GUARANTY Surety Mortgages Pledge Antichresis

THE CONTRACT Definition

Nature Characteristics

and

GUARANTY

SURETY

PLEDGE

CHATTEL MORTGAGE

REAL MORTGAGE

ANTICHRESIS

A contract whereby a person called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (Art. 2047, par. 1)

A contract whereby one person engages to be answerable for the debt, default, or miscarriage of the principal. (Art.2047, par.2)

A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing fulfilment 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. (Art.2093-2123)

A contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation (Art 2140).

A contract whereby the debtor secures to the creditor the fulfilment 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. (Art.2124-2123)

A contract whereby the creditor acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit (Art 2132)

1.

1.

1. Real 2. Accessory 3. Subsidiary Unilateral – it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled.  As an accessory contract, its consideration is that of the principal contract from which it receives life.  A mortgage does not involve a transfer, cession

1.

1. Accessory - Dependent for its existence upon the principal obligation guaranteed by it. *may also guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation (Art. 2052). 2. Subsidiary and Conditional -it takes effect only when the principal debtor fails to in his obligation subject to the limitation (Arts.

2.

3.

Real contract – it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is called the pledgee, or to a third person by common agreement; Accessory contract – it has no independent existence of its own; Unilateral contract – it

2.

3.

Accessory contract – it is for the purpose of securing the performance of a principal obligation Formal contract – registration in the Chattel Mortgage Register is indispensable for its validity Unilateral contract – it produces only obligations on the part of the creditor to free the thing from the encumbrance on

Accessory contract – it secures the performance of a principal obligation 2. Formal contract – it must be in a specified form to be valid, i.e., “in writing.” (Art 2134) Indivisibility (Art 2089) GENERAL RULE: An antichresis is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the

2053, 2058, 2063, 2065) 3. Unilateral - it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa although after his fulfillment, the principal debtor becomes liable to indemnify the guarantor (art. 206) but this is merely an incident of the contract and also because it may be entered into even without the intervention of the principal debtor (art 2050) 4. It requires that the guarantor must be a person distinct from the debtor. 5. Nominal 6.Consensual 7. falls under the Statute of Frauds- it is not presumed and must be in writing otherwise it is unenforceable (Art.1403,(2), par.b) 8. strictly interpreted against the creditor and in favor of the guarantor and is not to be extended beyond its terms/specified limits

4.

creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfilment of the principal obligation; and Subsidiary contract – the obligation incurred does not arise until the fulfilment of the principal obligation which is secured.

Indivisibility (Art 2089) GENERAL RULE: A pledge, is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.  Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable. Consequences of indivisibility: 1. Single thing – Every portion of the property pledged or mortgaged is answerable for

fulfilment of the obligation.



or conveyance of property but only constitutes a lien thereon. Until discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership. A mortgage gives the mortgagee no right or claim to the possession of the property, and therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged unless the mortgage should contain some provision to that effect. The only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. If the possession is transferred to the

creditor.  Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable. When the principal obligation becomes due, the things in which the antichresis consists may be alienated for the payment to the creditor. (Art. 2087)

 It is a contract between the creditor and the guarantor;  In its broad sense, guaranty includes pledge and mortgage because the purpose of guaranty may be accomplished not only by securing the fulfillment of an obligation contracted by the principal debtor through the personal guaranty of a third person but also by furnishing to the creditor for his security, property with authority to collect the debt from the proceeds of the same in case of default. (Manresa, 151152) -

2.

3.

the whole obligation Several things – All of the several things pledged or mortgaged are liable for the totality of the debt Debtor’s heir/creditor’s heir - Neither the debtor’s heir who has paid part of the debt cannot ask for proportionate extinguishment, nor creditor’s heir who received his share of the debt return the pledge or cancel the mortgage as long as the debt is not completely satisfied.

1. Where each one of several things guarantees a determinate portion of the credit 2. Where only a portion of the loan was released 3. Where there was failure of consideration. 4. Where there is no debtor-creditor relationship



mortgagee, it must not expressly be for purpose of applying the fruits to the interest then to the principal of the credit, for then it would be an antichresis. It is not an essential requisite that the principal of the mortgage credit bears interest, or that the interest as compensation for the use of the principal and enjoyment of its fruits be in the form of a certain percent thereof.

 Special Requisites (in addition to the common essential requisites): 1. It can cover only immovable property and alienable real rights imposed upon immovables (Art 2124); 2. It must appear in a public instrument (Art. 2125); and 3. Registration in the registry of

When the principal obligation becomes due, the things in which the pledge consists may be alienated for the payment to the creditor. (Art. 2087)

property is necessary to bind third persons, but not for the validity of the contract (Art 2125).  An order for foreclosure cannot be refused on the ground that the mortgage had not been registered provided no innocent third parties are involved. NOTE: Where a mortgage is not valid or false, the principal obligation which it guarantees is not rendered null and void. What is lost only is the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation but the mortgage deed remains as evidence or proof of a personal obligation of the debtor and the amount due to the creditor may be enforced in an

Requisites

Essential Requisites (Art 2085) 1. Secures the fulfillment of a principal obligation; 2. Pledgor must be the absolute owner of the thing pledged or mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default which is still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development Bank vs. Lim, 324 SCRA 346) 3. Pledgor must have free disposal of their property, or be legally authorized for such purpose. Special Requisites (in addition to the common essential requisites): 1. Possession of the thing pledged must be transferred to the

Essential Requisites (Art 2085) 4. Secures the fulfillment of a principal obligation; 5. Mortgagor must be the absolute owner of the thing pledged or mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default which is still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development Bank vs. Lim, 324 SCRA 346) 6. mortgagor must have free disposal of their property, or be legally authorized for such purpose.

ordinary personal action. Essential Requisites (Art 2085) 7. Secures the fulfillment of a principal obligation; 8. mortgagor must be the absolute owner of the thing pledged or mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default which is still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development Bank vs. Lim, 324 SCRA 346) 9. mortgagor must have free disposal of their property, or be legally authorized for such purpose.

Essential Requisites (Art 2085) 10. Secures the fulfillment of a principal obligation; 11. antichretic debtor must be the absolute owner of the thing pledged or mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default which is still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development Bank vs. Lim, 324 SCRA 346) 12. antichretic debtor must have free disposal of their property, or be legally authorized for such purpose.  Special Requisites (in addition to the common essential requisites): 1. It can cover only the fruits of an immovable property; (Art

2.

3.

creditor or a third person by agreement (Art 2093); It can only cover movable property and incorporeal rights evidenced by documents of title and the instruments proving the right pledged shall be delivered to the creditor, and if negotiable must be endorsed (Art 2094); and The description of the thing pledged and the date must appear in a public instrument to bind third persons, but not for the validity of the contract (Art 2096).

2132) Delivery of the immovable is necessary for the creditor to receive the fruits and not that the contract shall be binding; 3. Amount of principal and interest must be specified in writing (Art. 2134); and 4. Express agreement that debtor will give possession of the property to creditor and that the latter will apply the fruits to the interest, if any, then to the principal of his credit. (Art 2132) 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 2.

Registration

Need not registered

be

Need not registered

be

Effect of registration: Creates a real right  The registration of the chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or a lien which, being recorded, follows the chattel wherever it goes. The registration gives the mortgagee symbolical possession (Northern Motors, Inc. vs. Coquia, 68 SCRA 374). Effect of failure to register chattel mortgage in the chattel mortgage registry  Article 2140 makes the recording in the Chattel Mortgage Register an essential requisite but if the instrument is not recorded, the mortgage is nevertheless binding between the parties. But

the person in whose favour the law establishes a mortgage has no other right than to demand the execution and the recording of the document. Affidavit of Good Faith  Oath in a contract of chattel mortgage wherein the parties "severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud.” (Sec. 5, Chattel Mortgage Law) Effect of absence The special affidavit is required only for the purpose of transforming an already valid mortgage into “preferred mortgage.” Thus,

it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. In other words, its absence vitiates the mortgage only as against third persons without notice like creditors and subsequent encumbrancers.

Parties and Capacity

Creditor Principal Debtor Guarantor - Secondarily liable - Liability depends on an independent agreement to pay the obligation if the primary debtor fails to do so - Collateral undertaking - Binds himself to pay if the principal cannot pay - Insurer of the insolvency of the debtor - Can avail of benefit of excussion and division in case creditor proceeds against him. ( “Benefit of Excussion” Art. 2058- right in

Creditor Principal debtor Surety - Primarily liable - Surety assumes liability as a regular party to the undertaking - An original promissory - Undertakes to pay if the principal does not pay - Insurer of the debt - Cannot avail the benefit of excussion and division - Held to know every default of the principal - Not discharged by mere indulgence of the creditor or by want of notice of default

Pledgor Pledge

Mortgagor Mortgagee

Mortgagor Mortgagee

Antichretic Creditor Antichretic Debtor

which the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the properties of the principal debtor, and has resorted to all of the legal remedies against such debtor. “Benefit of Division” (art.2065)- should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. General Rule: Joint Liability. Exceptions: when solidarity is stipulated or if any of the circumstances enumerated in Art. 2059 should take place. In case the coguarantor pays for the whole obligation, he may demand of each of the coguarantors the share which proportionally owes from him. If

any of the coguarantors should be insolvent his share shall be borne by the others including the paying guarantor in the same joint proportion. This rule shall not be applicable unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. However, the coguarantors may set up against the one who paid the same defenses which have pertained to the principal debtor against the creditor and which are not purely personal to the debtor. (Art.2074) Not bound to take notice of the nonperformance of his principal Often discharged by the mere indulgence of the creditor

Beneficiary Consideration

or want of notice of default Qualifications of a Guarantor (arts. 20562057): Possess integrity 1. Capacity to bind himself 2. Has sufficient property to answer obligation which he guarantees Gen. Rule: the qualifications need not need only be present at the time of the perfection of the contract Exception: when the guarantor is selected by the principal debtor because the latter answers for the insolvency of the former. In this case, the guarantor must possess the qualifications prescribed not only at the moment the guaranty is given but also until the extinguishment of the debt. For the benefit of the creditor Principal obligation

For the benefit of the creditor Principal obligation

 Insofar

as pledgor concerned, cause is

the is the the

A. shares of stock in a corporation B. Interest in business

Future property cannot be an object of a contract of mortgage (Art



principal obligation. If the pledgor is not the debtor, the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor.

C.

Machinery and house of mixed materials treated by parties as personal property and no innocent third person will be prejudiced thereby (Makati Leasing and Finance Corporation vs. Weaver Textile Mills, Inc., 122 SCRA 296 [1983]. D. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard in order to be effective as to third persons E. Motor vehicles, the mortgage of which had been registered both with the Land Transportation Commission and the Chattel Mortgage Registry is order to affect third persons F. House which is intended to be demolished G. Growing crops and large cattle (section 7, paragraphs 2 and 3, Act No. 1508) Note:

2085[2]) However, a stipulation subjecting to the mortgage lien, properties (improvements) which the mortgagor may subsequently acquire install, or use in connection with real property already mortgaged belonging to the mortgagor is valid (People’s Bank and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84)

Section 7 of the Chattel Mortgage Law

(Saldana vs. Phil. Guaranty Co., Inc., 106 Phil. 919 [1960]); otherwise, the mortgage is invalid. Kinds

In the Broad sense: a. Personalthe guaranty of the credit given by the guarantor b. Real- the guaranty is the property, movable or immovable As to its origin: a. Conventionalagreed upon by the parties b. Legal- imposed by virtue of a provision of law c. Judicial- one which is required by a court to guarantee the eventual right of one of the parties in a case. As to Consideration: a. Gratuitousthe guarantor does not receive anything for acting as such b. Onerousthe guarantor receives valuable consideration As to the Person Guaranteed a. Singleone constituted solely to guarantee or

1.

2.

Conventional /Voluntary – created by contract Legal – created by operation of law (examples: Art. 546, 1731 and 1914 NCC)

1.

2.

 The provisions of



possession, care and sale of the thing as well as on the termination of the pledge governing conventional pledges are applicable to pledges created by operation of law (Art 2121) Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is otherwise agreed, in legal pledge, the remainder of the price of the sale after payment of the debt and

3.

Voluntary – agreed to by the parties or constituted by the will of the owner of the property on which it is created Legal – one required by law to be executed in favour of certain persons  The persons in whose favour the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized (Art 2125 par 2) Equitable – one which, although lacking the formalities of a mortgage, shows

secure performance by the debtor or the principal obligation b. Double or Subguarantyone constituted to secure the fulfillment by the guarantor of a prior guaranty:  In case of insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor (Art. 2075) As to Scope and Extent a. Definite- the guaranty is limited to principal obligation only or to a specific portion thereof b. Indefinite or simple- one which not only includes the principal obligation but also all its accessories including judicial costs c. Specific d. Continuing Not limited to a single transaction but contemplates a future course of dealings, covering a series of transactions generally for an



expenses, shall be delivered to the debtor. In legal pledge, there is no definite period for the payment of the principal obligation. The pledgee must make a demand for the payment of the amount due him; otherwise he cannot exercise the right of sale at public auction (Art 2122)

the intention of the parties to make the property a security for a debt

Extent/Coverage the Contract

of

indefinite time or until revoked. Can be comprehensive or continuing The cause of the contract is the same cause which supports the principal obligation as to the principal debtor. If it is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either form the principal debtor or from the creditor; a consideration moving to the principal alone with suffice

Prohibited Acts

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

Prohibition against Pactum Commissorium (Art 2088; 2137) Pactum Commissorium  Stipulation whereby the thing pledged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed.

Can only cover obligations existing at the time the mortgage is constituted and not those contracted subsequent to the execution thereof. Exception: in case of stocks in department stores, drug stores, etc.

same

Absent express stipulation to the contrary, the mortgage includes the accessions, improvements, growing fruits and income of the property not yet received when the obligation becomes due and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use (Art 2127) same

same

Requisites: 1. There should be a pledge by way of security for the payment of the principal obligation; and 2. There should be a stipulation for an automatic appropriation by the creditor of the property in event of nonpayment of the obligation within the stipulated period.

GENERAL

RULE: Pactum Commissorium is forbidden by law and is declared null and void. EXCEPTION: The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold. (Art 2112) NOTE: The security contract remains valid; only the prohibited stipulation is void.

RIGHTS OBLIGATIONS

AND As to the guarantor:

As to the surety:

Rights of the Pledgee

1.

Mortgagor - To

Obligations of

-guarantor must not be the principal debtor. Exception: in a real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his personal or real properties Where the guarantee is definite: It is limited in whole or in part to the principal debt, to the exclusion of accessories. Where guaranty is indefinite or simple: It shall comprise not only the principal obligation, but also its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. As to the creditor: 1. Undertaking is to him and not to the debtor. As to the principal debtor: Performance of the principal obligation of the contract.

1. Liability is contractual and accessory but direct. - He directly, primarily and equally binds himself with the principal as original promisor, although he possesses no direct or personal interest over the latter’s obligation, nor does he receive any benefits therefrom. 2. Liability is limited by the terms of the contract- a contract of surety is not presumed; it cannot extend to more than what is stipulated. 3. Liability arises only if principal debtor is held liable,- the creditor may sue separately or together, the principal debtor and any of the sureties; in the absence of collusion, the surety is bound by a judgment against the principal even though he was not a party to the proceedings. The nature of its undertaking makes it privity to all

1. Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality (Art 2109) 2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art 2108) 3. To bring actions pertaining to the owner (Art 2103) 4. To choose which of several things pledged shall be sold 5. To bid at the public auction (Art 2113) 6. To appropriate the thing in case of nd failure of the 2 public auction (Art 2112) 7. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art 2102) 8. To retain excess value received in the public sale (Art 2115) 9. To retain the thing until after full payment of the debt (Art 2098) 10. To be reimbursed for the expenses made for the preservation of

alienate the mortgaged property but the mortgage shall remain attached to the property. NOTE: A stipulation forbidding the owner from alienating the immovable mortgage shall be void (Art 2130) being contrary to public policy inasmuch as the transmission of property should not be unduly impeded. 2.

Mortgagee - To rd claim from a 3 person in possession of the mortgaged property the payment of the part of the credit secured by the which said third person possesses (Art 2129) NOTE: It is necessary that prior demand for payment must have been made on the debtor and the latter failed to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906)

antichretic creditor: 1

To pay taxes and charges on the estate, including necessary expenses NOTE: Creditor may avoid said obligation by: a. compelli ng debtor to reacquire enjoyme nt of the property or b. by stipulatio n 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

proceedings against its principal. 4. Surety is not entitled to the benefit of exhaustionReason: surety assumes a solidarity liability for the fulfillment of the principal obligation. 5. Surety is not entitled to notice of the principal’s default 6. Prior demand of the creditor for the performance of the principal obligation by the principal debtor is not necessary for the assumption of the surety’s obligation to the contract- as soon as the principal debtor is in default, the surety is likewise in default 7. Surety is not exonerated by the neglect of creditor to sue principal. As to the creditor: 2. Undertaking is to him and not to the debtor. As to the principal debtor: 1. Performance of the principal

the thing pledged (Art 2099) 11. To object to the alienation of the thing 12. To possess the thing (Art 2098) 13. To sell at public auction in case of nonpayment of debt at maturity (Art 2112) To choose which of the several things pledged shall be sold (Art 2119) 14. Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality (Art 2109) 15. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art 2108) 16. To bring actions pertaining to the owner (Art 2103) 17. To choose which of several things pledged shall be sold 18. To bid at the public auction (Art 2113) 19. To appropriate the thing in case of nd failure of the 2 public auction (Art 2112) 20. To apply said fruits, interests or

obligation of the contract.

earnings to the interest, if any, then to the principal of the credit (Art 2102) 21. To retain excess value received in the public sale (Art 2115) 22. To retain the thing until after full payment of the debt (Art 2098) 23. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099) 24. To object to the alienation of the thing 25. To possess the thing (Art 2098) 26. To sell at public auction in case of nonpayment of debt at maturity (Art 2112) 27. To choose which of the several things pledged shall be sold (Art 2119) Obligations of the Pledgee 1. Take care of the thing with the diligence of a good father of a family (Art 2099) 2. Not to use thing unless authorized or by the owner or its preservation requires its use (Art 2104) 3. Not to deposit the rd thing with a 3 person

unless so stipulated (Art 2100) 4. Responsibility for acts of agents and employees as regards the thing (Art 2100) 5. To advise pledgor of danger to the thing (Art 2107) 6. To advise pledgor of the result of the public auction (Art 2116) RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED (ART.2107)  Requisites: 1. The pledgor has reasonable grounds to fear the destruction or impairment of the thin pledged 2. There is no fault on the part of the pledgee 3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as the former 4. The pledge does not choose to exercise his right to cause the thing pledged to be sold at public auction NOTE: The pledgee’s right to have the thing

pledged sold at public sale granted under the Article 2108 is superior to that given to the pledgor to substitute the thing pledged under Article 2107. Rights and Obligations of a Pledgor RIGHTS: 1. To demand return in case of reasonable grounds to fear destruction or impairment of the thing without the pledgee’s fault, subject to the duty of replacement (Art 2107) 2. To bid and be preferred at the public auction (Art 2113) 3. To alienate the thing pledged provided the pledgee consents to the sale (Art 2097) To ask that the thing pledged be deposited (Arts 2104 & 2106) OBLIGATIONS: 2. To advise the pledgee of the flaws of the thing (Art 2101) Not to demand the return of the thing until after full payment of the debt, including interest due thereon and expenses

incurred for preservation 2105)

EXTINGUISHMENT AND REMEDIES Extinguishment of Contract

Extinguishment of Guaranty: 1. Release in favor of one of the guarantors, without the consent of the others, benefits all to to the extent of the share of the guarantor to whom it has been guaranteed 2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if he should afterwards lose the same through eviction or conveyance of property. Effect of eviction: revival of principal obligation, not the guaranty 3. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot be subrogated to the rights, mortgages and preferences of the former

Same with guaranty

its (Art

Extinguishment of Pledge 1.

For the same causes as all other obligations (Art 1231) 2. Return of the thing pledged by the pledgee to the pledgor (Art 2110) 3. Statement in writing by the pledgee that he renounces or abandons the pledge (Art 2111) 4. Payment of the debt (Art 2105) 5. Sale of thing pledged at public auction (Art 2115) NOTE: The possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been

4. For the same causes as all other obligations under art.1231 5. When principal obligation is extinguished 6. Extension granted to the debtor by the creditor without the consent of the guarantor Note: mere failure on the part of the creditor to demand the payment after the debt has become due but does not of itself constitute any extension of time referred to herein. Exceptions: 1. Creditor did not collect from third persons 2. Obligations payable in installment 3. Waiver by guarantor 4. Extension granted by creditor on bond 5. Extension granted to first-tier obligors cannot prejudice second tier parties Payment of the guarantor without notice to the debtor (Art.2068):

extinguished but not the principal obligation itself. (Art 2110) Requirements for sale of thing pledged at public auction: (Art 2112) 1. The debt is due and unpaid 2. Sale must be at a public auction 3. there must be notice to the pledgor and owner, stating the amount due 4. Sale must be with the intervention of a notary public Effect of sale of the thing pledged: (Art 2115) 2. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case 3. If the price of the sale is more than the amount due the creditor, the debtor is not

1. The guarantor may interpose against the debtor those defenses which he could have set up against the creditor at the time the payment was made. Payment before maturity: 1. Not entitled to reimbursement unless the p[payment was made with the consent or has been ratified by the debtor (Ratification may be expressed or implied) Effect of Repeat Payment by the Debtor: General Rule: before the guarantor pays the debtor, he must first notify the debtor, otherwise the latter may set up defenses he could have set up against the creditor (art.2068). if he fails to give such notice and the debtor repeats payment, the guarantor can only collect from the creditor and guarantor has no cause of action against the debtor for the return of the

4.

entitled to the excess unless the contrary is provided If the price of the sale is less, the creditor is not entitled to recover the deficiency even if there is a stipulation to that effect

Remedies

amount paid by guarantor even if creditor should become insolvent. Exception: the guarantor can still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present: 1. Guarantor was prevented by fortuitous event to advise the debtor of payment 2. The creditor becomes insolvent The guaranty is gratuitous Effect of failure of the creditor to exhaust and resort all legal remedies: Creditor shall suffer the loss but only to the extent of the value of the said property for the insolvency of the debtor Remedies of guarantor: Remedies are alternative. 1. Obtain release form the guaranty (can only be exercised against the principal debtor). Reason: the creditor cannot be

Not applicable (arts. 2047, par. 2; 2059[2])

Offenses Involving Chattel Mortgage

General Rule: Guarantor has no cause of action against debtor until after the former has paid the obligation Exceptions: (art.2071) 1. When he is sued for payment 2. Insolvency of the principal debtor 3. Debtor has bound himself to relieve him from the guaranty

1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; and 2. Selling or pledging personal property already

Foreclosure  The remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given

 It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and

Remedies of creditor in case of nonpayment of debt 1.

2.

Bring an action for specific performance; or Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court.(Art 2137)

 The

parties, however, may agree on an extrajudicial foreclosure in the same manner as

compelled to release the guarantor before payment of his obligation to the creditor. 2. Demand a security that shall protect him from any proceedings by the creditor, and against the danger of insolvency of the debtor. Remedy on the paying guarantor against his co-guarantors: 1. Right of indemnity or reimbursement 2. Right of subrogation General Rule: guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be reimbursed by the principal debtor. The indemnity consists of: 1. Total amount of the debt- no right to demand reimbursement until he has actually paid the debt, unless by terms of the contract, he is given the right before making the payment. He

within a specified person, and this periods has expired 4. Debt becomes demandable 5. Lapse of ten (10) years when there is no fixed period for its maturity 6. Reasonable grounds to fear that the principal will abscond The debtor is in imminent danger of becoming insolvent.

mortgaged, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the bank of the mortgage and duly recorded in the Chattel Mortgage Register (Article 319, Revised Penal Code). Note: The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 61 [1915]), or the mortgagorseller informed the purchaser that the thing sold had been mortgaged. (People vs. Alvares, 45 Phil. 472 [1923]). But the sale is valid although no written consent was obtained from the mortgagee but the mortgagor lays himself open to criminal prosecution. (Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of



includes the sale itself (DBP vs Zaragoza, 84 SCRA 668) Foreclosure is valid where the debtor is in default in the payment of his obligation (Gobonseng, Jr. vs CA, 246 SCRA 472)

 Kinds: 1. Judicial – ordinary action for foreclosure under Rule 68 of the Rules of Court 2. Extrajudicial – when mortgagee is given a special power of attorney to sell the mortgaged property by public auction, under Act No. 3135  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



they are allowed in contracts of mortgage and pledge (Tavera vs. El 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).

cannot collect more than he has ppaid. 2. Legal interest thereon from the time payment was made known (notice of payment is in effect a demand so that if the debtor does not pay immediately, he incurs in delay) to the debtor even though it did not earn interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of payment he has made. 3. Expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor; only those which depend upon his will or own acts or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor. 4. Damages if they

Appeals, 198 SCRA 826 [1981]). Foreclosure of Chattel Mortgage  Foreclosure sale in chattel mortgage is by public auction under Act No. 1508, but the parties may stipulate that it be by private sale.  The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer. The 30-day period is also a grace period for the mortgagor to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor (Cabral vs. Evangelista, 28 SCRA 1000). Application

of



on the title in favor of third persons, of which he had no actual or constructive notice (St. Dominic Corporation vs. IAC 151 SCRA 577). Where there is a right to redeem, inadequacy of price is not material because the judgment debtor may reacquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the auction sale and consequently not sufficient to set aside the sale. Mere inadequacy of the price obtained at the sheriff’s sale will not be sufficient to set aside the sale unless “the price is so inadequate as to shock the conscience of the court” taking into consideration the

are due in accordance with law. General rules on damages apply. Exceptions: 1. When the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only in so far as the payment had been beneficial to the debtor (Art.2050). 2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who accepted it. (Art.1238) 3. Waiver of the right to demand reimbursement. Guarantor’s right to subrogation: Subrogation transfers to the person

proceed of sale: 1. Costs and expenses of keeping and sale 2. Payment of the obligation secured by the mortgage 3. Claims of persons holding subsequent mortgages in their order 4. The balance, if any, shall be paid to the mortgagor or person holding under him

 The creditor may



maintain an action for the deficiency, except if the chattel mortgage is constituted as security for the purchase of personal property payable in instalments (Art. 1484). The action for deficiency may be brought within ten (10) years from the time the cause of action accrues (Arts

peculiar circumstances attendant thereto. (Sulit vs. CA, 268 SCRA 441)  Should there remain a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency. This rule applies both to judicial and extra-judicial foreclosure real mortgage.  The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action accrues (Arts 1142 & 1144). Extrajudicial foreclosure real property (Act No. 3135)  The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale of the property mortgaged if and

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. It is necessary to enable the guarantor to enforce the indemnity given in Art.2066. It arises by operation of law upon payment by the guarantor. It is not necessary that the creditor cede to the guarantor the former’s rights against the debtor. It is not a contractual right. The right of guarantor who has paid a debt to subrogation does not stand upon contract but upon the principles of natural justice. The guarantor is subrogated by virtue of the payment to the rights of the creditor, not those of the debtor. Guarantor cannot exercise the right to redemption of his principal. If the guarantor paid a smaller amount by virtue of compromise, he cannot demand

1141 and 1142).  Only equity of redemption is available to the mortgagor; the latter can no longer redeem after the confirmation of the foreclosure sale. Right of redemption  When the condition of a chattel mortgage is broken the following may redeem: a) mortgagor; b) person holding a subsequent mortgage; or c) subsequent attaching creditor.  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.  The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage

when the mortgagee is given a special power of express authority to do so in the deed itself or in a document annexed thereto.  The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an essential and inseparable part of a bilateral agreement (Perez vs PNB, 17 SCRA 833).  No sale can be legally made outside the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in the said place in the municipal building of the municipality in which the property or part thereof is situated. Redemption  It is the

more than what he actually paid. Right of guarantor to proceed against debtor before payment: General Rule: Guarantor has no cause of action against debtor until after the former has paid the obligation Exceptions: (art.2071) 1. When he is sued for payment 2. Insolvency of the principal debtor 3. Debtor has bound himself to relieve him from the guaranty within a specified person, and this periods has expired 4. Debt becomes demandable 5. Lapse of ten (10) years when there is no fixed period for its maturity 6. Reasonable grounds to fear that the principal will abscond 7. The debtor is in imminent danger of becoming insolvent. The guarantor cannot be sued with his principal much less alone except in (art.2059).

and the costs, and expenses incurred by such breach of condition before the sale thereof (Sec 13, Act No. 1508). Right to possession of foreclosed property 1. Real mortgage – After the redemption period has expired, the purchaser of the property has the right to a conveyance and to be placed in possession thereof.

transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage, or divests the property of the lien which the mortgage may have created.

 A sale by the

 Purchaser is



not obliged to bring a separate suit for possession. He must invoke the aid of the courts and ask for a WRIT OF POSSESSION. Section 7 of Act No. 3135 allows the purchaser to take possession of the



mortgagor to a third party of the mortgaged property during the period for redemption transfers only the right to redeem the property and the right to possess, use and enjoy the same during said period. Where sale with assumption of mortgage not registered and made without the consent of the mortgagee, the buyer, thereof, was not validly substituted as debtor and, hence, had no right to redeem (Bonnevie vs. CA,

1. Notice to guarantor of the action: -the guarantor must be notified. -if the guarantor appears, he is still given the benefit of exhaustion even if judgment should be rendered against him and the principal debtor. Voluntary appearance does not constitute a renunciation of his right to excussion (see Art.2059[1]). -Guarantor cannot set up the defenses if he does not appear and it may no longer be possible for him to question the validity of the judgment. 2. a guarantor is entitled to be heard before execution can be issued against him where he is not a party in the case involving his principal (procedural due process)

foreclosed property during the period of redemption upon filing of an ex parte application and approval of a bond. 2.

Chattel mortgage – When default occurs and the creditor desires to foreclose, the creditor has the right to take the property as a preliminary step for its sale. NOTE: Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action either to effect judicial foreclosure directly or to secure possession (REPLEVIN) as a preliminary to the sale contemplated in Section 14 or Act. No. 1508

125 SCRA 122).  Kinds: 1. Equity of Redemption – right of mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage within the 90-day period from the date of the service of the order of foreclosure or even thereafter but before the confirmation of the sale. Applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure. NOTE: Redemption of the banking institutions is allowed within one year from confirmation of sale. 2.

Right of Redemption – right of mortgagor to redeem the mortgaged property within one year from the date of registration of the

certificate of sale. Applies only to extrajudicial foreclosure of real mortgage. NOTE: The right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513) Period of Redemption 1. Extra-judicial (Act #3135) a. natural person – one year from registration of the certificate of sale with Registry of Deeds b. juridical person – same rule as natural person c. juridical person (mortgagee is bank) three months after foreclosure

2.

or before registration of certificate of foreclosure which ever is earlier (sec. 47, of General Banking Law) Judicial – before confirmation of the sale by the court

NOTE: Allowing a 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. There is nothing in the law which prevents a waiver of the statutory period for redemption (Ramirez vs CA, 219 SCRA 598). 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 1% interest per month on the purchase price c. taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed from the date of registration of sale, up to the time of redemption 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 b.

2.