 Kinds of commodatum:

CREDIT TRANSACTIONS a. Ordinary Commodatum – use by the borrower of

the thing is for a certain period of time
CREDIT TRANSACTIONS b. Precarium - one whereby the bailor may demand
 All transactions involving the purchase or loan of the thing loaned at will and it exists in the
goods, services, or money in the present with a following cases:
promise to pay or deliver in the future i. neither the duration nor purpose of the
contract is stipulated
Contracts of security ii. the use of the thing is merely tolerated by
Types: the owner
1. Secured transactions or contracts of real security
- supported by a collateral or an encumbrance of 2. Simple loan or mutuum – where the lender delivers
property to the borrower money or other consumable thing
2. Unsecured transactions or contracts of personal upon the condition that the latter shall pay the same
security - supported only by a promise or amount of the same kind and quality.
personal commitment of another such as a
guarantor or surety Commodatum Mutuum
Key: COPS-LOTR
Security 1. Object
 Something given, deposited, or serving as a Non-consumable Consumable
means to ensure fulfilment or enforcement of an 2. Cause
obligation or of protecting some interest in Gratuitous May or may not be
property gratuitous
 Types of Security 3. Purpose
a. personal – when an individual becomes Use or temporary Consumption
surety or guarantor possession
b. real or property – when a mortgage, pledge, 4. Subject Matter
antichresis, charge or lien or other device Real or personal Only personal
property property
used to have property held, out of which the
5. Ownership of the thing
person to be made secure can be
Retained by the Passes to the debtor
compensated for loss bailor
6. Thing to be returned
Bailment Exact thing loaned Equal amount of the
 The delivery of property of one person to another same kind and
in trust for a specific purpose, with a contract, quality
express or implied, that the trust shall be 7. Who bears risk of loss
faithfully executed and the property returned or Bailor Debtor
duly accounted for when the special purpose is 8. When to return
accomplished or kept until the bailor claims it. In case of urgent Only after the
need, even before expiration of the
 Parties: the expiration of the term
1. bailor - the giver; one who delivers property term
2. bailee- the recipient; one who receives the
custody or possession of the thing thus delivered
Loan Credit
LOAN (Articles 1933 – 1961) Delivery by one party Ability of a person to
and the receipt of borrow money or
other party of a things by virtue of
 A contract wherein one of the parties delivers to
given sum of money the trust or
another, either something not consumable so that or other consumable confidence reposed
the latter may use the same for a certain time thing upon an by the lender that he
and return it or money or other consumable agreement, express will pay what he
thing, upon the condition that the same amount or implied, to repay promised.
of the same kind and quality shall be paid. (Art the same.
1933)

Characteristics: Loan Credit

1. Real Contract – delivery of the thing loaned is 1. Interest taken at Interest is taken in
necessary for the perfection of the contract the expiration of the advance
NOTE: An accepted promise to make a future credit
loan is a consensual contract, and therefore 2. Always on a Always on a single
binding upon the parties but it is only after double name paper name paper (i.e.
(two signatures promissory note with
delivery, will the real contract of loan arise. (Art
appear with both no indorse-ment
1934) parties held liable other than the
for payment) maker)
2. Unilateral Contract - once the subject matter has
been delivered, it creates obligations on the part COMMODATUM (Articles 1935 – 1952)
of only one of the parties (i.e. borrower).
 Nature:
 Kinds:
1. Commodatum – when the bailor (lender) delivers 1. PURPOSE: Bailee in commodatum acquires the
to the bailee (borrower) a non-consumable thing temporary use of the thing but not its fruits (unless
so that the latter may use it for a certain time stipulated as an incidental part of the contract).(Art
and return the identical thing. 1935)
  Use must be temporary, otherwise the except for a claim for damages suffered because
contract may be a deposit. of the flaws of the thing loaned.

2. CAUSE: Essentially gratuitous; it ceases to be a NOTES:

commodatum if any compensation is to be paid  However, the bailee’s right extends no
by the borrower who acquires the use, in such further than retention of the thing loaned
case there arises a lease contract. until he is reimbursed for the damages
 Similar to a donation in that it confers a suffered by him.
benefit to the recipient. The presumption is  He cannot lawfully sell the thing to satisfy
that the bailor has loaned the thing for such damages without court’s approval.
having no need therefor.  In case there are two or more bailees, their
obligation shall be solidary.
3. SUBJECT MATTER: Generally non-consumable
whether real or personal but if the consumable
Obligations of the bailor (Art 1946 – Art 1952):
goods are not for consumption as when they are
1. To respect the duration of the loan
merely for exhibition, consumable goods may be
GENERAL RULE: Allow the bailee the use of the
the subject of the commodatum. (Art 1936)
thing loaned for the duration of the period stipulated
or until the accomplishment of the purpose for which
4. Bailor need not be the owner of the thing owned
the commodatum was instituted.
(Art. 1938) since by the loan, ownership does not
EXCEPTIONS:
pass to the borrower.
a. In case of urgent need in which case
 A mere lessee or usufructuary may lend but
bailee may demand its return or temporary use;
the borrower or bailee himself may not lend
b. The bailor may demand immediate return
nor lease the thing loaned to him to a third
of the thing if the bailee commits any act of
person (Art 1932[2])
ingratitude specified in Art. 765.
5. Purely Personal (Art 1939):
2. To refund to the bailee extraordinary expenses for
 Death of either party terminates the contract
the preservation of the thing loaned, provided the
unless by stipulation, the commodatum is
bailee brings the same to the knowledge of the bailor
transmitted to the heirs of either or both
before incurring them, except when they are so
parties.
urgent that the reply to the notification cannot be
 Bailee can neither lend nor lease the object
awaited without danger.
of the contract to a third person.
3. To be liable to the bailee for damages for known
NOTE:Use of the thing loaned may extend to
hidden flaws.
members of the bailee’s household except:
 Requisites:
a. contrary stipulation;
a. There is flaw or defect in the thing loaned;
b. nature of the thing forbids such use
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
Obligations of the Bailee: (Arts 1941 – 1945)
d. He does not advise the bailee of the same; and
1. To pay for the ordinary expenses for the use and
e. The bailee suffers damages by reason of said flaw
preservation of the thing loaned. (Art 1941)
or defect
2. To be liable for the loss of the thing even if it
should be through a fortuitous event in the
following cases: (KLAS D)
NOTES:
a. when he keeps it longer than the period
Article I. If the above requisites concur, the bailee
stipulated, or after the accomplishment of its
has the right of retention for damages.
use
b. when he lends or leases it to third persons
 The bailor cannot exempt himself from the
who are not members of his household payment of expenses or damages by abandoning
c. when the thing loaned has been delivered the thing to the bailee.
with appraisal of its value
d. when, being able to save either of the thing SIMPLE LOAN OR MUTUUM (Art 1953 – 1961)
borrowed or his own things, he chose to save
the latter; or  A contract whereby one party delivers to another,
e. when the bailee devoted the thing for any money or other consumable thing with the
purpose different from that for which it has understanding that the same amount of the same
been loaned (Art 1942) kind and quality shall be paid. (Art. 1953)
3. To be liable for the deterioration of thing loaned
(a) if expressly stipulated; (b) if guilty of fault or NOTES:
negligence; or (c) if he devotes the thing to any  The mere issuance of the checks does not result in
purpose different from that for which it has been the perfection of the contract of loan. The Civil
loaned Code provides that the delivery of bills of exchange
4. To pay for extraordinary expenses arising from and mercantile documents, such as checks, shall
the actual use of the thing by the bailee, which produce the effect of payment only when they have
shall be borne equally by both the bailor and the been encashed (Gerales vs. CA 218 SCRA 638). It is
bailee, even though the bailee acted without only after the checks have produced the effect of
fault, unless there is a stipulation to the contrary payment that the contract of loan may be deemed
(Art 1949 par 2) perfected.
5. To return the thing loaned  The obligation is “to pay” and not to return because
 The bailee has no right to retain the thing the consumption of the thing loaned is the
loaned as security for claims he has against distinguishing character of the contract of mutuum
the bailor even for extraordinary expenses from that of commodatum.
 No estafa is committed by a person who refuses payment shall be the value of the currency at the
to pay his debt or denies its existence. time of the creation of the obligation
2. If what was loaned is a fungible thing other than
Simple Loan/Mutuum Rent money - the borrower is under obligation to pay the
lender another thing of the same kind, quality and
1. Delivery of money Delivery of some non- quantity. In case it is impossible to do so, the
or some consumable consumable thing in borrower shall pay its value at the time of the
thing with a promise order that the other perfection of the loan.
to pay an equivalent may use it during a
of the same kind and certain period and Interest
quality return it to the
 The compensation allowed by law or fixed by the
former.
parties for the loan or forbearance of money, goods
2. There is a transfer There is no transfer or credits
of ownership of the of ownership of the  Requisites for Demandability: (ELI)
thing delivered thing delivered 1. must be expressly stipulated
Exceptions:
a. indemnity for damages
3. Relationship Relationship is that b. interest accruing from unpaid interest
between the parties of a landlord and 2. must be lawful
is that of obligor- tenant 3. must be in writing
obligee

4. Creditor receives Owner of the

Compound Interest
payment for his loan property rented GENERAL RULE: Unpaid interest shall not earn interest.
receives EXCEPTIONS:
compensation or 1. when judicially demanded
price either in 2. when there is an express stipulation (must be in
money, provisions, writing in view of Art. 1956)
chattels, or labor
Guidelines for the application of proper interest rates
from the occupant
1. If there is stipulation: that rate shall be applied
thereof in return for
its use (Tolentino vs
2. The following are the rules of thumb for the
Gonzales, 50 Phil 558 application/imposition of interest rates:
1927) a) When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
Loan Sale delicts is breached, the contravenor can be held
liable for damages.
1. Real contract Consensual contract b) With regard particularly to an award of interest
in the concept of actual and compensatory
2. Generally Bilateral and damages, the rate of interest, as well as the
unilateral because reciprocal accrual thereof, is imposed, as follows:
only borrower has i. When the obligation breached consists of
obligations payment of a sum of money (loan or
forbearance of money), the interest shall be
NOTE: If the property is “sold”, but the real intent is that which is stipulated or agreed upon by
only to give the object as security for a debt – as the parties. In absence of an agreement, the
when the “price” is comparatively small – there really rate shall be the legal rate (i.e. 12% per
is a contract of loan with an “equitable mortgage.” annum) computed from default.
NOTE: The interest due shall itself earn legal
Commodatum/ interest from the time it is judicially
Barter
Mutuum demanded
ii. In other cases, the rate of interest shall be
1. Subject matter is Subject matter is six percent (6%) per annum.
money or fungible non-fungible, (non
things consumable) things
NOTE: No interest, however, shall be
adjudged on unliquidated claims or damages
2. In commodatum, The thing with except when or until the demand can be
the bailee is bound equivalent value is established with reasonable certainty. When
to return the given in return for the demand cannot be established, the
identical thing what has been interest shall begin to run only from the date
borrowed when the received of the judgment of the court is made.
time has expired or iii. When the judgment of the court awarding a
purpose served sum of money becomes final and executory,
the rate of legal interest, whether the case
3. Mutuum may be Onerous, actually a
gratuitous and mutual sale
falls under paragraph i or ii above, shall be
commodatum is 12% per annum from such finality until its
always gratuitous satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit. (Eastern Shipping
 Form of Payment (Art 1955): Lines vs. CA, July 12, 1994)
1. If the thing loaned is money - payment must be
made in the currency stipulated, if it is possible; NOTES:
otherwise it is payable in the currency which is  Central Bank Circular No. 416 fixing the rate of
legal tender in the Philippines and in case of interest at 12% per annum deals with loans,
extraordinary inflation or deflation, the basisi of forbearance of any money, goods or credits and
 judgments involving such loans, or forbearance in
the absence of express agreement to such rate Deposit Commodatum
 Interest as indemnity for damages is payable only
in case of default or non-performance of the 1. Purpose is 1. Purpose is the
contract. As they are distinct claims, they may be Safekeeping transfer of the use
demanded separately. (Sentinel Insurance Co.,
2. May be gratuitous 2. Essentially and
Inc. vs CA, 182 SCRA 517) always gratuitous
 Central Bank Circular No. 905 (Dec. 10, 1982)
removed the Usury Law ceiling on interest rates 3. Movable/corporeal 3. Both movable and
for secured and unsecured loans, regardless of things only in case of immovable may be
maturity. extrajudicial deposit the object

Validity of unconscionable interest rate in a loan  Kinds of Deposit:

Supreme Court in Sps. Solangon vs. Jose 1. Judicial (Sequestration) –takes place when an
Salazar, G.R. No. 125944, June 29, 2001, said that attachment or seizure of property in litigation is
since the usury law had been repealed by CB Cir. No. ordered.
905 there is no more maximum rate of interest and
the rate will just depend on the mutual agreement of 2. Extra-judicial
the parties (citing Lim Law vs. Olympic Sawmill Co., a. Voluntary – one wherein the delivery is made by
129 SCRA 439). But the Supreme Court said that the will of the depositor or by two or more
nothing in said circular grants lenders carta blanche persons each of whom believes himself entitled
authority to raise interest rates to level which will to the thing deposited. (Arts 1968 – 1995)
either enslave their borrowers or lead to a b. Necessary – one made in compliance with a legal
hemorrhaging of their assets (citing Almeda vs. CA, obligation, or on the occasion of any calamity, or
256 SCRS 292). In Medel vs. CA, 299 SCRA 481, it was by travellers in hotels and inns (Arts 1996 -
ruled that while stipulated interest of 5.5% per month 2004), or by travellers with common carriers (Art
on a loan is usurious pursuant to CB Circular No. 905, 1734 – 1735).
the same must be equitably reduced for being NOTE: The chief difference between a voluntary
iniquitous, unconscionable and exorbitant. It is deposit and a necessary deposit is that in the
contrary to morals, (contra bonos mores). It was former, the depositor has a complete freedom in
reduced to 12% per annum in consonant with justice choosing the depositary, whereas in the latter, there
and fair play. is lack of free choice in the depositor.

DEPOSIT (Articles 1962 – 2009) Judicial Extra-judicial

1. Creation
 A contract constituted from the moment a person Will of the court Will of the parties
receives a thing belonging to another, with the or contract
obligation of safely keeping it and of returning 2. Purpose
the same. Security or to insure Custody and
the right of a party safekeeping
Characteristics: to property or to
1. Real Contract - contract is perfected by the recover in case of
favorable judgment
delivery of the subject matter.
2. Unilateral (gratutitous deposit) - only the 3. Subject Matter
depositary has an obligation. Movables or Movables only
3. Bilateral (onerous deposit) - gives rise to immovables,
obligations on the part of both the depositary but generally
and depositor. immovables
4. Cause
Deposit Mutuum Always onerous May be compen-
1. Purpose sated or not, but
Principal purpose is Principal purpose is generally gratuitous
safekeeping or consumption
custody 5. When must the thing be returned
2. When to Return Upon order of the Upon demand of
Depositor can The lender must wait court or when depositor
demand the return of until the expiration litigation is ended
the subject matter at of the period granted
will to the debtor 6. In whose behalf it is held
3. Subject Matter Person who has a Depositor or third
Subject matter may Subject matter is right person designated
be movable or only money or other
immovable property fungible thing GENERAL RULE: Contract of deposit is gratuitous (Art
4. Relationship 1965)
Relationship is that Relationship is that EXCEPTIONS:
of lender (creditor) of depositor and 1. when there is contrary stipulation
and borrower depositary.
2. depositary is engaged in business of storing goods
(debtor).
3. property saved from destruction without
5. Compensation knowledge of the owner
There can be NO compensation of
compensation of things deposited with NOTES:
credits. each other (except
by mutual
agreement).
 Article 1966 does not embrace incorporeal although there is no negligence on his part and
property, such as rights and actions, for it follows the third person;
the person of the owner, wherever he goes. b. he deposits the thing
 A contract for the rent of safety deposit boxes with a third person who is manifestly careless or
is not an ordinary contract of lease of things but unfit although authorized even in the absence of
a special kind of deposit; hence, it is not to be negligence; or
strictly governed by the provisions on deposit. c. the thing is lost through
The relation between a bank and its customer is the negligence of his employees whether the
that of a bailor and bailee. (CA Agro vs CA, 219 latter are manifestly careless or not.
SCRA 426) 4. If the thing deposited should earn interest (Art 1975):
a. to collect interest and the capital itself as it fall
Obligations of the Depositary (Art 1972 –1991): due
1. To keep the thing safely (Art 1972) b. to take steps to preserve its value and rights
 Exercise over the thing deposited the same corresponding to it
diligence as he would exercise over his 5. Not to commingle things deposited if so stipulated
property (Art 1976)
2. To return the thing (Art 1972) 6. Not to make use of the thing deposited unless
 Person to whom the thing must be authorized (Art 1977)
returned: GENERAL RULE: Deposit is for safekeeping of the
a. Depositor, to his heirs and successors, or the subject matter and not for use. The unauthorized use
person who may have been designated in the by the depositary would make him liable for
contract damages.
b. If the depositary is capacitated - he is subject EXCEPTIONS:
to all the obligations of a depositary whether 1. When the preservation of the thing deposited
or not the depositor is capacitated. If the requires its use
depositor is incapacitated, the depositary 2. When authorized by the depositor
must return the property to the legal
representative of the incapacitated or to the NOTE: The permission to use is NOT presumed except
depositor himself if he should acquire when such use is necessary for the preservation of
capacity (Art 1970). the thing deposited.
c. If the depositor is capacitated and the
depositary is incapacitated - the latter does Effect if permission to use is given (Art 1978):
not incur the obligation of a depositary but 1. If thing deposited is non-consumable,
he is liable: the contract loses the character of a deposit and
i..to return the thing deposited while still acquires that of a commodatum despite the fact
in his possession; that the parties may have denominated it as a
[Link] pay the depositor the amount which he deposit, unless safekeeping is still the principal
may have benefited himself with the purpose.
thing or its price subject to the right of 2. If thing deposited consists of money/consumable
any third person who acquired the thing things, the contract is converted into a simple
in good faith (Art 1971) loan or mutuum unless safekeeping is still the
principal purpose in which case it is called an
 Time of return: irregular deposit. Example: bank deposits are
a. Upon demand even though a specified irregular deposits in nature but governed by law
period or time for such return may have been on loans.
fixed except when the thing is judicially 7. When the thing deposited is delivered sealed and
attached while in the depositary’s possession closed :
or should he have been notified of the a. to return the thing deposited in the same
opposition of a third person to the return or condition
the removal of the thing deposited. (Art b. to pay for damages should the seal or lock be
1998) broken through his fault, which is presumed
b. If deposit gratuitous, the depositary may unless proved otherwise
return the thing deposited notwithstanding c. to keep the secret of the deposit when the seal
that a period has been fixed for the deposit if or lock is broken with or without his fault (Art
justifiable reasons exists for its return. 1981)
c. If the deposit is for a valuable NOTE: The depositary is authorized to open the
consideration, the depositary has no right to thing deposited which is closed and sealed when
return the thing deposited before the (Art 1982):
expiration of the time designated even if he i. there is presumed authority (i.e. when the key
should suffer inconvenience as a has been delivered to him or the instructions
consequence.(Art 1989) of the depositor cannot be done without
opening it)
 What to return: product, accessories, and ii. necessity
8. To change the way of the deposit if under the
accessions of the thing deposited (Art 1983)
circumstances, the depositary may reasonably
3. Not to deposit the thing with a third person
presume that the depositor would consent to the
unless authorized by express stipulation (Art
change if he knew of the facts of the situation,
1973)
provided, that the former notifies the depositor
 The depositor is liable for the loss of the thereof and wait for his decision, unless delay would
thing deposited under Article 1973 if: cause danger
a. he transfers the 9. To pay interest on sums converted to personal use if
deposit with a third person without authority the deposit consists of money (Art 1983)
10. To be liable for loss through fortuitous event action against the buyer in case the price has not
(SUDA): (Art 1979): been paid him (Art 1991).
a. if stipulated
b. if he uses the thing without the depositor's Obligations of the Depositor (Art 1992 – 1995):
permission 1. To pay expenses for preservation
c. if he delays its return a. If the deposit is gratuitous, the depositor is
d. if he allows others to use it, even though he obliged to reimburse the depositary for expenses
himself may have been authorized to use the incurred for the preservation of the thing
same deposited (Art 1992)
b. If the deposit is for valuable consideration,
NOTES: expenses for preservation are borne by the
 Fixed, savings, and current deposits of money in depositary unless there is a contrary stipulation
banks and similar institutions shall be governed 2. To pay loses incurred by the depositary due to the
by the provisions concerning simple loan. (Art character of the thing deposited
1980)
 The general rule is that a bank can compensate GENERAL RULE: The depositor shall reimburse the
or set off the deposit in its hands for the payment depositary for any loss arising from the character of the
of any indebtedness to it on the part of the thing deposited.
depositor. In true deposit, compensation is not EXCEPTIONS:
allowed. 1. at the time of the deposit, the depositor was not
aware of the dangerous character of the thing
Irregular deposit Mutuum 2. when depositor was not expected to know the
dangerous character of the thing
1. The consumable 1. Lender is bound 3. when the depositor notified the depository of the
thing deposited may by the provisions of same
be demanded at will the contract and 4. the depositary was aware of it without advice from
by the depositor cannot demand the depositor
restitution until the
time for payment, as Extinguishment of Voluntary Deposit (Art 1995)
provided in the
1. Loss or destruction of the thing deposited
contract, has arisen
2. In case of gratuitous deposit, upon the death of
2. The only benefit is 2. Essential cause for either the depositor or the depositary
that which accrues the transaction is the 3. Other causes, such as return of the thing, novation,
to the depositor necessity of the merger, expiration of the term fulfilment of the
borrower resolutory condition, etc (Art 1231)

3. The irregular 3. Common creditors Necessary Deposits

depositor has a enjoy no preference 1. Made in compliance with a legal obligation
preference over in the distribution of 2. Made on the occasion of any calamity such as fire,
other creditors with the debtor’s
storm, flood, pillage, shipwreck or other similar
respect to the thing property
deposited
events (deposito miserable)
3. Made by travellers in hotels and inns or by travellers
with common carrier
Rule when there are two or more depositors (Art
Deposit by Travellers in hotels and inns:
1985):
 The keepers of hotels or inns shall be responsible as
1. If thing deposited is divisible and depositors are
depositaries for the deposit of effects made by
not solidary: Each depositor can demand only his
travellers provided:
proportionate share thereto.
a. Notice was given to them or to their employees
2. If obligation is solidary or if thing is not
of the effects brought by the guest; and
divisible: Rules on active solidarity shall apply,
b. The guests take the precautions which said hotel-
i.e. each one of the solidary depositors may do
keepers or their substitutes advised relative to
whatever may be useful to the others but not
the care and vigilance of their effects.
anything which may be prejudicial to the latter,
NOTES:
(Art. 1212) and the depositary may return the
thing to anyone of the solidary depositors unless  Liability extends to vehicles, animals and articles
a demand, judicial or extrajudicial, for its return which have been introduced or placed in the annexes
has been made by one of them in which case, of the hotel.
delivery should be made to him (Art. 1214).  Liability shall EXCLUDE losses which proceed from
3. Return to one of depositors stipulated. The force majeure. The act of a thief or robber is not
depositary is bound to return it only to the person deemed force majeure unless done with the use of
designated although he has not made any demand arms or irresistible force.
for its return.  The hotel-keeper cannot free himself from the
responsibility by posting notices to the effect that he
NOTES: is not liable for the articles brought by the guest. Any
 The depositary may retain the thing in pledge stipulation to such effect shall be void.
until full payment of what may be due him by  Notice is necessary only for suing civil liability but
reason of the deposit (Art 1994). not in criminal liability.
 The depositor’s heir who in good faith may have
sold the thing which he did not know was GUARANTY (Articles 2047 – 2084)
deposited, shall only be bound to return the price
he may have received or to assign his right of
 A contract whereby a person (guarantor) binds NOTE: He directly, primarily and equally binds
himself to the creditor to fulfil the obligation of himself with the principal as original promisor,
the principal debtor in case the latter fail to do although he possesses no direct or personal interest
so. over the latter’s obligation, nor does he receive any
benefits therefrom. (PNB vs CA, 198 SCRA 767)
 Classification of Guaranty: 2. Liability limited by the terms of the contract.
1. In the Broad sense: NOTE: It cannot be extended by implication beyond
a. Personal - the guaranty is the credit given by the terms of the contract (PNB vs CA, 198 SCRA 767)
the person who guarantees the fulfilment of 3. Liability arises only if principal debtor is held liable.
the principal obligation. NOTES:
b. Real - the guaranty is the property, movable  The creditor may sue separately or together the
or immovable. principal debtor and the surety. Where there are
several sureties, the obligee may proceed against
2. As to its Origin any one of them.
a. Conventional - agreed upon by the parties.  In the absence of collusion, the surety is bound
b. Legal - one imposed by virtue of a provision by a judgment against the principal even though
of a law. he was not a party to the proceedings. The
c. Judicial - one which is required by a court to nature of its undertaking makes it privy to all
guarantee the eventual right of one of the proceedings against its principal (Finman General
parties in a case. Assurance Corp. vs. Salik, 188 SCRA 740)
3. As to Consideration
a. Gratuitous - the guarantor does not receive 4. Surety is not entitled to the benefit of exhaustion
any price or remuneration for acting as such. NOTE: He assumes a solidary liability for the
b. Onerous - the guarantor receives valuable fulfilment of the principal obligation (Towers
consideration. Assurance Corp vs. Ororama Supermart, 80 SCRA
4. As to the Person guaranteed 262) as an original promissory and debtor from the
a. Single - one constituted solely to guarantee beginning.
or secure performance by the debtor of the 5. Undertaking is to creditor and not to debtor.
principal obligation. NOTE: The surety makes no covenant or agreement
b. Double or sub-guaranty - one constituted to with the principal that it will fulfil the obligation
secure the fulfilment by the guarantor of a guaranteed for the benefit of the principal. Such a
prior guaranty. promise is not implied by law either; and this is true
5. As to Scope and Extent even where under the contract the creditor is given
a. Definite - the guaranty is limited to the the right to sue the principal, or the latter and the
principal obligation only, or to a specific surety at the same time. (Arranz vs. Manila Fidelity
portion thereof. & Surety Co., Inc., 101 Phil. 272)
b. Indefinite or simple - one which not only 6. Surety is not entitled to notice of principal’s default
includes the principal obligation but also all NOTE: The creditor owes no duty of active diligence
its accessories including judicial costs to take care of the interest of the surety and the
surety is bound to take notice of the principal’s
SURETYSHIP default and to perform the obligation. He cannot
complain that the creditor has not notified him in the
 A contract whereby a person (surety) binds absence of a special agreement to that effect.
himself solidarily with the principal debtor (Palmares vs CA, 288 SCRA 422)
 A relation which exists where one person 7. Prior demand by the creditor upon principal is not
(principal) has undertaken an obligation and required
another person (surety) is also under a direct and NOTE: As soon as the principal is in default, the
primary obligation or other duty to the obligee, surety likewise is in default.
who is entitled to but one performance, and as 8. Surety is not exonerated by neglect of creditor to
between the two who are bound, the second sue principal
rather than the first should perform (Agro
Conglomerates, Inc. vs. CA, 348 SCRA 450) Characteristics of Guaranty and Suretyship:
NOTES: 1. Accessory - It is indispensable condition for its
 The reference in Article 2047 to solidary existence that there must be a principal obligation.
obligations does not mean that suretyship is NOTES:
withdrawn from the applicable provisions  Guaranty may be constituted to guarantee the
governing guaranty. A surety is almost the same performance of a voidable or unenforceable
as a solidary debtor, except that he himself is a contract. It may also guarantee a natural
principal debtor. obligation. (Art 2052)
 In suretyship, there is but one contract, and the  The guarantor cannot bind himself for more than
surety is bound by the same agreement which the principal debtor and even if he does, his
binds the principal. A surety is usually bound with liability shall be reduced to the limits of that of
the principal by the same instrument, executed the debtor.
at the same time and upon the same 2. Subsidiary and Conditional - takes effect only in case
consideration (Palmares vs CA, 288 SCRA 422) the principal debtor fails in his obligation.
 It is not for the obligee to see to it that the
principal debtor pays the debt or fulfill the NOTES:
contract, but for the surety to see to it that the  The guarantor cannot bind himself for more than
principal debtor pays or performs (Paramount the principal debtor and even if he does, his
Insurance Corp vs CA, 310 SCRA 377) liability shall be reduced to the limits of that of
the debtor. But a guarantor may bind himself for
Nature of Surety’s undertaking: less than that of the principal (Art 2054)
1. Liability is contractual and accessory but direct
  A guaranty may be given as security for used as an aid in determining whether a party’s
future debts, the amount of which is not yet undertaking is that of a surety or guarantor.
known; there can be no claim against the (Palmares vs CA, 288 SCRA 292)
guarantor until the debt is liquidated. A  It does not apply in case of compensated
conditional obligation may also be secured. sureties.
(Art 2053) 10. It is a contract which requires that the guarantor
3. Unilateral - may be entered even w/o the must be a person distinct form the debtor because a
intervention of the principal debtor, in which person cannot be the personal guarantor of himself.
case Art. 1236 and 1237 shall apply and it gives NOTE: However, in a real guaranty, like pledge and
rise only to a duty on the part of the guarantor in mortgage, a person may guarantee his own obligation
relation to the creditor and not vice versa. with his personal or real properties.
4. Nominate
5. Consensual Guaranty Suretyship
6. It is a contract between the guarantor/surety and
creditor. 1. Liability depends 1. Surety assumes
upon an independent liability as regular
NOTES: agreement to pay the party to the
obligation if primary undertaking
 Acceptance of guaranty by creditor and debtor fails to do so
notice thereof to guarantor:
 In declaring that guaranty must be 2. Collateral under- 2. Surety is an
express, the law refers solely and taking original promisor
exclusively to the obligation of the
guarantor because it is he alone who 3. Guarantor is 3. Surety is
binds himself by his acceptance. With secondarily liable primarily liable
respect to the creditor, no such
requirement is needed because he binds 4. Guarantor binds 4. Surety undertakes
himself to pay if to pay if the principal
himself to nothing.
the principal DOES NOT PAY
 However, when there is merely an offer CANNOT PAY
of a guaranty, or merely a conditional
guaranty, in the sense that it requires 5. Insurer of 5. Insurer of the
action by the creditor before the solvency of debtor debt
obligation becomes fixed, it does not
become binding until it is accepted and 6. Guarantor can 6. Surety cannot
until notice of such acceptance by the avail of the benefit avail of the benefit of
creditor is given to, or acquired by, the of excussion and excussion and division
division in case
guarantor, or until he has notice or
creditor proceeds
knowledge that the creditor has against him
performed the condition and intends to
act upon the guaranty.
Indorsement Guaranty
 But in any case, the creditor is not
precluded from waiving the requirement 1. Primarily of 1. Contract of
of notice. transfer security
 The consideration of the guaranty is the same
as the consideration of the principal 2. Unless the note is 2. Failure in either or
obligation. promptly presented both of these
for payment at particulars does not
 The creditor may proceed against the maturity and due generally work as an
guarantor although he has no right of action notice of dishonor absolute discharge of
against the principal debtor. given to the indorser a guarantor’s
7. Not presumed. It must be expressed and reduced within a reasonable liability, but his is
in writing. time he will be discharged only to
NOTE: A power of attorney to loan money does discharged abso- the extent of the loss
not authorize the agent to make the principal lutely from all which he may have
liable as a surety for the payment of the debt of liability thereon, suffered in
whether he has consequence thereof
a third person. (BPI vs. Coster, 47 Phil. 594) suffered any actual
8. Falls under the Statute of Frauds since it is a damage or not
“special promise to answer for the debt, default
or miscarriage of another”. 3. Indorser does not 3. Guarantor
9. Strictly interpreted against the creditor and in warrant the solvency. warrants the solvency
favor of the guarantor/surety and is not to be He is answerable on a of the promisor
extended beyond its terms or specified limits. strict compliance
(Magdalena Estates, Inc. vs Rodriguez, 18 SCRA with the law by the
967) The rule of strictissimi juris commonly holder, whether the
promisor is solvent or
pertains to an accommodation surety because the
not
latter acts without motive of pecuniary gain and
hence, should be protected against unjust 4. Indorser can be 4. Guarantor cannot be
pecuniary impoverishment by imposing on the sued as promisor sued as promisor
principal, duties akin to those of a fiduciary.
Guaranty Warranty
NOTES:
 The rule will apply only after it has been
definitely ascertained that the contract is
one of suretyship or guaranty. It cannot be
 A contract by which a An undertaking that the guarantor shall only be liable for those costs
person is bound to the title, quality, or incurred after he has been judicially required to pay.
another for the quantity of the
fulfilment of a subject matter of the Qualifications of a guarantor: (Arts 2056-2057)
promise or contract is what it
1. possesses integrity
engagement of a has been represented
third party to be, and relates to 2. capacity to bind himself
some agreement 3. has sufficient property to answer for the
made ordinarily by obligation which he guarantees
the party who makes
the warranty NOTES:
 The qualifications need only be present at the time
NOTES: of the perfection of the contract.
 A guaranty is gratuitous, unless there is a  The subsequent loss of the integrity or property or
stipulation to the contrary. The cause of the supervening incapacity of the guarantor would not
contract is the same cause which supports the operate to exonerate the guarantor or the eventual
obligation as to the principal debtor. liability he has contracted, and the contract of
 The peculiar nature of a guaranty or surety guaranty continues.
agreement is that is is regarded as valid despite  However, the creditor may demand another
the absence of any direct consideration received guarantor with the proper qualifications. But he may
by the guarantor or surety either from the waive it if he chooses and hold the guarantor to his
principal debtor or from the creditor; a bargain.
consideration moving to the principal alone will
suffice. Benefit of Excussion (Art 2058)
 It is never necessary that the guarantor or surety  The right by which the guarantor cannot be
should receive any part or benefit, if such there compelled to pay the creditor unless the latter has
be, accruing to the principal. (Willex Plastic exhausted all the properties of the principal debtor,
Industries Corp. vs. CA, 256 SCRA 478) and has resorted to all of the legal remedies against
such debtor.

NOTE:
 Not applicable to a contract of suretyship (Arts 2047,
Double or sub-guaranty (Art 2051 2nd par) par. 2; 2059[2])
 One constituted to guarantee the obligation of a  Cannot even begin to take place before judgment has
guarantor been obtained against the debtor (Baylon vs CA, 312
SCRA 502)
Continuing guaranty (Art 2053)
 One which is not limited to a single transaction When Guarantor is not entitled to the benefit of
but which contemplates a future course of excussion: (PAIRS)
dealings, covering a series of transactions 1. If it may be presumed that an execution on the
generally for an indefinite time or until revoked. property of the principal debtor would not result in
the satisfaction of the obligation
NOTES:  Not necessary that the debtor be judicially
 Prospective in operation (Diño vs CA, 216 SCRA 9) declared insolvent or bankrupt
 Construed as continuing when by the terms 2. When he has absconded, or cannot be sued within
thereof it is evident that the object is to give a the Philippines unless he has left a manager or
standing credit to the principal debtor to be used representative
from time to time either indefinitely or until a 3. In case of insolvency of the debtor
certain period, especially if the right to recall the  Must be actual
guaranty is expressly reserved (Diño vs CA, 216 4. If the guarantor has expressly renounced it
SCRA 9) 5. If he has bound himself solidarily with the debtor
 “Future debts” may also refer to debts existing at
the time of the constitution of the guaranty but Other grounds: (BIPS)
the amount thereof is unknown and not to debts 6. If he is a judicial bondsman or sub-surety
not yet incurred and existing at that time. 7. If he fails to interpose it as a defense before
 Exception to the concept of continuing guaranty judgment is rendered against him
is chattel mortgage. A chattel mortgage can 8. If the guarantor does not set up the benefit against
only cover obligations existing at the time the the creditor upon the latter’s demand for payment
mortgage is constituted and not those contracted from him, and point out to the creditor available
subsequent to the execution thereof (The Belgian property to the debtor within Philippine territory,
Catholic Missionaries, Inc. vs. Magallanes Press, sufficient to cover the amount of the debt (Art 2060)
Inc., 49 Phil 647). An exception to this is in case  Demand can be made only after judgment on the
of stocks in department stores, drug stores, etc. debt
(Torres vs. Limjap, 56 Phil 141).  Demand must be actual; joining the guarantor in
the suit against the principal debtor is not the
Extent of Guarantor’s liability: (Art 2055) demand intended by law
1. Where the guaranty definite: It is limited in 9. Where the pledge or mortgage has been given by him
whole or in part to the principal debt, to the as special security
exclusion of accessories.
2. Where guaranty indefinite or simple: It shall Benefit of Division (Art 2065)
comprise not only the principal obligation, but  Should there be several guarantors of only one
also all its accessories, including the judicial debtor and for the same debt, the obligation to
costs, provided with respect to the latter, that answer for the same is divided among all.
 Liability: Joint the debtor, even though it did not earn interest
for the creditor. Guarantor’s right to legal
NOTES: interest is granted by law by virtue of the
 The creditor can claim from the guarantors only payment he has made.
the shares they are respectively bound to pay 3. Expenses incurred by the guarantor after having
except when solidarity is stipulated or if any of notified the debtor that payment has been
the circumstances enumerated in Article 2059 demanded of him by the creditor; only those
should take place. expenses that the guarantor has to satisfy in
 The right of contribution of guarantors who pays accordance with law as a consequence of the
requires that the payment must have been made guaranty (Art. 2055) not those which depend
(a) in virtue of a judicial demand, or (b) because upon his will or own acts or his fault for these are
the principal debtor is insolvent (Art 2073). his exclusive personal responsibility and it is not
 If any of the guarantors should be insolvent, his just that they be shouldered by the debtor.
4. Damages if they are due in accordance
share shall be borne by the others including the
with law. General rules on damages apply.
paying guarantor in the same joint proportion
following the rule in solidary obligations.
EXCEPTIONS:
 The above rule shall not be applicable unless the 1. Where the guaranty is constituted without the
payment has been made in virtue of a judicial knowledge or against the will of the principal
demand or unless the principal debtor is debtor, the guarantor can recover only insofar as
insolvent. the payment had been beneficial to the debtor
 The right to contribution or reimbursement from (Art. 2050).
his co-guarantors is acquired ipso jure by virtue 2. Payment by a third person who does not intend
of said payment without the need of obtaining to be reimbursed by the debtor is deemed to be
from the creditor any prior cession of rights to a donation, which, however, requires the
such guarantor. debtor’s consent. But the payment is in any case
 The co-guarantors may set up against the one valid as to the creditor who has accepted it (Art.
who paid, the same defenses which have 1238).
pertained to the principal debtor against the 3. Waiver of the right to demand reimbursement.
creditor and which are not purely personal to the
debtor. (Art 2074) Guarantor’s right to Subrogation (ART.2067)
 Subrogation transfers to the person subrogated, the
Procedure when creditor sues: (Art. 2062) credit with all the rights thereto appertaining either
 The creditor must sue the principal alone; the against the debtor or against third persons, be they
guarantor cannot be sued with his principal, guarantors or possessors of mortgages, subject to
much less alone except in Art. 2059. stipulation in conventional subrogation.

1. Notice to guarantor of the action NOTE: This right of subrogation is necessary to enable
 The guarantor must be NOTIFIED so that he the guarantor to enforce the indemnity given in Art.
may appear, if he so desires, and set up 2066.
defenses he may want to offer.  It arises by operation of law upon payment by the
 If the guarantor appears, he is still given the guarantor. It is not necessary that the creditor cede
benefit of exhaustion even if judgment should to the guarantor the former’s rights against the
be rendered against him and principal debtor. debtor.
His voluntary appearance does not constitute  It is not a contractual right. The right of guarantor
a renunciation of his right to excussion (see who has paid a debt to subrogation does not stand
Art. 2059(1)). upon contract but upon the principles of natural
 Guarantor cannot set up the defenses if he justice.
does not appear and it may no longer be  The guarantor is subrogated by virtue of the payment
possible for him to question the validity of to the rights of the creditor, not those of the debtor.
the judgment rendered against the debtor.  Guarantor cannot exercise the right of
2. A guarantor is entitled to be heard before and redemption of his principal (Urrutia & Co vs
execution can be issued against him where he is Morena and Reyes, 28 Phil 261)
not a party in the case involving his principal
(procedural due process). Effect of Payment by Guarantor
1. Without notice to debtor: (Art 2068)
Guarantor’s Right of Indemnity or Reimbursement  The debtor may interpose against the guarantor
(Art 2066) those defenses which he could have set up
GENERAL RULE: Guaranty is a contract of against the creditor at the time the payment was
indemnity. The guarantor who makes payment is made, e.g. the debtor can set up against the
entitled to be reimbursed by the principal debtor. guarantor the defense of previous extinguishment
of the obligation by payment.
NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt – no right to 2. Before Maturity (Art 2069)
demand reimbursement until he has actually
paid the debt, unless by the terms of the
 Not entitled to reimbursement unless the
payment was made with the consent or has been
contract, he is given the right before making
ratified by the debtor
payment. He cannot collect more than what
he has paid.
Effect of Repeat Payment by debtor: (Art 2070)
2. Legal interest thereon from the time the
payment was made known (notice of payment
GENERAL RULE: Before guarantor pays the creditor, he
must first notify the debtor (Art. 2068). If he fails to
in effect a demand so that if the debtor does
give such notice and the debtor repeats payment, the
not pay immediately, he incurs in delay) to
guarantor can only collect from the creditor and  Judicial bonds constitute merely a special class of
guarantor has no cause of action against the debtor contracts of guaranty by the fact that they are given
for the return of the amount paid by guarantor even “in virtue… of a judicial order.”
if the creditor should become insolvent.  If the person required to give a legal or judicial bond
should not be able to do so, a pledge or mortgage
EXCEPTION: The guarantor can still claim sufficient to cover the obligation shall admitted in
reimbursement from the debtor in spite of lack of lieu thereof (Art 2083)
notice if the following conditions are present: (PIG)  A judicial bondsman and the sub-surety are NOT
a. guarantor was prevented by fortuitous event
entitled to the benefit of excussion because they are
to advise the debtor of the payment; and
not mere guarantors, but sureties whose liability is
b. the creditor becomes insolvent;
primary and solidary. (Art 2084)
c. the guaranty is gratuitous.
PLEDGE, MORTGAGE AND ANTICHRESIS
Right of Guarantor to proceed against debtor
before payment
I. Common Elements of Pledge, Mortgage, and
GENERAL RULE: Guarantor has no cause of action Antichresis (Articles 2085 – 2092)
against debtor until after the former has paid the
obligation
A. Essential Requisites (SOD) (Art 2085)
EXCEPTION: Article 2071 1. Secures the fulfillment of a principal obligation;
2. Pledgor, mortgagor, antichretic debtor must be the
NOTES:
absolute owner of the thing pledged or mortgaged;
 Article 2071 is applicable and available to the and
surety. (Manila Surety & Fidelity Co., Inc. vs Batu  The reason being that in anticipation of a
Construction & Co., 101 Phil 494) possible foreclosure sale in case of default which
 Remedy of guarantor: is still a sale, the rule is that the seller must be
(a) obtain release from the guaranty; or the owner of the thing sold (Cavite Development
(b) demand a security that shall protect him Bank vs. Lim, 324 SCRA 346)
from any proceedings by the creditor, and 3. Pledgor, mortgagor, antichretic debtor must have
against the danger of insolvency of the free disposal of their property, or be legally
debtor authorized for such purpose.

Art. 2066 Art. 2071 NOTES:

Provides for the Provides for his  Third persons can pledge or mortgage their own
enforcement of the protection before he property to secure the principal obligation.
rights of the has paid but after he
guarantor/surety has become liable  It is not necessarily void simply because the
against the debtor accommodation pledgor or mortgagor did not benefit
after he has paid the from the same. So long as valid consent was given,
debt the fact that the loan was given solely for the benefit
Gives a right of Protective remedy of the principal debtor would not invalidate the
action after payment before payment. mortgage (GSIS vs CA, 170 SCRA 533)
Substantive right Preliminary remedy  The accommodation pledgor or mortgagor, without
expressly assuming personal liability for such debt, is
Extinguishment of guaranty: (RA2CE2) not liable for the payment of any deficiency, should
1. Release in favor of one of the guarantors, without the property not be sufficient to cover the debt
the consent of the others, benefits all to the (Bank of America vs. American Realty Corporation,
extent of the share of the guarantor to whom it 321 SCRA 659).
has been granted (Art 2078);
 The accommodation pledgor or mortgagor is not
2. If the creditor voluntarily accepts immovable or
solidarily bound with the principal obligor but his
other properties in payment of the debt, even if
liability extents only to the property pledged or
he should afterwards lose the same through
mortgaged. Should there be any deficiency, the
eviction or conveyance of property (Art 2077);
creditor has recourse on the principal debtor who
3. Whenever by some act of the creditor, the
remains to be primarily bound.
guarantors even though they are solidarily liable
cannot be subrogated to the rights, mortgages  The law grants to the accommodation pledgor or
and preferences of the former (Art 2080); mortgagor the same rights as a guarantor and he
4. For the same causes as all other obligations (Art cannot be prejudiced by any waiver of defense by
1231); the principal debtor.
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor B. Prohibition against Pactum Commissorium (Art
without the consent of the guarantor (Art 2079) 2088; 2137)

BOND Pactum Commissorium

 An undertaking that is sufficiently secured, and  Stipulation whereby the thing pledged or mortgaged,
not cash or currency or under antichresis shall automatically become the
property of the creditor in the event of non-payment
Bondsman (Art 2082) of the debt within the term fixed.
 A surety offered in virtue of a provision of law or
a judicial order. He must have the qualifications Requisites:
required of a guarantor and in special laws like 1. There should be a pledge, mortgage, or antichresis of
the Rules of Court. property by way of security for the payment of the
principal obligation; and
NOTES: 2. There should be a stipulation for an automatic
appropriation by the creditor of the property in
 event of nonpayment of the obligation within the F. Pledgor, mortgagor, antichretic debtor retains
stipulated period. ownership of the thing given as a security

GENERAL RULE: Pactum Commissorium is forbidden PLEDGE (Arts 2093 – 2123)

by law and is declared null and void.
EXCEPTION: The pledgee may appropriate the thing  A contract wherein the debtor delivers to the
pledged if after the first and second auctions, the creditor or to a third person a movable or document
thing is not sold. (Art 2112) evidencing incorporeal rights for the purpose of
securing fulfilment of a principal obligation with the
NOTE: The security contract remains valid; only understanding that when the obligation is fulfilled,
the prohibited stipulation is void. the thing delivered shall be returned with all its
C. Capability to secure all kinds of obligations, fruits and accessions.
i.e. pure or conditional (Art 2091)
 Special Requisites (in addition to the common
D. Indivisibility (Art 2089) essential requisites):
GENERAL RULE: A pledge, mortgage, or antichresis 1. Possession of the thing pledged must be transferred
is indivisible, even though the debt may be divided to the creditor or a third person by agreement (Art
among the successors in interest of the debtor or of 2093);
the creditor. 2. It can only cover movable property and incorporeal
 Their indivisibility is not affected by the fact that rights evidenced by documents of title and the
the debtors are jointly or not solidarily liable. instruments proving the right pledged shall be
delivered to the creditor, and if negotiable must be
Consequences of indivisibility: endorsed (Art 2094); and
1. Single thing – Every portion of the property 3. The description of the thing pledged and the date
pledged or mortgaged is answerable for the must appear in a public instrument to bind third
whole obligation persons, but not for the validity of the contract (Art
2. Several things – All of the several things pledged 2096).
or mortgaged are liable for the totality of the
debt  Kinds:
3. Debtor’s heir/creditor’s heir - Neither the 1. Conventional /Voluntary – created by contract
debtor’s heir who has paid part of the debt 2. Legal – created by operation of law (examples: Art.
cannot ask for proportionate extinguishment, nor 546, 1731 and 1914 NCC)
creditor’s heir who received his share of the debt
return the pledge or cancel the mortgage as long NOTES:
as the debt is not completely satisfied.  The provisions of possession, care and sale of the
thing as well as on the termination of the pledge
EXCEPTIONS: governing conventional pledges are applicable to
1. Where each one of several things guarantees pledges created by operation of law (Art 2121)
a determinate portion of the credit  Unlike, however, in conventional pledge where the
2. Where only a portion of the loan was released debtor is not entitled to the excess unless it is
3. Where there was failure of consideration. otherwise agreed, in legal pledge, the remainder of
4. Where there is no debtor-creditor the price of the sale after payment of the debt and
relationship expenses, shall be delivered to the debtor.
 In legal pledge, there is no definite period for the
NOTES:
payment of the principal obligation. The pledgee
 The mere embodiment of a real estate mortgage must make a demand for the payment of the amount
and a chattel mortgage in one document does not due him; otherwise he cannot exercise the right of
have the effect of fusing both securities into an sale at public auction (Art 2122)
indivisible whole.
 The mortgagee, therefore, may legally foreclose Characteristics:
the real estate mortgage extrajudicially and 1. Real contract – it is
waive the chattel mortgage foreclosure, and perfected by the delivery of the thing pledged by
maintain instead a personal action for the the debtor who is called the pledgor to the creditor
recovery of the unpaid balance of the credit who is called the pledgee, or to a third person by
(Phil. Bank of Commerce vs. Macadaeg, 109 Phil common agreement;
981) 2. Accessory contract – it
has no independent existence of its own;
E. When the principal obligation becomes due, 3. Unilateral contract – it
the things in which the pledge, mortgage, or creates an obligation solely on the part of the
antichresis consists may be alienated for the creditor to return the thing subject thereof upon
payment to the creditor. (Art. 2087) the fulfilment of the principal obligation; and
4. Subsidiary contract – the
NOTES: obligation incurred does not arise until the
 If the debtor fails to comply with the obligation fulfilment of the principal obligation which is
at the time it falls due, the creditor is merely secured.
entitled to move for the sale of the thing pledged
or mortgaged in order to collect the amount of Consideration in pledge:
his claim from the proceeds.  Insofar as the pledgor is concerned, the cause is the
 If he wishes to secure a title to the mortgaged principal obligation.
property, he can buy it in the foreclosure sale  If the pledgor is not the debtor, the cause is the
(Montevirgin vs. CA, 112 SCRA 641) compensation stipulated for the pledge or the mere
liberality of the pledgor.
 22. To retain the thing until after full payment of the
Extent of pledge: Unless stipulated otherwise, debt (Art 2098)
pledge extends to the fruits, interests or earnings of 23. To be reimbursed for the expenses made for the
the thing. preservation of the thing pledged (Art 2099)
24. To object to the alienation of the thing
Rights and Obligations of a Pledgor 25. To possess the thing (Art 2098)
Rights Obligations 26. To sell at public auction in case of non-payment of
1. To demand return in 1. To advise the debt at maturity (Art 2112)
case of reasonable pledgee of the 27. To choose which of the several things pledged shall
grounds to fear flaws of the thing be sold (Art 2119)
destruction or (Art 2101)
impairment of the thing 2. Not to demand Obligations of the Pledgee
without the pledgee’s the return of the
fault, subject to the thing until after
KEY: CUDA3
duty of replacement full payment of 1. Take care of the thing with the diligence of a good
(Art 2107) the debt, father of a family (Art 2099)
2. To bid and be including interest 2. Not to use thing unless authorized or by the owner or
preferred at the public due thereon and its preservation requires its use (Art 2104)
auction (Art 2113) expenses incurred 3. Not to deposit the thing with a 3 rd person unless so
3. To alienate the thing for its stipulated (Art 2100)
pledged provided the preservation (Art 4. Responsibility for acts of agents and employees as
pledgee consents to the 2105) regards the thing (Art 2100)
sale (Art 2097)
4. To ask that the thing
5. To advise pledgor of danger to the thing (Art 2107)
pledged be deposited 6. To advise pledgor of the result of the public auction
(Arts 2104 & 2106) (Art 2116)

Rights of the Pledgee RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED

KEY: D SBC BA2R2OPS2 (ART.2107)
1. Option to demand replacement or immediate  Requisites:
payment of the debt in case of deception as to 1. The pledgor has reasonable grounds to fear the
substance or quality (Art 2109) destruction or impairment of the thin pledged
2. To sell at public auction in case of reasonable 2. There is no fault on the part of the pledgee
grounds to fear destruction or impairment of the 3. The pledgor is offering in place of the thing,
thing without his fault (Art 2108) another thing in pledge which is of the same kind
3. To bring actions pertaining to the owner (Art and quality as the former
2103) 4. The pledge does not choose to exercise his right
4. To choose which of several things pledged shall to cause the thing pledged to be sold at public
be sold auction
5. To bid at the public auction (Art 2113) NOTE: The pledgee’s right to have the thing pledged sold
6. To appropriate the thing in case of failure of the at public sale granted under the Article 2108 is superior
2nd public auction (Art 2112) to that given to the pledgor to substitute the thing
7. To apply said fruits, interests or earnings to the pledged under Article 2107.
interest, if any, then to the principal of the credit
(Art 2102)
8. To retain excess value received in the public sale
(Art 2115) Prohibition against double pledge
9. To retain the thing until after full payment of the  Property which has been lawfully pledged to one
debt (Art 2098) creditor cannot be pledged to another as long as the
10. To be reimbursed for the expenses made for the first one subsists.
preservation of the thing pledged (Art 2099) NOTE: Possession of a creditor of the thing pledged is an
11. To object to the alienation of the thing essential requisite of pledge.
12. To possess the thing (Art 2098)
13. To sell at public auction in case of non-payment Extinguishment of Pledge (CRAPS)
of debt at maturity (Art 2112) 1. For the same causes as all other obligations (Art
To choose which of the several things pledged shall 1231)
be sold (Art 2119) 2. Return of the thing pledged by the pledgee to the
14. Option to demand replacement or immediate pledgor (Art 2110)
payment of the debt in case of deception as to 3. Statement in writing by the pledgee that he
substance or quality (Art 2109) renounces or abandons the pledge (Art 2111)
15. To sell at public auction in case of reasonable 4. Payment of the debt (Art 2105)
grounds to fear destruction or impairment of the 5. Sale of thing pledged at public auction (Art 2115)
thing without his fault (Art 2108) NOTE: The possession by the debtor or owner of the
16. To bring actions pertaining to the owner (Art thing pledged subsequent to the perfection of the pledge
2103) gives rise to a prima facie presumption that the thing has
17. To choose which of several things pledged shall been returned and, therefore, that the pledge has been
be sold extinguished but not the principal obligation itself. (Art
18. To bid at the public auction (Art 2113) 2110)
19. To appropriate the thing in case of failure of the
2nd public auction (Art 2112) Requirements for sale of thing pledged at public
20. To apply said fruits, interests or earnings to the auction: (Art 2112)
interest, if any, then to the principal of the credit 1. The debt is due and unpaid
(Art 2102) 2. Sale must be at a public auction
21. To retain excess value received 3. there must be notice to the pledgor and owner,
in the public sale (Art 2115) stating the amount due
4. Sale must be with the intervention of a notary  An order for foreclosure cannot be refused on the
public ground that the mortgage had not been
registered provided no innocent third parties are
Effect of sale of the thing pledged: (Art 2115) involved.
1. The sale of the thing pledged shall extinguish the NOTE: Where a mortgage is not valid or false, the
principal obligation, whether or not the proceeds principal obligation which it guarantees is not rendered
of the sale are equal to the amount of the null and void. What is lost only is the right to foreclose
principal obligation, interest and expenses in a the mortgage as a special remedy for satisfying or
proper case settling the indebtedness which is the principal
2. If the price of the sale is more than the amount obligation but the mortgage deed remains as evidence or
due the creditor, the debtor is not entitled to the proof of a personal obligation of the debtor and the
excess unless the contrary is provided amount due to the creditor may be enforced in an
3. If the price of the sale is less, the creditor is not ordinary personal action.
entitled to recover the deficiency even if there is
a stipulation to that effect  Kinds:
1. Voluntary – agreed to by the parties or constituted by
REAL ESTATE MORTGAGE (Articles 2124-2131) the will of the owner of the property on which it is
 A contract whereby the debtor secures to the created
creditor the fulfilment of a principal obligation, 2. Legal – one required by law to be executed in favour
specially subjecting to such security immovable of certain persons
property or real rights over immovable property  The persons in whose favour the law establishes a
in case the principal obligation is not complied mortgage have no other right than to demand the
with at the time stipulated. execution and the recording of the document in
which the mortgage is formalized (Art 2125 par
Characteristics of the contract: 2)
1. Real 3. Equitable – one which, although lacking the
2. Accessory formalities of a mortgage, shows the intention of the
3. Subsidiary parties to make the property a security for a debt
4. Unilateral – it creates only an obligation on
the part of the creditor who must free the PLEDGE REAL MORTGAGE
property from the encumbrance once the 1. Constituted on 1. Constituted on
obligation is fulfilled. movables immovables
NOTES: 2. Property is 2. Delivery is not
 As an accessory contract, its consideration is that delivered to pledgee necessary
or by common
of the principal contract from which it receives consent to a third
life. person
 A mortgage does not involve a transfer, cession or 3. Not valid against 3. Not valid against
conveyance of property but only constitutes a third persons unless a third persons unless
lien thereon. Until discharged, it follows the description of the registered
property wherever it goes and subsists thing pledged and
notwithstanding changes of ownership. date of pledge
appear in a public
 A mortgage gives the mortgagee no right or claim instrument
to the possession of the property, and therefore,
a mere mortgagee has no right to eject an Extent of Mortgage:
occupant of the property mortgaged unless the  Absent express stipulation to the contrary, the
mortgage should contain some provision to that mortgage includes the accessions, improvements,
effect. The only right of a mortgagee in case of growing fruits and income of the property not yet
non-payment of a debt secured by mortgage received when the obligation becomes due and to the
would be to foreclose the mortgage and have the amount of the indemnity granted or owing to the
encumbered property sold to satisfy the proprietor from the insurers of the property
outstanding indebtedness. If the possession is mortgaged, or in virtue of expropriation for public
transferred to the mortgagee, it must not use (Art 2127)
expressly be for purpose of applying the fruits to
the interest then to the principal of the credit, Object of Mortgage:
for then it would be an antichresis.  Future property cannot be an object of a contract of
 It is not an essential requisite that the principal mortgage (Art 2085[2]) However, a stipulation
of the mortgage credit bears interest, or that the subjecting to the mortgage lien, properties
interest as compensation for the use of the (improvements) which the mortgagor may
principal and enjoyment of its fruits be in the subsequently acquire install, or use in connection
form of a certain percent thereof. with real property already mortgaged belonging to
the mortgagor is valid (People’s Bank and Trust Co.
 Special Requisites (in addition to the common vs. Dahican Lumber Co., 20 SCRA 84)
essential requisites):
1. It can cover only immovable property and Special Rights:
alienable real rights imposed upon immovables 1. Mortgagor - To alienate the mortgaged property but
(Art 2124); the mortgage shall remain attached to the property.
2. It must appear in a public instrument (Art. 2125);
and NOTE: A stipulation forbidding the owner from alienating
3. Registration in the registry of property is the immovable mortgage shall be void (Art 2130) being
necessary to bind third persons, but not for the contrary to public policy inasmuch as the transmission of
validity of the contract (Art 2125). property should not be unduly impeded.
2. Mortgagee - To claim from a 3rd person in claims to have suffered by reason of the price
possession of the mortgaged property the obtained at the auction sale and consequently not
payment of the part of the credit secured by the sufficient to set aside the sale. Mere inadequacy of
which said third person possesses (Art 2129) the price obtained at the sheriff’s sale will not be
NOTE: It is necessary that prior demand for payment sufficient to set aside the sale unless “the price is so
must have been made on the debtor and the latter inadequate as to shock the conscience of the court”
failed to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil taking into consideration the peculiar circumstances
906) attendant thereto. (Sulit vs. CA, 268 SCRA 441)
 Should there remain a balance due to the mortgagee
Foreclosure after applying the proceeds of the sale, the
 The remedy available to the mortgagee by which mortgagee is entitled to recover the deficiency. This
he subjects the mortgaged property to the rule applies both to judicial and extra-judicial
satisfaction of the obligation to secure that for foreclosure real mortgage.
which the mortgage was given  The action to recover a deficiency after foreclosure
prescribes after 10 years from the time the right of
NOTES: action accrues (Arts 1142 & 1144).
 It denotes the procedure adopted by the
mortgagee to terminate the rights of the Stipulation of upset price or “tipo”
mortgagor on the property and includes the sale  It is a stipulation in a mortgage of real property of
itself (DBP vs Zaragoza, 84 SCRA 668) minimum price at which the property shall be sold,
 Foreclosure is valid where the debtor is in default to become operative in the event of a foreclosure
in the payment of his obligation (Gobonseng, Jr. sale at public auction. It is null and void for the
vs CA, 246 SCRA 472) property must be sold to the highest bidder. Parties
cannot, by agreement, contravene the law and
 Kinds: interfere with the lawful procedure of the courts (BPI
1. Judicial – ordinary action for foreclosure under vs Yulo, 31 Phil 476)
Rule 68 of the Rules of Court
2. Extrajudicial – when mortgagee is given a special Extrajudicial foreclosure real property (Act No. 3135)
power of attorney to sell the mortgaged property  The law covers only real estate mortgages. It is
by public auction, under Act No. 3135 intended merely to regulate the extrajudicial sale of
the property mortgaged if and when the mortgagee is
Judicial Extrajudicial given a special power of express authority to do so in
foreclosure foreclosure the deed itself or in a document annexed thereto.
1. There is court 1. No court  The authority to sell is not extinguished by the death
intervention intervention of the mortgagor (or mortgagee) as it is an essential
2. Decisions are 2. Not appealable and inseparable part of a bilateral agreement (Perez
appealable because it is vs PNB, 17 SCRA 833).
immediately  No sale can be legally made outside the province in
executory
which the property sold is situated; and in case the
3. Order of court 3. Foreclosure does
cuts off all rights of not cut off right of
place within said province in which the sale is to be
the parties all parties involved made is the subject of stipulation, such sale shall be
impleaded made in the said place in the municipal building of
4. There is equity 4. There is right of the municipality in which the property or part
of redemption redemption thereof is situated.
except on banks
which provides for Procedure for extrajudicial foreclosure of both real
a right of estate mortgage under Act No. 3135 and chattel
redemption mortgage under Act No. 1508 (A.M. No. 99-10-05-0,
5. Period of 5. Period to redeem
January 15, 2000)
redemption starts start from date of
from the finality of registration of
1. Filing of application before the Executive Judge
the judgment until certificate of sale through the Clerk of Court
order of 2. Clerk of Court will examine whether the requirement
confirmation of the law have been complied with, that is, whether
6. No need for a 6. Special power of the notice of sale has been posted for not less than
special power of attorney in favor of 20 days in at least three (3) public places of the
attorney in the mortgagee is municipality or city where the property is situated,
contract of needed in the and if the same is worth more than P400.00, that
mortgage contract such notice has been published once a week for at
least three (3) consecutive weeks in a newspaper of
NOTES: general circulation in the city of municipality
 A foreclosure sale retroacts to the date of 3. The certificate of sale must be approved by the
registration of the mortgage and that a person Executive Judge
who takes a mortgage in good faith and for 4. Where the application concerns extrajudicial
valuable consideration, the record showing clear foreclosure of real mortgages in different locations
title to the mortgagor, will be protected against covering one indebtedness, only one filing fee
equitable claims on the title in favor of third corresponding to such debt shall be collected
persons, of which he had no actual or 5. The Clerk of Court shall issue certificate of payment
constructive notice (St. Dominic Corporation vs. indicating the amount of indebtedness, the filing fees
IAC 151 SCRA 577). collected, the mortgages sought to be foreclosed,
 Where there is a right to redeem, inadequacy of the description of the real estates and their
price is not material because the judgment respective locations
debtor may reacquire the property or else sell his
right to redeem and thus recover any loss he
6. The notice of sale shall be published in a sale. Applies to judicial foreclosure of real mortgage
newspaper of general circulation pursuant to and chattel mortgage foreclosure.
Section 1, PD No. 1079 NOTE: Redemption of the banking institutions is allowed
7. The application of shall be raffled among all within one year from confirmation of sale.
sheriffs
8. After the redemption period has expired, the 2. Right of Redemption – right of mortgagor to redeem
Clerk of Court shall archive the records. the mortgaged property within one year from the
9. No auction sale shall be held unless there are at date of registration of the certificate of sale. Applies
least two (2) participating bidders, otherwise the only to extrajudicial foreclosure of real mortgage.
sale shall be postponed to another date. If on
the new date set forth for the sale there shall not NOTE: The right of redemption, as long as within the
be at least two bidders, the sale shall then period prescribed, may be exercised irrespective of
proceed. The names of the bidders shall be whether or not the mortgagee has subsequently conveyed
reported to the Sheriff of the Notary Public, who the property to some other party (Sta. Ignacia Rural
conducted the sale to the Clerk of Court before Bank, Inc. vs. CA, 230 SCRA 513)
the issuance of the certificate of sale.
Period of Redemption
NOTES: 1. Extra-judicial (Act #3135)
 The Mortgagor and Mortgagee have no right to a. natural person – one year from registration of
waive the posting and publication requirements the certificate of sale with Registry of Deeds
under Act. No. 3135. Notices are given to secure b. juridical person – same rule as natural person
bidders and prevent a sacrifice of the property. c. juridical person (mortgagee is bank) - three
Clearly, the statutory requirements of posting months after foreclosure or before registration
and publication are mandated, not for the of certificate of foreclosure which ever is earlier
mortgagor’s benefit, but for the public or third (sec. 47, of General Banking Law)
persons. Failure to comply with the statutory 2. Judicial – before confirmation of the sale by the
requirements as to publication of notice of court
auction sale constitutes a jurisdictional defect
which invalidates the [Link] of republication NOTE: Allowing a redemption after the lapse of the
of notice of foreclosure sale made subsequently statutory period, when the buyer at the foreclosure sale
after the original date renders such sale void does not object but even consents to the redemption,
(PNB vs. Nepomuceno Productions Inc., G.R. No. will uphold the policy of the law which is to aid rather
139479. December 27, 2002). than defeat the right of redemption. There is nothing in
 Sec 3 of Act 3135 does not require personal or the law which prevents a waiver of the statutory period
any particular notice on the mortgagor much less for redemption (Ramirez vs CA, 219 SCRA 598).
on his successors-in-interest where there is no
contractual stipulation therefor. Hence, unless Amount of the redemption price:
required in the mortgage contract, the lack of 1. Mortgagee is not a bank (Act No. 3135, in relation to
such notice is not a ground to set aside a Sec. 28, Rule 39 of Rules of Court)
foreclosure sale. a. purchase price of the property
 Neither does Sec 3 require posting of notice of b. 1% interest per month on the purchase price
c. taxes paid and amount of purchaser’s prior lien,
sale on the mortgage property and the certificate
if any, with the same rate of interest computed
of posting is not required, much less considered
from the date of registration of sale, up to the
indispensable, for the validity of a foreclosure
time of redemption
sale.
2. Mortgagee is a bank (GBL 2000)
a. amount due under the mortgage deed
Redemption
b. interest
 It is the transaction by which the mortgagor
c. cost and expenses
reacquires or buys back the property which may
NOTE: Redemption price in this case is reduced by
have passed under the mortgage, or divests the
the income received from the property
property of the lien which the mortgage may
have created.
ANTICHRESIS (Articles 2132 -2139)
NOTES:
 A sale by the mortgagor to a third party of the  A contract whereby the creditor acquires the right to
mortgaged property during the period for receive the fruits of an immovable of the debtor,
redemption transfers only the right to redeem with the obligation to apply them to the payment of
the property and the right to possess, use and the interest, if owing, and thereafter to the principal
enjoy the same during said period. of his credit (Art 2132)
 Where sale with assumption of mortgage not
registered and made without the consent of the Characteristics
mortgagee, the buyer, thereof, was not validly 1. Accessory contract – it secures the performance of a
substituted as debtor and, hence, had no right to principal obligation
redeem (Bonnevie vs. CA, 125 SCRA 122). 2. Formal contract – it must be in a specified form to be
valid, i.e., “in writing.” (Art 2134)
 Kinds:
1. Equity of Redemption – right of mortgagor to  Special Requisites (in addition to the common
redeem the mortgaged property after his default essential requisites):
in the performance of the conditions of the 1. It can cover only the fruits of an immovable
mortgage within the 90-day period from the date property; (Art 2132)
of the service of the order of foreclosure or even 2. Delivery of the immovable is necessary for the
thereafter but before the confirmation of the creditor to receive the fruits and not that the
contract shall be binding;
3. Amount of principal and interest must be NOTES:
specified in writing (Art. 2134); and
4. Express agreement that debtor will give
Section III.1 The parties, however, may agree
possession of the property to creditor and that on an extrajudicial foreclosure in the same manner as
the latter will apply the fruits to the interest, if they are allowed in contracts of mortgage and pledge
any, then to the principal of his credit. (Art 2132) (Tavera vs. El Hogar Filipino, Inc., 68 Phil 712).
Section III.2A stipulation authorizing the antichretic
NOTE: The obligation to pay interest is not of the creditor to appropriate the property upon the non-
essence of the contract of antichresis, there being payment of the debt within the agreed period is void (Art
nothing in the Code to show that antichresis is only 2088).
applicable to securing the payment of interest-
bearing loans. On the contrary, antichresis is CHATTEL MORTGAGE (Articles 2140-2141)
susceptible of guaranteeing all kinds of obligations,
pure or conditional  A contract by virtue of which personal property is
recorded in the Chattel Mortgage Register as a
security for the performance of an obligation (Art
Antichresis Pledge
1. Refers to real 1. Refers to personal
2140).
property property
2. Perfected by mere 2. Perfected by Characteristics
consent delivery of the thing 1. Accessory contract – it is for the purpose of securing
pledged the performance of a principal obligation
3. Consensual contract 3. Real Contract 2. Formal contract – registration in the Chattel
Mortgage Register is indispensable for its validity
3. Unilateral contract – it produces only obligations on
Antichresis Real Mortgage the part of the creditor to free the thing from the
1. Property is 1. Debtor usually encumbrance on fulfilment of the obligation.
delivered to creditor retains possession of
the property  Special Requisites (in addition to the common
2. Creditor acquires 2. Creditor does not essential requisites):
only the right to have any right to 1. It can cover only personal or movable property in
receive the fruits of receive the fruits;
general; however, the parties may treat as personal
the property, hence, but the mortgage
it does not produce a creates a real right property that which by its nature would be real
real right over the property property;
3. The creditor, 3. The creditor has 2. Registration of the mortgage with the Chattel
unless there is no such obligation Mortgage Register where the mortgagor resides; if
stipulation to the property is located in a different province,
contrary, is obliged registration in both provinces required;
to pay the taxes and 3. Description of the property as would enable the
charges upon the parties or other persons to identify the same after
estate reasonable investigation and inquiry; and
4. It is expressly 4. There is no such
4. Accompanied by an affidavit of good faith to bind
stipulated that the obligation on part of
creditor given mortgagee third persons, but not for the validity of the
possession of the contract.
property shall apply 5. It can cover only obligations existing at the time the
all the fruits thereof mortgage is constituted.
to the payment of NOTE: A mortgage containing a stipulation in regard
interest, if owing, to future advances in the credit will take effect only
and thereafter to the from the date the same are made and not from the
principal date of the mortgage (Jaca vs Davao Lumber Co.,
Subject matter of both is real property 113 SCRA 107)
Obligations of antichretic creditor: Effect of registration: Creates a real right
1 To pay taxes and charges on the estate, including  The registration of the chattel mortgage is an
necessary expenses effective and binding notice to other creditors of its
NOTE: Creditor may avoid said obligation by: existence and creates a real right or a lien which,
a. compelling debtor to reacquire being recorded, follows the chattel wherever it goes.
enjoyment of the property or The registration gives the mortgagee symbolical
b. by stipulation to the contrary possession (Northern Motors, Inc. vs. Coquia, 68
2 To apply all the fruits, after receiving them, to SCRA 374).
the payment of interest, if owing, and thereafter
to the principal Effect of failure to register chattel mortgage in the
3 To render an account of the fruits to the debtor chattel mortgage registry
4 To bear the expenses necessary for its  Article 2140 makes the recording in the Chattel
preservation and repair Mortgage Register an essential requisite but if the
instrument is not recorded, the mortgage is
Remedies of creditor in case of non-payment of nevertheless binding between the parties. But the
debt person in whose favour the law establishes a
mortgage has no other right than to demand the
Article II. Bring an action for specific execution and the recording of the document.
performance; or
Article III. Petition for the sale of the real
property as in a foreclosure of mortgages under Rule
68 of the Rules of Court.(Art 2137)
 Chattel Mortgage Pledge  The creditor may maintain an action for the
deficiency, except if the chattel mortgage is
1. Delivery of the 1. Delivery of the thing
constituted as security for the purchase of personal
personal property to the pledged is necessary
property payable in instalments (Art. 1484).
mortgage is not
necessary  The action for deficiency may be brought within ten
2. registration in the 2. registration not (10) years from the time the cause of action accrues
Chattel Mortgage necessary to be valid (Arts 1141 and 1142).
Registry is necessary for  Only equity of redemption is available to the
its validity mortgagor; the latter can no longer redeem after the
confirmation of the foreclosure sale.
3. If property is 3. Debtor is not entitled
foreclosed, the excess to excess unless Right of redemption
over the amount due otherwise agreed or  When the condition of a chattel mortgage is broken
goes to the debtor except in case of legal the following may redeem:
pledge a) mortgagor;
b) person holding a subsequent mortgage; or
4. If there is deficiency 4. If there is deficiency, c) subsequent attaching creditor.
after foreclosure, creditor is not entitled  An attaching creditor who so redeems shall be
creditor is entitled to to recover subrogated to the rights of the mortgagee and
recover the deficiency notwithstanding any entitled to foreclose the mortgage in the same
from the debtor, except stipulation to the manner that the mortgagee could foreclose it.
under Art. 1484 contrary
 The redemption is made by paying or delivering to
the mortgagee the amount due on such mortgage and
Subject matter of both is movable property the costs, and expenses incurred by such breach of
condition before the sale thereof (Sec 13, Act No.
1508).
Affidavit of Good Faith
 Oath in a contract of chattel mortgage wherein Right to possession of foreclosed property
the parties "severally swear that the mortgage is 1. Real mortgage – After the redemption period has
made for the purpose of securing the obligation expired, the purchaser of the property has the right
specified in the conditions thereof and for no to a conveyance and to be placed in possession
other purposes and that the same is a just and thereof.
valid obligation and one not entered into for the
purpose of fraud.” (Sec. 5, Chattel Mortgage Law) NOTES:
 Purchaser is not obliged to bring a separate suit
Effect of absence for possession. He must invoke the aid of the
The special affidavit is required only for the courts and ask for a WRIT OF POSSESSION.
purpose of transforming an already valid  Section 7 of Act No. 3135 allows the purchaser to
mortgage into “preferred mortgage.” Thus, it is take possession of the foreclosed property during
not necessary for the validity of the chattel the period of redemption upon filing of an ex
mortgage itself but only to give it a preferred parte application and approval of a bond.
status. In other words, its absence vitiates the
mortgage only as against third persons without 2. Chattel mortgage – When default occurs and the
notice like creditors and subsequent creditor desires to foreclose, the creditor has the
encumbrancers. right to take the property as a preliminary step for
its sale.
Foreclosure of Chattel Mortgage NOTE: Where the debtor refuses to yield the
NOTES: property, the creditor’s remedy is to institute an
 Foreclosure sale in chattel mortgage is by public action either to effect judicial foreclosure directly or
auction under Act No. 1508, but the parties may to secure possession (REPLEVIN) as a preliminary to
stipulate that it be by private sale. the sale contemplated in Section 14 or Act. No. 1508
 The mortgagee may, after thirty (30) days from
the time of the condition broken, cause the
mortgaged property to be sold at public auction
by a public officer. The 30-day period is also a
grace period for the mortgagor to discharge the
mortgage obligation. After the sale of the chattel
at public auction, the right of redemption is no
longer available to the mortgagor (Cabral vs.
Evangelista, 28 SCRA 1000).

Application of proceed of sale:

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

NOTES: