2.

Interest accruing from unpaid interest Interest due shall earn interest from the time it
is judicially demanded although the obligation may be silent on this point (Art. 2212.)

If interest is payable in kind:

If interest is payable in kind, its value shall be appraised at the current price of the products or
goods at the time and place of payment.
Take note that you should not confuse this with the rule when the principal obligation consists of
goods other than money. If the principal obligation consists in the payment of goods and it is
impossible to deliver the goods, the borrower should pay the value of the thing at the time of the
constitution of the obligation.
But if interest is payable in kind, it should be appraised at its value at the time of payment.
General Rule: Accrued interest shall not earn interest
Exceptions:
1. When judicially demanded (Art. 2212)
2. Express stipulation Also called compounding interest where the parties agree that
accrued interest shall be added to the principal and the resulting total amount shall earn
interest.
A stipulation as to compounding interest must be in writing.
How does compounding interest work?
Lender lends P100,000 payable in 2 years at 10% interest compounded per annum.
At the end of the first year, how much is due? Principal plus 10% interest = 110,000.
On the second year, the 110,000 becomes the new principal amount and it is what will earn the 10%
interest. So at the end of the second year, how much is due?
110,000 + 10% of 110,000
= 110,000 + 11,000
= 121,000
In compounding interest, you add the unpaid interest to the principal. The resulting amount is your
new principal which will then earn interest again.
What if the borrower pays interest when there is no stipulation providing for it?
If the debtor pays unstipulated interest by mistake, he may recover, since this is a case of
solutio indebiti or undue payment.
But if the debtor voluntarily pays interest (either unstipulated or stipulated by not in writing) because
of some moral obligation, he cannot later recover. The obligation to return the interest is a natural
obligation.

II. GUARANTY AND SURETYSHIP

CHAPTER 1 NATURE AND EXTENT OF GUARANTY
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

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If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title 1 of this Book shall be observed. In such case the contract is called a suretyship.
Guaranty (def.) A contract whereby the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
In a contract of guaranty, the parties are the guarantor and the creditor.
Characteristics of the Contract of Guaranty (A-SC-U-D)

1. Accessory: It is dependent for its existence upon the principal obligation guaranteed by it.
2. Subsidiary and Conditional: It takes effect only when the principal debtor fails in
his obligation.

3. Unilateral:
a.

It gives rise to obligations on the part of the guarantor in relation to the creditor and
not vice-versa. (Although after its fulfillment, the principal debtor should indemnify
the guarantor, but this obligation is only incidental)

b.

It may be entered into even without the intervention of the principal debtor.

4. Distinct Person: It requires that the person of the guarantor must be distinct from the
person of the principal debtor (you cannot guaranty your own debt). However, in a real
guaranty, a person may guarantee his own obligation with his own properties.

Classification of Guaranty
1. In the broad sense:

a. personal: the guaranty is the credit given by the person who guarantees
the fulfillment of the principal obligation (guarantor)

b. real: the guaranty is property. If the guaranty is immovable property: real mortgage
or antichresis; If the guaranty is movable property: pledge or chatter mortgage

2. As to origin:

a. conventional: by agreement of the parties

b. legal: imposed by law
c. judicial: required by a court to guarantee the eventual right of one of the parties in a
case

3. As to consideration:

a. gratuitous: the guarantor does not receive anything for acting as guarantor
b. onerous: the guarantor receives valuable consideration for acting as guarantor
4. As to the person guaranteed:

a. single: constituted solely to guarantee or secure performance of the principal

obligation

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b. double or sub-guaranty: constituted to secure fulfillment of a prior guaranty;

guarantees the obligation of a guarantor

5. As to scope and extent:

a. definite: limited to the principal obligation only or to a specific portion thereof

b. indefinite or simple: includes not only the principal obligation but also all its
accessories, including judicial costs.

Second Paragraph of Art. 2047: Suretyship

If a person binds himself solidarily with the principal debtor, it is a contract of suretyship. The
guarantor is called a surety. Suretyship is governed by Articles 1207 to 1222 of the Civil Code on
solidary obligations. Suretyship dispenses with certain legal requirements/conditions precedent for
proceeding against a guarantor.
What is the difference between passive solidarity (solidarity among debtors)
and suretyship?
Review of oblicon: According to Tolentino, the two are similar in the following ways:

1. A solidary debtor, like a surety, stands for some other person.

2. Both debtor and surety, after payment, may require that they be reimbursed.
The difference is that the lender cannot go after the surety right away. There has to be default on
the part of the principal debtor before the surety becomes liable. If it were mere solidarity among
debtors, the creditor can go after any of the solidary debtors on due date.
Nature of a Suretys Undertaking

1. Contractual and Accessory BUT Direct: The contractual obligation of the surety is merely

an accessory or collateral to the obligation contracted by the principal. BUT, his liability to the
creditor is direct, primary, and absolute.

2. Liability is limited by the terms of the contract: The extent of a suretys liability is
determined only by the terms of the contract and cannot be extended by implication.

3. Liability arises only if principal debtor is held liable: If the principal debtor and the

surety are held liable, their liability to pay the creditor would be solidary. But, the surety does
not incur liability unless and until the principal debtor is held liable.
a.

A surety is bound by a judgment against the principal even though the party was not a
party to the proceedings.

b.

The creditor may sue, separately or together, the principal debtor and the surety
(since they are solidarily bound).

c.

Generally, a demand or notice of default is not required to fix the suretys liability.

d.

An accommodation party (one who signs an instrument as maker, drawer, acceptor, or

indorser without consideration and only for the purpose of lending his name) is, in
effect, a surety. He is thus liable to pay the holder of the instrument, subject to
reimbursement from the accommodated party.

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Example: Tuks accommodates Shak so that he can obtain a loan from the bank. At
the bottom of the loan agreement, the following signatures appear:
(sgd) Tuks
Lino Chris Kapunan

(sgd) Shak
Sherwin Shakramy

Is Tuks a surety or a solidary debtor? According to JPSP, based on this document

above, Tuks is a solidary debtor. Remember the rule? I promise to pay signed by two
parties = solidary. To make sure that hes merely a guarantor or surety, Tuks should
sign a separate guaranty agreement. Besides, a guaranty must be express. It is not
presumed.
e. A surety bond is void where there is no principal debtor.

4. Surety is not entitled to exhaustion: A surety is not entitled to the exhaustion of the
properties of the principal debtor since the surety assumes a solidary liability for the
fulfillment of the principal obligation.

5. The undertaking is to the CREDITOR, not to the principal debtor: The debtor cannot

claim that the surety breached its obligation to pay for the principal obligation because there
is no obligation as between the surety and the debtor. If the surety does not pay, the
principal debtor is still not relieved of his obligation.

Guaranty Distinguished from Suretyship:

GUARANTY
Guarantor promises to answer for the debt,
default or miscarriage of the principal
Liability of the guarantor depends upon an
independent agreement to pay the obligation if
the primary debtor fails to do so
The engagement of the guarantor is a collateral
undertaking
The guarantor is secondarily liable

SURETYSHIP
Surety promises to answer for the debt, default or
miscarriage of the principal (same)
Surety assumes liability as a regular party to
the undertaking
Surety is charged as an original promisor
A surety is primarily liable

MAIN DIFFERENCE: A surety undertakes to pay if the principal does not pay (insurer of the debt). A
guarantor binds himself to pay if the principal cannot pay (insurer of the solvency of the debtor).
Since the obligation of the surety is to pay so long as the principal does not pay (even if he can;
even if he is solvent), the undertaking of the surety is more onerous than that of a guarantor
who pays only in the event that the principal is broke.
Illustration:
A borrows P10,000 from B, with C agreeing to be the surety. A refuses to pay B out of spite. In this
case, since C is a surety, B can immediately demand payment from C.
If, in this case, C is a guarantor instead, B would have to exhaust all the property of A before he can
collect from C. it is not enough that A refuses to pay even if he can; in order for C to be liable, A
would have to be unable to pay.
If you were a lender and the borrower offers as security either X as guarantor or a
real estate mortgage, which one would you choose?
Choose the mortgage. If you were the lender, a real estate mortgage is more advisable because you
can collect against the property. In a guaranty/surety, you would have to go against the guarantor or

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surety you would have to sue him, obtain judgment, and then execute judgment. This is subject to
a lot of delays. The guarantor or surety can stall your claim.
Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.
GENERAL RULE: Guaranty is gratuitous.
EXCEPTION: Guaranty is onerous only if it is stipulated.
What is the cause/consideration of a contract of guaranty?
The cause of a contract of guaranty is the same cause which supports the principal obligation
of the principal debtor. There is no need for an independent consideration in order for the contract of
guaranty to be valid. The guarantor need not have a direct interest in the obligation nor receive any
benefit from it. It is enough that the principal obligation has consideration.
Art. 2049 A married woman may guarantee an obligation without the husbands consent, but shall
not thereby bind the conjugal partnership, except in cases provided by law.
Art. 94 of the Family Code
The absolute community of property shall be liable for:
(3) Debts and obligations contracted by either spouse without the consent of the other to the extent
that the family may have been benefited.
A married woman who acts as guarantor without the consent of the husband binds only her
separate property unless the debt benefited the family.
There is no express prohibition against a married woman acting as guarantor for her husband.
Remember that now, in order to bind the absolute community, the consent of both spouses is needed.
If only the consent of one spouse is obtained, the absolute community will not be liable unless the
obligation redounded to the benefit of the community.
When the husband acts as a guarantor for another person without the consent of the wife, the
guaranty binds only the husband since the benefit really accrues to the principal debtor and not to the
husband or his family. The exception is if the husband is really engaged in the business of
guaranteeing obligations because in this case, his occupation or business is deemed to be undertaken
for the benefit of the family.
Art. 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the
principal debtor, the provisions of articles 1236 and 1237 shall apply.
A contract of guaranty is between the guarantor and the creditor. It can be instituted without the
knowledge or even against the will of the debtor, since the purpose of the contract is to give the
creditor all the possible measures to secure payment.
However, if the contract of guaranty is entered into without the knowledge or consent or against the
will of the principal debtor, the effect is like payment by a 3rd person:
1. The guarantor can only recover insofar as the payment has been beneficial to the debtor.
2. The guarantor cannot compel the creditor to subrogate him in the creditors rights such as
those arising from a mortgage, guaranty or penalty.
If the guaranty was entered into with the consent of the principal debtor, the guarantor is subrogated
to all the rights which the creditor had against the debtor once he pays for the obligation.
Illustration:

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A owes B P10,000. Without the knowledge of A, C guarantees the obligation. C pays A P10,000. C
tries to collect the P10,000 from A, but A tells him that he has already paid B 4,000.
In this case, C can only collect P6,000 from A since it was only the extent to which A was
benefited by his payment.
If the loan was secured by a mortgage, C cannot foreclose the mortgage if A does not pay him
because he is not subrogated to the rights of B.
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or
unenforceable contract. It may also guarantee a natural obligation.
A guaranty is an accessory contract and cannot exist without a valid principal obligation. So if the
principal obligation is void, the guaranty is also void.
BUT, a guraranty may be constituted to guarantee the following defective contracts and natural
obligations:
1. Voidable: because the contract is binding unless it is annulled
2. Unenforceable: because an unenforceable contract is not void.
3. Natural obligations: even if the principal obligation is not civilly enforceable, the creditor may
still go after the guarantor
Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured.
Continuing Guaranty (def) A guaranty that is not limited to a single transaction but which
contemplates a future course of dealings, covering a series of transactions generally for an
indefinite time or until revoked.
A continuing guaranty is generally prospective in its operation and is intended to secure future
transactions (generally does not include past transactions).
Examples:

1. Common example given by JPSP is the credit line The bank allows you to borrow up to
a certain ceiling, but there is no release of funds yet. If you have an obligation with a third
person and you default, the third person just needs to inform the bank, and the bank will
release the money. The money released will be considered as a loan from the bank to you.
The bank will allow the release of the money so long as it doesnt exceed the ceiling.

2. To secure payment of any debt to be subsequently incurred If the contract states

that the guaranty is to secure advances made from time to time, now in force or
hereafter made, or uses the words any debt, any indebtedness, any sum, any
transaction, the guaranty is a continuing guaranty.

3. To secure existing unliquidated debts Future debts may also mean debts that
already exist but whose amount is still unknown.

Art. 2053 may be misleading because it says that a guaranty may be constituted to secure future
debts. The important thing to remember in the guaranty of future debts is that there must be an

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existing obligation already that is being guaranteed. Because without that existing obligation, the
guaranty would be void. Guaranty is an accessory obligation, so it cannot exist without the principal.
Example: G guarantees the 10K loan that B owes L and any other indebtedness that B may
incur against L. This is a valid guaranty because there is already an existing obligation (the
10K loan).
G guarantees the loan that B and L will enter into tomorrow. This is not valid. Although it is
for a future debt, it is not valid under Article 2053 because there is no principal obligation yet.
There is nothing to guarantee.
Guaranty of Conditional Obligations
If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the
fulfillment of the condition.
If it is subject to a resolutory condition, the happening of the condition extinguishes both the principal
obligation and the guaranty.
Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits of that of the
debtor.
Since the contract of guaranty is a subsidiary and accessory contract, the guarantors liability
cannot exceed that of the principal obligation. If the guarantor binds himself for more than the
liability of the principal debtor, his liability shall be reduced.
However, if the creditor sues the guarantor, the guarantor may be made to pay costs, attorneys fees,
and penalties even if this will make his liability exceed that of the principal.
How do you opt out of this rule?
Example: G guaranteed Bs 100K obligation to L to the extent of 100K. As an extra
consideration for lending the money, L wants an additional 20K from guarantor (gravy,
according to JPSP). Since 2054 provides that the guarantor cannot bind himself for more than
the principal debtor, how do the parties opt out of the rule?
Guarantor and Lender should enter into a new and separate agreement. They should take
it out of the context of the guaranty and have a new agreement in which L would (kunwari)
perform some service for G in consideration of the additional 20K.
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its
accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has been judicially required to pay.
RULE: Guaranty is never presumed. It must be express.
Reason for the rule: Because a guarantor assumes an obligation to pay for anothers debt without
any benefit to himself. Thus, it has to be certain that he really intends to incur such an obligation and
that he proceeds with consciousness of what he is doing.
Form required for Guaranty
Guaranty must be IN WRITING
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A contract of guaranty, to be enforceable, must be in writing because it falls under the Statute of
Frauds as a special promise to answer for the debt, default or miscarriage of another. De Leon
textbook says that surety is not covered by the Statute of Frauds. JPSP says that a surety is still
covered by the SOF since it is still a promise to answer for the default of another person. What is not
covered by the SOF is being a solidary co-debtor.
Construction of Guaranty
A guaranty is strictly construed against the creditor and in favor of the guarantor and is not
to be extended beyond its terms or specific limits. Doubts should be resolved in favor of the
guarantor or surety.
Generally, a guarantor is liable only for the obligation of the debtor stipulated upon, andnot
toobligations assumed PREVIOUS to the execution of the guaranty unless an intent to be
so liable is clearly indicated. (Prospective application of the guaranty)
However, this rule of construction is applicable only to an accommodation surety or one that is
gratuitous. It does not apply in cases where the surety is compensated with consideration. In such
cases, the agreement is interpreted against the surety company that prepared it.
Is a stipulation that says that the guaranty will subsist only until maturity of the
obligation valid?
Generally, no. Such a stipulation would defeat the purpose of a guaranty which is to answer for the
default of the principal debtor. If the guaranty is only up to the date of maturity, there is no way that
the guarantor can be liable since default comes only at maturity date.
But Cayo pointed out a situation in class where this might be possible and JPSP agreed: If the
lender asked for a guaranty precisely because there was a danger of the borrower absconding or
becoming insolvent prior to maturity date, then the guaranty is valid.
2nd Paragraph of Art. 2055: Extent of Guarantors Liability

1. Definite guaranty The liability of the guarantor is limited to the principal debt, to the
exclusion of accessories.

2. Indefinite or simple guaranty If the agreement does not specify that the liability of the

guarantor is limited to the principal obligation, it extends not only to the principal but also
to all its accessories.
This is because in entering into the agreement, the principal could have fixed the limits of
his responsibility solely to the principal. If he did not fix it, it is presumed that he wanted to
be bound not only to the principal but also to all its accessories.

GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of
guaranty since the contract is unilateral; only the guarantor binds himself to do something.

EXCEPTION:
If the guarantor merely offers to become a guaranty, it does not become a binding obligation unless
the creditor accepts and notice of acceptance is given to the guarantor.
On the other hand, if the guarantor makes a direct or unconditional promise of guaranty (and not
merely an offer), there is no need for acceptance and notice of such acceptance from the creditor.
Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer for the obligation which he guarantees.

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The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to
be complied with.
Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or
should become insolvent, the creditor may demand another who has all the qualifications required in
the preceding article. The case is excepted where the creditor has required and stipulated that a
specified person should be the guarantor.
Ideally, the qualifications of a guarantor are the ff:
1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he guarantees
But the creditor can waive these requirements.
Jurisdiction over the guarantor:
Jurisdiction over the guarantor belongs to the court where the principal obligation is to be fulfilled, in
accordance with the rule that accessory follows the principal.
Effect of Subsequent Loss of Qualifications
The qualifications need only to be present at the time of the perfection of the contract. The
subsequent loss of the qualifications would not extinguish the liability of the guarantor, nor will it
extinguish the contract of guaranty.
However, the creditor may demand another guarantor with the proper qualifications.
When may the creditor demand another guarantor?
1. In case the guarantor is convicted in the first instance of a crime involving dishonesty (since
he loses integrity)
2. In case the guarantor becomes insolvent (since he loses sufficient property to answer for the
obligation which he guarantees) there is no need for a judicial declaration of insolvency
What is the effect of the guarantors death on the guaranty?
The guaranty survives the death of the guarantor. The general rule is that a partys contractual rights
and obligations are transmissible to his successors. The rules on guaranty do not expressly provide
that the guaranty is extinguished upon the death of the guarantor. Applying Art. 2057, the
supervening incapacity of the guarantor does not extinguish the guaranty but merely gives the
creditor the right to demand a replacement. But the creditor can waive this right and choose to hold
the guarantor to his bargain. If he so chooses, the creditors claim passes to the heirs of the deceased
guarantor.
When may the creditor NOT demand another guarantor?
Where the creditor has stipulated in the original agreement that a specified person should be the
guarantor, he is bound by the terms of the agreement and he cannot thereafter deviate from it.

CHAPTER 2 EFFECTS OF GUARANTY

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

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The liability of the guarantor is only accessory and subsidiary. Thus, in order for the creditor to collect
from the guarantor, the ff. conditions must be fulfilled:
1. The creditor should have exhausted all the property of the debtor; and
2. The creditor has resorted to all legal remedies against the debtor (ex. Accion pauliana/
rescission of fraudulent alienations)
Can the creditor implead the guarantor as a co-defendant with the debtor?
No. Except in cases provided in 2059, Article 2062 says that creditor should proceed against the
principal debtor alone.
Art. 2059. This excussion shall not take place:
1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager
or representative;
5. If it may be presumed that an execution on the property of the principal debtor would not result
in the satisfaction of the obligation.
GENERAL RULE: The guarantor is entitled to demand that the creditor first exhaust the properties of
the principal debtor before collecting from the guarantor.
EXCEPTIONS:
1.
2.
3.
4.
5.

Under Art. 2059

If the guarantor does not comply with Art. 2060
If the guarantor is a judicial bondsman and sub-surety (Art. 2084)
Where a pledge or mortgage has been given by him as a special security.
If he fails to interpose it as a defense before judgment is rendered against him.

EXCEPTIONS UNDER ART. 2059 (RUSIA)

1. When the right is Renounced or waived.

The waiver must be made in express terms.

2. When the liability assumed by the guarantor is Solidary.

In this case, he becomes a surety with primary liability.
3. When the principal debtor is Insolvent.
What kind of insolvency? JPSP says its practical insolvency meaning assets are less than
liabilities, but it still depends on the situation.
Examples:
B borrows 100K from L guaranteed by G. B has 1M in assets which are all still with him and
1.5M in liabilities. B defaults. Can L collect from G right away?
No. In this case, G still has the benefit of excussion. Why? Because even if B is apparently
insolvent, since his liabilities exceed his assets, there is still no claim against these assets by
the other creditors. They can still be accessed by L, and L can still file an action for collection

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of money against B. So in this case, even if B is insolvent on paper, his properties are still
with him, and he can still pay L. Therefore, G still should still have the benefit of excussion.
B borrows 100K from L guaranteed by G. On due date, B defaults and has zero assets but has
a 200K credit/receivable from X. Can L collect from G.
Still no. L must file an action for collection and an accion subrogatoria so that he can
exercise Bs right to collect the money from X. Only if these actions fail can L then collect
from G.

4. When the principal debtor Absconds or cannot be locally sued.

So even if the borrower has fled to the Bahamas, if he still has properties here, Lender must
sue against the property first before collecting from the guarantor.

5. When resort to all legal remedies would be a Useless formality.

If exhausting the properties of the debtor would be useless since it would still not satisfy
the obligation, the guarantor cannot require the creditor to resort to these legal remedies
against the debtor anymore, since doing so would be a useless formality.
In this case, it is not even necessary that the debtor is judicially declared insolvent or
bankrupt.

How does the lender get around this requirement? If the lender wants to be able to go against the
guarantor right away without having to go through excussion, he must get the guarantor to either sign
a waiver of the benefit of excussion or make him solidarily liable (a surety).
Example: B borrowed 100k guaranteed by G. B defaulted. Lender made a demand for
payment against G. G paid. Later, G found out that he had the benefit of excussion. He
demanded reimbursement from Lender. Can G recover?
G cannot recover. Payment constitutes a waiver of the benefit.
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up
against the creditor upon the latters demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory sufficient to cover the amount of the debt.
Art. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the
creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of
said property, for the insolvency of the debtor resulting from such negligence.
To collect from the guarantor, the creditor must make a prior demand for payment from the
guarantor.

1. When should the demand be made? The demand can only be made after judgment on the
debt.

2. How should it be made? The demand must be an actual demand. Joining the guarantor in
the suit against the principal is not the demand intended by law.

Additional Requisites in Order to Claim the Benefit of Excussion

Guarantor tells Lender Exhaust Borrowers property first before collecting from me. Is this enough
for the Guarantor to claim the benefit of excussion?
No. In order to demand that the creditor exhaust the properties of the principal debtor, the guarantor
must:

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1. Set up the benefit of excussion against the creditor upon demand for payment by the creditor
from him; and

2. Point out to the creditor available property of the debtor within Philippine territory

sufficient to cover the amount of debt. (Therefore, property located abroad or which is not
easily available is not included among those that the guarantor can point out to the creditor.)

Once the guarantor has fulfilled the requisites for making use of the benefit of excussion, the
creditor has the duty to exhaust all the property of the debtor and to resort to all legal remedies
against the debtor. If he fails to do so, he shall suffer the loss to the extent of the value of the
property.
Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except
in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the
action. The guarantor may appear so that he may, if he so desires, set up such defenses as are
granted him by law. The benefit of excussion mentioned in article 2058 shall always be unimpaired,
even if judgment should be rendered against the principal debtor and the guarantor in case of
appearance by the latter.
The creditor must sue the principal debtor alone. He cannot sue the guarantor with the principal or
the guarantor alone except in the cases mentioned in Art. 2059 where the guarantor loses the benefit
of excussion.
The guarantor must be notified so that he may appear and set up his defenses if he wants to.
If the guarantor appears, he is still given the benefit of exhaustion event after judgment is rendered
against the principal debtor.
If he does not appear, judgment is not binding on him. Lender must sue the guarantor to claim
against him.
So, collecting from the guarantor is really a two-step process. The purpose of the two-step process is
to allow the guarantor to make use of the benefit of excussion. The disadvantage is that there is a
time lag between the judgment against the principal debtor and the one against the guarantor, which
allows the guarantor to hide his assets in the meantime.
How to get around this two-step process: A bank guaranty or a letter of credit. In a bank guaranty, if
the debtor does not pay, the creditor need only inform the bank of the default and the bank releases
the money. Its like a standing loan by the bank in favor of the debtor to answer for a debt in favor of
third persons, in case he is unable to pay.

Art. 2063. A compromise between the creditor and the principal debtor benefits the guarantor but
does not prejudice him. That which is entered into between the guarantor and the creditor benefits
but does not prejudice the principal debtor.
Reason: A compromise binds only the parties thereto and not third persons. Thus, it cannot prejudice
the guarantor or debtor who was not a party to the compromise.
Exception: If the compromise has a benefit in the nature of a stipulation in favor of a third person,
the compromise may bind that third person.
Example: D owes C 10K with G as guarantor.
D and C agree to reduce the debt to 8K. Gs liability is also reduced to 8K in case D does not pay,
since the compromise is beneficial to G.

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Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion both with respect to the
guarantor and to the principal debtor.
A sub-guarantor can demand the exhaustion of the properties both of the guarantor and of the
principal debtor before he pays the creditor.
Art. 2065. Should there be several guarantors of only one debtor and for the same debt, the
obligation to answer for the same is divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively bound to pay, unless solidarily has been
expressly stipulated.
The benefit of division among the co-guarantors ceases in the same cases and for the same
reasons as the benefit of excussion against the principal debtor.
When is there a benefit of division among several guarantors?
The following conditions must concur in order that several guarantors may claim the benefit of
division:
1. There should be several guarantors
2. Of only one debtor
3. For the same debt
In this case, the liability of the co-guarantors is joint. They are not liable to the creditor beyond
the shares which they are bound to pay.
Exceptions:
1.The co-guarantors cannot avail themselves of the benefit of division under the circumstances
enumerated in Art. 2059 (RUSIA).
2. If solidarity has been expressly stipulated.
Art. 2066. The guarantor who pays the debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the creditor, even
though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;
(4) Damages, if they are due.
Once the guarantor pays the principal obligation, the principal debtor must pay him back consisting
of:
(TIED)

1. The Total amount of the debt The guarantor has the right to demand reimbursement

only when he has actually paid the debt UNLESS there is a stipulation which gives him the
right to demand reimbursement as soon as he becomes liable even if he has not yet paid. The
guarantor cannot ask for more than what he has paid.

2. Interest The guarantor is entitled to interest from the time notice of payment of the debt

was made known to the debtor. The notice is a demand upon the debtor to pay the
guarantor. If he delays, he is liable for damages in the form of interest. The guarantor can
collect interest even if the principal obligation was a loan without an interest. This is because

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the right of the guarantor is independent of the principal obligation to the creditor. The basis
of the right is the delay of the debtor in reimbursing.

3. Expenses This refers only to those expenses that the guarantor has to satisfy in accordance
with law as a consequence of the guaranty. This is limited to those expenses incurred by the
guarantor after having notified the debtor that payment has been demanded of him by the
creditor.

4. Damages Guarantor is entitled to damages only if they are due.

Exceptions to the right to indemnity of the guarantor
1. Where the guaranty is constituted without the knowledge or against the will of the debtor, the
guarantor can only recover insofar as the payment had been beneficial to the debtor
2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to
be a donation, which requires the debtors consent. But the payment is valid with respect to
the creditor.
3. Waiver
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than
what he has really paid.
When the guarantor pays, he becomes subrogated to the rights of the creditor against the debtor.
What happens really is just a change in creditor. The guarantor becomes the creditor, but the
obligation subsists in all other aspects. He may, for example, foreclose a mortgage in case of failure
of the debtor to reimburse him.
The right of subrogation is given to the guarantor so that he can enforce his right to indemnity/ to be
reimbursed.
It arises by operation of law upon payment by the guarantor. The creditor need not formally cede his
rights to the guarantor.
But the right of subrogation is given only to the guarantor if he has the right to be reimbursed. If, for
some reason, he has no right to be reimbursed, he cannot subrogate either.
Compromise
B owes lender P1M. Lender was a good friend of Guarantor and agreed that if G became liable, he
would only have to pay P500K. If B defaults and Guarantor pays P500K, he can only recover P500K
from B, not the original P1M.
Is there a situation where this rule would even be disadvantageous to the Debtor?
Yes. Lets say there was no such rule. B owes L P1M. G, who was a compadre of L, brokered a deal
with L, in which they agreed that should G become liable, he would only pay P500K. Since theres no
rule, G tells B about the deal with L. G tells B that if G pays the P500K, B should reimburse him
P600K. This would give B a savings of P400 K, while G earns P100K. Everyone will be happy.
But since there is a rule that says that G cannot ask for more than what he has actually paid, G has
no inducement, no incentive to broker that deal with his compadre L. Why would he go through the
trouble when in any case, he would be getting the same amount that he pays?

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How do you get out of this situation? B should hire G as his agent to broker the deal with L. As
compensation for the service rendered by G, B will pay him P100K. So the agreement is taken out of
the context of the guaranty and everyone is happy.
Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against
him all the defenses which he could have set up against the creditor at the time the payment was
made.
Obligation of the guarantor before he pays the creditor
Before he pays the creditor, guarantor should first give notice to the principal debtor. If he does not
give notice, the debtor may enforce all the defenses which he could have set up against the creditor at
the time of payment.
Example: Debtor pays Creditor. But Creditor is sneaky and tells Guarantor that Debtor defaulted. So
Guarantor pays, without telling Debtor. Guarantor makes a demand for reimbursement from Debtor.
Is Debtor liable?
No. Debtor can invoke the fact of payment to the Creditor against Guarantor. Had Guarantor given
notice to Debtor, he would have known of the defenses that Debtor had against Creditor which would
have made him think twice about paying. Guarantors remedy here is against sneaky Creditor.
Art. 2069. If the debt was for a period and the guarantor paid it before it become due, he cannot
demand reimbursement of the debtor until the expiration of the period unless the payment has been
ratified by the debtor.
If the principal debt was one with a period, it becomes demandable only upon expiration of the period.
Guarantor is only liable if the debtor defaults, but there can be no default before the expiration of the
period. If the guarantor still pays before the expiration of the period, he must wait for the period to
expire before he can collect from the debtor.
Exception: Guarantor need not wait for the period if the debtor ratifies payment or consents to it.
Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of
the payment, repeats the payment, the former has no remedy whatever against the debtor, but only
against the creditor. Nevertheless, in case of gratuitous guaranty, if the guarantor was prevented by
a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.
This is like the situation in 2068, only this time, the guarantor pays before the debtor pays. Even in
such a case, guarantor still cannot recover from debtor because he should have informed debtor of his
intention to pay. Had he informed debtor, debtor would not have paid. Guarantor will suffer the loss of
his failure to comply with his one and only obligation before paying which is to notify the debtor.
Exception: Guarantor may claim reimbursement from debtor if (requisites):
1. It is a gratuitous guaranty
2. The guarantor was prevented by a fortuitous event from informing the debtor of payment
3. Creditor becomes insolvent
Remember that the culprit here, aside from the guarantor who did not inform the debtor, is the
sneaky creditor who nonchalantly received payment twice. If he is solvent, the guarantor must collect
from him. But if he is insolvent and the three requisites above are present, the guarantor can
reimburse from the principal debtor.
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for payment;

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(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of 10 years, when the principal obligation has no fixed period for its maturity
unless it be of such nature that it cannot be extinguished except within a period longer than 10
years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of
insolvency of the debtor.
Under these 7 circumstances, the guarantor has these rights against the debtor BEFORE he makes
payment:
1. Right to be released if lender agrees
Release from the guaranty requires that the lender consent because the guaranty is actually
a contract between the lender and the guarantor
2. Right to demand a security
The purpose is to enable the guarantor to take measures to protect his interest in view of the
probability that debtor would default and he would be called upon to answer for the obligation.
Art. 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who
is not present, the guarantor who satisfies the debt may sue either the person so requesting or the
debtor for reimbursement.
Art. 2073. When there are two or more guarantors of the same debtor and for the same debt, the
one among them who has paid may demand of each of the others the share which is
proportionately owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others, including the
payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been made in virtue of
a judicial demand or unless the principal debtor is insolvent.
This article applies only if there are two or more guarantors of the same debtor for the same debt and
one of them has paid:
1. by virtue of a judicial demand; or
2. when the principal debtor is insolvent.
The liability of the guarantors is joint. If one of them pays the entire obligation, he is entitled to be
reimbursed the amount of the shares of the other guarantors.
Example: A, B, C guaranty the 90K loan of X. A pays 90K. A can collect 30 K each from B and C.

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But unlike in an ordinary joint obligation, if one of the guarantors is insolvent, the co-guarantors must
answer for his share. In this sense, the obligation behaves like a solidary obligation.
Example: A, B, C guaranty the 90K loan of X. A pays 90K. B becomes insolvent. A and C must
shoulder Bs share. So their liabilities become 45K each. A can collect 45 K from C.
Art. 2074. In the case of the preceding article, the co-guarantors may set up against the one who
paid, the same defenses which would have pertained to the principal debtor against the creditor, and
which are not purely personal to the debtor.
Example: A, B, C guaranty the obligation of X. A pays even if the obligation has prescribed already. A
demands reimbursement from B and C. Can they refuse to pay? Yes, they can invoke defenses
inherent in the obligation, such as prescription, against the co-guarantor who pays.
A, B, C guaranty the obligation of X who was a minor. A pays. Can B and C refuse to reimburse him
on the ground that X is a minor? No, because the defense is personal to X.
Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is
responsible to the co-guarantors in the same terms as the guarantor.
A, B, C are guarantors of X. D is a guarantor of A. C pays the entire obligation. A becomes insolvent.
Can C reimburse from D? Yes, according to Art. 2075.

CHAPTER 3 EXTINGUISHMENT OF GUARANTY

Art. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor,
and for the same causes as all other obligations.
Because guaranty is an accessory and subsidiary contract, it is extinguished once the principal
obligation is extinguished.
But the extinguishment of the guaranty does not always carry with it the extinguishment of
the principal obligation.
Any agreement between the creditor and the principal debtor which essentially varies the terms of the
principal contract without the consent of the surety will release the surety from liability. This is
because the alteration would result in a novation of the principal contract which is consequently
extinguished and replaced with a new one. Since the old principal contract is extinguished, the
accessory contract of guaranty/surety is also extinguished.
When is an alteration material?
There must be a change which imposes a new obligation or added burden or which takes away some
obligation already imposed, changing the legal effect of the contract.
Examples:
1. Increase in the principal amount, regardless of the extent of the liability assumed by the
guarantor
2. Substitution of the principal debtor
3. Extension or shortening of the term of the principal debt
In these cases, the guaranty is extinguished altogether.
Decrease in the amount of the principal obligation: The guaranty subsists and is benefited by the
change since the guarantor cannot bind himself for more than the principal obligation.

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Art. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt,
even if he should afterwards lose the same through eviction, the guarantor is released.
This is a case of dacion. Since dacion extinguishes the principal obligation, the accessory obligation is
also extinguished and is not revived even if the creditor is subsequently evicted from the property.
Art. 2078. A release made by the creditor in favor of one of the guarantors, without the consent of
the others, benefits all to the extent of the share of the guarantor to whom it has been granted.
A, B, C are guarantors of X for 90K. The creditor releases A without the consent of B and C. The
release should benefit B and C to the extent of 30K (As share). They shall be liable only for 60K or
30K each.
A, B, C are guarantors of X for 90K. The creditor releases A with the consent of B and C. Since B and
C consented to the release, their liability is still 90K or 45K each.
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after
the debt has become due does not of itself constitute any extension of time referred to herein.
If the creditor grants the debtor an extension of time within which to comply with the principal
obligation, the guaranty is extinguished. This is because the principal debtor could become insolvent
during the extension period, and the guarantor would not be able to ask for reimbursement.
But if the guarantor consents or waives his right under this article in advance, the extension will
not extinguish the guaranty.
It is immaterial whether the guarantor suffers actual prejudice as a result of the extension. The
length of time of the extension is also immaterial. As long as the period is extended, the guaranty is
extinguished.
The extension must be based on a new agreement between the debtor and creditor. If the creditor
merely fails to make a demand on due date, it is not an extension.
Can the guarantor sue the creditor for his delay in making a demand, thereby lengthening the risk of
the insolvency of the principal debtor? No.
Art. 2080. The guarantors, even though they are solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages and
preference of the latter.
Art. 2081. The guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those that are purely personal to the debtor.

Chapter 4 Legal and Judicial Bonds

The only important thing you have to remember about a legal bond is that it is a surety. Therefore
there is no benefit of excussion.

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PLEDGE AND MORTGAGE

PROVISIONS COMMON TO PLEDGE AND MORTGAGE
Article 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1)That they be constituted to secure the fulfillment of a principal obligation;

(2)That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3)That the persons constituting the pledge or mortgage have the free disposal of their

property and in the absence thereof, that they be legally authorized for the purpose.

(4)Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage.
[A guaranty cannot exist without a valid obligation. However, it may guarantee the performance of a
voidable or unenforceable contract or a natural obligation]
Article 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor.
WHAT IS PLEDGE?
It is a contract by virtue of which the debtor delivers to the creditor or to a third person a
movable or a document involving incorporeal rights 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.
What are the kinds of pledge?
Pledge may be either:
1. Voluntary or conventional (created by agreement of the parties);
2. Legal (by operation of law).
What are the characteristics of pledge? [RAUS]
Pledge is:

1. Real, because it is perfected by delivery of the thing pledged.

2. Acessory, because it has no independent existence.
3. Unilateral, because it creates an obligation solely on the part of the creditor to return the
thing pledged upon fulfillment of the principal obligation.

4. Subsidiary, because the obligation of the creditor does not arise until fulfillment of the
principal obligation.

WHAT IS THE CONSIDERATION IN PLEDGE?

If the pledgor is also the debtor, the consideration is the principal contract.
If the pledgor is a third person, the cause it the compensation received or the liberality of the pledgor.
WHAT ARE THE DIFFERENCES BETWEEN PLEDGE AND MORTGAGE?

1. Mobility pledge is constituted on movables; mortgage on immovables.

2. Delivery pledge requires delivery for perfection; mortgage does not.

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3. Requisites to bind third person/s pledge, to bind third persons must be in a

public instrument; mortgage, must be registered in the proper registry.

A LOAN IS SECURED BY BOTH A PLEDGE AND A GUARANTY. CAN THE CREDITOR

REFUSE PAYMENT BY THE GUARANTOR AND CHOOSE TO FORECLOSE IN ORDER TO
SATISFY THE DEBT?
No, payment by the guarantor cannot be refused.
WHAT ARE THE ESSENTIAL REQUISITES OF PLEDGE AND MORTGAGE? [PRADO]

1. Purpose - To secure fulfillment of principal obligation;

2. Real There must be delivery of the thing.
3. Alienation when the principal obligation becomes due and the debtor defaults, the thing
may be alienated to satisfy the former.

4. Disposal Pledgor/mortgagor must have free disposal of the thing or capacity to dispose.
5. Ownership Pledgor/mortgagor must be the absolute owner of the thing;

PURPOSE: To secure fulfillment of a principal obligation

WHAT IF THE THING PLEDGED/MORTGAGED IS SUBSEQUENTLY LOST; WHO BEARS THE
LOSS? IS THE PRINCIPAL OBLIGATION EXTINGUISHED?
The pledgor bears the loss. Remember that there hasnt been transfer of ownership.
The principal obligation is of course not extinguished, the pledge/mortgage is only accessory.
However, the debtor must replace the thing or lose the benefit of the period.
Pledge/mortgage is a direct lien on the property. It is better than guarantee because the property
pledged can be sold upon default by the debtor, unlike in guaranty where several requirements
have to be complied with first.
PROBLEM: D TRANSFERS PROPERTY TO C AND AT THE SAME TIME EXECUTES AN
INDEMNITY AGREEMENT; OR D TRANSFERS PROPERTY TO C TO SECURE AN EXISTING
OBLIGATION. HOW WILL THE TRANSFER BE CHARACTERIZED?
Both transfers will be characterized as pledges.

REAL: There must be delivery of the thing to perfect the contract.

An agreement to pledge, when there is breach, gives rise to damages.

ALIENATION: When the principal obligation becomes due and the

debtor defaults, the thing may be alienated to satisfy the former.
DOES THE CREDITOR HAVE TO GO TO COURT TO ENFORCE THE PLEDGE OR MORTGAGE?
No, to require litigation would be to nullify the lien and defeat the purpose of the contract.

FREE DISPOSAL:

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WHAT DO FREE DISPOSAL AND CAPACITY TO DISPOSE OF THE PROPERTY MEAN?

Free disposal means that the property is not subject to any claim by a third person.
Capacity to dispose means that though the pledgor/mortgagor does not have free disposal, the third
person with a claim authorized him to dispose (tingin ko lang).
In case of corporations, the board should adopt a resolution to approve the pledge/mortgage. If
what is to be pledged or mortgaged constitutes all of the corporations assets, 2/3 of outstanding
capital stock must approve.
Rule on consent:
If pledgor/mortgagor is married, consent of spouse is needed; if agent, authorization of principal.
For married persons how to wiggle out of a pledge or mortgage agreement:
Pledge or mortgage your conjugal property without your spouses signature. In case the property
is foreclosed, you can raise the defense that there was no consent (remember, half consent is no
consent!)
What if the pledge was constituted to secure an obligation of the family business, doesnt this
redound to the benefit of the conjugal partnership?
No, JPSP said that the pledge of conjugal property con only be considered to redound to the benefit of
the partnership if the family business is constituting pledges.
If you are the pledgee/mortgagee, check if pledgor/mortgagor has authority to dispose of
the property.
Another example on free disposal or legal authority:
Ex. Pledgor corporation is placed under receivership. The corporation cannot pledge shares of
stock because pledge is a disposition requiring court approval.

OWNERSHIP:
CAN FUTURE PROPERTY BE PLEDGED?
No, it is essential that the pledgor be the absolute owner of the thing.
Note: It is the sale and not the registration in the LTO that transfers ownership of a vehicle.
Note: A co-owner can only pledge/mortgage his ideal share in the co-ownership.
Note: A mortgagor can rely on what is on the face of the Torrens title.
WHAT IS MEANT BY ABSOLUTE OWNERSHIP?
BOTH BENEFICIAL AND LEGAL TITLE must vested in the pledgor/mortgagor
Ex. Trustee is legal owner of shares of stock; trustor is beneficial owner: Neither can pledge
the shares.
Pledge/mortgage cant be constituted without a principal obligation even if there is a subsequent
principal obligation. This is different from situation where the lender extends a credit line for
1M, though borrower has not yet drawn, the credit line can still be secured via
pledge/mortgage.
Ex. deed of assignment/absolute sale to secure fulfillment of obligation this is a mortgage or an
implied trust according to the SC.
The pledgor/mortgagor must be absolute owner of the thing or the property. The creditor may rely
on the title/stock certificate if there is no notice of defect in title.
However, failure of the pledgor to present the thing is a red flag that should put the pledgee on
guard as to the pledgors right to pledge the thing.

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Though the pledgor must own the thing and have free disposal of it, see the following
problem discussed in class:
Ex. On day 1, stocks are sold to X with the condition that the sale will be effective if X tops the
bar. On day 2, X pledges the stocks.
On day 3, the bar exam results come out, with X in the number one
spot. Is the pledge valid?
Yes, the pledge is valid. Remember Oblicon, conditional obligations? The effects of a
conditional obligation to give, when the condition happens, retroact to the date of the
constitution of the obligation. OWNERSHIP RETROACTS TO DAY 1.
In the above condition, what if the condition is resolutory?
As long as the pledge is registered in a public document, it is valid and binding as to third persons.
Ex: Day 1 - X receives from A shares of stock with the resolutory condition that they shall be
returned to A if X does not pass the bar.
Day 2 X pledges the shares.
Day 3 X fails the bar.

Is the pledge valid?

Yes. As long as the pledgee registered the pledge in a public instrument, such pledge is binding on A.
*But if you use the argument that the effects retroact, doesnt that mean that when X pledged
the things, he wasnt the owner? I suppose the public instrument is stronger than the legal
fiction.
CAN THE CREDITOR IMMEDIATELY ACCEPT A PLEDGE FURNISHED BY A DEBTOR IF THE
PLEDGE BELONGS TO A THIRD PERSON?
No, the creditor cannot require on the word of the pledgor/mortgagor alone, he must exercise due
care and make sure the pledge/mortgage has given consent. This is especially true in the banking
industry, which is impressed with public interest.
WHAT IS THE CONSEQUENCE THEN IF THE CREDITOR DOES NOT VERIFY WITH THE
PLEDGOR/MORTGAGOR?
The pledge/mortgage is null and void. Article 599 gives the owner of a movable who has been
unlawfully deprived thereof the right to recover the same.

(1) Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

WHAT DOES THE CREDITOR WITH THE PLEDGE/MORTGAGE WHEN THE DEBTOR DEFAULTS?
The creditor can move for the sale of the thing pledged or mortgaged.
WHAT IF THE CREDITOR WANTS TO ACQUIRE THE THING?
He may purchase it at the public auction.
WHAT IF THERE IS A STIPULATION THAT THE CREDITOR WILL ACQUIRE THE THING UPON
DEFAULT?
The stipulation (pactum commissorium) is null and void.
WHAT ARE THE REQUISITES FOR PACTUM COMMISSORIUM TO EXIST?
1.

There should be a pledge/mortgage;

2. There should be a stipulation for AUTOMATIC appropriation or the thing in case of default
by the debtor.

ARE THERE ANY EXCEPTIONS TO PACTUM COMMISSORIUM?

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Yes, Article 2112 provides that if the thing pledged or mortgaged is not sold in two public auctions,
the creditor may appropriate the same.
WHAT IS THE REASON FOR THE PROHIBITION?
The value of the thing pledged or mortgaged is usually more than the amount of the obligation.
WHAT HAPPENS TO THE CONTRACT OF PLEDGE/MORTGAGE IF THERE IS A STIPULATION OF
PACTUM COMMISSORIUM; IS IT VOID?
No, only the stipulation is void; the principal contract will subsist.
HOW CAN YOU OPT OUT OF THE PROHIBITION ON PACTO COMMISSORIO?
1.

You can enter into another contract subsequent to the pledge/mortgage. The prohibition
applies only to stipulations made in the contract of pledge/mortgage.

2.

The debtor can voluntarily cede the property to the creditor. This would in effect be a novation
of the pledge/mortgage.

3.

There can be a stipulation where the debtor merely promises to sell; non-compliance would
give the creditor, not a right to the property, but an action for damages.

4. There can be a stipulation granting the creditor authority to take possession and not
ownership of the property upon foreclosure.

Examples on pactum commissorium:

Ex. X corporation pledges shares; the pledge agreement states that pledgee has authority to instruct
Corporate Secretary of X to transfer shares in name of pledgee in case of default. VALID?
NO. The execution of document transferring the shares is only a confirmation of the sale that
was already consummated automatically.
Ex. If the agreement is that, upon default, pledgee sells the things pledged at market price
and applies profits to the outstanding obligation. Valid?
Yes. There is no automatic transfer of ownership. In fact, the sale of the thing to satisfy the
obligation is the essence of pledge.
Ex. Upon default, pledgor conveys property to pledgee by dation; and for the purpose, pledgee is
attorney in fact of pledgor. Valid?
YES. It is not automatic; there is need for another agreement to be entered into.
Ex. Pledgee has the option to purchase the thing upon default at price certain.
Valid? Yes. There must be a subsequent sale; it is not automatic.
Remember, for PC to exist, the EFFECTIVE ACT IS DEFAULT, upon which, there is automatic
transfer of ownership.
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate share of
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditors heir who has received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not yet been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate portion of credit.
The debtor, in this case, shall have the right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors
are not solidarily liable.

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WHAT DO YOU MEAN PLEDGE/MORTGAGE IS INDIVISIBLE?

Ex: 1M Loan. It was secured by REM. The REM covered several (100) condominium units. In
accordance with the schedule, there was payment of 100K, can you ask release of
corresponding amount of units?
No release. Pledge is indivisible.
WHAT ARE THE EXCEPTIONS TO INDIVISIBILITY:
1. Where each one of several thing guarantees a determinate portion of credit.
Ex: If you have 100 mortgages securing corresponding portion of the loan, then when the
corresponding portion is paid, the corresponding pledge/mortgage is extinguished. All 100 mortgages
may be in the same document.
Or, if the parties agree to allow partial discharge of the pledge/mortgage. How? Cancel
pledge/mortgage and constitute a new pledge/mortgage.The downside is that you must again pay
doc. stamps and reg. fees, unlike in the document with 100 mortgages, where the fees are only
paid once.
2. If there was only partial release of the loan. CB v. CA. The bank only released a portion of the
loan; the court ordered a corresponding portion of the REM to be released.
3. Where there was failure of consideration. Creditor took over management but the
business failed.
Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure
or subject to a suspensive or resolutory condition.
Pledge/mortgage may secure all sorts of valid, voidable, unenforceable obligations.
Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action
between the contracting parties, without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew
were subject to some burden, or by misrepresenting himself to be the owner of the same.

PROVISIONS APPLICABLE ONLY TO PLEDGE

Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to
constitute the contract of pledge, that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement.
Remember. Pledge/mortgage are real contracts.
If you agree, but dont deliver to the pledgee or a third person/s, there is no pledge but there is
an agreement to enter into a pledge.
Can delivery be made to the pledgor?
Yes, if he is acting as agent of pledgee or where the thing pledged is so unwieldy as to make
delivery impossible, constructive delivery is allowed.
What may be the objects of pledge?
Movables within the commerce of man.

Delivery may be the actual thing or a title (certificates of deposit, stocks).

Must be indorsed. Shares of stock not negotiable so no indorsement is required, however, for
safety reasons, the same may be required.
Article 2094. All movables which are within commerce may be pledged, provided they are
susceptible of possession.

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Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of
stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.
Article 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
The problem here is: how do third persons check if the thing is pledged when the thing
isnt represented by some sort of title which can be annotated?
They cant but they should exercise diligence. Red flags would be failure or inability of debtor to
show the thing or the title to the thing.
No requirement as to form but to affect third persons, it must be in a public instrument
(notarized document).
Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or
owner, subject to the pledge.
The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee
consents to the alienation, but the latter shall continue in possession.
Ex: pledgor pledges property to pledgee to secure a loan. Pledge is in a public instrument. Pledgor
sell property to third person/s without notice to pledgee sale is valid but transfer of ownership is
suspended until pledgee consents.
Why would the pledgee want to be informed administrative purposes; who gets property
when obligation is paid.
Article 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession
or in that of a third person to whom it has been delivered, until the debt is paid.
Article 2099. The creditor shall take care of the thing pledged with the diligence of a good father of
a family; he has a right to the reimbursement of the expenses made for its preservation, and is
liable for its loss or deterioration, in conformity with the provisions of this Code.
Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a
stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.
Remedy of pledgor if pledgee deposits it with a third party without authority?
The pledgor may demand extrajudicial deposit of the thing under 2104 or deposit with a third
person/s in 2106.
If the pledgee deposits the thing with a third person without authorization, can the pledgor demand
resolution of the pledge agreement?
Yes. Substantial breach under 1191 gives the injured party the right to resolve the obligation. It can
be argued that the principal consideration was that the custodian be the pledgee; now if the
creditor transfers possession, its a principal breach.
Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case
under article 1951.
[The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same,
shall be liable to the latter of the damages which he may suffer by reason thereof.]
Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor
shall compensate what he receives with those which are owing him; but if none are owing him, or
insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there
is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right
pledged.

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In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals
pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.
The creditor who receives the fruits should apply them to whatever amount is owing (obligations
due and payable), if not due, the fruits just form part of the pledge.
If the period is for the benefit of the pledgee, even if the obligation is not due, he may
compensate against the interest or the principal, as the case may be.
Ex: Lender lends Borrower money, payable upon demand. To secure the loan, B pledges a goat.
Here the benefit of the period is for the creditor, L. L may then take the goats milk and offspring and
compensate against what is owing him even if the obligation is not yet due.
Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in
order to recover it from, or defend it against a third person.
If the thing is expropriated, the thing will continue with respect to the thing given.

labo!

Article 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if
he should do so, or should misuse the thing in any other way, the owner may ask that it be
judicially or extrajudicially deposited.
When the preservation of the thing pledged requires its use, it must be used by the creditor but only
for that purpose.
The creditor can only use the thing if he is authorized or its preservation requires
use. If he misuses it, the pledgor can demand extrajudicial deposit.
Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a proper case.
Article 2106. If through the negligence or willful act of the pledgee, the thing pledged is in danger of
being lost or impaired, the pledgor may require that it be deposited with a third person.
Though the pledgor cannot demand return of the thing unless the obligation is fulfilled, if the thing
pledged is in danger of being lost or impaired through the pledgees willful act or negligence, he
may require its deposit with a third person.
Article 2107. If there are reasonable grounds to fear the destruction or impairment of the thing
pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon
offering another thing in pledge, provided the latter is of the same kind as the former and not of
inferior quality, and without prejudice to the right of the pledgee under the provisions of the
following article.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
Article 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or
diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal obligation in the same manner as the
thing originally pledged.
If the thing is in danger of diminution or destruction, without the pledgees fault, the pledgor may
demand its return, provided he replaces it with another of the same kind and quality.
Despite the pledgors right above, in the same situation, the pledgee may opt to sell the thing and
keep the proceeds; the pledgees right takes precedence over the pledgors. In this case, the proceeds
of the sale shall be security for the debt.
In 2108, upon due date, if the cash value is less than the principal obligation, the creditor can
still recover the balance from the debtor, unlike in foreclosure. this looks important.
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The pledgor can question the sale, alleging that he could have obtained a better price.
Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may
either claim another thing in its stead, or demand immediate payment of the principal obligation.
This is an instance where the debtor loses the benefit of the period: If the debtor dupes the
creditor as to the quality of the thing, the creditor may demand immediate payment or delivery of
another security.
Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is
extinguished. ANY STIPULATION TO THE CONTRARY SHALL BE VOID.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner,
there is a prima facie presumption that the same has been returned by the pledgee. This
same presumption exists if the thing pledged is in the possession of a third person who has
received it from the pledgor or owner after the constitution of the pledge.
If after the perfection of the pledge, the property is in the possession of the pledgor, as owner, the
presumption is that it was returned and extinction of the pledge, UNLESS the owner holds it as
agent of the pledgee.
*Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge
is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or
owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary.
PROBLEM: TO SECURE HIS LOAN, BORROWER PLEDGED HIS CAR TO LENDER. OUT OF THE
KINDNESS OF HIS HEART, LENDER COMPOSED A LETTER RENOUNCING THE PLEDGE. HE USED THE
CAR TO DRIVE TO THE POST OFFICE AND MAILED THE LETTER.
WHILE DRIVING HOME, LENDER SPOTTED BORROWER WITH LENDERS WIFE AND FELT VERY
ANGRY AND JEALOUS.
WHEN BORROWER RECEIVED THE LETTER, HE WENT TO LENDERS HOUSE TO RECOVER THE CAR BUT
LENDER REFUSED AND TOLD BORROWER TO PISS OFF. CAN LENDER REFUSE TO RETURN THE CAR?

No. See Article 2111.

Article 2112. The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction,
and with notification to the debtor and the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held.
If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In
this case he shall be obliged to give an acquittance for his entire claim.
WHAT ARE THE FORMALITIES REQUIRED FOR THE NOTARIAL SALE?
(1) the debt is due and unpaid;
(2) the sale must be at a public auction;
(3) there must be notice to the pledgor and owner, stating the amount due; and
(4) the sale must be with the intervention of a notary public.
How is the public sale conducted?
Default rule: Proceed before a Notary Public and ask him to conduct a notarial sale. The notary
supervises the sale of the pledged property, drafts the rules and notifies the debtor and the
owner.
Is there a period required for notification?

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No particular period is required by law. Notice can be given right before close of office the day
preceding the sale. Before that date, debtor already defaulted; he should have known a notarial
sale was forthcoming.
The reason, according to JPSP, is, if there were a period, the pledgor would be able to litigate
and obtain an injunction.
Can it be a private sale?
Ex: stocks pledged, listed on the PSE and just coursed through a broker. Yes there is no
express prohibition. But see the de Leon book under Article 2112.
Exception to pactum commissorium if the thing is not sold after two sales, the creditor may
appropriate the thing and it shall be considered as full payment for the entire obligation.
Article 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better
right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
The pledgor is allowed to bid and all things being equal, his bid shall be preferred over that of
others. The law wants to conserve the property in the owner.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder because the law
seeks to prevent fraud. Fraud is possible if the parties had stipulated that the debtor shall be
allowed to the excess and the creditor, who is bidding alone, bids low.
Article 2114. All bids at the public auction shall offer to pay the purchase price at once. If any
other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as
the pledgor or owner is concerned.
Pledgee can waive cash requirement, but that is his lookout.
Article 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not
the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses
in a proper case.
If the price of the sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.
The obligation is extinguished when the pledge is sold regardless of whether the proceeds are less or
more than the amount of the obligation. Unlike in a mortgage, there can be recovery of deficiency.
IN PLEDGE, YOU CAN STIPULATE THAT THE DEBTOR WILL BE ENTITLED TO THE
EXCESS BUT YOU CANT STIPULATE THAT THE CREDITOR WILL BE ALLOWED TO
RECOVER DEFICIENCY.
PROBLEM: IN THE PLEDGE AGREEMENT, THE PARTIES STIPULATED THAT, IN CASE OF NOTARIAL
SALE, THE PLEDGOR SHALL BE ENTITLED TO THE EXCESS AND THE PLEDGEE SHALL BE ENTITLED
TO RECOVER THE DEFICIENCY. ARE THE STIPULATIONS VALID?
The stipulation that the debtor shall be entitled to the excess is valid. The stipulation giving the
creditor the right to recover the deficiency is void. See Article 2115.
HOW DO YOU GUARD AGAINST THE SITUATION OF NOT BEING ABLE TO RECOVER THE
DEFICIENCY IF YOU ARE THE PLEDGEE?
Set a minimum bid (if this is actually allowed; JPSP says yes, book says
no) OR
Instead of selling the thing, just sue for the entire obligation.

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OR
Stipulate that if the value of the pledge goes under a certain amount, then the debtor shall be
obliged to pledge additional securities.
Ex: 1M obligation, 1.5M worth of stocks pledged; stipulate that if the value goes below 1.3M then
the debtor will be obliged to pledge additional securities.
Without such a stipulation, can Article 2108 have the same effect?
Ex: 1M obligation, 1.5M worth of stocks pledged. When the stocks go down top 1.4M, can you
claim that the value of the pledge is diminishing and then choose to sell the stocks for 1.4M,
keeping the profits as security, pursuant to 2108?
JPSP says: Maybe but speculative. Probably not if the change in price is just a day-today fluctuation.
PROBLEM: 1M IS SECURED BY A 700K MORTGAGE AND A 900K PLEDGE. IF YOU ARE THE
LENDER, AND THE BORROWER DEFAULTS, WHICH SECURITY TO YOU GO AFTER FIRST?
Go against the REM first, then take the whole pledge and make $$$! In REM, unlike in pledge, the
debtor is entitled to the excess and the creditor is entitled to recover the deficiency, as a default
rule.
Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the
result thereof.
This is to allow the debtor to take reasonable steps if he suspects that the sale was not honest.
Article 2117. Any third person who has any right in or to the thing pledged may satisfy the principal
obligation as soon as the latter becomes due and demandable.
The creditor cannot refuse payment by a third person WITH AN INTEREST in the thing
pledged. Third party can be a buyer of the thing or someone with a junior lien.
Why would a third person with a junior lien want to pay the obligation? The property may be
more valuable than the obligation and he may want his lien to become senior.
Article 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee
may collect and receive the amount due. He shall apply the same to the payment of his claim,
and deliver the surplus, should there be any, to the pledgor.
Under this article, the thing pledged is a credit which has become due. The creditor can thus
collect the amount due and compensate, DELIVERING THE SURPLUS TO THE DEBTOR.

The pledgee has the duty to collect any due credits, in line with the ordinary diligence required of him.
Article 2119. If two or more things are pledged, the pledgee may choose which he will cause to
be sold, unless there is a stipulation to the contrary.
He may demand the sale of only as many of the things as are necessary for the payment of the debt.
PROBLEM: A 1.5M DEBT IS SECURED BY 2M WORTH OF SMC SHARES. IF YOU ARE THE
PLEDGEE, HOW WOULD YOU SELL?
Sell all. You are not required to sell by piece.
Pledgor can restrict only if there are two pledges securing the obligation.
Article 2120. If a third party secures an obligation by pledging his own movable property under the
provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to
2070, and articles 2077 to 2081.

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He is not prejudiced by any waiver of defense by the principal obligor.

The third party pledgor is entitled to:
1. Indemnity;
2. Subrogation;
3. Pledgor is released if creditor accepts property in payment of debt;
4. Release in favor of one pledgor benefits all;
5. Extension granted to debtor extinguishes pledge;
6. Pledgors are released from obligation if by some act of the creditor, there can be no
subrogation;
7. Pledgor may set up defenses inherent in the debt.
Article 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731,
and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as
well as on the termination of the pledge. However, after payment of the debt and expenses, the
remainder of the price of the sale shall be delivered to the obligor.
Article 2122. A thing under a pledge by operation of law may be sold only after demand of the
amount for which the thing is retained.
The public auction shall take place within one month after such demand. If, without just grounds,
the creditor does not cause the public sale to be held within such period, the debtor may require
the return of the thing.
In pledges by operation of law, the remainder of the sale price shall be delivered to the debtor.
The foregoing articles govern the following pledges by operation of law; BUT after sale, the excess,
if any, is returned to the pledgor:

Possessor in good faith may retain the thing on which he spent for necessary expenses
until he is reimbursed.

He who works on a movable may retain the same until paid for the work.

Depositary may retain thing until paid for the deposit.

Agent may retain objects of agency until reimbursed by principal.

Laborers wages are considered a lien on goods manufactured or work done.

How about any deficiency? I think creditor will be entitled to recover because here, he did not accept
the pledge voluntarily and the reason for prohibiting recovery is absent (the reason being that
creditors should know not to lend more than what can be secured).
Article 2123. With regard to pawnshops and other establishments, which are engaged in making
loans secured by pledges, the special laws and regulations concerning them shall be observed,
and subsidiarily, the provisions of this Title.

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REAL MORTGAGE
Art. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.
Mortgage (def). A real estate mortgage is a contract whereby the debtor secures to the creditor
the fulfillment of a principal obligation, specially subjecting to such security immovable property
or real rights over immovable property in case the principal obligation is not complied with at the
time stipulated.

What are the characteristics of the contract of mortgage?

Mortgage is a real, accessory, and subsidiary contract.

Who takes possession of the mortgaged property?

As a general rule, the mortgagor retains possession of the property mortgaged.
However, it is not an essential requisite of the contract of mortgage that the property remains in
the possession of the mortgagor. If the mortgagor delivers the property to the mortgagee, it can
still be a contract of mortgage, plus some other contract.

What is the consideration in a contract of mortgage?

Since mortgage is an accessory contract, the consideration is the same as that of the principal
contract.

What are the kinds of real mortgage?

1. Voluntary Agreed to between the parties or constituted by the will of the owner of the
property
2. Legal Required by law to be executed in favor of certain persons
3. Equitable Lacks the proper formalities of mortgage but shows the intention of the
parties to make the property as a security for a debt.

What is the subject matter of real mortgage

1. Immovables
2. Alienable rights imposed upon immovables

Can you mortgage future property?

Future property CANNOT be the object of a contract of mortgage. One cannot constitute a
mortgage on any other property he might have now and those he might acquire in the
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future. Remember that one of the essential requisites of mortgage is that the mortgagor
should be the absolute owner of the thing mortgaged.
But a stipulation which says that the mortgage covers future improvements upon real property
already mortgaged is valid. This is because these future improvements are deemed included in
the real property by accession; they are not separate from the real property already subject of
the mortgage.
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding
between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to
demand the execution and the recording of the document in which the mortgage is formalized.
Art. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right may be exercised simultaneously
with the action upon the contract.
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission, modification, or
extinguishment of real rights over immovable property

What are the requisites of real mortgage?

1. It must be constituted to secure a principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
4. When the principal obligation becomes due, the property mortgaged may be alienated
for the payment to the creditor.
5. To prejudice third persons, the mortgage must be recorded in the Registry of Property.
If the first four requisites are present, there is already a valid mortgage between the parties
mortgagor and mortgagee.
But to affect third persons, there is a need to comply with the fifth requisite : The document of
mortgage must be recorded in the Registry of Property. This is because recording the
document in the Registry of Property serves as notice to 3rd persons. This is similar to the
requirement in pledge that the pledge be in a public document.

Can there be an oral mortgage?

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As between the parties, YES. As long as the four essential requisites above are present, there
is already a mortgage between the parties. It need not be in writing in order to be enforceable
since it is not covered by the Statute of Frauds.
But the oral mortgage is not binding against third persons. And the mortgagee cannot register
the mortgage in the Registry of Property if it is an oral mortgage. So his remedy is to invoke
Art. 1357 and 1358. 1357 provides that if there is already a valid contract, one party can
compel the other party to observe the proper form. In this case, since there is already a valid
mortgage between the parties, the mortgagee can compel the mortgagor to execute a public
document of mortgage, so that the mortgagee can then register it in the Registry of Property.
Remember that 1357 is only for convenience. Its purpose is to compel the mortgagor to
execute a public document, so that the mortgagee can register the mortgage. It does not
determine the validity or even the enforceability of the mortgage between the parties. Before
you can invoke it, there has to be a valid mortgage first.
Once the previously oral mortgage is in a public document and is subsequently registered in the
Registry of Property, it becomes binding on third persons.

Procedure: What happens when you enter into a contract

of mortgage?
Step 1: Execute the document of mortgage
Step 2: Go to a notary public, who will notarize the document.
Step 3: Pay the documentary stamp tax within the first five days of the succeeding month. The
doc
stamp tax is a percentage of the value of the property mortgaged.
Step 4: Go to the Office of the Register of Deeds and pay the registration fees. Before you pay
the
registration fees, the government will require you to update payment of realty taxes on
the property. After payment of the registration fees, the mortgage will be annotated on
the title.
Problem: Mortgagor mortgages a house and lot worth 500K to Mortgagee to secure a principal
obligation of 100K and any and all future indebtedness. The mortgage is registered.
Meanwhile, Mortgagor owes another creditor, X, 500K. The total indebtedness of Mortgagor to
Mortgagee eventually reaches 500K. On due date, Mortgagor fails to pay both X and
Mortgagee. The house and lot is his only property. X is able to obtain a writ or attachment on
the house and lot. Who has a better right to the house and lot X or mortgagee?
Mortgagee has a better right with respect only to 1/5 of the house and lot. This is because
the mortgage was registered only to the extent of 100K, and not to the any and all future
debts. Therefore, the mortgage is binding on third persons only with respect to the 100K debt,
or 1/5 of the house. X can argue on two grounds:
1. That Mortgagee paid doc stamp taxes based only on the 100K debt, not on the
succeeding 400K debt. So he even cheated the government of its revenues in this
case.
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2. Besides, at the time of the mortgage, the 400K debt was non-existent.
Therefore, X has a better right with respect to the 4/5 which was not registered.
How does mortgagee opt out of this problem?
1. He can do a credit line arrangement in which he will give the debtor a ceiling up to which
he can borrow. The mortgage deed will say that the principal obligation is 500K, but
debtor has the choice of asking for a release of funds below this ceiling. This way, the
mortgagee is sure that the entire 500K loan is registered. But this is costly, since the doc
stamp tax will be based on the ceiling and not on the actual amount released.
2. The better solution is that the mortgagee should execute and register a new document
each time he releases funds to the mortgagor/debtor.

What happens if the mortgage is void?

If for some reason, the mortgage is void, the principal obligation subsists. What is lost is only
the right of the creditor to foreclose the mortgage in order to satisfy the principal obligation.
Moreover, even if the mortgage itself is void, the mortgage deed remains as proof of the
principal obligation.
Art. 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security
it was constituted.
In guaranty, the property of the guarantor is not subjected to a lien. The action of the creditor is
against the guarantor himself and not against his property. The creditor would still have to sue
the guarantor, obtain judgment, execute it, etc.
On the other hand, in mortgage, the property is subjected to a lien. It creates a real right which
is inseparable from the property mortgaged. It is enforceable against the whole world (provided
it is registered). Until the principal obligation is discharged, the mortgage follows the property
wherever it goes and subsists even if the ownership changes.
So if the mortgagor sells the mortgaged property, the property still remains subject to the
fulfillment of the obligation secured by it. All subsequent purchasers must respect the
mortgage, as long as it is registered, or even if it is not registered, if the purchaser knew that it
was mortgaged.
The mortgagee has a right to rely in good faith on what appears on the certificate of title of the
mortgagor. In the absence of anything to excite suspicion, he is under no obligation to look
beyond the certificate.

Does the mortgagor lose his title to the property mortgaged?

No. A mortgage does not involve a transfer, cession, or conveyance of property but only
constitutes a lien thereon. It does not extinguish the title of the debtor. The mortgagor/debtor
continues to be the owner. The only right of the mortgagee is to foreclose the mortgage and
sell the property to satisfy the obligation. The mortgagors default does not operate to vest in
the mortgagee the ownership of the encumbered property.
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Since the mortgagor retains ownership of the mortgaged property, he can even mortgage it
again to another mortgagor (junior lien/encumbrance).
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and rents or income not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.
Future property, in themselves, cannot be the subject matter of mortgage. But, the future
improvements, accessions, and fruits of property already mortgaged are also covered by the
mortgage. This is because they are deemed to be part of the principal thing which was already
existing at the time of the constitution of the mortgage.
To exclude these things, there must be an express stipulation to that effect.
Examples:
1. The mortgage deed contains a provision that all property taken in exchange or
replacement, as well as all buildings, machineries, and, equipment, and others that the
mortgagor may acquire, construct, install, attach, or use in its lumber concession shall
immediately become subject to the mortgage.
This is a valid stipulation, especially where the property mortgaged is subject to
deterioration (such as machinery and equipment). The purpose of this stipulation is to
maintain the value of the property mortgaged.
2. JPSP example: In the mortgage deed, Mortgagor mortgages house and lot #1 and
another house and lot which he will acquire next month. The deed is registered. Is this
a valid mortgage?
Between mortgagor and mortgagee, the mortgage is valid with respect to both house
and lot #1 and #2. The remedy of the mortgagee, once mortgagor acquires the second
house and lot, is to compel the mortgagor to execute a public document evidencing the
mortgage of the 2nd house and lot and to register it, so that it would be binding on third
parties.
But, as against third parties, the mortgage is only valid with respect to the first house
and lot but not to the second house and lot, until the latter is registered.

What happens if the thing mortgaged is expropriated?

The security becomes the cash given by the government as indemnity. Upon default, the
mortgagee can apply the cash as payment for the obligation.
Art. 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in
part, with the formalities required by law.

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The mortgage credit is a real right, and under property law, real rights over immovables are
also considered immovables in themselves. Thus, they may be alienated or assigned to third
persons, in whole or in part, by the mortgagee who is the owner of the right. The assignee may
then foreclose the mortgage in case of nonpayment of the principal obligation.
The alienation or assignment of the mortgage credit is valid even if it is not registered.
Registration is only necessary to affect third persons.
Art. 2129. The creditor may claim from a third person in possession of the mortgaged
property, the payment of the part of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law establishes.
Art. 2129 does not really apply to all third persons in possession of the property. It only applies
to those in possession of the mortgaged property in the concept of owner. If the possession
by a third person is only as lessee, the creditor may not collect the credit from that third person.
When a mortgagor alienates/sells the mortgaged property to a third person, the creditor may
demand from him the payment of the principal obligation. This is because the mortgage credit
is a real right, which follows the property wherever it goes, even if its ownership changes.
However, before the creditor can collect from the third person, he must have made a demand
on the debtor, and the latter should have failed to pay.
Example: A mortgaged his land worth P5M in favor of B to secure a debt of P6M. A sold the
land to C.

On due date, B should demand payment of the P6M from A. If A fails to pay, B may foreclose
the mortgage. B may also choose to collect P5M (not P6M) from C, which is the part of the
principal obligation secured by the property sold to C. C is not liable for the deficiency of P1M
in the absence of a contrary stipulation. If C pays B, C can go after A for reimbursement.
Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall
be void.
A stipulation forbidding the owner from alienating the mortgaged property is void for being
contrary to public policy because it is an undue impediment or interference on the transmission
of property. However, if the mortgagor alienates the property, the transferee must respect the
mortgage because it is a real right.
A stipulation that requires the mortgagor to notify the mortgagee in writing before he sells the
property is VALID. This is not a prohibition but a mere regulation.
The mortgagee would want to regulate the disposition of the property by the mortgagor because
first, he would want to know the type of person from whom he might have to collect the credit
later on. Second, any disposition of the mortgaged property by the mortgagor is a red flag that
may indicate that the mortgagor/debtor may not be able to pay the debt later on (Because why
is he suddenly disposing of his property? Maybe he doesnt have money anymore.)
Art. 2131. The form, extent and consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to the other matters not included in this Chapter shall
be governed by the provisions of the Mortgage Law and of the Land Registration Law.

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FORECLOSURE
The essence of a mortgage is that upon default, the mortgagee can foreclose he can sell the
property and apply the proceeds of the sale to the payment of the principal obligation.

What is foreclosure?
It is the remedy available to the mortgagee by which he subjects the mortgaged property to the
satisfaction of the obligation. It denotes the procedure adopted by the mortgagee to terminate
the rights of the mortgagor on the property and includes the sale itself.

How do you foreclose?

There are two types of foreclosure judicial and extra-judicial foreclosure.
The default rule is judicial foreclosure. You can only do extra-judicial foreclosure if the
mortgage deed has a provision which gives the mortgagee the special power of attorney to sell
the mortgaged property in accordance with Act 3135.
But these are only default rules. The parties may also stipulate that the sale will be a private
sale.

Mortgage to a Foreigner RA 133

Can you mortgage to a foreigner?
Yes, since foreigners are only prohibited from owning real property in the Philippines, not from
being mortgagees. The situation is governed by RA 133.
However, if the mortgagor defaults, the foreigner CANNOT foreclose extra-judicially. He can
only foreclose judicially. Moreover, he cannot bid or take part in any sale of the real
property in case of foreclosure.

Can the foreigner take possession of the property during

the mortgage?
Pursuant to the mortgage, the alien- mortgagee cannot take possession of the property during
the mortgage. But, he can possess it as lessee.

Can the foreigner take possession of the property upon default of

the mortgagor?
The foreigner can take possession of the mortgaged property upon default but only for the
purpose of foreclosure and receivership in accordance with the prescribed judicial procedures,
AND in no case exceeding five years.
When confronted with a foreclosure problem

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First, check if theres a stipulation saying that there will be a private sale. If there is such a
stipulation, the property can be sold at a private sale. If there is no such stipulation, then there
will be either judicial or extra-judicial foreclosure.
Second, look for the following tell-tale signs:
1. Is the mortgagee a foreigner? If its a foreigner, its automatically judicial foreclosure
(Act 133).
2. If the mortgagee is not a foreigner, look for a stipulation in the mortgage agreement
which gives the mortgagee the special power of attorney to carry out the extrajudicial foreclosure in accordance with Act 3135. If you find this stipulation, it is an
extra-judicial foreclosure.
3. If there is no stipulation for extra-judicial foreclosure under Act 3135, it is a judicial
foreclosure governed by Rule 68 of the Rules of Court.
Third, if its an extra-judicial foreclosure, look at the parties. Who is foreclosing?
1. If it is a bank, the governing law is Act 3135, but there will be certain exceptions
applicable only to banking institutions, provided in Section 47 of the General Banking
Act.
2. If the mortgagee is not a bank, the extra-judicial foreclosure will be governed by Act
3135.
Fourth, now that you know whether its judicial or extra-judicial foreclosure, lets go through
each of the processes
JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

STEP 1: The mortgagee should file a petition for judicial foreclosure in the court which has
jurisdiction over the area where the property is situated
STEP 2: The court will conduct a trial. If, after trial, the court finds merit in the petition, it will
render judgment ordering the mortgagor/debtor to pay the obligation within a period not less
than 90 nor more than 120 days from the finality of judgment.
STEP 3: Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to
prevent his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD.
STEP 4: If mortgagor fails to pay within the 90-120 days given to him by the
court, the property shall be sold to the highest bidder at public auction to satisfy
the judgment.
STEP 5: There will be a judicial confirmation of the sale. After the confirmation of the
sale, the purchaser shall be entitled to the possession of the property, and all the
rights of the mortgagor with respect to the property are severed or terminated.
The equity of redemption period actually extends until the sale is confirmed. Even after the
lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so
long as there has been no confirmation of the sale yet. Therefore, the equity of
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redemption can be considered as the right of the mortgagor to redeem the

property BEFORE the confirmation of the sale.
IMPORTANT:After the confirmation of the sale, the mortgagor does not have
aright to redeem the property anymore. This is the general rule in judicial
foreclosures
there is no right of redemption after the sale is confirmed.
The exception to this rule is when the judicial foreclosure is done by a BANK. In
such a case, there is still a right of redemption within one year from the
registration of the sale.
STEP 6: The proceeds of the sale of the property will be disposed as follows:

1. First, the costs of the sale will be deducted from the price at which
the property was sold

2. The amount of the principal obligation and interest will be deducted

3. The junior encumbrances will be satisfied
4. If there is still an excess, the excess will go back to the mortgagor.In
mortgage,the mortgagee DOES NOT get the excess (unlike in pledge).
If there is a deficiency, the mortgagee can ask for a DEFICIENCY
JUDGMENTwhich can be imposed on other property of the mortgagor. This is
unlike the rule in pledge, where the pledgee cannot collect any deficiency.
This is also unlike the rule in extra-judicial foreclosure where the mortgagee
must go to court and file another action for the collection of the deficiency.
In this case, there is no need to file an action. The mortgagee just has to file
a motion in court for the deficiency judgment.

Why should you stay away from judicial foreclosure?

Judicial foreclosure is costly, since the parties would need to hire lawyers. Moreover, in judicial
foreclosure, the parties have very little control over the sale because there is court
intervention. Judicial foreclosure is also more susceptible to stalling/dilatory tactics by the
mortgagor, since he can file all sorts of motions in court to prevent the sale.
EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135

When is extra-judicial foreclosure proper?

There must be a provision in the mortgage giving the mortgagee the special power of attorney
to carry out the extra-judicial foreclosure under Act 3135.

Where should the sale be made?

The sale can only be made in the province where the property is situated. So if several
properties located in different provinces are mortgaged to secure one principal obligation, the
creditor must foreclose in each and every jurisdiction where the property is located.

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What is the procedure?

STEP 1: File a complaint for extra-judicial foreclosure with
the Executive Judge
STEP 2: Notice of the sale
There are two kinds of notices required:
1. Posting in at least 3 public places 20 days before the sale usually in the Sheriffs
office, the Assessors office, and the Register of Deeds.
2. Publication in a newspaper of general circulation, once a week for at least three
consecutive weeks if the value of the property exceeds P400
This need not be done within a span of 21 days. For example, you can publish on
August 30, which is a Friday, then on September 2, which is a Monday, and then on
September 9, which is also a Monday. In this case, publication for three consecutive
weeks is completed within 11 days.
The notice should contain the description of the property to be sold, date, time, and place of the
sale, and the principal obligation to be satisfied by the sale of the mortgaged property.
There is no need for personal notice to the mortgagor, unlike in a guaranty. This is because
the mortgagor, having defaulted in the principal obligation, should expect that a foreclosure is
forthcoming. This is because the mortgagor, having defaulted in the principal obligation, should
expect that a foreclosure is forthcoming. If youre the mortgagee, you would want to surprise the
mortgagor so the he cannot employ dilatory tactics such as getting an injunction in order to
delay the foreclosure. If youre nasty, you should publish it in Abante, which is a newspaper of
general circulation, but which nobody consults for the purpose of checking if their mortgaged
property is about to be foreclosed.
STEP 3: Public Auction
Time for conducting the public sale: Between 9 am to 4 pm
Manner of conducting the sale: The sale should be under the direction of the sheriff of the
province, the justice or auxiliary justice of the peace of the municipality, or of a notary public of
the municipality, who shall be compensated with FIVE PESOS for each day of actual work
performed (wow $$$).
Who may bid: Anyone may bid at the sale, unless there are exceptions stipulated in the
mortgage deed. Even the mortgagee/creditor may bid. And unlike in pledge, even if the
mortgagee/creditor is the sole bidder, the sale is still valid. This is because there is a right
to redeem in extra- judicial foreclosure. Therefore, the lower the price at which it is sold, the
better the chances of the mortgagor/debtor to redeem the property.

Can the parties stipulate a minimum price at which the

property shall be sold?

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No, because the property must be sold to the highest bidder. Parties cannot, by agreement,
contravene the law. However, this rule may not apply where the purchaser happens to be the
creditor or mortgagee himself. The mortgagor can argue that the stipulation should be binding
on the mortgagee on the principle of estoppel.

What is the effect of inadequacy of the price at which the property

is sold at auction?
If there is a right to redeem, inadequacy of price is not material because the debtor may
reacquire the property. It will even make it easier for him to redeem it if it is sold at a low price.
Mere inadequacy of price will not be sufficient to set aside the sale unless the price is so
inadequate as to shock the conscience.
What happens if there is an excess?
The excess should first be applied to satisfy the junior liens and encumbrances on the property.
If there is still an excess, it goes to the mortgagor.

What happens if there is a deficiency?

The mortgagee must go to court and file an action to collect the deficiency. He may file an
action for a deficiency judgment even during the period of redemption.

STEP 4: Possession of the Property

Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession
during the redemption period (one year from the date of the sale).
However, if the winning bidder already wants possession of the property, he may file a petition
in court to gain possession. He must give a bond equivalent to the rent for the use of the
property for 12 months. The bond will answer for any loss to the mortgagor if it is later found
that he was not in default in the mortgage obligation or that the conduct of the sale violated Act
3135. Upon approval of the bond, the court will issue a writ of possession in favor of the
purchaser.
Exception to this rule: If the party foreclosing is aBANK, Sec 47 of the General
BankingLaw provides that the purchaser shall immediately have the right to take
possession of the property upon confirmation of the sale.

Remedy of the Mortgagor

If the winning bidder is able to obtain the writ of possession even before the expiration of the
one-year period, the mortgagor may petition that the sale be set aside and the writ of
possession be cancelled on the ground that he was not in default or that the sale was not made
in accordance with Act 3135. The petition must be filed within 30 days from the grant of the writ
of possession.

STEP 5: Redemption

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The debtor has the right to redeem the property sold within one year from the date of the
sale, reckoned from date of execution of the certificate of sale since it is only from that date
that the sale takes effect as a conveyance.
Exception: If the mortgagee foreclosing is a BANK and the mortgagor is a JURIDICAL
PERSON, the juridical person shall have the right to redeem the property BEFORE the
registration of the certificate of sale but NOT EXCEEDING 90 DAYS FROM THE DATE OF
THE FORECLOSURE .
What is the difference between the RIGHT OF REDEMPTION and EQUITY OF REDEMPTION?

The right of redemption is the right of the mortgagor to redeem the mortgaged
property within a certain period (in most cases, within 1 year) AFTER the sale of
the property in satisfaction of the mortgage debt. It is available to the mortgagor
only when the mortgage is foreclosed extrajudicially. It is not available in judicial
foreclosures, except when the mortgagee foreclosing is a bank.
On the other hand, equity of redemption is the right of the mortgagor in a judicial
foreclosure to pay the amount of his obligation BEFORE the confirmation of the sale
of the mortgaged property.
Who may redeem?
The debtor, his successors in interest, or any judicial creditor or judgment
creditor of the debtor, or any person having a junior encumbrance or lien on the
property may exercise the right of redemption.
Example: Mortgagor mortgaged a house and lot to A. Later, Mortgagor also
mortgaged it to B. A foreclosed the mortgage and bought the house and lot at the
auction. In this case, upon the sale of the property to A, the only right that B as
second mortgagee has is the right to redeem. He may exercise the right by paying
off the debt secured by the first mortgage. Bs exercise of Mortgagors equity of
redemption is equivalent to foreclosure of the junior mortgage.
How much should the one exercising the right of redemption pay?
The mortgagor (or whoever is redeeming the property) should pay the PURCHASE
PRICE of the property (not the amount of the original obligation anymore) plus

INTEREST OF 1% PER MONTH (this is according to De Leon, citing Rule 39 Section

28 of the Rules of Court. JPSP says interest is at 2% per month).
Exception: If the mortgagee foreclosing is aBANK, under Sec 47 of the
GeneralBanking Law, the mortgagor should pay the amount of the ORIGINAL
OBLIGATION (not the purchase price) plus INTEREST AT THE ORIGINAL RATE
stipulated in the mortgage contract plus all COSTS and expenses incurred by the
bank from the sale of the property.
What happens if the debtor/mortgagor fails to redeem the property within the
prescribed period?

If the debtor/mortgagor fails to redeem the property within the prescribed period, the purchaser
has the absolute right to a writ of possession. From then on, the mortgagor loses his right over
the property.
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Title to the property sold under a mortgage foreclosure remains with the mortgagor until the
expiration of the redemption period. The right of the purchaser at the foreclosure sale is merely
inchoate or contingent until after the period of redemption has expired without the right being
exercised. When the debtor/mortgagor fails to redeem within the period for redemption, the
purchasers right becomes final.

What is the effect of the timely exercise of the right of redemption?

If the debtor/mortgagor is able to exercise the right of redemption on time, he does not really
recover property since he does not lose ownership until after the expiration of the redemption
period. He merely frees it of the encumbrance created by the mortgage.
What happens if the mortgagor sells the property to a third person within the
redemption period?

The third person, in buying the property, is actually buying not the property itself but the right
to redeem the property and the right to possess it within the redemption period.
X mortgaged property to a Bank to secure a P1M loan at 17% interest. The mortgage was
foreclosed. At the sale, the property was sold to the Bank as the highest bidder for P800K.
The bank then sold the property to Y for P1.5M. If X wants to redeem the property, to
whom should he pay and how much?

X should pay to the Bank. He should pay only P1M - the amount of the principal obligation plus
interest at 17%, plus costs (Sec 47 General Banking Law: Remember, this is the exception to
the general rule that the mortgagor should pay the purchase price and 1% interest per month).
Y would then have a right to seek reimbursement from the Bank.
The right of redemption may be exercised by the mortgagee under the same terms, even if the
property is subsequently sold to a third party. A different rule would make it easy for the buyer
at the foreclosure sale to render the right of redemption nugatory simply by making a
conveyance of the property for an amount beyond the capacity of the mortgagor to pay.

Can the right of redemption be waived by the mortgagor in advance?

It depends if there is a fair exchange of value and information between the parties.
If the mortgagor is a farmer who mortgages his parcel of land and he waives the right to
redeem, he can later argue that the waiver was not valid for being contrary to the public policy
of preserving the property in the hands of the owner.
But if the mortgagor is a businessman who waives the right to redeem in exchange for lower
interest rates, this waiver is valid because there is a fair exchange of value.
SUMMARY OF EXCEPTIONS UNDER SECTION 47 OF THE GENERAL BANKING
LAW OF 2000

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When the party foreclosing the mortgage is a BANK, the same procedure as in judicial or extrajudicial foreclosure, as the case may be, is followed. However, the following are the exceptions
to the general rules, applicable only to banks:
1. In judicial foreclosures, there is still a right to redeem
As a general rule, there is no right of redemption in judicial foreclosure. Upon
confirmation of the sale, the mortgagor cannot redeem the property anymore.

But if the mortgagor foreclosing judicially is a bank, the mortgagor shall have a right to
redeem within one year from the sale.
2. Redemption Price
In ordinary extra-judicial foreclosure, the redemption price is the purchase price
plus interest at 1% (or 2%?) per month.

In extra-judicial foreclosure by a bank, the redemption price consists of:

a. the amount of the mortgage obligation
b. plus the interest on the loan at the rate stipulated in the mortgage contract
c. plus costs of the sale incurred by the bank
3. Automatic Right of Possession
In ordinary extra-judicial foreclosure, the mortgagor retains possession of the
property within the redemption period. If the purchaser wishes to have possession
within the redemption period, he must file a petition for the issuance of a writ of
possession with a corresponding bond.

In extra-judicial foreclosure by a bank, the purchaser automatically has the right to take
possession after the confirmation of the sale.
4. Injunction
If anybody wants to enjoin the conduct of foreclosure proceedings instituted by a
bank, the petitioner must file a bond fixed by the court to satisfy whatever
damage the bank may suffer by the injunction.

There is no such provision in the case of ordinary extra-judicial foreclosure.

5. Period of Redemption for Juridical Persons
In ordinary extra-judicial foreclosure, the mortgagor may redeem the property
after it is sold within one year from the execution of the certificate of sale. There is
no distinction, whether the party redeeming is a natural or juridical person.
If the party foreclosing extrajudicially is a bank, the same rule as above is applicable
to natural persons. BUT, juridical persons may redeem the property subject only to
the following conditions:

a. it must be BEFORE the registration of the sale

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b. and, it must not be later than 90 days from the date of the sale
EFFECTS ON THE JUNIOR MORTGAGE
What happens if there was a second mortgage constituted on the property that
was foreclosed?
If the property was mortgaged a second time, the second mortgage is
subordinate to the first mortgage. The first mortgagor has the right to foreclose
the mortgage upon default by the debtor.
The following are the rights of a junior mortgagee:
1. If the first mortgagee forecloses judicially, before the sale is effected,
the junior mortgagee may exercise the equity of redemption vested in
the mortgagor. The junior mortgagee may satisfy the obligation of the
mortgagor to prevent the sale of the property.
What happens to the ownership of the property when the second
mortgagee exercises the right of redemption?
There are two interpretations one under the Rules of Court and
another under the Civil Code.
When the second mortgagee exercises the equity of redemption by paying
the obligation of the mortgagor/debtor, the mortgagor/debtor has 60 days
to reimburse the second mortgagee what he paid. If the original debtor fails
to pay within this period, ownership will be consolidated in the second
mortgagee who paid. This interpretation is according to Section 28 Rule 39
of the Rules of Court.
But according to the Civil Code rules on payment (oblicon), the effect
should be like payment of an obligation by a third person, in which case,
the second mortgagee merely becomes subrogated in the right of the first
mortgagee to foreclose the mortgage.
2. When an extra-judicial sale is made, the junior mortgagee may exercise the
mortgagors right to redeem within one year from the sale. De Leon says
that he should pay the amount of the original obligation. JPSP says that the
junior mortgagee exercising the right to redeem should follow Act 3135
he should pay the price at which the property was sold.
3. If the property is sold for more than the amount of the obligation to the
first mortgagee, the excess should be applied to the payment of the
obligation to the second mortgagee.
But if there is no excess, the second mortgage is extinguished.
If youre the second mortgagee, you can also foreclose, not the property (since
you cannot do that because the right of the first mortgagee is superior), but the

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right of redemption instead. This is so that you would be the only one who
can exercise it when the proper time comes.

CHATTEL MORTGAGE
Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage.
What is chattel mortgage?
Chattel mortgage is the contract by virtue of which personal property is recorded in
the Chattel Mortgage Register as a security for the performance of an obligation.

This definition under the Chattel Mortgage Law is no longer applicable. It is the
definition under Art. 2140 of the Civil Code that applies now.
What are the characteristics of the contract of chattel mortgage?
1. It is an accessory contract because it secures performance of a
principal obligation
2. It is a formal contract because it requires registration in the Chattel Mortgage
Register for its validity (but only against third persons)
3. It is a unilateral contract because it produces only obligations on the part
of the creditor to free the thing from the encumbrance on fulfillment of
the obligation.
What is the subject matter of chattel mortgage?
The subject matter of chattel mortgage is personal or movable property.
What are the requisites for a valid chattel mortgage?

1. It must be constituted to secure a principal obligation.

2. The mortgagor must be the absolute owner of the thing mortgaged.
3. He must have free disposal of the thing or otherwise be authorized to do so.
4. When the principal obligation becomes due, the property mortgaged may be alienated
for the payment to the creditor.
5. To prejudice third persons, the mortgage must be recorded in the Chattel Mortgage
Registry.
If the first four requisites are present, there is already a valid mortgage between the parties
mortgagor and mortgagee.

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But to affect third persons, there is a need to comply with the fifth requisite: The document of
mortgage must be recorded in the Chattel Mortgage Registry. This is because recording the
document in the Chattel Mortgage Registry serves as notice to 3rd persons. This is similar to the
requirement in pledge that the pledge be in a public document and the requirement in Real
Estate Mortgage that it must be recorded in the Registry of Property.
Note that unlike in pledge, there is no need for actual delivery of the personal property to the
mortgagee.
DISTINCTIONS BETWEEN CHATTEL MORTGAGE AND PLEDGE
DELIVERY OF THE PERSONAL
PROPERTY
REGISTRATION IN THE
REGISTRY OF PROPERTY
PROCEDURE FOR SALE
RIGHT TO EXCESS OF
PROCEEDS OF SALE
RIGHT TO RECOVER
DEFICIENCY

CHATTEL MORTGAGE
Not necessary
Necessary for validity of
the chattel mortgage
against third persons
Governed by Section 14 of
the Chattel Mortgage Law
Excess goes to the
debtor/mortgagor
Creditor/mortgagee can
recover deficiency from
the debtor/mortgagor,
except if covered by Recto
Law

PLEDGE
Delivery is necessary for
validity of the pledge
Not necessary; public
document is enough to
bind third persons
Governed by Article 2112
of the Civil Code
Excess goes to the
pledgee/creditor unless
otherwise stipulated
Creditor/pledgee is not
entitled to recover any
deficiency after the
property is sold,
notwithstanding any
contrary stipulation

Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict
with the Chattel Mortgage Law, shall be applicable to chattel mortgage.

THE CHATTEL MORTGAGE LAW

How do you constitute a chattel mortgage?
To constitute a chattel mortgage, the parties must register the personal property
mortgaged in the Chattel Mortgage Register as security for the performance of
an obligation. However, if the chattel mortgage is not registered, it is still valid
and binding as between the parties. The requirement of registration is not for
validity but only for binding third parties.
What is the effect of registration?
The registration of the chattel mortgage creates a real right or lien which
follows the personal property wherever it goes. Registration gives the
mortgagee symbolic possession.

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What is the form required for a chattel mortgage?

According to Sec. 5 of the Chattel Mortgage Law, the following form should
be sufficient:
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT
This mortgage made this Fifth day of October 2002 by Sheryl
Tanquilut, a resident of municipality of Taytay, Province of Rizal
Philippines, mortgagor, to Anna del Castillo a resident of the municipality
of Cainta, Province of Rizal Philippines, mortgagee, witnesseth:
That the said mortgagor hereby conveys and mortgages to the said
mortgagee all of the following-described personal property situated in
the municipality of Taytay Province of Rizal, and now in the possession of
said mortgagor, to wit:
A PAIR OF SKY BLUE NIKE PRESTO SNEAKERS, SIZE 3XS
This mortgage is given as security for the payment to the said Anna
del Castillo, mortgagee, of the sum of fifty pesos, with interest thereon at the
rate of twenty-five per centum per annum due on 25 December 2002.

The conditions of this obligation are such that if the mortgagor, his
heirs, executors, or administrators shall well and truly perform the full
obligation above stated according to the terms thereof, then this
obligation shall be null and void.
Executed at the municipality of Taytay in the Province of Rizal
this Fifth day of October 2002.
In the presence of:

Sgd. Sheryl Tanquilut

Sgd. Xilca Alvarez

Sgd. Helen Arevalo
FORM OF OATH (affidavit of good faith)
[Tip: know the contents of an affidavit of good faith. JPSP might
ask us to make one in the exam. Lumabas sa past exam]
We severally swear that the foregoing 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 a just and valid obligation, and one not entered into
for the purpose of fraud.
FORM OF CERTIFICATE OF OATH
In the Province of Rizal, personally appeared Sheryl Tanquilut,
Xilca Alvarez, and Helen Arevalo, the parties who signed the foregoing
affidavit and made oath to the truth thereof before me.
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Sgd. Bhoy-B
Notary public

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What happens if there is no affidavit of good faith?

The mortgage is still valid between the parties, but it will not bind third persons,
such as creditors and subsequent encumbrancers. If there is no affidavit of good
faith, the mortgage will not be preferred as against these third persons.
Can you constitute a chattel mortgage to secure a future obligation or a current
obligation plus any and all obligations hereinafter contracted by the mortgagor in favor of
the mortgagee?
No. You can only constitute a chattel mortgage to secure debts or obligations that
are existing at the time the mortgage is constituted. If it is constituted to secure
an obligation that is not yet existent, it is void. The affidavit of good faith
executed by the mortgagor states that the mortgage is constituted to secure the
obligation specified therein and for no other purpose.
What the parties should do is to execute a new document/ deed of
chattel mortgage to cover the newly contracted obligation.
Can you mortgage future property?
Section 7 of the Chattel Mortgage Law provides that as a general rule, you
cannot mortgage property that you do not own at the time of the constitution of
the mortgage. Therefore, you cannot mortgage future property.
But as an exception to this rule, the inventory of retail stores can be the subject of
chattel mortgage, even if technically, they may be acquired by the mortgagor after
the mortgage is constituted. This is because the after-acquired property is actually
in renewal or in replenishment of goods on hand when the mortgage was
executed. The SC came up with this exception in order not to hamper the
circulation of capital in the industry.
What happens when the mortgagor pays the obligation?
If the mortgagor pays the obligation, he gets a discharge from the mortgagee so
that he can then cancel the lien annotated on the title and in the Chattel
Mortgage Registry.
What happens when the mortgagor defaults on the obligation?
1. Right of Redemption
In case of default, the following persons may redeem the property before
it is sold, by paying the amount of the obligation plus costs and expenses
incurred from the breach:
a. the mortgagor
b. a subsequent mortgagee
c. a subsequent attaching creditor
If an attaching creditor redeems, he is subrogated to the rights of
the mortgagor. He can foreclose the mortgage.

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But once the property is sold at auction, there can be no

redemption anymore.
2. Right of Mortgagee to Possession
If the creditor/mortgagee wants to foreclose upon default, he has the
implied right to take the mortgaged property. If the debtor/mortgagor
refuses to surrender the property, the creditor should file an action for
replevin to take possession or for judicial foreclosure.
3. Foreclosure
The parties can stipulate for a private sale upon default.
If there is no stipulation, the applicable rule is Section 14 of the
Chattel Mortgage Law.
According to Section 14, the creditor/mortgagee can cause the property
to be sold at public auction thirty days after default. This is a minimum grace
period given to the mortgagor to redeem the property before it is sold at
auction. There is no maximum time period for holding the sale.
The procedure is the same as that for extra-judicial foreclosure of a real
estate mortgage, except for the notice requirements. In chattel mortgage,
the only notice requirement is posting at two or more public places in the
municipality and personal notice to the mortgagor and junior mortgagees
at least ten days before the date of the sale (no publication).
The proceeds of the sale will be applied as follows:
a. Costs and expenses of the sale
b. Payment of the obligation secured by the mortgage
c. Claims of persons holding subsequent mortgages in their
order; and
d. The balance, if any, shall be given to the mortgagor
Can the mortgagee recover any deficiency after the sale of the property?
Unlike in pledge, the creditor can still file an action for recovery of
any deficiency in case the proceeds of the sale do not satisfy the
entire obligation, unless the situation is covered by the Recto Law.
PROBLEMS ON REAL AND CHATTEL MORTGAGE
Mortgagor mortgaged property worth 120K to secure a 100K loan. Mortgagor defaulted.
Mortgagee foreclosed. The property was sold to X for 70K. Should mortgagor redeem the
property?
Yes, because he can sell it for more than 70K and realize more than the amount
of the principal obligation.
But if, in the example above, the mortgagor has creditors running after him for debts
worth 300K, should he redeem?
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No, he should not redeem. If he redeems, he spends 70K in order to re-acquire

property, which he may thereafter lose again to his other creditors.
Borrower borrows P1M from Lender. Borrower executes a deed of assignment by way of
security over the shares of stock in favor of Lender in order to secure payment of the loan.
It is stipulated that upon payment of the loan by Borrower, Lender will re-convey the shares
of stock to Borrower. What is this arrangement?
This can either be a PLEDGE or an IMPLIED TRUST.
Its not really a pledge because there is an absolute conveyance of ownership by
the supposed pledgor in favor of the pledgee. But the Supreme Court has treated
this in several cases as a pledge.
JPSP likes the implied trust theory better because there is a statutory basis. Art.
1454 of the Civil Code provides that if an absolute conveyance of property is made
in order to secure the performance of an obligation of the grantor toward the grantee, a
TRUST by virtue of law is established. If the fulfillment of the obligation is
offered by the grantor when it becomes due, he may demand the reconveyance
of the property to him.
If its a trust, there is no need to foreclose (actually, theres no right to foreclose).
What happens if theres default? Art. 1454 does not cover this situation, which is
probably why the Supreme Court has characterized this type of transaction as a
pledge instead. JPSP thinks that if theres default, ownership will be
consolidated in the lender/trustee. But if the parties dont want any problem,
they should stipulate the precise effect of default.
Borrower borrows P10M from Lender. Borrower offers the following securities to Lender:
(1) a GUARANTY by X who is worth P100M
(2) a PLEDGE of shares of stock worth P10M
(3) a REAL ESTATE MORTGAGE worth P15M
Which one should Lender choose?
It really depends on the circumstances, but here are the considerations:
1. If he chooses the pledge, it is easier to foreclose, and he can get the
excess in case the shares of stock are sold for more than P10M.
2. If he chooses the guaranty, it is good only if he is sure that the
guarantor will pay. If the guarantor is any of the following, persons, the
guaranty would be a good choice:
a. the Government because it is never insolvent
b. a Bank in the form of a bank guaranty through a letter of credit
c. Insurance Company though in some cases, it is also hard to
collect from an insurance company (also, take note that they would
be governed, not by the Civil Code provisions on guaranty, but by
the Insurance Code).

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But the disadvantage of choosing the guaranty is that the guarantor who
is worth P100M can afford to hire good lawyers who can stall the Lenders
claim.
3. In the case of the real estate mortgage, it depends on how easy it would
be to dispose of the property. If its property at a prime spot in Makati,
this might be a good choice since it can probably be sold at a good price
right away. But if its located in the boondocks, the Lender may have a
very difficult time selling it.
Borrower borrows P10M from Lender. The loan is secured by a guaranty by X, who is worth
P100M, a real estate mortgage worth P8M, and a pledge worth P8M. If Borrower defaults,
what is the best way for Lender to proceed?
1. Foreclose the real estate mortgage first. Then get a deficiency judgment for
the remaining P2M.
2. Then, foreclose the pledge because in pledge, he gets to keep the excess
resulting in an upside of P6M.
3. The Guarantor is not yet an option since he has the benefit of excussion.
The Lender must first go through steps 1 and 2 and other remedies
before running after X.
Borrower borrows P10M from Lender. The loan is secured by a pledge worth P8M and a
guaranty by X. How should the Lender proceed in case of default by Borrower?
If Lender forecloses the pledge, he will have a deficiency of P2M, which he
cannot collect anymore. On the other hand, he cannot proceed against the
guarantor without foreclosing the pledge first.
So what should he do? He should sue Borrower in his capacity as debtor, not as a
pledgor, for collection of the debt. Then, he should attach the property pledged.
When judgment in his favor is rendered, he can then execute it against the
attached shares. The shares can be sold at an ordinary execution sale, not a
foreclosure sale. In this way, the shares will be taken out of the context of the
pledge, and any deficiency in the sale can still be recovered by the lender. After
the execution of the judgment on the shares, the Lender can then go after the
Guarantor for the deficiency.

ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of
an immovable of his debtor, with the obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit.
What is antichresis?
Antichresis is a contract by which the creditor acquires the right to receive the fruits of an
immovable belonging to the debtor, with the obligation to apply them to the payment of the
interest, if owing, and thereafter to the principal of his credit.
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What are the characteristics of antichresis?

1. Accessory It secures the performance of a principal obligation. Manresa, however,
believes that it is an independent contract.
2. Formal Contract It must be in specified form to be valid (in writing).
Is delivery of the property to the creditor required?
Delivery is not required for the validity of the contract itself. BUT, it is required in order that the
creditor may receive the fruits.
Does antichresis apply to all of the fruits of the immovable concerned?
GENERAL RULE: The general rule is that the contract of antichresis covers ALL the fruits of
the encumbered property.
If the parties do not want all of the fruits to be subject to the antichresis, they must STIPULATE
otherwise.
Is it essential for the contract to have a stipulation for interest in order to have an
accessory contract of antichresis?

No. It is not essential to the contract of antichresis that the loan that it guarantees should have
interest. There is nothing in the law that says that antichresis can only guarantee interestbearing loans.
What are the differences between antichresis and real mortgage?

ANTICHRESIS

Property is delivered to the creditor

Creditor acquires only the right to receive the
fruits of the property; not a real right
General rule is that creditor must pay the
taxes and charges upon the estate; parties
must stipulate otherwise
Expressly stipulated that the creditor shall
apply the fruits to the payment of interest, if
owing, and thereafter to the principal

REAL MORTGAGE
Debtor usually retains possession of the
property
Creditor has no right to receive the fruits, but
mortgage creates a real right over the property
which is enforceable against the world
Creditor has no obligation to pay taxes and
charges
No obligation on the part of the mortgagee to
apply the fruits to interest and principal

Antichresis and real mortgage are similar in that the subject matter is real property.
Like pledge and mortgage, antichresis gives a real right if it is registered in the Registry of
Property.
Example: A borrowed P1M from B. To secure the loan, A delivered a parcel of land with
coconut trees to B, giving B the power to administer it and harvest the coconuts. What is
the nature of the contract?
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Answer: The contract is one of mortgage, not antichresis. In order for it to be a contract of
antichresis, it must be expressly agreed between creditor and debtor that the creditor, having
been given possession of the property, is to apply the fruits to the payment of interest, if owing,
and thereafter, to the principal.
Art. 2133. The actual market value of the fruits at the time of the application thereof to the
interest and principal shall be the measure of such application.
When it is time to apply the fruits to the payment of the interest or the principal, the creditor
must base the value of the fruits on their market value at the time of the application.
Example:

The property subject of the contract of antichresis has mango trees. In January, one kilo of
mangoes costs P50/kilo. But in May, when mangoes are in season, one kilo costs 25/kilo. If
interest is due in January, the creditor must apply the fruits to the payment of interest based on
the price of P50/kilo. If interest is due in May, he should compute at the price of P35/kilo.
Art. 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void.
Is there a form required for the contract of antichresis?

Yes. The contract must state the amount of the principal and the interest IN WRITING. If
this form is not followed, the contract of antichresis is VOID. The requirement that it be in
writing is necessary not merely to bind third persons but to make the contract valid.
But even if the antichresis is void, the principal obligation is still valid.
Art. 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes
and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation and repair.
The sums spent for the purposes stated in this article shall be deducted from the fruits.
What are the obligations of the creditor under the contract of antichresis?

1. Pay the taxes and charges upon the estate

If the creditor does not pay the taxes, he is required by law to pay indemnity for damages to
the debtor.
If the debtor pays the taxes on the property which the creditor should have paid, the amount
is to be applied to the payment of the debt. If the amount of taxes paid by the debtor is
enough to satisfy the principal obligation, then the loan and the antichresis are extinguished;
the creditor must return the property to the debtor.
What if the creditor does not want to pay the taxes and charges? They must so stipulate in
their agreement OR see the next article.
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2. Apply the fruits

The creditor must apply the fruits of the property to the payment of interest,
if owing, and thereafter to the principal.

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first having
totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by the
preceding article, may always compel the debtor to enter again upon the enjoyment of the
property, except when there is a stipulation to the contrary.
When can the debtor get back the property subject of the antichresis?

The debtor can get it back only when he has totally paid the principal obligation. This is
because the property stands as a security for the payment of the principal obligation.
Is there an exception?

Yes. The exception to this rule is if the creditor does not want to pay the taxes and charges
upon the estate. In such a case, the creditor may compel the debtor to get the property back,
UNLESS there is a contrary stipulation (exception to the exception).
But this has the effect of extinguishing the contract of antichresis.
Art. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of
the debt within the period agreed upon.
Every stipulation to the contrary shall be void. But the creditor may petition the court for
the payment of the debt or the sale of the real property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.
What happens when the debtor defaults on the principal obligation?

The creditor DOES NOT acquire ownership of the real estate. Any stipulation to the contrary
shall be void. This is because the contract of antichresis covers only the right to receive the
fruits from the estate, and not its ownership. Also, this is pactum commisorium, which is void.
The creditor has the following remedies in case of default:
1. Bring an action for specific performance.
2. Petition for the sale of the real property in judicial foreclosure proceedings under Rule
68 of the Rules of Court.
Can the parties stipulate on an extra-judicial foreclosure? Yes, in the same manner that
they are allowed in pledge and mortgage.
Can the creditor acquire the property given in antichresis by prescription?

No, and any stipulation to the contrary shall be void. In order to acquire property be
prescription, possession must be in the concept of owner. The antichretic creditor possesses
the property merely as a holder.
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Exception: Just like in a co-ownership, if the creditor repudiates the antichresis, he can acquire
the property by prescription.
Art. 2138. The contracting parties may stipulate that the interest upon the debt be
compensated with the fruits of the property which is the object of the antichresis, provided that
if the value of the fruits should exceed the amount of interest allowed by the laws against
usury, the excess shall be applied to the principal.
The creditor must first apply the fruits to the payment of the interest. If the value of the fruits
exceeds the value of the interest due, then the creditor should apply the excess to the principal.
The second part of this provision is no longer applicable, since there is no Usury Law anymore.
Art. 2139. The last paragraph of article 2085, and articles 2089 to 2091, are applicable to this
contract.
Other characteristics of Antichresis:

1. A third person, who is not a party to the principal contract, may offer his immovable
under the contract of antichresis to secure the debt of another. (2085)
2. The contract of antichresis is indivisible. (2089)
3. The indivisibility of the antichresis is not affected by the fact that the debtors are not
solidarily liable. (2090)
4. The contract of antichresis may secure all kinds of obligations pure or conditional.
(2091)