Credit Transactions

CREDIT TRANSACTIONS
CREDITTRANSACTIONS Q:Whatiscredit? A: It is a persons ability to borrow money by virtue of confidence or trust reposed in him by thelenderthathewillpaywhathemaypromise. Q:Whatiscredittransaction? A: It refers to agreement based on trust or belief of someone on the ability of another person to complywithhisobligations. Q:Whatdocredittransactionsinclude? A:Theyincludealltransactionsinvolvingloansof: 1. goods 2. servicew 3. money extended to another either gratuitously or onerously with a promisetopayordeliverinthefuture. Q:Whatissecurity? A:Itissomethinggiven,deposited,orservingasa means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in theproperty. Q:Whatarethetypesofsecurity? A: Personal: when an individual become a surety
oraguarantor. depend on the existence of another contract. (e.g. commodatum and mutuum) Accessory contracts They have to depend on another contract. These accessory contracts depend on the existence of a principal contract of loan. (e.g. guaranty proper, suretyship, pledge, mortgage and antichresis)
b.
3.
Astotheirconsideration a. Onerous This is a contract where

there is consideration or burden imposedlikeinterest. GratuitousThisisacontractwhere there is no consideration or burden imposed.(e.g.commodatum)
b.
Q:Whatisbailment? A: It is the delivery of a personal property for some particular use, or on mere deposit, upon a contract, express or implied, that after the purpose has been fulfilled, it shall be redelivered tothepersonwhodeliveredit,orotherwisedealt with according to his directions, or kept until he reclaimsit,asthecasemaybe.
Note: Generally, no fiduciary relationship is created by bailment. No trusteebeneficiary relationship is created.
Real or property: when an encumbrance is

madeonproperty.
Q:Whatarethekindsofcredittransactions? A: 1. Ascontractsofsecurity a. Contracts of real security These

are contracts supported by collateral/s or burdened by an encumbrance on property such as mortgageandpledge. Contracts of personal security These are 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 asinsuretyorguaranty.
b.
2.
Astotheirexistence a. Principal contracts They can exist

alone. Their existence does not
Q: What are the contractual bailments with referencetocompensation? A: 1. For the sole benefit of the bailor (gratuitous) e.g.gratuitousdeposit,commodatum 2. For the sole benefit of the bailee (gratuitous) e.g.commodatum,mutuum 3. For the benefit of both parties (mutual benefitbailments) a. e.g. deposit for compensaton, involuntary deposit, pledge andbailmentsforhire: b. hireofthingstemporaryuse c. hire of service for work or labor d. hire of carriage of goods for carriage e. hireofcustodyforstorage
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII UNIVERSITYOFSANTOTOMAS VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA Facultad de Derecho Civil V ICE C HAIR FOR A DMINISTRATION AND F INANCE : J EANELLE C. L EE VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
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UST GOLDEN NOTES 2011
I.LOAN Q:Whatisloan? A: It is a contract where 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 is called a commodatum; or money or other consumable things, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply calledaloanormutuum(Art.1933,NCC) Q:Whatarethekindsofloan? A: 1. Commodatum where the bailor (lender) delivers to the bailee (borrower) a nonconsumable thing so that the latter may use it for a given timeandreturnthesamething 2. Mutuum where the bailor (lender) delivers to the bailee (borrower) money or other consumable thing upon the condition that the latter shall pay same amountofthesamekindandquality Q:Whatmaybetheobjectofacontractofloan? A:Itdependsuponthekindofloan. 1. Commodatum the object is generally notconsumable; 2. Mutuumtheobjectisconsumable. Q: Distinguish consumable from non consumablethings. A: A thing is consumable when it cannot be used in a manner appropriate to its nature without being consumed. (Art. 418) (e.g. food, firewood, gasoline) On the other hand, a nonconsumable thing is a movable thing which can be used in a manner appropriate to its nature without it being consumed.(Art.418)(e.g.car,television,radio) Q:Distinguishfungiblefromnonfungiblethings. A: Fungible thing is one where the parties have agreedtoallowthesubstitutionofthethinggiven or delivered with an equivalent thing (3 Manresa 58). Nonfungible thing is one where the parties have the intention of having the same identical thingreturnedaftertheintendeduse(Ibid).
Note: As to whether a thing is consumable or not, it dependsuponthenatureofthething. As to whether it is fungible or not, it depends upon theintentionoftheparties. Fungibles are usually determinedby number, weight ormeasure.
Q:Arenonfungiblethingsirreplaceable? A: GR: Nonfungible things are irreplaceable. They must be returned to the lender after the purposeoftheloanhadbeenaccomplished. XPN: Nonfungible things may be replaced by agreement of the parties. In such case, the contractisbarterandnotloan. Q:Distinguishloanfrom: Credit; Discount; Rentorlease;and Barter. A:
CREDIT Abilitytoborrowmoney byvirtueofthe confidencereposedby thelenderuntohimthat hewillpaywhathehas promised DISCOUNT Interestisdeductedin advance Alwaysondoublename paper RENT Theownerofproperty doesnotlosethe ownership;heloseshis controlovertheproperty rentedduringtheperiod ofcontract Landlordtenant relationship BARTER Subjectmatterarenon fungiblethings Alwaysonerous Thereisamutualsale resultinginthetransfer ofownershiponboth sides Thepartiesdonotreturn thethingssubjectofthe exchange LOAN Deliverybyonepartyandthe receiptbytheotherpartyofa givensumofmoney,uponan agreement,expressedorimplied, torepaythesumloaned,withor withoutinterest LOAN Interestistakenattheexpiration ofacredit Generallyonasinglenamepaper LOAN
Thethingloanedbecomesthe propertyoftheobligor
Obligorobligeerelationship LOAN Subjectmatterismoneyorother fungiblethings Maybegratuitousoronerous inmutuum,thereistransferof ownership,thereisnosale incommodatum,thebailee returnsthethingafterthe expirationoftheperiodagreed upon
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CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM
CREDIT TRANSACTIONS
Q:Whatisbarter? A: It is a contract whereby one of the parties bindshimselftogiveonethinginconsiderationof the others promise to give another thing. (Art. 1638,NCC) Q: What is the legal effect of an accepted promisetodeliversomethingbywayofmutuum orsimpleloan? A: It is binding upon the parties, but the mutuum or simple loan itself shall not be perfected until the delivery of the object of the contract (Art. 1934,NCC). Q: What is the effect if the loan is for an unlawfulpurpose? A: If the loan is executed for illegal or immoral or unlawful purpose or use, the contract is void. The bailor may immediately recover the thing before any illegal act is committed and provided he is innocent or in good faith (Arts. 1411 and 1412, NCC). A.COMMODATUMANDMUTUUM COMMODATUM Q:Whatiscommodatum? A:Itisacontractwhereoneoftheparties(bailor) delivers to another (bailee) something not consumable so that the latter may use the same foracertaintimeandthereafterreturnsit. Q: What are the characteristics of a contract of commodatum? A: 1. Real contract delivery of the thing loanedisnecessaryfortheperfectionof thecontract 2. Unilateral contract once subject matter is delivered, creates obligations on the part of only one of the parties (theborrower) 3. Essentiallygratuitous 4. Purpose is to transfer the temporary useofthethingloaned 5. Principalcontract 6. Purelypersonalcontract Q:Whataretheelementsofcommodatum? A:Theremustbe: 1. abaileeandbailor 2. 3. thebaileeacquirestheuseofthething itmustbegratuitous
Q:Whatcouldbethesubjectofcommodatum? A: GR: Under Art. 1933, the subject matter of commodatum must be nonconsumable becausethethingmustbereturned. XPN: 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 exhibitionpurposes.Aftertheaffair,thesame and identical goods shall be returned to the lenderorbailor(Art.1936,NCC). Q:Whatmaybetheobjectofcommodatum? A:Bothmovableandimmovablepropertymaybe theobjectofcommodatum.(Art.1937,NCC) Q:Whatarethekindsofcommodatum? A: 1. Ordinary commodatum bailor cannot just demand the return of the thing at will, because there is a period agreed uponbytheparties. 2. Precarium one whereby the bailor may demand the thing loaned at will in thefollowingcases: a. if the duration of the contract hadnotbeenstipulated; b. if the use to which the thing loanedshouldbedevotedhad notbeenstipulated;or c. if the use of the thing is merely by tolerance of the owner
Note: The word owner in Art. 1947 (2) is not proper because the bailor need not be the owner of the thing. (Pineda, Credit Transactions and Quasi contracts, p. 26, 2006ed)
Q: What are the consequences of the purely personalcharacterofcommodatum? A: GR: Commodatum is purely personal in character hence death of either bailor or bailee extinguishes the contract (Art. 1939,NCC)
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XPN: By stipulation, the commodatum is transmitted to the heirs of either or bothparty. In case of lease of the thing subject of commodatum: GR: The bailee can neither lend nor lease the object of the contract to a thirdperson. XPN: Members of the bailees household may make use of the thing loaned.
Note: Members of the bailees household arenotconsideredasthirdpersons.
If fungible thing was loaned, the borrower is obliged to pay the lender another thing ofthesamekind,qualityandquantity.
Note: Mere issuance of checks does not perfect the contractofloan.Itisonlyafterthecheckshavebeen encashed that the contact may be deemed perfected. Further, when the movable thing delivered in loan is not to be returned to the bailor, but may be substituted or replaced with another equivalentthing,itisafungiblething.
Q:Distinguishcommodatumfrommutuum. A:
COMMODATUM MUTUUM Object Nonconsumable(Non Consumable fungible) Cause Gratuitous,otherwiseitisa Mayormaynotbe lease gratuitous Purpose Useortemporarypossession ofthethingloanedbut GR: not its fruit because the bailorremainstheowner Consumption XPNs: use of the fruits is stipulated; enjoyment of the fruits isstipulated;or enjoyment of the fruits isincidentaltoitsuse SubjectMatter Real orpersonalproperty Generallynonconsumable Onlypersonal thingsbutmaycover property consumablesifthepurpose ofthecontractisfor exhibition. Ownershipofthething Retainedbythebailor Passestothedebtor Thingtobereturned Equalamountofthe Exactthingloaned samekindandquality Whobearsriskofloss Bailor Debtor Whentoreturn Incaseofurgentneedeven Onlyafterthe beforetheexpirationof term(thecontractisinthe expirationoftheterm meantimesuspended) Contract Contractof Contractofuse consumption
XPNtotheXPN: Contrarystipulation;or Natureofthethingforbidssuchuse.

Note: Household members are those who permanently living or residing within the same residence including thehouseholdhelpers.
Q:Distinguishcommodatumfromlease. A:
COMMODATUM Realcontract Objectisanon consumable(non fungible)thing Essentiallygratuitous LEASE Consensual Objectmayevenbe workorservice Onerous
MUTUUM Q:Whatismutuum? A: It is a contract whereby one of the parties called the lender delivers to another called the borrower, money or other consumable thing subject to the condition that the same amount of thesamekindandquantityshallbepaid. Q: What are the characteristics of a contract of mutuum? A: Borroweracquiresownershipofthething. If the thing loaned is money, payment must be made in the currency which is legal tender in the Philippines and in case of extraordinary deflation or inflation, the basis of payment shall be the value of the currency at the time of the creation oftheobligation.
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CREDIT TRANSACTIONS
Q:Distinguishmutuumfrom: Lease;and Barter.(seeArticle1954) A:
MUTUUM Objectismoneyorany consumable(fungible) thing Thereistransferof ownership Creditordebtor relationship Unilateral LEASE Objectmaybeanything, whethermovableor immovable,fungibleor nonfungible Notransferofownership Lessorlesseerelationship Bilateral BARTER Subjectmatterarenon fungiblethings Alwaysonerous Thereisamutualsale resultinginthetransfer ofownershiponboth sides
MUTUUM Subjectmatterismoney orotherfungiblethings Maybegratuitousor onerous Whileinmutuum,there istransferofownership, thereisnosale
contract which cannot be perfected until the deliveryoftheobject. Q: What are the governing rules on payment of loan? A: It depends on the object of the contract of loan. Money governed by Arts. 1249 and 1250, NCC GR: Payment shall be made in the currencystipulated. XPN: If not, that currency which is legal tenderinthePhilippines.
Note: In case of extraordinary inflation value of the currency at the time of the creationoftheobligation.
Consumable or fungible thing debtor or borrower shall pay another thing of the same kind, quality and quantity even if it should change in value. If cannot be done, the value of the thing at the time of its perfection (delivery) shall be the basisofthepaymentoftheloan. Q:Mayapersonbeimprisonedfornonpayment ofdebt? A: No. This is because of the constitutional provision under Article III, Section 3 of the 1987 Constitution which expressly provides that no person shall be imprisoned for nonpayment of a debtorpolltax. Q: Can estafa be committed by a person who refusestopayhisdebtordeniesitsexistence? A: No, because the debtor in mutuum becomes the owner of the thing delivered to him. If he consumed or disposed of the thing, the act which is an act of ownership is not misappropriation. Hence, there is no basis for a criminal prosecution. Q: Does destruction of the thing loaned extinguishonesobligationinasimpleloan? A: The destruction of the thing loaned does not extinguish ones obligation to pay because his obligation is not to return the thing loaned but to payagenericthing.
Themoneyor consumablething Thepartiesdonotreturn loanedisnotreturned thethingssubjectofthe butthesameamount exchange ofthesamekindand quantityshallbepaid. Q:Whatisthecauseinasimpleloan? A: 1. As to the borrower the acquisition of thething 2. As to the lender the right to demand the return of the thing loaned or its equivalent (Monte de Piedad v. Javier, CA,36Off.Gaz.2176). Q:Whatmaybetheobjectofmutuum? A:Moneyorfungibleandconsumablethings. Q:Canloanofmoneybepayableinkind? A: Yes, if there is an agreement between the parties(Art.1958,NCC). Q:Whenisacontractofsimpleloanperfected? A: Real contracts, such as deposit, pledge and commodatum, are not perfected until the deliveryoftheobjectoftheobligation.(Art.1316, NCC) While mutuum or simple loan is not mentioned, it has the same character as commodatum. Hence, mutuum is also a real
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Q: Who are the parties to a commodatum? Distinguish. A: 1. Bailor/Comodatario/Commodans the giver/ lender the party who delivers the possession or custody of the thing bailed. 2. Bailee/Comodante/Commodatarius the recipient/ borrower the party who receives the possession or custody of thethingthusdelivered. B.OBLIGATIONSOFTHEBAILORANDBAILEE BAILOR OBLIGATIONSOFTHEBAILOR Q:Whataretheobligationsofthebailor? A: Allow the bailee the use of the thing loaned forthedurationoftheperiodstipulated or until the accomplishment of the purpose. Refund the extraordinary expenses the bailee incurred for the preservation of thething. GR: The bailee must bring to the knowledge of the bailor such expenses beforeincurringthesame. XPN: In case there is urgency and delay wouldcauseimminentdanger.
Note: If the extraordinary expenses arise on the occasion of the actual use of the thing loaned by the bailee, the expenses shall be borne by the bailor and bailee equally, even though the bailee is without fault.(Art.1949,NCC)
3. 4. 5.
thebailorisawarethereof; he does not advise the bailee of the same;and the bailee suffers damages by reason of saidflawordefect.
To be liable for damages for known hidden defects. Cannot exempt himself from payment of expenses or damages by abandonment ofthethingtobailee. Q:Whenisthebailorliableforhiddendefects? A:Whenthefollowingrequisitesarepresent: 1. there was a flaw or defect in the thing loaned; 2. theflawordefectishidden;
Q: What is the cause of action against the bailor whodidnotdisclosetheflawordefect? A: Action for recovery of damages on the ground ofquasidelictbecauseofnegligenceorbadfaith. RIGHTSOFABAILOR Q: Can the bailor demand the return of thing loanedanytimehepleases? A: GR:No XPNs: 1. Incaseofurgentneedbythebailor 2. Incaseofprecarium 3. If the bailee commits an act of ingratitudetothebailor(Art.1948,NCC), towit: a. If the bailee should commit some offenses against the person, honor or the property of the bailor, or his wife or children under his parental authority; b. If the bailee imputes to the bailoranycriminialoffense,or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee, his wife or children under his authority;or c. If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor.
Note: The rationale for the application of Art. 765 which refers to donations is the fact that commodatum,likedonation,isgratuitousinnature.
Q: If the contract of commodatum is a precarium,willArt.1942(1)and(2)stillapply? A: It depends. If there has been a demand on the part of the bailor before the loss of the thing underthecircumstancessetforthunderArt.1942 (1)and(2)andthebaileedidnotreturnthething,
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CREDIT TRANSACTIONS
then the latter is liable. However, if there has beennodemandonthepartofthebailorandthe thing was lost, the bailor is estopped and cannot hold the bailee liable for under a contract of precarium, the use of the thing by the bailee depends on the pleasure of the bailor and no time is fixed for such use. Hence, demand on the part of the bailor is needed for the return of the thing. Without such, loss of the thing on the handsofthebaileewillnotmakehimliable.
Note: Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: Ifhedevotesthethingtoanypurposedifferent fromthatforwhichithasbeenloaned; If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; xxx
under Articles 1207 and 1208. Solidarity is provided to safeguard effectively the rights of the bailoroverthethingloaned.
Note: The concurrence of two or more creditors or two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (Art. 1207) If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary doesnot appear, the credit or debt shallbe presumedtobedividedintoasmanyequalsharesas there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits.(Art.1208)
Q:Mustthebailorbetheownerofthething loaned? A: No. The bailor in commodatum need not be the owner of the thing loaned. It is sufficient that he has possessory interest over subject matter (Art.1938,NCC).
Note: A mere lessee or usufructuary may gratuitously give the use of the thing leased or in usufruct, provided there is no prohibition against such.
OBLIGATIONSOFTHEBAILEE Q:Whataretheobligationsofabailee? A:
Astoordinary expenses Payfortheordinaryexpensesfor theuseandpreservationofthe thing Liableforlosseventhrough fortuitouseventwhen [askdl]: when being able to save either of the thing borrowedorhisownthing, hechosetosavethelatter he keeps it longer than the period stipulated, or after the accomplishment of its use(indefault); the thing loaned has been delivered with appraisal of itsvalue when he lends or leases it to third persons who are not members of his household there is deviation from the purpose Notliableforthedeteriorationof thethingloanedcausedbythe ordinarywearandtearofthething loaned.(Art.1943) Note:Whentherearetwoormore bailees,theirliabilityissolidary.
BAILEE Q: If there are two or more bailees to a contract of commodatum, what is the nature of their liability? A: When there are 2 or more bailees to whom a thing is loaned in the same contract, they are liablesolidarily.(Art.1945,NCC)
Note:Theirliabilityissolidaryinordertoprotectthe bailorsrightsoverthethingloaned.
Astothelossof thethingin caseof fortuitous event
Q: Following the principle of autonomy of contracts, may the parties to a contract of commodatum validly stipulate that the liability ofthebaileesshallbejoint? A: No. Article 1245 expressly provides that in a contract of commodatum, when there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. It 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
Astothe deterioration ofthething loaned
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RIGHTSOFABAILEE Q:Whataretherightsofabailee? A:FRUD Useofthething; Make use of the fruits of the thing when suchrightisstipulatedinthecontract; Not answerable for the deterioration of the thingloanedduetotheusethereofand withouthisfault;and Right of retention for damages due to hidden defects or flaws of the thing of whichhewasnotadvisedbythebailor. Q: Art. 1178 of the NCC provides that all rights acquired by virtue of an obligation are transmissible. Is the right to use the thing by virtue of a contract of commodatum transmissible? A:No,itisnottransmissiblefor2reasons: Art.1178providesthatthetransmissibilityof saidacquiredrightsareeithersubjectto thelawsortoacontrarysipulation;and Art. 1939 provides that a contract of commodatum is purely personal in character.
Note: To rule otherwise would be to run counter to the purely personal character of the commodatum and to the proviso that transmissibility is subject to thelawgoverningsuchobligations.
Q: Can the bailee lend or lease the object of the contracttoathirdperson? A: GR:Thebaileecanneitherlendnorleasethe objectofthecontracttoathirdperson. XPN: Members of the bailees household maymakeuseofthethingloaned.
Note: Members of the bailees household are notconsideredasthirdpersons.
Q: In commodatum, does the bailee acquire the useofthefruitsofthething? A: No. The bailee in commodatum acquires only the use of the thing loaned but not its fruits (Art. 1935,NCC). Q: Is a stipulation that the bailee may make use ofthefruitsofthethingloanedvalid? A: Yes. It is understood that the enjoyment of the fruits must only be incidental to the use of the thing.Itshould notbethemaincause;otherwise, the contract is not a commodatum but a usufruct (Art.1940,NCC). Q: Will the stipulation that the bailee may make use of the fruits of the thing loaned impair the essenceofcommodatum? A: No. It will not impair the essence of commodatum because the actual cause or consideration therefore is still the liberality of the bailororlender. Q:Isthererightofretentionincommodatum? A: GR: The bailee cannot retain the thing loaned onthegroundthatthebailorowesthebailee. XPN: The bailee has the right of retention for claims of damages which the bailee incurred orsufferedbyreasonofthehiddendefectsor flawsofthethingloaned,ofwhichhewasnot informedoradvisedbythebailor.
Note: The reason for the general rule that there is noright ofretention is that bailment implies atrust that as soon as the time has expired or the purpose accomplished, the bailed property must be returned to the bailor. Also, Art. 1287 provides that compensation shall not be proper when one of the debts arises from the obligations of a bailee in commodatum.(Art.1287,reworded)
XPNtotheXPN: Contrarystipulation;or Nature of the thing forbids such use. Q: What is the legal effect if the bailee pays for theuseofthething? A: The contract ceases to be commodatum; it becomeslease.
Q: Suppose during the said retention of the bailee,thethingislostduetoafortuitousevent. Can the bailor hold the bailee liable for said loss basedonArt.1942(2)? A: No, the bailee cannot be held liable for the loss. Art. 1942 (2) contemplates wrongful retention or a situation where the bailee is not entitledtoretainthethingloaned.
Note: Article 1942 (2) provides that the bailee is liable for the loss of the thing, even if it should be through a fortuitous event if he keeps it longer than the period stipulated, or after the accomplishment
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CREDIT TRANSACTIONS
of the use for which the commodatum has been constituted.
Q: What if the bailee is entitled to payment or reimbursementofexpensesincurredordamages sufferedandthebailoroffersthethingloanedas payment for said expenses or damages, would such offer be valid or not, in view of the prohibitionunderArt.1952whichstatesthatthe bailor cannot exempt himself from the payment ofexpensesordamagesbyabandoningthething tothebailee? A: The offer is not valid. It may be considered as dation inpayment.Inthiscase, theabandonment done by the bailor was made in favor of the bailee for the payment of the expenses incurred by the latter, hence, a violation of what the law hasexpresslyprohibitedunderArticle1952. Q: When is the bailee not entitled to reimbursementfortheexpensesheincurred? A: If, for the purpose of making use and preservation of the thing, the bailee incurs expenses other than those ordinary and extraordinaryexpenses. Q: Before he left for Riyadh to work as a mechanic, Pedro left his van with Tito, with the understandingthatthelattercoulduseitforone year for his personal or family use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount of P15,000.00. After using the vehicle for two weeks, Tito discovered that it consumed too much fuel. To make up for the expenses,heleasedittoAnnabelle.Twomonths later, Pedro returned to the Philippines and askedTitotoreturnthevan. Unfortunately, while being driven by Tito, the van was accidentally damaged by a cargo truck withouthisfault. Who shall bear the P15,000.00 spent for the repairofthevan?Explain. A: The contract between Pedro and Tito is one of commodatum. Of the P15, 000.00 spent, Pedro, the bailor, shall bear the expenses for the repair of the faulty brakes, they being extraordinary expenses incurred due to the nondisclosure by thebailorofthedefectorfault;Tito,ontheother hand, shall shoulder "that part of the P15,000.00 spent for the tuneup, said expense being ordinaryfortheuseandpreservationofthevan.
Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito? Explain. A: The costs for the fuel and other materials are considered ordinary expenses, and consequently Tito, the bailee, shall shoulder them (Art. 1941, NCC) Does Pedro have the right to retrieve the van evenbeforethelapseofoneyear?Explain. A: No, Pedro cannot demand the return of the van until after the expiration of the oneyear periodstipulated.However,ifinthemeantimehe should have urgent need of the van, he may demanditsreturnortemporaryuse. Who shall bear the expenses for the accidental damage caused by the cargo truck, granting that the truck driver and truck owner are insolvent? Explain. A: Both Tito and Pedro shall bear equally the costs of the extraordinary expenses, having been incurred on the occasion of actual use of the van by Tito, the bailee, even though he acted without fault.[Art.1949(2),NCC](2005BarQuestion) C.INTERESTANDTHESUSPENSIONOFTHE USURYLAW Q:Whatisinterest? A:Itisnothingmorethanthecompensationtobe paid by the borrower for the use of the money lenttohimbythelender. Q:Whatistheruleoninterests? A: GR: No interest shall be due unless it is stipulatedinwriting.(Art.1956,NCC) XPN: In case of interest on damages or indemnity for damages, it need not be in writing. Q:Whatisthebasisoftherighttointerest? A: It only arises by reason of the contract (stipulation in writing) or by reason of delay or failure to pay principal on which interest is demanded (Baretto v. Santa Marina, No. 11908, feb.4,1918). If the obligation consists of the payment of a sum of money, and the debtor incurs delay, the
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indemnity for damages shall be the payment of legal interest (Philrock, Inc. v. Construction Industry Arbitration Commission, G.R. Nos. 13284849,June25,2001) Q:Cantherebeinterestinequitablemortgage? A: No. Interest could not be collected on equitable mortgage because the same is not stipulated in writing (Tan v. Valdehueza, G.R. No. L38745,Aug.6,1975).
Note: One which, although it lacks the proper formalities or other requisites of a mortgage required by law, nevertheless reveals the intention of the parties to burden real property as a security for a debt, and contains nothing impossible or contrarytolaw.
Q:Canpaidunstipulatedinterestberecovered? A:Ifpaidbymistakethedebtormayrecoverasin the case of solutio indebiti or undue payment. However if payment is made voluntarily, no recovery can be made as in the case of natural obligation. Q: Sabugo granted a loan to Samilin. The loan agreement was not reduced in writing. Thereafter, Sabugo demanded additional interest which was paid by Samilin in cash and checks. Upon advice of her lawyer, Samilin demanded for the return of the amount of interestpaid.Isthepaymentofinterestvalid? A: No. Payment of monetary interest is allowed onlyif: 1. there was an express stipulation for the paymentofinterest;and 2. the agreement for the payment of interestwasreducedinwriting. Theconcurrenceofthetwoconditionsisrequired for the payment of monetary interest. Thus, collection of interest without any stipulation thereforinwritingisprohibitedbylaw.(Sigaanv. Villanueva,G.R.No.173227,Jan.20,2009.) Q: May interest be adjudged on unliquidated claims? A: GR:No. XPN: Unless thesame can be established with reasonablecertainty.(AtlanticGulfandPacific Company of Manila, Inc. v. CA, G.R. Nos. 11484142,Aug.23,1995)
Q: In case the interest may be adjudged on unliquidated claim but the pleadingsincourtdid not spell out said amount with certitude, when shalllegalinterestthereonrun? A: 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 reasonablyascertained.(Ibid) Q: What is the actual base for computing such legalinterest? A: It shall be the amount as finally adjudged by theSupremeCourt.(Ibid) Q: What is the basis for computation for indemnityfordamages? A: It shall be the interest agreed upon by the partiesandintheabsenceofstipulation,thelegal interestwhichis6%perannum(Art.2208,NCC).
Note: 6% because it is based on damages and it has been said that judgments other than loans, forbearance,etc.isbasedon6%.
Q:Whataretheclassesofinterest? A: 1. Simple interest which is paid for the use of the money, at a certain rate stipulatedinwritingbytheparties. 2. Compound interest which is imposed upon accrued interest, that is, the interestdueandunpaid. 3. Legal that interest which the law directs to be paid in the absence of any agreementastotherate. Q:Whencantherebe: 1. Monetaryinterest; 2. Compensatoryinterest? A: 1. Monetary interest must be expressly stipulated in writing and it must be lawful. (Art. 1956, NCC) It is payable on thedelayoftheuseofthemoney. 2. Indemnity for damages (compensatory interest) the debtor in delay is liable to pay legal interest (6% or 12%) as indemnity for damages even in the absence of stipulation for the payment interest. Such interest as indemnity for damages is payable only in case of defaultornonperformanceofcontract.
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Note: If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the debtorisliablefordamages.(Art.2209,NCC)
Q: What is the basis for the interest rate for compensatoryinterest? A: 1. Central Bank Circular 416 12% per annum incasesof: a. Loans b. Forbearance of money, goods and credits c. Judgement involving such loan or forbearance, in the absence of express agreement as to such rate ofinterest
Note:Duringtheinterimperiodfrom the date of judgment until actual payment.
A: Back rentals being equivalent to a loan or forbearance of money, the interest rate due thereonis12%perannumfromthetimeofextra judicial demand (Catungal v. Hao, G.R. No. 134972,Mar.22,2001).
Note: Back rental is the full extended value of land letbylease,payablebytenantforlifeoryears.
d. Pursuant to P.D. No. 116 amending Act No. 2655 (Usury Law), the Central Bank of the Philippines issued Circular No. 416 raising the legal rate of interest from 6% to 12% perannum. e. In the absence of a stipulation as to interest, the loan due will now earn interest at the legal rate of 12% per annum. (Sulit v. CA, G.R. No. 119247, Feb.17,1997).
Q:Whatistheruleoncompoundingofinterest? A: GR: Accrued interest (interest due and unpaid)shallnotearninterest. XPN:When: 1. judiciallydemanded;or 2. thereisexpressstipulationmadebythe parties that the interest due and unpaid shall be added to the principal obligation and the resulting total amountshallearninterest.
Note: Compounding of interest may be availed only when there is a written stipulation in the contract forthepaymentofinterest.
2.
Art.2209,NCC6%perannumincasesof: a. Othersources(i.e.sale) b. Damages arising from injury from person. c. Loss of property which does not involvealoan. Interest accruing from unpaid interest interest due shall earn interest from the time it is judicially demanded although the obligationmaybesilentuponthispoint.
3.
Q:Whatisforbearance? A: It signifies the contractual obligation of the creditor to forbear during a given period of time torequirethedebtorpaymentofanexistingdebt then due and payable. Such forbearance of giving time for the payment of a debt is, in substance, a loan(91C.J.S.598). Q: What is the interest rate imposable for back rentals?
Q:Whatisfloatinginterest? A: It is the interest stipulated by banks which is not fixed and made to depend upon the prevailing market conditions, considering the fluctuatingeconomicconditions. Q:Isastipulationforfloatinginterestvalid? A: No. While it may be acceptable for practical reasons given the fluctuating economic conditions forbankstostipulatethatinterestratesonaloan not be fixed and instead be made dependent on prevailing market conditions, there should be a reference rate upon which to peg such variable interest rates [Consolidated Bank and Trust Corp. (Solid Bank) v. CA, G.R. No. 114672, Apr. 19, 2001]. Q:Whatisinterestondamages? A: Interest that which is imposed in a judgment asindemnityfordamages.
Note:Itneednotbeinwritingandcomputedfrom thetimeofthefinalityofdecision.
Q: A judgment was rendered ordering the defendant Maybel to pay Vanessa with legal interest of 12% from the filing of the complaint until paid. The decision became final and executory. Maybel argues that the rate of 12%
385
under Central Bank Circular 416 was misapplied. How much by way of legal interest should a judgmentdebtorpaythejudgmentcreditor? A: The judgments spoken of and referred to under Central Bank Circular 416 are judgments in litigations involving loans or forbearances of money, goods or credits. Any other kind of monetary judgments which has nothing to do with, nor involving loans or forbearance of any money goods or credits does not fall within the coverage of said law. Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to personsandlossofpropertyanddoesnotinvolve any loan, much less forbearances of any money, goodsorcredits. Q: Carlos sues Dino for (a) collection on a promissory note for a loan, with no agreement on interest, on which Dino defaulted, and (b) damages caused by Dino on his (Carlos') priceless Michaelangelo painting on which Dino accidentally spilled acid while transporting.it. The court finds Dino liable on the promissory note and awards damages to Carlos for the damaged painting, with interests for both awards. What rates of interest may the court imposewithrespecttobothawards?Explain. A: With respect to the collection of money or promissorynote,itbeingaforbearanceofmoney, the legal rate of interest for having defaulted on the payment of 12% will apply. With respect to the damages to the painting, it is 6% from the timeofthefinaldemanduptothetimeoffinality of the decision and 12% of the total amount from finality of judgment until judgment credit is fully paid. The court considers the latter as a forbearance of money. (Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994; Arts. 2210and2211,NCC)(2002BarQuestion) Q:Musttheprincipaldebtstillbepaidin usurioustransactions? A: Yes. Under the Usury Law, notwithstanding stipulations of usurious interest, the debtor must still pay the principal debt (Lopez v. El Hogar Filipino,No.22678,Jan.12,1925). Q: What is the rationale behind the validity of unconscionableInterestrateinaloan? A:TheSupremeCourtsaidnothinginsaidcircular (Circular905)suspendingUsuryLawgrantslender authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorraghing of their assets (Almeda v. CA, G.R. No.113412,Apr.17,1996) In the case of Medel v. CA (G.R. No. 131622, Nov. 27, 1998), the court ruled that while stipulated interest of 5.5% per month on a loan is usurious pursuant to CBC No. 905, the same must be equitably reduced for being iniquitous, unconscionable and exorbitant. It is contrary to morals. It was reduced to 12% per annum in consonantwithjusticeandfairplay. Q: Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum interest. However, the promissory note contained a proviso that the bank "reserves the right to increase interest within the limits allowed by law." By virtue of such proviso, over the objections of Samuel, the bank increased the interestrateperiodicallyuntilitreached48%per annum. Finally, Samuel filed an action questioning the right of the bank to increase the interest rate up to 48%. The bank raised the defense that the Central Bank of the Philippines had already suspended the Usury Law. Will the actionprosperornot?Why? A:Theactionwillprosper.Whileitistruethatthe interest ceilings set by the Usury Law are no longer in force, it has been held that PD No. 1684 and CB Circular No. 905 merely allow contracting parties to stipulate freely on any adjustment in the interest rate on a loan or forbearance of money but do not authorize a unilateral increase of the interest rate by one party without the other'sconsent(PNBv.CA,G.R. No.107569,Nov. 8, 1994). To say otherwise will violate the principle of mutuality of contracts under Article 1308 of the Civil Code. To be valid, therefore, any change of interest must be mutually agreed upon by the parties (Dizon v. Magsaysay, G.R. No. L 23399, May 31, 1974). In the present problem, the debtor not having given his consent to the increase in interest, the increase is void. (2001 BarQuestion) II.DEPOSIT Q:Whatisdeposit? A: It is a contract whereby a person (depositor) delivers a thing to another (depositary), for the principal purpose of safekeeping it, with the obligationofreturningitwhendemanded. Q:Whenisacontractofdepositconstituted?
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A: From the moment a person receives a thing belongingtoanother,withtheobligationofsafely keepingitandreturningthesameupondemand. Q: What are the characteristics of contract of deposit? A: 1. Real contract because it can only be perfectedbythedeliveryoftheobjectofthe contract. However, an agreement to constitute a future deposit is a consensual contract and is thereforebinding.
Note: There is no consensual contract of deposit; there is only a consensual promise to deliver which isbindingifsuchisaccepted. borrower SubjectMatter Movable(extrajudicial)or Moneyorotherfungible maybeimmovable thing (judicial) Relationship Depositordepositary Lenderborrower Compensation Nocompensationof Therecanbe thingsdepositedwith compensationofcredits eachother(exceptby mutualagreement) 2. DEPOSIT COMMODATUM PrincipalPurpose Safekeeping Transferofuse Nature Maybegratuitousor Alwaysgratuitous onerous 3. DEPOSIT AGENCY Purpose Representationofthe Safekeeping principalbytheagent Reasonforcustodyofthething Thecustodyofthething Itismerelyanincidental istheprincipaland obligationoftheagent essentialreasonforthe deposit Nature Itisgenerallyonerousor Essentiallygratuitous forcompensation 4. DEPOSIT LEASE PrincipalPurpose Safekeeping Useofthething Whentoreturn Upondemandofthe Uponterminationofthe depositor leasecontract. 5. DEPOSIT SALE Ownership Retainedbydepositor. Transferredtobuyer.
2.
Object of the contract must be a movable property. However, in cases of judicial deposit, the subject matter may be a real property. Purpose is for the safekeeping of the thing deposited. This must be the principal purposeandnotonlysecondary.
3.
Itisgratuitous,unlessthereisa: a. Contraryagreement;or b. The depositary is engaged in the business of storing goods, like a warehouseman. 5. The depositary cannot use the thing deposited,unless: a. Permittedbythedepositor;or b. Preservation of the thing requires itsuse,butonlyforsaidpurpose. Maybemadeorallyorinwriting. Q:Distinguishdepositfrom: 1. Mutuum; 2. Commodatum; 3. Agency; 4. Lease;and 5. Sale. A: 1.
MUTUUM Purpose Safekeeping/custody Consumption Whentoreturn Upondemandofthe Uponexpirationofthe depositor termgrantedtothe DEPOSIT
4.
Q:Whatarethekindsofdeposit? A: 1. Judicial(sequestration) 2. Extrajudicial a. Voluntarythedeliveryismadeby thewillofthedepositor. b. Necessary made in compliance with a legal obligation, or on the occasion of any calamity, or by
387
travelers in hotels and inns, or by travelerswithcommoncarriers. Q: Distinguish judicial from extrajudicial deposit? A:
EXTRAJUDICIAL Creation Willofthecontracting Willofthecourt parties Purpose Securityortoensurethe rightofapartyto propertyortorecoverin Custodyandsafekeeping caseoffavorable judgment SubjectMatter Movablesor immovablesbut Movablesonly generallyimmovables Cause Generallygratuitousbut Alwaysonerous maybecompensated Whenmustthethingbereturned Uponorderofthecourt Upondemandof orwhenlitigationis depositor ended Inwhosebehalfitisheld Depositororthird Personwhohasaright persondesignated JUDICIAL
A: The depositor need not be the owner of the thing deposited because the purpose of the contract is safekeeping and not transfer of ownership.
Note: 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.
Q: What is the nature of the rent of safety depositboxes? A: The rent of safety deposit boxes is an ordinary contract of lease of things and not a special kind of deposit because the General Banking Act as revised has deleted the part where banks are expressly authorized to accept documents or papersforsafekeeping. The case of Sia v. CA, G.R. No. 102970, May 13, 1993 enunciating that a rent of a safety deposit box is a special kind of deposit, was decided under the former General Banking Act. However, SC has not yet decided a case abandoning the ruling in Sia v. CA, making it conform with the newGeneralBankingAct. Fixed, savings and current deposits in banks and othersimilarinstitutionsarenottruedepositsbut are considered simple loans because they earn interest.(Art.1980,NCC) Q: Is ownership necessary in a contract of deposit?
Q: What is the nature of advance payment in a contractofsale? A: A so called deposit of an advance payment in thecaseofasaleisnotthedepositcontemplated under Art. 1962. It is that advance payment upon which ownership is transferred to the seller once it is given subject to the completion of payment by the buyer under an agreement. (Cruz v. AuditorGeneral,No.L12233,May30,1959). A.VOLUNTARYDEPOSIT Q: What are the obligations of depositary in voluntarydeposit? A: 1. Tokeepthethingsafelyandreturnit 2. Exercise same diligence as he would exercise overhisownproperty rd 3. Not to deposit the thing with a 3 person unlessexpresslyauthorizedbystipulation
Note: Depositary is liable for the loss if: He deposits the thing to a 3rd person without authority, even though the lossisduetofortuitousevents Deposits the thing to a 3rd person who is manifestly careless or unfit althoughthereisauthority.
a.
b.
4.
Ifthethingshouldearninterest: a. collectinterestasitfallsdue b. take steps to preserve the value andrightscorrespondingtoit Nottocomminglethingsifsostipulated GR:Nottomakeuseofthethingdeposited XPNs: a. When preservation of thing depositedrequiresitsuse b. Whenauthorizedbydepositor
5. 6.
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CREDIT TRANSACTIONS
c. GR: In such case it is no longer a deposit but a contract of loan or commodatum,asthecasemaybe. XPN: Principal reason for the contract is still safekeeping, it is stilldeposit. PARTIES Q:Whoarethepartiestoacontractofdeposit? A: 1. Depositary to whom the thing is deposited 2. Depositor the one who deposits the thing DEPOSITARY Q:Whoisadepositary? A: The depositary is the one to whom the thing is deposited. Q:Maythedepositarychangethemannerofthe deposit? A: Yes, if he may reasonably presume that the depositorwouldconsenttothechangeifheknew 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, unlessdelaywouldcausedanger(Art.1974,NCC). Q: Is a guardian a depositary of the wards property? A: The guardian is not holding the funds of the ward merely for safekeeping exclusively but also intended for the latters maintenance and support. Losses, if any without the fault of the guardian shall be deducted from the funds of the ward (Phil. Trust Co. v. Ballesteros, No. L8261, April20,1956). Q: What is the effect when the depositary has permissiontousethethingdeposited? A: GR: The contract loses the concept of a deposit and becomes a loan or commodatum. XPN: Where safekeeping is still the principal purposeofthecontract(Art.1978,NCC).
Note: The permission shall not be presumed, and its existencemustbeproved.
d.
7.
8.
Whenthethingdepositedisdeliveredsealed andclosed: a. return the thing in the same condition b. pay damages if seal be broken throughhisfault c. keep the secret of the deposit when seal is broken w/ or w/o his fault d. However, the depositary is authorized to open the seal or lock when: a. there is presumed authority b. outofnecessity GR: Pay for any loss or damage that may ariseduetohisfault XPN:Liabilityoflossthroughfortuitousevent XPNs to XPN: Even in case of loss through fortuitousevent,stillliableif(USAD): a. Stipulated b. he Uses thing w/o depositors permission c. heDelaysitsreturn d. he Allows others to use it (even if hehimselfisauthorizedtouseit)
Return the thing deposited with all its fruits, accessions,andaccessories 10. Pay interest on sums converted to personal useifthedepositconsistsofmoney Q:Whenisavoluntarydepositextinguished? A: 1. Lossordestructionofthingdeposited; 2. In gratuitous deposit, upon death of eitherdepositorordepositary;or 3. Other causes (e.g. return of thing, novation, expiration of the term, fulfillmentofresolutorycondition)
9.
Q: What is the rule with respect to the determinationofthevalueofthething? A: GR: The statement of the depositor shall be accepted as prima facie evidence of the value
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iftheforcibleopeningoftheboxorreceptacle isimputabletothedepositary. XPN: If there is a clear, strong and convincing evidencetothecontrary. It is significant to know the value of the thing deposited in case when there is a controversy on the value of the thing deposited which is deliveredclosedandsealed. Q: Under Art. 1983, what is included in the term products,accessoriesandaccessions? A: The depositors ownership over the thing carries with it the right to the fruits and all accessionstheretoincluding: Q: What is the duty of the depositarys heir if he sold the thing which he did not know was deposited? A: He shall 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 paidbyhim(Art.1991,NCC).
Note: The provision applies only when the depositary has died and left heir/s who took possession of the thing in the concept of an owner andsolditingoodfaithtoathirdperson.
1. 2. 3. Naturalfruits Industrialfruits Civilfruits(Art.441,NCC)
Q: When the deposit consists of money, what must be returned upon the extinguishment of contract? A: The provision of Article 1896 shall apply wherein the money deposited must be returned together with interest for the use thereof. The imposition of interest is in the form of penalty for the use of money there being no agreement to pay the interest at the outset, otherwise, the contractwillbeamutuum. Q: Can the depositary demand that the depositor should prove his ownership of the thingdeposited? A: GR:No. XPN: Should he discover that the thing has been stolen and who its true owner is, he mustadvisethelatterofthedeposit.
Note: If the depositary has reasonable grounds to believethatthethinghasnotbeenlawfullyacquired bythedepositor,theformermayreturnthesame.
Q: What is the right of the depositary if he has notbeenpaidtheamountduetohim? A: The depositary may retain the thing in pledge until full payment of what may be due him by reasonofthedeposit(Art.1994,NCC). Q: May the depositary sell the thing retained in pledge? A: Yes, Article 2108 provides that if, without the fault of the pledgee, there is danger, destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at public auction. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged.
(Pineda,p.93,2006ed)
Q: What should the depositary do if he loses the thing through force majeure or government order and receives money or another thing in its place? A: He shall deliver the sum or other thing to the depositor.
Q:ManejaassignedandconveyedtoSerranoher time deposit. Notwithstanding series of demandsforencashmentoftheaforementioned time deposits, OBM refused to honor the time deposits. Is OBM liable to Serrano despite the fact the Central Bank declared that OBM could no longer operate due to its chronic reserve deficiencies? A: Yes. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings or current, are to be treated as loansand are to be covered by the law on loans. Current and savings deposits are loans toabankbecauseitcanusethesame.Serrano,in makingtimedepositsthatearninterestwithOBM was in reality a creditor of the respondent bank, and not a depositor. The bank was in turn a debtor of Serrano. Failure of OBM to honor the time deposits is failure to pay its obligation as a debtor and not a breach of trust arising from a depositarys failure to return the subject matter of the deposit. (Serrano v. Central Bank, G.R. No. 30511,Feb.14,1980)
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DEPOSITOR Q:Whoisadepositor? A: The depositor is the one who deposited the thing. Q: What is the rule when there are two or more depositors? A:Iftheyarenotsolidary,andthethingadmitsof division, each one cannot demand more than his share. When there is solidarity or the thing does not admit of division, the provisions of Art. 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 itonlytothepersondesignated(Art.1985,NCC). Q:Whataretheobligationsofdepositor? A: 1. Payment for necessary expenses for preservation a. If the deposit is gratuitous reimbursedepositary b. With compensation no need for reimbursement; expenses borne bydepositary 2. GR: Pay losses incurred by depositary due to thecharacterofthethingdeposited. XPNs: a. When at the time of deposit, the depositor was not aware of the dangerous character of the thing orwasnotexpectedtoknowit; b. When the depositor notified the depositary;or c. When the depositary was aware of it without advice from the depositor. 3. In case of an onerous deposit, to pay the compensation agreed upon as consideration forthedeposit. Q: To whom should the thing deposited be returned? A: 1. To the depositor, to his heirs and successors, or to the person who may have been designated in the contract (Art.1972,NCC). If the depositor was incapacitated at the time of making the deposit, to his guardian or administrator or to the depositor himself should he acquire capacity(Art.1970,NCC). 3. Evenifthedepositorhadcapacityatthe time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative (Art.1988, NCC). Q: Where should the thing deposited be returned? A: GR:Attheplaceagreedupon. XPN: In the absence of stipulation, at the place where the thing deposited might be, even if it should not be the same place where the original deposit was made provided the transfer was accomplished without malice on thepartofthedepositary. Q: When should the thing deposited be returned? A: GR: Upon demand or at will, whether or not a periodhasbeenstipulated. XPNs: 1. Thing is judicially attached while in the depositaryspossession. 2. Depositary was notified of the opposition of a third person to the return or the removal of the thing deposited(Art.1986,NCC). 3. When the thing is stolen and the period of 30 days from notice to the true owner for him to claim it had not yet lapsed, the depositary cannot return the thing deposited to the depositor. This is intended to protect the true owner. 4. In case of gratuitous deposit, if the depositary has a justifiable reason for not keeping the deposit. If the depositor refuses, the depositary may secure its consignation from the court (Art.1989,NCC). 2.
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B.NECESSARYDEPOSIT Q:Whenisdepositconsideredasnecessary? A: 1. When it is in compliance with a legal obligation; 2. It takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events; 3. Made by passengers with common carriers;or 4. Madebytravelersinhotelsorinns. Q: When can the keepers of hotels or inns be held responsible for loss of thing in case of deposit? A:Whenbotharepresent: 1. they have been previously informed by guest about the effects the latter broughtin;and 2. the guest has taken precautions prescribedfortheirsafekeeping.
Note: They are liable regardless of the degreeofcareexercisedwhen: a. loss or injury is caused by his employees or even by strangers;or b. loss is caused by act of thief or robber when there is no use of armsorirresistibleforce.
Q: What is the extent of the liability of the hotel keepersincaseofloss? A: 1. It covers liability in hotel rooms which come under the term baggage or articlessuchasclothingasareordinarily usedbytravelers. 2. It includes lost or damages in hotels annexes such as vehicles in the hotels garage. Q: Can the keepers of the hotels or inns exercise therightofretention? A: Yes, as security for credits incident to the stay at the hotel (in the nature of a pledge created by operationoflaw). C.JUDICIALDEPOSIT Q:Whendoesjudicialdeposit(sequestration) takeplace? A: When an attachment or seizure of property in litigationisorderedbyacourt.(Art.2005,NCC)
Note: It is auxiliary to a case pending in court. The purpose is to maintain the status quo during the pendency of the litigation or to insure the right of the parties to the property in case of a favorable judgment. (De Leon, Comments and cases on credit transaction,p.154,2010)
Q: What are the instances when the keepers of hotels or inns are not liable for loss of thing in caseofdeposit? A:Theyarenotliablewhen: 1. loss or injury is caused by force majeure; 2. lossduetotheactsofguests,hisfamily, hisemployees,orvisitors;and 3. loss arises from the character of the goods. Q: Are hotel or inn keepers still liable regardless of the posting of notices exempting themselves fromanyliability? A: Yes. Hotel/Innkeepers cannot escape or limit liability by stipulation or the posting of notices. Anystipulationbetweenthehotelkeeperandthe guest whereby the responsibility of the former (Arts. 19982001) is suppressed or diminished shallbevoid.
Q: What may be the object of Judicial sequestration? A:Movablesandimmovables(Art.2006,NCC) Q: When will the properties sequestered cease tobeincustodialegis? A: When the insolvency proceedings of a partnership terminated because the assignee in insolvency has returned the remaining assets to the firm, said properties cease to be in custodia legis (Ng Cho Cio, et al. v. Ng Diong & Hodges, L 14832,Jan.28,1961) III.GUARANTYANDSURETYSHIP
A.NATUREANDEXTENTOFGUARANTY Q:Whatisguaranty? A: It is a contract where a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the lattershouldfailtodoso.
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CREDIT TRANSACTIONS
Q:Whatissuretyship? A: It is a contract where a person binds himself solidarilywithprincipaldebtor. Q:Distinguishguarantyfromsuretyship. A:
GUARANTY Collateralundertaking Guarantorsecondarily liable Guarantorbindshimself topayiftheprincipal cannotpay Insurerofsolvencyof debtor Guarantorcanavailof thebenefitofexcussion anddivisionincase creditorproceedsagainst him SURETYSHIP Suretyisanoriginal promissory Suretyprimarilyliable Suretyundertakestopay ifprincipal doesnotpay Insurerofthedebt
Q:Whatarethekindsofguaranty? A: 1. Generalclassification a. Personal guaranty where an

individual personally assumes the fulfillment of the principal obligation; Real guaranty is property, movable,orimmovable.
b.
2.
Astoitsorigin a. Conventional constituted by

agreementoftheparties b. c.
Legal imposed by virtue of a

provisionoflaw
Judicialrequiredbyacourtto
guarantee the eventual right of thepartiesinacase.
3.
Suretycannotavailof thebenefitofexcussion anddivision
Astoconsideration a. Gratuitous guarantor does

not receive any price or remuneration for acting as such. Onerous one where the guarantor receives valuable considerationforhisguaranty
Q: What is the similarity between guaranty and suretyship? A: Both guarantor and surety promise or undertake to answer for the debt, default or miscarriageofanotherperson. Q: What are the characteristics of guaranty and suretyship? A:ACCUNCS 1. Accessory 2. Consensual 3. Conditional 4. Unilateral 5. Nominate 6. Cannotbepresumed 7. CoveredbytheStatuteofFrauds Q:Distinguishguarantyfromwarranty. A:
GUARANTY acontractbywhicha personisboundto anotherforthe fulfillmentofa promiseor undertakingofathird person WARRANTY anundertakingthatthe title,qualityorquantityof thesubjectmatterofa contractiswhatitis representedtobe,and relatestosome agreementmade ordinarilybytheparty whomakesthewarranty
b.
4.
Astoperson a. Single constituted solely to

guarantee or secure performance by the debtor of theprincipalobligation. Double or subguaranty constituted to secure the fulfillment of the obligation of a guarantorbyasubguarantor
b.
5.
Astoscopeandextent a. Definite where the guaranty

is limited to the principal obligation only, or to a specific portionthereof. Indefinite or simple where the guaranty included all the accessory obligations of the principal, e.g. costs, including judicialcosts.
b.
B.EFFECTSOFGUARANTY Q:Whataretheobligationsthatmaybesecured inacontractofguaranty? A: 1. Validobligations 2. Voidableobligations 3. Unenforceableobligations 4. Natural obligations When the debtor
himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligationfromanaturalintoacivilone.
393
5. Conditional obligations only in case of

suspensive condition because it gives rise to the principal and hence, gives rise also totheaccessoryobligation.
Note: Voidable contract is one which has all the essential elements of a valid contract, except that the element of consent is vitiated. It is valid and obligatorybetweenthepartiesbeforeitsannulment. Unenforceable contact, on the other hand, is one which cannot be enforced by action or complaint in court, unless they have been ratified by the party who did not give his consent thereto. Since both are considered valid obligations between the parties until their annulment, and subject to ratification, theycanbesecuredinacontractofguaranty.
Q: Is a valid principal obligation necessary in contractofguaranty? A: Since guaranty is an accessory contract, it is an indispensable condition for its existence that there must be aprincipal obligation. Hence, if the principalobligationisvoid,itisalsovoid. Q:Inwhatformshouldacontractofguarantybe made? A:Itmustbeexpressedandinwriting(par.2,Art. 1403, NCC); otherwise, it is unenforceable unless ratified.Itneednotbeinapublicinstrument.
Note: Guaranty, as a contract, requires the expression of the consent of the guarantor in order to be bound. It cannot be presumed because of the existenceofacontractorprincipalobligation.
Q:Statethegeneralcharacterofguaranty. A: GR:Generallygratuitous(Art.2048,NCC) XPN:Stipulationtothecontrary. Q: Who are the parties to a contract of guaranty? A: 1. Guarantor 2. Creditor GUARANTOR Q:Whoisaguarantor? A: The guarantor is the person who is bound to another for the fulfillment of a promise or undertakingofathirdperson. Q:Whatarethequalificationsofaguarantor? A: 1. Possessesintegrity; 2. Capacitytobindhimself;and 3. Has sufficient property to answer for theobligationwhichheguarantees.
Note: The qualifications need only be present at the timeoftheperfectionofthecontract.
Q: Is acceptance necessary in a contract of guaranty? A: GR: The acceptance of the creditor is not essentialinsuchcontracts. XPN: When there is a mere offer of a guaranty or a conditional guaranty wherein theobligationdoesnotbecomebindinguntil it is accepted by the creditor and notice of suchacceptanceisgiventotheguarantor. Q: In case of doubt, in whose favor should a contractofguarantyorsuretyberesolved? A: GR: Strict construction against the creditor andliberalinfavoroftheguarantororsurety; termscannotbeextendedbeyonditsterms. XPN:Incasesofcompensatedsureties.
Q: What is the effect of subsequent loss of requiredqualifications? A: The subsequent loss of integrity, property or supervening incapacity of the guarantor would not operate to exonerate the guarantor or the eventual liability he has contracted, and the contractofguarantycontinues. However, the creditor may demand another guarantor with the proper qualifications. But he maywaiveitifhechoosesandholdtheguarantor tohisbargain. Q: When is the qualification of the guarantor lost? A: Convictionofacrimeinvolvingdishonesty Insolvency Q: What is the effect of absence of direct considerationorbenefittoguarantor? A:Guarantyorsuretyagreementisregardedvalid despite the absence of any direct consideration
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received by the guarantor or surety, such consideration need not pass directly to the guarantor or surety; a consideration moving to theprincipalwillsuffice. Q: What is the rule when a married woman is a guarantor? A: GR:Bindsonlyherseparateproperty. XPNs: 1. If with her husbands consent, it binds the community or conjugal partnership property. 2. Without husbands consent, in cases provided for by law, such as when the guaranty has redounded to the benefit ofthefamily. Q: What are the rights of a third person who paysforthedebtguaranteedorsecured? A: 1. If payment is made without the knowledge or against the will of the debtor: a. Guarantor can recover only insofar asthepaymenthasbeenbeneficial tothedebtor b. Guarantor cannot compel the creditor to subrogate him in his rights. 2. If payment is made with the knowledge or consent of the debtor Subrogated to all the rights which creditor had againstthedebtor. Q:Whatistheextentofguarantorsliability? A: 1. Where the guaranty is definite It is limited in whole or in part to the principal debt to the exclusion of accessories. 2. Where the guaranty is indefinite or simple It shall comprise not only the principal obligation but also all its accessories, including the judicial costs provided that the guarantor shall only beliableforthosecostincurredafterhe hasbeenjudiciallyrequiredtopay. Q: What are the situations when a guarantor may lawfully be required to pay more than the originalobligationoftheprincipaldebtor? A: 1. Ifupondemand,aguarantorfailstopay the obligation, he can be held liable for interest, even if in thus paying, the liability becomes more than that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity for judicial collection. It should be noted, however, that the interest runs from the time the complaintisfiled,notfromthetimethe debt becomes due and demandable (Tagawa v. Aldanese, No.18636, sept. 28,1922). 2. Creditors suing on a surety bond may recover from the surety, as part of their damages, interest at the legal rate, judicial cost and attorneys fees when appropriate even if the surety would therebybecomeliabletopaymorethan the total amount stipulated in the bond (Dino v. CA, G.R. No. 89775, Nov. 26, 1995). 3. A penalty clause may also increase the liability of the surety (General Insurance Surety Co. v. Republic, G.R. No. L13873, Jan.31,1963) Q:Whatistheeffectofguarantorsdeath? A: 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. Q:Whatistheeffectofthedebtorsdeath? A: His obligation will survive. His estate will be answerable. If the estate has no sufficient assets, theguarantorshallbeliable. Q:Whatistherulewithrespecttojurisdictionin anactionbasedonacontractofguaranty? A: The guarantor shall be subject to the jurisdiction of the court of the place where the obligationistobecompliedwith.
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BENEFITOFEXCUSSION Q:Whatisthebenefitofexcussion? A: It is a right by which the guarantor cannot be compelledtopaythecreditorunlessthelatterhas exhausted all the properties of the principal debtor and has resorted to all legal remedies againstsuchdebtor. Q: What are the requisites of benefit of exhaustionorexcussion? A: The guarantor must set up the right of excussionagainstthecreditoruponthe latters demand for payment from him; and 1. 2. 3. 4. Guarantorhasexpresslyrenouncedit. Guarantor has bound himself solidarily withtheDebtor. Debtorisinsolvent. Guarantor has absconded, or cannot be sued within the Philippines unless he leftamanagerorrepresentative. If it may bepresumed that an execution on the property of the Debtor cannot satisfytheobligation. Guarantor does not invoke the benefit against Creditor upon demand to him for payment and he does not point out available property of the Debtor within the Philippines sufficient to cover the obligation(Art.2060,NCC). Guarantor is a judicial bondsman or subsurety. A pledge or mortgage of his own property has been given by Guarantor asspecialsecurity. Guarantor fails to interpose it as a defensebeforejudgmentisrendered.
5.
6.
7. 8.
He must point out to the creditor the available property of the debtor (not exempted from execution) found within the Philippine territory (Art. 2060,NCC). Q: May a complaint be filed against the debtor andguarantorsimultaneouslyinonecasebefore the exhaustion of all the properties of the debtor? A: Yes. There is nothing procedurally objectionable in impleading the guarantor as a codefendant. As a matter of fact, the Rules of Court on permissive joinder of parties explicitly allow it. If the creditor obtained a favorable judgment against the debtor and guarantor, the latter is entitled to a deferment of the execution of the said judgment against him until all properties of the debtor shall have been exhausted to satisfy the latters obligation involvedinthecase. Q:Whatistheeffectofdeclarationofinsolvency withrespecttotherightofexcussion? A: Just because the debtor has been declared insolvent in insolvency proceeding does not necessarily mean that he cannot pay, for part of the debtors assets may still be available to the creditor. One good proof of the debtors inability to pay is an unsatisfied writ of execution which has been returned by the implementing sheriff (Machetti v. Hospicio de San Jose, 43 Phil. 297, Feb.7,1920) Q:Whenistherenobenefitofexcussion? A:RJSAIRFEDS
9.
BENEFITOFDIVISION Q:Whatistheprincipleofbenefitofdivision? A: Should therebe severalguarantors of only one debtor for the same debt, the obligation to answer for the same is divided among all. (Joint liability)
Note: GR: Creditor can claim from the guarantors only up to the extent they are respectively boundtopay. XPN:Whensolidarityhasbeenstipulated. Should any of the guarantors become insolvent, his share shall be borne by the other guarantors including the paying guarantor in the same joint proportion in accordance with the rule in solidary obligations. Therighttobereimbursedfromhiscoguarantorsis acquiredipsojurebyvirtueofsaidpayment.
Q: Distinguish benefit of division from benefit of contribution. A: BENEFITOF BENEFITOFDIVISION CONTRIBUTION Controversyisbetween Controversybetween thecoguarantorsand andamongtheseveral thecreditor coguarantors Thereisnopayment Thereisalready
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yet,butthereismerely paymentofdebt;the aclaimpressedagainst payingcoguarantoris oneormoreco seekingthecontribution guarantors ofthecoguarantors Q: What is the effect of the creditors negligence inexhaustingthepropertiesofthedebtor? A: He shall suffer the loss to the extent of the value of the pointed property which was not exhaustedbythecreditor(Art.2061,NCC).
Note: The article applies when the guarantor has compliedwiththeconditionsofArt.2060(requisites ofbenefitofexcussion).
Q: What is the rule with regard to action of the creditoragainstthedebtor? A: GR: Only the principal debtor should be sued alone. XPN: If the benefit of excussion is not available, the guarantor can be sued jointly withthedebtor. Q: Is the guarantor entitled to be notified of the complaintagainstthedebtor? A:Yes.Iftheguarantordesirestosetupdefenses as are granted him by law, he may have the opportunitytodoso. Q: What are the consequences of the guarantors appearance or nonappearance in thecaseagainstthedebtor? A: 1. If he does not appear and judgment is rendered against the debtor, he cannot setupdefenseswhichhecouldhaveset up had he appeared; moreover, he cannotquestionthedecisionanymore; 2. Ifheappearssuchasbyfilingananswer 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 his benefit of excussion by his appearanceinthecase. Q: What is the effect of compromise between thecreditorandthedebtortotheguarantor? A: If the compromise is beneficial to the guarantor, it is valid; otherwise, it is not binding st uponhim(1 sentence,Art.2063,NCC).
Q: What is the effect of compromise between the creditor and the guarantor to the principal debtor? A: If compromise is beneficial to the principal debtor, it is valid; otherwise, it is not binding upon him (2nd sentence, Art. 2063, NCC). To be binding, it must benefit both the guarantor and thedebtor. Q:Whatistheruleontherightofindemnityand reimbursement of the guarantor who paid the debt? A: GR: Guarantor is entitled to be reimbursed by Debtorfor: 1. totalamountofthedebtpaid; 2. legal interest from the time payment wasmadeknowntothedebtor; 3. expenses incurred after notifying debtor that demand to pay was made uponhim;and 4. damagesinaccordancewithlaw. XPNs: 1. Guaranty is constituted without the knowledge or against the will of the debtor. Effect: Guarantor may only recover only somuchaswasbeneficialtothedebtor. 2. Payment by 3rd persons who does not intendtobereimbursed. Effect: deemed a donation and as such requirestheconsentofdebtor. Q: What is the right of the guarantor after the paymentofthedebtismadetothecreditor? A: Right of subrogation. The guarantor is subrogated to all the rights which the creditor st hadagainstthedebtor(1 par.,Art.2067) Q: What happens when guarantor pays without noticetothedebtor? A: The debtor may interpose against the guarantor defenses available to the debtor as against the creditor at the time payment was made.
Note: GR: Guarantor must 1st notify the debtor before paying, otherwise, if the debtor pays again, the guarantor can only collect from the creditor and guarantor will have no cause of action against the debtor even if the creditor becomes insolvent.
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XPN: Guarantor may still recover from debtor ifthefollowingcircumstancesconcur: 1. Guarantyisgratuitous; 2. Guarantor was prevented by fortuitous eventfromnotifyingthedebtor;and 3. Creditorwasinsolvent.
SUBGUARANTY Q:Whatisdoubleorsubguaranty? A: It is one constituted to guarantee the obligationoftheguarantor.

Note: In case of insolvency of the guarantor for whom he boundhimself,heisresponsibletothe co guarantorsinthesametermsastheguarantors(Art. 2075,NCC).
Q: Can the guarantor proceed against the principal debtor even before having paid the creditor? A: GR:No. XPNs: 1. Whenheissuedforpayment; 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 ofpayment; 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;or 7. If the principal debtor is in imminent dangerofbecominginsolvent.
Note: In all these cases, the cause of action of the guarantor is either 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 (Art. 2071, NCC).
Q:Whatistheremedyofapersonwhobecomes a guarantor at the request of another for the debtofathirdpersonwhoisnotpresent? A: He has the option of suing either the principal debtorortherequestingparty(Art.2072,NCC).
Note: The provision applies when the guarantor has actuallypaidthedebt.
Q: Is a subguarantor entitled to the right of excussion? A: Yes, both with respect to the guarantor and to theprincipaldebtor(Art.2064,NCC). CONTINUINGGUARANTY Q:Whatiscontinuingguarantyorsuretyship? A: GR: It is not limited to asingle transaction but contemplates a future course of dealings, covering a series of transactions generally for anindefinitetimeoruntilrevoked. XPN: A chattel mortgage can only cover obligations existing at the time the mortgage is constituted and not to obligations subsequenttotheexecutionofthemortgage. XPN to the XPN: In case of stocks in departmentstores,drugstoresetc. Q:Whatisthetestofcontinuingguaranty? A: A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved (Dino v. CA, G.R. No. 89775, Nov. 26, 1995) Q:Mayguarantysecurefuturedebts? A: Yes. A guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. It is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until theexpirationorterminationthereof.(Dinov.CA, G.R.No.89775,Nov.26,1995)
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Q: PAGRICO submitted a Surety Bond issued by R&BSuretytosecureanincreaseinitscreditline with PNB. For consideration of the Surety Bond, Cochingyan and Villanueva entered into an Indemnity Agreement with R&B Surety and bound themselves jointly and severally to the terms and conditions of the Surety Bond. When PAGRICO defaulted, PNB demanded payment to R&B Surety; R&B Surety, in turn, demanded payment to Cochingyan and Villanueva. R&B suedthem.Villanuevaarguedthatthecomplaint was premature because PNB had not yet proceeded against R&B Surety to enforce the latter's liability under the Surety Bond. Is the contentioncorrect? A: No. Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. While in a contract of indemnity against loss an indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability ofthepersontobeindemnifiedhasarisenwithout regard to whether or not he has suffered actual loss. Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. (Cochingyan, Jr. v. R&B Surety and Ins. Co.,GR.No.L47369,June30,1987) C.EXTINGUISHMENTOFGUARANTY Q: What are the grounds for extinguishing a contractofguaranty? A: 1. Principalobligationisextinguished 2. Samecausesasallotherobligations 3. If creditor voluntarily accepts immovable or other properties in payment of the debt (even if he should
afterwards lose thesame througheviction orconveyanceofproperty)
D.LEGALANDJUDICIALBONDS Q:WhatisaBond? A: A bond, when required by law, is commonly understood to mean an undertaking that is sufficiently secured, and not cash or currency. Whatever surety bonds are submitted are subject to any objections as to their sufficiency or as to thesolvencyofthebondsman. Q:WhatisaBondsman? A:Abondsmanisasuretyofferedinvirtueofa provisionoflaworajudicialorder.Hemusthave thequalificationsrequiredofaguarantorandin speciallawsliketheRulesofCourt. Q:Whatarethequalificationstoaproperty bond? A: The necessary qualifications of sureties to a propertybondshallbeasfollows: 1. Each of them must be a resident owner ofrealestatewithinthePhilippines; 2. Where there is only one surety, his real estate must be worth at least the amountoftheundertaking; 3. In case there are two or more sureties, they may justify severally in amounts lass than that expressed in the undertaking, if the entire sum justified to is equivalent to the whole amount of bail demanded. (Sec. 12, Rule 114, RulesofCourt) Q:Whatisthenatureofabond? A: All bonds including judicial bonds are contractualinnature. Q:WhatisaJudicialBond? A: Judicial bonds constitute merely as a special class of contracts of guaranty, characterized by the fact that they are given in virtue of a judicial order. Q: Is the right of excussion available to a bondsman? A:No.Ajudicialbondsmanandthesubsuretyare not entitled to the benefit of excussion because theyarenotmereguarantors,butsuretieswhose liabilitiesisprimaryandsolidary.(ART2084,NCC)
4.
5. 6.
Release in favor of one of the guarantors, w/o consent of the others, benefitsalltotheextentoftheshareof the guarantor to whom it has been granted Extension granted to debtor by creditor withoutconsentofguarantor When by some act of the creditor, the guarantors even though they are solidarilyliablecannotbesubrogatedto the rights, mortgages, and preferences oftheformer
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Q: What is the liability of the surety if the creditorwasnegligentincollectingthedebt? A: A surety is still liable even if the creditor was negligent in collecting from the debtor. The contract of suretyship is not that the oblige will see that the principal pays the debt or fulfills the contract, but that the surety will see that the principal pay or perform(PNB v. Manila Surety & FidelityCo.,Inc.,14SCRA776,1965) Q: What is the effect of violation by the creditor ofthetermsofthesuretyagreement? A: A violation by the creditor of the terms of the surety entitles the surety to be released therefrom. (Associated Ins. & Surety Co. v. BacolodMurcia Milling Co.,GR. No.L12334,May 22,1959) Q:Whatistheeffectofasuretybondfiledforan alienstayinginthecountrywhichisforfeitedfor violatingitsterms? A: The effect of the violation is that its subsequent unauthorized cancellation thru mistake or fraud does not relieve the surety. A bond surrendered thru mistake or fraud may, therefore, be considered as a valid and subsisting instrument.(FarEasternSuretyandIns.Co.,v.CA, GRNo.L12019,Oct16,1958) Q: What is the rule when the performance of a bondisrenderedimpossible? A:Itisthesuretysdutytoinformthecourtofthe happening of the event so that it may take action or decree in the discharge of the surety when the performance of the bond is rendered impossible by an act of God, or the obligee, or the law. (Peoplev.OtiakOmal&LuzonCo.,Inc.,GR.No.L 14457,June30,1961)
PLEDGE,MORTGAGE,ANDANTICHRESIS Q:Whatispledge,mortgageandantichresis?Distinguish. A:
PLEDGE Anaccessorycontractwherebyadebtor deliverstothecreditororathirdperson amovableorpersonalproperty,or documentevidencingincorporealrights, tosecurethefulfillmentofaprincipal obligationwiththeconditionthatwhen theobligationissatisfied,thething deliveredshallbereturnedtothe pledgorwithallitsfruitsandaccessions, ifany. movableorpersonalproperty,or documentevidencingincorporealrights MORTGAGE(Real) Definition Itisacontractwherebythedebtor securestothecreditorthe fulfillmentofaprincipalobligation, speciallysubjectingtosuch security,immovablepropertyor realrightsoverimmovable property,incasetheprincipal obligationisnotpaidorcomplied withatthetimestipulated. Objectofthecontract immovablepropertyorrealrights overimmovableproperty ANTICHRESIS
AcontractwherebytheCR acquirestherighttoreceivethe fruitsofanimmovableofthe dedtor,withtheobligationto applythemtothepaymentof interest,ifowing,andthereafter totheprincipalofhiscredit.
fruitsofanimmovable
Q: What are the similarities of pledge and mortgage? A: 1. Bothareaccessorycontracts; 2. Both pledgor and mortgagor must be theabsoluteowneroftheproperty; 3. Both pledgor and mortgagor must have the free disposal of their property or be authorizedtodoso;and 4. In both, the thing proffered as security maybesoldatpublicauction,whenthe principal obligation becomes due and nopaymentismadebythedebtor. Q: Are the contracts of pledge, mortgage or antichresisindivisible? A: GR: A pledge, mortgage or antichresis is indivisible.
Note: Indivisibility may be waived. Indivisibility onlyappliestothecontractingparties.
XPNs: 1. Where each one of several things guarantees determinate portion of the credit
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2. 3. Where only a portion of the loan was released Where there was failure of consideration GR:No. XPN: If the third party pledgor or mortgagor expressly agreed to be bound solidarily with theprincipaldebtor. Q: What is the right of an owner of personal propertypledgedwithoutauthority? A:Hemay invokeArt.559,NCC. Thedefensethat pawnshopowneracquiredownershipofthething ingoodfaithisnotavailable.
Note:Art.559Thepossessionofmovableproperty 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 fromthepersoninpossessionofthesame. If the possessor of a movable lost or of 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 therefore.
Q: What are the obligations that can be secured bypledge,mortgageandantichresis? A: 1. Validobligations 2. Voidableobligations 3. Unenforceableobligations 4. Naturalobligations 5. Conditionalobligations Q: What rules are common to pledge and mortgage? A: Constituted to secure the fulfillment of a validprincipalobligation. Pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged. They must have the free disposal of their property, and in the absence thereof, that they be legally authorized for such purpose. Debtor retains ownership of the thing given asasecurity. Q: May property acquirable in the future be mortgaged? A: No. Where the mortgagor mortgaged a property and in the contract he agreed to mortgage additional properties which he may acquire in the future, there was no valid mortgage as to the latter because he was not yet the owner of the properties at the time of the mortgage (Dilag v. Heirs of Ressurrecion, No. 48941,May6,1946). Q: Is mortgage constituted to secure future advancesvalid? A: Yes. It is a continuing security and not dischargedbyrepaymentoftheamountnamedin the mortgage, until the full amount of the advances is paid. A chattel mortgage can only cover obligations existing at the time the mortgage is constituted and not to obligations subsequenttotheexecutionofthemortgage. Q: Is a third person who pledged and mortgaged hispropertyliableforanydeficiency? A:
Q: What is the nature of an assignment of rights toguaranteeanobligationofadebtor? A: It is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee (Manila Banking Corp. v. Teodoro, Jr.,G.R.No.53955,Jan.13,1989) ACCOMMODATIONMORTGAGE Q:Whoisanaccommodationmortgagor? A: He is a third person who is not a party to a principal obligation and secures the latter by mortgagingorpledginghisownproperty. Q: What is the extent of the liability of an accommodationmortgagor? A: It extends up to the loan value of their mortgaged property and not to the entire loan itself. PACTUMCOMMISSORIUM Q:Whatispactumcommisorium? A:Itisastipulationwherebythethingpledgedor mortgaged or subject of antichresis shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed. Such stipulation is null and void.
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Q: What are the elements of pactum commissorium? A: 1. There is a pledge, mortgage or antichresis of a property by way of security;and 2. There is an express stipulation for the automatic appropriation by the creditor ofthepropertyincaseofnonpayment
Note: What are prohibited are those stipulations executed or made simultaneously with the original contract,andnotthosesubsequentlyenteredinto.
Q: ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in XYZ Inc. It was agreed that if the pledgor failed to pay the loan with 10% yearly interest within four years, the pledgee is authorized to foreclose on the shares of stock. As required, MNO delivered possession of the shares to ABC with the understanding that the shares would be returned to MNO upon the payment of the loan. However, the loan was not paid on time. A month after 4 years, may the shares of stock pledged be deemed owned by ABC or not? Reason. A: The shares of stock cannot be deemed owned by ABC upon default of MNO. They have to be foreclosed. Under Article 2088, NCC, the creditor cannot appropriate the things given by way of pledge. And even if the parties have stipulated thatABCbecomestheownerofthesharesincase MNOdefaultsontheloan,suchstipulationisvoid for being a pactum commissorium. (2004 Bar Question) Q: To secure a loan obtained from a rural bank, Purita assigned her leasehold rights over a stall in the public market in favor of the bank. The deed of assignment provides that in case of default in the payment of the loan, the bank shallhavetherighttosellPurita'srightsoverthe market stall as her attorneyinfact, and to apply theproceedstothepaymentoftheloan. Was the assignment of leasehold rights a mortgageoracession?Why? Assumingtheassignmenttobeamortgage,does the provision giving the bank the power to sell Purita's rights constitute pactum commissorium ornot?Why? A: The assignmentwas a mortgage, not a cession, of the leasehold rights. A cession would have transferred ownership to the bank. However, the
grant of authority to the bank to sell the leasehold rightsin case of default is proof that no such ownership was transferred and that a mere encumbrance was constituted. There would have beennoneedforsuchauthorityhadtherebeena cession. No, the clause in question is not a pactum commissorium. It is pactum commissorium when default in the payment of the loan automatically vests ownership of the encumbered property in thebank.Intheproblemgiven,thebankdoesnot automatically become owner of the property upon default of the mortgagor. The bank has to sell the property and apply the proceeds to the indebtedness.(2001BarQuestion) Q:XborrowedmoneyfromYandgaveapieceof land as security by way of mortgage. It was expressly agreed between the parties in the mortgagecontractthatuponnonpaymentofthe debt on time by X, the mortgaged land would already belong to Y. If X defaulted in paying, would Y now become the owner of the mortgagedland?Why? A: No, Y would not become the owner of the land. The stipulation is in the nature of pactum commissorium which is prohibited by law. The property should be sold at public auction and the proceeds thereof applied to the indebtedness. Anyexcessshallbegiventothemortgagor. Q: Suppose in the preceding question, the agreement between X and Y was that if X failed topaythemortgagedebtontime,thedebtshall be paid with the land mortgaged by X to Y. Would your answer be the same as in the precedingquestion?Explain. A: No, the answer would not be the same. This is avalidstipulationanddoesnotconstitutepactum commissorium. In pactum commissorium, the acquisition is automatic without need of any further action. In the instant problem another act is required to be performed, namely, the conveyance of the property as payment (dacion enpago).(1999BarQuestion) Q: In order to secure a bank loan, XYZ Corporation surrendered its deposit certificate, withamaturitydateofSeptember1,1997tothe bank. The corporation defaulted on the due repayment of the loan, prompting the bank to encash the deposit certificate. XYZ Corporation questioned the above action taken by the bank as being a case of pactum commissorium. The bankdisagrees.Whatisyouropinion?
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A:Isubmitthatthereisnopactumcommissorium here. Deposits of money in banks and similar institutions are governed by the provisions of simple loans (Art. 1980, NCC). The relationship between the depositor and a bank is one of creditor and debtor. Basically, this is a matter of compensation as all the elements of compensation are present in this case. (BPI v. CA, G.R. No. 104612, May 10, 1994) (1997 Bar Question) Q: Spouses Uy Tong purchased seven motor vehicles from Bayanihan Investment payable in installments. It was agreed that if the spouses shouldfailtopaytheirobligation,Bayanihanwill automatically be the owner of the apartment which the spouses has a leasehold right. The spousesafterpayingthedownpayment,failedto pay the balance, hence, Bayanihan filed an action for specific performance against the spouses. The judgment provided that in case the spouses failed to pay the obligation within 30 days from notice, they are to execute a Deed of Absolute Sale over the apartment and/or leasehold rights. Is the stipulation a pactum commissorium? A: No. The questioned agreement evinces no basis for the application of pactum commissorium. There is no contract of pledge or mortgage entered into by the parties. Bayanihan sought the intervention of the court by filing an action for specific performance. Hence there was no automatic appropriation of the property. (Uy Tongv.CA,G.R.No.77465,May21,1988) IV.PLEDGE A.DEFINITION Q:Whatispledge? A: A contract where debtor delivers to creditor or rd 3 person a movable or document evidencing incorporeal right for the purpose of securing fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned w/ allitsfruitsandaccessions. B.KINDSOFPLEDGE Q:Whatarethekindsofpledge? A: 1. Conventionalbyagreementofparties 2. Legalbyoperationoflaw
Note: A thing lawfully pledged to one creditor, cannot be pledged to another as long as the 1st pledgesubsists.
C.ESSENTIALREQUISITES Q: What are the essential requisites for a contractofpledge? A: 1. Constituted to secure the fulfillment of aprincipalobligation; 2. Pledgor is the absolute owner of the thingpledged; 3. Persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. (Art. 2085,NCC)
Note: A contract of pledge not appearing in a public instrument does not affect its validity. It is valid betweentheparties.
Q: What kind of possession is required in pledge? A:Themeretakingofthepropertyisnotenough. There must be continuous possession of the thing. However, the pledgee is allowed to temporarilyentrustthephysicalpossessionofthe thing pledged to the pledgor without invalidating the contract. But here, the pledgor would be in possessionasameretrusteeandhispossessionis subjecttotheorderofthepledgee. Q: Pablo owns a tractor which he left with his son Mike for safekeeping. Mike then offered the saidtractortoCaliboassecurityforthepayment of his debt. When Pablo came back and learned that the tractor was in the custody of Calibo, he demanded its return. Calibo, however, refused. Calibo alleged that the tractor was pledged to him, and in the alternative, the tractor was left with him in the concept of deposit and he may validly hold on to it until Mike pays his obligation.IsCalibocorrect? A: No. There is no valid pledge because Mike is not the absolute owner of the property pledged. He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a principal obligation, cannot legally constitutesuchaguarantyasmayvalidlybindthe property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or mortgaged. There is likewise no valid deposit, in
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this case, where the principal purpose for receiving the object is not safekeeping. (Calibo Jr. v.CA,G.R.No.120528,Jan.29,2001) Q: Is constructive or symbolic delivery of the thingsufficienttoconstitutepledge? A: GR:No. XPN: If the pledge consists of goods stored in a warehouse for purposes, of showing the pledgees control over the goods, the delivery to him of the keys to the warehouse is sufficient delivery of possession (constructive/symbolicdelivery). The type of delivery will depend upon the nature and peculiar circumstances of each case(Yuliongsiuv.PNB,G.R.No.L19227,Feb. 17,1968)
Note: Constructive or symbolic delivery does not confer physical possession of the thing, but by construction of law, is equivalent to acts of real delivery.
Q: What is the rationale behind the requirement that the pledge cannot take effect against third personsifthethingisnotdescribedandthedate doesnotappearinapublicinstrument? A: To forestall fraud because a debtor may attempttoconcealhispropertyfromhiscreditors when he sees it in danger of execution by simulating a pledge thereof with an accomplice (TecBi&Co.v.CharteredBankofIndia,No.9802, Feb.5,1916/March31,1917). Q:Whatisadoublepledge? A: A double pledge is when the same thing or property subject of a first pledge will be the subjectofanotherpledge. Q:Cantherebeavaliddoublepledge? A: No. A property already pledged cannot be pledged while the first pledge is subsisting (Mission de San Vicente v. Reyes, No. 5508, Aug. 14,1911). Q: Can incorporeal rights evidenced by proper documentbepledged? A: Yes (Art. 2095, NCC). It is, however, required that the actual instrument be delivered to the pledge. More, if the instrument is a negotiable document,itmustbeindorsed.
D.OBLIGATIONSOFPLEDGORANDPLEDGEE Q:Whoarethepartiesinacontractofpledge? A: 1. Pledgor the debtor; the one who delivers the thing pledged to the creditor 2. Pledgee the creditor; the one who receivesthethingpledged Q:Whataretherightsofapledgee? A: 1. Retain the thing until debt is paid. (Art. 2018,NCC) 2. To be reimbursed for the expenses made for the preservation of the thing pledged.(Art.2099,NCC) 3. Creditor may bring any action pertaining to the pledgor in order to rd recoveritfromordefenditagainsta3 person. Q:Whataretheobligationsofapledgee? A: 1. Take care of the thing pledged with the diligence of a good father of a family. (Art.2099,NCC)
Note: Pledgee is liable for the loss or deterioration of the thing by reason of fraud, negligence, delay, or violation of thetermsofthecontract.
2.
GR: Pledgee cannot deposit the thing pledgedtoa3rdperson. XPN: Unless there is stipulation to the contract(Art.2100,NCC)
Note: Pledgee is liable for the loss or deterioration of the thing pledged caused by the acts or negligence of the agents or employeesofthepledgee.
3.
4.
Apply the fruits, income, dividends, or interests produced or earned by the property, to interests or expenses first, thentotheprincipal.(Art.2102,NCC) GR: Cannot use the thing pledged withoutauthority. XPNs: a. If the pledgor had given him authorityorpermissiontouse it;
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b. If the use of the thing is necessary for its preservation butonlyforthatpurpose.
Note: The remedies are alternative and not cumulative. Only one may be chosen. The law used the conjunctive or. Either one is more convenient thanannulment.
5.
Return the thing pledged to thepledgor when the principal obligation is fulfilled orsatisfiedit.
Q: Does the debtor continue to be the owner of thethingincasethesameisexpropriatedbythe State? A: No. Ownership is transferred to the expropriatingauthority.
Note: The creditor may bring actions pertaining to theownerofthethingpledgedinordertorecoverit from, or defend it against a third person (Art. 2103, NCC).
Q: Can the debtor ask for the return of the thing pledgedagainstthewillofthecreditor? A: GR:No. XPNs: 1. If the debtor has paid the debt and its interest, with expenses in a proper case (Art.2105,NCC). 2. If the thing is in danger of destruction or impairment provided, the pledgor offers an acceptable substitute for it which is of the same kind and not of inferiorqualityandwithoutprejudiceto the application of Art. 2108 whenever warranted. Q: Can the pledgee cause the sale of the thing pledgedinpublicauctionwheretheobligationis notyetdue? A: Yes, if without the fault of the pledge, there is danger of destruction, impairment or diminution invalueofthethingpledged.Theproceedsofthe auction shall be security for the principal obligation in the same manner as the thing originallypledged(Art.2108,NCC). Q: What are the rights of the creditor who is deceivedonthesubstanceorqualityofthething pledged? A:Todemand: 1. from the pledgor an acceptable substituteofthething;or 2. the immediate payment of the principal obligation(Art.2109,NCC).
Q: What is the effect of the return of the thing pledgedtothepledgorbythepledgee? A: The pledge shall be extinguished. Any stipulation to the contrary shall be void (Art. 2110,NCC). Q: What is the presumption when the thing is found in the possession of the pledgor subsequenttotheperfectionofthepledge? A:Thereisprimafaciepresumptionthatthething pledged has been returned by the pledgee to the pledgor or owner, in any of the following circumstances: 1. Ifthethingisfoundinthepossessionof the pledgor or owner after the pledge hadbeenperfected;or 2. Ifthethingisfoundinthepossessionof a third person who received it from the pledgororowneraftertheperfectionof nd thepledge(2 par.,Art.2110,NCC).
Note: Itispresumedthat the accessory obligationof 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 ownsthething(Art.1274,NCC).
Q:Whatistherequisitefortherenunciationor abandonmentofthepledgebythepledgee? A: There must be a statement in writing to that st effect(1 sentence,Art.2111,NCC).

Note: The renunciation of the pledge is not contrary to law, public order, public policy, morals or good customs.Further,Art.1356oftheNCC,whichspeaks oftheformofcontracts,mustbecompliedwith.
Q: Is acceptance or return of the thing necessary for the validity of the renunciation under Art. 2111? A: No. it is not a case of donation where acceptance is necessary to make the donation valid. Q: Suppose the thing was not returned, is there extinctionofthepledge? A:Yes.Evenifthethingwasnotreturned,aslong as there is an effective renunciation,
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abandonment or waiver, the pledge is already extinguished. The pledgor is considered a depositor and the pledgee shall become a depositary of the thing. Accordingly,thelawondepositwillapply. Q: What is the right of the pledgee when the debthasnotbeensatisfiedinduetime? A: The pledgee has the right to proceed with the sale of the thing at a public auction to raise funds forpaymentoftheobligation(Art.2112,NCC). Q:Whataretherequisitesofpublicsale? A: 1. Theobligationmustbedueandunpaid; 2. Thesaleofthethingmustbeatapublic auction; 3. There must be notice to the pledgor and owner stating the amount for whichthesaleistobeheld;and 4. ThesalemustbeconductedbyaNotary Public. Q:Whatisdeedofacquittance? A: It is a document of the release or discharge of the pledgor from the entire obligation including interests and expenses. This shall be executed by thepledgeeafterappropriatingthethingincasea nosalewasmadeinasecondauction. Q: May the pledgor participate in the public auction? A:Yes.Moreover,heshallhaveabetterrightifhe offers the same terms as the highest bidder [Art. 2113(1),NCC]. Q:Whocanbidinthepublicauction? A: 1. Thepublic 2. Pledgor/owner/debtor shall be preferred if same terms as the highest bidderisoffered 3. Pledgee/creditor he must not be the only one bidder, otherwise, his bid is invalidandvoid Q: Can checks be accepted as payment as purchasepriceinapublicsale? A:No,theyarenotlegaltenders.(CFIv.CA,No.L 4191,April30,1952).
Note:Thesameruleappliestopromissorynotes,bill of exchange and other negotiable instruments because they produce the effect of payment only whentheyhavebeenencashed. Paymentincashmustbemadeatonce.
Q:Mayathirdpersonpaythepledgorsdebt? A: Yes, if he has any interest in the fulfillment of theprincipalobligation(Art.2117,NCC). Q:Whatistherulewhenwhathasbeenpledged isacredit? A: 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 (Art. 2118, NCC). Q: Santos made time deposits with OBM. IRC, through its president Santos, applied for a loan with PNB. To secure the loan, Santos executed a DeedofAssignmentofthetimedepositsinfavor of PNB. When PNB tried to collect from OBM, the latter did not pay the CTDs. PNB then demanded payment from Santos and IRC, but the latter refused payment alleging that the obligationwasdeemedpaidwiththeirrevocable assignmentoftheCTDs. Is the liability of IRC deemed paid by virtue ofthedeedofassignment? IsOBMliablefordamages A: 1. No. For all intents and purposes, the deed of assignment in this case is actually a pledge. Where a CTD in a bank, payable at a future time, was handedoverbyadebtortohis creditor, itwasnotpayment,unlesstherewasan express agreement on the part of the creditortoreceiveitassuch. 2. Yes. While it is true that no interest shallbedueunlessithasbeenexpressly stipulatedinwriting,thisappliesonlyto interest for the use of money. It does not comprehend interest paid as damages. Santos has the right to recover damages resulting from the default of OBM and the measure of such damages is interest at the legal rate of 6% per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts. (Integrated Realty Corp. v. PNB,G.R.No.60705,June28,1989)
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Q:Whatistherulewhentwoormorethingsare pledged? A:Thepledgeemaychoosewhichhewillcauseto be sold, unless there is a stipulation to the st contrary(1 sentence,Art.2119,NCC). Q: What is the restriction on the right of the pledgeeunderthe1stsentenceofArt.2119? A: He may only demand the sale of only as many of the things as are necessary for the payment of nd thedebt(2 sentence,Art.2119,NCC). E.RIGHTSOFPLEDGOR Q:Whataretherightsofthepledgor? A: 1. Right to dispose the thing pledged, provided there is consent of the pledgee(Art.2097,NCC) 2. Right to ask that the thing pledged be deposited (Art. 2104 and Art. 2106, NCC) 3. Right to substitute thing pledged (Art. 2107,NCC) Q: When may the owner ask that the thing pledged be deposited judicially or extrajudicially? A: 1. If the creditor uses the thing without authority 2. If he misuses the the thing in any other way;or 3. If the thing is in danger of being lost or impaired because of the negligence or willfulactofthepledge(Art.2106,NCC) Q: Does the pledgor have the right to demand the return of the thing pledged against the will ofthecreditor? A: No. He cannot ask for its return until the obligation is fully paid including interest due thereon and expenses incurred for its preservation(Art.2105,NCC) Q: What are the requisites before the pledgor may substitute the thing pledged with another thing? A: 1. Pledgor has reasonable grounds to fear the destruction or impairment of the thingpledged; 2. 3. Nofaultonthepartofthepledge Pledgor is offering in place of the thing, another thing in pledge which is of the same kind and quality as the former; and Pledgee does not choose to exercise his right to cause the thing pledged to be soldatpublicauction(Art.2107,NCC)
4.
F.PERFECTION Q:Howisacontractofpledgeperfected? A: A contract of pledge is perfected when the thingpledgedisplacedintheactualpossessionof or delivered to the pledgee or a third person designated by the parties by common consent. (Art.2093,NCC) Note:IfArt.2093isnotcompliedwith,thepledge isvoid. Q:FourcarabaoswerepledgedbyTtoE.Tisthe registered owner of the carabaos. The carabaos wereactuallyinthepossessionofJ.Enevertook possession of the carabaos. There is nothing in the contract which stated that J was by common consent made the depositary of the carabaos in Esbehalf.Istherealawfullyconstitutedpledge? A: None. The delivery of possession of the property pledged requires actual possession and a mere symbolic delivery is not sufficient. (Betita vGanzon,49Phil.87) Q: What is the effect when possession or deliveryofthethingpledgedwasnotmade? A:Anagreementtoconstituteapledgeonlygives rise to a personal action between the contracting parties. Unless the movable given as a security by way of pledge be delivered to and placed in the possession of the creditor or of a third person designated by common agreement, the creditor acquires no right to the property because pledge ismerelyalienandpossessionisindispensableto therightofalien. Q: What is the effect if the pledgee fails to take thepropertypledgedintohispossession? A: If a pledgee fails or neglects to take the property pledged into his possession, he is presumed to have waived the right granted him bythecontract.(U.S.v.Terrel,2Phil.222)
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Q: What are the requisites to bind third persons inacontractofpledge? A: To bind third persons, the pledge must be embodied in a public instrument where the followingentriesmustappear Adescriptionofthethingpledged;and Statement of date when the pledge was executed.(Art.2096,NCC) Q:AisindebtedtoB.Apledgeshisdiamondring to B. The ring is delivered to B, but in the public instrument executed, there is no description of the ring, and the date of the pledge does not appear. If A sells the ring to C, does C have to respectthepledgeinfavorofB? A: No. C does not have to respect the pledge since as to him, the pledge is not effective and valid. Q:Whatisthereasonbehindtherequisites? A: The purpose of the requirements is to forestall fraud, because a debtor may attempt to conceal his property from his creditors when he sees it in danger of execution by simulating a pledge thereof with an accomplice. (Tec Bi & Co. v. CharteredBankofIndia,41Phil.576) Q: What is the effect if no public instrument is made? A:Whenthecontractofpledgeisnotrecordedin a public instrument, it is void as against third persons; the buyer of the thing pledged is a third person. The fact that the person claiming as pledgee has taken actual physical possession of the thing sold will not prevent the pledge from being declared void insofar as the innocent stranger is concerned. (Tec Bi & Co. v. Chartered Bank of India, Australia and China, 16 O.G. 908; Ocejo, Perez and Co. v. International Bank, 37 Phil.631) Q: What is the effect of an undated contract of pledge? A: An undated instrument of pledge cannot ripen intoavalidpledge.(Betitav.Ganzon,49Phil.87) G.FORECLOSURE Q: When may a pledgee foreclose the thing pledged? A:Whenthereisnopaymentofthedebtontime, the object of the pledge may be alienated for the purposeofsatisfyingtheclaimsofthepledgee. Q: What is the procedure for the public sale of a thingpledged? A: 1. Theobligationmustbedueandunpaid 2. Thesaleofthethingpledgedmustbeat publicauction 3. Theremustbenoticetothepledgor andowner,statingtheamountfor whichthesaleistobeheld 4. ThesalemustbeconductedbyNotary Public. H.PLEDGEBYOPERATIONOFLAW Q:Whatisapledgecreatedbyoperationoflaw? A:PledgebyoperationoflaworLegalPledgesare thoseconstitutedorcreatedbyoperationoflaw. Thisreferstotherightofretention. Q:Whatrulesapplytolegalpledge? A: 1. The rules governing conventional pledgeapplies. 2. There is no definite period for the paymentoftheprincipalobligation.The pledgemust,therefore,makeademand for the payment of the amount due him. Without such demand, he cannot exercise the right of sale at public auction.(DeLeon) Q:Whataretheinstancesoflegalpledgeswhere thereisrightofretention? A: 1. Art. 546 Right of the possessor in good faith to retain the thing until refundedofnecessaryexpenses. 2. Art. 1707 Lien on the goods manufactured or work done by a laboreruntilhiswageshadbeenpaid. 3. Art. 1731 Right to retain of a worker who executed work upon a movable untilheispaid. 4. Art. 1914 Right of an agent to retain the thing subject of the agency until reimbursed of his advances and damages(Arts.1912and1913,NCC). 5. Art. 1994 Right of retention of a depositary until full payment of what is duehimbyreasonofthedeposit.
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6. Art. 2004 Right of the hotelkeeper to retain things of the guest which are brought into the hotel, until his hotel billshadbeenpaid. even if there is a stipulation that he be soliable.Suchstipulationisvoid.
Q: What is the meaning of the right of the mortgageeorpledgeetoforeclose? A: If the debtor failed to pay on maturity date, the thing pledged or mortgaged may be sold at public auction as provided by law so that the proceeds may be used for payment of the obligation.
Q: What must the pledgee do before he may causesaleofthethingpledged? A: The pledgee must first make a demand of the amount for which the thing is retained. After the demand, the pledgee must proceed with the sale of the thing within thirty (30) days. Otherwise, the pledgor can require of him the return of the thingretained. Note: there is only one public auction here. (Paras) Q: To whom will the remainder of the price pertain? A: The remainder of the price of sale shall be deliveredtotheobligor.(Art.2121) Q:Whataretheinstanceswhenthepledgormay demand that the thing pledged be deposited judiciallyorextrajudicially? A: 1. Creditor uses the thing without authority 2. Creditormisusesthething 3. The thing is in danger of being lost or impaired due to the negligence or willfulactsofthepledgee. Q: What are the effects of sale of the thing pledged? A: 1. Extinguish the principal obligation even iftheproceedsofthesaledonotsatisfy thewholeamountoftheobligation. 2. If proceeds from the sale exceed the amount due, the debtor is not entitled to the excess, the excess goes 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 receive any deficiency unless there is a contrary agreement or in case of legal pledge, thepledgorisentitledtotheexcess 3. If the proceeds of the sale is less than the amount due, the creditor has no right to recover the deficiency and the pledgor is not liable for the deficiency
I.PLEDGEDISTINGUISHEDFROMMORTGAGE
Q: Distinguish contract of pledge from chattel mortgage. A:

CHATTELMORTGAGE PLEDGE Delivery Deliveryisnotnecessary Deliveryisnecessary Registration Registrationinthe Registrationinthe ChattelMortgageregister RegistryPropertyisnot isnecessaryforits necessary. validity Lawgoverningthesale Procedureforthesaleof thethinggivenas Art.2112,NCC securityisgovernedby Sec.14,ActNo.1508 Excess Ifthepropertyissold,the Ifthepropertyis debtorisnotentitledto foreclosed,theexcess theexcessunless goestothedebtor otherwiseagreed. Recoveryofdeficiency Thecreditorisentitledto Thecreditorisnot recoverthedeficiency entitledtorecoverthe fromthedebtorexceptif deficiency thechattelmortgageisa notwithstandingany securityforthepurchase stipulationtothe ofpropertyin contrary. installments Possession Possessionremains with Possessionisvested in thedebtor thecreditor Contract Formalcontract Realcontract Recordinginapublicinstrument Mustbeinapublic instrumentcontaining Mustberecordedina descriptionofthething publicinstrumenttobind pledgedandthedate thirdpersons thereoftobindthird persons
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Q: Distinguish contract of pledge from real estatemortgage. A:

PLEDGE Realcontract Subjectmatteris personalproperty Possessionofthething pledgedisvestedinthe creditor Pledgeehastherightto receivethefruitsofthe thingpledged,withthe obligationofapplyingthe sametotheinterestof thedebt,ifowing,and thebalance,ifany,tothe principal Saleatpublicauctionof thethingpledgedis alwaysextrajudicial Descriptionofthething andthedateofpledge mustappearinapublic instrumentotherwise,it isnotvalidastothird person Notarealright REALESTATE MORTGAGE Consensualcontract Subjectmatterisreal property Possessionofthething mortgagedremainswith thedebtor
1.
2. 3.
It covers only immovable property and alienable real rights imposed upon immovables Itmustappearinapublicinstrument Registration in the registry of property rd isnecessarytobind3 persons
Mortgageedoesnot possesssuchright
Salemaybejudicialor extrajudicial Mustberegistered, otherwise,itisnotvalid againstthirdpersons althoughbinding betweentheparties Realrightandreal propertybyitself
Q:Whatarethekindsofrealmortgages? A: 1. Conventional mortgages constituted voluntarilybythecontractingparties. 2. Legalmortgagerequiredbylaw. 3. Equitable mortgage intention of the parties is to make the immovable as a security for the performance of the obligation but the formalities of a real mortgagearenotcompliedwith. Q: Distinguish contract of real estate mortgage fromcontractofsalewithrightofrepurchase. A:
REALESTATE MORTGAGE Accessorycontract Thereisnotransferof titleandpossessionof theproperty Creditorhasnorightto thefruitsoftheproperty duringthependencyof themortgage Ifthedebtorfailstopay hisdebt,thecreditor cannotappropriatethe propertymortgagednor disposeofit SALEWITHRIGHTOF REPURCHASE Principaland independentcontract Thereistransferoftitle andpossessionofthe property,although conditional Thevendeearetrois entitledtothefruitseven duringtheperiodof redemption Assoonasthereisa consolidationoftitlein thevendeearetro,he maydisposeofitasan absoluteowner

V.REALMORTGAGE A.DEFINITIONANDCHARACTERISTICS Q:Whatisrealestatemortgage(REM)? A: It is a contract whereby the debtor secures to the creditor the fulfillment of the principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligationisnotfulfilledatthetimestipulated
Note: Registration is necessary to bind third persons butnotforthevalidityofthecontract. Being an accessory contract, its consideration is one andthesameasthatoftheprincipalobligation.
B.ESSENTIALREQUISITES Q: What are the requisites for valid constitution ofarealmortgage? A:
Q:Isregistrationofmortgageamatterofright? A:Yes.Byexecutingthemortgage,themortgagor is understood to have given his consent to its registration, and he cannot be permitted to revokeitunilaterally. Q: What is the meaning of mortgage as a real andinseparableright? A: The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted(Art.2126,NCC).
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Q:Whatarethethingsthataredeemedincluded inthemortgage? A: 1. Naturalaccessions 2. Improvements 3. Growingfruits 4. Rents 5. Income 6. Insuranceproceeds 7. Expropriationprice(Art.2127,NCC) Q: When does the mortgage lien attach in case ofneworfutureimprovements? A:Onthedateoftheregistrationofthemortgage (Luzon Lumber and Hardware Co., Inc, v. Quiambao,G.R.No.L5638,Mar.20,1954). Q:Whatisdragnetclause? A: It is a mortgage provision which is specifically phrased to subsume all debts of past or future origin. Such clauses are carefully scrutinized and strictly construed. The mortgage contract is also one of adhesion (Philippine Bank of Communications v. CA, G.R. No. 118552, Feb. 5, 1996). Q: Is the amount stated in the contract controlling in case of mortgage securing future advancements? A: No. The amount named in the contract does not limit the amount for which the mortgage standasasecurity,if,fromthefourcornersofthe instrument the intent to secure future and other indebtednesscanbegathered. Q: Petitioner obtained a loan of P20K from defendant Rural Bank of Kawit. The loan was secured by a REM over a parcel of land. The mortgage contract states that the mortgage will cover the payment of the loan of P20K and such other loans or other advances already obtained or to be obtained by the mortgagors from the bank.TheloanofP20kwasfullypaid.Thereafter they again obtained a loan of P18K, secured by the same mortgage. The spouses defaulted. The bank extra judicially foreclosed the mortgage. Wastheforeclosuresalevalid? A: Yes. It has long been settled that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security, if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancement is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements is paid (Mojica v. CA,G.R.No.94247,Sept.11,1991). Q: May a mortgage credit be alienated or assignedtoathirdperson? A: Yes, in whole or in part, with the formalities requiredbylaw(Art.2128,NCC). Q: What are the requisites to be followed for assignmentofcredit? A: An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property incasetheassignmentinvolvesrealproperty(Art. 1625,NCC). Q: May the creditor claim from the third person in possession of the property payment of the credit? A: Yes, up to the extent secured by the property which the third party possesses, in terms and with the formalities which the law establishes (Art.2129,NCC). Q: Is a stipulation forbidding the owner from alienatingtheimmovablemortgagedvalid? A: No. The prohibition to alienate is contrary to public good inasmuch as the transmission of property should not be unduly impeded (Report, CodeCommission,p.58). Q: What are the laws that govern contract of realmortgage? A: 1. NewCivilCode 2. MortgageLaw 3. PropertyRegistrationDecree(PD1529) 4. Sec. 194, as amended by Act No. 3344, Revised Administrative Code (Phil. Bank of Commerce v. De Vera, G.R. No. L 18816,Dec.29,1962) 5. R.A. 4882 law governing aliens who becomemortgagees.
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C.FORECLOSURE Q:Whatisforeclosure? A: It is a remedy available to the mortgagee in which he subjects the mortgaged property to the satisfactionoftheobligation. Q:Whatarethekindsofforeclosure? A: Judicial governed by Rule 68, Rules of Court Extrajudicial mortgagee is given a SPA to sell the mortgaged property (Act No. 3135) Q:Whatisthenatureofjudicialforeclosure? A: It is an action quasi in rem (Ocampo v. Domalanta,20SCRA1136). Q: Does an action for foreclosure of mortgage survivethedeathofmortgagor? A:Yes,becausetheclaimisnotpuremoneyclaim 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 mortgagors 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 hehasduringlifesetasidecertainpropertyforits payment, and such property does not, except in so far as its value may exceed the debt, belong to the estate (Testamentaria de Don Amadeo Matute Olave v. Canlas, No. L12709, Feb. 28, 1962). Q: What are the options or remedies of the mortgageeincaseofdeathofthedebtor? A: 1. To waive the mortgage and claim the entire debt from the estate of the mortgagorasanordinaryclaim; 2. Toforeclosethemortgagejudiciallyand prove any deficiency as an ordinary claim;or 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 (Maglaque v. Planters Development Bank,GRNo.109472,May18,1999). Q: When is judicial foreclosure considered completed? A: 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 grantingorwithholdingconfirmationastherights and interests of the parties and the ends of justice may require (Rural Bank of Oroquieta v. CA,No.53466,Nov.10,1980). Q: What is the significance of confirmation in judicialforeclosure? A: Confirmation 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 retroactstothedateofthesale.Itisafinalorder, not interlocutory (Ocampo v. Domalanta, No. L 21011,Aug.30,1967).
Note:Ifthepropertyhasbeenmortgagedinfavorof the Philippine National Bank, redemption is allowed within one year from the confirmation of the sale (Gonzalesv.PNB,No.24850,March1,1926). The redemptionmust be madewithin one year after thesale,ifthemortgageeisabank,bankingorcredit institutions(Sec.78,R.A.337).
Q:Whataretheeffectsofconfirmationofsale? A: There can be no redemption of the property. Such confirmation retroacts to the date of the auction sale. After the confirmation, the previous ownersloseanyrighttheymayhavehadoverthe property, which rights in turn vested on the Purchaser of the property (Lonzame v. Amores, No.L53620,Jan.31,1985). Q:Whatisthebasisofextrajudicialforeclosure? A: An extrajudicial foreclosure may only be effected if in the mortgage contract covering a realestate,aclauseisincorporatedthereingiving the mortgagee the power, upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgage property (Sec. 1,ActNo.3135,asamendedbyActNo.4148). The authority to sell may be done in a separate document but annexed to the contract of mortgage. The authority is not extinguished by
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the death of the mortgagor or mortgagee as it is an essential and inseparable part of a bilateral agreement (Perez v. PNB, No. L21813, July 30, 1966). Q:Howisextrajudicialforeclosureinitiated? A:Byfilingapetitionwiththeofficeofthesheriff. It may also be initiated through a Notary Public commissioned in the place where the property is situated.
Note: Notice containing the place and date is required before an auction sale is made in extrajudicialforeclosure.(Sec.3,ActNo.3135)
Q: What governs extrajudicial foreclosure by PNB? A: The same shall be governed by Sections 29, 30 and 34 of Act No. 3135 and not by the PNB Charter (PNB v. CA, G.R. No. 60208, December 5, 1985). Q: What are the requisites of notice of sheriffs sale? A: It must contain the correct number of the certificate of title and the correct technical description of the real property to be sold (San Josev.CA,GRNo.106953,Aug.19,1993). Q:Whatisthepurposeofnoticeofsale? A: To inform the public of the nature and condition of the property sold, and of the time, placeandtermsofthesale. Q: MBTC granted a loan to spouses Peafiel, who mortgaged their two (2) parcels of land in Mandaluyong. The spouses defaulted in the payment. MBTC instituted an extrajudicial foreclosure proceeding under Act No. 3135. The Notice of Sale was published in Maharlika Pilipinas, which has no business permit in Mandaluyong and its list of subscribers shows that there were no subscribers from Mandaluyong. Did MBTC comply with the publication requirement under Section 3, Act No.3135? A: No. Maharlika Pilipinas is not a newspaper of general circulation in Mandaluyong where the propertyislocated.Tobeanewspaperofgeneral circulation,itisenoughthatitispublishedforthe dissemination of local news and general information, that it has a bona fide subscription list of paying subscribers, and that it is published at regular intervals. The newspaper must be
availabletothepublicingeneral,andnotjusttoa select few chosen by the publisher. Otherwise, the precise objective of publishing the notice of sale in the newspaper will not be realized. (Metropolitan Bank and Trust Company, Inc. v. EugenioPeafiel,G.R.No.173976,Feb.27,2009) Q: May a mortgagor enjoin the implementation of a writ of possession on the ground that there is a pending case for annulment of the extrajudicialforeclosureoftheREM? A: No. As a rule, any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for refusing the issuance of a writ of possession. Regardless of whether or not there is a pending suit for annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession, without prejudice to the outcome of the case. Hence, an injunction to prohibit the issuance of writ of possession is entirely out of place. Prohibition does not lie to enjoin the implementation of a writ of possession. Once the writ of possession has been issued, the trial court has no alternative buttoenforcethewritwithoutdelay.(Sps.Ongv. CA,G.R.No.121494,June8,2000) Q:Canthemortgageerecoverthedeficiency? A: If there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency (DBPv.Mirang,G.R.No.L29130,Aug.8,1975).
Note: In judicial foreclosure, the Rules of Court specificallygivesthemortgageetherighttoclaimfor deficiencyincaseadeficiencyexists(Sec.6,Rule70). While Act No. 3135 governing extrajudicial foreclosures of mortgage does not give a mortgagee the right to recover deficiency after the public auction sale, neither does it expressly or impliedly prohibitsuchrecovery. This right to recover deficiency had been categoricallyresolved in StateInvestment v. CA (G.R. No.101163,January11,1993).Thus,themortgagee is entitled to recover the deficiency in case the sale proceeds are not sufficient to cover the debt in extrajudicialforeclosures. The action to recover a deficiency after foreclosure prescribes after ten (10) years from the time the rightofactionaccruesasprovidedinArticle1144(2), NCC (DBP v. Tomeldan, G.R. No. 51269, Nov. 17, 1980).
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Q:Whatisstipulationofupsetprice? A: It is a stipulation of minimum price at which the property shall be sold to become operative in theeventofaforeclosuresaleatpublicauction.It isnullandvoid. REDEMPTION Q:Whatisredemption? A:Transactionbywhichthemortgagorreacquires orbuysbackthepropertywhichmayhavepassed underthemortgageordiveststhepropertyofthe lienwhichthemortgagemayhavecreated. Q:Whatarethekindsofredemption? A: 1. Equity of redemption right of mortgagor 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 sale. It applies in case of judicial foreclosure. 2. Right of redemption right of the mortgagor to redeem the mortgaged property within one year from the date of registration of the certificate of sale. It applies in case of extrajudicial foreclosure. Q: X and Y, judgment creditors of A, obtained the transfer of the title of the mortgaged property in their names. Earlier, A executed a mortgage over the same property in favor of FGU Insurance.The latter mortgage was registered. When A defaulted, FGU foreclosed the property.A certificate of sale was thereafter issued in FGUs favor, which was confirmed by the RTC. However, before the new TCT could be issued, X and Y filed their respective motion for intervention and to set aside the judgment alleging that they are the new owners of the propertyandthefailureofFGUtoimpleadXand Yintheactionforforeclosuredeprivedthelatter of due process. Is the contention of X and Y correct? A:No.Subordinatelienholdersacquireonlyalien upon the equity of redemption vested in the mortgagor, and their rights are strictly subordinate to the superior lien of the mortgagee. Such equity of redemption does not constitute a bar to the registration of the property in the name of the mortgagee. Registration may be granted in the name of the mortgagee but subject to the subordinate lien holders equity of redemption, which should be exercised within ninety (90) days from the date the decision becomes final. This registration is merely a necessary consequence of the execution of the final deed of sale in the foreclosure proceedings. (Looyuko v. CA, G.R. No. 102696, July12,2001) Q: What are the requisites for valid right of redemption? A: 1. Mustbemadewithinoneyearfromthe timeoftheregistrationofthesale. 2. Payment of the purchase price of the property plus 1% interest per month together with the taxes thereon, if any, paid by the purchaser with the same rateofinterestcomputedfromthedate ofregistrationofthesale;and 3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper Register of Deeds (Rosales v. Yboa,G.R.No.L42282,Feb.28,1983).
Note: The redemptioner should make an actual tender in good faith of the full amount of the purchase price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as the case maybe,withinterestthereonattheratespecifiedin the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. (Heirs of Quisimbingv.PNB,G.R.No.178242,Jan.20,2009)
Q: Is the period of redemption a prescriptive period? A: No. The period of redemption is not a prescriptive period but a condition precedent provided by lawto restrict the right of the person exercisingredemption. If a person exercising the right of redemption has offered to redeem the property within the period fixed, he is considered to have complied with the condition precedent prescribed by law and may thereafter bring an action to enforce redemption. If, on the other hand, the period is allowed to lapse before the right of redemption is exercised, then the action to enforce redemption will not
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prosper, even if the action is brought within the ordinaryprescriptiveperiod. Q: D obtained a loan from C secured by a REM over a parcel of land. When D defaulted, C extrajudicially foreclosed the property. C was declared the highest bidder in the auction. On October 29, 1993, C caused the registration of the certificate of sale. On November 9, 1994 D filed a complaint for annulment of the extrajudicial foreclosure and auction sale. Can D redeem the property beyond the one year redemptionperiod? A:No.Dlostanyrightorinterestoverthesubject property primarily because of his failure to redeem the same in the manner and within the period prescribed by law. His belated attempt to question the legality and validity of the foreclosure proceedings and public auction must accordingly fail. (Sps. Landrito v. CA G.R. No. 133079,Aug.9,2005) Q: Can a mortgagor, whose property has been extrajudicially foreclosed and sold, validly execute a mortgage contract over the same property in favor of a third party during the periodofredemption? A: Yes. The purchaser at the foreclosure sale merelyacquiredaninchoaterighttotheproperty which could ripen into ownership only upon the lapse of the redemption period without his credit having been discharged, it is illogical to hold that during that same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that the land will consequently be without an owner although it remains registered in the nameof the mortgagor. Such mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon (Medida v. CA, G.R. No. 98334,May8,1992). Q: DBP guaranteed LCDs loan. When LCD defaulted, DBP paid it and sought reimbursement. LCD failed to reimburse DBP, hence DBP extrajudicially foreclosed the REM, where it was the highest bidder. The Sheriffs certificate of sale was annotated in the certificateoftitlesonApril30,1976.LaCampana failed to redeem the properties. The court, among others, ordered LCD to pay such sums of money unlawfully collected or received by way of rentals and/or fruits from the subject properties to DBP. When should the period for the remittance of collected/received rentals/fruits from the properties, of LCD to DBP start? A: In foreclosure proceedings, the buyer becomes theabsoluteownerofthepropertypurchasedifit is not redeemed during the prescribed period of redemption, which is one year from the date of registrationofthesale.TheSheriffscertificateof sale was annotated in the certificate of titles on April 30, 1976. DBP became the absolute owner of the properties on May 1, 1977. Thus, the period to be considered in determining the amount of collection should start from May 1, 1997 up to the time when the possession of the properties are actually and completely surrendered to DBP. (La Campana Development Corporation v. DBP, G.R. No. 146157, Feb. 13, 2009)
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Flowchart of Extra-judicial Foreclosure of Real Estate Mortgage
Executionofloan+REMagreement(REM withbuiltinSPAtosellincaseofdefault)
Defaultofmortgagorfornonpaymentor violationofthetermsoftheloanorREM agreement
Filingofpetitionforsalewith Clerk of Court
Publication / posting of notice / jurisdictionalrequirements
Onceaweekfor3consecutiveweeksina newspaperofgeneralcirculation
Foreclosuresale
Note:Theredemptionprice: Ifthemortgageeisabank: outstandingobligation +intereststipulatedintheagreement Consolidationoftitlebyfilingaffidavit withRegistryofDeeds(operative document)
Registrationofthesale withRegistryofDeeds
Oneyearredemptionperiod
Cancellationoftitleofthemortgagor andissuanceofnewtitleinfavorof mortgagee
Note: if after the expiration of the redemption period, thepetitionforwritofpossessionismandatory or ministerial
Petitionforwritofpossession
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Flowchart for Judicial Foreclosure of Real Estate Mortgage
Complaint with the court. Include subsequent lien holders, otherwise equity of redemption will not be divested. (Lampin v. IAC, No. L70987, Sept. 29, 1988))
Hearing
Judgment
Entry of judgment
Mortgagee to file motion for confirmation of sale
Execution sale
Upon failure to pay, mortgagee to file motion for execution foreclosing mortgage
90 days 120 days from entry of judgment for mortgagor to pay his debt, as determined by court
Issuance of order confirming the sale (order is appealable) (Ocampo v. Dimalanta, No. L21011, Aug. 30, 1967) Wait for finality of order
Registration of the order confirming the sale
Cancellation of the title of the mortgagor/issuance of new title to the mortgagee
* If mortgagee/bidder is bank or credit institution, mortgagor has one more year from registration of order confirming the sale + certificate of sale to redeem the property.
Secure a writ of possession, by motion, from the same court that ordered the foreclosure
Note: GR: In judicial foreclosure, there is only equity of redemption. XPN: If the mortgagee is a bank or credit institution, there is one year right of redemption.
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VI.CHATTELMORTGAGE A.DEFINITIONANDCHARACTERISTICS Q:Whatischattelmortgage? A: It is a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. Q: What are the characteristics of chattel mortgage? A: 1. It is a formal contract because it must beembodiedinapublicinstrumentand recorded in the Chattel Mortgage Register; 2. It is an accessory contract because its existence depends upon an existing validprincipalobligation; 3. It is a unilateral contract because the obligation is only on the part of the creditor to free the chattel from encumbrance upon the payment of the principalobligation; Q: What are the laws that govern chattel mortgages? A: 1. ChattelMortgageLaw(ActNo.1508) 2. ProvisionsoftheCivilCodeonpledge
Note: In case of conflict between nos. 1 and 2,theformershallprevail.
4. It does not convey dominion but is only a security (In re: Du Tec Chuan, No. 11156,March28,1916); It creates a real right or a lien which is being recorded and follows the chattel wherever it goes (Northern Motors, Inc. v.Coquia,No.L40018,Dec.15,1975).
5.
Q: What are the requisites in a chattel mortgage? A: 1. GR:Itcoversonlymovableproperty XPN: When the parties treat as personalty that which is according to its naturerealty. 2. Registration with the Chattel Mortgage Register. 3. Descriptionoftheproperty. 4. Accompanied by an affidavit of good rd faithtobind3 persons.
Note: The absence of an affidavit of good faith does notaffectthevalidityofthecontract.
RevisedAdministrativeCode RevisedPenalCode(Art.319) Other special laws (i.e. Motor vehicle law) 6. Ship Mortgage Decree of 1978 (P.D. No. 1521) Q: What may be the subject matter of chattel mortgage? A: 1. Sharesofstockinacorporation; 2. Interestinbusiness; 3. Machinery and house of mixed materials treated by parties as personal property and no innocent third person will be prejudiced thereby (Makati Leasing and Finance Corp. v. Weaver Textile Mills, Inc., No. L58469, May, 16, 1983); 4. Vessels, the mortgage of which have beenrecordedwiththePhilippineCoast Guard in order to be effective as to thirdpersons; 5. Motor vehicles, the mortgage of which had been registered both with the Land Transportation Commission and the Chattel Mortgage Registry in order to affectthirdpersons; 6. House which is intended to be demolished;or 7. Growing crops and large cattle (pars. 2 and3,Sec.7,ActNo.1508).
3.
4. 5.
Note: Section 7 of the Chattel Mortgage Law does not demand specific description of every chattel mortgaged in the deed of mortgage, but only requires that the description of the mortgaged property be such as to enable the parties to the mortgage or any other person to identify the same afterareasonableinvestigationandinquiry(Saldana v. Phil. Guaranty Co., Inc., No. L13194, Jan. 29, 1960);otherwise,themortgageisinvalid.
Q:Whatisaffidavitofgoodfaith? A: It is an oath in a contract of chattel mortgage wherein the parties severally swear that the mortgage is made for thepurpose ofsecuring the obligation specified in the conditions thereof and
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for no other purposes and that the same is a just and valid obligation and one not entered into for thepurposeoffraud.
Note: The absence of the affidavit vitiates the mortgage only as against third persons without noticelikecreditorsandsubsequentencumbrances.
Q: Distinguish contract of chattel mortgage from contractofrealestatemortgage. A: REALESTATE CHATTELMORTGAGE MORTGAGE Subjectmatter Personalproperty Realproperty Requirementofregistration Essentialforthevalidity Merelyforthepurpose ofthiscontract ofbindingthirdpersons Procedurefortheforeclosureofachattelmortgage isdifferentfromtheprocedureofforeclosurefor realestatemortgage B.REGISTRATION Q:Whatisthelegalsignificanceofregistration? A:Itistantamounttothesymbolicdeliveryofthe mortgage to the mortgagee, which is equivalent toactualdelivery(Meyersv.Thein,No.5577,Feb. 21,1910). Q: What is the difference in registration of real mortgageandchattelmortgage? A: A deed of real estate mortgage is considered registered once recorded in the entry book. However, chattel mortgage must be registered not only in the entry book but also in the Chattel Mortgage Register. (Associated Insurance and SuretyCo.v.LimAng,(CA)52Off.Gaz.5218) Q: What is the effect if the chattel mortgage is notregisteredinthechattelmortgageregister? A: It is still binding between the parties but it will notbebindingtoinnocentthirdparties. Q: When should the registration of the chattel mortgagebemade? A: The law is silent on the time or period when registration should be made. The Court of Appeals has held though that the law is substantiallyandsufficientlycompliedwithwhere the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of innocent third persons isprejudiced(Ledesmav.Perez,2C.A.Rep.126).
Q: Should the foreclosure sale in chattel mortgagebedoneinpublicauction? A: Act No. 1508 provides for the foreclosure sale in chattel mortgage be done by public auction. However,thepartiesarefreetostipulatethatthe foreclosurebedonebyprivatesale. Q: In case of foreclosure sale in chattel mortgage, may the creditor recover deficiency if the redemption price is less than the debt secured? A: GR:CRmayrecoverdeficiency. XPN: when the chattel mortgage is used to secure the purchase of personal property in installments(RectoLaw). Q:Whatistheeffectofanincreaseinmortgage credit? A: If the parties to a chattel mortgage take an oath that the debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious thatavalidmortgagecannotbemadetosecurea debt to be thereafter contracted (11 C.J. 448). 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 credit becomes a new mortgage (Belgian Catholic Missionaries v. Magallanes Press,No.25729,Nov.24,1926). Q: What is the effect of obtaining a personal judgmentonthemortgagelien? A:Itisdeemedabandoned. Q: What are the offenses involving chattel mortgage? A: 1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consentofthemortgagee;or 2. Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and duly recorded in the
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Chattel Mortgage Register (Art. 319, RPC). A:IfitwasthelandwhichVinichattelmortgaged, such mortgage would be void, or at least unenforceable,sincehewasnottheownerofthe land. Ifwhatwasmortgagedasachattelisthebuilding, the chattel mortgage is valid as between the parties only, on grounds of estoppel which would preclude the mortgagor from assailing the contract on the ground that its subjectmatter is an immovable. Therefore Vinis defense is untenable,andFeliciacanforeclosethemortgage over the building, observing, however, the procedure prescribed for the execution of sale of a judgment debtors immovable under Rule 39, Rules of Court, specifically, that the notice of auction sale should be published in a newspaper ofgeneralcirculation.(1994BarQuestion) VII.ANTICHRESIS
C.FORECLOSURE Q:Howischattelmortgageforeclosed? A: Publicsale Privatesale GR: If there is an express stipulation in thecontract. XPN:Fraudorduress Q: What is the procedure in foreclosure of a chattelmortgage? A:Themortgageemay,afterthirty(30)daysfrom the time of the default or from the time the condition is violated, cause the mortgaged property to be sold at public auction by a public officer(Sec.14,ActNo.1508) The30dayperiodtoforecloseachattelmortgage is the minimum period after violation of the mortgageconditionforthemortgage The creditor has at least ten (10) days notice servedtothemortgagor The notice of time, place and purpose of such sale,isposted After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. (Cabral v. Evangelista, 28 L26860, July30,1969) Q: What are the legal consequences of establishing a chattel mortgage over a building erectednotbytheowneroftheland? A: A building is immovable or real property whetheritiserectedbytheowneroftheland,by a usufructuary, or by a lessee. It may be treated asamovablebythepartiestoa chattelmortgage butsuchisbindingonlybetweenthemandnoton third parties. As far as third parties are concerned,thechattelmortgagedoesnotexist. Q:Viniconstructedabuildingonaparcelofland he leased from Andrea. He chattel mortgaged the land to Felicia. When he could not pay Felicia, Felicia initiated foreclosure proceedings, Vini claimed that the building he had constructed on the leased land cannot be validly foreclosed because the building was, by law, an immovable.IsVinicorrect?
A.DEFINITIONANDCHARACTERISTICS Q:Whatisantichresis? A: It is a contract whereby the CR acquires the right to receive the fruits of an immovable of the debtor, with the obligation to apply them to the payment of interest, if owing, and thereafter to theprincipalofhiscredit. Q:Whatarethecharacteristicsofantichresis? A: 1. Accessorycontract. 2. Formal contract the amount of the
principal and of the interest must both be in writing; otherwise the contract of antichresisisvoid.
3. 4. 5. 6. 7.
Itdealsonlywithimmovableproperty. Itisarealright. The creditor has the right to receive the fruitsoftheimmovable. Itisarealcontract. It can guarantee all kinds of valid obligations.
Note: It is not essential that the loan should earn interest in order that it can be guaranteed with a contract of antichresis. Antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional. [Javier v. Valliser, (CA) N. 2648R, Apr. 29,1950;Sta.Rosav.Noble,35O.G.27241] A stipulation authorizing the antichretic creditor to appropriate the property upon the nonpayment of the debt within the period agreed upon is void (Art. 2038,NCC).
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Q: What is the form of a contract of antichresis anditscontents? A:FDAPa 1. CoversonlytheFruitsofrealproperty 2. Delivery of the property necessary so that CR may receive the fruits therefrom
Note: Delivery of the property to the creditor is required only in order that the creditor may receive thefruitsandnotforthevalidityofthecontract.
2.
ANTICHRESIS Referstorealproperty Formal Principalandinterest mustbespecifiedin writing,otherwise contractisvoid PLEDGE Personalproperty Real Neednotbeinwriting, oralevidencemaybe allowedtoprovethe same.
3.
ANTICHRESIS Creditorisgiventheright toenjoythefruitsand applythemtothe paymentoftheinterest andtotheprincipalof theloan PACTODERETROSALE
3.
4.
Amount of principal and interest must be specified in writing, otherwise, the contractshallbevoid. Express agreement that debtor will give Possession to the CR and that CR will apply the fruits to the interest and then totheprincipal.
Creditordoesnothave suchright
Q: Is prescription as a mode of acquiring ownership available to the creditor in antichresis? A: No. 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 (Ramirez v. CA,G.R.No.L38185,September24,1986). Q: How should the amount of payment in antichresisbedetermined? A: The actual market value of the fruits at the timeoftheapplicationthereoftotheinterestand the principal shall be the measure of such application(Art.2133,NCC). Q: What is the effect if the amount of the principal and of the interest is not specified in writing? A:Thecontractisvoid(Art.2134,NCC). Q: Who are the parties to a contract of antichresis? A: 1. Antichretic creditor one who receives the fruits on the immovable property of thedebtor. 2. Antichretic debtor one who pays his debt through the application of the fruitsofhisimmovableproperty.
Note: The fruits of the immovable which is the object of the antichresis must be appraised at their actual market value at the time of the application (Art. 2138).The property delivered stands as a security for the payment of the obligation of the debtor in antichresis. Hence, the debtor cannot demanditsreturnuntilthedebtistotallypaid.
Q:Distinguishantichresisfrom: 1. Realestatemortgage; 2. Pledge;and 3. Pactoderetrosale. A:

ANTICHRESIS Propertyisdeliveredto creditor Creditoracquiresonly therighttoreceivethe fruitsoftheproperty; doesnotproduceareal rightunlessregisteredin theRegistryProperty Creditorobligedtopay thetaxesandcharges upontheestateunless stipulatedotherwise Thereisanexpress stipulationthatthe creditorshallapplythe fruitstothepaymentof theinterest,ifowing,and thereaftertothe principalofthedebt. REALESTATE MORTGAGE Debtorusuallyretains possessionofthe property Creditorhasnorightto receivefruits,but mortgagecreatesreal rightagainsttheproperty
Creditorhasnosuch obligation
Thereisnosuch obligationonthepartof themortgage
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B.OBLIGATIONSOFANTICHRETICCREDITOR Q: What are the obligations of an antichretic creditor? A:To: pay the taxes and charges assessable against the property like real estate taxes and others; bear the necessary expenses for the preservationoftheproperty; beartheexpensesnecessaryfortherepairof theproperty;and apply the fruits received for payment of the outstanding interests, if any, and thereafteroftheprincipal. Q: When can the antichretic debtor reacquire thepossessionofhisproperty? A: The debtor can only demand the return of the property after having fully paid his obligations to the creditor. It is not fair for the debtor to regain the possession of the property when his debt has not been fully paid. Until there is full payment of theobligation,thepropertyshallstandassecurity therefor (Macapinlac v. Gutierrez Repide, No. 18574,Sept.20,1922). Q: How can the creditor be exempted from the obligationsimposedbyArt.2135? A: The creditor may compel the debtor to re enterintotheproperty.
Note: Article 2135. The creditor, unless, there is a stipulation to the contrary, is obliged to pay the taxesandchargesupontheestate. He is also bound to bear the expenses necessaryforitspreservationandrepair. The sums spent for the purposes stated in thisarticleshallbedeductedfromthefruits.
Q: What is the remedy of the creditor in case of nonpaymentofhiscredit? A:File: 1. anactionforcollection;or 2. a petition for the public sale of the property (Barretto v. Barretto, No. 11933,Dec.1,1917).
VIII.QUASICONTRACTS
Q:WhatisaQuasiContract? A: Quasicontracts are lawful, voluntary, and unilateralactswhichgenerallyrequireapersonto
reimburse or compensate another in accordance with the principle that no one shall be unjustly enriched at the expense of another. (Art. 2142, NCC) Q:Whatarethebasesforquasicontracts? A: 1. No one must unjustly enrich himself at anothersexpense 2. ifonebenefits,hemustreimburse 3. justiceandequity Q:Whatareexamplesofquasicontracts? A: NegotiorumGestio SolutioIndebiti A.NEGOTIORUMGESTIO Q:WhatisNegotiorumGestio? A:Thisisakindofquasicontractwheresomeone called the gestor takes the management of the business or property of another person known as owner without the consent or authority of the latter. Q: What are the essential requisites for negostiorumgestio? A: 1. Nomeetingoftheminds 2. Taking charge of anothers business or property 3. The property or business must have beenabandonedorneglected 4. Theofficiousmanager(gestor)mustnot have been expressly or implicitly authorized 5. The officious manager (gestor) must havevoluntarilytakencharge Q:Whatareexamplesofnegotiorumgestio? A: 1. If an attorneyinfact continues to manage the principals estate after the principals death, the former agent becomes a gestor (Julian, et al. v. De Antonio, [CA] 2 O.G.966, October 14, 1943). 2. If a coownership is illegally partitioned, thepossessorsbecomegestorswiththe duty to render the accounting (De Gala v.DeGala&Albatros,60Phil311).
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CREDIT TRANSACTIONS
Q:Whatistherequireddiligencefromagestor? A: Diligence of a good father of a family (Art. 2145, NCC). Hence, a gestor is liable for the acts or negligence of his employees (MRR Co. v. CompaniaTransatlantica,38Phil.875). Note:Theliabilityfordamages,whichhowever,in certaincases,maybemitigated. Q: What is the effect of ratification of the owner ofthebusiness? A: Ratification produces the effect of an express agency; and this is true even if the business is not successful(Art2149,NCC). Q: What are the liabilities of the owner even if thereisnoratification? A: 1. Liability for the obligation incurred in hisinterest. 2. Liability for necessary and useful expenses and for damages. (Art 2150, NCC) Q:Whatistheruleiftheownerisaminor? A: Even if the owner is a minor, he is still liable under the article for he should not be unjustly enriched at anothers expense. (Rotea v. Delupio, 67Phil.330) B.SOLUTIOINDEBITI Q:WhatisSolutioIndebiti? A:Solutioindebitiisthequasicontractthatarises when a person is obliged to return whatever was received by him through error or mistake or received by him although there was no right to demandit. Q:Whataretherequisitesforsolutionindebiti? A: 1. Receiptofsomething. 2. Therewasnorighttodemandit 3. Unduedeliverywasbecauseofmistake.
Note: When the payment was not by mistake or voluntary, but was made because if the coercive process of the writ of execution, solutio indebiti does not apply (Manila Surety & Fidelity Co., Inc. v. Lim,GRno.L0343,December29,1959)
Q:Whatareexamplesofsolutioindebiti? A: 1. Erroneous payment of interest not due (Velezv.Balzarza,73Phil.630) 2. Erroneous payment of rental not called forinviewoftheexpirationofthelease contract(Yansonv.Sing,C.A.382438) 3. Taxes erroneously given (Aquinena and Co.v.Muertequi,32Phil.261) Q: Can solutio indebiti be applied because of doubtfulordifficultquestionoflaw? A: Yes, there can be payment because of doubtfulordifficultquestionoflawmayleadto solutio indebiti because of the mistake committed.(Art.2155,NCC) Q: GMC Corp. used to compute and pay its monthly cost of living allowance (COLA) on the basis of 30days a month ever since law mandated the payment of COLA. Wage Order 6 was implemented, increasing the COLA by P3 a day. GMC however multiplied the P3 additional COLA by 22days. The Union objected arguing that the managements unilateral act was tantamount to withdrawal of benefits. Is there a mistakeintheapplicationoflaw? A: GMC cannot be faulted for the erroneous application of law. Payment may be said to have been made by reason of a mistake in the construction or application of doubtful or difficult question of law. Since it is a past error that is being corrected, no vested right may be said to have arisen nor any diminution of benefit under Art. 100 of the Labor Code, may be said to have resulted by virtue of the correction. (Globe Mackay Cable and Radio Corp. v. NLRC, GR no. 74156,June29,1988) Q:Whatistheliabilityofapayeeingoodfaith? A: 1. In case of impairment or loss, liability is onlytotheextentofbenefit. 2. In case of alienation, the price is to be reimbursed, or in case of credit, the sameshouldbeassigned.
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IX.CONCURRENCEANDPREFERENCEOFCREDITS duties, on the movables, moneyorsecurities obtainedbythem; Claims for the unpaid price of movable 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 thereofcanbedeterminedproportionally; 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 mortgaged, up to thevaluethereof; Credits for making repairs or preservation or personal property on the movable thus made,repaired,keptorpossessed; Claims for laborers wages, on the goods manufacturedortheworkdone; For expenses of salvage, upon the goods salvaged; 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; Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, until their delivery and forthirtydaysthereafter; Credits for lodging and supplies usually furnished to travelers by hotelkeepers, on the movables belonging to the guest as long as such movables are in the hotel, but not formoneyloanedtotheguests; Credits for seeds and expenses for cultivation and harvest advanced to the debtor,uponthefruitsharvested; Credits for rent for one year, upon the personal property of the lessee existing on the immovable leased on the fruits of the same, but not on money or instruments of credit; Claims in favor of the depositor if the depository has wrongfully sold the thing deposited,uponthepriceofthesale.
A.MEANINGOFCONCURRENCEAND PREFERENCE Q:Whatisconcurrenceofcredits? A: Concurrence of credit implies the possession by two or more creditors of equal rights or privileges over the same property or all the propertyofadebtor. Q:Whatispreferenceofcredit? A:Preferenceofcreditisarightheldbyacreditor tobepreferredinthepaymentofhisclaimabove othersoutofthedebtorsassets.
Note: The rules apply when two or more creditors have separate and distinct claims against the same debtorwhohasinsufficientproperty.
3.
4.
5.
B.CLASSIFICATIONOFCREDITS Q:Whatarethegeneralcategoriesofcredit? A: 1. Special preferred credits those listed in

Arts. 22412242, NCC shall be considered mortgages and pledges of real and personal property or liens (Art. 2243). Hence, they are not included in the insolventdebtorsassets. Ordinary preferred credits those listed in Art 2244, NCC as amended by Art. 110 oftheLaborCode Common credits those listed under Art. 2245, NCC, which shall be paid pro rata regardlessofdates.
6. 7. 8.
9.
2.
3.
10.
Q:Whatistheextentofliabilityofadebtorfor hisobligations?
A: The debtor is liable with all his property,

present and future, for the fulfillment of his obligations, subject to the exemptions provided bylaw. C.PREFERREDCREDITSONSPECIFICMOVABLES Q:Whatarethepreferredcreditswithrespectto thespecificmovableproperty? A: 1. Duties, taxes and fees due thereon to the stateoranysubdivisionthereof; 2. Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their
11.
12.
13.
Note: 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 (30) days from the unlawfulseizures.
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CREDIT TRANSACTIONS
Summary: 1. taxes 2. malversationbypublicofficials 3. vendorslien 4. pledge,chattelmortgage 5. mechanicslien 6. laborerswages 7. salvage 8. tenancy 9. carrierslien 10. hotelslien 11. croploan 12. rentalsoneyear 13. deposit

10. Credits of insurers, upon the property insured, for the insurance premium for twoyears. Summary: 1. taxes 2. vendorslien 3. contractorslien 4. lienofmaterialmen 5. mortgage 6. expensesofpreservation 7. recordedattachments 8. warrantyinpartition 9. conditionaldonations 10. premiumsfor2yearinsurers
D.PREFERREDCREDITSONSPECIFIC IMMOVABLES Q:Whatarethepreferredcreditswithrespectto specificimmovableproperty? A: 1. Taxesdueuponthelandorbuilding; 2. For the unpaid price of real property soldupontheimmovablesold; 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,canalsorotherworks; 4. Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals, and other works, upon said buildings, canals or otherworks; 5. Mortgage credits recorded in the Registry of Property, upon the real estatemortgage; 6. Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon theimmovablepreservedorimproved; 7. Credits annotated in the Registry of Property,byvirtueofajudicialorder,by attachments or executions, upon the property affected, and only as to later credits; 8. Claims of coheirs for warranty in the partitionofan immovableamongthem, upontherealpropertythusdivided; 9. Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovabledonated;
E.EXEMPTPROPERTIES Q: What are the exempt properties from executionandsale? A:FSTBCFPLBELMCL 1. GR: Family home constituted jointly by husbandandwifeorbyunmarriedhead ofafamily(Art.152,FC). XPNs:For: a. nonpaymentoftaxes; b. debts incurred prior to the constitution of the family home; c. debts secured by mortgages on the premises before or aftersuchconstitution;and d. debts due to laborers, mechanics, architects, builders, material men and others who have rendered service or furnished material for the construction of the building 2. Right to receive Support as well as any money or property obtained as such support.(Art.205,FC) 3. Tools and implements necessarily used byhiminhistradeoremployment; 4. Two horses, or two cows, or two carabaos or other Beasts of burden, such as the debtor may select, not exceeding one thousand pesos in value and necessarily used by him in his ordinaryoccupation; 5. HisnecessaryClothingandthatofallhis family. 6. Household Furniture and utensils necessary for housekeeping and used for that purpose by the debtor, such as
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for indemnity for damages in cases of labor accident or illness resulting from thenatureoftheemployment; Credits and advancements made to the debtor for support of himself or herself, and family, during the last preceding insolvency; Support during the insolvency proceedings, and for three months thereafter; Fines and civil indemnification arising fromacriminaloffense; Legal expenses, and expenses incurred in the administration of the insolvents estate for the common interest of the creditors, when properly authorized andapprovedbythecourt; Taxesandassessmentsduethenational government, other those mentioned in Articles2241,No.1,and2242,No.1; Taxes and assessments due any province, other than those mentioned inArticles2241,No.1and2242,No.1; Taxes and assessments due any city or municipality other than those mentioned in Articles 2241, No.1 and 2242,No.1; Damages for death or personal injuries causedbyaquasidelict; Gifts due to public and private institutionsofcharityorbeneficence; Credits which without special privilege, appear in (a) a public instrument; or (b) in the 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(Art.2244).
7. 8.
9.
10.
11. 12.
13.
14.
Provisions for individual or family use insufficientforthreemonths; The professional Libraries of attorneys, judges, physicians, pharmacists, dentist, engineers, surveyors, clergymen, teachers and other professionals, not exceeding three thousand pesos in value; OnefishingBoatandnet,notexceeding the total value of one thousand pesos, the property of any fisherman, by the lawful use of which he earns a livelihood; So much of the Earnings of the debtor for his personal services within the month preceding the levy as are necessaryforthesupportofhisfamily; Letteredgravestones; All Moneys, benefits, privileges or annuities accruing or in any manner growing out of any life insurance, if the annual premiums paid do not exceed five hundred pesos, and if they exceed the sum, a like exemption shall exist whichshallbearthesameproportionto the moneys, benefits privileges and annuities so accruing or growing out of such insurance that said five hundred pesos bears to the whole premiums paid; Copyrights and other properties especially exempted by law (Sec. 12, Rule39) PropertyunderLegalcustodyandofthe publicdominion.
5.
6.
7. 8.
9.
10.
11.
12. 13. 14.
Q:Whatistheorderofpreferencewithrespect tootherpropertiesofthedebtor? A: 1. Proper funeral expenses for the debtor, or children under his or her parental authoritywhohavenoproperty oftheir own,whenapprovedbythecourt; 2. Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedingsininsolvency; 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 theirown; 4. Compensation due to the laborers of their dependents under laws providing
Summary: 1. funeralexpenses 2. wagesofemployeesoneyear 3. expensesoflastillness 4. workmenscompensation 5. supportforoneyear 6. supportduringinsolvency 7. finesincrimes 8. legalexpensesadministration 9. taxes 10. tort 11. donations 12. appearing in public instrument or final judgment
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F.ORDEROFPREFERENCEOFCREDIT Q:Whatistheorderofpreferenceofcredits? A: 1. Those credits which enjoy preference with respect to specific movable, excluded all others to the extent of the value of the personal property to which the preference refers(Article2246). 2. If there are two or more credits with respect to the same specific movable property, they shall be satisfied prorata, after the payment of duties, taxes, and fees due the State or anysubdivisionthereof(Art.2247,NCC). 3. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the valueoftheimmovableorrealrighttowhich thepreferencerefers(Art.8). 4. If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right (Art.2249,NCC). 5. The excess, if any, after the payment of the credits which enjoy preference with respect tospecificproperty,realorpersonal,shallbe added to the free property which the debtor may have, for the payment of the other credits(Art.2250,NCC). 6. Those credits which do not enjoy any preference with respect to specific property and those which enjoy preference, as to the amount not paid, shall be satisfied according tothefollowingrules: a. In the order established in Article 2244; b. Common credits referred to in Article 2245 shall enjoy no preference and shall be paid pro rata regardlessof dated (Art. 2251, NCC). Q:Whataretheteststodetermineinsolvency? A: 1. Equity test A state of inability of a persontopayhisdebtsatmaturity. 2. Balance sheet test The assets, if all made immediately available, would not besufficienttodischargethebalance. Q: What are the remedies of an insolvent debtor? A: 1. Petition the court to suspend payments ofhisdebts;or 2. To be discharged from his debts and liabilities by voluntary or involuntary insolvencyproceedings.(Sec.1) Q: What is the effect of insolvency proceedings filedbyindividualdebtors? A: 1. Suitspendingincourt a. securedobligations suspendeduntilassignee appointed b. unsecuredobligations terminatedexcepttofix amountofobligation c. foreclosuresuitspending continue 2. Suitsnotyetfiledcannotbefiled anymorebutclaimsmaybepresented toassignee.
Note: The result is different if the petitioner is a corporation because under the Revised Rules on Corporate Recovery, all claims whether secured or unsecuredarestayed.
X.INSOLVENCYLAW
A.DEFINITIONOFINSOLVENCY
Q:Whatisinsolvency? A:Thestateofapersonwhoseliabilitiesaremore than his assets. The term is frequently used in the more restricted sense to express inability of a person to pay his debts as they become due in theordinarycourseofhisbusiness.
Q: If A is declared an insolvent by the court, what would be the effect, if any, of such declarationonhiscreditors?Explain. A: 1. The sheriff shall take possession of all assets of the debtor until the appointmentofareceiverorassignee; 2. Paymenttothedebtorofanydebtsdue tohimand thedeliverytothedebtorof any property belonging to him, and the transfer of any property by him are forbidden; 3. Allcivilproceedingspendingagainstthe insolventshallbestayed;and 4. Mortgagesandpledgesarenotaffected by the order declaring a person insolvent.(Sec.59,InsolvencyLaw)
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Q: Assuming that A has guarantors for his debts, are the guarantors released from their obligationsonceAisdischargedfromhisdebts? A: The guarantors are not discharged, because the discharge is limited to A only (Sec. 68). Precisely under the principle of excussion, the liability of the guarantors arises only after the exhaustion of the assets of the principal obligor. The effect of discharge merely confirms exhaustion of the assets of the obligor available tohiscreditors. Q. What remedies are available to the guarantors in case they are made to pay the creditors?Explain. A: Their remedy is to prove in the insolvency proceeding that they paid the debt and that they substituted for the creditors, if the creditors have notproventheirclaims(Sec.56). Under Article 2081 of the Civil Code, the guarantor may set up against the creditor all the defenses that pertain to the principal debtor. The discharge obtained by the debtor on the principal obligation can now be used as a defense by the guarantors against the creditors. The guarantors are also entitled to indemnity under Article 2066 oftheCivilCode. Q: X and Y were employees of ATLAS which hypothecated its certain assets to DBP. When ATLAS defaulted in its obligations, DBP foreclosedandacquiredthemortgagedassetsby virtue of the foreclosure sale. Meanwhile, X and Y filed an action against both ATLAS and DBP for unpaidwages.TheLaborArbiterruledinfavorof XandY.IstheLAcorrectinconsideringworkers preference under Article 110 of the Labor Code overthatofDBPsmortgagelien? A: Declaration of bankruptcy or a judicial liquidation must be present before the workers preference may be enforced. A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the judgment debtor. A recorded mortgage is a special preferred credit while the preference given to workers under Article 110 of the Labor Code is an ordinary preferred credit. (DBP v. NLRC, G.R. No. 86227, Jan.19,1994) Q: Is the power to petition for the adjudication ofbankruptcygrantedtojuridicalpersons? A: The law grants to a juridical person, as well to natural persons, the power to petition for the adjudication of bankruptcy of any natural or juridical person provided that with respect to juridical persons, it is a resident corporation and adjoins at least two other residents in presenting the petition to the Bankruptcy Court. When a foreign bank alleged in its petition that it is licensed to do business in the Philippines and actually doing business in the country, it is in effect stating that it is a resident foreign corporation in the Philippines. (State Investment House v. Citibank, N.A., G.R. Nos. 7992627, Oct. 17,1991)
B.SUSPENSIONOFPAYMENTS
Q:Whatissuspensionofpayments? A: It is the postponement, by court order, of the payment of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectivelyfalldue. Q: When is the remedy of suspension of paymentsavailable? A: The debtor who, possessing sufficient property tocoverallhisdebts,foreseestheimpossibilityof meeting them when they respectively fall due, may petition that he be declared in the state of suspension of payments by the court of the province or city in which he has resided for six months next preceding the filing of his petition (Sec.2[1]). Q:Whendoessuspensiontakeeffect? A:Uponthefilingofthepetition. Q: What are the steps in suspension of payments? A: 1. Filing of the petition by the debtor (Sec. 2);
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2. 3. 4. Issuancebythecourtofanordercalling ameetingofcreditors(Sec.3); Publication of the order and service of summons(Sec.4); Meetings of creditors for the consideration of the debtors proposition(Sec.8);
Note: To hold a valid meeting, the creditors representing at least 3/5 of the liabilities of the debtor must be present.
5. 6.
7.
8.
Approval by the creditors of the debtorsproposition(Sec.8,[20]); The Double Majority Rule applies. To obtain a majority vote, it is necessary that: a. At least 2/3 of the creditors must vote on the same proposition,and b. Said2/3representatleast3/5 of the total liabilities of the debtor. Objections, if any, to the decision must be made within 10 days following the meeting.(Sec.11); Issuance of order by the court directing that the agreement be carried out in case the decision is declared valid, or when no objection to said decision has beenpresented.
Q: What are the documents that should accompanythepetition? A: 1. A verified schedule containing a full and true statement of the debts and liabilitiesofthepetitionertogetherwith alistofcreditors;(Secs.15,2) 2. A verified inventory containing a list of creditors, an accurate description of all the property of the petitioner including property exempt from execution and a statement as to the value of each item of property, its location, and encumbrances thereon, if any; (Secs. 16,2) 3. A statement of his assets and liabilities; (Sec.2)and 4. The proposed agreements he requests ofhiscreditors.(Ibid.)
Q:Whataretheeffectsoffilingofthepetition? A: 1. No disposition in any manner of his propertymaybemadebythepetitioner except insofar as concerns the ordinary operations of commerce or of industry inwhichheisengaged;(Sec.3[2]) 2. No payments may be made by the petitioner except in the ordinary course ofhisbusinessorindustry(Ibid.);and; 3. Upon the request to the court, all pending executions against the debtor shall be suspended except execution against property especially mortgaged. (Sec.6) Q:Whoarethecreditorsaffectedbythefilingof thepetition? A: Only creditors included in the schedules filed bythedebtorshallbecitedtoappearandtotake partinthemeeting.(Sec.5)Hence,thosewhodid not appear because they were not informed of theproceedingsareunaffectedbythesame. Q: Who are the creditors not affected by order ofsuspensionofpayments? A: 1. Those having claims for personal labor, maintenance, expenses of the last illness and funeral of wife or child of debtor, incurred during the 60 days immediately preceding the filing of the petition;and 2. Those having legal or contractual mortgages.(Sec.9) Q: When is a petition for suspension of paymentsdeemedrejected? A: 1. When the number of creditors representing at least 3/5 of the liabilitiesnotattend;(Secs.8,10)or 2. When the two majorities required are not in favor of the proposed agreement (Sec.10). Q:Whatistheeffectofdisapprovalofpetition? A: If the decision of the meeting be negative as regards the proposed agreement or if no decision is had in default of such number or of such
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majorities, the proceeding shall be terminated without recourse. In such case, the parties concerned shall be at liberty to enforce the rights whichcorrespondtothem.(Sec.11)
PETITION FOR ORDINARY SUSPENSION OF PAYMENTS Toobtain defermentin thepayment ofdebts. Insolvency Law. Doesnot coversecured creditors. PETITIONFORCORPORATE REHABILITATION
2.
Verified petition for rehabilitation under the Interim Rules of Procedure for Corporate Rehabilitation which includessuspensionofpayments. C.VOLUNTARYINSOLVENCY
Q:Whatisavoluntaryinsolvency? A: This is availed of a debtor who, having debts exceedingP1,000.00,cannotdischargeallofthem with all of his existing assets and who, as a consequence, voluntarily goes to court to have himself declared as an insolventso that his assets may beequitably distributed among his creditors. (Sec.14) Q: What is the procedure for voluntary insolvency? A: 1. Filing of the petition by the debtor prayingforthedeclarationofinsolvency (Sec.2); 2. Issuance of an order of adjudication declaring the petitioner insolvent (Sec.18); 3. Publication and service of the order (Sec.19); 4. Meeting of the creditors to elect the assigneeininsolvency(Sec.30); 5. Conveyance of the debtors property by the clerk of court to the assignee (Sec. 32); 6. Liquidation of the debtors assets and paymentofhisdebts(Sec.33); 7. Composition,ifagreedupon(Sec.63); 8. Discharge of the debtor on his application (Sec. 64), except a corporation; 9. Objection, if any, to the discharge (Sec. 66); 10. AppealtotheSCincertiorari. Q: X, a wellknown architect, is suffering from financial reverses. He has four creditors with a total claim of P26 Million. Despite his intention to pay these obligations, his current assets are insufficienttocoverallofthem.Hiscreditorsare about to sue him. Consequently, he was constrained to file a petition for insolvency. Since X was merely forced by circumstances to petition the court to declare him insolvent, can the judge properly treat the petition as one for involuntaryinsolvency?Explain. A: The petition cannot be treated as one of involuntary insolvency, because it was filed by X
Purpose Torehabilitatethepetitioning company. Law InterimRulesonCorporate Rehabilitation Creditors Coversallcreditors,whether securedornot. Duration Suspensionvaliduntil: Dismissalofthepetitionor Terminationofthe rehabilitation proceedings. Filedby Corporation,partnershipor association,or Thecreditorsholdingatleast 20%ofthedebtorstotal liabilities. Effect
180daysor3 months
Thedebtor, naturalor juridical person
Nomore Thecourt,still,hastoissueastay needforthe ordernotlaterthan5daysfrom courttoissue thefilingofthepetition. astayorder. Effectsoffilingthepetition Allclaimsagainstthedebtorare Allactionsor stayedupontheissuanceofstay claimsagainst order. the corporation Thecreditorsmayproceedto pending enforcetheirclaimagainstthe beforethe suretyevenifduringthependency court, oftherehabilitationproceedings tribunal, involvingthecorporatedebtor. board,or (Phil.BloomingMills,Inc.and bodyshallbe AlfredoChingv.CA,G.R.No. suspended. 142381,Oct.5,2003)
Q: What are the modes or forms of suspension ofpayment? A: 1. Petition for ordinary suspension of paymentsunderAct1956
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himself, the debtor, and not by his creditors (Sec. 20). To treat it as one of involuntary insolvency would unduly benefit X as a debtor, because he would not be subject to the limitation of time withinwhichheissubjectinthecaseofvoluntary insolvencyforpurposesofdischarge(Sec.65). Q: What are the requisites of petition for voluntaryinsolvency? A: The petition which must be verified (Sec. 17) is tobefiled: 1. Byaninsolventdebtor 2. Owing debts exceeding in amount the sum ofP1,000.00 3. IntheRTCoftheprovinceorcityinwhichhe has resided for 6 months next preceding the filingofsuchpetition,and 4. Settingforthinhispetitionthefollowing: a. Hisplaceofresidence; b. The period of residence therein immediately prior to filing said petition; c. His inability to pay all his debts in full; d. His willingness to surrender all his property, estate, and effects not exempt from execution for the benefitofhiscreditors;and e. An application to be adjudged an insolvent.(Sec.14) Q: What are the documents to accompany the petition? A: 1. Averifiedschedulemustcontain: a. A full and true statement of all debts and liabilities of the insolventdebtor;and b. Anoutlineofthefactsgivingriseor which might give rise to a cause of action against such insolvent debtor;(Sec.15) 2. Averifiedinventory,whichmustcontain: a. An accurate description of all the personal and real property of the insolvent exempt or not from execution including a statement as to its value, location and encumbrancesthereon;and b. Anoutlineofthefactsgivingriseor which might give rise to a right of action in favor of the insolvent debtor.(Sec.16) Q:Whomaypetitionforvoluntaryinsolvency? A: The petition may be filed by any officer duly authorized by the vote of the board of directors or trustees at a meeting especially called for that purpose,orbyassentinwriting ofthemajority of thedirectorsortrustees,asthecasemaybe.(Sec. 52) Q:Whatistheeffectoffilingpetition? A: Once the petition is filed, it ipso facto takes away and deprives the debtor petitioner of the right to do or commit any act of preference as to creditors, pending the final adjudication. (PhilippineTrustCo.v.NationalBank,42Phil413) Q: What are the effects of court order declaring debtorinsolvent? A: 1. All the assets of the debtor not exempt from execution are taken possession of bythesheriffuntiltheappointmentofa receiverorassignee; 2. Thepaymenttothedebtorofanydebts due to him and the delivery to the debtor or to any person for him of any property belonging to him, and the transfer of any property by him are forbidden; 3. Allcivilproceedingspendingagainstthe insolventdebtorshallbestayed;and 4. Mortgages or pledges, attachments, or executions on property of the debtor duly recorded and not dissolved are not affectedbytheorder.(Sec.59)

D.INVOLUNTARYINSOLVENCY
Q:Whatisaninvoluntaryinsolvency? A: This is availed of by the petition of 3 or more creditors, none of whom became a creditor by assignment within 30 days prior to filing of petition and whose aggregate credit is not less than P1,000.00, because of commission of one or moreactsofinsolvency.(Sec.20) Q:Whataretheactsofinsolvency? A: 1. Such person is about to depart or has departedfromthePhilippines, with intentto defraudhiscreditors;
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2. Being absent from the Philippines, with intent to defraud his creditors, he remains absent; He conceals himself to avoid the service of legal process for purpose of hindering or delayingordefraudinghiscreditors; He conceals, or is removing, any of his propertytoavoiditsbeingattachedortaken onlegalprocess; Hehassufferedhispropertytoremainunder attachment or legal process for 3 days for the purpose of hindering or delaying or defraudinghiscreditors; He has confessed or offered to allow judgmentinfavorofanycreditororclaimant for the purpose of hindering or delaying or defraudinganycreditororclaimant; He has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying or defrauding his creditors; He has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder, delay, or defraud any oneofhiscreditors; He has made any assignment, gift, sale, conveyance, or transfer of his estate, property, rights, or credits with intent to delay,defraud,orhinderhiscreditors; He has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance, or transfer of his estate, property,rights,orcredits; Being a merchant or tradesman he has generally defaulted in the payment of his currentobligationsforaperiodof30days; For a period of 30 days he has failed after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity;and An execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. (Sec.20) Filing of answer or motion to dismiss (Sec.23); 5. Hearingofthecase(Sec.24); 6. Issuance of order or decision adjudging debtorinsolvent(Ibid.) 7. Publication and service of order (Sec. 25); 8. Meetings of creditors for election of an assigneeininsolvency(Sec.30); 9. Conveyance of debtors property by clerkofcourttotheassignee(Sec.32); 10. Liquidation of the debtors assets and paymentofdebts(Sec.33);
Note: Assets of the insolvent which are not exempt from execution will then be distributed among his creditors in accordance with the rules of concurrence and preference of credits in the Civil Code.
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Q: What is the procedure in involuntary insolvency? A: 1. Filing of the petition by three or more creditors(Sec.20); 2. Issuance of order requiring the debtor to show cause why he should not be adjudgedinsolvent(Sec.21); 3. Serviceofordertoshowcause(Sec.22);
11. Composition,ifagreedupon(Sec.63); 12. Discharge of the debtor on his application, except a corporation (Sec. 52); 13. Objection, if any, to the discharge (Sec. 66);and 14. Appeal to the Supreme Court in certain cases(Sec.62) Q:Whataretherequisitesforfilingapetitionfor InvoluntaryInsolvency? A:Thepetitionisfiledby: 1. Threeormorecreditors; 2. None of whom has become such a creditor by assignment, within 30 days priortothefilingofsaidpetition; 3. Whose credits accrued in the Philippines; 4. The total amount of which credits is not lessthanP1,000.00;and 5. In the RTC of the province or city in which the debtor resides or has his principalplaceobusiness. 6. Thepetitionmust: 7. be verified by at least 3 of the petitioningcreditors; 8. set forth one or more acts of insolvency mentionedinthelaw;and 9. be accompanied by a bond, approved by the court with at least 2 sureties, in suchpenalsumasthecourtshalldirect.
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Q: Can a surety institute involuntary proceedings? A: No, a surety for the debtor is not a creditor. Hence, he cannot institute involuntary proceedings.Allhecandoistoprovehisclaim. Q: Distinguish voluntary insolvency from involuntaryinsolvency. A:
VOLUNTARY INSOLVENCY Filedbythedebtor. Only1creditoris required. INVOLUNTARYINSOLVENCY Filedby3ormorecreditors. 3ormorecreditorsare required. Requirementsforcreditors: 1. Residents of the Philippines; 2. Their credits or demands must have accrued in the Philippines;and 3. Must not have been a creditor by assignment within 30 days prior to the filingofthepetition. Wherethedebtorhas residenceorhashisprincipal placeofbusiness. Debtormusthave committedanyoftheactsof insolvency. Amountofdebtsmustnot belessthanP1,000.00. Debtorisconsidered insolventupontheissuance bythecourtofanorderafter duehearingdeclaringhim insolvent;adjudication grantedonlyafterhearing. Bondisrequired.
Norequirementfor creditors.
Q: Who are the creditors not entitled to vote in theelectionofassignee? A: 1. Those who did not file their claims at least 2 days prior to the time appointed forsuchelection;(Sec.29) 2. Those whose claims are barred by the statuteoflimitations;(Ibid.) 3. Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed as providedinSec.59;and 4. Holders of claims for unliquidated damagesarisingoutofpuretort. Q:Istheassigneerequiredtogiveabond? A: After his election, the assignee is required to give a bond for the faithful performance of his duties.(Secs.30,31)
Note: Courts have the power to appoint receivers to hold the property of individuals or corporations although no insolvency proceedings are involved. A receiver appointed by a court before the institution of the insolvency proceedings may be appointed the permanentassigneeinsuchproceedings.
Venue:wherehe hasresided6 monthspriortothe filingofpetition. Noneedforthe commissionofany oftheactsof insolvency. Amountofdebts mustexceed P1,000.00. Debtordeemed insolventthrough anorderof adjudicationafter filingofthepetition; adjudicationmaybe grantedexparte. Bondisnot required.
Q:Whoisanassigneeininsolvency? A: A person elected by the creditors or appointed by the court to whom an insolvent debtor makes an assignment of all his property for the benefit ofhiscreditors. Note: The assignee must be a person elected by the majority of the creditors who have proven their claims, such majority being in number and amount.
Q:Whatisthedateofcleavage? A:Thedatewhenthepetitionis filed,fromwhich is counted backward or forward, in determining the effects provided for under the Insolvency Law. Illustrations: 1. Acreditorbyassignmentofcreditmade within 30 days from date of cleavage shall be disqualified as petitioning creditor(Sec.20); 2. Attachment levied upon within a period of 30 days before the date of cleavage may be set aside by the assignee (Sec. 32); 3. Judgment on cases filed and decided within 30 days prior to the date of cleavage may be set aside by the assignee(Sec.32); 4. Judgmentsoncasesfiledbefore30days from the date of cleavage but decided within 30 days because of confession of judgment or declaration of default by debtor may be set aside by action of assignee; 5. Properties acquired after date of cleavage, after discharge of debtor in
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good faith shall not be liable for debts incurredpriortothedateofcleavage; Fraudulent preferences made within 30 days prior to the date of cleavage may be set aside in action brought by assignee. Q:Whataretheeffectsoffilingofpetition? A: 1. The proceedings are deemed to commence against the partners at the sametime; 2. Upon order of the court, all the properties of the partnership and also all the separate property of each partner, if they are liable, shall be taken;(Sec.51) 3. All creditors of the partnership and the separate creditors of each partner shall be allowed to prove their respective claims;(Ibid.) 4. The assignee shall be chosen by the creditorsofthepartnership;and(Ibid.) 5. Pending insolvency proceedings by or against any partnership, person or corporation no statute of limitations shall run upon a claim of or against the estateofthedebtor.(Sec.73) Q: What is the effect of insolvency of partnershiporanypartner? A: 1. A partnership may be declared insolvent notwithstanding the solvency ofthepartnersconstitutingthesame. 2. A partnership is not necessarily insolventbecauseoneofitsmembersis insolvent. The solvent members are bound to wind up the partnership affairs. 3. Under the law, a partnership is automatically dissolved by the insolvency of any partner or of the partnership Q: What is the effect when corporation declared insolvent? A: Its property and assets shall be distributed to the creditors but no discharge shall be granted to anycorporation.(Sec.52) Q:Isinsolvencylawapplicabletocorporations? A:TheInsolvencyLawexpresslyprovidesthatitis notapplicabletocorporations: 1. Engaged principally in the banking business 2. Anyothercorporationastowhichthere is a special provision of law for its liquidationincaseofinsolvency.(Ibid)
6.
Q:Whatisadividendininsolvency? A: A parcel of the fund arising from the assets of theestate,rightfullyallottedtoacreditorentitled to share in the fund whether in the same proportion with other creditors or in a different proportion. It is paid by the assignee only upon orderofthecourt(Secs.43,44). Q: When may a partnership be declared insolvent? A: A partnership may be declared insolvent by a petition of the partners and may be done during the continuation of the partnership business or after its dissolution and before the final settlementthereof. A partnership may be declared insolvent notwithstanding the solvency of the partners constituting the same. (Campos Rueda & Co. v. Pacific Commercial Co., G.R. No. L18703 Aug. 28,1922) Q: Who may petition for declaration of insolvencyofapartnership? A: 1. Voluntary insolvency By all the partnersoranyofthem; 2. InvoluntaryinsolvencyByoneormore of the partners or three or more creditorsofthepartnership. Q: What are the properties included in the insolvencyproceedings? A: Allthepropertyofthepartnership;and All the separate of each of the partners except: Separate properties of limited partners (Art.1843,NCC) Properties which are exempt by law (Sec.51)
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Q:Inthefilingofclaimsinaninsolvencyproceeding,whatdebtsmayandmaynotbeproved? A:
DEBTSTHATMAYBEPROVED The debts which may be proved against the estate of the debtorininsolvencyproceedingsarethefollowing: 1. All debts due and payable from the debtor at the timeofadjudicationofinsolvency;(Sec.53) 2. All debts existing at the time of the adjudication of insolvency but not payable until a future time, a discount being made if no interest is payable by the termsofthecontract; 3. Any debt ofthe insolvent arisingfrom hisliabilityas indorser, surety, bail or guarantor, where such liability became absolute after the adjudication of insolvency but before the final dividend shall have beendeclare;(Sec.54) 4. Other contingent debts and contingent liabilities contracted by the insolvent if the contingency shall happenbeforetheorderoffinaldividend;(Sec.55); and 5. Any debt of the insolvent arising from his liability to any person liable as bail, surety, or guarantor or otherwise, for the insolvent, ho shall have paid the debtinfull,orinpart.(Sec.56) DEBTSTHATMAYNOTBEPROVED The following debts are not provable or allowed in insolvencyproceedings: 1. Claims barred by the statute of limitations; (Sec. 29,73) 2. Claims of secured creditors with a mortgage or pledge in their favour unless they surrender the security;(Sec.59) 3. Claims of creditors who hold an attachment or execution on the property of the debtor duly recordedandnotdissolved;(Sec.32) 4. Claims on account of which a fraudulent preferencewasmadeorgiven;(Sec.61) 5. Support, as it does not arise from any business transactionbutfromtherelationofmarriage;and 6. A claim for unliquidated damages arising out of a pure tort, which neither constitutes a breach of an express contract nor results in any unjust enrichment of the tortfeasor that may form the basisofanimpliedcontract.
Q:Whatisacontingentclaim? A: A claim in which liability depends on some future event that may or may not happen and which makes it uncertain whether there will be anyliability.
Note: After the close of the insolvency proceedings and the happening of the contingency, the creditor may pursue any available remedy for the collection ofhisclaim.
Q: How are claims arising or acquired after insolvencytreated? A: 1. Claim arose after commencement of proceedings An obligation coming in force after the initiation of the proceedings is not generally a proper claimtobeproved. 2. Claim owned by insolvent purchased after insolvency One indebted to an insolvent will not be permitted to interposeasanoffset,aclaimownedby the insolvent which he has purchased aftertheinsolvency.
Q: What are the alternative rights of a secured creditor? A: 1. To maintain his rights under his security or lien and ignore the insolvency proceedings,inwhichcase,itistheduty of the assignee to surrender to him the propertyencumbered; 2. To waive his right under the security or lien and thereby share in the distribution of the assets of the debtor; or 3. To have the value of the encumbered property appraised and then share in the distribution of the assets of the debtor with respect to the balance of hiscredit. Q:Whatiscomposition? A: It is an agreement, made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment,agreetoacceptadividendlessthanthe whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the wholedebt.
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Q:Distinguishcompositionfromaccord. A: Accord properly denotes an agreement between a debtor and a single creditor for a discharge of the obligation by a part payment or ondifferentterms. Composition, on the other hand, designates an arrangement between a debtor and the whole body of his creditors (or at least a considerable portionofthem)fortheliquidationoftheirclaims bythedividendoffered. Q:Whataretherequirementsforavalidofferof composition? A: 1. The offer of the terms of composition must be made after the filing of the schedule of the debtors property and the submission of the list of his creditors; 2. The offer must be accepted in writing by a majority of the creditors representing a majority of the claims whichhavebeenallowed; 3. It must be made after the depositing in such place designated by the court, the consideration to be paid and the costs oftheproceedings;and 4. The terms of the composition must be approved or confirmed by the court. (Sec.63) Q:Whenmaythecourtconfirmacomposition? A:When: 1. It is for the best interest of the creditors; 2. Thedebtorhasnotbeenguiltyofanyof the acts, or of a failure to perform any of the duties which would create a bar tohisdischarge;and 3. Theofferanditsacceptanceareingood faith and have not been made or procured in a manner forbidden by the Act. Q: What are the effects of confirmation of composition? A: 1. The consideration shall be distributed asthejudgeshalldirect; 2. The insolvency proceedings shall be dismissed; 3. The title to the insolvents estate shall revertinhim; 4. The insolvent shall be released from his debts
Q:Whenmayconfirmationbesetaside? A: The court may, upon application of a party in interest within 6 months after the composition has been confirmed, set the same aside and reinstate the case if it shall be made to appear uponatrial: 1. That fraud was practiced in the procuringofsuchcomposition;and 2. The knowledge thereof has come to the petitioner since the confirmation of suchcomposition.(Sec.63) Q:Whatisdischarge? A: Discharge, under the Insolvency Law, is the formal and judicial release of an insolvent debtor from his debts with the exception of those expresslyreservedbylaw.
Note: Only natural persons may ask for discharge; corporations cannot ask for discharge. (Sec. 52) When granted, takes effect not from its date, but from the commencement of the proceedings in insolvency.
Q: When insolvent debtor may apply for discharge? A: A debtor may apply to the RTC for a discharge at anytime after the expiration of 3 months from the adjudication of insolvency, but not later than 1 year from such adjudication of insolvency, unless the property of the insolvent has not been converted into money (Sec. 64) without his fault, thereby delaying the distribution of dividends among the creditors in which case the court may extendtheperiod Any creditor may oppose the discharge by filing his objections thereto, specifying the grounds of his opposition. After the debtor has filed and served his verified answer, the court shall try the issueorissuesraised.(Sec.66) Q:Whataretherequisitesfordischarge? A: 1. Compliance with statutory requirementsregardingsurrenderofhis assets for the benefit of the creditors and regarding the rendition of an accountofhisassetsandliabilities;
a. Note: A discharge in insolvency is a matter of legislative grace
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CREDIT TRANSACTIONS
or favour to the debtor, to be obtained only by a strict compliance with the conditions prescribedbythestatute.
1.
2.
Applicationfordischargeshouldbefiled after the expiration of 3 months from the adjudication of insolvency, but not laterthan1year;(Sec.64);and
Insolvent debtor must not have committed any of the acts of insolvency preventingdischarge. Q: What are the acts of debtoror grounds which willpreventdischarge? A: No discharge shall be granted, or if granted, shallbevalid,tothefollowingcases: 1. Falseswearing; 2. Concealmentofanypartofhisestateor effects; 3. Fraudorwillfulneglectinthecareofhis property or in the delivery thereof to theassignee; 4. Procuring his properties to be attached or seized on execution within 1 month before the commencement of insolvencyproceedings; 5. Destruction, mutilation, alteration or falsification of his books, documents, andpapers; 6. Giving fraudulent preference to a creditor; 7. Nondisclosure of the assignee of a proven false or fictitious debt within 1 monthafteracquiringknowledge; 8. Being a merchant, failure to keep properbooksoraccounts; 9. Influencingtheactionofanycreditor,at any state of the proceedings, by pecuniaryconsideration; 10. Effecting any transfer, conveyance or mortgage in contemplation of insolvency; 11. Conviction of any misdemeanor under theInsolvencyLaw: 12. In case of voluntary insolvency, he has received the benefit of insolvency within 6 years next preceding his applicationfordischarge;and 13. If insolvency proceeding in which he could have applied are pending by or against him in the RTC of any other provinceorcity.(Sec.65) Q:Whataretheeffectsofdischarge? A: 3.
2.
3.
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It releases the debtor from all claims, debts,liabilitiesanddemandsetforthin the schedule or which were or might have been proved against his estate in insolvency. (Sec. 69). Hence, non provable debts are not affected whether or not they were properly scheduled; It operates as a discharge of the insolvent and future acquisitions, but pemits mortgagees and other lien creditors to have their satisfaction out ofthemortgageorsubjectofthelien; It is a special defense which may be pledged and be a complete bar to all suits brought on any such debts, claims, liabilitiesordemands.(Ibid.) It does not operate to release any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety or otherwise;(Sec.68) The certificate of discharge is prima facie evidence of the fact of release, andtheregularityofsuchdischarge.
Note: Where a debtor is judicially declared insolvent, the remedy of the guarantor or suretywouldbetofileacontingentclaiminthe insolvency proceeding, if his rights as such guarantor or sureties are not to be barred by the subsequent discharge of the insolvent debtorfromallhisliabilities.
Q: What are the debts and obligations not affectedbydischargeofinsolvent? A: 1. Taxes or assessments due the Government,whethernationalorlocal; 2. Any debt created by the fraud or embezzlementofthedebtor; 3. Any debt created by the defalcation of the debtor as a public officer or while actinginafiduciarycapacity; 4. Debt of any person liable for the same debt, for or with the insolvent debtor, either as partner, joint contractor, inorser,suretyorotherwise;(Sec.68) 5. Debtsofacorporation(Sec.52); 6. Claimforsupport; 7. Discharged debt but revived by a subsequentnewpromisetopay; 8. Debts which have not been duly scheduled in time for proof and allowance, unless the creditors had notice or actual knowledge of the insolvency proceedings, are not dischargedastosuchcreditors;
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Claims for unliquidated damages arising outofapuretort; 10. Claimsofsecuredcreditors;(Sec.59) 11. Claimsnotinexistenceornotmatureat thetimeofthedischarge; 12. Claims that are contingent at the time ofdischarge. Q:Whendischargemayberevoked? A:Adischargemayberevokedbythecourtwhich granteditonpetitionofanycreditor: 1. Whose debt was proved or provable against the estate in insolvency on the ground that the discharge was fraudulentlyobtained; 2. Who has discovered facts constituting the fraud subsequent to the discharge andfraudulenttransfer;andprovided, 3. The petition is filed within 1 year after thedateofthedischarge.(Sec.69)
9.
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LEASE
LEASE Q:Whatiscontractoflease? A: A contract by which one of the parties agrees to give the other for a fixed time and price the useorprofitofathingorofhisservicetoanother who undertakes to pay some rent, compensation orprice. Q: What are the characteristics of a contract of lease? A: 1. Consensual; 2. Bilateral; 3. Commutative; 4. Principalcontract; 5. Nominate; 6. Subject matter must be within the commerceofman; 7. Purpose is to allow enjoyment or use of athing; 8. Purpose to which the thing will be devotedshouldnotbeimmoral; 9. Onerous; 10. Periodistemporary; 11. Period may be definite or indefinite; and 12. Lessorneednotbetheowner. Q:Whatarethekindsoflease? A: 1. Lease of things (immovable/ movable) One of the parties binds himself to give to another the enjoyment or use of a thingforapricecertain. Period: definite or indefinite but not morethan99years.(Art.1634)
Note: It may be made orally but if the leaseofrealpropertyisformorethanone year, it must be in the writing (Statute of Frauds). Statute of Frauds requires certain agreements to be in writing before they can be proved and enforced in a judicial action. However, noncompliance does not make the oral contract void. The only effect is that no action for the enforcement of the contract can be proved. Moreover, the right to invoke the StatuteofFraudsmaybewaivedbyfailure to object to the presentation of oral evidence, or by cross examining the witness on the issue. (Pineda, Obligations andContracts,pgs.577,579,580)
2.
Lease of work (contract for a piece of work)Oneofthepartiesbindshimself to produce a result out of his work or laborforacertainprice.
Note:Dutiesofacontractorwhofurnishes workandmaterials: 1. todeliver; 2. totransferownership;and 3. to warrant eviction and hidden defects. Remedyofemployerincaseofdefects: 1. Ask contractor to remove the defect or to execute another work; 2. If contractor fails or refuses, employer can ask another at thecontractorsexpense.
3. Lease of service One party binds himself to render to the other some serviceforapricecertain.
Q:Whenisleaseconsideredacontractofsale? A: A lease of personal property with option to buy, where title is transferred at the end of the contractprovidedrentshavebeenfullypaid. Q:Distinguishleasefromsale. A:
LEASE Onlytheuseor enjoymentistransferred Transferistemporary Lessorneednottobethe owner Thepriceoftheobject (distinguishedfromthe rent)isusuallynot mentioned SALE Ownershipistransferred Transferispermanent Sellermustbetheowner atthetimeofdelivery Usually,thesellingprice ismentioned
Q:Distinguishleasefromusufruct. A:
LEASE Ownershiponthepartof thelessorisnot necessary GR: Personalright XPN:Realright Limitedtotheuse specifiedinthecontract USUFRUCT Ownershipofthething onthepartofthegrantor isnecessary Realright Includesallpossibleuses andenjoymentofthe thing
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Lessorplacesand maintainsthelesseein thepeacefulenjoyment ofthething Definiteperiod Createdbycontractasa generalrule Lesseehasnodutyto makerepairs Lesseehasnodutytopay taxes Lesseecannotconstitute ausufructoftheproperty leased Ownerallowsthe usufructuarytouseand enjoytheproperty Maybeforanindefinite period Createdbylaw,contract, lastwillorprescription Usufructuaryhasdutyto makerepairs Usufructuaryhasaduty topaytaxes Usufructuarymay constituteasublease
1.
2.
By Filipinos public domain with an area of 500 hectares and may acquire notmorethan12hectares Bycorporations a. Ifatleast60%Filipinosowned public domain for a period of 25 years, renewable for another25years;theareanot to exceed more than 1,000 hectares
I.LEASEOFTHINGS Q:Isleaseofrealpropertyarealright? A: GR:Leaseofarealpropertyisapersonalright XPNs:Itisarealright: 1. If it is for more than one year and to be enforceablemustbewriting 2. If it is registered with Registry of Propertyregardlessofitsperiod Q: What are the effects if the lease of real propertyisnotregistered? A: 1. Itisnotbindingonthirdpersons; 2. Such third person is allowed to terminate the lease in case he buys the propertyfromtheownerlessor; 3. Actual knowledge of existence and duration of lease is equivalent to registration;or 4. A stranger who knows of the existence of the lease, but was led to believe that the lease would expire soon or before the new lease in favor of him begins, the stranger can still be considered innocent. Q:Whatcanbethesubjectmatterofalease? A:Thingswithinthecommerceofman.
Note: Lease of properties belonging to the public domainisvoid.
Q: What are the rules on lease of things when lesseeisanalien? A: Personalproperty99yearlimitapplies. Aliens cannot lease public lands, and cannot acquire private lands except through succession If lease of real property (private lands), maximum of 25 years renewable for another25years(P.D.713) Under the Investor s Lease Act of 1995, the 25 year period was extended to 50 yearsprovidedthefollowingconditions aremet: Lesseemustmakeinvestments LeaseisapprovedbyDTI If terms are violated, DTI can terminateit
Note: The ILA did not do away with P.D. 713, under ILA the consent of DTI is required, while in P.D. 713 noconsentisrequired.
Q:Whatisrent? A: The compensation either in money, provisions, chattels or labor, received by the lessor from the lessee. Q:Whataretherequisitesofrent? A: 1. Not fictitious or nominal, otherwise the contractbecomesgratuitous; 2. Capableofdetermination;and 3. May be in the form of products, fruits, orconstruction,aslongasithasvalue.
Note:Ownerhastherighttofixtherentbecausethe contractisconsensualandnotimposedbylaw. Increasing the rent is not an absolute right of the lessor. The new rate must be reasonable and in no case shall the lessor be allowed to increase the rentalwhenthetermhasnotyetexpired,unless,the tenantconsents.(Paras,p.262)
Q:Whatarethepropertiesthatmaybeleased? A:
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If the rent is fixed for the first time, courts cannot interfere, but if it is a renewal, the courts can settle thedisagreements.
Q: What is the right of a purchaser of a leased property? A: GR: Purchaser of thing leased can terminate thelease. XPNs: 1. Lease is recorded in Registry of Property; 2. There is a stipulation in the contract of salethatthepurchasershallrespectthe lease; 3. Purchaser knows the existence of the lease; 4. Saleisfictitious;or 5. Saleismadewitharightofrepurchase. SUBLEASE Q:Whatissublease? A: It is an agreement between a sublessor and sublessee whereby the former grants temporarily the enjoyment or use of the same thing, service orworksubjectoftheoriginalcontractofleaseto the latter in exchange for compensation or price, respecting the terms and conditions of original contractofleasebetweenthelessorandlessee. Q:Whatisthenatureofsublease? A: It is a separate and distinct contract of lease wherein the original lessee becomes a sublessor toasublessee. Q:Whataretherequisitesofavalidsublease? A: There must be no express prohibition for sublease in a contract of lease. Also, the duration of sublease cannot be longer than that of the leasetowhichitisdependent Q:Whoarethepartiestoasublease? A: 1. Lessor 2. Sublessor(originallesseeinthecontract oflease) 3. Sublessee
Q:Doesthelesseehavetherighttosubleasethe property? A:Yes,unlessexpresslystipulated.

Note: If the prohibition to sublease is not express but only implied, the sublease will still be allowed. (Art.1650)
Q: What is the remedy of the lessor if the lessee violatestheprohibitionastosublease? A: Rescission and damages or only damages allowing the contract to remain in force. The sublessee is subsidiarily liable for any rent due. The lessor has an accion directa against the sublessee for unpaid rentals and improper use of theobject. Q: Can rights under a contract of lease be assigned? A: GR: Lessee cannot assign the lease without consentoflessor(Art.1649,NCC) XPN:Stipulationtothecontrary Q: When does an assignment of lease take place? A: It exists when the lessee made an absolute transfer of his leasehold rights in a contract, and he has disassociated himself from the original contractoflease.(Pineda,p.451)
Note: The assignment has the effect of novation consisting in the substitution. There being a novation, the consent of lessor is necessary to effect assignment unless the contract of lease allows the lesseetoassign.(Pineda,p.452)
Q:Whatistheeffectofassignmentoflease? A: The personality of the original lessee disappears and there only remain in the juridical relation of two persons: the lessor and the assignee, who is converted into a lessee. (Pineda, p.451)
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Q: Distinguish sublease from assignment of lease. A:

SUBLEASE Thereare2leasesand2 distinctjuridical relationshipsalthough immediatelyconnected andrelatedtoeachother Personalityofthelessee doesnotdisappear Lesseedoesnottransmit absolutelyhisrightsand obligationstothe sublessee Sublessee,generally, doesnothaveanydirect actionagainstthelessor ASSIGNMENTOFLEASE Thereisonlyonejuridical relationship,thatofthe lessorandtheassignee, whoisconvertedintoa lease Personalityofthelessee disappears Lesseetransmits absolutelyhisrightsto theassignee Assigneehasadirect actionagainstthelessor
Q: May a lessee sublease a leased property withouttheconsentofthelessor? A: Yes, provided that there is no express prohibition against subleasing. Under the law, wheninthecontractofleaseofthings,thereisno express prohibition, the lessee may sublet the thing leased without prejudice to his responsibility for the performance of the contract towardthelessor.(Art.1650,NCC) In case there is a sublease of the premises being leased,thesublesseeisboundtothelessorforall the acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the lessee. (Art. 1651, NCC) The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not be responsible beyond the amountoftherentdueformhim. As to the lessee, the latter shall still be responsible to the lessor for the rents; bring to the knowledge of the lessor every usurpation or untoward act which any third person may have committed or may be openly preparing to carry out upon the thing leased; advise the owner the need for all repairs; to return the thing leased upon the termination of the lease just as he received it, save what has been lost or impaired by the lapse of time or by ordinary wear and tear or from an inevitable cause; responsible for the deteriorationorlossofthethingleased,unlesshe
proves that it took place without his fault. (1999 BarQuestion) Q: What is the responsibility of the lessee to the lessorincasehesubleasestheproperty? A: By express provision of Article 1650, NCC, the lessee is still responsible for the performance of hisobligationstowardthelessor. Q:Whataretheresponsibilitiesofasublesseeto thelessor? A: GR: No juridical relationship between lessor andsublessee. XPNs: All acts which affect the use and preservationofthethingleased For any rent due to the lessor from the lesseewhichthelatterfailedtopay the lessor must collect first from thelessee if the lessee is insolvent, the sublessee becomes liable (subsidiaryliability) Q:Whenisasublesseeliabletothelessor? A: 1. All acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor andthelessee 2. The sublessee is subsidiary liable to the lessorforanyrentduefromthelessee REMEDIESINSUBLEASE Q:Whatisacciondirecta? A: A direct action which the lessor may bring against a sublessee who misuses the subleased property. Q:Whataretheremedieswheneitherthelessor or the lessee did not comply with his obligations? A:RED 1. Rescissionanddamages; 2. Damages only (contract will be allowed toremaininforce);or 3. Ejectment
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IMPLIEDNEWLEASE Q: What is tacita reconducion (implied new lease)? A: A lease that arises if at the end of the contract the lessee should continue enjoying the thing leased for 15 days with the acquiescence of the lessor, unless a notice to the contrary had previouslybeengivenbytheeitherparty. Q: What are the requisites for tacita reconducion? A: Thetermoftheoriginalcontracthasexpired The lessor has not given the lessee a notice tovacate The lessee continued enjoying the thing leased for at least 15 days with the acquiescenceofthelessor Q:Whenistherenoimpliednewlease? A: 1. Before or after the expiration of the term, there is a notice to vacate given byeitherparty; 2. There is no definite fixed period in the original lease contract as in the case of successiverenewals. Q:Whataretheeffectsofanimpliednewlease? A: 1. The period of the new lease is not that stated in the original contract; but for then legal periods established by law in Art. 1682, if the lease is rural lease, or Art.1687,iftheleaseisurbanlease. 2. Accessory obligations contracted by a third person are extinguished (Art. 1672,NCC) 3. Other terms of the original contract are revived
Note: The terms that are revived are only those which are germane to the enjoyment of possession, but not those with respect to special agreements which are by nature foreign to the right of occupancy or enjoyment inherent in a contractoflease.
DURATIONOFSUBLEASE Q:Whatisthedurationofthelease? A: 1. With determinate or fixed period Lease will be for the said period and it ends on the day fixedwithoutneedofademand 2. Nofixedperiod a. For rural lands (Art. 1682, NCC) It shall be all time necessary for the gathering of fruits which the whole estate mayyieldin1year,orwhichit mayyieldonce b. Forurbanlands 3. If rent is paid daily, lease is from the day to day 4. If rent is paid weekly, lease is from week to week 5. If rent paid monthly, lease is from month to month 6. If rent is paid yearly, lease is from year to year Q: When is the lessee entitled to a reduction of rent? A: GR: In case of the loss of more than onehalf of the fruits through extraordinary and unforeseenfortuitousevents. XPN:Stipulationtothecontrary. Note:Itisapplicableonlytoleaseofrurallands. Q: What are the rules on the extension of the leaseperiod? A: 1. If a lease contract for a definite terms allows lessee to duly notify lessor of his desire to so extend the term, unless the contraryisstipulated 2. May be extended as stipulation lessee can extend without lessors consentbutlesseemustnotifylessor 3. May be extended for 6 years agreed upon by both parties as stipulation this must be interpreted in favor of the lessee. Hence, oridinarily the lessee, at the end of the original period, may either: a. leavethepremises;or b. remaininpossession 4. In coownership, assent of coowner is needed, otherwise, it is void or
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ineffective as against nonconsenting coowners Where according to the terms of the contract, the lease can be extended only by the written consent of the parties thereto, no right of extension canrisewithoutsuchwrittenconsent If the option is given to the lessor, the lessee cannot renew the lease against theformersrefusal The lessor may impose additional conditions after the expiration of the originalperiod Par. 2, Art. 1687, NCC provides that in the event that the lessee has occupied the leased premises for over a year, courtsmayfixalongertermoflease
Note:Thepowerofthecourtstoestablish a grace period is potestative or discretionary, depending on the particular circumstancesofthecase.
4. 5.
5.
6.
Lossofthething Rescission due to the performance of the obligations of one of the parties statedunderArt.1654and1657. Thedwellingplaceoranyotherbuilding is unfit for human habitation and is dangeroustolifeorhealth.
6.
7.
8.
Q:Whatisperpetuallease? A: A lease contract providing that the lessee can stay in the premises for as long as he wants and for as long as he can pay the rentals and its increase.
Note: It is not permissible. It is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusivewillofthelessee.
TERMINATIONOFLEASE Q: When does immediate termination of lease apply? A: 1. Only to dwelling places or any other buildingintendedforhumanhabitation 2. Even if at the time the contract was perfected, the lessee knew of the dangerousconditionorwaivedtheright to rescind the contract on account of thiscondition Q: What are the grounds for termination of lease? A:WiReLExRun 1. Expirationoftheperiod 2. Resolution of the right of lessor (i.e.: when the lessor is a usufructuary and theusufructisterminated) 3. By the will of the purchaser or transfereeofthething
Q: Will the death of the lessee extinguish the leaseagreement? A: No. The death of the lessee will not extinguish the lease agreement, since lease is not personal in character and the right is transmissible to the heirs. (Heirs of Dimaculangan v. IAC, G.R. No. 68021,Feb.20,1989)(1997BarQuestion) Q:Whataretheremediesoftheaggrievedparty in case of noncompliance of the other partys obligations under Arts. 1654 (obligations of lessor)and1657(obligationsoflessee)? A: 1. Rescissionwithdamages 2. Damages only allowing the lease to subsists Q: What are the restrictions in exercising the righttorescind? A:JAS 1. Breach must be Substantial and fundamental(deminimisnoncuratlex thelawisnotconcernedwithtrifles). 2. ItrequiresJudicialaction. 3. It can be filed only by the Aggrieved party. Q: In case of action to rescind, may the other party validly request for time within which to complywithhisduties? A: No. The aggrieved party seeking rescission will prevail.UnderArticle1659,NCC,thecourthasno discretion to refuse rescission, unlike the situation covered by Art. 1191, NCC, in the general rules on obligations [Bacalla v. Rodriguez, et.al.,C.A.40O.G.(supp.),Aug.30,1941] Q:Howistheamountofdamagesmeasured? A: Difference between the rents actually received and that amount stipulated in the contract representing the true rental value of the premises. (A. Maluenda and Co. vs. Enriquez, 49 Phil.916)
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Q: Under a written contract dated December 1, 1989, Victor leased his land to Joel for a period offive(5)yearsatamonthlyrentalofP1,000.00, to be increased to P1,200.00 and P1,500.00 on the third and fifth year, respectively. On January 1, 1991, Joel subleased the land to Conrad for a period of 2 years at a monthly rental of P1,500.00. On December 31, 1992, Joel assigned the lease to his compadre, Ernie, who acted on the belief that Joel was the rightful owner and possessor of the said lot. Joel has been faithfully paying the stipulated rentals to Victor. When Victor learned on May 15, 1992 about the sublease and assignment, he sued Joel, Conrad and Ernie for rescission of the contract of lease andfordamages. 1. Will the action prosper? If so, againstwhom?Explain. 2. In case of rescission, discuss the rights and obligations of the parties. A: 1. Yes, the action for rescission of the lease will prosper because Joel cannot assign the lease to Ernie without the consent of Victor (Art. 1649, NCC). But Joel may sublet to Conrad because there is no express prohibition (Art. 1650, NCC; Alipio v. CA, G.R. No. 134100,Sept.29,2000). Victor can rescind the contract of lease with Joel, and the assignment of the lease to Ernie, on the ground of violation of law and of contract. The sublease to Conrad remained valid for 2 years from January 1, 1991, and had not yet lapsed when the action was filedonMay15,1992. 2. In case of rescission, the rights and obligations of the parties should be as follows:AtthetimethatVictorfiledsuit on May 15, 1992, the assignment had not yet lapsed. It would lapse on December 1, 1994, the very same date that the 5year basic lease would expire. Since the assignment is void, Victor can get the property back because of the violation of the lease. Both Joel and Ernie have to surrender possession and are liable for damages. But Conrad has not yet incurred any liability on the sublease which still subsisted at the time of the filing of the actiononMay15,1992. Ernie can file a crossclaim against Joel for damages on account of the rescissionofthecontractofassignment. Conrad can file a counterclaim against Victor for damages for lack of causes of action at the time of the filing of the suit.(2005BarQuestion) Q: A is the owner of a lot on which he constructed a building in the total cost of P10,000,000. Of that amount B contributed P5,000,000providedthatthebuildingasawhole would be leased to him (B) for a period of ten years from January 1, 1985 to December 31, 1995 at a rental of P100,000 a year. To such condition, A agreed. On December 20, 1990, the building was totally burned. Soon thereafter, As workers cleared the debris and started construction of a new building. B then served noticeuponAthathewouldoccupythebuilding being constructed upon completion, for the unexpired portion of the lease term, explaining that he had spent partly for the construction of the building that was burned. A rejected Bs demand.DidAdorightinrejectingBsdemand? A: Yes, A was correct in rejecting the demand of B. As a result of the total destruction of the building by fortuitous event, the lease was extinguished. (Art. 1655, NCC) (1993 Bar Question) II.LEASEOFWORKORSERVICES Q:Whatisacontractforapieceofwork? A: A contract whereby one of the parties binds himself to produce a result out of his work or labor and the other party binds himself to pay remunerationtherefor. Q:Whatisacontractforleaseofservices? A: A contract whereby one party binds himself to render some service to the other party consisting his own free activity of labor, and not its result and the other party binds himself to pay a remuneration therefor. (Pineda Sales, p. 440441, 2002ed) Q:Distinguishleaseofservicesfromagency. A:
LEASEOFSERVICES Basedonemployment thelessorofservices doesnotrepresenthis employernordoeshe executejuridicalacts AGENCY Basedonrepresentation agentrepresenthis principalandenterinto juridicalacts
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Principalcontract Preparatorycontract (Paterno v. Jao Yan, GR. No. L12218, February 28, 1961)
Q: Distinguish contract of piece of work and contractofleaseservices. A:

PIECEOFWORK Objectofcontractisthe resultofthework withoutconsideringthe laborthatproducedit Iftheresultpromisedis notaccomplished,the lessororpromissoryis notentitledto compensation LEASEOFSERVICES Objectofcontractisthe serviceitselfandnotthe resultwhichitgenerates Eveniftheresult intendedisnotattained, theservicesofthe lessormuststillbepaid
Q: What if the value has not been agreed upon inacontractofleaseofservice? A:Whennoratehasbeenfixed,thesameshallbe determined by the courts according to the uses and customs of the place and the evidence, unless the services by agreement were to be rendered gratuitously. (Pineda Sales, p. 444, 20002ed) III.LEASEOFRURALANDURBANLANDS Q: What is a rural land (ProductProducing Lands)? A: Regardless of site, if the principal purpose is to obtain products from the soil, the lease is of rural lands. Hence, as used here, rural lands are those where the lessee principally is interested in soil products. Q: What is an urban land (NonProduct ProducingLands)? A: Lands leased principally for purposes of residencearecalledurbanlands. Q: What is the form required of a contract of leaseofthings? A: Lease may be made orally, but if the lease of realpropertyisformorethanayear,itmustbein writingsunderthestatuteoffrauds.
Note: Where the written contract of lease called for the erection by the tenant, of a building of strong wooden materials, but what he actually did construct on the leased premises was semiconcrete edifice at a much higher cost, in accordance with a subsequent oral agreement with the lessor, oral evidence is admissible to prove the verbal modification of the original terms of the lease.
Q:Whatisthepurposeinrecordingalease? A: A lease does not have to be recorded in the Registry of Property to be binding between the parties; registration is useful only for the purpose of notifying strangers to the transaction. (Art 1648,NCC) Q:Whatismeantbyproperauthority? A:Properauthoritymeansapowerofattorneyto constitutethelease. Q:Whenisaproperauthorityrequired? A: 1. Husband with respect to the paraphernalrealestateofthewife; 2. FatherorGuardianwithrespecttothe propertyoftheminorortheward; 3. Manager with respect to the property underadministration. Q:Whoisamanager? A: 1. administratorofaconjugalproperty 2. administratorofacoownership 3. administrator of state patrimonial property Q: Is the husband the administrator of the paraphernalrealproperty? A: No, unless such administrator has been transferredtohimbyvirtueofapublicdocument. (Art.110,FC) Q: A husband was properly given his wife authority to administer the paraphernal real property. Does this necessarily mean that just because the husband is now the administrator, he can lease said property without any further authority? A:Itdepends. 1. If the lease will be for one year or less, nootherauthorityisrequired. 2. If the lease on the real property will be for more than a year, then a special power of attorney (aside from the public instrument transferring administration) is required. (Art.1878, NCC) 3. Furthermore, whether it be a) or b), if the lease is to be recorded, there must
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be a special power of attorney. (Art 1647,NCC).
Note: If it is the wife who is administering her paraphernal real estate, the husband has no authority whatever, to lease, in any way, or administertheproperty.
Q: If a father, who is administering the real estate of his minor son, wants to record the lease,shouldheaskforjudicialpermission? A: Yes (Art. 1647, NCC). But even if no judicial authorization is asked, such defect cannot be invoked by a lessee who has dealt with him. (Summers v. Mahinay, [CA] 40 O.G. [11th S] No. 18, p.40). Only the son or his own heirs may questionthevalidityofthetransaction. Q: How can leases of personal property be bindingonthirdpersons? A: By executing a public instrument (by analogy, Art.1625,NCC). A.QUALIFIEDPERSONS
bound by the lease. (Quimson vs. Suarez, 45 Phil. 901) Q: When is proper authority required for the recordingofcontractoflease? A: 1. Spouse with respect to the separate or exclusivepropertiesoftheother,unless the administration of such properties has been transferred to said spouse done in a public instrument duly recorded.(Art.110,FamilyCode)
Note: Conjugal property cannot be leased withoutthejointconsentofthespouses
2. 3.
Father or guardian with respect to the realpropertyofaminorchildorward Administrator or manager of a realty with respect to the property under his administration a. (Art.1647)
Q: Who are persons disqualified to become lessees? A: Persons disqualified to buy referred to in article 1490 and 1491, are also disqualified to become lessees of the things mentioned therein. (Article1646) Q: Are foreigners disqualified to lease lands in thePhilippines? A: GR:Yes XPN: lease of lands for residential purposes (Smith, Bell and Co. vs. RegisterofDeeds,96Phil53) B.REGISTRATION
Note: the proper authority is a special power of attorney duly executed if the lease is for more than oneyear(Art.1878(8))
Q: What is the effect of recording of contract of lease? A: Even if not recorded with the Registry of Property, the lease is binding between the parties. However, if third persons have to be bound,thecontractmustberecorded. Note: However, if a purchaser has actual knowledge of the existence of the lease, which knowledge is equivalent to registration, he is
Q:Whenisleaseofrealpropertyarealright? A:Generally,aleaseofrealpropertyisapersonal right. However, it is considered real under the followingconditions: 1. If it is for more than one year and to be enforceable,itmustbeinwriting 2. If it is registered with the Registry of Property, regardless of its period. (PinedaSales,p.449,2002ed) C.PROHIBITIONS Q:Whatistheruleregardingsubleaseofruralor urbanlands? A: The lessee may sublet the property in absence ofanexpressprohibition. Note: the sublease may be of the whole or part onlyofthethingleased. This right to sublease is without prejudice to the sublessors responsibility in the performance of thecontracttowardsthelessor.(Art.1650,NCC)
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IV.RIGHTSANDOBLIGATIONS OFLESSORSANDLESSEES 2. If repairs last for 40 days or more, lessee can ask for reduction of the rent inproportiontothetimeincludingthe st 1 40 days and the part of the propertyofwhichheisdeprived
Q: Who are the persons disqualified to become lessees? A: GR: Husband and wife with respect to their separateproperties. XPN: Separation of property agreed uponorjudicialseparationofproperty. Those disqualified due to fiduciary relationship.
Note: In either case, rescission may be availed of if the main purpose of the lease is to provide a dwelling place and the property becomes uninhabitable.
Q:Whataretheobligationsofthelessor? A:ReDCaP 1. To Deliver the things in such condition as to render it fit for the use intended (cannotbewaived) 2. GR: To make, during the lease all the necessary Repairs in order to keep it suitablefortheusetowhichithasbeen devoted XPN:Stipulationtothecontrary. 3. To maintain the lessee in the Peaceful and adequate enjoyment of the lease fortheentiredurationofthecontract 4. Cannot alter the form of the thing leased Q: What are the rules on changing the form of thingleased? A: 1. Lessor can alter the thing leased provided there is no impairment of the use to which the things are devoted underthetermsofthelease 2. Alteration can be made by lessee provided the value of property is not substantiallyimpaired Q: What are the rules if urgent repairs are necessary? A: 1. Lesseeisobligatedtotoleratethework, althoughitmaybeannoyingtohimand although during the same time he may be deprived of a part of the premises, if repairslastfornotmorethan40days
Q:Whataretheeffectsifthelessorfailstomake urgentrepairs? A:Thelesseemay: 1. orderrepairsatthelessorscost; 2. suefordamages; 3. suspendthepaymentoftherent;or 4. ask for rescission, in the case of substantialdamagetohim. Q:Whatarethekindsoftrespassinlease? A: 1. Trespass in the fact (perturbation de mere hecho) physical enjoyment is reduced.Lessorwillnotbeliable. 2. Trespass in the law (perturbation de derecho) a 3rd person claims legal right to enjoy the premises. Lessor will beheldliable. Q:Whataretheobligationsofthelessee? A:TRUEPRU 1. Pay the price of the lease according to thetermsstipulated 2. Use the thing leased as a diligent father of a family devoting it to the use stipulated, and in the absence of stipulation, to that which may be inferred from nature of thing leased, accordingtothecustomoftheplace 3. PaytheExpensesofthedeedoflease 4. Notify the lessor of Usurpation or untowardacts 5. TonotifythelessorofneedforRepairs 6. To Return the property leased upon termination of the lease in the same condition as he receive it except when what has been lost or impaired by lapse of time, ordinary wear and tear or inevitablecause/fortuitousevent 7. Tolerance of urgent repairs which cannot be deferred until the end of lease(par.1,Art.1662,NCC)
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Q: What is the effect of the destruction of the thingleased? A: 1. Total destruction by fortuitous event Leaseisextinguished. 2. Partialdestruction a. Proportional reduction of rent;or b. Rescissionofthelease. Q:Whenmaylesseesuspendpaymentofrent? A:Whenthelessorfailsto: 1. undertakeurgentrepairs;or 2. maintain the lessee in peaceful and adequate enjoyment of the property leased.
Note:Fortheinterveningperiod,thelesseedoesnot havetopaytherent.
1.
2.
Ordinary fortuitous event no reduction. The lessee being the owner of crops must bear the loss. Res perit domino Extraordinaryfortuitousevent a. More than onehalf of the fruits were lost, there is a reduction (XPN: specific stipulationtothecontrary) b. Less than onehalf, or if the loss is exactly onehalf, there isnoreduction
Note:Therentmustbereducedproportionately.
Q:Whendoesthesuspensionbecomeeffective? A:Therightbegins: 1. In the case of repairs from the time of thedemandanditwentunheeded 2. In case of eviction from the time the final judgment for eviction becomes effective Q: What are the alternative remedies of the aggrieved party in case of nonfulfillment of duties? A: 1. Rescissionanddamages 2. Damages only, allowing the contract to remaininforce(specificperformance)
V.SPECIALRULESFORLEASEOFRURALAND URBANLANDS
RURALLANDS
Q:Whatistheeffectofsterilityoflandincaseof rurallease? A:Thereisnoreduction.Thefertilityorsterilityof thelandhasalreadybeenconsideredinthefixing oftherent. Q: What is the effect of damage caused by a fortuitouseventontherurallease? A:
Q: X leased his land to Y for the purpose of growing crops thereon. Due to an extraordinary fortuitous event, more than onehalf of the crops were. In the lease contract, the rent was fixed at an aliquot (proportional) part of the crops.IsYentitledtoareductioninrents? A:No,becauseheretherentisalreadyfixedatan aliquot part of the crops. Thus, every time the crops decrease in number, the rent is reduced automatically. If therefore, the tenant here refuses to give the stipulated percentage, he can be evicted. (Hijos de I. dela Rama v. Benedicto, 1 Phil.495) Q:Whatistheruleforreductionofrent? A: The reduction on rent can be availed of only if the loss occurs before the crops are separated from their stalk, root, or trunk. If the loss is afterwards,thereisnoreductionofrent. Q: What is the duration of rural lease with an unspecifiedduration? A: The lease of a piece of rural land, when its duration has not been fixed, is understood to have been for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years have to elapseforthepurpose. (Art.1682,NCC) Q: A rural lease was agreed upon to last for a certain definite period. But the tenant planted fruit trees which would require a long period of time to bear fruit, as well as introduce certain more or less valuable improvements. Has this act of the tenant changed the duration of the contract? A: No, the duration of the lease has not been changed. There was a fixed period for the lease and therefore the nature of the fruit trees or
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valuableimprovementsisimmaterial.(Iturraldev. Garduno,9Phil.605) Q: If at the end of the lease, there are still pendingcrops,whowillownthem? A:Thelessee.However,acontrarystipulationwill prevail. Q:Whatistheruleforlandtenancyonshares? A: This refers to the contracts of aparceria. Land tenancy on shares are primarily governed by special laws (ex: Agricultural Tenancy Act, RA 1199), and suppletorily, by the stipulations of the parties, the provisions on partnership, and the customsoftheplace. Q:Whoisatenant? A: A tenant is a person, who, himself, and with the aid of available from within his immediate farm household, cultivates the land belonging to, orpossessedbyanother,withthelattersconsent for the purpose of production, sharing the produce with the landholder under the share tenancy system, or paying to the landlord a price certain or ascertainable in produce, or in money or both, under the leasehold tenancy system. (Pangilinan v. Alvendia, GR no. 10690, June 28, 1957) Q: What is included in an immediate farm household? A: This includes the members of the family of the tenant, and such other person/s, whether related to the tenant or not, who are dependent upon him for support, and who usually help him operatethefarmenterprise. Q:Canatenantworkfordifferentlandowners? A: It is prohibited for a tenant, whose holding is 5 hectares or more, to contract work at the same time on two or more separate holdings belonging to different landholders without the knowledge and consent of the landholder with whom he had first entered into the tenancy relationship. (Sec. 24,RA1199) Q: What are the grounds for ejectment of the tenantonshares? A: 1. voluntarysurrenderoftheland 2. bona fide intention of the landholders to cultivate the land himself personally or thru the employment of farm machineries tenant violates or fails to comply with the terms and conditions of the contractortheRA1199 failure to pay the agreed rental or deliverthelandholdersshare tenant uses the land for different purpose sharetenant fails to follow farm practices which will contribute towards the proper care and increased production negligence permits serious injury to land which will impair its productive capacity conviction by a competent court of a tenantoranymemberofhisimmediate family or farm household of a crime against the landholder or a member of hisimmediatefamily.
3.
4. 5. 6.
7.
8.
Q: Will the sale of the land extinguish the farm tenancyrelationship? A: No. The purchaser or the transferee shall assume the rights and obligations of the former landholderinrelationtothetenant. Q: Does death extinguish the tenancy relationship? A:Itdepends. 1. Death of tenant extinguishes relationship but heirs and members of his immediate farm household may continue to work on the land until the closeoftheagriculturalyear. 2. Death of landholder does not extinguish the relationship because his heirs shall assume his rights and obligation. Q: Does the expiration of the period of the contract of tenancy fixed by the parties extinguishtherelationship? A: No. The landlord is required by law, if the tenant does not voluntarily abandon the land or turn it over to him, to ask the court for an order of dispossession of the tenant. (Sec. 49, RA 1199, asamendedbyRA2263)
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URBANLANDS Q:Whataretherulesapplicabletorepairswhich anurbanlessorisliable? A: 1. Specialstipulation 2. Ifnone,customoftheplace. Q:Whataretheruleswhenthedurationoflease isnotfixed? A: 1. If there is a fixed period the lease wouldbeforthesaidperiod. 2. If there are no fixed period apply the following: a. rentpaiddailyleaseisfrom daytoday b. rentpaidweeklyleaseis fromweektoweek c. rentpaidmonthlylease frommonthtomonth d. rentpaidyearlyleasefrom yeartoyear VI.HOUSEHOLDSERVICE Q:Whatisthescopeofhouseholdservice? A: It includes the work of family servants and driver but not that of laborers in a commercial or industrialenterprise. Q:Isworkingtoreduceindebtednessallowed? A: Yes. What is prohibited is to work as a servant forfree. Q:Whenismedicalattendancegivenfree? A: Medical attendance shall be given free only if theinjuryorillnessaroseoutofandinthecourse ofemployment. Q: What is the duration of the contract for householdservice? A: 2 years. Any period agreed upon in excess of twoyearsisvoid.
Note: Upon expiration, however, it is subject to a renewal for such periods as may be agreed upon by the parties. (Pineda Sales, p. 551, 2002 ed, Article 142,LaborCode)
Q: What is the effect if the contract for householdserviceismorethan2years? A: The contract is void insofar as the excess is concerned. Q: Is there a form of contract required for householdservice? A: No formalities are required for the contract of household service, and even if the term of employment should exceed one year, the Statute of Frauds will not apply because in the contract, performance is supposed to commence right away. Q: Can house helpers work more than ten hours aday? A: Yes because the law says shall not be required. Hence, if the helper agrees to work overtime, this is clearly permissible. (Baloloy v. Uy,[CA]62O.G.5661) Q: When can additional compensation be demanded? A: 1. ifthevoluntaryovertimeworkisagreed upon; 2. if the nature of the work so demands suchovertimeservice. Q: What are included in the computation of periodforhoursofwork? A: The hours of work include not only those of actual work but also the time during which the services of the helper are available to the employer,eveniftheservicesarenotavailedof. Q:Whatistheruleforyayas? A: A yaya or nursemaid for small children, by thenatureofherwork,may rendermorethan10 hours work, but she is evidently entitled to a higherrateofcompensation. Q:Whatistheruleonvacationforhelpers? A: The law says four days vacation each month, with pay. If the helper insists on this, the employer must grant the vacation, and he cannot insistonmerelygivingthemonetaryvalue.
451
VII.CONTRACTOFLABOR Q:Whatisacontractoflabor? A: It is a consensual, nominate, principal, and commutative contract whereby one person, calledtheemployer,compensatesanother,called the laborer, worker, or employee, for the latters service. It is relationship impressed with public interest in keeping with our constitutional policy ofsocialjustice. Q: What are the essential characteristics of a contractoflabor? A: 1. Employer(Er) freely enters into a contractwiththeemployee(Ee); 2. EmployercanselectwhohisEewillbe 3. Employer can dismiss the Ee; the workerinturncanquithisjob; 4. Employermustgiveremuneration;and 5. Employer can control and supervise the conductoftheEe. A.OBLIGATIONINCASEOF DEATHORINJURYOFLABORERS Q: What are the rules regarding Ers liability in caseofdeathorinjury? A: 1. If the cause of the death or personal injury arose out of and in the course of employment,theErisliable. 2. If the cause was due to the Ees own notorious negligence, or voluntary act or drunkenness, the employer shall not beliable. 3. If the cause was partly due to the Ees lack of sue care, the compensation shall beinequitablyreduced. 4. If the cause was due to the negligence of a fellow Ee, the Er and the guilty Ee shallbeliablesolidarily. 5. If the cause was due to the intentional or malicious act of fellow Ee, the felloe Ee is liable; also the Er unless he exercised due diligence in selecting and supervisingsaidEe. VIII.CONTRACTFORPIECEOFWORK Q: Distinguish contract for piece of work from leaseofservices.
CONTRACTFORPIECE OFWORK The object is the resultantworkorobject. LEASEOFSERVICES Theobjectisservices. The risk is generally borne by the Er, not by the worker unless the latter is guilty of fault or negligence.
The risk is borne by the workerbeforedelivery.
Q: What are the elements of the contract of work? A: 1. Consent 2. Objectexecutionofpieceofwork 3. Causecertainpriceorcompensation Q:Whoisacontractor? A: The worker is also called a contractor. He in turn may obtain the services of others, who will workunderhim. Q: What is the test to determine if one is an Ee oranindependentcontractor? A:Therightofcontroltestisused.Iftheperson for whom services are to be performed controls only the end to be achieved, the worker is a contractor; if the former controls not only the end but also the manner and means to be used, thelatterisanemployee. Q:Whatcanthecontractorfurnish? A:Thecontractormayfurnish: 1. Bothmaterialandthelabor, 2. Oronlythelabor. Q: What are the duties of a contractor who furnishesbothworkandthematerial? A: This is equivalent to sale; therefore, these are theduties: 1. Todeliver 2. Totransferownership 3. To warrant against eviction and hidden defects
452
LEASE
Q: What are the remedies of the Er in case of defects? A: 1. Askthecontractortoremovethedefect ortoexecuteanotherwork. 2. If the contractor fails or refuses, the Er can ask another at the contractors expense. If a building is involved, expenses for correction and completion mayberecovered. Q: What is the rule on agreements waiving or limitingthecontractorsliability? A: 1. In the absence of fraud, the agreement wouldordinarilybevalid. 2. In the absence of prohibitory statute, the validity of a limitation is generally upheld, with a view of obtaining compensation commensurate to the riskassumed. Q: A asked B to make a radio cabinet. B bound himself to furnish the material. Before the radio cabinetcouldbedelivered,itwasdestroyedbya fortuitous event. A) Who suffers the loss? B) Is thecontractextinguished? A: B suffers the loss of both the materials and the work, unless there was mora accipiendi.Iftherewasmoraaccipiendi, itisevidentthatAsufferstheloss. No, and therefore B may be required to do the work all over again, unless there had been a prior stipulation to the contrary or unless a remaking is possible.(Art.1717,NCC)
Note: The law merely refers to the burden of the loss,andnottotheextinguishmentofthecontract.
2.
If the acceptance is made without objection, the Er may still sue for hiddendefects.
Q: Who suffers the loss in case of a fortuitous eventoranunavoidableaccident? A: As a general principle, in the absence of an express agreement to the contrary, the contractor must bear the loss from the destruction of work underway, even in case of an unavoidableaccident. Q: What is the effect when the Er accepts the work? A: 1. The contractor is generally relieved of liability.
Q:Whereistheplaceofpayment? A: 1. Wherestipulated 2. If no stipulation, then at time and place ofdelivery. Q:Whataretherulesonliabilityforcollapseofa building? A: 1. The collapse of the building must be within 15 years from the completion of thestructure. 2. The prescriptive period is 10 years followingthecollapse. 3. If the engineer or architect supervises the construction, he shall be solidarily liablewiththecontractor. 4. The liability does applies to collapse or ruin,nottominordefects. 5. Even if payment has been made, an actionisstillpossible.(Art.1723,NCC) Q:Whoisliablewhenabuildingcollapsesduring anearthquake? A:Itdepends. 1. Iftheproximatecauseofthecollapseof the building is an earthquake, no one can be held liable in view of the fortuitousevent. 2. If the proximate cause is, however, defective designing or construction, or directly attributable to the use of inferior or unsafe material, it is clear thatliabilityexists. Q: Can the contractor withdraw or demand for a higher price when the work is already stipulated? A: GR: the contractor cannot withdraw or demand a higher price even if there be ahighercostoflaborormaterials. XPNs: 1. if there was a written authorized changeofplansandspecifications; 2. if the additional price is also in writing, agreed upon by both parties.
453

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CREDIT TRANSACTIONS

Astotheirconsideration a. Onerous This is a contract where

Real or property: when an encumbrance is

Q:Whatarethekindsofcredittransactions? A: 1. Ascontractsofsecurity a. Contracts of real security These

Astotheirexistence a. Principal contracts They can exist

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

XPNtotheXPN: Contrarystipulation;or Natureofthethingforbidssuchuse.

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

MUTUUM Subjectmatterismoney orotherfungiblethings Maybegratuitousor onerous Whileinmutuum,there istransferofownership, thereisnosale

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

Astothelossof thethingin caseof fortuitous event

Astothe deterioration ofthething loaned

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

1. 2. 3. Naturalfruits Industrialfruits Civilfruits(Art.441,NCC)

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

Q:Whatarethekindsofguaranty? A: 1. Generalclassification a. Personal guaranty where an

Astoitsorigin a. Conventional constituted by

Legal imposed by virtue of a

Astoconsideration a. Gratuitous guarantor does

Astoperson a. Single constituted solely to

Astoscopeandextent a. Definite where the guaranty

UST GOLDEN NOTES 2011

5. Conditional obligations only in case of

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

SUBGUARANTY Q:Whatisdoubleorsubguaranty? A: It is one constituted to guarantee the obligationoftheguarantor.

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

AcontractwherebytheCR acquirestherighttoreceivethe fruitsofanimmovableofthe dedtor,withtheobligationto applythemtothepaymentof interest,ifowing,andthereafter totheprincipalofhiscredit.

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

Q:Whatistherequisitefortherenunciationor abandonmentofthepledgebythepledgee? A: There must be a statement in writing to that st effect(1 sentence,Art.2111,NCC).

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

UST GOLDEN NOTES 2011

CIVILLAWTEAM: ADVISER:ATTY.ELMERT.RABUYA;SUBJECTHEAD:ALFREDOB.DIMAFELIXII; ASST.SUBJECTHEADS:KARENFELIZG.SUPNAD,LAMBERTOL.SANTOSIII;MEMBERS:PAULELBERTE.AMON,ALSTONANARNA,OZANJ. FULLEROS,CECILIOM.JIMENO,JR.,ISMAELSARANGAYA,JR.;CONTRIBUTORS:LOISERAEG.NAVAL,MONICAJUCOM

Q: Distinguish contract of pledge from chattel mortgage. A:

UST GOLDEN NOTES 2011

Q: Distinguish contract of pledge from real estatemortgage. A:

Salemaybejudicialor extrajudicial Mustberegistered, otherwise,itisnotvalid againstthirdpersons althoughbinding betweentheparties Realrightandreal propertybyitself