1

GUARANTY (Articles 2047 – 2084) A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the

principal debtor in case the latter fail to do so. Classification of Guaranty: 1. In the Broad sense:

a. Personal - the guaranty is the credit given by the person who guarantees the fulfilment of the principal obligation.

b. Real - the guaranty is the property, movable or immovable.

2. As to its Origin a. Conventional - agreed upon by the parties. b. Legal - one imposed by virtue of a provision of a law. c. Judicial - one which is required by a court to guarantee the eventual right of one of the parties

in a case. 3. As to Consideration

a. Gratuitous - the guarantor does not receive any price or remuneration for acting as such. b. Onerous - the guarantor receives valuable consideration.

4. As to the Person guaranteed a. Single - one constituted solely to guarantee or secure performance by the debtor of the

principal obligation. b. Double or sub-guaranty - one constituted to secure the fulfilment by the guarantor of a prior

guaranty. 5. As to Scope and Extent

a. Definite - the guaranty is limited to the principal obligation only, or to a specific portion thereof.

b. Indefinite or simple - one which not only includes the principal obligation but also all its accessories including judicial costs

SURETYSHIP A contract whereby a person (surety) binds himself solidarily with the principal debtor A relation which exists where one person (principal) has undertaken an obligation and another

person (surety) is also under a direct and primary obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, the second rather than the first should perform (Agro Conglomerates, Inc. vs. CA, 348 SCRA 450)

NOTES:

The reference in Article 2047 to solidary obligations does not mean that suretyship is withdrawn from the applicable provisions governing guaranty. A surety is almost the same as a solidary debtor, except that he himself is a principal debtor.

In suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal. A surety is usually bound with the principal by the same instrument, executed at the same time and upon the same consideration (Palmares vs CA, 288 SCRA 422)

It is not for the obligee to see to it that the principal debtor pays the debt or fulfill the contract, but for the surety to see to it that the principal debtor pays or performs (Paramount Insurance Corp vs CA, 310 SCRA 377)

Nature of Surety’s undertaking: 1. Liability is contractual and accessory but direct

2

NOTE: He directly, primarily and equally binds himself with the principal as original promisor, although he possesses no direct or personal interest over the latter’s obligation, nor does he receive any benefits therefrom. (PNB vs CA, 198 SCRA 767)

2. Liability limited by the terms of the contract. NOTE: It cannot be extended by implication beyond the terms of the contract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principal debtor is held liable. NOTES:

The creditor may sue separately or together the principal debtor and the surety. Where there are several sureties, the obligee may proceed against any one of them.

In the absence of collusion, the surety is bound by a judgment against the principal even though he was not a party to the proceedings. The nature of its undertaking makes it privy to all proceedings against its principal (Finman General Assurance Corp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefit of exhaustion

NOTE: He assumes a solidary liability for the fulfilment of the principal obligation (Towers Assurance Corp vs. Ororama Supermart, 80 SCRA 262) as an original promissory and debtor from the beginning.

5. Undertaking is to creditor and not to debtor. NOTE: The surety makes no covenant or agreement with the principal that it will fulfil the obligation guaranteed for the benefit of the principal. Such a promise is not implied by law either; and this is true even where under the contract the creditor is given the right to sue the principal, or the latter and the surety at the same time. (Arranz vs. Manila Fidelity & Surety Co., Inc., 101 Phil. 272)

6. Surety is not entitled to notice of principal’s default NOTE: The creditor owes no duty of active diligence to take care of the interest of the surety and the surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect. (Palmares vs CA, 288 SCRA 422)

7. Prior demand by the creditor upon principal is not required NOTE: As soon as the principal is in default, the surety likewise is in default.

8. Surety is not exonerated by neglect of creditor to sue principal Characteristics of Guaranty and Suretyship: 1. Accessory - It is indispensable condition for its existence that there must be a principal obligation.

NOTES:

Guaranty may be constituted to guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation. (Art 2052)

The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor.

2. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.

NOTES:

The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But a guarantor may bind himself for less than that of the principal (Art 2054)

A guaranty may be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Art 2053)

3. Unilateral - may be entered even w/o the intervention of the principal debtor, in which case Art. 1236 and 1237 shall apply and it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa.

4. Nominate 5. Consensual 6. It is a contract between the guarantor/surety and creditor.

3

NOTES:

Acceptance of guaranty by creditor and notice thereof to guarantor:

In declaring that guaranty must be express, the law refers solely and exclusively to the obligation of the guarantor because it is he alone who binds himself by his acceptance. With respect to the creditor, no such requirement is needed because he binds himself to nothing.

However, when there is merely an offer of a guaranty, or merely a conditional guaranty, in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become binding until it is accepted and until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty.

But in any case, the creditor is not precluded from waiving the requirement of notice.

The consideration of the guaranty is the same as the consideration of the principal obligation.

The creditor may proceed against the guarantor although he has no right of action against the principal debtor.

7. Not presumed. It must be expressed and reduced in writing. NOTE: A power of attorney to loan money does not authorize the agent to make the principal liable as a surety for the payment of the debt of a third person. (BPI vs. Coster, 47 Phil. 594)

8. Falls under the Statute of Frauds since it is a “special promise to answer for the debt, default or miscarriage of another”.

9. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended beyond its terms or specified limits. (Magdalena Estates, Inc. vs Rodriguez, 18 SCRA 967) The rule of strictissimi juris commonly pertains to an accommodation surety because the latter acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to those of a fiduciary. NOTES:

The rule will apply only after it has been definitely ascertained that the contract is one of suretyship or guaranty. It cannot be used as an aid in determining whether a party’s undertaking is that of a surety or guarantor. (Palmares vs CA, 288 SCRA 292)

It does not apply in case of compensated sureties. 10. It is a contract which requires that the guarantor must be a person distinct form the debtor

because a person cannot be the personal guarantor of himself. NOTE: However, in a real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his personal or real properties.

Guaranty Suretyship 1. Liability depends upon an independent agreement to pay the obligation if primary debtor fails to do so

1. Surety assumes liability as regular party to the undertaking

2. Collateral under-taking

2. Surety is an original promisor

3. Guarantor is secondarily liable

3. Surety is primarily liable

1. Guarantor binds

himself to pay if the principal CANNOT PAY

4. Surety undertakes to pay if the principal DOES NOT PAY

4

5. Insurer of solvency of debtor

5. Insurer of the debt

6. Guarantor can avail of the benefit of excussion and division in case creditor proceeds against him

6. Surety cannot avail of the benefit of excussion and division

Indorsement Guaranty 1. Primarily of transfer

1. Contract of security

2. Unless the note is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time he will be discharged abso-lutely from all liability thereon, whether he has suffered any actual damage or not

2. Failure in either or both of these particulars does not generally work as an absolute discharge of a guarantor’s liability, but his is discharged only to the extent of the loss which he may have suffered in consequence thereof

3. Indorser does not warrant the solvency. He is answerable on a strict compliance with the law by the holder, whether the promisor is solvent or not

3. Guarantor warrants the solvency of the promisor

4. Indorser can be sued as promisor

4. Guarantor cannot be sued as promisor

Guaranty Warranty A contract by which a person is bound to another for the fulfilment of a promise or engagement of a third party

An undertaking that the title, quality, or quantity of the subject matter of the contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty

NOTES:

A guaranty is gratuitous, unless there is a stipulation to the contrary. The cause of the contract is the same cause which supports the obligation as to the principal debtor.

5

The peculiar nature of a guaranty or surety agreement is that is is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either from the principal debtor or from the creditor; a consideration moving to the principal alone will suffice.

It is never necessary that the guarantor or surety should receive any part or benefit, if such there be, accruing to the principal. (Willex Plastic Industries Corp. vs. CA, 256 SCRA 478)

Double or sub-guaranty (Art 2051 2nd par) One constituted to guarantee the obligation of a guarantor Continuing guaranty (Art 2053) One which is not limited to a single transaction but which contemplates a future course of

dealings, covering a series of transactions generally for an indefinite time or until revoked. NOTES:

Prospective in operation (Diño vs CA, 216 SCRA 9)

Construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved (Diño vs CA, 216 SCRA 9)

“Future debts” may also refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time.

Exception to the concept of continuing guaranty is chattel mortgage. A chattel mortgage can only cover obligations existing at the time the mortgage is constituted and not those contracted subsequent to the execution thereof (The Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc., 49 Phil 647). An exception to this is in case of stocks in department stores, drug stores, etc. (Torres vs. Limjap, 56 Phil 141).

Extent of Guarantor’s liability: (Art 2055) 1. Where the guaranty definite: It is limited in whole or in part to the principal debt, to the exclusion

of accessories. 2. Where guaranty indefinite or simple: It shall comprise not only the principal obligation, but also all

its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Qualifications of a guarantor: (Arts 2056-2057) 1. possesses integrity 2. capacity to bind himself 3. has sufficient property to answer for the obligation which he guarantees

NOTES:

The qualifications need only be present at the time of the perfection of the contract.

The subsequent loss of the integrity or property or supervening incapacity of the guarantor would not operate to exonerate the guarantor or the eventual liability he has contracted, and the contract of guaranty continues.

However, the creditor may demand another guarantor with the proper qualifications. But he may waive it if he chooses and hold the guarantor to his bargain.

Benefit of Excussion (Art 2058) The right by which the guarantor cannot be compelled to pay the creditor unless the latter has

exhausted all the properties of the principal debtor, and has resorted to all of the legal remedies against such debtor.

6

NOTE:

Not applicable to a contract of suretyship (Arts 2047, par. 2; 2059[2])

Cannot even begin to take place before judgment has been obtained against the debtor (Baylon vs CA, 312 SCRA 502)

When Guarantor is not entitled to the benefit of excussion: (PAIRS) 1. If it may be presumed that an execution on the property of the principal debtor would not result in

the satisfaction of the obligation

Not necessary that the debtor be judicially declared insolvent or bankrupt 2. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or

representative 3. In case of insolvency of the debtor

Must be actual 4. If the guarantor has expressly renounced it 5. If he has bound himself solidarily with the debtor Other grounds: (BIPS) 6. If he is a judicial bondsman or sub-surety 7. If he fails to interpose it as a defense before judgment is rendered against him 8. If the guarantor does not set up the benefit against the creditor upon the latter’s demand for

payment from him, and point out to the creditor available property to the debtor within Philippine territory, sufficient to cover the amount of the debt (Art 2060)

Demand can be made only after judgment on the debt

Demand must be actual; joining the guarantor in the suit against the principal debtor is not the demand intended by law

9. Where the pledge or mortgage has been given by him as special security Benefit of Division (Art 2065) Should there be several guarantors of only one debtor and for the same debt, the obligation to

answer for the same is divided among all. Liability: Joint NOTES:

The creditor can claim from the guarantors only the shares they are respectively bound to pay except when solidarity is stipulated or if any of the circumstances enumerated in Article 2059 should take place.

The right of contribution of guarantors who pays requires that the payment must have been made (a) in virtue of a judicial demand, or (b) because the principal debtor is insolvent (Art 2073).

If any of the guarantors should be insolvent, his share shall be borne by the others including the paying guarantor in the same joint proportion following the rule in solidary obligations.

The above rule shall not be applicable unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.

The right to contribution or reimbursement from his co-guarantors is acquired ipso jure by virtue of said payment without the need of obtaining from the creditor any prior cession of rights to such guarantor.

The co-guarantors may set up against the one who paid, the same defenses which have pertained to the principal debtor against the creditor and which are not purely personal to the debtor. (Art 2074)

Procedure when creditor sues: (Art. 2062) The creditor must sue the principal alone; the guarantor cannot be sued with his principal, much

less alone except in Art. 2059.

7

1. Notice to guarantor of the action

The guarantor must be NOTIFIED so that he may appear, if he so desires, and set up defenses he may want to offer.

If the guarantor appears, he is still given the benefit of exhaustion even if judgment should be rendered against him and principal debtor. His voluntary appearance does not constitute a renunciation of his right to excussion (see Art. 2059(1)).

Guarantor cannot set up the defenses if he does not appear and it may no longer be possible for him to question the validity of the judgment rendered against the debtor.

2. A guarantor is entitled to be heard before and execution can be issued against him where he is not a party in the case involving his principal (procedural due process).

Guarantor’s Right of Indemnity or Reimbursement (Art 2066) GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be reimbursed by the principal debtor. NOTE: The indemnity consists of: (DIED)

1. Total amount of the debt – no right to demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment. He cannot collect more than what he has paid.

2. Legal interest thereon from the time the payment was made known (notice of payment in effect a demand so that if the debtor does not pay immediately, he incurs in delay) to the debtor, even though it did not earn interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of the payment he has made.

3. Expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor; only those expenses that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (Art. 2055) not those which depend upon his will or own acts or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor.

4. Damages if they are due in accordance with law. General rules on damages apply.

EXCEPTIONS:

1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor (Art. 2050).

2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it (Art. 1238).

3. Waiver of the right to demand reimbursement. Guarantor’s right to Subrogation (ART.2067) Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining

either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation.

NOTE: This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Art. 2066.

It arises by operation of law upon payment by the guarantor. It is not necessary that the creditor cede to the guarantor the former’s rights against the debtor.

It is not a contractual right. The right of guarantor who has paid a debt to subrogation does not stand upon contract but upon the principles of natural justice.

The guarantor is subrogated by virtue of the payment to the rights of the creditor, not those of the debtor.

8

Guarantor cannot exercise the right of redemption of his principal (Urrutia & Co vs Morena and Reyes, 28 Phil 261)

Effect of Payment by Guarantor 1. Without notice to debtor: (Art 2068)

The debtor may interpose against the guarantor those defenses which he could have set up against the creditor at the time the payment was made, e.g. the debtor can set up against the guarantor the defense of previous extinguishment of the obligation by payment.

2. Before Maturity (Art 2069)

Not entitled to reimbursement unless the payment was made with the consent or has been ratified by the debtor

Effect of Repeat Payment by debtor: (Art 2070) GENERAL RULE: Before guarantor pays the creditor, he must first notify the debtor (Art. 2068). If he fails to give such notice and the debtor repeats payment, the guarantor can only collect from the creditor and guarantor has no cause of action against the debtor for the return of the amount paid by guarantor even if the creditor should become insolvent. EXCEPTION: The guarantor can still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present: (PIG)

a. guarantor was prevented by fortuitous event to advise the debtor of the payment; and b. the creditor becomes insolvent; c. the guaranty is gratuitous.

Right of Guarantor to proceed against debtor before payment GENERAL RULE: Guarantor has no cause of action against debtor until after the former has paid the obligation EXCEPTION: Article 2071 NOTES:

Article 2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs Batu Construction & Co., 101 Phil 494)

Remedy of guarantor: (a) obtain release from the guaranty; or (b) demand a security that shall protect him from any proceedings by the creditor, and against the

danger of insolvency of the debtor

Art. 2066 Art. 2071 Provides for the enforcement of the rights of the guarantor/surety against the debtor after he has paid the debt

Provides for his protection before he has paid but after he has become liable

Gives a right of action after payment

Protective remedy before payment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE2) 1. Release 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 (Art 2078); 2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if

he should afterwards lose the same through eviction or conveyance of property (Art 2077);

9

3. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot be subrogated to the rights, mortgages and preferences of the former (Art 2080);

4. For the same causes as all other obligations (Art 1231); 5. When the principal obligation is extinguished; 6. Extension granted to the debtor by the creditor without the consent of the guarantor (Art 2079) BOND An undertaking that is sufficiently secured, and not cash or currency Bondsman (Art 2082) A surety offered in virtue of a provision of law or a judicial order. He must have the qualifications

required of a guarantor and in special laws like the Rules of Court. NOTES:

Judicial bonds constitute merely a special class of contracts of guaranty by the fact that they are given “in virtue… of a judicial order.”

If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage sufficient to cover the obligation shall admitted in lieu thereof (Art 2083)

A judicial bondsman and the sub-surety are NOT entitled to the benefit of excussion because they are not mere guarantors, but sureties whose liability is primary and solidary. (Art 2084)

PLEDGE, MORTGAGE AND ANTICHRESIS I. Common Elements of Pledge, Mortgage, and Antichresis (Articles 2085 – 2092) A. Essential Requisites (SOD) (Art 2085) 1. Secures the fulfillment of a principal obligation; 2. Pledgor, mortgagor, antichretic debtor must be the absolute owner of the thing pledged or

mortgaged; and The reason being that in anticipation of a possible foreclosure sale in case of default which is

still a sale, the rule is that the seller must be the owner of the thing sold (Cavite Development Bank vs. Lim, 324 SCRA 346)

3. Pledgor, mortgagor, antichretic debtor must have free disposal of their property, or be legally authorized for such purpose.

NOTES:

Third persons can pledge or mortgage their own property to secure the principal obligation.

It is not necessarily void simply because the accommodation pledgor or mortgagor did not benefit from the same. So long as valid consent was given, the fact that the loan was given solely for the benefit of the principal debtor would not invalidate the mortgage (GSIS vs CA, 170 SCRA 533)

The accommodation pledgor or mortgagor, without expressly assuming personal liability for such debt, is not liable for the payment of any deficiency, should the property not be sufficient to cover the debt (Bank of America vs. American Realty Corporation, 321 SCRA 659).

The accommodation pledgor or mortgagor is not solidarily bound with the principal obligor but his liability extents only to the property pledged or mortgaged. Should there be any deficiency, the creditor has recourse on the principal debtor who remains to be primarily bound.

The law grants to the accommodation pledgor or mortgagor the same rights as a guarantor and he cannot be prejudiced by any waiver of defense by the principal debtor.

B. Prohibition against Pactum Commissorium (Art 2088; 2137) Pactum Commissorium Stipulation whereby the thing pledged or mortgaged, or under antichresis shall automatically

become the property of the creditor in the event of non-payment of the debt within the term fixed.

10

Requisites: 1. There should be a pledge, mortgage, or antichresis of property by way of security for the payment

of the principal obligation; and 2. There should be a stipulation for an automatic appropriation by the creditor of the property in

event of nonpayment of the obligation within the stipulated period. GENERAL RULE: Pactum Commissorium is forbidden by law and is declared null and void. EXCEPTION: The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold. (Art 2112)

NOTE: The security contract remains valid; only the prohibited stipulation is void. C. Capability to secure all kinds of obligations, i.e. pure or conditional (Art 2091) D. Indivisibility (Art 2089) GENERAL RULE: A pledge, mortgage, or antichresis is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Their indivisibility is not affected by the fact that the debtors are jointly or not solidarily liable. Consequences of indivisibility: 1. Single thing – Every portion of the property pledged or mortgaged is answerable for the whole

obligation 2. Several things – All of the several things pledged or mortgaged are liable for the totality of the

debt 3. Debtor’s heir/creditor’s heir - Neither the debtor’s heir who has paid part of the debt cannot ask

for proportionate extinguishment, nor creditor’s heir who received his share of the debt return the pledge or cancel the mortgage as long as the debt is not completely satisfied.

1. Where each one of several things guarantees a determinate portion of the credit 2. Where only a portion of the loan was released 3. Where there was failure of consideration. 4. Where there is no debtor-creditor relationship

NOTES:

The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole.

The mortgagee, therefore, may legally foreclose the real estate mortgage extrajudicially and waive the chattel mortgage foreclosure, and maintain instead a personal action for the recovery of the unpaid balance of the credit (Phil. Bank of Commerce vs. Macadaeg, 109 Phil 981)

E. When the principal obligation becomes due, the things in which the pledge, mortgage, or antichresis consists may be alienated for the payment to the creditor. (Art. 2087)

NOTES:

If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled to move for the sale of the thing pledged or mortgaged in order to collect the amount of his claim from the proceeds.

If he wishes to secure a title to the mortgaged property, he can buy it in the foreclosure sale (Montevirgin vs. CA, 112 SCRA 641)

F. Pledgor, mortgagor, antichretic debtor retains ownership of the thing given as a security PLEDGE (Arts 2093 – 2123)

11

A contract wherein the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing fulfilment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Special Requisites (in addition to the common essential requisites): 1. Possession of the thing pledged must be transferred to the creditor or a third person by agreement

(Art 2093); 2. It can only cover movable property and incorporeal rights evidenced by documents of title and the

instruments proving the right pledged shall be delivered to the creditor, and if negotiable must be endorsed (Art 2094); and

3. The description of the thing pledged and the date must appear in a public instrument to bind third persons, but not for the validity of the contract (Art 2096).

Kinds: 1. Conventional /Voluntary – created by contract 2. Legal – created by operation of law (examples: Art. 546, 1731 and 1914 NCC) NOTES:

The provisions of possession, care and sale of the thing as well as on the termination of the pledge governing conventional pledges are applicable to pledges created by operation of law (Art 2121)

Unlike, however, in conventional pledge where the debtor is not entitled to the excess unless it is otherwise agreed, in legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall be delivered to the debtor.

In legal pledge, there is no definite period for the payment of the principal obligation. The pledgee must make a demand for the payment of the amount due him; otherwise he cannot exercise the right of sale at public auction (Art 2122)

Characteristics: 1. Real contract – it is perfected by the delivery of the thing pledged by the debtor who is called the

pledgor to the creditor who is called the pledgee, or to a third person by common agreement; 2. Accessory contract – it has no independent existence of its own; 3. Unilateral contract – it creates an obligation solely on the part of the creditor to return the thing

subject thereof upon the fulfilment of the principal obligation; and 4. Subsidiary contract – the obligation incurred does not arise until the fulfilment of the principal

obligation which is secured. Consideration in pledge:

Insofar as the pledgor is concerned, the cause is the principal obligation.

If the pledgor is not the debtor, the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor.

Extent of pledge: Unless stipulated otherwise, pledge extends to the fruits, interests or earnings of the thing. Rights and Obligations of a Pledgor

Rights Obligations 1. To demand return in case of reasonable grounds to fear destruction or impairment of the thing without the pledgee’s fault, subject to the duty of replacement

1. To advise the pledgee of the flaws of the thing (Art 2101) 2. Not to demand the return of the thing until after full payment of

12

(Art 2107) 2. To bid and be preferred at the public auction (Art 2113) 3. To alienate the thing pledged provided the pledgee consents to the sale (Art 2097) 4. To ask that the thing pledged be deposited (Arts 2104 & 2106)

the debt, including interest due thereon and expenses incurred for its preservation (Art 2105)

Rights of the Pledgee

KEY: D SBC BA2R2OPS2 1. Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality (Art 2109) 2. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art 2108) 3. To bring actions pertaining to the owner (Art 2103) 4. To choose which of several things pledged shall be sold 5. To bid at the public auction (Art 2113) 6. To appropriate the thing in case of failure of the 2nd public auction (Art 2112) 7. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art 2102) 8. To retain excess value received in the public sale (Art 2115) 9. To retain the thing until after full payment of the debt (Art 2098) 10. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099) 11. To object to the alienation of the thing 12. To possess the thing (Art 2098) 13. To sell at public auction in case of non-payment of debt at maturity (Art 2112) To choose which of the several things pledged shall be sold (Art 2119) 14. Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality (Art 2109) 15. To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art 2108) 16. To bring actions pertaining to the owner (Art 2103) 17. To choose which of several things pledged shall be sold 18. To bid at the public auction (Art 2113) 19. To appropriate the thing in case of failure of the 2nd public auction (Art 2112) 20. To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit (Art 2102) 21. To retain excess value received in the public sale (Art 2115) 22. To retain the thing until after full payment of the debt (Art 2098) 23. To be reimbursed for the expenses made for the preservation of the thing pledged (Art 2099) 24. To object to the alienation of the thing 25. To possess the thing (Art 2098) 26. To sell at public auction in case of non-payment of debt at maturity (Art 2112) 27. To choose which of the several things pledged shall be sold (Art 2119) Obligations of the Pledgee

KEY: CUDA3

1. Take care of the thing with the diligence of a good father of a family (Art 2099) 2. Not to use thing unless authorized or by the owner or its preservation requires its use (Art 2104) 3. Not to deposit the thing with a 3rd person unless so stipulated (Art 2100) 4. Responsibility for acts of agents and employees as regards the thing (Art 2100)

13

5. To advise pledgor of danger to the thing (Art 2107) 6. To advise pledgor of the result of the public auction (Art 2116) RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED (ART.2107) Requisites:

1. The pledgor has reasonable grounds to fear the destruction or impairment of the thin pledged 2. There is no fault on the part of the pledgee 3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind

and quality as the former 4. The pledge does not choose to exercise his right to cause the thing pledged to be sold at public

auction NOTE: The pledgee’s right to have the thing pledged sold at public sale granted under the Article 2108 is superior to that given to the pledgor to substitute the thing pledged under Article 2107. Prohibition against double pledge Property which has been lawfully pledged to one creditor cannot be pledged to another as long as

the first one subsists. NOTE: Possession of a creditor of the thing pledged is an essential requisite of pledge. Extinguishment of Pledge (CRAPS) 1. For the same causes as all other obligations (Art 1231) 2. Return of the thing pledged by the pledgee to the pledgor (Art 2110) 3. Statement in writing by the pledgee that he renounces or abandons the pledge (Art 2111) 4. Payment of the debt (Art 2105) 5. Sale of thing pledged at public auction (Art 2115) NOTE: The possession by the debtor or owner of the thing pledged subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, that the pledge has been extinguished but not the principal obligation itself. (Art 2110) Requirements for sale of thing pledged at public auction: (Art 2112) 1. The debt is due and unpaid 2. Sale must be at a public auction 3. there must be notice to the pledgor and owner, stating the amount due 4. Sale must be with the intervention of a notary public Effect of sale of the thing pledged: (Art 2115) 1. 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

2. If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the contrary is provided

3. If the price of the sale is less, the creditor is not entitled to recover the deficiency even if there is a stipulation to that effect

REAL ESTATE MORTGAGE (Articles 2124-2131) A contract whereby the debtor secures to the creditor the fulfilment of a principal obligation,

specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated.

Characteristics of the contract:

1. Real 2. Accessory 3. Subsidiary

14

4. Unilateral – it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled.

NOTES:

As an accessory contract, its consideration is that of the principal contract from which it receives life.

A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon. Until discharged, it follows the property wherever it goes and subsists notwithstanding changes of ownership.

A mortgage gives the mortgagee no right or claim to the possession of the property, and therefore, a mere mortgagee has no right to eject an occupant of the property mortgaged unless the mortgage should contain some provision to that effect. The only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. If the possession is transferred to the mortgagee, it must not expressly be for purpose of applying the fruits to the interest then to the principal of the credit, for then it would be an antichresis.

It is not an essential requisite that the principal of the mortgage credit bears interest, or that the interest as compensation for the use of the principal and enjoyment of its fruits be in the form of a certain percent thereof.

Special Requisites (in addition to the common essential requisites): 1. It can cover only immovable property and alienable real rights imposed upon immovables (Art

2124); 2. It must appear in a public instrument (Art. 2125); and 3. Registration in the registry of property is necessary to bind third persons, but not for the validity of

the contract (Art 2125). An order for foreclosure cannot be refused on the ground that the mortgage had not been

registered provided no innocent third parties are involved. NOTE: Where a mortgage is not valid or false, the principal obligation which it guarantees is not rendered null and void. What is lost only is the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation but the mortgage deed remains as evidence or proof of a personal obligation of the debtor and the amount due to the creditor may be enforced in an ordinary personal action. Kinds: 1. Voluntary – agreed to by the parties or constituted by the will of the owner of the property on

which it is created 2. Legal – one required by law to be executed in favour of certain persons

The persons in whose favour the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized (Art 2125 par 2)

3. Equitable – one which, although lacking the formalities of a mortgage, shows the intention of the parties to make the property a security for a debt

PLEDGE REAL MORTGAGE 1. Constituted on movables

1. Constituted on immovables

2. Property is delivered to pledgee or by common consent to a third person

2. Delivery is not necessary

3. Not valid against third persons unless a

3. Not valid against third persons unless

15

description of the thing pledged and date of pledge appear in a public instrument

registered

Extent of Mortgage: Absent express stipulation to the contrary, the mortgage includes the accessions, improvements,

growing fruits and income of the property not yet received when the obligation becomes due and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use (Art 2127)

Object of Mortgage: Future property cannot be an object of a contract of mortgage (Art 2085[2]) However, a stipulation

subjecting to the mortgage lien, properties (improvements) which the mortgagor may subsequently acquire install, or use in connection with real property already mortgaged belonging to the mortgagor is valid (People’s Bank and Trust Co. vs. Dahican Lumber Co., 20 SCRA 84)

Special Rights: 1. Mortgagor - To alienate the mortgaged property but the mortgage shall remain attached to the

property. NOTE: A stipulation forbidding the owner from alienating the immovable mortgage shall be void (Art 2130) being contrary to public policy inasmuch as the transmission of property should not be unduly impeded. 2. Mortgagee - To claim from a 3rd person in possession of the mortgaged property the payment of the

part of the credit secured by the which said third person possesses (Art 2129) NOTE: It is necessary that prior demand for payment must have been made on the debtor and the latter failed to pay (BPI vs Concepcion & Hijos, Inc., 53 Phil 906) Foreclosure The remedy available to the mortgagee by which he subjects the mortgaged property to the

satisfaction of the obligation to secure that for which the mortgage was given NOTES:

It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself (DBP vs Zaragoza, 84 SCRA 668)

Foreclosure is valid where the debtor is in default in the payment of his obligation (Gobonseng, Jr. vs CA, 246 SCRA 472)

Kinds: 1. Judicial – ordinary action for foreclosure under Rule 68 of the Rules of Court 2. Extrajudicial – when mortgagee is given a special power of attorney to sell the mortgaged property

by public auction, under Act No. 3135

Judicial foreclosure

Extrajudicial foreclosure

1. There is court intervention

1. No court intervention

2. Decisions are appealable

2. Not appealable because it is immediately executory

3. Order of court cuts off all rights of

3. Foreclosure does not cut off right of

16

the parties impleaded

all parties involved

4. There is equity of redemption except on banks which provides for a right of redemption

4. There is right of redemption

5. Period of redemption starts from the finality of the judgment until order of confirmation

5. Period to redeem start from date of registration of certificate of sale

6. No need for a special power of attorney in the contract of mortgage

6. Special power of attorney in favor of mortgagee is needed in the contract

NOTES:

A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes a mortgage in good faith and for valuable consideration, the record showing clear title to the mortgagor, will be protected against equitable claims on the title in favor of third persons, of which he had no actual or constructive notice (St. Dominic Corporation vs. IAC 151 SCRA 577).

Where there is a right to redeem, inadequacy of price is not material because the judgment debtor may reacquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the auction sale and consequently not sufficient to set aside the sale. Mere inadequacy of the price obtained at the sheriff’s sale will not be sufficient to set aside the sale unless “the price is so inadequate as to shock the conscience of the court” taking into consideration the peculiar circumstances attendant thereto. (Sulit vs. CA, 268 SCRA 441)

Should there remain a balance due to the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency. This rule applies both to judicial and extra-judicial foreclosure real mortgage.

The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action accrues (Arts 1142 & 1144).

Stipulation of upset price or “tipo” It is a stipulation in a mortgage of real property of minimum price at which the property shall be

sold, to become operative in the event of a foreclosure sale at public auction. It is null and void for the property must be sold to the highest bidder. Parties cannot, by agreement, contravene the law and interfere with the lawful procedure of the courts (BPI vs Yulo, 31 Phil 476)

Extrajudicial foreclosure real property (Act No. 3135) The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale

of the property mortgaged if and when the mortgagee is given a special power of express authority to do so in the deed itself or in a document annexed thereto.

The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) as it is an essential and inseparable part of a bilateral agreement (Perez vs PNB, 17 SCRA 833).

No sale can be legally made outside the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in the said place in the municipal building of the municipality in which the property or part thereof is situated.

Procedure for extrajudicial foreclosure of both real estate mortgage under Act No. 3135 and chattel mortgage under Act No. 1508 (A.M. No. 99-10-05-0, January 15, 2000)

17

1. Filing of application before the Executive Judge through the Clerk of Court 2. Clerk of Court will examine whether the requirement of the law have been complied with, that is,

whether the notice of sale has been posted for not less than 20 days in at least three (3) public places of the municipality or city where the property is situated, and if the same is worth more than P400.00, that such notice has been published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the city of municipality

3. The certificate of sale must be approved by the Executive Judge 4. Where the application concerns extrajudicial foreclosure of real mortgages in different locations

covering one indebtedness, only one filing fee corresponding to such debt shall be collected 5. The Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the

filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and their respective locations

6. The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1, PD No. 1079

7. The application of shall be raffled among all sheriffs 8. After the redemption period has expired, the Clerk of Court shall archive the records. 9. No auction sale shall be held unless there are at least two (2) participating bidders, otherwise the

sale shall be postponed to another date. If on the new date set forth for the sale there shall not be at least two bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff of the Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of sale.

NOTES:

The Mortgagor and Mortgagee have no right to waive the posting and publication requirements under Act. No. 3135. Notices are given to secure bidders and prevent a sacrifice of the property.

Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor’s benefit, but for the public or third persons. Failure to comply with the statutory requirements as to publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale.Lack of republication of notice of foreclosure sale made subsequently after the original date renders such sale void (PNB vs. Nepomuceno Productions Inc., G.R. No. 139479. December 27, 2002).

Sec 3 of Act 3135 does not require personal or any particular notice on the mortgagor much less on his successors-in-interest where there is no contractual stipulation therefor. Hence, unless required in the mortgage contract, the lack of such notice is not a ground to set aside a foreclosure sale.

Neither does Sec 3 require posting of notice of sale on the mortgage property and the certificate of posting is not required, much less considered indispensable, for the validity of a foreclosure sale.

Redemption It is the transaction by which the mortgagor reacquires or buys back the property which may have

passed under the mortgage, or divests the property of the lien which the mortgage may have created.

NOTES:

A sale by the mortgagor to a third party of the mortgaged property during the period for redemption transfers only the right to redeem the property and the right to possess, use and enjoy the same during said period.

Where sale with assumption of mortgage not registered and made without the consent of the mortgagee, the buyer, thereof, was not validly substituted as debtor and, hence, had no right to redeem (Bonnevie vs. CA, 125 SCRA 122).

Kinds: 1. Equity of Redemption – right of mortgagor to redeem the mortgaged property after his default in

the performance of the conditions of the mortgage within the 90-day period from the date of the

18

service of the order of foreclosure or even thereafter but before the confirmation of the sale. Applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure.

NOTE: Redemption of the banking institutions is allowed within one year from confirmation of sale. 2. Right of Redemption – right of mortgagor to redeem the mortgaged property within one year from

the date of registration of the certificate of sale. Applies only to extrajudicial foreclosure of real mortgage.

NOTE: The right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513) Period of Redemption 1. Extra-judicial (Act #3135)

a. natural person – one year from registration of the certificate of sale with Registry of Deeds b. juridical person – same rule as natural person c. juridical person (mortgagee is bank) - three months after foreclosure or before registration of

certificate of foreclosure which ever is earlier (sec. 47, of General Banking Law) 2. Judicial – before confirmation of the sale by the court NOTE: Allowing a redemption after the lapse of the statutory period, when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the right of redemption. There is nothing in the law which prevents a waiver of the statutory period for redemption (Ramirez vs CA, 219 SCRA 598). Amount of the redemption price: 1. Mortgagee is not a bank (Act No. 3135, in relation to Sec. 28, Rule 39 of Rules of Court)

a. purchase price of the property b. 1% interest per month on the purchase price c. taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest

computed from the date of registration of sale, up to the time of redemption 2. Mortgagee is a bank (GBL 2000)

a. amount due under the mortgage deed b. interest c. cost and expenses NOTE: Redemption price in this case is reduced by the income received from the property

ANTICHRESIS (Articles 2132 -2139) A contract whereby the creditor acquires the right to receive the fruits of an immovable of the

debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit (Art 2132)

Characteristics 1. Accessory contract – it secures the performance of a principal obligation 2. Formal contract – it must be in a specified form to be valid, i.e., “in writing.” (Art 2134) Special Requisites (in addition to the common essential requisites):

19

1. It can cover only the fruits of an immovable property; (Art 2132) 2. Delivery of the immovable is necessary for the creditor to receive the fruits and not that the

contract shall be binding; 3. Amount of principal and interest must be specified in writing (Art. 2134); and 4. Express agreement that debtor will give possession of the property to creditor and that the latter

will apply the fruits to the interest, if any, then to the principal of his credit. (Art 2132) NOTE: The obligation to pay interest is not of the essence of the contract of antichresis, there being nothing in the Code to show that antichresis is only applicable to securing the payment of interest-bearing loans. On the contrary, antichresis is susceptible of guaranteeing all kinds of obligations, pure or conditional

Antichresis Pledge 1. Refers to real property

1. Refers to personal property

2. Perfected by mere consent

2. Perfected by delivery of the thing pledged

3. Consensual contract 3. Real Contract

Antichresis Real Mortgage 1. Property is delivered to creditor

1. Debtor usually retains possession of the property

2. Creditor acquires only the right to receive the fruits of the property, hence, it does not produce a real right

2. Creditor does not have any right to receive the fruits; but the mortgage creates a real right over the property

3. The creditor, unless there is stipulation to the contrary, is obliged to pay the taxes and charges upon the estate

3. The creditor has no such obligation

4. It is expressly stipulated that the creditor given possession of the property shall apply all the fruits thereof to the payment of interest, if owing, and thereafter to the principal

4. There is no such obligation on part of mortgagee

Subject matter of both is real property

Obligations of antichretic creditor: 1 To pay taxes and charges on the estate, including necessary expenses

NOTE: Creditor may avoid said obligation by: a. compelling debtor to reacquire enjoyment of the property or b. by stipulation to the contrary

20

2 To apply all the fruits, after receiving them, to the payment of interest, if owing, and thereafter to the principal

3 To render an account of the fruits to the debtor 4 To bear the expenses necessary for its preservation and repair Remedies of creditor in case of non-payment of debt 1. Bring an action for specific performance; or 2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the

Rules of Court.(Art 2137) NOTES:

The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera vs. El Hogar Filipino, Inc., 68 Phil 712).

A stipulation authorizing the antichretic creditor to appropriate the property upon the non-payment of the debt within the agreed period is void (Art 2088).

CHATTEL MORTGAGE (Articles 2140-2141) A 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). Characteristics 1. Accessory contract – it is for the purpose of securing the performance of a principal obligation 2. Formal contract – registration in the Chattel Mortgage Register is indispensable for its validity 3. Unilateral contract – it produces only obligations on the part of the creditor to free the thing from

the encumbrance on fulfilment of the obligation. Special Requisites (in addition to the common essential requisites): 1. It can cover only personal or movable property in general; however, the parties may treat as

personal property that which by its nature would be real property; 2. Registration of the mortgage with the Chattel Mortgage Register where the mortgagor resides; if

property is located in a different province, registration in both provinces required; 3. Description of the property as would enable the parties or other persons to identify the same after

reasonable investigation and inquiry; and 4. Accompanied by an affidavit of good faith to bind third persons, but not for the validity of the

contract. 5. It can cover only obligations existing at the time the mortgage is constituted.

NOTE: A mortgage containing a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (Jaca vs Davao Lumber Co., 113 SCRA 107)

Effect of registration: Creates a real right The registration of the chattel mortgage is an effective and binding notice to other creditors of its

existence and creates a real right or a lien which, being recorded, follows the chattel wherever it goes. The registration gives the mortgagee symbolical possession (Northern Motors, Inc. vs. Coquia, 68 SCRA 374).

Effect of failure to register chattel mortgage in the chattel mortgage registry Article 2140 makes the recording in the Chattel Mortgage Register an essential requisite but if the

instrument is not recorded, the mortgage is nevertheless binding between the parties. But the person in whose favour the law establishes a mortgage has no other right than to demand the execution and the recording of the document.

21

Chattel Mortgage Pledge

1. Delivery of the personal property to the mortgage is not necessary

1. Delivery of the thing pledged is necessary

2. registration in the Chattel Mortgage Registry is necessary for its validity

2. registration not necessary to be valid

3. If property is foreclosed, the excess over the amount due goes to the debtor

3. Debtor is not entitled to excess unless otherwise agreed or except in case of legal pledge

4. If there is deficiency after foreclosure, creditor is entitled to recover the deficiency from the debtor, except under Art. 1484

4. If there is deficiency, creditor is not entitled to recover notwithstanding any stipulation to the contrary

Subject matter of both is movable property

Affidavit of Good Faith Oath in a contract of chattel mortgage wherein the parties "severally swear that the mortgage is

made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud.” (Sec. 5, Chattel Mortgage Law)

Effect of absence

The special affidavit is required only for the purpose of transforming an already valid mortgage into “preferred mortgage.” Thus, it is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. In other words, its absence vitiates the mortgage only as against third persons without notice like creditors and subsequent encumbrancers.

Foreclosure of Chattel Mortgage NOTES:

Foreclosure sale in chattel mortgage is by public auction under Act No. 1508, but the parties may stipulate that it be by private sale.

The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer. The 30-day period is also a grace period for the mortgagor to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor (Cabral vs. Evangelista, 28 SCRA 1000).

Application of proceed of sale:

1. Costs and expenses of keeping and sale 2. Payment of the obligation secured by the mortgage 3. Claims of persons holding subsequent mortgages in their order 4. The balance, if any, shall be paid to the mortgagor or person holding under him

22

NOTES:

The creditor may maintain an action for the deficiency, except if the chattel mortgage is constituted as security for the purchase of personal property payable in instalments (Art. 1484).

The action for deficiency may be brought within ten (10) years from the time the cause of action accrues (Arts 1141 and 1142).

Only equity of redemption is available to the mortgagor; the latter can no longer redeem after the confirmation of the foreclosure sale.

Right of redemption

When the condition of a chattel mortgage is broken the following may redeem: a) mortgagor; b) person holding a subsequent mortgage; or c) subsequent attaching creditor.

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.

The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs, and expenses incurred by such breach of condition before the sale thereof (Sec 13, Act No. 1508).

Right to possession of foreclosed property 1. Real mortgage – After the redemption period has expired, the purchaser of the property has the

right to a conveyance and to be placed in possession thereof.

NOTES:

Purchaser is not obliged to bring a separate suit for possession. He must invoke the aid of the courts and ask for a WRIT OF POSSESSION.

Section 7 of Act No. 3135 allows the purchaser to take possession of the foreclosed property during the period of redemption upon filing of an ex parte application and approval of a bond.

2. Chattel mortgage – When default occurs and the creditor desires to foreclose, the creditor has the

right to take the property as a preliminary step for its sale. NOTE: Where the debtor refuses to yield the property, the creditor’s remedy is to institute an action either to effect judicial foreclosure directly or to secure possession (REPLEVIN) as a preliminary to the sale contemplated in Section 14 or Act. No. 1508

CONCURRENCE AND PREFERENCE OF CREDITS (Articles 2236 – 2251) Concurrence of Credits Possession by two or more creditors of equal rights or privileges over the same property or all of

the property of the debtor Preference of Credits Right held by a creditor to be preferred in the payment of his claim above others out of the

debtor’s assets. NOTES:

The rules on preference of credits apply only when two or more creditors have separate and distinct claims against the same debtor who has insufficient property.

Preference creates no lien on property, and, therefore, gives no interest in property, specific or general, to the preferred creditor but a preference in application of the proceeds after the sale. (Molina vs. Somes, 31 Phil. 76)

The preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and the claims held by his various creditors have been established. (DBP vs. NLRC, 183 SCRA 328)

23

Preference of Credit

Lien

Applies only to claims which do not attach to specific properties

Creates a charge on a particular property

Liability of debtor’s property for his obligations GENERAL RULE: Debtor is liable with all his property, present and future, for the fulfilment of his obligations. (Art 2236) EXEMPT PROPERTY:

1. Present property – those provided under Arts. 155 and 205 of the Family Code, Sec. 13, Rule 39 of the Rules of Court, and Sec. 118 of the Public Land Act

2. Future property – a debtor who obtains a discharge from his debts on account of his insolvency, is not liable for the unsatisfied claims of his creditors with said property subject to certain exceptions expressly provided by law. (Secs. 68, 69, The Insolvency Law [Act No. 1956])

3. Property under legal custody and those owned by municipal corporations necessary for governmental purposes

General Categories of Credit: 1. Special Preferred Credits - those listed in Arts. 2241 and 2242 shall be considered as mortgages and pledges of real or personal property or liens (Art. 2243). Hence, they are not included in the insolvent debtor's assets. NOTES:

Arts. 2241 and 2242 do not give the order of preference or priority of payment. They merely enumerate the credits which enjoy preference with respect to specific movables or immovables. With respect to the same specific movables or immovables, creditors, with the exception of the State (No. 1), merely concur.

They only find application when there is a concurrence of credits, i.e., when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise.

Article 2242 makes no distinction between registered and unregistered vendor’s lien (No. 2). Hence, any lien of that kind enjoys the preferred credit status. Unlike the unpaid price of real property sold, mortgage credits (No. 5), in order to be given preference, should be recorded in the Registry of Property. But a recorded mortgage credit is superior to an unrecorded unpaid vendor’s lien (De Barretto vs. Villanueva, 1 SCRA 288)

The priority rule applies to credits annotated in the Registry of Property. As to credits mentioned in No. 7 of Article 2242, there is preference among the attachments or executions according to the order of the time they were levied upon the property. The pro rata rule in Article 2249 does not apply; otherwise, the result would be absurd. The preference of a credit annotated by an attachment or execution could be defeated by simply obtaining a writ of attachment or execution, no matter how much later (Manabat vs Laguna Federation of Facomas, Inc., 19 SCRA 621).

The last paragraph of Article 2241 applies only when the right of ownership in such property continues in the debtor, and, therefore, it is not applicable to cases where the debtor has parted with his ownership therein, as where he has sold the property (Peña vs. Mitchell, 9 Phil 587)

2. Ordinary Preferred Credits - those listed in Art. 2244 as amended by Art. 110 of the Labor Code. NOTES:

The provision not only enumerates the preferred credits with respect to other property, real and personal, of the debtor, but also gives their order of preference “in the order named”.

24

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favour of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority.

Article 2244, particularly par (14) item (1) thereof, is not applicable to obligations of the State as it is a recognized doctrine that the State is always solvent. It is inconceivable for the State to voluntarily initiate insolvency or general liquidation proceedings or to be subjected to such proceedings under its own laws.

3. Common Credits – those listed under Art. 2245, which shall be paid pro rata regardless of dates. NOTE: Ordinary Preferred and Common Credits cover only “free property” of the debtor, or those not subjected to Special Preferred Credit. Effects of Article 110 of Labor Code to Art 2244: 1. Removed the one-year limitation found in No. 2 of Art. 2244 2. Moving up the claims for unpaid wages (and other monetary claims) of laborers or workers of

insolvent from second priority to first priority in the order of preference established by Art. 2244 NOTES:

In case of bankruptcy or liquidation of the employer’s business, the unpaid wages and other monetary claims of the employees shall be given first preference and shall be paid in full before the claims of the government and other creditors may be paid. The terms, “declaration” of bankruptcy, or “judicial” liquidation have been eliminated, nevertheless, according to the SC, bankruptcy or liquidation proceedings are still necessary for the operation of the preference accorded to workers under Art. 110 of the Labor Code. (DBP vs. NLRC 183 SCRA 328; RA No. 6715 Sec 10)

In case of rehabilitation, the preference of credit granted to employees under Art 110 of the Labor Code is not applicable (Rubberworld [Phils.] vs CA, 305 SCRA 722).

Refectionary Credit Indebtedness incurred in the repair or reconstruction of something previously made, such repair or

reconstruction being made necessary by the deterioration or destruction of the thing as it formerly existed.

ORDER OF PREFERENCE OF CREDITS Arts. 2241 and 2242, jointly with Arts. 2246 to 2249 establish a two-tier order of preference: 1. First tier – includes taxes, duties and fees due on specific movable or immovable property; 2. Second tier – all other special preferred (non-tax) credits shall be satisfied pro-rata, out of any

residual value of the specific property to which such credits relate. NOTES:

The pro-rata rule does not apply to credits annotated in the Registry of Property by virtue of a judicial order, by attachments and executions, which are preferred as to “later credits”. In satisfying several credits annotated by attachments or executions, the rule is still preference according to the priority of the credits in the order of time.

In order to make the pro rating provided in Art 2249 fully effective, the preferred creditors

25

enumerated in Nos. 2 to 14 of Art 2242 must necessarily be convened, and the import of their claims ascertained. There must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, e.g. insolvency, settlement of decedent’s estate, or other liquidation proceedings except where there are not more than one creditor.