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    CONTRACTS OF SECURITY

    All the properties of the debtor whether personal orreal properties will also answer for his obligation.

    Receivable- 200,000CashLandBuildingsCars----------------------------

    2,000,000 200,000

    ----------------------------1,800,000

    Loan- 1,000,000+ 500,000

    --------------------1,500,000

    The assets which are supposed to answer for a loancan be decreased by

    a) failure to collect a receivable.b) fraudulent alienation like I will make it appear

    that I am donating this land to you. In order forme so that my creditors cannot go after myproperties anymore. Total asset can also bedecreased by:

    c) non-fraudulent alienation like selling the car,you get cash but it fastly dissipates, so assets

    decreased. Or,d) increase in the obligation, the possibility of all

    the obligation being paid would be lessenedbecause the assets also did not increase.

    If you are the creditor what would you do? If thedebtor cannot recover/collect the receivable, if you arethe creditor, you can exercise subrogatory action. Incase of fraudulent alienation, you can sue forrescission. If non-fraudulent, you cannot stop thedebtor from disposing his property. You cannot alsoprevent him from incurring further loan. You requireyour debtor to provide a security.

    2 kinds of security undertaking:

    1. Personal security undertaking- it is the personhimself who undertakes to pay the obligation ifthe principal debtor cannot pay or does notpay. This is called either guaranty orsuretyship. That person who undertakes to payunder a suretyship is called a surety. Theperson who undertakes to pay an obligation asan ordinary guarantor is called guarantor but ifsolidary guarantor, the undertaking issuretyship and you are called a surety.

    2. Real security undertaking- this does not mean

    real property only. Property is subjected assecurity for the fulfillment of the obligation, notthe person himself who promises to pay if theprincipal debtor cannot pay or does not pay butproperty is subjected as security. For example,I will obtain a loan from you and I willconstitute a mortgage. If there is default, thereis foreclosure of mortgage and the proceedswill cover payment of the obligation. Examplesare pledge, real and chattel mortgage,antichresis (you deliver the fruits to creditor aspayment for interest and the excess applies tothe principal obligation).

    Personal security contracts

    Contract of guaranty

    You have a principal debtor and principalcontract

    It is an accessory contract. The personundertakes to pay the obligation of theprincipal debtor in case the debtorcannot pay. If this guarantor undertakesto be bound solidarily with the principaldebtor, it is already called suretyship, heis bound as solidary debtor. In solidaryobligation, all for one, one for all.Creditors can go after him alone. He canbe sued independently without suingfirst the debtor. (Co-maker is actuallysolidary debtor or co-debtor or surety as

    far as the maker is concerned; principaldebtor as far as creditor is concerned).

    Pacific Banking Corp vs. IACSpouses Roberto and Celia Regala applied for a creditcard with the Pacific Banking Corporation but thehusband signed a Guarantors Undertaking but whathe understood to be bound was that he agreed to bebound jointly and severally with his wife. When he wassued for payment of the unpaid credit card obligationof his wife, he said he is only bound as guaranty. Wifedid not file answer and was declared in default. Regalacontended that you cannot prove insolvency of thewife because she did not answer. SC said the liability isnot that of a guarantor even if what is signed wasdenominated as guarantors undertaking because heundertook to be bound jointly and severally. Dont relyon the denomination you are signing, read the fineprint.

    E. Zobel Inc. vs CASpouses Labella applied for a loan secured by a chattelmortgage over a vessel they were buying plus therewas a Continuing Guaranty undertaking issued by E.Zobel but the undertaking contains that it obligatesyou as surety. There was a chattel mortgage which thebank failed to register, so they cannot foreclose.Under the law on guaranty, the guarantor who paid issubrogated to the rights of creditor. If this were

    guaranty, and if E. Zobel paid, he would have beensubrogated to the rights of the bank as mortgagee andit would have been entitled to foreclose the mortgage.But since the bank cannot foreclose the mortgagebecause of its own fault, the guarantor cannot alsoforeclose. The law says that if the guarantor cannot besubrogated to the rights of the mortgagee, then theguaranty is invalid. SC said well, youre right but thatdoes not apply to surety. That applies only toguarantors. SC said bound as surety.

    Machetti vs. Hospicio de San JoseSC said notwithstanding the use of the wordsguaranty or guarantee, circumstances may beshown to convert the contract into suretyship.

    GUARANTY A contract whereby a third person other

    than the debtor (debtor cannot byhimself guaranty) undertakes to pay incase the principal debtor cannot pay.

    It is an accessory contract orundertaking; there must be a principalundertaking (you cannot securesomething that does not exist)

    Security for fulfillment of a principalobligation. There must be a validobligation even if voidable, conditional,

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    unenforceable- all these can be securedby guaranty.

    It is subsidiary obligation- guarantor isliable only if the principal debtor cannot

    pay

    If guarantor binds himself solidarily, he isnot bound subsidiarily anymore butprincipally.

    Characteristics:A. Subsidiary- liable only if principal debtor cannot

    pay

    Castellvi de Higgins vs. SellnerSC said a surety and a guarantor are alike inthat each promises to answer for the debt ofanother A surety and a guarantor are unlike-surety admits liability as a regular party to the

    principal undertaking; guarantor- regular partyto an independent undertaking from theobligation of the principal debtor. Surety-charged as original promissor; guarantor-merely collateral. Surety- obligation is primary;guarantor- only secondary

    Piczon vs. PiczonIf you sign an undertaking for payment of acorporate obligation and you sign in thecapacity of the president of the corporation,the principal stockholder of the corporation, itdoes not make you a surety even if president.SC said mere signing as president and principalstockholder of corporation does not bind theperson as surety. Merely bound as guarantor,go against corporation first.

    Palmares vs. CAEven if a person binds himself with theprincipal debtor as surety, his character asguarantor is not lost in the sense that he canstill recover from the principal debtor. Suretyreally is not the principal debtor, he only bindshimself solidarily; he can still recover but hemust pay first. He cannot insist that thecreditors go to the principal debtors first beforehe can be held liable. He can be suedindependently. He can recover otherwise

    unjust enrichment.Solidary guarantor vs. solidary debtor (table in outline)

    B. ConsensualAs to perfection- guaranty is a consensualcontract. It is covered by the Statute ofFrauds, consensual but cannot be enforced (inwriting to be enforceable) but perfectly valid.It is a consensual contract but must be inwriting to be enforced or must be covered bythe statute of frauds.

    C. Gratuitous or OnerousA guarantee (just like deposit) can be

    gratuitous or onerous.

    Severino vs. Severino They had a dispute over the estate of thedeceased father who was survived by the wife.Another lady claiming to be recognized naturaldaughter. The wife and this woman filed acase for their shares in the estate against theother children of the deceased person. Inorder to put an end, one of the sons decided totake over the property of the estate andpromised to pay the surviving wife and thiswoman total sum of 100,000. At the time of

    the compromise agreement, he paid 40,000 sothere was a remaining balance of 60,000. Thisundertaking by the son was secured by thepromise of another person. He guaranteed the

    payment. The son did not pay. So the womanwent after the guarantor. The guarantor saidthat he was not liable because there was noconsideration. SC said guaranty can begratuitous or onerous. There need not be avaluable consideration received by theguarantor for his promise because whatsupports the contract of guaranty is the sameconsideration that supports the principalobligation. Principal obligation was the promiseof the son to pay the wife and half-sister, theconsideration was the dropping of the case.

    Kinds of Guaranty

    A. By its origina. Conventional- by agreement of the partiesb. Legal- by substantive or procedural lawc. Judicial- required by court order

    A. By extenta. Indefinite or unlimited or simple- covers

    principal obligation and accessory

    (ObliCon) If a third person pays without theknowledge or consent of debtor, suchperson can recover but only to the extentthat the principal debtor was benefited andhe is not subrogated the rights of thecreditor (same in credit). A third personcan secure the principal obligation of the

    debtor without the consent, even againstthe will of the principal debtor. But he canrecover only the extent that the debtor isbenefited and he cannot also exercisesubrogatory action.

    If on top of the guaranty, the obligation issecured by a mortgage and he pays thecreditor, he is not substituted as the newmortgagee, he cannot recover from thedebtor, he cannot foreclose the mortgagewhich was previously constituted in favorof the creditor.

    De Guzman vs. SantosA partnership was sued for sum of money.There was default, a writ of preliminaryattachment was issued and properties ofthe individual partners were beingattached. So to discharge the attachment,a counter-bond was put up by the partnersguaranteed by two persons as guarantors.After the case, the partnership was orderedto pay but they did not pay so theguarantors paid. Then one of theguarantors tried to collect from one of thepartners for reimbursement but the partnersaid that he did not give his consent forhim to act as guarantor so he said he is not

    liable.SC said he is liable to reimburse theguarantor to the extent that he wasbenefited. The partner cannot escapeliability by invoking the defense that he didnot give his consent.

    b. Limited

    A. By the person guaranteedGuarantee proper- the one discussedSub-guarantee- another person secures theundertaking of the guarantor; indemnityagreement- undertaking that secures the

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    guarantor in the sense that he can go after theindemnity contract to reimburse himself.

    B. By the liability of the guarantor

    a. Normal/ ordinary- one where the guarantorundertakes to pay in case the principaldebtor cannot pay

    b. Solidary- this is suretyship- jointly andseverally- undertaking is as a surety. Or Ihereby bind myself as surety

    Guarantor binds himself solidarily withthe debtor. By his undertaking to bebound solidarily, then he is boundprimarily, as an original promissor.

    I hereby guaranty- guarantor

    Machetti vs. Hospicio de San JoseMachetti was a contractor. He entered into acontract with Hospicio de San Jose. To securefulfillment of Machettis contract orundertaking with Hospicio de San Jose, he wasrequired to put up a performance bond.Originally, it was Machetti who filed a caseagainst Hospicio de San Jose for the unpaidbalance of the contract price. But there was acounter-claim filed by Hospicio claiming thatthere were deviations made by Machetti fromthe original plan therefore, damage was made.In the meantime, Machetti was declaredinsolvent through a petition filed by hiscreditors. And so when he was declared

    insolvent, all actions against him weredropped. All claims were filed in thatinsolvency proceedings. In the case that hefiled against Hospicio where there was acounter-claim, he was also dropped as a party-defendant. What Hospicio did was to ask thecourt for leave for permission to file a counter-note/third-party claim against Fidelity. Thecourt allowed the filing of the third-party claimagainst Fidelity ince Machetti was alreadydropped as principal debtor. The lower courtrendered judgment against Fidelity. In effect,it was holding Fidelity liable as surety.Guarantor is only liable when debtor cannotpay. Here, it cannot be proven that the debtor

    cannot pay because he was dropped as aparty-defendant. Fidelity appealed. Can it(Fidelity) be considered a surety such that itcan be liable even without going after theprincipal debtor? SC said no, the undertaking ismerely that of guarantor. Even if a contract isdenominated as a Guarantors Undertaking(guaranyty/guarantee), circumstances may beshown such that the undertaking is really thatof suretyship and not of guaranty but thesecircumstances are not present in the instantcase. If you undertake to secure the fulfillmentof the obligation as a guarantor, then you canonly be held liable if it can be proven that the

    principal debtor cannot pay and the best proofthat you cannot collect from principal debtor isthe return of the writ of execution unsatisfied.Here there can be no writ of execution issuedagainst Machetti because he was dropped asdefendant. Therefore, there is no way ofproving that he cannot pay. Can Hospiciocollect or it will wait until Machetti is no longerinsolvent? (cannot go after Fidelity becauseFidelity is a guarantor, not a surety) File theclaim in the insolvency proceedings. Hospiciodoes not want to file a claim because it will joinwith the other creditors, it will not be assured

    of recovering the full amount of its claim, onlya fraction of the amount claimed unless theyare preferred creditors (maybe this is thereason Hospicio filed against Fidelity)

    Ong vs. PCIBWhat if the undertaking is that of a surety andyou have a corporation which is a distressedcorporation (declared to be in a state ofsuspension of payment because it has a filed apetition for rehabilitation with the specialcommercial court)? And the court granted itspetition to be declared in a state of suspensionof payment? And so a stay order is issued bythe court. No monetary actions against thecorporation shall proceed. All actions formonetary claims only are suspended. In thesame manner that the case against Machetti

    was dropped. But here there is no declarationof insolvency. The corporation is not insolvent,it is merely a distressed corporation in thesense that it is not liquid. Issue of liquidity-cannot meet your current obligation with yourcurrent assets (assets may be in the form ofreal property that you cannot dispose of whenthe obligations are maturing). Suspension ofpayment- all actions suspended. Can thecreditor go after the surety? Creditor canimmediately go after him even without provingthat it cannot collect from the corporationbecause of the nature of the undertakingwhere he bound himself solidarily as an originalpromissor with the debtor corporation. What if

    the Ong spouses were guarantors? Would thesuit against them by the creditor prosper if thedebtor corporation is placed under a state ofsuspension of payment? NO, you have to provethat you cannot collect from the debtor beforeyou can hold the guarantor liable. Theundertaking of the surety is different- similar tothat of solidary debtor- can go after any of thesolidary debtors even without going after theother solidary debtor. You can go after the onesolidary debtor for the whole amount of theobligation even if one of the solidary debtorsbecome insolvent. If one solidary debtor paysand another becomes insolvent, the share of

    the insolvent debtors is shared by all thesolvent solidary debtors among themselves.Creditor can collect the whole amount from thesolidary debtors. Same here, the corporation isdeclared in a state of suspension of payment,the creditor cannot go after the distressedcorporation, but the creditor can go after thesurety. There is a higher risk assumed by asurety compared to a guarantor. If theguarantors bound themselves jointly andseverally with the principal debtor, then theguarantors are bound as sureties and not justas guarantors, even if the undertaking isdenominated as guarantors undertaking orguaranty undertaking.

    International Finance Corporation vs. ImperialTextile MillsImperial signed a Guarantors Undertaking.The tenor of the undertaking is that it bounditself together with another corporationsolidarily with the principal debtor. When acollection case was filed against the principaldebtor and against Imperial Textile Mills, thelower court dropped the action against Imperialbecause only the principal debtor is liable. CAsaid Imperial Textile is liable only if theprincipal debtor cannot pay, liable as

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    guarantor. SC said the undertaking is that of asurety not just a guarantor and therefore,solidarily liable with principal debtor, not justsubsidiarily. The judgment creditor can just go

    after any of the parties, principal debtors,Imperial Textile or the other surety for thesatisfaction of the entire amount of the judgment credit. Not just for a proportionateshare in the judgment credit but the entireamount because of the solidary undertaking.

    Elements of GuarantyA. Parties

    What are the qualifications before a person canqualify as a guarantor?

    1. He must be legally capacitated to enter

    into a contract.

    Consequence if he is not legallycapacitated to enter into a contract like if aminor- voidable but still valid. The minorcan invoke his minority in order to avoidpaying his undertaking. This defeats thepurpose of the security undertaking.

    Can a married woman be a guarantor ofanother persons obligation? Yes, as toexclusive property. Now with the absolutecommunity, can use the exclusive propertyacquired through gratuitous title likeinheritance or donation but cannot bind the

    absolute community property; if marriedprior to the effectivity of the Family Code,she cannot bind the conjugal partnership.

    2. He must possess sufficient properties toanswer for the obligation. Since this is apersonal undertaking to pay the obligationof another person, then he must have themeans to pay the obligation. (like if yourincome is only 3,000 a month and you donot have sufficient properties, you cannotqualify as a guarantor)

    3. The guarantor must possess integrity.

    Integrity- he must possess honesty. Goodmoral character.

    These qualifications must be possessed by theguarantor at the time of the perfection of thecontract of security.

    What if later on, the guarantor becomesinsolvent? Guarantor is convicted of a crimeinvolving dishonesty? What is the remedy ofthe creditor?

    Require the debtor to put up anotherguarantor. If the debtor fails to produceanother guarantor, the remedy of thecreditor is to demand for the fulfillmentof the obligation now even if not yet dueand demandable- debtor loses the rightto enjoy the period granted to him underthe contract (article 1198)

    Same rule applies also if the guarantor isconvicted of a crime involvingdishonesty

    If the guarantor is chosen by the creditorhimself, the guaranty is constituted to thebenefit of the creditor. It is to assure thecreditor that he can collect or that obligation

    on his favor will be fulfilled. If he is the onewho chooses the guarantor, then he can waivethese qualifications.

    Since this is a contractual guaranty, then theremust be the essential requisites of a contract:

    1. Consent- requires the consent of theguarantor and the creditor. How about thedebtor? Apply similar provisions of Obliconthat a third person can pay over theobjection, against the will of the debtor.The consent of the debtor is not required inorder to perfect the guaranty. What isrequired is the consent of the creditor.Must the consent be expressly given by thecreditor? NO.

    2. Object3. consideration

    Texas Co. vs. AlonzoThere is an agency agreement between TexasCo (Phils) and Leonora Bantug. In that agencyagreement, there was this provision that thecompany may require additional securities insuch individual, firm, bond as shall besatisfactory to the company. Note that thecompany may demand for additional securities.At that time that the agency agreement wassigned, a security undertaking was alreadysigned by Alonzo and upon the termination ofthe agency contract, Bantug still owed thecompany a certain sum which Bantug failed topay. Texas wanted to hold Alonzo liable. Thedefense of Alonzo was that his offer of securitywas not accepted invoking the provision in thesaid agency agreement for additional securityas shall be satisfactory to the company. Howwill you know if satisfactory? If it has conveyedacceptance to the offer of security. But itrefers to additional security. The undertakingwas executed simultaneously with theexecution of the agency agreement.SC agreedwith Alonzo saying that the offer of securitymust be accepted, must be shown to besatisfactory to the company. Proven to besatisfactory by conveying acceptance. Alonzodid not receive any notice of acceptance by

    Texas Company of is offer then he is not boundas surety. There must be express acceptanceby the creditor (only if it is required).Acceptance has to be expressly made if it is arequisite before the surety undertakingbecomes effective. Security put up by Alonzowas not additional security, it was constitutedsimultaneous with the agency agreement. Theprovision should not apply here. (dissentingopinion)

    In our previous discussion a security undertaking such

    as guaranty or suretyship is naturally gratuitous in the

    sense that it can be constituted without consideration

    from the debtor to the guarantor.

    Now we have a compensated guaranty, the debtor

    undertakes to pay premium to the guarantor. A

    bonding company executing a surety bond has an

    underlying agreement with the principal debtor to pay

    the premium. Because when you ask a bonding

    company to act as surety it is not for free. Although it

    is better if the client would put up the cash bond

    because premium could still be returned. Unlike in

    surety bond where the premium would go to the

    bonding company.

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    Phil. Pryce Assurance Corp. v. CA

    Can a creditor-seller go after the bonding company

    even if the bonding company wasnt able to collect thepremium due? Yes. Here, the bonding company tried to

    invoke the provision in the insurance code where it

    says insurance bond cannot be binding if the insured

    has not paid the premium unless the bond is accepted

    by the creditor. Here the seller accepted the surety

    bond. It released the merchandise to the buyer. SC

    said you cannot refuse to pay your undertaking. Even if

    you were not paid because the premium paid to you in

    check bounced.

    Subject matter and conditions:

    Q: What debts can be guaranteed?

    A: Debts that are valid. Remember that a surety or aguarantee undertaking is an accessory undertaking to

    the principal undertaking. So there must be a valid

    undertaking.

    Municipality of Gasan v. Marasigan

    SC said you cannot hold sureties liable for a contract

    they undertook to secure which was voided/ annulled

    by the municipality. Since the contract was annulled

    the security is likewise annulled. An accessory

    undertaking is dependent on the principal undertaking

    on the validity of the contract. When it was revived it

    did not automatically revive the undertaking. There

    must be a new undertaking secured by them. Luna and

    sevilla are not liable since it there was no valid

    obligation.

    Q: Can voidable obligation, unenforceable obligation,

    rescissible obligation be secured by guaranty or

    suretyship?

    A:Yes, because these are valid contract although they

    are defective

    Q: Can future debts be secured?

    A: Yes, but the obligation of the guarantor or surety

    takes effect or becomes enforeceable only when thedebt is liquidated.

    Q: Like there is an undertaking now, a guaranty

    undertaking to secure a payment of a future obligation

    which is obtained by the debtor. Can the creditor hold

    the guarantor liable now?

    A: No, because there is no obligation guaranteed yet

    or secured yet. There is no obligation which is

    liquidated. Not yet incurred ang principal obligation.

    Q: When is the guarantor liable?

    A: When the debts are liquidated.

    Q: When is the debts considered liquidated?

    A: When the amount is known.

    Selegna Management and Devt Corp. v. UCPBA debt is liquidated when the amount is known or isdeterminable by inspection of the terms and conditionsof the relevant promissory notes and relateddocumentation. Failure to furnish a debtor a detailedstatement of account does not ipso facto result in anunliquidated obligation.

    RCBC v. ArroCan the creditor hold the surety liable for debtsincurred by the principal debtor after the execution ofa comprehensive surety agreement yes because the

    undertaking was to secure any existing indebtedness,and/or to induce the bank at anytime or from time totime thereafter, to make loans or advances, or toextend credit in any other matter, upon which theborrower is or may become liable. The liability takeeffect only upon the debt becoming liquidated.

    Q: What is a continuing guaranty?A: One which covers all transactions including thosearising in the future which are within the description orcontemplation of the contract of guaranty untilexpiration or termination or revocation of suchagreement.

    Q: Usually a guaranty is constituted to securefulfillment of a present or future debt. Can it beconstituted to secure a past obligation?A:Yes. For as long as the obligation is not yet fulfilled.Previously acquired obligation.

    Willex Plastic Industries Corp. v. CAAlthough a contract of suretyship is ordinarily not to beconstrued as retrospective, in the end the intention ofthe parties as revealed by the evidence is controlling.

    Qualifications of a guarantor:1. must be legally incapacitated2. must have sufficient property to

    answer for the debt guaranteed

    3. must have consent of the debtori. if chosen by the debtor

    consent not required

    Form

    Q: In what forms must the guaranty be?

    A: For validity, the undertaking must be in writing for it

    to be enforceable, but the undertaking does not to be

    in writing to be valid.

    Macondray & Co., Inc. vs. Pinon

    There is no particular form required in order for a

    contract of guaranty to be valid. In fact a verbalcontract can be entered into by the parties. What is

    required is that it must be in writing for it to be

    enforceable.

    Wise & Co. v. Tanglao

    If a mortgage is executed over a certain part of a land,

    can the creditor foreclose the parts not mortgaged?

    No, only the part where a mortgage was executed. A

    guaranty and suretyship must be express and cannot

    be presumed.

    Solon v. Solon

    The terms of a contract of suretyship determine the

    suretys liability and cannot extend to more than what

    is stipulated therein.

    EFFECTS OF GUARANTY

    Effect of guaranty between creditor and

    guarantor.

    Q: What is the obligation of the creditor to the

    guarantor? Or is the creditor at all obligated to the

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    guarantor? Is notification an obligation of the creditor?

    Or an exercise of a right by the creditor?

    A: Payment of premium. If it is the creditor who

    proposes or undertakes to pay the compensation of theguarantor then he pays the compensation of the

    guarantor BUT in most cases it is the debtor who

    undertakes to pay the premium because after all it is

    the debtor whose obligation is secured by the

    guarantor.

    The guarantors obligation is to perform the principal

    obligation in the event that the principal debtor is

    unable to perform.

    Q: Can the guarantor bind himself for more than the

    principal obligation?

    A: He can bind himself for less but not for more.

    Q: What if he binds himself for more? Is it valid?

    A:Yes. But the amount will be reduced to the amount

    of the obligation.

    Q: Are there instances where the guarantor is liable for

    more than the principal obligation?

    A: Yes, in the case of:

    Gen Insurance and Surety Corp. v. Republic

    The undertaking of central is to comply with all the

    laws pertaining to the administration and management

    of its school including statement of salaries of teachers

    if it violated the rules and regulations it is liable to pay

    the government 10,000. The guaranty is penal in

    nature. Not for the payment of the salary but payment

    for the violation. It is like a performance bond.

    Q: When is isurety liable for interest?

    A:

    PNB v. Luzon surety company and commonwealth

    Upon default of the debtor the creditor demands from

    the guarantor and the guarantor fails to pay. Theguarantor can be held liable from the time of demand

    to pay interest for the unpaid amount. Even if the

    obligation of the guarantor is only ten thousand. If he is

    adjudged to be liable for interest for default of

    performance of undertaking.

    Q: When does the guarantor pay?

    A: Upon maturity of the obligation.

    Q: But can the guarantor pay BEFORE the maturity of

    the obligation?

    A:Yes, but he cannot yet ask for indemnity from the

    principal debtor because the obligation is not yet dueand demandable. He pays it at his own risk.

    Q: Why is it the duty of the guarantor to notify the

    debtor of the payment?

    A: Because the debtor may raise the ??? 1110 against

    him the guarantor which he can raise against the

    creditor like prior payment, lack or failure of

    consideration, simulation of contracts, prescription,

    statute of frauds.

    Another reason is that if the debtor pays not knowing

    that the guarantor had paid, then the guarantor cannot

    recover from the debtor.

    BUT if failure to notify is because of a fortuitous event,and the guaranty is gratuitous, and the creditor

    become insolvent. He can recover because it is

    gratuitous guaranty. ????

    The guarantor can be asked to be released from the

    guaranty if the debtor becomes insolvent.

    Privileges of the guarantor

    Benefit of exhaustion

    Q: What is the right to exhaustion?

    A: Right of the guarantor to demand that the creditorfirst exhaust the properties of the debtor before he can

    be made liable. Because the law says that guarantor

    cannot be held liable unless the creditor exhaust first

    the properties of the debtor and exercises all legal

    remedies against the debtor. Going after a guarantor

    would be a remedy of last recourse.

    A: According to paras, it is the duty of the creditor to

    exhaust the property of the debtor and to enforce all

    legal remedies against the debtor to prove that the

    debtor is still unable to pay.

    If the debtor is not notified and he is prejudiced

    because of the lack of notice he cannot be made to pay

    unless there is a waiver on the part of the guarantor.

    According to Civil code the suit must be filed against

    the creditor alone and then the former must ask the

    court to notify the guarantor, but you cannot just do

    that. Because you have to amend the complaint

    inorder to implead another person (Civ Pro) the

    practice is to implead both. If impleaded at the same

    time, and judgment is rendered against the debtor

    then the judgment would oftentimes provide for

    exhaustion of property of the debtor first over the

    guarantor.

    The guarantor must raise this defense. The right of

    exhaustion when demand is made upon him to pay but

    not enough to raise the benefit of exhaustion he must

    point to the creditor the available properties of the

    debtor.

    Q: What do you mean available properties of the

    debtor?

    A: Properties not exempt from execution like the

    professional library. Family home is exempted.

    Towers assurance corp. v. Ororama SupermarketEven if the surety cannot invoke the benefit of

    exhaustion it still must be notified and be heard before

    it can be held liable. His liability is not automatic by the

    mere fact that a favorable judgment is obtained by a

    creditor against a principal debtor. Because the

    undertaking of the surety bond was put up in order to

    discharge the writ of preliminary attachment. Towers

    assurance was never impleaded, summoned or notified

    that it was being held liable for its undertaking. Due

    process: Right to be heard.

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    FInman General Assurance Corp. v. Salik

    Finman was impleaded and notified as a party from the

    beginning. Only that they did not file an answer anddid not participate with the proceedings of the case. SC

    held that there is no need to notify the surety if its

    undertaking is closely intimately related to the

    undertaking of the principal.

    Adviento: I dont think it is a correct reasoning of the

    court considering the fact that he was really impleaded

    and it was afforded the right to be heard only he chose

    not to. Between Towers which was an earlier

    pronouncement and Finman which was a later

    pronouncement, personally I would vote for Towers.

    Baylon v. CA GR no. 109901 Aug 17, 1999A creditor filed a case against the debtor and

    guarantor, but the debtor was not served with

    summons. Nevertheless the case proceeded against

    the guarantor. And the trial court rendered judgment

    against the guarantor. Can the guarantor be held liable

    when there is no opportunity to exhaust the properties

    of the debtor? There was no judgment rendered

    against the debtor. And here the guarantor did not

    waive his right of exhaustion the guarantor even raised

    that defense inability to invoke the benefit of

    exhaustion. The court nullified the judgment of the trial

    court. Court held that it is axiomatic that the liability of

    the guarantor is only subsidiary. All the properties of

    the principal debtor must first be exhausted before his

    own is levied upon. Thus, the creditor may hold the

    guarantor liable only after judgment has been obtained

    against the principal debtor and the latter is unable to

    pay, "for obviously the 'exhaustion of the principal's

    property' the benefit of which the guarantor claims

    cannot even begin to take place before judgment

    has been obtained." This rule is embodied in article

    2062 of the Civil Code which provides that the action

    brought by the creditor must be filed against the

    principal debtor alone, except in some instances when

    the action may be brought against both the debtor andthe principal debtor

    Q: Now if the guarantor had pointed out to the creditor

    the available properties of the debtor and the creditor

    FAILS to exhaust the properties and the debtor

    becomes insolvent can the guarantor be held liable for

    the principal amount because of the failure of the

    creditor to exhaust the properties of the debtor?

    A:The guarantor cannot be liable for the value of the

    property. So the value can be deducted from the total

    amount of obligation.

    NB: the benefit of exhaustion is a RIGHT. It can bewaived.

    JN Devt Corp. v. Phil. Export and Foreign Loan

    Guarantee Corp.

    JN obtained a loan from TRB, which was secured by Phil

    Guarantee. When the loan matured JN did not pay and

    TRB notified Guarantee. Guarantor paid TRB, so He

    asked for reimbursement from JN but the debtor did

    not pay. So the guarantor had no choice but to sue in

    court to recover the amount that he had paid. The Trial

    court faulted the guarantor for paying and not having

    the properties of the debtor exhausted. SC held that

    exhaustion is a right and therefore can be waived.

    What better way to waive than by paying withoutdemanding that the properties of the debtor be first

    exhausted which Phil Guarantee did. But this cannot be

    invoked by the debtor in order to escape

    reimbursement of the guarantor.

    Q: When is the benefit of exhaustion not available?

    A:

    1. Waiver

    2. If the guarantor bound himself solidarily3. If the debtor is insolvent4. If the debtor cannot be sued in the Philippines

    or absconds

    5. if it may be presumed that the execution wouldnot result in satisfaction of judgment

    The act of phil guarantee paying was not an express

    renunciation of the benefit of exhaustion. An example

    of an express waiver of the benefit of exhaustion is the

    provision in the willex case. In the willex case they

    were invoking the benefit of exhaustion, but the court

    held that there was an express waiver there of the

    exhaustion of properties. You cannot invoke that

    benefit anymore.

    In the JN case, there may not be a stipulation in the

    guaranty undertaking but the act of phil guaranteepaying the obli w/o demanding first the exhaustion of

    the properties of the debtor first is also a waiver on his

    part although there is no express stipulation on the

    contract.

    Benefit of Division

    This happens if there are 2 or more guarantors

    securing the same obligation. Similar to the general

    rules of ObliCon. Mere plurality of debtor results in joint

    obligation not solidary. Because there is no

    presumption of solidarity. Solidary only if there is

    agreement between the parties, provided by law andnature of the obligation requires solidarity.

    Same general rule, mere plurality of debtor results in

    joint obligation not solidary. Therefore if you have 3

    guarantors if no stipulation to the amount presumption

    is liable in equal shares. So the creditor can only go

    after each guarantor for their respective amount.

    Unless solidarity is agreed by the guarantors among

    themselves for the payment of obligation. In that case

    the creditor may go to any of the guarantors for the full

    amount. Solidarity among the guarantors does not

    mean they bound themselves solidarily with the

    principal debtor, because that is suretyship already.

    When is the benefit not available, same as benefit of

    exhaustion.

    1. Waiver on part of guarantor - if one guarantorpays for the full amount he can no longer askto be reimbursed from his fellow guarantors, hemust recover from the debtor)

    2. If bound themselves with the principal debtorNOT among themselves

    3. If the debtor is insolvent

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    Q: What is the effect if 2059 is present?

    A: Creditor can demand for full payment of the entire

    obligation to any of the co-guarantors.

    Q: When must the guarantor invoke it?

    A: Same as the benefit of exhaustion, when demand is

    made upon him to pay. Judicial again applies only if the

    several guarantors secure the same obligation. It does

    not apply if several guarantors secure different

    obligations.

    Mira Hermanos v. Manila Tabacconists

    These two guarantors secured two different obligations

    3,000 and 2,000 respectively. Since the balance of

    manila tobacconists is only 2000 pesos it is still

    covered by the FIRST security. No benefit of division

    because they secured two different obligations.

    Defenses of the guarantor

    Q: What defenses is available to the guarantor if

    demand is made upon him by the creditor?

    A:The guarantor can raise the defense that can be

    raised by the debtor except those personal defenses.

    Q: What are these personal defenses?

    A: Vitiated consent cannot be invoked by the

    guarantor but payment, remission or condonation,

    compensation between the creditor and debtor.

    Q: Can it be invoked by the guarantor? If all the

    requisites for legal compensation between the creditor

    and debtor are present can the guarantor invoke it?

    A: Under the law legal compensation takes place by

    operation of law without the knowledge of the parties

    as long as all the elements are present. So the

    guarantor can invoke that.

    Q: What if there is the element of legal compensation

    is present among the guarantor and creditor can the

    guarantor invoke that?

    A:YES it can. But the debtor cannot invoke that.

    Q: If the guarantor invoke legal compensation can he

    seek reimbursement from the principal debtor?

    A:Yes, because it was his liability that was

    extinguished not the debtors. It benefited the debtor.

    The guarantor can also invoke novation of the contract.

    Extension of time granted by the creditor without his

    consent.

    EFFECTS OF GUARANTY BETWEEN THE DEBTOR

    AND GUARANTOR

    Rights before payment by the guarantor

    2071 He can demand to be relieved from the guaranty

    even before he pays the principal obligation. The law

    allows him to be relieved from his obligation even

    before paying or to demand that his undertaking be

    secured by the debtor in case of insolvency.

    Q: In what instances can he ask to be relieved from the

    guaranty? (part of the guarantor)

    A:

    When sued for payment thats just anexercise of a creditors right under guarantyundertaking but the law gives the guarantorthe right to proceed against the debtor to berelieved from the guaranty.

    In case of insolvency of the debtor higher riskthat he will be made liable for his undertaking

    When the debtor has bound himself to releasethe guarantor after a certain period and thatperiod has arrived. So the guarantor candemand that he be released from theundertaking.

    After ten years has passed when there is nostipulation of period for the fulfillment of theprincipal obligation, UNLESS the principalobligation cannot be performed w/in ten years.Like loans payable for 20 years like housing.

    If there is reasonable ground to believe thatthe debtor will abscond. No benefit ofexhaustion. So higher risk that the guarantorwill be held liable to pay the obligation. If thereis reasonable ground to believe that the debtorwill abscond the probability of the guarantorrecovering is minimum also.

    Imminent danger of insolvency.NOTE: MERE imminent danger not ACTUAL

    insolvency affords the guarantor the right to be

    relieved from the guaranty.

    Q: But this will prejudice the creditor right? Manresa

    said that it should not prejudice the creditor. But how

    will we reconcile?A: Go and meet halfway demand that the debtor put

    up security that way the creditor will not be prejudiced.

    And that is allowed in 2071. AKA Indemnity

    agreement.

    Benefit of exhaustion and division cannot be invoked

    by the surety because the benefit of exhaustion is not

    available if the guarantor bound himself solidarily with

    the principal debtor. Binding themselves solidarily

    (between guarantors) is a different thing.

    Q: Can a surety ask to be released from the suretyship

    undertaking in 2071? Or is it only the guarantor who

    can invoke the right just like the benefit of exhaustion

    and division. Is it available to the surety?

    A:Yes.

    Manila Surety & Fidelity Co. v. Batu Construction Co.

    The right of the guarantor to proceed against the

    principal debtor even before having paid by obtaining a

    release from guaranty or demanding a security which

    will protect him from any proceedings from the creditor

    and from the danger of insolvency of the debtor

    applies also to surety. Even if bound solidarily. If any of

    the instances in 2071 is present.

    Rights of the guarantor after paymeent

    To be reimbursed! TIDE! Total amount paid plus

    interest. Damages, rarely is the guarantor awarded

    this but of course he is also entitled to it. But you

    cannot demand this as a matter of right, it is

    discretionary upon the court unlike interest.

    Expenses, especially when guarantor is compelled to

    litigate in order to recover from the principal debtor.

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    Q: When is he entitled to interest?

    A: From the time he demanded from the debtor that

    he be reimbursed. Guarantor is entitled to interest

    from time of demand.

    The guarantor also has a right of subrogation.

    Q: When can the guarantor subrogated?

    A: Only when the guaranty is substituted with the

    consent of the debtor. If without consent or against the

    will of the debtor he cannot compel the creditor to

    subrogate him to his rights. So not always available to

    the guarantor.

    Q: What is the right of subrogation?

    A:To exercise the accessory obligation. Like aside

    from the guaranty it is likewise secured by mortgage orpledge.

    So if the creditor goes after the guarantor instead of

    foreclosing the mortgage, the guarantor has TIDE plus

    he is also subrogated to the right of the creditor as

    mortgagee or pledgee.

    Q: Must he demand from the creditor that the creditor

    assign the mortgage to him? Must another document

    be executed?

    A: No. Subrogation happens by operation of law. So

    the creditor need not execute another document.

    Obligation is 9,000. The creditor was able to collect

    from the guarantor 5,000. So there is an unpaid

    balance of 4,000.

    Q: And there is a mortgage, Who can foreclose the

    mortgage? The guarantor or creditor?

    A: Remember that upon payment or after payment,

    aside from the right to seek reimbursement from the

    debtor, the guarantor is subrogated to the right of the

    creditor.

    Q: When you have a mortgage lien, who can foreclose

    the mortgage?A: Remember the creditor has still a credit in the

    amount of 4,000 the guarantor is subrogated to the

    right of the creditor with respect to the 5,000 that he

    paid. The creditor has a priority in foreclosing the

    mortgage.

    Another scenario, the creditor foreclosed the mortgage

    but the proceeds from the foreclosure sale is only

    5,000 there is a deficiency of 4,000 which was paid by

    the guarantor. When you foreclose a mortgage there is

    what you call the right of redemption, the mortgagor

    can redeem within a period of one year as a general

    rule.

    Q: Can the guarantor exercise the right of subrogation

    by redeeming the property not from the creditor but

    from the buyer? Can he redeem it from the creditor or

    from the buyer in the foreclosure sale?

    A:The rule is if the guarantor pays the 9,000 he is

    subrogated to the right of the creditor specially with

    respect to mortgage. He cannot seek reimbursement

    from the debtor he can foreclose the mortgage but of

    course he has to seek reimbursement first before he

    can foreclose. Because mortgage is an accessory

    undertaking.

    Q: When you foreclose you have to sell the property ina public sale, can the guarantor by invoking the right of

    subrogation redeem the property from X? Whose right

    is it to redeem?

    A:That is a right pertaining to the debtor. He cannot

    enterprise the right of the debtor by invoking the right

    of subrogation because when you exercise the right of

    subrogation you exercise the right of the creditor. You

    can foreclose the mortgage but you cant redeem

    because that is a right pertaining to the debtor.The

    guarantor is entitled to reimbursement but he cannot

    redeem.

    While there is no rule that requires the return theexcess to the debtor but the creditor is entitled only to

    such amount of the proceeds in order to pay the

    obligation he has no right to retain the excess. But

    there has never been a bid in excess to the amount of

    obligation. Since nobody wants to buy property from a

    foreclosure sale other than the creditor because of the

    redemption period. The risk is that you will not be

    the owner of the property.

    Q: What is the advantage of subrogation over

    reimbursement?

    A: Because there is a chance that the debtor might be

    insolvent. And if he is insolvent you are a preferred

    creditor with respect to the property mortgage in case

    of subrogation.

    Q: But what is the advantage of reimbursement over

    subrogation?

    A: If you are the guarantor, it is faster. Not only that

    but also entitled to interest.

    Q: From when?

    A: Remember right of reimbursement, TIDE? Total

    amount paid, Interest from the time that he notified

    the debtor that he has made a demand for the debtorto reimburse him. From that moment on he is entitled

    to interest. So that is an advantage of resorting to

    demanding for reimbursement than of exercising the

    right of subrogation.

    Q: Remember that guaranty can be constituted even

    without consent of the debtor. If guarantor secures

    payment of the obligation of the debtor without his

    consent from whom can he seek reimbursement?

    A: Both. But only beneficial reimbursement from the

    debtor because he constituted a guaranty without his

    consent.

    Beneficial reimbursement depends how much thedebtor was benefited.

    EFFECTS OF GUARANTY AS BETWEEN CO-

    GUARANTORS

    Remember! If there are two or more guarantors there

    is benefit of division. The guarantor can invoke that,

    therefore,

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    If creditor demands from A payment of obligation, A is

    liable only for 3,000 pesos. But the benefit of division is

    not available to A if he waives it.

    Q: If he waives can he seek reimbursement from A &

    C?

    A: No. he waived the benefit but he can ask for

    reimbursement from the debtor. Because the right of

    reimbursement is from the debtor not from a co-

    guarantor.

    Another instance where there is no right of division is if

    the debtor becomes insolvent. So if the debtor

    becomes insolvent, and the creditor demands from A

    payment of the entire obligation and because A cannot

    invoke the benefit of division because the debtor is

    insolvent A has to pay 9,000 in this instance, a canseek contribution from B & C in the amount of 3,000

    each but of course there is no preventing A from

    recovering 9,000 pesos from the debtor after all if he

    recovers from B & C they are entitled to be reimbursed

    by the debtor too.

    Another instance where A can recover from the other

    co-guarantors is if A is ordered by the court to pay the

    entire contribution. It is only when there is insolvency

    that the creditor can demand from one guarantor pay

    the entire obligation and he can seek contribution from

    his co-guarantors. In the instances where there is no

    right of division, the other co-guarantor who pays

    cannot seek contribution, it has to be by court order.

    Aside from waiver of course and insolvency, another

    instance is when debtor absconds, so creditor files a

    case against guarantor A, A cannot invoke the right of

    division because the debtor absconded so there is a

    court order that A must pay the entire obligation, if

    that is the case A can seek from B & C for their

    contribution. If A voluntarily pays he cannot seek

    contribution from B & C. He can only seek contribution

    if the debtor is insolvent and/or ordered by the court to

    pay the entire thing.

    Q: Now if a co-guarantor pays and one of the other co-

    guarantors is insolvent how much can you recover

    from B?

    A: 4,500 they both share it. One cannot claim to only

    be liable for 3,000. But if there is a sub-guarantor, A

    can go to the sub-guarantor that undertook the liability

    of C.

    The co-guarantors can raise the defense that the

    principal debtor can raise against the creditor. EXC of

    course incapacity, insanity, or vitiated consent.

    Q: Now, if A was able to obtain a compromise from

    creditor and A paid instead of 9,000 only 6,000. How

    much can he recover from the debtor? Is he entitled to

    obtain 9,000 the original obligation of the debtor?

    A: No, only 6,000. You cannot enrich by asking 9,000.

    Whatever benefit he obtained benefit the debtor.

    Extinguishment of Guaranty

    I. Extinction of Guaranty

    A. Negligence of the creditor

    Because guaranty is a contract and contract is a sourceof obligation, necessarily, the same ground for the

    extinguishment of an obligation are the grounds thatextinguishes a guaranty like payment, loss,condonation, merger, novation.

    Some of the causes of extinguishing a guaranty. Oneof the rights of the guarantor is to demand that thecreditor first exhaust the properties of the debtorbefore he can be held liable, that is exercising the rightof exhaustion or excussion. If after the guarantor haspointed to the creditor properties of the debtor and yetthe creditor fails to exhaust the properties of thedebtor through his own negligence and after that thedebtor becomes insolvent he can no longer hold theguarantor liable because of his own negligence.

    ImpossibiIity of subrogation? If you have 2 securities ofthe contract, one real security of chattel mortgage, theother is personal security of guaranty. Now chattelmortgage is the recording of personal property with theRegister of Property as security for the fulfillment of anobligation.

    A. Zobel Inc. vs CAWhen E. Zobel was sued of his undertaking hisdefense was that he was released from hisundertaking as guarantor because he could notbe subrogated to the rights of the creditor overthe chattel mortgage because of the failure bythe bank to register the mortgage. SC said thatmight be true if you are a guarantor but sinceyou are a surety you cannot invoke thatdefense. Lets change the facts, if E. Zobel wasa guarantor and not just a surety could itinvoke the defense provided under 2080 that itcould not be subrogated to the rights of thecreditor and therefore it was released of itsundertaking as a guarantor? Yes, a guarantorcan invoke that defense of impossibility ofsubrogation but in that particular case, couldnot invoke the defense because it was not aguarantor but surety.

    2080 said that the guarantor, even if they be solidary,

    does it refer to suretyship? How do we interpret thatphrase even though they be solidary, does it refer tosurety? But the court has been consistent in itspronouncement that 2080 applies only to guarantoreven in the later case of Ang vs. Associated Bank, thecourt said that 2080 does not apply to contract ofsuretyship. It means the guarantors who bound amongthemselves solidarily not the guarantors bindingthemselves solidarily with the principal debtor becauseotherwise that will be suretyship already. But solidarilythere refers to the obligation of the guarantor amongthemselves meaning that anyone of them can be heldliable.

    A. Extension of Payment

    If the creditor grants an extension of payment to thedebtor without the consent of the guarantor, then theguarantor is relieved. Why? You are extending the riskof him being liable and you know that this is merely anaccessory subsidiary contract especially if it is agratuitous guaranty. The extension, in order to bindthe guarantor, must be with the consent of theguarantor. Take note that mere failure to collect uponmaturity of the obligation does not mean extension ofthe period. Or an undertaking not to file an action isnot an express grant of extension. That is simplerunderstood if the obligation is to be fulfilled in one

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    time. The problem arises if the obligation containspayment in installments. What is the rule inobligations consisting performance by installment?Each installment is treated as a distinct and separate

    obligation and therefore default in one installmentdoes not mean default in all the other installments.Unless there is an acceleration clause.

    Villa vs. Garcia Bosque4 installments for the payment of printingpress and bookstore. 1st installment uponexecution of the contract; 2nd installment after1 year; 3rd installment after 2 years; 4th

    installment after 3 years. There was extensionof the period for the payment of the secondinstallment. There was a restructuring, so tospeak, of the second installment. But it waseventually paid. And then for the third

    installment there was partial payment also.For the fourth installment, no payment wasmade. Only after all the installments becamedue and demandable that the seller-creditorsued for the payment of the balance of thepurchase price and went after the guarantor orthe surety. The defense raised by the suretywas that there were released from theirundertaking because there was an extensiongranted to the second installment. SC saidthere was no issue anymore with respect to thesecond installment because it was alreadytotally paid. In fact you have no obligationanymore over the second installment. Andbesides, the rule is, extension of payment over

    one installment does not necessarily mean thatthere is extension of payment for the otherinstallments. It pertains only to that particularinstallment thats not even an issue because ithas already been paid and no longer liable onthat second installment. You are not releasedfrom your undertaking on the third and fourthinstallment by the mere fact that the secondinstallment was restructured or that there wasan extension for the period of payment for thesecond installment.

    Radio Corporation vs. RoaThere is a sale but there was a stipulation for

    the payment of the price over a period of 71months but there was an acceleration clause.There was an extension for the payment of 3months. There was an acceleration clausesuch that if you default in one installment, theother installment becomes due anddemandable. (illustration on board: If youextend the payment for like 2 months, hereyou are in effect extending the payment for theother installments. If you default on the firstinstallment, you can sue for the entire amountbut since granted an extension for exampleafter 2 months). If you extend the period forthe payment of just one installment you are ineffect extending the payment for the entire

    obligation. That is the reason why theguarantor is released if he does not give hisconsent.

    Philippine American General Insurance Co vs.MutucSeamen in ocean-going vessel are required toput up a bond for the faithful fulfillment of theircontract because of their experience that manywould jump ship so the shipping company orthe principal would require that the seamanwould put up a bond by a bonding company.So for Mutuc, the bond was put up by

    Philippine American General InsuranceCompany but because of the history of seamenjumping ship and the higher probability of thebonding company being liable of its

    undertaking so they would require anindemnity agreement. You have the principalguaranty or suretyship undertaking in favor ofthe principal or employer the shippingcompany. Phil Am Gen required Mutuc toexecute an indemnity bond. Its useless torequire Mutuc, by himself, to execute anindemnity bond so other people were going toundertake to pay the surety. In the maincontract that was secured by the indemnityagreement in the suretyship undertaking, therewas a provision for the automatic extension ofthe contract if Mutucs contract with theshipping company is renewed. If the

    employment contract of Mutuc is renewed,automatically the surety bond is likewiseextended. Because of that, in the indemnityagreement there was also a provision for theautomatic extension without prior notice to theindemnitors Alberto and Mojica. In fact thecontract of Mutuc was renewed a couple oftimes. On the 4th year or the 3rd renewal of hiscontract, he jumped ship. So Phil Am Gen paidMaersk the amount of the bond. And Phil AmGen is now holding Alberto and Mojica liable ontheir indemnity agreement. The defense ofAlberto was that there was an extension of theperiod and he did not give his consenttherefore he was released from his

    undertaking. SC said you are wrong becauseyou already gave your consent to the contractmany times. You signed and consented to theautomatic renewal or extension of the periodeven without notice to you and therefore youneed not be notified everytime the contract ofMutuc is renewed and everytime the suretyshipundertaking is renewed. Therefore, the courtheld Alberto liable on his indemnityundertaking even if he did not give his consenteverytime there is a renewal of the contract.

    Prudencio vs CAA holder for value is one who is a holder who

    acquired the instrument not from the makerbut from a party other than the maker.Therefore if you obtain it from the maker youcannot be a holder in due course. You are aholder but you cannot be a holder in duecourse because of course you are privy to allthe other agreements or the fraud that mighthave been committed against the maker.There was a construction company who wantedto obtain a loan from PNB. But PNB would notgrant the loan because this constructioncompany maybe is not well-known, it doesnthave a credit line with PNB. So its agent,Toribio, who was a relative of the Prudenciospouses, prevailed upon the Prudencio spouses

    to mortgage their property. They refusedbecause they did not need the money and theyare also not connected with the business butafter several weeks of prodding, they werefinally made to agree to subject their propertyas security for the loan. On top of that, theywere convinced to sign the promissory note asmakers of the note as accommodation makers.Of course it was known by the bank. Thereason why they allowed to subject theirproperty and to sign as makers/borrowers ofthe loan was the fact that the principal debtorhad a contract with the government for the

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    construction of the Municipyo of Palawan at thecost of P30,000. As contractor, he has areceivable from the state. What the principaldebtor did was to assign all its receivable from

    the government in favor of PNB. If there is anassignment there is an assurance that the debtwill be paid because all the payables from thestate will be paid to PNB. The signing of thepromissory note was pro-forma. Maybe thatwas the peace of the mind of the Prudenciospouses that the payment is assured becausewhatever is payable from the government willbe paid to PNB. What did PNB do? It allowedthe state, instead of the state paying to PNB, topay the principal debtor even after the loanhas matured. And then the principal debtorwasnt able to pay it now wants to hold thePrudencio spouses liable as accommodation

    maker. The defense raised by the Prudenciospouses was that PNB is not a holder in duecourse and therefore they can raise thedefense of lack of consideration. Asaccommodation party we are sureties and wecan raise the defense of extension of payment.SC said you are released as surety by theextension of payment. How was extension ofpayment manifested here? By the fact thatPNB allowed the release of money by thegovernment to the principal even aftermaturity of the loan. On the side of NIL, thecourt said the spouses were also released oftheir undertaking because they can invoke lackof consideration because PNB was not a holder

    in due course.

    Mere failure to demand is not an extension of payment.

    Cochingyan vs. R&B Surety The undertaking of PNB to hold in

    abeyance any action to enforce claim didnot amount to an extension granted tothe debtor.

    Payment by the debtor of the principal obligationnecessarily extinguishes the guaranty becauseextinguishment of the principal obligation extinguishesthe accessory undertaking of guaranty.

    What if there is partial payment made by the debtor?If the obligation of the debtor is 100,000 and theundertaking of the guarantor is to secure only 50,000.Debtor paid 50,000 is the guarantor released? What isthe rule in application of payment? It is the debtor whodecides, if not the creditor, if not through the mostonerous. The unsecured is the most onerous. Thesecured portion could be absorbed by the guarantor.50,000 will be applied to the unsecured portion so theguarantors obligation remains.

    If the obligation is 100,000 instead of paying thedebtor delivers property also more or less 100,000. Isthe principal obligation extinguished? Yes, by dacion

    en pago. If principal obligation is extinguished bydacion en pago, the guaranty is extinguished. Dacionen pago is governed by the rules on sales.

    The creditor is deprived of possession and ownership ofproperty, there was a breach of the implied warrantyagainst eviction. Is the obligation of the debtorreinstated? Maybe as to the breach of warranty. But ifthe debtor cannot perform or cannot pay his obligationunder the breach, can the creditor hold the guarantorliable? Not anymore, when the principal obligation isextinguished by dacion en pago, automatically theobligation of the guarantor is also extinguished. If later

    on the creditor is deprived of ownership or possession,he can no longer hold the guarantor liable.

    If the obligation is condoned by the creditor,

    automatically the guarantor is released.

    If the guarantor has obtained a remission of the debtbecause of his special relationship with the creditor canhe recover the amount that he guaranteed? Can herecover or can he claim from the debtor the amountthat he caused to be remitted? No he cannot.

    Merger:Between debtor and creditor- extinguishes theguaranty because merger between debtor and creditorextinguishes the principal obligation

    Between creditor and guarantor- does not extinguish

    the principal obligation but extinguishes the guarantybecause the guarantor now becomes the creditor(absurd if the debtor cannot pay he will pay himself)

    Between debtor and guarantor- the principal obligationremains but the guaranty is extinguished because theguarantor cannot or debtor cannot secure his ownobligation

    Compensation:Between guarantor and creditorExample: obligation becomes due and demandabledebtor does not pay, creditor goes against theguarantor, the guarantor invokes compensationbetween him and the creditor. If the principal

    obligation is 100,000 the creditor also owes theguarantor 100,000 the same amount of obligation,both are due and demandable, both for payment of asum of money. Can the guarantor recover from theprincipal debtor? Yes, because the debtor wasbenefited. The money of the guarantor which wasmade to pay for the obligation. The guarantor wassupposed to collect from the creditor. He was not ableto collect because he invoked compensation andtherefore he is allowed to recover from the principaldebtor. Unlike condonation because it involvesgratuitous abandonment of the debt. In compensation,there is merely a set-off. One owes the other, theother owes the other party. Instead of both collecting

    from each other, quits na.

    Novation

    Extinctive novation- principal obligation is extinguishedand a new one is entered into, the stipulation andconditions of which are inconsistent with the othersbefore the first is extinguished. If thats the case andthere is a security undertaking if the old obligation isextinguished the entire guaranty is extinguished.

    Modificatory novation- does this automaticallyextinguish the guaranty? Not necessarily because ifthe new obligation because of the modification of theterms and conditions of the parties becomes less

    burdensome then the guarantor is subrogated. But ifby the modification of the stipulations and conditionsof the parties the obligation becomes moreburdensome then the guaranty is extinguished.

    What about the death of the guarantor, does thisextinguish guaranty? No, we have seen this in thecase of De Guzman vs. Santos when one of the jointguarantors died his administratrix paid of thejudgment debt.

    Legal and Judicial Bonds

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    Bonds or security undertakings put up by virtue of ajudicial order. Now if the party or the litigant who isbound to put up a bond cannot put up a bond becausebond is a personal security undertaking in lieu of that a

    pledge or a mortgage over property can be executed.Unlike an ordinary guarantor, a bondsman cannotimpose exhaustion of the properties of the principaldebtor. Even the sub-surety of the bondsman cannotinvoke excussion of the property of the debtor or theprincipal.

    Real Security Undertaking

    Pledge- just like guaranty and suretyship, it is anaccessory undertaking whereby personal property ofthe debtor or of a third person is delivered to thecreditor or a third person to ensure fulfillment of aprincipal obligation.

    How does pledge differ from a chattel mortgage?While in pledge, personal property is delivered to thecreditor or a third person, in chattel mortgage,personal property is merely recorded in the Registry ofProperty. There is no delivery of the personal propertyto the creditor or to another person, agreed by boththe debtor and the creditor. Thats the principaldifference between pledge and chattel mortgage. Bothinvolve personal property.

    In pledge, the property is delivered not forsafekeeping, not for use, its not commodatum, its notdepositum, but its pledge. Like commodatum ordepositum, it is a real contract because it is perfected

    by the delivery of the object; unlike a chattel mortgageover which the property is not delivered to the creditor.But the property is merely recorded in the Registry ofProperty.

    How does chattel mortgage differ from a real estatemortgage? Real mortgage involve real property. Likechattel mortgage, the property is not delivered to themortgagee or the creditor or to a third person.

    What are the characteristics common to both pledgeand mortgage?

    1. It is constituted to secure fulfillment of aprincipal obligation.

    2. It must be constituted by the owner.3. The person constituting the pledge ormortgage must have free disposal of theproperty. Free disposal means it must not beburdened with any legal claim.

    I. Common characteristics.

    Flancia vs. CAWilliam Onghinato extended a loan in favorof Oakland Development ResourcesCorporation, housing project. In order todevelop a project, it obtained a loan fromWilliam Onghinato. And to securefulfillment of payment of the loan, the

    corporation constituted a mortgage overthe property where the project wasdeveloped. Then the corporation enteredinto a contract to sell with buyers and thespouses Godofredo and Dominica Flanciawere buyers under a contract to sell.Because Oakland was unable to pay theloan Onghinato instituted proceedings forthe foreclosure of the mortgage. Thespouses Flancia objected saying thatOakland could not validly constitute themortgage because it was not the owner ofthe property because it was already sold to

    them. The court had the occasion todiscuss the 3 requisites of a valid mortgagewhich incidentally are the first 3 requisitesfor a valid pledge. First, it must be

    constituted to fulfill a principal obligation.The court said here did they comply withthe first requisite? Was there a principalobligation that was secured? Yes, therewas a loan extended by Onghinato in favorof Oakland. Was Oakland the owner of theproperty mortgaged? In a contract to sellownership is not transferred to the buyeralthough the buyer may be allowedpossession of the thing but that possessionis not equivalent to possession as owner.Unlike in a contract of sale where deliveryof the property transfers ownership to thebuyer. The court said that the contract

    entered into was a contract to sell, it isvery clear from the stipulations of thecontract that while they are allowedpossession of the property they are not theowners because title will be transferredonly upon full payment of the purchaseprice. Therefore, if the house and lotoccupied by the Flancia spouses was thesubject of a contract of pledge, until ownedby Oakland, it can validly constitute amortgage over the property including thehouse and lot. Did Oakland have freedisposal of the thing at the time of themortgage? Yes, there was no claim, therewere no annotations on the title of Oakland

    at the time it was constituted. There threeelements of a valid mortgage werepresent. Therefore, Flancia spouses cannotobject to the foreclosure. They cannot saythat the mortgage was invalid.

    A. Constituted to secure fulfillment of a principalobligation. This is a security undertaking. Itmust be a principal obligation.

    If it is constituted to secure fulfillment of an obligationwhat kind of obligation can be secured by themortgage? Can it secure void obligation? NO, becausea void obligation have no cause and effect.

    Can it secure rescissible contracts? YesVoidable contracts? YesUnenforceable contracts? YesFuture obligations? Yes just like guaranty which cansubstitute to secure future obligations but of coursethe obligation of the guarantor comes to effect onlyupon the liquidation of the principal obligation.

    Mortgage and pledge can be constituted to securefuture obligations. But of course the property subjectof the real security undertaking cannot be forecloseduntil that future obligation becomes due anddemandable.

    Mojica vs. CAThe Mojica spouses obtained a loan for P20,000from Rural Bank of Kawit. They secured theloan with a mortgage. One of the conditions inthe mortgage was that it was constituted forthe payment of the loan of P20,000 and suchother loans and advances already obtained andto be obtained by the mortgagor. The loan ofP20,000 was paid. After they paid theyobtained another loan of P18,000 and therewas an annotation in the promissory note thatit was also secured by the mortgageconstituted to secure the P20,000 loan. The

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    Mojica spouses were not able to pay theP18,000 loan. The bank foreclosed themortgage. The bank was the highest bidderand title was consolidated in the name of the

    bank. The Mojica spouses want to nullify theforeclosure claiming that the foreclosure wasinvalid because the mortgage was notconstituted to secure the P18,000 loan becausethere was no real estate mortgage constitutedto secure that particular loan. SC said therewas no need to execute another mortgagebecause there was already a drag net clause orblanket mortgage clause. Similar to continuingguaranty. If you talk about mortgage it iscalled a drag net clause to secure such otherfuture obligation of the mortgagee. This is tosecure not only this particular loan but suchother loans which may be incurred by the

    mortgagee or the debtor.

    B. Constituted only by the absolute owner of thething pledged or mortgaged. Must beconstituted by the owner.

    A pledge or a mortgage can be constituted notnecessarily by the principal debtor. Meaning if I oweyou 100,000 the mortgage can be executed by anotherperson for as long as he is the owner of the property.That means that the mortgagor or the pledgor may notbe the debtor himself.

    Vda. De Bautista vs. MarcosThe mortgage here was constituted by BrigidaMarcos before the homestead patent wasissued in her name. SC said it was invalidbecause at the time when it was constitutedyou were not yet the owner because hehomestead patent was issue after themortgage was constituted. If the mortgagewas invalid there is no right of the mortgagorto foreclose the mortgage.

    X and Y are spouses. Their children are A B C and D.X, the husband, died. The wife survived with the 4children. The wife obtained a loan and secures theloan by constituting a mortgage over the conjugalproperty. Is the mortgage valid considering that upon

    the death of the husband the children also inheritedfrom the estate of the husband half of the conjugalproperty? It is valid only with respect to the portionbelonging to the wife. But it is invalid with respect tothe portion belonging to the children.

    What about mortgage constituted over property whichis a subject for a pending application for homesteadpatent? In Vda. De Bautista vs. Marcos, there was nopending application yet at the time the mortgage wasconstituted. What if there is a pending application andwhile the application is still in process and the propertyis subjected to a mortgage? Is the mortgage valid?Whether the applicant is the owner at the time of theapplication? Do you consider the applicant as the

    owner? If the applicant is not yet the owner at thetime of the application, then he cannot validlyconstitute a mortgage over the property.

    C. Free disposal or legal authority of personconstituting the pledge or mortgage

    The mortgagor must have free disposal of the thing ormust be duly authorized.

    Why is it required that the mortgagor or the pledgormust be the owner of the property? Unlikecommodatum, you need not be the owner of the

    property, in depositum also, because there is notransfer of ownership. In mortgage, you need nottransfer the ownership because it is only constituted tosecure an obligation but why is it necessary that the

    mortgagor or pledgor must be the absolute owner andmust have the free disposal of the property? Becauseof the possibility that the property might be alienatedto satisfy the principal obligation. If you constitute amortgage over a property which you do not own orover which you are not duly authorized by the owner,then there can be no valid foreclosure of the mortgage.

    D. Things pledged or mortgaged may be alienatedat the instance of the creditor

    Since the essence of constituting a pledge or amortgage is to secure fulfillment of a principalobligation, can the parties (debtors, creditors) be

    presumed that the debtor is also the pledgor of themortgagor just agree to stipulate cge, if I cannot fulfillmy obligation, imu na ni NO because that is pactumcommissorium and that is a void stipulation. Youcannot stipulate that.

    If there is a stipulation in the mortgage that upondefault of the debtor the creditor can register the saleover the property we are looking at a scenario where amortgage deed was executed and at the same time asale was executed. One of the stipulations that if thedebtor defaults, the creditor can register the sale. Thecreditor now becomes the absolute owner. Is this avalid stipulation? NO, it constitutes pactumcommissorium, it is a void stipulation. Thats why many

    creditors would require that when they execute amortgage deed, they execute a pacto de retrodocument.

    If one of the stipulations of the mortgage contract isthat upon default the debtor will execute a deed of salein favor of the creditor over the property subject of themortgage. Do you consider that pactumcommissorium? It is not pactum commissoriumbecause there is still another act which will beperformed by the debtor before ownership istransferred to the creditor.

    Pactum commissorium- no other act by the debtor in

    order to transfer ownership; there is automatic transferof ownership. The stipulation provides automatictransfer and no other intervention on the part of thedebtor. It is a void stipulation.

    If a mortgage is an accessory undertaking just likeguaranty and suretyship, is the mortgagor entitle toexhaustion of the properties of the debtor? Can themortgagor invoke the benefit of excussion orexhaustion? Benefit of excussion is available only incases of ordinary guaranty.

    E. Pledge and Mortgage are Indivisible

    If several parcels of land (3 parcels of land) are the

    subject of one real estate mortgage in order to securean obligation of 10 million pesos. The debtor has paid5 million, can the mortgagor ask for partial release ofthe mortgage? Can you release 1 parcel? Anyway the2 parcels are enough? NO, that is the indivisiblenature of pledge and mortgage. You cannot ask for apartial release unless if a particular property issubjected as security for payment for this particularamount- if this property will secure 2 million of theloan, this one 5 million of the loan, this one 3 million ofthe loan. If you have paid 5 million, can you ask for therelease of the parcel designated as security for 5million? Not necessarily.

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    Yu vs. PCIBankSeveral properties were mortgaged somelocated in Dagupan, some in QC to secure

    payment of a loan worth 10 million. The loanwas not paid so the creditor initiatedforeclosure proceedings. Under the law,foreclosure must be done in the provincewhere the properties are located. So forproperties located in Dagupan, foreclosureproceedings were initiated in Pangasinan, forthose properties located in QC, there was alsoa scheduled foreclosure sale. There was onlyone application filed and only one filing fee butin the notices of the foreclosure sale inDagupan it was stated that properties weresubject as securities for payment of the 10million loan. There was also notice in QC that

    these properties are being sold for the loan of10 million. It was published in both Dagupanand QC which means that the debt is 20,000. You cannot do that. You cannot conductforeclosure sale in Dagupan and a separateforeclosure sale in QC because of the rule ofthe indivisibility of the mortgage. SC saidindivisibility refers to the mortgage. Does notrefer to the venue for foreclosure of mortgagebecause the law is clear that foreclosure mustbe conducted in the province in where theproperties are located. Indivisibility does notmean that you must conduct the foreclosuresale only in one place even if the otherproperties are located in other provinces

    because that would violate the law.Indivisibility refers to the mortgage itself whereyou cannot ask for partial release if there ispartial payment. It does not mean prohibitionagainst the splitting of the venue if theproperties are located in different provinces.

    Is a promise to constitute a pledge or mortgage valid?Like a promise to constitute guaranty or suretyship isvalid? If I promise to constitute a mortgage over realproperty to secure my loan to you and I fail to pay theloan can you foreclose? Can you sell my property inpublic sale? What does it mean when the law saysgive rise to personal action only? That means you

    can compel me to execute the mortgage deed but youcannot foreclose or sell the property at a public salebecause there is no mortgage constituted yet.

    If I promise to constitute a mortgage, make sure that Iexecute the proper document so you can foreclose.That is your right if I merely make a promise then yourremedy is only a personal action to compel me toexecute the proper document.

    PLEDGE

    Pledge- is an accessory contract which is perfected bythe delivery of the thing (real contract) by virtue ofwhich the debtor or pledgor delivers to the creditor or

    a third person personal property as security for theperformance of a specific obligation, the fulfillment ofwhich the thing must be returned with its accessionsand accessories.

    Requisites:1. It must be constituted to secure fulfillment of a

    principal obligation

    2. It must be constituted by the absolute ownernot necessarily the principal debtor for as longas pledgor is the owner.

    3. The pledgor must free disposal of the thing orhe must be duly authorized by the owner.

    4. The fourth requisite which is not found in

    mortgage is that the property must bedelivered to the creditor or third person asagreed by the parties.

    Kalibo vs. CAMr. Abella rented the house of Mr. Kalibo inTagbilaran. Because he failed to pay the monthlyrentals, he delivered to Mr. Kalibo a tractor inpledge as security for payment of the rentals forthe house. It turned out that the tractor wasowned by his father Pablo Abella. And then PabloAbella demanded for the return, the delivery to himof the tractor and Mr. Kalibo objected saying that itwas delivered to him as pledge as security for thepayment of the unpaid rentals. Was there a valid

    pledge constituted between Abella and Mr. Kalibo?SC said NO because one of the pledge to be validlyconstituted is that it must be constituted by theowner and here there was no dispute that thetractor was owned by the father and not by MikeAbella. There could be no valid pledge constituted.So he said if there was no valid pledge then it wasdeposited with him. The purpose of deposit issafekeeping but the tractor was delivered to him aspledge as security for the unpaid rentals. SC saidreturn the tractor to Pablo Abella since there wasno valid mortgage constituted

    Who are the parties of pledge?

    1. Pledgor- the person who delivers2. Pledgee- the party who receives or to whomthe property is delivered or the creditor

    If the pledgor is not the principal debtor and theprincipal debtor fails to perform or fulfill the principalobligation, the result of that is that the thing subject ofthe pledge will be sold at public auction to satisfy theobligation, it is the right of the pledgor to recover fromthe principal debtor. He is also entitled to besubrogated to the rights of the creditor.

    What kind of things can be the object of a pledge?Only movable objects. Is it all kinds of movable? Itdoes not include those outside the commerce of men

    like prohibited drugs or illegal things. It must besusceptible of possession. The thing must be movable.

    Can animals be the objects of a contract of pledge?Yes, for as long as they are delivered to a pledgee orthird person.

    Can incorporeal rights which are invisible be theobjects of a pledge? Can shares of stocks be pledged?Yes, but what you deliver are the stocks certificates

    Or goods stored in a warehouse? Yes, deliver thewarehouse receipt instead of delivering the thing.

    If it is stocks certificate or negotiable documents thatare delivered to the pledgee, if these are negotiabledocuments then these must be properly indorsed. Itdoes not mean though that if you indorse thenegotiable document or stocks certificate, theownership is already transferred to the pledgee. It isonly to facilitate sale later on. Pledge is an accessoryundertaking to secure fulfillment of a principalobligation, it is not constituted to pay a principalobligation. Otherwise that would be novation or if theobligation consists a sum of money that would bedacion en pago. Even if you indorse the negotiablewarehouse receipt or the negotiable quedan or the

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