NOTES IN CREDIT TRANSACTIONS

I. GENERAL PROVISIONS
A. Definitions of Credit or Security Transactions.
Credit transactions include all transactions involving the purchase of l
oan of goods, services or money in the present with a promise to pay or deliver
in the future.
> Without a promise to pay or deliver in the future, there can be no security tr
ansaction.

B. Parties to a Bailment.
1. Bailor (Comodatario) the giver, the party who delivers the possession or
custody of the thing bailed.
2. Bailee (Comodante) the recipient; the party who receives the possession
or custody of the thing thus delivered.

C. Kinds of Bailment Contract.

1. Those for the sole benefit of the bailor.
1.1 gratuitous deposit
1.2 mandatum
2. Those for the sole benefit of the bailee
2.1 commodatun
2.2 gratuitous mutuum
3. Those for the benefit of both parties
3.1 deposit for the compensation;
involuntary deposit
3.2 pledge
3.3 bailments for hire

D. Loan in General
D.1 Characteristics of the Contract
1. Real Contract because the delivery of the thing loaned is necessary for
the perfection of the contract (Article 1934; see also Article 1316); and
2. Unilateral Contract because once the subject matter has been deliver
ed, it creates obligations on the part of only one of the parties, i. e. the bor
rower

D.2 Kinds of Loan

1. Commodatum where the bailor (lender) delivers to the bailee (borrower) a
non-consumable thing so that the latter may use it for a certain time and retur
n the identical thing; and
2. Mutuum where the bailor (lender) delivers to the bailee (borrower) money
or other consumable thing upon the condition that the latter shall pay same amo
unt of the same kind of quality.

\D. 3 Distinctions between Commodatum and Mutuum

Commodatum (Hiram)
1. subject matter is non-consumable things
2. ownership retained by lender
3. essentially gratuitous

4. borrower must return the same thing loaned

5. may involved real or personal property

6. loan for use or temporary possession
7. right to demand the return of the thing loaned before expiration of term in c
ase of urgent need
8. loss is shouldered by bailor since he is the owner
Mutuum (Utang)
1. subject matter is money or other consumable things
2. ownership transferred to borrower
3. may be gratuitous or onerous

4. borrower need only pay the same amount of the same kind and quality
5. involves only personal property

6. loan for consumption

7. no right to demand return before the lapse of the term agreed upon

8. borrower suffers the loss even if the loss is caused exclusively by a for
tuitous event
D.4 Distinction between Commodatum (Hiram) and Lease (Upa)
1. Commodatum is a real contract, whereas lease is a cosensual contract.
2. The object of commodatum is a non-consumable (nonfungible) thing, wherea
s the object of lease may even be work or service.
3. Commodatum is essentially gratuitous, whereas lease is not gratuitous.
II. COMMODATUM
A. Characteristics
1. Gratuitous, otherwise it is a lease (Article 1935)
2. Purpose is the temporary use of the thing loaned (Article 1935)
3. Bailee s right to use is limited to the thing loaned and not to its fruits
(Article 1935) unless there is stipulation to the contrary (Article 1940)
4. Subject matter is generally non-consumable things but may cover consumab
les if the purpose of the contract is for exhibition.
5. Bailor need not to be the owner; it is sufficient that he has possessory
interest over subject matter (Article 1938).
6. Commodatum is purely personal in character hence death of either bailor
or bailee extinguishes the contract (Article 1939)
7. General Rule: Bailee can neither lend nor lease the object of the contr
act to a third person.
Exception: Member of bailee s household
Exception to the exception:
a) contrary stipulation
b) nature of thing forbids such use

B. Obligations of the Bailee

1. Bailee is liable for ordinary expenses for the use and preservation of t
he thing loaned.
2. General Rule: Bailee is not liable for loss or damage due to a fortuit
ous event (because the bailor retains ownership)
Exceptions: a) Bailee devote thing to a different purpose
b) Bailee keeps thing longer than the period stipulated or after the accomp
lishment of the use for which commodatum was constituted.
c) Thing loaned was delivered with appraisal of its value (unless there is
express stipulation to the contrary)
d) Bailee lends thing to a third person not a member of his household
e) Bailee, if being able to save either the thing borrowed or his own thing
chose to save the latter
3. Bailees are solidarily liable when the thing is loaned to two or more ba
ilees in the same contract.
Note:
1. G.R.-Bailee is not liable for ordinary wear and tear due to use of the thing
loaned.
 Exceptions: a.) If he is guilty of fault or negligence
b.) If he devotes thing to any purpose different from that for which it has
been loaned.
2. Bailee cannot retain the thing loaned as security for claims he has against
the bailor, even though by reason of extraordinary expenses.

C. Obligations of Bailor
1. To allow the bailee the use of the thing loaned for the duration of peri
od stipulated or until the accomplishment of the purpose for which commodatum wa
s constituted.
Exceptions: a. urgent need during which time the
commodatum is suspended.
b. precarium
b.1 if duration of the contract has not been stipulated
b.2 if use or purpose of the thing has not been stipulated
b.3 if use of thing is merely tolerated by the bailor
2. To refund extraordinary expenses for the preservation of the thing loane
d provided bailor is notified before the expenses were incurred.
Exception: urgent need hence no notice is necessary.
3. To refund 50% of the extraordinary expenses arising from actual use of t
he thing loaned (i.e. caused by fortuitous event)
Exception: contrary stipulation
4. To pay damages to bailee for known hidden flaws in the thing loaned.
Note:
1. Bailor has the right to demand return of the thing if bailee commits any
act of ingratitude.
D. Recent Jurisprudence on Commodatum
Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals
(165 SCRA 515)
Private respondents were able to prove that their predecessors house was
borrowed by petitioner Vicar after the church and the convent were destroyed. T
hey never asked for the return of the house, but when they allowed its free use,
they became bailors in commodatum and the petitioner the bailee. The bailee s fa
ilure to return the subject matter of commodatum to the bailor did not mean adve
rse possession on the part of the borrower. The bailee held in trust the proper
ty subject matter of commodatum. The adverse claim of petitioner came only in
1951 when it declared the lots for taxation purposes. The action of petitioner
Vicar by such adverse claim could not ripen into title by way of ordinary acquis
itive prescription because of the absence of just title.

III. SIMPLE LOAN OR MUTUUM

A. Definition
 Mutuum is a contract whereby one of the parties delivers to another part
y money or other consumable thing with the understanding that the same amount of
the same kind and quality shall be paid.
B. Characteristics
1. Borrower acquires ownership of the thing and can therefore dispose of th
e thing borrowed. There is no criminal liability for failure to pay one s debt.
2. If the thing loaned is money, payment must be made in the currency which
is legal tender in the Philippines and in case of extraordinary deflation or in
flation, the basis of payment shall be the value of the currency at the time of
the creation of the obligation.
3. If fungible thing was loaned, the borrower is obliged to pay the lender
another thing of the same kind, quality and quantity.

C. Distinctions between Mutuum (Utang) and Lease (Upa)

1. In mutuum, the object is money or any consumable (fungible) thing, where
as in lease, the object may be any thing, whether movable or immovable, fungible
or nonfungible.
2. In mutuum, the thing loaned becomes the property of the debtor, whereas
in lease, the owner does not lose his right of ownership.
3. In mutuum, the relationship which is created is that of creditor and deb
tor, whereas in lease, the relationship that is created is that of landlord and
tenant or lessor and lessee (Tolentino vs. Gonzales, 50 Phil. 558).
D. Rules on Interest
1. In order that interest may be charged, it must be expressly stipulated i
n writing (Article 1956).
Exceptions: 1. Debtor in delay is liable to pay legal interest as ind
emnity for damages even in the absence of stipulation for the payment of interes
t (Article 2209)
2. Interest due shall earn interest (compounding interest) from the
time it is judicially demanded although the obligation may be silent upon this
point (Article 2212) or when there is express stipulation (Article 1959).
E. Recent Jurisprudence on Mutuum (Loan)
Francisco vs. Gregorio
(115 SCRA 394)
No interest is due where there was tender of payment prior to demand to
pay or perform an agreed act. A debtor cannot be considered in delay who offere
d a check backed by sufficient deposit or ready to pay cash if the creditor chos
e that means of payment.
State Investment House vs. Court of Appeals
(198 SCRA 390)
The appropriate measure for damages in case of delay in discharging an o
bligation consisting of the payment of a sum of money, is the payment of the pen
alty interest at the rate agreed upon; and in the absence of a stipulation of a
particular rate of penalty interest, then the payment of additional interest at
a rate equal to the regular monetary interest, and if no regular interest had be
en agreed upon, then payment of legal interest.
Tio Khe Chio vs. Court of Appeals
(202 SCRA 119)
Circular No. 416 of the Central Bank which took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) raised the legal rate of int
erest from six (6%) percent to twelve (12%) percent. The adjusted rate mentione
d in the circular refers only to loans or forbearances of money, goods or credit
s and court judgments thereon but not to court judgments for damages arising fro
m injury to persons and loss of property which does not involve a loan.
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 7101
7, July 28, 1986, 143 SCRA 158, the Court declared that the legal rate of intere
st is six (6%) percent per annum and not twelve (12%) percent, where a judgment
award is based on an action for damages for personal injury, not use or forbeara
nce of money, goods or credit. In the same vein, the Court held in GSIS vs. Cou
rt of Appeals, G.R. No. 52478, October 30, 1986, 145 SCRA 311, that the rates un
der the Usury Law (amended by P. D. 116) are applicable only to interest by way
of compensation for the use or forbearance of money; interest by way of damages
is governed by Article 2209 of the Civil Code.

Eastern Shipping Lines, Inc. vs. CA

(234 SCRA 78)
1. In a loan, the interest due should be that stipulated in writing and in
the absence thereof, the rate shall be 12% per annum.
2. In case of other obligations, interest on the amount of damages may be i
mposed at the court s discretion at the rate of 6% per annum.
3. When the money judgment becomes final and executory, the rate of legal i
nterest shall be 12% per annum from such finality until its satisfaction, the in
terim period being an equivalent to a forbearance of credit.

GSIS VS. Court of Appeals

(218 SCRA 233)
Central Bank Circular No. 416 applies only to interest on loans.

A. C. Enterprises, Inc. vs. Construction

Industry Arbitration Commission (CIAC)
(244 SCRA 55)
a.) Obligation not based on a loan or forbearance of money is not covered by CB
Circular No. 416.
b.) Legal interest of 12% p. a. shall only be adjudged in cases involving loan o
r forbearance under CB Circular No. 416.
PNB vs. CA
(236 SCRA 20)
Presidential Decree No. 1684 and CB Circular No. 905 did not authorize e
ither party to unilaterally raise the interest rate without the other s consent.
Ruiz vs. Caneba
(191 SCRA 865)
Where the court s judgment which did not provide for the payment of intere
st has already become final, no interest may be awarded.
Sangrador vs. Villarama
(168 SCRA 215)
That there is no longer any ceiling on interest or interest rates on loa
ns (Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984]) applies only where th
e parties openly and expressly agree on a specific rate of interest to accrue on
the loan. Where the interest rate is not expressly stipulated, the loan shall
earn 12% interest per annum.
Insular Bank of Asia and America
Vs. Spouses Salazar
(159 SCRA 133)
It is the rule that escalation clauses are valid stipulations in commerc
ial contracts to maintain fiscal stability and to retain the value of money on l
ong term contracts. However, the enforcement of such stipulations are subject t
o certain conditions.
Banco Filipino vs. Navarro
(152 SCRA 346)
and PNB vs. Intermediate Appellate Court
(183 SCRA 133)
An escalation clause can be valid only if it also includes a de-escalati
on clause or a stipulation that the rate of interest agreed upon shall be reduce
d in the event that the maximum rate of interest is reduced by law or by Monetar
y Board.
Llorin vs. Court of Appeals
(218 SCRA 436)
An escalation clause must be bilateral hence it must provide for reducti
on or de-esclation of interest for said clause to be valid.
Almeda vs. Court of Appeals
(256 SCRA 292)
The binding effect of any agreement between parties to a contract is pre
mised on two settled principles: (1) that any obligation arising from contract
has the force of law between the parties; and (2) that there must be mutuality b
etween the parties based on their essential equality. Any contract which appears
to be heavily weighed in favor of one of the parties so as to lead to an uncons
cionable result is void. Any stipulation regarding the validity or compliance o
f the contract which is left solely to the will of one of the parties is likewis
e invalid.
Moreover, respondent bank s reliance on C. B. Circular No. 905, Series of
1982 did not authorize the bank, or any lending institution for that matter, to
progressively increase interest rates on borrowings to an extent which would hav
e made it virtually impossible for debtors to comply with their own obligations.
True, escalation clauses in credit agreements are perfectly valid and do not c
ontravene public policy. Such clauses, however, (as are stipulations in other c
ontract) are nonetheless still subject to laws and provisions governing agreemen
ts between parties, which agreement while they may be the law between the contr
acting parties-implicitly incorporate provisions of existing law. Consequently,
while the Usury Law ceiling on interest rates was lifted by C. B. Circular No.
905, nothing in the said circular could possibly be read as granting respondent
bank carte blanche authority to raise interest rates to levels which would eithe
r enslave its borrowers or lead to a hemorrhaging of their assets.
Escalation clauses are not basically wrong or legally objectionable so l
ong as they are not solely potestative, but based on reasonable and valid ground
s. Here, as clearly demonstrated above, not only (are) the increases of the in
terest rates on the basis of the escalation clause patently unreasonable and unc
onscionable, but also there are no valid and reasonable standards upon which the
increases are anchored.
PNB vs. Court of Appeals
(258 SCRA 549)
To begin with, PNB s argument rests on a misapprehension of the import of
the appellate court s ruling. The Court of Appeals nullified the interest rate in
creases not because the promissory note did not comply with P.D. No. 1684 by pro
viding for a de-escalation, but because the absence of such provision made the c
lause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipi
no Savings & Mortgage Bank vs. Navarro (152 SCRA 340) that although P. D. No. 16
84 is not to be retroactively applied to loans granted before its effectivity th
ere must nevertheless be a de-escalation clause to mitigate the one-sidedness o
f the escalation clause. Indeed because of concern for the unequal status of bo
rrowers vis--vis the banks, our cases after Banco Filipino have fashioned the rul
e that any increase in the rate of interest made pursuant to an escalation claus
e must be the result of agreement between the parties.
In this case no attempt was made by PNB to secure the conformity of priv
ate respondents to the successive increases in the interest rate. Private respo
ndents assent to the increases can not be implied from their lack of response to
the letters sent by PNB, informing them of the increases. For as stated in one
case (PNB vs. CA, 238 SCRA 20) [1994]), no one receiving a proposal to change a
contract is obliged to answer the proposal.
Liam Lao vs. Olympic Sawmill
(129 SCRA 439)
Usury is now legally non-existent. Interest can be charged as lender an
d borrower may agree upon. The Rules of Court in regard to allegations of usury
, being procedural in nature, should be considered repealed with retroactive eff
ect.
Issue: If the debtor is sued by the creditor for the recovery of loan together
with interest, does the failure of the creditor to file a reply denying under oa
th the defense or usury amount to an admission thereof?
Held: No. It is the failure of the creditor to deny under oath in his answer to
a complaint filed by the debtor against him for the recovery of usurious intere
st he has collected that is contemplated by Section 9 of the Usury Law as an adm
ission of usury.
It does not apply to the present case where the creditor is the plaintif
f seeking the recovery of a loan together with interest and the debtor sets up t
he defense that the transaction is usurious.
Korean Airlines vs. Court of Appeals
(234 SCRA 717)
Legal interest of 6% p.a. on the amount of damages in favor of a litigan
t should commence from rendition of judgment of the trial court instead of the d
ate of filing of the complaint.

IV. DEPOSIT
A. Definition
A deposit is constituted from the moment a person receives a thing belon
ging to another, with the obligation of safety keeping it and of returning the s
ame.
B. Characteristics
1. Real Contract because it is perfected by the delivery of the subject mat
ter.
2. If gratuitous, it is unilateral because only the depository has an oblig
ation. If onerous, it is bilateral.
3. Principal purpose of the contract of deposit is the safekeeping of the t
hing delivered.
4. Contract of deposit is generally gratuitous.
Exception: a) contrary stipulation
b) depository is in the business of storing
goods
c) property saved from destruction during calamity without owner s knowledge; jus
t compensation should be given the depository.
C. Distinctions between Deposit and Mutuum

1. Principal
Purpose
2. Return

3. Object
Deposit
Safekeeping or mere custody

Depositor can demand return at will

Movable (extrajudicial) and immovable property (judicial)

Mutuum
Consumption of the
subject matter
 Lender must wait for
the expiration of the
stipulated period
Money or fungible
thing
D. Distinctions between Deposit and Commodatum

1. Principal
Purpose
2. Nature
Deposit
Safekeeping

May be gratuitous
Commodatum
Transfer of use

Always gratuitous
E. Kinds of Deposit
1. Judicial
2. Extrajudicial
a. Voluntary
b. Necessary
3. Distinctions between Extrajudicial and Judicial Deposits
1. The first is constituted by will of the contracting parties, while the second
is constituted by virtue of a court order.
2. In the first, the object must be movable property, whereas in the second, the
object may be either movable or immovable property.
3. The purpose of the first is the safekeeping of the thing deposited, whereas t
he main purposes of the second is to secure or protect the owner s right.
4. The first is, as a general rule, gratuitous, whereas the second is always one
rous.
5. In the first, the depository is obliged to return the thing deposited upon de
mand made by the depositor, whereas the second, the thing shall be delivered onl
y upon order of the court.
F. Voluntary Deposit
1. Defined as one wherein the delivery is made by the will of the depositor
.
2. Although generally the owner, the depositor need not be the owner of the
thing deposited.
3. May be oral or in writing.
G. Obligations of the Depositary
1. Depositary is obliged to keep the thing safely and to return it when req
uired, even though a specified term may have been stipulated in the contract.
2. Depositary is liable if the loss occurs through his fault or negligence.
Loss of thing while in the depositary s possession raises a presumption of fault
. Required degree of care is greater if the deposit is for compensation than wh
en it is gratuitous.
3. Depositary is not allowed to deposit the thing with a third person.
Exception: contrary stipulation
4. Depositary is liable for the loss of the thing deposited if:
4.1 he transfers the deposit with a third person without authority although
there is no negligence on his part and the third person;
4.2 he deposits the thing with a third person who is manifestly careless or unfi
t although authorized, even in the absence of negligence; or
4.3 the thing is lost through the negligence of his employees whether the latter
are manifestly careless or not.
Note: Depositary is not responsible for loss of thing without negligence of th
e third person with whom he was allowed to deposit the thing if such third perso
n is not manifestly careless or unfit
5. Depositary is obliged to first notify the depositor and wait for the lat
ter s decision if he will change the way or manner of the deposit.
Exception: delay will cause danger
6. If thing deposited should earn interest, the depositary is under obligat
ion (1) to collect the interest as it becomes due and (2) to take such steps as
may be necessary to preserve its value and the rights corresponding to it. The
depositary is bound to collect not only the interest but also the capital itsel
f when due.
7. Depositary has the obligation not to commingle things deposited if so st
ipulated, even if they are of the same kind and quality (Article 1976).
8. Depositary is under obligation not to make use of the thing deposited (b
ecause deposit is for safekeeping of the subject matter and not for its use); ot
herwise he shall be liable for damages.
Exceptions: a) express permission of the depositor
b) preservation of the thing deposited required its use (article 1977)

Note:
1. If the thing deposited is non-consumable and the depositary has permissi
on to use the thing, the contract becomes one of commodatum.
2. If the thing deposited is money or other consumable thing, the contract
is converted into a simple loan or mutuum.
Exception: Where safekeeping is still the principal purpose of the contract
, the same shall be considered an irregular deposit.
3. Depositary is liable for loss through a fortuitous event even without hi
s fault.
(a) if it is so stipulated;
(b) is he uses the thing without the depositor s permission;
(c) if he delays its return;
(d) if he allows others to use it, even though he himself may have been authoriz
ed to use the same (article 1979)
4. Depositary has the obligation to:
(a) return the thing deposited when delivered closed and sealed, in the sam
e condition;
(b) pay for damages should the seal or lock be broken through his fault whic
h is presumed unless proven otherwise; and
(c) keep the secret of the deposit when the seal or lock is broken, with or
without his fault.
Note: Depositary is authorized to open the thing deposited which is cl
osed and sealed when there is:
(a) presumed authority (keys having been delivered to depositary), or
(b) in case of necessity.
5. Depositary has the obligation to return not only the thing but also all
its products, accessions and accessories which are a consequence of ownership.

H. Persons to whom Return of Thing Deposited Must be Made

1. The depositary is obliged to return the thing deposited, when required, to th
e depositor, to his heirs and successors, or to the person who may have been des
ignated in the contract (Article 1972).
2. If the depositor was incapacitated at the time of making the deposit, the pro
perty must be returned to his guardian or administrator or the person who made t
he deposit or to the depositor himself should he acquire capacity (Article 1970)
.
3. Even if the depositor had capacity at the time of making the deposit but he s
ubsequently loses his capacity during the deposit, the thing must be returned to
his legal representative (Article 1988).
I. Place of Return of Thing Deposited
1. at the place agreed upon by the parties, and
2. in the absence of stipulation, at the place where the thing deposited mi
ght be even if it should not be the same place where the original deposit was ma
de provided the transfer was accomplished without malice on the part of the depo
sitary.
Note: Depositor shoulders the expenses for transportation

J. Time of Return of Thing Deposited

General Rule: Upon demand or at will, whether or not a period has been stipulate
d.
Exceptions: a) thing is judicially attached while in the
depositary s possession
b) depositary was notified of the opposition of
a third person to the return or the removal
of the thing deposited (Article 1986)
K. Right of Depositary to Return Thing Deposited
1. if deposit is gratuitous; and
2. justifiable reasons exist for its return
Note: Otherwise, depositary may avail of consignation therefore there is no ri
ght to return before expiration of the term designated if deposit is for valuabl
e consideration (Article 1989).
L. Alteration of Depositary s Heir
1. If in good faith, heir may either return the price he received or assign
his right of action against the buyer in case the price has not been paid.
2. If in bad faith, heir is liable for damages and may be sued for estafa.
M. Relation between Bank and Depositor
Deposits of money in banks, whether fixed, savings and current, are gove
rned by the provisions on mutuum and the relation between a depositor and a bank
is that of a creditor and a debtor.
Serrano vs. Central Bank
(96 SCRA 96)
A bank s failure to honor a deposit is failure to pay its obligation as de
btor and not a breach of trust arising from a depositary s failure to return the s
ubject matter of the deposit.
Guingona vs. City Fiscal of Manila
(126 SCRA 577)
While the bank has the obligation to return the amount deposited, it has
, however, no obligation to return or deliver the same money that was deposited.
Overseas Bank of Manila vs. Court of Appeals
(172 SCRA 521)
It has been held that suspension of a bank which had fallen into a distre
ssed financial situation by order of the Central Bank cannot excuse it from its o
bligations to depositors who had nothing whatever to do with the Central Bank ac
tuations or the events leading to the bank s distressed state.
Integrated Realty Corp. vs. Phil. National Bank
(174 SCRA 295)
and
Fidelity Savings vs. Cenzon
(184 SCRA 141)
The obligation of a bank to pay interest on a deposit ceases the moment
the operations the bank is completely suspended by the Central Bank. The deposi
t is not entitled to interest during the period the bank is not allowed to opera
te.
N. Obligations of Depositor
1. He is obliged to pay expenses for the preservation of the thing deposite
d, if deposit is gratuitous.
2. He is obliged to pay for losses incurred due to the character of the thi
ng deposited.
Exceptions: a) unless depositor was not aware thereof
b) depositor was not expected to know the dangerous character of the thing
c) unless he notified the depositary of the same; or
d) depositary was aware of it without depositor s advice (Article 1993)
Note: Depositary has the right to retain the thing deposited in pledge until f
ull payment of what may be due him by reason of the deposit (Article 1994).
O. Necessary Deposit
1. Necessary deposit in compliance with a legal obligation
1.1 The judicial deposit of a thing, the possession of which is being disput
ed in a litigation by two or more persons (Article 538);
1.2 The deposit with a bank or public institution of public bonds or instrum
ents if credit payable to order or bearer given in usufruct when the usufructuar
y does not give proper security for their conservation (Article 586);
1.3 The deposit of a thing pledged when the creditor uses the same without t
he authority of the owner or misuses it in any other way (Article 2104);
1.4 Those required in suits as provided in the Rules of Court; and
1.5 Those constituted to guarantee contracts with the government. In this l
ast case, the deposit arises from an obligation of public or administrative char
acter.

2. Necessary deposit made on the occasion of a calamity.

3. Deposit by travelers in hotels and inns

3.1 They have been previously informed about the effects brought by the gues
ts; and
3.2 The latter have taken the precautions prescribed regarding their
safekeeping.
Note:
1. Hotelkeeper is liable regardless of the amount in the following cases:
a) The loss or injury is caused by his servants or employees as well as by
strangers provided that notice has been given and proper precautions taken. (Ar
ticle 1998); and
b) The loss is cause by the act of a thief or robber done without the use o
f arms and irresistible force (Article 2001) for in this cause, the hotelkeeper
is apparently negligent.
2. Hotelkeeper is not liable in the following cases:
a) The loss or injury is caused by force majeure like flood, fire (Article
2000), theft or robbery by a stranger (not by hotelkeeper s servant or employee) w
ith the use of arms or irresistible force (Article 2001), etc., unless he is gui
lty of fault or negligence in failing to provide against the loss or injury from
said cause (see Article 1170, 1174);
b) The loss is due to the acts of the guests, his family, servants or visit
ors (Article 2002).
c) The loss arises from the character of the things brought into the hotel
(Article 2002).
3. Stipulations on exemption or diminution of liability is void (Article 20
03).
4. Hotelkeeper has a right to retain the things of guests as security for u
npaid lodging expenses and supplies.
P. Judicial deposit or Sequestration
1. Distinction between Judicial and Extrajudicial Deposits

Cause

Purpose

Subject Matter
Remuneration
Beneficiary
Judicial
by will or court

to secure the right of a party to recover in case of a favorable judgment

movable and immovable property
onerous
person with favorable judgment
Extrajudicial
by will of the parties
custody and safekeeping of the thing

only movable property

generally gratuitous
depositor

V. GUARANTY
A. Definition
Guaranty is a contract whereby a person binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail t
o do so.

B. Characteristics
1. accessory
2. subsidiary and conditional
3. unilateral
4. requires that the guarantor must be a person
distinct from the debtor

C. Distinction between Guaranty and Suretyship

3
Guaranty
Guarantor is secondarily
liable.

Guarantor binds himself

to pay only when the
principal cannot pay.

Guarantor is an insurer of
the debtor s solvency.
1
2

3
Suretyship
Surety is primarily liable and is therefore not entitled to the exhaustion of th
e properties of the principal debtor

Surety assumes liability as a regular party to the undertaking and undertakes to

pay if the principal does not pay.

Surety is an insurer of the debt.

D. Recent Jurisprudence on Suretyship
Inciong, Jr. vs. Court of Appeals
(257 SCRA 578)
Issue: Petitioner argues that the dismissal of the complaint against Na
ybe, the principal debtor, and against Pantanosas, his co-member, constituted a
release of his obligation especially because the dismissal of the case against P
antanosas was upon the motion of private respondent itself, citing Article 2080
as basis for his argument.
Held: Section 4, Chapter 3, Title 1, Book IV of the Civil Code states
the law on joint and several obligations. Under Article 1297 thereof, when ther
e are two or more debtors in one and the same obligation, the presumption is tha
t the obligation is joint so that each of the debtors is liable only for a propo
rtionate part of the debt. There is a solidary liability only when the obligati
on expressly so states, when the law so provides or when the nature of the oblig
ation so requires.
Petitioner signed the promissory note as a solidary co-maker and not as
a guarantor therefore Article 2080 is not applicable. Because the promissory no
te involved in this case expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of them may be proceeded aga
inst for the entire obligation. The choice is left to the solidary creditor to
determine against whom he will enforce collection. Consequently, the dismissal
of the case against Judge Pantanosas may not be deemed as having discharged peti
tioner from liability as well. As regards Naybe, suffice it to say that the cou
rt never acquired jurisdiction over him. Petitioner, therefore, may only have r
ecourse against his co-makers, as provided by law.
Philippine National Bank vs. Court of Appeals
(198 SCRA 767)
A surety s liability to the creditor or promisee of the principal
is said to be direct, primary and absolute. In other words, he is directly, pri
marily and equally bound with the principal as original promissor although he po
ssesses no direct or personal interest over the latter s obligations nor does he r
eceive any benefits therefrom.

Philippine National Bank vs. Pineda

(197 SCRA 1)
If the principal debtor and the surety are held liable, their liability t
o pay the creditor would be solidary but the nature of the surety s undertaking is
such that it does not incur liability unless and until the principal debtor is
held liable.
Finman General Assurance Corp. vs. Salik
(188 SCRA 740)
In the absence of collusion, the surety is bound by a judgment against th
e principal even though he was not a party to the proceedings. The nature of it
s undertaking makes it privy to all proceedings against its principal.
E. Rules Governing the Nature and Extent of Guaranty
1. G.R.-Guaranty is generally gratuitous
Exception: contrary stipulation

Garcia, Jr. vs. Court of Appeals

(191 SCRA 493)
The peculiar nature of a guaranty or surety agreement is that it is rega
rded as valid despite the absence of any direct consideration received by the gu
arantor or surety either from the principal debtor or from the creditor. While
a contract of guaranty or surety, like any other contract, must generally be sup
ported by a sufficient consideration, such consideration need not pass directly
to the guarantor or surety; a consideration moving to the principal alone will s
uffice. The guarantor or surety, therefore, becomes liable for the debt or duty
of another although he possesses no direct or personal interest over the obliga
tions nor does he receive any benefit therefrom.

2. Guaranty is an accessory contract therefore there must be a valid princi

pal obligation for guaranty to be valid. Guarantor may secure the performance o
f voidable, unenforceable, natural, conditional, and future obligations (Article
2052).

3. Guarantor s liability cannot exceed the principal obligation (Article 2054

).

4. Guaranty cannot be presumed. If there is any doubt on the terms and con
ditions of the guaranty or surety agreements, the doubt should be resolved in fa
vor of the guarantor or surety (Philippine National Bank vs. Court of Appeals, 1
98 SCRA 767). However, the rule of strictissimi juris commonly refers to an acc
ommodation surety and is not applied in case of compensated sureties.

5. The qualifications of a guarantor are:

5.1 He possesses integrity;
5.2 He has capacity to bind himself; and
5.3 He has sufficient property to answer for the obligation which he guarantees
6. Where the creditor has required and stipulated that a specified person s
hould be a guarantor, the substitution of guarantor may not be demanded (Article
2057) because in such a case the selection of the guarantor is a term of the ag
reement and as a party, the creditor, is therefore, bound thereby (see Articles
1159, 1306).
F. Effects of Guaranty between the
Guarantor and the Creditor
1. G.R.-Guarantor has the right to the benefit of excussion or exhaustion o
f the debtor s property before he can be compelled to pay.
Exceptions:
a) if guarantor has expressly renounced excussion
b) if guarantor has bound himself solidarily with the debtor (suretyship)
c) in case of debtor s insolvency
d) when guarantor has absconded or cannot be sued within the Philippines unless
he left a manager or representative
e) if it may be presumed that an execution on the debtor s property will not satis
fy the obligation
f) if guarantor does not set up the benefit of excussion and fails to point out
to the creditor available property of the debtor within the Philippines
g) if he is a judicial bondsman and sub-surety
h) where a pledge or mortgage has been given by the guarantor as a special secur
ity
i) if guarantor fails to interpose it as a defense before judgment is rendered a
gainst him (Saavedra vs. Price, 68 Phil. 669)
2. A compromise between the creditor and the principal debtor benefits the
guarantor but does not prejudice him. A compromise which is entered into betwee
n the guarantor and the creditor benefits but does not prejudice the principal d
ebtor (Article 2063).
3. Guarantor is likewise entitled to the benefit of division where there ar
e several guarantors of only one debtor and for the same debt. Guarantor s liabil
ity is only joint therefore, they are not liable beyond the shares which they ar
e respectively bound to pay (Article 2065).
Exceptions: a) solidarity
B) if any of the circumstances in Article 2057 should take pla
ce.
Willex Plastic Industries Corporation vs. Court of Appeals
(256 SCRA 478)
Willex Plastic argues that the Continuing Guaranty . Being an accessory con
tract, cannot legally exist because of the absence of a valid principal obligati
on. Its contention is based on the fact that it is not a party either to the Con
tinuing Surety Agreement or to the loan agreement between Manila Bank and Inter-R
esin Industrial.
Put in another way, the consideration necessary to support a surety obli
gation need not pass directly to the surety, a consideration moving to the princ
ipal alone being sufficient. For a guarantor or surety is bound by the same cons
ideration that makes the contract effective between the principal parties theret
o . It is never necessary that a guarantor or surety should receive any part o
r benefit, if such there be, accruing to his principal. xxx
 Willex Plastic contends that the Continuing Guaranty cannot be retroactive
ly applied so as to secure the payments made by Interbank under the two Continuin
g Surety Agreements and invokes the El Vencedor and Dio rulings to support its co
ntention that a contract if suretyship or guaranty should be applied prospective
ly.
In El Vencedor vs. Canlas (44 Phil. 699), we held that a contract of sur
etyship is not retroactive and no liability attaches for defaults occurring befo
re it is entered into unless an intent to be so liable is indicated. There we fo
und nothing in the contract to show that the parties intended the surety bonds t
o answer for the debt contracted previous to the execution of the bonds. In con
trast, in this case, the parties to the Continuing Guaranty clearly provided that
the guaranty would cover sums obtained and/or to be obtained by Inter-Resin Indust
rial from Interbank.
On the other hand, in Dio vs. Court of Appeals (216 SCRA 9), the issue wa
s whether the sureties could be held liable for an obligation contracted after t
he execution of the continuing surety agreement. It was held that by its very n
ature a continuing suretyship contemplates a future course of dealing. It is pro
spective in its operation and is generally intended to provide security with res
pect to future transactions. By no means, however, was it meant in that case tha
t in all instances a contract of guaranty or suretyship should be prospective in
application.
Indeed, as we also held in Bank of the Philippine Islands vs. Foerster (
49 Phil. 843), although a contract of suretyship is ordinarily not to be constru
ed as retrospective, in the end the intention of the parties as revealed by the
evidence is controlling.
Dio vs. Court of Appeals
(216 SCRA 91)
Issue: If the contract of guaranty states that the same is to secure
advances to be made from time to time , is this a valid guaranty?
Held: Yes, this will be construed as a continuing guaranty/surety gi
ven to secure future debts and is not limited to a single transaction but which
contemplates a future course of dealing, covering a series of transactions gene
rally for an indefinite period of time or until revoked.
G. Effects of Guaranty between the
Debtor and the Guarantor
1. Guaranty is a contract of indemnity. The guarantor who pays for a debto
r must be indemnified by the latter. The indemnity comprises:
1.1 the total amount of the debt;
1.2 the legal interest thereon from the time the payment was made known to the d
ebtor, even though it did not earn interest for the creditor;
1.3 The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him;
1.4 Damages, if they are due (Article 2066)
Exceptions:
a) Where the guaranty is constituted without the knowledge or against the will o
f the principal debtor, the guarantor can recover only insofar as the payment ha
d been beneficial to the debtor (Article 2050)
b) Payment by a third person who does not intend to be reimbursed by the debtor
is deemed to be a donation, which, however, requires the debtor s consent. But th
e payment is in any case valid as to the creditor who has accepted it (Article 1
238)
c) The right to demand reimbursement is subject to waiver.
2. Guarantor has the right of subrogation against the debtor to enable him
to enforce the indemnity granted in Article 2066 and he cannot demand more than
what he actually paid (Article 2067).
3. Guarantor has the right to proceed against the debtor even before paymen
t in the following instances:
3.1 When he is sued for the payment;
3.2 In case of insolvency of the principal debtor;
3.3 When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
3.4 When the debt has become demandable by reason of the expiration of the perio
d for payment;
3.5 After the lapse of ten years, when the principal obligation has no fixed per
iod for its maturity, unless it be of such nature that it cannot be extinguished
except within a period longer than ten years;
3.6 If there are reasonable grounds to fear that the principal debtor intends to
abscond;
3.7 If the principal debtor is in imminent danger of becoming insolvent (Article
2071).
Guarantor may either obtain release from the guaranty or demand a securit
y that shall protect him from any proceedings by the creditor and from danger of
debtor s insolvency (Article 2071).
H. Effects of Guaranty as Between Co-guarantors
1. The obligation of several guarantors of the same debtor and for the same
debt is joint and each is bound only to pay his proportionate share. Therefore
, one who has paid the entire debt may seek reimbursement from each of his co-gu
arantors the share which is proportionately owing him.
Requisites:
a) payment must have been made by virtue of a judicial demand or
b) because the principal debtor is insolvent
I. Extinguishment of Guaranty
1. Being accessory and subsidiary, guaranty is terminated when the principa
l obligation is extinguished by:
a) payment or performance;
b) loss of the thing due
c) condonation or remission of the debt
d) confussion or merger of the rights of the creditor and debtor
e) compensation
f) novation
Guaranty may also be extinguished if the creditor has released the guaran
tor although the principal obligation remains (Article 2078) or in case of mater
ial alteration which imposes a new obligation or added burden on the party promi
sing or which takes away some obligation already imposed, changing the legal eff
ect of the original contract and not merely the form thereof. (NASCO vs. Torrent
o, 20 SCRA 427 [1967]).
2. Release of one guarantor by the creditor without the consent of the othe
r guarantors benefits all to the extent of the share of the guarantor released (
Article 2078).
3. An extension of the term granted by the creditor to the debtor without g
uarantor s consent extinguishes the guaranty (Article 2029).
4. The guarantor who pays is entitled to be subrogated to all the rights of
the creditor (Article 2067). If there can be no subrogation because of the fau
lt of the creditor, as when the creditor releases or fails to register a mortgag
e, the guarantors are thereby released. The same rules applies even though the
guarantors be solidarily (Article 2080).
J. Legal and Judicial Bonds
1. A judicial bondsman and the sub-surety are not entitled to the benefit o
f excussion because they are not mere guarantors, but sureties whose liability i
s primary and solidary.
VI. PLEDGE
A. Definition
Pledge is a contract by virtue of which the debtor delivers to the cred
itor or to a third person a movable (Article 2094) or document evidencing incorp
oreal rights (Article 2095) for the purpose of securing the fulfillment of a pri
ncipal obligation with the understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its fruits and accessions.
B. Characteristics
1. A real contract because it is perfected by the delivery of the thing ple
dged by the debtor who is called the pledgor to the creditor who is the pledge,
or to a third person by common agreement;
2. An accessory contract because it has no independent existence of its own
;
3. A unilateral contract because it creates an obligation solely on the par
t of the creditor to return the thing subject thereof upon the fulfillment of th
e principal obligation;
4. A subsidiary contract because the obligation incurred does not arise u
ntil the fulfillment of the principal obligation to which it is secured.
C. Essential Requirements
1. The pledge is constituted to secure the fulfillment of a principal oblig
ation.
2. The pledgor or mortgagor is the absolute owner of the thing pledged or m
ortgaged.
3. The persons constituting the pledge or mortgage have the free disposal o
f their property, and in the absence thereof, that they be legally authorized fo
r the purpose.
4. The thing pledged must be delivered to the creditor or to a third person
by common agreement.
D. Common Provisions Governing Pledge or Mortgage
1. Contract may be constituted only by the absolute owner of the thing pled
ged or mortgaged otherwise, the pledge or mortgage is void, such as that constit
uted by an impostor. (see De Lara vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs.
Philippine National Bank, 96 Phil. 157 [1954])
2. A mortgage of conjugal property by one of the spouses is valid only as t
o one-half (1/2) of the entire property. (Philippine National Bank vs. Court of
Appeals, 98 SCRA 207 [1960]).
3. While it is true that under Article 2085 it is essential that the mortga
gor be the absolute owner of the property mortgaged, a mortgagee has the right t
o rely upon what appears in the certificate of title and does not have to inquir
e further. Stated differently, an innocent purchaser for value (like a mortgage
e) relying on a torrens title issued is protected. (Duran vs. Intermediate Appe
llate Court, 138 SCRA 491 [19685])
4. A stipulation whereby the thing pledged or mortgaged or under antichresi
s (Article 2137) shall automatically become the property of the creditor in the
event of non-payment of the debt within the term fixed is known as pactum commis
orium or pacto commissorio which is forbidden by law and declared null and void
(article 2088)
E. Disctinctions between Pledge and Real MOrtgage
Real Mortgage
Pledge
1.
2.

3.
Movable property
Delivery of the object pledged to the pledgee or a third person
Pledge is not valid against third persons unless a description of the thing pled
ged and the date of the pledge appear in a public instrument.
1.
2.

3.
Immovable property
Delivery of the thing mortgaged is not necessary
Mortgage is not valid against third persons if not registered.
F. Provisions Applicable only to Pledge
1. The pledgor retains his ownership of the thing pledged. He may, therefo
re, sell the same provided the pledgee consents to the sale. As soon as the ple
dgee gives his consent, the ownership of the thing pledged is transferred to the
vendee subject to the rights of the pledgee, namely, that the thing sold may be
alienated to satisfy the obligation (Article 2112) and that the pledgee must co
ntinue in possession during the existence of the pledge. (Article 2093, 2098).
2. The possession of the pledgee constitutes his security. Hence, the debt
or cannot demand for its return until the debt secured by it is paid. (See Arti
cle 2105; Serrano vs. Court of Appeals, 196 SCRA 107 [1991]) But the right of r
etention is limited only to the fulfillment of the principal obligation for whic
h the pledge was created. (Article 2098).
3. Pledgee has the obligation to take care of the thing pledged with the di
ligence of a good father of the family. He is entitled to reimbursement of the
expenses incurred for its preservation and he is liable for loss or deterioratio
n by reason of fraud, negligence, delay or violation of the terms of the contrac
t. (Articles 1174, 1170).
4. Pledgee is not authorized to transfer possession of the thing pledged to
a third person.
Exception: stipulation authorizing pledgee to transfer possession. (Articl
e 2100)
5. The pledgee has no right to use the thing pledged or to appropriate the
fruits thereof without the authority of the owner (Article 2104; see Article 197
7). But the pledgee can apply the fruits, income, dividends, or interest, if ow
ing and thereafter to the principal of his credit. (see Article 2132).
Exception: contrary stipulation
6. The pledgor may ask that the thing pledged be deposited judicially or ex
trajudicially.
6.1 if the creditor uses the thing without authority;
6.2 if he misuses the thing in any other way (Article 2104);
6.3 if the thing is in danger of being lost or impaired because of the negligenc
e or willful act of the pledge.
7. Pledgor cannot ask for the return of the thing pledged until said obliga
tion is fully paid including interest due thereon and expenses incurred for its
preservation (Article 2099).
Exception: Pledgor is allowed to substitute the thing pledged which is in d
anger of destruction or impairment with another thing of the same kind and quali
ty (Article 2107).
8. The possession of the thing pledged by the debtor or owner subsequent to
the perfection of the pledge gives rise to a prima facie presumption that the t
hing has been returned and, therefore, that the pledge has been extinguished.
9. When the thing pledged is later found in the hands of the pledgor or the
owner, only the accessory obligation of pledge is presumed remitted, not the pr
incipal obligation itself (Article 1274).
10. The sale of the thing pledged extinguishes the principal obligation whet
her the price of the sale is more or less than the amount due.
a. If the price of the sale is more than the amount due the creditor, the debtor
is not entitled to the excess unless the contrary is provided;
b. In the same way, if the price of the sale is less, neither is the creditor en
titled to recover the deficiency. A contrary stipulation is void (Article 2115)
.

VII. REAL MORTGAGE

A. Definition
 Real Mortgage is a contract whereby the debtor secures to the creditor t
he 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.
B. Characteristics
1. It is an accessory and subsidiary contract.
2. It is also unilateral because it creates only an obligation on the part
of the creditor who must free the property from the encumbrance once the obligat
ion is fulfilled.
3. The mortgagor, as a general rule, retains possession of the property mor
tgaged as security for the payment of the sum borrowed from the mortgagee, and p
ays the latter a certain percent thereof as interest on his principal by way of
compensation for his sacrifice in depriving himself of the use of said money and
the enjoyment of its fruits, in order to give them to the mortgagor.
4. The objects of a real mortgage are immovable (Article 415) and alienable
real rights imposed upon immovables.
Note: While a mortgage of land necessarily includes, in the absence of
stipulation, the improvements thereon, a building by itself may be mortgaged ap
art from the land on which it is built. Possessory rights over said property be
fore title is vested on the grantee may be validly transferred or conveyed as in
a deed of mortgage. (prudential Bank vs. Panis, 153 SCRA 390 [1967]); Nartales
vs. GSIS, 156 SCRA 205 [1987]).
5. In order that a mortgage may be validly constituted, it must appear in a
public document duly recorded in the Registry of Property (see Gaotian vs. Gaff
ud, 24 SCRA 706 [1969])
Note: If the instrument of mortgage is not recorded, the mortgage is nev
ertheless binding between the parties.
6. A mortgage creates a real right (see Tuazon vs. Grosco, 5 Phil. 596 [190
5]), a lien inseparable from the property mortgaged, which is enforceable agains
t the whole world. Until discharged, it follows the property wherever it goes a
nd subsists notwithstanding changes of ownership.
Note:
a.) If the mortgagor sells the mortgaged property, the property rema
ins subject to the fulfillment of the obligation secured by it. (see Bonnevie v
s. Court of Appeals, 125 SCRA 122 [1983]) All subsequent purchasers of the prop
erty must respect the mortgage, whether the transfer to them be with or without
the consent of the mortgagee. But the mortgage must be registered (Article 2125
) or, if not registered, the buyer must know of its existence. (see Phil. Natio
nal Bank & Trust Corp. vs. Court of Appeals, 193 SCRA 158 [1991]) The mortgagor
may not be the principal debtor (Article 2085, 2nd par.).
b.) The right or lien of an innocent mortgagee for value upon the mo
rtgaged property must be respected and protected, even if the mortgagor obtained
his title through fraud. The remedy of the persons prejudiced is to bring an a
ction for damages against the person who caused the fraud and if the latter is i
nsolvent, an action against the Treasurer of the Philippines may be filed for th
e recovery of damages against the Assurance Fund (Philippine National Bank vs. C
ourt of Appeals, 187 SCRA 735 [1990])
C. Effect of Mortgage
1. The only right of a mortgagee in case of non-payment of a debt secured b
y real mortgage would be to foreclose the mortgage and have the encumbered prope
rty sold to satisfy the outstanding indebtedness (Guanzon vs. Argel, 33 SCRA 474
[1970])
2. The mortgagor s default does not operate to vest in the mortgagee the ownersh
ip of the encumbered property. His failure to redeem the property does not auto
matically vest ownership of the property to the mortgagee which would grant the
latter the right to appropriate the property or dispose of it for such effect is
against public policy as enunciated by Article 2088. (Reyes vs. Sierra, 93 SCR
A 472 [1979]).
Adlawan vs. Torres
(233 SCRA 645)
By mortgaging a piece of property, a debtor merely subjects it to a lien
but ownership thereof is not parted with.
D. Extent of Mortgage
General Rule: A mortgage constituted on immovable property is not limi
ted to the property itself but also extends to all its accessions, improvements,
growing fruits and rents or income (see Article 2102) as well as to the proceed
s of insurance should the property be destroyed of the expropriation value of th
e property should it be expropriated.
Exception: contrary stipulation
E. Alienation or Assignment of Mortgage
1. Said assignment is valid and assignee may foreclose the mortgage in case
of nonpayment of the mortgage indebtedness. (Santiago vs. Pioneer Savings and
Loan Bank, 157 SCRA 100 [1988]).
2. The fact that the mortgagor has transferred the mortgaged property to a
third person does not relieve him from his obligation to pay the debt to the mor
tgage creditor in the absence of novation (McCallough & Co. vs. Sierra, 41 Phil.
1 [1921]).
3. The mortgage credit being a real right which follows the property, the c
reditor may demand from any possessor the payment of the credit secured by said
property. It is necessary, however, that prior demand for payment must have bee
n made on the debtor and the latter failed to pay. (Bank of the Phil. Island vs
. Concepcion & Hijos, Inc., 53 Phil. 906 [1929])
4. An assignee cannot acquire greater rights than those pertaining to an as
signor (Koa vs. Court of Appeals, 219 SCRA 541).
F. Stipulation Forbidding Alienation of Mortgaged Property
1. Such a stipulation is void. However, if the mortgagor alienates the pro
perty, the transferee is bound to respect the encumbrance because being a real r
ight, the property remains subject to the fulfillment of the obligation for whos
e guaranty it was constituted (Article 2126).

G. Foreclosure of Mortgages
1. Judicial foreclosure governed by Rule 68 of the Rules of Court.
2. Extrajudicial Foreclosure governed by Act. No. 3135 as amended, if and w
hen the mortgagee is given a specific power or express authority to do so.
a. Public auction must be conducted in the province where the property is situat
ed.
b. Posting of notice of sale in at least 3 public places therein
c. Publication in a newspaper of general circulation
d. Personal notice to mortgagor is not required (Bonnevie vs. Court of Appeals,
125 SCRA 122 [1983]; GSIS vs. Court of Appeals, 170 SCRA 533 [1989]).
e. Debtor has the right to redeem the property sold within the term of one year
from and after the date of the sale (Section 6). The reckoning date in case of
registered land is from the registration of the certificate of sale since it is
only from such date that the sale takes effect as a conveyance. (Jose vs. Blue,
42 SCRA 351, [1971]; Gorospe vs. Santos, 69 SCRA 191 [1976]; General vs. Barra
meda, 60 SCRA 162 [1976]. Every conveyance of lands acquired under the free pate
nt or homestead provisions, when proper, shall be subject to repurchase by the a
pplicant, his widow or legal heirs, within a period of five years from the date
of the conveyance. (Section 119, C.A. No. 141 [Public Land Law], as amended) or
foreclosure sale (Tupas vs. Damasco, 132 SCRA 593 [1984]).
Note: Cerna vs. CA (220 SCRA 517): The filing of a collection suit bars the fo
reclosure of mortgage.

H. Right of Mortgagee to Recover Deficiency

1. If there be a balance due to the mortgagee after applying the proceeds o
f the sale, the mortgagee is entitled to recover the deficiency. (Development B
ank of the Philippines vs. Mirang, 66 SCRA 141 [1975]. In judicial foreclosure,
the Rules of Court specifically gives the mortgagee the right to claim for defi
ciency in case a deficiency exists (Section 6, Rule 70). While Act No. 3135 go
verning extrajudicial foreclosures of mortgage does not give a mortgagee the rig
ht to recover deficiency after the public auction sale, neither does it expressl
y or impliedly prohibit such recovery.
Note: This right to recover deficiency had been categorically resolved in Stat
e Investment vs. Court of Appeals (217 SCRA 32 [1993]). Ergo, the mortgagee is
entitled to recover the deficiency in case the sale proceeds are not sufficient
to cover the debt in extrajudicial foreclosures.

2. The action to recover a deficiency after foreclosures prescribes after t

en (10) years from the time the right of action accrues as provided in Article 1
144(2) of the Civil Code (Development Bank of the Philippines vs. Tomeldan, 101
SCRA 171 [1980].
I. Waiver of Security by Creditor
1. The mortgagee may waive the right to foreclose his mortgage and maintain
a personal action for recovery of the indebtedness. There is no statutory prov
ision in our jurisdiction prohibiting a personal action to recover a sum of mone
y even though a mortgage has been given as security for the payment of the same.
(Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [1924]; Solomon and Lachica v
s. Dantes, 63 Phil. 522 [1937]).
2. The mortgagee cannot have both remedies. He has only one cause of actio
n, i. e., non-payment of the mortgage debt; hence, he cannot split up his cause
of action by filing a complaint for payment of the debt and another complaint fo
r foreclosure. (Caltex Phils. Vs. Intermediate Appellate Court, 176 SRCA 741 [1
989]).
J. Kinds of Redemption
1. Equity of redemption or the right of the mortgagor to redeem the mortgag
ed property after his default in the performance of the conditions of the mortga
gee but before the sale of the mortgaged property or confirmation of the sale (s
ee Top-Rate International Services, Inc. vs. Intermediate Appellate Court, 142 S
RCA 467 [1986]). The mortgagor s equity of redemption is simply the right of the
mortgagor to extinguish the mortgage and retain ownership of the property by pay
ing the secured debt within the 90-day period after the judgment becomes final,
in accordance with Section 2, Rule 68 of the Rules of Court or even after the fo
reclosure sale but prior to its confirmation. (Limpin vs. Intermediate Appellat
e Court, 166 SCRA 87 [1988]).
2. Right of redemption or the right of the mortgagor to redeem the mortgage
d property within a certain period(1 yr) after it was sold for the satisfaction
of the mortgaged debt.

K. Right of Redemption
1. In all cases of extrajudicial sale, the mortgagor may redeem the propert
y at any time within the term of one year from and after the date of registratio
n of the sale (see Section 6, Act No. 3135; Reyes vs. Tolentino 42 SCRA 365 [19
71]).
2. In judicial foreclosure of real estate mortgage, there is a right of red
emption which he can exercise at any time after service of judgment of foreclosu
re and within the 90-day period and even thereafter provided he does so before t
he foreclosure sale is confirmed by the court. (Anderson vs. Reyes, 54 Phil 944
). Confirmation of the sale of mortgaged real property cuts off all the rights
or interests of the mortgagor and of the mortgage and persons holding under him,
and with them the equity of redemption in the property and vests them in the pu
rchaser. Confirmation retroacts to the date of the sale. It is a final order,
not interlocutory. (Ocampo vs. Domalanta, 20 SRCA 1136 [1967]; Binalbagan Estat
e, Inc. vs. Gatuslao, 76 Phil. 128 [1946]; Villar vs. Javier, 97 Phil 604 [1955
]; Lonzome vs. Amores, 134 SCRA 380 [1985].
Exception: However, if the property has been mortgaged in favor of the DBP
(CA 459) Philippine National Bank (RA 1300), banks, banking and credit instituti
ons (RA 337, or the General Banking Act) or rural banks (RA 2670), redemption is
allowed within one year from the registration of the sale. (Conzales vs. Phil.
National Bank, 48 Phil. 824 [1926]). The redemption must be made within one ye
ar after the sale if the mortgagee is a bank, banking or credit institution (Sec
tion 78, R. A. No. 337; Piano vs. Cayanog, supra). Under the Revised charter of
the PNB, the period is one year from the registration of the foreclosure sale.

L. Requisites for Valid Redemption

1. The redemption must be made within 12 months from the time of the regist
ration of the sale.
2. Payment of the purchase price of the property plus 1% interest per month
together with the taxes thereon, if any, paid by the purchaser with the same ra
te of interest computed from the date of registration of the sale; and
3. Written notice of the redemption must be served on the officer who made
the sale and a duplicate filed with the proper Register of Deeds. (Rosales vs.
Yboa, 120 SCRA 869 [1983]).
Ramirez vs. Court of Appeals
(219 SCRA 598)
Acceptance of redemption price after the expiration of the statutory per
iod for redemption is deemed a waiver of the one-year period to redeem foreclose
d property.
M. Recent Jurisprudence on Real Mortgages
Noel vs. Court of Appeals
(240 SCRA 78)
In the absence of proof of gross inadequacy of the price, the fact that
the sale was made with what might appear as an inadequate consideration does not
make the contract one of mortgage.
Mercado vs. Court of Appeals
(240 SCRA 616)
A co-owner does not lose his part ownership of a co-owned property where
his share is mortgaged by another co-owner without the former s knowledge and con
sent.
Tarnate vs. Court of Appeals
(241 SCRA 254)
It is a settled rule that a mortgagee may recover any deficiency
in the mortgage account which is not realized in a foreclosure sale and that th
e action for recovery of that deficiency may be filed even during the redemption
period.
Olea vs. Court of Appeals
(247 SCRA 274)
a.) A stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption is effected within a stipulated period is void
for being a pactum commissorium which enables the mortgagee to acquire ownershi
p of the mortgaged property without need of foreclosure.
b.) Where in a contract of sale with pacto de retro, the vendor remains in physi
cal possession of the land sold as lessee or otherwise, the contract should be c
onsidered an equitable mortgage.
c.) Where the contract contains a stipulation that upon payment by the vendor of
the purchase price within a certain period the document shall become null and v
oid and have no legal force and effect, the purported sale should be considered
a mortgage contract.
d.) In case of doubt, a contract purporting to be sale with the right of purchas
e shall be considered an equitable mortgage.
e.) A mortgage action prescribes after 10 years.
DBP vs. Court of Appeals
(249 SCRA 331)
The fact that the annulment of the sale will also result in the invalidi
ty of the mortgage does not have an effect on the validity and efficacy of the p
rincipal obligation, for even an obligation that is unsupported by any security
of the debtor may also be enforced by means of an ordinary action. Where a mort
gaged is not valid, as where it is executed by one who is not the owner of the p
roperty, or the consideration of the contract is simulated or false, the princip
al obligation which it guaranteed is not thereby rendered null and void. That o
bligation matures and becomes demandable in accordance with the stipulations per
taining to it.
Gabonseng vs. Court of Appeals
(246 SCRA 472)
The application for foreclosure of mortgage is premature where the debto
rs have not yet defaulted on the payment of either the principal or the interest
on their loans.
Ajax Marketing & Development
Corporation Vs. Court of Appeals
(248 SCRA 222)

An action to foreclose a mortgage is usually limited to the amount menti

oned in the mortgage but where the intent of the contracting parties is manifest
that the mortgaged property shall also answer for future loans or advancements
then the same in not improper as it is valid and binding between the parties.
Filinvest Credit Corporation
Vs. Court of Appeals
(248 SCRA 549)
a.) If the mortgagee cannot obtain possession of a mortgaged property for its sa
le on foreclosure, it must bring a civil action either to recover such possessio
n as a preliminary step to the sale or to obtain judicial foreclosure.
b.) Replevin is the appropriate action to recover possession preliminary to the
extrajudicial foreclosure of a chattel mortgage.
Philippine Bank of Communications
Vs. Court of Appeals
(253 SCRA 241)
Issue: The mortgage contract provides:
This mortgage is given as security for the payment to the MORTGAGEE on demand or
at maturity, as the case may be, of all promissory notes, letters of credit, tru
st receipts, bills of exchange, drafts, overdrafts and all other obligations of
every kind already incurred or which hereafter may be incurred .
Can the bank charge penalty based on said provision?
Held:
1. The obligation in this case was not a series of indeterminate sums incur
red over a period of time, but two specific amounts procured in a single instanc
e. Thus, the inapplicability of the ruling in Lim Julian vs. Lutero (49 Phil. 7
03) which pertains only to mortgages securing future advancements. Instead, wha
t applies here is the general rule that an action to foreclose a mortgage must be
limited to the amount mentioned in the mortgage.
2. The mortgage provision relied upon by the petitioner is known in America
n Jurisprudence as a dragnet clause, which is specifically phrased to subsume all
debts of past or future origin. Such clauses are carefully scrutinized and str
ictly construed.
3. The mortgage contract is also one of adhesion as it was prepared solely
by the petitioner and the only participation of the other party was the affixing
of his signature or adhesion thereto. Being a contract of adhesion, the mortgage
is to be strictly construed against the petitioner, the party which prepared th
e agreement.
4. A reading, not only of the earlier quoted provision, but of the entire m
ortgage contract yields no mention of penalty charges. Construing this silence
strictly against the petitioner, it can fairly be concluded that the petitioner
did not intend to include the penalties on the promissory notes in the secured a
mount. This explains the finding by the trial court, as affirmed by the Court o
f Appeals, the penalties and charges are not due for want of stipulation in the m
ortgage contract.
5. Indeed, a mortgage must sufficiently describe the debt sought to be secu
red, which description must not be such as to mislead or deceive, and an obligat
ion is not secured by a mortgage unless it comes fairly within the terms of the
mortgage. In this case, the mortgage contract provides that it secures notes an
d other evidences of indebtedness. Under the rule of ejusdem generis, where a d
escription of things of a particular class or kind is accompanied by words of a g
eneric character, the generic words will usually be limited to things of a kindr
ed nature with those particularly enumerated . A penalty charge does not belong to
the species of obligations enumerated in the mortgage, hence, the said contract
cannot be understood to secure the penalty.
6. A mortgage and a note secured by it are deemed parts of one transaction
and are construed together, thus, an ambiguity is created when the notes provide
for the payment of a penalty but the mortgage contract does not Construing the
ambiguity against the petitioner, it follows that no penalty was intended to be
covered by the mortgage.
DBP vs. Court of Appeals
(253 SCRA 414)
Issue: Whether the land in dispute could have been validly mortgaged while sti
ll the subject of a Free Patent Application with the government.
1. Petitioner bank did not acquire valid title over the land in dispute bec
ause it was public land when mortgaged to the bank. We cannot accept petitioner s
contention that the lot in dispute was no longer public land when mortgaged to
it since the Olidiana spouses had been in open, continuous, adverse and public p
ossession thereof for more than thirty (30) years. In Visayan Realty, Inc. vs.
Meer (86 Phil. 515), we ruled that the approval of a sales application merely au
thorized the applicant to take possession of the land so that he could comply wi
th the requirements prescribed by law before a final patent could be issued in h
is favor. Meanwhile the government still remained the owner thereof, as in fact
the application could still be canceled and the land awarded to another applica
nt should it be shown that the legal requirements had not been complied with. W
hat divests the government of title to the land is the issuance of the sales pat
ent and its subsequent registration with the Register of Deeds. It is the regis
tration and issuance of the certificate of title that segregate public lands fro
m the mass of public domain and convert it into private property. Since the dis
puted lot in the case before us was still the subject of a Free Patent Applicati
on when mortgaged to petitioner and no patent was granted to the Olidiana spouse
s, Lot No. 2029 (Pls-61) remained part of the public domain.
2. With regard to the validity of the mortgage contracts entered into by th
e parties, Art. 2085, par. 2 of the New Civil Code specifically requires that th
e pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.
Thus, since the disputed property was not owned by the Olidiana spouses when th
ey mortgaged it to petitioner, the contracts of mortgage and all their subsequen
t legal consequences as regards Lot No. 2029 (Pls-61) are null and void. In a m
uch earlier case (Vda. De Bautista vs. Marcos, 3 SCRA 434), we held that it was
an essential requisite for the validity of a mortgage that the mortgagor be the
absolute owner of a property mortgaged, and it appearing that the mortgage was c
onstituted before the issuance of the patent to the mortgagor, the mortgage in q
uestion must of necessity be void and ineffective. For the law explicitly requi
res an imperative for the validity of a mortgage that the mortgagor be the absol
ute owner of what is mortgaged.
State Investment House, Inc.
vs. Court of Appeals
(254 SCRA 368)
1. STATE s registered mortgage right over the property is inferior to that of
respondent-spouses unregistered right. The unrecorded sale between respondents-
spouses and SOLID is preferred for the reason that if the original owner (SOLID,
in this case) had parted with his ownership of the thing sold then he no longer
had ownership and free disposal of that thing so as to be able to mortgage it
again. Registration of the mortgage is of no moment since it is understood to b
e without prejudice to the better right of third parties.
2. As a general rule, where there is nothing in the certificate of title to
indicate any cloud or vice in the ownership of the property, or any encumbrance
thereon, the purchaser is not required to explore further than what the Torrens
Title upon its face indicates in quest for any hidden defect or inchoate right
that may subsequently defeat his right thereto. This rule, however, admits of a
n exception as where the purchaser or mortgagee has knowledge of a defect or lac
k of title in his vendor, or that he was aware of sufficient facts to induce a r
easonably prudent man to inquire into the status of the title of the property in
litigation. In this case, petitioner was well aware that it was dealing with S
OLID, a business entity engaged in the business of selling subdivision lots. In
fact, the OAALA found that at the time the lot was mortgaged, respondent State I
nvestment House, Inc., (now petitioner) has been aware of the lot s location and t
hat said lot formed part of Capital Parks/Homes Subdivision. In Sunshine Financ
e and Investment Corp. vs. Intermediate Appellate Court (203 SCRA 210), the Cour
t, noting petitioner therein to be a financing corporation, deviated from the ge
neral rule that a purchaser or mortgagee of a land is not required to look furth
er than what appears on the face of the Torrens Title.
3. The above-enunciated rule should apply in this case as petitioner admits
of being a financing institution. We take judicial notice of the uniform pract
ice of financing institutions to investigate, examine and assess the real proper
ty offered as security for any loan application especially where, as in this cas
e, the subject property is a subdivision lot located at Quezon City, M. M. It i
s a settled rule that a purchaser or mortgagee cannot close its eyes to facts wh
ich should put a reasonable man upon his guard, and then claim that he acted in
good faith under the belief that there was no defect in the title of the vendor
or mortgagor. Petitioner s constructive knowledge of the defect in the title of t
he subject property, or lack of such knowledge due to its negligence, takes the
place of registration of the rights of respondent s spouses. Respondent court thu
s correctly ruled that petitioner was not a purchaser or mortgagee in good faith
hence, petitioner can not solely rely on what merely appears on the face of the
Torrens Title.

VII. ANTICHRESIS
1. Definition
Antichresis is a contract whereby the creditor acquires the right to rec
eive the fruits of an immovable of his debtor, with the obligation to apply them
to the payment of the interest, if owing and thereafter to the principal of his
credit.
B. Characteristics
1. It is an accessory contract because it secures the performance of a prin
cipal obligation.
2. It is a formal contract because the amount of the principal and of the i
nterest must both be in writing, otherwise the contract of antichresis is void.
Note:
1. Delivery of the property to the creditor is required only in order that
the creditor may receive the fruits and not for the validity of the contract.
2. It is not essential that the loan should earn interest in order that it
can be guaranteed with a contract of antichresis. Antichresis is susceptible of
guaranteeing all kinds of obligations, pure or conditional. (Javier vs. Vallis
er, (CA) N. 2648-R, April 29, 1950; Sta. Rosa vs. Noble, 35 O.G. 27241).
3. The fruits of the immovable which is the object of the antichresis must
be appraised at their actual market value at the time of the application. (see
Article 2138)
4. The property delivered stands as a security for the payment of the oblig
ation of the debtor in antichresis. Hence, the debtor cannot demand its return
until the debt is totally paid.
5. A stipulation authorizing the antichretic creditor to appropriate the pr
operty upon the non-payment of the debt within the period agreed upon is void.
(see Article 2038).
C. Distinctions between Antichresis and Pledge

1.
2.
3.
Antichresis
Refers to real property
Perfected by mere consent
Consensual contract

1.
2.
3.
Pledge
Refers to personal property
Perfected by delivery
Real contract
D. Distinctions between Antichresis and Real Mortgage

1.

2.

3.

4.
Antichresis
Property is delivered to the creditor
Creditor requires only the right to receive the fruits of the property; hence it
does not produce a real right

Creditor, unless there is stipulation to the contrary, is obliged to pay the tax
es and charges upon the estate (Article 2135)
Creditor given possession of the property shall supply the fruits thereof to the
payment of interest, if owing, and thereafter to the principal of the credit
1.

2.

3.

Real Mortgage
4.
Debtor usually retains the possession of the property
Creditor does not have any right to receive the fruits, but mortgage creates a r
eal right over the property which is enforceable against the whole world
Creditor has no such obligation
Mortgagee has no such obligation
E. Obligations of Antichretic Creditor
1. The creditor is obliged, unless there is a stipulation to the contrary,
to pay the taxes and charges upon the estate. If he does not pay the taxes, he
is, by law (Article 1170), required to pay indemnity for damages to the debtor.
(Pando vs. Gimenez, 54 Phil. 459 [1930]).
2. Another obligation of the creditor is to apply the fruits, after receivi
ng them to the interest, if owing, and thereafter to the principal (Article 2132
) in accordance with the provisions of Article 2133 or 2138. Hence, the duty of
the creditor to render an account of said fruits to the debtor and the correspo
nding right of the latter that the said fruits be applied to the debt. (Barrett
o vs. Barretto, 37 Phil. 234 [1917]; Diaz and Rubillos vs. De Mendezona, 48 Phil
. 666 [1926]; Macapilac vs. Gutierrez Recipe 43 Phil. 770 [1922]).
F. Remedy of Creditor in Case of Default
1. To bring an action for specific performance
2. To petition for the sale of the real property as in a foreclosure of mor
tgages under Rule 68 of the Rules of Court. The parties, however, may agree on
an extrajudicial foreclosure in the same manner as they are allowed in contracts
of mortgage and pledge (see Article 1307; Tavera vs. El Hogar Filipino, Inc. 68
Phil. 712 [1939]).

IX. CHATTEL MORTGAGE

A. Definition
A chattel mortgage is
1. an accessory contract because it is for the purpose of securing the perf
ormance of a principal obligation;
2. a formal contract because for its validity, registration in the Chattel
Mortgage Register is indispensable.
3. a unilateral contract because it produces only obligations on the part o
f the creditor to free the thing from the encumbrance upon fulfillment of the ob
ligation.

Filipinas Marble Corporation vs.

Intermediate Appellate Court
(142 SCRA 180)
A mortgage is a mere accessory contract and thus, its validity would dep
end on the validity of the loan secured by it. We however, reject the petitione
r s argument that since the chattel mortgage involved was not registered, the same
is null and void. Article 2125 of the Civil Code clearly provides that the non
-registration of the mortgage does not affect the immediate parties. It states:
Article 2125. In addition to the requisites 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 r
ecorded, the mortgage is nevertheless binding between the parties.
xxx xxx xxx
The petitioner cannot invoke the above provision to nullify the chattel
mortgage it executed in favor of respondent DBP.

C. Distinction between Chattel Mortgage and Pledge

5Chattel Mortgage
Delivery of personal property to the mortgagee is not necessary
Registration in the Chattel Mortgage Register is necessary for its validity
Procedure for sale of the mortgaged property is found in Section 14 of RA 1508,
as amended
If property is foreclosed, the excess over the amount due goes to the debtor

If property is foreclosed, creditor is entitled to recover the deficiency from t

he debtor
Exception: if chattel mortgage is a security for the purchase of personal prope
rty in installments (Article 1484)

2
3

5
Pledge
Delivery is necessary

Registration in the Registry of Property is not necessary for its validity

Procedure for sale of pledged thing is found in Article 2112 of the Civil Code

If property is sold, the debtor is not entitled to the excess

Exceptions:
a.) contrary stipulation (Article 2125)
b.) legal pledge (Article 2121)
If property is sold, creditor is not entitled to recover the deficiency notwiths
tanding any stipulation to the contrary (Article 2115).
D. Offenses Involving Chattel Mortgage
1. Knowingly removing any personal property mortgaged under the Chattel Mor
tgage Law to any province or city other than the one in which it was located at
the time of the execution of the mortgage without the written consent of the mor
tgagee; and
2. Selling or pledging personal property already mortgaged, or any part the
reof, under the terms of the Chattel Mortgage Law without the consent of the mor
tgagee written on the bank of the mortgage and duly recorded in the Chattel Mort
gage Register (Article 319, Revised Penal Code).
Note: The mortgagor is not relieved of criminal liability even if the
mortgage indebtedness is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 61
[1915]), or the mortgagor-seller informed the purchaser that the thing sold had
been mortgaged. (People vs. Alvares, 45 Phil. 472 [1923]). But the sale is val
id although no written consent was obtained from the mortgagee but the mortgagor
lays himself open to criminal prosecution. (Servicewide Specialists, Inc. vs.
Intermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of Appeals,
198 SCRA 826 [1981]).
E. Subject Matter of Chattel Mortgage
1. Shares of stock in a corporation
2. Interest in business
3. Machinery and house of mixed materials treated by parties as personal propert
y and no innocent third person will be prejudiced thereby (Makati Leasing and Fi
nance Corporation vs. Weaver Textile Mills, Inc., 122 SCRA 296 [1983].
4. Vessels, the mortgage of which have been recorded with the Philippine Coast G
uard in order to be effective as to third persons
5. Motor vehicles, the mortgage of which had been registered both with the Land
Transportation Commission and the Chattel Mortgage Registry is order to affect t
hird persons
6. House which is intended to be demolished
7. Growing crops and large cattle (section 7, paragraphs 2 and 3, Act No. 1508)
Note: Section 7 of the Chattel Mortgage Law does not demand a minute a
nd specific description of every chattel mortgaged in the deed of mortgage, but
only requires that the description of the mortgaged property be such as to enabl
e the parties to the mortgage or any other person to identify the same after a r
easonable investigation and inquiry (Saldana vs. Phil. Guaranty Co., Inc., 106 P
hil. 919 [1960]); otherwise, the mortgage is invalid.
F. Creation of Chattel Mortgage
1. The law as it now stands provides for only one way for executing a valid
chattel mortgage, i.e., the registration of the personal property in the Chatte
l Mortgage Register as security for the performance of an obligation. (Article
2140; see Article 2085). Under the Chattel Mortgage Law, if the property as sit
uated in a different province from that in which the mortgagor resides, the regi
stration must be in both registers (Section 4, Act No. 1508); otherwise, the cha
ttel mortgage is void.
2. It has been ruled however that if the chattel mortgage is not recorded,
it is nevertheless binding between the parties. (Filipinas Marble Corporation
vs. Intermediate Appellate Court, 142 SCRA 180 [1986]; Article 2125).
G. Effect of Registration
The registration of the chattel mortgage is an effective and binding not
ice to other creditors of its existence and creates a real right or a lien which
being recorded follows the chattel wherever it goes. The registration gives th
e mortgagee the symbolical possession. (Northern Motors, Inc. vs. Coquia, 68 SC
RA 374 [1975]).
H. Registration of Assignment and Mortgage Optional
1. There is no law expressly requiring the recording of the assignment of a
mortgage. While such assignment may be recorded, the law is permissive and not
mandatory.
2. The assignee is subrogated to the rights and obligations of the assignor
-mortgagee with respect to the chattel mortgage constituted in favor of the latt
er. Consequently, the assignee is bound by the terms and conditions of the chat
tel mortgage executed between the mortgagor and the mortgagee. (BA Finance Corp
oration vs. Court of Appeals, 201 SCRA 157 [1991]).
I. Affidavit of Good Faith
1. The affidavit of good faith is an oath in a contract of chattel mortgage
wherein the parties severally swear that the mortgage is made for the purpose of
securing the obligation specified in the conditions thereof and for no other pu
rpose and that the same is just and valid obligation and one not entered into fo
r the purpose of fraud.
2. Under Section 5 of the Chattel Mortgage Law, in describing what shall be
deemed sufficient to constitute a good chattel mortgage, includes the requireme
nt of an affidavit of good faith appended to the mortgage and recorded therewith
. But the absence of the affidavit vitiates a mortgage only as against third pe
rsons without notice like creditors and subsequent encumbrances. (Lilius vs. Ma
nila Railroad Co., 62 Phil. 50 [1935]; Phil. Refining Co. vs. Jarque, 61 Phil. 2
29 [1935]; Giberson vs. A. N. Jurreidini Bros., 44 Phil. 216 [1922]).
3. A deed of chattel mortgage is void where it provides that the security s
tated therein is for the payment of any and all obligations hereinbefore contract
ed and which may hereafter be contracted by the mortgagor in favor of the mortga
gee . A mortgage that contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are made and not from the da
te of the mortgage. (Jaca vs. Davao Lumber Co., 113 SCRA 107 [1982]).
J. Foreclosure of Chattel Mortgage
1. Public Sale if the mortgagor defaults in the payment of the secured debt
or otherwise fails to comply with the conditions of the mortgage, the creditor
has no right to appropriate to himself the personal property (Article 2141, 2088
) because he is permitted only to recover his credit from the proceeds of the sa
le of the property at public auction through a public officer in the manner pres
cribed in Section 14 of Act No. 1508. (Mahoney vs. Tuason, 39 Phil. 951 [1919]);
Esguerra vs. Court of Appeals, 173 SCRA 1 [1989]).
2. Private Sale if there is an express stipulation in the contract.
Exception: fraud or duress
Note:
1. The mortgagee may, after thirty (30) days from the time of the condition
broken, cause the mortgaged property to be sold at public auction by a public o
fficer (Section 14, Act No. 1508)
2. The 30-day period to foreclose a chattel mortgage is the minimum period
after violation of the mortgage condition for the mortgage creditor with at leas
t ten (10) days notice to the mortgagor and posting of public notice of time, pl
ace and purpose of such sale, and is a period of grace for the mortgagor, to dis
charge the mortgage obligation. After the sale of the chattel at public auction
, the right of redemption is no longer available to the mortgagor. (Cabral vs.
Evangelista, 28 SCRA 1000 [1969])
K. Right of Mortgagee to Recover Deficiency
1. The creditor may maintain an action for the deficiency although the Chat
tel Mortgage Law is silent on this point (Ablaza vs. Ignacio, (unrep) 103 Phil.
1151 [1958]; Garrido vs. Tuason, 24 SCRA 727 [1968] Phil. National Bank vs. Manil
a Investment & Construction, Inc., supra; Bank of the Philippine Isalnd vs. Olut
anga Lumber Co., 47 Phil. 20 [1924]). The action may be sought within ten (10)
years from the time the cause of action accrues.
2. If the chattel mortgage is constituted, whether by the debtor-vendee or
a third person, as security for the purchase of personal property payable in ins
tallments, no deficiency judgment can be asked and any agreement to the contrary
shall be void (Article 1484).
3. The chattel mortgagee is entitled to deficiency judgment in an action fo
r specific performance (Article 1484 [1]) where the mortgaged property is subseq
uently attached and sold. The execution sale in such case is not a foreclosure
sale. (Industrial Finance Corporation vs. Ramirez, 77 SCRA 152 [1977]).
X. CONCURRENCE AND PREFERENCE OF CREDITS
A. Liability for Obligations
The debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subject to the exemptions provided by law.
B. Exempt Property
1. Family home constituted jointly by husband and wife or by unmarried head
of a family (Article 152, Family Code).
Exceptions: a.) for non-payment of taxes;
b.) for debts incurred prior to the constitution of the family home;
c.) for debts secured by mortgages on the premises before or after such cons
titution; and
d.) for debts due to laborers, mechanics, architects, builders, material men
and others who have rendered service or furnished material for the construction
of the building
2. Right to receive support as well as any money or property obtained as su
ch support. (Article 205, Family Code)
3. Tools and implements necessarily used by him in his trade or employment;
4. Two horses, or two cows, or two carabaos or other beasts of burden, such
as the debtor may select, not exceeding one thousand pesos in value and necessa
rily used by him in his ordinary occupation;
5. His necessary clothing and that of all his family.
6. Household furniture and utensils necessary for housekeeping and used for
that purpose by the debtor, such as the debtor may select, of a value not excee
ding one thousand pesos;
7. Provisions for individual or family use insufficient for three months;
8. The professional libraries of attorney s, judges, physicians, pharmacists,
dentist, engineers, surveyors, clergymen, teachers and other professionals, not
exceeding three thousand pesos in value;
9. One fishing boat and net, not exceeding the total value of one thousand
pesos, the property of any fisherman, by the lawful use of which he earns a live
lihood;
10. So much of the earnings of the debtor for his personal services within t
he month preceding the levy as are necessary for the support of his family;
11. Lettered gravestones;
12. All moneys, benefits, privileges or annuities accruing or in any manner
growing out of any life insurance, if the annual premiums paid do not exceed fiv
e hundred pesos, and if they exceed the sum, a like exemption shall exist which
shall bear the same proportion to the moneys, benefits privileges and annuities
so accruing or growing out of such insurance that said five hundred pesos bears
to the whole premiums paid;
13. The right to receive legal support, or money or property obtained as suc
h support, or any pension or gratuity from the government;
14. Copyrights and other properties especially exempted by law (Section 12,
Rule 39)
15. Property under legal custody and of the public dominion.
C. Preferred Credits with Respect to
Specific Movable Property
1. Duties, taxes and fees due thereon to the state or any subdivision there
of;
2. Claims arising from misappropriation, breach of trust, or malfeasance by
public officials committed in the performance of their duties, on the movables,
money or securities obtained by them;
3. Claims for the unpaid price of movable sold, on said movables, so long a
s they are in the possession of the debtor, up to the value of the same, and if
the movable has been resold by the debtor and the price is still unpaid, the lie
n may be enforced on the price; this right is not lost by the immobilization of
the thing by destination, provided it has not lost its form, substance and ident
ity; neither is the right lost by the sale of the thing together with other prop
erty for a lump sum, when the price thereof can be determined proportionally;
4. Credits guaranteed with a pledge so long as the things pledged are in th
e hands of the creditor, or those guaranteed by a chattel mortgage upon the thin
gs mortgaged, up to the value thereof;
5. Credits for making repairs, safekeeping or preservation or personal prop
erty on the movable thus made, repaired, kept or possessed;
6. Claims for laborers wages, on the goods manufactured or the work done;
7. For expenses of salvage, upon the goods salvaged;
8. Credits between the landlord and the tenant arising from the contract of
tenancy on shares, on the share of each in the fruits or harvest;
9. Credits for transportation, upon the goods carried, for the price of the
contract and incidental expenses, until their delivery and for thirty days ther
eafter;
10. Credits for lodging and supplies usually furnished to travelers by hotel
keepers, on the movables belonging to the guest as long as such movables are in
the hotel, but not for money loaned to the guests;
11. Credits for seeds and expenses for cultivation and harvest advanced to t
he debtor, upon the fruits harvested;
12. Credits for rent for one year, upon the personal property of the lessee
existing on the immovable leased on the fruits of the same, but not on money or
instruments of credit;
13. Claims in favor of the depositor if the depository has wrongfully sold t
he thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference
attaches have been wrongfully taken, the creditor may demand them from any posse
ssor within thirty (30) days from the unlawful seizures.
Summary: a.) taxes
b.) malversation by public officials
c.) vendor s lien
d.) pledge, chattel mortgage
e.) mechanic s lien
f.) laborer s wages
g.) salvage
h.) tenancy
i.) carrier s lien
J.) hotel s lien
k.) crop loan
l.) rentals - one year
m.) deposit
Note: The foregoing enumeration is not an order to preference (Articles 2248
2249)
D. Preferred Credits with Respect to Specific Immovable Property
1. Taxes due upon the land or building;
2. For the unpaid price of real property sold upon the immovable sold;
3. Claims of laborers. Masons, mechanics and other workmen, as well as of a
rchitects, engineers and contractors, engaged in the construction, reconstructio
n or repair of buildings, canals or other works, upon said buildings, canals or
other works;
4. Claims of furnishers of materials used in the construction, reconstructi
on, or repair of buildings, canals, and other works, upon said buildings, canals
or other works;
5. Mortgage credits recorded in the Registry of Property, upon the real est
ate mortgage;
6. Expenses for the preservation or improvement of real property when the l
aw authorizes reimbursement, upon the immovable preserved or improved;
7. Credits annotated in the Registry of Property, by virtue of a judicial o
rder, by attachments or executions, upon the property affected, and only as to l
ater credits;
8. Claims of co-heirs for warranty in the partition of an immovable among t
hem, upon the real property thus divided;
9. Claims of donors or real property for pecuniary charges or other conditi
ons imposed upon the donee, upon the immovable donated;
10. Credits of insurers, upon the property insured, for the insurance premiu
m for two years.
Summary: a.) taxes
b.) vendor s lien
c.) contractor s lien
d.) lien of materialmen
e.) mortgage
f.) expenses of preservation
g.) recorded attachments
h.) warranty in partition
i.) conditional donations
j.) premiums for 2 year insurers
 Note: The foregoing enumeration is not an order of preference (Carried
Lumber Co. vs. ACCFA, 83 SCRA 411 [1975]).
E. Order of Preference with Respect to Other Properties of the Debtor
1. Proper funeral expenses for the debtor, or children under his or her par
ental authority who have no property of their own, when approved by the court;
2. Credits for services rendered the insolvent by employees, laborers, or h
ousehold helpers for one year preceding the commencement of the proceedings in i
nsolvency;
3. Expenses during the last illness of the debtor or of his or her spouse a
nd children under his or her parental authority, if they have no property of the
ir own;
4. Compensation due to the laborers of their dependents under laws providin
g for indemnity for damages in cases of labor accident or illness resulting from
the nature of the employment;
5. Credits and advancements made to the debtor for support of himself or he
rself, and family, during the last preceding insolvency;
6. Support during the insolvency proceedings, and for three months thereaft
er;
7. Fines and civil indemnification arising from a criminal offense;
8. Legal expenses, and expenses incurred in the administration of the insol
vent s estate for the common interest of the creditors, when properly authorized a
nd approved by the court;
9. Taxes and assessments due the national government, other those mentioned
in Articles 2241, No. 1, and 2242, No. 1;
10. Taxes and assessments due any province, other than those mentioned in Ar
ticles 2241, No. 1 and 2242, No. 1;
11. Taxes and assessments due any city or municipality other than those ment
ioned in Articles 2241, No.1 and 2242, No. 1;
12. Damages fro death or personal injuries caused by a quasi-delict;
13. Gifts due to public and private institutions of charity or beneficence;
14. Credits which without special privilege, appear in (a) a public instrume
nt; or (b) in the final judgment, if they have been the subject of litigation.
These credits shall have preference among themselves in the order of priority o
f the dates of the instruments and of the judgments, respectively (Article 2244)
Summary: a) funeral expenses
b) wages of employees one year
c) expenses of last illness
d) workmen s compensation
e) support for one year
f) support during insolvency
g) fines in crimes
h) legal expenses - administration
i) taxes
 j) tort
k) donations
l) appearing in public instrument or
final judgment

Note:
1. In contrast with Articles 2241 and 2242, Article 2244 creates no liens o
n determinate property which follow such property. What Article 2244 creates ar
e simply rights in favor or certain creditors to have the cash and other assets
of the insolvent applied in a certain sequence or order of priority (Republic vs
. Peralta, 150 SCRA 37 [1987]).
2. Article 2244 relates to the property of the insolvent that is not burden
ed with the liens or encumbrances created or recognized by Article 2241 and 2242
.
3. Recent Jurisprudence on Concurrence
and Preference of Credits
a) A foreclosing bank creditor cannot be held liable for unpaid wages and t
he like of the employees of the mortgagor. The employees should file their clai
ms in a proceeding in bankruptcy on their employer. (Development Bank of the Ph
ilippines vs. National Labor Relations Commissions, 186 SCRA 841 [1990]).
b) From the provisions of Article 110 of the Labor Code and Section 10, Rul
e VIII, Book III of the Revised Rules and Regulations Implementing the Labor Cod
e, a declaration of bankruptcy or a judicial liquidation must be present before
the worker s preference may enforced. (Development Bank of the Philippines vs. Sa
ntos, 171 SCRA 138 [1989]).
DBP vs. NLRC
(236 SCRA 117)
1. To the extent that claims for unpaid wages fall outside the scope of Art
icles 2241(6) and 2242(3), they would come within the ambit of the category of o
rdinary preferred credits under Article 2242.
3. The right of first preference as regards unpaid wages recognized by Article 1
10 of the Labor Code does not constitute a lien on the property of the insolvent
debtor in favor or workers. It is a right to a first preference in the dischar
ge of the funds of the judgment debtor.
BPI vs. Court of Appeals
(229 SCRA 223)
Whenever a distressed corporation asks SEC for rehabilitation and suspen
sion of payments, preferred creditor may no longer assert such preference, but s
hall stand on equal footing with other creditors. This rule will enable the reh
abilitation receiver to effectively exercise his powers free from judicial and e
xtrajudicial interference that might unduly hinder rescue of the company.
DBP vs. NLRC
(229 SCRA 350)
1. Article 110 of the Labor Code as amended must be viewed and read in conjuncti
on with the provisions of the Civil Code on concurrence and preference of credit
s.
2. The Civil Code and Labor Code provisions require judicial proceedings in rem
in adjudication of creditor s claims against the debtor s assets to become operative
.
3. RA 6715 expanded worker preference to cover not only unpaid wages but also othe
r monetary claims of laborers, to which even claims of the Government must be de
emed subordinate.
4. Amendatory provisions of RA 5715 which became effective on 21 March 1989 shou
ld only be given prospective application.
F. Order of Preference of Credits
1. Those credits which enjoy preference with respect to specific movable, e
xcluded all others to the extent of the value of the personal property to which
the preference refers (Article 2246).
2. If there are two or more credits with respect to the same specific mova
ble property, they shall be satisfied pro-rata, after the payment of duties, tax
es, and fees due the State or any subdivision thereof (Article 2247).
3. Those credits which enjoy preference in relation to specific real proper
ty or real rights, exclude all others to the extent of the value of the immovabl
e or real right to which the preference refers (Article 8).
4. If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of
the taxes and assessments upon the immovable property or real right (Article 224
9).
5. The excess, if any, after the payment of the credits which enjoy prefere
nce with respect to specific property, real or personal, shall be added to the f
ree property which the debtor may have, for the payment of the other credits (Ar
ticle 2250).
6. Those credits which do not enjoy any preference with respect to specific
property and those which enjoy preference, as to the amount not paid, shall be
satisfied according to the following rules:
a. In the order established in Article 2244;
b. Common credits referred to in Article 2245 shall enjoy no preference and shal
l be paid pro rata regardless of dated (Article 2251).

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