CREDIT TRANSACTION

CREDIT- the ability to borrow money or thing by virtue of the

confidence or trust reposed by a lender that the borrower will pay
what he may promise.

CREDIT TRANSACTIONS

➢ include all transactions involving the purchase or loan of

goods, services or money in the present with a promise to
pay or deliver in the future

ADVANTAGES:

1) more exchanges are possible

2) people are able to enjoy a thing today but pay it later
3) through the banking system, actual money transfer is
eliminated

NATURE: contract of security

TYPES:

1) secured transaction or real contract of security – supported by

collateral which maybe, a property (personal and real)

2) unsecured – contract of personal security

– words of the borrower to pay or deliver

– personal commitment of another as in
the case of guaranty or surety

SCOPE: Contracts of GUARANTY, SURETY, MORTGAGE,

ANTICHRESIS, CONCURRENCE and PREFERENCE OF
CREDIT, DEPOSIT, USURY LAW and the WAREHOUSE
RECEIPT LAW

BAILMENT – french word for “bailer” meaning “to deliver” ;

concur

➢ defined as the delivery of property by one person to

another IN TRUST for a specific purpose, with a contract,
express or implied, that the trust shall be faithfully
executed and the property returned or accounted for when
the special purpose is accomplished or kept until the bailer
reclaims it.

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NATURE: a contractual relation, hence must comply with the
essential requisites of a contract such as CONSENT,
OBJECT and CAUSE

SOURCES:

1) agreement of parties or contract

2) LAW (created by law)

PARTIES:

1) BAILOR (comodatario) or GIVER, one who delivers the

possession or custody of the thing

2) BAILEE (comodante) or RECIPIENT, the person who receives

the possession or custody of the thing delivered

KINDS/CLASSIFICATION OR CONTRACTUAL BAILMENT

❖ always with reference to COMPENSATION

1) for the sole benefit of the bailor

ex. gratuitous deposit (Art. 1965) and mandatum (no

compensation but the bailee undertakes to do some
act)

2) for the benefit of the bailee

ex. commodatum and mutuum (Art. 1933)

3) for the benefit of both parties

(mutual benefit of bailment)

ex. deposit for a compensation or

a) involuntary deposit (1996)

b) pledge
c) bailment for hire

❖ this is more of a business transaction

BAILMENT FOR HIRE – arises when goods are left with the bailee
for some use or service by him and is always for compensation

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KINDS:

1) hire of things – goods are delivered for the temporary use of

the hirer (ex. lease)

2) hire of service – goods are delivered for some work or labor

upon it by the bailee
(ex. contract for a piece of work)

3) hire for carriage of goods – goods are delivered either to a

common carrier or private individual for the purpose of being
carried from one place to another

4) hire for custody – goods are delivered for storage (Warehouse

Receipt Law)

Assignment: Art. 1933 to 1961

LOAN - (defined in Art. 1933).

Art. 1933- “By the contract of loan, one of the

parties delivers to another, either something not
consumable so that the latter may use the same for
certain time and return it, in which case the contract is
COMMODATUM; or money or other consumable thing,
upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract
is simply called a loan or MUTUUM.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a

stipulation to pay interest.

In commodatum, the bailor retains the ownership of

the thing loaned, while in simple loan, ownership
passes to the borrower.”

➢ Characteristic of the contract:

1. it is a real contract – because delivery is

necessary to perfect the contract.
2. unilateral- because once there is delivery, it
creates obligation on the part of only one of
the parties, i.e., the borrower.

➢ Cause of the contract:

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 • to the borrower- the acquisition of the thing
and to the lender- the right to demand its
return or its equivalent.

➢ Kinds of loan:

1. Commodatum- the delivery of non

consumable thing( that which could be used
in a manner appropriate to its nature
without its being consumed) to the borrower
Ex. Tables, chairs, appliances

KINDS:

1) ordinary commodatum (Art. 133)

2) precarium- one whereby the bailor
may demand the return of the thing
at will.

2. Mutuum- delivery of consumable (that

which cannot be used in a manner
appropriate to its nature without it being
consumed) to the borrower with the
condition that the latter shall pay the same
amount or same kind and quality.

DISTINCTIONS:

1) Loan and Commodatum

a) C- same thing to be returned. ( non

fungible thing) – here the intention is
to compel the return of the same
thing.

L- equivalent amount to be
returned, (fungible thing)- if the
intention is to allow a substitution of
the thing given.

b) C- essentially gratuitous
L- may be gratuitous or onerous
(with interest)

c) C- ownership is retained by the

lender
L- ownership goes to the borrower
or the bailee

d) C - may involved real and personal

property
L - refers to personal property only.

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 e) C- referred to as loan for use or
temporary possession.
L - referred to as loan for
consumption

f) C- lender bears the risk of loss

because he is still the owner of the
thing.
L- borrower bears the risk of loss
because he is already the owner.

g) C- while borrower is generally

obliged to return the thing at the end
of the period, he can be compelled to
return the thing even before the end
of the period
L- borrower is obliged to pay only
at the end of the period.

h) C - personal in character
L - not personal in character.

LOAN AS DISTINGUISHED FROM

OTHER CONTRACTS:

1) Loan and Rent or lease

a.) L- lender loses his property in

favor of the borrower;
R- landlord does not lose
ownership, he merely loses control
thereof in a limited way for the
duration of the rent.

b). L- the relationship is one of

lender and borrower (creditor-
debtor)
R- the relationship is one of lessor
and lessee.

2.) Loan from discount of a

paper

Take note: Case: [Herrera vs.

Petrophil Corporation, GR 48349,
December 29, 1986]

a.) L- interest is taken at the

expiration of the credit
D- interest is deducted in
advance

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 b.) L- loan is generally on a single-
name paper [a promissory note
with no endorsement other than
the signature of the maker]
D- always on double- name
paper [ one on which two
signatures appear with both
parties liable for payment]

3.) Loan from deposit

a.) L- purpose is to grant its use to

the borrower.
D- purpose is safekeeping by
depository

b.) L- borrower pays at the end of

the period
D – return can be demanded
anytime

c) L- relationship is that of lender

and borrower
D- relationship is that of a
depositor and depositary

d) L- there can be compensation of

credits (quits)
D- NO compensation of things
deposited with each other except by
mutual agreement)

4) Loan from irregular deposit

a) L- borrower can use and return

the thing loaned at the end of
the period
ID- depository can also use (as
distinguished from regular
deposit)

b) L- lender has no preference over

other creditors
ID- irregular depositor has
preference

c) L- essential cause is necessity of

borrower
ID- essential use is the special
benefit for depositor

5) Loan from Sale

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 a) L- real contract
S- consensual contract

b) L- generally unilateral because

only borrower has obligations
S- bilateral and reciprocal

> Take note: Case of Jayme vs. Salvador,

55 Phil. 501 where SC said “ if a property is
sold but the real intention is only to give the
object as security for a debt, as when the
price is comparatively small, there really is a
contract of LOAN, with an equitable
mortgage”.

Art. 1934- “An accepted promise to deliver something by

way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the
contract”.

➢ an affirmation that the contract of loan is a REAL

CONTRACT.
➢ Talks about the binding effect of an accepted
promise to lend:

• An ACCEPTED PROMISE to make a future

loan is a CONSENSUAL contract and
therefore binding upon the parties but it is
only AFTER DELIVERY, will the real
contract of loan arises”.

Ex: If X promised Y to lend him

P5,000.00- that in itself is a consensual
contract but it is only when the 5,000 is
given to Y will there be a Real Contract
of Loan. Without delivery, no real
contract of loan exists.

NATURE OF COMMODATUM [ derived from the Latin word “

Commodum” which means usefulness or “commodo” which means
particular usefulness to a borrower]

Art. 1935- “ The bailee in a commodatum acquires the

thing loaned but not its fruits [ otherwise it is USUFRUCT,
unless a stipulation as to the fruits is made as provided for

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under Art. 1940]; if any compensation is to be paid by him
who acquires the use, the contract ceases to be a
commodatum”.

* It is a contract where one of the parties called

the bailor delivers to another known as the bailee a
NON CONSUMABLE OBJECT so that the latter may
USE the same for a certain period and later return
it.

> QUERY: Can consumable goods be an object of

commodatum? YES, if the purpose is merely for
exhibition and not use. (Art. 1936)

➢ Take note: Bailor- LENDER ( also known as

comodatario)
Bailee- BORROWER ( also known as
comodante]

➢ Characteristics:

1. real contract
2. principal
3. gratuitous (otherwise, it becomes a contract
of lease)
4. personal in nature (based on trust and
confidence)

Art. 1936 -“ Consumable goods may be the subject of

commodatum if the purpose of the contract is NOT the
consumption of the object, as when it is merely for
exhibition”.

> self explanatory

Art. 1937- “ Movable or immovable property may be the

object of commodatum.”

➢ Objects of commodatum can either be

immovable or movable. Ex: if a particular
portion of land is lent to a farmer for him to
build a “kubo” which he will use during the
duration of the planting season for free. Note
here that there must be a “duration of time
given “ , otherwise, it could not be considered as
commodatum. But take note also that under
the Civil Code, this could be regarded as
PRECARIUM, a particular kind of commodatum

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 especially when “while no time was given but the
owner can get the object at his own will.

➢ has counterpart in the contract of lease (Art.

1645)

Art. 1938- “ The bailor in commodatum need not be the

owner of the thing loaned.”

➢ Reason: Because the contract does not transfer

ownership. All that is needed is that, the bailor
has the right to use the object, which right he
can validly transfer.

➢ QUERY: Is there a need to obtain the consent of

the owner if the lender is not the owner of the
thing? The law is silent on this point but,
considering that all that is needed is, the lender
has the right to use, then it could be presumed
that the owner’s consent need not be obtained.
Take note of the Case of : Mercado and Ebora
vs. Aguilar, 45 O.G. 5th S. 118, June 30, 1947.

Art. 1939- “ Commodatum is purely personal in character.

Consequently:

1. the death of either the bailor or the bailee

extinguishes the contract;

2. the bailee can neither lend nor lease the

object of the contract to a third person.
However the members of bailee’s household
may make use of the thing loaned, unless the
nature of the thing forbids such use.”

> This Art. has to be distinguished with Art.

1938. The latter refers to a bailor while this
Art. refers to a Bailee.

> This is an exception to the general rule

provided for under Art. 1178 which states “ all
rights by virtue of an obligation are
transmissible”.

Art. 1940- “ A stipulation that the bailee may make use

of the fruits of the thing loaned is valid.”

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 ➢ this is an exception to Art. 1935. Hence, there
should be a stipulation to this effect.
➢ QUERY: Will the stipulation to this effect destroy
the nature or essence of the contract? NO,
because the actual consideration or cause of
commodatum is LIBERALITY.

> Take note: that the enjoyment of the fruits is

only incidental to the use of the thing itself,
otherwise if this is the main consideration, the
contract is not Commodatum but USUFRUCT.

OBLIGATIONS OF THE BAILEE

Art. 1941- “ The bailee is obliged to pay for the ordinary

expenses for the use and preservation of the thing
loaned.”

> Reason: Founded on the obligation of the bailee

to return the very same thing. Hence, he is expected
to take care of the thing with the diligence of a
good father of the family and to this end, he shall
be held responsible for the ordinary expense for
the use and preservation of the thing loaned.

➢ QUERY: What about extra ordinary expenses: It

must be borne by the BAILOR as he maintains
ownership of the property.

Art. 1942- “ The bailee is liable for the loss of the thing
even if it should be through a fortuitous event:

1.) if he devotes the thing to any purpose different

from that which it has been loaned; [ reason: this
amounts to bad faith or abuse of generosity considering
that commodatum is gratuitous]

2.) if he keeps it longer than the period stipulated or

after the accomplishment of the use for which
commodatum has been constituted; [ reason: he is
guilty of certain kind of default or mora]

3.) if the thing loaned has been delivered with the

appraisal of its value, unless there is a

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 stipulation exempting the bailee from
responsibility in case of fortuitous event; [ reason:
commodatum is not a contract of sale for it does not
transfer ownership]

• the exception in essence might convert

commodatum to mutuum.

4.) if he lends or leases the thing to a third person,

who is not a member of his household; [reason:
to do this will violate the personal nature of
commodatum]

5.) if, being able to save either the thing borrowed

or his own thing, he chose to save the latter. [
reason: this amounts to an act of ingratitude and to a
failure to exercise due diligence considering that
commodatum is a gratuitous contract]

➢ Extent of Liability of Bailee: Full extent of the

loss

Art. 1943- “ The bailee does not answer for the

deterioration of the thing loaned due only to the use
thereof and without his fault”

➢ deterioration is expected by reason of use. So

long as bailee has no fault at all, he is free from
liability.

Art. 1944- “ The bailee cannot retain the thing loaned

on the ground that the bailor owes him something, even
though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in
Art. 1951. “ [ damages that might be caused by the flaws on
the object loaned which the bailor knows to be existing at the
time the contract is entered into].

> reason: commodatum is based on trust, hence

whatever is borrowed should be returned.

➢ it is immaterial which comes first, the loan or the

borrowing made by the bailor.

> Take note: as distinguished from pledge, where

the creditor has the right to retain the thing until
he is fully paid.

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 Art. 1945- “when there are two or more bailees to whom
a thing is loaned in the same contract, they are liable
solidarily.

> this is imposed by law, hence a legal obligation.

This is also an exception to the general rule
provided under Articles 1207 and 1208 saying, “
concurrence of two or more parties to the
same obligation gives rise to a joint
obligation”.

OBLIGATIONS OF THE BAILOR

Art. 1946- “ The bailor cannot demand the return of the

thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for
which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing,
he may demand its return or temporary use.

In case of temporary use of the bailor, the contract

of commodatum is suspended while the thing is in the
possession of the bailor.”

> reason: commodatum is for a certain time. If

the thing will be taken back, then the purpose for
which the thing was loaned might not be achieved.
This is based on the ground of equity.

➢ Take note: the return might be temporary OR can

be permanent. Remember that the gratuitous use
of the borrower must yield the necessity of the
lender.

➢ On the other hand take note of the “suspension”

of the period.

Art. 1947- “The bailor may demand the thing at will and
the contractual relation is called precarium in the
following cases:

1. If neither the duration of the contract nor the

use to which the thing loaned should be devoted,
has been stipulated; or

2. If the use of the thing is merely tolerated by

the owner.

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 ➢ Precarium is a special form of commodatum
because in true commodatum, the position of the
bailee is more secured because of the time fixed.

➢ Take note of the two cases (above cited) when

precarium exists.

Art. 1948- “ The bailor may demand the immediate

return of the thing if the bailee commits any act of
ingratitude specified in Art. 765.”

➢ Art. 765: Instances when donation may be

revoked by reason of ingratitude:

1. donee commits some offenses against the

person, the honor or the property of the
donor, or of the wife or his children under his
parental authority.

2. donee imputes to the donor any criminal

offense or any act involving moral turpitude
even if he may prove it, unless the crime is
committed against the donee himself, his wife
or children under his parental authority.

3. if he unduly refuses him support when the

donee is legally or morally bound to give
support to the donor.

Art. 1949- “ The bailor shall refund the extraordinary

expenses during the contract for the preservation of the
thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except
when they are so urgent that the reply to the notification
cannot be awaited without danger.

If the extraordinary expenses arise on the occasion

of the actual use of the thing by the bailee, even though
he acted without fault, they shall be borne equally by
both the bailor and the bailee, unless there is stipulation
to the contrary.

> this is an equitable solution. The bailor pays for

the half, of the expenses because he is the owner,
while the bailee pays for the other half because of
the benefits derived by him from using the thing
loaned.

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 Art. 1950- “If, for the purpose of making use of the
thing, the bailee incurs expenses other than those
referred to in Art. 1941 (ordinary expense) and 1949
(extra ordinary expense), he is not entitled to
reimbursement.”

➢ self explanatory

Art. 1951- “The bailor who , knowing the flaws of the

thing loaned, does not advise the bailee of the same,
shall be liable to the latter for the damage which he may
suffer by reason thereof.”

> Reason: if a person lends he ought to confer

benefit and not to do harm such that if he knows of
the flaws on the object loaned, he shall be liable to
damage done or injuries sustained by the borrower.
In which case if he does not pay, the bailee has
the RIGHT OF RETENTION of the thing loaned.

>this is an exception to the general rule.

> flaws here consist of hidden defects not obvious

ones.

➢ Requisites for this Article to apply:

1. there is flaw or defect on the thing loaned.

2. the flaw or defect must be hidden
3. the bailor is aware thereof
4. the bailor did not advice the bailee of the
same
5. the bailee suffers damages by reason of the
flaw or defect.

Art. 1952- “ The bailor cannot exempt himself from the

payment of expenses or damages by abandoning the
thing to the bailee.”

➢ Reason: because the value of the thing

borrowed may be lesser than the expenses
incurred.

SIMPLE LOAN or MUTUUM

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Art. 1953- A person who receives a loan of money or any
fungible thing acquires the ownership thereof, and is bound to
pay the creditor an equal amount of the same kind and quality.

> MUTUUM- contract whereby one of the parties deliver

to another money or other consumable thing with the
understanding that the same amount of the same kind and
quality shall be paid. It involves the return of the
equivalent only and not the same thing.

> Take note: a loan of money may be paid in kind.

> Take note: Import of the word “to pay”, is what

distinguishes mutuum from commodatum and “to pay
includes the payment of interest.

> Take note: No estafa or criminal liability is attached

for non payment of debt. Only civil liability.

> Money Market Transaction- is a market dealing in

standardized short term credit instruments( involving large
amounts) where lenders and borrowers transact through a
middleman in open market. It is in the nature of SIMPLE
LOAN. [ Case: Allied Banking Corp. vs. Lim Sio Wan,
549 SCRA 504]

> QUERY: Is simple loan the same with trust receipt

transaction? NO.

➢ TRUST RECEIPT- (covered by PD 115 or Trust

Receipt Law), refers to a written or printed
document in which is expressed a “security
transaction” where the LENDER [having no prior
title to the goods on which the lien is given] and
not having possession thereof [as it remains to the
borrower] LENDS his money to the borrower on
security of the goods which borrower has the
privileged of selling clear of liens, on agreement
that payment shall be made from the proceeds of
the sale. This is prevalent practice in banking (to
facilitate collection of loans) “ which by itself
is a contract of adhesion”[ stipulations are
made by one party only] , a reprehensible
practice but tolerated, lest borrower wanted their
loans disapproved.

➢ Take note of the words “fungible” and

“consumable” thing – which by nature are the
same. The Old Code, refers to things which
cannot be used without being consumed as
FUNGIBLE, the New Civil Code calls them
CONSUMABLE . Nonetheless, the distinction is more

15
 on the intention of the parties, i.e., if it will be
used hence consumed , it is consumable but if the
thing is used for exhibition, such that the very
same thing will be returned, it is FUNGIBLE.

➢ Take note that that if the security given for a loan

of money is destroyed [ex. Growing/standing crops]
by fortuitous event, the obligation to pay is not
extinguished because, it could be paid in some
other kind and from other sources.

Art. 1954- A contract whereby one person transfers the

ownership of non fungible things to another with the
obligation on the part of the latter to give things of the same
kind, quantity and quality shall be considered a barter.

➢ this article refers to BARTER- a “thing for a

thing transaction”;- refers to a Contract of trade or
exchange

➢ DISTICTION: MUTUUM and COMMODATUM from

BARTER

1.) M- subject matter is Money or fungible

thing
B- subject matter is non fungible (non
consumable) thing

2) C- bailee is bound to return the identical

thing borrowed when the time has expired or
after the purpose has been served.
B- equivalent thing is given in return for
what has been received.

3) M- maybe gratuitous and Commodatum is

always gratuitous.
B- it is an onerous contract. It is really a
mutual sale

Art. 1955- The obligation of a person who borrows money shall

be governed by the provisions of Articles 1249 (debts of money
shall be in the currency stipulated, if not possible then the currency
which is legal tender in the Phil.) and 1250 of this Code, [extra
ordinary inflation and deflation].

If what was loaned is a fungible thing other than money,

the debtor owes another thing of same kind, quantity and
quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time of the
perfection of the loan shall be paid.

> refers to the “means of payment”

16
 > Take note:

1) loan of money- payment must be made in the

currency stipulated, if it is possible to deliver such
currency, if not, then payable in the currency which
is legal tender in the Philippines[ all notes and coins
issued by the Central Bank, or that currency which
when tendered in the right amount, the creditor
cannot refused to accept. In the Phil. the legal tender
is the Philippine peso]. In case of extra ordinary
inflation[ more money in circulation but of little value],
or deflation [less money but high value]. The basis of
payment shall be the value of the currency at the
time of creation of the obligation. Take note: check
is not a legal tender.

2) loan of fungible thing- pay the lender another

thing of same kind, quantity and quality. If it is
impossible, then the value of the thing at the time of
the perfection of the loan.

Art. 1956- No interest shall be due unless it has been

stipulated in writing.

> Requisites for recovery of interest

1) it must be expressly stipulated. [Case: Tan vs.

Valdehueza, 66 SCRA 61]

> Take note: only in contracts of loan, with or

without interest that interest may be stipulated
upon and demanded. [Case: Soncuya vs.
Azarraga, 65 Phil. 635]

> Take note: sales invoices or slips issued by

stores to its customers stating interest and
attorney’s fees in usual printed form, without
signature of the debtor, does not constitute
“express stipulation”. Hence, customer is not
liable to pay interest, except the 6%
interest on the amount due if he incurs delay.

2) the agreement must be in writing

3) the interest must be lawful [take note: of the
suspension of the Usury Law]

> take note: if there is a rate of interest agreed upon,

then that rate shall be paid. If the exact rate of interest is
not agreed, the legal rate of 12% ( now 6%) shall be
payable [in loan of money and forbearances of money].
No increase in interest shall be due unless such increase
has been expressly stipulated. [ Case: Toung vs. Ganzon

17
Olan, 568 SCRA 376] ; [Case: PNB vs. CA, 196 SCRA
536] Take note:

> Take note: the receipt of the creditor of an interest up to

a certain date on a loan that has already matured does not
result to an automatic renewal or extension of the maturity
period. Whether or not a loan may be renewed does not
depend solely on the debtor but more on the discretion of
the creditor.

> Take note: in case of installment payment, a debtor is

in effect, agreeing to pay an interest on the cash price,
whether the fact or rate of interest are disclosed in the
contract. [ Case: Relucio vs. Bullante-Garfin, 187 SCRA
405]

> LIABILITY FOR INTEREST IN THE ABSENCE OF

STIPULATION
( Take note: this is an exception to Art. 1956)

1) indemnity for damages – a debtor who incurs in

delay is liable to pay 6% legal interest annually,
even in the absence of a stipulation in the payment of
interest. ( Basis: delay in payment)

TAKE NOTE OF THE NEW RULE:

* if it is for 1) loan of money or 2)

forbearances of money, goods or credits and 3)
judgment involving such loans or forbearance-
legal interest is NOW 6% as per Section 1, CB
Circular No. 799 series of 2013, effective July 1, 2013
[ reckoned from the date of default, i.e., from judicial
or extra judicial demand as provided for Under Art.
1169 of the Civil Code] THEREFORE [ amending the
12% per annum rate imposed by as per Central
Bank Circular No. 416] and 6% also if for:

1) DEFAULT in payment of price or

consideration under a Contract of Sale
2) ACTION for damages for injury to
persons and loss of property and;
3) DAMAGES for unpaid insurance
claims, then the legal rate is 6% per
annum. [ Case: Castelo vs. CA,
244 SCRA 180]

> Take note: if there is an agreement as

regards the interest, the agreement prevails but if
none, the above rate shall be applied. [ Case:
State Investment House, Inc. vs. CA, 198
SCRA 390]

18
 • Take note: For unliquidated claims or
damages -6% interest per annum can be
collected reckoned from the date of judgment,
because that will be the only time when the
amount of damages will be ascertained. [
Case: Lim vs. CA, 373 SCRA 394]

• Take note: In case a judgment of the

Court awarding sum of money has
become final, a 12% per annum [now
6%] can be collected [reckoned from the
date of final judgment to full satisfaction]
regardless of whether the obligation involves
loan or forbearance of money. [ Case:
International Container Terminal Services
vs. FGU Insurance Corp., 556 SCRA 174]

2.) Interest accruing from unpaid interest-

interest on interest due

>Requisites before this could be collected:

1. a stipulation for the payment of

interest has been made by the parties
in their contract thus if no stipulation has
been made for the payment of interest,
then NO interest upon interest can be
collected BUT, the debtor is liable to pay
12%(now 6%) interest per annum by way
of DAMAGES, from the date of delay.

2. there must be judicial demand to

collect, (although the obligation may be
silent upon this point as provided for under
Art. 2212 Civil Code and Sec. 5 Usury
Law). [Case: David vs. CA, 310 SCRA
710]

➢ LIABILITY FOR SURCHARGES AND PENALTIES

* take the form of LIQUIDATED DAMAGES,

which becomes Discretionary on the part of the
Court to decrease if iniquitous or unconscionable,
on a case to case basis. The Court may even not
award this even if there is a stipulation as to its
payment. This is DISTINCT from interest.

Art. 1957- Contracts and stipulations, under any cloak or device

whatever, intended to circumvent the laws against Usury shall

19
be void. The borrower may recover in accordance with the laws
on usury.

> Take note: what becomes void is the usurious interest

and not the contract as a whole. Take note however that
under the Usury Law, interest rates are no longer
subject to ceiling.

> Examples:

1. repayment of loan with interest antedated

than actual transaction.
2. pretended lease by borrower at usurious
rental
3. Price of sale with right to repurchase clearly
inadequate
4. rent free by lender of borrower’s property in
addition to interest on loan

Art. 1958- In the determination of the interest, if it is payable in

kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment.

➢ self explanatory

Art. 1959- Without prejudice to the provisions of Art. 2212,

interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest due
and unpaid, which as added principal shall earn new interest.

>talks about “compounded interest” which is sanctioned

as long as there is a stipulation re: payment of interest,
hence the borrower may be made liable to pay the interest
on the total amount of the principal, the monetary interest
and the penalty interest.

Art. 1960- If the borrower pays interest when there has been
no stipulation therefore, the provisions of this Code concerning
solution indebiti, or natural obligations, shall be applied as the
case may be.

➢ solutio indebiti- no one shall be enriched at the

expense of another. Thus, if a borrower pays
interest where he is not obliged to do so as there
was no stipulation as to the payment of interest or
by mistake, he recovers whatever is paid. But, if
he paid the interest because he felt morally
obliged to do so, despite no stipulation as to the

20
 payment of interest, he could not recover anymore
under the principles of Natural Obligation.

Art. 1961- Usurious Contracts shall be governed by Usury Law

and other special laws, so far as they are not inconsistent with
this Code.

➢ Take note: that Usury Law is now legally

inexistent. However, there seems to be a doubt
because the Supreme Court said, The CB Circular
did not repeal the Usury Law, it merely suspended
its effectivity. [Case: First Metro Investment
Corp. vs. Este del Sol Mountain Reserves Inc.
369 SCRA 99]

➢ Today, parties can agree on the rate of interest, but

this will not preclude the Court to reduce the
agreed interest, as reason and equity demand.

THE USURY LAW

SOME IMPORTANT POINTS:

> With the promulgation of Central Bank Circular No. 905

effective January 1, 1983, USURY has become “legally
inexistent”, because now the borrower and the lender can
agree on any interest that may be legally charged on the loan.
It is only after the interest rate ceilings will be restored again by
the Monetary Board, will the Usury Law be applied. For now, the
Circular is the law on the matter of interest rates.

>Just the same, the following terms and rules should be

known.

1) USURY- contracting for or receiving something in excess

of the amount allowed by law for the loan or forbearance
of money, goods and chattels.

Elements:

a. a loan or forbearance- refers to mutuum

[not commodatum because this is gratuitous]
and forbearance is defined as-contractual
obligation of the creditor to forbear during a
given period or to require the debtor, payment of
an existing debt then due and payable. This in
substance is a loan.

21
 b. an understanding between the parties that
the loan shall or may be returned.

c. an unlawful intent to take more than the legal

rate for the use of money or its equivalent.

d. the taking or agreeing to take for the use of

the loan of something in excess of what is allowed
by law

2) INTEREST- compensation allowed by law or fixed by the

parties for the loan or forbearance of money, goods or
chattels.

Kinds:

1. Simple- that which is paid for the principal at

a certain rate fixed or stipulated by the parties.

2. Compound- that which is imposed upon interest due and unpaid.

The accrued interest is added to the principal sum and the whole is
treated as a new principal upon which the interest for the next period
is calculated.

3. Legal – that which the law directs to be

charged in the absence of any agreement as
to the rate between the parties. (6% per
annum)

4. Lawful- that which the law allows and does

not prohibit (the rate within the maximum
prescribed)

5. Unlawful or usurious - that which is paid

or stipulated to be paid beyond the
maximum.

* Multi- tiered interest rates- higher rates

imposed on loans of low priority than those
loans for production purposes. As regards
pawnshops and other credit institutions, they can
impose higher rates.

➢ ESCALATION CLAUSE [in loan agreement]-

stipulation in a contract of loan or forbearance of
money, goods or credits, where the rate of interest
agreed upon by the parties may be increased in the
event that the applicable maximum rate is increased
by law or the Monetary Board.

Nature: Valid, provided the following

requisites are present: [ Case: Banco Filipino

22
 Savings and Mortgage Bank vs. CA, 332
SCRA 241]

1. there is a stipulation also that the rate

may be reduced when the maximum rate is
reduced by law or the Monetary Board ( or
it includes a de-escalation clause or
subsequent reduction)

2. the adjustment in the rate of interest

agreed upon shall take effect on or after
the effectivity of the increase or decrease
of the maximum rate of interest.
[prospective in operation]

Determinants:

1. agreement of the parties[ cannot be

potestative on the part of the creditor

2. prevailing market rates

> Prescriptive Period for collection of usurious

interest- four(4) years from its commission.

CONTRACT OF DEPOSIT

Art. 1962- A deposit is constituted from the moment a person

receives a thing belonging to another, with the obligation of
safely keeping it and returning the same. If the safekeeping of
the thing is not the principal purpose of the contract, there is no
deposit but some other contract. [ like when money is given to
another so it could be invested or where records of the case is kept by
a lawyer: here the principal purpose is REPRESENTATION and not
deposit]

> speaks of the contract of deposit- which came from the

Roman term “depositum”.

> Principal Purpose: safekeeping

➢ Take note: if safekeeping is merely the

secondary purpose or incidental/ accessory only,
there is no contract of deposit. Thus, in balance
of commission account where possession remains
with the agent at principal’s disposal, this is
DEPOSIT per se, for the agent is required to return
the thing when demanded otherwise, if he disposes
the same, he could be charged of ESTAFA. Same

23
 wise, that if a bank with whom dollars are
deposited and converts the same to Philippine
currency is not allowed even if the peso
equivalent is credited to the depositor’s
account. This is violative of the contract of
deposit.[ Case: BPI vs. IAC, 164 SCRA 630]

➢ Parties:

1) depositor- one who owns the thing for deposit

2) depositary- one who keeps the thing either

gratuitously or for a fee [ should not be the
owner of the thing]

➢ Characteristics of the Contract:

1. real contract- it is perfected by delivery

2. unilateral- when the deposit is gratuitous

because it is only the depositary who has the
obligation, i.e., to keep

3. bilateral- when deposit is for compensation

> Take note: that the depositor cannot make use of the
thing deposited except only in cases provided for in Art. 1977

1) with the express permission of the depositor

2) when the preservation of the thing deposited
requires its use (Example: appliances)

> DISTINCTION WITH OTHER CONTRACTS:

1) with Mutuum

1) D- principal purpose is safekeeping

M- purpose is consumption

2) D- depositor can demand the return of the

thing at will
M- the lender must wait for the expiration of
the period granted to the debtor

3) D- object may be both immovable and

movable thing
M- object is money or other fungible thing

2) with Commodatum

1) D- purpose is safekeeping

24
 C- purpose is transfer of the use of the thing

2) D- may be gratuitous
C- always gratuitous

3) D- in (extra judicial deposit), only movable

(corporeal)
thing may be deposited.
C- both movable or immovable thing may be
given

Art. 1963- An agreement to constitute deposit is binding, but

the deposit itself is not perfected until the delivery of the thing

➢ owing to the nature of the contract as a real

contract, an agreement for future deposit is binding
but perfected only upon delivery.

Art. 1964- A deposit may be constituted judicially or extra-

judicially

> Take note: of the word “constituted” , meaning, “its

source”. It should be created by a) virtue of a court
order and 2) by law, And, not by the will of both parties.

➢ this article talks of the two kinds of deposit:

1) JUDICIAL- takes place when attachment or

seizure of the property in litigation is ordered.

2) EXTRA- JUDICIAL- which may be:

a) voluntary- one where delivery is made by

the depositor or by two or more persons
who believe themselves to be entitled to
the thing deposited

b) necessary or one in compliance with a

legal obligation, or on the occasion of any
calamity, or by travelers in hotel and inns or
by travelers with common carrier.

Art. 1965- A deposit is a gratuitous contract, except when there

is an agreement to the contrary or unless the depositary is
engaged in the business of storing goods.

> talks of the exceptions when contract of deposit could not be

considered as gratuitous:

25
 1. where there is contrary stipulation
2. where the depositary is engaged in the business of
storing goods
3. where property is saved from destruction without the
knowledge of the owner. Based on one’s obligation to pay
anything that is done for him.

Art. 1966- Only movable things may be the object of a deposit

( Except: Judicial deposit- where both immovable and

movable may be the object because here the purpose is to
protect the rights of the parties to a suit).

> Take note: Contract of Deposit contemplates only

CORPOREAL THINGS and does not include incorporeal or intangible
objects, like rights and actions. As regards DOCUMENTS OF
TITLE or DEEDS, while it may be true that they could be
materially deposited, these Titles or Deeds could not be
considered as object to be deposited for they are actually
expressions of the right of an individual, hence incorporeal

> Reason why only corporeal thing can be deposited: in

view of its purpose which is safekeeping.

➢ Take note: delivery of the keys of a house

cannot be considered DEPOSIT per se [because of
the nature of the house], unless its virtually the
key which is deposited, but if it is the house which
is entrusted for its care and custody, hence the
delivery of the key- the contract is one of AGENCY.

Art. 1967- An extra judicial deposit is either voluntary or

necessary:

> Speaks of extra judicial deposit whether voluntary or

necessary.

> General Rule: Contracts of deposit are voluntary.

> Exception: under the two kinds of necessary deposit
or those provided for under Arts. 1996 and 1998.

* In Art. 1996-

1) when made in compliance with a legal

obligation.

Ex: a) deposit of a thing under litigation

between
two persons (Art. 538)

26
 b) deposit of bonds or instruments of credit
payable
to order or bearer given in usufruct when
the usufructuary does not give security
for their conservation. (Art. 586)

c) deposit of thing pledged when the creditor

uses
the same without authority or misuses it
in any other way. (Art. 2104)

2) when it takes place on the occasion of

any calamity such as fire, storm, flood,
pillage, shipwreck or other similar events.

* In Art. 1998

> the deposit made by travelers in hotels and

inns.

VOLUNTARY DEPOSITS:

Art. 1968 - A voluntary deposit is that wherein the delivery is

made by the will of the depositor. A deposit may also be made
by two or more persons each of whom believes himself entitled
to the thing deposited with a third person, who shall deliver it
in a proper case to the one to whom it belongs.

> talks of the definition of voluntary deposit and the

parties to a contract of deposit [ depositor and depositary]
Take note: that a depositary may be a third person. Take
note further: that the depositor need not be the owner of
the thing like in the case of a carrier, agent or lessee for
this does not entail the transfer of ownership. And that,
the depositary cannot dispute the title of the
depositor. Simply put, a depositor is in estoppel.

> Take note: Distinction between a voluntary and

necessary deposit:

* VD- depositor has complete freedom to choose

the depositary

ND- there is lack of freedom of choice in the

depositor.

> Cases:
1.BPI vs. IAC and Zschomack, G.R. No. 66828,
August 19, 1988

27
 2. Agro Industrial Development Corporation vs.
CA and Security Bank , 219 S 426
3. Roman Catholic Bishop of Jaro v. dela
Pena, 26 Phil 144

Art. 1969- A contract of deposit may be entered into orally or

in writing.

> talks of the form of deposit.

> Take note: Owing to the nature of the contract of
deposit being a real contract, except for DELIVERY which
perfects the contract, no other formality is required for
deposit to be valid.

Art. 1970- If a person having capacity to contract accepts a

deposit made by one who is incapacitated, the former shall be
subject to all obligations of a depositary, and may be compelled
to return the thing by the guardian or administrator of the
person who made the deposit, or by the latter himself if he
should acquire capacity.

> talks of a situation where a depositary is a CAPACITATED

PERSON while the depositor is an INCAPACITATED PERSON.

Art. 1971- If the deposit has been made by a capacitated

person with another who is not, the depositor shall only have
an action to recover the thing deposited while it is still in the
possession of the depositary, or to compel the latter to pay
him the amount by which he may be enriched or benefited
himself with the thing or its price. However, if a third person
who acquired the thing acted in bad faith, the depositor may
bring an action against him for its recovery.

> the opposite of Art. 1970. Here it is the depositor who is the
CAPACITATED PERSON while the depositary is an
INCAPACITATED PERSON.

> Take note of the General Rule: An incapacitated depositary

does not incur the obligation of a depositary. However, he is
liable:

1) to return the thing while still in his possession

2) to pay the depositor the amount by which he may
have benefited
himself or price thereof. Or, the recourse of the depositor
is to go against a third person who acquired the
thing in bad faith. But, if the third person is in good
faith, then the latter is a buyer in good faith, therefore,

28
 barring the depositor to recover the thing or the price
thereof from him.

OBLIGATIONS OF THE DEPOSITARY:

Art. 1972- The depositary is obliged to keep the thing safely

and to return it, when required to the depositor, or to his heirs
or successors, or to the person who may have been designated
in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing shall be governed by the
provisions of Title 1 of the Book. [ which is, the Law on Obligations
and Contract]

If the deposit is gratuitous, this fact shall be taken into

account in determining the degree of care that the depositary
must observe.

> refers to the obligations of the depositary.

1. to keep the thing safely thus,

a. he is liable if the thing is lost through his own fault

or negligence even if the thing is insured.

b. if the thing is lost in his possession, the

presumption is, it was lost through his own fault.

c. if the deposit is for compensation, the degree of

care should be greater than when deposit is
gratuitous, [ normally with the diligence of a good
father of a family]

2. to return the thing when required, even if there is

a time specified for its return in the contract.

* because the relationship is based on trust.

3. he cannot excuse himself from liability in the

event of loss by invoking “diligence of a good father
of a family” more so, if not warranted by the facts
of the case.

> Query: Can a depositary be faulted if the money deposited

with him was deposited to his personal account and the deposit
was lost say by an act not attributable to his fault? NO, because
the act was in consonance with his obligation to safely keep the
object deposited.

29
Art. 1973- Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositor is liable
for the loss if he deposited the thing with a person who is
manifestly careless or unfit. The depositary is responsible for
the negligence of his employees.

> talks of the liability of the depositary in case of loss:

> Depositary is liable when:

1. he transfers the thing deposited without authority even

if the loss is not due to his own fault or the third person;

2. he deposits the thing with a third person who is

manifestly careless or unfit, although authorized, even in the
absence of negligence. If the third person is not manifestly
careless, then the depositary is not liable because of the
authority given by the depositor.

3. the thing is lost through the negligence of his employees

whether the latter are manifestly careless or not.

Art. 1974- The depositary may change the way of the deposit
if under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts of
the situation. However, before the depositary may make such
change, he shall notify the depositor thereof and wait for his
decision, unless delay would cause danger.

> talks of the obligation to change the way or manner of the

deposit when called for by circumstances consistent to the
depositor’s duty to take care of the thing with the diligence of
a good father of a family.

> Take note: that prior notice must be given and that the
decision should come from the depositor unless the delay would
cause danger to the thing deposited.

Art. 1975- The depositary holding certificates, bonds, securities

or instruments which earn interest shall be bound to collect
the latter when it becomes due, and to take such steps as may
be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for rent

of safety deposit boxes. [ Reason: this is not an ordinary contract
of deposit but a special kind of deposit where the relation between
the bank and the customer with respect to the contents of the safety
deposit box is that, of a bailor and bailee, i.e., to return the
contents of the deposit box]. This is actually a lease of a thing, (the

30
safety deposit box) (Case: CA Agro- Industrial Development
Corporation vs. CA, 219 SCRA 426 ).

> talks about interest earning negotiable instruments where the

depositary is not only bound to collect the interest but the capital
as well when due and demandable.

Art. 1976- Unless there is a stipulation to the contrary, the

depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall own
or have a proportionate interest in the mass.

> talks of intentional commingling of solids of same kind and

quality which results to Proportional Co-Ownership, because
the things mixed have already lost their respective identities.

> Take note: This is similar to the rule on commixtion (union

between two solids) under the Law on Property.

> This provision is particularly applicable to a warehouseman,

who may commingle goods by agreement or by custom. ( Sec.
25 Warehouse Receipts Law).

Art. 1977- The depositary cannot make use of the thing

deposited without the express permission of the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation of the thing deposited

requires its use, it must be used but only for that purpose. [
Ex. TV and other appliances]

> Reason for the rule: Deposit is for safekeeping of the

deposited object not for the use of the depositary.

Art. 1978- When the depositary has permission to use the

thing deposited, the contract loses the concept of a deposit and
becomes a loan or a commodatum, except where safekeeping is
still the principal purpose of the contract.

The permission shall not be presumed, and its existence

must be proved.

>talks of the effects of permission to use is given [ actually

this refers to irregular deposit]

> Distinguish:

31
 1) if the thing deposited is NON CONSUMABLE- the
contract becomes COMMODATUM, unless safekeeping is
still the principal purpose.

2) if the thing deposited is CONSUMABLE- the contract

becomes simple loan or MUTUUM, unless safekeeping is
still the principal purpose . [Case: Javellana vs. Lion
et.al., 11 Phil. 141]

> Take note: Bank deposits are in the nature of IRREGULAR

DEPOSIT, but they are actually loans governed by the Law on
Loans.

> DISTINGUISH: Irregular deposit from Loan

1. ID- the consumable thing deposited may be demanded

at will by the irregular depositor.
L- the lender is bound by the contract and cannot
ask for payment until it due and demandable.

2. ID- the benefit accrues to the depositor

L- the essential cause is the necessity of the borrower.
A loan with a stipulation to pay interest is for the
benefit of both parties.

3. ID- the depositor has preference over all creditors with

respect to the thing deposited.
L- common creditors enjoy no preference in the
distribution of the
debtor’s property

> Take note: the right to demand the thing deposited is

imprescriptible.

Art. 1979- The depositary is liable for the loss of the thing
through a fortuitous event.

1) if it is so stipulated;

2) if he uses the thing without the depositor’s permission

3) if he delays his return;

4) if he allows others to use it, even though he himself may

have been authorized to use the same. [ Reason:
permission to use is not presumed]

32
 > Take note: the general rule is, the depositary is not liable
for fortuitous event. This article talks about the four(4)
exceptions.

Art. 1980- Fixed savings and current deposits of money in

banks and similar institutions shall be governed by the
provisions concerning simple loan. [Case: People vs. Ong, 204
SCRA 942]

> Take note: the relationship between the bank and a

depositor is that of a debtor (bank) and a creditor
(depositor), because banks are allowed to use the money
deposited.

> Query: Is the bank allowed to compensate or set off the

deposit in its hands for the payment of any indebtedness
to it on the part of the depositor?. YES. Because the
relationship of the parties (debtor-creditor). And this is
even so because, deposits in banks are governed by the
contract between the parties. Besides, bank deposits are
not TRUE DEPOSIT within the contemplation of the law- since
depositor is not expected to get the [same] or identical
money deposited. [ Case: Equitable PCI Bank vs. Ng
Sheung Ngor, 541 SCRA 223]; [ Gullas vs. PNB, 62 Phil.
619].

>Take note: that in true deposits, set off or

compensation is not allowed as provided for under Art.
1287 of the Civil Code. [ Case: Phil. Deposit Insurance
Corp. vs. CA, Abad, GR No. 126911, p30,2003]

> Query: What action may one file in order to recover

time deposits in a distressed bank? An ordinary action for
COLLECTION and not a petition for Mandamus and
Prohibition. [ Case: Serrano vs. Central Bank, L-30511,
Feb. 14, 1980].

Art. 1981- When the thing deposited is delivered closed and

sealed, the depositary must return it in the same condition, and
he should be liable for damages should the seal or lock be
broken through his fault.

Fault on the part of the depositary is presumed, unless there

is proof to the contrary.

As regards the value of the thing deposited, the

statement of the depositor shall be accepted, when the forcible
opening is imputable to the depositary, should there be no proof
to the contrary. However, the Courts may pass upon the
credibility of the depositor with respect to the value claimed by
him.

33
 When the seal or lock is broken, with or without the
depositary’s fault, he shall keep the secret of the deposit.

> refers to deposits of closed and sealed items.

> Take note of the obligations of the depositary in this
case.

1. return the thing deposited when delivered closed

and sealed, in the same condition.

2. pay for damages should the seal or lock is

broken through his fault which is presumed, unless
proven otherwise.

3. Keep the secret of the deposit

> Reason for the rule: to avoid a situation where

irresponsible depositary may violate the trust reposed
upon him. However, said depositary is justified to open
the thing deposited which is closed or sealed where: 1)
there is presumed authority or 2) there is necessity.

Art. 1982- When it becomes necessary to open a locked box or

receptacle, the depositary is presumed authorized to do so, if the
key has been delivered to him; or when the instructions of the
depositor as regards the deposit cannot be executed without
opening the box or receptacle.

> refers to a case where there is a presumed authority of

the depositor to open a box or receptacle.

Art. 1983- The thing deposited shall be returned with all its
products, accessories and accessions.

Should deposit consist of money, the provisions relative

to agents in Art. 1896 [ speaks of necessary deposit] shall be
applied to the depositary.

> self explanatory

> Take note: this article could be made to apply to

“earnest money” where sale did not push through.

Art. 1984- The depositary cannot demand that the depositor

prove his ownership of the thing deposited.

Nevertheless, should he discover that the thing has been

stolen and who its true owner is, he must advise the latter of
the deposit.

34
 If the owner, in spite of such information, does not claim
it within the period of one (1) month the depositary shall be
relieved of all responsibility by returning the thing deposited to
the depositor.

> this refers to a situation where a thing deposited is

discovered to have been STOLEN. Take note: that this is
not applicable if the thing is LOST and then subsequently
found by another.

> Take note: In deposit, the depositary is not obliged

to ask for the ownership of the thing subject matter
thereof. Nor for the depositor to prove his ownership. In
so far as the depositary is concerned, ownership of the
depositor is presumed.

Art. 1985- When there are two or more depositors, if they are
not solidary, and the thing admits of division, each one cannot
demand more than his share.

When there is solidarity or the thing does not admit of

division, the provisions of Art. 1212 [ each one of the solidary
depositors may do whatever is useful to others, but not, anything
prejudicial to the latter] and 1214 [ if a demand is made by one of
the depositors, the thing shall be delivered to the one who demanded]
shall govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary shall
return it only to the person designated.

> TWO SITUATIONS ARE COVERED HERE:

> the first- refers to a situation where there are

two or more depositors who are NOT SOLIDARY and
the thing deposited is DIVISIBLE: Rule is: each of
the depositors could not demand more than his share.

> the second- where depositors are SOLIDARY or the

thing deposited is INDIVISIBLE: Rule is: Depositary
may return the object to anyone of the depositors,
UNLESS, one makes a demand, in which case, it will
be returned to him EXCEPT if there is a designated
depositor to whom the object will be returned, then it
will be returned to him alone.

Art. 1986- If the depositor should lose his capacity to contract

after having made the deposit, the thing cannot be returned
EXCEPT to the persons who may have the administration of his
property and rights.

35
 > refers to whom will the object be returned if depositor
becomes incapacitated, [ after deposit was made].

➢ General Rule in deposit: The thing should be

returned to the depositor, his heirs, successors in
interest, or to the person designated in the contract.

Except: when the depositor becomes

incapacitated in which case:

a. shall not be returned to him.

b. to his guardian or a person

designated to be his administrator or one
who made the deposit. Or to him, if he
becomes capacitated again.

Art. 1987 - If at the time deposit was made, a place was

designated for the return of the thing, the depositary must take
the thing deposited to such place but the expenses for
transportation shall be borne by the depositor.

If NO place has been designated for the return, it shall be

made where the thing deposited may be, even if it should not be
the same place where the deposit was made, provided that there
was no malice on the part of the depositary.

➢ refers to the place where deposit may be

returned.

➢ Take note:

1. place designated- at the expense of the

depositor

2. if none- where the thing may be at the

time of return and need not be on the place
where it was deposited.

Art. 1988- The thing deposited must be returned to the

depositor upon demand, even though a specified period or time
for such return may have been fixed.

This provision shall not apply when the thing is judicially

attached while in the depositary’s possession, or should he
have been notified of the opposition of a third person to the
return or to the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
attachment or opposition.

36
 >Take note: first paragraph refers to when deposit may
be returned. That is, UPON DEMAND, although a period is
agreed upon .

➢ Except in cases provided for on the 2nd paragraph:

a. when it is judicially attached while in the

possession of the depositary.

b. when a third person opposes the return or the

removal of the thing deposited, in which case the
depositary shall NOTIFY the depositor of such
Opposition.

Art. 1989- Unless the deposit is for valuable consideration, the

depositary who may have justifiable reasons for not keeping
the thing deposited, may even before the time designated,
return it to the depositor, and if the latter should refuse to
receive it, the depositary may secure its consignation in court.

> refers to cases when a depositary may return the thing for
justifiable reason, [ or has grounds for not keeping the thing]
even prior to the time of return.

➢ in which cases:

a. the depositary may return it

b. if the depositor refuses to receive, then consign
the same to the Court.

> Consignation- act of depositing the things due at the

disposal of judicial authority.

> Take note however of the rules:

* if the DEPOSIT is gratuitous- depositary can

return it [ [example: the depositary goes
abroad]. In case depositor refuses to accept,
then consignation is justified.

* if the DEPOSIT is for valuable

consideration or for compensation- the
depositary cannot return it or has no right to
return it before the time agreed upon to return
becomes due, even if he suffers inconvenience.
He is bound by the period and restitution before
said period constitutes breach of his obligation.

37
Art. 1990- If the depositary by force majeure or government
order loses the thing and receives money or another thing on its
place, he shall deliver the sum or other thing to the depositor.

> refers to when a thing is lost by fortuitous event or by

government order.
> OBLIGATION OF THE DEPOSITARY:

• return the sum given or the thing given in lieu

of the thing lost or taken. Not only this, the
depositor is entitled to whatever right given to
the depositor.

Art. 1991- The depositor’s heir who in good faith may have
sold the thing which he did not know was deposited, shall only be
bound to return the price he may have received or to assign his
right of action against the buyer in case the price has not been
paid him.

> refers to the sale of the object of deposit by the

depositor’s heir in GOOD FAITH. Not BAD FAITH,
otherwise the heir will be liable for damages.

> WHAT THE HEIR SHOULD DO:

1. return the price he may have received or ;

2. assign his right to collect the price to the depositor
if price is not yet paid.

OBLIGATIONS OF THE DEPOSITOR:

Art. 1992- If the deposit is gratuitous, the depositor is obliged

to reimburse the depositary for the expenses he may have
incurred for the preservation of the thing deposited.

> refers to the obligation to pay expenses for preservation [

necessary expenses]. Applicable only in gratuitous deposit. [
It should be for the account of the depositor] Basis:
grounds of equity

> Take note however of the distinction:

* If deposit is GRATUITOUS- the depositor is obliged

to reimburse the depositary for expenses of
preservation whether ordinary or extra ordinary.
USEFUL EXPENSES or those for luxury and pleasure
are not covered.
* If deposit is for compensation- the expenses
for preservation shall be borne by the depositary

38
 because they are deemed included in the
compensation. [ DEBATABLE].

Art. 1993- the depositor shall reimburse the depositary for any
loss arising from the character of the thing deposited, unless at
the time of the constitution of the deposit the former was not
aware of, or was not expected to know the dangerous character
of the thing, or unless he notified the depositary of the same, or
the latter was aware of it without advice from the depositor.

> refers to the obligation of the depositor to reimburse

depositary for any LOSS due to the character of the thing:

➢ General Rule: The depositor shall reimburse the

depositary in case of loss due to the character of the
thing deposited.

Exceptions:

1. the depositor was not aware of the

character of the thing;

2. the depositor is not expected to know of the

said character [ presumably dangerous]

3. depositor notified the depositary of the

character of the thing deposited

4. the depositary is aware of the character of

the thing deposited even without advice from
depositor.

Art. 1994- The depositary may retain the thing in pledge until
full payment of what may be due him by reason of the deposit.

> Talks of the RIGHT OF RETENTION given to the

depositary if not reimbursed of what is due him. Same
right as that of the agent.

> Take note: this is not the rule in Commodatum because

in the latter, the bailee has no right of retention when not
reimbursed of expenses spent by him. The only time that
the bailee has the right of retention is, when he suffered
damages brought about by the flaws in the object given. .

Art. 1995- A deposit is extinguished:

1. upon the loss or destruction of the thing deposited.

39
 2. in case of gratuitous deposit, upon the death of either
the depositor or the depositary.

> refers to the grounds of extinguishing deposit. Not

exclusive. Deposit may also be extinguished by return
of the thing, novation, merger, expiration of the term
and fulfillment of resolutory condition, etc.

➢ Take note: rule in case of death of anyone of

the parties:

• If deposit is gratuitous- death of either

party extinguishes deposit. Because,
gratuitous deposit is personal in nature.

• If deposit is for compensation- death of

either party DOES NOT extinguish deposit.
Because, onerous deposit is not personal in
nature, therefore transmissible to the heirs.
Take note: the latter has the right to
terminate the contract even before the
expiration of the term.

NECESSARY DEPOSIT

Art. 1996- A deposit is necessary:

1) when it is made in compliance with a legal

obligation [Examples: a) the deposit o f a thing which is
the subject of litigation by two or more persons; b)
deposit with a bank or public institution bonds or
instruments of credit payable to order or bearer given in
usufruct when the usufructuary does not give proper
security for their conservation; c) the deposit of the thing
pledged when the creditor uses the same without
authority or misuses it in any other way; d) deposits made
by those who desire to use firearms]

2) when it takes place on the occasion of any

calamity, such as fire, storm, flood, pillage, shipwreck ,
or other similar events. [ known as depositos
miserables].

➢ Other kinds of necessary deposit:

1) those made by travelers in hotels or inns

2) made by passengers with common carriers

40
Art. 1997- The deposit referred to in No.1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of deficiency, by the rules on
voluntary deposit.

The deposit mentioned in No.2 of the preceding article shall

be regulated by the provisions concerning voluntary deposit and
by Art. 2168 [ refers to negotiorum gestio- a quasi contract].

➢ talks of the governing laws

Art. 1998- The deposits of effects made by travelers in hotels or

inns shall also be regarded as necessary. The keepers of hotels
or inns shall be responsible for them as depositaries, provided
that notice was given to them, or to their employees, of the
effects brought by the guests, and that, on the part of the latter,
they take the precautions which said hotel keepers or their
substitutes advised relative to the care and vigilance of their
effects.

> take note that for the liability to attach, information

must be given by the guests of their items. Example: if
a guest checks in, in a hotel and his cellphone is destroyed
by a hotel keeper, the hotel keeper is liable only if the
guest made known to him about his cell phone.

> take note: precautions may be given orally or through

written notices [ posters/ cards] posted on the lobby as well
as in the individual rooms. TAKE NOTE: a hotel keeper
cannot free herself from responsibility by posting notices to
the effect that he is not liable for articles brought by the
guests.

> INN is a “public house for the lodging of travelers for

compensation and until capacity is reached; or a place of
public entertainment that does not provide lodging.
HOTEL- “ a building of many rooms chiefly for overnight
accommodation of transients and several floors served by
elevators, usually with a large lobby …”. MOTEL- “an
establishment which provides lodging and parking and in
which the rooms are usually accessible from an outdoor
parking area.

> INNKEEPER- the keeper of an inn for the lodging of

travelers and passengers for a reasonable compensation.

> TRAVELLER- refers to transient and does not include

ordinary or regular boarder in any apartment, house, inn
or hotel. Distance traveled is immaterial. Sometimes
referred to as “guest”.

41
 > EFFECTS- all kinds of personal property, like jewelry,
cash and the like.

> EXTENT OF LIABILITY- does not only include lost or

damaged effects/ baggage such as clothings but also include
vehicles lost or damaged in hotel’s garage.

> INSTANCES WHEN HOTEL KEEPER IS LIABLE: [

regardless of the amount of care]

1. loss or injury is caused by his servants or

employee as well as by strangers provided that notice
has been given and proper precautions has been
taken.

2. the loss is caused by a thief or robber done

without the use of firearm or irresistible force,
because here the hotel keeper is presumed negligent.

> INSTANCES WHEN HOTEL KEEPER IS NOT LIABLE:

1. when loss or injury is caused by force majeure

2. the loss is due to the acts of the guest/s his family,
servants or visitors;
3. when theft or robbery is caused by strangers with
the use of arms or irresistible force unless he is
guilty of fault or negligence.
4. the loss is brought by the character of the things
brought into the hotel.

Art.1999- The hotel keeper is liable for the vehicles , animals

and articles which have been introduced or placed in the
annexes of the hotel.

> self explanatory

Art. 2000- The responsibility referred to in the two preceding

articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotel or inns as well as by strangers; [like
malicious mischief or theft] but not that which may proceed from
any force majeure [ like flood or robbery by intimidation of persons].
The fact that the travelers are constrained to rely on the
vigilance of the keepers of the hotels or inns shall be
considered in determining the decree of care required of him.

> take note of the discussion above

42
Art. 2001- The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force.

> Rationale for this article: presumed fault on the part of

the innkeeper who is bound to keep his place safe from the
intrusion of thieves, day or night.

> QUERY: if X using a fire escape went up, raised the

guest’s window, entered the room and took the bag of Y, is
the hotel keeper liable? Answer: YES, in the first place he
should have a watchman to avoid such occurrence.

Art. 2002- The hotel keeper is not liable for compensation if

the loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arise from the character of the things
brought into the hotel.

> refers to acts which may be a voluntary malicious act or

simply of negligence

Art. 2003- The hotel keeper cannot not free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel- keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to 2001
is suppressed or diminish shall be VOID.

> rule is similar with the rule on common carriers

whereby they could not exempt themselves from liability or
limit their liability. Reason: because of their duty to
supervise and control their place. Hence, the reliance and
faith of guest to be safe while within their premises
should not be disregarded.

Art. 2004- The hotel-keeper has the right to retain the things
brought into the hotel by the guest, as security for credits on
account of lodging, and supplies usually furnish to the guests.

> refers to the right of retention.

> Purpose of Retention: to compensate the innkeeper

for the extraordinary liabilities imposed upon him by law.

43
 > Query: does the innkeeper has the right to sell the
thing left by the guest? Answer: By analogy to the contract
of Pledge YES. The right of retention is in the nature of a
contract of pledge created by operation of Law.

> take note: if bills for food and accommodation are

not paid, this constitutes the crime of ESTAFA.

SEQUESTRATION OR JUDICIAL DEPOSIT:

Art. 2005- A judicial deposit or sequestration takes place when

attachment or seizure of property in litigation is ordered.

> refers to judicial deposit or garnishment which takes

“place when an attachment or seizure of property in
litigation is ordered by the Court”.

➢ Nature: This is auxiliary to a pending case. The

property is the custody of the Court and it shall
remain under its control. This could be done by
the seizure of the property by the Court’s sheriff
or officer of the Court under a writ of attachment
or a writ of execution.

➢ Purpose: to maintain the status quo during the

pendency of a litigation or to insure the right of
the parties to the property in case of a favorable
judgment.

Art. 2006- Movable or immovable property may be the object

of sequestration.

> self explanatory

Art. 2007- The depositary of property or objects sequestered

cannot be relieved of his responsibility until the controversy
which gave rise thereto has come to an end, unless the Court so
orders. [ Case: Ng Cho Cio et.al., vs. Ng Diong and Hodges, L-14832,
Jan. 28, 1961].

> self explanatory

44
Art. 2008- The depositary of property sequestered is bound to
comply, with respect to the same, with all the obligations of a
good father of a family.

> self explanatory

Art. 2009- As to matters not provided for in this Code, judicial

sequestration shall be governed by the Rules of Court.

> suppletory rules are provided under the Rules of Court.

In case of
conflict, the Civil Code prevails.

GUARANTY AND SURETYSHIP

Nature and Extent:

Art. 2047- By guaranty a person, called the guarantor, binds

himself to the creditor to fulfill the obligation of the principal
debtor, in case the latter should fail to do so. [definition of the
contract of guaranty]

If a person binds himself solidarily with the principal

debtor, the provision of Se.4, Chapter 3, Title 1 of this Book shall
be observed. In such case the contract is called suretyship.
[definition of the contract of suretyship].

➢ Take note: classification of guaranty:

A. GUARANTY in the broad sense which

could be:

1. PERSONAL: which could be:

a. Personal- and this may be in the form

of guaranty [in the strict sense of the
word] or;

b. Suretyship- where the surety binds

himself
solidarily.

2. REAL- where the guaranty is PROPERTY

45
 1. If real property is given, the contract
may be:

a. real mortgage;
b. antichresis

2. If personal property is given- the

3. guaranty
may be in the form of:

a. pledge ;
b. chattel mortgage

B. AS TO ITS ORIGIN:

Kinds:

1. Legal- imposed by virtue of operation of law

2. Conventional- imposed by virtue of a
contract
3. Judicial – one which is required by the Court
to guaranty the eventual right of one of the
parties.

C. AS TO CONSIDERATION:

1. Gratuitous- no price or consideration given;

2. Onerous- a guarantor receives valuable
consideration for his guaranty

D. AS TO THE PERSON GUARANTEED:

1. Single- that which is constituted solely to

guaranty or secure performance by the debtor
of the principal obligation

2. Double or sub-guaranty- that which is

constituted to secure the fulfillment by the
guarantor of a prior guaranty

E. AS TO ITS SCOPE AND EXTENT:

1. Definite- here guaranty is limited to the

principal
Obligation only or to a specific portion thereof.

2. Indefinite- guaranty includes not only the

principal
Obligation but also its accessories [ex.
Interest]
Including the judicial cost.

46
 ➢ Take note: Characteristics of the Contract:

1. It is accessory- because it depends upon

the principal obligation guaranteed by it.

2. It is subsidiary and conditional- because

it takes effect only if the principal debtor fails to
pay his obligation;

3. It is unlilateral- because it gives rise to a

duty on the part of the guarantor to pay
the obligation to the creditor and not vice
versa and it may be entered even without the
intervention of the principal debtor;

4. It is a contract which requires that the

guarantor be a separate and distinct
person from the principal debtor because
one could not guaranty for himself as this will
counter the very purpose of the contract- which
is for the creditor to proceed against the
guarantor if the principal debtor does not pay.
[ *Case: Velasquez vs. Solidbank
Corporation, 500 SCRA 119] Take note: of
the exception in the case of PLEDGE and
MORTGAGE because the pledge and/ or
mortgagee can guarantee their own debt using
their properties.

5. As to FORM, contract of guaranty must be

in writing
Thus covered by the Statutes of Fraud, being
a special
Promise to answer for the debt of another.

➢ CONCEPT OF THE CONTRACT OF INDEMNITY-

this is the contract between the debtor and the
guarantor. As distinguished from guaranty- which
is a contract between the guarantor and the
creditor. [ *Case: Vizconde vs. IAC, GR. 74321,
April 10, 1987].

➢ CONCEPT OF SURETYSHIP- it is a
contractual relation
resulting from an agreement whereby one person,
[the surety] engages to be answerable to a third
person [creditor] for the debt, default, or
miscarriage of another [principal debtor]. [ By
nature, a surety is “an insurer of the debt, such
that his liability is primary and that he could be

47
sued by the creditor independently of the principal
debtor notwithstanding that he has not benefited
from the contract at all.

• THINGS TO REMEMBER UNDER THIS

CONTRACT:

▪ Nature of undertaking:

1. Liability of the surety is contractual

and accessory but DIRECT. That is, he
is primarily liable and as equally bound
with the principal debtor and regardless
whether or not the principal is financially
able or not because their liabilities is
interwoven and inseparable with each
other. [*Case: Garon vs. Project
Movers Realty Development
Corporation, 520 SCRA 317]. Take
note: In this connection, it is not for the
creditor to see to it that the principal
debtor pays, but for the surety to see to
it that the principal debtor pays
otherwise, the surety is liable. [ Case:
Paramount Insurance Corp. vs. CA,
310 SCRA 377].

2. Liability is limited by the terms of the

contract. The extent of a surety’s
liability is determined only by the terms
and clauses of the contract. It could not
be extended nor presumed. [ PNB vs. CA,
198 SCRA 767]. A surety however is
not released by the change in the contract
which does not make the obligation
more onerous. [Case: Intra Strata
Assurance Corp. vs. Republic, 557
SCRA 363].

3. Liability arises only if principal debtor is

held liable. It means that while the
liability of the surety is solidary with that
of the principal debtor, the SURETY does
not incur liability unless and until the
principal debtor is held liable. [Case:
Empire Insurance Co. vs. NLRC, 294
SCRA 263]. Take note however, that so
long the principal debtor is made liable,
a surety may be sued by the creditor
independently of the former [Case: *

48
Gateway Electronics Corp. vs.
Asianbank Corp. 574 SCRA 698], and
that “demand” nor “notice of default of
the debtor” need not be given him
before he could be sued because he is
made privy to all proceedings affecting
the principal debtor [ Case: Finman
General Assurance Corp. vs. Salik, 188
SCRA 740]. Take note: also that,
where there is no principal debtor who is
liable, there can be no surety hence a
surety bond is VOID or a supersedeas
bond in an ejectment case is likewise VOID
when it signed only by the surety but
not the principal debtor or obligor, [
Case: Singson vs. Babida, 79 SCRA
111].

• Take note: An accommodation

party (one who signs his name on
an instrument as maker, drawer or
indorser without receiving value
therefore and for the purpose of
lending his name) has the same
liability as that of the SURETY.
[Case: * Tomas Ang vs.
Associated Bank and Antonio
Ang Eng Liong, GR. No.
146511, Sept. 5, 2007.

4. Surety is not entitled to exhaustion of

the properties of the principal debtor,
being an original promisor and considering
his liability which is primary and
solidary.

5. Surety’s undertaking is to the

creditor, not to the debtor. Thus, his
undertaking is for the principal debtor to
pay because it is only when the latter
pays that he is relieved of his
responsibility, unless otherwise expressly
provided, [ Case: Arranz vs.Manila
Fidelity & Surety Co. Inc., 101 Phil.
272]

6. Surety is not entitled to notice of

principal’s default.

7. Surety is not exonerated by neglect of

creditor to sue principal. Delay in suing
the principal does not also exonerate the
surety.

49
 > Take note: Suretyship is a continuing contract,
i.e., until the
principal obligation is fully paid or
satisfied. [ Case: Ongkiko vs. BPI
Express Card Corp., 486 SCRA 206].

➢ Distinction between a Guarantor and a

surety:

1. G- subsidiarily liable [his is a collateral

undertaking].
S- primary liable; charged as an
original promisor.

2. G- pays if debtor CANNOT

S- pays if debtor DOES NOT

3. G- insurer of the debtor’s solvency

S- insurer of the debt.

4. G- discharged by the mere indulgence

of the
creditor of the principal and not
usually liable
unless notified of the default of the
principal
[ Case: Corp. vs. V. P. Eusebio
Construction Inc., 434 SCRA
202].

S- not discharged by the mere

indulgence of the creditor of the
principal or by want of notice of the
default of the principal no matter how
much he is injured.

• Take note: the essence of the obligation of

the
surety is to pay the creditor
without
qualification, if the principal
debtor does
not pay. [ Case: *Lirag Textile
Mills. Inc.
vs. SSS, SSS, 153 SCRA
338].

> Query: Is a solidary debtor a guarantor of his co-

debtors? Answer: NO. Because he himself is a
principal debtor, [ Case: Escano vs. Ortigas, 526
SCRA 26]. Take note: however of the ruling in

50
 the [*Case of Diamond Builders Conglomeration
vs. Country Bankers Insurance Corporation, 540
SCRA 194] * where the surety pays the creditor
directly and the obligation is extinguished even when
he has no privity of contract with the creditor.

➢ Take note: where a guarantor binds himself

solidarily without losing his character as a
guarantor. This is a possible scenario. All that is
guarded is to “determine the intention of the
guarantor at the outset”. If he binds himself
solidarily liable with the principal debtor [though
he is a guarantor] then the creditor can go against
him directly, without necessarily losing his
character as a guarantor and still he has a right to
seek reimbursement like any guarantor. This is so
because of the term “joint and severally”. This is by
express provision or agreement because ordinarily,
even if it is a contract of guaranty, if the
guarantor makes himself “jointly and severally
liable”, he is considered as surety. Hence, be
careful of the terms of the contract.

Case: Palmares vs. CA, 288 SCRA 422] , where

the SC declares that “when a person signs as a
co-maker and binds himself solidarily liable with
the debtor, he could not be considered as a
guarantor but as a SURETY if the debtor
defaults in the payment because here he
becomes an insurer of debt. Take note: TERM and
TERMINOLOGY NOT CONTROLLING, instead what is
controlling is the INTENTION.

➢ Query: What about a surety, is he a solidary

debtor? Answer: Almost the same as the
solidary debtor except that he himself is a
principal debtor.

> Take note: Distinction between Guaranty and

Indorsement:

1. G- nature is to secure or for security

I- it is primarily that of transfer

2. G- liability of the guarantor is more

extensive
I- indorser is discharged when the bill or the
note
Is not presented upon maturity and
due notice of
dishonor is given.

51
 3. G- warrants the solvency of the promisor,
whether
the latter is solvent or not.
I - the indorser does not, he only warrants
his
indorsement[ to his immediate indorsee].

4. G - cannot be sued as a promisor

I- as an indorser, he can be sued

> Take note: Distinction between a Guaranty

and Warranty:

1. G- is a contract where a person is bound

to another
for the fulfillment of the promise of
another or a
third party [principal debtor]
W- it is an undertaking that the title,
quality and
quantity of the subject matter of a
contract is
what it has been represented to be.

Art. 2048 - A guaranty is gratuitous, unless there is a

stipulation to the contrary.

➢ Take note: the cause of the contract of

guaranty as well as the contract of suretyship is
the same as the cause of the principal obligation.

Art. 2049- A married woman may guarantee an obligation

without her husband’s consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.

➢ talks about the limitation of the extent a married

woman can
be a guarantor. In this case, she will be binding
her paraphernal property.

Art. 2050- If a guaranty is entered into without the

knowledge or consent, or against the will of the principal
debtor, the provisions of Art. 1236 and 1237 [rules of payment]
shall apply.

> talks about the UNILATERAL character of the

contract. That is, for the benefit of the creditor
and not for the benefit of the principal debtor
who is not a party to the contract of guaranty.

52
 Hence, the creditor has the right to take all
measures to secure the payment of the debt even
WITHOUT the knowledge of the principal debtor.
Take note: the right of the guarantor in this case is
the same with the right of a third person who paid
against or without the consent of the debtor. The
Rules on Payment Apply and these are:

1) Art. 1236- the creditor is not bound to

accept the payment or performance of a third
person who has no interest in the fulfillment
of the obligation, unless there is a stipulation
to the contrary.

Whoever pays for another may demand

from the debtor, what he has paid, except that if
he has paid without the knowledge or against
the will of the debtor, he can recover only in
so far as the payment has been beneficial
to the debtor.

2) Art. 1237- Whoever pays on behalf of the

debtor without the knowledge or against the will
of the latter, cannot compel the creditor to
subrogate him in his rights, such as those
arising from mortgage, guaranty or
penalty.

Art. 2051- A guaranty may be conventional, legal or judicial,

gratuitous or by onerous title.

It may also be constituted, not only in favor of the

principal debtor but also in favor of the guarantor, with the
latter’s consent, or without his knowledge, or even over his
objection.

➢ Talks of the different kinds of guaranty

➢ Take note of the nature of Sub-guaranty- an
obligation to guaranty the obligation of a guarantor.

Art. 2052- A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to

guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.

➢ It emphasizes that a contract of guaranty is an

accessory contract.

53
Art. 2053- A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.

➢ It talks about “continuing guaranty or suretyship.

That is, one which is not limited to a single
transaction but contemplates future course of
dealings or transaction.
➢ No claim until the debt is liquidated because a
contract of guaranty is SUBSIDIARY.

Art. 2054 - A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount
and the onerous nature of the conditions.

Should he have bound himself for more, his obligations

shall be reduced to the limits of that of the debtor. [if he
does, his liability is reduced to the limits of that of the principal].

➢ this is owing to the fact that a contract of

guaranty is a subsidiary and accessory contract.

➢ Example: X borrowed from Y P100,000.00 with Z

as the guarantor. If X could not pay, Z is liable
only for the amount of P100,000. Thus, for
example if X did not constitute a mortgage on his
debt, Z could not add a mortgage apart from his
guaranty of P100,000. He can however guaranty
the payment of X’s debt in the amount of
P50,000.00 only.

➢ Take note: [Case of Pacific Banking

Corporation vs. IAC, GR 72275, Nov. 13,
1991] where this provision is expounded and
where SC ruled “ while the undertaking was signed
as “Guarantor’s undertaking”, it is in substance a
contract of surety.

➢ Take note further: the measure of the

guarantor’s or surety’s obligation is not, the
measure of the principal’s obligation because a
creditor may recover more from a principal
debtor who is bound by his contract with him.

➢ Rule if a person has two debts, one where he

is a sole debtor and the other, he is a
solidary co-debtor: the debt where he is a sole

54
 debtor is more onerous, hence, his obligation on
the latter must be satisfied first.

➢ Rule if the debt is increased: If debt is

increased without the guarantor’s consent, the
latter is released from liability.

➢ Liability of the Guarantor for Interest Due:

He is liable
even if in thus paying, the liability becomes
more than of the principal obligation. Reason: the
increased liability is not because of the contract
but because of the default and the necessity of
judicial collection.

> Take note: Effect of a Penal Clause in an

obligation: if a surety bond has a penal clause[ in
case of violation of a condition in the contract], the
penalty may be demanded even if its value is more
than the amount of the principal obligation: Reason:
because of the violation of the condition. [Case:
General Insurance and Surety Corp. vs.
Republic, GR. 13873, Jan. 31, 1963].

Art. 2055- A guaranty is not presumed, it must be

express[refers solely and exclusively to the obligation of the
guarantor because it is he alone who binds himself by his acceptance,
in so far as the creditor is concerned, this requirement is not needed
because he binds himself to nothing] and cannot extend to more
than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only of

the principal obligation, but also all its accessories, including
the judicial costs, provided with respect to the latter, that the
guarantor shall be only liable for those costs incurred after he
has been judicially required to pay.

➢ refers to the FORM of the contract of guaranty,

i.e., MUST
not only be expressed but also be reduced to
writing. This contract (not suretyship) falls within
the Statute of Frauds since it contains a special
promise to answer for the debt, default or
miscarriage of another. Take note: An ORAL
GUARANTY is unenforceable, [ NOT VOID].
Query: What about if the contract is oral, can this
fact or defense be waived by the guarantor?
Answer: YES, because it is well known that the
defense of the Statute of Fraud is waivable.

➢ Take note: Kinds of Guaranty According to

Period or

55
 Condition:

1. with a term- (express or implied

2. with a condition – ( suspensive or
resolutory)
3. simple or indefinite- ( no period is
specified; no
amount is fixed) Take note that here: all
the
consequences of the 2nd paragraph are
enforceable.

*Take note: If the surety binds itself for a

limited
period, it cannot be held liable beyond the
period.

➢ Rule of Construction: Being a special obligation,

it must be
strictly enforced against the creditor and in favor
of the guarantor and is not to be extended
beyond its terms or specified limits. Thus, if there
are doubts on its terms and conditions, it should
be resolved in favor of the guarantor or surety.[
Case: PNB vs. CA, 198 SCRA 767]. Reason:
this is premised that a contract of guaranty is
gratuitous. But if it is for compensation, as for
example in the case of surety companies, the rule
is, where there is ambiguities, it must be
interpreted against the surety company. [
Exception to the Rule on STRICTISSIMI
JURIS, which refers to accommodation surety or
that which acts for free or without motive of
pecuniary gain].

➢ Take note: Guaranty does not cover previous

obligations
or arrangements made by the principal debtor,
prior to the constitution of the guaranty. A contract
of guaranty or suretyship is PROSPECTIVE not
retroactive, unless the contrary is stipulated
upon. [ Case: Pastoral vs. Mutual Security
Insurance Corp. vs. Dy Eng Geok, 104 Phil.
806]

Art. 2056- One who is obliged to furnish a guarantor shall

present a person who possesses integrity, capacity to bind
himself and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where the obligation is to
be complied with. [ means, the court of the place of performance
(loci solutionis) has jurisdiction over the guarantor].

56
 ➢ refers to the qualifications of the guarantor which
must exist at the time of the perfection of the
contract.

➢ Take note: that the creditor can WAIVE the

requirements, for generally right is waivable.

Art. 2057- If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated a
specified person should be the guarantor.

➢ refers to the subsequent loss of the required

qualifications.

> Take note: subsequent loss of integrity or

insolvency
generally does not end the guaranty; it will
only give right
to the creditor to demand substitution of the
guarantor but
this right may be waived and dependent
on who chose
the guarantor.

➢ Rules:

1. specified person stipulated as guarantor

[presumably chosen by the creditor and
debtor] substitution may not be demanded
because the selection of the guarantor is a
term or condition of the agreement and as
a party , the creditor is bound by it.

2. guarantor selected by the principal

debtor- the
latter answers for the integrity, capacity
and solvency
of the former because such qualifications
must be
possessed not only at the moment
guaranty is given
but until the extinguishment of the debt.

2. guarantor personally designated by the

creditor-

57
 responsibility is upon the latter after all the
guarantor was selected by him.

➢ Query: If a guarantor dies, are the heirs still

liable?. Answer: YES to the extent of the value of
the inheritance because the obligation is not purely
personal and therefore, transmissible. Query: Why
not personal?. Answer: because all the creditor
is interested is the recovery of the money
regardless of the giver. [Case: Estate of Hemady
vs. Luzon Surety & Insurance Co., 53 O.G.
2786] Thus, the action must be against the estate
of the deceased guarantor.

ASSIGNED CASES:

1. Tupaz vs. CA, 475 SCRA 398

2. American Home Insurance Company of New York vs. F.F. Cruz

and Co., GR No. 174926, August 10, 2011

3. Bitanga vs. Pyramid Construction Engineering Corp. 563

SCRA 544

4. JN Development Corp. vs. Phil. Export and Foreign Loan

Guarantee Corp. 468 SCRA 555

5. Gateway Electronics Corp. Asian Bank Corp. GR No. 172041,

December 18, 2008

6. Toh vs. Solid Bank Corporation, 408 SCRA 544

7. Security Bank and Trust Company v. Cuenca, 341 S 341 S

781

8. Ang vs. Associated Bank, GR 146511, Sept. 5, 2007

9. Stronghold Insurance Co., Inc. vs. Republic Asahi Glass Corp.

492 S 179

10. Palmares vs. CA and M.B. Lending Corp. 282 S 422

EFFECTS OF GUARANTY

58
Art. 2058- The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies against
the debtor.

> refers to the effects of the contract of guaranty

between the creditor and the guarantor premised on the
nature of the contract as accessory and subsidiary. In
sum, they are:

1. the guarantor is entitled to the benefit of

excussion (or benefit of exhaustion) of the debtor’s
property except in cases provided for under Art.
2059 and provided the guarantor follows Art. 2060;

2. a compromise between the creditor and the

principal debtor benefits but not prejudice the
guarantor. (Art. 2063)

3. If there should be several guarantors, they are in

general entitled to the benefit of division, (Art.
2065).

> Benefit of Exhaustion- the right of the guarantor to

have all the properties of the principal debtor and all legal
remedies against him first exhausted before he can be
compelled to pay the creditor. [Case: Tupaz vs. CA, 475
SCRA 398]. Take not that: this is NOT applicable to
suretyship.

> Requisites before this benefit could be availed:

1. the guarantor sets up this defense before

judgment is rendered against him.

2. he has not pledged or mortgaged his own

property to the
creditor for the satisfaction of the principal
obligation, because a mortgagor is not entitled to
the this benefit.

3. he does not fall under the cases provided for

under Art.
2059.

4. he complies with Art. 2060

> Query: if a debtor is declared insolvent in an

insolvency proceeding, does it necessarily follow that he
could no longer pay?. Answer: NO, because he might
have some properties available to the creditor. Take
note: One good evidence is a Writ of Execution is served
upon the debtor and it was not satisfied.

59
 > Take note: it is required that the creditor notifies the
guarantor of the debtor’s inability to pay, because LACK
OF NOTICE will prejudice him unless there is waiver on his
part. No notice, guarantor is not liable, unlike in the case
of a surety.

> Query: In a suit against the debtor, can you implead

the guarantor. Answer: YES. But he is still entitled to the
benefit of exhaustion.

Art. 2059- This excussion shall not take place:

1. if the guarantor has expressly renounced it;

2. if he has bound himself solidarily with the debtor;
3. in case of insolvency of the debtor;
4. when he has absconded, or cannot be sued within the
Philippines unless he has left a manager or
representative;
5. If it may be presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation. [ useless already]

> refers to the exceptions when the benefit of

exhaustion could not be availed of by the guarantor. [
ACRONYM: R(renounce), U (useless), S (solidarily liable),
I ( insolvency ) and A (abscond), in short RUSIA. [ Case:
Imperial Insurance vs. de los Angeles, 111 SCRA 24].

> Take note of the additional instances: 1) if the

guaranty is in judicial bond; 2) if Art. 2060 is not
complied with and 3) if the principal obligation is a
natural, voidable or unenforceable obligation i. e., there is
still guaranty but the principal debtor is no longer liable.

Art. 2060- In order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor
upon the latter’s demand for payment from him, and point out
to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the debt.

> refers to the necessity of ACTUAL DEMAND TO PAY

which must be made after judgment is made against the
debtor. Take note: The fact that the debtor is sued
together with the guarantor does not mean, demand to
pay was already made. [ Case: Baylon vs. CA, 312
SCRA 502].

> Take note: also of the obligation of the guarantor to

point out the available properties of the debtor within the
Philippines. Those levied or attached properties are not
included.

60
Art. 2061- The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor resulting
from such negligence.

>refers to the obligation of the creditor to exhaust the

properties of the debtor first, otherwise he suffers the loss.

Art. 2062- In every action by the creditor, which must be

against the principal debtor alone, except in cases provided
under Art. 2059, the former shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he
may, if he so desire, set up such defenses as are granted him by
law. The benefit of excussion mentioned in Art. 2058 shall
always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.

> refers to a suit against debtor in Court.

> Take note: As a general rule, the suit may be brought

only against the debtor. But there is nothing wrong, if
both the debtor and the guarantor may be both sued.
Only that, this will not EXEMPT the creditor from exhausting
the properties of the debtor first. And, the suit against
both of them does not operate as a NOTICE TO PAY to the
guarantor. [This is an INNOVATION under the New
Civil Code because under the Old Code, the debtor
and the guarantor should be sued jointly.]

> Query: Is there a need for the guarantor to appear: NO

NEED. If ever he appears, all he does is to set up his
defense of “benefit of exhaustion”.

> Query: Can a writ of execution be issued against the

guarantor should the debtor lose in the case? Answer: NO,
unless the debtor does not pay and all available properties
are already exhausted. Except: when guarantor could
not avail of the benefit as in cases provided for under Art.
2059.

> Query: Is there a need for hearing before a writ of

execution be issued against the guarantor?. Answer: YES.
Notice and hearing are requirements for due process.

Art. 2063- A compromise between the creditor and the

principal debtor benefits the guarantor but does not prejudice

61
him. That which is entered into between the guarantor and
the creditor benefits but does not prejudice the principal
debtor.

> refers to a COMPROMISE - a contract whereby the

parties, by making reciprocal concessions, avoid litigation or
put an end to one already commenced.

> Take note: the compromise may be entered into

between the CREDITOR and the PRINCIPAL DEBTOR.
Or, between the GUARANTOR and the CREDITOR. In
the former, the guarantor should not be prejudiced while
in the latter, the principal debtor should not be prejudiced.

Art. 2064- The guarantor of a guarantor shall enjoy the benefit

of excussion, both with respect to the guarantor and to the
principal debtor.

> this refers to SUB- GUARANTY.

> Take note: a sub guarantor can also avail the benefit
of excussion: Reason: because he is of same footing as
that of the guarantor.

Art. 2065- Should there be several guarantors of only one

debtor and for the same debt, the obligation to answer for the
same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively
bound to pay, unless solidarity has been expressly stipulated.

The benefit of division against the co-guarantors ceases in

the same cases and for the same reasons as the benefit of
excussion against the principal debtor.

> refers to the benefit of division. But take note: the

benefit of excussion shall not be denied to the several
guarantors whose liability is JOINT unless solidarity is
stipulated.

> Take note: The benefit of division is not applicable in

these cases:

1. there are two or more debtors of one debt, even if

they are bound solidarily, each with different
guarantors.
2. there are two or more guarantors of same debtor
but not only for same debt.

62
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR:

Art. 2066- The guarantor who pays for a debtor must be

indemnified by the latter:

The indemnity comprises:

1. The total amount of the debt [ full payment is required but

he could not have himself reimbursed more than what is due
even if he paid such amount]
2. The legal interests thereon from the time payment
was made known to the debtor, even it did not earn
interest for the creditor;
3. The expenses incurred by the guarantor after having
notified by the debtor that payment had been
demanded of him;
4. Damages, if they are due.

> take note that this Article is premised on the nature of

the contract of guaranty which is a, Contract of
Indemnity.

> Take note of the exceptions to indemnity or

reimbursement:

1. where the guaranty is constituted without the

knowledge or against the will of the principal
debtor- here the guarantor can recover only up to
the extent the debtor is benefited.

2. payment by a third person who does not intend

to be reimbursed by the debtor- which now becomes a
DONATION, which of course should be accepted.
Effect: payment is nonetheless valid to a creditor who
accepted it.

3. the right to demand is subject to waiver.

> ACRONYM of those to be reimbursed: TIED

Art. 2067- The guarantor who pays is subrogated by virtue

thereof to all the rights which the creditor had against the
debtor.

If the guarantor has compromised with the creditor, he

cannot demand from the debtor more than what he has really
paid.

63
 > refers to the benefit of SUBROGATION- whereby it
transfers to the person subrogated, the credit with all the
rights thereto appertaining, either against the debtor or
against third persons, be they guarantors or possessors of
mortgages, subject to the stipulation on conventional
subrogation.

> Take note: the benefit of subrogation results by

operation of law from the act of payment and there is no
necessity on the part of the guarantor to ask the
creditor to expressly assign his right of action. Reason:
this right is based on the principle of natural justice.

> Query: Is this right applicable to a surety? Answer:

No, because he is a principal by himself. No subrogation in
surety.

Art. 2068- If the guarantor should pay without notifying the

debtor, the latter may enforce against him all the defenses
which he could set up against the creditor at the time the
payment was made.

> refers to the debtor’s right to set up defenses against

guarantor if the latter pays the creditor without his
consent. Example: Payment, Prescription or all other
modes extinguishing and obligation.

Art. 2069- If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the period
unless the payment has been ratified by the debtor.

> refers to advance payment which is not necessary. Take

note: ratification may be express or implied.

> Take note: [ Case: JN Development Corp. vs. Phil.

Export and Foreign Loan Guarantee Corp. , 468 SCRA
555]

Art. 2070- If the guarantor has paid without notifying the

debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatsoever
against the debtor, but only against the creditor. Nevertheless,
in case of gratuitous guaranty, if the guarantor was prevented
by a fortuitous event from advising the debtor of the payment,
the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid. [ the last paragraph is an
exception].

64
 > refers to payment by both the guarantor and the
principal debtor:

> in so far as gratuitous guaranty is concerned, this is

favored by law because guarantor is not paid hence it
would be unjust if he will not be reimbursed, thus, the
guarantor can still recover.

> Take note: General Rule: Before the guarantor pays the
creditor, he must first notify the debtor. If he does not give
notice and the debtor repeats payment, guarantor’s only
remedy is to go against the creditor and not from the
debtor even if the creditor becomes insolvent. The
EXCEPTIONS are:

1. the creditor becomes insolvent (?).

2. the guarantor was prevented by fortuitous event
to advice the debtor of the payment
3. the guaranty is gratuitous

> Reason for this article: to prevent the guarantor from

impairing the rights of the principal debtor.

Art. 2071- The guarantor, even before having paid, may proceed
against the principal debtor: [ means no payment made yet by the
guarantor]

1. when he is sued for payment;

2. in case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve him from
the guaranty within a specified period and this period
has expired.
4. when the debt has become demandable, by reason of the
expiration of the period of payment;
5. after the lapse of ten(10) years, when the principal
obligation has no fixed period of maturity, unless it be
of such nature that it cannot be extinguished within a
period longer than ten years;
6. if there are reasonable grounds to fear that the
principal debtor intends to abscond;
7. if the principal debtor is in imminent danger of
becoming insolvent.

In all these cases, the action of the guarantor is to obtain

release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor.

> Purpose of this Article: to enable the guarantor to

take measures for the protection of his interest.

65
 > refers to the rights of the guarantor before
payment:

1. to obtain release from the guaranty from the

debtor;
2. to demand security.

> Query: is it necessary to obtain the creditor’s consent.

Answer: YES

> Take note: here, the guarantor has not paid yet hence
could not demand reimbursement, thus, his remedy is to
obtain release from the guaranty or to obtain security that
shall protect him from proceedings that the creditor might
have against him.

> Take note: The action for release must be against the
principal debtor and not against the creditor.

> Take note: Nature of the remedies available:

ALTERNATIVE depending upon the choice of the guarantor
and the guarantor who brings an action under this Article
must choose the remedy and apply for it specifically.

> Take note: this article applies also to a SURETY.

> Take note: Distinctions between Art. 2066 and 2071

1. 2066- the guarantor asked for the enforcement of

his right after he has paid the creditor;

2071- the guarantor has not paid yet but his

already
ensuring his right.

2. 2066- gives a right of action after payment

2171- provides a protective remedy before

payment

3. 2066- this is an enforcement of substantive

right

2071- this is in the nature of a preliminary

remedy

4. 2066-gives a right of action , which, without the

provisions
of the other, might be worthless. Guarantor does
not seek release from the creditor.

2071- seeks to obtain from the debtor release

from guaranty.

66
Art. 2072- If one, at the request of another, becomes
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.

> refers to a case where a third person is called to guaranty

the debt of an absentee at the request of another.

➢ Said person may sue:

1. the person who requested him to be a guarantor

2. the debtor

EFFECTS OF GUARANTY AS BETWEEN CO- GUARANTORS:

Art. 2073- When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is
proportionately owing him.

If any of the guarantors should be insolvent, his share

shall be borne by the others, including the payer in the same
proportion.

The provisions of this article shall not be applicable

unless the payment has been made in virtue of a judicial demand
or unless the principal debtor is insolvent.

> Take note: this article is applicable only where there is

payment and PAYMENT was made:

1. in virtue of a judicial demand

2. or, because the principal debtor is insolvent.

• Without these two requirements, a guarantor

who pays may proceed directly against his
co- guarantors for their respective shares,
with the latter spending for travel and other
expenses in going after the principal debtor.

Art. 2074- In case of the preceding article, the co-guarantors

may set up against the one who paid, the same defenses which
could have pertains to the principal debtor against the creditor,
and which are not purely personal to the debtor

➢ self explanatory

67
Art. 2075- A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.

➢ take note: this is applicable only if his (sub

guarantor’s) guarantor is insolvent.

EXTINGUISHMENT OF GUARANTY

Art. 2076- The obligation of the guarantor is extinguished at the

same time as that of the debtor, and for the same causes as
all other obligations.

> this article affirms the nature of the contract of

guaranty as being accessory and subsidiary because if the
principal obligation is extinguished, guaranty is also
extinguished.

> The grounds for extinguishing an obligation also applies

in guaranty:

Causes:

1. Novation
2. Compensation
3. Merger
4. Remission
5. Payment and
6. Loss.

* It is also extinguished by: annulment,

rescission, fulfillment of a resolutory
condition and prescription.

* Take note: however that a guaranty may be

released
without the extinguishment of the principal
obligation as when the creditor releases the
guarantor.

> Take note: Death of the principal debtor is not a

defense a surety can use to wipe out its monetary
obligation under a performance bond. If at all the
obligation is chargeable to the decedent’s estate. Reason:
Because a surety’s liability to the creditor or promise to the
principal is direct and primary, [ Case: Stronghold
Insurance Co., Inc. vs. Asahi Glass Corporation].

68
 > Take note: also of the effect of alteration of the
contract:

* if it is a material alteration as when it makes the

contract more onerous, like 1) varying the terms of
the contract , 2) period is extended, 3) assignment of
credit or change in the object , WITHOUT THE
CONSENT OF THE GUARANTOR, the guaranty is
extinguished. Query: What about if the interest rate
is increased, will it extinguish the guaranty. Answer:
NO. this is not material alteration. The guarantor is
bound to pay the original rate of interest.

Art. 2077- If the creditor voluntarily accepts immovable or other

property in payment of the debt, even if he should afterwards
lose the same through eviction, the guarantor is released.

> talks about dation in payment or dacion en pago. And

this refers to immovable or other (personal) property. This
in effect is novation of the obligation.

> Query: What is the effect of novation in this case:

Answer: revives the principal obligation but NOT the
guaranty because here, the creditor took the risk.

Art. 2078- A release made by the creditor in favor of one of

the guarantors, without the consent of the others, benefits all
to the extent of the share of the guarantor to whom it has
been granted.

> talks about the effect of the release of a guarantor

without the consent of his co-guarantors.

> to apply this article, be guided by the benefit of

division, where practically the guarantors’ obligation
is joint. Hence, if one of them is insolvent, the others
bear his share. The rule applies when one is released, the
others will be benefited. Example: If A, B and C are
guarantors for a debt of P30,000.00 and A is released
without the consent of B and C , A and B will be liable to
pay only P20,000 or P10,000 each as the case may be. If
A and B are released, C will be liable to pay P10,000.00
only, no more no less. But if A is released with the
consent of B and C, then B and C will be liable still for
P30,000.00, with each of them paying P15,000.00 each.

Art. 2079- An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to

69
demand payment after the debt has become due does not of
itself constitute an extension of time.

> talks about the effect of an extension of time given to the

debtor without the consent of the guarantor.

> Effect: it releases the guarantor, because if not, what

if in the interim the debtor becomes insolvent, then the
guarantor will be prejudiced. Query: What about if the
creditor merely fails to demand payment. Answer: This
does not constitute an implied extension. So, the recourse
of the guarantor is to pay and be immediately subrogated
to the rights of the creditor against the debtor.

> Query: What happens if a surety signs a promissory

note issued by a debtor in favor of a creditor and the
debtor assigns to the latter all payments he would receive
from a third person, without the consent of the surety, and in
the process, the creditor releases the third person? The
surety is extinguished and the creditor should take the
blame- this will also release the debtor if done without his
consent. [ Case: Toh vs. Solid Bank Corporation, 408
SCRA 544].* in this case, creditor’s act is detrimental to
the debtor.

> Query: Can the guarantor waives the extension.

Answer: YES. As this is not contrary to law and public
policy.

Art. 2080- The guarantors, even though they be solidary, are

released from their obligation whenever by some act [also
includes inaction] of the creditor they cannot be subrogated to the
rights, mortgages and preferences of the latter.

> talks of an erring creditor who because of his fault, he

could not be subrogated to his rights by the guarantor in
case the latter pays instead of the debtor. Example: the
creditor releases or fails to register a mortgage in his
favor or remits the same. EFFECT: Even if the guarantor
does not pay, the guaranty is released. [ discussed and
ruled in the Toh Case also].

> Take note: This article could be availed of by the

guarantor only when he is sued for payment NOT BEFORE
he is sued or where there is no case for payment filed yet
against him NOR after rendition of judgment. [ Case:
Municipality of Gasan vs. Marasigan, 63 Phil. 510]

Art. 2081- The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent

70
in the debt; but not those that are purely personal to the
debtor.

> talks about the available defenses to the guarantor to

free himself from his obligation.

> Query: What are these defenses:

Answer:

1. inherent in the principal obligation

a. prescription
b. res judicata
c. payment
d. illegality of cause

2. defenses which are ordinarily personal to the

principal debtor, but are inherent to the debt.

* any one of the vices of consent [ force,

intimidation, mistake, violence and undue
influence

3. defenses of the guarantor himself

a. vitiated consent on his part

b. compensation between the debtor and the
creditor
c. remission of the principal obligation or of the
guaranty
d. merger of the person of debtor and creditor

* Take note: b, c, and d, are the modes of

extinguishing an obligation. Here the principal
obligation is extinguished and so is the guaranty
being an accessory contract.

LEGAL AND JUDICIAL BONDS

Art. 2082- The bondsman who is to be offered in virtue of a

provision of law or of a judicial order shall have the
qualifications prescribed in Art. 2056 and in special laws.

> refers to the qualification of the bondsman which is the

same with that of the guarantor. [integrity, capacity to bind
himself and sufficiency of property].

> BOND- is an undertaking that is sufficiently secured,

and not cash or currency; it stands as a guaranty for a

71
 principal obligation, which exists independently of said
obligation, the latter being merely an accessory obligation.
Take note: All bonds to include “judicial bonds” are
contractual in nature.

> JUDICIAL BOND- constitutes merely a special class of

contracts of guaranty, characterized by the fact that they
are issued “in virtue of a judicial order”.

> Take note: the surety/bondsman must sign on the

bond itself, otherwise, it will not bind him.

Art. 2083- If the person bound to give a bond in the cases of

the preceding article, should not be able to do so, a pledge
or mortgage considered sufficient to cover his obligation shall
be admitted in lieu thereof.

> self explanatory

> Take note however: of the action to be taken if a

surety’s performance of the bond is rendered impossible by
fortuitous event, or of the act of the oblige, or of the law: *
It is surety’s duty to inform the Court of the happening of
the event so that it may take action or decree in the
discharge of the surety, otherwise he shall be made liable
for his negligence to take action, hence will not be
discharged. [Case: People vs. Otiak Omal and Luzon
Surety Co. Inc., L-14457, June 30, 1961]

Art. 2084- A judicial bondsman cannot demand the exhaustion

of the property of the principal debtor.

A sub-surety in the same case, cannot demand the

exhaustion of the property of the debtor or of the surety.

> refers to the fact that a judicial bondsman is not entitled

to the benefit of exhaustion of the property of the debtor.
Reason: he is not a mere guarantor but a surety who is
primarily and solidarily liable with the principal debtor.

> take note: Unlike in guaranty, the negligence of the

creditor of not collecting from the debtor does not relieve
a judicial bondman.

72
PLEDGE

>already repealed by RA No. 11057(in its repealing

clause) otherwise known as PERSONAL PROPERTY SECURITY
ACT [PPSA] was enacted on August 17, 2018.

INTRODUCTION:

This law expressly repealed, amended or modified, among others,

the provisions of the Chattel Mortgage Law (Act No. 1508) (specifically,
Sections 1-16), the provisions of the Civil Code of the Philippines
(Republic Act No. 386) (“Civil Code”) on mortgage and pledge
(specifically, Articles 2085-2123, 2127, 2140-2141, 2241, 2243 and
2246-2247), and the registration of chattel mortgages under the
Property Registration Decree (Presidential Decree No. 1529) (specifically,
Sections 114-116). The full implementation of this law is
conditioned on the issuance of its implementing rules and regulations
and the establishment of a NEW REGISTRY (where the security
interest created under this law will be registered ). Once the registry is
established, the creation of a valid security interest over personal
property under Philippine law will be entirely governed by the PPSA and
the PPSA Rules, except interests in aircraft which are subject to the
Civil Aviation Authority Act of 2008 (Republic Act No. 9497) and
interests in ships which will continue to be governed by the Ship
Mortgage Decree of 1978 (Presidential Decree No. 1521). In this
connection, the implementing rules and regulations of the PPSA (“PPSA
Rules”) were published last November 18, 2019 and have become
effective on December 3, 2019. Verily, the PPSA Rules directed the
Land Registration Authority to establish the registry within six months
from the publication of the PPSA Rules.

Purposes:

1. to strengthen the secured transactions legal framework in

the Philippines
2. to provide for the creation, perfection, determination of
priority, establishment of a centralized notice registry, and
enforcement of security interests in personal property
(tangible and intangible), except aircraft and ships.

Coverage:

>All secured transactions (i.e., a collateral is given

consisting of tangible property, [personal property, equipment,
inventory and personal property to in its generic sense, to secure
payment and the performance of an obligation] when the debt
should be paid first. Also, under this Act, priority right is given to a
buyer of accounts receivable and to a lessor under an operating lease
for not less than one(1) year. The creditors herein have what you
call a SECURITY INTEREST which in itself is a property right.

73
 >Security interest defined: it is a property right in collateral
that secures payment or other performance of other obligation,
regardless of whether the parties have denominated it as a security
interest and regardless of the type of asset, the status of the grantor
or secured creditor or the nature of the secured obligation;
including the right pf a buyer of accounts receivable and a lessor
under an operating lease of less than one(1) year.

>TAKE NOTE: The essential requisites for a transaction to

be considered SECURED TRANSCATION must comply with the
following MEANS OF PERFECTION.

1. Registration of the Notice with the LRA

2. Possession of the collateral by the secured creditor.
3. Control of the investment property and deposit
account.

>TAKE NOTE HOWEVER: that in ordinary pledge, the general

provisions still remain.

Creation of Security Interest:

It may be created by:

1.a security agreement

2. an operating lease for not less than one year, or
3.the sale of an account receivable (unless otherwise stipulated by
the parties in the document of sale).

As provided under the PPSA Rules, parties are free to enter into any
form of security arrangements over movable property as long as the
security arrangement is not inconsistent with the PPSA or the PPSA Rules.
Notably, it should be noted that, PPSA Rules apply also to other
functional equivalents of security interest, including fiduciary transfers of
title; financial lease; assignment or transfer receivables; and sale with
retention of title.

74
 >Take note: that, unless provided by the PPSA, the PPSA Rules,
or upon agreement of the parties, a security interest will continue in the
collateral notwithstanding the sale, lease, license, exchange, or other
disposition of the collateral.

HOW SECURITY INTEREST IS PERFECTED:

After a security interest has been created, it may be perfected by:

1. registration of a notice with the registry

2. possession of the collateral by the secured creditor, whether
actual or constructive and,
3. control of investment property and deposit account.

>Take note: On perfection, a security interest becomes effective

against third parties.

> Take note: A security interest in any tangible asset may be

perfected by registration (i.e., by filing a notice with the registry) or
possession (whether actual or constructive). While a security interest in
investment property or deposit account may be perfected by registration
or control (i.e., through (i) the creation of a security interest in favor of
the deposit-taking institution or intermediary, (ii) the conclusion of a
control agreement (which must be executed under oath and must include
the date and time of execution), or (iii) for investment property that is an
electronic security but not held with an intermediary, the notation of the
security interest in the books of the issuer).

WHEN A SECURITY INTEREST IS EXTINGUISHED:

A security interest is extinguished when all secured obligations have

been discharged and there are no outstanding commitments to extend
the credit secured by the security interest.

NATURE AND CONTENTS OF SECURITY AGREEMENT:

>The security agreement must be contained in a written contract

signed by the parties and must identify the collateral and the secured
obligation. The description of the collateral is considered sufficient
(whether it is specific or general) if it reasonably identifies the collateral.
For example, a description such as “all personal property” of the grantor
is sufficient. The security agreement must provide for the language to be
used in agreements and notices.

>The security agreement may provide for the creation of a security

interest in a future property or after-acquired asset, but it is created
only when the grantor acquires rights in it or the power to
encumber it.

>The security agreement may also provide that a security interest

in a tangible asset that is transformed into a product extends to the

75
product (but limited to the value of the encumbered asset before it
became part of the product).

>It may likewise provide that a security interest in a tangible asset

extends to its replacement (but limited to the value of the encumbered
asset before it was replaced).

Priority of Security Interest

PPSA rules provide that when there are several secured

creditors over same collateral the priority of security interests and liens
in the same collateral will be determined according to time of
registration of a notice or perfection by other means, without
regard to the order of creation of the security interest and liens or
(except as expressly stipulated in the PPSA Rules) to the mode of
perfection.

>Take note: should the grantor has become insolvent, the

security interest perfected before the commencement of insolvency
proceedings in respect of the grantor will remain perfected and retain the
priority it had before the commencement of the proceedings, subject to
applicable insolvency law.

MODES OF ENFORCEMENT OF SECURITY INTEREST: (by a

secured creditor)

1. judicial process or
2. extra-judicial process, including (a) the sale of the secured
assets through public or private disposition or (b)
retention of collateral.

Taking Possession of the Collateral

>Take note: when the collateral is not in the possession of the

secured creditor, when there is default in the payment, the secured
creditor may take possession of the collateral without undergoing judicial
process [if there is stipulation to this effect] but possession must be
without breach of the peace [which includes entering the private
residence of the grantor without permission, resorting to physical violence
or intimidation, or being accompanied by a law enforcement officer when
taking possession or confronting the grantor].

>Take note: when the secured creditor cannot take possession of

the collateral without breach of the peace, the secured creditor may do
the following:

76
1. The secured creditor will be entitled to an expedited hearing
upon application with the court for an order granting the secured
creditor possession of the collateral.

2. The secured creditor must provide the debtor, grantor, and, if

the collateral is a fixture, any real estate mortgagee, a copy of the
application with supporting documents and evidence.

3. The secured creditor is entitled to an order granting possession

of the collateral upon the court finding that a default has occurred
under the security agreement and that the secured creditor has a
right to take possession of the collateral.

77
>Under the following special cases, upon default, the secured creditor
may take possession of the collateral without judicial process by:

78
 1. instructing the account debtor of an accounts receivable to make
payment to the secured creditor, and apply such payment to the
satisfaction of the obligation secured by the security interest after
deducting the secured creditor’s reasonable collection expenses;

2. in a negotiable document where the security interest is perfected

by possession, proceeding as to the negotiable document or goods
covered by the negotiable document;

3. in a deposit account maintained by the secured creditor, applying

the balance of the deposit account to the obligation secured by the
deposit account; and

4. in other cases of a security interest in a deposit account

perfected by a control agreement, instructing the deposit-taking
institution to pay the balance of the deposit account to the secured
creditor’s account by providing (i) a copy of the security agreement
and (ii) the secured party’s affidavit, stating that a default has
occurred and that the secured party is entitled to enforce the
security interest non-judicially.

Disposition of Collateral

After default, a secured creditor may (upon prior notice to the

grantor, other secured creditors, and any other person from whom the
secured creditor received notification of a claim of interest in the
collateral) sell or otherwise dispose of the collateral, publicly or
privately, in its present condition or following any commercially
reasonable preparation or processing. A disposition is commercially
reasonable if the secured creditor disposes of the collateral in conformity
with commercial practices among dealers in that type of property.
[Section 7.09 of the PPSA Rules].

Retention of Collateral

Also, after default, a secured creditor may also propose to the

debtor and grantor to take all or part of the collateral in total or partial
satisfaction of the secured obligation by sending a proposal to the
grantor, other secured creditors, and any other person from whom the
secured creditor received notification of a claim.

>Take note: The secured creditor may retain the collateral in case
of: (i) a proposal for the acquisition of the collateral in full satisfaction of
the secured obligation, without objection from any of the addressees of
the proposal; or (ii) a proposal for the acquisition of the collateral in
partial satisfaction of the secured obligation, but only if the secured
creditor received the written affirmative consent of the addressees of the
proposal.

79
Registry during the Transitional Period

Under the PPSA Rules, the Land Registration Authority (“LRA”),

within six months from the publication of the PPSA Rules, will establish
and administer the centralized, nationwide registry. The registry must
provide electronic means for registration and search of notices. The LRA
will issue the necessary guidelines on the use and management of the
registry.

During the Transitional Period, the registration of the security

agreement with the LRA will be in accordance with the Chattel Mortgage
Law. The LRA will also determine a system of provisional registration of
such agreements during such Transitional Period.

END OF LECTURE ON PPSA

CONTINUATION OF LECTURE ON CREDIT TRANSACTIONS

MORTGAGE

> it came from the latin word, MORTUUM UADIUM. The word
“mort” means dead and the term “gage” means pledge.
Literally, mortgage means a dead or unproductive pledge.

> it is a CONTRACT in which the debtor guarantees to the

creditor the fulfillment of a principal obligation, subjecting for
the faithful compliance therewith a real property [or real rights
over immovable property], in case of non-fulfillment of said
obligation at the time stipulated.

Art. 2124- only the following property may be the object of a

contract of mortgage: [ actually this refers to real mortgage]

1. immovables;
2. alienable real rights in accordance with the laws,
imposed upon immovables.

Nevertheless, movables may be the object of a chattel

mortgage.

> refers to the object or subject matter of a mortgage.

> Take note: CHARACTERISTICS OF A REAL

MORTGAGE:

80
 1. it is a real right
2. it is an accessory contract
3. it is indivisible

[ ex: if X and Y obtained a loan giving as a

security 1 hectare land worth P500,000.
Supposing the land was partitioned and X paid
his share of P250,000. Is the mortgage
extinguished. Answer: NO. because the
mortgage itself is indivisible.

4. it is inseparable as in the case of a house and lot.

Take note however that these days, a house may
be mortgaged separately from the land. Take note:
the mortgage adheres to the property, regardless of
who its owner may subsequently be. [ Case:
Soriano vs. Galit, 411 SCRA 631]

5. it is a real property [in itself], (Art. 415 par.10).

6. it is a limitation on ownership
7. it can secure all kinds of obligation
8. The property cannot be appropriated [ because
mortgage does not transfer ownership]
9. the mortgage is a lien.

> KINDS OF MORTGAGE

1. Voluntary- one which is agreed upon by the

parties or constituted by the will of the owner of
the property on which it is created.
2. Legal- one required by law to be executed in favor
of certain persons. [ those required by law to be
registered or a bond will be given]
3. Equitable-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 security
for a debt, and contains nothing impossible or
contrary to law[ where the property high in price
is sold for a very low price].

> Take note: of its distinctions with the contract of

pledge; pacto de retro sale; or a chattel mortgage.

*> Take note: a mortgagee usually does not possess the

land mortgaged. Or even if he is in possession thereof, he
could not acquire the property because his possession is
not in the concept of an owner. Moreover, even if the
debt is not paid upon maturity, the mortgagee cannot
appropriate the property for himself. Any stipulation to the
contrary is void. [ Case: Rosa Naval et.al. vs. Genaro
Homeres, CA, L-19482-R, May 30, 1959]

81
 > Take note: mortgage can be constituted to secure
future advancement is valid. Ex: a stipulation which
says “ for the payment of loan in the amount of P20,000
and such other loans or other advances obtained or still to
be obtained by the mortgagors as the makers”. [ Case:
Mojica vs. CA, GR 94247, September 11, 1991]

> Take note: Future property cannot be the object of

mortgage because the mortgagor cannot legally mortgage
what he does not own yet. [ Case: Dilag vs. Heirs of
Resurreccion, 70 Phil. 650]. Take note however that a
“stipulation subjecting to the mortgage lien, properties (such
as improvements) which the mortgagor may subsequently
acquire, install or use in connection with a real property
already mortgaged to the mortgagor is VALID. REASON:
because of the possibility of acquiring or building it on the
property mortgaged. Ex: in a mortgage of a parcel of land
without improvement thereon was mortgaged and it was
stipulated thereon that even buildings to be subsequently
built is included in the mortgage. [ Case: People’s Bank
and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84]

> Take note: While a mortgage of a land necessarily

includes, in the absence of a stipulation, the improvements
thereon, a building by itself may be mortgaged apart from
the land on which it is built. [Remember Art. 415, on the
inclusion of buildings]

Art. 2125- In addition to the requisites stated in Art. 2085, it

is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in
the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a

mortgage have no other right than to demand the execution
and the recording of the document in which the mortgage is
formalized.

> refers to the import of registration. This is an essential

requisite of mortgage to bind third persons. Take note : if
not registered it is still valid between the contracting
parties. Take note further: the right to attack a mortgage
may be lost by a waiver of defects and objections, or by
unreasonable delay to act amounting to ratification. [ Case:
San Juan vs. CA, 363 SCRA 450].

> take note: Rules where:

1) MORTGAGE is in a private document

82
 * No valid mortgage is constituted when done in
a private
document, therefore is not registered, hence
the creditor can recover the debt and has the
right to compel the debtor to execute mortgage
in a public document. [Case: Hechanova vs.
Adil, 144 SCRA 450].

2) WHERE MORTGAGE IS NOT REGISTERED.

* still binding between the parties but not to

third persons. Hence, an Order of foreclosure
could not be refused on the ground that the
mortgage is not registered, provided however
that no innocent third person is affected.

3) WHERE MORTGAGE IS REGISTERED UNDER

ACT 3344

* the registration of a mortgage over a real

property under Act 3344 is without prejudice to
the better right of third persons. Thus, an
unregistered pacto de retro sale over a house is
superior to a recorded mortgage over the same
house of a later date. Reason: A mortgagor
could not validly mortgage which he does not
own anymore.

*> DOCTRINE OF MORTGAGE IN GOOD FAITH

* Means that, a mortgagee has a right to rely in

good faith on the Certificate of Title of the
mortgagor of a property given as security and in the
absence of any sign that might arouse suspicion, has
no obligation to undertake further investigation.

• Take note: that inorder for this doctrine

to apply, there must be a showing that the
mortgagor has already transferred the title
to his name and that after he obtains title, he
mortgaged it to another who relied on his
title.

• Take note: this doctrine is not applicable if

the property is still in the name of the real
owner of the property. And, in a situation
where the mortgagee has actual knowledge
of the status of the mortgagor, i.e., he knows
him to be a mortgagee [of an owner] only,
yet he acted as if he owns the property. [
Case: Bank of Commerce vs. San Pablo,

83
 Jr., 522 SCRA 713] and [ Abad vs.
Guimba, 465 SCRA 356].

• Take note: when the purchaser or

mortgagee is a bank or any financial
institution, this doctrine does not apply in
view of the general care and diligence
required of a mortgagee bank. [ Case:
Premiere Development Bank vs. CA, 453
SCRA 630].

• Take note: effect of the invalidity of

mortgage on the principal obligation. IT IS
STILL VALID. Reason: Mortgage is an
accessory contract, therefore the controlling
factor is the principal obligation.

Art. 2126- The mortgage directly and immediately subjects the

property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted.

> refers to the fact that a mortgage creates a real right.

And so, it is enforceable against the whole world. All
subsequent transferees should therefore be bound by the
mortgage. Take note however, that this article is applicable
only if the MORTGAGE is registered.

> Query: Can a mortgaged property be sold by its

owner? Answer: YES. And so therefore if he sells the
property, his buyer is bound by the mortgage. [ Case:
Bonnevie vs. CA, 125 SCRA 122]; [ Asuncion vs.
Evangelista, 316 SCRA 848].

> Query: Can the owner of the property under

expropriation mortgage the property. Answer: YES. Unless
and until the expropriation proceeding is terminated,
ownership remains with the registered owner.

Art. 2128- The mortgage credit [ right of the mortgagee] may be

alienated or assigned to a third person, in whole or in part,
with the formalities required by law.

> refers to non prohibition as to the alienation of the

mortgagee’s right to alienate, not the property.

> Query: Is there a need that the transfer be registered.

Answer: NO. It is still valid between the parties and it is
inseparable to the property mortgaged. Registration is

84
 needed only to effect third persons. [ Case: Republic vs.
Lim, 462 SCRA 265]

Art. 2129- The creditor may claim from a third person in

possession of the mortgaged property, the payment of the
part of the credit secured by the property which said third
person possesses, in terms and with the formalities which the
law establishes.

> this is an offshoot of the preceding article. It merely

means that since the mortgagee’s right is a real right, the
transferee is bound by the real estate mortgage and the
right to pay the obligation never ceased.

> Query: Can the third person foreclose the property if

the mortgagee who transferred its right did not pay the
debt. Answer: YES, but there is a need that a prior
demand must be made first and if debt is not paid, that
is the only time that foreclosure becomes proper.

Art. 2130- A stipulation forbidding the owner from alienating

the immovable mortgaged shall be void.

> refers to the stipulation forbidding the owner of the

property to alienate his property during the pendency of
the mortgage which is VOID. Reason: contrary to
express provision of law and public policy.

> Query: What about a stipulation granting the RIGHT

OF FIRST REFUSAL [ stipulation granting the mortgagee
the right to buy the property should the mortgagor
decides to sell it], is this valid. Answer: YES. Query: is
it necessary to get mortgagee’s consent. Answer: By
implication YES because jurisprudence states that, “if there
is a stipulation regarding the right of first refusal, he has
to notify the mortgagee of his intention to sell otherwise,
the contract entered by him with third person is
RESCISSIBLE. Hence, the BUYER should be BEWARE of this
right of first refusal, especially if the mortgage is registered”
[ Case: Litonjua vs. L & R Corp. 320 SCRA 405].

> Query: Is it necessary for mortgagor to get the

consent of the mortgagee if he decides to sell the
mortgaged property. Answer: YES, if there is a stipulation
to this effect, NO, if there is none especially where the
property is registered under the Torrens System. Although
the general rule is NO NEED to get mortgagee’s
consent. In relation to this- take note of the ruling where
the property is registered under the Spanish Mortgage
Law, when the stipulation may be disregarded by the

85
 mortgagor [ Case: Philippine Industrial Co. vs. El
Hogar Filipino, 43 Phil. 336].

> RULE ON A SECOND MORTGAGE: Ordinarily, it is

VALID. What about if it is prohibited in the contract itself,
and the penalty is for the first mortgagee to be given the
right to immediately foreclose the property, what is the
effect of the violation. Answer: the violation does not
give to the first mortgagee the right to treat the second
mortgage as null and void.

Art. 2131- The form, extent and consequences of a mortgage,

both as to its constitution, modification and extinguishment,
and as to other matters not included in this Chapter, shall be
governed by the provisions of the Mortgage Law and of the
Land Registration Law.

> refers to the suppletory laws that may aid the Courts in
deciding mortgage cases.

> In relation to this, take note: of TIPO or UPSET PRICE,

[fixed price for which the property will be sold at a public
auction, which is VOID] and contrary to Sec. 3 Rule 68
of the Rules of Court, which provides that the property
mortgaged should be sold to the highest bidder in an
auction.

> Take note of the following:

1. FORECLOSURE- remedy available to the

mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to
secure which the mortgage was given. It denotes
the procedure adopted by the mortgagee to
terminate the rights of the mortgagor on the
property and includes the sale itself. [ DBP vs.
Zaragoza, 84 Phil. 668 ]

a) Nature: 1) it is valid when the debtor is

in default in the payment of the obligation. And,
the right could not be exercised by any person
other than the creditor-mortgagee or his
assigns. [ Case: Borromeo vs. CA, 553 SCRA,
269] b) as a general rule, demand to pay is
made first, before foreclosure. c) must be
limited to the amount mentioned in the
document.

b) Kinds:

1. Judicial- action is brought with the

Court for the Court to order the

86
 foreclosure of the property and is
governed by Sec. 1 Rule 4 of the
Rules of Court. By nature, this is an
action quasi in rem or enforceable
against a specific property of the
defendant .

PROCEDURE:

a. a complaint is filed. After notice

and hearing, the Court orders
the mortgagor to pay the
mortgage debt with interest
and charges within a period
of not less than 90 days but
not more than 120 days
from the entry of judgment.

b. if the mortgagor does not pay,

the Court upon motion shall
order the property to be sold
to the highest bidder at a public
auction.

c. The Court confirms the Sale or

if not warranted, then the
Court may choose not to
confirm the sale. The Court
retains control of the
proceedings. Order of
Confirmation is an
interlocutory order.

d. *After confirmation, judgment

is rendered. If not satisfied,
a party can appeal the
judgment. Annulment of
Judgment is NOT an available
remedy. [ Case: Agbada vs.
Inter- Urban Developers,
Inc. , 389 SCRA 430]

e. If no appeal is made, then the

property shall be sold applying
the proceeds to the following:
1) cost of the sale; 2) amount
due to the mortgagee; 3) claims
of junior encumbrances or
those holding subsequent
mortgagees in the order of their
priority and 4) if there is an
excess, then give it to the
mortgagor or his assigns. If
there is a deficiency, then

87
 the mortgagee can recover
it from the mortgagor.

f. Issuance of a Certificate of
Sale. If this is not issued, the
title is not passed to the
vendee. [Case: Sayson vs.
Luna, 433 SCRA 502]

2. EXTRA-JUDICIAL FORECLOSURE
under Act 3135- [precedes from the right
of the mortgagee to foreclose the property
as incorporated in the contract such as
when mortgagee in the DEED OF REAL
ESTATE MORTGAGE was already
mentioned to have a special power of
attorney to sell the property in case of
non payment of the mortgage. [Case:
Paguyo vs. Gatbunton, 523 SCRA
156]. * THIS IS APPLICABLE ONLY
IN REAL ESTATE MORTGAGES].

SALIENT FEATURES:

1. there must be notice [re: of the

sale], posting and publication
thereof are mandatory.
Otherwise, it will invalidate the
notice or makes the sale
voidable and if there is a total
lack of notice, publication or
posting, the sale may be voided.
Notice of Sale must be published
in a newspaper of general
circulation [for the consumption of
many once a week for three
consecutive weeks] and posted
in three public places and not
necessarily where the property
is located . [Case: Tamayo, Jr.
vs. Heirs of G. Dominguez, 498
SCRA 342]; [ San Jose vs. CA,
255 SCRA 450; and [ Spouses
Suico vs. PNB, 531 SCRA 514].
* take note of the rulings in these
c ases.

No need to give notice to mortgagee or assigns. The action for extra

judicial foreclosure survives the mortgagor.

88
3. After notice, there must be a
public sale which should be held in
the place where the property is
situated. No postponements unless
the scheduled date is declared a
public holiday otherwise a
REPUBLICATION is necessary.

4. Proceeds of the sale should be

applied properly. If there is excess,
it shall be given to the mortgagor.
[Case: LCK Industries Inc. vs.
Planters Development Bank, 538
SCRA 634]. Take note that:
Under Act No. 3135, unlike in
judicial foreclosure, this act does
not give the mortgagee the right
to recover the deficiency [of the
mortgage debt] neither does it
expressly or impliedly prohibit
such recovery. Jurisprudence
however states that deficiency
may be recovered. [Suico
Rattan and Buri Interiors vs. CA,
490 SCRA 560]; [ Case: DBP vs.
Licuanan, 516 SCRA 644]. Take
note: If the third person is the
mortgagor, he could not recover
the deficiency, his action must be
against the [his] debtor and this is
when the original mortgagor
transfers his mortgage credit to a
third person.

5. Redemption of the Property sold

within one (1) year from sale. If
registered land, then the 1yr. period
is reckoned from the date the sale
was registered. * Take note: in case
of juridical persons, they have the
right to redeem the property but
not after the registration of the
certificate of foreclosure sale
which in no case shall be more
than three(3) months after
foreclosure, which ever is earlier,
as provided for under Sec. 47 of
the General Banking Law of
2000]

6. An aggrieved party [debtor or

mortgagor] petition for the sale to
be set aside/annulled and if a writ
of possession is already issued, to

89
 have it cancelled on the following
grounds: a) fraud, collusion, accident,
mutual mistake, breach of trust or
misconduct by the purchaser; and b)
sale has not been fairly and regularly
conducted and 3) inadequacy of
price such that it shocks the
conscience of the Court. [Case:
GSIS vs. CA, 266 SCRA 187]

7. Prescriptive period for

recovery of deficiency is ten (10)
years from the right of action
accrues - this is adopted from
Art. 1144(2), because the right to
recover deficiency in a mortgage is
tantamount to an action to enforce
a written contract or a promissory
note.

> Take note of the following Terms and Concepts:

1. A mortgagee may institute a PERSONAL ACTION

for [Collection o f Sum of Money] or a REAL
ACTION [ for Foreclosure of Mortgage] against
the mortgagor. This is his choice. But these two
remedies are ALTERNATIVE, not cumulative or
successive.

2. Take note: what is extinguished during

foreclosure is not the loan but the mortgage lien.
Remember again that, a mortgage is just a
security.

3. Actions available to mortgagee where the

mortgagor is dead:

a. to waive the mortgage and claim the entire

debt from the estate of the mortgagor as an
ordinary claim.
b. To foreclose the mortgage judicially and
prove any deficiency as an ordinary claim.
c. To rely on the mortgage exclusively,
foreclosing the same at anytime before it is
barred by prescription without right to file a
claim for deficiency [ Case: Maglague vs.
Planters Development Bank, 307 SCRA
156].

3. Retroactivity of foreclosure to date of

registration of mortgage. Thus, as between a lis
pendens or an adverse claim annotated earlier than

90
entries on the foreclosure of the mortgage or
certificate of sale, the foreclosure and certificate
prevail because of the retroactivity. What matters is,
the mortgage is registered ahead of the adverse
claim. [ Case: Phil. Veteran’s Bank vs. Monillas,
550 SCRA 251]

4. CONCEPT OF REDEMPTION- transaction by

which a mortgagor reacquires or buys back the
property which may have passed under the
mortgage or divests the property of the lien which
the mortgage might have created. This is allowed
in favor of banking institutions and in extra
judicial foreclosure of property.

KINDS:

1. EQUITY OF REDEMPTION- or the right of

the mortgagor in case of judicial foreclosure
to redeem the mortgaged property after his
default in the performance of the conditions of
the mortgage but before the judicial sale is
confirmed by the Court. This is done by
paying the debt within the 90 day period
after the judgment becomes final in
accordance with Rule 68 or even after the
foreclosure sale but before confirmation.
Reason: after confirmation of sale, the
previous owner loses whatever right he has
over the property as it now becomes the
property of the purchaser in an auction. [Case:
Raymundo vs. Sunico, 25 Phil. 365]. Take
note: where the foreclosure is judicially
effected, no equivalent right of redemption
exists. [ Case: Limpin vs. IAC, 166 SCRA
1987]. Take note further: that if the
mortgage credit is acquired by a second
mortgagee,[third party] his right is secondary to
the first mortgagee. Query: Is there a need
for physical possession of the property?.
Answer: NO, this can be levied upon by a writ
of execution.

2. RIGHT OF REDEMPTION- right of a

mortgagor in case of an extra judicial
foreclosure to redeem the mortgaged property
within a certain period [within a term of
one(1) year from and after the date of the sale
or from date of registration for registered
properties] and after it was sold for the
satisfaction of the mortgage debt. By nature,
this right is an ABSOLUTE PRIVILEGE given to
the redemptioner. Take note: the exercise

91
 of the right of redemption is an implied
admission of the regularity of the foreclosure
sale and estops the mortgagor from impugning
its validity on that ground. [Case: Aclon vs.
CA, 387 SCRA 415].

Take note:

1. Actions to be taken to obtain possession

of the mortgaged property for
foreclosure purposes:

a. bring civil action to recover [

Action for Recovery of
Possession; unlawful detainer]
b. Replevin for chattel mortgage

2. Query: If a mortgagor desires to

redeem his property after the same has
been sold at an auction, how much will he
pay. Answer: the amount of the loan at
the time the sale was made and not the
price the property was sold. Because,
there is the possibility that there is
deficiency during the sale.

3. Query: Can right of redemption be

exercised in judicial foreclosure. Answer:
NO, except only where the mortgagee is
the PNB or a banking institution. Note:
what can be exercised in judicial
foreclosure is EQUITY OF REDEMPTION.

> REQUISITES FOR VALID REDEMPTION:

1. The redemption must be made within

one year from the date of registration of
sale.

2. Payment of the purchase price of the

property plus 1% interest per month plus
taxes if any or when already paid.

3. Written notice of the redemption must

be served on the officer who made the
sale and the duplicate filed with the
Office of the Register of Deeds.

4. In judicial foreclosure, the general rule is that the mortgagor

cannot exercise the right of redemption except only when the
mortgagee is a banking institution. Note: because in judicial
foreclosure, what can be exercised is EQUITY OF REDEMPTION.

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 5. the mortgagor or his assignee is
required to tender payment within the
prescribed time to make the redemption
valid.

> PERSONS ENTITLED TO EXERCISE THE

RIGHT OF REDEMPTION:

1. mortgagor and his privy

2. his successor in interest.

> Concept of Writ of Possession- generally

an order issued by the Court whereby the
sheriff is commanded to place in possession
a real or personal property to the person
entitled thereto such as when the property
is extra judicially foreclosed. The issuance
of the writ is a ministerial function of the Court
[ Case: Mendoza vs. Salinas, 514 SCRA
414]

> Take note: Questions regarding the legality/

validity of the mortgage or its foreclosure is not
a legal ground for refusing the issuance of a
writ of possession. Injunction to prohibit the
issuance of the writ is entirely out of place.
[ Case: Metropolitan Bank and Trust Co. vs.
Tan, 555 SCRA 502 ]; Samson vs. Rivera,
428 SCRA 7595] Thus, the mere filing of a
Motion for the issuance of a writ of possession,
filed after the lapse of redemption will suffice.
If within the redemption period, a bond will be
filed. [ Case: Maluwat vs. Metropolitan Bank
and Trust Co. 532 SCRA 124].

ANTICHRESIS

Art. 2132- By the contract of antichresis the creditor acquires

the right to receive the fruits of an immovable of his debtor,
with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit.

➢ refers to the nature of the contract of

antichresis.

➢ Characteristics:

93
 1. it is an accessory contract because it secures
a principal obligation.

2. It is a formal contract- because it must be

in specified form to be valid, i.e., it must be in
writing.

➢ Take note: this contract requires the delivery

of the property given as security to the
creditor. This is so not for the purpose of validity
but in order for the creditor to receive the fruits.
Take note further: that the contract does not
cover the immovable but the FRUITS ONLY.

➢ Parties:

1. antichretic creditor- who could not acquire

the property by prescription because he does
not possess the property in the concept of
an owner but a mere holder only. [ Case:
Ramirez vs. CA, GR 38185, Sept. 24, 1986]

2. antichretic debtor- who remains the owner

of the property.

➢ DISTINGUISH WITH:

1. MORTGAGE

A- property is delivered to the creditor

M- the debtor retains possession of the
property

A- creditor acquires only the right to

receive the fruits of the property. It
does not produce a real right.
M- the creditor does not have the right to
receive the fruits but creates a real right
over the property which is enforceable
against the whole world.

A- the creditor unless there is a

stipulation to the contrary is obliged
to pay tax and other charges upon the
estate;
M- the creditor has no such obligation.

A- the creditor applies the fruits to the

payment of interest, if owing and then to
the principal.

94
 M- no such obligation in mortgage

2. PLEDGE

A- refers to real property

P- refers to personal property

A- perfected by mere consent [but it is

necessary that the property be
delivered for the creditor to
appropriate the fruits.
P- perfected by the delivery of the thing
pledged

A- is a consensual contract
P - is a real contract

Art. 2133- the actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application.

> self explanatory. This forestalls the use of antichresis

for purposes of USURY.

Art. 2134- The amount of the principal and the interest shall
be specified in writing; otherwise, the contract of antichresis
shall be void.

> This is mandatory provision otherwise the contract is

VOID.

Art. 2135- The creditor, unless there is a stipulation to the

contrary, is obliged to pay the taxes and charges upon the
estate.

He is also bound to bear the expenses necessary for the

preservation and repair.

The sums spent for the purposes stated in this article shall
be deducted from the fruits.

> refers to the obligations of the antichretic creditor

> Rule if the fruits are insufficient: Still the creditor is

obliged to
pay the expenses above- because this is implied from
the 2nd paragraph of Art. 2136.[ hence, the creditor can

95
 compel the debtor to enter into another contract of
antichresis until the expenses above mentioned are fully
satisfied, after all, the obligation to pay these expenses
are actually for the account of the debtor- since they are
chargeable to the fruits].

Art. 2136- The debtor cannot reacquire the enjoyment of the

immovable without first having totally paid what he owes the
creditor.

But the latter, inorder to exempt himself from the

obligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the enjoyment
of the property, except when there is a stipulation to the
contrary.

> refers to what creditor can do to exempt himself from

the payment of taxes and necessary repairs. Take note:
the antichretic creditor has the right to be reimbursed for
his expenses for machinery and other improvements upon
the land and for the sums paid for taxes.

Art. 2137- The creditor does not acquire the ownership of the
real estate for the non payment of the debt within the period
agreed upon. [ Case: Trillana vs. Manansala, 96 Phil. 865]

Every stipulation to the contrary shall be void. But the

creditor may petition the Court for the payment of the debt or
the sale of the property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.

> Take note: this provision has been repealed by

RA 11057, because under this ACT, creditor can now sell
[see procedure] the property once a secured transaction
is not paid. In effect, precarium is no longer prohibited.

> Take note: this article practically prohibits pactum

commissorium hence the express prohibition [repealed when
transaction is secured].

> Take note: Remedies available to the creditor:

1. to bring an action for specific performance

2. to petition for the sale of the real property as in
a foreclosure of mortgages under Rule 68 of the
Rules of Court.

Art. 2138- The contracting parties may stipulate that the

interest upon the debt be compensated with the fruits of the

96
property which is the object of the antichresis, provided that if
the value of the fruits should exceed the amount of interest
allowed by the laws against usury, the excess shall be applied to
the principal.

> take note: excess of the fruits shall be applied to the

principal.

Art. 2139- The last paragraph of Art. 2085, and Articles of

2089 to 2091 are applicable to this contract.

CHATTEL MORTGAGE: [Take note: Articles 1-16 of the Chattel

Mortgage Law is repealed by RA11057] by express provision[
see repealing clause]

>General provisions on Chattel Mortgage however

remains.

CONCURRENCE AND PREFERENCE OF CREDIT [ Art. 2236-2251]

Concurrence of Credit defined- implies the possession of two or

more creditors of equal rights or privileges over the same property or
all of the property of a debtor.

Preference of Credit defined- is the right held by the creditor to

be preferred in the payment of his claim above the others, [i.e., to
be paid first] out of the debtor’s assets.

> Take note of the rule on electronic transactions:

[Sec. 13, RA 8792 or the Electronic Commerce Act

* electronic transactions made through networking

among banks, linkages thereof with other entities or
net work and vice versa shall be deemed
consummated upon the actual dispensing of cash
or the debit of one account and corresponding
credit to another, whether the transaction is
initiated by the depositor or by an authorized
collecting party. The obligation of one bank, entity
or person similarly to another arising therefrom shall
be absolute and shall not be subjected to the process
of preference of credit. The foregoing however is
applicable only to transactions utilizing
automated teller machine (ATM) switching
network.

97
 > Nature and effect:

1. it does not create interest on the property

only a right on the part of one creditor to be paid
first over the other creditors. The preferred creditor
however has no priority right to sell the
property of the debtor, all he has is the priority
right to be paid first from the proceeds of the
sale of the property.

2. The right can be effective only when claimed

and asserted otherwise, it is waived.

3. applicable only when there are two or more

creditors and the debtor has insufficient property
to pay all his creditors.

4.applicable only when all credits are due.

5. It is different from lien over the property for it

applies only to a claim [right to be paid first] over a
property unlike liens, where they impose a charge
over a property.

Art. 2236- the debtor is liable with all his property, present and
future for the fulfillment of his obligations subject to the
exemptions provided by law.

>self explanatory. Just take note of the exempted

properties 1.) under Art. 152 of the Family Code,
[FAMILY HOME] and related provisions under it; 2.)
those properties exempt from execution under Sec.
13, Rule 39 of the Rules of Court; 3.) provision on
future property under the Insolvency Law and 4.)
those properties under custodia legis which are
exempt from attachment or execution.

Art. 2237- Insolvency shall be governed by special laws in so

far as they are not inconsistent with this Code.

> take note: that in the event of bankruptcy or

liquidation of employer’s business, the unpaid wages and
monetary claims of the employees or workers should be
paid first, consistent to the provisions of the Labor Code.

Art. 2238- So long as the conjugal partnership or absolute

community subsists, its property shall not be among the assets
to be taken possession of by the assignee for the payment of

98
the insolvent debtor’s obligations, except in so far as the latter
have redounded to the benefit of the family. [ If it is the
husband who is insolvent, the administration of the conjugal
partnership or absolute community, may, by order of the Court,
be transferred to the wife or a third person other than the
assignee. The second sentence is no longer applicable under the
Family Code because under the latter the administration of the
absolute community property is joint], bracketing mine.

> Take note: for this to apply, two requisites must be

complied with:

1. subsistence of the conjugal partnership or the

absolute community;

2. the obligation of the insolvent spouse have not

redounded to the benefit of the family.

* Take note: the second sentence: no longer

applicable because under the Family Code,
administration of the conjugal partnership or absolute
community is joint between the spouses, unless one
is particularly designated as such.

Art. 2239- If there is property other than that mentioned in the

preceding article, owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or interest therein
shall be among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor’s obligation.

➢ refers to the right of the assignee over the share

of the insolvent debtor to an undivided asset he co
–owned with others.

Art. 2240- Property held by the insolvent debtor as a trustee of

an express or implied trust, shall be excluded from the
insolvency proceedings.

➢ self explanatory

CLASSIFICATIONS OF CREDITS:

Art. 2241-repealed

Art. 2242- With reference to specific immovable property and

real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute as encumbrance on

99
the immovable or real right. [ also considered as SPECIAL
PREFERRED CREDIT]

1. Taxes due on the land and building;

2. For the unpaid price of the real property sold, upon the
immovable sold.

3. Claims of laborers, masons, mechanics and other

workmen, as well as of architects, engineers and
contractors engaged in the construction,
reconstruction or repair of buildings, canals or other
works, upon said buildings, canal or other works.

4. Claims of furnishers of materials used in the

construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or
other works.

5. Mortgage credits recorded in the Registry of Property,

upon the real estate mortgaged;

6. Expenses for the preservation or improvement of real

property when the law authorizes reimbursement, upon
the immovables preserved or improved.

7. Credits annotated in the Registry of Property, in

virtue of a judicial order, by attachments or executions,
upon the property affected and only as to later credits.
[ here there is preference among the attachments or the
executions according to the order of the time they were levied
upon the property. The pro-rata rule in Art. 2249 does not
apply.]

8. Claims of co-heirs for warranty in the partition of the

immovable among them, upon the real property thus
divided.

9. Claims of donors of real property for pecuniary charges

or other conditions imposed upon the donee, upon the
immovable donated.

10. Credits of insurers, upon the property insured, for

the insurance premium for two years.

> Take note: The enumeration does not indicate

which among those enumerated is preferred.
With the exception of No. 1, each of those
enumerated merely concur with each other.

> Take note [Case: de Barretto vs. Villanueva, 1

SCRA 288] where SC said, “ recorded mortgage

100
 credit is superior to an unrecorded unpaid vendor’s
lien”. Same way that prior unrecorded mortgage
cannot prevail over registered mortgage of a later
date. Take note however that: this is applicable
between TWO MORTGAGES. But not where it involves
an unrecorded pacto de retro sale of a prior date
and a recorded mortgage where the FORMER
PREVAILS, because you could not mortgage a
property which you have already sold.

> Concept of Refectionary Credit- indebtedness

incurred in the repair or reconstruction of something
previously made, such as repair or construction being
made necessary by the deterioration or destruction of
the thing as it formerly existed. It also includes
expenses for materials used on new constructions.

Art. 2244- With reference to other property, real and

personal, of the debtor, the following claims or credits shall be
preferred in the order named: [known as ORDINARY PREFERRED
CREDITS]

>TAKE NOTE: This article is also repealed by RA 11057. The

Act stresses that secured transactions must ne preferred.

1. Proper funeral expenses for the debtor, or children

under his or her parental authority who have no
property of their own, when approved by the Court;

2. Credits for services rendered the insolvent by

employees, laborers or household helpers for one year
preceding the commencement of the proceedings in
insolvency;

3. Expenses during the last illness of the debtor or of his

or her spouse and children under his or her parental
authority, if they have no property of their own;

4. Compensation due the laborers or their dependents

under laws providing for indemnity for damages in
cases of labor accident, or illness resulting from the
nature of the employment.

5. credits and advancements made to the debtor for

support of himself or herself, and family, during the lat
year preceding the insolvency.;

6. support during the insolvency proceedings and, for

three months thereafter

7. fines and civil indemnification arising from a criminal

offense;

101
8. legal expenses, and expenses incurred in the
administration of the insolvent’s estate for the common
interest of creditors, when properly authorized and
approved by the court;

9. taxes and assessment due the national government other

than those mentioned in Arts. 2241 No. 1 ; and 2242
No.1

10. taxes and assessments due any province, other than

those referred to in Arts. 2241 No.1; and 2242 No.1;

11. taxes and assessments due any city or municipality,

other than those indicated in Arts. 2241 No.1 and 2242
No.1;

12. Damages for death or personal injuries caused by

quasi-delict;

13. Gifts due to public and private institutions of charity

or beneficence;

14.Credits which, without special privilege appear in 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.

➢ the enumeration here is controlling because the

article does not only enumerates preferred credits
but also gives their “order of preference”. This
applies to the “free property of the insolvent”.

➢ Take note: here if the value of the insolvent’s

specific property is of greater value than the sum
of the tax liens and other preferred credit, the
surplus is considered “residual” therefore
considered as “free property”. But if the value of
the specific property is Lesser, then the
unsatisfied balance of the tax liens shall be
treated as an ordinary preferred credit under Art.
2244, hence to be paid in the order preference
provided therein. This explains why in Art. 2244, tax
liens are ranked No. 9,10 and 11.

> Take note: To enforce the provisions on

preference of credits, there must be judicial
proceedings. [ Case: DBP vs. NLRC, 229 SCRA
350]. Take note however that: foreclosing bank
creditor cannot he held liable for unpaid wages and

102
 the like. Employees of the mortgagor should go
against their claim in a proceeding in bankruptcy on
their employer. [ Case: DBP vs. NLRC, 186 SCRA
841).

Art. 2245- Credits of any other kind or class, or by any other

right or title not comprised in the four preceding articles, shall
enjoy no preference.

> refers to the other kinds of credits.

➢ Take note: Insolvency Proceedings involving

Banks:

* Take note: In proceedings involving

receivership and liquidation of a bank, any act
of the Monetary Board of the Central Bank
is final and executory, which the Court
cannot set aside, restrained or enjoined EXCEPT
only, “upon convincing proof that the action
is plainly arbitrary and made in bad faith. [
Case: Central Bank vs. dela Cruz, 191 SCRA
346] .

• the depositor or creditor of a bank declared

insolvent is not to file a separate action
against the bank, instead its remedy is to
intervene in the judicial proceedings for
liquidation instituted by the Bank thru the
Solicitor General. [ Case: Manalo vs. CA,
366 SCRA 752].

> Take note: Bank deposits could not be

considered as preferred credits. They are considered
as simple loans. Hence, depositors do not enjoy
priority rights. Instead what applies on them is the
principle on equity saying “ assets of an insolvent
bank are to be distributed ratably among general
creditors of the bank”. [ Case: Central Bank of the
Phils. Vs. Morfe, 96 SCRA 96].

ORDER OF PREFERENCE OF CREDITS

>TAKE NOTE: Art. 2246 and 2247 are now repealed by

RA 11057. Secured transactions are preferred.

Art. 2248- Those credits which enjoy preference in relation to

specific real property or real rights, exclude all others to the

103
extent of the value of the immovable or real right to which the
preference refers.

Art. 2249- If there are two or more credits with respect to the
same specific real property or real right , they shall be satisfied
pro rata, after payment of duties, taxes and assessments upon
the immovable property or real right.

Art. 2250- The excess, if any, after the payment of the credits
which enjoy preference with respect to specific property, real
or personal, shall be added to the free property which the
debtor may have, for the payment of the other credits.

> Take note: these are the guiding rules on preference

of credit.

> Take note likewise of the TWO TIER ORDER OF

PREFERENCE, which means, the first- tier, includes
only taxes, duties and fees due on specific movable or
immovable property. ALL OTHERS, special
preferred(non tax) credit stand on the second- tier, to
be satisfied “pari passu” and pro-rata, out of any residual
value of the specific property to which such other credit
relates.

> PRO-RATA RULE- division according to share, interest,

or liability of each creditor. Take note: this is NOT
APPLICABLE to credits annotated in the Registry of
Property in virtue of a judicial order, by attachment
or execution.

Art. 2251- Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
following rules:

1) in the order established in Art. 2244;

2) common credits referred to Under Art. 2245 shall be paid

pro rata regardless of dates.

➢ Take note: For easier computation, take the

value of the remaining specific property of the
insolvent and immediately deduct those liabilities
owing to it, giving preference to tax and unpaid
liabilities relating to the said property. Example a
car worth P200,000 but the total indebtedness is
P250,000. Deduct Tax and unpaid liability. Tax is
P10,000. unpaid liabilities relating to the car is
P150,000. [ P50K for repair; P50K for maintenance;

104
 P50K for insurance]; Hence: P200,000- 10,000=
P190,000.00. Divide the P190K among the
unpaid liabilities relating to the car:

Example:

Unpaid liability (P150K)

_______________ x P190,000 =
P114K for the
(200k-10K for tax)
repair
Total Indebtedness
for the car (P250K)

* Apply same formula for the maintenance

and insurance.

* If there are other properties then, then get

their value to pay off other credits (liabilities)
pro-rata.

ASSIGNMENT OF CREDIT [ a consensual contract]

Art. 1624- An assignment of credits and other incorporeal

rights shall be perfected in accordance with the provisions of
Art. 1475.1[on consensual contract]

Assignment of Credit- process of transferring the

right of the assignor to the assignee who is allowed to
proceed against the debtor, either onerously or
gratuitously. [in case of donation]

➢ Take note: in case of gratuitous assignment as in

the case of donation- it must conform with the
formalities of donation like, there must be an
acceptance.

Art. 1625- the assignment of 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 in case the assignment involves real property.

➢ Take note:

1
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of
law governing the forms of the contract.

105
 • transfer of personal property to affect third
persons must be in a public instrument,
(notarized document).
• transfer of real property to affect third
persons must be REGISTERED.

Art. 1626- The debtor who, [before having knowledge of the

assignment, pays his creditor ] shall be released from the
obligation.

➢ Take note: Debtor is bound by the assignment of

credit only from the time he has knowledge of it,
otherwise he will be released of the obligation. [
Case: Sison v. Yap Tico, 37 Phil. 534]

Query: Before a debt may be assigned, is there a need

for the consent of the debtor? NO. Reason: Because his
knowledge will only affect the validity of his payment. If he
pays before knowing of the assignment, he will be released
from the obligation. [ Case: South City Homes, Inc.,
Fortune Motors, Palawan Lumber Manufacturing vs.
BA Finance Corp., GR 135462, Dec. 7, 2001]

Art. 1627- The assignment of a credit includes all the accessory

rights, such as a guaranty, mortgage, pledge or preference.

- self explanatory

Art. 1628- The vendor in good faith shall be responsible for the
existence and legality of the credits at the time of sale,
unless it shall have been sold as doubtful; but not for the
solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and
of common knowledge. [GENERAL RULE]

➢ WARRANTIES IN ASSIGNMENT OF CREDIT

1. objective- the credit itself

2. subjective- solvency of the debtor

Art. 1629- In case the assignor in good faith should have made
himself responsible for the solvency of the debtor, and the
contracting parties should have agreed upon the duration of the
liability, it shall last for one(1) year only, from the time of the
assignment if the period had already expired.

If the credit should be payable within a term or a period

which has not yet expired, the liability shall cease one (1) year
after the maturity.

106
 ➢ Duration:

a. if there is time agreed upon- the time

prevails
b. if no time is fixed or agreed upon then
the rule is:

1. if debt is already due: ONE

YEAR from assignment

2. if debt is not yet due: ONE

YEAR from
maturity

Art. 1630- One who sells an inheritance without enumeration of

the things of which it is composed, shall only be answerable for
his character as an heir.

➢ this refers to present inheritance because normally,

one cannot sell his future inheritance. At most,
what could be disposed of is one’s right to
future inheritance. Query: Can an heir sell his
inheritance pending partition. YES.

➢ Take note: No sale of future inheritance without

specification, otherwise what was sold only is his
hereditary rights.

Art. 1631- One who sells for a lump sum the whole of certain
rights, rents or products, shall comply by answering the
legitimacy of the whole in general; but he shall not be obliged to
warrant each of the various parts of which it may be composed,
except in the case of eviction from whole or part of the greater
value.

➢ Take note: of the need to warrant the legitimacy

of the whole of the rights, rents and products.

Art. 1632- Should the vendor profited by some of the fruits or

received anything from the inheritance sold, shall pay the
vendee thereof, if the contrary has not been stipulated.

➢ self explanatory

Art. 1633- The vendee shall, on his part, reimburse the vendor for
all that the latter may have paid for the debts of and charges on

107
the estate and satisfy the credits he may have against the same,
unless there is an agreement to the contrary.

➢ self explanatory

Art. 1634- When a credit or other incorporeal right in litigation is

sold, the debtor shall have a right to extinguish it by reimbursing
the assignee for the price the latter paid therefor, the judicial
costs incurred by him, and the interest on the price from the day
on which the same was paid.

A credit or other incorporeal right shall be considered in

litigation from the time the complaint concerning the same is
answered.

The debtor may exercise his right within thirty days from the
date the assignee demands payment from him. (judicial or extra
judicial)

➢ self explanatory

Art. 1635- From the provisions of the preceding article shall be

excepted the assignments or sales made: [ KNOWN AS
INSTANCES OF LEGAL REDEMPTION]

1) To a co-heir or co-owner of the right assigned;

[reason: co-ownership is not favored]

2) To a creditor in payment of his credit;

[reason: assignment is presumed valid]

3) To the possessor of a tenement or piece of land

which is subject to the right in litigation assigned.
[reason: he can litigate anyway]

➢ Take note: These are the instances were legal

redemption is present.

ACT NO. 2137- THE WAREHOUSE RECEIPTS LAW

[ Enacted February 5, 1912]

THINGS TO REMEMBER UNDER THIS LAW:

108
> Definition of terms:

4. Warehouse- buildings or place where goods are

deposited and stored for profit.
5. Warehouse man- a person lawfully engaged in the
business of storing goods for profit.
6. Warehouse receipt- (not actually defined by the law
but its definition is derived from several American
jurisprudence).

> written contract between the owner of the goods

and the warehouseman to pay the compensation of
the latter for storing the goods of the former. Or, a
written acknowledgment by a warehouseman that he
has received and holds certain goods therein
described in store for the person to whom it is
issued.

➢ Nature:

• it is a document of title of goods

• it is a bilateral contract
• NOT NEGOTIABLE within the contemplation
of the Negotiable Instrument Law- although
the warehouse law declares it to be
negotiable [ unlike a promissory note and bill
of exchange like check] because it does not
contain an UNCONDITIONAL PROMISE OR
ORDER to pay a sum certain in money.

> Form and Contents: (Sec. 2 and 3)

* may be in any form but customarily and

since it is a receipt, it should be in written or
printed terms.

• it contains among others the following:

> location of the warehouse, date of issue,

consecutive number of receipt, a statement on
the manner by which the goods may be
delivered [either to the bearer or a specific
person], rate of storage charges, description
of the goods and packages, signature of the
warehouseman, warehouseman ownership of
or interest in goods, and statement of the
amount of advances made and of liabilities
incurred for which the warehouseman claims
as liens.

> Take note: these facts must appear on

the receipt

109
 for the protection of the depositor and his
successors in interest.

* effect of omission of any of the terms or

requirements above - It will only render the
warehouseman liable for DAMAGES to those
injured by the omission. It will not affect its
VALIDITY and its NEGOTIABILITY.

* Take note: a warehouseman may insert

some terms and conditions on the receipt
provided that 1) they are not contrary to the
provisions of the act and 2) in any wise impair
his obligation to exercise that degree of care
[diligence of a good father of a family] in the
safekeeping of the goods. Take note further:
that a warehouseman is NOT authorized to
insert any term EXEMPTING him from liability
for a) misdelivery of goods as this is
contrary to Sections 10 b) not giving
statutory notice in case of sale of goods as
this would be contrary to Sections. 33 and 34
and c) acts due to his negligence.

4. Non Negotiable Receipt- a receipt in which it is

stated that the goods received will be delivered to the
depositor or to any other specified person (Sec. 4).

> Take note: The words “NON NEGOTIABLE” could

not be inserted on the receipt, otherwise, if inserted,
the receipt is VOID. BUT, it is the duty of the
warehouseman to place the words “ NON NEGOTIABLE
or NOT NEGOTIABLE”, to this kind of receipt
because if he fails to do so, the holder of this kind
of receipt who purchased it for value can treat it- at
his option to be NEGOTIABLE RECEIPT, thereby
making the warehouseman liable, as if what he has
issued is a negotiable receipt, ( Sec. 7). [Case:
Roman vs. Asia Banking Corporation, 46 Phil.
705]. Take note further: that duplicate copies of
the receipt should be marked “DUPLICATE”, a holder
who purchased the receipt for value can treat it as
“ORIGINAL”, thereby making the warehouseman liable
as if what he has issued is an original copy, ( Sec.
6).

7. Negotiable Receipt- a receipt in which it is stated that

the goods received will be delivered to the bearer or to
the order of any person named in such receipt.

110
> OBLIGATIONS AND RIGHTS OF A WAREHOUSEMAN
UPON THEIR RECEIPTS: [ take note that a warehouseman is
essentially a DEPOSITARY with respect to the goods entrusted to
him ]

1. to take care of the goods entrusted to his

safekeeping. (Sec.21)

➢ with the diligence of a good father of a family.

➢ Take note: that in the absence of any agreement
to the contrary, the warehouseman is not liable
for any loss or injury to the goods which
could not have been avoided even with the
exercise of a diligence of a good father of a
family.
➢ AMOUNT OF LIABILITY: warehouseman may
limit his liability to an AGREED VALUE OF THE
PROPERTY RECEIVED. Take note however: that
he could not stipulate with the depositor that HE
WILL NOT BE LIABLE for any loss even if caused
by his negligence, otherwise the stipulation is
VOID as it is contrary to Sec. 3.

3. to deliver them to the holder of the receipt or to

the depositor provided the conditions under Sec. 8
are complied with:

CONDITION SINE QUA NON:

➢ DEMAND [ this will give rise to the obligation to

deliver], unless demand becomes useless as
when the warehouseman has rendered it beyond
his power to deliver the goods, [Art. 1169 (3)
CC], in which case demand is dispensed with.
Such demand must be accompanied by:

a. an offer to satisfy the warehouseman’s

lien

b. an offer to surrender the receipt if

negotiable [for purposes of indorsement]. This
is for the protection of the warehouseman. The
warehouseman should require the surrender of
the receipt because he will be criminally liable if
he does not do so [under Sec. 54]. QUERY:
Can he waived the requirement on the surrender
of the receipt?. YES, where he refuses to
deliver on grounds other than the non
production of the receipt or on some LAWFUL
GROUNDS [when warehouseman can refuse
delivery] such as:

111
 1. he was requested by or on behalf of
the person lawfully entitled to a right or
possession over the property, not to make
such delivery. Or, he had information that
delivery is about to be made to one not
entitled to the possession of the goods.
[under Sec. 10].

2. the one demanding delivery is in

possession of a duplicate copy of the
receipt only unless there is a statement
that the receipt is a DUPLICATE copy and
the original copy is not yet cancelled,
(sec. 16]

3. where there are several claimants of

the goods. Prior to verification of who the
lawful claimant would be, he can refuse
delivery. [ Sec. 18].

4. where there is loss of the goods

delivered without his fault. [ Sec. 21].
Here , there is nothing to deliver now.

5. he has a lien over the goods [ Sec.

31].

6. where there is sale of the goods and he

is not paid of his lawful charges [sec.
36].

c. readiness and willingness to sign an

acknowledgment receipt upon delivery of
the goods.

> PERSONS TO WHOM GOODS MUST BE DELIVERED ( Sec.9)

[ Take note: if delivered to them the warehouseman could
not be held liable for MISDELIVERY]

1. person lawfully entitled to possession of goods or

his agent

* this includes 1) person to whom a competent

court has ordered the delivery of the goods, 2) to
an attaching creditor [under Sec. 25], 3) purchaser
in case of sale of the goods by the warehouseman to
enforce his lien (under Sec.33) and 4) where the
goods are perishable or hazardous, (under Sec. 34).

112
 2. person entitled to delivery under a non
negotiable receipt or with written authority

3. person in possession of a negotiable receipt.

[ unless shown later to have no authority at all. In which
case, he could be liable for misdelivery and could be sued
by the real owner of the goods.]

> Take note: If the warehouseman delivers the

goods to another and not to those above mentioned,
he will be liable for MISDELIVERY. In which case,
1) his liability would be similar to that of a bank
paying a forged check or 2) made liable for
CONVERSION [ defined as the unauthorized
assumption and exercise of the right of
ownership over goods belonging to another
through the alteration of their condition or the
exclusion of the owner’s right].

> Take note further: That the warehouseman is

also liable for CONVERSION even if he has delivered
the goods to those above mentioned if found that
prior to the delivery he 1) was requested not to
make delivery or 2) had received notice of the
adverse claim or title of a third person. (Sec. 10).

➢ Need for cancellation of receipts when goods

are delivered. Need to cancel receipt or place a
marking signifying “partly delivered” [or which
are those delivered already] if there are still
undelivered goods. If he fails to do so, he will
be liable to a purchaser in good faith. Applicable
only to “negotiable receipts” but not to non
negotiable receipts because here, delivery is made
even without requiring the surrender or
canceling the receipt. (Sec. 11 and 12).

> LIABILITIES OF A WAREHOUSEMAN

> Regarding altered receipts- (Sec. 13)

* Warehouseman is not excused from liability.

1.if alteration is immaterial- still liable on the

altered receipt, according to its original tenor. It does
not matter whether the alteration is fraudulent or not.

2. If alteration is material but authorized - he

shall be liable according to the terms of the receipt
as altered.

113
 3. If alteration is material but innocently made
though unauthorized- liable on the receipt
according to the original tenor.

4. If alteration is material and fraudulently

made- he is liable to a purchaser for value
without notice of the alteration according to the
original tenor. As regards the alterer and
subsequent purchasers for value with notice, he
is liable only if he delivered it to them. [the last
sentence is doubtful]. He is not liable
however if the receipt is stolen or lost and
subsequently indorsed.

> Regarding lost or destroyed receipts ( Sec. 14)

➢ The matter should be pass upon by the Court

which shall determine whether the receipt is
indeed lost or destroyed. Thus, the Court may
order delivery only upon 1) proof of loss or
destruction of the receipt and 2) upon the
giving of bond with sufficient sureties. Take
note: warehouseman is still liable to the holder
for value without notice (of the lost or destruction)
because he can always secure himself on the
bond given.

> On duplicate copies ( Sec. 15)

➢ It is essential that the bondman must indicate the

word “duplicate” to duplicate copies of the receipt
otherwise, he will be liable if the duplicate is
negotiated. By placing the word duplicate, he
warrants that 1) the duplicate is an accurate
copy of the original and 2) the original receipt is
uncancelled at the date of issue of the duplicate.

> for non existence or misdescription of goods (Sec.

20)

> Gen. Rule: He is liable for damages caused by

reason of the above. This is so because, a
warehouseman is under obligation to deliver the
identical property stored with him and if he fails to
do so, he is liable to the owner thereof. As regards
a bona fide purchaser, he is estopped from denying
that he received the goods as described in the
receipt.

114
 > Limitation of Liability: But if the description
consist merely of “marks” or “labels” upon the goods
or package, HE IS NOT LIABLE, even if the goods
are not the kind described by the marks or labels.

> for care of goods (Sec. 21)

* diligence of a good father of a family.

> IN SUM, the warehouseman is liable in the following

instances:

1. failure to stamp “duplicate” on copies of negotiable

receipt. (Sec. 4)
2. failure to place “non negotiable” or “not negotiable” on
non negotiable receipt. (Sec. 7)
3. misdelivery of the goods (Sec. 10).
4. failure to effect cancellation of a negotiable receipt
upon delivery of the goods (Sec. 11).
5. Issuing receipts for non existing goods or misdescribed
goods (Sec. 20)
6. Failure to take care of the goods (Sec. 21)
7. Failure to give notice in case of sale of goods to satisfy
his lien (Sec. 33) or because the goods are perishable or
hazardous (Sec. 34).

> Warehouseman cannot claim ownership over the goods

and thereby refuses to deliver them to the owner thereof
UNLESS: (sec. 16)

➢ Right is derived:

1) directly or indirectly from a transfer made

by the depositor at the time of deposit for
storage or subsequent thereto;

2) from the warehouse lien.

* founded on the doctrine of estoppel.

> DUTIES OF A WAREHOUSEMAN: (Sec. 17 and 18)

> Where there are several claimants:

* Warehouseman must ascertain within a reasonable

time the validity of the claims of the different
parties. Or, for his own protection, file a complaint
in Interpleader so the matter will be passed to the
Court. All parties must litigate among themselves.

115
 This is the only way where he can obtain relief from
his responsibility. If he is the one sued for his
refusal to deliver, the fact that there are several
claimants of the goods can be used as a defense for
his non delivery. Take note: That if he does not
comply with this requirement, he will be held liable
for CONVERSION. Take note further that: Title
to said property in his name or that there are several
persons claiming title of the property cannot be
used as a DEFENSE, once he is sued, (Sec. 19).

> On commingling of deposited goods (Sec. 22-24)

➢ General Rule:- Warehouseman may not comingle

goods belonging to depositors, [unless agreed
upon or authorized by the depositors]. In case
of fungible goods [like sugar, rice, salt etc], the
warehouseman may mingle them with the goods of
the same kind and grade provided that he is
authorized by agreement or custom. In that case,
the different owners become owners thereof.

➢ This rule is also sanctioned by the Art. 1976 of

the Civil Code.

> On attached or levied property, (Sec. 25)

(refers to the goods under the custody of the
warehouseman)

➢ General Rule: A warehouseman has the direct

obligation to hold the goods for the original
owner or for the person to whom the
negotiable receipt of title has been duly
negotiated. Thus, while in possession of such
goods, the same cannot be attached or levied
upon under an execution unless:

1.the documents be first surrendered;

2.the negotiation is enjoined ; or
3.the document is impounded by the
Court.

➢ Take note: Sec. 25 is not applicable 1) if

the person depositing is not the owner of the
property [like a thief] or one who has no right to
convey title to the goods binding the owner; 2)
actions for recovery or manual delivery of goods
by the real owner and 3) where attachment is
made before the issuance of the negotiable
receipt of title.

116
 ➢ Query: What are the remedies of the creditor or
owner of the negotiable receipt ( Sec. 26)- Take
note: here what is attached is the negotiable
receipt in the possession of the debtor and the
goods are in the possession of the warehouseman.
Answer: The creditor should go to the Court by
filing an INJUNCTION CASE so the negotiable
receipt could not be negotiated further.

> WHAT CONSIST (or included in) THE WAREHOUSEMAN’s

lien: (sec. 27)

> a warehouseman shall have a lien over : goods

deposited or the proceed thereof in his hands, FOR ALL
lawful charges for storage and preservation of the goods,
also for all claims for money advanced, interest, insurance
and etc…. (all expenses and charges relative to the goods
stored including expenses of sale as the case maybe.

> Take note: Except for charges for storage of those

goods subsequent to the receipt and preservation thereof,
all other liens MUST BE STATED in the receipt otherwise,
they could not be charged solely against the depositor.
(Sec. 30)

> GOODS subject to lien: (Sec. 28)

1. goods belonging to the depositor or his principal

[ on the presumption that depositor is the
authorized agent hence the real owner of the property
is his principal who is in fact, the real debtor]

2. goods stored in fraud of true owner’s right

>HOW the lien may be lost by the warehouseman. (sec.

29)

1. by voluntary surrendering the goods to the

depositor because this will tantamount to waiver
of his rights. This does not contemplate a
situation where the surrender is by virtue of a writ
of replevin or by force or without the consent of
the warehouseman.

2. by refusing to deliver the goods when a demand

is made with which he is bound to comply. This
does not mean however that the depositor is
freed from his liability to pay the warehouseman of
the fees and charges due the latter. These fees
and charges remain to be the personal liability of
the depositor.

117
 > RIGHTS OF A WAREHOUSEMAN: (sec. 31- 36)

1. He may refuse to deliver the goods until lien is

satisfied.
2. He has all the rights and remedies of a creditor when
a debtor does not pay. Such as but not limited to:

a. refusing to deliver the goods until the lien is paid

b. by causing the extrajudicial sale of the property
and applying
the proceeds thereof to the lien
c. by filing a civil action for collection of unpaid
charges or by way of counterclaim in an action to
recover the property;
d. all other remedies as may be sanctioned by law.
(Sec. 35)

3. He can satisfy his lien by selling the stored

goods.

* Procedure of Sale:

*give a written notice to the depositor and to

all other persons claiming interest on the goods
either by personal delivery or by mail
signifying his intention containing the following:

a. itemized statement of his claim

showing the due date of the sum due
b. brief statement of the goods against
whom the lien exists
c. demand to pay within ten (10) days
from receipt of notice
d. a statement that unless the claim is
paid within the period specified, the
goods will be advertised for sale and
sold by auction at a specified time
and place

* follow procedure for auction

sale with the requisite publication of
the notice of sale for at least
two consecutive weeks in a
newspaper published in the place
where the sale is made. The sale
should not be held LESS THAN
fifteen (15) days from the time of
first publication. Anytime before the
sale, any person claiming the
property may pay the lien and other

118
 charges and should this be done, the
goods be delivered to him.

* if no payment is made,
sale shall proceed as scheduled.
From the proceeds of the sale,
the warehouseman may satisfy
his lien. Any excess shall be held
by the warehouseman subject to
be delivered to the owner of the
goods upon demand.

>Relative to perishable and hazardous goods:

(Sec.34)

* notice will be given to the owner or

depositor thereof to pay the lien or remove
the goods otherwise it will be sold in a
public or private sale without need for
advertisement. If sold, lien will be satisfied
from its proceeds but if not, then the goods
will be disposed in a lawful manner and as
a consequence, the warehouseman incurs no
liability.

NEGOTIATION AND TRANSFER OF RECEIPTS

( same manner as negotiating a promissory note and a bill of
exchange under the Negotiable Instrument Law)

> MANNER OF TRANSFER: THROUGH NEGOTIATION

which could be either : ( Sec. 37)

1. By delivery- if the goods are deliverable to the bearer

or when it is indorsed in blank or to the bearer by the
person to whose order the goods are deliverable or by
a subsequent indorsee.

* Indorsement in blank- when the holder merely

signs his name at the back without specifying to
whom the goods are to be delivered.

* Special Indorsement- specifies the person or to

whose order the goods are to be delivered.

2. By indorsement- either in blank or by special

indorsement. Delivery
alone is not enough.

119
 > Take note: A non negotiable receipt of title CANNOT BE
NEGOTIATED. However, it could be TRANSFERRED or assigned
by DELIVERY. In which case , the transferee acquires only the
rights of the transferor. If indorsed, the transferee acquires no
additional right. (Section 39)

> WHO MAY NEGOTIATE (Sec. 40)

1.by the owner thereof

2. by any person to whom the possession or custody of the
receipt has been entrusted by the owner, if the terms
of the receipt, the warehouseman undertakes to deliver
the goods to the order of the person to whom the
possession or custody of the receipt has been entrusted,
or if, at the time of such entrusting, the receipt is in
such form that it may be negotiated by delivery.

> RIGHTS OF A PERSON TO WHOM RECEIPT HAS BEEN

NEGOTIATED: (Sec. 41)

1. the title of the person negotiating the receipt

2. the title of the person (owner/depositor) to whose order
by the terms of the receipt the goods were to be
delivered, over such goods
3. the direct obligation of the warehouseman to hold
possession of the goods for him, as if the
warehouseman directly contracted with him

> RIGHTS OF A PERSON TO WHOM RECEIPT HAS BEEN

TRANSFERRED (Sec. 42). Take note: Here, the receipt is
merely transferred, it was not negotiated. It contemplates
also a situation where a non negotiable instrument is transferred:

1.The title to the goods as against the transferor

2. the right to notify the warehouseman of the transfer
thereof
3. the right, thereafter, to acquire the obligation of the
warehouseman to hold the goods for him.

➢ Take note: Here, the transferee merely steps into

the shoes of the transferor, nothing more , nothing
less.

> RIGHTS OF TRANSFEREE OF A NEGOTIABLE

INSTRUMENT
(Sec. 43).
[ This contemplates a situation where a negotiable receipt
payable to order, which may not be negotiated by mere
DELIVERY has been delivered, WITHOUT indorsement:] The

120
instrument here is not meant to be indorsed though payable to
order.

1. The right to the goods as against the transferor

2. the right to compel the transferor to indorse the
receipt

> WARRANTIES ON SALE OF RECEIPT: (Sec. 44) [ talks

about the warranties of a transferor either by delivery or
indorsement] He warrants that:

1. That the instrument is genuine.

2. That he has a legal right to negotiate or transfer it
3. That he has knowledge of no fact which would impair
the validity or worth of the receipt
4. that he has a right to transfer the title to the goods
and that the goods are merchantable or fit for a
particular purpose, whenever such warranties would
have been implied, if the contract of the parties had
been to transfer without a receipt of the goods
represented thereby.

*Take note: that in this case, the last transferor

warrants that all the previous transfer are valid.

> LIABILITY OF A PERSON NEGOTIATING OR

TRANSFERRING A RECEIPT (Sec. 45)

> Take note: That to a certain extent, the liability of a

transferor of a negotiable warehouse receipt is different
from the liability of an indorser of a negotiable instrument.
The latter not only conveys the instrument it also enters
into a contract with the indorsee that the amount covered
by the instrument will be paid by HIM (indorser) if the one
primarily liable will not pay. IN WAREHOUSE RECEIPTS,
the transferor is not a GUARANTOR, meaning, he is
only conveying or transferring the instrument and
that he is not liable if the warehouseman fails to
deliver the goods because of loss due to his own
fault.

> LIABILITY OF MORTGAGEE, PLEDGEE OR HOLDER FOR

SECURITY (Sec. 46)

> Take note: that those mentioned above who in good

faith accepts payment of the debt from a person does not
warrant the genuineness of the receipt nor the
quality of the goods described therein.

121
 > Thus for example: if A receives from B a
warehouse receipt as security for B’s debt and A delivers it
to X who pays him for B, A assuming he acts in good is not
liable to X in case X cannot obtain possession of the goods
because they are inexistent or the receipt is fake.

>VALIDITY OF NEGOTIATION AS AGAINST REAL OWNER (Art.

47)

> Take note: This merely means that as against the

real owner of the goods, a purchaser in good faith
can validly claim a transfer of title. This holds true if
the said purchaser transacted with the owner’s authorized
agent. But if, the purchaser even in good faith transacted
with another person other than the owner or his agent, no
valid transfer could be inferred. [ Case: Siy Cong Bieng
and Co., vs. Hongkong and Shanghai Bank, 56 Phil.
598]

> EFFECT OF SUBSEQUENT NEGOTIATION BY A SELLER

(Art. 48)
[ This contemplates a DOUBLE SALE]

> A buyer should require the seller, mortgagor or

pledgor of a warehouse receipt to give him the
warehouse receipt, otherwise if the same goods covered
by the same receipt are sold by the said seller, mortgagor
or pledgor, the subsequent purchaser acquires a better
right than him (buyer), especially so if the former is in
good faith.

> INDORSEE’s RIGHT is superior to vendor’s lien (Art. 49]

> Take note: The section merely says that an

innocent purchaser of a negotiable warehouse receipt
has a better right than an UNPAID SELLER who has a
lien over the goods covered by the receipt. Thus, a
warehouseman is not obliged to deliver to unpaid seller the
goods covered by the receipt because the innocent
purchaser for value has a better right than an unpaid seller
UNLESS the warehouse receipt is surrendered by the
purchaser in good faith to the warehouseman.

CRIMINAL OFFENSES:

> PUNISHABLE ACTS UNDER THIS ACT:

The warehouseman or his agent or servant is liable

for the following acts:

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1. Issuing receipts without receiving any goods for
storage (Sec. 50); Penalty: imprisonment not
exceeding 5 yrs. or by a fine not exceeding
P10,000.00 or both;

2. Issuing receipt containing false statements (

Sec.51) Penalty: imprisonment not exceeding one
(1) yr or by a fine not exceeding P2,000.00 or
both.

3. Issuing duplicate receipt not so marked. (Sec.

52); Penalty: imprisonment not exceeding 5
yrs. or by a fine not exceeding P10,000.00 or
both;

4. Issue for warehouseman’s goods of receipt which

does not state that fact (Sec. 53); Penalty:
imprisonment not exceeding one (1) yr or by a
fine not exceeding P2,000.00 or both.

5. Delivery of goods without obtaining negotiable

receipt (Sec. 54) Penalty: imprisonment not
exceeding one (1) yr or by a fine not exceeding
P2,000.00 or both.

> Take note: For a warehouseman to be

liable under this section, it must be
shown that he withdrew the goods from
his warehouse or has something to do for
the withdrawal of the goods. Take note
further: That the criminal responsibility here
is INDIVIDUAL unless there is conspiracy.
Lastly, it should be noted that actual
transfer of the goods to a third person is not
necessary. What is important is, there could
have been a transfer of the goods to a third
person during the negotiation.

6. Negotiation of receipts for mortgaged goods (Sec.

55) Penalty: imprisonment not exceeding one (1)
yr or by a fine not exceeding P2,000.00 or
both.

END OF THE LECTURE

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