompressor c. taxes TIFF paid and amount of purchaser’s are needed to see this picture. 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 c. Cost and expenses

NOTE: Redemption price in this case is reduced by the income received from the property ANTICHRESIS (Articles 2132-2139) – A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply then to the payment of the interest, if owing, and thereafter to the principal of the credit (Art 2132) 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 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 5. NOTE: The obligation to pay interest is not of 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, pure or conditional Antichresis Refers to real property Perfected by mere consent Consensual contract

Antichresis Property is delivered to creditor Creditor acquires only the right to receive the fruits of the property, hence, it does not produce a real right

Pledge Refers to personal property Perfected by delivery of the thing pledged Real contract

Real Mortgage Debtor usually retains possession of the property Creditor does not have any right to receive the fruits, but the mortgage creates a real right over the property Page 223 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 The creditor, unless there is stipulation to the contrary, is obliged to pay the taxes and charges upon the estate It is expressly stipulated that the creditor given possession of the property shall apply all the fruits thereof to the payment of interest, if owing, and thereafter to the principal Subject matter of both is real property

The creditor has no such obligation

There is no such obligation on part of mortgagee

OBLIGATIONS OF ANTICHRETIC CREDITOR (FAT-P) 1. to pay taxes and charges on the estate, including necessary expenses NOTE: Creditor may avoid said obligation by: a. compelling debtor to reacquire enjoyment of the property b. by 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 4. to bear the expenses necessary for its preservation and repair REMEDIES OF CREDITOR IN CASE OF NONPAYMENT OF DEBT 1. action for specific performance 2. petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court NOTES: • the parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts QuickTime™ and a (Tavera v. El of mortgage and pledge TIFF (Uncompressed) decompressor are needed to see this picture. Hogar Filipino, Inc. 68 Phil 712) • 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) CHATTEL MORTGAGE (Arts. 2140-2141)

It is a contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. NOTE: If the movable, instead of being recorded is delivered to the creditor, it is pledge and not chattel mortgage. CHATTEL MORTGAGE Involves movable property Delivery of the personal property is NOT necessary Registration is necessary for validity Procedure: Sec 14 of Act no 1508, as amended If the property is foreclosed, the excess over the amount due goes to the debtor

Creditor is entitled to deficiency from the debtor EXCEPT if it is a security for the purchase of personal property in installments

PLEDGE Involves movable property Delivery of the personal property is necessary Registration is NOT necessary for validity Procedure: Art 2112 of Civil Code If the property is sold, the debtor is not entitled to the to the excess UNLESS it is otherwise agreed or in case of legal pledge Creditor is not entitled to recover deficiency notwithstanding any stipulation to the contrary

LAWS GOVERNING CHATTEL MORTGAGE 1. Chattel Mortgage Law, Act No. 1508, as amended 2. Civil Code 3. Revised Administrative Code 4. Revised Penal Code 5. Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership AFFIDAVIT OF GOOD FAITH - An 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. EFFECT OF REGISTRATION 1. creates real rights 2. adds nothing to mortgage Note: Registration of assignment of mortgage is not required

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 RIGHT OF REDEMPTION 1. when the condition of a chattel mortgage is broken, the ff may redeem: a. mortgagor; b. person holding a subsequent mortgage; c. subsequent attaching creditor. 2. an attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it 3. the redemption is made by paying or delivering o the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale FORECLOSURE OF CHATTEL MORTGAGE 1. public sale 2. private sale – there is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage PERIOD TO FORECLOSE 1. After 30 days from the time of the condition is broken 2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation. 3. After the sale at public auction, the right of redemption is no longer available to the mortgagor. CIVIL ACTION TO RECOVER CREDIT 1. independent action not required 2. mortgage lien deemed abandoned obtaining a personal judgment


RIGHT OF MORTGAGEE TO RECOVER QuickTime™ and a TIFF (Uncompressed) decompressor DEFICIENCY are needed to see this picture. 1. where mortgage foreclosed: creditor may maintain action for deficiency although Chattel Mortgage Law is silent on this point. Reason is chattel mortgage is only given as a security and not as payment of the debt. 2. where mortgage constituted as security for purchase of personal property payable in installments: no deficiency judgment can

be asked and any contrary agreement shall be void 3. where mortgaged property subsequently attached and sold: mortgagee is entitle to deficiency judgment in an action for specific performance APPLICATION OF PROCEEDS OF SALE 1. costs and expenses of keeping and sale 2. payment of the obligation 3. claims of persons holding subsequent mortgages in their order 4. balance, if any, shall be paid to the mortgagor, or person holding under him


CONCURRENCE OF CREDIT: It implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor. PREFERENCE OF CREDIT: It is the right held by a creditor to be preferred in the payment of his claim above other out of the debtor’s assets. GENERAL PROVISIONS: 1. the debtor is liable with all his property, present and future, for the fulfillment of his obligations, subjects to exemptions provided by law - exempt property: a. present property 1. family home (Arts 152, 153 and 155, NCC) 2. right to receive support as well as money or property obtained by such support shall not be levied upon on attachment or execution (Art 205, NCC) 3. Sec 13, Rule 39, Rules of Court 4. Sec 118, the public Land Act,( CA No. 141, as amended) b. future property • a debtor who obtains a discharge from his debts on account of insolvency, is not liable for the unsatisfied claims of his creditors with said property (Secs. 68 and 69, Insolvency Law, Act No. 1956) c. property in custodia legis and of public dominion Page 225 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 2. insolvency shall be governed by the Insolvency Law (Act No. 1956, as amended) 3. Exemption of conjugal property or absolute community or property provided that: a. Partnership or community subsists b. Obligations of the insolvent spouse have not redounded to the benefit of the family 4. if there is co-ownership, and one of the coowners is the 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 5. property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings CLASSIFICATION OF CREDITS 1. special preferred credits (Arts 2241 and 2242 of NCC) a. considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency b. taxes due to the State shall first be satisfied 2. ordinary preferred credits (Art 2244) preferred in the order given by law 3. common credits (Art 2245) - credits of any other kind or class, or by any other right or title not comprised in Arts 2241-2244 shall enjoy no preference ORDER OF PREFERENCE OF CREDIT 1. credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers. 2. if there are 2 or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof 3. those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable QuickTime™ and a TIFF (Uncompressed) decompressor or real right to which the preference refers. are needed to see this picture. 4. if there are 2 or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessment of the taxes and assessments upon the immovable property or real right. 5. the excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added

to the free property which the debtor may have, for the payment of other credits. 6. those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: • order established by Art 2244 • common credits referred to in Art 2245 shall be paid pro rata regardless of dates. INSOLVENCY LAW INSOLVENCY – state of a person whose liabilities are more than his assets. It is the inability of a person to pay his debys as they become due in the ordinary course of business. BALANCE SHEET TEST – relative condition of a man’s assets and liabilities that the former if all made immediately available, would not be sufficient to discharge the latter. EQUITY TEST – a person may be insolvent although he may be able to pay his debts at some future time on a settlement and winding up of his affairs.

INSOLVENCY vs. BANKRUPTCY The only distinction between insolvency and bankruptcy is a matter of terminology and the source of the laws relating thereto. Either a bankruptcy or insolvency statute may operate to discharge a debt as well as release the debtor from imprisonment, and either may operate on the petition of the debtor or that of his creditors. INSOLVENCY PRIMARILY GOVERNED BY THE CC Insolvency shall be governed by special laws insofar as they are not inconsistent with the CC. Insolvency is thus primarily governed by the CC and subsidiarily by the Insolvency Law. The Insolvency Law is intended to cover the entire subject of insolvency and bankruptcy and must be treated as a complete body of law upon the subject. PURPOSES OF INSOLVENCY LAW: 1. To effect an equitable distribution of the bankrupt’s property among his creditors; and 2. To benefit the debtor in discharging him from his liabilities and enabling him to start afresh with the property set apart to him as exempt. 3. The regulatory and unifying influence of the law on credit transactions and business usage throughout the country. Page 226 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007

WHAT MAY BE PERMITTED OF A DEBTOR BY THE INSOLVENCY LAW 1. Petition the court to suspend payments; 2. To be discharged from his debts and liabilities by voluntary or involuntary insolvency proceedings.

SUSPENSION OF PAYMENTS – postponement, by court order, of the payment of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectively fall due. PURPOSE: To suspend or delay the payment of debts the amount of which is not affected although a postponement is declared. BASIS: Probability of the debtor’s inability to meet his obligations when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities. REQUISITES OF PETITION FOR SUSPENSION OF PAYMENTS: 1. Petition is filed by a debtor; 2. Possessing sufficient property to cover all his debts; 3. Foreseeing the impossibility of meeting them when they respectively fall due; and 4. Petitioning that he be declared in the state of suspension of payments RULE ON DOUBLE MAJORITY IN THE MEETING OF CREDITORS Majority shall be: 1. Two thirds (2/3) of the creditors voting upon the same proposition, which QuickTime™ and a TIFFleast (Uncompressed) 2. Represents at threedecompressor fifths (3/5) of the are needed to see this picture. total liabilities of the debtor. KINDS OF INSOLVENCY: VOLUNTARY INSOLVENCY – an insolvent debtor owing debts exceeding the amount of P1,000.00 may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for six months next preceding the filing of the petition.

DISTINCTIONS BETWEEN SUSPENSION OF PAYMENTS AND INSOLVENCY SUSPENSION INSOLVENCY OF PAYMENTS Purpose Suspend or Discharge the delay the debtor from the payment of payment of debts debts Sufficiency of Debtor has Debtor does not property sufficient have sufficient property to pay property to pay his debts all his debts Effect on Amount of The creditors amount of indebtedness is receive less indebtedness not affected than their credits, and in case where there are preferences, some creditors may not receive any amount at all Number of Number of In case of creditors creditors is involuntary required immaterial insolvency, three or more creditors are required EFFECT OF COURT ORDER DECLARING DEBTOR INSOLVENT (ADCM) 1. All the assets of the debtor not exempt from execution are taken possession of by the sheriff until the appointment of a receiver or assignee. 2. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him of any property belonging to him and the transfer of any property by him are forbidden. 3. All civil proceedings pending against the insolvent debtor shall be stayed. 4. Mortgages or pledges, attachments or executions on property of the debtor duly recorded and not dissolved are not affected by the order. INVOLUNTARY INSOLVENCY – an adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippines, whose credits or demands accrued in the Philippines, and the amount of which credits or demands are in the aggregate of not less than P1,000.00 Page 227 of 297


Number creditors


VOLUNTARY INSOLVENCY One creditor is sufficient

Who may petition the proceedings

Filed by the insolvent debtor

Acts of insolvency

Debtor must not be guilty of any of the acts of insolvency (Sec. 20) The amount of indebtedness must exceed P1,000.00

Amount debt


Posting bond


Bond is required


Ex parte adjudication

An order of adjudication may be granted ex parte

Residency duration to vest jurisdiction in courts

Petition is filed in the RTC of the province or city where the debtor has resided for six months Court issues the order of adjudication declaring the petitioner insolvent upon the filing of the voluntary petition

Requirement of hearing

INVOLUNTARY INSOLVENCY Three or more creditors are required Filed by three or more creditors who possess the qualifications required by law Debtor must have committed one or more of such acts of insolvency Amount must not be less than P1,000.00 (aggregate) Petition must be accompanied by a bond An order of adjudication granted only after a hearing Length of residence is immaterial

The debtor is not adjudicated insolvent until after hearing of the case

QuickTime™ and a ASSIGNEE – person the creditors or TIFF elected (Uncompressed)by decompressor are needed to see this picture. appointed by he court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors.

CREDITORS NOT ENTITLED TO VOTE IN THE ELECTION OF ASSIGNEE 1. Those who did not file their claims at least two days prior to the time appointed for such election

2. Those whose claims are barred by the statute of limitations 3. Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed 4. Holders of claims for unliquidated damages arising out of pure tort. EFFECTS OF ASSIGNMENT 1. Assignee takes the property in the plight and conditions that the insolvent held it. 2. Upon appointment, the legal title to all the property of the insolvent is vested in the assignee, and the control of the property is vested in the court. 3. All actions to recover all the estate, debts, and effects of the insolvent shall be brought by the assignee and not by the creditors. 4. The assignment shall: a. Dissolve any attachment levied within one month next preceding the commencement of insolvency proceedings; b. Vacate and set aside judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedings; c. Vacate and set aside execution issued thereon; d. Vacate and set aside any judgment entered by default or consent of the debtor within 30 days prior to the commencement of insolvency proceedings

*SERVICEWIDE v. CA (320 SCRA 478 [1999]) ASSIGNMENT OF CREDIT/CONSENT: As provided in Article 2096 in relation to Article 2141 of the Civil Code, a thing pledged may be alienated by the pledgor or owner with the consent of the pledgee. This provision is in accordance with Act No. 1508 which provides that a mortgagor of personal property shall not sell or pledge such property, or any part thereof, mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the office where such mortgage is recorded. A mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into the shoes of the creditor-mortgagee Page 228 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 to whom the chattel is mortgaged, it follows that the assignee’s consent is necessary in order to bind him of the alienation of the mortgaged thing by the debtor-mortgagor This is tantamount to a novation. BOND OF THE ASSIGNEE After his election, the assignee is required to give a bond for the faithful performance of his duties. Purpose: 1. To establish his official character 2. To establish his right to sue in that capacity The bond is solely for the benefit of the creditors of the insolvent, and that third persons have no remedy against the sureties if the assignee, purporting to be as such, wrongfully takes property from such third persons and converts it to his own use. PROPERTIES OF INSOLVENT THAT PASS TO THE ASSIGNEE: (AFRU) 1. All real and personal property, estate, and effects of the debtor, including all deeds, books, and papers in relation thereto; 2. Properties fraudulently conveyed; 3. Right of action for damages to real property 4. The undivided share or interest of the insolvent debtor in property held under coownership PROPERTIES OF INSOLVENT THAT DO NOT PASS TO THE ASSIGNEE; (ET-CMANT) 1. Property exempt from execution; 2. Property held in trust; 3. Property of the conjugal partnership or absolute community except insofar as the debtor’s obligations redounded to the benefit of the family. 4. Property to which a mortgage or pledge exists unless the creditor surrenders his security or lien. 5. After-acquired property except fruits and income of property owned by the debtor 6. Non-leviable assets like life insurance policy which do not have any cash surrender value 7. Right of action for tort which is purely personal in nature. QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.

POWERS OF THE ASSIGNEE 1. To sue and recover all the estate, debts, and claims belonging to or due to the debtor; 2. To take into his possession all the estate of the debtor except property exempt from execution; 3. In case of non-resident or absconding or concealed debtor, to demand and receive




7. 8.

of every sheriff all the property and money in his possession belonging to the debtor. To sell, upon order of the court, any estate of the debtor which has come into his possession; To redeem all mortgages and pledges and to satisfy any judgment which may be an encumbrance on any property sold by him. To settle all accounts between the debtor and his debtors subject to the approval of the court; To compound, under the order of the court, with any person indebted to such debtor; To recover any property fraudulently conveyed by the debtor.

CREDITOR’S LIABILITY FOR FRAUDULENTLY ASSIGNING HIS CREDIT A creditor’s transfer or assignment of his credit to another without the knowledge and at the back of other creditors of the insolvent may be a shrews surprise move that enables the transferor creditor to collect almost if not the entire amount of the said creditor. REMEDY OF THE ASSIGNEE: Section 37 of the Insolvency Law: The creditor coming within this purview is liable to an action by the assignee for double the value of the property so embezzled or disposed of, to be received for the benefit of the insolvent’s estate. Section 37 constitutes a sort of penal clause which shall be strictly construed. When Sec. 37 does not apply: Not applicable where what has been disposed of is the creditor’s own credit and not the insolvent’s property. DIVIDENDS IN INSOLVENCY DIVIDENDS IN INSOLVENCY – parcel if the fund arising from the assets of the estate, rightfully allotted to a creditor entitled to share in the fund, whether in the same proportion with other creditors or in a different proportion. It is paid by the assignee only upon order of the court. CLASSIFICATION AND PREFERENCE OF CREDITORS PREFERENCE – an exception to the general rule. By it, one person is given a superior right or claim over another. Hence, the law on preferences is strictly construed. (The general rule is that the purpose of insolvency proceeding is the equitable distribution of the insolvent’s assets among the debtor’s creditors.) Page 229 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007

RULES ON ORDER OF DISTRIBUTION 1. The priorities fixed by law govern 2. The claims which are given priority must be paid in full in the order of their priority, before the general creditors receive anything. 3. Creditors claiming preference must sufficiently establish their credits and their right to preference to entitle them to such preference. ORDER OF DISTRIBUTION (EPPC) 1. Equitable claims under Sec. 48; 2. Preferred claims with respect to specific movable property and specific immovable property under Art. 2241 and 2242 of the CC. 3. Preferred claims as to unencumbered property of the debtor which shall be paid in the order named in Art. 2244 of the CC. 4. Common or ordinary credits which shall be paid pro rata regardless of dates under Art. 2245 of the CC. With reference to specific movable and immovable property of the debtor, the taxes due the State shall first be satisfied. The preferred claims enumerated in Art. 2241 and 2242 are considered as mortgages and pledges of real or personal property or liens within the purview of the Insolvency Law.

EQUITABLE CLAIMS UNDER THE INSOLVENCY LAW (PD-MN-RCW) Section 48 of the Insolvency Law: Any property found among the property of the insolvent, the ownership of which has not been conveyed to him by legal and irrevocable title, shall not be considered to be property of the insolvent and shall be placed at the disposal of its lawful owners, on order of the court on petition of the assignee or any creditor whose right to QuickTime™ and a the estate of the insolvent has been established. TIFF (Uncompressed) decompressor are needed to see this picture.

1. Paraphernal property belonging to the wife of the insolvent; 2. Property held by the insolvent on deposit, administration, lease, or usufruct; 3. Merchandise held by the debtor on commission; 4. Negotiable instruments for collection or remittance; 5. Money held by the debtor for remittance;

6. Amounts due the insolvent for sales or merchandise on commission; 7. Merchandise bought by the insolvent on credit where no delivery is made or where the right of ownership or possession has been retained by the seller; 8. Goods or chattels wrongfully taken by the insolvent or the amount of the value thereof. ALTERNATIVE RIGHTS OF SECURED CREDITOR 1. To maintain his right under his security or lien and ignore the insolvency proceedings – it is the duty of the assignee to surrender to him the property encumbered; 2. To waive his right under the security or lien – thereby, share in the distribution of the assets of the debtor; 3. To have the value of the encumbered property appraised and then share in the distribution of the assets of the debtor with respect to the balance of his credit. WAIVER – release or surrender of the claim to the receiver, sheriff, or assignee. THE FOLLOWING WAIVER:




1. Mere recommendation that the assignee be appointed; 2. Voting of a secured claim. COMPOSITION - An agreement, made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole debt.



Designates an arrangement between a debtor and the whole body of his creditors (or at least a considerable portion of them) for the liquidation of their claims by the dividend offered.

An agreement between a debtor and a single creditor for a discharge of the obligation by a part payment or on different terms.





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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 1. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of his list of creditors; 2. The offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed; 3. It must be made after depositing in such place designated by the court, the consideration to be paid and the costs of the proceedings; and 4. The terms of the composition must be approved or confirmed by the court. WHEN COURT MAY CONFIRM A COMPOSITION 1. If it is in the best interest of the creditors; 2. The debtor has not been guilty of any of the acts, or of a failure to perform any of the duties which would create a bar to his discharge; and 3. The offer and its acceptance are in good faith and have not been made or procured in a manner forbidden by the Act. EFFECTS OF CONFIRMATION OF COMPOSITION 1. The consideration shall be distributed as the judge shall direct; 2. The insolvency proceedings shall be dismissed; 3. The title to the insolvent’s property shall revest in him; and 4. The insolvent shall be released from his debts. 5. The substitution, in a certain sense, composition for the insolvency proceedings. 6. A lawful composition and its performance by the insolvent has the same effect of a written discharge, although no written discharge is granted. 7. For all legal and practical purposes, the insolvency ended on the date of the confirmation of composition and the firm was restored to its status quo.andIta reacquired its QuickTime™ TIFF (Uncompressed) decompressor personality. Its ceased to be in areproperties needed to see this picture. custodia legis. WHEN CONFIRMATION MAY BE SET ASIDE 1. Any time within six months after the composition has been confirmed; 2. Fraud was practiced in procuring such composition;

3. Knowledge thereof has come to the petitioner after the confirmation of such composition. DISCHARGE - The formal and judicial release of an insolvent debtor from his debts with the exception of those expressly reserved by law.

WHEN AN INSOLVENT DEBTOR MAY APPLY FOR A DISCHARGE GR: A debtor may apply to the RTC for a discharge at three months to one year after the adjudication of insolvency. Exception: The property of the insolvent has not been converted into money without his fault, thereby delaying the distribution of dividends among the creditors in which case the court may extend the period.

DEBTS RELEASED BY A DISCHARGE 1. All claims, debts, and liabilities, and demands set forth in the schedule; and 2. All claims, debts, liabilities and demands which were or might have been proved against the estate in insolvency DEBTS NOT RELEASED BY DISCHARGE (TEDLICS-REST-SEC) 1. Taxes or assessments due the Government; 2. Any debt created by the fraud or embezzlement of the debtor; 3. Any debt created by the defalcation of the debtor as a public officer or while acting in a fiduciary capacity; 4. Debt of any person liable for the same debt, for or with the insolvent debtor, either as a partner, joint contractor, indorser, surety or otherwise; 5. Debts of a corporation (Reason: Corporation is not granted a discharge) 6. Claim for support (Reason: It will make the law a means of avoiding the enforcement of the obligation) 7. Discharged debt but revived by a subsequent new promise to pay (Reason: Discharge does not end the moral obligation to pay) 8. Debts which have not been duly scheduled in time for proof and allowance. Exception: The creditors had notice or actual knowledge of the insolvency proceedings

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 9. Claims for: a. Unliquidated damages arising out of pure tort b. Secured creditors; c. Not in existence or not mature at the time of the discharge; d. Contingent at the time of the discharged. LEGAL EFFECTS OF DISCHARGE Discharge takes effect from the commencement of the proceedings in insolvency. 1. Releases the debtor from all claims, debts, liabilities and demand set forth in the schedule or which were or might have been proved against his estate in insolvency. 2. Operates as a discharge of the insolvent and future acquisitions but permits mortgages and other lien 3. It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands. 4. It does not operate to release any person liable for the same debts, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise. 5. The certificate of discharge is prima facie evidence of the fact of release, and the regularity of such discharge. Remedy of guarantor or surety when debtor declared judicially insolvent: File a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities.

WHEN DISCHARGE MAY BE REVOKED Discharge may be revoked by the court which granted it upon petition of any creditor: 1. Whose debt was proved orandprovable against QuickTime™ a TIFF (Uncompressed) decompressor the estate in insolvency, the ground that are needed to seeon this picture. the discharge was fraudulently obtained; and provided, 2. The petition is filed within one year after the date of the discharge. FRAUDULENT PREFERENCES AND TRANSFERS TRANSFER – includes the sale and every other and different modes of disposing of or parting with

property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security. WHEN PREFERENTIAL (PCDG)



1. There must be a parting of the insolvent’s property; 2. For the benefit of the creditor; 3. Consequent diminution of the insolvent’s estate; 4. With the result that such creditor receives a greater proportion of his claim than other creditors of the same class. GR: A debtor is not prohibited from paying one creditor in preference to another Exception: In cases mentioned in the Insolvency Law Deposit of money to one’s credit on a bank does not create any preference. Reason: The estate of the depositor is not diminished for there is an obligation on the part of the bank to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it.

WHEN FRAUDULENT PREFERENCE EXISTS Fraudulent preference – when the debtor procures any part of his property to be attached, sequestered, or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his property, whether directly or indirectly, absolutely or conditionally, to any one under the following circumstances: 1. The debtor is insolvent or in contemplation of insolvency; 2. The transaction in question is made within 30 days before the filing of a petition by or against the debtor; 3. It is made with a view to giving preference to any creditor or person having a claim against him; and 4. The person receiving a benefit thereby has reasonable cause to believe: a. That the debtor is insolvent; b. That the transfer is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of or any way hinder the operation or Page 232 of 297

Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 evade the provisions of the Insolvency Law. *Date of registration of sale of real property should determine whether the sale was prohibited by the Insolvency Law or not. WHEN PRESUMPTION OF FRAUD EXISTS 1. If such payment, pledge, mortgage, conveyance, sale, assignment or transfer is not made in the usual and ordinary course of business of the debtor; or 2. If such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. EQUAL EXCHANGE NOT A PREFERENCE An exchange of securities within the thirty-day period is not a fraudulent preference under the law, even when both parties know that the debtor is insolvent, if: 1. The security given up is a valid one at the time the exchange; 2. Of equal value with the one received in exchange. Reason: Exchange takes nothing away from the other creditor Equal value: Not necessary that their value should be mathematically equal, but it is sufficient if they are substantially equal.

WHEN FRAUDULENT TRANSFER EXISTS 1. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character; 2. Made by the insolvent; 3. Within one month before the filing of the petition in insolvency against him Exception: Transfer for a valuable pecuniary consideration in good faith Effect of fraudulent transfer: Such transfer is VOID QuickTime™ and a

RIGHT OF ASSIGNEE TO RECOVER TIFF (Uncompressed) decompressorPROPERTY are needed to see this picture. OR ITS VALUE The creditors of the insolvent are not authorized to institute an independent action. In all actions or proceedings to set aside or nullify fraudulent preferences or transactions as VOID, the assignee appears for, and represents the general creditors.

1. Death after the order of adjudication – the proceedings shall be continued and concluded in like manner and with like validity and effects as if he had lived. 2. Death before the order of adjudication – the proceedings shall be discontinued. Remedy: File claims in the proper testate or intestate proceedings

WHEN RECEIVER MAY BE APPOINTED Anytime before the election of an assignee, when it appears by the verified petition of a creditor: 1. That the assets of the insolvent or a considerable portion thereof have been pledged, mortgaged, transferred, assigned, conveyed, or seized on legal process in violation of Sec. 70; 2. That it is necessary to commence an action to recover the same; The receiver shall deliver all the property, assets, or effects remaining in his hands to the assignee who shall be substituted for him in all pending actions or proceedings.

WHEN PETITION MAY BE DISMISSED At anytime before the appointment of an assignee: 1. Voluntary petition – upon the application of the debtor, if no creditor files written objections; 2. Involuntary petition – a. Upon the application of the petitioning creditors; or b. By written consent of all creditors filed in court, in which case, the proceedings may be dismissed at any time. After the appointment of an assignee, dismissal is not allowed without the consent of all parties interested in or affected thereby. WHEN APPEAL MAY SUPREME COURT





From an order granting or refusing: 1. An adjudication in insolvency and in the latter case, from the order fixing the amount of costs, expenses, damages, and attorney’s fees allowed the debtor; 2. A creditor’s claim when the amount in dispute exceeds P300.00


Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 3. A claim for property not belonging to the insolvent, presented under Sec. 48 (equitable claims) 4. Settling an account of an assignee; 5. Setting apart homestead or other property claimed as exempt from execution. 6. A discharge to the debtor. 2006 JURISPRUDENCE ON SECURITY TRANSACTIONS Acol v. Philippine Commercial Credit Card Incorporated, GR No. 135149 (25 July 2006): [1] Contracts of Adhesion, [2] Obligations and Contracts on Provisions Against Public Policy.

it was held that the said stipulation is null and void for being contrary to public policy. Prompt notice by the cardholder to the credit card company of the loss or theft of his card should be enough to relieve the former of any liability occasioned by the unauthorized use of his stolen card. Under the said stipulation, Acol could have theoretically done everything in his power to give respondent the required written notice, but if the bank took its time to include the card in its Cancellation Bulletin, it could still hold Acol liable for whatever unauthorized transaction incurred during such intervening period. This is iniquitous and against public policy under Art. 1306 of the Civil Code. The court then, strikes down the said provision.

FACTS: Acol procured from respondent a bankard credit card and an extension, which he used for several years. One day, he discovered that it was missing, and so, on the following day, he called up the card company and made a report; the representative spoke to him and told him that his card would be included in the circular of lost cards. He called again the day thereafter inquiring as to what else he must do in connection with the loss. The representative told him that he should put the report in writing and submit it, together with his wife’s and daughter’s extension cards. He then promptly sent the said letter which the company received 2 days thereafter. Unfortunately, someone had already used his credit card (with purchases amounting to P76,067.28 ) on the date that he called in the loss and the day thereafter. Acol said that he would not pay for accounts incurred after the date he reported the loss, and after investigation and review, the bank, through its EVP and GM, that it was not Acol who used his card during the dates in question. Nonetheless, the bank still decided to collect the said amounts within 15 days from notice, citing the Terms and Conditions Governing the Issuance of a Bankard, provision no. 1 [which basically says that the holder of the card will still be liable in case of loss, until a written notice of the loss is given to the bank and such loss be included in the Cancellation Bulletin]. The bank then filed for collection with the RTC. The QuickTime™ RTC ruled in favor of Acol; the and CAa reversed the TIFF (Uncompressed) decompressor are needed to see this picture. same. ISSUE: Whether provision no. 1 in the Terms and Conditions is binding on Acol, considering that the contract was one of adhesion. HELD: Not binding. In Ermitaňo v. CA, where a provision identical to the one at hand was contested,

Citibank v. Spouses Cabamongan and Sons, GR No. 146918 (02 May 2006): [1] Simple Loan, [2] Interest Rates, and [3] Oblicon Concept of Diligence; Diligence Required on Banks FACTS: The spouses Cabamongan [hereinafter Spouses] opened a foreign currency time deposit with Citibank, in the amount of $55,216.69 for a term of 182 days. Prior to the maturity of the said deposit, a person claiming to be Carmelita Cabamongan [the wife] pre-terminated the said deposit. Said person presented a Bank of America Versatele Card, and ATM Card, and a Mabuhay Credit Card. She filled up the required documents for pre-termination [from which a discrepancy in signatures was apparent], with the assistance of the bank’s Acct. Officer, who also interviewed her casually during the said transaction. She failed to bring the original certificate of deposit, so the bank had her execute a release and waiver document in favor of Citibank; the said document was not notarized on the same day, but nevertheless, the money was given to the person withdrawing, with the transaction lasting onlu for 40 minutes. The person withdrawing left an ID with the bank, prompting the said bank to call Carmelita at her listed address. The wife of the Spouses’ son received the call and was surprised to hear that Carmelita preterminated the deposit because the Spouses were then in the US. She immediately called them and informed them of what happened. Previously, someone broke into the Spouses’ home in the US, where they reported that only a jewelry box went missing; after the phone call, they discovered that

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Civil Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 their passports and bank deposit certificates were also gone. Carmelita called Citibank to report the incident, but the bank relented to refund the said amount taken for the reason that the said deposit was pre-terminated and released to one “Carmelita” after proper identification. A case was filed by the Spouses in the RTC, which ruled in their favor. The CA affirmed the finding of the CA that the Bank was negligent, hence this appeal. ISSUES: 1. Whether the decision of the RTC and the CA, finding respondent bank negligent, is correct. 2. What is the correct interest rate to be charged? HELD: Negligence The Court agrees with the observation of the CA that Citibank, through the Acct. Officer was negligent; even with discrepancies in the pictures and signatures, and the failure to surrender the original of the certificate of time deposit, the pre-termination was allowed. Even the waiver document was not notarized; a procedure meant to protect the bank. Since banking institutions are impressed with public interest, the highest degree of diligence is expected; by nature of its functions, banks are under the obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. Citibank is liable for damages.

12%, regardless if it falls within [1] or [2] from such finality until satisfaction, with this interim period being considered a forbearance of money. In a loan of forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, a rate of 12% / annum counted from the time of demand. Thus, the rate of 2.564% shall apply for the contract period of the deposit [182 days], and the rate of 12% shall apply from the demand. In the intervening period [after 182 but before demand], the interest chargeable shall be interest rate granted by Citibank, since the time deposit provided for roll over upon the maturity of the principal and interest. Damages Moral damages are also owed under Art. 2220 of the Civil Code, because of the gross negligence of the bank’s officer amounting to bad faith.

Interests Chargeable The time Article 1980 provides that a contract between a bank and a depositor shall be governed by the provisions on simple loans. Thus, the said time deposit constitutes a simple loan for which, the interest rate on the actual damages of $55,216.69 should be in accordance with the guidelines set in Eastern Shipping Lines v. CA: [1] Obligation breached is a loan or forbearance of money : (a) stipulated interest, or (b) 12% from time of demand, if no interest is stated. [2] If the obligation is not a loan or a QuickTime™ and a TIFF an (Uncompressed) decompressor forbearance of money, interest on the amount of are needed to see this picture. damages may be imposed at the discretion of the court at the rate of 6%. No rate on uniquidated claims until demand can be established with reasonable certainty. If demand is certain, it shall run from that time, if not, from the time of judgment; interest shall be based on the amount finally adjudged in any case. [3] Upon finality of the judgment of the court awarding a sum of money, the legal rate shall be Page 235 of 297

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