Guaranty, Pledge, Mortgage, And Antichresis

CREDIT TRANSACTIONS [GUARANTY, PLEDGE, MORTGAGE, ANTICHERIS]

GUARANTY Guaranty is 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] While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay [See benefit of excussion, Art. 2058].

Suretyship is 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 a third person (oblige), who is entitled to but one performance, and as between the two who are bound, the one rather than the other should perform. If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety.

GUARANTY DISTINGUISHED FROM SURETYSHIP Guaranty Guarantor’s liability depends upon an independent agreement to pay the obligation Guarantor’s engagement is a collateral undertaking Guarantor is subsidiarily liable i.e. only obliged to pay if the principal cannot pay Guarantor not bound to take notice of default of his principal Guarantor often discharged by the mere indulgence of the creditor and is usually not liable unless notified of the principal’s default

Suretyship Surety assumes liability as a regular party to the undertaking Surety is an original Promissory Surety is primarily liable i.e. bound to pay if the principal does not pay Surety ordinarily held to know every default of his principal Surety not discharged either by the mere indulgence of the creditor or by want of notice of default of the principal

NATURE AND EXTENT OF GUARANTY (1) A guaranty is generally gratuitous [2048] (a) General Rule: Guaranty is gratuitous (b) Exception: When there is a stipulation to the contrary (2) On the cause of a guaranty contract A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. [Severino v. Severino] (a) 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. (b) 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. (3) A married woman who is a guarantor binds only her separate property, generally [2049]

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Exceptions (a) With her husband’s consent, bind the community or conjugal partnership property (b) Without husband’s consent, in cases provided by law, such as when the guaranty has redounded to the benefit of the family. (4) A guaranty need not be undertaken with the knowledge of the debtor [2050] (a) Guaranty is unilateral – exists for the benefit of the creditor and not for the benefit of the principal debtor (b) 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 However, as regards payment made by a third person: (a) Payment without the knowledge or against the will of the debtor: (i) Guarantor can recover only insofar as the payment has been beneficial to the debtor [Art. 1236] (ii) Guarantor cannot compel the creditor to subrogate him in his rights [Art. 1237] (b) Payment with knowledge or consent of the debtor: Subrogated to all the rights which the creditor had against the debtor (5) The guaranty must be founded on a 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. (6) A guaranty may secure the performance of a voidable, unenforceable, and natural obligation [2052(2)] A guaranty may secure the performance of a: (a) Voidable contract – such contract is binding, unless it is annulled by a proper court action (b) Unenforceable contract – because such contract is not void (c) Natural obligation – the creditor may proceed against the guarantor although he has no right of action against the principal 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. (7) A guaranty may secure a future debt [2053] Continuing Guaranty or Suretyship: (a) Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. [Diño v. CA] (b) 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 Rationale: 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.

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(b) To secure payment of any debt to be subsequently incurred – a guaranty shall be construed as continuing when by the terms thereof 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 – refers to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time. (d) The surety agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, just like obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. A continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof 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. Where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one.” (8) A guaranty may secure the performance of a conditional obligation [2053] (a) Principal obligation subject to a suspensive condition – the guarantor is liable only after the fulfillment of the condition. (b) Principal obligation subject to a resolutory condition – the happening of the condition extinguishes both the principal obligation and the guaranty (9) A guarantor’s liability cannot exceed the principal obligation [2054] General Rule: 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 (a) 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.

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Interest runs from: (1) Filing of the complaint (upon judicial demand); or (2) The time demand was made upon the surety until the principal obligation is fully paid (upon extra-judicial demand) Rationale: 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. (b) 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 may exceed 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 principal, the latter’s liability being governed by the obligations he assumed under his contract (10) The existence of a guaranty is 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. Rationale: (a) There be assurance that the guarantor had the true intention to bind himself; (b) To make certain that on making it, the guarantor proceeded with consciousness of what he was doing. (11) Contract of guaranty is covered by the Statute of Frauds [See Art. 1403(2)(b)] 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. However, it need not appear in a public document NATURE AND EXTENT OF SURETYSHIP (1) Liability is contractual and accessory but direct (2) Liability is limited by the terms of the 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 even 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 no 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 (1) THE UNDERTAKING IS TO THE CREDITOR, NOT THE 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. GARRATON NOTES

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Exception: Unless otherwise expressly provided. (2) PRIOR

DEMAND BY THE CREDITOR UPON PRINCIPAL NOT REQUIRED. EXONERATED BY NEGLECT OF CREDITOR TO SUE PRINCIPAL.

SURETY

IS NOT

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. This rule will apply only after it has been definitely ascertained that the contract is one of suretyship or guaranty. Strictissimi juris rule NOT applicable to compensated sureties Reasons: (1) Compensated corporate sureties are business associations 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 byadequate counter-bonds or indemnity agreements. Such corporations are in fact insurers and in determining their rights and liabilities, the rules peculiar to suretyship do not apply. The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors. [Mercantile Insurance Company v. Ysmael, 169 SCRA 66]

EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR (1) THE GUARANTOR HAS THE RIGHT TO BENEFIT FROM EXCUSSION/ EXHAUSTION [2058] The guarantor cannot be compelled to pay the creditor unless the latter has: (a) Exhausted all of the property of the debtor; and (b) Resorted to all the legal remedies against the debtor. Exceptions to the benefit of excussion (2059) (a) As provided in Art. 2059: (i) If the guarantor has expressly renounced it. (ii) If he has bound himself solidarily with the debtor. Here, the liability assumed is that of a surety. The guarantor becomes primarily liable as a solidary co- debtor. In effect, he renounces in the contract itself the benefit of exhaustion. (iii) In case of insolvency of the debtor – guarantor guarantees the solvency of the debtor. If the debtor becomes insolvent, the liability of the guarantor arises as the debtor cannot fulfill his obligation (iv) When the 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: When the debtor has left a manager or representative

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(v) 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.

Southern Motors, Inc. v. Barbosa: “The right of guarantors…to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation.”

Luzon Steel Corp. v. Sia: “The surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and excussion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor". (b) In order that the guarantor may make use of the benefit of excussion, he must: (i) Set it up against the creditor upon the latter’s demand for payment from him; (ii) Point out to the creditor: (a) Available property of the debtor – the guarantor should facilitate the realization of the excussion since he is the most interested in its benefit. (b) 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. (c) Sufficient to cover the amount of the debt (c) If he is a judicial bondsman and sub- surety (2084) (d) Where a pledge or mortgage has been given by him as a special security (e) If he fails to interpose it as a defense before judgment is rendered against him. (2) THE

CREDITOR HAS THE RIGHT TO SECURE A JUDGMENT AGAINST THE GUARANTOR PRIOR TO THE EXCUSSION

General Rule: 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. (3) THE

CREDITOR HAS THE DUTY TO MAKE PRIOR DEMAND FOR PAYMENT FROM THE GUARANTOR 2060)

(a) The demand is to be made only after judgment on the debt (b) Joining the guarantor in the suit against the principal debtor is not the demand intended by law. Actual demand has to be made. (4) THE GUARANTOR HAS THE DUTY TO SET UP THE 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. (5) THE CREDITOR HAS THE DUTY TO RESORT TO ALL LEGAL REMEDIES [2058, 2061]

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After the guarantor has fulfilled the conditions required for making use of the benefit of excussion, it becomes the duty of the creditor to: (a) Exhaust all the property of the debtor pointed out by the guarantor; (b) If he fails to do so, he shall suffer the loss for the insolvency of the debtor, but only to the extent of the value of the said property (6) THE

CREDITOR HAS THE DUTY TO NOTIFY THE GUARANTOR IN THE ACTION AGAINST THE DEBTOR [2062]

Notice to the guarantor is mandatory in the action against the principal debtor. The guarantor, however, is not duty bound to appear in the case, and his non- appearance shall not constitute default, w/ its consequential effects. Rationale: To give the guarantor the opportunity to allege and substantiate whatever defenses he may have against the principal obligation, and chances to set up such defenses as are afforded him by law (7) A COMPROMISE SHALL NOT PREJUDICE THE PERSON NOT PARTY TO IT [2063] (a) A compromise between creditor and principal debtor benefits the guarantor but does not prejudice him. (b) A compromise between guarantor and the creditor benefits but does not prejudice the principal debtor. (8) CO-GUARANTORS ARE ENTITLED TO THE BENEFIT OF DIVISION [2065] The benefit of division applies only when there are several guarantors and one debtor for a single debt. Except when solidarity has been stipulated, a co-guarantor is liable only to the extent of his share in the obligation as divided among all the coguarantors. EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR (1) THE GUARANTOR WHO PAYS HAS THE RIGHT TO BE SUBROGATED TO THE RIGHTS OF THE CREDITOR [2067] A guarantor who pays the debt is entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payments; to stand in the place of the creditor not only through the medium of the contract, but even by means of the securities entered into w/out the knowledge of the surety; having the right to have those securities transferred to him though there was no stipulation for it, and to avail himself of all securities against the debtor The need to enforce the provisions on indemnity in Article 2066 forms the basis for the subrogation clause of Article 2067. The assumption, however, is that the guarantor who is subrogated to the rights of the creditor, has the right to be reimbursed for his answering for the obligation of the debtor. Absent this right of reimbursement, subrogation will not be proper. (2) THE

GUARANTOR HAS THE DUTY TO NOTIFY THE DEBTOR BEFORE PAYING THE CREDITOR [2068].

Should payment be made without notification, and supposing the debtor has already made a prior payment, the debtor would be justified in setting up the defense that the obligation has already been extinguished by the time the guarantor made the payment. The guarantor will then lose the right of reimbursement and consequently the right of subrogation. (3) THE GUARANTOR CANNOT DEMAND REIMBURSEMENT FOR PAYMENT MADE BY HIM BEFORE THE OBLIGATION HAS BECOME DUE [2069].

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General Rule: Since a contract of guaranty is only subsidiary, the guarantor cannot be liable for the obligation before the period on which the debtor’s Liability will accrue. Any payment made by the guarantor before the obligation is due cannot be indemnified by the debtor. Exception: Prior consent or subsequent ratification by the debtor (4) THE GUARANTOR MAY PROCEED AGAINST THE DEBTOR EVEN BEFORE PAYMENT HAS BEEN MADE [2071] General Rule: Guarantor has no cause of action against the debtor until after the former has paid the obligation. Exceptions (Art. 2071) (a) When he is sued for the payment; (b) In case of insolvency of the principal debtor; (c) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (d) When the debt has become demandable, by reason of the expiration of the period for payment; (e) 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; (f) If there are reasonable grounds to fear that the principal debtor intends to abscond; (g) If the principal debtor is in imminent danger of becoming insolvent. Rationale: 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. As such, he may, in the alternative, obtain release from the guaranty; or demand security that shall protect him from any proceeding by the creditor, and against the insolvency of the debtor.

EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS When there are two or more guarantors, one debtor and one debt: (a) The one who pays may demand from each of the others the share proportionally owing to him (b) If any of the guarantors is insolvent, his share shall be borne by the others, including the payer, in the same proportion [Art. 2073] For purposes of proportionate reimbursement, the other guarantors may interpose such defenses against the paying guarantor as are available to the debtor against the creditor, except those that are personal to the debtor [Art. 2074] Requisites for the applicability of Art. 2073: (1) Payment has been made by one guarantor; (2) The payment was made because (a) Of the insolvency of the debtor, or (b) By judicial demand (3) The paying guarantor seeks to be indemnified only to the extent of his proportionate share in the total obligation. EXTINGUISHMENT OF GUARANTY (1) Once the obligation of the debtor is extinguished in any manner provided in the Civil Code, the obligation of the guarantor is also extinguished [2076]. However,

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there may be instances when, after the extinguishment of the guarantor’s obligation (as in the case of a release from the guaranty), the obligation of the debtor still subsists. (2) Although the guarantor generally has to make payment in money, any other thing of value, if accepted by the creditor, is valid payment and therefore releases the guarantor [dacion en pago] [2077]. (3) If one guarantor is released without the consent of the others, the release would benefit the coguarantors to the extent of the proportionate share of the guarantor released [2078]. (4) A guarantor is released if the creditor, without the guarantor’s consent, extends the time within which the debtor may perform his obligation [2079]. This is to protect the interest of the guarantor should the debtor be insolvent during the period of extension and deprive the guarantor of his right to reimbursement. (5) The guarantors are released if by some act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter. [2080] In order to constitute an extension discharging the surety, it should appear that the extension was for (1) a definite period, (2) pursuant to an enforceable agreement between the principal and the creditor, and (3) that it was made without the consent of the surety or with a reservation of rights with respect to him. (Filipinas Textile Mills v. CA, November 12, 2003) LEGAL AND JUDICIAL BONDS 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 [2082 IN RELATION TO ART. 2056] (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] (a) Guaranty or suretyship is a personal security. (b) 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. (a) Reason: They are not mere guarantors, but sureties whose liability is primary and solidary. (b) 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.

PLEDGE Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. [Art.2085 in relation to 2093] PROVISIONS APPLICABLE ONLY TO PLEDGE (1) Transfer of possession to the creditor or to third person by common agreement is essential [2093].

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(a) Actual delivery is important. (b) Constructive 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 the commerce of man may be pledged as long as they are susceptible of possession [2094]. (3) Incorporeal rights may be pledged. The instruments representing the pledged rights shall be delivered to the creditor; if negotiable, they must be indorsed [2095]. (4) Pledge shall take effect against 3rd persons only if the following appear in a public instrument: (a) Description of the thing pledged. (b) Date of the pledge [2096]. (5) The thing pledged may be alienated by the pledgor or owner only 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, but the latter shall continue to have possession [2097]. (6) Creditor has the right to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid [2098]. (7) Special Laws apply to pawnshops and establishments engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily to them. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. (Manila Banking Corp. v. Teodoro, 169 SCRA 95) KINDS (1) Voluntary or conventional – Created by agreement of parties. (2) Legal – Created by operation of law. ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE [ART. 2085] (1) Constituted to secure the fulfillment of a principal obligation. (2) Pledgor or mortgagor must 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 pledged or mortgaged may be alienated for the payment to the creditor. [Art. 2087] OBLIGATION OF PLEDGEE (1) The pledgee cannot deposit the thing pledged with a 3rd person, unless there is a contrary stipulation [2100]. (2) Is responsible for the acts of his agents or employees with respect to the thing pledged [2100]. (3) Has no right to use the thing or to appropriate its fruits without authority from the owner [2104] (4) May cause the public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or dimunition in value of the thing. The proceeds of the auction shall be a security for the principal obligation [2108]. RIGHTS OF PLEDGOR (1) Takes responsibility for the flaws of the thing pledged [2101 in relation to Art. 1951].

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(2) 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 [2105]. Yuliongsiu vs. PNB: There is authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. The type of delivery will depend upon the nature and the peculiar circumstances of each case. PNB vs. Atendido: according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge. If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. (3) Subject to the right of the pledgee under article 2108, pledgor is allowed to substitute the thing which is in danger of destruction or impairment without any fault on the part of the pledgee with another thing of the same kind and quality [2107]. (4) 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 [2106]. PERFECTION – ARTS. 2093, 2096 REQUISITES FOR PERFECTION (1) The thing pledged is placed in the possession of the creditor or a third person [2093] (2) For the pledge to take effect as against third persons, a description of the thing pledged and the date of the pledge should appear in a public instrument [2096] FORECLOSURE ARTS. 2112, 2115 REQUIREMENTS IN SALE OF THE THING PLEDGED BY A CREDITOR, IF CREDIT IS NOT PAID ON TIME (ART 2112) (1) Debt is due and unpaid. (2) Sale must be at a public auction. (3) Notice to the pledgor and owner, stating the amount due. (4) Sale must be made with the intervention of a notary public. (5) If at the first auction the thing is not sold, a second one with the same formalities shall be held. (6) If at the second auction, there is no sale either, the creditor may appropriate the thing pledged but he shall give an acquittance (release) for his entire claim. EFFECT OF THE SALE OF THE THING PLEDGED [Art 2115] (1) Extinguishes the principal obligation, whether the proceeds of the sale is more or less than the amount due. (2) If the price of sale is more than amount due, the debtor is not entitled to the excess unless the contrary is provided. (3) If the price of sale is less, the creditor is not entitled to recover the deficiency. A contrary stipulation is void. PLEDGE BY OPERATION OF LAW – ART. 2121- 2122 LEGAL PLEDGES/PLEDGE BY OPERATION OF LAW [Art. 2121] (1) Necessary expenses shall be refunded to every possessor, but only a possessor in good faith may retain the thing until he has been reimbursed. (a) 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 GARRATON NOTES

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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] (2) He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. This is called the mechanic’s lien. [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. This is called the agent’s lien. [Art. 1914] (4) The laborer’s wages shall be a lien on the goods manufactured or the work done. [Art. 1707] Note: (1) In legal pledges, the remainder of the price of the sale shall be delivered to the obligor. (2) Public auction of legal pledges may only be executed after demand of the amount for which the thing is retained. It shall take place within one month after the demand, otherwise the pledger may demand the return of the thing pledged, provided s/he is able to show that the creditor did not cause the public sale without justifiable grounds. [Article 2122] DISTINGUISHED FROM CHATTEL MORTGAGE – ARTS. 2140, 1484 Chattel Mortgager Pledge Delivery of Personal Property Not required Delivery is required for the validity of the pledge Registration in the Chattel Mortgage Register Necessary for validity of the CM against Not necessary; Public document is enough third persons to bind third persons Right to Excess of Proceeds of Sale The excess goes to the debtor/ mortgagor The excess goes to the pledgee/creditor, unless otherwise stipulated Right to Recover Deficiency Creditor/ mortgagee can recover from the Creditor/ mortgagee is not entitled to debtor/ mortgagor, except if covered by recover any deficiency after the property is Recto Law sold, notwithstanding contrary stipulation Note: The provisions of the Civil Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages [Art. 2141]

REAL MORTGAGE Mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, immediately making immovable property or real rights answerable to the principal obligation in case it is not complied with at the time stipulated. OBJECTS OF REAL MORTGAGE [Art. 2124] (1) Immovables (2) Alienable real rights over immovables. (a) Future property cannot be an object of mortgage; however, a stipulation subjecting to the mortgage improvements which the mortgagor may subsequently acquire, install or use in connection with real property already mortgaged belonging to the mortgagor is valid. CHARACTERISTICS GARRATON NOTES

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(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 percentage thereof. (3) Mortgage creates an encumbrance over the property, but ownership of the property is not parted with. It merely restricts the mortgagor’s jus disponendi over the property. The mortgagor may still sell the property, and any stipulation to the contrary is void [Art. 2130] (4) Mortgage extends to the natural accessions, to the improvements of growing fruits and the rents or income NOT YET RECEIVED when the obligation becomes DUE, including indemnity from insurance, and/or amount received from expropriation for public use [Art. 2127] (a) Applies only when the accessions and accessories subsequently introduced belongs to the mortgagor. (b) To exclude them, there must be an express stipulation, or the fruits must be collected before the obligation becomes due. (c) Third persons who introduce improvements upon the mortgaged property may remove them at any time The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract. [Central Bank v. CA, 139 SCRA 46] KINDS (1) Voluntary – constituted by the will of the owner of the property on which it is created (2) Legal – required by law to be executed in favor of certain persons: (a) Persons in whose favor the law establishes a mortgage have no other right than to demand the execution and recording of the document in which the mortgage is formalized [Article 2125] (b) The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Art 2056 (integrity, capacity to bind himself, and sufficient property to answer for the obligation), and in other laws [Article 2082] (c) If the person bound to give a bond should not be able to do so, a pledge or mortgage considered sufficient to recover his obligation shall be admitted in lieu thereof [Article 2083] (3) Equitable – One which, although lacking the proper formalities of a mortgage, shows the intention of the parties to make the property a security for the debt. (a) Lien created through equitable mortgage ought not to be defeated by requiring compliance with formalities necessary to the validity of a voluntary real estate mortgage. Ex.: Pacto de retro (b) Provisions governing equitable mortgage: Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607. PRINCIPLE OF INDIVISIBILITY OF PLEDGE/MORTGAGE [ART. 2089 TO 2090] (a) Dayrit v. CA: A mortgage directly and immediately subjects the property upon which it is imposed. It is indivisible even though the debt may be divided, and such indivisibility is likewise unaffected by the fact that the debtors are not solidarity liable. (b) Central Bank v. CA: Where only a portion of the loan is released, the mortgage becomes enforceable only as to the proportionate value ofthe loan Indivisibility applies only as to pledgors/mortgagors who are themselves debtors in the principal obligation, and not to accommodation pledgors/mortgagors GARRATON NOTES

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"When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or mortgage, are considered separate from each other. But when the several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still liable for such balance." [Tolentino] The question is whether or not the written instrument in controversy was a mortgage OR a conditional sale. The correct test, where it can be applied, is the continued existence of a debt or liability between the parties. If such exists, the conveyance may be held to be merely a security for the debt or an indemnity against the liability. (Reyes v. Sierra, 93 SCRA 473)

ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE (1) Constituted to secure the fulfillment of a principal obligation. (2) Pledgor or mortgagor must 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. Note: Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. [Art. 2085] (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 pledged or mortgaged may be alienated for the payment to the creditor. [Art. 2087] (7) Must be recorded in the Registry of Property in order to be validly constituted. Note: The mortgage would still be binding between the parties even if the instrument is not recorded. FORECLOSURE OF MORTGAGE It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation secured by the mortgage. (a) In General: An action for foreclosure of a mortgage is limited to the amount mentioned in the mortgage, EXCEPT when the mortgage contract intends to secure future loans or advancements (b) BLANKET mortgage/DRAGNET– mortgage that subsumes all debts of past or future origin (c) Mortgage may be used as a “continuing security” which secures future advancements and is not discharged by the repayment of the amount in the mortgage (d) Alienation or assignment of mortgage credit is valid even if it is not registered Acceleration Clause, or the stipulation stating that on the occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and demandable, is ALLOWED KINDS OF FORECLOSURE (1) Judicial Foreclosure (2) Extrajudicial Foreclosure JUDICIAL FORECLOSURE Rule 68, ROC: (a) May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real or personal (in case of chattel mortgage) property involved or a portion thereof is situated.

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(b) If the court finds the complaint to be well founded, 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. If the mortgagor fails to pay at the time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction. (c) Upon confirmation of the sale by the court, 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. (d) Before the confirmation, the court retains control of the proceedings (e) Execution of judgment subject to APPEAL but not annulment (f) The foreclosure of the property is completed only when the sheriff’s certificate is executed, acknowledged and recorded 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) Balance, if any shall be paid to the mortgagor. Nature of Judicial Foreclosure Proceedings (1) Quasi in rem action. Hence, jurisdiction may be acquired through publication. (2) Foreclosure is only the result or incident of the failure to pay debt. (3) Survives death of mortgagor. EXTRAJUDICIAL FORECLOSURE [ACT NO. 3135] (1) Applies to mortgages where the authority to foreclose is granted to the mortgagee. (2) Authority is not extinguished by death of mortgagor or mortgagee. This is an agency coupled with interest. (3) Public sale should be made after proper notice to the public, otherwise it is a jurisdictional defect which could render the sale voidable. (4) There is no need to notify the mortgagor, where there is no contractual stipulation therefor. Proper notice consists of: (a) Posting notice in three public places and/or (b) Publication in newspaper of general circulation Purpose of notice is to obtain the best bid for the foreclosed property (5) Surplus proceeds of foreclosure sale belong to the mortgagor. (6) Debtor (who must be a NATURAL PERSON) has the right to redeem the property sold within 1 year from and after the date of sale. (a) If the mortgagee is a bank and the debtor is a juridical person, then there is no right of redemption. However, it may redeem the property BEFORE the registration of the TCT to the buyer, which is similar to the equity of redemption. The TCT must be registered within THREE MONTHS after the foreclosure. (b) The mortgagor can only legally transfer the right to redeem and the use of the property during the period of redemption. (7) Remedy of party aggrieved by foreclosure is a petition to set aside sale and the cancellation of writ of possession. However, if the mortgagee is a bank, the mortgagor is required to post a bond equal to the value of the mortgagee’s claim.

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(8) Republication of the notice of sale is necessary for the validity of the postponed extrajudicial sale (9) In foreclosure of real estate mortgage under Act 3135, the buyer at auction may petition the land registration court for a writ of possession pending the one-year period of redemption of the foreclosed property. 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: (a) Both should be distinguished from execution sale governed by Rule 39, ROC. (b) Foreclosure retroacts to the date of registration of mortgage. (c) A stipulation of upset price, or the 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. Right of mortgagee to recover deficiency (1) Mortgagee is entitled to recover deficiency. (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. Effect of inadequacy of price in foreclosure sale (1) Where there is right to redeem, inadequacy of price is immaterial because the judgment debtor may redeem the property. (a) Exception: Where 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 it is 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. A suit for the recovery of the deficiency after the foreclosure of a mortgage is in the nature of a mortgage action because its purpose is precisely to enforce the mortgage contract. [Caltex v. IAC, 176 SCRA 741] Waiver of security by creditor (1) Mortgagee may waive the right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. (2) Mortgagee cannot have both remedies. This is because he only has one cause of action, the nonpayment of the mortgage debt. Redemption (1) 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 (2) Kinds: (a) Equity of redemption: in judicial foreclosure of real estate mortgage under the ROC, it is the right of the mortgagor to redeem the mortgaged property by paying the secured debt within the 120 day period from entry of judgment or

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after the foreclosure sale, but before the sale of the mortgaged property or confirmation of sale (i) formal offer to redeem preserves the right of redemption, e.g., by filing an action to enforce the right to redeem (b) Right of redemption: in extrajudicial foreclosure of real estate mortgage, the right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt. (ii) For natural persons – one year from the registration of the TCT (iii) For juridical persons – three months from the foreclosure (iv) Formal offer to redeem must be with tender of redemption price to preserve right of redemption Note: There is no right of redemption in pledge and chattel mortgage.

Medida v. CA: The rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage foreclosure remains, in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed

ANTICHRESIS Antichresis is 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, not to make the contract binding (3) Amount of principal and interest must be specified in writing [Art. 2134] (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 NOTE: The obligation to pay interest is not the essence of the contract of antichresis; there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional OBLIGATIONS OF ANTICHRETIC CREDITOR (1) To pay taxes and charges on the estate, including necessary expenses [Art. 2135]. Creditor may avoid said obligation by: (a) compelling the 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 NON-PAYMENT OF DEBT

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(1) Action for specific performance (2) Petition for the sale of the real property as in a foreclosure of mortgage under Rule 68 of the Rules of Court [Art. 2137] (a) The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge [Tavera v. El Hogar Filipino, Inc. 68 Phil 712] (b) 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 DEFINITION AND CHARACTERISTICS

Chattel Mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms, the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title. [Section 3, Act 1508] CHARACTERISTICS (1) It is an accessory contract because it secures performance of a principal obligation (2) It is a formal contract because it requires registration in the Chattel Mortgage Register for its validity (but only as against third persons) (3) It is a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance on fulfillment of the obligation. (4) The excess of the proceeds of the sale goes to the debtor/mortgagor (5) Creditor/mortgagee can recover deficiency from the debtor/mortgagor, except if covered by the Recto Law REGISTRATION PERIOD WITHIN WHICH REGISTRATION SHOULD BE MADE The law is substantially and sufficiently complied with where the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of innocent third persons is prejudiced. EFFECT OF REGISTRATION (1) Creates real rights (2) Adds nothing to mortgage REGISTRATION OF ASSIGNMENT OF MORTGAGE NOT REQUIRED (a) A chattel mortgage may be alienated or assigned to a third person (b) The debtor is protected if he pays his creditor without actual knowledge that the debt has been assigned (c) Affidavit of good faith is required. AFFIDAVIT OF GOOD FAITH is 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 Absence: Mortgage is vitiated only as against third persons without notice. VENUE OF REGISTRATION GARRATON NOTES

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(a) If he resides in the Philippines, in the office of the register of deeds of the province in which the mortgagor resides at the time of the making of the chattel mortgage (b) If he does not reside in the Philippines, in the province in which the property is situated (c) If the property is situated in a province different from that in which the mortgagor resides, the mortgage shall be recorded in both provinces. [Sec. 4, Act 1508] When a corporation is a party to a chattel mortgage, the affidavit may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized to make or receive such mortgage. When a partnership is a party, the affidavit may be made and subscribed by one member thereof. VALIDITY OF CHATTEL MORTGAGE Chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators unless: (1) The possession of the property is delivered to and retained by the mortgagee or (2) The mortgage is recorded. (Sec. 4, Act 1508) FORMAL REQUISITES (a) It should substantially comply with the form prescribed by law (b) It should be signed by the person/s executing the same in the presence of two witnesses who shall sign the mortgage as witnesses to the execution thereof and (c) Each mortgagor and mortgagee or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in the form prescribed by law, which affidavit, signed by the parties to the mortgage and the two witnesses and the certificate of the oath signed by the person authorized to administer an oath shall be appended to such mortgage and recorded therewith. [Sec. 5, Act 1508] DESCRIPTION OF PROPERTY The mortgaged property should be described such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same. Large cattle as chattel mortgage The description in the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos or cowlicks, and other marks of ownership as described and set forth in the certificate of ownership of said animal/s, together with the number and place of issue of such certificates of ownership. Growing crops as chattel mortgage The mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing, and faithfully and without delay to harvest the same, and that in default of the performance of such duties, the mortgagee may enter upon the premises, take all the necessary measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus, if any, shall be paid to the mortgagor or those entitled to the same.

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PROPERTY COVERED BY CM It is deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. [Sec. 8, Act 1508] Breaches Failure of mortgagee to discharge the mortgage If the mortgagee, assign, administrator, executor, or either of them, (1) after performance of the condition before or after the breach thereof, or (2) after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the same, twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof. [Sec. 8] When the condition of the chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. 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 Foreclosure The mortgagee, his executor, administrator or assign may cause the mortgaged property or any part thereof to be sold at a public auction by a public officer: (1) After 30 days from the time of condition broken (2) At a public place in the municipality where the mortgagor resides, or where the property is situated (3) Provided at least 10 day-notice of the time, place, and purpose of such sale has been posted at 2 or more public places in such municipality, and (4) The mortgagee, his executor, administrator, or assign shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the time and place of sale at least 10 days previous to the sale: (a) either by notice in writing directed to him or left at his abode, if within the municipality, or (b) sent by mail if he does not reside in such municipality DISPOSITION OF PROCEEDS The proceeds of the sale shall be applied to the payment: (1) First, to the costs and expenses of mortgage (2) The residue shall be paid to persons holding subsequent mortgages in their order (3) The balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand ***END OF NOTES*** PRAYER TO ST. JOSEPH OF CUPERTINO FOR SUCCESS IN EXAMINATIONS O ST. JOSEPH OF CUPERTINO WHO BY YOUR PRAYER OBTAINED FROM GOD TO BE ASKED AT YOUR EXAMINATION, THE ONLY PREPOSITION YOU KNEW. GRANT THAT I MAY LIKE YOU SUCCEED IN THE (HERE MENTION THE NAME OF EXAMINATION EG. HISTORY PAPER I ) EXAMINATION. IN RETURN I PROMISE TO MAKE YOU KNOWN AND CAUSE YOU TO BE INVOKED. O ST. JOSEPH OF CUPERTINO PRAY FOR ME O HOLY GHOST ENLIGHTEN ME OUR LADY OF GOOD STUDIES PRAY FOR ME SACRED HEAD OF JESUS, SEAT OF DIVINE WISDOM, ENLIGHTEN ME.

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Guaranty, Pledge, Mortgage, And Antichresis

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