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Credit Transaction Contracts

- These are the bailment contracts.

Q: How many bailment contracts do we have?

A: Several.

Okay! Let’s start with a contract which is the basis, because it is the principal contract
which is the basis of six accessory contracts.

Let’s start with the creditor who lends money to a debtor let’s say in the amount of
100k. If one borrows money from another. This is your mutuum, so this is your loan,
simple loan and you have only one contract which can stand by itself and from this
principal contract would come the six accessory contracts.

Q: how many accessory contracts do we have?

A: antichresis, real mortgage, chattel mortgage, pledge, guaranty and suretyship.

Let’s say the creditor has collect collateral for the 100k, let’s put collateral to be
provided for by the debtor ant it is a personal property.

Q: how many possible contracts, accessory contracts can arise if there is a collateral?

A: We have already one, and then another two, one maybe a chattel mortgage,dba?
And second is pledge.

Okay! chattel mortgage, debtor is indebted of 200k, debtor pass a collateral

Q: what is the purpose of a collateral as you studied in your credit transaction?

A: to answer in the event the debtor fails to pay, so in the event the debtor fails to pay
this one, the creditor runs after the collateral, not automatically become the owner,
because that is bawal how do you call that arrangement in the event that the debtor
fails to pay his indebtedness automatically the creditor appropriate ownership over the
collateral, that is your pactum commissorium, it is void, bakit? Impakto eh. Because it is
prejudicial to the debtor. Chattel mortgage is constituted over this personal property,
the debtor becomes now the mortgagor, because he is the one mortgaging, then the
creditor becomes the mortgagee.

If it is pledge, debtor becomes the pledger then the creditor becomes the pledgee
Kinds of contracts as to perfection

1. Consensual = consent + object + cause

- The moment the parties agreed on what is the object and what is the cause, and that agreement is the
consent you have now valid perfected contract. The moment the parties agreed what to be bought an
the price even not put in writing, the contract of sale is perfect or lease in the boarding house if have
agreed with the landlady the place you’re going to occupy for rent and how much is the rental even
you have no written contract it is valid, consensual.

Is mortgage consensual, is pledge consensual?

2. Real = consent + object+ Cause+ delivery

- The thing must be delivered for validity, if there is no delivery of the object there is no contract and the
other party has no obligation to be___ of the object because it is not yet delivered.
3. Formal = consent+ object + cause +form required by law usually a written form.
- The contract should be put in to writing to be valid. If it is not I writing, void.

So with this where do you classify chattel mortgage and pledge?

Chattel Mortgage vs. Pledge

First distinction: as to perfection

Chattel mortgage is a formal contract

Pledge is a real contract

What kind of contract is chattel mortgage? So if I lend you 100,000, your motor vehicle will be the collateral.
What is required so that the chattel mortgage contract will be valid?

Do you need to deliver to me the motor vehicle meanwhile that you have not yet paid the indebtedness? You
don’t need to, just keep your thing. But what is my security as the creditor in the event you failed to pay it
would be very hard for me to run after that motor vehicle.

So what is required by the law? You need a written instrument. So a chattel mortgage is a FORMAL
CONTRACT. You need to put into into writing. If not put in writing the contract is null and void. So there’s no
such thing as an oral or verbal contract of a chattel mortgage. Why? If it is in writing then it can be registered
in the LTO as well as the chattel mortgage register under the custody of the register of deeds so that the
registration becomes a notice to the whole world that this motor vehicle has been mortgage. So that if the
mortgagor therefore sells it to another and is now in the hands of another person, the mortgagee can still run
against the motor vehicle for purposes of foreclosure.

How about in pledge? The basic example of pledge is what you do in a pawnshop. What do you do in a
pawnshop, you borrow money diba but there must be collateral. So we have a case of a pawnshop which is
called the pledgee and the one borrowing called the pledgor but since this is a pawnshop transaction
technically the parties instead of pledgor we called that party as pawner and the pawnshop as pawnee. Pledge
however can exist between ordinary persons. So when I lend you 10,000, instead of executing a chattel
mortgage we make use of a contract of pledge. So how do we do it? You have a laptop you deliver it to me, I’ll
keep it until such time that you paid the obligation. You need to deliver because pledge is not consensual, not
formal but a REAL CONTRACT. You need delivery for the perfection even if we do not reduce that into writing
it is still valid. That’s why when you go there in the pawnshop; you don’t need to sign a pledge contract. The
pawnshop will just issue you a piece of paper which contains the description of what you have pledge. What is
required by law is delivery. So that the difference. Chattel mortgage is a formal contract while pledge is a real

Second distinction: as to Possession.

Q: Who has possession in chattel mortgage?

A: the debtor keeps the thing. When is he obliged to surrender, at the time of the foreclosure proceedings if
the debtor default in the payment, creditor will now foreclose the mortgage. The foreclosure proceedings will
either be judicial or extra judicial but pointing to one purpose, the sale of the collateral so that from the
proceeds if there are interest, surcharges and penalties, it will be used and the proceeds in the sale will be
used for that. Mortgagor defaults- creditor forecloses- and because of the foreclosure the debtor will have to
surrender the property.

Q: How about in pledge?

A: in pledge the possession is with the creditor. Debtor fails to pay; creditor can easily conduct the auction
sale. So that the second difference.

Third distinction: What happens to the proceeds?

In chattel mortgage, the proceeds, the prize to be paid by the highest bidder. Debtor fails to pay- creditor
conducts foreclosure proceedings, there is an auction sale. The amount of the principal is 100,000 plus interest
and charges, let’s say amounts to 120,000. Personal property was auctioned, the proceeds 200,000. So
200,000 minus 120,000 you have 80,000, this is your excess. In mortgage, where will the excess go? Should it
be taken by the creditor, should it be return to the debtor? Or to the sheriff (haha)? The excess goes back to
the debtor. This is chattel mortgage ah.

In pledge, Just the same pactum commissorium applies in pledge hence no automatic appropriation. Ok,
Debtor fails to pay, auction sale, publication then notice to the pledgor. Pledgor can participate. He was not
the highest bidder. The thing pledge was sold for 200,000. Total amount claim by the pawnshop is 120,000.
There is an excess of 80,000. To whom the excess belong? In pledge the excess belongs to the creditor except
if there is a stipulation that the creditor returns it to the debtor but if no stipulation to that effect, creditor
gets the excess.

Q: In case of deficiency, what is the rule? So during auction, proceeds is only 90,000. The total indebtedness is
120,000. Who shoulders the deficiency?

A: In chattel mortgage, the creditor run after the debtor to recover the deficiency except. Meron tayong
exception, you learned one in sale under 1484, this is your RECTO LAW.
Under 1484, if it is a sale where the price is payable by installments. Let’s say I’m the seller you’re the buyer,
you give me a down payment of 100,000 the price is 500,000, and the balance is 400,000. You’re going to pay
that for 3 yrs. monthly. Sale of personal property by installments, ok we have a contract and it is a contract of
sale with chattel mortgage. It was you the buyer will keep the thing you bought from me but as a security for
that 400,000 unpaid price, we have to execute chattel mortgage and one of the stipulation therein is the
payment of monthly installments. You defaulted in the payment with two to three installments, what is my
remedy? I have three alternative remedies under 1484, collection or specific performance, rescission is the
second remedy, but I like foreclosure, so I foreclose the chattel mortgage. The thing is in your possession
which is now subject to foreclosure was now sold at public auction. There was deficiency. Question can I still
run for the deficiency? Do you still apply the general rule that in case of deficiency the mortgagee can still run
against the mortgagor? No more because this is covered by 1484 so I cannot run for that deficiency. The recto
law protects the buyer. Suppose we made a stipulation that in the event of deficiency I can still run after you,
can I use that stipulation? NO because any stipulation to that effect would be null and void under 1484.

So rule!! If there is a chattel mortgage, in case of deficiency creditor/mortgagee can still run against the
debtor/mortgagor. But note if it is covered by 1484.

A: In pledge if there is a deficiency, the pledgee cannot run after the pledgor.

Q: Suppose there is stipulation where you sign voluntarily that in case of deficiency in the auction sale, the
pledgor is still liable; can the pawnshop run after you?

A: No because that is a void stipulation. Kanina sinabi natin in case of excess it belongs to pledgee diba, but if
there is stipulation that the pledgee will return the excess of the proceeds to the pledgor that is a valid
stipulation. Ngayon, in case of excess (should be deficiency, nagkamali ata si sir ng sinabi), the
excess(deficiency) is shouldered by the pledgee, if there is a stipulation that the pledgor shoulders the
deficiency, that is the void stipulation.

Q: How if the collateral is a real property, how many contracts do we have?

A: two possible contracts. We have a real mortgage and antichresis.

In antichresis, we have the antichretic debtor and antichretic crerditor. So what is the difference? What kind
of contract is a real mortgage? Here the written form is required for its validity not for its enforceability. That
is different from your statutes of fraud because your statute of fraud, a written form is required not for
validity but or enforceability. If a contract belongs to a formal contract, written form is an indispensable
requisite without it is void.

Ok, real mortgage, ano? C, R OR F? You need a written instrument for validity. Should it be notarized? Should
it be in a public instrument? Sign by the parties but not notarized, is it void? It is valid. Why is there a need to
notarize? If you want it to be registered you have to have it notarized because if not notarized the register of
deeds will not registered. So real mortgage is a formal contract.

How about antichresis? The law requires that the principal and interest will be put in writing to be valid. If the
principal and interest is not in writing then it is void. But an antichresis is also a real contract because here the
collateral is to be delivered to the creditor and in keeping it he gathered the fruits and applies these fruits as
payment of the interest and if still there is an excess then apply it to the principal.

Let’s say this is the strawberry farm. Who keeps the farm during the subsistence of the real mortgage? So the
creditor lent the debtor 100,000, the debtor provided the farm as collateral. Who cultivates the farm
meanwhile? Debtor because this is the real mortgage. The debtor is in possession so the debtor continue
cultivating the farm. When he will surrender? Not during foreclosure proceedings. As a rule he should be
surrendering but the practice is that he keeps it. He participates in the foreclosure proceedings, if he is the
highest bidder then well and good. Is the debtor who is in possession of his farm continuing cultivating the
farm despite the fact that this was already sold at public auction to the highest bidder? Yes because this is a
real mortgage. In real mortgage the mortgagor debtor has a redemption period. 1 year from the registration
of the certificate of sale in the RD. if he fails to redeem then that is tha time, the highest bidder will now claim
the property and the debtor will have to vacate the property. Ok so possession is with the debtor.

How about if it is an antichresis? Creditor takes charge of the property until such time that the debtor is able
to pay. If the debtor has settled his entire obligation then the creditor returns the real property. So what will
the creditor do with the farm? He cultivates and gathers the fruits. Lets say the strawberry farm produced an
income of 50,000. Less 30,000 as capital and expenses. So you have 20,000 as net income. The fruits will now
be applied to the payment of the interest of the 100,000. The interest is the stipulated interest. Let’s say 12%
so 12,000. So minus 12,000 remaining 8,000. Since it is antichresis what will the creditor do with the 8,000, he
will not return to debtor or keep but will be used to deduct from the principal. So 92,000 na lng yong naiwan
sa principal, next year same process. Suppose the fruits is not sufficient to pay the interest and the principal
during the stipulated period say 5 years. Can the creditor gets the property as his own? The creditor cannot
appropriate it as his own. Pactum commisorium- no automatic ownership to the creditor. He has to go
through the foreclosure proceedings.

Ok debtor has no collateral, walang personal and real property. A person can be collateral but it is called a co-
maker. The co-maker can either be a guarantor or surety. In the event the debtor fails to pay creditor runs
against the person to pay just like collateral the creditor runs after the property. Now, where does the
contract lie?

So if you have a creditor and a debtor and you have here the guarantor or surety, we have here a tripartite
relationship. Where does the contract lie? The contract of guaranty and surety is with the guarantor or surety
and the creditor. It is an undertaking buy the guarantor that in the event the debtor fails to pay the guarantor
will pay. Certainly, the guarantor/ surety can run after the debtor if the financial statues of the debtor
increase, the G/S can run after the debtor by virtue of contract of indemnity. It is an implied contract of

Q: which is better to be a guarantor or a surety?

A: Guarantor is better because the guarantor has the benefit of excussion. Excuss is to exhaust. The benefit of
the guarantor that before the creditor can run after him, the creditor must exhaust first all the assets of the
debtor. If the assets are sufficient, there is no need for the creditor to run after the guarantor. No assets then
the creditor run after the guarantor. There are assets but deficient, creditor runs after the guarantor for the
How about in surety? The surety is solitarily liable. If debtor fails to pay, creditor has three choices, run after
the debtor only, run after the surety only, or run after the debtor and the surety both of them at the same
time because the surety is solitarily liable as if he is the principal debtor. No benefit of excussion.

These contracts are what we called as contracts of real security. Ito yong tinatawag nilang secured
transactions because they are supported by collateral or encumbrance on property while this one is what you
called as contract of personal security. While these (I think referring to contract of surety and guaranty) are
called unsecured transactions because they are not supported, it is only promise to pay or personal
commitment of another. While these persons have properties, the debtor as well as the guarantor surety, you
have to go through the proceedings before you can run after their properties. While as to the others there are
already the properties ready for disposal. Ok so if you read some contracts in the banks and they say is a
secured transaction then there is collateral.

Contract of Loan

There are two kinds of loan:

1. Mutuum or simple loan

2. Commotadum

Two kinds of commodatum:

1. Ordinary commodatum and,

2. Precarium

The distinction between the two is only the period of the contract.

So if the parties have agreed on a definite period form which the borrower would use the object and to be
return at a definite time, that is ordinary commodatum. But if there is no period of time, the borrower just use
the thing at the tolerance of the lender, that is precarium. So if i lend you my cellphone and I said you can use
this for 1 week and on the 27th you have to return it, that is ordinary commodatum. But if I allow you to use it
anytime you like and anytime i demand you have to return that is your precarium.

Who are the parties?

If it is an ordinary contract of loan of money then you have a creditor and debtor. Technically the creditor is
the bailor and the debtor is the Bailee. If we use the Spanish term we have the debtor as comodatario and the
creditor as comodante.

Difference between mutuum and commodatum: a bar question

1. As to object: this is the subject matter or the thing which is lent

In mutuum, money or anything which is consumable or fungible. So when you borrow rice to your board mate
and you return the same kind, quantity and quality, it is a mutuum.
In comodatum, the thing is non-consumable and non-fungible. So anything can be watch, cellphone, or laptop.
Can you borrow a real property? You stay in the condominium unit of your friend free of charge, what is the
contract? In mutuum the subject matter is strictly personal property but in commodatum the subject matter
may be a real or personal property. So pwedeng hiramin ang real property. House and lot pwedeng hiramin,
parcel of land pwedeng hiramin free of charge and that is commodatum.

2. As to cause or consideration: The cause or consideration is that which the borrower gives in return or
what the lender receives in return.

If it is mutuum, it is either onerous or gratuitous. So this is with interest if it is mutuum because you learn in
your contracts that if it is with interest that is onerous. If it is gratuitous, it is for free. In sale and lease that is
onerous. In mutuum, the parties may stipulate that the debtor will pay interest. But still if it is gratuitous the
lender receives something which is “thank you”.

In commodatum, it is essentially gratuitous. Should always be gratuitous. The borrower will not pay anything
for the property because ones there is a consideration, it ceases to be a comodatum. If a borrower pay for the
use, that is lease. If you pay for your stay in a condominium unit, that in no longer commodatum but if you pay
for ordinary expenses that is not rent. It is still gratuitous.

As to purpose, in mutuum the purpose is consumption of the object because when you borrow money and
used it, it is exhausted. In commodatum, it is just the use of the thing. Now, suppose the borrower borrowed
money but he did not spend it. It is not for consumption but for exhibition, then that is not anymore mutuum
but comodatum. So as a rule the subject matter in commodatum is non-consumable but it may happened that
the subject matter is consumable if the use of the thing is for display or exhibition and not for consumption.

What is transferred? In mutuum, it is the ownership. In commodatum, it is only possession.

We agreed that I’m going to lend you 10,000. Then I handed you 10,000 put in an envelope. You receive it you
open the envelop you count it and put it in your pocket. We did not notice na snatch na pala. Are you going to
pay the 10,000? Is the borrower bound to pay although he was not able to use it? What applies there is res
perit domino or owner bears the loss. In this case, who is the owner at that time of the lost? In mutuum, once
the property is delivered by the lender to the borrower, ownership is transferred and the borrower becomes
the owner of the property and when the loss occurred during that time res perit domino applies. Hence the
borrower bears the risk of loss and he should pay for the same.

In commodatum, I lent you a laptop, and then suddenly hear comes two guys and immediately they pointed at
us banana cue stick so the hold uppers run away with the laptop. Is the borrower liable? In comodatum only
possession is transferred. So applying the principle of res perit domino, the lender bears the loss and he
cannot make the borrower liable. But there are instances that even if the thing was lost through fortuitous
event, the borrower is still liable.

General rule, the borrower is not liable for fortuitous loss in commodatum. So certainly if the lost is with his
fault then he is liable.

Exceptions: under article 1942 even if the loss is fortuitous the Bailee is still liable if:
1. If the borrower uses the thing for the purpose different from that for which it was borrowed.

Actual case: two brothers they are farmers, the other brother borrowed the cow of his elder brother which
will be used during the town fiesta parade. After the town fiesta instead of returning the brother used the cow
to plow and hollow his farm and in the course of which the cow was struck by lightning. Is the borrower
brother liable for the death of the car? Yes. Because it is under 1942, that the borrower used the cow for the
purpose different from that for which it was borrowed.

2. If the borrower is in default and during this time of default the thing is lost or destroyed.

Let’s say, I lend you my laptop and I told you to return in the 27th of January. You did not return it on the
stipulated time of its return. On the 28th on your way to return it, there was a fortuitous lost either by act of
man or act of nature. Will you be liable? Yes because you are in default. So lesson here, do not be in delay kasi
mahirap ang delay.

3. If the thing borrowed was delivered by the lender with appraisal of its value. Well, it is an implied
agreement that the borrower has to take good care of the thing because the value is there and if
something wrong happens, and then he will be liable for that value.

4. If he leases or lend it to another.

If you borrow my phone, can you lend it to another? No. commodatum is personal in nature. Now if the thing
is lost in the hands of another, the borrower is still liable even if it was lost fortuitously. However if the person
to whom the borrower lend is a member of his household, then you will not be liable.

So if you lend the phone which you borrowed to me to your sister and it was lost fortuitously are you liable? It
depends. If your sister lives in the same household, you will not be liable. If she lives in different house, you
will be liable. What I’m saying is if you are the borrower you can lend it to another provided that he/she
belongs to the same household. Supposed your sister is your boarder she stays in the ground floor, you stay at
the second floor. Would your boarder be absolve? When we say household, it refers to a family living under
the same roof.

5. If in a situation, the borrower had the chance of saving the thing borrowed and that of his thing and
he prefers to save his own thing causing the thing borrowed of its lost, then the borrower is liable.

1983 bar question: B borrowed a truck from A. the truck was parked in the garage of B together with B’s car
then there was fire. The borrower has only the chance to save one and by human nature he chooses his own
car. The truck was burned. Is the borrower liable? Yes. Fortuitous lost but it falls under the exceptions.