Download - Credit Transcription - Prefi
-
8/7/2019 Credit Transcription - Prefi
1/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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,
-
8/7/2019 Credit Transcription - Prefi
2/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
3/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
4/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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.
-
8/7/2019 Credit Transcription - Prefi
5/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
6/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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.
-
8/7/2019 Credit Transcription - Prefi
7/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
8/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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.
-
8/7/2019 Credit Transcription - Prefi
9/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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,
-
8/7/2019 Credit Transcription - Prefi
10/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
11/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
12/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
13/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
14/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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.
-
8/7/2019 Credit Transcription - Prefi
15/16
Grace and Clarz Credit Transcription Notes forPrefi
Feb.11
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
-
8/7/2019 Credit Transcription - Prefi
16/16
Grace and Clarz Credit T