NOTES IN CREDIT TRANSACTIONS BY: RENE CALLANTA

I. A.

GENERAL PROVISIONS Definitions of Credit or Security Tr ns ctions.

Credit transactions include all transactions involving the purchase of loan of goods, services or money in the present with a promise to pay or deliver in the future. > Without a promise to pay or deliver in the future, there can be no security transaction. B. P rties to B i!"ent.

1. Bailor (Comodatario# the giver, the party who delivers the possession or custody of the thing bailed. 2. Bailee (Comodante# the recipient; the party who receives the possession or custody of the thing thus delivered. C. 1. $inds of B i!"ent Contr ct. Those for the sole benefit of the bailor. 1.1 gratuitous deposit 1.2 mandatum Those for the sole benefit of the bailee 2.1 commodatun 2.2 gratuitous mutuum Those for the benefit of both parties 3.1 deposit for the compensation; involuntary deposit 3.2 pledge 3.3 bailments for hire Lo n in Gener ! Characteristics of the Contract

2.

3.

D. D.1

1. Real Contract because the delivery of the thing loaned is necessary for the perfection of the contract !rticle 1"3#; see also !rticle 131$%; and 2. Unilateral Contract because once the sub&ect matter has been delivered, it creates obligations on the part of only one of the parties, i. e. the borrower D.2 Kinds of Loan

1. Commodatum where the bailor lender% delivers to the bailee borrower% a non'consumable thing so that the latter may use it for a certain time and return the identical thing; and 2. Mutuum where the bailor lender% delivers to the bailee borrower% money or other consumable thing upon the condition that the latter shall pay same amount of the same (ind of )uality. \D. 3 Distinctions between Commodatum and Mutuum Co""od tu" %&ir "# 1. sub&ect matter is non' 'utuu" %(t n)# 1. sub&ect matter is money or

Page 1

consumable things 2. ownership retained by lender 3. essentially gratuitous #. borrower must return same thing loaned the

other consumable things 2. ownership borrower transferred to

3. may be gratuitous or onerous #. borrower need only pay the same amount of the same (ind and )uality *. involves property only personal

*. may involved real or personal property $. loan for use possession or temporary

$. loan for consumption +. no right to demand return before the lapse of the term agreed upon -. borrower suffers the loss even if the loss is caused e,clusively by a fortuitous event

+. right to demand the return of the thing loaned before e,piration of term in case of urgent need -. loss is shouldered by bailor since he is the owner

D.4 1.

Distinction between Commodatum (Hiram) and Lease (Upa) Commodatum is a real contract, whereas lease is a cosensual contract.

2. .he ob&ect of commodatum is a non'consumable nonfungible% thing, whereas the ob&ect of lease may even be wor( or service. 3. Commodatum is essentially gratuitous, whereas lease is not gratuitous.

II.
A. 1. 2. 3. #. *. $. +.

CO''ODAT('
C* r cteristics Gratuitous, otherwise it is a lease !rticle 1"3*% /urpose is the temporar use of the thing loaned !rticle 1"3*% 0ailee1s right to use is limited to the thin! loaned and not to its fruits !rticle 1"3*% unless there is stipulation to the contrary !rticle 1"#2% 3ub&ect matter is generally non"consumable things but may cover consumables if the purpose of the contract is for e,hibition. 0ailor need not to be the owner; it is sufficient that he has possessor interest over sub&ect matter !rticle 1"3-%. 4ommodatum is purel personal in character hence death of either bailor or bailee e,tinguishes the contract !rticle 1"3"% General Rule# 0ailee can neither lend nor lease the ob&ect of the contract to a third person. !ception5 6ember of bailee1s household

a% b%

contrary stipulation nature of thing forbids such use

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!ception to the e!ception5

B. 1. 2.

O+!i) tions of t*e B i!ee 0ailee is liable for ordinary e,penses for the use and preservation of the thing loaned. General Rule# 0ailee is not liable for loss or damage due to a fortuitous event because the bailor retains ownership% !ceptions" a% b% c% d% e% 0ailee devote thing to a different purpose 0ailee (eeps thing longer than the period stipulated or after accomplishment of the use for which commodatum was constituted. the

.hing loaned was delivered with appraisal of its value unless there is e,press stipulation to the contrary% 0ailee lends thing to a third person not a member of his household 0ailee, if being able to save either the thing borrowed or his own thing chose to save the latter

3.

0ailees are solidaril liable when the thing is loaned to two or more bailees in the same contract.

#ote" 1. G.R.,0ailee is not liable for ordinary wear and tear due to use of the thing loaned. E-ce.tions5 a.% b.% 7f he is guilty of fault or negligence 7f he devotes thing to any purpose different from that for which it has been loaned.

2. 0ailee cannot retain the thing loaned as security for claims he has against the bailor, even though by reason of e,traordinary e,penses. C. O+!i) tions of B i!or

1. .o allow the bailee the use of the thing loaned for the duration of period stipulated or until the accomplishment of the purpose for which commodatum was constituted. !ceptions5 a. b. b.1 b.2 b.3 urgent need during which time the commodatum is suspended. precarium if duration of the contract has not been stipulated if use or purpose of the thing has not been stipulated if use of thing is merely tolerated by the bailor

2. .o refund e,traordinary e,penses for the preservation of the thing loaned pro$ided bailor is notified before the e,penses were incurred. %&ception5 urgent need hence no notice is necessary.

3. .o refund *28 of the e,traordinary e,penses arising from actual use of the thing loaned i.e. caused by fortuitous event% %&ception5 contrary stipulation

#. .o pay damages to bailee for (nown hidden flaws in the thing loaned. #ote5 1. 0ailor has the right to demand return of the thing if bailee commits any act of ingratitude.

D.

Recent /uris.rudence on Co""od tu"

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Catholic 'icar (postolic of the Mountain )ro$ince $s. Court of (ppeals 1$* 349! *1*% /rivate respondents were able to prove that their predecessors1 house was borrowed by petitioner :icar after the church and the convent were destroyed. .hey never as(ed for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. .he bailee1s failure to return the sub&ect matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. .he bailee held in trust the property sub&ect matter of commodatum. .he adverse claim of petitioner came only in 1"*1 when it declared the lots for ta,ation purposes. .he action of petitioner :icar by such adverse claim could not ripen into title by way of ordinary ac)uisitive prescription because of the absence of &ust title.

III.
A.

SI'PLE LOAN OR '(T(('

Definition

Mutuum is a contract whereby one of the parties delivers to another party money or other consumable thing with the understanding that the same amount of the same (ind and )uality shall be paid. B. C* r cteristics

1. 0orrower ac)uires ownership of the thing and can therefore dispose of the thing borrowed. .here is no criminal liability for failure to pay one1s debt. 2. 7f the thing loaned is money, payment must be made in the currency which is legal tender in the /hilippines and in case of e,traordinary deflation or inflation, the basis of payment shall be the value of the currency at the time of the creation of the obligation. 3. 7f fungible thing was loaned, the borrower is obliged to pay the lender another thing of the same (ind, )uality and )uantity. C. Distinctions +et0een 'utuu" %(t n)# nd Le se %(. #

1. 7n mutuum* the ob&ect is money or any consumable fungible% thing, whereas in lease* the ob&ect may be any thing, whether movable or immovable, fungible or nonfungible. 2. 7n mutuum, the thing loaned becomes the property of the debtor, whereas in lease, the owner does not lose his right of ownership. 3. 7n mutuum* the relationship which is created is that of creditor and debtor, whereas in lease, the relationship that is created is that of landlord and tenant or lessor and lessee .olentino vs. ;on<ales, *2 /hil. **-%. D. 1. Ru!es on Interest +n order that interest ma be char!ed* it must be e&pressl stipulated in ,ritin! !rticle 1"*$%. !ceptions" 1. =ebtor in delay is liable to pay legal interest as indemnity for damages even in the absence of stipulation for the payment of interest !rticle 222"% 2. 7nterest due shall earn interest compounding interest% from the time it is &udicially demanded although the obligation may be silent upon this point !rticle 2212% or when there is e,press stipulation !rticle 1"*"%. E. Recent /uris.rudence on 'utuu" %Lo n# -rancisco $s. Gre!orio 11* 349! 3"#% >o interest is due where there was tender of payment prior to demand to pay or perform an agreed act. ! debtor cannot be considered in delay who offered a chec( bac(ed by sufficient deposit or ready to pay cash if the creditor chose that means of payment.

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.tate +n$estment /ouse $s. Court of (ppeals 1"- 349! 3"2% .he appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money, is the payment of the penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate e)ual to the regular monetary interest, and if no regular interest had been agreed upon, then payment of legal interest. Tio 0he Chio $s. Court of (ppeals 222 349! 11"% 4ircular >o. #1$ of the 4entral 0an( which too( effect on ?uly 2", 1"+# pursuant to /residential =ecree >o. 11$ @sury Aaw% raised the legal rate of interest from si, $8% percent to twelve 128% percent. .he ad&usted rate mentioned in the circular refers only to loans or forbearances of money, goods or credits and court &udgments thereon but not to court &udgments for damages arising from in&ury to persons and loss of property which does not involve a loan. 7n the case of )hilippine Rabbit 1us 2ines* +nc. $s. Cru3 , ;.9. >o. +121+, ?uly 2-, 1"-$, 1#3 349! 1*-, the 4ourt declared that the legal rate of interest is si, $8% percent per annum and not twelve 128% percent, where a &udgment award is based on an action for damages for personal in&ury, not use or forbearance of money, goods or credit. 7n the same vein, the 4ourt held in G.+. $s. Court of (ppeals, ;.9. >o. *2#+-, Bctober 32, 1"-$, 1#* 349! 311, that the rates under the @sury Aaw amended by /. =. 11$% are applicable only to interest by way of compensation for the use or forbearance of money; interest by way of damages is governed by !rticle 222" of the 4ivil 4ode. %astern .hippin! 2ines* +nc. $s. C( 23# 349! +-% 1. 2. 3. 7n a loan, the interest due should be that stipulated in writing and in the absence thereof, the rate shall be 128 per annum. 7n case of other obligations, interest on the amount of damages may be imposed at the court1s discretion at the rate of $8 per annum. When the money &udgment becomes final and e,ecutory, the rate of legal interest shall be 128 per annum from such finality until its satisfaction, the interim period being an e)uivalent to a forbearance of credit. G.+. '.. Court of (ppeals 21- 349! 233% 4entral 0an( 4ircular >o. #1$ applies only to interest on loans. (. C. %nterprises* +nc. $s. Construction +ndustr (rbitration Commission 4C+(C5 2## 349! **% a.% b.% Bbligation not based on a loan or forbearance of money is not covered by 40 4ircular >o. #1$. Aegal interest of 128 p. a. shall only be ad&udged in cases involving loan or forbearance under 40 4ircular >o. #1$. )61 $s. C( 23$ 349! 22% /residential =ecree >o. 1$-# and 40 4ircular >o. "2* did not authori<e either party to unilaterally raise the interest rate without the other1s consent.

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Rui3 $s. Caneba 1"1 349! -$*% Where the court1s &udgment which did not provide for the payment of interest has already become final, no interest may be awarded. .an!rador $s. 'illarama 1$- 349! 21*% .hat there is no longer any ceiling on interest or interest rates on loans 2iam 2a, $s. 7l mpic .a,mill Co., 12" 349! #3" C1"-#D% applies only where the parties openly and e,pressly agree on a specific rate of interest to accrue on the loan. Where the interest rate is not e,pressly stipulated, the loan shall earn 128 interest per annum. +nsular 1an8 of (sia and (merica 's. .pouses .ala3ar 1*" 349! 133% 7t is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money on long term contracts. Eowever, the enforcement of such stipulations are sub&ect to certain conditions. 1anco -ilipino $s. 6a$arro 1*2 349! 3#$% and )61 $s. +ntermediate (ppellate Court 1-3 349! 133% !n escalation clause can be valid only if it also includes a de'escalation clause or a stipulation that the rate of interest agreed upon shall be reduced in the event that the ma,imum rate of interest is reduced by law or by 6onetary 0oard. 2lorin $s. Court of (ppeals 21- 349! #3$% !n escalation clause must be bilateral hence it must provide for reduction or de' esclation of interest for said clause to be valid. (lmeda $s. Court of (ppeals 2*$ 349! 2"2% The bindin! effect of an a!reement bet,een parties to a contract is premised on t,o settled principles5 %1# that any obligation arising from contract has the force of law between the parties; and %2# that there must be mutuality between the parties based on their essential e)uality. !ny contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. !ny stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is li(ewise invalid. 6oreover, respondent ban(1s reliance on 4. 0. 4ircular >o. "2*, 3eries of 1"-2 did not authori<e the ban(, or any lending institution for that matter, to progressively increase interest rates on borrowings to an e,tent which would have made it virtually impossible for debtors to comply with their own obligations. .rue, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. 3uch clauses, however, as are stipulations in other contract% are nonetheless still sub&ect to laws and provisions governing agreements between parties, which agreement while they may be the law between the contracting parties'implicitly incorporate provisions of e,isting law. 4onse)uently, while the @sury Aaw ceiling on interest rates was lifted by 4. 0. 4ircular >o. "2*, nothing in the said circular could possibly be read as granting respondent ban( carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Fscalation clauses are not basically wrong or legally ob&ectionable so long as they are not solely potestative, but based on reasonable and valid grounds. Eere, as clearly demonstrated above, not only are% the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

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)61 $s. Court of (ppeals 2*- 349! *#"% .o begin with, />01s argument rests on a misapprehension of the import of the appellate court1s ruling. .he 4ourt of !ppeals nullified the interest rate increases not because the promissory note did not comply with /.=. >o. 1$-# by providing for a de' escalation, but because the absence of such provision made the clause so one'sided as to ma(e it unreasonable. .hat ruling is correct. 7t is in line with our decision in 1anco -ilipino .a$in!s 9 Mort!a!e 1an8 $s. 6a$arro 1*2 349! 3#2% that although /. =. >o. 1$-# is not to be retroactively applied to loans granted before its effectivity there must nevertheless be a de' escalation clause to mitigate the one'sidedness of the escalation clause. 7ndeed because of concern for the une)ual status of borrowers vis'G'vis the ban(s, our cases after 0anco Hilipino have fashioned the rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of agreement between the parties. 7n this case no attempt was made by />0 to secure the conformity of private respondents to the successive increases in the interest rate. /rivate respondents assent to the increases can not be implied from their lac( of response to the letters sent by />0, informing them of the increases. Hor as stated in one case )61 $s. C(, 23- 349! 22% C1""#D%, no one receiving a proposal to change a contract is obliged to answer the proposal. 2iam 2ao $s. 7l mpic .a,mill 12" 349! #3"% @sury is now legally non'e,istent. 7nterest can be charged as lender and borrower may agree upon. .he 9ules of 4ourt in regard to allegations of usury, being procedural in nature, should be considered repealed with retroactive effect. +ssue# 7f the debtor is sued by the creditor for the recovery of loan together with interest, does the failure of the creditor to file a reply denying under oath the defense or usury amount to an admission thereofI /eld# >o. 7t is the failure of the creditor to deny under oath in his answer to a complaint filed by the debtor against him for the recovery of usurious interest he has collected that is contemplated by 3ection " of the @sury Aaw as an admission of usury. 7t does not apply to the present case where the creditor is the plaintiff see(ing the recovery of a loan together with interest and the debtor sets up the defense that the transaction is usurious. 0orean (irlines $s. Court of (ppeals 23# 349! +1+% Aegal interest of $8 p.a. on the amount of damages in favor of a litigant should commence from rendition of &udgment of the trial court instead of the date of filing of the complaint.

IV.
A.

DEPOSIT
Definition

! deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safety (eeping it and of returning the same. B. 1. 2. 3. #. C* r cteristics Real Contract because it is perfected by the delivery of the sub&ect matter.

/rincipal purpose of the contract of deposit is the safe8eepin! of the thing delivered. 4ontract of deposit is generally gratuitous.

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7f !ratuitous, it is unilateral because only the depository has an obligation. 7f onerous, it is bilateral.

!ception5

a% contrary stipulation b% depository is in the business of storing goods c% property saved from destruction during calamity without owner1s (nowledge; &ust compensation should be given the depository. nd 'utuu" 'utuu" mere 4onsumption of the sub&ect matter Aender must wait for the e,piration of the stipulated period 6oney or fungible thing

C.

Distinctions +et0een De.osit De.osit

1. )rincipal )urpose 2. Return

3afe(eeping custody =epositor can return at will

or

demand

3. 7b:ect 6ovable e,tra&udicial% and immovable property &udicial% D. Distinctions +et0een De.osit De.osit 1. )rincipal )urpose 2. 6ature E. 1. 2. 3afe(eeping 6ay be gratuitous

nd Co""od tu" Co""od tu" .ransfer of use !lways gratuitous

$inds of De.osit ?udicial F,tra&udicial a. :oluntary b. >ecessary Distinctions bet,een %&tra:udicial and ;udicial Deposits 1. 2. 3. #. *. .he first is constituted by will of the contracting parties, while the second is constituted by virtue of a court order. 7n the first, the ob&ect must be movable property, whereas in the second, the ob&ect may be either movable or immovable property. .he purpose of the first is the safe(eeping of the thing deposited, whereas the main purposes of the second is to secure or protect the owner1s right. .he first is, as a general rule, gratuitous, whereas the second is always onerous. 7n the first, the depository is obliged to return the thing deposited upon demand made by the depositor, whereas the second* the thing shall be delivered only upon order of the court.

3.

3. 1. 2. 3. G.

Vo!unt ry De.osit =efined as one wherein the delivery is made by the will of the depositor. !lthough generally the owner, the depositor need not be the owner of the thing deposited. 6ay be oral or in writing. O+!i) tions of t*e De.osit ry

1. =epositary is obliged to (eep the thing safely and to return it when re)uired, even though a specified term may have been stipulated in the contract.

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2. =epositary is liable if the loss occurs through his fault or negligence. Aoss of thing while in the depositary1s possession raises a presumption of fault. 9e)uired degree of care is greater if the deposit is for compensation than when it is gratuitous. 3. =epositary is not allowed to deposit the thing with a third person. %&ception# #. contrary stipulation

Depositar is liable for the loss of the thin! deposited if# #.1 he transfers the deposit with a third person without authority although there is no negligence on his part and the third person; #.2 #.3 he deposits the thing with a third person who is manifestly careless or unfit although authori<ed, even in the absence of negligence; or the thing is lost through the negligence of his employees whether the latter are manifestly careless or not.

Note: =epositary is not responsible for loss of thing without negligence of the third person with whom he was allowed to deposit the thing if such third person is not manifestly careless or unfit *. =epositary is obliged to first notify the depositor and wait for the latter1s decision if he will change the way or manner of the deposit. %&ception# delay will cause danger

$. 7f thing deposited should earn interest, the depositary is under obligation 1% to collect the interest as it becomes due and 2% to ta(e such steps as may be necessary to preserve its value and the rights corresponding to it. .he depositary is bound to collect not only the interest but also the capital itself when due. +. =epositary has the obligation not to commingle things deposited if so stipulated, even if they are of the same (ind and )uality !rticle 1"+$%. -. =epositary is under obligation not to ma(e use of the thing deposited because deposit is for safe(eeping of the sub&ect matter and not for its use%; otherwise he shall be liable for damages. %&ceptions# a% b% e,press permission of the depositor preservation of the thing deposited re)uired its use article 1"++%

Note: 1. 7f the thing deposited is non'consumable and the depositary has permission to use the thing, the contract becomes one of commodatum. 2. 7f the thing deposited is money or other consumable thing, the contract is converted into a simple loan or mutuum. %&ception# 3. Where safe(eeping is still the principal purpose of the contract, the same shall be considered an irregular deposit.

Depositar is liable for loss throu!h a fortuitous e$ent e$en ,ithout his fault. a% b% c% d% if it is so stipulated; is he uses the thing without the depositor1s permission; if he delays its return; if he allows others to use it, even though he himself may have been authori<ed to use the same article 1"+"%

#.

Depositar has the obli!ation to#

c%

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a% b%

return the thing deposited when delivered closed and sealed, in the same condition; pay for damages should the seal or loc( be bro(en through his fault which is presumed unless proven otherwise; and (eep the secret of the deposit when the seal or loc( is bro(en, with or without his fault.

Note: is# a% b%

Depositar is authori3ed to open the thin! deposited ,hich is closed and sealed ,hen there presumed authority (eys having been delivered to depositary%, or in case of necessity.

*. =epositary has the obligation to return not only the thing but also all its products, accessions and accessories which are a conse)uence of ownership. &. 1. Persons to 0*o" Return of T*in) De.osited 'ust +e ' de .he depositary is obliged to return the thing deposited, when re)uired, to the depositor, to his heirs and successors, or to the person who may have been designated in the contract !rticle 1"+2%. 7f the depositor was incapacitated at the time of ma(ing the deposit, the property must be returned to his guardian or administrator or the person who made the deposit or to the depositor himself should he ac)uire capacity !rticle 1"+2%. Fven if the depositor had capacity at the time of ma(ing the deposit but he subse)uently loses his capacity during the deposit, the thing must be returned to his legal representative !rticle 1"--%. P! ce of Return of T*in) De.osited at the place agreed upon by the parties, and

2.

3. I. 1.

2. in the absence of stipulation, at the place where the thing deposited might be even if it should not be the same place where the original deposit was made provided the transfer was accomplished without malice on the part of the depositary. Note: =epositor shoulders the e,penses for transportation /. Ti"e of Return of T*in) De.osited Gener ! Ru!e5 @pon demand or at will, whether or not a period has been stipulated. E-ce.tions: a% thing is &udicially attached while in the depositary1s possession b% depositary was notified of the opposition of a third person to the return or the removal of the thing deposited !rticle 1"-$% $. Ri)*t of De.osit ry to Return T*in) De.osited 1. 2. if deposit is gratuitous; and &ustifiable reasons e,ist for its return

Note: Btherwise, depositary may avail of consignation therefore there is no right to return before e,piration of the term designated if deposit is for valuable consideration !rticle 1"-"%. L. A!ter tion of De.osit ry4s &eir

1. 7f in good faith, heir may either return the price he received or assign his right of action against the buyer in case the price has not been paid. 2. '. 7f in bad faith, heir is liable for damages and may be sued for estafa. Re! tion +et0een B n5 nd De.ositor

=eposits of money in ban(s, whether fi,ed, savings and current, are governed by the provisions on mutuum and the relation between a depositor and a ban( is that of a creditor and a debtor.

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.errano $s. Central 1an8 "$ 349! "$% ! ban(1s failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depositary1s failure to return the sub&ect matter of the deposit. Guin!ona $s. Cit -iscal of Manila 12$ 349! *++% While the ban( has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. 7$erseas 1an8 of Manila $s. Court of (ppeals 1+2 349! *21% 7t has been held that suspension of a ban( which had fallen into a Jdistressed financial situationK by order of the 4entral 0an( cannot e,cuse it from its obligations to depositors who had nothing whatever to do with the 4entral 0an( actuations or the events leading to the ban(1s distressed state. +nte!rated Realt Corp. $s. )hil. 6ational 1an8 1+# 349! 2"*% and -idelit .a$in!s $s. Cen3on 1-# 349! 1#1% .he obligation of a ban( to pay interest on a deposit ceases the moment the operations the ban( is completely suspended by the 4entral 0an(. .he deposit is not entitled to interest during the period the ban( is not allowed to operate. N. 1. 2. O+!i) tions of De.ositor Ee is obliged to pay e,penses for the preservation of the thing deposited, if deposit is gratuitous. Ee is obliged to pay for losses incurred due to the character of the thing deposited. !ceptions" a% b% c% d% unless depositor was not aware thereof depositor was not e,pected to (now the dangerous character of the thing unless he notified the depositary of the same; or depositary was aware of it without depositor1s advice !rticle 1""3%

Note: =epositary has the right to retain the thing deposited in pledge until full payment of what may be due him by reason of the deposit !rticle 1""#%. O. 1. Necess ry De.osit 6ecessar deposit in compliance ,ith a le!al obli!ation 1.1 .he &udicial deposit of a thing, the possession of which is being disputed in a litigation by two or more persons !rticle *3-%; 1.2 .he deposit with a ban( or public institution of public bonds or instruments if credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservation !rticle *-$%; 1.3 .he deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way !rticle 212#%; 1.# .hose re)uired in suits as provided in the 9ules of 4ourt; and

1.* .hose constituted to guarantee contracts with the government. 7n this last case, the deposit arises from an obligation of public or administrative character. 2. 3. 6ecessar deposit made on the occasion of a calamit . Deposit b tra$elers in hotels and inns

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3.1 3.2

.hey have been previously informed about the effects brought by the guests; and .he latter have ta(en the precautions prescribed regarding their safe(eeping.

#ote" 1. /otel8eeper is liable re!ardless of the amount in the follo,in! cases 5 a% .he loss or in&ury is caused by his servants or employees as well as by strangers provided that notice has been given and proper precautions ta(en. !rticle 1""-%; and b% .he loss is cause by the act of a thief or robber done without the use of arms and irresistible force !rticle 2221% for in this cause, the hotel(eeper is apparently negligent. 2. /otel8eeper is not liable in the follo,in! cases# a% .he loss or in&ury is caused by force ma&eure li(e flood, fire !rticle 2222%, theft or robbery by a stranger not by hotel(eeper1s servant or employee% with the use of arms or irresistible force !rticle 2221%, etc., unless he is guilty of fault or negligence in failing to provide against the loss or in&ury from said cause see !rticle 11+2, 11+#%; b% c% 3. .he loss is due to the acts of the guests, his family, servants or visitors !rticle 2222%. .he loss arises from the character of the things brought into the hotel !rticle 2222%.

3tipulations on e,emption or diminution of liability is void !rticle 2223%.

#. Eotel(eeper has a right to retain the things of guests as security for unpaid lodging e,penses and supplies. P. 1. /udici ! de.osit or Se6uestr tion Distinction bet,een ;udicial and %&tra:udicial Deposits /udici ! Cause )urpose by will or court to secure the right of a party to recover in case of a favorable &udgment movable and immovable property onerous person with favorable &udgment E-tr 7udici ! by will of the parties custody and safe(eeping of the thing

.ub:ect Matter Remuneration 1eneficiar only movable property generally gratuitous depositor

V.
A.

G(ARANTY
Definition

Guarant is a contract whereby a person binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. B. C* r cteristics 1. 2. 3. #. accessory subsidiary and conditional unilateral re)uires that the guarantor must be a person

Page 33

distinct from the debtor C. Distinction +et0een Gu r nty Gu r nty 1 ;uarantor is secondarily liable. 1 nd Suretys*i. Suretys*i. 3urety is primarily liable and is therefore not entitled to the e,haustion of the properties of the principal debtor 3urety assumes liability as a regular party to the underta(ing and underta(es to pay if the principal does not pay. 3urety is an insurer of the debt.

;uarantor binds himself to pay only when the principal cannot pay.

;uarantor is an insurer of the debtor1s solvency.

D.

Recent /uris.rudence on Suretys*i. +ncion!* ;r. $s. Court of (ppeals 2*+ 349! *+-% +ssue# /etitioner argues that the dismissal of the complaint against >aybe, the principal debtor, and against /antanosas, his co'member, constituted a release of his obligation especially because the dismissal of the case against /antanosas was upon the motion of private respondent itself, citing !rticle 22-2 as basis for his argument. /eld5 3ection #, 4hapter 3, .itle 1, 0oo( 7: of the 4ivil 4ode states the law on &oint and several obligations. @nder !rticle 12"+ thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is &oint so that each of the debtors is liable only for a proportionate part of the debt. .here is a solidary liability only when the obligation e,pressly so states, when the law so provides or when the nature of the obligation so re)uires. /etitioner signed the promissory note as a solidary co'ma(er and not as a guarantor therefore !rticle 22-2 is not applicable. 0ecause the promissory note involved in this case e,pressly states that the three signatories therein are &ointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation. .he choice is left to the solidary creditor to determine against whom he will enforce collection. 4onse)uently, the dismissal of the case against ?udge /antanosas may not be deemed as having discharged petitioner from liability as well. !s regards >aybe, suffice it to say that the court never ac)uired &urisdiction over him. /etitioner, therefore, may only have recourse against his co'ma(ers, as provided by law. )hilippine 6ational 1an8 $s. Court of (ppeals 1"- 349! +$+% ! surety1s liability to the creditor or promisee of the principal is said to be direct, primary and absolute. 7n other words, he is directly, primarily and e)ually bound with the principal as original promissor although he possesses no direct or personal interest over the latter1s obligations nor does he receive any benefits therefrom. )hilippine 6ational 1an8 $s. )ineda 1"+ 349! 1% 7f the principal debtor and the surety are held liable, their liability to pay the creditor would be solidary but the nature of the surety1s underta(ing is such that it does not incur liability unless and until the principal debtor is held liable.

Page 33

-inman General (ssurance Corp. $s. .ali8 1-- 349! +#2% 7n the absence of collusion, the surety is bound by a &udgment against the principal even though he was not a party to the proceedings. .he nature of its underta(ing ma(es it privy to all proceedings against its principal. E. 1. Ru!es Go8ernin) t*e N ture nd E-tent of Gu r nty

G.R.';uaranty is generally gratuitous !ception" contrary stipulation Garcia* ;r. $s. Court of (ppeals 1"1 349! #"3% .he peculiar nature of a guaranty or surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either from the principal debtor or from the creditor. While a contract of guaranty or surety, li(e any other contract, must generally be supported by a sufficient consideration, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal alone will suffice. .he guarantor or surety, therefore, becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.

2. ;uaranty is an accessory contract therefore there must be a valid principal obligation for guaranty to be valid. ;uarantor may secure the performance of voidable, unenforceable, natural, conditional, and future obligations !rticle 22*2%. 3. ;uarantor1s liability cannot e,ceed the principal obligation !rticle 22*#%.

#. ;uaranty cannot be presumed. 7f there is any doubt on the terms and conditions of the guaranty or surety agreements, the doubt should be resolved in favor of the guarantor or surety /hilippine >ational 0an( vs. 4ourt of !ppeals, 1"- 349! +$+%. Eowever, the rule of strictissimi &uris commonly refers to an accommodation surety and is not applied in case of compensated sureties. *. .he )ualifications of a guarantor are5

Ee possesses integrity; Ee has capacity to bind himself; and Ee has sufficient property to answer for the obligation which he guarantees $. Where the creditor has re)uired and stipulated that a specified person should be a guarantor, the substitution of guarantor may not be demanded !rticle 22*+% because in such a case the selection of the guarantor is a term of the agreement and as a party, the creditor, is therefore, bound thereby see !rticles 11*", 132$%. 3. Effects of Gu r nty +et0een t*e Gu r ntor nd t*e Creditor 1. G.R.';uarantor has the right to the benefit of e,cussion or e,haustion of the debtor1s property before he can be compelled to pay. !ceptions" a% b% c% d% e% f% g% h% if guarantor has e,pressly renounced e,cussion if guarantor has bound himself solidarily with the debtor suretyship% in case of debtor1s insolvency when guarantor has absconded or cannot be sued within the /hilippines unless he left a manager or representative if it may be presumed that an e,ecution on the debtor1s property will not satisfy the obligation if guarantor does not set up the benefit of e,cussion and fails to point out to the creditor available property of the debtor within the /hilippines if he is a &udicial bondsman and sub'surety where a pledge or mortgage has been given by the guarantor as a special security

Page 33

i%

if guarantor fails to interpose it as a defense before &udgment is rendered against him 3aavedra vs. /rice, $- /hil. $$"%

2. ! compromise between the creditor and the principal debtor benefits the guarantor but does not pre&udice him. ! compromise which is entered into between the guarantor and the creditor benefits but does not pre&udice the principal debtor !rticle 22$3%. 3. ;uarantor is li(ewise entitled to the benefit of division where there are several guarantors of only one debtor and for the same debt. ;uarantor1s liability is only &oint therefore, they are not liable beyond the shares which they are respectively bound to pay !rticle 22$*%. %&ceptions# a% solidarity 0% if any of the circumstances in !rticle 22*+ should ta(e place. <ille& )lastic +ndustries Corporation $s. Court of (ppeals 2*$ 349! #+-% Wille, /lastic argues that the J4ontinuing ;uarantyK. 0eing an accessory contract, cannot legally e,ist because of the absence of a valid principal obligation. 7ts contention is based on the fact that it is not a party either to the J4ontinuing 3urety !greementK or to the loan agreement between 6anila 0an( and 7nter'9esin 7ndustrial. /ut in another way, the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. Hor a Jguarantor or surety is bound by the same consideration that ma(es the contract effective between the principal parties thereto L. 7t is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.K ,,, Wille, /lastic contends that the J4ontinuing ;uarantyK cannot be retroactively applied so as to secure the payments made by 7nterban( under the two J4ontinuing 3urety !greementsK and invo(es the Fl :encedor and =iMo rulings to support its contention that a contract if suretyship or guaranty should be applied prospectively. 7n Fl :encedor vs. 4anlas ## /hil. $""%, we held that a contract of suretyship J is not retroactive and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated.K .here we found nothing in the contract to show that the parties intended the surety bonds to answer for the debt contracted previous to the e,ecution of the bonds. 7n contrast, in this case, the parties to the J4ontinuing ;uarantyK clearly provided that the guaranty would cover Jsums obtained andNor to be obtainedK by 7nter'9esin 7ndustrial from 7nterban(. Bn the other hand, in =iMo vs. 4ourt of !ppeals 21$ 349! "%, the issue was whether the sureties could be held liable for an obligation contracted after the e,ecution of the continuing surety agreement. 7t was held that by its very nature a continuing suretyship contemplates a future course of dealing. J7t is prospective in its operation and is generally intended to provide security with respect to future transactions.K 0y no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application. 7ndeed, as we also held in 0an( of the /hilippine 7slands vs. Hoerster #" /hil. -#3%, although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. Di=o $s. Court of (ppeals 21$ 349! "1% +ssue# 7f the contract of guaranty states that the same is to secure advances to be made Jfrom time to timeK, is this a valid guarantyI /eld# Oes, this will be construed as a continuing guarantyNsurety given to secure future debts and is not limited to a single transaction but which contemplates a future course of dealing, covering a series of transactions generally for an indefinite period of time or until revo(ed.

Page 33

G.

Effects of Gu r nty +et0een t*e De+tor nd t*e Gu r ntor

1. ;uaranty is a contract of indemnity. .he guarantor who pays for a debtor must be indemnified by the latter. The indemnit comprises5 1.1 1.2 1.3 1.# the total amount of the debt; the legal interest thereon from the time the payment was made (nown to the debtor, even though it did not earn interest for the creditor; .he e,penses incurred by the guarantor after having notified the debtor that payment had been demanded of him; =amages, if they are due !rticle 22$$% %&ceptions# a% Where the guaranty is constituted without the (nowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor !rticle 22*2% /ayment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, re)uires the debtor1s consent. 0ut the payment is in any case valid as to the creditor who has accepted it !rticle 123-% .he right to demand reimbursement is sub&ect to waiver.

b%

c%

2. ;uarantor has the right of subrogation against the debtor to enable him to enforce the indemnity granted in !rticle 22$$ and he cannot demand more than what he actually paid !rticle 22$+%. 3. Guarantor has the ri!ht to proceed a!ainst the debtor e$en before pa ment in the follo,in! instances# When he is sued for the payment; 7n case of insolvency of the principal debtor; When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has e,pired; When the debt has become demandable by reason of the e,piration of the period for payment; !fter the lapse of ten years, when the principal obligation has no fi,ed period for its maturity, unless it be of such nature that it cannot be e,tinguished e,cept within a period longer than ten years; 7f there are reasonable grounds to fear that the principal debtor intends to abscond; 7f the principal debtor is in imminent danger of becoming insolvent !rticle 22+1%. ;uarantor may either obtain release from the guaranty or demand a security that shall protect him from any proceedings by the creditor and from danger of debtor1s insolvency !rticle 22+1%. &. Effects of Gu r nty s Bet0een Co,)u r ntors

1. .he obligation of several guarantors of the same debtor and for the same debt is &oint and each is bound only to pay his proportionate share. .herefore, one who has paid the entire debt may see( reimbursement from each of his co'guarantors the share which is proportionately owing him. a% b% I. Re6uisites: payment must have been made by virtue of a &udicial demand or because the principal debtor is insolvent E-tin)uis*"ent of Gu r nty and subsidiar * !uarant is terminated ,hen the principal obli!ation is

1. 1ein! accessor e&tin!uished b # a% b% c% d% e% f%

;uaranty may also be e,tinguished if the creditor has released the guarantor although the principal obligation remains !rticle 22+-% or in case of material alteration which imposes a new obligation or added

Page 33

payment or performance; loss of the thing due condonation or remission of the debt confussion or merger of the rights of the creditor and debtor compensation novation

burden on the party promising or which ta(es away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof. 6(.C7 $s. Torrento, 22 349! #2+ C1"$+D%. 2. 9elease of one guarantor by the creditor without the consent of the other guarantors benefits all to the e,tent of the share of the guarantor released !rticle 22+-%. 3. !n e,tension of the term granted by the creditor to the debtor without guarantor1s consent e,tinguishes the guaranty !rticle 222"%. #. .he guarantor who pays is entitled to be subrogated to all the rights of the creditor !rticle 22$+%. 7f there can be no subrogation because of the fault of the creditor, as when the creditor releases or fails to register a mortgage, the guarantors are thereby released. .he same rules applies even though the guarantors be solidarily !rticle 22-2%. /. Le) ! nd /udici ! Bonds

1. ! &udicial bondsman and the sub'surety are not entitled to the benefit of e,cussion because they are not mere guarantors, but sureties whose liability is primary and solidary.

VI.
A.

PLEDGE
Definition

)led!e is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable !rticle 22"#% or document evidencing incorporeal rights !rticle 22"*% for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. B. C* r cteristics

1. ! real contract because it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is the pledge, or to a third person by common agreement; 2. !n accessor contract because it has no independent e,istence of its own;

3. ! unilateral contract because it creates an obligation solely on the part of the creditor to return the thing sub&ect thereof upon the fulfillment of the principal obligation; #. ! subsidiar contract because the obligation incurred does not arise until the fulfillment of the principal obligation to which it is secured. C. 1. 2. Essenti ! Re6uire"ents .he pledge is constituted to secure the fulfillment of a principal obligation. .he pledgor or mortgagor is the absolute owner of the thing pledged or mortgaged.

3. .he persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authori<ed for the purpose. #. D. .he thing pledged must be delivered to the creditor or to a third person by common agreement. Co""on Pro8isions Go8ernin) P!ed)e or 'ort) )e

1. 4ontract may be constituted only by the absolute owner of the thing pledged or mortgaged otherwise, the pledge or mortgage is void, such as that constituted by an impostor. see De 2ara $s. ( roso* "* /hil. 1-* C1"*#>? )ar@ui $s. )hilippine 6ational 1an8* "$ /hil. 1*+ C1"*#D% 2. ! mortgage of con&ugal property by one of the spouses is valid only as to one'half 1N2% of the entire property. )hilippine 6ational 1an8 $s. Court of (ppeals, "- 349! 22+ C1"$2D%. 3. While it is true that under !rticle 22-* it is essential that the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to in)uire further. 3tated differently, an innocent purchaser for value li(e a mortgagee% relying on a torrens title issued is protected. Duran $s. +ntermediate (ppellate Court, 13- 349! #"1 C1"$-*D%

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#. ! stipulation whereby the thing pledged or mortgaged or under antichresis !rticle 213+% shall automatically become the property of the creditor in the event of non'payment of the debt within the term fi,ed is (nown as pactum commisorium or pacto commissorio which is forbidden by law and declared null and void article 22--% E. Disctinctions +et0een P!ed)e nd Re ! 'Ort) )e 1. 2. 3. P!ed)e 6ovable property =elivery of the ob&ect pledged to the pledgee or a third person /ledge is not valid against third persons unless a description of the thing pledged and the date of the pledge appear in a public instrument. 3. Pro8isions A..!ic +!e on!y to P!ed)e 1. .he pledgor retains his ownership of the thing pledged. Ee may, therefore, sell the same provided the pledgee consents to the sale. !s soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee sub&ect to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation !rticle 2112% and that the pledgee must continue in possession during the e,istence of the pledge. !rticle 22"3, 22"-%. 2. .he possession of the pledgee constitutes his security. Eence, the debtor cannot demand for its return until the debt secured by it is paid. 3ee !rticle 212* ? .errano $s. Court of (ppeals* 1"$ 349! 12+ C1""1D% 1ut the right of retention is limited only to the fulfillment of the principal obligation for which the pledge was created. !rticle 22"-%. 3. /ledgee has the obligation to ta(e care of the thing pledged with the diligence of a good father of the family. Ee is entitled to reimbursement of the e,penses incurred for its preservation and he is liable for loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract. !rticles 11+#, 11+2%. #. /ledgee is not authori<ed to transfer possession of the thing pledged to a third person. %&ception# stipulation authori<ing pledgee to transfer possession. !rticle 2122% 1. 2. 3. Re ! 'ort) )e 7mmovable property =elivery of the thing mortgaged is not necessary 6ortgage is not valid against third persons if not registered.

*. .he pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner !rticle 212#; see !rticle 1"++%. 1ut the pledgee can apply the fruits, income, dividends, or interest, if owing and thereafter to the principal of his credit. see !rticle 2132%. %&ception# $. contrary stipulation

The pled!or ma as8 that the thin! pled!ed be deposited :udiciall or e&tra:udiciall . $.1 $.2 $.3 if the creditor uses the thing without authority; if he misuses the thing in any other way !rticle 212#%; if the thing is in danger of being lost or impaired because of the negligence or willful act of the pledge.

+. /ledgor cannot as( for the return of the thing pledged until said obligation is fully paid including interest due thereon and e,penses incurred for its preservation !rticle 22""%. /ledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same (ind and )uality !rticle 212+%. -. .he possession of the thing pledged by the debtor or owner subse)uent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been e,tinguished. ". When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation itself !rticle 12+#%. %&ception#

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12. .he sale of the thing pledged e,tinguishes the principal obligation whether the price of the sale is more or less than the amount due. a. b. +f the price of the sale is more than the amount due the creditor , the debtor is not entitled to the e,cess unless the contrary is provided; 7n the same way, if the price of the sale is less, neither is the creditor entitled to recover the deficiency. ! contrary stipulation is void !rticle 211*%.

VII.
A.

REAL 'ORTGAGE
Definition

Real Mort!a!e is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially sub&ecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. B. 1. C* r cteristics 7t is an accessory and subsidiary contract.

2. 7t is also unilateral because it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled. 3. .he mortgagor, as a general rule, retains possession of the property mortgaged as security for the payment of the sum borrowed from the mortgagee, and pays the latter a certain percent thereof as interest on his principal by way of compensation for his sacrifice in depriving himself of the use of said money and the en&oyment of its fruits, in order to give them to the mortgagor. #. .he ob&ects of a real mortgage are immovable !rticle #1*% and alienable real rights imposed upon immovables. #ote" While a mortgage of land necessarily includes, in the absence of stipulation, the improvements thereon, a building by itself may be mortgaged apart from the land on which it is built. /ossessory rights over said property before title is vested on the grantee may be validly transferred or conveyed as in a deed of mortgage. prudential 1an8 $s. )anis* 1*3 349! 3"2 C1"$+D%; 6artales $s. G.+., 1*$ 349! 22* C1"-+D%. *. 7n order that a mortgage may be validly constituted, it must appear in a public document duly recorded in the 9egistry of /roperty see Gaotian $s. Gaffud, 2# 349! +2$ C1"$"D% #ote" 7f the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. $. ! mortgage creates a real right see Tua3on $s. Grosco, * /hil. *"$ C1"2*D%, a lien inseparable from the property mortgaged, which is enforceable against the whole world. @ntil discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership. #ote" a.% 7f the mortgagor sells the mortgaged property, the property remains sub&ect to the fulfillment of the obligation secured by it. see 1onne$ie $s. Court of (ppeals , 12* 349! 122 C1"-3D% !ll subse)uent purchasers of the property must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. 1ut the mortgage must be registered !rticle 212*% or, if not registered, the buyer must (now of its e,istence. see )hil. 6ational 1an8 9 Trust Corp. $s. Court of (ppeals, 1"3 349! 1*- C1""1D% .he mortgagor may not be the principal debtor !rticle 22-*, 2 nd par.%. b.% .he right or lien of an innocent mortgagee for value upon the mortgaged property must be respected and protected, even if the mortgagor obtained his title through fraud. .he remedy of the persons pre&udiced is to bring an action for damages against the person who caused the fraud and if the latter is insolvent, an action against the .reasurer of the /hilippines may be filed for the recovery of damages against the !ssurance Hund )hilippine 6ational 1an8 $s. Court of (ppeals* 1-+ 349! +3* C1""2D% C. Effect of 'ort) )e 1. .he only right of a mortgagee in case of non'payment of a debt secured by real mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness Guan3on $s. (r!el* 33 349! #+# C1"+2D%

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2. .he mortgagor1s default does not operate to vest in the mortgagee the ownership of the encumbered property. Eis failure to redeem the property does not automatically vest ownership of the property to the mortgagee which would grant the latter the right to appropriate the property or dispose of it for such effect is against public policy as enunciated by !rticle 22--. 4Re es $s. .ierra, "3 349! #+2 C1"+"D%.

(dla,an $s. Torres 233 349! $#*% 0y mortgaging a piece of property, a debtor merely sub&ects it to a lien but ownership thereof is not parted with. D. E-tent of 'ort) )e

General Rule: ! mortgage constituted on immovable property is not limited to the property itself but also e,tends to all its accessions, improvements, growing fruits and rents or income see !rticle 2122% as well as to the proceeds of insurance should the property be destroyed of the e,propriation value of the property should it be e,propriated. !ception" E. contrary stipulation

A!ien tion or Assi)n"ent of 'ort) )e

1. 3aid assignment is valid and assignee may foreclose the mortgage in case of nonpayment of the mortgage indebtedness. .antia!o $s. )ioneer .a$in!s and 2oan 1an8, 1*+ 349! 122 C1"--D%. 2. .he fact that the mortgagor has transferred the mortgaged property to a third person does not relieve him from his obligation to pay the debt to the mortgage creditor in the absence of novation McCallou!h 9 Co. $s. .ierra* #1 /hil. 1 C1"21D%. 3. .he mortgage credit being a real right which follows the property, the creditor may demand from any possessor the payment of the credit secured by said property. 7t is necessary, however, that prior demand for payment must have been made on the debtor and the latter failed to pay. 1an8 of the )hil. +sland $s. Concepcion 9 /i:os* +nc.* *3 /hil. "2$ C1"2"D% #. !n assignee cannot ac)uire greater rights than those pertaining to an assignor 0oa $s. Court of (ppeals* 21" 349! *#1%. 3. Sti.u! tion 3or+iddin) A!ien tion of 'ort) )ed Pro.erty 1. 3uch a stipulation is void. /o,e$er, if the mortgagor alienates the property, the transferee is bound to respect the encumbrance because being a real right, the property remains sub&ect to the fulfillment of the obligation for whose guaranty it was constituted !rticle 212$%. G. 1. 3orec!osure of 'ort) )es ?udicial foreclosure governed by 9ule $- of the 9ules of 4ourt.

2. F,tra&udicial Horeclosure governed by !ct. >o. 313* as amended, if and when the mortgagee is given a specific power or e,press authority to do so. a. b. c. d. e. /ublic auction must be conducted in the province where the property is situated. /osting of notice of sale in at least 3 public places therein /ublication in a newspaper of general circulation /ersonal notice to mortgagor is not re)uired 1onne$ie $s. Court of (ppeals , 12* 349! 122 C1"-3D; G.+. $s. Court of (ppeals* 1+2 349! *33 C1"-"D%. =ebtor has the right to redeem the property sold within the term of one year from and after the date of the sale 3ection $%. .he rec(oning date in case of registered land is from the registration of the certificate of sale since it is only from such date that the sale ta(es effect as a conveyance. 4;ose $s. 1lue, #2 349! 3*1, C1"+1D; Gorospe $s. .antos, $" 349! 1"1 C1"+$D; General $s. 1arrameda, $2 349! 1$2 C1"+$D. JFvery conveyance of lands ac)uired under the free patent or homestead provisions, when proper, shall be sub&ect to repurchase by the applicant, his widow or legal heirs, within a period of five years from the date of the

Page 33

conveyance.K 3ection 11", 4.!. >o. 1#1 C/ublic Aand AawD, as amended% or foreclosure sale Tupas $s. Damasco, 132 349! *"3 C1"-#D%. #ote" Cerna $s. C( 222 349! *1+%5 .he filing of a collection suit bars the foreclosure of mortgage. &. Ri)*t of 'ort) )ee to Reco8er Deficiency 1. 7f there be a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency. De$elopment 1an8 of the )hilippines $s. Miran!* $$ 349! 1#1 C1"+*D. 7n :udicial foreclosure, the 9ules of 4ourt specifically gives the mortgagee the right to claim for deficiency in case a deficiency e,ists 3ection $, 9ule +2%. While !ct >o. 313* governing e&tra:udicial foreclosures of mortgage does not give a mortgagee the right to recover deficiency after the public auction sale, neither does it e,pressly or impliedly prohibit such recovery. #ote" .his right to recover deficiency had been categorically resolved in .tate +n$estment $s. Court of (ppeals 21+ 349! 32 C1""3D%. Frgo, the mort!a!ee is entitled to reco$er the deficienc in case the sale proceeds are not sufficient to co$er the debt in e&tra:udicial foreclosures. 2. .he action to recover a deficiency after foreclosures prescribes after ten 12% years from the time the right of action accrues as provided in !rticle 11## 2% of the 4ivil 4ode =evelopment 0an( of the /hilippines vs. .omeldan, 121 349! 1+1 C1"-2D. I. 9 i8er of Security +y Creditor

1. .he mortgagee may waive the right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. .here is no statutory provision in our &urisdiction prohibiting a personal action to recover a sum of money even though a mortgage has been given as security for the payment of the same. /i:os de +. de la Rama $s. .a:o , #* /hil. +23 C1"2#>? .olomon and 2achica $s. Dantes* $3 /hil. *22 C1"3+D%. 2. .he mortgagee cannot have both remedies. Ee has only one cause of action, i. e., non'payment of the mortgage debt; hence, he cannot split up his cause of action by filing a complaint for payment of the debt and another complaint for foreclosure. 4Calte& )hils. 's. +ntermediate (ppellate Court* 1+$ 394! +#1 C1"-"D%. /. $inds of Rede".tion

1. $uit% of redemption or the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgagee but before the sale of the mortgaged property or confirmation of the sale see Top"Rate +nternational .er$ices* +nc. $s. +ntermediate (ppellate Court, 1#2 394! #$+ C1"-$D%. .he mortgagor1s e)uity of redemption is simply the right of the mortgagor to e,tinguish the mortgage and retain ownership of the property by paying the secured debt within the "2' day period after the &udgment becomes final, in accordance with 3ection 2, 9ule $- of the 9ules of 4ourt or even after the foreclosure sale but prior to its confirmation. 2impin $s. +ntermediate (ppellate Court, 1$$ 349! -+ C1"--D%. 2. Ri&ht of redemption or the right of the mortgagor to redeem the mortgaged property within a certain period 1 yr% after it was sold for the satisfaction of the mortgaged debt. $. Ri)*t of Rede".tion

1. 7n all cases of e,tra&udicial sale, the mortgagor may redeem the property at any time within the term of one ear from and after the date of re!istration of the sale see 3ection $, !ct >o. 313*; Re es $s. Tolentino #2 349! 3$* C1"+1D%. 2. 7n :udicial foreclosure of real estate mortgage, there is a right of redemption which he can e,ercise at any time after service of &udgment of foreclosure and within the AB"da period and even thereafter provided he does so before the foreclosure sale is confirmed by the court. 4(nderson $s. Re es, *# /hil "##%. 4onfirmation of the sale of mortgaged real property cuts off all the rights or interests of the mortgagor and of the mortgage and persons holding under him, and with them the e)uity of redemption in the property and vests them in the purchaser. 4onfirmation retroacts to the date of the sale. 7t is a final order, not interlocutory. 7campo $s. Domalanta, 22 394! 113$ C1"$+D; 1inalba!an %state* +nc. $s. Gatuslao, +$ /hil. 12- C1"#$D; 'illar $s. ;a$ier, "+ /hil $2# C1"**D; 2on3ome $s. (mores, 13# 349! 3-2 C1"-*D.

Page 33

!ception"

Eowever, if the property has been mortgaged in favor of the =0/ 4! #*"% /hilippine >ational 0an( 9! 1322%, ban(s, ban(ing and credit institutions 9! 33+, or the ;eneral 0an(ing !ct% or rural ban(s 9! 2$+2%, redemption is allowed within one year from the registration of the sale. Con3ales $s. )hil. 6ational 1an8* #- /hil. -2# C1"2$D%. .he redemption must be made within one year after the sale if the mortgagee is a ban(, ban(ing or credit institution 3ection +-, 9. !. >o. 33+; )iano $s. Ca ano!, supra%. @nder the 9evised charter of the />0, the period is one year from the registration of the foreclosure sale.

L.

Re6uisites for V !id Rede".tion

1. .he redemption must be made within 12 months from the time of the registration of the sale. 2. /ayment of the purchase price of the property plus 18 interest per month together with the ta,es thereon, if any, paid by the purchaser with the same rate of interest computed from the date of registration of the sale; and 3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the proper 9egister of =eeds. Rosales $s. Cboa, 122 349! -$" C1"-3D%. Ramire3 $s. Court of (ppeals 21" 349! *"-% !cceptance of redemption price after the e,piration of the statutory period for redemption is deemed a waiver of the one'year period to redeem foreclosed property. '. Recent /uris.rudence on Re ! 'ort) )es 6oel $s. Court of (ppeals 2#2 349! +-% 7n the absence of proof of gross inade)uacy of the price, the fact that the sale was made with what might appear as an inade)uate consideration does not ma(e the contract one of mortgage. Mercado $s. Court of (ppeals 2#2 349! $1$% ! co'owner does not lose his part ownership of a co'owned property where his share is mortgaged by another co'owner without the former1s (nowledge and consent. Tarnate $s. Court of (ppeals 2#1 349! 2*#% 7t is a settled rule that a mortgagee may recover any deficiency in the mortgage account which is not reali<ed in a foreclosure sale and that the action for recovery of that deficiency may be filed even during the redemption period. 7lea $s. Court of (ppeals 2#+ 349! 2+#% a.% ! stipulation that the ownership of the property would automatically pass to the vendee in case no redemption is effected within a stipulated period is void for being a pactum commissorium which enables the mortgagee to ac)uire ownership of the mortgaged property without need of foreclosure. Where in a contract of sale with pacto de retro* the vendor remains in physical possession of the land sold as lessee or otherwise, the contract should be considered an e)uitable mortgage. Where the contract contains a stipulation that upon payment by the vendor of the purchase price within a certain period the document shall become null and void and have no legal force and effect, the purported sale should be considered a mortgage contract. 7n case of doubt, a contract purporting to be sale with the right of purchase shall be considered an e)uitable mortgage.

b.%

c.%

d.%

Page 33

e.%

! mortgage action prescribes after 12 years. D1) $s. Court of (ppeals 2#" 349! 331%

.he fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also be enforced by means of an ordinary action. Where a mortgaged is not valid, as where it is e,ecuted by one who is not the owner of the property, or the consideration of the contract is simulated or false, the principal obligation which it guaranteed is not thereby rendered null and void. .hat obligation matures and becomes demandable in accordance with the stipulations pertaining to it. Gabonsen! $s. Court of (ppeals 2#$ 349! #+2% .he application for foreclosure of mortgage is premature where the debtors have not yet defaulted on the payment of either the principal or the interest on their loans. (:a& Mar8etin! 9 De$elopment Corporation 's. Court of (ppeals 2#- 349! 222% !n action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage but where the intent of the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same in not improper as it is valid and binding between the parties. -ilin$est Credit Corporation 's. Court of (ppeals 2#- 349! *#"% a.% 7f the mortgagee cannot obtain possession of a mortgaged property for its sale on foreclosure, it must bring a civil action either to recover such possession as a preliminary step to the sale or to obtain &udicial foreclosure. 9eplevin is the appropriate action to recover possession preliminary to the e,tra&udicial foreclosure of a chattel mortgage. )hilippine 1an8 of Communications 's. Court of (ppeals 2*3 349! 2#1% +ssue# .he mortgage contract provides5 J.his mortgage is given as security for the payment to the 6B9.;!;FF on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of e,change, drafts, overdrafts and all other obligations of every (ind already incurred or which hereafter may be incurred L.K 4an the ban( charge penalty based on said provisionI &e!d: 1. .he obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. .hus, the inapplicability of the ruling in Aim ?ulian vs. Autero #" /hil. +23% which pertains only to mortgages securing future advancements. 7nstead, what applies here is the general rule that Jan action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.K 2. .he mortgage provision relied upon by the petitioner is (nown in !merican ?urisprudence as a Ddra!netE clause* which is specifically phrased to subsume all debts of past or future origin. 3uch clauses are carefully scrutini<ed and strictly construed.K 3. .he mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affi,ing of his signature or

b.%

Page 33

JadhesionK thereto. 0eing a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement. #. ! reading, not only of the earlier )uoted provision, but of the entire mortgage contract yields no mention of penalty charges. 4onstruing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. .his e,plains the finding by the trial court, as affirmed by the 4ourt of !ppeals, the Jpenalties and charges are not due for want of stipulation in the mortgage contract.K *. 7ndeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. 7n this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. @nder the rule of e&usdem generis, where a description of things of a particular class or (ind is Jaccompanied by words of a generic character, the generic words will usually be limited to things of a (indred nature with those particularly enumeratedL.K ! penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty. $. ! mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not 4onstruing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage. D1) $s. Court of (ppeals 2*3 349! #1#% +ssue# Whether the land in dispute could have been validly mortgaged while still the sub&ect of a Hree /atent !pplication with the government. 1. /etitioner ban( did not ac)uire valid title over the land in dispute because it was public land when mortgaged to the ban(. We cannot accept petitioner1s contention that the lot in dispute was no longer public land when mortgaged to it since the Blidiana spouses had been in open, continuous, adverse and public possession thereof for more than thirty 32% years. 7n 'isa an Realt * +nc. $s. Meer -$ /hil. *1*%, we ruled that the approval of a sales application merely authori<ed the applicant to ta(e possession of the land so that he could comply with the re)uirements prescribed by law before a final patent could be issued in his favor. 6eanwhile the government still remained the owner thereof, as in fact the application could still be canceled and the land awarded to another applicant should it be shown that the legal re)uirements had not been complied with. What divests the government of title to the land is the issuance of the sales patent and its subse)uent registration with the 9egister of =eeds. 7t is the registration and issuance of the certificate of title that segregate public lands from the mass of public domain and convert it into private property. 3ince the disputed lot in the case before us was still the sub&ect of a Hree /atent !pplication when mortgaged to petitioner and no patent was granted to the Blidiana spouses, Aot >o. 222" /ls'$1% remained part of the public domain. 2. With regard to the validity of the mortgage contracts entered into by the parties, !rt. 22-*, par. 2 of the >ew 4ivil 4ode specifically re)uires that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. .hus, since the disputed property was not owned by the Blidiana spouses when they mortgaged it to petitioner, the contracts of mortgage and all their subse)uent legal conse)uences as regards Aot >o. 222" /ls'$1% are null and void. 7n a much earlier case 'da. De 1autista $s. Marcos, 3 349! #3#%, we held that it was an essential re@uisite for the $alidit of a mort!a!e that the mort!a!or be the absolute o,ner of a propert mort!a!ed , and it appearing that the mortgage was constituted before the issuance of the patent to the mortgagor, the mortgage in )uestion must of necessity be void and ineffective. Hor the law e,plicitly re)uires an imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged. .tate +n$estment /ouse* +nc. $s. Court of (ppeals 2*# 349! 3$-% 1. 3.!.F1s registered mortgage right over the property is inferior to that of respondent' spouses1 unregistered right. .he unrecorded sale between respondents'spouses and 3BA7= is preferred for the reason that if the original owner 3BA7=, in this case% had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing

Page 33

so as to be able to mortgage it again. 9egistration of the mortgage is of no moment since it is understood to be without pre&udice to the better right of third parties. 2. !s a !eneral rule, where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not re)uired to e,plore further than what the .orrens .itle upon its face indicates in )uest for any hidden defect or inchoate right that may subse)uently defeat his right thereto. .his rule, however, admits of an e&ception as where the purchaser or mortgagee has (nowledge of a defect or lac( of title in his vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to in)uire into the status of the title of the property in litigation. 7n this case, petitioner was well aware that it was dealing with 3BA7=, a business entity engaged in the business of selling subdivision lots. 7n fact, the B!!A! found that Jat the time the lot was mortgaged, respondent 3tate 7nvestment Eouse, 7nc., now petitioner% has been aware of the lot1s location and that said lot formed part of 4apital /ar(sNEomes 3ubdivision. 7n .unshine -inance and +n$estment Corp. $s. +ntermediate (ppellate Court 223 349! 212%, the 4ourt, noting petitioner therein to be a financing corporation, deviated from the general rule that a purchaser or mortgagee of a land is not re)uired to loo( further than what appears on the face of the .orrens .itle. 3. .he above'enunciated rule should apply in this case as petitioner admits of being a financing institution. We ta(e &udicial notice of the uniform practice of financing institutions to investigate, e,amine and assess the real property offered as security for any loan application especially where, as in this case, the sub&ect property is a subdivision lot located at Pue<on 4ity, 6. 6. 7t is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor . )etitionerFs constructi$e 8no,led!e of the defect in the title of the sub:ect propert * or lac8 of such 8no,led!e due to its ne!li!ence* ta8es the place of re!istration of the rights of respondent1s spouses. 9espondent court thus correctly ruled that petitioner was not a purchaser or mortgagee in good faith hence, petitioner can not solely rely on what merely appears on the face of the .orrens .itle.

VII.
1.

ANTIC&RESIS
Definition

(ntichresis is a contract whereby the creditor ac)uires 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. B. 1. C* r cteristics 7t is an accessory contract because it secures the performance of a principal obligation.

2. 7t is a formal contract because the amount of the principal and of the interest must both be in writing, otherwise the contract of antichresis is void. #ote" 1. =elivery of the property to the creditor is re)uired only in order that the creditor may receive the fruits and not for the validity of the contract. 2. 7t is not essential that the loan should earn interest in order that it can be guaranteed with a contract of antichresis. !ntichresis is susceptible of guaranteeing all (inds of obligations, pure or conditional. ;a$ier $s. 'alliser, 4!% >. 2$#-'9, !pril 2", 1"*2; .ta. Rosa $s. 6oble, 3* B.;. 2+2#1%. 3. .he fruits of the immovable which is the ob&ect of the antichresis must be appraised at their actual mar(et value at the time of the application. see !rticle 213-% #. .he property delivered stands as a security for the payment of the obligation of the debtor in antichresis. Eence, the debtor cannot demand its return until the debt is totally paid. *. ! stipulation authori<ing the antichretic creditor to appropriate the property upon the non'payment of the debt within the period agreed upon is void. see !rticle 223-%. C. Distinctions +et0een Antic*resis Antic*resis nd P!ed)e P!ed)e

Page 33

1. 2. 3. D.

9efers to real property /erfected by mere consent 4onsensual contract

1. 2. 3.

9efers to personal property /erfected by delivery 9eal contract nd Re ! 'ort) )e Re ! 'ort) )e

Distinctions +et0een Antic*resis Antic*resis

1. 2.

/roperty is delivered to the creditor 4reditor re)uires only the right to receive the fruits of the property; hence it does not produce a real right 4reditor, unless there is stipulation to the contrary, is obliged to pay the ta,es and charges upon the estate !rticle 213*% 4reditor given possession of the property shall supply the fruits thereof to the payment of interest, if owing, and thereafter to the principal of the credit

1. 2.

=ebtor usually retains possession of the property

the

3.

4reditor does not have any right to receive the fruits, but mortgage creates a real right over the property which is enforceable against the whole world 4reditor has no such obligation

3.

#.

6ortgagee has no such obligation #.

E.

O+!i) tions of Antic*retic Creditor

1. .he creditor is obliged, unless there is a stipulation to the contrary, to pay the ta,es and charges upon the estate. 7f he does not pay the ta,es, he is, by law !rticle 11+2%, re)uired to pay indemnity for damages to the debtor. )ando $s. Gimene3, *# /hil. #*" C1"32D%. 2. !nother obligation of the creditor is to apply the fruits, after receiving them to the interest, if owing, and thereafter to the principal !rticle 2132% in accordance with the provisions of !rticle 2133 or 213-. Eence, the duty of the creditor to render an account of said fruits to the debtor and the corresponding right of the latter that the said fruits be applied to the debt. 1arretto $s. 1arretto* 3+ /hil. 23# C1"1+>? Dia3 and Rubillos $s. De Mende3ona* #- /hil. $$$ C1"2$D; Macapilac $s. Gutierre3 Recipe #3 /hil. ++2 C1"22D%. 3. 1. Re"edy of Creditor in C se of Def u!t .o bring an action for specific performance

2. .o petition for the sale of the real property as in a foreclosure of mortgages under 9ule $- of the 9ules of 4ourt. .he parties, however, may agree on an e,tra&udicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge see !rticle 132+; Ta$era $s. %l /o!ar -ilipino* +nc . $- /hil. +12 C1"3"D%.

I:.
A.

C&ATTEL 'ORTGAGE
Definition ! chattel mortgage is

2. a formal contract because for its validity, registration in the 4hattel 6ortgage 9egister is indispensable.

Page 33

1. an accessory contract because it is for the purpose of securing the performance of a principal obligation;

3. a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation. -ilipinas Marble Corporation $s. +ntermediate (ppellate Court 1#2 349! 1-2% ! mortgage is a mere accessory contract and thus, its validity would depend on the validity of the loan secured by it. We however, re&ect the petitioner1s argument that since the chattel mortgage involved was not registered, the same is null and void. !rticle 212* of the 4ivil 4ode clearly provides that the non'registration of the mortgage does not affect the immediate parties. 7t states5 J(rticle 212G. 7n addition to the re)uisites in !rticle 22-*, it is indispensable, in order that a mortgage may be validly constituted that the document in which it appears be recorded in the 9egistry of /roperty. +f the instrument is not recorded* the mort!a!e is ne$ertheless bindin! bet,een the parties. ,,, ,,, ,,, .he petitioner cannot invo(e the above provision to nullify the chattel mortgage it e,ecuted in favor of respondent =0/.

C.

Distinction +et0een C* tte! 'ort) )e C* tte! 'ort) )e

nd P!ed)e P!ed)e

=elivery of personal property to the mortgagee is not necessary 9egistration in the 4hattel 6ortgage 9egister is necessary for its validity /rocedure for sale of the mortgaged property is found in 3ection 1# of 9! 1*2-, as amended 7f property is foreclosed, the e,cess over the amount due goes to the debtor

=elivery is necessary

9egistration in the 9egistry of /roperty is not necessary for its validity /rocedure for sale of pledged thing is found in !rticle 2112 of the 4ivil 4ode 7f property is sold, the debtor is not entitled to the e,cess %&ceptions# a.% contrary stipulation !rticle 212*% b.% legal pledge !rticle 2121%

7f property is foreclosed, creditor is entitled to recover the deficiency from the debtor %&ception5 if chattel mortgage is a security for the purchase of personal property in installments !rticle 1#-#%

7f property is sold, creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary !rticle 211*%.

1. Qnowingly removing any personal property mortgaged under the 4hattel 6ortgage Aaw to any province or city other than the one in which it was located at the time of the e,ecution of the mortgage without the written consent of the mortgagee; and

Page 33

D.

Offenses In8o!8in) C* tte! 'ort) )e

2. 3elling or pledging personal property already mortgaged, or any part thereof, under the terms of the 4hattel 6ortgage Aaw without the consent of the mortgagee written on the ban( of the mortgage and duly recorded in the 4hattel 6ortgage 9egister !rticle 31", 9evised /enal 4ode%. #ote" .he mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full U... $s. 0ila 8o, 32 /hil. $1 C1"1*D%, or the mortgagor'seller informed the purchaser that the thing sold had been mortgaged. 4)eople $s. (l$ares, #* /hil. #+2 C1"23D%. But the sale is valid although no written consent was obtained from the mortgagee but the mortgagor lays himself open to criminal prosecution. .er$ice,ide .pecialists* +nc. $s. +ntermediate (ppellate Court* 1+# 349! -2 C1"-"D; D * ;r. $s. Court of (ppeals, 1"- 349! -2$ C1"-1D%. E. Su+7ect ' tter of C* tte! 'ort) )e 1. 2. 3. #. *. $. +. 3hares of stoc( in a corporation 7nterest in business 6achinery and house of mi,ed materials treated by parties as personal property and no innocent third person will be pre&udiced thereby Ma8ati 2easin! and -inance Corporation $s. <ea$er Te&tile Mills* +nc.* 122 349! 2"$ C1"-3D. :essels, the mortgage of which have been recorded with the /hilippine 4oast ;uard in order to be effective as to third persons 6otor vehicles, the mortgage of which had been registered both with the Aand .ransportation 4ommission and the 4hattel 6ortgage 9egistry is order to affect third persons Eouse which is intended to be demolished ;rowing crops and large cattle section +, paragraphs 2 and 3, !ct >o. 1*2-%

#ote" 3ection + of the 4hattel 6ortgage Aaw does not demand a minute and specific description of every chattel mortgaged in the deed of mortgage, but only re)uires that the description of the mortgaged property be such as to enable the parties to the mortgage or any other person to identify the same after a reasonable investigation and in)uiry .aldana $s. )hil. Guarant Co.* +nc., 12$ /hil. "1" C1"$2D%; otherwise, the mortgage is invalid. 3. Cre tion of C* tte! 'ort) )e

1. .he law as it now stands provides for only one way for e,ecuting a valid chattel mortgage, i.e., the registration of the personal property in the 4hattel 6ortgage 9egister as security for the performance of an obligation. !rticle 21#2; see !rticle 22-*%. @nder the 4hattel 6ortgage Aaw, if the property as situated in a different province from that in which the mortgagor resides, the registration must be in both registers 3ection #, !ct >o. 1*2-%; otherwise, the chattel mortgage is void. 2. 7t has been ruled however that if the chattel mortgage is not recorded, it is nevertheless binding between the parties. -ilipinas Marble Corporation $s. +ntermediate (ppellate Court , 1#2 349! 1-2 C1"-$D; !rticle 212*%. G. Effect of Re)istr tion

.he registration of the chattel mortgage is an effective and binding notice to other creditors of its e,istence and creates a real right or a lien which being recorded follows the chattel wherever it goes. .he registration gives the mortgagee the symbolical possession. 46orthern Motors* +nc. $s. Co@uia* $- 349! 3+# C1"+*D%. &. Re)istr tion of Assi)n"ent nd 'ort) )e O.tion !

1. .here is no law e,pressly re)uiring the recording of the assignment of a mortgage. While such assignment may be recorded, the law is permissive and not mandatory. 2. .he assignee is subrogated to the rights and obligations of the assignor'mortgagee with respect to the chattel mortgage constituted in favor of the latter. 4onse)uently, the assignee is bound by the terms and conditions of the chattel mortgage e,ecuted between the mortgagor and the mortgagee. 1( -inance Corporation $s. Court of (ppeals* 221 349! 1*+ C1""1D%. I. Affid 8it of Good 3 it*

1. .he affidavit of good faith is an oath in a contract of chattel mortgage wherein the parties Jseverally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purpose and that the same is &ust and valid obligation and one not entered into for the purpose of fraud.

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2. @nder 3ection * of the 4hattel 6ortgage Aaw, in describing what shall be deemed sufficient to constitute a good chattel mortgage, includes the re)uirement of an affidavit of good faith appended to the mortgage and recorded therewith. 0ut the absence of the affida$it $itiates a mort!a!e onl as a!ainst third persons ,ithout notice li8e creditors and subse@uent encumbrances . Ailius vs. 6anila 9ailroad 4o., $2 /hil. *2 C1"3*D; /hil. 9efining 4o. vs. ?ar)ue, $1 /hil. 22" C1"3*D; ;iberson vs. !. >. ?urreidini 0ros., ## /hil. 21$ C1"22D%. 3. ! deed of chattel mortgage is void where it provides that the security stated therein Jis for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgageeK. ! mortgage that contains a stipulation in regard to future advances in the credit will ta(e effect only from the date the same are made and not from the date of the mortgage. 4;aca $s. Da$ao 2umber Co.* 113 349! 12+ C1"-2D%. /. 3orec!osure of C* tte! 'ort) )e

1. 'ublic (ale if the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of the mortgage, the creditor has no right to appropriate to himself the personal property !rticle 21#1, 22--% because he is permitted only to recover his credit from the proceeds of the sale of the property at public auction through a public officer in the manner prescribed in 3ection 1# of !ct >o. 1*2-. Mahone $s. Tuason, 3" /hil. "*1 C1"1"D%; %s!uerra $s. Court of (ppeals* 1+3 349! 1 C1"-"D%. 2. 'ri)ate (ale if there is an e,press stipulation in the contract. %&ception5 fraud or duress #ote" 1. .he mortgagee may, after thirty 32% days from the time of the condition bro(en, cause the mortgaged property to be sold at public auction by a public officer 3ection 1#, !ct >o. 1*2-% 2. .he 32'day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor with at least ten 12% days notice to the mortgagor and posting of public notice of time, place and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. !fter the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. Cabral $s. %$an!elista* 2- 349! 1222 C1"$"D% $. Ri)*t of 'ort) )ee to Reco8er Deficiency

1. .he creditor may maintain an action for the deficiency although the 4hattel 6ortgage Aaw is silent on this point (bla3a $s. +!nacio, unrep% 123 /hil. 11*1 C1"*-D; Garrido $s. Tuason, 2# 349! +2+ C1"$-D1 )hil. 6ational 1an8 $s. Manila +n$estment 9 Construction* +nc.* supra? 1an8 of the )hilippine +salnd $s. 7lutan!a 2umber Co ., #+ /hil. 22 C1"2#D%. .he action may be sought within ten 12% years from the time the cause of action accrues. 2. 7f the chattel mortgage is constituted, whether by the debtor'vendee or a third person, as security for the purchase of personal property payable in installments, no deficiency &udgment can be as(ed and any agreement to the contrary shall be void !rticle 1#-#%. 3. .he chattel mortgagee is entitled to deficiency &udgment in an action for specific performance !rticle 1#-# C1D% where the mortgaged property is subse)uently attached and sold. .he e,ecution sale in such case is not a foreclosure sale. 4+ndustrial -inance Corporation $s. Ramire3, ++ 349! 1*2 C1"++D%.

:.
A.

CONC(RRENCE AND PRE3ERENCE O3 CREDITS

Li +i!ity for O+!i) tions

.he debtor is liable with all his property, present and future, for the fulfillment of his obligations, sub&ect to the e,emptions provided by law.

1. -amil home constituted &ointly by husband and wife or by unmarried head of a family !rticle 1*2, Hamily 4ode%.

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B.

E-e".t Pro.erty

%&ceptions#

a.% b.% c.% d.%

for non'payment of ta,es; for debts incurred prior to the constitution of the family home; for debts secured by mortgages on the premises before or after such constitution; and for debts due to laborers, mechanics, architects, builders, material men and others who have rendered service or furnished material for the construction of the building

2. 9ight to receive support as well as any money or property obtained as such support. !rticle 22*, Hamily 4ode% 3. .ools and implements necessarily used by him in his trade or employment;

#. .wo horses, or two cows, or two carabaos or other beasts of burden, such as the debtor may select, not e,ceeding one thousand pesos in value and necessarily used by him in his ordinary occupation; *. Eis necessary clothing and that of all his family.

$. Eousehold furniture and utensils necessary for house(eeping and used for that purpose by the debtor, such as the debtor may select, of a value not e,ceeding one thousand pesos; +. /rovisions for individual or family use insufficient for three months;

-. .he professional libraries of attorney1s, &udges, physicians, pharmacists, dentist, engineers, surveyors, clergymen, teachers and other professionals, not e,ceeding three thousand pesos in value; ". Bne fishing boat and net, not e,ceeding the total value of one thousand pesos, the property of any fisherman, by the lawful use of which he earns a livelihood; 12. 3o much of the earnings of the debtor for his personal services within the month preceding the levy as are necessary for the support of his family; 11. Aettered gravestones;

12. !ll moneys, benefits, privileges or annuities accruing or in any manner growing out of any life insurance, if the annual premiums paid do not e,ceed five hundred pesos, and if they e,ceed the sum, a li(e e,emption shall e,ist which shall bear the same proportion to the moneys, benefits privileges and annuities so accruing or growing out of such insurance that said five hundred pesos bears to the whole premiums paid; 13. .he right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the government; 1#. 1*. C. 1. 4opyrights and other properties especially e,empted by law 3ection 12, 9ule 3"% /roperty under legal custody and of the public dominion. Preferred Credits 0it* Res.ect to S.ecific 'o8 +!e Pro.erty =uties, ta,es and fees due thereon to the state or any subdivision thereof;

2. 4laims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; 3. 4laims for the unpaid price of movable sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same, and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobili<ation of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; #. 4redits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage upon the things mortgaged, up to the value thereof; *. 4redits for ma(ing repairs, safe(eeping or preservation or personal property on the movable thus made, repaired, (ept or possessed;

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$. +.

4laims for laborers wages, on the goods manufactured or the wor( done; Hor e,penses of salvage, upon the goods salvaged;

-. 4redits between the landlord and the tenant arising from the contract of tenancy on shares, on the share of each in the fruits or harvest; ". 4redits for transportation, upon the goods carried, for the price of the contract and incidental e,penses, until their delivery and for thirty days thereafter; 12. 4redits for lodging and supplies usually furnished to travelers by hotel(eepers, on the movables belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests; 11. 4redits for seeds and e,penses for cultivation and harvest advanced to the debtor, upon the fruits harvested; 12. 4redits for rent for one year, upon the personal property of the lessee e,isting on the immovable leased on the fruits of the same, but not on money or instruments of credit; 13. 4laims in favor of the depositor if the depository has wrongfully sold the thing deposited, upon the price of the sale. 7n the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully ta(en, the creditor may demand them from any possessor within thirty 32% days from the unlawful sei<ures. (ummar%5 a.% ta,es b.% malversation by public officials c.% vendor1s lien d.% pledge, chattel mortgage e.% mechanic1s lien f.% laborer1s wages g.% salvage h.% tenancy i.% carrier1s lien ?.% hotel1s lien (.% crop loan l.% rentals ' one year m.% deposit .he foregoing enumeration is not an order to preference !rticles 22#- 22#"%

#ote" D. 1. 2.

Preferred Credits 0it* Res.ect to S.ecific I""o8 +!e Pro.erty .a,es due upon the land or building; Hor the unpaid price of real property sold upon the immovable sold;

3. 4laims of laborers. 6asons, mechanics and other wor(men, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other wor(s, upon said buildings, canals or other wor(s; #. 4laims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals, and other wor(s, upon said buildings, canals or other wor(s; *. 6ortgage credits recorded in the 9egistry of /roperty, upon the real estate mortgage;

$. F,penses for the preservation or improvement of real property when the law authori<es reimbursement, upon the immovable preserved or improved; +. 4redits annotated in the 9egistry of /roperty, by virtue of a &udicial order, by attachments or e,ecutions, upon the property affected, and only as to later credits; -. 4laims of co'heirs for warranty in the partition of an immovable among them, upon the real property thus divided; ". 4laims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

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12.

4redits of insurers, upon the property insured, for the insurance premium for two years. (ummar%" a.% ta,es b.% vendor1s lien c.% contractor1s lien d.% lien of materialmen e.% mortgage f.% e,penses of preservation g.% recorded attachments h.% warranty in partition i.% conditional donations &.% premiums for 2 year insurers

#ote" .he foregoing enumeration is not an order of preference 4Carried 2umber Co. $s. (CC-(* -3 349! #11 C1"+*D%. E. Order of Preference 0it* Res.ect to Ot*er Pro.erties of t*e De+tor

1. /roper funeral e,penses for the debtor, or children under his or her parental authority who have no property of their own, when approved by the court; 2. 4redits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement of the proceedings in insolvency; 3. F,penses 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; #. 4ompensation due to the laborers of their dependents under laws providing for indemnity for damages in cases of labor accident or illness resulting from the nature of the employment; *. 4redits and advancements made to the debtor for support of himself or herself, and family, during the last preceding insolvency; $. +. 3upport during the insolvency proceedings, and for three months thereafter; Hines and civil indemnification arising from a criminal offense;

-. Aegal e,penses, and e,penses incurred in the administration of the insolvent1s estate for the common interest of the creditors, when properly authori<ed and approved by the court; ". .a,es and assessments due the national government, other those mentioned in !rticles 22#1, >o. 1, and 22#2, >o. 1; 12. .a,es and assessments due any province, other than those mentioned in !rticles 22#1, >o. 1 and 22#2, >o. 1; 11. .a,es and assessments due any city or municipality other than those mentioned in !rticles 22#1, >o.1 and 22#2, >o. 1; 12. 13. =amages fro death or personal in&uries caused by a )uasi'delict; ;ifts due to public and private institutions of charity or beneficence;

1#. 4redits which without special privilege, appear in a% a public instrument; or b% in the final &udgment, if they have been the sub&ect of litigation. .hese credits shall have preference among themselves in the order of priority of the dates of the instruments and of the &udgments, respectively !rticle 22##% (ummar%" a% b% c% d% e% f% g% h% i% &% (% funeral e,penses wages of employees one year e,penses of last illness wor(men1s compensation support for one year support during insolvency fines in crimes legal e,penses ' administration ta,es tort donations

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l%

appearing in public instrument or final &udgment

#ote" 1. 7n contrast with !rticles 22#1 and 22#2, !rticle 22## creates no liens on determinate property which follow such property. What !rticle 22## creates are simply rights in favor or certain creditors to have the cash and other assets of the insolvent applied in a certain se)uence or order of priority Republic $s. )eralta, 1*2 349! 3+ C1"-+D%. 2. !rticle 22## relates to the property of the insolvent that is not burdened with the liens or encumbrances created or recogni<ed by !rticle 22#1 and 22#2. ;. Recent /uris.rudence on Concurrence nd Preference of Credits

a% ! foreclosing ban( creditor cannot be held liable for unpaid wages and the li(e of the employees of the mortgagor. .he employees should file their claims in a proceeding in ban(ruptcy on their employer. De$elopment 1an8 of the )hilippines $s. 6ational 2abor Relations Commissions , 1-$ 349! -#1 C1""2D%. b% Hrom the provisions of !rticle 112 of the Aabor 4ode and 3ection 12, 9ule :777, 0oo( 777 of the 9evised 9ules and 9egulations 7mplementing the Aabor 4ode, a declaration of ban(ruptcy or a &udicial li)uidation must be present before the wor(er1s preference may enforced. 4De$elopment 1an8 of the )hilippines $s. .antos* 1+1 349! 13- C1"-"D%. D1) $s. 62RC 23$ 349! 11+% 1. .o the e,tent that claims for unpaid wages fall outside the scope of !rticles 22#1 $% and 22#2 3%, they would come within the ambit of the category of ordinary preferred credits under !rticle 22#2. .he right of first preference as regards unpaid wages recogni<ed by !rticle 112 of the Aabor 4ode does not constitute a lien on the property of the insolvent debtor in favor or wor(ers. 7t is a right to a first preference in the discharge of the funds of the &udgment debtor. 1)+ $s. Court of (ppeals 22" 349! 223% Whenever a distressed corporation as(s 3F4 for rehabilitation and suspension of payments, preferred creditor may no longer assert such preference, but shall stand on e)ual footing with other creditors. .his rule will enable the rehabilitation receiver to effectively e,ercise his powers free from &udicial and e,tra&udicial interference that might unduly hinder rescue of the company. D1) $s. 62RC 22" 349! 3*2% 1. 2. 3. !rticle 112 of the Aabor 4ode as amended must be viewed and read in con&unction with the provisions of the 4ivil 4ode on concurrence and preference of credits. .he 4ivil 4ode and Aabor 4ode provisions re)uire &udicial proceedings in rem in ad&udication of creditor1s claims against the debtor1s assets to become operative. 9! $+1* e,panded Jwor(er preferenceK to cover not only unpaid wages but also other monetary claims of laborers, to which even claims of the ;overnment must be deemed subordinate. !mendatory provisions of 9! *+1* which became effective on 21 6arch 1"-" should only be given prospective application.

3.

#. 3.

Order of Preference of Credits

1. .hose credits which en&oy preference with respect to specific movable, e,cluded all others to the e,tent of the value of the personal property to which the preference refers !rticle 22#$%.

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2. 7f there are two or more credits with respect to the same specific movable property, they shall be satisfied pro'rata, after the payment of duties, ta,es, and fees due the 3tate or any subdivision thereof !rticle 22#+%. 3. .hose credits which en&oy preference in relation to specific real property or real rights, e,clude all others to the e,tent of the value of the immovable or real right to which the preference refers !rticle -%. #. 7f there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the ta,es and assessments upon the immovable property or real right !rticle 22#"%. *. .he e,cess, if any, after the payment of the credits which en&oy 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 !rticle 22*2%. $. .hose credits which do not en&oy any preference with respect to specific property and those which en&oy preference, as to the amount not paid, shall be satisfied according to the following rules5 a. b. 7n the order established in !rticle 22##; 4ommon credits referred to in !rticle 22#* shall en&oy no preference and shall be paid pro rata regardless of dated !rticle 22*1%.

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