CREDIT

Credit – means the ability of an individual to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period

Credit Transaction – an obligation based on the ability of an individual to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period

Bailment 1. The delivery of property of one person to another 2. in trust for a specific purpose, 3. with a contract, that the trust shall be faithfully executed and the property returned or duly accounted for 4. when the special purpose is accomplished or kept until the bailor reclaims it.

Parties• Bailor / comodatario• Bailee /comodante

LOAN

What are the two kinds of loan?1. Commodatum2. Mutuum

• Commodatum1. a contract where the lender delivers to the borrower a non-consumable thing 2. so that the latter may use it for a certain time and 3. return the identical thing4. essentially gratuitous5. object is the temporary use of the thing loaned

Bailor retains the ownership of the thing loaned (Art. 1933)

The lender need not be the owner of the thing loaned. It is enough that he has possessory interest in the thing or right to use it which he may assert against the bailee and third persons though not against the rightful owner. (Ex. A lessee may sublet the thing leased).

Types:• ordinary commodatum• precarium

• Simple loan or mutuum1. a contract where the lender delivers to another money or other consumable thing, 2. upon condition that the same amount of the same kind and quality shall be paid (in Art. 1953, used fungible)

May be gratuitous or with a stipulation to pay interestOwnership passes to the borrower

Commodatum

Nature

Useo Gen. Rule: of the thing loaned but not its fruits (Art. 1935)

Exception: A stipulation that the bailee may make use of the fruits of the thing loaned is valid (Art. 1940).

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Subjecto Gen. Rule: not consumableo Exception: consumable goods if purpose merely for exhibition, not for consumption (Art. 1936)

Objecto Movableo Immovable (Art. 1937)

The bailor in commodatum need not be the owner of the thing loaned (Art. 1939)

Commodatum is purely personal in character. Consequently:

o The death of either the bailor or the bailee extinguishes the contract;o Gen. Rule:The bailee can neither lend nor lease the object of the contract to a third person.

Exception: The members of the bailee's household may make use of the thing loanedExceptions:

1. there is a stipulation to the contrary2. the nature of the thing forbids such use (Art. 1939)

Obligations of the Bailee

Expenseso bailee – ordinary expenses for the use and preservation of the thing loaned (Art. 1941)

Loss

Gen. Rule: Borrower not liable for loss or damage due to a fortuitous event.Exceptions:

Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (PLALS)

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.

DeteriorationRequisites for exemption of the bailee:

1. deterioration due only to the use thereof2. without his fault (Art. 1943)

Right of Retention

Gen. Rule: Bailee has no right of retention.Exception: Damages under Art. 1951 (hidden flaws)

1. there is a flaw or defect in the thing loaned2. the flaw or defect is hidden3. the lender is aware of the flaw

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4. the lender does not advise the borrower of the flaw5. the borrower suffers damages by reason of the flaw or defect

Liability

When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (Art. 1945)

Obligations of the Bailor

Duration of the Loan

1. Ordinary CommodatumGen. Rule: The bailor cannot demand the return of the thing loaned until

1. after the expiration of the period stipulated, or 2. after the accomplishment of the use for which the commodatum has been constituted.

Exceptions: 1. If in the meantime, he should have urgent need of the thing, he may demand its:

o return or o temporary use - the contract of commodatum is suspended while the thing is in the possession of the bailor (Art. 1946)

2. if bailee commit any act of ingratitude under Art. 765• If the donee should commit some offense against the person, the honor or the property of the donor, or of his wife or

children under his parental authority;• If the donee imputes to the donor any criminal offense, or any act involving moral turpitude, even though he should

prove it, unless the crime or the act has been committed against the donee himself, his wife or children under his authority;

• If he unduly refuses him support when the donee is legally or morally bound to give support to the donor.

2. Precarium

Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

(2) If the use of the thing is merely tolerated by the owner. (1750a)

Expenses

1. Extraordinary expenses for the preservation of the thing loaned – must be borne and refunded by the bailor provided that:• the bailee brings the same to the knowledge of the bailor before incurring themException: when they are so urgent that the reply to the notification cannot be awaited without danger (Art. 1949)

2. Extraordinary expenses for the actual use of the thing by the bailee• Gen. Rule: borne equally by both the bailor and the bailee• Exception: stipulation to the contrary (Art. 1949)

3. Other expenses for the purpose of making use of the thing – borne by the bailee (Art. 1950)

NOTE: Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n)

Loan

Nature

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Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

• Return of equivalent only• Fungible things – those which may be replaced by a thing of equal quality and quantity• Consumable things - those which cannot be used without being consumed

Art. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.

Consideration – promise of the borrower to pay

Form of Payment

• Money• Fungible thing other than money

o Gen. Rule: payment of the same kind, quality, and quantity (value of thing irrelevant)o Exception: If impossible to do so, pay its value at the time of the perfection of the loan

INTEREST

When liable if there is a stipulation:

1. Monetary Interest• No concept of delay

Requisites:1. There must be a stipulation of payment of interest2. It must be in writing (Art. 1956)

It is only in contracts of loan, with or without security, that interest may be stipulated and demanded.

Gen. Rule: Stipulation of interest must be mutually agreed upon pursuant to consensuality and mutuality of contract.

Exception: Parties may agree upon a formula for determining the interest rate, over which neither party has control.

Escalation clause – a clause which authorizes the automatic increase in interest rate• Must be accompanied by de-escalation clause. A de-escalation clause is a clause which provides that the rate of interest

agreed upon will also be automatically reduced. There must be a specified formula for arriving at the adjusted interest rate, over which neither party has any discretion.

When liable even without stipulation

2. Penalty Interest

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be

1. the payment of the interest agreed upon, and 2. in the absence of stipulation, the legal interest, which is six percent per annum (Art. 2209)

Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonably certainty (Art. 2213).

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• Non-payment of loan• No need for express stipulation• Indemnity for damages

Indemnity for Damages – the debtor in delay is liable to pay legal interest as indemnity for damages even without a stipulation for the payment of interest

Where to base rate of damages:• Penalty clause• Regular interest of the loan• Legal interest rate – 12% p. a.

Example: Lender lends P10K at 10% interest with penalty interest of 6%. On due date, Borrower fails to pay. Borrower only pays a year after. How much should he pay?

Æ Borrower should pay the principal + interest on the loan + penalty interest= 10K + 10% of 10K + 6% of 10K= 10K + 1K + .6K= 11,600

Lender lends P10K at 10% interest. On due date, Borrower fails to pay. Borrower only pays a year after. How much should he pay?

Æ Borrower should pay 10K + 10% of 10K (interest on the loan) + 10% of 10K (penalty interest)= 10K + 1K + 1K= 12,000The penalty interest in this case is 10% since there is no penalty interest stipulated. The additional interest is based on the regular interest of the loan.

Lender lends P10K, no interest. On due date, Borrower fails to pay. How much shouldBorrower pay a year later?

Æ Borrower should pay P10K + 12% of P10K = 11,200. The penalty interest is 12% since there is no interest on the loan nor a penalty interest stipulated. The extra interest is based on the legal rate of interest.

3. Compounding Interest

Gen. Rule: Accrued interest shall not earn interestExceptions:

1. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point (Art. 2212).

2. Express stipulation of compounding interest which must be in writing (Art. 1959)

Art. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. (n)

Notes:

Take note that you should not confuse this with the rule when the principal obligation consists of goods other than money. If the principal obligation consists in the payment of goods and it is impossible to deliver the goods, the borrower should pay the value of the thing at the time of the constitution of the obligation.

But if interest is payable in kind, it should be appraised at its value at the time of payment.

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How does compounding interest work?

Lender lends P100,000 payable in 2 years at 10% interest compounded per annum. At the end of the first year, how much is due? Principal plus 10% interest = 110,000.

On the second year, the 110,000 becomes the new principal amount and it is what will earn the 10%interest. So at the end of the second year, how much is due?110,000 + 10% of 110,000= 110,000 + 11,000= 121,000

DEPOSIT

Deposit in General

Art. 1962. A deposit is constituted from the moment 1. a person receives a thing belonging to another, 2. with the obligation of safely keeping it and of returning the same.

• If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (1758a)

Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. (n)

Kinds of Deposit

1. Judicial - judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered (Art. 2000)

2. Extrajudicial (Art. 1967)

a. Voluntary

b. Necessary

ConsiderationGen. Rule: A deposit is a gratuitous contractExceptions:

1. when there is an agreement to the contrary2. the depositary is engaged in the business of storing goods (Art. 1965)3. where property is saved from destruction without knowledge of the owner

Object

• Extrajudicial deposit – only movable things may be the object of a deposit (Art. 1966)• Judicial deposit – movable or immovable

Purpose• Extrajudicial deposit – safekeeping• Judicial deposit – to protect the rights of the parties to the suit

Voluntary Deposit

NatureHow:

1. Delivery is made by the will of the depositor

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2. Delivery is made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs (Art. 1968)

Form

• orally or in writing. (n)

Capacity

1. If depositary is capacitated and the depositor is incapacitated• The depositary is subject to all the obligations of a depositary

o Return the property to the guardian or administrator of the incapacitated; oro Return the property to the depositor himself if the depositor should acquire capacity

2. If depositary is incapacitated and the depositor is capacitated:

As against the depositary1. to recover the thing deposited while it is still in the possession of the depositary2. to compel the latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price

• the depositor has no cause of action for recovery if depositary not in possession of the thing

As against third person

If a third person who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery. (Art. 1971)

If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights (Art. 1986).

The depositary’s heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound:

• to return the price he may have received or• to assign his right of action against the buyer in case the price has not been paid him (Art. 1991).

Obligations of the Depositary1. to keep the thing safely and to return it2. to remain the depositary3. not to change the way of the deposit

4. to collect interest and preserve value (special kind of deposit)5. to commingle fungible deposit6. to not use the thing deposited7. to return the deposited thing’s products, accessories and accessions (Art. 1983)8. to return the thing deposited

1. to keep the thing safely and to return itGen. Rule: The depositary is obliged to keep the thing safely and to return it, when required, to the:

• depositor• his heirs and successors• the person who may have been designated in the contract (Art. 1972)

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe.

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Gen. Rule: The depositary cannot deposit the thing with a third person.• Absolutely liable for loss if deposited with a third person, even if through fortuitous event

Exception: Unless there is a stipulation to the contrary • Gen. Rule: Depositary not liable for loss

Exception: The depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit (even if through fortuitous event)

The depositary is responsible for the negligence of his employees (Art. 1973)

Gen. Rule: The depositary is not liable for loss of the thing.Exception: Art.1979

Art. 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;

(2) If he uses the thing without the depositor's permission;

(3) If he delays its return;

(4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)

Art. 1990. If the depositary by 1. force majeure or 2. government order

loses the thing and receives money or another thing in its place, he shall deliver the sum or other thing to the depositor.

3. not to change the way of the depositGen. Rule: The depositary cannot change the way of the deposit.Exception: If under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation

• Prerequisite: Gen. Rule: He shall notify the depositor thereof and wait for his decisionException: If delay would cause danger

When the thing deposited is delivered closed and sealed, the depositary must:

1. return it in the same condition• he shall be liable for damages should the seal or lock be broken through his fault

2. When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the deposit (Art. 1981)

Fault on the part of the depositary is presumed, unless there is proof to the contrary.• As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening

is imputable to the depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the value claimed by him. (Art. 1981)

When it becomes necessary to open a locked box or receptacle, the depositary is presumed authorized to do so:

• if the key has been delivered to him; or • when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle

(Art. 1982)

4. to collect interest and preserve value (special kind of deposit)

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Gen. Rule: The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound:• to collect the latter when it becomes due, and • to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding

to them according to law (Art. 1975)

Exception: The above provision shall not apply to contracts for the rent of safety deposit boxes. (but see case as to interpretation)

5. to commingle fungible deposit

Gen. Rule: The depositary may commingle grain or other articles of the same kind and quality, in which case the various depositors shall own or have a proportionate interest in the mass

Exception: Unless there is a stipulation to the contrary (Art. 1976)

6. to not use the thing deposited

Regular DepositGen. Rule: The depositary cannot make use of the thing deposited.

• Otherwise, he shall be liable for damages.

Exceptions: 1. With express permission of the depositor2. When the preservation of the thing deposited requires its use, it must be used but only for that purpose (Art. 1977)

Irregular Deposit

Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract.

The permission shall not be presumed, and its existence must be proved. (1768a)

7. to return the deposited thing’s products, accessories and accessions (Art. 1983)

• The depositary owes interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the deposit.

8. to return the thing deposited

If at the time the deposit was made a place was designated for the return of the thing, the depositary must take the thing deposited to such place; but the expenses for transportation shall be borne by the depositor.

If no place has been designated for the return, it shall be made where the thing deposited may be, provided that there was no malice on the part of the depositary (Art. 1987)

Gen. Rule: The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed.

Exceptions: 1. When the thing is judicially attached while in the depositary's possession, or 2. Should he have been notified of the opposition of a third person to the return or the removal of the thing deposited.

Gen. Rule: The depositary who may have justifiable reasons for not keeping the thing deposited may, even before the time designated, return the deposit

• If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. (1771a) (Art. 1984)

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• if the latter should refuse to receive it, the depositary may secure its consignation from the court. (Art. 1989)

Exception: If the deposit is for a valuable consideration

Ownership

1. The depositary cannot demand that the depositor prove his ownership of the thing deposited,2. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of

the deposit.

3. If the owner, in spite of such information, does not claim it within the period of 1 month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor.

Solidarity

1. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand more than his share.

2. Each one of the solidary depositors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter.

3. The depositary may deliver to any one of the solidary depositors; but if any demand, judicial or extrajudicial, has been made by one of them, delivery should be made to him.

4. However, if there is a stipulation that the thing should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a)

Obligations of the Depositor

1. expenses for preservation of the thing deposited• Gratuitous - the depositor is obliged to reimburse the depositary for the expenses he may have incurred• For compensation – depositary to bear the expenses (Art. 1992)

2. any lossGen. Rule: The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited.

Exceptions: 1. unless at the time of the constitution of the deposit the former was not aware of2. unless the depositor was not expected to know the dangerous character of the thing3. unless he notified the depositary of the same4. the latter was aware of it without advice from the depositor (Art. 1993)

Pledge created by operation of law

Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (1780)

Extinguishment

Art. 1995. A deposit is extinguished:

(1) Upon the loss or destruction of the thing deposited;

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(2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n)

Necessary Deposit

1. If made in compliance with a legal obligation (Art. 1996)2. If it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events

(Art. 1996)3. Deposit of effects made by travelers in hotels and inns 4. Deposit of goods made by travelers with common carriers

When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation.

When liable for loss:

1. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused by:

o the servants or employees of the keepers of hotels or inns o strangers

a. Does not require notice (see Art. 1998)

b. Servants or employees must be negligent (see Art. 1973)

The fact that travellers are constrained to rely on the vigilance of the keeper of the hotels or inns shall be considered in determining the degree of care required of him. (Art. 2000)

When not liable for loss:

1. force majeure (Art. 2000)• The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms

or through an irresistible force. (Art. 2001)

2. The hotel-keeper is not liable for compensation if the loss is a. due to the acts of the guest, his family, servants or visitors, or b. if the loss arises from the character of the things brought into the hotel (Art. 2002).

Others:

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void. (n)

Pledge by operation of law

Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n)

Sequestration or Judicial Deposit

Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. (1785)• Pursuant to a court order

Object• Movable or immovable (Art. 2006)

• In case of immovable, it is deposited by annotating the attachment on the title with the Register of Deeds

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Purpose• To maintain the status quo during the pendency of the litigation to insure the right of the parties to the property in case

of a favorable judgment

Art. 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a)

Art. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a good father of a family. (1788)

GUARANTY AND SURETYSHIP

What are guaranty and suretyship?

By guaranty 1. a person, called the guarantor, 2. binds himself to the creditor 3. to fulfill the obligation of the principal debtor 4. in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the contract is called a suretyship. (1822a)

What are the requisites for there to be a guaranty?

1. There must be an existing principal obligation 2. The principal obligation must not be void.3. The guarantor is different from the debtor. 4. The guarantor must be qualified.5. Guaranty must be in writing to be enforceable, though valid even if made orally

Who can be a guarantor?

The guarantor must have:1. integrity2. capacity to bind himself3. sufficient property to answer for the obligation which he guarantees4. not convicted in first instance of a crime involving dishonesty

However, the creditor may waive these requirements.

What will happen if the guarantor is not qualified?

Gen. Rule: The creditor may demand another who has all the qualifications requiredException: Where the creditor has required and stipulated that a specified person should be the guarantor (Art. 2057)

What are the rules on construction with respect to them?

1. If gratuitous /accommodation guaranty against the creditor and in favor of the guarantor guarantor is liable only for the obligations of the debtor stipulated upon, and not to obligations assumed

previous to the execution of the guaranty

2. If with consideration against the guarantor and in favor of the creditor

Is the acceptance of the creditor necessary for a guaranty to be constituted?

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No. The contract is unilateral.

Exception: if merely offers to become a guaranty

What is the presumption with respect to consideration?

It is gratuitous.

May a guaranty be constituted without the consent of the debtor?

Yes, a guaranty may be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823)

What is the rule if a person guaranteed an obligation without the consent of the debtor?

The rules are the same as that of a payment of an uninterested third person.

Can a guaranty secure future obligations?

Yes, this is known as a continuing guaranty. However, there can be no claim against the guarantor until the debt is liquidated (Art. 2053)

What is the extent of the guarantor’s liability?

1. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.

2. definite guaranty – liability limited to the principal debt, to the exclusion of accessories3. indefinite guaranty – liabilities:

a. principal obligationb. accessoriesc. judicial costs - the guarantor shall only be liable for those costs incurred after he has been judicially required to pay

(Art. 2055)

Can a contract of guaranty be implied?

No, a guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.

What is the main difference between a guaranty and suretyship?

In a guaranty, the guarantor benefits from excussion or exhaustion.

Gen. Rule: 1. The guarantor is entitled to excussion.2. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal

debtor. (Art. 2064)

Exceptions: (RUSIA)1. If the guarantor has expressly renounced it;2. If he has bound himself solidarily with the debtor;3. In case of insolvency of the debtor;4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of

the obligation. (Art. 2059)

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What is the meaning of excussion?

Requisites before guarantor has to pay:1. the creditor has exhausted all the property of the debtor, and 2. the creditor has resorted to all the legal remedies against the debtor (Art. 2058)

a. there must be notice to the guarantor / actual demandb. there must be a judgment on the debt

What are the procedural requirements before the guarantor can avail of excussion?

1. he must set it up against the creditor upon the latter’s demand for payment from him2. he must point out to the creditor property of the debtor:

• the property must be available• within Philippine territory• sufficient to cover the amount of the debt

available means not in litigation or encumbered

The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (Art. 2061)

What is the rule on compromise (applies to a guarantor only)?

1. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. 2. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor

(Art. 2063).

When is there a co-guaranty?

The obligation to answer for the same is divided among all guarantors if:1. several guarantors2. one debtor3. for the same debt

What is the nature of the obligation of a guarantor with respect to a co-guarantor (not sub-guarantor)?

It is direct. There is no benefit of excussion as among themselves.

What are the rules with respect to co-guaranty?

1. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay. 2. The one among them who has paid may demand of each of the others the share which is proportionally owing from him.3. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same

proportion.4. In the case of the preceding article, the co-guarantors may set up against the one who paid, the same defenses which

would have pertained to the principal debtor against the creditor, and which are not purely personal to the debtor. (1845)

This is only applicable if the payment has been made: 1. by virtue of a judicial demand or2. if the principal debtor is insolvent. (Art.2073)

A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. (1846)

Exceptions:

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1. If solidarity has been expressly stipulated2. Art. 2059 (Art. 2065)

If the guarantor pays, how much will the debtor pay him?

Amount actually paid, unless otherwise stipulated + legal interests from the time the payment was made known to the debtor + expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him + damages, if they are due. (1838a)

When can the guarantor demand payment?

Gen. Rule: After payment.Exceptions: The guarantor, even before having paid, may proceed against the principal debtor:

a. When he is sued for the payment;b. In case of insolvency of the principal debtor;c. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has

expired;d. When the debt has become demandable, by reason of the expiration of the period for payment;e. After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature

that it cannot be extinguished except within a period longer than 10 years;f. If there are reasonable grounds to fear that the principal debtor intends to abscond;g. If the principal debtor is in imminent danger of becoming insolvent.

What are the remedies of the guarantor?

1. to obtain release from the guaranty, or 2. to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of

the debtor

Remember that:1. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly

or impliedly.

2. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation.

3. Conventional subrogation of a third person requires the consent of the original parties and of the third person.

What is an indemnity agreement?

Indemnity Agreement is executed for the benefit of the surety and not the creditor. It will have the force of law upon agreement of the indemnitor (principal debtor) to its terms and conditions.

1. Contract of indemnity against loss – the debtor will not be liable until the surety makes the payment or sustains loss

2. Contract of indemnity against liability – the debtor’s liability arises as soon as the liability of the surety has arisen regardless of whether he has suffered actual loss

What is the effect if the guarantor (with consent of debtor) pays the creditor?

1. There is subrogation.2. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid.

(1839)

What happens if the guarantor pays before the debt becomes due and demandable?

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He cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor.

What is the rule when there is double payment by the debtor and the guarantor?

Gen. Rule: If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor.

Exception: (Requisites)1. gratuitous guaranty2. guarantor was prevented by a fortuitous event from advising the debtor of the payment3. the creditor becomes insolvent

What extinguishes guaranty/suretyship?

The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (1847)

Any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety will release the surety from liability. This is because the alteration would result in a novation of the principal contract which is consequently extinguished and replaced with a new one.

Examples:1. Increase in the principal amount, regardless of the extent of the liability assumed by the guarantor2. Substitution of the principal debtor3. Extension or shortening of the term of the principal debt

A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850

An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a)

Decrease in the amount of the principal obligation: The guaranty subsists and is benefited by the change since the guarantor cannot bind himself for more than the principal obligation.

The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. (1852)

The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. (1853)

PLEDGE, MORTGAGE AND ANTICHRESIS

Requisites:

1. That they be constituted to secure the fulfillment of a principal obligation2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence

thereof, that they be legally authorized for the purpose (Art. 2085)4. That when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated

for the payment to the creditor (Art. 2087)

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5. The thing pledged be placed in the possession of the creditor, or of a third person by common agreement (PLEDGE)

What is pactum commissorium?

Requisites:1. There should be a pledge / mortgage2. Debtor defaulted in payment of obligation3. There is a stipulation for automatic appropriation of the thing.

What is the exception to pactum commissorium?

In pledge, the Two Sale Rule. If after two public auctions, there was no sale, the creditor may appropriate the thing pledged.

What is the effect of the appropriation of the creditor?

In this case he shall be obliged to give an acquittance for his entire claim. (Art. 2112)

What is the meaning of indivisibility of pledge or mortgage?1. The pledge or mortgage can only be extinguished if the debt is fully satisfied.2. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

3. However, where each one of several thing guarantees a determinate portion of credit, the pledgor/mortgagor can ask for proportionate extinguishment.

PLEDGE

Pledge 1. a contract by virtue of which 2. the debtor delivers to the creditor or to a third person3. a movable or a document involving incorporeal rights

If there is no delivery, there is no pledge.

What is the effect if the pledge is not made in a public instrument?

It is not binding as against third persons.

When can the pledgee sell at a public auction the pledged property?

If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n)

Can the pledgor alienate the thing pledged?

Yes, but only if it is with the consent of the pledgee. The buyer holds the pledged property subject to the pledged.

The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession.

What is the diligence required of the pledgee?

Good father of a family.

Can the pledgee deposit the thing pledged with a third person?

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No, except when there is a stipulation authorizing him to do so.

In such a case, the pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.

Can the pledgee use the thing pledged?

No, except:1. When authorized by the pledgor2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.

(Art.2104)

When can the pledgor deposit the thing pledged with a third person?

1. If pledgee uses the thing pledged, without authority (Art. 2104)2. If pledgee misuses the thing pledged (Art. 2104)3. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired (Art. 2106)

What are the options of the creditor if he is deceived on the substance or quality of the thing pledged?

He may either1. claim another thing in its stead, or 2. demand immediate payment of the principal obligation (Art. 2109) alternative remedies

When can the pledgee sell the thing in pledge even if the debt is not yet due and demandable? If there are reasonable grounds to fear the destruction or impairment of the thing pledged and the pledgee has no fault.

The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (Art. 2108)

When can the pledgor ask for substitution of the thing in pledge?

If pledgor offers another thing in pledge, of the same kind as the former and not of inferior quality (Art. 2107)

What is the rule with respect to the fruits of the pledge?

1. The pledge shall extend to the interest and earnings of the right pledged.

2. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him. must be due

3. If none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal.

Exception: If there is a stipulation to the contrary

When is pledge extinguished?1. Return of the thing pledged 2. Renunciation3. Public auction

Renunciation

1. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)

What is the presumption?

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If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n)

What is the procedure in public auction?

Formalities Required:(1) the debt is due and unpaid;(2) the sale must be at a public auction;(3) there must be notice to the pledgor and owner, stating the amount due; and(4) the sale must be with the intervention of a notary public.

1. Notify the pledgor.

2. If two or more things are pledged, the pledgee may choose which he will cause to be sold unless there is a stipulation to the contrary.

3. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder.

4. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

5. All bids at the public auction shall offer to pay the purchase price at once.

6. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case.

7. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n)

What is the rule with respect to the price of the sale?

Gen. Rule: If the price of the sale is more than said amount, the debtor shall not be entitled to the excess.

Exception: If it is otherwise agreed.

Absolute Rule: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

What is the rule when the pledgor is a person other than the debtor?

He shall have the same rights as a guarantor. He is not prejudiced by any waiver of defense by the principal obligor. (n)

What is a legal pledge?

It is a pledge created by operation of law.

How is it different from voluntary pledge?

After payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)

What is procedure in sale of a thing in legal pledge?

1. It may be sold only after demand of the amount for which the thing is retained. 2. The public auction shall take place within 1 month after such demand.

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3. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)

MORTGAGE

REAL MORTGAGE

What can be the subject of a real mortgage?

Immovable property.

What is the nature of a mortgage?

1. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.

2. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes.

Can the mortgagee forbid the mortgagor from alienating the property?

No, a stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

What are the formal requisites in constituting a real mortgage?

It is indispensable that the document in which it appears be recorded in the Registry of Property.

What is the effect if this is not complied with?

If the instrument is not recorded, the mortgage is nevertheless binding between the parties. However, third persons are not affected.

Mind Map in Foreclosures:

1. Public or Private Sale. Is it a public or a private sale? If there is a stipulation that the foreclosure should be conducted in a private sale, then the sale may be private.

2. Determination of the Governing Law. Who are the parties to the mortgage contract?

a. Mortgagor

1. Is the mortgagee a natural person? The governing law is either Rule 68 or Act 3135.

2. Is the mortgagee a bank? The governing law is General Banking Act.

3. Is the mortgagee a foreigner (whether natural or juridical)? The governing law is RA 133.

3. Is it extrajudicial or judicial foreclosure? If extrajudicial foreclosure is stipulated, then it may be extrajudicially foreclosed. However, an alien mortgagee may only judicially foreclose, pursuant to RA 133.

Judicial Foreclosure (Rule 68; General Banking Act)

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Steps:

1. Complaint in action for foreclosure. The complaint shall set forth a. the date and due execution of the mortgage; b. its assignments, if any; c. the names and residences of the mortgagor and the mortgagee; d. a description of the mortgaged property; e. a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the

amount claimed to be unpaid thereon; and f. the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the

holder of the mortgage, all of whom shall be made defendants in the action. (1a)

2. Judgment on foreclosure for payment or sale.

3. Equity of Redemption. The court shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (2a)

Notes: Equity of redemption period – mortgagor/debtor must pay the obligation within a period of not less than 90 nor more than 120 days from the entry of judgment, before the confirmation of the sale. Even after the lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the equity of redemption can be considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale.

4. Foreclosure Upon Motion. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof.

• Section 4. Disposition of proceeds of sale. 1. to the person foreclosing the mortgage2. to junior encumbrancers in the order of their priority, to be ascertained by the court, or 3. if there be no such encumbrancers or there be a balance or residue after payment to them, then to the

mortgagor or his duly authorized agent, or to the person entitled to it. (4a)

• Section 5. How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper. (5a)

• Sec. 47, GBL. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

5. Confirmation of Sale By a Court Order Upon Motion. When confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

6. Writ of Possession Upon Motion. Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said

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purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a)

Foreclosure by a mortgagee bank. Sec. 47, GBL. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law.

Exception: (If mortgagee is a foreign entity)Section 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged for a period not exceeding five years, renewable for another five, in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not bid or take part in any sale of such real property as a consequence of such mortgage.

7. Deficiency Judgment Upon Motion. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise; the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. (6a)

8. Registration of order confirming sale and issuance of new title in the Registry of Deeds if there is no right of redemption (other than mortgagee a bank). A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser.

In the alternative:

8. Registration of the certificate of sale and order confirming sale in the Registrar of Deeds if there is right of redemption.

Period of Redemption: within 1 year from the date of registration of the certificate of foreclosure sale in the Register of Deeds concerned, not the foreclosure sale.

How to Redeem:

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title.

• The mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying 1. the amount due under the mortgage deed, 2. with interest thereon at rate specified in the mortgage, and 3. all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. (Sec. 47, GBL)

Rights during Redemption Period (Rule 39):

1. Section 31. Manner of using premises pending redemption; waste restrained. Until the expiration of the time allowed for redemption, the court may, as in other proper cases, restrain the commission of waste on the property by injunction, on the application of the purchaser or the judgment obligee, with or without notice;

but it is not waste for a person in possession of the property at the time of the sale, or entitled to possession afterwards, during the period allowed for redemption, to continue a. to use it in the same manner in which it was previously used, or b. to use it in the ordinary course of husbandry; or

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c. to make the necessary repairs to buildings thereon while he occupies the property. (33a)

2. Section 32. Rents, earnings and income of property pending redemption. The purchaser or a redemptioner shall not be entitled to receive the rents, earnings and income of the property sold on execution, or the value of the use and occupation thereof when such property is in the possession of a tenant. All rents, earnings and income derived from the property pending redemption shall belong to the judgment obligor until the expiration of his period of redemption. (34a)

9. Issuance of new title upon failure to redeem. If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. (n) • Section 34, Rule 39. Recovery of price if sale not effective; revival of judgment. - If the purchaser of real property sold

on execution, or his successor in interest, fails to recover the possession thereof, or is evicted therefrom, a. in consequence of irregularities in the proceedings concerning the sale, or b. because the judgment has been reversed or set aside, or c. because the property sold was exempt from execution, or d. because a third person has vindicated his claim to the property,he may on motion in the same action or in a separate action recover from the judgment obligee the price paid, with interest, or so much thereof as has not been delivered to the judgment obligor, or he may, on motion, have the original judgment revived in his name for the whole price with interest, or so much thereof as has been delivered to the judgment obligor. The judgment so revived shall have the same force and effect as an original judgment would have as of the date of the revival and no more. (36a)

Extrajudicial Foreclosure

• must be expressly stipulated• There’s a special power of attorney to carry out extrajudicial foreclosure. The Spa authorizing the extrajudicial

foreclosure of the real property must either be inserted into or attached to the deed of real estate mortgage.• Must file an action for deficiency judgment even during the period of redemption

Steps:1. File an application for extrajudicial foreclosure with the Executive Judge through the clerk of court (who is also the Ex-

Officio Sheriff) where the property is situated• Purpose is to seek schedule

2. Notice of the Sale (Public Notice)• Posting in at least 3 public places 20 days before the sale• Gen. Rule: Publication in a newspaper of general circulation once a week for three consecutive weeks if the

property is worth more than P400.Exception: For real estate mortgages covering loans not exceeding P100,000, exclusive of interests due and unpaid, granted by rural banks or thrift banks, publication in a newspaper shall be dispensed with. It is sufficient that notices of foreclosure are posted for a period of 60 days immediately preceding the public auction in the most conspicuous areas at the premises of a. the rural bank or thrift banks, as the case may be, and b. at the municipal building, c. municipal public market, d. barangay hall, and e. barangay public market, if any, where the land is situated.

3. Examination by the clerk of court4. Public Auction

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

• In case the mortgage deed specified a place in a municipality in the province where the sale would be made, such sale shall be made in such place.

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• If the place of sale in the municipality as not stipulated, in the municipal building of the municipality in which the property or part thereof is situated.

Time: between 9am -4pmProcedure: The sale shall be by public auction or bidding made through sealed bids which must be submitted to the Sheriff who shall conduct the sale. The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a tie, an open bidding shall be conducted between the highest bidders.

Payment: Payment of the winning bid shall be made either in cash or in manager’s check, in Philippine currency, within 5 days from notice.

5. Certificate of Sale is issued by clerk of court6. Registration of Sale7. Redemption

Right of Redemptiona. Mortgagee not a bank - right to defeat the right of the purchaser within 1 year from registration of the sale b. Mortgagee a bank

• Mortgagor a Natural Person - right to defeat the right of the purchaser within 1 year from registration of the sale

• Mortgagor a Juridical Person – right to defeat the right of the purchaser before the registration of the certificate of sale but not exceeding 90 days from the date of foreclosure, whichever is earlier;

Note: The period of redemption could be extended by the parties.

Amounta. Mortgagee not a bank– purchase price of the property + interest of 1% per monthb. Mortgagee a bank – original obligation + interest at the original rate stipulated in the mortgage contract + costs and expenses incurred from the sale of property

8. Possession. Gen. Rule: If the winning bidder already wants possession of the property, he may file a petition in RTC of the province or city where the property is situated to gain possession. He must give a bond equivalent to the rent for the use of the property for 12 months. The bond will answer for any loss to the mortgagor if it is later found that he was not in default in the mortgage obligation or that the conduct of the sale violated Act 3135. Upon approval of the bond, the court will issue a writ of possession in favor of the purchaser.

Exception: If mortgagee is a bank. The purchaser shall immediately have the right to take possession of the property upon confirmation of sale GBL). Note, however, that an alien mortgagee cannot take possession of the mortgaged property.

Proceeds of the Sale:1. Costs of the sale2. Principal obligation and interest3. Junior encumbrances4. Excess to mortgagor

Who may redeem:1. Debtor2. Successors in interest3. Any judicial creditor or judgment creditor of the debtor4. Any person having a junior encumbrance or lien on the property

Ex: Contracts: Loan, Extrajudicial Real Estate Mortgage, Chattel Mortgage, PledgeFrom the standpoint of the creditor, the ff should be the order:

1. Extrajudicial Real Estate Mortgage

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• If there’s a deficiency, and you filed a complaint for deficiency judgment, that’s equivalent to specific performance. Hence, the creditor cannot foreclose on the chattel mortgage and enforce the pledge. So the next step should be foreclosure of the chattel mortgage.

2. Chattel Mortgage3. Pledge (You choose pledge if the corporation is valuable. In such case, the creditor will have the opportunity to do a

secondary sale)

From the standpoint of the debtor• He must use the real property mortgaged to constitute another mortgage in order to pay the creditor

CHATTEL MORTGAGE

Chattel mortgage – an accessory contract by virtue of which personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. (n)

Requisites:

1. That they be constituted to secure the fulfillment of a principal obligation2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence

thereof, that they be legally authorized for the purpose (Art. 2085)4. That when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated

for the payment to the creditor (Art. 2087)5. The mortgage must be recorded in the Chattel Mortgage Registry (Art. 2140)

• If contract not recorded, then it would be a contract to mortgage (Art. 2092)• If there is delivery and it was registered, then it would be a pledge

Subject matter• Personal property

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

Gen. Rule: A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators.Exceptions:

1. If the possession of the property is delivered to and retained by the mortgagee2. If the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the

time of making the same3. If he resides without the Philippines, if the mortgage is recorded in the office of the register of deeds in the province in

which the property is situation (Sec. 4, Act. 1508)

Form1. Chattel mortgage signed by the person or persons executing the same2. In the presence of two witnesses and signed by them3. Mortgagor and mortgagee (or mortgagee’s agent or atty) shall subscribe to the affidavit of good faith4. Certificate of oath signed by the authority administering the same

• Corporation – director, trustee, cashier, treasurer, or manager thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage

• Partnership – by one member thereof

Affidavit of Good Faith(contents)

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1. Mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose

2. The same is a just and valid obligation, and one not entered into for the purpose of fraud• Not binding against third parties if without affidavit; becomes unregisterable• Will only give it a preferred status

Description of property• Such that would enable the parties to identify the same• If large cattle

1. brands, class, sex, age, knots known as remolinos, or cowlicks, or other marks of ownership2. number certificates of ownership3. place of issue of certificates of ownership

After-acquired properties v. After-incurred obligations

A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. (Sec. 7, par. 4)

• after-acquired properties: stipulation NOT void. The creditor may compel execution of another chattel mortgage.• after-incurred obligations: unlike pledge, real estate mortgage or antichresis, chattel mortgage can only cover obligations

existing at the time the mortgage is constituted; cannot cover future debtso because of the affidavit of good faith

When after-acquired properties and after-incurred obligations form part of the contract, those parts will be a contract to mortgage. The remedy is to assign a collateral agent who is authorized to register said contract to mortgage.

Gen. Rule: A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor.Exception: Inventory / stock-in-trade - Stores open to public for retain business where the goods are constantly sold and substituted with new stock. A description of inventory is sufficient.

Redemption of principal obligation – happens before the sale and after the condition of a chattel mortgage is broken:Who may redeem:

• Mortgagor• Person holding a subsequent mortgage• A subsequent attaching creditor

o An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it by the terms of this act

What to pay:• Amount due on such mortgage• Reasonable costs and expenses incurred by such breach of condition

When to redeem:• Within 30 days from the time the condition is broken

Extrajudicial Foreclosure

How Commenced: The application for the foreclosure of the mortgage should be filed with the Executive Judge through the Clerk of Court (who is also the Ex-Officio Sheriff). After receipt of the application, the Clerk of Court shall, among other duties, (1) raffle the application among Sheriffs, and (2) cause the posting of the notice of sale.Notice:

• at least 10 day’s notice of the time, place, and purpose of such sale• notice posted at two or more public places in municipality where the mortgagor resides or where the property is situated• notice in writing or sent by mail if persons to be notified does not reside in the municipality

o notify the mortgagor or person holding under him and the persons holding subsequent mortgages

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o directed to him or left at his abode if within the municipality or sent by mail if he does not reside in such municipality

Who May Foreclose:• Mortgagee• His executor• Administrator• Assign

When: after 30 days from the time the condition is broken

Where: • municipality where the mortgagor resides• where the property is situated

Return

Officer making the sale shall:1. make in writing a return of his doings

• articles sold• amount received for each article

2. file the return of his doings in the office of the register of deeds where the mortgage is recorded• within 30 days after the foreclosure sale

The return shall operate as a discharge of the lien thereon created by the mortgage.

Proceeds of the Sale1. costs and expenses of keeping and sale2. payment of the demand or obligation secured by such mortgage3. residue

• persons holding subsequent mortgages• mortgagor or person holding under him on demand

There is no right of redemption after the sale.

Rights acquired by the second mortgagee and subsequent purchaser• before payment of debt –right of redemption• after payment of debt – The judgment or attaching creditor who purchased the property at the execution sale could only

acquire the right of redemption

Art. 319, RPC• knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than

the one in which it was locatd t the time of the execution without the written consent of the mortgagee• selling or pledging personal property already mortgaged, or any part thereof, under the terms of the Chattel Mortgage

Law:1. without the consent of the mortgagee written on the back of the mortgage 2. without it being duly recorded in the Chattel Mortgage Register

ANTICHRESIS

By the contract of antichresis 1. the creditor acquires the right to receive the fruits 2. of an immovable 3. of his debtor, (or a third person)4. with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit.

(1881)

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What are the formal requisites in antichresis?

The amount of the principal and of the interest shall be specified in writing.

What is the effect if this is not complied with?

The contract of antichresis shall be void. (n)

How are the fruits valued?

The actual market value of the fruits at the time of the application thereof to the interest and principal shall be the measure of such application. (n)

Who bears the expenses?

1. Taxes – creditor, unless otherwise stipulated2. Necessary expenses for preservation and repair - creditor

The sums spent for the purposes stated in this article shall be deducted from the fruits. (1882)

When can the debtor reacquire the enjoyment of the immovable?

1. If he totally pays the creditor, or2. If the creditor wants to exempt himself from paying the aforementioned expenses, unless there is a stipulation to the

contrary.

What will happen in case the debtor defaulted in his payment?

The antichresis becomes subject to foreclosure, judicially or extrajudicially.

What are the other things which I should remember with respect to antichresis?

1. The contract of antichresis is indivisible (Art. 2089)2. The indivisibility of the antichresis is not affected by the fact that the debtors are not solidarily liable (Art. 2090)3. The contract of antichresis may secure all kinds of obligations – pure or conditional. (Art. 2091)

CONCURRENCE AND PREFERENCE OF CREDITS

What is the rule when a person has a debt? The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law.

When do you apply the rules on concurrence and preference of credit?

Requisites:1. There are two or more creditors2. With separate and distinct claims3. Against the same debtor4. Who has insufficient property

What is the procedure in the application of properties for the payment of debts?

1. First, you have to classify the credits.a. Concurrence – equal in time (pari passu) and prorated in amount

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b. Preference – paid in time; paid in full

2. As to preferred credits, there are two levels of preference:a. Special preferred credits -refers to specific property, movable or immovableb. Ordinary Preferred Credits – relates to all other properties of the debtor; free property

3. After the preferred credits, the next in application are the common credit.a. Common Credits – neither special preferred credits nor ordinary preferred credits; paid pro rata regardless of dates

What are the special preferred credits?

Art. 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;

(2) a. Claims arising from misappropriation, breach of trust, or malfeasance b. by public officials c. committed in the performance of their duties, d. on the movables, money or securities obtained by them;

(3) a. Claims for the unpaid price of movables sold, b. on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price;

• this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity;

• neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

(5) Credits for the making, repair, safekeeping or preservation of personal property, 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) a. Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses, b. until their delivery and for thirty days thereafter;

(10) a. Credits for lodging and supplies usually furnished to travellers by hotel keepers, b. on the movables belonging to the guest as long as such movables are in the hotel, c. but not for money loaned to the guests;

(11) a. Credits for seeds and expenses for cultivation and harvest advanced to the debtor, b. upon the fruits harvested;

(12) a. Credits for rent for one year,

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b. upon the personal property of the lessee existing on the immovable leased and on the fruits of the same, c. but not on money or instruments of credit;

(13) a. Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, b. 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 possessor, within thirty days from the unlawful seizure. (1922a)

Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right:

(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 architects, engineers and contractors, engaged in the construction, reconstruction 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, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works;

(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;

(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovable preserved or improved;

(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions, upon the property affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;

(9) Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance premium for two years. (1923a)

Application:1. Taxes shall first be satisfied.2. Then any order among the rest.

What are the ordinary preferred credits?

Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: (LaFILSSuCATQuaGP) (labor, funeral expenses, illness, labor, support, support, criminal offense, administration expenses, taxes (natl, provincial, municipal), quasi-delict, gift, public instrument, final judgment)

(1) Credits for services rendered the insolvent by employees, laborers, or household helpers

(2) a. Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, b. when approved by the court;

(3) Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have no property of their own;

(4)

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a. Compensation due the laborers or their dependents under laws providing for indemnity for damages b. in cases of labor accident, or illness resulting from the nature of the employment;

(5) a. Credits and advancements made to the debtor for support of himself or herself, and family, b. during the last year preceding the insolvency;

(6) a. Support during the insolvency proceedings, and b. for three months thereafter;

(7) a. Fines and civil indemnification b. arising from a criminal offense;

(8) a. Legal expenses, and expenses incurred in the administration of the insolvent's estate b. for the common interest of the creditors, c. when properly authorized and approved by the court;

(9) Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1;

(12) Damages for 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 instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)

Application:1. The order should be memorized.

ORDER OF PREFERENCE OF CREDITS

1. If only one is specially preferred – it excludes all others to the extent of the value of the personal property to which the preference refers.

2. If two or more specially preferred – taxes first then as to the rest, pro rata3. If there is an excess after payment of specially preferred credits, then it shall pertain to ordinary preferred credits.4. Ordinary preferred credits – with preference in accordance with the order stated; fully pay 1 then 2 and so on and so

forth.5. If there is an excess, then to common credit - credits not enumerated in 2244; pro rata

Application:

STEP 1: MAKE AN INVENTORY OF ASSETS

• List down all the assets of the debtor.

• Group these assets into two: the Preferred Group and the Free Property Group.Those assets with special preferred claims under 2241 and 2242 imposed upon them belong to the Preferred Group. Those without special preferred claims

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will constitute the debtor’s Free Property.

• Remember to take out property held by the debtor only in the capacity of trustee. He may have legal title to it, but the beneficial title and ownership actually belong to another person. Since the property does not belong to the debtor, they should not be included in the proceedings. The same goes for property of the AC of CPG, property held as lessee or usufructuary, etc.

STEP 2: GROUP THE CLAIMS

Make four groups – (1) special preferred credits on movables, (2) special preferred credits on immovables, (3) ordinary preferred credits, and (4) common credits.

STEP 3: SATISFY THE SPECIAL PREFERRED CLAIMS

First: Take the value of the specific movable/immovable upon which the preferred claim is imposed. Second: Pay the taxes due on the property.Third: Pay the preferred claim of the creditor.

Fourth: If, after paying the taxes and other special preferred claims, there is an excess, take the value of the excess and add it to the debtor’s Free Property.

Fifth: If the value of the specific property is not enough to satisfy the taxes and other special preferred claims, and there is a deficiency, follows these rules:

STEP 5: SATISFY THE ORDINARY PREFERRED CLAIMS

STEP 6: SATISFY THE COMMON CLAIMS

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