CREDIT TRANSACTIONS Professor: Atty. Vincent Z. Bolivar Source: Pineda, Ernesto L. (2004). CREDIT TRANSACTIONS. Manila: Central Book Supply, Inc.
Contents CREDIT TRANSACTIONS .......................................................................... 1 TITLE XI – LOAN ...................................................................................... 2 CHAPTER 1—COMMODATUM COMMODATUM .......................................................... 3 SECTION 1.—NATURE OF COMMODATUM ................................. 3 SECTION 2.—OBLIGATIONS OBLIGATIONS OF THE BAILEE ................................. 4 SECTION 3.—OBLIGATIONS OBLIGATIONS OF THE BAILOR ................................ 5 CHAPTER 2—SIMPLE LOAN OR MUTUUM ........................................ 7 TITLE XII – DEPOSIT............................................................................... 10 CHAPTER 1—DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS ...... 10 CHAPTER 2—VOLUNTARY VOLUNTARY DEPOSITS............................................... 11 SECTION 1.—GENERAL PROVISIONS .......................................... 11 SECTION 2.—OBLIGATIONS OBLIGATIONS OF THE DEPOSITARY ...................... 12 SECTION 3.—OBLIGATIONS OBLIGATIONS OF THE DEPOSITOR........................ 16 CHAPTER 3—NECESSARY NECESSARY DEPOSIT.................................................. 18 CHAPTER 4—SEQUESTRATION SEQUESTRATION OR JUDICIAL DEPOSIT ............... ..... 19 TITLE XV—GUARANTY GUARANTY .......................................................................... 19 CHAPTER 1—NATURE NATURE AND EXTENT OF GUARANTY ........................ 19 CHAPTER 2—EFFECTS OF GUARANTY ............................................. 24 SECTION 1.—EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR ...................................... 24 SECTION 2.—EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR ................................................ 26 SECTION 3.—EFFECTS OF GUARANTY AS BETWEEN COGUARANTORS GUARANTORS ............................................................................ 27 CHAPTER 3—EXTINGUISHMENT EXTINGUISHMENT OF GUARANTY GUARANTY ............................. 28 CHAPTER 4—LEGAL AND JUDICIAL BONDS ..................................... 30 TITLE XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS............................ ANTICHRESIS............................ 31 CHAPTER 1—PROVISIONS COMMON TO PLEDGE AND MORTGAGE31 CHAPTER 2—PLEDGE ...................................................................... 34 CHAPTER 3—MORTGAGE MORTGAGE .......................................................... ..... 40 JUDICIAL FORECLOSURE FORECLOSURE OF MORTGAGE ................................... 44 EXTRAJUDICIAL EXTRAJUDICIAL FORECLOSURE FORECLOSURE OF MORTGAGE ......................... 46 REDEMPTION IN MORTGAGES .................................................. 48 CHAPTER 4—ANTICHRESIS ANTICHRESIS .............................................................. 49 CHAPTER 5—CHATTEL MORTGAGE MORTGAGE .......................................... ...... 51 ACT NO. 1508 ............................................................................ 53 TITLE XIX. - CONCURRENCE AND PREFERENCE OF CREDITS.................. 54 CHAPTER 1—GENERAL PROVISIONS PROVISIONS ............................................... 54 CHAPTER 2—CLASSIFICATION CLASSIFICATION OF CREDITS ................................ ..... 54 CHAPTER 3—ORDER OF PREFERENCE PREFERENCE OF CREDITS .................... ..... 55
CREDIT TRANSACTIONS Introductory Credit, Concept – The “credit” of a person means his ability to borrow money by virtue of the confidence or trust reposed in him by the lender that he will pay what he may promise. Otherwise stated, it is the trust or belief reposed by a person in another, of the latter’s ability to comply with an obligation. Credit Transactions, Concept – Prescinding from the above concept of credit, the term “credit transactions” refers to agreements based on the trust or belief of someone on the ability of another person to comply with his obligation. The term “credit transactions” includes all transactions involving loans of money, goods or services extended to another either gratuitously or onerously.
Significance of Credit – Persons are able to enjoy a thing today but pay for it later; and through the banking system, the transfer of actual money is eliminated by cancellation of debts and credits. Coverage of Credit Transactions; Bar Subject – Credit transactions cover all bailment contracts (commodatum and mutuum), contracts of deposit (voluntary and necessary), guaranty and suretyship, pledge, mortgage (real and chattel), antichresis, concurrence, and preference of credits all provided in the New Civil Code. Additionally , it covers special laws like the Usury Law, Warehouse Receipt Law, Insolvency Law, Financing Company Act, Pawnshop Regulation Act, Consumer Act of the Philippines, Truth in Lending Act, Ship Mortgage Decree of 1978, Chattel Mortgage Law, and Extra-judicial Foreclosure of Real Estate Mortgage.
Security, Concept – It is something promised or delivered to ensure the fulfillment of an obligation. Kinds of Credit Transactions – (A) As contracts of security: 1. Contracts of real security – contracts supported by collateral/s or burdened by an encumbrance on property such as mortgage and pledge. 2. Contracts of personal security – contracts where performance by the principal debtor is not supported by collateral/s but only by a promise to pay or by the personal undertaking or commitment of another person such as in surety or guaranty. (B) As to their existence: 1. Principal contracts – can exist alone such as commodatum and mutuum. Their existence does not depend on the existence of another contract.
2. Accessory contracts – depend on another contract such as guaranty proper, suretyship, pledge, mortgage and antichresis. These contracts depend on the existence of a principal contract of loan. (C) As to their consideration: 1. Onerous – a contract where there is consideration or burden imposed like interest. The interest is the burden. 2. Gratuitous – a contract whereby there is no consideration or burden imposed like commodatum which is essentially for free. Bailment, Defined – the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. Generally, no fiduciary relationship is created by a bailment and hence it is not accurate to refer to the transfer as “in trust,” because no trustee-beneficiary relationship is created. It is different from bail in criminal procedure which is the security given for the release of a person in custody of the law, furnished by him or a bondsman, to guarantee his appearance before any court as required under the conditions hereinafter specified. Bail may be given in the form of corporate surety, property bond, cash deposit, or recognizance. Personalties or Parties in Bailment – 1. Bailor – one who gives or delivers the property bailed. 2. Bailee – one who receives the things delivered or bailed. Bailor is also known as comodatario or commodans. Bailee is also known as comodante or commodatarius. Letter of Credit – Trust Receipt Transactions Arrangement, Concept – Under a letter of credit – trust receipt transaction arrangement, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as a security of the loan. Bridge Financing – The essence of bridge financing loans is to obtain funds through an interim loan, while the main loan is not yet available. —oOo—
TITLE XI – LOAN General Provisions Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a) ________ Two kinds of contracts of loan: 1. Contract of commodatum – where one of the parties (bailor) delivers to another (bailee) something not consumable so that the latter may use the same for a certain time and thereafter returns it; 2. Contract of mutuum – where money or other consumable thing is delivered by the lender to the borrower subject to the condition that the same amount of the same kind and quality shall be paid. This is called simple loan. Consumable and Non-Consumable Things, Concepts – a thing is consumable when it cannot be used in a manner appropriate to its nature without being consumed. On the other hand, a non-consumable thing is a movable thing which can be used in a manner appropriate to its nature without it being consumed. (nature of the thing ) Fungible and Non-Fungible Things, Concepts – 1. Fungible thing – one where the parties have agreed to allow the substitution of the thing given or delivered with an equivalent thing. 2. Non-fungible thing – one where the parties have the intention of having the same identical thing returned after the intended use. (intention of the parties) Kinds of Commodatum – 1. Precarium – the bailor may demand the thing loaned at will under the conditions set forth in Article 1947. The use of the thing by the bailee depends on the pleasure of the bailor. 2. Ordinary Commodatum – the bailor cannot just demand the return of the thing at will because there is a period agreed upon which must be respected. Distinctions between Commodatum and Mutuum Distinctions between Loan and Deposit
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Credit distinguished from Loan - The “credit” of an individual means his ability to borrow money by virtue of the confidence or trust reposed by the lender unto him that he will pay what he may promise. A “loan” means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. Loan distinguished from Discount – (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on a single-name paper.
Commodatum is essentially gratuitous. 1 See 2 See
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Loan distinguished from Rent or Lease – In a contract of “rent” the owner of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract. In the contract of “loan” the thing loaned becomes the property of the obligor. In the contract of “rent” the relation between the contractors is that of a landlord and tenant. In a contract of “loan” of money, goods, chattels or credits, the relation between the parties is that of obligor and obligee. Deposit with Interest is Loan – An instrument acknowledging receipt of a sum of money as a deposit returnable two months after notice with interest is is evidence of a contract of loan and not of deposit. Loan with Stipulation of Sale of Land, In case of Non-Payment; Effect – An agreement for a loan with the stipulation that if the loan is not paid, a parcel of land would be deemed sold to the lender for the amount of the loan is valid. There is no pacto comisorio. ________ Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n) ________ Commodatum and Mutuum are Real Contracts; Where Perfected – These two contracts cannot be perfected by mere consent because they are not consensual agreements. They are contracts which require the delivery of the objects of the obligations. In brief, no delivery, no contract. Article 1316 expressly provides – Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)
While mutuum is not mentioned, it has the same character as commodatum. Mutuum is also a real contract which cannot be perfected until the delivery of the object of the contract.
Legal Effect of Promise to Deliver – A promise to deliver something by way of commodatum or mutuum if accepted is binding upon the promissor and promisee because contracts are obligatory when all the essential requisites for their validity are present (Art. 1356). The accepted promise, however, does not constitute the real contract of loan which requires delivery of the object for its perfection. Article 1934 is akin to Article 1479 concerning an accepted promise to buy and sell which is reciprocally demandable – Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)
________ CHAPTER 1 —COMMODATUM SECTION 1.—NATURE OF COMMODATUM Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a) ________ Characteristics of Commodatum – 1. It is essentially gratuitous; 2. Its purpose is to transfer the temporary use of the thing loaned to the bailee; 3. The use of thing is for a “certain time”; 4. It is a real contract because it requires delivery of the object for its perfection; 5. It is a principal contract because its existence does not depend upon another contract; 6. It is a unilateral contract because after the object had been delivered by the bailor (lender), it creates obligations to be performed by the bailee alone (borrower); and 7. It is purely personal because of the trust and belief reposed on the bailee. Fruits of the Property under Commodatum – The fruits of the property shall pertain to the bailor or owner. The bailee does not enjoy the fruits (Art. 1935). Usufruct will result if the bailee is authorized to enjoy the fruits of the property. However, under Article 1940, if there is a stipulation in the contract allowing the bailee to enjoy the fruits of the thing loaned, the stipulation shall be valid. ________ Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (n) ________ Subject of Commodatum – Under Article 1933, the subject matter of commodatum must be non-consumable because the thing must be returned. What has been consumed cannot be returned. However, consumable goods may be the object of commodatum if the purpose is not to consume them such as when they were loaned merely for ad ostentationem or exhibition purposes. After the affair, the same and identical goods shall be returned to the lender or bailor. ________ Art. 1937. Movable or immovable property may be the object of commodatum. (n) ________ Object of Commodatum – Both immovable and movable property may be the subject matter o f commodatum. ________ Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. (n) 3 | P
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________ Art. 1939. Commodatum is purely personal in character. Consequently: (1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n) ________ The present Article superseded the old rule by making commodatum a purely personal contract. Thus, the rights and obligations arising from commodatum are extinguished by the death of either the bailor or bailee.
If the extraordinary expenses are incurred during the actual use of the thing, the bailee and the bailor shall equally bear the expenses unless there is a stipulation to the contrary (Art. 1949). ________ Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event;
Being personal to the borrower or bailee, the use of the object cannot be ceded to a third person. Excepted from this prohibition are the members of the household of the bailee subject to the following conditions: (1) there is no agreement or stipulation to the contrary, and (2) the nature of the object forbids such use.
(4) If he lends or leases the thing to a third person, who is not a member of his household;
The members of the household of the bailee are not considered third persons.
Obligations to Pay for Ordinary Expenses – The ordinary expenses for the use and preservation of the thing loaned must be shouldered by the bailee (borrower) because he is under obligation to return the identical thing to the bailor. Consequently, it is understood that he should take good care of the thing with the diligence of a good father of a family as mandated by Article 1163.
Article 1939 is an exception to the broader rule that all rights acquired in virtue of an obligation are transmissible (Art. 1178). The Article prohibits transmission of the use of the thing to third persons subject, however, to the exception above stated. ________ Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n) ________
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745) ________
Liability of Bailee For Loss of the Thing Loaned Even by Reason of Fortuitous Event – The Article is an exception to the general rule that “no person shal l be responsible for those events which could not be foreseen, or which, though forseen, were inevitable” (Art. 1174).
When Bailee May Use Fruits of Thing Loaned – The general rule is that the bailee is not entitled to the use or enjoyment of the fruits of the thing loaned. The fruits belong to the owner (Art. 441). However, if there is a stipulation to that effect, the bailee may make use of the fruits of the thing.
Meaning of the Term “Loss” – “Loss” – “it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or cannot be recovered.”
It is understood that the enjoyment of the fruits must only be incidental to the use of the thing. It should not be the main cause, otherwise, the contract is not a commodatum but a usufruct. The stipulation will not impair the essence of commodatum because the actual cause or consideration therefor is still the liberality of the bailor or lender. ________
Rationale Behind the Imposition of Liability upon the Bailee for the Loss Caused by Fortuitous Event – In all the six (6) situations in Article 1942, the bailee has committed imporper conduct. To punish him for such act/s of impropriety or bad faith, he is made liable for the loss even if the acts he had committed are not the proximate cause of the loss. It is enough that he laid the basis for the operation of the loss.
SECTION 2.—OBLIGATIONS OF THE BAILEE
The reasons behind the imposition of liability on the bailee in spite of the presence of a fortuitous event are as follows –
Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a) ________ Article Applies Only to Ordinary Expenses – If the expenses incurred by the bailee are extraordinary, the bailor must reimburse the bailee provided that before incurring them, he first informs the bailee about it.
First paragraph – He is in bad faith. He deviated the purpose for which the thing was borrowed. Second paragraph – He is guilty of mora or default. Article 1165, (third paragraph also renders him liable due to delay. Third paragraph – The law presumes that the parties, due to the appraisal, have intended that the bailee (borrower) shall be 4 | P
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liable for the loss due to fortuitous event. That appears to be the reason for the appraisal of the value of the thing before its delivery.
Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, t hey are liable solidarily. (1748a) ________
Fourth paragraph – The bailee violated the pure personal character of the commodatum. He abused the trust reposed in him by the bailor (lender).
Solidary Obligation, Concept – each one of the debtors is obliged to pay the entire obligation, and where each one of the creditors has the right to demand from any of the debtors, the payment or fulfillment of the entire obligation (Art. 1207).
Fifth paragraph – In preferring to save his own property than the thing loaned, he committed an act tantamount to ingratitude considering that the loan is gratuitous. The bailee did not mind the liberality of the bailor (lender) when he chose to save his own property. ________ Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (1746) ________ No Liability for Deterioration of the Thing in the Absence of Fault – Deterioration is the lowering of the value or character of a thing. It normally occurs by reason of ordinary wear and tear. Such depreciation is borne by the bailor (lender) being the owner of the thing. However, if the deterioration is caused by the fault or negligence of the bailee, he is responsible for it. ________
(a) Passive solidarity – which is the solidarity on the part of the debtors; (b) Active solidarity – which is the solidarity on the part of the creditors. Solidary Liability of Two or More Bailees (Borrowers); Reason – Solidarity is provided to safeguard effectively the rights of the bailor (lender) over the thing loaned. In case of loss of the thing, he can fully enforce his right against any one or some of the bailees depending upon his convenience. Article 1945 constitutes as an exception to the general rule of “joint obligations” where there are two or more debtors, who concur in one and same obligation under Article 1207 and 1208. ________ SECTION 3.—OBLIGATIONS OF THE BAILOR
Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (1747a) ________ Generally, Bailee (Borrower) has No Right of Retention, Exception – As a general rule, the bailee (borrower) cannot retain the thing loaned to him on the ground that the bailor (lender) owes him something including claims for extraordinary expenses incurred by him (bailee). Excepted from the rule are claims for damages which the bailee suffered by reason of the hidden defects or flaws of the thing loaned, of which he was not warned or advised by the bailor (lender). However, his right is only to retain the thing until he is finally reimbursed. He has no right to sell the thing to satisfy his claims for damages. Rationale Behind the Article – “bailment implies a trust that as soon as the time has expired, or the purpose accomplished, the bailed property must be restored to the bailor.” Article 1287 also provides – Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)
Retention in Violation of the Law Cannot Ripen into “Just Title” ________
Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (1749a) ________ When the Return of the Thing Loaned May be Demanded – The return of the thing loaned may be demanded by the bailor only – 1. After the expiration of the period stipulated; or 2. After the accomplishment of the use for which the commodatum has been constituted. The parties are mutually bound by the terms of their contract of commodatum (Art. 1934). However, in precarium, the bailor (lender) may demand the thing loaned at will. This incidentally is the same rule in deposit under Article 1988. Exception to the Rule – An exception to the rule of “no demand” arises when the bailor in the meantime, has an urgent need of the thing loaned, in which case, he may demand its (a) return, or (b) its temporary use. In case of temporary use, the commodatum is not extinguished but merely suspended while the possession of the thing loaned remains in the bailor (lender). After the urgent need of the bailor (lender) has been gratified, he must return the thing to the bailee (borrower) so its use may resume for the remainder
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of the stipulated time or period or until the purpose of the loan had been accomplished. However, if the period had already expired, the bailee (borrower) can no longer demand the return of the thing. It must be noted, the contract is gratuitous. Damages are not recoverable by the bailee (borrower) in the absence of bad faith on the part of the bailor (lender). When Loan is For Unlawful Purposes – the contract is void. The bailor (lender) may immediately recover the thing before any illegal act is committed and provided he is innocent or in good faith. ________ Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases: (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been sti pulated; or (2) If the use of the thing is merely tolerated by the owner. (1750a) ________ Precarium – This is a specie of commodatum where the bailee (borrower) is bound to return the thing upon the demand of the bailor (lender) in any of the following circumstances – 1. If the duration of the contract had not been stipulated; 2. If the use to which the thing loaned should be devoted had not been also stipulated; and 3. If the use of thing is merely by tolerance of the owner. Word “Owner”, Inaccurate – because the bailor (lender) need not be the owner of the thing (Art. 1938). ________
Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. (n) ________ Applicability – Article 1948 applies to ordinary commodatum. In precarium (Art. 1947), the bailor (lender) can always demand the immediate return of the thing at will or pleasure of the bailor (lender). Immediate Demand by Bailor (Lender) Due to Bailee’s (Borrower’s) Act of Ingratitude – If the bailee has committed acts of ingratitude specified in Article 765, the bailor may immediately demand the return of the thing loaned even if the period stipulated for its use has not yet expired. ________
Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a) ________ Ordinary and Extraordinary Expenses; Rule – On the refund of expenses incurred by the bailee (borrower), the following rules shall apply – 1. Ordinary expenses for the use and preservation of the thing shall be paid or shouldered by the bailee or borrower (Art. 1941), because he is under the strict obligation of returning the thing at the proper time and in good condition. 2. Extraordinary expenses shall be borne by the bailor (lender). The bailor shall fully refund to the bailee the extraordinary expenses incurred by the latter provided the bailor has been notified before the expenses were incurred. However, the requirement of a notice is dispensed with, when there is urgency in the repair or preservation of the thing loaned which means that the delay will cause imminent danger to the property. 3. If extraordinary expenses are incurred by the bailee on the occasion of the actual use of the thing, such expenses shall be divided equally between the bailor and bailee. Reason For Equal Sharing – “The bailee pays one-half because of the benefit derived from the use of the thing loaned to him, and the bailor pays the other half because he is the owner and the thing will be returned to him.” ________ Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. (n) ________ Incurring of Other Expenses – The bailee (borrower) is not entitled to the refund of the other expenses outside of those covered by Articles 1941 and 1949 incurred for the purpose of making use of the thing. This is to prevent the bailee (borrower) from incurring expenses which are not useful to the bailor (lender). Hence, he should not be compelled to make reimbursement to the bailee. ________ Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752) ________ Failure to Advise Bailee of Defects of Flaws of the Thing Loaned; Tortious Act – If the bailor (lender) is aware of any defects or flaws of the thing loaned and omitted to timely advise the bailee, and by reason thereof, the latter suffered damages, there is tort or quasi-delict , for which the bailor (lender) is liable (Art. 2176). The omission constituted negligence. While there is a pre-existing contract between the parties, the gross violation of the contract is by itself a tort or quasi-delict . Rule When Bailor (Lender) Not Aware of the Flaws of the Thing Loaned – Article 1951 applies only if the bailor is aware 6 | P
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of the existing flaws or hidden defects which are unknown to the bailee (borrower). The bailor is deemed to have acted in bad faith. If the bailor (lender) is not aware of the flaws, he cannot be made liable for the resulting danger because commodatum is essentially gratuitous and not onerous. Liberality must be reciprocated with liberality. Reason for Article 1951 – When a person lends a thing, he ought to confer a benefit, and not to do mischief. If he does not reveal the flaws, he is liable for his bad faith. Where Both Parties are Aware of the Flaws or Defects – If both the bailor and bailee (borrower) are aware of the flaws or defects in the thing loaned, the bailee (borrower) is deemed to have assumed the risk. The bailor is not liable for the damages suffered by the bailee by reason thereof. May the Bailee Retain the Thing Loaned for Damages he Suffered? Yes. (See Article 1944, second sentence). ________ Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n) ________ Abandonment of the Thing Cannot Exempt Bailor (Lender) From Payment of Expenses and Damages – This Article is one instance where the renunciation of one’s right over the property is not sufficient to satisfy an obligation for expenses incurred, unlike in case of co-ownership (Art. 488), and in easement of party wall (Art. 662, par. 2) ________ CHAPTER 2 —SIMPLE LOAN OR MUTUUM Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a) ________ Mutuum, Defined – a contract whereby one of the parties called the “lender” delivers to another called the “borrower,” money or other consumable thing with the condition or agreement that the same amount of the same kind and quantity shall be paid (Art. 1933). What is the Cause in a Loan? (a) As to the borrower, the acquisition of the thing; (b) As to the lender, the right to demand the return of the thing loaned or its equivalent to demand the return of the thing loaned or its equivalent. Ownership over the Thing is Transferred – In a contract of loan, the borrower becomes the owner of the thing or property delivered to him. What will be paid therefore is not the same or identical thing delivered. The borrower is bound to pay (not return) to the lender only the equivalent of the thing. If the obligation is to return the same or identical thing, the contract would be a contract of commodatum. A loan of money, nevertheless, may by agreement be payable in kind (Art. 1958).
Mutuum distinguished from Rent
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Fungible Thing – When the movable thing delivered in loan is not to be returned to the bailor, but may be substituted or replaced with another equivalent thing, it is a fungible thing. Fungible things are usually determined by number, weight or measure. If the thing delivered is intended to be returned and irreplaceable after the purpose of the loan had been accomplished, the thing is non-fungible. The present Article speaks of fungible things. Mutuum is a contract of “consumption” unlike commodatum which is a contract of “use” of a thing. ________ Art. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n) ________ Definition of Barter – Under 1638, barter is defined as a contract where one of the parties binds himself to give one thing to another in consideration of the latter’s promise to give another thing. Transfer of Ownership of Non-Fungible Things Replaceable with Things of the Same Kind, Quantity and Quality; Effect – The present Article speaks of a barter or exchange. The transfer of ownership of non-fungible things to a party with obligation on his part to give things of the same kind, quantity and quality to another party is considered barter. As a rule, non-fungible things are irreplaceable. They must be returned to the lender after the purpose of loan had been accomplished. The present Article is an exception. The nonfungible things may be replaced by agreement of the parties. However, the contract ceased to be a loan. It becomes a barter. Distinctions between Loan and Barter ________
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Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a) ________ Governing Rules on Payment of Loan – The subject matter of simple loan may either be money or consumable thing. The rules of payment shall be as follows – (a) If it is money, the obligation of the debtor or borrower shall be governed by the following Articles –
3 See 4 See
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Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n)
(b) If it is other consumable or fungible thing, the debtor or borrower shall pay another thing of the same kind, quantity and quality, even if it should change in value. If this cannot be done, the value of the thing at the time of its perfection (delivery) shall be the basis of the payment of the loan.
If the obligation consists of the payment of a sum of money, and the debtor incurs delay, the indemnity for damages shall be the payment of legal interest. Reckoning Period for Payment of Interest of Unliquidated Claims – No interest shall be adjudged on unliquidated claims unless the same can be established with reasonable certainty, and where the pleadings in the trial court did not spell out said amounts with certitude, the legal interest thereon shall run only from the promulgation of judgment of said court, it being at that stage that the quantification of damages may be deemed to have been reasonable ascertained. Actual Base for Computation – The actual base for the computation of such legal interest shall be the amount as finally adjudged by the Supreme Court. Interest on Damages – This kind of interest need not be in writing. Article 1956 applies only to interest for use of money and not to interest imposed as items of damages. The interest on the damages awarded should be computed from the time of the finality of the decision, and not from the filing of the complaint against the accused.
Note that the value of the thing shall be its value at the time of the perfection (delivery) of the contract and not at the time of payment of the loan. ________
Interest Recoverable in case of Delay in Payment of Money Obligations –
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a) ________
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (1108)
Applicability – The Article applies only to interest for use of money. It is not applicable to interest as indemnity for damages. Meaning of Interest – Interest is nothing more than the compensation agreed to be paid by the borrower for the use of the money lent to him by the lender. Classes of Interest – Interests are classified as follows – (a) Simple – that interest which is paid for the use of the principal at a certain rate stipulated in writing by the parties. (b) Compound – that interest which is imposed upon the accrued interest, that is, interest due and unpaid. The accrued interest is added to the principal and the resulting sum (principal and accrued interest) is treated as a new principal upon which the interest for the next period is based. (c) Legal – that interest which the law directs to be paid in the absence of any agreement as to the rate. It is fixed at 6% per annum. No liability For Interest Without Written Agreement – The present Article has strictly required a written commitment on the part of the debtor to pay interest to make him liable. Right to Interest, Basis – The right to interest arises only by reason of the contract (stipulation in writing) or by reason of delay or failure to pay principal on which interest is demanded.
Floating Rate of Interest; Void – A stipulation for a floating rate of interest in a letter of credit in which there is no reference rate set either by it or by the Central Bank, leaving the determination thereof to the sole will and control of the lender bank is invalid. Legal Rate of Interest from 6% to 12% Where Applicable – The Supreme Court held that the 12% interest applies only to forbearances of money, goods and credits and court judgments thereon, but not on court judgments for damages which do not involve a loan in which cases the legal rate of interest remains at 6% per annum. Can There be Interest in Equitable Mortgage? No, because the same is not stipulated in writing. Compound Interest is Not Automatic – A lender cannot just be entitled to compound interest. There must first be a stipulation for payment of interest and this interest may earn interest only when it is judicially demanded, although the obligation is silent upon this point (Art. 2212). This is called compound interest. ________ Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. (n) ________ Usurious Loans Cannot Hide Behind Legal Forms – The form of the contract is not conclusive for the law will not permit a 8 | P
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usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a document though legal in form was in fact a device to cover usury. Usury Law, Legally Non-Existent – The Usury Law by virtue of CB Circular No. 905 adopted on December 22, 1982, has become legally non-existent. The Circular has expressly removed the interest ceilings prescribed by the Usury Law. May the Borrower Recover Interests He Paid in a Usurious Transaction? In usurious loans, the entire obligation does not become void because of an agreement for usurious interest— the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, and the debt is to be considered without stipulations as to the interest. The amount paid as interest under a usurious agreement is recoverable by the debtor, since the payment is deemed to have been made under restraint, rather than voluntary. Must the Principal Debt Still be Paid in Usurious Transactions? Yes. Under the Usury Law, notwithstanding stipulations of usurious interest, the debtor must still pay the principal debt. Courts May Simply Reduce Unreasonable Interests – Even if the ceilings on interests imposed by the Usury Law had been suspended by the CB Circular No. 905, nonetheless, lenders cannot charge unreasonable and unconscionable interests. The courts may reduce the same. In brief, the lender may recover both the principal and reasonable interest. Rule That "Principal" May be Recovered by the Usurer with Legal Rate of Interest From Demand, Abandoned . CB Circular No. 905 Has No Retroactive Effect – It is an elementary rule of contracts that the laws in force at the time the contract was made and entered into, governed it. ________ Art. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. (n) ________ How to Determine Interest, When Payable In Kind – If the interest by stipulation is payable in kind, the products or goods to be paid as interest must be appraised to determine their value in money. The basis is the current price of the products or goods at the time and place of payment. ________ Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n) ________ Accrued Interest, Meaning – Interest due and remaining unpaid is termed "accrued interest". Compound Interest – This is the interest on the accrued interest.
Accrued Interest Not to Earn Compound Interest, Exceptions – The general rule is that the accrued interest shall not earn interest (compound interest) except: (a) when there is a written stipulation to that effect (Art. 1959), or (b) when judicial demand has been made upon the borrower. Rationale Behind the General Rule Against Compound Interests – If there is no rule against compound interest, debts would accumulate with rapidity beyond all ordinary calculation and endurance. It would tend also to inflame the avarice and harden the heart of the creditor. Some allowance must be made for the indolence of mankind. ________ Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti , or natural obligations, shall be applied, as the case may be. (n) ________ Application of Solutio Indebiti and Natural Obligation – The Article applies when the borrower pays interest for the money loaned to him without any written stipulation for payment of interest. In the absence of such written stipulation, he cannot be compelled to pay interest because under such situation, no interest is due. If the borrower paid interest by mistake, he can recover what he had paid under the principle of solutio indebiti (Art. 2154). No one shall be enriched at the expense of another. If the borrower agreed orally to pay the interest (the percentage of which is reasonable) but the agreement was not reduced into writing and legally therefore, no interest is due, nevertheless, the borrower paid the interest as he considered the payment thereof as a moral obligation on his part, the payment is valid as performance of a natural obligation (Art. 1423). In the foregoing situations, the rules governing solutio indebiti or natural obligation shall apply. ________ Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n) ________ Aim of the Usury Law – Act No. 2655 (Usury Law) was enacted on February 24, 1916. It was passed to curb usury, since that taking of excessive interest for the loan of money has been regarded with abhorrence from the earliest time. Under P.D. No. 1684, the Central Bank was empowered to prescribe the maximum rates of interest for loans and forbearances. Forbearance, Meaning – The term forbearance, as used in the Usury Law, signifies the contractual obligation of the creditor to forbear during a given period to require the debtor, payment of an existing debt then due and payable. Such forbearance of giving time for the payment of a debt is, in substance, a loan. In the absence of any loan or forbearance, there can be no basis for usury.
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When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory , the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit . (EASTERN SHIPPING LINES, INC. v. CA)
Back Rentals, Equivalent to Loan or Forbearance; Twelve (12%) Percent Interest Imposable – Back rentals being equivalent to loan or forbearance of money, the interest due thereon is twelve (12%) percent per annum from the time of extra-judicial demand. Did CB Circular No. 905 Repeal/Amend The Usury Law? No. It merely suspended its effectivity. If the Central Bank restores the ceilings on interest rates, the Usury Law would again be applicable. If Interest Agreed Upon is Unconscionable, The Court May 5 Reduce The Same Under Article 21, New Civil Code If Borrower Does Not Question The Interest Rate, Same Will Stand – If the borrower does not put in issue the unreasonableness of the interest rate which he has agreed to pay, the court will not extend him any help because the Usury Law is presently ineffective. It is necessary, however, that the borrower has agreed to the payment of the interest. The lender cannot just unilaterally increase the rate of interests to an iniquitous level. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded . In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
—oOo—
Deposit, Definition – Deposit is a contract where by a person (called depositor) delivers a thing to another (called depositary) for he principal purpose of safekeeping it with the obligation of returning it when demanded. Characteristics of Contract of Deposit – 1. It is a real contract because it can only be perfected by the delivery of the contract. XPN: An agreement to constitute a future deposit is a consensual contract and is binding. 2. Only movable things or personal property can be the object of a contract of deposit. XPN: Judicial deposit is provided by law even if the subject matter is land. 3. It is principally intended for safekeeping of the thing deposited. 4. It is generally gratuitous, unless there is a contrary agreement or the depositary is engaged in the business of storing goods such as a warehouseman. 5. Generally, the depositary cannot use the thing deposited except with permission of the depositor or when the preservation of the thing requires its use but only for said purpose. When money is deposi ted in a bank as “deposit”; Effect – When money is placed in a bank for safekeeping, same money must be returned. Commercial deposits, Eliminated Classes of deposits – a) Judicial deposit (or sequestration) – one which is brought about by the attachment or seizure of a property by order of the court. b) Extra-judicial deposit—which could either be voluntary or necessary. a. Voluntary – one made by the will of the depositor with the consent of the depositary. b. Necessary – one made in compliance with a legal obligation, or on occasion of a calamity. Deposit distinguished from Commodatum Deposit distinguished from Mutuum Deposit distinguished from Agency
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Deposit distinguished from Lease – In deposit, the principal purpose is the safekeeping of the thing deposited and its return upon demand. In lease, the principal purpose is the use of the thing with compensation called rentals. Return may be demanded upon the termination of the lease contract.
TITLE XII – DEPOSIT CHAPTER 1 —DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Deposit distinguished from Sale – The ownership of the thing is not transferred to the depositary, but in sale the object of the contract is transferred to the buyer.
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a) ________
Nature of advance payment in sale; Not deposit proper – A so called deposit of an advance payment in the case of sale is not the deposit contemplated under Article 1962. It is advance 6 See
Page 55 Page 55 8 See Page 56 7 See
5 See Medel v. CA,
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payment , and ownership is transferred to the seller once it is given. ________
Extra-judicial deposits, Classes – Voluntary deposit is defined in Article 1968 while necessary deposit under Article 1996. ________
Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. (n) ________
CHAPTER 2 —VOLUNTARY DEPOSITS SECTION 1.—GENERAL PROVISIONS
Contract to make a future deposit – The present Article applies only to voluntary deposits because there must be an agreement, and not to necessary or involuntary deposits. In the latter deposits, there is no agreement between the parties to create the contract. ________
Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. (1763) ________
Art. 1964. A deposit may be constituted judicially or extrajudicially. (1759) ________
Voluntary deposit Concept – It is a contract or juridical relation where a thing is delivered at the will of a person (depositor) to another (depositary) for the purpose of safekeeping by the latter coupled with the obligation of returning it upon demand.
Constitution of deposits, Classes – 1. Judicial constitution – when there is a court order. 2. Extra-judicial constitution – when it is created under Article 1968 (voluntary) and under Article 1996 (necessary). ________
There is freedom of action. The depositor is free to choose the depositary. Depositor need not be the owner of the thing – GR: Depositor be the owner of the thing deposited.
Art. 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in the business of storing goods. (1760a) ________
XPN: 1.
Deposit is generally a g ratuitous contract; Exception – a) If the parties have agreed that compensation be paid; and b) The depositary is engaged in the business of storing goods.
2.
Deposit should be considered as a loan if there is a stipulation for payment of interest. The reason is that interest can only arise from a contract of loan. ________ Art. 1966. Only movable things may be the object of a deposit. (1761) ________ Applicability – Only to extra-judicial deposit wherein only movables may be the object whether the deposit is voluntary or necessary. Judicial deposits, however, may cover either immovable or movable property, the aim of which being to protect the rights and interests of the concerned party or parties in the litigation. Movable things – Tangible things which can be transported from one place to another without being destroyed. They do include intangible or incorporeal things like rights and actions which may be the subject of assignment. Immovable things cannot be held physically for safekeeping. ________ Art. 1967. An extrajudicial deposit is either voluntary or necessary. (1762) ________
Article 1968, second sentence: “ A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case t o the one to whom it belongs.” Article 1984, first paragraph: “The depositary cannot demand that the depositor prove his ownership of the thing deposited.” Note: Ownership of the thing deposited is not transferred to the depositary. Hence, the depositor need not be the owner.
Second sentence is in the nature of an interpleader – The deposit in the second sentence is made by two or more persons. Section 1, Rule 62 of the Revised Rules of Court provides the formal rule on Interpleader— Section 1. When interpleader proper . Whenever conflicting claims upon the same subject matter are or may be made against a person who claims no interest whatever in the subject matter, or an interest which in whole or in part is not disputed by the claimants, he may bring an action against the conflicting claimants to compel them to interplead and litigate their several claims among themselves.
________ Art. 1969. A contract of deposit may be entered into orally or in writing. (n) ________ Form of the contract of deposit – Either orally or in writing or partly oral and partly in writing. There are no formalities required, except the delivery of the thing, to make the contract valid and enforceable. ________
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Art. 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should acquire capacity. (1764) ________
and the loss of the thing, shall be governed by the provisions of Title I of this Book.
Incapacitated person, Concept – A person is considered incapacitated if he cannot give consent to the contract such as minors, insane, demented persons, deaf-mutes who do not know how to write. Capacity to act may also be modified by other circumstances like civil interdiction, insolvency, etc.
Depositary’ principal obligations – 1. To keep the thing safely; 2. To return the thing deposited when required, to the depositor or his heirs and successors in interest.
Voidable contract – Where one of the parties is incapable of giving consent to a contract, the contract is voidable. However, the deposit is still recognized. The capacitated person who accepts the deposit made by an incapacitated shall be subject to all the obligations of a depositary as provided under Articles 1972 to 1991 as if there is a regular contract of deposit. Moreover, if the depositary refuses to return the thing deposited, he can be compelled to return it by the legal representative of the incapacitated person or by the latter himself if he becomes capacitated. The depositary here cannot allege for his benefit and advantage, so as to frustrate the return of the thing, the incapacity of the incapacitated depositor. ________ Art. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (1765a) ________ Rule in Article 1971 is the opposite of the Rule in Article 1970 – In the present article, it is the depositor who is capacitated while the depositary is the incapacitated one. The depositor may only recover the thing deposited if it is still in the possession of the incapacitated depositary. If the thing is already disposed of in favor of a third persons who acted in good faith whose rights cannot be disturbed, the only remedy of the depositor is to collect the amount by which the incapacitated depositary had been enriched or benefited. However, if the third person acted in bad faith, that is, he is aware of the flaw in the possession of the incapacitated depositary, the depositor can recover the thing from him with damages. ________ SECTION 2.—OBLIGATIONS OF THE DEPOSITARY Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. (1766a) ________
Law to govern the safekeeping of the thing – The law on Obligations and Contracts. 1. Diligence of a good father of a family in the performance of his obligations to protect and preserve the thing deposited, unless a higher degree of diligence is stipulated by the parties. 2. If the thing is lost, the depositary is liable if the loss is due to his own fault. But not when the loss is due to fortuitous event or force majeure. 3. Whenever a thing in the possession of the debtor is lost, the presumption is that he is at fault, unless there is proof to the contrary. Exceptions to the rule that the depositary is not liable when loss of the thing is due to fortuitous event – 1. If it is so stipulated; 2. If he uses the thing without the depositor’s permission; 3. If he delays its return; 4. If he allows others to use it, even though he himself may have been authorized to use the same. (Art. 1979) The owner-depositor bears the lost as long as the depositary is not at fault. Res perit domino. Standard of care or diligence – Greater care or diligence is required if the deposit is for a compensation than when it is for free. Is a guardian a depositar y of the ward’s property? No. ________
Art. 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The depositary is responsible for the negligence of his employees. (n) ________ Depositary prohibited from depositing the thing with a third person; Exception – Deposit is founded on trust and confidence. XPN: If there is a stipulation to the contrary. The stipulation will be the law between the parties. XPN to the XPN: If the thing is deposited with a person manifestly careless and unfit. The depositary is also liable if the loss or damage to the property is caused through the negligence of the depositary’s employees (imputed or vicarious liability of employers). 12 | P
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________ Art. 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger. (n) ________ Way or manner of deposit cannot be changed by depositary; Exception – when he may reasonably presume that the depositor would agree to the modification. Even then, however, the law requires that notice be sent to the depositor and to await the latter’s decision before any change be made, unless time is of the essence to avoid danger. ________ Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes. (n) ________ Collection of principal and interests when due by depositary – If the thing deposited generates interests like bonds, securities, etc., the depositary who has the obligation to preserve the thing, must collect the interest as well as the principal when they become due. He must see to it that the securities and the rights corresponding to them preserve their value.
Rent of safety deposit boxes; Character – a contract of rent of safety deposit boxes is not an ordinary contract of lease of things but a special kind of deposit . It is not strictly governed by the provisions on deposit. The rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to the view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; the contract is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters. The guard key of the box remained with the bank; without this key, neither of the renters could open the box. On the other hand, the bank could not likewise open the box without the renter's key. x x x The prevailing rule is that the relation between a bank renting out safedeposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit. (CA AGRO-INDUSTRIAL DEVELOPMENT CORP. v. CA)
________ Art. 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n) ________
Commingling of grains or articles of same kind and quality is generally allowed; Exception – when there is a prohibition. The different depositors shall own a proportionate share in the mass of the things deposited. Impliedly, if the grains, etc., are not of the same kind and quality, the depositary must keep them separately. ________ Art. 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages. However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a) ________ Depositary prohibited from using thing deposited – Without the permission of the depositor, the depositary cannot use the thing deposited. If he does so, he will be liable for damages as may be determined by the court. If expressly allowed, the contract ceases to be a deposit and becomes a loan or commodatum. The depositor cannot dispose of the thing deposited for the ise of another person specially so when the purpose for which the thing was deposited would be frustrated by the allowance of the use thereof. ________ Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. The permission shall not be presumed, and its existence must be proved. (1768a) ________ Article refers to an irregular deposit; Permission to use property; Effect – If the depositary is permitted to make use of the thing deposited, the deposit ceases to be one. It is converted to a contract of loan unless the principal reason for the contract is still the safekeeping of the property. In such a situation, the use of the thing is merely secondary. But the contract is still a deposit, however, it is called irregular deposit. Permission to use thing not presumed – the burden of proof to establish that permission to use the thing was granted is on the depositary. When the use of the thing is necessary to preserve it, the depositary may use the same but only for such purpose. He is not liable for damages. In case of controversy, the depositary must prove that the use was necessary to preserve the thing deposited in order to avoid any liability for damages. ________ Art. 1979. The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated; (2) If he uses the thing without the depositor's permission; (3) If he delays its return; 13 | P
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(4) If he allows others to use it, even though he himself may have been authorized to use the same. (n) ________ When depositary is liable for loss of thing due to fortuitous event – Fortuitous event is an unforeseen happening arising from acts of God such as storms, earthquakes, lightning, etc. GR: An obligor (depositary) is not liable for non-fulfillment of an obligation by reason of a fortuitous event or force majeure. (Art. 1174) XPN: Article 1979. Under any of the above circumstances, the depositary is rendered responsible for the loss of the thing deposited. Loss, which is generally total, includes partial destruction or depreciation of the value of the thing deposited. ________ Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (n) ________ Deposit in banks are considered simple loans – Fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans. ________ Art. 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be liable for damages should the seal or lock be broken through his fault. Fault on the part of the depositary is presumed, unless there is proof to the contrary. As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening is imputable to the depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the value claimed by him. When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the deposit. (1769a) ________ Art. 1982. When it becomes necessary to open a locked box or receptacle, the depositary is presumed authorized to do so, if the key has been delivered to him; or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. (n) ________ Closed and sealed deposit – the same must be returned in the same condition by the depositary. If the seal or lock be broken due to the fault of the depositary, he shall be liable for damages suffered by the depositor by reason of such breaking. It is presumed that the depositary is at fault, unless the contrary is proved. Value of the thing deposited; Estimate of [depositor] is prima facie evidence – If there is a controversy on the value of the thing deposited which is delivered closed and sealed, the statement of the depositor shall be accepted as prima facie
evidence of the value if the forcible opening of the box or receptacle is imputable to the depositary, unless there is a clear, strong and convincing evidence to the contrary. The court may now decide according to the weight or credibility of the evidence adduced by the parties. When breaking of seal or lock is not due to depositary’s fault – he still has the duty to keep secret the contents thereof.
If in the keeping of the sealed or locked deposit, the depositor has some instructions which could not be performed by the depositary without opening the box or receptacle, the latter is presumed to be authorized to do so. If the depositor has left the key to the box or receptacle to the depositary, there is a presumption of authority to open the same. If there is no such intention, there is no reason to leave the key to the depositary. ________ Art. 1983. The thing deposited shall be returned with all its products, accessories and accessions. Should the deposit consist of money, the provisions relative to agents in article 1896 shall be applied t o the depositary. (1770) ________ Other things to be returned in contract of deposit —When the depositary returns the thing in deposit, he must also return all its products, accessories and accessions. The depositor’s ownership over the thing carries with it the right to the fruits and all accessions thereto— Art. 441. To the owner belongs: (1) The natural fruits; (2) The industrial fruits; (3) The civil fruits.
When the deposit consists of money —the first paragraph of the Article does not cover deposit of money but other fungible things. If the deposit consists of money it is Article 1896 which is applicable. The word “agent” should be read as “depositary”. Art. 1896. The agent owes interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the agency.
The money deposited must be returned together with interest for the use thereof. The imposition of interest is a form of penalty there being no agreement to pay interest at the outset, otherwise, the contract will be a mutuum. ________ Art. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (1771a) ________ 14 | P
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Depositor cannot be required by depositary to prove his ownership—the depositary may not accept a thing for the purpose of safekeeping. He is under no obligation to do so. However, once he accepts a thing for deposit and actual possession is placed in his hands, he cannot demand that the depositor proves his ownership over the thing. The reasons behind this rule are— 1. It is not necessary because there is no transfer of ownership in contract of deposit; 2. A bailee (depositary) is stopped from asserting title to the thing received as against the bailor (Art. 1436); 3. To require proof of ownership, the depositary, on the pretext that he needs to know the nature and mode of acquisition of the thing by the depositor, may be able to retain the thing until the issue is settled. Fraud may thus be committed against the depositor. When thing appears to be unlawfully acquired; Duty of depositary—if the depositary has learned or received reliable information that the thing he accepted in deposit is not lawfully acquired by the depositor, he may return the thing to the depositor to avoid possible liability. When thing is a stolen property —if the identity of the true owner cannot be ascertained, the depositary may return the thing to the depositor; if the true owner is identified, the depositary must advise the latter of the deposit so that he may take the necessary precautions or actions to retrieve it. The depositary is not authorized to return the thing unceremoniously to the alleged owner without the knowledge of the depositor. HIS DUTY IS MERELY TO ADVISE THE OWNER OF THE DEPOSIT. If the depositor insists on his ownership as against the true owner, the depositary may file an interpleader suit against both of them to avoid responsibility. Failure of the owner to claim thing within 30 days from advisement—the depositary shall be relieved from responsibility by returning the thing to the depositor. If before the lapse of the 30 days, the depositor must have learned of the advice made, is now demanding the immediate return of the thing, may the depositary retain the thing until the lapse of 1 month from the advice? YES but inform the depositor of the legal reason for the retention. ________ Art. 1985. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share. When there is solidarity or the thing does not admit of division, the provisions of Articles 1212 and 1214 shall govern. However, if there is a stipulation that the thing should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a) ________ Respective rights of two or more depositors — 1. If joint depositors—each one may only demand the return of his proportionate share in the divisible thing/s deposited. 2. If solidary depositors—and the thing deposited is no capable of division, being indivisible in law, the
depositary may return the thing to anyone of the solidary depositors. Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a)
Stipulation to return thing to one of the depositors —the depositary shall return the thing only to said designated depositor, unless subsequently the agreement has been duly modified with the consent of all the parties concerned. ________ Art. 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights. (1773) ________ Applicability—the Article applies only after the deposit had already been made and that the depositor was capacitated at the time of the making of the deposit but became incapacitated before the return of the thing to him. If the depositor is already incapacitated at the time of the making of the deposit, Article 1970 applies. To whom should depositary return the thing? —the depositary shall not deliver or return the thing to anyone except to the person who has the administration of the depositor’s property and rights. As the depositor is still alive, the administrator may be a guardian appointed by the court, or the spouse who is given the power of administration by the court or the representative in case the depositor is declared an absentee. ________ Art. 1987. If at the time the deposit was made a place was designated for the return of the thing, the depositary must take the thing deposited to such place; but the expenses for transportation shall be borne by the depositor. If no place has been designated for the return, it shall be made where the thing deposited may be, even if it should not be the same place where the deposit was made, provided that there was no malice on the part of t he depositary. (1774) ________ In what place shall the thing be returned? — 1. Place designated in the contract of deposit; 2. If no place is designated, in the place where the things may be, even if this place is different from the place of deposit but there must be no bad faith on the part of the depositary in changing the place. Expenses for transportation —shall be borne by the depositor unless the depositary acted with malice in changing the place of returning or retrieval. ________ Art. 1988. The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. 15 | P
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This provision shall not apply when the thing is judicially attached while in the depositary's possession, or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. In these cases, the depositary must immediately inform the depositor of the attachment or opposition. (1775) ________ Time to return thing deposited; Reason —upon demand— whether or not a period is fixed for the return—because the term or period if agreed upon, is for the benefit of the depositor. XPN: If the deposit is for compensation, the depositary must still be paid for his services. “Return upon demand” rule is su bject to exceptions —
GR: The depositary shall return the thing deposited upon demand by the depositor. XPN: 1.
2.
3.
4.
When the thing in the possession of the depositary is subjected to a writ of attachment in which event it is placed in custodial egis and therefore under the control of the court; When there is an opposition to the return of the thing to the depositor and the depositary is duly notified thereof; When there is an opposition to the removal of the thing deposited and the depositary is duly notified thereof; When the thing is stolen and the period of thirty days from notice to the true owner for him to claim it had not yet elapsed, the depositary cannot return the thing to the depositor. This is to protect the true owner.
Note: Depositary must immediately notify the depositors of the attachment or opposition so that he can timely take steps to protect his rights and interests. Should the depositary return the thing despite the attachment, opposition, non-lapse of 30 day period, he may be held liable for damages caused to the offended party. ________ Art. 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons for not keeping the thing deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. (1776a) ________ Applicability—This Article applies only if the deposit is gratuitous. Remedy of depositary in case of depositor’s refusal to accept the thing—may resort to judicial consignation to be relieved from responsibility if despite the tender to deliver back the thing, the depositor unjustifiably refused to accept the same.
Rule when deposit is for valuable consideration —unless the reason for not continuing with the deposit constitutes a force majeure, he cannot just return the thing until the arrival of the
period designated in the contract. Otherwise, he will be liable for damages for breach of contract. ________ Art. 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor. (1777a) ________ No liability for loss due to force majeure or government order— GR: If the thing deposited is lost or confiscated by the government, the depositary is not liable for failure to return the thing upon demand of the depositor. XPN: If the depositary had received money or an equivalent thing for the property, he must deliver the same to the depositor, for that belongs to the latter as it is merely the substitute for the property deposited. ________
Art. 1991. The [depositary’s] heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. (1778) ________
Applicability—The article applies only when the depositary has died and left heir/s who took possession of the thing in the concept of an owner and sold it in good faith to a third person. Heir/s must be in god faith —the heirs must have already succeeded to the estate of the deceased depositary. This means, there was already a partition where the thing deposited was adjudicated to certain particular heir/s. These heir/s sold the thing in good faith, not knowing that the thing did not belong to their predecessor-in-interest it being merely a deposited property which must be returned to the depositor. Duty of the heir/s —the heir/s must return the purchase price received to the depositor. If the buyer has not yet paid the price, the right of action must be assigned to the depositor so he can pursue the appropriate action for collection or cancellation of the contract. Right of depositor if heir/s are in bad faith — 1. The depositor may sue them for recovery of the price with damages 2. He may seek the annulment of the contract of sale on the basis of fraud (Art. 1388) 3. He may file a criminal case for estafa for the appropriation of the thing under deposit. ________ SECTION 3.—OBLIGATIONS OF THE DEPOSITOR Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited. (1779a) ________
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Does the depositor have to reimburse the depositary for the latter’s expenses to preserve the property?—it depends. If for compensation, the depositor is not required to pay the depositary for the latter’s expenses for the preservation of the property. (Reason: expenses are included in the compensation paid to the depositary; necessary expense )
The deposit may be gratuitous (#s 1 and 3) or for compensation (#s 2 and 3). When it is gratuitous, the depositary is entitled to the reimbursement of necessary expenses incurred for the preservation of the thing. If it is for compensation and the agreed consideration has not been paid, the depositary has the right to retain the thing.
If the deposit is gratuitous, the depositor must reimburse the depositary for the latter’s expenses incurred for t he preservation of the thing deposited. (Reason: even if the thing is not deposited with the depositary, the depositor would still spend, as the good father of the family for the necessary expenses to maintain and preserve the thing he owns)
Pledge is created by operation of law —such pledge is also known as legal pledge.
Other expenses not included —useful and luxurious expenses are not included within the coverage of the Article. The depositor is, therefore, under no obligation to reimburse the depositary for useful or luxurious expenses the latter incurred. ________ Art. 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, unless at the time of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing, or unless he notified the depositary of the same, or the latter was aware of it without advice from the depositor. (n) ________ Depositor liable for losses or damages suffered by depositary ; Exceptions— GR: If the depositary suffers loss or damages arising from the character of the thing deposited, the depositor is liable therefor and must reimburse the depositary for such loss or damages. XPN: At the time of the constitution of the deposit: 1. The depositor was not aware of such character; 2. The depositor was not expected to know such dangerous character of the thing; 3. The depositor has notified the depositary of such character; and 4. The depositary was independently aware of it without need of advice from the depositor. ________ Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (1780) ________ Obligations of the depositor — 1. To reimburse the depositary for necessary expenses incurred by the latter (Art. 1992); 2. To pay the compensation agreed upon as consideration for the deposit (Art. 1965); 3. To indemnify the depositary for any loss or damages arising from the character of the thing deposited (Art. 1993). Right of depositary to retain thing in pledge —if the depositary has not been paid by the depositor for what may be due to him, until he is fully reimbursed.
Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)
May the depositary sell the thing retained in pledge? Yes. Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n)
After payment of the expenses, the remainder of the price of the sale, if any, shall be delivered to the obligor. Depositary’s right to retain is similar to that referring to an agent— Art. 1914. The agent may retain in pledge the things which are the object of the agency until the principal effects the reimbursement and pays the indemnity set forth in the two preceding articles. (1730)
________ Art. 1995. A deposit its extinguished: (1) Upon the loss or destruction of the thing deposited; (2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n) ________ Grounds for extinguishment of deposit mentioned in the article are not limitative —there are other causes for termination of deposit, such as: 1. Expiration of the period agreed upon; 2. Demand at the will of the depositor; 3. Mutual withdrawal from the contract; 4. Fulfillment of the purpose of the deposit; and 5. Fulfillment of the resolutory condition agreed upon. Loss or destruction of the thing —there is nothing more to return. Hence, the deposit is extinguished. Nevertheless, if the depositary is at fault, or is rendered liable despite fortuitous event or force majeure (Art, 1979), he shall pay for the value of the thing to the depositor. Death of either party; Effects —if the deposit is gratuitous, the death of either party extinguishes the contract. But, if the deposit is for a compensation (onerous) the death of the either party shall not extinguish the contract because the rights and liabilities arising therefrom are transmissible to their respective heirs unless there is a contrary ag reement (Art. 1178) ________
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CHAPTER 3 —NECESSARY DEPOSIT Art. 1996. A deposit is necessary: (1) When it is made in compliance with a legal obligation; (2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. (1781a) ________ Voluntary deposit distinguished from necessary (involuntary) deposit—A voluntary deposit is that kind where the delivery of the thing is made by the will of the depositor. The depositor has freedom to choose the depositary. A necessary (involuntary) deposit is one wherein the deposit is not made by the will of the depositor but created by force of the law or on occasion of a calamity. 1. Those made in compliance with a legal obligation; and Illustrations: Art. 538. Possession as a fact cannot be recognized at the same time in two different personalities except in the cases of co-possession. Should a question arise regarding the fact of possession, the present possessor shall be preferred; if there are two possessors, the one longer in possession; if the dates of the possession are the same, the one who presents a title; and if all these conditions are equal, the thing shall be placed in judicial deposit pending determination of its possession or ownership through proper proceedings . (445)
Same rules apply in cases of other disasters like storm, floods, shipwreck, pillage and similar other misfortunes. Pillage is the act of plundering, specially in war. ________ Art. 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions of the law establishing it, and in case of its deficiency, by the rules on voluntary deposit. The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2168. (1782) ________ Governing rules— 1. The deposit made in compliance with a legal obligation shall be governed by the law establishing it. If said law is deficient, the rules on involuntary deposit shall apply (Arts. 1968 to 1971). 2. The deposit made on the occasion of a calamity shall be governed by the provisions concerning voluntary deposit (Arts. 1968 to 1971). In addition, Article 2168 shall apply specially in the payment of compensation to the rescuer of the property. Art. 2168. When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation.
________ Art. 586. Should the usufructuary fail to give security in the cases in which he is bound to give it, the owner may demand that the immovables be placed under administration, that the movables be sold, that the public bonds, instruments of credit payable to order or to bearer be converted into registered certificates or deposited in a bank or public institution, and that the capital or sums in cash and the proceeds of the sale of the movable property be invested in safe securities. x x x Art. 1754. The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in Articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable. Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited . When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a)
Cash deposits placed as bond by certain officers before they assume their positions, as well as cash deposits for purchase of licensed firearms are other instances of voluntary deposits made in compliance with the law.
2.
Those which take place on the occasion of any calamity.
Art. 1998. The deposit of effects made by the travellers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. (1783) ________ Deposit of traveler’s (guests) effects; Nature —The deposit of their effects in hotels or inns is also regarded as necessary deposit (under paragraph 1). ________
Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel. (n) ________ Liability of hotel-keeper for vehicles, animals and articles — The protection and safety of these vehicles is also within the responsibility of the hotel-keeper. The Revised Penal Code provides for the subsidiary liability of inn-keepers. ________
Illustrations:
If a property of a person is saved by another on the occasion of conflagration, the property shall be considered as a necessary deposit in the hands of the latter. The owner is the depositor and the savior is the depositary.
Art. 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as strangers; but not that which may proceed from any force majeure. The fact that travellers are constrained to rely on the vigilance of the keeper 18 | P
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of the hotels or inns shall be considered in determining the degree of care required of him. (1784a) ________ Responsibility of hotel-keepers—liable for damages arising from the loss of, or, injury to, the personal effects of hotel guests caused by: 1. The negligence of its servants or employees; and 2. Loss or damage due to strangers. There is no liability when the loss is due to force majeure which refers to inevitable or unforeseen events caused by man like war. Neither is there liability if the loss is due to fortuitous event which refers to acts of God like typhoons, lightning and earthquake. ________ Art. 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms or through an irresistible force. (n) ________ Theft or robbery committed in a hotel room, not a force majeure—the hotel-keeper is liable. However, if the thief or robber used arms (like knife, or gun) and irresistible force, this act is deemed a force majeure by reason of which the hotelkeeper is rendered free from liability. The Article will not apply, however, when the theft or robbery was committed by an employee of the hotel-keeper, for then, it is Article 2000 which applies making the hotel-keeper liable for the loss. ________ Art. 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his family, servants or visitors, or if the loss arises from the character of the things brought into the hotel. (n) ________ Losses not chargeable to hotel-keeper — GR: Losses suffered by the hotel guests are chargeable to the hotel-keeper. XPN: When the losses are due to the follo wing causes: 1. Acts of the guest himself; 2. Acts of the guest’s family; 3. Acts of the guest’s servants or visitors; or 4. Character of the things of the guests subject to the conditions mentioned in Article 1993. ________ Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void. (n) ________
Agreement suppressing or diminishing liability; Effect —void. This is similar to the responsibility of common carriers which cannot be eliminated or diminished by stipulation or posting of notices, etc. ________ Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n) ________ Applicability—The Article applies only when the debtor is a guest of the hotel, that is, one who is registered or one allowed to stay as guest. The right of retention does not apply if the debtor is not a guest of the hotel as understood by the term traveler . Right to return given to hotel-keeper; Requisites —see Chuidian v. Hotel Inter-Continental , 22 CAR (2s) 736. Right to sell, debatable —The right of retention of the hotelkeeper is in the nature of a pledge created by operation of law and thus the hotel-keeper is allowed to sell the thing or belonging retained under Article 2121. Effect of obtaining food or accommodation in a hotel or inn without payment—estafa under the Revised Penal Code. ________ CHAPTER 4 —SEQUESTRATION OR JUDICIAL DEPOSIT Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. (1785) ________ Art. 2006. Movable as well as immovable property may be the object of sequestration. (1786) ________ Art. 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a) ________ Art. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family. (1788) ________ Art. 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court. (1789) —oOo—
TITLE XV—GUARANTY CHAPTER 1 —NATURE AND EXTENT OF GUARANTY
Posting of exculpatory notices; Effects —cannot free the hotelkeeper from responsibility for losses or damages suffered by the guest or traveler.
Guaranty, Definition—A contract of guaranty is one where a person (guarantor) binds himself to another (creditor) to fulfill
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the obligation of the principal debtor in case the latter should fail to do so. If the guarantor binds himself to be solidarily liable with the principal debtor, the contract is one of suretyship. Guaranty cannot exist without a valid obligation. ________ Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a) ________ Two contracts referred to in the article —The first paragraph refers to contract of guaranty , while the second refers to the contract of suretyship. Characteristics of guaranty — 1. It is a consensual contract, perfected by mere consent; 2. It is an accessory contract, the existence of which depends upon an existing valid principal contract like loan; 3. It is a conditional contract, as it will operate only when the principal debtor fails to fulfill his obligations. Payment by the debtor extinguishes the contract of guaranty; 4. It is a unilateral contract because only the guarantor has to obligation to indemnify the creditor in case of failure of the principal debtor to perform his prestation; 5. It is a subsidiary contract as the guarantor becomes liable to the creditor only when the principal debtor fails to pay his obligation. Nature of surety contract —merely an accessory contract and must be interpreted with its principal contract. Similarity between guarantor and surety —both promise or undertake to answer for the debt, default or miscarriage of another person.
liable A suretyship is an undertaking that the debt shall be paid ; a guaranty, an undertaking that the debtor shall pay . Kinds of guaranty — 1. General classification: a. Personal guaranty —an individual personally assumes the fulfillment of the principal obligation of the debtor (E.g., guaranty proper; suretyship). b. Real guaranty —a property (immovable or movable) is formally committed to answer for the principal obligation of the debtor (E.g., real estate mortgage; antichresis; pledge; chattel mortgage). 2. As to manner of creation: a. Conventional or voluntary —constituted by agreement of the guarantor and the debtor. b. Legal —created by provision of law. c. Judicial —ordered by a court in a pending case. 3. As to consideration: a. Gratuitous—the guarantor receives no valuable consideration because it is entered into for free. b. Onerous—the guarantor by stipulation is paid a valuable consideration for his guaranty of the obligation of the debtor. 4. As to its scope: a. Definite—the guaranty is confined or limited to the principal obligation only or over a specific part thereof. b. Indefinite (or simple)—covers or comprises not only the principal obligation but also its accessories including costs incurred after the guarantor had been required to pay by the court. Requisites for enforcement of surety’s liability— a) Application for damages must be filed before trial or entry of judgment; b) Due notice must be given the other party and his surety; and c) There must be a proper hearing, and the award of damages, if any, must be included in the final judgment.
GUARANTY
SURETY
His liability depends upon an independent agreement to pay the obligation of the principal if he fails to do so
He assumes liability as a regular party to the contract
Obligation is secondary
Obligation is primary
Undertaking is to pay if the principal debtor defaults
Undertaking is to pay if the principal debtor does not pay. Hence, obligation is more onerous
He is an insurer of the solvency of the principal debtor
He is an insurer of a debt
Surety, insurer of the debt —in suretyship, the surety becomes liable to the creditor without the benefit of excussion because the surety may be sued independently of the principal debtor. He has assumed or undertakes a responsibility or obligation greater or more onerous than that of a guarantor.
He is entitled to excussion, that is, the exhaustion of properties of the principal debtor before he may be held
He is not entitled to the benefit of excussion
Demand to principal debtor unnecessary to charge surety —a surety is considered as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter.
Surety is released if creditor and principal debtor varied the terms of contract without his (surety) consent —an essential alteration in the terms without the consent of the surety extinguishes the latter’s obligation.
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Indemnity against loss and indemnity against liability, distinguished—in the former, the indemnitor becomes liable when the person to be indemnified arises irrespective of whether he has suffered actual loss. Where the suretyship agreement provides that the surety would become liable “irrespective of whether or not the non -payment has actually been made by the company, the agreement is an indemnity against liability .” Guaranty and warranty, distinguished — GUARANTY
WARRANTY
A contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party
An undertaking that the title, quality or quantity of the subject matter of a contract is what it has been represented to be
________ Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n) ________ General character of guaranty —As a rule, it is a gratuitous contract. It becomes onerous only when there is a stipulation to the contrary. Consideration in a contract of guaranty —insofar as the creditor and guarantor are concerned, the cause of the contract is the same cause which supports the obligation as to the principal debtor. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. The guarantor or surety is liable, although he possess no direct or personal interest over the obligation nor does he receive any benefit therefrom. ________ Art. 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by l aw. (n) ________ Wife as guarantor; consent of husband not required — however, she cannot bind the conjugal partnership (or absolute community of property) without the consent of the husband, except in cases allowed by law. She may, however, administer and dispose of her own exclusive or separate properties. If she is appointed sole administratrix of the property of the husband, she may bind the property of the latter except to sell unless with a court authority. The conjugal partnership is liable for all debts and obligations contracted during the marriage by the designated administrator-spouse for the benefit of the conjugal partnership of gains, or by both spouses or by one of them with the consent of the other.
Art. 122. The payment of personal debts contracted by the husband or the wife before or during the marriage shall not be charged to the conjugal properties partnership except insofar as they redounded to the benefit of the family. Neither shall the fines and pecuniary indemnities imposed upon them be charged to the partnership. However, the payment of personal debts contracted by either spouse before the marriage, that of fines and indemnities imposed upon them, as well as the support of illegitimate children of either spouse, may be enforced against the partnership assets after the responsibilities enumerated in the preceding Article have been covered, if the spouse who is bound should have no exclusive property or if it should be insufficient; but at the time of the liquidation of the partnership, such spouse shall be charged for what has been paid for the purpose abovementioned. (163a)
________ Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply. (n) ________ Effect of guaranty without consent of principal debtor — guaranty may be constituted without the knowledge or consent of the principal debtor or even against his will. It must be noted that a guaranty is for the benefit of the creditor and not of the debtor. The debtor is not a party to the guaranty contract. However, the guarantor may recover from the debtor what he paid to the creditor ONLY to the extent of the benefit enjoyed by the debtor. Moreover, the guaranty is not binding until accepted by the creditor. Applicability of Articles 1236 and 1237 — Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights , such as those arising from a mortgage, guaranty, or penalty. (1159a)
Effect of guaranty with consent of debtor —the guarantor is subrogated by virtue thereof to all the rights which the creditor may have against the debtor. ________ Art. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title. It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823) ________
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Guaranty, kinds according to creation —(See Page 19) Sub-guaranty; consent of guarantor not needed (even against his opposition or objection)— joint or solidary debtors are not the same as sub-guarantors. The sub-guarantors assume the obligation of the guarantors, while the guarantors assume the obligation of the principal debtor. ________ Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a) ________ Requisites for guaranty —for guaranty to exist, there must be a valid obligation between a debtor and a creditor. No guaranty for void contracts —being merely an accessory contract , for its existence a guaranty must depend upon the existence of a valid principal obligation. Guaranty of voidable, unenforceable contracts and natural obligations; reasons — 1. Voidable contract —considered valid until it is duly annulled in a judicial proceeding; it enjoys the presumption of validity. 2. Unenforceable contract —not void; it is subject to ratification unlike a void contract which cannot be ratified because in the eyes of the law, it is nonexistent. 3. Natural obligation—an obligation which is not civil and therefore cannot be enforced in court. It does not grant the creditor a right of action to compel its performance. However, the debtor offers a guaranty for his natural obligation, he thereby implicitly recognizes the obligation. The obligation is thus transformed from the level of natural into a civil obligation. A factual basis is now created for the allowance of a valid guaranty.
Future debts may also refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown. ( Atok Finance Corp. v. CA, 222 SCRA 232) Test of continuing guaranty —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. Debt when considered liquidated —when it is for a price fixed in the contract. Contracts of surety generally prospective in effect like laws — unless the parties have intended them to be retrospective. Conditional obligations may also be secured by guaranty — unlike a pure obligation, a conditional obligation is not demandable at once. Its enforceability or extinction will depend upon the fulfillment of the stipulated condition. If the principal obligation is subject to a suspensive condition, the guarantor shall be liable only to the creditor after the happening or fulfillment of the condition. If it is subject to a resolutory condition, the happening of the condition will extinguish the principal obligation as well as the accessory contract of guaranty. Consequently, the creditor has no cause of action against the guarantor. Doubts on the terms and conditions of surety —should be resolved in favor of the surety. Failure to fulfill condition subsequent; effect —will nullify the guaranty if the said condition is not fulfilled. ________ Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.
Conditional obligations —they are valid subject only to the fulfillment of the condition imposed. ________
Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826) ________
Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a) ________
Limit of surety’s liability—limited to the amount of the bond.
Coverage; continuing guaranty —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. It is prospective in its operation and is generally intended to provide security with respect to future transactions. May future debts be secured by a guaranty if exact amount is not yet known? —Yes. Future debts may be secured by a guaranty even if the exact amount is not yet known. However, the guarantor cannot be sued until the debt is liquidated, which means, the amount of the debt is already determined or fixed.
Limit of guarantor’s liability—cannot go beyond the obligation of the principal debtor even if he agreed to do so. Reason: the contract of guaranty is merely accessory . It is unfair to make the guarantor liable for more than the obligation of the principal debtor.
The limitation on the liability of the guarantor applies both to the (a) amount and (b) onerous character of the obligation. Article 2054 must be distinguished from Article 2085 —in Article 2085, a third person who is not a party to the principal may secure the latter by pledging or mortgaging his own property. A person who mortgages his property to guaranty another’s debt, without expressly assuming personal liability for such
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debt , cannot be compelled to pay the deficiency remaining, after the mortgage has been foreclosed.
However, in judicial foreclosure, the mortgagor is liable for deficiency.
(1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation.
A guaranty which goes beyond the obligation of the debtor is not void; remedy —the same shall merely be reduced to the extent or limit of the debtor’s obligation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)
Situations when guarantor may lawfully be required to pay more than the original obligation of principal debtor —if upon demand, a guarantor fails to pay the obligation, he can be held liable for interest because of the default and the necessity of judicial collection.
The guarantor may also be released if the principal obligation is mutually changed or modified by the creditor and debtor without the knowledge or consent of the former. (material alteration of the contract ) ________
Penalty clause may also increase liability of surety — ________
Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a) ________
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a) ________ In what form should a contract of guaranty be made? —to be enforceable, it must be expressed and in writing, because it is a “special promise to answer for the debt, default or miscarriage of another”. However, it need not be in a public instrument. An oral guaranty is unenforceable. Guaranty is not presumed —it requires the expression of the consent of the guarantor in order to be bound.
Qualifications of guarantor — a) He must be a person of integrity where honesty and truthfulness are essential elements; b) He has full legal capacity whereby he can do acts with legal or binding effects; c) He has sufficient property to answer for the obligation of the debtor he is guaranteeing. The creditor may, however, waive these qualifications which are intended for his protection. The qualifications need be present only at the time of the perfection of the contract. If one or more qualifications are impaired due to supervening events, the creditor may demand for another qualified guarantor. It is his right, not his duty, to ask for a replacement.
Coverage of guarantor’s liability when guaranty is definite — the obligation of the debtor is confined or limited in whole or in part to the principal debt, to the exclusion of the accessories.
Coverage of indefinite (simple) guaranty —“comprehensive”; it shall compromise not only the principal obligation, but also its accessories, including the judicial costs, provided with respect to the latter, the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. Reason: the guarantor, in entering into the contract, could have fixed the limits of his responsibility solely to the strict terms of the principal obligation and if he did not do so, it must be presumed that he wanted to be bound to the extent so established. Doubts in the provision of contract of guaranty generally resolved in favor of surety —because it is a special obligation. XPN: in cases of compensated sureties. Demand or notice of principal’s default not required to fix sureties liability—
Release of guarantor or surety from obligation —by any of the modes of extinguishing an obligation whenever applicable.
Venue of action in guaranty —place where the obligation is to be complied with (locus solutionis), in consonance with the principle that the accessory follows the principal. ________ Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. (1829a) ________ When creditor may demand a substitute guarantor — a) When the original guarantor is convicted of a crime involving dishonesty like estafa and misappropriation; b) When the original guarantor becomes insolvent which means one whose assets at their present fair value are insufficient to pay his debts; When the creditor was the one who selected the guarantor himself who falls short of the qualifications, he cannot compel the principal debtor to furnish him a substitute guarantor. The obligation shall remain but without a guaranty unless the
Art. 1231. Obligations are extinguished:
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parties agree to solve the problem in some other acceptable ways. Effect of subsequent impairment or loss of required qualifications—will not generally end the guaranty. The creditor is given the right to demand substitution of guarantor. Effect of guarantor’s death—his heirs are still liable, to the extent of the value of the inheritance because the obligation is not purely personal, and is therefore transmissible. It is not personal because all the creditor is interested in is the recovery of the money, regardless of its giver. Effect of debtor’s debt—his obligation will survive (his estate will be answerable). If the estate has no sufficient assets, the guarantor shall be liable. ________
CHAPTER 2 —EFFECTS OF GUARANTY SECTION 1.—EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (1830a) ________ Benefit of exhaustion or excussion granted to guarantor; Meaning—it refers to the right of the guarantor to be free from execution of his own properties until the creditor shall have first exhausted all the properties of the principal debtor and has resorted to all legal remedies against the latter (i.e., accion pauliana). The liability of the guarantor is only subsidiary and his guaranty is only an accessory contract. Requisites of benefit of exhaustion or excussion —the following must be complied with before a guarantor may invoke the right of exhaustion or excussion: 1. He must set up the right of excussion against the creditor upon the latter’s demand for payment from him; 2. He must point out to the creditor the available property of the debtor (not exempted from execution found within the Philippine territory, Art. 2060). Note: It is understood of course that the guarantor does not fall in any of the situations in Article 2059 (where excussion cannot take place) and that he has not pledged or mortgaged his own property to the creditor to secure the principal obligation because if he did so, excussion cannot be involved for not being available to a pledgor or mortgagor.
Article 2058 not applicable to contract of suretyship —because a surety binds himself solidarily with the principal debtor. Q: May a complaint be filed against the debtor and guarantor simultaneously in one case before the exhaustion of all the properties of the debtor? A: Yes.
Declaration of insolvency, effect —Just because the debtor has been declared insolvent in an insolvency proceeding does not necessarily mean that he cannot pay, for part of the debtor’s assets may still be available to the creditor. ________ Art. 2059. The excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; (3) In case of insolvency of the debtor; (4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative; (5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. (1831a) ________ Instances where guarantor cannot invoke right of excussion — 1. When guarantor falls under any of the five (5) instances mentioned in Article 2059; 2. When the guarantor fails to comply with any of the two (2) conditions in Article 2060; 3. When the guarantor pledged or mortgaged his own property to the creditor as special security for the fulfillment of the debtor’s obligation; 4. When the guarantor fails to interpose the right as a defense before judgment is rendered against him by the court; 5. When the guarantor is a judicial bondsman or a subsurety because liability here is primary and solidary (Art. 2084). Reasons behind the instances under Article 2059 where benefit of excussion is not available to guarantor — 1. Renunciation of right —the benefit of excussion is a personal right. Its express waiver is valid. 2. Assumption of solidary liability —when the guarantor binds himself solidarily with the debtor, he becomes a surety with primary and direct liability. 3. Insolvency of the debtor —if the debtor becomes insolvent, the liability of the guarantor automatically arises because the debtor could not fulfill the obligation anymore. This insolvency must be established by evidence like an unsatisfied writ of execution. 4. Debtor absconded or cannot be sued in the Philippines—the creditor is not required by law to search for his debtor who has absconded or cannot be sued in the Philippines. Because, the debtor cannot ay the obligation, the guarantor is now subject to he creditor’s demand. 5. Execution against the debtor would be fruitless—if it clearly appears that execution against the property of the debtor would be useless (such as when the property levied upon is without value), the creditor may go immediately after the guarantor. ________ Art. 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832) ________
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Basic requirements before benefit of excussion may be invoked-- the following must be complied with before the benefit of excussion may be invoked by the guarantor: 1. He must set up the right of excussion against the creditor upon the latter’s demand for payment from him; 2. He must point out to the creditor the available property of the debtor found in the Philippines and sufficient to cover the amount of the debt. When a demand can be made? —It is only after a judgment has been rendered against the principal debtor and which could not be satisfied may the creditor demand payment from the guarantor. Just because the guarantor was sued at the same time as the debtor does not mean that the creditor has already made the demand on the guarantor. ________ Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (1833a) ________ Applicability—when the guarantor has complied with the conditions of Article 2060 whereby he pointed out to the creditor available property of the debtor but the creditor was negligent in exhausting the said property and thereafter, the principal debtor became insolvent. Effect if creditor’s negligence—he shall suffer the loss to the extent of the value of the pointed property which was not exhausted by the creditor. The guarantor shall remain liable, however, for the remaining obligation after deducting the value of the loss caused by the negligence of the creditor. ________
Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Article 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the lat ter. (1834a) ________
Notice to guarantor; reason —if the guarantor desires to set up defenses as are granted by law, he may have the opportunity to do so. He may or may not appear in the case and present evidence. . The consequences of his appearance or nonappearance are as follows: 1. If he does not appear and judgment is rendered against the debtor, he cannot set up defenses which he could have set up had he appeared; moreover, he cannot question the decision anymore. 2. If he appears such as by filing an answer in intervention, he may lose or may win the case. If he losses, he is still entitled to the benefit of excussion. There is no waiver of the right of excussion by his appearance in the case. ________ Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. (1835a) ________ Compromise, concept —a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. Effect of compromise — creditor and principal debtor —if 1. Between compromise is beneficial to the guarantor, it is valid; if not, it is not binding upon him. 2. Between creditor and guarantor —If compromise is beneficial to the principal debtor, it is binding upon the latter. If not, it is not binding. To be binding, it must benefit both guarantor and the debtor. ________ Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836) ________ Sub-guarantor is entitled to right of excussion —a subguarantor is a guarantor. He stands in the same footing as the guarantor whom he guarantees with respect to the principal debtor. As such, he has to enjoy the benefit of excussion both with respect to the (a) guarantor and (b) principal debtor. His liability is only subsidiary. ________
GR: Only the principal debtor should be sued alone. XPN: If the benefit of excussion is not available to the guarantor under Article 2059, he can be sued jointly with t he debtor. Even if they lose together in the suit, the guarantor, not being a surety, is still entitled to the benefit of excussion. Before execution can be implemented against him, the creditor must first establish that the debtor cannot pay and the best proof for this is an unsatisfied writ of execution. On the other hand, a surety may be sued independently of the principal debtor without prior exhaustion or excussion of the debtor’s properties.
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. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been e xpressly stipulated. The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837) ________ Benefit of division—Under this law, a co-guarantor is entitled to claim for a division of liability among his co-guarantors, and to pay only his aliquot part of the debt when the principal debtor fails to pay the same. 25 | P
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Applicability— 1. There are several guarantors; 2. They guaranteed only one debtor; and 3. There is only one debt. Liability of two or more co-guarantors —only joint and not solidary. Each one is liable only for his individual share in the debt. However, if several guarantors have agreed with the creditor that they are liable solidarily, anyone of them may be compelled by the creditor to pay the entire obligation when the principal debtor fails to pay.
3.
4.
from any interest which the creditor may have imposed in the debtor. Expenses incurred by the guarantor —must be related to the contract of guaranty and limited to those incurred after the guarantor has notified the principal debtor that the payment had been demanded of him. If incurred and attributable to the fault or negligence of the guarantor, cannot be reimbursed. Damages, when due—a matter of evidence. The general rule on Damages will be applicable.
Right to indemnification —may be waived by the guarantor. It may also prescribe within 10 years. It may also cease by reason of other modes of extinguishing obligations. ________
Benefit of division, when to be claimed—Just like the benefit of excussion, the “benefit of division” must be claimed at the time demand for payment is made upon the guarantors as provided in Article 2060 of the Code.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.
Cessation of benefit of division —this right shall cease or terminate for the same causes and reasons as the benefit of excussion against the principal debtor. ________
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. (1839) ________
SECTION 2.—EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE GUARANTOR
Right of subrogation —this results by operation of law from the act of payment and there is no necessity for the guarantor to ask the creditor to expressly assign his rights of action. (“Benefit of subrogation” based on natural justice and is not contractual).
Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises: (1) The total amount of the debt; (2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor; (3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) Damages, if they are due. (1838a) ________ Applicability—when the guarantor had actually paid the obligation of the debtor. GR: The guarantor must first pay the obligation before he can exact indemnification from the principal debtor. XPN: If the debtor had bound himself to pay the guarantor as soon as the latter shall have become bound and liable whether or not he has actually paid the creditor, the guarantor may already be indemnified by the debtor. Coverage of indemnity — 1. Total amount of the debt —the actual amount which he paid to the creditor. He cannot collect more than what he had actually paid, and the losses and damages he had actually incurred. The principal obligation includes the interest due. 2. Legal interest —from the time the guarantor has notified the debtor of the payment, the former is entitled to legal interest of 6 percent per annum on the amount paid. Basis: the default of the debtor in the payment and the necessary judicial collection by the guarantor. Note: granted by law and is different
Subrogation is the transfer of the credit of the creditor arising in a transaction, to a third person with all the rights appearing thereto, either against the debtor or against third persons. The subrogation under this article is a legal subrogation as it is he law which creates it. The debtor cannot oppose the subrogation as long as the guaranty was contracted with his knowledge and consent. The debtor’s obligation subsists. There is just a change in the person of the creditor of the principal debtor. Compromise with creditors —if the guarantor compromised with the creditor by paying only a lesser amount, he cannot demand more than what he had actually paid by way of compromise. ________ Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (1840) ________ Payment without notice to debtor —it is possible that the debtor has some special reasons which bar the collection of the obligation such as remission, prescription, performance, etc. Should the guarantor pay prematurely without notifying the debtor, the latter may set up defenses against him which could have been raised against the creditor at the time of payment. The remedy of the guarantor is now to go after the creditor for the recovery of the amount paid, if there is still a legal basis for the claim. If the guarantor suffers it is due to his own fault. ________ 26 | P
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Art. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. (1841a) ________ Payment before maturity effect —he cannot seek reimbursement from the debtor until the expiration of the period stipulated. The guarantor must wait. For being subsidiary in character, the guaranty is not enforceable until the debt has become due. XPN: If the premature payment was ratified by the debtor. ________ Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. (1842a) ________ Repeat payment by principal debtor; effect —not aware of the payment made by the guarantor, the guarantor can only go after the creditor. XPN: if the guaranty is— 1. A gratuitous one, and 2. The guarantor, due to fortuitous event was prevented from advising the debtor of the payment, and 3. The creditor becomes insolvent. Here the debtor must reimburse the guarantor for what the latter had paid. However, if the creditor is insolvent, the remedy of the guarantor is still against the creditor and not against the principal debtor. The creditor cannot be allowed to enrich himself. ________ Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten 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 ten years; (6) If there are reasonable grounds to fear that the principal debtor intends to abscond; (7) If the principal debtor is in imminent danger of becoming insolvent. In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1834a) ________
Action of guarantor against the debtor not for reimbursement—rather, the action is either for: 1. A demand for release from the guaranty , or 2. A demand for sufficient security that will protect him from the creditor’s complaint and from the danger of insolvency of the debtor. Distinctions between Article 2066 and Article 2071 — ARTICLE 2066
ARTICLE 2071
Gives the surety a right of action after payment
Gives a protective remedy before payment
Gives the surety a substantive right
Gives a preliminary remedy
When the surety’s rights under Article 2066 become available, he is past a point where a preliminary protective remedy is of any value to him. The surety may get reimbursement if he has satisfied the principal obligation. ________
Art. 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement. (n) ________ Applicability—where a person becomes a guarantor at the request of another for the debt of a third person who is not present, and the guarantor has actually paid the debt to the creditor. Remedy of guarantor —Under the above situation, the guarantor has the option of suing either: 1. The requesting party, or 2. The principal debtor. Basis: No person shall be enriched at the expense of another. It has the characteristics of a quasi-contract . ________ SECTION 3.—EFFECTS OF GUARANTY AS BETWEEN COGUARANTORS Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionately owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. ( 1844a) ________ Applicability—when one guarantor has paid the obligation of the principal debtor and is seeking contribution from his coguarantors. The payment, however, must be made by reason of a judicial demand, or insolvency of the principal debtor. (“Benefit of contribution”). 27 | P
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Juridical tie between co-guarantors — jointly and not solidarily liable. (Complements Article 2065 on “benefit of division”)
the principal debtor. They are transmissible defenses being inherent in the obligation, the effect of which is to nullify the obligation or render the same ineffective.
Article 2073 distinguished from Article 2065 — ARTICLE 2073
ARTICLE 2065
“Benefit of contribution”
“Benefit of division”
The controversy is between and among several coguarantors
It is between the coguarantors and the creditor who is claiming payment from all or one or some of the several co-guarantors
There is already payment of the debt, that is why, the paying co-guarantor is seeking the contribution of the coguarantors
There is no payment yet, but there is merely a claim pressed against one or more co-guarantors.
Benefit of contribution; right to seek contribution —only to the proportionate share of each in the debt which is divided among all. If one co-guarantor, due to his insolvency, cannot pay his share, the same shall be shouldered by all including the paying guarantor, in the same proportion. The former (insolvent), however, shall be liable to the others. Basis of paying guarantor’s right to contribution — by virtue of the payment he made, acquires by operation of law the right of contribution. He need not get any prior consent of the creditor. It is ipso jure.
Effect of payment outside of the restriction —(not by virtue of a judicial demand or by reason of the insolvency of the principal debtor), the paying co-guarantor cannot directly seek reimbursement from the others. He has to pursue first the claim against the principal debtor alone. Article 2073 applies to surety —A solidary accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he paid to the creditor. He may also demand reimbursement from his coaccommodation maker , without directing his actions against the debtor provided that: a) He made the payment by virtue of a judicial demand, or b) The principal debtor is insolvent. ________ Art. 2074. In the case of the preceding article, the coguarantors may set up against the one who paid, the same defenses which would have pertained to the principal debtor against the creditor, and which are not purely personal to the debtor. (1845) ________ Defenses of co-guarantors —If the co-guarantors have defenses which would have pertained to the principal debtor against the creditor at the time of payment, these may be set up against the paying co-guarantor. Instances of such defenses are payment already made by the debtor, remission, prescription, etc. Such defenses are available to the co-guarantors as against the paying guarantor because they are not purely personal to
However, if the defense is purely personal , it cannot be set up by the other co-guarantors as against the paying co-guarantor being intransmissible (e.g., minority of the principal debtor). ________ Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the coguarantors in the same terms as the guarantor. (1846) ________ Liability of sub-guarantor —A sub-guarantor guarantees a guarantor. If the principal debtor cannot pay, the guarantor is obliged to pay. If the guarantor cannot pay, the sub-guarantor pays because he guarantees the solvency of the guarantor. In case of insolvency of the guarantor for whom the subguarantor has bond himself, the latter is responsible to the other co-guarantors in the same terms as the guarantor whom he guaranteed. ________ CHAPTER 3 —EXTINGUISHMENT OF GUARANTY Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (1847) ________ Grounds for extinguishment of guaranty —same causes which extinguishes obligations: Art. 1231. Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849) Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850) Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extention of time referred to herein. (1851a) Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. (1852)
Release of guaranty is simultaneous with the discharge of the debtor—when the debtor is discharge from responsibility by
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the creditor, the guaranty is at the same time automatically released. Kinds of extinguishment— 1. Direct —this is the extinguishment of the guaranty independently of the principal obligation without the knowledge and consent of the guarantor. 2. Indirect —this is the extinguishment which arises from the extinction of the principal obligation. The Accessory follows the principal.
Alterations of changes in the contract which do not affect the contract of guaranty — 1. When the interest rates are increased without the consent of the guarantor, the principal obligation shall subsist at the original rate of interest. 2. Assignment of the suretyship by the creditor to another person without the consent of the surety did not release the latter. 3. A change or part performance of the contract which did not render the obligation more onerous cannot release the surety. To release the guarantor, there must be some change imposing or added burden on the party promising or which takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof. ________ Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. (1849) ________ Voluntary acceptance of property as payment by the creditor; effect— GR: Payment is effected through money—medium of exchange. XPN: The parties may agree that instead of money, property is offered in lieu thereof like in dation in payment . If the creditor accepts payment in the form of property whether immovable of movable, there is novation on the subject matter. This extinguishes the old obligation and also the guaranty, in effect. Effect if the creditor is evicted from the property —(property which he accepted as payment), the principal obligation, in the absence of any contrary agreement, is revived. This renewal, nevertheless, will not revive the guaranty. The action of the creditor against the principal debtor is for the eviction and this is different from what was guaranteed by the guarantor. The only remedy of the creditor is to proceed against the debtor alone. The creditor must suffer for he has taken the risk of accepting the property without full precaution. ________
Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850) ________ Effect of release of one guarantor —if the creditor releases one guarantor without the consent of the other co-guarantors, the latter will be benefited to the extent of the share of the released co-guarantor. ________ Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a) ________ Extension, concept—the extension referred to in the Article refers to the lengthening of the period or term agreed upon for the performance of the debtor’s obligation. GR: Effect of grant of extension of period to the principal debtor— a) With the consent of the guarantor —the guaranty is not extinguished. The right to object is a personal right. It can be waived. The waiver is not contrary to law of public policy. b) Without the consent of the guarantor —an extension of time granted to the principal debtor without the consent of the guarantor extinguishes the guaranty. XPN: Where an extension was granted to the debtor by the creditor without the knowledge and consent of the accommodation party, the extension does not release the latter from his obligation because, although he is like a surety, he is primarily liable to a holder in due course. Reason for the first sentence —the extension would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedy against the debtor upon the original maturity date. The surety is entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. Reason for the second sentence —the guarantor after all would not be prejudiced since his recourse would be to avail of the right granted him under Article 2071. Mere delay or neglect of creditor in collecting the debt; effects—the extension of term must be based on some new agreement between the creditor and the principal debtor by virtue of which the creditor deprives himself of his claim. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. Rule when obligation is payable in installments —where a borrower agreed to an acceleration clause, that is, in case of failure to pay one installment, his entire obligation will become due and demandable, the extension of time granted to one overdue installment, will release the guarantor. Reason: the extension referred to the whole or entire obligation. 29 | P
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________ Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. (1852) ________ Applicability—does not apply where the liability is as a surety, not as a guarantor. Release due to failure of subrogation —Under Article 2067, the guarantor who pays the debt of the principal debtor is entitled to the “benefit of subrogation” which arises by operation of law. It is necessary to enable the guarantor to enforce the items of indemnification granted him by law. This “benefit of subrogation” is not a contractual right but is premised in natural justice. If by reason of some act of the creditor the guarantor cannot be subrogated to the rights, mortgages and preferences of the said creditor (e.g., cancellation of mortgage), the guarantors are released from their obligation. Reason: To prevent connivance or collusion between the creditor and debtor in order not to prejudice the guarantors. XPN: If the failure or impossibility of subrogation is due to reasons attributable to the guarantors themselves, they cannot be released from their responsibility. Negligence of creditor resulting in failure of subrogation; effect—(e.g., when he failed to register a deed of real estate mortgage thus allowing a third person to lawfully levy on the property mortgaged), the guarantors are released from responsibility. Time to invoke benefit of Article —only during the proceeding against him for payment of the debt. It cannot be invoked before or after the judgment had been rendered. ________ Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853) ________ Defenses which cannot be set up against the creditor —all defenses inherent in the debt (such as previous payment, prescription, illegality of the cause, fraud and other vices of consent) pertaining to the principal debtor may be set up by the guarantor against the creditor. Such defenses if sufficiently established will release the guarantor from responsibility. Defenses which are purely personal to the debtor will not be available to the guarantor, such as the defense of minority of the principal debtor. It pertains personally to him alone. Some defenses not personally pertaining to the debtor — 1. Condonation 2. Consignation 3. Loss of the thing (before the debtor has incurred in delay) 4. Confusion or merger of rights— a. Between the persons of the guarantor and creditor, the principal debtor remains liable for the principal debt because only the
5.
guaranty is involved in the confusion or merger of rights. b. Between the persons of the creditor and debtor, the debt is extinguished as well as the contract of guaranty. Compensation—the guarantor can recover from the principal debtor the amount compensated because compensation has the same effect as actual payment of the obligation by the guarantor.
Death of principal debtor —cannot be used as a defense against the creditor. The obligation of the debtor is a transmissible one. The estate or his heirs will answer for it. ________ CHAPTER 4 —LEGAL AND JUDICIAL BONDS Art. 2082. 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 Article 2056 and in special laws. (1854a) ________ Applicability—the bondsman must be one required to be furnished by (1) provision of law or (2) judicial order. Bond, meaning —when required by law or judicial order, an undertaking that is sufficiently secured, and not cash or currency. Nature of bonds —exist only in consequence of a meeting of minds between the parties on the subject matter and consideration. They are contractual in nature unlike guaranty which can be legal, that is, mandated by law instanced by that required of a usufructuary under Article 583 (2): Art. 583. The usufructuary, before entering upon the enjoyment of the property, is obliged: xxx (2) To give security, binding himself to fulfill the obligations imposed upon him in accordance with this Chapter. (491)
Judicial bonds —constitute merely a special class of contracts of guaranty characterized by the fact that they are given “in virtue of a judicial order.” Qualifications of a bondsman —same as the qualifications of a guarantor under Article 2056; if there is a special law providing for other qualifications, the same must also be observed. Sec. 12. Qualifications of sureties in property bond. – The qualifications of sureties in a property bond shall be as follows: (a) Each must be a resident owner of real estate within the Philippines; (b) Where there is only one surety, his real estate must be worth at least the amount of undertaking; (c) If there are two or more sureties, each may justify in an amount less than that expressed in the undertaking but the aggregate of the justified sums must be equivalent to the whole amount of the bail demanded. In all cases, every surety must be worth the amount specified in his own undertaking over and above all just debts, obligations and properties exempt from execution. (Rule 114, Revised Rules of Court)
Form of surety bonds —it is necessary that they should be signed not only by the sureties themselves but also by all the principal obligors; otherwise, they are void, there being no principal obligation upon which their existence have to depend. 30 | P
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A guaranty is valid in whatever form it may be provided it complies with the Statute of Frauds. Once the principal contract is perfected, the guaranty becomes effective. No notice of acceptance by the creditor to the guarantor is necessary for its validity. ________
Concept of real mortgage (or real estate mortgage) —Real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security, immovable property or real rights over immovable property, in case the principal obligation is not paid or complied with at the time stipulated.
Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof. (1855) ________
A real mortgage is a right held by a creditor to have the realty seized and sold for the satisfaction of the debt in default of payment.
Mortgage or pledge may be substituted for the bond required—if found to be sufficient to cover his obligation. ________
A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation, and constituted by recording the document in which it appears with the proper Registry of Property, although even if it is not recorded, the mortgage is nevertheless binding between the parties.
Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
Purpose of pledge and mortgage —to secure the fulfillment of a principal obligation which ordinarily is a contract of loan.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety. ________
First requisite of the article—it is the nature of the contract that they are merely accessory contracts. They cannot exist without an existing valid principal obligation.
Benefit of excussion not available to bondsman and subsurety—
Effect of invalidity of pledge or mortgage —does not make the principal obligation void.
Notice of hearing to surety —a bondsman or surety must be given an opportunity to be heard, otherwise, the writ of execution issued against him is void.
Effect of invalidity of principal obligation —the pledge or mortgage being merely an accessory thereto is also void.
Approval of the bond —hearing on the approval of the bond may be dispensed with, provided the judge is satisfied that the surety is solvent. —oOo—
TITLE XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS CHAPTER 1—PROVISIONS COMMON TO PLEDGE AND MORTGAGE Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) ________ Concept of pledge —Pledge is an accessory contract whereby a debtor delivers to the creditor or to a third person a movable or personal property, or document evidencing incorporeal rights, to secure the fulfillment of a principal obligation with the condition that when the obligation is satisfied, the thing delivered shall be returned to the pledgor with all its fruits and accessions, if any.
Cause or consideration of the contracts of pledge and mortgage— 1. If the pledgor or mortgagor is the debtor himself, the cause or consideration of the pledge or mortgage is the principal obligation itself. 2. If the pledgor or mortgagor is not the debtor himself, but a third person, the cause or consideration is the compensation agreed upon for the execution of the pledge or mortgage or the plain liberality of the pledgor or mortgagor. Second requisite of the article —a pledge is void, if the thing pledged does not belong to the pledgor. A real estate mortgage is void if the mortgagor has no title to the land he mortgaged. The accessory contract of chattel mortgage has no legal effect whatsoever where the mortgagor is not the absolute owner of the property mortgaged, ownership of the mortgagor being an essential requirement of a valid mortgage contract. The manifestation of ownership are control and enjoyment over the thing owned. Similarities of pledge and mortgage — 1. Both contracts are constituted to secure a principal obligation; hence, they are only accessory contracts; 2. Both pledgor and mortgagor must be absolute owners of the property pledged or mortgaged; 3. Both pledgor and mortgagor must have the free disposal of their property or be authorized to do so; 4. In both, the thing proffered as security may be sold at public auction when the principal obligation becomes due and no payment is made by the debtor. Distinctions between pledge and mortgage — 31 | P
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PLEDGE
MORTGAGE
Object is movable property provided it is susceptible of possession
Object is immovable property
Property must be delivered . It is a real contract
Delivery is not necessary
Description of thing and date of pledge must appear in a public instrument . Otherwise, it is not valid as to third persons
registered , Must be otherwise, not valid against third persons although binding between the contracting parties
Not a real right
Real right and real property by itself
May property acquirable in the future be mortgaged? —No. because he was not yet the owner of the properties at the time of the mortgage. Formalities in a pledge or real estate mortgage —in order to constitute a valid pledge, property must be described with reasonable certainty and must be delivered to the pledgor. Similarly, to constitute a valid mortgage, the realty must be described therein. A mortgage of general undescribed property is not valid. The object of the contract must be certain. It must also be determinate as to its kind. Where the subject matter of the contract is land, it must be sufficiently described to allow its proper identification without need of entering into a new contract between the parties. Otherwise, the contract is void. Innocent mortgagees for value, like innocent buyers for value, protected by law Just as an innocent purchaser for value may rely on what appears on the certificate of title, a mortgagee has a right to rely on what appears on the title presented to him, and in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the said certificate. (Cabuhat v. CA, 366 SCRA 176) Rule when the mortgage is executed by an impostor —the mortgage is a nullity. However, where the Torrens title was in the name of the impostor or forger and the mortgagee acted in good faith, the mortgage is valid. Reason: To rule otherwise is to undermine the efficacy and conclusiveness of certificates of title. The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks. While the innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in the case of banking institution, a mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises on the land offered as collateral and to investigate who are the real owners thereof. (DBP v. CA, 331 SCRA 267)
Possession of property —mortgage could not be the basis of possession. A mortgage is merely a lien and title of the property does not pass to the mortgagee unless the mortgage should contain some special provision to that effect. Will the voiding of a Torrens title subject of mortgage cancel the mortgage lien thereon? —No. The land is still liable for the mortgage lien of the innocent mortgagee for value. The true owner of the land may sue the person responsible for the fraudulent registration or make a claim against the assurance fund. A mortgage made to secure future advances is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advances are paid. A third person who pledged or mortgaged his property is not liable for any deficiency —XPN: If the third party pledgor or mortgagor expressly agreed to be bound solidarily with the principal debtor. Right of an owner of personal property pledged without authority— Art. 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. (464a)
Nature of assignment of rights to guarantee an obligation of a debtor—a mortgage and not an absolute conveyance of title which confers ownership on the assignee. Third persons; accommodation mortgagor —third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. They are known as accommodation mortgagor. Liability of accommodation mortgagors —only up to the loan value of their mortgaged property and not to the entire loan itself. ________ Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n) ________ Article 2052 made applicable to pledge and mortgage - ________ Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) ________ Right of the mortgagee to foreclose ( accion hipotecaria)the term “alienate” means to transfer or convey property to another. However, the term “alienate” in the Article does not 32 | P
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mean that upon failure of the debtor to pay, the property will automatically belong to the debtor. Such thing, even if stipulated, will be void being a pactum commissorium. If the debtor failed to pay on maturity date, the thing pledged or mortgaged may be sold at public auction. Nature of foreclosure sale —although essentially a “forced sale,” is still a sale in accordance with Article 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder, who, in turn, is obliged to pay therefor the bid price in money or its equivalent, and the rule that the seller must be the owner of the thing sold also applies. Kinds of foreclosure of real estate mortgage — 1. Judicial —by the court in a judicial proceeding for the purpose. 2. Extrajudicial —outside of court authorized under Act No. 3135. The mortgagor in the contract may appoint the mortgagee as is attorney-in-fact to cause the foreclosure of the mortgage either through a sheriff or a notary public, in case the debtor fails to pay the obligation on time. Right of junior mortgagee —when the proceeds of the sale are just enough to pay the obligation due to the first mortgagee, the second (junior) mortgagee may only repurchase the property from the first mortgagee there being no excess from the proceeds of the sale. Is it necessary for the pledgee (or mortgagee) to sue the pledgor (or mortgagor) to enforce his credit? —No. Equity of redemption redemption—
distinguished
from
right
of
EQUITY OF REDEMPTION
RIGHT OF REDEMPTION
The right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the property or the confirmation of the sale
The right of the mortgagor to repurchase the property even after the confirmation of the sale, in case of foreclosure by banks, within one year from the registration of the sale
Applies in judicial foreclosure
Applies only in extrajudicial foreclosure, foreclosure by certain banks or banking institutions, and sale in execution
Simply the right of the mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-days period after the judgment became final
In relation to a mortgage— understood in the sense of a prerogative to reacquire mortgaged property after registration of the foreclosure sale—exists only in the case of the extrajudicial foreclosure of the mortgage
Nature of action to redeem —in personam, so much so that a judgment therein is binding only upon the parties properly impleaded and duly heard or given an opportunity to be heard.
________ Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) ________ Pactum commissirium, concept —an agreement in a contract of loan whereby the property pledged or mortgaged to secure the payment thereof, will automatically become the property of the creditor upon the failure of the debtor to pay the obligation on the time stipulated.
Elements of pactum commissorium— 1. There is a pledged, mortgage, or antichresis of a property by way of security for the payment of a principal obligation; and 2. There is an express stipulation for an automatic appropriation by the creditor of the property in case of nonpayment of the principal obligation by the debtor within the period stipulated upon. Reason why pactum commissorium is prohibited—being contrary to good morals and public policy; specifically, the amount of the loan obtained from the creditor is usually much less than the actual value of the thing pledged or mortgaged. Two acts prohibited of the creditor under Article 2088 — 1. The creditor cannot appropriate to himself the things given to him by way of pledge or mortgage. 2. The creditor cannot dispose of the things pledged or mortgaged. Pledgor or mortgagor bears risk of loss —because ownership is not transferred to the pledgee or mortgagee. Res perit domino. ________ Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n) ________ Indivisibility of pledge or mortgage —thus, it cannot be divided into parts. In other words, each parcel of land answers for the totality of the indebtedness. 33 | P
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Heirs of debtor or creditor —a debtor’s heir who has paid a part of the debt cannot demand a proportionate extinction of the pledge or mortgage as long as the debt has not been fully paid. Corollarily, the creditor’s heirs who received his share of the debt cannot return the thing pledged or cancel the mortgage to the prejudice of the unpaid heirs. Rule when several things are pledged or mortgaged, each thing for a determinate portion of the debt—the pledges or mortgages are considered separate from each other. Indivisibility of a pledge or mortgage may be waived —by express stipulation by the parties. It does not involve any principle of public order.
Indivisibility applies only to contracting parties — Embodiment of real estate mortgage and chattel mortgage in one document; effect —does not fuse both securities into an indivisible whole. ________ Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861) ________ What obligations may a pledge or mortgage secure? —all kinds of obligations may be secured as long as they are not void. ________ Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862) ________ Promise to constitute a pledge or mortgage; effects —if accepted, merely gives rise to a personal action between the contracting parties. It creates no real rights. The action is only to compel the promissory to execute the pledge or mortgage. Criminal liability may arise in fulfilling the promise — Art. 316. Other forms of swindling. — The penalty of arresto mayor in its minimum and medium period and a fine of not less than the value of the damage caused and not more than three times such value, shall be imposed upon:
pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) ________ Basic requirements of pledge — 1. It is constituted to secure the fulfillment of a principal obligation; 2. Pledgor is the absolute owner of the thing pledged; 3. Person constituting the pledge (who may be the pledgor himself or a third person) has the free disposal of the thing, and in the absence thereof, that he be legally authorized to make the pledge. Additional requisite —the thing pledged must be placed in the actual possession of the pledge or of a third person designated by the parties by common co nsent. Another requisite of pledge is that it must be reduced into a public instrument where the thing must be particularly described and the date of the pledge indicated to bind third persons. Continuous possession required —however, the pledge is allowed to temporarily entrust the physical possession of the thing pledged to the pledgor (as a trustee ) without invalidating the contract. Constructive or symbolic delivery is not sufficient to constitute a pledge; exception—where the subject of a pledge consists of goods stored in a warehouse for purposes of showing the pledgee’s control over the goods, the delivery to him of the keys to the warehouse is sufficient delivery of possession. ________ Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864) ________ 9
Object of pledge —only personal property may be the object of pledge. Pledge is confined to personalty and cannot be engaged or made a lien on realty. Not all personal properties may be pledged but only those which are within the commerce of man and susceptible of possession. No double pledge —A property pledged cannot be pledged again while the first pledge is still subsisting. ________ Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The
1. Any person who, pretending to be owner of any real property, shall convey, sell, encumber or mortgage the same. 9 Art.
2. Any person, who, knowing that real property is encumbered, shall dispose of the same, although such encumbrance be not recorded.
________ CHAPTER 2—PLEDGE Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of
416. The following things are deemed to be personal property: (1) Those movables susceptible of appropriation which are not included in the preceding article; (2) Real property which by any special provision of law is considered as personal property; (3) Forces of nature which are brought under control by science; and (4) In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. (335a) Art. 417. The following are also considered as personal property: (1) Obligations and actions which have for their object movables or demandable sums; and (2) Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. (336a)
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instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. ( n) ________ Pledge of incorporeal rights evidenced by proper document may be pledged—it is required that the actual instrument (like promissory notes, bills of lading, shares of stocks, quedans, warehouse receipts) be delivered to the pledgee. ________ Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a) ________ Pledge must be embodied in a public instrument to affect third persons —where the following entries must appear: 1. A description of the thing pledged; and 2. Statement of date when the pledge was executed. Unless these matters are reflected in the contract of pledge, innocent third persons who may have transacted with the pledgor involving the thing may validly claim a better right than the pledgee even if the latter has already taken possession thereof. Rationale behind the requirement —to forestall fraud, because a debtor may attempt to conceal his property from his creditors when e sees it in danger of execution by simulating a pledge thereof with an accomplice. Effect of undated contract of pledge —cannot ripen into a valid pledge. ________ Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The 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 in possession. (n) ________ May a pledgor alienate the thing while the pledge is subsisting?—the pledgor doe not transfer ownership to the pledgee by reason of the contract of pledge. Consequently, he remains the owner of the thing. His right to dispose of it ( jus dispondendi ) is not lost. However, there is a restriction in the alienation thereof. He must first secure the consent of the pledgee. Reckoning time as to when ownership is transferred to vendee—if the pledgee ha consented to the alienation of the things by the pledgor, as soon as the pledgee has given his consent, the ownership is transferred to the vendee subject to the right of the pledgee to continue to physically possess the thing and to sell it if the principal obligation is not paid on time. What really happens is a case of novation in the person of the debtor which process is known as delegacion. ________ Art. 2098. The contract of pledge gives a right to the creditor 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. (1866a) ________
Right of retention
If the creditor wants the original pledge to apply to the new debt, he should so demand at the time the later obligation is entered into. It cannot be fairly presumed that the debtor consents to the new pledge. ________ Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867) ________ Duty of pledgee to take care of the thing pledged —while the thing pledge remains in the possession of the pledgee, he is required to take care of the thing with the diligence of a good father of a family. So if the thing is lost or has deteriorated in value by reason of the negligence of the pledgee, the latter is responsible for the injury caused. However, if the loss or deterioration is due to fortuitous event , the pledgee is not liable unless— 1. There is delay, 2. A contrary agreement, or 3. When the nature of the obligation requires the assumption of risk, and also 4. In cases expressly provided by law. Rule on deterioration —insofar as the duty to preserve the good condition of the pledged thing is concerned, the pledgee stands on the same footing as an obligor. He is obliged to protect the thing. In case of loss or deterioration of the thing 10 pledged Article 1189, paragraph 1, 2, 3 are applicable. ________ Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n) ________ Pledged thing cannot be deposited with a third person; exception—while the pledgee may retain the thing pledged during the existence of the contract, he is, however, prohibited from depositing it with a third person. This is to protect the pledgor or owner of the thing from possible loss or deterioration of the thing pledged while in the hands of the depositary who is not a privy to the pledge.
10 Art.
1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; x x x
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Exception: Deposit is allowed with the consent of the pledgor. Thus, he cannot blame the pledgee if something goes wrong with the thing while under deposit with a third person.
future advancements (or renewals thereof) that the pledgor may procure from the pledgee. ________
Responsibility of pledgee for acts of is agents and employees—if the thing is lost, destroyed or suffered deterioration by reason of the acts or negligence of the agents or employees of the pledgee, the latter is responsible therefor under the principle of imputed or vicarious liability in the law on torts. ________
Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under Article 1951. (n) ________
Expropriation—in expropriation, the pledgor ceases to be the owner. The pledge is terminated. The price paid for the expropriated property shall be applied to the payment of the principal obligation, the interests and other expenses due to the pledgee. If there is any excess, the same shall be delivered to the pledgor.
11
Applicability of Article 1951 to pledge —if the pledgor knows if the dangerous condition or flaws of the thing pledged without informing the pledgee about it, the former is liable for the damages suffered by the latter by reason thereof. However, if the defect is apparent, the pledgor is not liable. The pledgee should be cautious and vigilant enough to protect himself. He is presumed to have taken ordinary care of is concerns. ________
Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) ________ Setting off fruits or interests —fruits and interest which the pledgee receives out of the things pledged, may be applied to compensate for what the pledgor owes him by reason of te pledge. If there is nothing to offset or if there is an excess after the offset, the remainder shall be applied to the payment of the principal obligation. Rule on extent or scope of pledge; exception —the pledge is not confined to the very thing pledged. It extends to the interests and earnings of the thing or right pledged, unless there is a contrary stipulation by the parties. As regards pledged animals, their offspring shall belong to the pledgor or owner because the young of animals are considered natural fruits. However, they are subject to the pledge, unless there is a contrary stipulation. The parties may validly agree not to include them in the pledge. ( See also Art. 2127) Future advancements may be secured by pledge —the contracting parties to a pledge will also stand as security for any
11 Art.
1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. ( 1869) ________
Legal subrogation—the pledgee is under obligation to protect the thing pledged. The Article subrogates him to the right of the pledgor to bring such legal actions in court or to defend it against third persons. ________ Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a) ________ Obligation not to use or misuse the thing —while the pledgee has the right to possess the thing pledged, e is not allowed, however, to use it, much less, to misuse it. Otherwise, the owner may demand the deposit of the thing judicially or extra judicially. Moreover, the pledgee may be liable for the damages or injury caused. Exceptions— 1. If the pledgor had given him authority or permission to use it; and 2. If the use of the thing is necessary for its preservation. There are things which may deteriorate if left in total disuse like things propelled by engines. ________ Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871) ________ Return of the pledge, when demandable —the thing pledged cannot be returned to the pledgor against the will of the pledgee, unless there is full payment of the obligation as well as the corresponding interest and expenses incurred by the pledgee occasional by the pledge. The pledgor, however, is allowed to seek the return of the thing if it is in danger of destruction or impairment provided he offers an acceptable substitute for it. ________
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Art. 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n) ________ When pledged thing is in danger of being lost or impaired; rule—in Article 2104, the owner of the thing pledged may demand that it be judicially or extra-judicially deposited in cases of (a) use of the thing without permission by the pledgee; and (b) when the pledgee is misusing the thing. Thus, if the pledgee is permitted to use a pledge watch in certain occasions, but is being seen wearing it while swimming on the beach, the deposit of the thing with someone may be asked. The present Article also justifies the deposit of the thing pledged with a third person but grounded on— a) Negligence, or b) Willful act of the pledgee which act will imminently bring about the loss or impairment of the thing pledged. ________ Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n) ________ Right of pledgor to demand return of the thing pledged —as a rule, until there is full satisfaction of the debt, the pledgor cannot demand the return of the thing he pledged. The Article allows the return of the thing to the pledgor before the fulfillment of the obligation only if there are reasonable grounds to fear that the ting pledged would destroyed or impaired (without fault on the part of the pledgee) provided the pledgor offers another thing as substitute which is of the same kind and not of inferior quality. This is without prejudice to the application of Article 2108 whenever warranted. If there is fault on the part of he pledgee, Articles 2104 and 2106 shall apply. ________ Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n) ________ Auction sale where obligation is not due yet —even if the obligation has not matured yet, but there is a danger that the thing would be destroyed, impaired or its value diminished, the pledgee, who is not at fault, is granted the right to sell the thing at a public sale. If the pledgor, under the situation would like to substitute the thing pledged with another acceptable
thing, the pledgee’s right to sell is given preference by Article 2107. Proceeds of sale; status —the proceeds of the sale shall pertain to the pledgor because he has not incurred default on the payment of its obligation. The proceeds shall be held by the pledgee as security for the principal obligation in the same manner as the thing originally pledged was possessed. ________
Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n) ________ Deception or misrepresentation on the substance and quality of the thing pledged —if the pledgor deceived the pledgee on the substance or quality of the thing pledged, the contract is voidable. There is fraud in the execution of the contract. Instead of annulment, the law gives the pledgee the option to pursue any one of the following remedies: a) To demand from the pledgor an acceptable substance of the thing; or b) To demand the immediate payment of the principal obligation. The remedies are alternative not cumulative. Only one may be chosen. The law used the conjunctive “or”. Either one is more convenient than annulment. ________ Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) ________ Return of the thing pledged to pledgor by pledgee; effect —it is the essence of pledge that its object be in the actual possession of the pledgee. Consequently, if the pledgee has returned it to the pledgor, the pledge is extinguished . The rule will be the same even if the parties have voluntarily agreed that the pledge shall continue despite the return of the thing. Presumption when thing is found in the possession of the pledgor—there is a prima facie presumption that the thing pledged has been returned by the pledgee to the pledgor or owner, in any of the following circumstances— a) If the thing is found in the possession of the pledgor or owner after the pledge had been perfected ; b) If the thing is found in the possession of a third person who received it from the pledgor or owner after the perfection of the pledge. If the presumption is not rebutted, the presumption prevails and becomes an unrebutted evidence. 37 | P
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It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. Note that what is presumed remitted is the pledge and not the principal obligation. ________
Right of pledgee when debt had not been satisfied in due time—when there is no payment of the debt on time, the object of a pledge may be alienated for the purpose of satisfying the claims of the pledge. The pledgee has the right to proceed with the sale of the thing at a public auction to raise the funds for payment of the obligation.
Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n) ________
Procedure— a) The obligation must be due and unpaid; b) The sale of the thing pledged must be at a public auction; c) There must be notice to the pledgor and owner stating the amount for which the sale is to be held; 14 d) The sale must be conducted by Notary Public.
Requisite of renunciation or abandonment —a pledge is a personal right of the pledgee. It may be renounced or waived. The renunciation or waiver thereof is not contrary to law, public order, public policy, morals and good customs. However, to be effective, the law requires that it be in writing in order to effectuate the extinction of pledge. Oral waiver or renunciation 12 is not valid. Article 1356 must be complied with.
Pactum commissorium, when allowed —if at the first auction, the thing is not sold (such as when there are no participating bidders), there will be another setting for the second auction following the same formalities. If there is still no auction sale effected, the pledgee is now allowed to appropriate the thing pledged. The act of appropriation ipso jure transfers the ownership of the thing to the pledgee.
Is acceptance by the pledgor or owner necessary? —No. This is not a case of donation where acceptance is mandatory to make the donation valid.
Acquittance—the pledgee after appropriating the thing shall execute a deed of acquittance in favor of the pledgor which is a document of his release or discharge from the entire obligation including interests and expenses.
Suppose the thing was not returned, is there extinction of the pledge?—No. Even if the thing was not returned, as long as there is an effective renunciation, abandonment, or waiver, the pledge is already extinguished. The pledgee is now considered as a depositor. Accordingly, the law on deposit will apply to them. Other grounds for extinguishment of a pledge ________
13
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) ________
12 Art.
1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) 13 Art. 1231. Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, a re governed elsewhere in this Code. (1156a)
Excess or surplus —if there is any excess out of the proceeds of the auction sale after deducting the amounts of the obligation and other liabilities of the pledgor, the latter is NOT ENTITLED to the said excess or surplus unless there is a contrary agreement in the contract of pledge. Inversely, if there is any deficiency, the debtor is NOT LIABLE for payment of such deficiency, even if there is a stipulation to that effect. The stipulation will be void. If the creditor, instead of electing to sell the thing pledged, sued the pledgor in an ordinary action, the pledgee may recover the deficiency from the debtor. ________ Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n) ________ Who can bid? —the public, the pledgor and pledgee may bid. The highest bidder wins. If the pledgee bids, and he made an offer without any competition, his bid is not valid. The sale is void. This is to prevent fraud on the part of the pledgee who may maneuver the bidding in such a way that no bidder may come so he bids alone. He will surely be the winner. If the pledgor bids, he shall be preferred if h offers the same terms as the highest bidder in deference to him as the original
14
A sheriff is not authorized to foreclose a pledge. The foreclosure of a personal property does not involve public i nterest.
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owner of the thing over which he may have some attachment of sentimental value. ________
a last chance to protect himself if there is any irregularity in the sale. ________
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) ________
Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable.(n) ________
All bid offers must be in cash —checks cannot be accepted as payment for the purchase price. They are not legal tenders. They produce the effect of payment only after they have been encashed. Same rule applies to promissory notes, bills of exchange and other negotiable instruments. Payment must be made at once or on the spot which means in cash. ________ Art. 2115. 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. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) ________ Effect of sale of thing pledged —the sale of the thing pledged extinguishes the principal obligation. The extinction is automatic regardless of whether or not the proceeds realized from the public auction sale are more or less than the amounts of the principal obligation and other incidental expenses. Excess goes to pledgee—if the price of the sale is more than the amount of the debt, the excess will go to the pledgee. This is to compensate him for the eventuality where the purchase price is lesser than the amount of the debt, wherein he cannot 15 receive any deficiency unless there is a contrary agreement. Pledgee cannot recover deficiency under the Article; it conflicts with Chattel Mortgage Law —this is akin to paragraph 3, Article 1484 (Recto Law). It has been held, however, that Article 2115 which prohibits a deficiency judgment in a case where a pledge is foreclosed, does not apply to a chattel mortgage because Section 14 of Act No. 1508 allows the mortgagee to recover the deficiency. Exception—Article 1484 (par. 3) involving the foreclosure of a chattel mortgage which was constituted to secure a sale of personalty payable in installments does not allow recovery of deficiency. ________ Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) ________ Duty of pledgee—if the pledgor is not present at the auction sale when the thing pledged is auctioned off, it is the duty of the pledgee to advise the pledgor or owner of the thing pledged about the result of the auction sale. This is to give him
15
Under Article 2118 and 2121, the pledgor is entitled to the excess or remainder.
May a third person pay the pledgor’s debt? —Yes, if he has any interest in the fulfillment of the principal obligation (e.g., the third person became a done of the thing pledged).
Payment may be effected when the debt becomes due. Reason why personal interest is required — Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a)
________ Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) ________ Rule when what has been pledged is a “credit”—the pledgee is granted the prerogative to collect the credit when it becomes due, and before it is redeemed by the pledgor. (Read with Article 2099) ________
Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n) ________ When two or more things are pledged; rule —in case of foreclosure of the pledge, and the value of the several things pledged are worth more than the amount of the obligation which is the usual experience, the pledgee has the option to choose which one or some should be sold to satisfy the obligation, unless by agreement, he is deprived of that right. It is understood, however, that if the pledge is legal pledge, before the pledgee could sell the things, he must first make a demand and comply with Article 2112. Restriction—the pledgee may, however, cause the sale of only as many of the several things as are necessary to satisfy the debt. He cannot exercise the right to sell indiscriminately. ________ Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of Article 2085 he shall have the same rights as a guarantor under Articles 2066 to 39 | P
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2070, and Articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) ________ Third party pledgor; rights —the right enjoyed by a guarantor under— 1. Articles 2066 to 2070; and 2. Articles 2077 to 2981. Waiver of defense by debtor —if the principal debtor waives any available defense which will bar the payment of the obligation such as rescission, previous payment, etc., cannot prejudice the third party pledgor. This is to avoid fraud or injustice to the latter. ________ Art. 2121. Pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) ________ Article speaks of legal pledge where there is a right of retention—legal pledges are those constituted or created by operation of law. The provisions on the foregoing Articles (Article 2093 to 2120) shall govern the matters o f — a) Possession (Art. 2098); b) Care (Art. 2099); c) Sale; d) Termination of the legal pledge ( Art. 2110 and 2111). Exception—if there is excess or surplus after the payment of the debt and allowable expenses, the same shall be delivered to the pledgor. Note that in voluntary (or conventional) pledge, the pledgor as a rule is not entitled to the excess, unless there is a contrary agreement. Instances of legal pledges where there is right of retention — a) Art. 546—the right of the possessor in good faith to retain the thing until refunded of necessary expenses. b) Art. 1707—the lien on the goods manufactured or work done by a laborer until his wages had been paid. c) Art. 1731—the right to retain of a worker who executed work upon a movable until he is paid. d) Art. 1912—the right of an agent to retain the thing subject of the agency until reimbursed of his advances and damages (Articles 1912 and 1913). e) Art. 1994—the right of retention of a depositary until full payment of what is due him by reason of the deposit. f) Art. 2004—the right of the hotel-keeper to retain things of the guest which are brought into the hotel, until his hotel bill had been paid. ________ Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)
________ Demand required first before legal pledgee may cause sale — the reason for this is that a legal pledge unlike a voluntary pledge, has no specific period of performance or payment. After demand, the pledgee must proceed with the sale of the thing/s pledged within thirty (30) days . Otherwise, the debtor can require him the return of the thing being retained. Rationale behind Articles 2121 and 2122 —because the old Code is silent on how the thing/s pledged should be disposed of in cases of retention exercised by the creditor in accordance with law. ________ Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) ________ Pawnshops—the law governing pawnshops is P.D. No. 114. Other establishments engaged in giving loans secured by pledges—shall be governed by special laws concerning them. Civil Code (Title XVI) applies subsidiarily—if the special laws concerned are insufficient. ________ CHAPTER 3 —MORTGAGE Art. 2124. Only the following property may be the object of a contract of mortgage: (1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables. Nevertheless, movables may be the object of a chattel mortgage. (1874a) ________ Mortgage, defined—Real estate mortgage (as distinguished from chattel mortgage) is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security, immovable property or real rights over immovable property in case the principal obligation is not paid or complied with at the time stipulated. A mortgage is a real right constituted to secure an obligation upon real property or rights therein to satisfy with the proceeds of the sale thereof such obligation when the same becomes due and has not been paid or fulfilled, the mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property, for any such effect is against public policy. Object of real mortgage — a) Immovables, and b) Alienable real rights imposed upon immovables Note: In chattel mortgage, the object is personal property. Kinds of Real mortgages —
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1. 2.
3.
Conventional mortgage—constituted voluntarily by the contracting parties. Legal mortgage—required by law to secure performance or payment to be executed in favor of certain persons. Equitable mortgage—the intention of the parties is to make an immovable merely as a security for the performance of an obligation but the formalities of a real mortgage are not complied with.
Characteristics of real mortgage — 1. Accessory contract —it can only exist if there is a principal obligation, which it secures. 2. Indivisible—even though the debt is divided among the debtors or their successors in interest of the debtor, or the credit among the creditors or successors in interest. 3. Inseparable—the mortgage attaches to the property regardless of who will be its subsequent owner or possessor. As the mortgage is inseparable from the mortgaged property, being a right in rem and a lien on the property, it cannot be substituted with a surety bond. In that case, the right in rem would be converted into a right in personam. 4. Subsidiary —once the obligation has been paid or satisfied, the property must be released from the encumbrance imposed. The mortgage is answerable only if the principal obligation is not paid. 5. Real right —when the mortgage is duly registered or when the purchaser knows of its existence, it is binding upon the latter. 6. Real property —by analogy. 7. Comprehensive—it can secure all kinds of obligations which are not void.
The persons in whose favor 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. (1875a) ________ Additional requisite for valid constitution of real mortgage — the present Article requires indispensably that the mortgage be in a public instrument and be recorded in the appropriate Registry of Property. This is to bind third persons who may chance to deal on the property. OTHERWISE, it is only binding between the parties to the contract. Registration, however, does not validate an otherwise invalid mortgage. The mere fact that a mortgage was registered does not stop any interested party from questioning it that it has no force and effect due to some reasons. Registration cannot be invoked to shield or protect fraud. Registration of mortgage, a matter of right —Reason: It would be too dangerous to the rights of the mortgagee to deny registration of his mortgage because his rights can easily be defeated by a transfer or conveyance of the mortgaged property to an innocent third person. If the purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after , not before, registration. It must follow as a necessary consequence that registration must first be allowed and its validity or effect litigated afterwards.
XPN: By stipulation, in cases where the original properties mortgaged are perishable or subject to inevitable wear and tear or were intended to be sold or used but with the understanding that they would be replaced with others to be thereafter acquired by the mortgagor.
Application: 1. Between an unrecorded equitable mortgage (reflected in a deed of sale with pacto de retro) and a subsequent but recorded second mortgage over the same property, the latter shall prevail specially so when the second mortgagee acted in good faith. 2. However, if the first transaction is a sale but not recorded, and the second transaction is one of mortgage which is recorded, the former prevails. The mortgagor had nothing more to mortgage after the sale.
Cause or consideration in real mortgage —the principal contract, without which it cannot exist as an independent contract.
Right of legal mortgagees—to demand the execution of a formal deed of mortgage and its recording with the Registry of Deeds.
Waiver of security, effect—a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor, including the subject matter of the mortgage, subject to the qualification that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived . ________
Invalidity of mortgage; effect—the principal obligation which it guarantees is not affected at all. What is merely impaired is the mortgagee’s right to foreclosure.
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.
Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (1876) ________
May future property be the object of real mortgage? — Generally, no.
Even then, the deed of real mortgage remains useful as evidence to prove the personal obligation of the debtor to the creditor in an ordinary personal action for collection. ________
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Mortgage is a real right and inseparable —whoever is the possessor of the property mortgaged, when the obligation matures, and there is failure to pay on the part of the debtor, the mortgage is subject to foreclosure. The mortgage follows the property until it is discharged. Alternative action available to mortgagee —A mortgage creditor may institute against the mortgage debtor EITHER (not both): 1. A personal action for debt, or 2. A real action to foreclose the mortgage. Nature of remedy of judicial foreclosure —an action quasi in rem based on a personal claim sought to be enforced against a specific property of the defendant. Its purpose is to have the property seized and sold by court order to the end that, the proceeds thereof be applied to the payment of plaintiff’s claim. The order to sell will be issued upon motion if the mortgagor fails to pay the judgment debt within a period not less than 90 days and not more than 120 16 days. Application: 1. If a third person has purchased the property and the mortgage was foreclosed, the purchaser cannot be held liable for any deficiency, unless he assumed the personal liability of the original debtor. 2. If the creditor has not given his consent to the transfer of the property and debt to another, the debtor remains personally liable to the former. The attempted novation is not binding upon the creditor because he did not give his consent. And because of the nature of the mortgage, the same may still be foreclosed. Right of mortgagee in case of non-payment of the debt — 1. Foreclose the mortgage, and 2. Have the encumbered property sold to satisfy the outstanding indebtedness. Reason for allowing second or subsequent mortgage —the mortgagor remains as the absolute owner of the property. Sale with assumption of mortgage —the assumption by the buyer is a condition to the seller’s consent so that without the approval of the mortgagee, no sale is perfected. The seller remains the owner and mortgagor of the property. A third person who bought the mortgaged property after the mortgage had been foreclosed without the consent of the mortgagee, bought only the mortgagor’s right of redemption. The buyer had no right to intervene in the proceeding for the issuance of a writ of possession of the mortgaged property. ________ Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income 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, with the declarations, amplifications and limitations established by law, whether the
16 This
estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (1877) ________ Things which are deemed included in a mortgage —not limited to the immovable property offered and accepted as security for the principal obligation but extends to all its natural accessions (not industrial), improvements, growing fruits, rents and income, insurance proceeds and expropriation price, in case there is an expropriation instituted by the state or other authorized governmental authorities or corporations. Basis of the law —the ownership of such accession, accessories and improvements subsequently introduced into the property also belongs to the mortgagor being the owner of the principal. XPN: An express stipulation excepting or excluding them from the coverage of the mortgage contract. When does the mortgage lien attach? —when a mortgage is made to include new or future improvements on registered land, the mortgage lien attaches and vests as of the date of registration of mortgage. Mortgage securing future advancements —it is not improper as it is valid and binding between the parties when the intent of the contracting parties is manifest. Dragnet clause —“to subsume all debts of past or future origin”; being a contract of adhesion, the mortgage is to be strictly construed against the party who prepared the agreement. Specified amount in contract not necessarily controlling — basis: intention of the parties. Mortgage in the character of continuing security —a mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage, until the full amount of the advancements are paid. Growing fruits—to be included in the mortgage, it must not have been harvested yet at the commencement of the mortgage. ________ Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878) ________ Alienation or assignment of mortgage credit, allowable —A mortgage is a real right. It directly subjects the mortgaged property to the fulfillment of the principal obligation. Being a right, it may be alienated or assigned by its owner (mortgagor) in favor of a third person. While the mortgage is indivisible, it may be assigned in part because the assignment is between the creditor and a third person, who is not a privy to the contract. Alienation means transfer or conveyance of one’s property to another person. Assignment means the mode of transferring gratuitously or onerously some right of an assignor to an assignee, who by
period does not apply to extra-judicial foreclosure.
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virtue thereof, is allowed to proceed against the debtor for the enforcement of the right. 1. If gratuitous, it must follow the formalities of a donation. If what is involved is a real property, Article 749 must be complied with. 2. If onerous, it may follow the rules on sales whenever applicable. Assignment of credit; requisites— “Art. 1625. An assignment of a credit, right or action shall produce no effect as against third person, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. (1526)”
Definition of assignment of credit —The alienation or assignment of a mortgage, even if not registered is valid between the parties because registration is only asserted to prejudice or bind third persons. There is a valid transfer of ownership to the assignee even if the alienation or assignment is not recorded with the Registry of Property. ________ Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879) ________ Liability of possessor of mortgaged property —The purchaser does not assume liability for the entire debt but only to the extent of the value of the mortgaged property in his possession. It is, however, required that the creditor must have first made a prior demand to the debtor and the latter failed to pay. ________ Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n) ________ Rationale—The prohibition to alienate is contrary to public good inasmuch as the transmission of property should not be unduly impeded. Since, the owner may dispose of the property (without prejudice to any criminal liability under Article 316 of the Revised Penal Code), the buyer, nevertheless, shall respect the encumbrance (which is a real right) on the property. He is answerable to the claim of the mortgagee under Article 2129. A mortgage, which is just an encumbrance on realty, does not extinguish the title of the debtor who does not lose his principal attribute as owner, that is the right to dispose of his property ( jus disponendi ). ________ Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a) ________ Laws that govern contract of real mortgage — 1. As to matters included in Chapter 3 (Articles 2126 to 2131) of the Civil Code governs;
2.
As to matters not included in Chapter 3, the Mortgage Law and the Property Registration Decree (P.D. No. 1529) superseding the Land Registration Act (Act No. 496) shall govern.
The Revised Administrative Code, particularly Section 194 as amended by Act No. 3344 shall also apply. R.A. No. 4882 is the law governing aliens who become mortgagees. Three types of forced sale — a) An extrajudicial foreclosure sale (Act No. 3135); b) A judicial foreclosure sale (Rule 68 of the Rules of Court); and c) An ordinary execution sale (Rule 39 of the Rules of Court). Foreclosure of real mortgage —foreclosure is the remedy available by law to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation 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 includes the sale itself. Basis and time of foreclosure —in a real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation. Effect of foreclosure on a different date —void. Effect of foreclosure: Release from obligation; exception — once the proceeds have been applied to the payment of the obligation, the debtor cannot anymore be required to pay, unless, of course there is a deficiency between the amount of the loan and the foreclosure sale price, because the obligation has already been extinguished. Prematurity of foreclosure —where the debtors have not yet defaulted on the payment of either the principal or the interest of their loans. Mortgage subsists until discharged regardless of change of ownership—all subsequent purchases of the property must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. Remedy of aggrieved party in a foreclosure —unlike an action, an extrajudicial foreclosure of real estate mortgage is initiated by filing a PETITION not with any court of justice but with the office of the sheriff. The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the theory that the lesser the price the easier it will be for the owner to effect the redemption. Writ of possession—the issuance of an order granting the writ of possession is in essence of rendition of judgment within the purview of Section 2, Rule 19 of the Rules of Court. After the consolidation of title in the buyer’s name, the failure of the mortgagor to redeem, the writ of possession becomes a 43 | P
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matter of right. Its issuance to a purchaser in an extrajudicial foreclosure is merely a ministerial function. ________ JUDICIAL FORECLOSURE OF MORTGAGE RULE 68 FORECLOSURE OF REAL ESTATE MORTGAGE Section 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action. Sec. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. Sec. 3. Sale of mortgaged property; effect. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law. Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure.
sale shall terminate; and afterwards, as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper.
Sec. 6. Deficiency judgment. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. Sec. 7. Registration. A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser. Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title. If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. Sec. 8. Applicability of other provisions. The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter.
Nature of judicial foreclosure —an action quasi in rem. It is based on a personal claim against a specific property of the defendant. Its purpose is to have the property seized and sold by court to the end that the proceeds thereof be applied to the payment of plaintiff’s claim.
Sec. 4. Disposition of proceeds of sale. The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it. Sec. 5. How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment, as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due, the
An action for foreclosure of mortgage survives death of mortgagor—because the claim is not a pure money claim but an action to enforce a mortgage lien . Being so, the judgment rendered therein may be enforced by a writ of execution. The action may be prosecuted by the interested person against the executor or administrator independently of the testate or intestate proceedings of the settlement of the mortgagor’s estate “for the reason that such claims cannot in any just sense be considered claims against the estate, but the right to subject specific property to the claim arises from the contract of the debtor whereby he has during life set aside certain property for its payment, and such property does not, except in so far as its value may exceed the debt, belong to the estate.” 44 | P
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Option or remedies of mortgagee in case of death of the debtor— 1. To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim; 2. To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and 3. To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription, without right to file claim for any deficiency. Venue in foreclosure proceedings — Section 1. Venue of real actions. —Actions affecting title to or possession of real property, or interest therein, shall be commenced and tried in the proper court which has jurisdiction over the area wherein the real property involved, or a portion thereof, is situated. x x x (Rule 4, Rules of Court)
Parties cannot change procedure of judicial foreclosure — When judicial foreclosure is considered completed —until the sheriff’s certificate is executed, acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee. The mortgagor is liable for additional interest properly chargeable on the balance of the mortgage indebtedness during the period from the notice of sale to actual sale. This principle is applicable to extrajudicial foreclosures.
Art. 1539. The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract, in conformity with the following rules: If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but, should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter case, the lack in the area be not less than one-tenth of that stated. The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract. The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-tenth of the price agreed upon. Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area of inferior quality, he may rescind the sale. (1469a) Art. 1540. If, in the case of the preceding article, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate. (1470a) Art. 1541. The provisions of the two preceding articles shall apply to judicial sales. (n)
Recovery of deficiency — A foreclosure sale is not complete until it is confirmed and before such confirmation, the court retains control of the proceedings by exercising sound discretion in regard to it either granting or withholding confirmation as the rights and interests of the parties and the ends of justice may require. Confirmation in judicial foreclosure —cuts off all the rights and interests of the mortgagor and of the mortgagee and persons holding under him, and with them the equity of redemption in the property and vests them in the purchaser. Confirmation retroacts to the date of the sale. It is final order, not interlocutory. Exception: If the property has been mortgaged in favor of a bank, banking or credit institutions (Sec. 78, R.A. No. 337), the redemption must be made within one year after the sale.
Note: Only foreclosure of mortgages to banking institutions and those made extrajudicially are subject to legal redemption by express provision of the statute. Requirement in confirmation — 1. Notice, and 2. Hearing. —at which they may have an opportunity to show cause why the sale should not be confirmed and also to inform them of the time when their right of redemption is cut off.
Effects of confirmation of sale —the previous owners lose any right they may have had over the property, which rights are in turn vested on the purchaser of the property. Applicability of Articles 1539 and 1540 in judicial sales —
Judicial foreclosure
Extrajudicial foreclosure
(Rule 68)
(Act No. 3135)
The mortgagee has the right to claim for deficiency in case such deficiency exits
The mortgagee has no right to recover deficiency after the public auction sale, unless there is a stipulation to that effect.
However, if the mortgagor is a third person and not the debtor himself, he is not liable for any deficiency in the absence of a contrary stipulation. Consequently, the action for recovery of deficiency should be filed only against the principal debtor. Deficiency judgment, concept —when the deficiency is embodied in the judgment in a judicial foreclosure proceeding, it is called deficiency judgment. When to file action for recovery of deficiency —10 YEARS from the time the action has accrued. Waiver of mortgage —the mortgagee ay waive the right to foreclose his mortgage and maintain instead a personal action for recovery of the indebtedness. In either case, he is entitled to obtain a deficiency judgment for whatever sum might be due after the liquidation of the property covered by the mortgage. The abandonment of security is recognized also by Rule 86 of the Revised Rules of Court. Restriction—the remedy of the mortgage is NOT CUMULATIVE BUT ALTERNATIVE. Foreclosure, retroactive in effect — 45 | P
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________ EXTRAJUDICIAL FORECLOSURE OF MORTGAGE ACT NO. 3135 AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES Section 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. Sec. 2. Said sale cannot be m ade legally outside o f 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 subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated. Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general 17 circulation in the municipality or city. Sec. 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual work performed, in addition to his expenses. Sec. 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made. Section 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of 18 sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act. Section 7. In any sale m ade under the prov isions of this Act, the 19 purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such
does not require a period of three full weeks. (Bonnevie v. CA, 125 SCRA 122) 18 Now, embodied in Sections 29-31 and 35 of the Rules of C ourt. 19 Now, Regional Trial Court. 17 This
petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately. Section 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal. Section 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in 20 section four hundred and sixty-five of the Code of Civil Procedure . Sec. 10. This Act shall take effect on its approval. Approved: March 6, 1924 (Act No. 3135) Approved: December 7, 1933 (Act No. 4118)
A.M. No. 99-10-05-0 PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE In line with the responsibility of an Executive Judge under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the ExOffice Sheriff, and his staff, and the issuance of commissions to notaries public and enforcement of their duties under the law, the following procedures are hereby prescribed in extrajudicial foreclosure of mortgages: 1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of court who is also the Ex-Officio Sheriff. 2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the Clerk of Court to: a) receive and docket said application and to stamp thereon the corresponding file number, date and time of filing; b) collect the filing fees therefore pursuant to rule 141, Section 7(c), as amended by A.M. No. 00-2-01-SC, and issue the corresponding official receipt; c) examine, in case of real estate mortgage foreclosure, whether the applicant has complied with all the requirements before the public auction is conducted under the direction of the sheriff or a notary public, pursuant to Sec. 4 of Act 3135, as amended; d) sign and issue the certificate of sale, subject to the approval of the Executive Judge, or in his absence, the Vice-Executive Judge. No
20 Now,
found in Section 30, Rules of Court.
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certificate of sale shall be issued in favor of the highest bidder until all fees provided for in the aforementioned sections and in Rule 141, Section 9(1), as amended by A.M. No. 00-2-01-SC, shall have been paid; Provided, that in no case shall the amount payable under Rule 141, Section 9(1), as amended, exceed P100,000.00; e) after the certificate of sale has been issued to the highest bidder, keep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deeds concerned, after which, the records shall be archived. Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extra-judicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier, as provided in Section 47 of Republic Act No. 8791 (as amended, Res. Of August 7, 2001). Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall, apart from the official receipt of the fees, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, which certificate shall serve the purpose of having the application docketed with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial foreclosures to proceed thereat. 3. The notices of auction sale in extrajudicial foreclosure for publication by the sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No. 1079, dated January 2, 1977, and non-compliance therewith shall constitute a violation of Section 6 thereof. 4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle applications for extrajudicial foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs IV assigned in the branches. 5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale to the Clerk of Court before the issuance of the certificate of sale. This Resolution amends or modifies accordingly Administrative Order No. 3 issued by then Chief Justice Enrique M. Fernando on 19 October 1984 and Administrative Circular No. 3-98 issued by the Chief Justice Andres R. Narvasa on 5 February 1998. The Court Administrator may issue the necessary guidelines for the effective enforcement of this Resolution. The Clerk of Court shall cause the publication of this Resolution in a nuewspaper of general circulation not later than August 14, 2001 and furnish copies thereof to the Integrated Bar of the Philippines. This Resolution shall take effect on the 1st day of September of the year 2001. Promulgated this 7th day of August 2001 in the City of Manila.
Extrajudicial foreclosure of mortgage; governing law — Subject matter of Act No. 3135 as amended —covers only real estate mortgages just like the rules on foreclosure of mortgages under the Revised Rules of Court (Rule 68). Basis of extrajudicial foreclosure —if in the mortgage contract covering a real estate mortgage, a clause is incorporated therein giving the mortgagee the power, upon default of the
debtor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property. The authority to sell may be done in a separate document but annexed to the contract of mortgage. The authority is not extinguished by the death of the mortgagor or mortgagee as it is an essential and inseparable part of a bilateral agreement. How foreclosure is initiated—unlike an action, an extrajudicial foreclosure of real estate mortgage is initiated by filing a PETITION not with any court of justice but with the office of the sheriff. It may also be initiated through a Notary Public commissioned in the place where the property is situated. It is a special law that governs particularly extrajudicial foreclosure only. It necessarily excludes the application of the General Banking Act (R.A. No. 337, as amended) Foreclosure by the PNB —governed by this law in relation to Sections 29, 30 and 34 of Rule 39 and not by the PNB Charter. Notice to the public is required before auction sale is held — See Sec. 3 of Act No. 3135, as amended. Requisites of notice of sheriff’s sale—to be valid, must contain: 1. The correct number of the certificate of title, and 2. The correct description of the real property to be sold.
Under normal conditions, the failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale, and a substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale. When publication not required —if the property to be sold in an auction is not more than 1. P50,000.00 (?) 2. P100,000.00—Rural and thrift bank 3. P250,000.00—Cooperative bank Purpose of notice of sale —to inform the public of the nature and condition of the property sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property . If this object is attained, immaterial of the errors and mistakes will not affect the sufficiency of the notice. Personal notice to the mortgagor is not required; exception — when it is stipulated by the parties that notice be given to the mortgagor or his heirs. Posting of notices —in at least 3 public places in the city or municipality where the property is situated, to wit: 1. Sheriff’s office, 2. Assessor’s office 3. Register of Deeds Foreclosure by a rural bank, posting of notices, mandatory — Newspaper of general circulation, concept —it is enough that it is published for the dissemination of local news and general 47 | P
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information, that it has a bona fide subscription list of paying subscribers, and that it is published at regular intervals. 3. If mortgage is the winning bidder, he need not pay the price in cash—in case of surplus in the purchase price, the mortgagee must account for the proceeds as if the price were paid in cash, and in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was received. Redemption of property sold at public auction, within 1 year—See Sec. 6 of Act No. 3135, as amended. Reckoning point of redemption —in cases of registered land is from the date of registration of the certificate of sale since it is only from that date that the same takes effect as conveyance. Applicability of Rule 39, Revised Rules of Court to extrajudicial foreclosures—only on the manner of redemption and computation of interest. To foreclose or not to foreclose, is the prerogative of mortgagee — Stipulation fixing upset price or “Tipo” is void —i.e., the minimum price at which the property shall be sold, to become operative in the event of foreclosure sale at public auction. ________
REDEMPTION IN MORTGAGES Redemption, meaning —a transaction by which the mortgagor reacquires or buys back the property which ay have passed under the mortgage or divest the property of the lien which the mortgage may have created. The right of the debtor, and sometimes of a debtor’s creditors, to repurchase from a buyer at a forced sale property of the debtor that was seized and sold in satisfaction of a judgment or other claim against the debtor, which right usually is limited to forced sale of real property.
Pactum commissorium —a stipulation that the ownership of the property would automatically pass to the vendee in case no redemption is effected within a stipulation period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure.
The general rule in judicial foreclosure is that the mortgagor cannot exercise the right of redemption after the sale has been confirmed by an order of the court. Time when to exercise right of redemption —in all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the term of one year from and after the date of registration of the certificate of sale with the appropriate Registry of Deeds. The rule is different in case of judicial foreclosure. However, the mortgagor of titled real estate acquired under the Public Land Act but foreclosed by a rural bank may redeem said property within two years from the registration of the sheriff’s certificate of sale, and if said mortgagor fails to exercise such right, he or his heirs may still repurchase the land within five years from the expiration of the two-year redemption period. Effect of the exercise of right of redemption —elimination from his title thereto of the lien created by the levy or attachment or judgment or registration of the mortgage thereon. It does not give to the mortgagor a new title, but merely restores to him, the title freed of the encumbrance of the lien foreclosed. Effect of failure to exercise right of redemption —the debtor loses his right over the property . The purchaser will not have the absolute right to a writ of possession which is the final process to carry out or consummate the extrajudicial foreclosure. The purchaser is entitled as a matter of right to consolidate title and to possess the property. Kinds of redemption in foreclosures — 1. Right of redemption—the right of the mortgagor to redeem the mortgaged property within a certain period after it has been sold for the satisfaction of the mortgaged debt. It applies to extrajudicial foreclosures under Act No. 3135 and to foreclosures by banks and other lending institutions. 2.
Nature of redemption —a mere statutory privilege; hence, it must be exercised in the mode and within the period prescribed by the statute. However, an action to redeem by the mortgage debtor is a real action. Requisites of redemption— 1. The redemption must be exercised within 1 year from the date of the registration of the certificate of sale; 2. There must be payment of the purchase price of the property plus 1% interest per month thereon together with the amounts of assessments or taxes thereon, if any, paid by the purchaser after the sale, with the same rate of interest computed from the
date of registration of the sale up to the time of redemption; and Written notice of the redemption must be served on the officer who made the same and a duplicate filed with the proper Register of Deeds.
Equity of redemption—the right of a mortgagor in a judicial foreclosure to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of the sale by the court.
Simply the right of the mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt WITHIN 90 DYAS after the judgment became final. Time to exercise equity of redemption —before but not after the sale has been confirmed by the court. Reckoning time—from the date of the service of such order (the order requiring the debtor to pay the judgment within 90 48 | P
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days which period is mandatory, otherwise the order directing the sale shall be void). In case of appeal, the reckoning point should be from the date of the entry of judgment because the rule, it seems cannot be complied with literally. Ninety day period is substantive right —granted to the mortgage debtor as the last opportunity to pay the debt and save his mortgaged property from final disposition at the foreclosure sale. What the second mortgagee acquires —only the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the first mortgagee.
belong to the judgment obligor until the expiration of the period of redemption. Surplus in purchase price —they are constructively, at least, real property and belong to the mortgagor or his assigns. Mortgage, a trustee for the surplus price —a senior mortgage, realizing more than the amount of his debt on a foreclosure sale, is regarded as a trustee for the benefit of junior encumbrancers. ________ CHAPTER 4 —ANTICHRESIS
Payment in check, effect —the redemption is not rendered invalid, but the sheriff undoubtedly places himself in a position where he can be held liable to the purchaser at a public auction if any damage has been suffered by the ;latter as a result of the medium by which payment was made. Article 1249 is not applicable.
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. (1881) ________
Purchase price—the amount payable is no longer the judgment debt but the purchase price at the auction sale.
Characteristics of antichresis — 1. It is a formal contract . The amount of the principal and of the interest agreed upon must be specified in writing. Otherwise, the antichretic contract is void. 2. It is an accessory contract . It cannot exist without a valid principal obligation. 3. It deals only with immovable property. 4. The creditor has the right to receive the fruits of the immovable. 5. It is a real right , if registered. 6. It is a real contract because it requires the delivery of the property to the creditor in order that the creditor may enjoy the fruits. 7. It can guarantee all kinds of valid obligations.
Exception—redemption of properties mortgaged with the Philippine National Bank and the Development Bank of the Philippines and foreclosed either judicially or extrajudicially are governed by special laws which provide for the payment of all the amounts owed by the debtor . General Banking Act provides for a different rule — SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (78a)
Rents, earnings and income of property pending redemption; rule—Section 32, Rule 39 which explicitly provides that the purchaser or redemptioner shall not be entitled to receive the rents, earnings or income of the property sold on execution, or the value of the use and occupation thereof when such property is in the possession of a tenant. Such rents, etc. shall
Nature of rights and duties of the antichretic creditor —similar to those of the mortgagee in possession under the equity jurisdiction of England and America. Definition of antichresis —by the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. Distinctions between antichresis and pledge — ANTICHRESIS PLEDGE Object is immovable property
Object is personal property
Perfected by mere consent. However, delivery is required only to allow creditors to receive the fruits and income
Object must be delivered to pledgee or third person designated by common consent of the parties
Principal and interest must be specified in writing. Otherwise, contract is void
Principal and interest need not be specified in writing. Oral evidence may be allowed to prove the same
Antichresis and mortgage, distinguished— ANTICHRESIS MORTGAGE The creditor acquires the right to receive the fruits of the property of the debtor which
The mortgagee does not have the right to receive the fruits
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is under antichresis
of the property mortgaged
Property is delivered to the creditor
The property is generally not delivered to the mortgagee. The mortgagor retains the possession
Creditor pays the taxes and charges upon the estate unless there is a contrary stipulation
Mortgagee has no obligation to pay taxes upon the estate
Creditor applies the fruits of the property for payment of interest and principal of the credit
Mortgagee has no obligation to receive the fruits and to apply the value thereof to the payment of the obligation
Rights of antichretic creditor — 1. To receive the fruits and income of the property; 2. To retain the property until the debt is fully paid; 3. To have the property sold upon non-payment of the debt when due; and 4. Right of preference to the proceeds of the sale of the property. Prescription, not available to creditor —prescription as a mode of acquiring ownership is not available to the creditor because his possession of the property is not in the concept of an owner but that of a mere holder during the existence of the contract. ________ Art. 2133. The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. (n) ________ How to determine the amount of payment —the actual market value of the fruits harvested or collected at the time of the payment of the interest and/or principal. Mutuum has an analogous provision (See Art. 1958). The reason is to prevent the use of the contract of antichresis for circumventing the provisions of the Usury Law which placed a limit or ceiling on the interests to be charged on loans (suspended ). Creditor must render an accounting —the mortgagee in possession, as antichretic creditor, of the mortgaged land is obliged to account to the debtor for the fruits thereof less the expenses incurred. ________ Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. (n) ________ Form of contract of antichresis, for its validity — Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable , or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)
Both the amount of the principal and interest to be charged must be specified in the written contract. Otherwise, the contract of antichresis is void. ________ Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the estate. He is also bound to bear the expenses necessary for its preservation and repair. The sums spent for the purposes stated in this article shall be deducted from the fruits. (1882) ________ Obligations of antichretic creditor — 1. To pay the taxes and charges assessable against the property like real estate taxes and others; 2. To bear the necessary expenses for the preservation of the property; 3. To bear the expenses necessary for the repair of the property; and 4. To apply the fruits received for payment of the outstanding interests, if any, and thereafter of the principal. Some expenses of the creditor are mere advances —the expenses (nos. 1, 2 and 3) incurred by the antichretic creditor shall be deducted from the fruits of the property. Ultimately, it is the owner of the property who shoulders the same. ________ Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor. But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may always compel the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to the contrary. (1883) ________ When can the antichretic debtor reacquire the possession of his property?—after having fully paid his obligations to the creditor. Until there is full payment of the obligation, the property shall stand as security therefor. Exemption of creditor from the obligations imposed by preceding article —the second paragraph of Article 2136 should have been included in Article 2135 where it is essentially relevant. To be exempted from the obligations imposed in the preceding paragraph, the creditor may compel the debtor to reenter into the property. Exception: if there is a contrary agreement stipulating that the debtor is not subject to compulsion, the creditor shall continue his possession of the property. ________ Art. 2137. The creditor does not acquire the ownership of the real estate for non-payment of the debt within the period agreed upon.
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Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply. (1884a) ________ Pactum commissorium, prohibited —the only right accorded by the law to the creditor is the enjoyment of the fruits of the property, the value of which will be applied for the payment of the obligations of the debtor in the following order-interest, first and thereafter the principal, which agreement is more for the benefit of the creditor. If the parties have agreed that the immovable shall become the property of the creditor in case of non-payment of the debtor’s obligation at the stipulated time, said agreement is pactum commissorium and is void. Remedy of creditor in case of non-payment of his credit — 1. File an action for collection; or 2. File a petition for the public sale of the property. The rules on foreclosure of mortgage shall apply. ________ Art. 2138. The contracting parties may stipulate that the interest upon the debt be compensated with the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the principal. (1885a) ________ Interest to be set off or compensated by fruits —this Article is not necessary anymore. ________ Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable to this contract. (1886a) ________ Applicability of provisions governing pledge and mortgage to antichresis—See last paragraph of Article 2085; and Articles 2089 to 2091. ________
credit of the mortgagor’s unsecured creditor. The mortgagee is not obligated to file an “independent action” for the enforcement of his credit.
In a chattel mortgage, may the chattels be sold in a private sale?—Yes, if there is an agreement between the parties. Section 14 of the Chattel Mortgage Law indicates how the chattel mortgage should be foreclosed, nevertheless, it is valid for the parties to stipulate that if the debtor violated the conditions of the mortgage, the creditor may sell, at a private sale and without prior notice, the mortgaged property for the purpose of applying the proceeds of the sale to the payment of the debt. Said stipulation is not contrary to law or public order. Characteristics of chattel mortgage — 1. It is a formal contract because it must be embodied in a public instrument and recorded in the Chattel Mortgage Register; 2. It is an accessory contract because its existence depends upon an existing valid principal obligation; 3. It is a unilateral contract because the obligation is only on the part of the creditor to free the chattel from encumbrance upon payment of the principal obligation; 4. It does not convey dominion but is only a security; 5. It creates a real right (derecho real, jus in re or jus ad rem) or a lien which is being recorded and follows the chattel wherever it goes. Distinctions between chattel mortgage and pledge — CHATTEL MORTGAGE PLEDGE As to delivery of property
Delivery of the property is not necessary
Delivery of the property is necessary
As to registration
Registration with the Chattel Mortgage Register is required for its validity
Registration is not required for its validity
As to procedure of sale
Section 14, Act No. 1508 applies
Article 2112 applies
As to excess in case of foreclosure
CHAPTER 5 —CHATTEL MORTGAGE Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n) ________ Chattel mortgage, definition—A contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. The registration in the Chattel Mortgage Register makes the chattel mortgage valid between the parties and effective against third persons. It is a requisite for the validity of the mortgage. Actual delivery is not necessary. Essence of chattel mortgage —the mortgaged chattels should answer for the mortgaged credit and not for the judgment
Excess over the amount due pertains to the debtor (mortgagor)
Excess pertains to the creditor (pledgee) unless it is otherwise agreed
As to recovery of deficiency in case of foreclosure
Creditor (mortgagee) is entitled to recover deficiency, except if the chattel mortgage is constituted as a security for the purchase of personal property payable in installments (Article 1484 [3])
Creditor (pledgee) is not entitled to recover deficiency in all events even if there is a stipulation to that effect between the parties (Art. 2115)
If there is no registration, there is no chattel mortgage. But, if there is delivery, the contract becomes a pledge. So if there is no registration and there is no delivery, it follows legally there is neither a chattel mortgage nor a pledge. ________
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Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage Law shall be applicable to chattel mortgages. (n) ________ Laws that govern chattel mortgages — a) Chattel Mortgage Law (Act No. 1508); b) Provisions of the Civil Code on pledge. In case of conflict however, with the Chattel Mortgage Law, the latter shall prevail; c) Revised Administrative Code; d) Revised Penal Code (Art. 319); e) Other Special Laws like the Motor Vehicles Law, LTO, etc. With regard to the mortgages of vessels, the governing law is the Ship Mortgage Decree of 1978 (P.D. No. 1521). Manner of constituting a chattel mortgage —the registration of a personal property in the Chattel Mortgage Register in the Office of the Registry of Property as security for the performance of a principal obligation. If the personal property is situated in a province, different from the province where the mortgagor resides, the registration must be done with the Registry of Deeds of both provinces. If cities are involved, then in the registers of both cities. Difference in registration of real mortgage and chattel mortgage—a deed of real mortgage is considered registered once recorded in the Entry Book. However, a chattel mortgage must be recorded: 1. Not only in the Entry Book; 2. But also in the Chattel Mortgage Register. Effect of non-registration of chattel mortgage —if a chattel mortgage is not registered with the Chattel Mortgage Register, it is nevertheless, binding between the parties.
documentation of such vessel to be effective as against third persons. Motor vehicles—in order to affect third persons should not only be registered in the Chattel Mortgage Registry, but also with the Land Transportation Office (LTO) as required by said law. Extent of chattel mortgage —See last paragraph of Sec. 7 of the Chattel Mortgage Law. When after-acquired property be included — A stipulation in the chattel mortgage, extending its scope and effect to after-acquired property, is valid and binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods. A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed.
Legal significance of registration—tantamount to the symbolical delivery of the chattel to the mortgagee, which is equivalent to actual delivery. Registration 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. It is a requisite for its validity.
A real estate mortgage if not recorded with the Registry of Property, is nevertheless binding between the parties (Art. 2125). Object of chattel mortgage —personal property which must be sufficiently described to enable the parties or other interested persons to identify the same after a reasonable investigation and inquiry. Minute and detailed description is not required. The following are some extraordinary properties which are considered as proper objects of chattel mortgage— 1. An interest in business; 2. Shares of stocks in a corporation; 3. Machinery installed in a leased land treated by the parties as personal property; 4. A house intended to be demolished; 5. A house of strong materials (which is actually a real property) may be considered as personal property for purposes of constituting a chattel mortgage or as long as the contracting parties so agree and no innocent third party is prejudiced. This is anchored on estoppel . Vessels—the registration of the mortgage must be done in the Office of the Philippine Coast Guard of the port of
Time or period when registration is to be made —the law is silent on the time or period when registration should be made. As held by the Court of Appeals, “the law is subs tantially 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.” Economic purpose of Chattel Mortgage Law —to promote business and trade and to give impetus to the country’s economic development. It has greatly facilitated sales of goods and merchandise. Effect of an increase in mortgage credit —a mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date of the mortgage. The increase in the mortgage becomes a new mortgage . Effect of obtaining a personal judgment on the mortgage lien—the mortgage lien is deemed abandoned when the creditor sued the debtor and obtained a personal judgment. Period to foreclose chattel mortgage —thirty days from the time the condition has been broken. 52 | P
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The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is given a period of grace 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. Affidavit of good faith, concept —an oath of the contracting parties where they “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 just and valid obligation and one not entered into for the purpose of fraud.” (Sec. 5, Chattel Mortgage Law)
Sec. 5. Form. — A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith. FORM OF CHATTEL MORTGAGE AND AFFIDAVIT. ( omitted ) FORM OF OATH. ( omitted ) FORM OF CERTIFICATE OF OATH. ( omitted ) Sec. 6. Corporations. — When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made and subscribed by one member thereof.
Purpose of affidavit of good faith —transforming an already valid mortgage into “preferred mortgage.”
Sec. 7. Descriptions of property. — The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.
Chattel mortgagee has a superior right to mortgagor’s judgment creditor—
If the property mortgaged be large cattle," as defined by section one of Act 22 Numbered Eleven and forty-seven , and the amendments thereof, the description of said property 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 or animals, together with the number and place of issue of such certificates of ownership.
Application of proceeds of public sale —in the following order: 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; and 4. The balance, if any, shall be paid to the mortgagor or person holding under him. Remedy of mortgagee when possession of chattel cannot be obtained for purposes of public sale; replevin —the appropriate action to recover possession preliminary to the extrajudicial foreclosure of a chattel mortgage. ________ ACT NO. 1508 AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE MORTGAGES SO EXECUTED Section 1. The short title of this Act shall be "The Chattel Mortgage Law." Sec. 2. All personal property shall be s ubject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage. 21
Sec. 3. Chattel mortgage defined. — A 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. Sec. 4. Validity. — A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the property is sit uated in a different province from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.
21 The
Code Commission considered this as inaccurate. See Article 2140
If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himse lf 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 mortgage 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 thereof, if any shall be paid to the mortgagor or those entitled to the same.
A chattel mortgage shall be 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. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after the breach thereof, or 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. 9-12. ( Repealed by Art. 367, Revised Penal Code )
Sec. 13. When the condition of a 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 by the terms of this Act. Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. — The mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is situated, provided at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent mortgages of the
22 Now
511 of the Administrative Code.
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time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the sale. The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the register of deeds where the mortgage is recorded, and the register of deeds shall record the same. The fees of the officer for selling the property shall be the same as in the case of sale 23 on execution as provided in Act Numbered One hundred and ninety , and the amendments thereto, and the fees of the register of deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand. If the sale includes any "large cattle," a certificate of transfer as required by 24 section sixteen of Act Numbered Eleven hundred and forty-seven shall be issued by the treasurer of the municipality where the sale was held to the purchaser thereof. Sec. 15. ( Superseded by Sections 115 and 116 of the Property Registration Decree ) Sec. 16. This Act shall take effect on August first, nineteen hundred and six. Enacted, July 2, 1906
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TITLE XIX. - CONCURRENCE AND PREFERENCE OF CREDITS
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CHAPTER 1 —GENERAL PROVISIONS Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) ________ Art. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n) ________ Art. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband who is insolvent, the administration of the conjugal partnership of absolute community may, by order of the court, be transferred to the wife or to a third person other than the assignee. (n) ________ Art. 2239. If there is property, other than that mentioned in the preceding article, owned by two or more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's obligations. (n) ________ Art. 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings. (n) ________ 23 Now
Rule 141, section 7 of the Rules of C ourt. Section 523 of the Administrative Code. 25 See PowerPoint presentation of Atty. Vincent Bolivar. 24 Now
CHAPTER 2 —CLASSIFICATION OF CREDITS Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: (1) Duties, taxes and fees due thereon to the State or any subdivision thereof; (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determi ned proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; (5) Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus made, repaired, kept or possessed; (6) Claims for laborers' wages, on the goods manufactured or the work done; (7) For expenses of salvage, upon the goods salvaged; (8) Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; (9) Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and for thirty days thereafter; (10) Credits for lodging and supplies usually furnished to travellers by hotel keepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; (11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested; (12) Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, but not on money or instruments of credit; (13) Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price of the sale. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure. (1922a) 54 | P
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________ Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right: (1) Taxes due upon the land or building; (2) For the unpaid price of real property sold, upon the immovable sold; (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works; (5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged; (6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved;
(4) Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or illness resulting from the nature of the employment; (5) Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the insolvency; (6) Support during the insolvency proceedings, and for three months thereafter; (7) Fines and civil indemnification arising from a criminal offense; (8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors, when properly authorized and approved by the co urt; (9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1; (10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1; (11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits;
(12) Damages for death or personal injuries caused by a quasidelict;
(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;
(13) Gifts due to public and private institutions of charity or beneficence;
(9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a) ________
(10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a) ________ Art. 2243. The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be satisfied. (n) ________ Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (1) Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; (2) Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; (3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own;
Art. 2245. Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. (1925) ________ CHAPTER 3 —ORDER OF PREFERENCE OF CREDITS Art. 2246. Those credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers. ________ Art. 2247. If there are two or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof. (1926a) ________ Art. 2248. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. ________ 55 | P
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