1
CREDIT TRANSACTIONS
INTRODUCTION
Meaning and scope of credit transactions.
(1) Credit transactions include all transactions involving the
purchase or loan of goods, services, or money in the present with
a promise to pay or deliver in the future.
(2) By the use of credit, more exchanges are possible, persons
are able to enjoy a thing today but pay for it later, and through
the banking system, actual money transfer is eliminated by cancellation of debts and credits. (see Principles of Economics, 9th
ed., by C.L. James, p. 130, Barnes & Noble College Outline Series.)
(3) Credit transactions are really contracts of security. They
are of two types:
(a) Secured transactions or contracts of real security. — Those
supported by a collateral or an encumbrance of property;1
and
(b) Unsecured transactions or contracts of personal security.
— Those the fulfillment of which by the principal debtor is
secured or supported only by a promise to pay or the personal
commitment of another such as a guarantor or surety.
1
The encumbrance is effected as follows: in pledge, by placing the movable property
in the possession of the creditor; in chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real estate mortgage, by the execution
of a public instrument encumbering the real property covered thereby; and in antichresis,
by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of the interest
and principal obligation. (Acme Shoe Rubber & Plastic Corp. vs. Court of Appeals, 260
SCRA 714 [1996].)
1
2
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
(4) Bailment contracts, together with the other related subjects such as usury (Act No. 2655, as amended [The Usury Law].),
the contracts of guaranty and suretyship, mortgage, antichresis,
and concurrence and preference of credits (Arts.* 2236-2251.), all
make up the so-called “credit transactions.”
Meaning and kinds of security.
The term security is something given, deposited, or serving as
a means to ensure the fulfillment or enforcement of an obligation
or of protecting some interest in property.
The security, as herein before intimated, may be personal
security, as when an individual becomes a surety or a guarantor; or
a property or real security, as when a mortgage, pledge, antichresis,
charge or lien or other device used to have property held, out of
which the person to be made secure can be compensated for loss.
Thus, a secured creditor is one who holds a security from his
debtor for payment of the latter’s debts. (see Navoa vs. Court of
Appeals, 251 SCRA 545 [1995].)
Meaning of bailment.
The word “bailment” comes from the French word “bailler,”
meaning “to deliver.”
It may be defined as the delivery of property of one person
to another in trust for a specific purpose, with a contract, express
or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it. (3
R.C.L. 73.)
Creation of bailment.
In general, bailment may be said to be a contractual relation.
To be legally enforceable, it must contain all the elements of a
valid contract. (see Art. 1318.)
*Unless otherwise indicated, refers to article in the Civil Code.
INTRODUCTION
3
It does not necessarily mean that an agreement is always
necessary to create bailment. It may be created by operation of
law. (see Art. 1996; 8 Am. Jur. 2d 950.)
Parties in bailment.
The parties to a bailment are the:
(1) Bailor (Comodatario2). — the giver; the party who delivers
the possession or custody of the thing bailed; and
(2) Bailee (Comodante3). — the recipient; the party who
receives the possession or custody of the thing thus delivered.
Kinds of contractual bailment.
There are several kinds of bailment creating different rights
and obligations on the part of the bailor and the bailee although
the different kinds are of the same general character. In every
bailment, there is an obligation on the part of the bailee to restore
the subject of the bailment in the same or in altered form or to
account therefor. (Ibid., 189.)
The classification is generally with reference to compensation
under which bailments are divided into three heads, namely:
(1) Those for the sole benefit of the bailor;
(2) Those for the sole benefit of the bailee; and
(3) Those for the benefit of both parties.
Under the first kind belongs gratuitous deposit (Art. 1965.)
and mandatum. The latter is a bailment of goods without
recompense where the mandatory or person to whom the
property is delivered undertakes to do some act with respect to
the same; as simply to carry it, or keep it, or otherwise to do
something with respect to it gratuitously. (see ibid., 910.)
As regards the second group, we have commodatum and
gratuitous simple loan or mutuum. (Art. 1933.)
2
In Spanish law; commodans in Roman law.
In Spanish law; commodatarius in Roman law.
3
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COMMENTS AND CASES ON CREDIT
TRANSACTIONS
The third type includes deposit for a compensation (Art.
1965.), including involuntary deposit (see Arts. 1996[2], 1997,
par. 2.), pledge (Arts. 2085, 2903.), and bailments for hire.
The first two kinds are the gratuitous bailments. In such bailments, there is really no consideration for they are considered
more as a favor by one party to the party benefited; but the law
imposes definite obligations upon both the bailor and the bailee.
The third kind, usually results from bailments involving business transactions. These bailments are known as mutual-benefit
bailments.
Kinds of bailment for hire.
Bailment for hire (locatio et conductio) arises when goods are left
with the bailee for some use or service by him and is always for
some compensation. This specie of bailment has been subdivided
as follows:
(1) Hire of things (locatio rei). — where goods are delivered for
the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.);
(2) Hire of service (locatio operis faciendi). — where goods
are delivered for some work or labor upon it by the bailee (i.e.,
contract for a piece of work, Art. 1713.);
(3) Hire for carriage of goods (locatio operis mercium vehendarum).
— where goods are delivered either to a common carrier (Art.
1732.) or to a private person for the purpose of being carried
from place to place (see 6 Am. Jur. 180-182.); and
(4) Hire of custody (locatio custodiae). — where goods are
delivered for storage. (Arts. 1507-1520; Act No. 2137 [The
Warehouse Receipts Law].)
— oOo —
5
I
LOAN*
(Arts. 1933-1961.)
GENERAL PROVISIONS
ARTICLE 1933. By the contract of loan, one of the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to
pay interest.
In commodatum the bailor retains the ownerships of
the thing loaned, while in simple loan, ownership passes
to the borrower. (1740a)
Definition of contract of loan.
The above provision defines two kinds of loan and gives their
characteristics.
Governing law.
Like any other contract, the contract of loan is governed by
the rules as to the requisites and validity of contracts in general.
*Title XI, Book IV, Civil Code.
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COMMENTS AND CASES ON CREDIT
TRANSACTIONS
6
Art. 1933
Our law formerly made a distinction between civil loans
governed by the old Civil Code and commercial loans regulated
by the Code of Commerce. This distinction has been abolished
(see Art. 2270[2].) and all loans are now primarily governed by the
applicable articles (Arts. 1933-1961.) in Title XI, Book IV, subject
to its transitional provisions. (Arts. 2252-2269.) Title V, Articles
311-314 of the Code of Commerce which are the provisions on
commercial loans are repealed.
Characteristics of the contract.
The contract of loan is:
(1) a real contract because the delivery of the thing loaned is
necessary for the perfection of the contract (Art. 1934; see also
Art. 1316.); and
(2) a unilateral contract because once the subject matter has
been delivered, it creates obligations on the part of only one of
the parties, i.e., the borrower.
Cause or consideration in a contract
of loan.
In a contract of loan, the cause is:
(1) as to the borrower, the acquisition of the thing; and
(2) as to the lender, the right to demand its return or its
equivalent.
Kinds of loan.
There are two kinds of loan, namely:
(1) Commodatum. — where the bailor (lender) delivers to the
bailee (borrower) a non-consumable thing so that the latter may
use it for a certain time and return the identical thing; and
(2) Simple loan or mutuum. — where the lender delivers to the
borrower money or other consumable thing upon the condition
that the latter shall pay the same amount of the same kind and
quality.
A thing is consumable when it is consumed when used in a
manner appropriate to its purpose or nature, like rice, gasoline,
money, fruit, firewood, etc. (see Art. 418.)
Art. 1933
LOAN
General Provisions
7
Commodatum and mutuum are Roman terms.
Loans distinguished from credit.
The credit of an individual means his ability to borrow money
or things by virtue of the confidence or trust reposed by a lender
that he will pay what he may promise within a specified period.
A loan (mutuum) means the delivery by one party (lender/
creditor), and the receipt by the other party (borrower/debtor)
who become the owner, of a given sum of money or other consumable thing upon an agreement, express or implied, to repay
the same amount of the same kind and quality, with or without
interest.
The concession of a “credit” necessarily involves the granting
of “loans” up to the limit of the amount fixed in the “credit.”
(People vs. Concepcion, 44 Phil. 126 [1922].)
Meaning of credit as opposed
to debt.
The term “credit,” in its usual meaning, is a sum credited on
the books of a company to a person who appears to be entitled
to it. It presupposes a creditor-debtor relationship, and may be
said to imply ability, by reason of property or estates, to make a
promised payment. It is the correlative to debt or indebtedness,
and that which is due to any person as distinguished from that
which he owes. (Republic vs. First National City Bank of New
York, 3 SCRA 851 [1961].)
It is a debt considered from the creditor’s standpoint. (Black’s
Law Dictionary, 4th ed., p. 441.) It may consist of money, goods,
or services.
Loan distinguished from discounting
of paper.
To discount a paper is a mode of loaning money, with these
distinctions:
(1) In a discount, interest is deducted in advance (see Sec. 5,
The Usury Law, infra.), while in a loan, interest is usually taken
at the expiration of a credit; and
8
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1933
(2) A discount is always on a double-name paper,1 while a
loan is generally, on a single-name paper.2 (People vs. Concepcion,
44 Phil. 126 [1922].)
Thus, on a loan of P1,000.00 at 16% interest, the borrower would
pay P1,160.00 at the end of the year. If the note is discounted, the
interest is deducted from the principal in advance. The borrower
would receive P840.00 but would pay back P1,000.00 at the end
of the year. The P160.00 is called the discount and P840.00 is called
the proceeds.
Discounting is slightly more expensive for the borrower
because interest is calculated on the amount loaned (P1,000.00)
and not on the amount actually received. In general, discount
and interest rates for similar loans are identical.3 (Principles of
Economics, by C.J. James, supra, pp. 131-132.)
ILLUSTRATIVE CASE:
Credit was extended by PNB to a partnership, the only security
required consisted of demand notes which were paid, together with
interest, on maturity.
Facts: By telegrams and a letter of confirmation to the
manager of the branch of PNB (Philippine National Bank),
C, President and member of the board of directors of PNB,
authorized an extension of credit in favor of partnership X, of
which the wife of C is a partner, in the amount of P300,000.00.
The special authorization given was essential in view of prior
memorandum order of C limiting the discretional power of
the local manager to grant loans and discount negotiable
documents to P5,000.00.
Pursuant to the authorization by C, credit aggregating
P300,000.00 was granted the firm, the only security required
consisting of six (6) demand notes. The notes, together with
1
One on which two signatures appear with both parties liable for payment. (Webster’s 3rd New Int. Dictionary)
2
A promissory note with no indorsement other than the signature of the maker.
(Ibid.)
3
A provision for the payment of rentals in advance with the lessee getting a rebate
or discount cannot be construed as a repayment of a loan because there is no grant or
forbearance of money. The difference between a discount and a loan or forbearance is that
the former does not have to be repaid, while the latter is subject to repayment. (Herrera
vs. Petrophil Corporation, 146 SCRA 385 [1986].)
Art. 1933
LOAN
General Provisions
9
the interest, were taken up and paid about two (2) months
later. Under the law (Sec. 35, Act No. 2747.), the PNB “shall
not directly or indirectly grant loans to any of the members of
the board of directors of the bank nor to agents of the branch
banks.”
Issues: (1) Was the granting of a credit of P300,000.00 to
partnership X a loan within the meaning of Section 35 or only a
concession of credit?
(2) Were the demand notes signed by the firm a loan or a
discount?
Held: (1) The concession of a credit necessarily involves the
granting of “loans” up to the limit of the amount fixed in the
“credit.”
(2) The demand notes signed by the firm were not discount
papers but were mere evidences of indebtedness, because (a)
interest was not deducted from the face of the notes, but was
paid when the notes fell due; and (b) they were single-name
and not double-name paper. C violated the prohibition. (People
vs. Concepcion, supra.)
Commodatum and mutuum (simple loan)
distinguished.
It is relatively simple to determine whether a given loan is
commodatum or mutuum by bearing in mind the following
principal points of distinction:
(1) Commodatum ordinarily involves something not consumable (see Art. 1936.), while in mutuum, the subject matter is money or other consumable thing;
(2) In commodatum, ownership of the thing loaned is retained
by the lender (Art. 1933.), while in mutuum, the ownership is
transferred to the borrower;
(3) Commodatum is essentially gratuitous (ibid.), while
mutuum may be gratuitous or it may be onerous, that is, with
stipulation to pay interest;
(4) In commodatum, the borrower must return the same thing
loaned (ibid.), while in mutuum, the borrower need only pay the
same amount of the same kind and quality;
10
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1934
(5) Commodatum may involve real or personal property (Art.
1937.), while mutuum refers only to personal property;
(6) Commodatum is a loan for use or temporary possession
(Art. 1935.), while mutuum is a loan for consumption;
(7) In commodatum, the bailor may demand the return of the
thing loaned before the expiration of the term in case of urgent
need (Art. 1946), while in mutuum, the lender may not demand
its return before the lapse of the term agreed upon; and
(8) In commodatum, the loss of the subject matter is suffered
by the bailor since he is the owner (Art. 1942; Art. 1174.), while in
mutuum, the borrower suffers the loss even if caused exclusively
by a fortuitous event and he is not, therefore, discharged from his
duty to pay.
It may also be said that while commodatum is purely personal
in character (see Art. 1939.), mutuum is not so.
Kinds of commodatum.
Commodatum is divided into:
(1) ordinary commodatum (Art. 1933.); and
(2) precarium. — one whereby the bailor may demand the
thing loaned at will. (see Art. 1947.)
ART. 1934. An accepted promise to deliver something
by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the contract.
(n)
Delivery essential to perfection
of loan.
The rule contained in the above article is a necessary
consequence of the fact that commodatum and mutuum are real
contracts which require the delivery of the subject matter thereof
for their perfection.4
4
Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (n)
Art. 1934
LOAN
General Provisions
11
Delivery is necessary in view of the purpose of the contract
which is to transfer either the use or ownership of the thing
loaned.
Binding effect of accepted promise
to lend.
It does not mean that a promise to lend would be without
efficacy and judicial value. An accepted promise to make a future
loan is a consensual contract5 and, therefore, binding upon the
parties but it is only after delivery, will the real contract of loan
arise. Thus:
(1) Application for loan approved by corporation. — Where an
application for a loan of money was approved by resolution of
the corporation (lender) and the corresponding mortgage was
executed and registered, there arises a perfected consensual
contract of loan. While a perfect contract of loan can give rise
to an action for damages, said contract does not constitute the
real contract of loan. (Saura Import and Export Co., Inc. vs.
Development Bank of the Phils., 44 SCRA 445 [1972]; see BPI
Investment Corp. vs. Court of Appeals, 377 SCRA 117 [2002].)
(2) Mortgage executed by virtue of loan granted. — Where the
mortgage deed was executed for and on condition of the loan
granted to the mortgagors, the fact that the latter did not collect
from the mortgagee bank the consideration of the mortgage
on the date it was executed but six (6) days later when the
mortgagors and their co-maker signed the promissory note is
immaterial. A contract of loan being consensual, it was perfected
at the same time that the contract of mortgage was executed, the
promissory note being only an evidence of an indebtedness and
did not indicate lack of consideration of the mortgage at the time
of its execution. (Bonnevie vs. Court of Appeals, 125 SCRA 122
[1983].)
5
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also
to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. (1258)
12
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1934
(3) Only partial amount released under a loan agreement secured by
mortgage. — Where a bank and a borrower undertook reciprocal
obligations by entering an P80,000.00 loan agreement on April
28, 1965 when the borrower executed a real estate mortgage, but
the bank was able to release only P17,000.00, the bank was held
in default for P63,000.00 to the borrower.
In reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other, and when one
party has performed or is ready and willing to perform his part
of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay. (see Art. 1169.)
Here, the promise of the borrower to pay, and he signified his
willingness to pay when he executed the real estate mortgage,
was the consideration for the obligation of the bank to furnish
the P80,000.00 loan. And the mere fact of insolvency of a debtor
(bank) is never an excuse for the non-fulfillment of an obligation
but instead it is taken as a breach of the contract by him. (Central
Bank of the Phils. vs. Court of Appeals, 139 SCRA 46 [1985].)
— oOo —
13
Chapter 1
COMMODATUM
SECTION 1. — Nature of Commodatum
ART. 1935. The bailee in commodatum acquires the
use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract
ceases to be a commodatum. (1941a)
Commodatum essentially gratuitous.
Commodatum is essentially gratuitous. Hence, the contract
ceases to be a commodatum if any compensation is to be paid by
the borrower who acquires the use. In such a case, there arises a
lease contract. (see Arts. 1642, 1643, 1644.)
If the consideration is the rendering of some service, an
innominate contract will result.1
ILLUSTRATIVE CASE:
Loan of a bull for breeding purposes was subject to payment of
breeding fee by borrower who used the bull after the period stipulated
until its death due to force majeure.
Facts: B borrowed from L (Bureau of Animal Industry)
three bulls for breeding purposes for a period of one year, later
on renewed for another year as regards one bull. The loan was
subject to the payment by the borrower of breeding fee of 10%
of the book value of the bulls. B kept and used the bull (the
1
Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties,
by the provisions of Titles I [Obligations] and II [Contracts] of this Book, by the rules
governing the most analogous nominate contracts, and by the customs of the place.
13
14
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1935
loan of which was renewed) for four years after the period
stipulated in the contract until it was killed during a Huk raid
by stray bullets.
B contends that the contract was commodatum, and that,
for that reason, as L retained ownership or title to the bull, it
should suffer the loss.
Issue: As the death of the bull was due to force majeure, is B
relieved from the duty of paying its value?
Held: No. A contract of commodatum is essentially gratuitous. If the breeding fee be considered compensation, then the
contract would be a lease of the bull. Under Article 1671 of the
Civil Code, the lessee would be subject to the responsibilities of
a possessor in bad faith because she had continued possession
of the bull after the expiration of the contract. And even if the
contract be commodatum, still B is liable under Article 1942(2,
3). (Republic vs. Bagtas, 6 SCRA 262 [1962].)
Contract similar to donation.
Commodatum is similar to a donation in that it confers a
benefit to the recipient. The presumption is that the bailor has
loaned the thing for having no need therefor. (see Art. 1946,
second sentence.)
Extent of bailee’s right of use.
The right to use is limited to the thing loaned but not to its
fruits unless there is a stipulation to the contrary. (Art. 1940.)
As owner of the thing loaned (Art. 1933, last par.), the bailor is
naturally entitled to its fruits.
Purpose of the contract.
The purpose of the contract of commodatum must be the
temporary use of the thing loaned. If the bailee is not entitled to
the use of the thing, the contract may be a deposit (see Art. 1962.)
not a commodatum.
It is an essential feature of the contract of commodatum that
the use of the property of another shall be “for a certain time.”
(Art. 1933, par. 2.)
Arts. 1936-1938
LOAN
Commodatum/Nature of Commodatum
15
ART. 1936. Consumable goods may be the subject of
commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition.
(n)
ART. 1937. Movable or immovable property may be the
object of commodatum.
Subject matter of the contract.
In commodatum, the subject matter is generally non-consumable things,2 whether real or personal. This but conforms to reality, for the bailee cannot use and return something which is
consumed when used. However, if the purpose of the contract is
not the consumption of the object as when it is merely for exhibition, consumable goods may be the subject of the commodatum
as where, L lends to B an oversized bottle of wine to be used as
a sample or for advertisement.3 If the intention of the parties is
to have the consumable goods loaned returned at the end of the
period agreed upon, the loan is a commodatum and not a mutuum.
An example of commodatum involving real property is when
a person allowed another to build a warehouse on the former’s
land so that the latter may use the property for a certain period
without any payment of rentals. If no time for use of the land
is specified, the contract would be that specie of commodatum
called “precarium” expressly recognized in Article 1947. If rental
is paid, the contract would be one of lease.4 (see Mina vs. Pascual,
25 Phil. 540 [1913].)
ART. 1938. The bailor in commodatum need not be the
owner of the thing loaned. (n)
2
Art. 418. Movable property is either consumable or non-consumable. To the first
class belong those movables which cannot be used in a manner appropriate to their nature without their being consumed; to the second class belong all the others.
3
Art. 1645. Consumable goods cannot be the subject matter of a contract of lease,
except when they are merely to be exhibited or when they are accessory to an industrial
establishment.
4
Art. 1643. In the lease of things, one of the parties binds himself to give another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.
16
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1939
Bailor need not be owner.
In commodatum, the bailor need not be the owner of the thing
loaned since by the loan, ownership does not pass to the borrower.
Hence, a mere lessee of the thing (see Arts. 1643, 1650.) or the
usufructuary (one entitled to the use and the fruits of property
belonging to another, see Art. 562.) may lend but the borrower or
bailee himself may not lend nor lease the thing loaned to him to
a third person. (Art. 1939[2].)
It is sufficient if the bailor has such possessory interest in the
subject matter or right to its use which he may assert against the
bailee and the third persons although not against the rightful
owner. Thus, a lessee may sublet the thing leased, when there
is no express prohibition in the contract of lease. (Art. 1650.) If
the lessee, by a contract of sublease, may transfer to another the
enjoyment of the thing leased for a consideration, there is no
reason why he should be unable to cede gratuitously its use by
way of commodatum. (Mercado vs. Aguilar, [C.A.] 45 O.G. Sup. 5,
p. 118.)
ART. 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of
the contract to a third person. However, the members of
the bailee’s household may make use of the thing loaned,
unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use. (n)
Commodatum, purely personal
in character.
Unlike mutuum, commodatum is a purely personal contract,
the lender having in view the character, credit, and conduct of
the borrower. Hence, the death of either party terminates the
contract unless by stipulation, the commodatum is transmitted
to the heirs of either or both parties. Such stipulation is valid
Art. 1940
LOAN
Commodatum/Nature of Commodatum
17
(see Art. 1306.) for paragraph 1 presupposes the absence of any
contrary stipulation. If there are two or more borrowers, the
death of one does not extinguish the contract in the absence of
stipulation to the contrary.
Article 1939 constitutes an exception to the general rule that
all rights acquired in virtue of an obligation are transmissible.
(see Art. 1178.)
Right of bailee to lend thing loaned
to third persons.
Generally, the bailee can neither lend nor lease the object of the
contract to a third person, in the absence of some understanding
or agreement to that effect.
However, the use of the thing loaned (e.g., television set) may
extend to the members of the bailee’s household (who are not,
therefore, considered third persons) except in two cases: (1) there
is a stipulation to the contrary; and (2) the nature of the thing
(e.g., dress) forbids such use.
ART. 1940. A stipulation that the bailee may make use
of the fruits of the thing loaned is valid. (n)
Contrary stipulation as to fruits.
The bailee is entitled only to the use of the thing loaned and
not to its fruits. The right to use a thing is distinct from the right
to enjoy the fruits since, as a rule, the fruits pertain to the owner
of the thing producing the fruits. (see Art. 441.) Thus, where an
animal is the thing loaned, its young subsequently born is not
included in the contract. However, the parties may stipulate
that the bailee may also make use of the fruits of the thing. Such
stipulation cannot be presumed.
The enjoyment of the fruits must only be incidental to the use
of the thing itself for if it is the main cause, the contract may be
one of usufruct. (see Art. 562.)
— oOo —
18
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
SECTION 2. — Obligations of the Bailee
ART. 1941. The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
(1743a)
Liability for ordinary expenses.
It is logical that the borrower should defray the expenses
for the use and preservation of the thing loaned for after all, he
acquires the use of the same, and he is supposed to return the
identical thing. (Art. 1933.)
As a rule, the borrower must take good care of the thing with
the diligence of a good father of a family. (Art. 1163.) Thus, if
B borrows the car of L, the former must pay for the gasoline,
motor oil, washing, greasing and spraying, etc. B cannot demand
reimbursement for the expenses.
As to extraordinary expenses, Article 1949 governs.
ART. 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event:
(1) If he devotes the thing to any purpose different
from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or
after the accomplishment of the use for which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event;
18
Art. 1943
LOAN
Commodatum/Obligations of the Bailee
19
(4) If he lends or leases the thing to a third person,
who is not a member of his household;
(5) If, being able to save either the thing borrowed or
his own thing, he chose to save the latter. (1744a and 1745)
Liability for loss of thing loaned.
The bailee must exercise proper diligence with regard to the
care and preservation of the thing loaned (see Art. 1163.) for he
must return the thing after its use.
As a general rule, the bailee is not liable for loss or damage
due to a fortuitous event. (see Art. 1174.) The reason is that the
bailor retains the ownership of the thing loaned. Article 1942
specifies the instances when the bailee is liable even for a loss
due to a fortuitous event. It would seem that the purpose of the
law is to punish the bailee for his improper acts although they
may not be the proximate cause of the loss.
The reason under No. 1 is that the bailee acts in bad faith (see
Art. 1170.); under No. 2, he incurs in delay (see Art. 1169, par.
2[1].); under No. 3, the law presumes that the parties intended
that the borrower shall be liable for the loss of the thing even if
it is due to a fortuitous event for otherwise they would not have
appraised the thing (see 11 Manresa 613; Republic vs. Bagtas,
6 SCRA 262 [1962], supra.); under No. 4, commodatum is purely
personal (Art. 1939.); and under No. 5, the bailee shows his
ingratitude after the thing is gratuitously loaned to him.
ART. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and
without his fault. (1746)
Liability for deterioration of thing
loaned.
The parties to the contract know that the thing borrowed
cannot be used without deterioration due to ordinary wear and
tear. Hence, in the absence of agreement to the contrary, the
depreciation caused by the reasonable and natural use of the
thing is borne by the bailor.
20
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1944
The bailee is liable if he is guilty of fault or negligence (see
Art. 1170.) or if he devotes the thing to any purpose different
from that for which it has been loaned. (Art. 1942[1].)
ART. 1944. The bailee cannot retain the thing loaned
on the ground that the bailor owes him something, even
though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in
Article 1951. (1747a)
Obligation to return thing loaned.
Except for a claim for damages suffered because of the flaws
of the thing loaned (Art. 1951.), the borrower has no right to retain
the thing loaned as security for claims he has against the lender,
even though they may be by reason of extraordinary expenses.
(1) Ownership remains in bailor. — The borrower acquires
only the use of the thing the ownership of which remains in the
lender. It would be extremely harsh if the bailor, after benefiting
the bailee, and the use having been accomplished, should be
deprived of its enjoyment on the excuse of the expenses more or
less certain or just. (11 Manresa 617.)
(2) Only temporary use given to bailee. — Furthermore, the
bailee would be violating the bailor’s trust in him to return the
thing as soon as the period stipulated expires or the purpose has
been accomplished. Therefore, the law imposes upon him the
obligation to return the same. (see Art. 1287.5)
Effect of retention or adverse claim
by bailee.
(1) The mere failure of the bailee to return the subject matter
of commodatum to the bailor does not constitute adverse
possession on the part of the bailee who holds the same in trust.
(2) In a case, the bailee declared the lots in question in its
name for taxation purposes. It was held that the action of the
5
Art. 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in commodatum.
Art. 1945
LOAN
Commodatum/Obligations of the Bailee
21
bailee by such adverse claim could not ripen into title by way of
ordinary acquisitive prescription because of the absence of just
title.6 (Catholic Vicar Apostolic of the Mt. Province vs. Court of
Appeals, 165 SCRA 515 [1988].)
Right of retention for damages.
The exception in Article 1951 is of evident justice. Note,
however, that the bailee’s right extends no further than to the
retention of the thing loaned until he is reimbursed for the
damages suffered by him. He cannot lawfully sell the thing to
satisfy said damages.
In case of pledge, the creditor has the right to retain the thing
pledged until he shall have been fully paid. (Art. 2098.)
ART. 1945. When there are two or more bailees to
whom a thing is loaned in the same contract, they are liable solidarily. (1748a)
Liability when there are two
or more bailees.
The reason for imposing solidary liability where there are
two or more borrowers is to safeguard effectively the rights of
the lender. (11 Manresa 617.) The law presumes that the bailor
takes into account the personal integrity and responsibility of all
the bailees and that, therefore, he would not have constituted the
commodatum if there were only one bailee.
6
Ordinary acquisitive prescription of real property requires possession of ten years
in good faith and with just title while extraordinary acquisitive prescription requires possession for thirty years, without need of title or of good faith. (see Arts. 1117, 1134, 1137.)
For purposes of prescription, there is just title when the adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of
ownership or other real rights, but the grantor was not the owner or could not transmit
any right. In the above case, the bailee had been in possession as owner for 11 years from
the time it repudiated the trust when it applied for registration of the lots. Its possession
was without just title and less than 30 years; hence, there was no possibility of acquisitive
prescription.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
22
Art. 1945
This is an exception by express provision of law to the
general rule that the concurrence of two or more parties in the
same obligation gives rise only to a joint obligation. (Arts. 1207,
1208.7)
— oOo —
7
Art. 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with the
prestations. There is a solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the obligations to which
the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one another, subject to the Rules of Court
governing the multiplicity of suits.
23
SECTION 3. — Obligations of the Bailor
ART. 1946. The bailor cannot demand the return of the
thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which
the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he
may demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of the bailor. (1749a)
Obligation to respect duration
of loan.
The primary obligation of the bailor is to allow the bailee the
use of the thing loaned for the duration of the period stipulated
or until the accomplishment of the purpose for which the
commodatum was constituted. The reason is that the bailor is
bound by the terms of the contract of commodatum which is “for
a certain time.” (see Arts. 1933, 1935.)
However, if he should have an urgent need of the thing (e.g.,
he needs the car loaned by him to bring a sick member of his
household to a hospital) or if the borrower commits an act of
ingratitude (Art. 1948.), he may demand its return or temporary
use. This right of the bailor is based on the fact that commodatum
is essentially gratuitous.
Under this article, the return may be only temporary or it
may be permanent because the law uses “its return” (meaning
permanent) or “temporary use.” In case of temporary use of
the thing by the bailor, the rights and duties of the parties are
likewise temporarily suspended. (Art. 1946, par. 2.)
23
24
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1947
ART. 1947. The bailor may demand the thing at will, and
the contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the
owner. (1750a)
Precarium defined.
Precarium is a kind of commodatum where the bailor may
demand the thing at will. It has been defined as a “contract by
which the owner of a thing, at the request of another person, gives
the latter the thing for use as long as the owner shall please.”
(Cyc. Law Dictionary; see Pajuyo vs. Court of Appeals, 430 SCRA
492 [2004].)
Cases when contract is precarium.
In either of the two cases mentioned in Article 1947, it
is presumed that use of the thing has been granted subject to
revocation by the bailor at any time, whether or not the use for
which the thing has been loaned has been accomplished. Hence,
the name precarium.
In the ordinary commodatum, the possession of the bailee is
more secure for he has the right to retain the thing loaned until
the expiration of the period agreed upon, or the accomplishment
of the use for which the commodatum has been constituted. (Art.
1946, par. 2.)
Note: The use of the word “owner” in Article 1947 is inaccurate.
Article 1938 is very clear that the bailor need not be the owner of
the thing loaned.
ILLUSTRATIVE CASE:
Gratuitous use of furniture was subject to the condition that
lessee would return them upon lessor’s demand but notwithstanding
such demand, former continued to use furniture until expiration of
lease.
Art. 1947
LOAN
Commodatum/Obligations of the Bailor
Facts: A was a tenant of B with respect to a house. Upon
the novation of the contract of lease, B gratuitously granted to
A the use of the furniture described in the contract, subject to
the condition that A would return them to B upon the latter’s
demand.
B later sold the property to C, and they notified A of
the conveyance, giving him 60 days to vacate the premises.
Thereafter, B required A to return all the furniture transferred
to him for his use. A wrote B reiterating that B may call for them
in the house where they are found. Another letter was written
to B informing her that A could not give up the 3 gas heaters
and the 4 electric lamps because he would use them until the
15th of the month when the lease was due to expire.
B refused to get the furniture in view of the fact that A had
declined to make delivery of all of them.
On the 15th of the month, A deposited all the furniture in a
warehouse in the custody of the sheriff.
Issues: (1) Has A complied with his obligation to return the
furniture upon B’s demand?
(2) Is B bound to bear the deposit fees thereof?
(3) Is B entitled to the costs of litigation?
Held: (1) No. The contract entered into between the parties
is one of commodatum because under it, B gratuitously granted
the use of the furniture to A reserving for himself the ownership
thereof. By this contract, A bound himself to return the furniture
to B upon demand. A did not comply with his obligation when
he merely placed them at the disposal of B, retaining for his
benefit the 3 gas heaters. The obligation assumed by A to return
the furniture means that he should return all of them to B at the
latter’s residence or house.
(2) No. As A had voluntarily undertaken to return all
the furniture to B upon the latter’s demand, the court could
not legally compel B to bear the expenses occasioned by the
deposit. A, as bailee, was not entitled to place the furniture on
deposit; nor was B under a duty to accept the offer because A
wanted to retain the 3 gas heaters and the 4 electric lamps.
(3) Yes. The costs in both instances should be borne by A
because B is the prevailing party. A was the one who breached
the contract of commodatum and without any reason he refused
to return and deliver all the furniture upon demand. In these
25
26
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 1948-1949
circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which B could not have
otherwise defrayed. (Quintos and Ansaldo vs. Beck, 69 Phil. 108
[1939].)
ART. 1948. The bailor may demand the immediate return
of the thing if the bailee commits any acts of ingratitude
specified in Article 765. (n)
Right of bailor to demand return of
thing for acts of ingratitude.
Based on Article 765 of the Civil Code, any of the following
constitutes act of ingratitude:
(1) If the bailee should commit some offenses against the
person, the honor or the property of the bailor, or of his wife or
children under his parental authority;
(2) If the bailee imputes to the bailor any criminal offense, or
any act involving moral turpitude, even though he should prove
it, unless the crime or the act has been committed against the
bailee himself, his wife or children under his authority; and
(3) If the bailee unduly refuses the bailor support when the
bailee is legally or morally bound to give support to the bailor.
Article 765 is applicable because like a donation, commodatum
is essentially gratuitous. (Art. 1933, par. 2.) The bailee who commits any of the acts of ingratitude makes himself unworthy of
the trust reposed upon him by the bailor. Hence, the right given
to the bailor to demand the immediate return of the thing.
Under Article 1948, the contractual relation between the parties is that of the ordinary commodatum. In the case of precarium
(Art. 1947.), the bailor can always demand the thing loaned at
will.
ART. 1949. The bailor shall refund the extraordinary
expenses during the contract for the preservation of the
thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except
when they are so urgent that the reply to the notification
cannot be awaited without danger.
Art. 1949
LOAN
Commodatum/Obligations of the Bailor
27
If the extraordinary expenses arise on the occasion of
the actual use of the thing by the bailee, even though he
acted without fault, they shall be borne equally by both the
bailor and the bailee, unless there is a stipulation to the
contrary. (1751a)
Obligation to refund extraordinary
expenses.
(1) Extraordinary expenses for the preservation of the thing loaned.
— Such expenses shall be borne by the bailor (e.g., expenses for
repairing borrowed house damaged by a typhoon). The reason
is that it is the bailor who profits by said expenses. If they are
incurred by the bailee, the bailor must refund them provided
the bailee brings the same to the knowledge of the bailor before
incurring them. As a rule, notice is required because it is possible
that the bailor may not want to incur the extraordinary expenses
at all. He should be given discretion as to what must be done
with his property.
An exception, of course, lies where they are so urgent that the
reply to the notification cannot be awaited without danger.
The right of the bailee to reimbursement is subject to the
provision of the second paragraph.
(2) Extraordinary expenses arising from actual use of the thing
loaned. — Such expenses (caused by fortuitous event) arising on
the occasion of the actual use of the thing loaned (e.g., expenses
for repairing a borrowed jeep damaged in a collision) shall be
borne by the bailor and bailee alike on a 50-50 basis.
“The foregoing is an equitable solution. The bailee pays onehalf because of the benefit derived from the use of the thing
loaned to him and the bailor pays the other one-half because he
is the owner and the thing will be returned to him.’’ (Report of
the Code Commission, p. 151.)
The parties, however, may, by stipulation, provide for a
different apportionment of such expenses, or that they shall be
borne by the bailee or bailor only.
28
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 1950-1951
ART. 1950. If, for the purpose of making use of the
thing, the bailee incurs expenses other than those referred
to in Articles 1941 and 1949, he is not entitled to reimbursement. (n)
No obligation to assume all other
expenses.
All expenses other than those referred to in Articles 1941
and 1949 “for the purpose of making use of the thing” (e.g.,
borrower buys extra tire to be used as a reserve on a trip) that is,
not necessary for the use and preservation of the thing, must be
shouldered by the borrower. This is only proper since he makes
use of the thing. Expenses for ostentation are to be borne by the
bailee because they are not necessary for the preservation of
thing.
Ordinary expenses incurred for the preservation of the thing
are also for the account of the bailee. This can be inferred from
the first paragraph of Article 1949.
ART. 1951. The bailor, who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer
by reason thereof. (1752)
Liability to pay damages for known
hidden flaws.
The following are the requisites which must concur for the
application of the above article:
(1) There is flaw or defect in the thing loaned;
(2) The flaw or defect is hidden;
(3) The bailor is aware thereof;
(4) He does not advise the bailee of the same; and
(5) The bailee suffers damages by reason of said flaw or
defect.
The bailor is made liable for his bad faith. The bailee is given
the right of retention until he is paid damages. (Art. 1944.) The
Art. 1952
LOAN
Commodatum/Obligations of the Bailor
29
same responsibility of a bailor in commodatum is imposed on a
pledgor. (Art. 2101.)
EXAMPLE:
If L lends to B his car without informing the latter that
its brake is not working properly, L will be liable in case B is
injured by reason thereof. The liability imposed by law is a just
sanction for the bad faith committed by L.
Of course, if the defect is patent or could have been known
to B after inspection or L was not aware of the defect, L is not
liable. (see Art. 1944.)
In the first case, it is presumed that B will adopt the
necessary precautions or is willing to take the risk incident
to the use of the car. In the second case, L is not liable for the
reason that commodatum is gratuitous.
Where flaw unknown to bailor.
Where the defect is not known to the bailor, he is not liable
because commodatum is gratuitous.
The rule is different in sale (see Art. 1547.) and lease (see Art.
1653.) for in these contracts, valuable consideration is received
by the vendor (see Art. 1458.) and the lessor. (see Art. 1643.)
ART. 1952. The bailor cannot exempt himself from the
payment of expenses or damages by abandoning the thing
to the bailee. (n)
No right of abandonment for expenses
and damages.
The reason for the above rule is that the expenses and/or
damages may exceed the value of the thing loaned, and it would,
therefore, be unfair to allow the bailor to just abandon the thing
instead of paying for said expenses and/or damages.
— oOo —
30
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Chapter 2
SIMPLE LOAN OR MUTUUM
ART. 1953. A person who receives a loan of money or
any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the
same kind and quality. (1753a)
Simple loan or mutuum defined.
Simple loan or mutuum is a contract whereby one of the
parties delivers to another money or other consumable thing
with the understanding that the same amount of the same kind
and quality shall be paid.1 (Art. 1933.)
It involves the return of the equivalent only and not the
identical thing because the borrower acquires ownership thereof.
(see Art. 1978.) A loan of money, however, may be payable in
kind. (see Art. 1958.)
Obligation of borrower is to pay.
The law uses the word “pay” and not the word “return”
because the consumption of the thing loaned is the distinguishing
character of the contract of mutuum from that of commodatum.
1
A money market transaction is in the nature of a simple loan or mutuum. (Citibank
vs. Sabeniano, 504 SCRA 378 [2006].) A money market is a market dealing in standardized
short-term credit instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a middleman or dealer in open market. In
a money market transaction, the investor is a lender who loans his money to a borrower
through a middleman or dealer. (Cebu International Finance Corp. vs. Court of Appeals,
316 SCRA 488 [1999]; Allied Banking Corp. vs. Lim Sio Wan, 549 SCRA 504 [2008].)
30
Art. 1953
LOAN
Simple Loan or Mutuum
31
This obligation “to pay” may include the accessory duty to pay
interest. (see Article 1956.)
The promise of the borrower to pay is the consideration for
the obligation of the lender to furnish the loan. A loan is thus a
bilateral contract.
No criminal liability for failure to pay.
In simple loan or mutuum, as contrasted to commodatum, the
borrower acquires ownership of the money, goods, or personal
property borrrowed. Being the owner, the borrower can dispose
of the thing borrowed and his act will not be considered
misappropriation thereof.
No estafa is committed by a person who refuses to pay his
debt or denies its existence.
Simple loan distinguished from
contract of rent.
A contract of loan differs materially from a contract of rent or
lease, as follows:
(1) A contract of loan signifies the delivery of money or
some other consumable thing to another with a promise to repay
an equivalent amount of the same kind and quality, but not a
promise to return the same thing loaned which becomes the
property of the obligor.
The contract of rent is a contract by which one of the parties
delivers to another some non-consumable thing in order that
the latter may use it during a certain period and return it to the
former. In a contract of rent, the owner or lessor of the property
does not lose his ownership. He simply loses his control over the
property rented during the period of the contract;
(2) In a contract of loan, the relation between the parties
is that of obligor and obligee, while in a contract of “rent,” the
relation is that of landlord and tenant; and
(3) In a contract of loan, the creditor receives “payment” for
his loan, while in a contract of “rent,” the owner of the property
rented receives “compensation” or “price” either in money,
32
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1953
provisions, chattels, or labor from the occupant thereof in return
for its use. (Tolentino vs. Gonzales, 50 Phil. 558 [1927].)
Simple loan distinguished from
trust receipt.
Under the Trusts Receipt Law (Pres. Decree No. 115.), trust
receipt “shall refer to the written or printed document signed
by the entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of [the]
Decree.’’ (Sec. 3[j], thereof.) It has also been defined as “a document
in which is expressed a security transaction, whereunder the
lender, having no prior title in the goods on which the lien is to be
given, and not having possession which remains in the borrower,
lends his money to the borrower on security of the goods, which
the borrower is privileged to sell clear of the lien on agreement
to pay all or part of the proceeds of the sale to the lender. (Black’s
Law Dictionary [1968 ed.], p. 1683.)
The danger in characterizing a simple loan as a trust receipt
transaction was explained in a case to wit:
“The Trust Receipts Law does not seek to enforce
payment of the loan, rather it punishes the dishonesty and
abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the
owner. Here, it is crystal clear that on the part of Petitioners
there was neither dishonesty nor abuse of confidence in
the handling of money to the prejudice of PBC. Petitioners
continually endeavored to meet their obligations, as shown
by several receipts issued by PBC acknowledging payment
of the loan.
Also noteworthy is the fact that Petitioners are not
importers acquiring the goods for re-sale, contrary to the
express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their
construction project. At no time did title over the construction
materials pass to the bank, but directly to the Petitioners from
CM Builders Centre. This impresses upon the trust receipt in
Art. 1953
LOAN
Simple Loan or Mutuum
33
question vagueness and ambiguity, which should not be the
basis for criminal prosecution in the event of violation of its
provisions.
The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them under
the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable, if not reprehensible.
Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless borrowers
at the mercy of banks, and is prone to misinterpretation.’’
(Consolidated Bank and Trust Corporation vs. Court of
Appeals, G.R. No. 114286, April 19, 2001, citing Colinares vs.
Court of Appeals, 339 SCRA 609 [2000].)
In Colinares, the debtor received the goods subject of the
trust receipt before the trust receipt itself was entered into, the
transaction in question was a simple loan and not a trust receipt
agreement. Prior to the date of execution of the trust receipt,
ownership over the goods was already transferred to the debtor.
This situation is inconsistent with what normally obtains in
a pure trust receipt transaction, wherein the goods belong in
ownership to the bank and are only released to the importer in
trust after the loan is granted. In Consolidated Bank, as in Colinares,
the delivery to respondent corporation of the goods subject to
the trust receipt occurred long before the trust receipt itself was
executed. Furthermore, respondent was not an importer which
acquired the banker fuel oil for re-sale; it needed the oil for its
own operations at no time did title over the out pass to petitioner
bank. Evidently, respondent Corporation was required to sign
the trust receipt simply to facilitate collection by petitioner of the
loan it had extended to the former.
Meaning of fungible things.
Fungible things, are those which are usually dealt with by
number, weight, or measure such as rice, oil, sugar, etc. so that
any given unit or portion is treated as the equivalent of any other
unit or portion.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
34
Art. 1953
For example, one cavan of “wagwag” rice of a particular
quality is, to all intents and purposes, the same as any other
portion of the same kind, quality, and quantity.
ILLUSTRATIVE CASE:
Standing crops given as security for a loan of money were
destroyed due to a fortuitous event.
Facts: B received money as a loan with interest from L
secured by a chattel mortgage on the standing crops on B’s
land. The crops were destroyed due to a fortuitous event.
Issue: Is the obligation of B to pay the loan extinguished?
Held: No. The obligation of B is not to deliver a determinate
thing, namely: the crops to be harvested on his land, but to pay
a generic thing, the amount of money representing the loan
with interest. (see Art. 1263.) The loss of the mortgaged crops
did not extinguish his obligation to pay, because it could still
be paid from other sources aside from the crops. The chattel
mortgage simply stood as a security for the fulfillment of his
obligation. (Republic vs. Grijaldo, 15 SCRA 681 [1965].)
Distinction between fungible
and consumable things.
The new Civil Code classifies movable property into consumable or non-consumable (Art. 418.2) thereby discarding the
old classification into fungible and non-fungible. (Art. 334, old
Civil Code.) Article 1953 (also Art. 1427 on Natural Obligations,
Art. 1464 on Sales, and Art. 1795 on Partnership.), however, still
speaks of fungible things. This change of classification seems
to be in name only as the definition of fungible things as those
which cannot be used without being consumed under the old
Civil Code is precisely that of consumable things. (see Art. 418.)
Nevertheless, whether a thing is consumable or not depends
upon its nature and whether it is fungible or not depends upon
the intention of the parties. Thus, while wine is consumable by
its nature, it is non-fungible if the intention is merely for display
or exhibition (see Art. 1936.) because the same wine must be
returned.
2
See Note 2, Chapter 1.
Arts. 1954-1955
LOAN
Simple Loan or Mutuum
35
ART. 1954. A contract whereby one person transfers
the ownership of non-fungible things to another with the
obligation on the part of the latter to give things of the
same kind, quantity, and quality shall be considered a barter. (n)
Mutuum and commodatum distinguished
from barter.
By the contract of barter or exchange, one of the parties binds
himself to give one thing in consideration of the other’s promise
to give another thing. (Art. 1638.)
(1) The distinction between mutuum and barter lies in the
subject matter. In the former, it is money or any other fungible
things; in the latter, non-fungible (non-consumable) things.
(2) In commodatum, the bailee is bound to return the identical
thing borrowed when the time has expired or the purpose has
been served. In barter, the equivalent thing is given in return for
what has been received.
(3) Mutuum may be gratuitous and commodatum is always
gratuitous. (Art. 1933, pars. 2, 3.) Barter, on the other hand, is an
onerous contract. It is really a mutual sale. (see Art. 1641.)
ART. 1955. The obligation of a person who borrows
money shall be governed by the provisions of Articles
1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it
is impossible to deliver the same kind, its value at the time
of the perfection of the loan shall be paid. (1754a)
Form of payment.
The object of simple loan may be either money or consumable
or fungible things.
(1) Loan of money. — If the thing loaned is money, payment
must be made in the currency stipulated, if it is possible to
deliver such currency; otherwise, it is payable in the currency
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
36
Art. 1955
which is legal tender in the Philippines (Art. 1249.3) and in case
of extraordinary inflation or deflation, the basis of payment shall
be the value of the currency at the time of the creation of the
obligation. (Art. 1250.4)
Presently, all notes and coins issued by the Bangko Sentral
ng Pilipinas are legal tender in the Philippines for all debts, both
public or private. A check is not a legal tender and, therefore,
cannot constitute valid tender of payment.
EXAMPLE:
D borrowed from C P5,000.00 payable after five years. On
the maturity of the obligation, the value of P5,000.00 dropped
to P2,500 because of inflation.
In this case, the basis of payment shall be the equivalent
value of the currency today five years ago. Hence, D is liable to
pay C P10,000.00 unless there is an agreement to the contrary.
(2) Loan of fungible thing. — If what was loaned is a fungible
thing other than money, the borrower is under obligation to pay
the lender another thing of the same kind, quality, and quantity.
In case it is impossible to do so, the borrower shall pay its value
at the time of the perfection of the loan.
EXAMPLE:
D borrowed from C two sacks of rice of a certain kind and
quality. At the time the loan was perfected, the price of each
sack was P400.00.
D should return to C two sacks of rice of the same kind and
quality although at the time of payment, the price had increased
to P500.00. If on the due date of the obligation, the same kind of
3
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal tender
in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance. (1170)
4
Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
Art. 1956
LOAN
Simple Loan or Mutuum
37
rice could not be delivered by D because it was not available for
some reason, then D should pay C the sum of P800.00 instead,
the value of the rice at the time of the perfection of the loan.
ART. 1956. No interest shall be due unless it has been
expressly stipulated in writing. (1755a)
Requisites for recovery of interest.
In order that interest may be chargeable, the following are
the requisites:
(1) The payment of interest must be expressly stipulated (Tan
vs. Valdehueza, 66 SCRA 61 [1975]; Jardenil vs. Salas, 73 Phil. 636
[1942].)
(2) The agreement must be in writing (Art. 1956.); and
(3) The interest must be lawful. (see, however, note to Arts.
1957 and 1961.)
In a case, the promissory note stipulated a late payment
penalty of 2.5% monthly to be added to each unpaid installment
until fully paid. Payment of interest was not expressly stipulated
in the note. Held: It should be deemed included in such penalty.
(Radiowealth Finance Company vs. Del Rosario, 335 SCRA 288
[2000].) Be that as it may, in the absence of stipulated interest,
there can be legal interest pursuant to Article 2209 of the Civil
Code. (infra.) In other words, interest may be paid either as
compensation for the use of money (monetary interest) referred
to in Article 1956 or imposed by law or by courts as penalty or
indemnity for damages (compensatory interest) under Articles
2209 and 2212 for breach of contractual obligations. (Republic
vs. Unimex, 518 SCRA 19 [2007]; Garcia vs. Thio, 518 SCRA 433
[2007]; Siga-an vs. Villanueva, 576 SCRA 696 [2009].) Unilateral
impositions of interest do not suffice as proof an agreement to pay
interest. (Phil. Phosphate Fertilizer Corp. vs. Kamalig Resources,
Inc., 540 SCRA 139 [2007].)
Existence of stipulation to pay
interest.
(1) If a particular rate of interest has been expressly stipulated
by the parties, that interest, not the legal rate of interest, shall be
38
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1956
applied. (Casa Filipina Development Corp. vs. Deputy Executive
Secretary, 209 SCRA 399 [1992].)
(2) If the exact rate of the interest is not mentioned, the legal
rate of 12% shall be payable. (Security Bank & Trust Co. vs. RTC
Makati, 263 SCRA 483 [1996]; Toung vs. Ganzon Olan, 568 SCRA
376 [2008]; see Sec. 1, Usury Law, infra.)
(3) No increase in interest shall be due unless such increase
has also been expressly stipulated. (see Phil. National Bank vs.
Court of Appeals, 196 SCRA 536 [1991].)
(4) Sales invoices or slips issued by a store to its customers,
stating interests and attorney’s fees in the usual printed forms
as terms and conditions, without the signature of the obligor, do
not constitute the express stipulation required by Article 1956.
Therefore, the obligor is not liable for the interest except only the
legal interest (6%) under Article 2209 (infra.) on the amount due
in case he incurs in delay. (see Royal Shirt Factory, Inc. vs. Co Bon
Tic, 94 Phil. 994 [1954]; Uy Chao vs. Compania Maritima, 10 C.A.
Rep. 294.)
(5) It is only in contracts of loan, with or without security,
that interest may be stipulated and demanded. (see Soncuya vs.
Azarraga, 65 Phil. 635 [1938].)
(6) The receipt by the creditor of interest payment up to a
certain date on a loan that has already matured does not ipso facto
result in the renewal or extension of maturity period of the loan
up to said date. Whether or not a loan may be renewed does not
solely depend on the debtor but more so on the discretion of the
creditor. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].)
(7) Vendor and vendee are legally free to stipulate for
the payment of either the cash price of a subdivision lot or its
installment price. Should the vendee opt to purchase a subdivision
lot via the installment payment system, he is, in effect, paying
interest on the cash price, whether the fact and rate of such interest
payment are disclosed in the contract or not. The contract for the
purchase and sale of a piece of land on the installment plan is not
only lawful; it also reflects a very widespread usage or custom
in our present day commercial life. (Relucio vs. Bullante-Garfin,
187 SCRA 405 [1990].)
Art. 1956
LOAN
Simple Loan or Mutuum
39
Liability for interest even in the absence
of stipulation.
Article 1956 is subject to two exceptions:
(1) Indemnity for damages. — The debtor in delay is liable to
pay legal interest (6%/12%) as indemnity for damages even in
the absence of stipulation for the payment of interest.5
(a) Under Article 2209,6 the appropriate measure for damages in case of delay in discharging an obligation consisting
of the payment of a sum or money,7 is the payment of the
5
No interest is due where there was tender of payment prior to any demand to pay
or perform an agreed act. A debtor cannot be considered in delay who offered check
backed by sufficient deposit or ready to pay cash if the creditor chose that means of payment. (Francisco vs. Gregorio, 115 SCRA 394 [1982].)
6
Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest, an which is six per cent per annum. (1108)
7
“1. When an obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.
“
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extra judicially (Art. 1169, Civil Code.) but when such certainty cannot be so reasonably
established at the time the demand is made, or where the pleadings of the plaintiff in the
trial court did not spell out such amounts with certitude, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3.
When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 [loan or
forbearance of money] or paragraph 2, above, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.’’ (Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78
[1994]; Atlantic Gulf & Pacific Company of Manila, Inc. vs. Court of Appeals, 249 SCRA
397 [1995]; Solid Homes, Inc. vs. Intermediate Appellate Court, 508 SCRA 165 [2006];
Cosme, Jr. vs. People, 508 SCRA 190 [2006].)
The legal interest shall begin to run on the date when the judgment is rendered and
not when the complaint was filed because the amount of the damages to which the plaintiff may be entitled remains unliquidated and unknown, until it is definitely ascertained,
40
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1956
penalty interest at the rate agreed upon; and in the absence of
a stipulation of a particular rate of penalty interest, then the
payment of additional interest at a rate equal to the regular
monetary interest, and if no regular interest had been agreed
upon, then payment of legal interest which is 6% annually or,
in the case of loans or forbearances of money, 12% per annum
as provided for in Central Bank Circular No. 416, infra. (State
Investment House, Inc. vs. Court of Appeals, 198 SCRA 390
[1991]; Eastern Shipping Lines, Inc. vs. Court of Appeals, 234
SCRA 78 [1994]; New Sampaguita Builders Construction, Inc.
vs. Phils., 435 SCRA 565 [2004], citing De Leon, Comments
and Cases on Credit Transactions [1995], p. 50.)
The “obligation consisting of the payment of a sum of
money’’ referred to in Article 2209 is not confined to a loan
or forbearance of money. It has also been applied by the
Supreme Court in cases involving default in the payment of
price or consideration under a contract of sale and an action
for damages for injury to persons and loss of property and
an action for damages arising from unpaid insurance claims.
(Castelo vs. Court of Appeals, 244 SCRA 180 [1995].)
(b) Under the provisions of Article 2213, interest “cannot
be recovered upon unliquidated claims or damages except
when the demand can be established with reasonable
certainty.’’ It is axiomatic that if the suit were for damages,
unliquidated and not known until definitely assessed and
determined by the courts, after proof, interest at rate of 6%
per annum should be from the date the judgment of the court
is made, i.e., at which time the qualification of damages may
be deemed to be reasonably ascertained. (Lim vs. Court of
Appeals, 373 SCRA 394 [2002].)
by the court and only upon presentation of proof thereon. (Construction Dev. Corp. of the
Phils. vs. Estrella, 501 SCRA 228 [2006].)
In Cristina Garments, Inc. vs. Court of Appeals (304 SCRA 356 [1999]), “because the
amount due arose from a contract for a piece of work, not from a loan or forbearance
of money, the legal interest of 6% per annum should be applied. Furthermore, since the
amount of the demand could be established with certainty when the complaint was filed,
the 6% interest should be computed from the filing of said complaint. But after the judgment becomes final and executory until the obligation is satisfied, interest should be reckoned at 12% per year.’’
Art. 1956
LOAN
Simple Loan or Mutuum
41
(c) Central Bank Circular No. 416 fixing the legal rate of
interest at 12% per annum, deals with 1) loans; 2) forbearance
of any money, goods or credits; and 3) judgments involving
such loans or forbearance, in the absence of express agreement
as to such rate of interest.
If the obligation arises from other sources (e.g., sale) or
by way of damages arising from injury to persons and loss of
property which does not involve a loan, what is applicable is
the rate of 6% annually as provided in Article 2209 and not
the rate of 12% per annum provided by Central Bank Circular
No. 416. (see Pilipinas Bank vs. Court of Appeals, 225 SCRA
268 [1993]; Tio Khe Cheo vs. Court of Appeals, 202 SCRA 119
[1991]; see A.C. Enterprises, Inc. vs. Construction Industry
Arbitration Commission, 244 SCRA 55 [1995]; Philippine
National Bank vs. Court of Appeals, 263 SCRA 766 [1996];
Terminal Facilities and Services Corp. vs. Philippine Ports
Authority, 378 SCRA 82 [2002].)
(d) When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest,
regardless of whether the obligation involves a loan or forbearance of money shall be 12% per annum from such finality until its satisfaction. This interim period being deemed to
be by then an equivalent to a forbearance of credit. Prudential Guarantee and Assurance, Inc. vs. Court of Appeals, 491
SCRA 411 [2006]; International Container Terminal Services,
Inc. vs. FGU Insurance Corp., 556 SCRA 174 [2008].)
(e) While the interest agreed upon forms part of the
consideration of the contract itself, interest as indemnity for
damages is payable only in case of default or non-performance of the contract. As they are distinct claims, they may
be demanded separately. (see Sentinel Insurance Co., Inc. vs.
Court of Appeals, 182 SCRA 517 [1990].)
In the absence of stipulation, the rate of interest where the
obligation constitutes a loan or forbearance of money shall be
12% per annum to be computed from date of default, i.e., from
judicial or extrajudicial demand as provided in Article 1169
of the Civil Code.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
42
Art. 1956
(2) Interest accruing from unpaid interest. — Interest due shall
earn interest from the time it is judicially demanded although
the obligation may be silent upon this point. (Art. 2212; see Sec.
5, Usury Law.) Both Article 2212 of the Civil Code and Section
5 of the Usury Law are applicable only where interest has been
stipulated by the parties. Article 1212 contemplates the presence
of stipulated or conventional interest which has accrued when
demand was judicially made. In cases where no interest had been
stipulated by the parties, no accrued conventional interest could
further earn interest upon judicial demand. (Phil.-American
Accident Insurance Co., Inc. vs. Flores, 97 SCRA 811 [1980];
David vs. Court of Appeals, 310 SCRA 710 [1999].)
Where the court’s judgment which did not provide for the
payment of interest has already become final, no interest may
be awarded. (Santuban vs. Fule, 133 SCRA 762 [1984]; Ruiz vs.
Caneba, 191 SCRA 865 [1990]; Solidbank Corporation vs. Court
of Appeals, 379 SCRA 159 [2002].) What remains is the ministerial
execution of the judgment.
EXAMPLES:
(1) Under a written contract of loan, D obliged himself to
pay C the sum of P10,000.00 at 18% interest a year which is
lawful. In this case, all the requirements to entitle B to recover
interest are present. If D incurs in delay, he is liable to pay the
interest agreed upon as damages and not for the use of the
money.
(2) If nothing was mentioned about the payment of
interest, then no interest is due. If D incurs in delay, he is liable
to pay interest at the legal rate which is 12% per annum from the
date of delay.
(3) Suppose in the first example, D incurred in delay
for one year. The indemnity for damages shall also be the
stipulated interest of 18% so that D shall be liable to pay a total
of P3,600.00: P1,800.00 as compensatory interest for the first
year and another P1,800.00, as indemnity for damages for the
one year delay.
(4) If the interest was judicially demanded 6 months after
D incurred in delay, the interest due (P1,800 + P900 = P2,700.00)
Art. 1956
LOAN
Simple Loan or Mutuum
43
shall earn legal interest (12%) from that time until payment is
made. (Art. 2212.)
Note: By virtue of Central Bank Circulars No. 416, dated
July 29, 1974 and No. 905, dated December 10, 1982, the legal
rate is increased from 6% to 12% per annum.
ILLUSTRATIVE CASE:
Interest for 14 years was due on principal obligation when
foreclosure was filed.
Facts: The remaining balance of D’s indebtedness to C
is P576,573.90 with an agreed interest at the rate of 6% per
annum from January 1, 1959. D defaulted. So, C filed a suit for
foreclosure of mortgage on December 12, 1962.
Issue: How much interest is payable?
Held: The interest at 6% per annum from January 1, 1959 to
December 12, 1962 is P136,482.13. This is to be added to the
principal amount, thus making a total of P713,056.03 which
shall earn legal interest at 6% (now 12%) per annum from
December 12, 1962 until fully paid. Such interest is not due
by stipulation but by the mandate of the law, i.e., Article 2212.
(Joven de Cortes vs. Venturanza, 79 SCRA 709 [1977].)
Liability for surcharges and penalties.
Surcharges and penalties agreed to be paid by the debtor
in case of default partake of the nature of liquidated damages,
covered by Section 4, Chapter 3, Title XVIII of the Civil Code.
Article 2227 thereof provides: “ART. 2227. Liquidated damages,
whether intended as an indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable. In exercising
this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of
each case.’’
It should be stressed that the Court will not make any
sweeping ruling that surcharges and penalties imposed by
lenders like banks for non-payment of the loans extended by
them are generally iniquitous and unconscionable. What may be
iniquitous and unconscionable in one case, may be totally just
and equitable in another.
44
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1957
Interest separate and distinct from surcharges
and penalties.
The essence or rationale for the payment of interest often referred to as “cost of money,’’ is separate and distinct from that
of surcharges and penalties. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be
demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify
non-payment or reduction of interest.
The charging of interest for loans forms a very essential and
fundamental element of the banking business, which may truly
be considered to be at the very core of its existence or being. It is
inconceivable for a bank to grant loans for which it will not charge
any interest at all. (Rizal Commercial Banking Corporation vs.
Court of Appeals, 289 SCRA 292 [1998]; Digutan vs. Court of
Appeals, 376 SCRA 560 [2002].)
ART. 1957. Contracts and stipulations, under any
cloak or device whatever, intended to circumvent the laws
against usury shall be void. The borrower may recover in
accordance with the laws on usury. (n)
Usurious contracts declared void.
(1) Form of contract not conclusive. — The above provision
is deemed necessary to defeat the cunning devices of usurers.
(Report of the Code Commission, p. 152.) The form of the
contract is not conclusive. Parol evidence is admissible to show
that a written document though legal in form was in fact a cloak
or device to cover usury if from a construction of the whole
transaction it becomes apparent there exists a corrupt intention
to violate the laws on usury.
Cases illustrating the cunning devices of usurers are discussed
subsequently under the Usury Law. It is evident that the Civil
Code yields to the Usury Law when it comes to the question of
how much of the loans and interests paid by the borrower may
be recovered. (Briones vs. Cammayo, 41 SCRA 404 [1971].)
Art. 1957
LOAN
Simple Loan or Mutuum
45
(2) Contract void only as to interest involved. — A usurious
contract should not be considered void in its entirety but only
as to the interest involved. (see Sec. 7, Usury Law, infra.) It is
only the stipulation on usurious interest which should be treated
as void so that the loan becomes without stipulation to pay
interest. (Briones vs. Cammayo, supra.) In a simple loan with
stipulation of usurious interest, the prestation of the debtor to
pay the principal debt which is the cause of the contract (Art.
1350.) is not illegal. (Angel Jose Warehousing Co., Inc. vs. Chelda
Enterprises, 41 SCRA 404 [1971]; Private Dev. Corp. of the Phils.
vs. Intermediate Appellate Court, 213 SCRA 282 [1992].) The
nullity of the stipulation on the usurious interest does not affect
the lender’s right to receive back the principal amount of the
loan.
(3) Right of debtor. — With respect to the debtor, the amount
paid as interest under a usurious agreement is recoverable by
him, since the payment is deemed to have been made under
restraint, rather than voluntarily. (First Metro Investment Corp.
vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99 [2001].) In a
case, however, the Supreme Court affirmed the judgment of the
lower court ordering the debtor to pay the creditor the principal
loaned plus interest thereon at the legal rate from the filing of the
complaint. (Sanchez vs. Buenviaje, 126 SCRA 208 [1983].)
Note: Interest rates are no longer subject to any ceiling. The
rate will depend on the agreement of the parties. (see Note in II –
The Usury Law.)
Instances of contracts disguised
to cover usurious loans.
The following may be mentioned:
(1) Credit sale of property at exorbitant price to loan applicant. —
When a credit sale of property is made to an applicant for a loan
at an exorbitant price to be paid at a future day in order to enable
the purchaser to sell it immediately for cash and thus obtain the
money of which he is in need, and the purchaser’s obligation
is for a greater sum than the fair value of the property sold and
lawful interest. It is, however, necessary to show actual intent to
46
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1957
reserve usurious interest under the guise of excess of price (91
C.J.S. 592.);
(2) Purchase of lender’s property at an exorbitant price to be taken
from loan. — When the lender corruptly requires of the borrower
as a condition for securing the loan, the purchase of the lender’s
property at an exorbitant price to be taken out of the loan, or
payable at a subsequent date and takes the borrower’s obligation
for the sum loaned, or for both the loan and purchase price; or
as a condition for extending time in which to pay a debt, the
purchase of the lender’s property at an exorbitant price. In such
case, the principal debt is the amount of the loan plus the fair
value of the property at the time of the receipt by the buyer. All
in excess of that sum is usury.
But if the evidence does not disclose a guilty intent, such a
contract will be upheld even though the collateral sale is made at
a price higher than the market value of the property sold (Ibid.);
(3) Price of sale with right to repurchase clearly inadequate. —
When a vendor sells a property at a clearly inadequate price,
reserving an option to repurchase at a price greater than the
original price with lawful interest as such contract is in effect to
be a mortgage to secure a usurious loan (Ibid.);
(4) Pretended lease by borrower at usurious rental. — Where the
borrower wishes to borrow money to enable him to purchase
property and the lender furnishes the money taking title in
himself, and puts the borrower in possession under a pretended
lease at a usurious rental (Ibid., 598.);
(5) Rent free by lender of borrower’s property in addition to
interest on loans. — Where the lender, in addition to interest on
the sum loaned, is to have the privilege of occupying rent-free,
certain property of the borrower. Where other circumstances are
present, showing that the purchase and lease are bona fide and not
colorable, the transaction will, of course, be perfectly valid (Ibid.);
(6) Date for repayment of loan with interest ante-dates actual
transaction. — Where an obligation for the repayment of money
bearing interest from its date, ante-dates the actual transaction
and receipt of the money loaned to hide a usurious contract.
Art. 1958
LOAN
Simple Loan or Mutuum
47
Where, however, the circumstances of the loan show good faith
on the part of the contracting parties, as where the delay in the
receipt of the money is unavoidably incident of the completion
of the transaction or is due merely to the failure of the borrower
to make earlier demand for it, the contract will not ordinarily be
regarded as usurious, even though the actual result may be to
give to the lender something more than the lawful rate of interest,
if delay is not unreasonable (Ibid., 612; see Art. 1602.); and
(7) Payment by borrower for lender’s services as additional compensation for loan. — An apparently lawful loan is usurious when
it is intended that additional compensation for loan be disguised
by an ostensibly unrelated contract providing for payment by
the borrower for the lender’s services which are of little value
or which are not, in fact, to be rendered. (First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 369 SCRA 99
[2000].)
ART. 1958. In the determination of the interest, if it is
payable in kind, its value shall be appraised at the current
price of the products or goods at the time and place of payment. (n)
Determination of interest payable
in kind.
This article has the same purpose: to make usury harder to
perpetrate. (Briones vs. Cammayo, 41 SCRA 404 [1971]; see Arts.
1602, last par., 2132, and 2133; Sec. 8, Usury Law, infra.)
EXAMPLE:
B borrowed P1,000.00 from L payable in palay in one (1)
year which shall be appraised at the current market price at
the time and place of payment. When the contract was entered
into, the price per cavan of palay was P500.00. On the due date
of the loan, the price increased to P600.00.
In this case, the value of the palay shall be appraised at
P600.00 per cavan.
48
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 1959-1960
ART. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n)
When unpaid interest earns interest.
As a general rule, accrued interest (interest due and unpaid)
shall not earn interest except in two instances:
(1) When judicially demanded as provided for in Article
2212 (supra.); and
(2) When there is an express stipulation made by the parties
to wit: that the interest due an unpaid shall be added to the
principal obligation and the resulting total amount shall earn
interest. (see Mambulao Lumber Co. vs. Phil. National Bank, 22
SCRA 359 [1968].) This practice is called compounding interest and
it is allowed by the Usury Law if there is express stipulation.
(Sec. 5, Ibid.)
The parties may stipulate on the imposition of both interest
and penalty in case of default on the part of the borrower. (Art.
1226.8) Under Article 1959, the compounding of not only of the
monetary interest but also of the penalty charge, also called
penalty or compensatory interest is allowed. Hence, the borrower
may be held liable to pay the interest on the total amount of
principal, the monetary interest and the penalty interest. (Tan vs.
Court of Appeals, 367 SCRA 571 [2001].)
In view of Article 1956, the stipulation as to compound interest
must be in writing. (Nolan vs. Majinay, 12 Phil. 559 [1909].)
ART. 1960. If the borrower pays interest when there has
been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be
applied, as the case may be. (n)
8
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. x x x.
Art. 1961
LOAN
Simple Loan or Mutuum
49
Recovery of unstipulated
interest paid.
This article simply means that if unstipulated interest (it is,
therefore, not due) is paid by mistake, the debtor may recover as
this would be a case of solutio indebiti or undue payment. (Art.
2154.9) But where the unstipulated interest, or interest stipulated,
there being a stipulation but it is not in writing, is paid voluntarily
because the debtor feels morally obliged to do so, there can be no
recovery as in the case of natural obligations. (Art. 1423.10)
ART. 1961. Usurious contracts shall be governed by
the Usury Law and other special laws, so far as they are
not inconsistent with this Code. (n)
Usurious transactions governed
by special laws.
The Usury Law and other special laws apply only so far as
they are not inconsistent with the Civil Code.
However, according to Article 1175, “usurious transactions
shall be governed by special laws.’’ These two provisions have
given rise to the question: In case of conflict, which would prevail,
the Usury Law or the Civil Code? (see Sec. 6 of the Usury Law.)
Note: Usury is now legally non-existent. The interest legally
chargeable depends upon the agreement between the lender
and the borrower. (Liam Law vs. Olympic Sawmill Co., 129
SCRA 439 [1984]; Joven vs. De Guzman, 193 SCRA 434 [1990];
Phil. National Bank vs. Encina, 544 SCRA 608 [2008].) Central
Bank Circular No. 905 (Dec. 10, 1982, effective Jan. 1, 1983)
9
Art. 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.
10
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to
compel their performance. Natural obligations, not being based on positive law but on
equity and natural law, do not grant a right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. (Arts. 1424-1430.)
50
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1961
removed the Usury Law ceiling on interest rates11 for secured
and unsecured loans, regardless of maturity (Bautista vs. Pilar
Development Authority, 312 SCRA 64 [1999].), rendering it
legally ineffective. This Circular, however, is of doubtful validity.
(see Note in II–Usury Law.) According to the Supreme Court,
the Circular which took effect on January 1, 1983 “did not repeal
nor in any way amend the Usury Law but simply suspended the
latter’s effectivity.’’ (First Metro Investment Corp. vs. Este Del
Sol Mountain Reserves, Inc., 369 SCRA 99 [2001], citing Medel
vs. Court of Appeals, 299 SCRA 481 [1998] and Security Bank &
Trust Company vs. Regional Trial Court, 263 SCRA 483 [1996].)
The parties are now free to stipulate the interest to be paid on
monetary obligations, and absent any evidence of fraud, undue
influence or any vice of consent exercised by one party against
the other, the interest rate agreed upon is binding upon them.
But “while the Usury Law ceiling on interest rates was lifted
by C.B. Circular No. 905, nothing in said circular grants lenders
carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrohaging of
their assets.’’ When the agreed rate is found to be iniquitous and
unconscionable, the courts may reduce the same as reason and
equity demand. (Imperial vs. Juacian, 427 SCRA 517 [2004].) It
has been held that an interest rate of 24% per annum agreed upon
by the parties is not unconscionable or excessive. (Bacolor vs.
Banco Filipino Savings & Mortgage Bank, 515 SCRA 79 [2007].)
But an interest rate of 4% per month or 48% per annum is highly
unconscionable and inordinate. (Bulos, Jr. vs. Yasuma, 527 SCRA
727 [2007]; see Svendsen vs. People, 546 SCRA 659 [2008].)
— oOo —
11
Notwithstanding the suspension of the effectivity of the Usury Law, courts are empowered to reduce the stipulated rate of interest, although it can no longer be considered
“usurious,’’ if it is inequitous or unconscionable. (see Art. 1229.)
51
II
THE USURY LAW
(Act No. 2655, as amended.)
(Secs. 1-12.)
Rate of interest no longer subject to any
ceiling prescribed under Usury Law.
Under the authority granted to it by Sections 1-a, 4-a, and
4-b of the Usury Law, the Monetary Board of the Central Bank
in Resolution No. 224 dated December 3, 1982, approved the
following regulations, among others, governing interest rates on
loans or forbearance of money, goods, or credit:
“General Provisions
SECTION 1. The rate of interest including commissions,
premiums, fees and other charges, on a loan or forbearance
of any money, goods, or credit, regardless of maturity and
whether secured or unsecured, that may be charged or
collected by any person, whether natural or judicial, shall not
be subject to any ceiling prescribed under the Usury Law, as
amended.
SEC. 2. The rate of interest for the loan or forbearance
of any money, goods, or credit and the rate allowed in
judgments, in the absence of express contract as to such
rate of interest, shall continue to be twelve per cent (12%) per
annum.
SEC. 3. Loans denominated or payable in a foreign currency shall continue to be subject to Central Bank regulations
on foreign borrowings.” (see C.B. Circular No. 905, Dec. 10,
1982.)
51
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
52
With the promulgation of the circular, effective January 1,
1983, usury has become “legally inexistent” as the lender and the
borrower can legally agree on any interest that may be charged
on the loan. This circular was given retroactive effect. (Verdejo vs.
Court of Appeals, 157 SCRA 743 [1988].) In the event, however,
interest rate ceilings on loans are restored by the Monetary Board,
the Usury Law would again apply. This possibility justifies the
continued inclusion of this topic in the book, assuming that the
interest limits prescribed by the Usury Law and previous Central
Bank circulars mentioned subsequently are still applicable.
The Circular did not repeal nor in any way amend the Usury
Law but simply suspended the latter’s effectivity.
Legality of Central Bank Circular No. 905.
Under Section 1-A (infra.) of the Usury Law, as amended by
Presidential Decree No. 116 (further amended by Pres. Decree No.
858 and 1684.), the Monetary Board is “authorized to prescribe
the maximum rate or rates of interest for the loan or renewal
thereof or the forbearance of any money, goods or credits and
to change such rate or rates whenever warranted by prevailing
economic and social conditions.’’
C.B. Circular No. 905 is of doubtful legality because it appears
to be in excess of the authority granted to the Monetary Board
which is only to prescribe the ceilings of interest rates, and not to
abolish or remove such ceilings.1
Usury defined.
Usury may be defined as contracting for or receiving something in excess of the amount allowed by law for the loan or for1
Central Bank Circular No. 905 was issued by the Central Bank’s Monetary Board
pursuant to P.D. No. 1684 empowering it to prescribe the maximum rates of interest for
loans and certain forbearances. P.D. No. 1684 and C.B. Circular No. 905 no more than
allow contracting parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money, goods, or credits. They
do not authorize either party to unilaterally raise or lower the interest rate without the
other’s consent. It is basic that there can be no contract in the true sense in the absence
of the element of agreement, or of mutual assent of the parties. (Phil. National Bank vs.
Court of Appeals, 238 SCRA 20 [1994]; Security Bank & Trust Company vs. RTC of Makati, 263 SCRA 483 [1996].)
THE USURY LAW
53
bearance of money, goods or chattels. (Tolentino vs. Gonzales, 50
Phil. 558 [1927].)
Usury, purely a statutory creation.
The subject of usury is entirely one of statutory regulation
and prohibition. In the absence of statute, any rate of interest
may be charged.
The restriction of the price to be paid for the use of money
being purely statutory, usury is to be determined by statutory
provisions applicable to the transaction, and the statute is the
source of power of the court in dealing with the evil. (68 C.J.S.
569-570.)
Elements of usury.
It may be stated generally that the elements of usury consist
of the following:
(1) a loan or forbearance;
(2) an understanding between the parties that the loan shall
or may be returned;
(3) an unlawful intent to take more than the legal rate for the
use of money or its equivalent; and
(4) the taking or agreeing to take for the use of the loan of
something in excess of what is allowed by law.
To determine whether all these requisites are present, the
court will disregard the form which the transaction may take and
look only to its substance. (91 C.J.S. 583.)
When the Usury Law applies.
Act No. 2566 is an act fixing rates of interest upon loans and
declaring the effect of receiving or taking usurious rates, and for
other purposes. (Arevalo vs. Dimayuga, 49 Phil. 894.) The law
(Sec. 1.) mentions two transactions, to wit: loan and forbearance of
a debt.
(1) A “loan,” within the purview of the Usury Law, would
be the loan called “mutuum” we have just studied. (see Arts.
54
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
1953, 1958.) Commodatum is not included because it is essentially
gratuitous.
(2) The term “forbearance,’’ as used in the Usury Law, signifies the contractual obligation of the creditor to forbear during a
given period to require the debtor, payment of an existing debt
then due and payable. Such forbearance or giving time for the
payment of a debt is, in substance, a loan. (91 C.J.S. 598.)
Where there is no loan or forbearance, there can be no usury.
Thus, a provision for a discount with respect to rentals paid in
advance would not contravene the Usury Law. The discount is,
in effect, a reduction of the rentals. (Herrera vs. Petrophil Corporation, 146 SCRA 385 [1986].) A contract to pay compensation
for the past use of money, although amounting to more than the
lawful rate of interest for the period of the loan, is not usury,
which relates to compensation for the future use of money. (91
C.J.S. 558.)
Purpose, theory, and nature
of the Usury Law.
(1) The Usury Law has been enacted for the protection
of borrowers from the imposition of unscrupulous lenders
who take undue advantage of the necessities of others. It is
undoubtedly against public policy to charge excessive interest
for the use of money. (see 91 C.J.S. 570; New Sampaguita Builders
Construction, Inc. vs. PNB, 435 SCRA 565 [2004], citing De Leon
Comments and Cases on Credit Transactions [1995], p. 87.)
(2) It proceeds on the theory that a usurious loan is attributable to such inequality in the relation of the lender and borrower
that the borrower’s necessities deprive him of freedom in contracting and place him at the mercy of the lender. In theory, the
borrower is put by the law in the same category with persons
under legal disability to contract, such as unemancipated minors
and insane persons. (Ibid.) To attain this purpose, the law has
imposed penalties as punishment on those who violate its provisions and fixed rules prescribing the rates of interest for the loan
or forbearance of money.
(3) Statutes relating to usury may be either remedial or penal,
or both remedial and penal, in their character, their construction
THE USURY LAW
55
being controlled by the nature of their provisions. (91 C.J.S. 569.)
Our Usury Law is both remedial (see Secs. 6, 8 and 9.) and penal.
(see Sec. 10.)
Historical background
of the Usury Law.
The taking of excessive interest for the loan of money has
been regarded with abhorrence from the earliest times. If we look
back upon history, we shall find that there is scarcely any people,
ancient or modern, that have not had usury laws.
(1) Usury, as such unlawful profits were known, was prohibited by the ancient laws of the Chinese and Hindus, by the
Mosaic Law of the Jews, by the Koran, by the Athenians and by
the Romans, and has been frowned upon by distinguished publicists throughout all the ages.
(2) During the Middle Ages, the people of England and
especially the English Church, entertained the opinion then
current in Europe that the taking of any interest for the loan of
money was a detestable vice, hateful to man, and contrary to
the laws of God. It is said that not only was the usurer liable
during his life to the censurer of the church, but after his death,
his chattels were forfeited to the king, and his lands escheated to
the lord of the fee. Contracts for interest not exceeding 10% were
expressly legalized by Act of Parliament in 1545, which act was
repealed in 1555 but restored in 1570.
Subsequent acts gradually reduced the rate of interest allowed until 1714 when the lawful rate was fixed at 5% where
it remained until 1854, when all restrictions on interest charges
were removed.
(3) The early American colonial usury acts were modeled
after the English act, the rate of interest allowed being usually
higher, however. These early enactments adopted the penalty
for usury fixed by the statute of the mother country, and made
all usurious contracts wholly void. The tendency of subsequent
statutes, however, has been steadily to mitigate the punishment
inflicted on the usurer. (see C.J.S. 558-559.)
(4) The illegality of usury is now wholly a creature of legislation. The Philippine statute on the subject is Act No. 2655 (as
56
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
amended) which became effective May 1, 1916. It is a drastic law
following in many respects the most advanced American legislation. (U.S. vs. Tan Quingco Chua, 39 Phil. 552 [1919]; Tolentino
vs. Gonzales, 50 Phil. 558 [1927].) Central Bank Circular No. 905
(supra.) which took effect on January 1, 1983 simply suspended
the effectivity of the Usury Law. It did not repeal or in any way
amend the Usury Law. Only a law can repeal another law. (First
Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc.,
369 SCRA 99 [2001].)
Construction of the law.
(1) In general. — In the construction of usury statutes, it is
the duty of the court to ascertain the intent and purpose of the
legislature. The mischief to be stopped and the remedy therefor
should be considered, and the statute so construed as to carry
into effect the intention of the lawmaking body in removing
the mischief and applying the remedy so far as it can be done
consistently with the phraseology of the statute. The general
intent must be kept in view in determining the scope and
meaning of any part of the law and it must be held in mind that
it was enacted for the protection of the borrower. (68 C.J.S. 572573.)
(2) Liberal or strict construction. — While laws enacted to
guard against unreasonable rates of interest are favorably regarded, and are liberally construed to accomplish their purpose,
usury provisions which are penal in their nature are to be strictly
construed. In other words, when operating on the contract or the
security taken, the statute is not, strictly speaking, punitive in its
character, and should be construed so as to repress the evil the
legislature had in view in its enactment, but when the punishment of the person who has committed the usury is sought, then
according to the benignant principle which pervades our criminal jurisprudence, it should be construed in all cases of doubt
and uncertainty in favor of the accused. In strict construction,
any uncertainties are resolved in favor of him who is sought to
be penalized. (Ibid., 573-574.)
(3) Prospective or retrospective operation. — The general rule
is that, unless there is a clear legislative intent to the contrary,
THE USURY LAW
57
usury statutes will be construed to be prospective only, and not
retrospective. (Ibid., 576.)
(a) Contracts previously non-usurious. — If a contract is
legal at its inception, it cannot be rendered illegal by any
subsequent legislation for this would be tantamount to the
impairment of the obligation of the contract. Thus, contracts
which were not usurious under the law in effect at the time
they were made, or which, although usurious at the time of
their inception, were by a later legislation rendered valid and
non-usurious, cannot be rendered usurious by a subsequent
change in the law. So, a claim of usury is not available where
the contract was entered into before a usury law became
effective. (68 C.J.S. 578.)
It has been held that a person who collected usurious
interest after the adoption of the Usury Law upon a contract
made when there was no usury law in force could not be held
responsible under the Usury Law. When a contract contains
an obligation to pay interest upon the principal, the interest
thereby becomes a part of the obligation of the contract. Laws
adopted after the execution of a contract, changing or altering
the rate of interest, cannot be made to apply to such contract
without violating the provisions of the Constitution which
prohibits the passage of a law “impairing the obligation of
contracts.” (U.S. vs. Diaz, 42 Phil. 766 [1922]; 8 Cyc., 996.)
(b) Contracts previously usurious. — However, usury statutes which do not impair the obligation of contracts by making contracts legal which were illegal at their inception may
constitutionally be made retrospective. Thus, the right of a
debtor under a usurious contract to refuse to pay interest or
to recover usury has been held not to be a vested constitutional right secured against legislative innovation but that it
constitutes a mere privilege within the legislative power to
take away.
Statutes which take away an existing defense of usury are
generally held not to affect the obligation of the contract, but
to pertain to the remedy only. The effect of such legislation
is not to change the contract of the parties, but only to
remove a bar to its enforcement, and where the legislature so
58
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 1-1a
intends, it will operate retrospectively. As a general rule, the
legislature has the power to validate any or all parts of preexisting usurious contracts. (see 91 C.J.S. 576-577; U.S. vs. Tan
Quingco Chua, 39 Phil. 552 [1919].)
In a case, where the contract entered into before the effectivity
of the Usury Law stipulated interest at a rate (60% per annum)
contrary to the Usury Law, the borrower was held liable only for
the legal rate (then 6% per annum) both for the period prior to
and after the date the law became effective. The Supreme Court
considered the contract of loan as one stipulating no interest.
(Aguilar vs. Rubiato and Gonzales Villa, 40 Phil. 570 [1919].)
SECTION 1. The rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed
in judgments, in the absence of express contract as to
such rate of interest, shall be six per centum per annum or
such rate as may be prescribed by the Monetary Board of
the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. (as amended
by Pres. Decree No. 116.)
SEC. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any money, goods
or credits and to change such rate or rates whenever warranted by prevailing economic and social conditions; Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance.2
In the exercise of the authority herein granted, the
Monetary Board may prescribe higher maximum rates for
loans of low priority such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized
to prescribe different maximum rate or rates for different
types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. (as amended
by Pres. Decrees No. 116, 858, and 1684.)
2
Reads: “Provided, that such changes shall not be made often than once every twelve
months,’’ before amendment by Pres. Decree No. 1685.
Secs. 1-3
THE USURY LAW
59
SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or
personal, or choses in action, a higher rate of interest or
greater sum or value, including commissions, premiums,
fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or
renewal or forbearance is secured in whole or in part by a
mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or
an interest therein, than twelve per centum per annum or
the maximum rate prescribed by the Monetary Board and
in force at the time the loan or renewal thereof or forbearance is granted; Provided, That the rate of interest under
this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may
likewise apply to loans secured by other types of security
as may be specified by the Monetary Board. (as amended
by Pres. Decree No. 116.)
SEC. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money
or other property, real or personal, a higher rate or greater
sum or value, for the loan or forbearance of money, goods,
or credits, where such loan or forbearance is not secured
as provided in Section two thereof, than fourteen per centum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance
is granted. (as amended by Pres. Decree No. 116.)
Interest defined.
Interest is the compensation allowed by law or fixed by the
parties for the loan or forbearance of money, goods or credits.
ILLUSTRATIVE CASE:
Loan in Japanese fiat currency to be repaid, without interest, in
the same amount in Philippine currency after the war.
Facts: D borrowed P4,000.00 in Japanese fiat currency from
L, promising to repay “the same amount” or the same number
of pesos “in Philippine currency” or “in currency prevailing
after the war” without any interest, “one year after this date,
October 5, 1944.”
60
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 1-3
D contends that the transaction was immoral and against
public order because taking advantage of his superior
knowledge of war development, L imposed on him the onerous
obligation and could now obtain P4,000.00 in return for an
investment of P40.00, D’s estimate of the value of the Japanese
money he borrowed. He further asserts that the contract was
contrary to the Usury Law because he would be paying interest
greatly in excess of the lawful rates.
Issue: Is the contract legal and obligatory?
Held: Yes. For the following reasons: First, D voluntarily
signed the document without having been misled as to its contents and “insofar as knowledge of war events was concerned,”
both parties were “on equal footing.” Second, the date of liberation was anybody’s guess. Third, there was the possibility that
upon re-occupation, the Philippine Government would not invalidate the Japanese currency which after all had been forced
upon the people in exchange for valuable goods and property.
The odds were about even when the parties played their bargaining game.
It is not immoral or against public order for a homeowner
to recover P10,000.00 when his house was burned, because
he invested only about P100.00 for the insurance policy. And
when the holder of a sweepstakes ticket who paid only P4.00
luckily obtained the first prize of P100,000.00 or over, the whole
business is not immoral or against public order.
D is not paying interest. Precisely, the contract says the
money received “will not earn interest.” D and L both elected to
subject their rights and obligations to contingency. The gain to
L is not interest within the meaning of the Usury Law. Interest
is some additional money to be paid in any event, which is not
the case here because L might have gotten less if the Japanese
occupation had extended to the end of 1945 or if the liberation
forces had chosen to permit the circulation of the Japanese
notes. (Roño vs. Gomez, 83 Phil. 890 [1949].)
Kinds of interest.
They are the following:
(1) Simple interest. — that which is paid for the principal at a
certain rate fixed or stipulated by the parties (see Art. 2209, Civil
Code.);
Secs. 1-3
THE USURY LAW
61
(2) Compound interest. — that which is imposed upon interest
due and unpaid. The accrued interest is added to the principal
sum and the whole (principal and accrued interest) is treated as
a new principal upon which the interest for the next period is
calculated (Arts. 1959, 2212, ibid.);
(3) Legal interest. — that which the law directs to be charged
in the absence of any agreement as to the rate between the parties.
(Art. 2209, ibid.) Thus, as provided in Section 1, the rate collectible
is 6% per annum. The same rate is allowed in judgments when
there is no express contract between the parties in anticipation of
the same. The interest is computed from the time of the rendition
of the trial court’s, not of the appellate court’s decision. (De Lima
vs. Laguna Tayabas Co., 160 SCRA 70 [1988].)
The rule has been laid down that the 6% interest imposed
by a court should be computed from the date of the rendition of
the judgment and not from the filing of the complaint because at
the time of the filing of the complaints, the amount of damages
to which the plaintiff may be entitled remains unliquidated
and not known until it is definitely ascertained, assessed and
determined by the court and only after the presentation of proof
thereon. (Phil. Airlines, Inc. vs. Court of Appeals, 275 SCRA
621 [1997]; Korean Airlines vs. Court of Appeals, 234 SCRA 717
[1994]; Eastern Shipping Lines vs. Court of Appeals, 234 SCRA
78 [1994].)
(4) Lawful interest. — that which the law allows or does not
prohibit, that is, the rate of interest within the maximum prescribed by law (Secs. 2, 3.); and
(5) Unlawful or usurious interest. — that which is paid or
stipulated to be paid beyond the maximum fixed by law. (Ibid.)
Note: Under the authority granted to it by Section 1 of the
Usury Law, the Monetary Board of the Central Bank in its Resolution dated July 29, 1974 has prescribed that the legal rate of
interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express
contract as to such rate, shall be 12% per annum. (see C.B. Cir. No.
416 [1974].3)
3
The circular should not be given retroactive application. (Viloria vs. Court of Appeals, 123 SCRA 259 [1983].)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
62
Secs. 1-3
The circular does not apply to all kinds of obligations (e.g.,
from a contract of sale) and “all kinds of monetary judgment.”
“The judgments spoken of and referred to are judgments in
litigation involving loans or forbearance of any money, goods or
credits, or to cases where money is transferred from one person
to another and the obligation to return the same or a portion
thereof is adjudged. Any other kind of monetary judgments
which has nothing to do with nor involving loans or forbearance
of any money, goods and credits does not fall within the coverage
of the Usury Law for it is not within the ambit of the authority
granted by the Central Bank. Thus, where the decision sought to
be executed is one rendered in an action for damages for injury to
persons and loss of property, the law applicable is Article 22094 of
the Civil Code.” (Reformina vs. Tomol, Jr.,5 139 SCRA 260 [1985];
Phil. Rabbit Bus Lines, Inc. vs. Cruz, 143 SCRA 158 [1986]; Food
Terminal, Inc. vs. Court of Appeals, 262 SCRA 339 [1996].)
Article 2209 applies to transactions requiring the payment
of indemnities as damages in the form of interest at 6% per
annum, in connection with any delay in the performance of the
obligation arising therefrom other than those involving loan or
forbearance of money, goods, or credits. (Republic Planters Bank
vs. Court of Appeals, 216 SCRA 738 [1992]; National Power Corp.
vs. Angas, 208 SCRA 542 [1992]; Philippine National Bank vs.
Court of Appeals, 263 SCRA 766 [1996].)
Circular No. 416 was held applicable to judgments involving
the payment of unliquidated cash advances to an employee
by her employer (Villarica vs. Court of Appeals, 123 SCRA 259
[1983].) and the return of money paid by a buyer of a leasehold
right but which contract was voided due to the fault of the seller.
4
Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest which is six percent per annum. (1108)
5
This case stressed that the interest rate under Central Bank Circular No. 416 applies
to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment involving a
loan or forbearance of money, goods, or creates. Cases beyond the scope of said circular
are governed by Article 2209 which considers interest a form of indemnity for the delay
in the performance of an obligation. (Cristina Garments, Inc. vs. Court of Appeals, 304
SCRA 356 [1999].)
Secs. 1-3
THE USURY LAW
63
(Buisier vs. Court of Appeals, 154 SCRA 438 [1987]; see Pilipinas
Bank vs. Court of Appeals, 225 SCRA 268 [1993].)
Section 1-a which, as distinguished from Section 1, appears
to be the actual and operative grant of authority to the Monetary
Board of the Bangko Sentral ng Pilipinas to prescribe maximum
rates of interest where the parties have not stipulated thereon,
in excluding mention of rates allowed in judgments, should be
construed as limiting its authority only to loans or forbearances
of money, etc. and to judgments involving such loans or
forbearances. But the 12% interest may be imposed although
there is neither a loan nor a forbearance in case of delay in the
payment of the sums adjudged in a final judgment, and not as
part of the judgment for damages. (Nakpil & Sons vs. Court of
Appeals, 160 SCRA 334 [1988].)
The interim period from the finality of the judgment awarding
a monetary claim and until payment thereof, is deemed to be
equivalent to forbearance of credit. Thus, from the time the
judgment becomes final until its full satisfaction, the applicable
rate of legal interest shall be 12%. (Food Terminal, Inc. vs. Court
of Appeals, 262 SCRA 339 [1996]; Eastern Assurance and Surety
Corporation vs. Court of Appeals, 322 SCRA 73 [2000].)
That there is no longer any ceiling on interest or interest
rates on loans (Liam Law vs. Olympic Sawmill Co., 129 SCRA
439 [1984].) applies only where the parties openly and expressly
agree on a specific rate of interest to accrue on the loan. Where
the interest rate is not expressly stipulated, the loan shall earn
12% interest per annum. (Sangrador vs. Villarama, 168 SCRA 215
[1988].) The interim period from the finality of the judgment
awarding a monetary claim and until payment thereof, deemed
to be equivalent to a forbearance of credit. Thus, from the time the
judgment becomes final until its full satisfaction, the applicable
rate of legal interest shall be 12%. (Food Terminal, Inc. vs. Court
of Appeals, 262 SCRA 339 [1996].)
It has been held in a case that while the stipulated rate of
interest at 5.5% per month on a P500,000 loan cannot be rendered
“usurious in view of Central Bank Circular No. 905, it is “excessive,
iniquitous, unconscionable and exhorbitant.” The courts are
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
64
Secs. 1-3
empowered to “reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are iniquitous or
unconscionable.’’ (Medel vs. Court of Appeals, 299 SCRA 481
[1998]; see Art. 1229.) “Nothing in the said circular grants lenders
carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets’’ (Solangon vs. Salazar, 360 SCRA 379 [2001]; Ruiz vs.
Court of Appeals, 401 SCRA 410 [2003]; Dio vs. Japor, 463 SCRA
170 [2005].)
Interest rates.
Under the Usury Law, they are:
(1) Legal rate. — 12% per annum
(2) Maximum rate. —
(a) 12% per annum, if loan is secured in whole or in part
by a mortgage upon real estate with a Torrens title (Sec. 2.); or
any agreement conveying such real estate (also registered) or
an interest therein. For purposes of the ceiling, loans secured
by government securities such as treasury bills, Central Bank
certificates of indebtedness, etc. qualify as secured loans.
(b) 14% per annum, if the loan is not secured as above
stated (Sec. 3.); or
(c) that prescribed by the Monetary Board of the Central
Bank. This allows for more flexible interest rate ceilings.
Note: Central Bank Circular No. 817 (July 21, 1981) fixed the
effective rates of interest as follows:
(1) not exceeding 16% per annum, including commissions,
premiums, fees, and other charges for secured loans of 365 days
or less;
(2) not exceeding 18% per annum, if such loans are unsecured;
and
(3) if the maturity of the loan is more than 365 days, the
interest shall not be subject to any ceiling.
Secs. 1-3
THE USURY LAW
EXAMPLES:
(1) B borrowed P10,000.00 from L payable within one (1)
year. The parties did not expressly stipulate in writing that B
shall pay interest. Under the law, B is not liable to pay interest.
(see Art. 1956.)
(2) Suppose, in the above example, it is expressly stipulated
in writing that B shall pay interest but the parties failed to fix
the rate thereof. In this case, the legal rate of 12% is payable.
(3) Suppose now that B expressly agreed in writing to
pay interest of 18% per annum. The interest stipulated is simple
interest. If it was also agreed that the interest due and unpaid
shall likewise earn interest, this interest on interest is called
compound interest.
(4) Under Central Bank Circular No. 817, if the loan is
secured by a registered real estate, the interest of 18% including
commissions, etc. is unlawful or usurious; if such loan is
unsecured, then the interest is lawful.
ILLUSTRATIVE CASE:
Borrower claimed that stipulation to pay “interest at the rate
fixed by Act No. 2655 x x x” did not specify rate of interest; hence, he
was not obliged to pay more than the legal rate.
Facts: L brought suit against B upon a registered mortgage
deed of real estate which states the following with regard to
interest: “x x x B should pay or cause to be duly paid to L x
x x the aforesaid amount of P1,000.00, Philippine currency,
together with the interest at the rate fixed by Act No. 2655 x x
x.”
B offered 10% interest but it was rejected. A demand was
made by L for 12%. B contended that as the contract did not
specify the rate of interest to be paid, he was not obliged to pay
more than 6% a year.
Issue: Which among the several rates of interest fixed in Act
No. 2655 did the parties agree upon?
Held: The contract between the parties was a loan secured
by a mortgage of real estate, the ownership whereof had been
duly registered. Therefore, when in the deed B stated that the
loan should earn interest fixed in Act No. 2655, he could not
have had in mind anything else than Section 2 for that alone
65
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TRANSACTIONS
Secs. 1-3
fixed the maximum interest chargeable on loans secured by a
mortgage, namely, 12% per annum.
Furthermore, the subsequent act of B and his heirs after his
death to pay L and his widow after his death also indicated that
the rate of interest agreed upon by and between the parties was
that fixed in Section 2. (Rivero vs. Rabe, 54 Phil. 982 [1930].)
Dissenting opinion (Justices Street and Ostrand): “The rate
of interest to be allowed should be 6%, in accordance with
Section 1. The rate of 12% which the court supposes to have
been intended by the contracting parties, is not a rate fixed
by Act No. 2655, because the rate is merely a maximum rate
beyond which the parties are not permitted to go in interestbearing contracts secured by mortgages upon real property.
The parties to such a contract can fix any rate lower than 12%,
but not more. If the agreement had been to pay the maximum
rate of interest permissible under Act No. 2655, then the debtor
would have been bound to pay at the rate of 12%.”
Multi-tiered interest rates.
Under Section 1-a (par. 2.), the Monetary Board may
prescribe higher maximum rates of interest for loans of low
priority than those loans used for, say, productive purposes.
Low priority loans are enumerated in Section 1-a. (par. 2.) Loans
made by pawnshops, finance companies, and other similar credit
institutions may also be allowed to charge higher rates although
the rates prescribed for these institutions need not necessarily be
uniform.
The Monetary Board is likewise authorized by the same provision to prescribe different maximum rate or rates for different
types of borrowings, including deposits and deposit substitutes,
or loans of financial intermediaries. It may change the maximum
interest rate or rates for loans “whenever warranted by prevailing economic and social conditions.” Such changes in interest
rate ceilings “may be effected gradually on scheduled dates announced in advance” (par. 1.), i.e., on a staggered basis.
Section 2 and Section 3 compared.
Section 2 may be distinguished from Section 3 in the following
manner:
Secs. 1-3
THE USURY LAW
67
(1) In Section 2, the taking or receiving (not mere agreeing)
of usurious interest is the act penalized, while in Section 3, the
mere demanding or agreeing to charge excessive interest is also
punishable;
(2) In Section 2, the loan or forbearance is secured by a
registered real estate, while in Section 3, it is not so secured or
there may be no security at all;
(3) In Section 2, the maximum rate of interest allowed is 12%
per annum, while in Section 3, 14% per annum; and
(4) In Section 2, commissions, premiums, fines, and penalties
are included in the computation of interest, while in Section 3,
they are not considered. (see C.B. Cir. No. 721, supra.)
Under both sections, it is only the creditor who is criminally
liable.
Validity of stipulation to pay penalty
in case obligation not fulfilled.
Where a borrower has agreed to pay a rate of interest not
forbidden by law, but has stipulated that, in the event of his not
making payment at the time specified, the obligation shall bear
a higher rate of interest, either from default or from the date of
its execution, or that some specific sum shall be paid in addition
to the principal and interest contracted for, the increased rate is
generally regarded as a penalty. (27 R.C.L. 232; see Art. 1226.)
(1) Such a penalty does not include interest, and as such the
two are different and distinct things which may be demanded
separately. “When an excessive rate of interest is made payable
only in case of default in payment of the principal, the higher
rate is not for the use of the money, but imposed as a penalty
for non-performance of the contract. x x x There is no policy
and nowhere in Act No. 2655 is there a provision preventing the
stipulation and enforcement of a penalty in case of a violation of
the contract.” (Lopez and Javelona vs. El Hogar Filipino, 47 Phil.
249 [1925]; Bachrach Motor Co. vs. Espiritu, 52 Phil. 346 [1928];
Go Chioco vs. Martinez, 45 Phil. 256 [1923]; see Insular Bank of
Asia and America vs. Spouses Salazar, 159 SCRA 133 [1988].)
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TRANSACTIONS
Secs. 1-3
The above doctrine, however, is good only with respect to
transactions falling under Section 3. Section 2, as amended,
includes penalties in the computation of interest for the purpose
of determining whether the same exceeds the rate fixed by law or
not.
(2) In another case, the rate stipulated was 9% subject to an
additional rate of 5% in the event of default, or a total of 14%. This
stipulation about the payment of such additional rate, according
to the Supreme Court, partakes of the nature of a penalty
clause which is sanctioned by law. (Equitable Banking Corp. vs.
Liwanag, 32 SCRA 293 [1970]; GSIS vs. Court of Appeals, 145
SCRA 311 [1986].) The case does not disclose whether the loan
was secured or not by real estate mortgage.
Attorney’s fees to cover costs
of collection not interest.
Stipulations in negotiable instruments for the payment
of collection as attorney’s fees are not forbidden by law in
our jurisdiction. The lender may without violating the Usury
Law provide in a note for an attorney’s fee to cover the cost of
collection. Thus, in a case, the clause in a promissory note sued
on, reading “and a further sum equal to 10% of the total amount
due as and for expenses of collection for attorney’s fees whether
actually incurred or not” was held as not in contravention of the
Usury Law.
The purpose of a stipulation in a note for reasonable
attorney’s fees is not to give the lender a larger compensation for
the loan than the law allows, but to safeguard the lender against
future loss or damage by being compelled to retain counsel (inhouse or not) to institute judicial proceedings for the collection
of his credit (New Sampaguita Builders Construction, Inc. vs.
PNB, 435 SCRA 565 [2004], citing De Leon, Comments and Cases
on Credit Transactions, [1995], p. 64.). The additional words,
“whether actually incurred or not” are merely surplusage where
such expenses have actually incurred. But whether a creditor
can enforce payment of attorney’s fees not actually incurred is
questionable. (Andreas vs. Green, 48 Phil. 463 [1925].) In any case,
courts have the power to determine their reasonableness based
Secs. 1-3
THE USURY LAW
69
on quantum meruit and to reduce the amount thereof if excessive.
(New Sampaguita Builders Construction, Inc. vs. PNB, supra.)
Note: In a case (Gov’t. of the Phil. Islands vs. Lim, 61 Phil.
737 [1935].), a stipulation in the promissory notes executed by
the defendants and incorporated in the mortgage deeds, wherein
they voluntarily undertook “to pay the sum of P1,300.00 as court
costs, expenses of collection and attorney’s fees whether incurred
or not” was held a valid and a permissible penal clause the same
being neither excessive nor exorbitant. (see also Gov’t. of the
Phil. Islands vs. Vaca and Calderon, 64 Phil. 6 [1937]; Gov’t. of
the Phil. Islands vs. Macanaya, 60 Phil. 1049 [1934].)
Where attorney’s fees stipulated
excessive.
If the amount of attorney’s fees stipulated is excessive, the
same is subject to equitable reduction.
In a case, the mortgagee binds herself to pay a loan of
P50,000.00 within 30 days and, in case of foreclosure, to pay
the mortgagee 30% of the sum owing and unpaid as attorney’s
fees and liquidated damages, exclusive of costs and expenses of
sale. The Supreme Court held that the contract was not usurious
per se, there being no allegation that the mortgagee’s intention
in inserting the stipulation in question was to exact a usurious
interest nor that said contract was contra bonos mores, but sustained
the reduction by the lower court of the stipulated attorney’s fees
and liquidated damages to 5% in accordance with the provisions
of Articles 1227 and 12296 of the Civil Code. (Geniza vs. Sy, 6
SCRA 20 [1962]; see Yulo vs. Pe, 101 Phil. 134 [1957]; Umali vs.
Miclat, 105 Phil. 1109 [1959].)
Determination of existence of usury.
(1) Corrupt agreement must be present. — The gist of the offense of usury is in actually receiving (at least where the criminal
6
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been
no performance, the penalty may also be reduced by the courts if it is inequitous or unconscionable.
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COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 1-3
prosecution is based on Section 2) unlawful interest. To constitute usury, within the prohibition of the law, there must be an
intention knowingly to contract for or take usurious interest; for
if neither party intend it but act bona fide and innocently, the law
will not infer a corrupt agreement. Where indeed the contract
upon its very face, imports usury, as by an express reservation of
more than lawful interest, there is no room for the presumption;
for the intent is apparent, res ipsa loquitur.
But where the contract on its face is for legal interest only, there
must be proof that there was some corrupt agreement, or device
or shift, to cover usury, and that it was in full contemplation of
the parties. The real intention of the parties must be ascertained
from the circumstances surrounding the transaction and from
the language of the document itself. (U.S. vs. Tan Quingco Chua,
39 Phil. 552 [1919].)
(2) Where consideration of loan is property or services of uncertain
value. — A contract is ordinarily not usurious under which the
creditor is to receive, in consideration of his loan or forbearance,
property or services of uncertain value, even though the
probable value is greater than lawful interest, unless the excess
is so palpable as to show a corrupt intent to violate or evade the
usury law. (91 C.J.S. 616-617.) Thus, “an agreement that instead
of interest the lender of money would receive the rents and
profits of certain land for a term of years, is not usurious where
no intention to evade the statute is shown; and the fact that such
rents and profits happen to amount to more than lawful interest
does not render the contract usurious.” (Verzosa vs. Bucag
[Unrep.], 97 Phil. 996 [1955]; Toquero vs. Villegas, [C.A.] 40 O.G.
No. 15, p. 10.)
This principle, of course, is not applicable where the contract
upon its face imports usury, as by an express stipulation of more
than the lawful rate.
(3) Form of contract not conclusive. — The form of the contract
is not conclusive. (see Art. 1957.) The cardinal inquiry is: Did the
parties resort to the transaction for the purpose of disguising
usury in violation of law? The law will not permit a usurious
loan to hide itself behind a legal form. Parol evidence is admis-
Secs. 1-3
THE USURY LAW
71
sible to show that a written document though legal in form was
in fact a device to cover usury. If from a construction of the whole
transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit
no scheme, however ingenious, to becloud the crime of usury.
(U.S. vs. Tan Quingco Chua, supra; see Art. 1957, Civil Code.)
EXAMPLE:
B borrowed from L P1,000.00 with interest at 24% per annum
or P240.00. The interest, let us suppose, is usurious. To hide the
usurious transaction, the contract entered into by the parties
is called pacto de retro (sale with right to repurchase) whereby
B sells his land to L for P1,000.00 with right to repurchase the
same within a fixed period.
It is stipulated that B shall continue in possession as lessee
and pay a fixed rental of P240.00 a year.
Here, the real intention of the parties is that the pretended
purchase price is the money loaned and the simulated rent is
the interest. The courts have held this form of agreement as a
mere cloak or device to circumvent the Usury Law.
When the Usury Law not applicable.
Most of the ordinary contracts, when entered into in good
faith, do not come within the pale of usury. Since the purpose
of the Usury Law is to prevent excessive charges for the use
of money, it applies only to those contracts which in substance
involve a loan of money or forbearance to collect money due. (91
C.J.S. 587.) Hence, it does not apply to:
(1) The rental in contract of lease where the relation between
the contractors is that of landlord and tenant and not that of
borrower and lender (Tolentino vs. Gonzales, 50 Phil. 558 [1927].)
so that rent charges may be fixed without regard to the Usury
Law. The provision for the payment of rentals in advance where
the lessee gets a rebate or discount for the advance payment
cannot be construed as a repayment of a loan because there is no
grant or forbearance of money as to constitute an indebtedness
of the lessee. The provision for a discount is not unusual in lease
72
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 1-3
contracts. (Herrera vs. Petrophil Corporation, 146 SCRA 385
[1986].)
But where the lease provided for the imposition of an additional 15% upon unpaid rent in the form of liquidated damages,
it was held that such stipulation is in reality a mere cover for the
payment of usurious interest. (Pamintuan vs. Tiglao, 53 Phil. 1
[1929].)
ILLUSTRATIVE CASE:
Vendor a retro remained as tenant and agreed to pay rent.
Facts: S sold to B a parcel of land with a right of repurchase.
In the same deed, S agreed to become a tenant of B and to pay
a rental price of P375.00 a month, based upon the value of
the property, during the period of the existence of the right to
repurchase. A case subsequently arose between S and B.
Issue: Under a pacto de retro, where the vendor becomes
a tenant of the vendee and agrees to pay a certain amount
per month as rent, may such tenant charge his landlord with
violation of the Usury Law upon the ground that the sum
paid as rent, based upon the value of the property, amounts to
usurious rate of interest?
Held: In the present case, the court ruled that the transaction
was one of rent and not a loan. The property in question was
sold absolutely with the right only to repurchase. During the
period of redemption, B, the vendee, and not S, the vendor, was
the owner of the property. S was a tenant of B and the relation
which existed between them was that of landlord and tenant.
That relation could only be terminated by a repurchase of the
property by S in accordance with the terms of the said contract.
Dissenting opinion (Justice Malcolm): “The contract was
merely a clever device to cover up the payment of usurious
interest. The fact that the document purports to be a true
sale with right of repurchase means nothing. The fact that
the instrument includes a contract of lease on the property
whereby the lessee as vendor apparently binds himself to pay
rent at the rate of P375.00 per month and whereby default in
the payment of the rent agreed for two consecutive months will
terminate this lease and will forfeit any right of repurchase, as
though the term had expired naturally does mean something
Secs. 1-3
THE USURY LAW
73
and taken together with the oral testimony, is indicative of a
subterfuge hiding a usurious loan. (Tolentino vs. Gonzales, 50
Phil. 558 [1927].)
Note: Under Article 1602 of the Civil Code (a new provision),
a contract of pacto de retro “shall be presumed to be an equitable
mortgage in any of the following cases: x x x (2) When the vendor
remains in possession as lessee or otherwise; x x x and x x x any
money, fruits, or otherwise shall be considered as interest which
shall be subject to the usury law.”
(2) A bona fide sale, for a person has a right to sell his property
at such price and at such terms as to the time and mode of
payment as he may see fit. A hard bargain need not necessarily
be a void bargain. (U.S. vs. Constantino Tan Quingco Chua, 39
Phil. 552 [1919].)
ILLUSTRATIVE CASE:
Clause in mortgage executed by buyer to secure payment with
interest of balance of purchase price of property sold, gives seller right
to collect rents for the first 60 days after sale in consideration of his
waiver of interest for said period.
Facts: S, as administrator of an estate left by a deceased,
sold with the consent of the heirs and approval of the probate
court, a parcel of land to B at the agreed price of P75,000.00 of
which P65,000.00 was paid at the time of the sale. To secure the
balance, B executed a mortgage on the premises by the terms of
which the balance of P10,000.00 was to bear interest at the rate of
12% per annum from maturity until final payment and all rents
of the property from the date of sale until full payment shall be
collected by S for the benefit of the estate under administration.
It appeared that the court authorized the sale on the basis
of a letter of B to S to the effect “that the said mortgage will
carry no interest, during [the] period of sixty (60) days [after
the sale], but whatever rent to be derived from said property
during said period to redound to the benefit of the estate.”
Issue: Is the mortgage valid considering that in addition
to the payment of 12% interest per annum, it gives the right to
collect rents on the property?
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TRANSACTIONS
Secs. 1-3
Held: Yes. Standing alone and within itself, the mortgage
might be construed as tending to show that S was to receive
more than 12% interest on the amount of the rate. The circumstances of the case show that the transaction was a sale of property as distinguished from a loan of money; that it was founded
upon an order of the court; that it was the result of a series of
negotiations between S and B; and that at the time the mortgage was executed, it was contemplated by both parties that
the note would be paid at its maturity, and that the clause giving S the right to the rents for the first 60 days was inserted in
consideration of S’s waiver of interest on the note for the first
60 days.
The said clause in the mortgage was founded on B’s own
proposition. It is very apparent that neither S nor B ever contemplated the making of a usurious contract and that, at the
time it was made, neither of them ever thought or understood
that it was. (Reyes vs. Elser, 45 Phil. 685 [1924].)
(3) The increase in price of thing sold as a result of a sale on
credit, over its cash sales price, commonly known as time-price
differential, for a vendor may well fix upon his property one
price for cash and another for credit and the mere fact that the
credit price exceeds the cash price by a greater percentage than is
permitted by the Usury Law is a matter of concern to the parties
but not to the courts if the sale is made in good faith and not as a
mere pretext to cover a usurious loan. (27 R.C.L. 214.)
Such time-price differential is not interest within the meaning
of the Usury Law. It serves not only to cover the expenses
generally entailed by such transactions on credit, but also to
encourage cash sales, so useful to commerce. (Manila Trading &
Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513 [1925]; also
Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966].)
But a stipulation in a contract of sale made on a cash basis
and for a cash price whereby the vendor forbears to require the
cash payment agreed upon in consideration of the vendee’s
promise to pay at a future day a sum greater than such agreed
cash value with lawful interest, renders the excessive charge
therefor usurious. (see 91 C.J.S. 591.)
Secs. 1-3
THE USURY LAW
75
ILLUSTRATIVE CASES:
1. Purchase price is P5,300.00 if paid in cash; to be increased
by 5%, if purchase is on credit.
Facts: M Company sold to T Company certain agricultural
implements under the following terms: P5,300.00 if paid in cash,
otherwise the amount of P265.00 or 5% on P5,300.00, would be
added, making a total of P5,565.00, this total sum of P5,565.00
to be paid in the manner specified in a chattel mortgage given
to secure its payment by T. The goods were not paid in cash.
Issue: Whether or not the increase of price of goods sold
on credit upon their cash value constitutes interest within the
meaning of the Usury Law.
Held: No. In the contract of sale, the parties may fully agree
upon the price of the goods sold, and it cannot be said that the
credit, greater than the cash price, constitutes interest within the
meaning of the Usury Law. It is up to the purchaser to decide
which price he prefers in making the purchase. If he prefers to
purchase for cash, he obtains a reduction of the price; if, on the
contrary, he prefers to buy on credit, he cannot complain of the
increase of the price demanded by the vendor. (Manila Trading
& Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513 [1925].)
————
————
————
2. Present sale is made for cash price of P15,000.00, but in
consideration for vendor’s forbearance to require cash payment,
vendee promises to pay interest above maximum rate.
Facts: L bought certain parcels of land which he subsequently conveyed to B who executed a mortgage upon the
same land to secure the payment of the purchase price.
Under the mortgage, B bound himself to pay L the sum of
P15,000.00 in a single payment, and interest, in the amount of
P2,250.00, to be paid in two (2) semi-annual installments so long
as the debt should subsist; and if B should not make payment
within twelve (12) years from the date of the instrument, L may
enter into the possession of the mortgaged property.
Issue: Is the mortgage in question usurious?
Held: Yes. The mortgage purports on its face to obligate B to
pay 15% interest per annum well above the rate allowed by law.
L contended that the interest represented the price which was
agreed upon as the value of the property sold and, therefore,
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TRANSACTIONS
Secs. 1-3
the contract did not truly represent a loan or forbearance at an
unlawful rate. In this case, however, the contract was a present
sale at the cash price of P15,000.00 and a forbearance in respect
to the collection of that sum for an indefinite period within
the limits of 12 years, in consideration of an agreement to pay
interest at a usurious rate so long as the indebtedness should
subsist. The credit was not extended for a definite time and the
debtor was left at liberty to pay off the whole debt at any time
within the 12-year limit that he chose.
The case more properly falls within the rule stated in 39
Cyr., page 927, to the effect that: ”. . . Where the sale is made
on a cash basis and for a cash price and the vendor forbears to
require the cash payment agreed upon in consideration of the
vendee’s promising to pay at a future day a sum greater than
such agreed cash value with lawful interest, in such case, there
is a forbearance to collect an existing debt, and the excessive
charge therefor is usurious.” (Delgado vs. Alfonso Duque Valgona,
44 Phil. 739 [1923].)
(4) A bona fide pacto de retro sale, for if the parties have acted
in good faith, such a transaction is not within the purview of the
Usury Law.
Effect where principal not absolutely
payable.
The usury statutes are intended to prevent the charging of an
excessive rate of interest for the lending of money. It is essential,
therefore, to constitute usury that the principal sum be payable
absolutely and at all events.
Accordingly, the statutes have no application to those
uncertain transactions in which the lender incurs risk of losing in
whole or in part the principal sum lent, or in which the payment
of the amount is contingent upon conditions beyond the control
of the parties. (91 C.J.S. 599.) Thus, a loan given to save a business
venture, to be repaid only if the venture be successful is not
subject to the provisions of the Usury Law. The same is true
in the case of loans on bottomry and respondentia (see Sec. 101,
Pres. Decree No. 1460 [The Insurance Code of 1978].) because the
Sec. 4
THE USURY LAW
77
repayment is subject to the perils of marine navigation. (see Sec.
99, Ibid.)
Note: A loan on bottomry is a contract in the nature of a mortgage
by which the owner of a ship borrows money for the use of the
ship which is pledged as security, it being stipulated that if the
ship be lost, the lender shall also lose his money. When the loan
is constituted on the cargo, it is called loan on respondentia.
SEC. 4. No pawnbroker or pawnbroker’s agent shall
directly or indirectly stipulate, charge, demand, take or
receive any higher rate or greater sum of value for any
loan or forbearance than two and one-half per centum per
month when the sum lent is less than one hundred pesos;
two per centum per month when the sum lent is one
hundred pesos or more, but not exceeding five hundred
pesos; and fourteen per centum per annum when it is
more than the amount last mentioned; or the maximum
rate or rates prescribed by the Monetary Board in force at
the time the loan or forbearance is granted. A pawnbroker
or pawnbroker’s agent shall be considered such, for the
benefits of this Act, only if he be duly licensed and has an
establishment open to the public.
It shall be unlawful for a pawnbroker or pawnbroker’s
agent to divide the pawn offered by a person into two or
more fractions in order to collect greater interest than that
permitted by this section.
It shall be unlawful for a pawnbroker or pawnbroker’s
agent to require the pawner to pay an additional charge as
insurance premium for the safekeeping and conservation
of the article pawned. (as amended by Pres. Decree No.
116.)
Interest that can be charged
by a pawnshop.
The Monetary Board has raised the basis of interest rates for
pawnshops effective February 29, 1980, as follows:
(1) 2 1/2% per month. — when the sum lent is not more than
P2,000.00; and
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
78
Sec. 4
(2) 18% per annum. — when the sum lent is more than
P2,000.007 (Central Bank Cir. No. 722, dated March 3, 1982, which
repealed Central Bank Cir. No. 499.)
It should be noted that under this section, the prohibition
comprehends the act of stipulating or charging a higher rate of
interest than that allowed by the section.
Pawnbrokers are permitted to charge relatively higher
interest rates for otherwise they will not make profits considering
that loans applied for are usually very small and they have to
maintain offices, keep books, pay taxes, etc.
In addition to interest charges, pawnshops may impose a
maximum service charge of P5.00, but in no case to exceed 1%
of the principal loan. (Sec. 10, Pres. Decree No. 114 [Pawnshop
Regulation Act]; see Appendix 9.)
Dividing pawn in several fractions
not allowed.
Under Section 4, a pawnbroker is not allowed to divide the
pawn (object) into several fractions in order to collect greater
interest than that permitted nor to require additional charge as
insurance premium for safekeeping of the article pawned. The
purpose is to prevent the collection of interest in excess of the
rate permitted by said section.
EXAMPLE:
B borrows from L, a pawnbroker, P4,000.00 with a diamond
ring as security. Under Section 4 (as prescribed by the Monetary
Board), the maximum interest that can be charged is 18% per
annum.
L cannot divide the security into, say, two fractions in order
to collect 2 1/2% interest a month for two separate debts of
P2,000.00 each. Similarly, if there are two rings pawned for a
single debt of P4,000.00, L is not allowed to divide them into
two separate pawns for two separate debts of P2,000.00 each.
7
Under Central Bank Circular No. 905 (supra.) which removes interest rate ceilings
on any loan or forbearance of money, pawnshops are prohibited from collecting interest
on loans in advance for a period of more than one (1) year.
Secs. 4-a-5
THE USURY LAW
79
SEC. 4-a. The Monetary Board may eliminate, exempt
from, or suspend the effectivity of, interest rate ceilings on
certain types of loans or renewals thereof or forbearance
of money, goods, or credit, whenever warranted by prevailing economic and social conditions. (as amended by Pres.
Decree No. 858.)
SEC. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary
Board shall be guided by the following:
1. The existing economic conditions in the country
and the general requirements of the national economy;
2. The supply of and demand for credit;
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board
may adopt. (as amended by Pres. Decree No. 116.)
SEC. 5. In computing the interest on any obligation,
promissory note or other instrument or contract, compound
interest shall not be reckoned, except by agreement: Provided, That whenever compound interest is agreed upon,
the effective rate of interest charged by the creditor shall
not exceed the equivalent of the maximum rate prescribed
by the Monetary Board, or, in default thereof, whenever the
debt is judicially claimed, in which last case it shall draw
six per centum per annum interest or such rate as may be
prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for a period
of more than one year: Provided, however, That whenever
interest is paid in advance, the effective rate of interest
charged by the creditor shall not exceed the equivalent of
the maximum rate prescribed by the Monetary Board. (as
amended by Pres. Decree No. 116.)
When compound interest allowed.
Compound interest (which is interest on interest) is allowed
only in two cases:
(1) when there is an express written stipulation to that effect
(see Art. 1959, Civil Code.) or, in default thereof;
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
80
Secs. 4-a-5
(2) upon judicial demand and this is so even if the contract
be silent upon this point. (see Art. 2212,8 ibid., supra.) The debtor
is not liable to pay compound interest even after judicial demand
where there is no stipulation for the payment of interest.
The compounding of interest may be annually, semi-annually,
or monthly depending on the agreement.
EXAMPLE:
B borrowed from L P10,000.00 payable in two (2) years. It
was agreed in writing that interest would be 14% per annum and
that interest due and unpaid shall earn interest compounded
annually. At the end of two (2) years, B must pay:
(1) P10,000.00 — Principal
(2) P2,800.00 — interest for the use of the money for two
years (14% per annum)
(3) P196.00 — interest on the accrued interest of P1,400.00
for the first year (14% per annum) or a total sum of P12,996.00
Demandability of compound interest.
(1) Agreement to charge interest on interest. — When there is
an express agreement to charge interest on interest, such fact
should not be taken into consideration in determining whether
or not the stipulated interest exceeds the limits prescribed by the
Usury Law. Thus, the stipulated interest of 12% per annum9 on
the interest due and unpaid on the principal which is payable also
at 12% per annum is not usurious even if such accrued interest,
when added to the original interest, exceeds the rate of interest
that may legally be charged by the law for the loan. The reason is
that accrued interest is not considered interest upon the original
debt but on a new principal. (Gov’t. of the Phil. Islands vs. Vaca,
64 Phil. 6 [1937]; Villaruel vs. Alvayda & Vicencio, 46 Phil. 277
[1924].)
8
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded although the obligation may be silent upon this point.
9
See Section 2.
Secs. 4-a-5
THE USURY LAW
81
But a contract which stipulates for the payment of the maximum rate of interest on the principal sum, and of interest upon
interest accruing monthly upon such sum, is usurious and the
mere voluntary payment of the interest improperly charged, to
the creditor by the debtor, is not binding. (Cu Unjieng y Hijos vs.
Mabalacat Sugar Co., 54 Phil. 976 [1930].)
(2) Judicial demand to pay debt with interest stipulated in contract.
— Section 5 of the Usury Law, which provides that compound
interest shall not be reckoned except by agreement or whenever
the debt is judicially demanded, and Article 2212 of the Civil
Code, which stipulates that interest due shall earn legal interest
from the time it is judicially demanded, although the obligation
is silent on this point, contemplate the presence of stipulated
or conventional interest which had accrued when demand was
judicially made. Both legal provisions are not applicable where
no interest is stipulated in the contract. (Phil. American Accident
Ins., Co. vs. Flores, 97 SCRA [1980].)
Right of creditor to charge advance
interest.
(1) One year or less. — It is permissible under Section 5 for
the creditor to charge interest in advance corresponding to not
more than one year whatever the duration of the loan may be. In
principle, the contract is usurious because by deducting or paying
in advance the interest at the time of the loan, the principal sum
is thereby reduced with the result that the lender is compensated
for the use of the amount which, in fact, he has not loaned and so
the borrower pays a rate greater than that allowed by law on the
sum that he actually receives.
In most American jurisdictions, taking the highest lawful
interest in advance is permitted in the case of short term loans for
they make the amount of the excess interest insignificant. While
it does not appear that the line of demarcation between what
is a short term loan and what is a long term loan has ever been
definitely fixed, the rule has frequently been applied where the
loan is for a period of one year or less. (see 91 C.J.S. 613.)
It has been held that a person found guilty of usury is exempted under Section 6 from the obligation to return the inter-
82
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 6
est and commissions collected by him in advance, provided said
interest and commissions are not for a period of more than one
year and the rate of interest does not exceed the maximum limit
fixed by law. (Hodges vs. Salas, 63 Phil. 567 [1936]; see proviso,
Sec. 7.) So that, where the stipulated interest is 20% a year but at
the maturity of the obligation the debtor has paid 10% only, in
advance for one year, the debtor cannot recover the interest paid
on the ground that the original agreement was usurious in character.
(2) More than one year. — Under Section 5, the taking of
interest for more than one (1) year is apparently prohibited. It
is believed, however, that interest may be taken in advance for
more than one (1) year as long as the “effective rate of interest
charged by the creditor shall not exceed the equivalent of the
maximum rate prescribed by the Monetary Board.” (last clause.)
This is possible if the interest is taken at a lesser rate.
The test of usury in such case is whether the amount taken
or deducted as interest exceeds the lawful maximum rate upon
the money actually received and retained by the borrower, being
the difference between the face amount of the amount and the
amount so deducted. (91 C.J.S. 614.)
SEC. 6. Any person or corporation who, for any such
loan or renewal thereof or forbearance, shall have paid
or delivered a higher rate or greater sum or value than is
hereinbefore allowed to be taken or received, may recover
the whole interest, commissions, premiums, penalties and
surcharges paid or delivered with costs and attorney’s fees
in such sum as may be allowed by the court in an action
against the person or corporation who took or received
them if such action is brought within two years after such
payment or delivery; Provided, however, That the creditor
shall not be obliged to return the interest, commissions
and premiums for a period of not more than one year collected by him in advance when the debtor shall have paid
the obligation before it is due, provided such interest, and
commissions and premiums, do not exceed the rates fixed
in this Act. (as amended by Act No. 3998.)
Sec. 6
THE USURY LAW
83
Borrower’s right to recover usurious
interest paid.
As provided in this section, a borrower who has paid or
delivered usurious interest may recover the entire interest he
paid with costs and attorney’s fees. Thus, if the interest given is
20%, the whole 20% may be recovered and not merely 8% or 6%,
the interest in excess of 12% or 14%,10 as the case may be.
Accordingly, in a case (Go Chico vs. Martinez, 45 Phil. 256
[1923].) where the debtor paid interest amounting to P11,850.00
which is equivalent to 18% per annum, the court allowed the
recovery of the whole P11,850.00 paid.
Right under the Civil Code.
Article 1413 of the Civil Code, reads as follows:
“Interest paid in excess of the interest allowed by the
usury law may be recovered by the debtor, with interest
thereon from the date of the payment.”
Under the above-quoted provisions, it would seem that only
the interest in excess of that allowed by the Usury Law should
be returned. Has Section 6 of the Usury Law been amended by
Article 1413 of the Civil Code? The Civil Code is inconsistent
on the matter. While under Articles 1175 and 1957 (supra.), the
Usury Law shall govern. Article 1961 (supra.) is to the effect that
the Usury Law and special laws are applicable only “so far as
they are not inconsistent with this Code.”
However, in a case (Angel Jose Merchandising vs. Chelda
Enterprises and D. Syjueco, 23 SCRA 119 [1968].), the Supreme
Court ruled that the person paying usurious interest can recover
not only the interest in excess of 12% or 14%,11 as the case may be,
but the entire interest paid. Since a stipulation for the payment
of usurious interest is void. (Arts. 1957, 1409[7], Civil Code.),
the effect is the same as if there is no stipulation as to interest.
(Art. 1956.) In another case (Sanchez vs. Buenviaje, 126 SCRA
208 [1983].), however, the Supreme Court allowed the creditor to
10
11
See Sections 2 and 3.
See Sections 2 and 3.
84
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 6
recover the principal loaned plus interest thereon at the legal rate
from the filing of the complaint.
The debtor is entitled to recover the interest paid with legal
interest from the date of payment. (see Capule vs. De la Cruz, 10
C.A. Rep. 119.)
Pari delicto rule not applicable
in usury cases.
In allowing the recovery of usurious interest paid, the law
does not consider the debtor in pari delicto12 with the creditor on
the theory that the payment has not been made voluntarily. The
lender in usury is regarded as the criminal and the borrower as
the injured party. Ignorance of the Usury Law is no defense even
where the lender acted honestly. To apply the pari delicto rule
in usurious contracts would run counter to the avowed public
policy to discourage usury. (see Go Chioco vs. Martinez, 45 Phil.
256 [1923]; People vs. Nullet, 73 Phil. 63 [1941].)
The law (Sec. 6, first sentence) fixes the period of two (2)
years after payment or delivery within which civil actions to
recover usurious interest paid must be brought. (see Valdezco
vs. Francisco, 52 Phil. 350 [1927]; Arevalo vs. Dimayuga, 89 Phil.
894 [1951].)
Where interest added to principal
but not paid.
Usurious interest not actually paid but simply added to the
capital from time to time, cannot be regarded as “taken or received” by the lender within the meaning of Sections 2, 3, 4, and
6 of the Usury Law. (Garcia & Buencamino vs. Matias & Policarpio, 49 Phil. 257 [1926].)
12
Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise.
Sec. 7
THE USURY LAW
85
(1) The right of recovery is given only to a borrower who
“shall have paid or delivered” a higher rate on interest than is
allowed. (Sec. 6.) Thus, a debtor who promises to pay 22% interest
on the principal but pays only 12% cannot recover the 12% paid
by him. (see Garcia and Buencamino vs. Matias and Policarpio,
supra.)
(2) The right to recover attorney’s fees given by Section 6
cannot also be exercised unless usurious interest has actually
been taken or received. (Delgado vs. Alonzo Duque Valgona,
44 Phil. 739 [1923]; C. Viuda de Pamintuan vs. Tiglao, 53 Phil. 1
[1929].)
Borrower’s right to recover costs
and attorney’s fees.
Section 6, in effect, says that any person who has paid upon
any usurious contract a higher rate than is allowed by law may
recover the whole interest paid “with costs and attorney’s fees in
such sum as may be allowed by the court.”
The language recognizes a discretion in the court in respect to
fixing the amount of the fees but it has no discretion to deny the
allowance altogether. When the right of action to recover interest
paid is established, reasonable attorney’s fees should be allowed
as a matter of course, the same as costs are awarded. The purpose
of the law is to encourage persons who have suffered from
contracts of this character to come to court and vindicate their
rights and at the same time to serve as a wholesome deterrent
to the taking of usurious interest. The ignorance of the creditor
of the law against usury is not a defense to relieve him from the
legal consequences of his contract. (Delgado vs. Alonzo Duque
Valgona, supra.)
SEC. 7. All covenants and stipulations contained in
conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods
or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum
or value for the loan or renewal or forbearance of money,
86
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 7
goods, or credits than is hereinbefore allowed, shall be
void; Provided, however, That no merely clerical error in
the computation of interest, made without intent to evade
any of the provisions of this Act, shall render a contract
void; Provided, further, That parties to a loan agreement,
the proceeds of which may be availed of partially or fully
at some future time, may stipulate that the rate of interest
agreed upon at the time the loan agreement is entered into,
which rate shall not exceed the maximum allowed by law,
shall prevail notwithstanding subsequent changes in the
maximum rates that may be made by the Monetary Board;
and Provided, finally, That nothing herein contained shall
be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when
there has been no intention on the part of said purchaser
to evade the provisions of this Act and said purchase was
not a part of the original usurious transaction. In any case,
however, the maker of said note shall have the right to
recover from said original holder the whole interest paid
by him thereon and, in case of litigation, also the costs
and such attorney’s fees may be allowed by the court. (as
amended by Pres. Decree No. 116.)
Usurious loan void only with respect
to interest.
Section 7 avoids all usurious “covenants and stipulations”
but immediately after this provision, it recognizes the validity
of usurious negotiable instruments, whenever acquired in good
faith by a third person so that the usurious contract which is
void is not absolutely void, but perfectly valid under certain
circumstances. Again, Section 8 makes void and of no effect
whatever loans which are payable in agricultural products, etc.,
unless the price of the products is fixed by referring to the current
price thereof at the time of the performance of the obligation; and
according to Section 10, the lender violating this law should be
compelled to return to the borrower an amount equivalent only
to what he may have received as interest.
It results from the very context of the law, therefore, that the
lawmaker, in using the word “void” in the Usury Law did not
Sec. 7
THE USURY LAW
87
intend complete nullity but merely a nullity with respect to the
agreed interest. The loan is to be considered without stipulation
as to interest. (Lopez vs. El Hogar Filipino, 47 Phil. 250 [1925]; see
Briones vs. Cammayo, 41 SCRA 404 [1971]; Development Bank
of the Phils. vs. Perez, 442 SCRA 238 [2004].)
Effect of clerical error in computation
of interest.
Merely clerical error in the computation of interest, made
without intent to evade any of the provisions of the Usury Law
shall not render a contract “void.”
Mistakes in calculation made in good faith, resulting in the
lender’s unintentionally charging or receiving interest in excess
of what is allowed by law, negative the existence of the unlawful
intent necessary to constitute usury. (see 91 C.J.S. 586.)
Usurer’s right to recover principal
loaned.
Under the Usury Law, a usurious loan is void but this does
not mean that the debtor may keep the principal received by
him as loan thus justly enriching himself at the expense of the
creditor, but the creditor has no right of action for the recovery of
the stipulated interest, although he may seek for the recovery of
the principal loaned (Go Chioco vs. Martinez, 45 Phil. 256 [1923].)
by judicial action. (see Arts. 1169, 2209, 2211, Civil Code.) The
debtor seeking equity must do equity by performing the moral
obligation of returning to the creditor the capital that he may have
received. The law, as it is now, does not provide for the forfeiture
of the capital in favor of the debtor in usurious contracts. (Lopez
vs. El Hogar Filipino, 47 Phil. 250 [1925]; Delgado vs. Alonso
Duque Valgona, 44 Phil. 739 [1923]; Pascua vs. Perez, 10 SCRA
199 [1964]; Palileo vs. Cosio, 97 Phil. 919 [1955].)
It has been held, however, by the Court of Appeals that a
usurious loan is wholly null and void not only as to the loan
but also as to the usurious interest because it is inconsistent with
Articles 1352 and 1409(1) of the Civil Code which provide that a
contract whose cause is contrary to law or public policy is null
88
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 7
and void and without effect whatsoever; and under Article 1411,
both the debtor and the creditor have no action against each
other. Hence, the creditor is not allowed to recover the principal
of the loan. (Sebastian vs. Bautista, [CA] 58 O.G. No. 15, 3147;
People vs. Masangkay, [CA] 58 O.G. No. 17, 3565; Torres vs. Joco,
[CA] 59 O.G. No. 10, 1580.)
Nevertheless, the principal may still be recovered in view of
the following:
(1) A usurious loan is not a complete nullity but only with
respect to the agreed interest. The rule is that the nullity or
extinguishment of the accessory obligation does not carry with it
that of the principal obligation (see Arts. 1230, 1273, 1274, 1276,
Civil Code.);
(2) In a loan contract, the cause is, as to the borrower, the
acquisition of the thing and as to the lender, the right to demand
its return or its equivalent (Monte de Piedad vs. Javier, [CA]
36 O.G. 2176.) and not exactly the stipulated interest. If at all,
payment of interest may be considered as a motive of the lender,
which is different from the cause thereof (see Art. 1351; Antioquia
vs. Dizon, 4 C.A. Rep. 736.);
(3) The prestation to pay the interest is separable from that
to pay the principal debt (see Art. 1420, Civil Code; Briones vs.
Cammayo, 41 SCRA 404 [1971].); and
(4) To deny the lender the right to recover the principal
would be to unjustly enrich the borrower at the lender’s expense.
(see Art. 22.) Furthermore, penal sanctions are available against a
usurious lender, as a further deterrence to usury.
Forfeiture of right to interest of creditor
in a usurious loan.
In allowing the creditor to recover only the principal but not
the stipulated usurious interest, the law, in effect, decrees the
forfeiture of the right of the creditor to any interest.
In cases of this character, therefore, it is erroneous for the court
to allow the creditor the legal rate of interest on the judgment
from the date of the filing of the complaint. The right to damages
falls with the denial of the creditor’s right to usurious interest.
Sec. 7-a
THE USURY LAW
89
(Phil. Commercial and Industrial Bank vs. Griño, 24 SCRA 620
[1968]; Sajo vs. Gustilo, 48 Phil. 451 [1926].)
The stipulation as to interest is considered void, thus allowing
the debtor to claim the whole interest paid. For example, in a
loan of P10,000.00 with interest at 20% per annum or P2,000.00 a
year, if the borrower pays P2,000.00 this whole amount would be
considered usurious interest not just the portion thereof in excess
of the interest allowed by law. In Sanchez vs. Buenviaje (126 SCRA
208 [1983].), the Supreme Court allowed the insurer to recover
the legal interest on the principal amount loaned but such
interest arose from the debtor’s delay in paying the principal
from the time of the creditor’s demand. That is the reason why
legal interest was counted only from the time the creditor filed
his complaint for the recovery of the debt. (Investors Finance
Corporation vs. Autoworld Sales Corporation, 134 SCAD 222,
340 SCRA 735 [2000].)
SEC. 7-a. Parties to an agreement pertaining to a loan
or forbearance of money, goods or credits may stipulate
that the rate of interest agreed upon may be increased in
the event that the applicable maximum rate of interest is
increased by law or by the Monetary Board; Provided, That
such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed
upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary
Board; Provided, further, That the adjustment in the rate
of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate
or interest. (as amended by Pres. Decree No. 1684.)
Escalation clause in a loan agreement.
The unilateral determination and imposition of increased
interest by the lender will be violative of the principle of mutuality
of contracts ordained in Article 1308 of the Civil Code.
Section 7-a applies to contractual stipulations providing
for adjustments in the interest rate agreed upon in the event
there is a change in the legal rate of interest effected by law or
90
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 7-a
the Monetary Board as authorized by law. Such change should
benefit both the creditor and the debtor.
(1) Escalation clause must not be solely potestative. — It is the
rule that escalation clauses are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of
money on long-term contracts. (New Sampaguita Builders
Construction, Inc. vs. PNB, 935 SCRA 565 [2004], citing De Leon,
Comments and Cases on Credit Transactions [1995], p. 87.)
However, the enforcement of such stipulations are subject to
certain conditions. (Insular Bank of Asia and America vs. Spouses
Salazar, 159 SCRA 133 [1988]; Florendo vs. Court of Appeals, 265
SCRA 678 [1996]; see Premiere Development Bank vs. Central
Surety & Insurance Co., Inc., 579 SCRA 359 [2009].)
(a) While the Usury Law ceiling on interest rates was lifted
by Central Bank Circular No. 905, nothing in said circular
grants a lender “carte blanche authority to raise interest
rates to levels which would either enslave the borrower or
lead to a hemorrhaging of their assets. Escalation clauses
are not basically wrong or legally objectionable so long as
they are not solely potestative but based on reasonable and
valid grounds. (Almeda vs. Court of Appeals, 256 SCRA 292
[1996]; Phil. National Bank vs. Court of Appeals, 258 SCRA
549 [1996]; Solangon vs. Salazar, 360 SCRA 379 [2001].)
(b) To give the lender unbridled right to unilaterally
upwardly adjust the interest on a loan, would completely take
away from the borrower the right to assent to an important
modification in their agreement and would negate the
element of mutuality in contracts’’ ordained in Article 1308
of the Civil Code. (Phil. National Bank vs. Court of Appeals,
238 SCRA 20 [1994]; Concepcion vs. Court of Appeals, 274
SCRA 614 [1997]; Mendoza vs. Court of Appeals, 359 SCRA
438 [2001]; Florendo, Jr. vs. Metropolitan Bank & Trust Co.,
532 SCRA 43 [2007]; Equitable PCI Bank vs. Ng Sheung Ngor,
541 SCRA 223 [2007].)
(2) De-escalation clause also stipulated. — An escalation clause
can be valid only if it also includes a de-escalation clause or a
stipulation that the rate of interest agreed upon shall be reduced
in the event that the maximum rate of interest is reduced by law
Sec. 7-a
THE USURY LAW
91
or by the Monetary Board. (see Banco Filipino Savings and Mortgage Bank vs. Navarro, 152 SCRA 346 [1987]; Philippine National Bank vs. Intermediate Appellate Court, 183 SCRA 133 [1990].)
The adjustment shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.13
The purpose of the law in mandating the inclusion of a deescalation clause is to prevent one-sidedness in favor of the lender
which is considered repugnant to the principle of mutuality of
contracts ordained in Article 130814 of the Civil Code. (Lloren, Jr.
vs. Court of Appeals, 218 SCRA 436 [1993].)
(3) Increase or reduction of interest effected by law or the Monetary
Board. — A contract which embodies an escalation clause
authorizing automatic increase in interest rates in the event a law
increasing the rates of interest that may be charged is passed,
does not include a Central Bank Circular which, although having
the force and effect of law, is not strictly a statute or law. The
distinction is recognized in Section 7-a above which speaks of
interest increased or reduced by law or by the Monetary Board.
Administrative rules and regulations adopted pursuant to law
have the force and effect of law but they do not fall within the
term “law.” (Banco Filipino Savings and Mortgage Bank vs.
Navarro, supra; see Almeda vs. Court of Appeals, supra; Banco
Filipino Savings and Mortgage Bank vs. Court of Appeals, 332
SCRA 241 [2000].)
13
The Monetary Board has ruled that if the authority of the lender under the loan
agreement to increase the interest rate stipulated on the loan contract is predicated on the
promulgation of a law or a CB regulation increasing the lawful rate of interest that may
be charged in such kind of loan, “such lender may not increase the interest rates on the
basis of the elimination of interest rate ceilings.’’ With the abolition of interest rate ceilings
on July 1, 1981 on loans with maturity of more than 730 days, the Board ruled, “it cannot
be said that the ceilings have been increased. Indeed, interest rates may even go down,
depending on market forces, under a no-interest rate ceiling regime.
Besides, there is the question as to how much interest rates may be increased. If we
take the position that stipulated interest rates may be increased due to the lifting of the
interest rate ceilings, then we will be giving lenders the absolute discretion to increase the
stipulated interest rate at any level.’’
14
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
92
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TRANSACTIONS
Sec. 7-a
Interest to be based on the prevailing market rate.
Where the clause authorizes the creditor “to correspondingly
increase the rate of the interest in the event of changes in prevailing
market rates,’’ it cannot be said to be dependent solely on the will
of the creditor as it is also dependent on the prevailing market
rates. Obviously, the fluctuation in the market rates is beyond the
control of the creditor. (Polotan vs. Court of Appeals, 296 SCRA
247 [1998].)
(a) The contractual provision in question states that “if
there occurs any change in the prevailing market rates, the
new interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need
of serving notice to the cardholder other than the required
posting on the monthly statement served to the Cardholder.’’
This, it was held, could not be considered an escalation clause
for the reason that it neither states an increase nor a decrease
in interest rate. Said clause simply states that the interest rate
should be based on the prevailing market rate. Interpreting
it differently, while said clause does not expressly stipulate a
reduction in interest rate, it nevertheless provides a leeway
for the interest rate to be reduced in case the prevailing
market rates dictate the reduction. (Ibid.)
(b) While it may be acceptable, for practical reasons
given the fluctuating economic conditions, for banks to
stipulate that interest rates on a loan not be fixed and instead
be made dependent upon prevailing market conditions,
there should always be a reference rate upon which to peg
such variable interest rates. The aforequoted provision was
upheld notwithstanding that it may partake of the nature of
an escalation clause, because at the same time it provides for
the decrease in the interest rate in case the prevailing market
rates dictate its reduction. In other words, the interest rate is
designed to be based on the prevailing market rate. On the
other hand, a stipulation ostensibly signifying an agreement
to “any increase or decrease in the interest rate,’’ without
more, cannot be accepted as valid for it leaves solely to the
creditor the determination of what interest rate to charge
Sec. 8
THE USURY LAW
93
against an outstanding loan. (Consolidated Bank and Trust
Corporation vs. Court of Appeals, 356 SCRA 671 [2001],
citing Polotan vs. Court of Appeals, 296 SCRA 247 [1998].)
SEC. 8. All loans under which payment is to be made in
agricultural products or seeds or in any other kind of commodities shall also be null and void unless they provide
that such products or seeds or other commodities shall be
appraised at the time when the obligation falls due at the
current local market price; Provided, That unless otherwise stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence
of not less than two witnesses, any contract advancing
money to be repaid later in agricultural products or seeds
or any other kind of commodities shall be understood to
be a loan and any person or corporation having paid otherwise shall be entitled in case action is brought within
two years after such payment or delivery, to recover all
the products or seeds delivered as interest, or the value
thereof together with the costs and attorney’s fees in such
sum as may be allowed by the court. Nothing contained in
this section shall be construed to prevent the lender from
taking interest for the money lent, provided such interest
be not in excess of the rate herein fixed. (as amended by
Act No. 2992.)
Determination of interest where loan
of money payable in kind.
Where interest for a loan or forbearance is paid in a medium
other than money, such as “in agricultural products or seeds or
in any other kind of commodities” the means of ascertaining
whether the payment exceeds the rate allowed by law is to
reduce the medium of payment to its equivalent in pesos “at the
time the obligation falls due at the current local market price.”
(1) When usurious. — If the value of the medium when so
ascertained is more than the lawful rate upon the debt upon
which the interest is paid, it amounts to the collection of usury.
Thus, a contract of loan or forbearance which is made payable in
a specified commodity at a lower price or value than its current
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
94
Sec. 8
local market price is usurious if the difference between the
agreed price and the actual price exceeds lawful interest upon
the principal sum, except where the debtor is given the option of
discharging his obligation by paying the sum lawfully due from
him within a specified time.
(2) When not usurious. — On the other hand, even where a
loan contract specifies a usurious rate of interest, but the interest
is made payable in a specified quantity of goods, the transaction
is not usurious if the money equivalent of the goods delivered in
payment does not exceed lawful interest on the principal sum.
(see 91 C.J.S. 616.)
Under Section 8, any contract advancing money to be repaid
later in goods shall be considered a loan and a borrower who
paid it not as a loan but as some other transaction is entitled to
recover the goods, delivered as interest, or the value thereof. The
parties, however, may agree on the payment of interest on a loan
of money payable in kind provided such interest be not in excess
of the lawful rate.
EXAMPLE:
B borrowed from L P20,000.00 payable in one year. It was
stipulated that payment shall be made in palay at the rate of
P400.00 per cavan of palay.
The contract is not valid because it does not provide that
the price per cavan of palay “shall be appraised at the time
when the obligation falls due at the current local market price.”
(see Art. 1958, supra.)
ILLUSTRATIVE CASES:
1. Sugar to be sold and delivered in the future at a fixed selling
price, buyer having advanced an amount upon the contract, and it
turned out the price at date of delivery was higher than that fixed.
Facts: By two contracts, S bound himself to sell to B sugar
from his crop of the agricultural year 1919-1920, at certain
prices, the said sugar to be delivered during specified months
of the year 1920.
S claimed that B advanced money to him upon both
contracts as a loan payable in sugar which must be appraised
Sec. 8
95
THE USURY LAW
on the basis of the current market price at the time of delivery,
and since the prices stipulated (from P11.00 to P14.00 per picul)
were not even one-half of the maximum market price (P30.00
per picul) on the respective dates of delivery, the said contracts
were usurious.
Issue: Are contracts of sale of agricultural products to be
delivered in the future fixing a selling price usurious or illegal
when the market price should turn to be higher at the time of
delivery?
Held: No. The fact that on the date of delivery of the sugar,
its market price was higher than that stipulated, did not make
them usurious or illegal because B assumed the same risk of a
loss taken by S due to the difference in price, and if the price
instead of rising, had slumped, B would have had to pay the
price stipulated, and not the market price. In this case, the court
found the transactions to be contracts of sale. (Lutero vs. Siuliong
& Co., 54 Phil. 272 [1903].)
————
————
————
2. In addition to the payment of interest, mortgagor bound
himself to sell mortgaged sugar crop at less than the market price.
Facts: As security for the amount of P8,000.00 advanced
by L to B, the latter mortgaged sugar cane planted and sown
on his hacienda. B bound himself, in addition to the payment
of interest, to deliver and sell to L crop estimated to be P2,500
piculs of sugar at P1.50 less than the price for each picul “in the
Iloilo Market on the date or dates of its arrival.’’
Issue: Is the mortgage usurious?
Held: Yes. The mortgage upon its face should be construed
as a usurious transaction. Under the transaction, L would not
only receive 12%15 interest on the amount of the loan, but in
addition, the further sum of P3,750.00 and the difference
between the market price of the sugar and the price he was
to pay for it. L contended that he was to be paid the P1.50 per
picul for his commission and expense in the handling and sale
of the sugar. But the mortgage, according to the court, would
not bear that construction as it did not contain any provision of
that nature.
15
See Section 2.
96
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 9-9-a
The promise of B to sell the sugar for less than its market
price in addition to the interest was one of the inducements
for the making of the loan by L. (Gui Jong & Co. vs. Rivera and
Avellar, 45 Phil. 781 [1924].)
SEC. 9. The person or corporation sued shall file its
answer in writing under oath to any complaint brought or
filed against said person or corporation before a competent court to recover the money or other personal or real
property, seeds, or agricultural products, charged or received in violation of the provisions of this Act. The lack of
taking an oath to an answer to a complaint will mean the
admission of the facts contained in the latter.
SEC. 9-a. The Monetary Board shall promulgate such
rules and regulations as may be necessary to implement
effectively the provisions of this Act. (as added by Pres.
Decree No. 116.)
Effect of failure of defendant to make
denial of usury under oath.
When an action for recovery of usurious interest is instituted,
Section 9 requires the person against whom the action is filed,
to file his answer in writing under oath. If allegations of usury
are not denied specifically and under oath, they are deemed
admitted. (Sec. 1, Rule 9, Rules of Court.) But the only thing
admitted is the allegation that the interest charged is usurious,
not that the contract entered into is a loan which is something that
must be proved independently of the admission. (Lo Bun Chay
vs. Paulino, 54 Phil. 144 [1929].) The nature of the transaction is
not admitted. (Sun Bros. Appliances vs. Caluntad, 16 SCRA 895
[1966].)
Section 9 is applicable only if the action is brought “to recover
the money x x x charged or received in violation of the provisions”
of the Usury Law. If the person or corporation sued shall not
file its answer under oath denying the allegation of usury by the
plaintiff (debtor), the defendant (creditor) shall be deemed to
have admitted the usury. The provision does not apply to a case
where it is the defendant (debtor), not the plaintiff (creditor) in
Secs. 9-9-a
THE USURY LAW
97
an action by the latter for collection, who is alleging usury. (Liam
Law vs. Olympic Sawmill Co., 129 SCRA 439 [1984].)
Rule subject to waiver.
The rule is a procedural one which is subject to waiver. In a
case, it was held that the failure of the plaintiff (creditor) to make
a denial of usury under oath is not deemed an admission where
the defendant (debtor) has been declared in default for failure to
appear at the pre-trial.16
In such a case, the defendant is deemed to have waived
his right to consider the lack of oath as an admission and to
object to the reception of plaintiff’s evidence establishing his
cause of action and negating the charge of usury. Besides, the
reglementary admission of the allegation of usury arising from
such failure may, like any other admission in court, be withdrawn
with leave of court under Sections 2 and 3, Rule 10 of the Rules of
Court permitting “substantial amendments” of pleadings once
as a matter of right when “the action has not been placed on the
trial calendar,” and “after the case is set for hearing . . . only upon
leave of Court.” (Dionisio vs. Puerto, 60 SCRA 471 [1974].)
Reasons for requiring denial of usury
under oath.
The law was enacted to do away with usury. It was passed
against the usurer and not in his favor. And finding, no doubt,
that the evil to be eradicated was so widespread, the legislator
felt justified in presuming that it existed whenever its existence
was alleged unless denied under the oath, thus demanding the
guaranty of his oath, not in the allegation, but in the denial of this
fact. (Lo Bun Chay vs. Paulino, 54 Phil. 144 [1929].)
Presumptions and burden of proof.
(1) Generally speaking, usury will not be presumed and the
party who alleges or asserts that a transaction is usurious has the
16
According to the Liam Law case (supra.), the rule is not applicable where the debtor
is the one sued.
98
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TRANSACTIONS
Secs. 9-9-a
burden of proving such assertion; more particularly, if neither
party intends it and they both act bona fide, the law will not infer
a corrupt agreement.
However, a usurious intent will be presumed where the instrument or transaction is usurious on its face, or where there
was an intentional doing of what is forbidden by the Act, that is,
an intentional charging, of more than the legal rate of interest;
and the payment or receipt of usurious interest raises a presumption that it was made in pursuance of a prior usurious agreement.
(2) Also, the evidence introduced may be such as to cast on
the lender the burden of introducing explanatory evidence; and
the lender’s own evidence may sufficiently establish usury so as
to relieve the borrower of the burden of proof. (91 C.J.S. 699-700.)
(3) Where there is no allegation or evidence to exact usurious
interest, the contract of loan cannot be considered as a usurious
contract. (Geniza vs. Sy, 5 SCRA 754 [1962].)
Note: Usury is now legally non-existent. Interest can be
charged as lender and borrower may agree upon. (see note p. 62.)
Section 1, Rule 9 of the Rules of Court in regard to allegation of
usury, being procedural in nature, should be considered repealed
with retroactive effect.17 (Liam Law vs. Olympic Sawmill Co.,
supra.)
ILLUSTRATIVE CASES:
1. Complaint in intervention for annulment of sale failed to
plead defense of usury to complaint for partition of parcel of land
formerly owned in common by other defendants and intervenor who
sold his share to plaintiff.
Facts: B filed a complaint for partition of a parcel of land.
It appeared that the land in question was formerly owned by S
and the defendants in joint ownership. B alleged that S sold his
share to him. S filed a complaint for intervention alleging that
the contract was not in reality a sale but a loan with usurious
17
Section 1 which provides, inter alia, that “allegations of usury are deemed admitted
if not denied specifically and under oath’’ is deleted in the 1997 Rules of Civil Procedure.
Secs. 9-9-a
THE USURY LAW
interest, and he prayed that the said sale be annulled and B be
ordered to reimburse the usurious interest received.
The records showed that after the sale of S’s share to B,
the latter obtained the proper transfer title. Neither the defense
of usury nor the answer to the third-party claim was made
under oath. The trial court ruled that S was deemed to have
admitted the facts alleged in B’s complaint for failure to plead
the defense of usury under oath.
Issues: (1) Who must take the oath, the person against whom
the action is filed for the recovery of the usurious interest, or
the person who brings the action?
(2) What is deemed admitted if no oath is taken?
Held: (1) It is the person sued. Within the spirit of the law,
it is immaterial whether the allegation of usury is made in the
complaint or in a plea of intervention for the purpose of the
oath. In third-party claims, the intervenor (b) may interpose
his allegations against the plaintiff (S), and then he is, with
respect to the third-party claim, the plaintiff, and the original
plaintiff (S) is the defendant. The point of the law is then
whenever a person or a corporation is alleged to have charged
usurious interest, said person or corporation must deny such
an imputation under oath or be deemed to admit the charge.
(2) If no oath is taken to the answer, the only thing admitted
is the allegation that the interest charged is usurious, not that
the contract entered into is a loan, which is something that must
be proved independently of the admission especially when this
allegation is disputed. The law cannot presume an absurdity. In
order that the admission of the collection of usurious interest
may be invoked, it is necessary first to establish the contract by
virtue of which such interest could be collected. B, therefore,
should have shown by competent evidence that the contract
was really a loan.
Dissenting opinion (Villareal, J. with whom Johnson and
Villamor, JJ., concurred.): “x x x I am at a loss to see how
the existence of usurious interest can be admitted without
admitting the contract of loan whereof they are the cause or
consideration. If the existence of usurious interests is admitted,
then the consideration whereof they are cause or consideration
must of necessity be admitted. x x x Section 9 x x x plainly
provides that the lack of taking an oath to an answer to a
99
100
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 9-9-a
complaint will mean the admission of the facts contained in
the latter. If this is so, then the lack of the taking an oath to
the answer to the complaint in intervention alleging that the
contract is a loan contract with usurious interest admits both
points, because both are facts contained in said complaint.” (Lo
Bun Chay vs. Paulino, 54 Phil. 144 [1929].)
————
————
————
2. Plaintiff (creditor) failed to deny under oath the affirmative
defense of usury set up by defendant (debtor).
Facts: L brought an action against B to recover a mortgage
debt with stipulated legal interest. B set up the affirmative
defense of usury, claiming that the loan camouflaged the
usurious interest by innocently providing that the principal
shall bear interest at the legal rate. L failed to deny under oath
the alleged usury.
Issue: If the debtor is sued by the creditor for the recovery
of loan together with interest, does the failure of the creditor to
file a reply denying under oath the defense of usury amount to
an admission thereof?
Held: No. It is the failure of the creditor to deny under oath
in his answer to a complaint filed by the debtor against him
for the recovery of usurious interest he has collected that is
contemplated by Section 9 of the Usury Law as an admission of
usury. It does not apply to the present case where the creditor
is the plaintiff seeking the recovery of a loan together with
interest and the debtor sets up the defense that the transaction
is usurious. (O’laco vs. Sanchez, 6 C.A. Rep. 1092.)
Note: In a subsequent case, however, the Court of Appeals
ruled that “for the purpose of Section 9, the defendant who
alleges usury as a defense in his answer is considered as
plaintiff, and the original plaintiff who seeks to recover the
alleged usurious interest as the defendant, hence, the latter is
bound to deny the imputation under oath.” (Alcantara, Sr. vs.
Gregorios, 8 C.A. Rep. 950.)
In a case, the Supreme Court said: “If it is alleged that
defendant [debtor] entered a contract of loan with plaintiff
[creditor] in which the latter collected a usurious interest, there
is need to deny the transaction under oath, and if no oath is
taken, the only thing admitted is the allegation that the interest
Secs. 9-9-a
THE USURY LAW
101
is usurious and not that the contract entered into is a loan.”
(Sun Bros. Appliances vs. Caluntad, 16 SCRA 895 [1966].) Note: In
Liam Law vs. Olympic Sawmill & Co. (129 SCRA 439 [1981]), the
Supreme Court made the same ruling as in the O’laco case.
————
————
————
3. Only one of three defendants (creditors) made a denial of
usury under oath.
Facts: After a complaint was filed against defendants
A, B (A’s husband), and C, an answer signed by a lawyer
as “Attorney for the Defendants” was presented. The oath
following was subscribed by B only. The plaintiff argued on
appeal that this was in contravention of Section 9.
Issue: Must all the defendants subscribe to the oath in their
answer to a complaint charging usury or is the verification of
one sufficient?
Held: The better practice would be for the answer to be
sworn to by the wife as well as by the husband. It would likewise
be the better practice for the plaintiff, after the answer setting
up usury as a defense is filed, in his replication or otherwise,
to raise the point of irregularity in defendant’s answer. When
this is done, it is easy for the defendants to so amend as to meet
the situation. If the plaintiff did not by any means contest the
sufficiency of the verification in the lower court, it would be
highly technical on appeal to throw the case out of court on
such a specious excuse. (Sajo vs. Gustilo, 48 Phil. 451 [1925].)
————
————
————
4. Debtor’s action is not for recovery of usurious interest
received but for declaration of document as null and void on ground
of usury.
Facts: B brought an action against L, praying that a
document in which he appeared as a party be declared null
and void on the ground that the transaction evidenced by it
was usurious. B did not bother to present any evidence as to
the character of the transaction in question on the ground that
L’s failure to verify his answer constituted an admission of the
facts contained in the complaint.
Issue: Is Section 9 applicable to the action of B?
Held: No. Section 9 applies only to actions brought “to
recover the money or other personal or real property, seeds,
102
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 10
or agricultural products charged or received in violation of
the provisions of this Act.” The action of B can hardly be said
to have been brought for the recovery of money or property.
(Cabigao vs. Lim, 50 Phil. 844 [1927].)
SEC. 10. Without prejudice to the proper civil action,
violation of this Act and the implementing rules and regulations promulgated by the Monetary Board shall be subject
to criminal prosecution and the guilty person shall, upon
conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or to imprisonment
for not less than thirty days nor more than one year, or
both, in the discretion of the court, and to return the entire
sum received as interest from the party aggrieved, and in
case of nonpayment, to suffer subsidiary imprisonment at
the rate of one day for every two pesos; Provided, That
in case of corporations, associations, societies or companies, the manager, administrator or gerente or the person
who has charge of the management or administration of
the business shall be criminally responsible for any violation of this Act. (as amended by Pres. Decree No. 116.)
Prescription of criminal action.
The crime of usury prescribes in four (4) years from its
commission. (Ramos vs. Buyson Lampa, 63 Phil. 215 [1936].)
Where the accused received the annual usurious interest every
year for three (3) years, the prescriptive period is to be counted
from the date of the last payment of usurious interest. (People vs.
Hodges, 66 Phil. 291 [1938].)
The rule is that when usurious interest has been paid but the
action to recover has already prescribed, such interest cannot be
credited against and deducted from the principal. (Mendoza vs.
Dujua, [CA] 41 O.G. 3014, citing Adorable vs. De Guzman, S.C.G.R. No. 47102 [1940], cited in II Tolentino’s Code of Commerce,
4th ed., p. 1239.) It is also held that in a series of usurious
transactions, it cannot be said that as the transactions are linked
together, the period of prescription must begin from the last
transaction. In a series of crimes, the period of prescription runs
from the occurrence of each offense. (Mendoza case, supra, citing
Secs. 11-12
THE USURY LAW
103
People vs. Fuentes and Norona, S.C.-G.R. No. 42449, cited in II
Tolentino’s Code of Commerce, 4th ed., p. 1243.)
SEC. 11. All acts and parts of acts, inconsistent with
the provisions of this Act are hereby repealed.
SEC. 12. This Act shall take effect on the first day of
May, nineteen hundred and sixteen.
ENACTED: February 24, 1916.
— oOo —
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
104
III
DEPOSIT*
(Arts. 1962-2009.)
Chapter 1
DEPOSIT IN GENERAL AND ITS
DIFFERENT KINDS
ART. 1962. A deposit is constituted from the moment
a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract. (1758a)
Definition of contract of deposit.
The above article in effect gives the definition of a contract of
deposit. The term “deposit” is derived from the word “depositum”
of the Roman Law.
Governing law.
The classification of deposits into civil deposit governed
by the old Civil Code and commercial deposit governed by the
Code of Commerce has been abolished by the new Civil Code.
*Title XII, Book IV, Civil Code.
104
Art. 1962
DEPOSIT
Deposit in General and Its Different Kinds
105
(see Art. 2270[2].) All deposits, whether civil or commercial, are
now primarily regulated by Title XII, Book IV of the new Civil
Code (Arts. 1962-2009.) subject to its transitional provisions.
(Arts. 2252-2269.)
Characteristics of the contract.
(1) It is a real contract like commodatum and mutuum because
it is perfected by the delivery of the subject matter.
(2) When the deposit is gratuitous, it is a unilateral contract
because only the depositary (depositorio) has an obligation. But
when the deposit is for compensation, the juridical relation
created becomes bilateral because it gives rise to obligations on
the part of both the depositary and depositor (depositante).
Safekeeping, principal purpose
of the contract.
(1) Effect where safekeeping only an accessory obligation. — The
principal purpose of the contract of deposit is the safekeeping of
the thing delivered so that if safekeeping is only an accessory or
secondary obligation of the recipient of the thing, deposit is not
constituted but some other contract like lease, commodatum, or
agency. (Art. 1868.) Thus, the delivery of money to a person so
that he may make payment or invest the money for the account
of the giver, or of documents or records to a lawyer hired to
represent a party to a suit, cannot be regarded as constituting
a deposit, but only as an agency. Here, the principal end of the
contract is representation of one by another and not the custody
and preservation of the thing delivered.
(2) Balance of commission account in agent’s possession at
principal’s disposal appropriated by agent. — Where the balance of
a commission account remains in the possession of the agent at
the principal’s disposal, the same acquires at once the character
of a deposit which the former must return or restore to the latter
at any time it is demanded. The agent undoubtedly commits the
crime of estafa if he appropriates or diverts it to his own use.
It could only become his as a loan, if so expressly agreed by its
owner who would then be obligated not to demand it until the
106
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TRANSACTIONS
Art. 1962
expiration of the legal or stipulated period. (U.S. vs. Igpuara, 27
Phil. 619 [1913].)
(3) Dollars deposited with bank sold by bank which credited peso
proceeds to depositor’s current account. — Where the document
which embodies the contract states that U.S. dollars in cash
were received by the bank for safekeeping, and the subsequent
acts of the parties also show that the intent was really for the
bank to safely keep the dollars and return it to the plaintiff who
demanded the return of the money about five months later, the
above arrangement is the contract of deposit defined under
Article 1962. The bank violates its obligation if it sells the dollars
and it cannot defeat the plaintiff’s claim by asserting that the peso
proceeds of the sale were properly credited to the latter’s current
account. (Bank of the Phil. Islands vs. Intermediate Appellate
Court, 164 SCRA 630 [1988].)
The depositary cannot make use of the thing deposited except
only in the two instances mentioned in Article 1977.
Deposit distinguished from mutuum.
The distinctions are as follows:
(1) In deposit, the principal purpose is safekeeping or mere
custody, while in mutuum, the consumption of the subject matter;
(2) In deposit, the depositor can demand the return of the
subject matter at will, while in mutuum, the lender must wait
until the expiration of the period granted to the debtor; and
(3) In deposit, both movable and immovable property may
be the object, while in mutuum, only money and any other
fungible thing.
Deposit distinguished from commodatum.
The following are the distinctions:
(1) In deposit, the principal purpose is safekeeping, while in
commodatum, the transfer of the use;
(2) Deposit may be gratuitous, while commodatum is essentially and always gratuitous; and
Arts. 1963-1964
DEPOSIT
Deposit in General and Its Different Kinds
107
(3) In (extrajudicial) deposit, only movable (corporeal)
things may be the object, while in commodatum, both movable
and immovable property may be the object.
ART. 1963. An agreement to constitute a deposit is
binding, but the deposit itself is not perfected until the delivery of the thing. (n)
Binding effect of agreement
to deposit.
A deposit is a real contract and is, therefore, perfected only
upon delivery of the object of the contract. Where there has been
no delivery, there is merely an agreement to deposit which,
however, is binding and enforceable upon the parties.
Hence, a contract of future deposit is consensual. (see Art.
1934.)
ART. 1964. A deposit may be constituted judicially or
extrajudicially. (1759)
Creation of deposit.
A deposit may be created by virtue of a court order or by
law and not by the will of the parties. This is the reason why
the Code employs the word “constituted” in defining (Art. 1962.)
and classifying (Art. 1964.) deposit.
In a deposit, it is essential that the depositary is not the owner
of the property deposited. (Art. 1962.)
Kinds of deposit.
Deposit is either:
(1) judicial or one which takes place when an attachment or
seizure of property in litigation is ordered (Arts. 2005-2008.); or
(2) extrajudicial (Art. 1967.) which may be;
(a) voluntary or one wherein the delivery is made by
the will of the depositor or by two or more persons each of
whom believes himself entitled to the thing deposited (Arts.
1968-1995.); or
108
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TRANSACTIONS
Arts. 1965-1966
(b) necessary or one made in compliance with a legal obligation, or on the occasion of any calamity, or by travellers in
hotels and inns (Arts. 1996-2004.) or by travellers with common carriers. (Arts. 1734-1735.)1
ART. 1965. A deposit is a gratuitous contract, except
when there is an agreement to the contrary, or unless the
depositary is engaged in the business of storing goods.
(1760a)
Contract of deposit generally gratuitous.
A contract of deposit is generally gratuitous.
(1) Where there is contrary stipulation. — The first exception is
recognized in the general rule in contracts that the parties may
establish any stipulation they may deem convenient provided
it is not contrary to law, morals, good customs, public order, or
public policy. (Art. 1306.)
(2) Where depositary engaged in business of storing goods. —
The second exception is based on the fact that the depositary
is engaged in the business of storing goods (as in the case of a
warehouseman) for compensation and not out of pure generosity.
(3) Where property saved from destruction without knowledge
of the owner. — In involuntary deposit, where property is saved
from destruction during a calamity by another person without
the knowledge of the owner, the latter is bound to pay the former
just compensation. (see Arts. 1996[2], 1997, par. 2.)
ART. 1966. Only movable things may be the object of a
deposit. (1761)
1
Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common carriers are
presumed to have been at fault or to have acted negligently, unless they prove that they
observed extraordinary diligence as required in Article 1733.
Art. 1967
DEPOSIT
Deposit in General and Its Different Kinds
109
Subject matter of deposit.
(1) Only movable or personal property may be the object
of extrajudicial deposit, whether voluntary (Art. 1968.) or
necessary. (Art. 1995.) Article 1966 proceeds from the object of a
deposit which is safekeeping of a thing. The possibility that the
thing may disappear or may be lost or stolen is not present in
real property. Thus, the delivery of the keys of a house cannot be
considered as a deposit of the same, and entrusting its care and
custody is, juridically, an agency. (11 Manresa 671.)
(2) Judicial deposit (Arts. 2005-2006.), however, may cover
movable as well as immovable property its purpose being to
protect the rights of parties to a suit.
Only corporeal things contemplated.
Article 1966 does not embrace incorporeal or intangible
property, such as rights and actions, for it follows the person of
the owner, wherever he goes, and is not, by reason of its incorporeality, susceptible of custody in the tangible sense that deposit is
juridically understood. True it is that the deeds or documents in
which those rights are contained can be the object of deposit, but
in such a case, they are only the materialized and representative
expression of the rights. (11 Manresa 671.)
ART. 1967. An extrajudicial deposit is either voluntary
or necessary. (1762)
Kinds of extrajudicial deposit.
Deposit is generally voluntary. It becomes necessary in the
three cases mentioned in Articles 1996 and 1998, i.e., when made
in compliance with a legal obligation, on the occasion of any
calamity, or by travellers in hotels and inns.
The deposit of goods made by travellers or passengers with
common carriers may also be regarded as necessary. (supra.)
— oOo —
110
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Chapter 2
VOLUNTARY DEPOSIT
SECTION 1. — General Provisions
ART. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may
also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third
person, who shall deliver it in a proper case to the one to
whom it belongs. (1763)
Voluntary deposit defined.
A voluntary deposit is one wherein the delivery is made by the
will of the depositor.
Ordinarily, there are only two persons involved. Sometimes,
however, the depositary may be a third person. (Art. 1968, par.
2.)
Voluntary and necessary deposits
distinguished.
The chief difference between a voluntary deposit and a
necessary deposit is that in the former, the depositor has complete
freedom in choosing the depositary, whereas in the latter, there is
lack of free choice in the depositor. (see 11 Manresa 674.)
Depositor need not be owner
of thing.
Generally, the depositor must be the owner of the thing
deposited. But it may belong to a person other than the depositor.
110
Arts. 1969-1970
DEPOSIT
Voluntary Deposit/General Provisions
111
Thus, a carrier, commission agent, a lessee, etc. may deposit
goods temporarily in his possession considering that the contract
does not involve the transfer of ownership.
As a matter of fact, the depositary cannot dispute the title
of the depositor to the thing deposited. (Art. 1984, par. 1.) The
depositary is in estoppel. (see Art. 1436.)
Where there are several depositors.
Two or more persons each claiming to be entitled to a thing
may deposit the same with a third person. In such case, the third
person assumes the obligation to deliver to the one to whom it
belongs.
The action to compel the depositors to settle their conflicting
claims among themselves would be in the nature of an interpleader.
(Sec. 1, Rule 62, Rules of Court.1) Here, one of the depositors is
not the owner.
ART. 1969. A contract of deposit may be entered into
orally or in writing. (n)
Form of contract of deposit.
The above article follows the general rule that contracts shall
be obligatory in whatever form they may have been entered into
provided all the essential requisites for their validity are present.
(Art. 1356.) Thus, except for the delivery of the thing, there are no
formalities required for the existence of the contract.
ART. 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all the obligations of a depositary,
and may be compelled to return the thing by the guardian,
or administrator of the person who made the deposit, or by
the latter himself if he should acquire capacity. (1764)
1
Section 1. When interpleader proper. — Whenever conflicting claims upon the same
subject matter are or may be made against a person who claims no interest whatever in
the subject matter, or an interest which in whole or in part is not disputed by the claimants, he may bring an action against the conflicting claimants to compel them to interplead and litigate their several claims among themselves.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
112
Art. 1971
Where depositary capacitated and
depositor incapacitated.
If the depositary is capacitated, he is subject to all the obligations of a depositary whether or not the depositor is capacitated.
In the latter case, the depositary must return the property to the
legal representative of the incapacitated2 or to the depositor himself if he should acquire capacity. (see Art. 1986.)
Under the law, “persons who are capable cannot allege the
incapacity of those with whom they contract.” (Art. 1397.)
ART. 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall
only have an action to recover the thing deposited while it
is still in the possession of the depositary, or to compel the
latter to pay him the amount by which he may be enriched
or benefited himself with the thing or its price. However, if a
third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery.
(1765a)
Where depositary incapacitated and
depositor capacitated.
The incapacitated depositary (like a minor or an insane
person) does not incur the obligation of a depositary. However,
he is liable (1) to return the thing deposited while still in his
possession and (2) to pay the depositor the amount by which
he may have benefited himself with the thing or its price subject
to the right of any third person who acquired the thing in good
faith.
2
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed
to in a state of drunkenness or during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special disqualifications
established in the laws.
Art. 1971
DEPOSIT
Voluntary Deposit/General Provisions
EXAMPLE:
A deposited a watch with B, a minor who sold it to C.
If C acted in bad faith, A may recover the watch from him.
But if C acted in good faith, A’s only recourse is against B to
compel him to return the price received for the watch or the
amount by which he may have benefited himself.
— oOo —
113
114
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
SECTION 2. — Obligations of the Depositary
ART. 1972. The depositary is obliged to keep the thing
safely and to return it, when required, to the depositor, or
to his heirs and successors, or to the person who may
have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing,
shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into
account in determining the degree of care that the depositary must observe. (1766a)
Obligation to keep the thing deposited
and return it.
The safekeeping and the return of the thing when required, are
the two primary obligations of the depositary.
(1) Degree of care. — Ordinarily, the depositary must exercise
over the thing deposited the same diligence as he would exercise
over his property for two reasons:
First, because it is an essential requisite of the judicial relation
which involves the depositor’s confidence in his good faith and
trustworthiness; and
Second, because of the presumption that the depositor, in
choosing the depositary, took into account the diligence which
the depositary is accustomed with respect to his own property.
(see 11 Manresa 683.)
The depositary cannot excuse himself from liability in the
event of loss by claiming that he exercised the same amount of
care toward the thing deposited as he would toward his own if
such care is less than that required by the circumstances.
114
Art. 1972
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
115
(2) Rules applicable. — The liability of the depositary for
the care and delivery of the thing is governed by the rules on
obligations. (Arts. 1163, et seq.)
(a) He is liable if the loss occurs through his fault or
negligence (Art. 1170.), even if the thing was insured. (Art.
2207.3)
(b) The loss of the thing while in his possession, ordinarily
raises a presumption of fault on his part. (see Art. 1265.)
(c) The required degree of care is greater if the deposit is
for compensation than when it is gratuitous. This is similar
to the rule in agency (Art. 1909.) and common carriers. (Art.
1733.) But even when it is gratuitous, due care must still be
exercised.
(3) Return before specified term. — The thing deposited must
be returned to the depositor whenever he claims it, even though
a specified term or time for such may have been stipulated in the
contract.
ILLUSTRATIVE CASE:
Trust fund which trustee mixed with his own and deposited in a
bank to his personal account was lost through force majeure.
Facts: A had in his possession, as trustee or agent, the sum
of P6,000.00 belonging to B as head of the church. A mixed this
trust fund with his own and deposited the whole in a bank to
his personal account or credit. Shortly thereafter and during
the war of the revolution, A was arrested by the military
authorities as a political prisoner and the entire deposit was
confiscated by the government.
Issue: Should A be made responsible for the loss of the
money?
Held: No. By placing the money in the bank and mixing it
with his personal funds, A did not thereby assume an obligation
3
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the loss or injury.
116
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TRANSACTIONS
Art. 1973
different from that under which he would have lain if such
deposit had not been made nor did he thereby make himself
liable to repay the money at all hazards. If the money had been
forcibly taken from his pocket or from his house by the military
forces of one of the combatants during a state of war, he would
have been exempt from responsibility. The fact that he placed
the trust funds in the bank in his personal account did not add
to his responsibility.
Dissenting opinions (Trent, J.) “When A mixed the trust
fund with his own and deposited the whole in the bank to his
personal account, he stamped on the said fund his own private
marks and unclothed it of all the protection it had. If this
money had been deposited in the name of A as trustee or agent
of B, the military authorities would not have confiscated it for
the reason that they were looking for insurgent funds only.”
(Roman Catholic Bishop of Jaro vs. De La Peña, 26 Phil. 144 [1913].)
ART. 1973. Unless there is a stipulation to the contrary,
the depositary cannot deposit the thing with a third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited the thing with a
person who is manifestly careless or unfit. The depositary
is responsible for the negligence of his employees. (n)
Obligation not to transfer deposit.
Unless authorized by express stipulation, the depositary is
not allowed to deposit the thing with a third person because a
deposit is founded on trust and confidence and it can be supposed
that the depositor, in choosing the depositary, has taken into
consideration the latter’s qualification.
(1) Liability for loss. — Under Article 1973, the depositor is
liable for the loss of the thing deposited if:
(a) he transfers the deposit with a third person without
authority although there is no negligence on his part and the
third person;
(b) he deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence; or
(c) the thing is lost through the negligence of his employees whether the latter are manifestly careless or not.
Arts. 1974-1975
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
117
(2) Exemption from liability. — The depositor is not responsible
in case the thing is lost without negligence of the third person
with whom he was allowed to deposit the thing if such third
person is not “manifestly careless or unfit.”
ART. 1974. The depositary may change the way of the
deposit if under the circumstances he may reasonably
presume that the depositor would consent to the change
if he knew of the facts of the situation. However, before
the depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay
would cause danger. (n)
Obligation not to change way
of deposit.
The depositary may change the way or manner of the deposit
if there are circumstances indicating that the depositor would
consent to the change.
However, the depositary should first notify the depositor
and wait for the latter’s decision. This requirement may not be
dispensed with unless delay would cause danger. It follows the
general rule that the depositary must take good care of the thing
with the diligence of a good father of a family.
ART. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for
the rent of safety deposit boxes. (n)
Obligation to collect interest on choses
in action deposited.
If the thing deposited should earn interest, the depositary is
under the obligation (1) to collect the interest as it becomes due
and (2) to take such steps as may be necessary to preserve its
118
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1975
value and the rights corresponding to it. Thus, the depositary of
a negotiable promissory note which has been dishonored by nonpayment by the maker, must give notice of dishonor to indorsers
for under the law, indorsers to whom such notice is not given
are discharged from liability. (see Sec. 89, Negotiable Instrument
Law [Act No. 2031].)
Under Article 1975, the depositary is bound to collect not
only the interest but also the capital itself when due.
Contract for rent of safety deposit
boxes.
A contract for the rent of safety deposit boxes (second
paragraph) is not an ordinary contract of lease of things4 but a
special kind of deposit; hence, it is not to be strictly governed
by the provisions on deposit. (CA Agro-Industrial Dev. Corp.
vs. Court of Appeals, 219 SCRA 426 [1993]; see Sia vs. Court of
Appeals, 222 SCRA 24 [1993].) The prevailing rule in the United
States is that the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents of the box is
that of bailor and bailee. Thus:
“The prevailing rule appears to be that where a safedeposit company leases a safe-deposit box or safe and the
lessee takes possession of the box or safe and places therein
his securities or other valuables, the relation of bailee and
bailor is created between the parties to the transaction as
to such securities or other valuables; the fact that the safedeposit company does not know, and that it is not expected
that it shall know, the character or description of the property
which is deposited in such safe-deposit box or safe does not
change that relation. That access to the contents of the safedeposit box can be had only by the use of a key retained by
the lessee (whether it is the sole key or one to be used in
connection with one retained by the lessor) does not operate
to alter the foregoing rule.
4
Art. 1643. In the lease of things, one of the parties binds himself to give to another
the enjoyment or use of a thing for a price certain, and for a period which may be definite
or indefinite. However, no lease for more than ninety-nine years shall be valid.
Art. 1975
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
119
The argument that there is not, in such a case, a delivery
of exclusive possession and control to the deposit company,
and that, therefore, the situation is entirely different from that
of ordinary bailment, has been generally rejected by the courts
usually on the ground that as possession must be either in the
depositor or in the company, it should reasonably be considered
as in the latter rather than in the former, since the company is, by
the nature of the contract, given absolute control of access to the
property, and the depositor cannot gain access thereto without
the consent and active participation, of the company.’’ (10 Am.
Jur. 2d 440-441.)
ILLUSTRATIVE CASE:
The contents of a safety deposit box which can be opened only
with the use of one (1) of two (2) renter’s keys given to the joint
renters and by a guard key in the possession of the bank were missing.
Facts: B corporation, through its President, and spouses
H and W entered into an agreement whereby the former
purchased from the latter two (2) parcels of lands. Among the
terms and conditions of the agreement were that the titles to the
lots shall be transferred to B upon full payment of the purchase
price and that the owner’s copies of certificates of titles thereto,
shall be deposited in a safety deposit box of any bank. The
same could be withdrawn only upon the joint signatures of a
representative of B and the spouses upon full payment of the
purchase price.
B and the spouses then rented a safety deposit box of a
private bank and for this purpose they signed a contract of
lease, which contains inter alia, the following conditions. x x
x “13. The bank is not a depository of the contents of the safe
and has neither the possession nor control of the same. 14. The
bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in
connection therewith.’’
Thereafter, R offered to buy from B the property at a higher
price. When the safety box was opened in the presence of B,
the spouses, and the bank’s representative, the box yielded no
certificates of title. Because of the delay in the reconstitution of
the title, R withdrew her earlier offer to purchase the lots; as
a consequence thereof, B, petitioner, allegedly failed to realize
120
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1975
his expected profits. Hence, B filed a complaint for damages
against the respondent bank. In its answer, the bank alleged
that B has no cause of action because of paragraphs 13 and 14
of the contract of lease.
The Court of Appeals affirmed the decision of the lower
court principally on the theory that the contract between B and
the bank is in the nature of a contract of lease and as such it
is governed by Article 1643 of the Civil Code. In a nutshell,
B maintains that regardless of nomenclature the contract in
question is actually a contract of deposit. Accordingly, it is
claimed that the respondent bank is liable for the loss of the
certificates of title pursuant to Article 1972. It further argues
that conditions 13 and 14 of the contract are null and void for
being contrary to law and public policy.
Issue: Is the contractual relation between a commercial bank
and another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter, one of bailor
and bailee, or one of lessor and lessee?
Held: The petition is partly meritorious.
(1) Contract is not an ordinary contract of lease but a special
kind of deposit. — “We agree with the petitioner’s contention
that the contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, we do not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by
the provisions of the Civil Code on deposit; the contract in the
case at bar is a special kind of deposit. It cannot be characterized
as an ordinary contract of lease under Article 1643 because the
full and absolute possession and control of the safety deposit
box was not given to the joint renters — the petitioner and the
Pugaos [H and W].
The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the
box. On the other hand, the respondent Bank could not likewise
open the box without the renter’s key. In this case, the said key
had a duplicate which was made so that both renters could
have access to the box.
Article 1975 [cannot] be invoked by the respondent Court
as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary
Art. 1975
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit
box. It is clear that the depositary cannot open the box without
the renter being present.’’
(2) Relation created is that of bailor and bailee. — “We observe,
however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree
with the petitioner that under the latter, the prevailing rule is
that the relation between a bank renting out safe-deposit boxes
and its customer with respect to the contents of the box is that
of a bailor and bailee, the bailment being for hire and mutual
benefit. (10 Am. Jur. 2d 441.) This is just the prevailing view
because:
‘There is, however, some support for the view that
the relationship in question might be more properly
characterized as that of landlord and tenant, or lessor
and lessee. It has also been suggested that it should
be characterized as that of licensor and licensee. The
relation between a bank, safe-deposit company, or storage
company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral
or written, in whole or in part. But there is apparently no
jurisdiction in which any rule other than that applicable to
bailments governs questions of the liability and rights of
the parties in respect of loss of the contents of safe-deposit
boxes. (10 Am. Jur. 2d 442-443.)’
In the context of our laws which authorize banking
institutions to rent out safety deposit boxes, it is clear that in
this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act (R.A. No.
337, as amended.) pertinently provides:
‘SEC. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than
building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable
objects, and rent safety deposit boxes for the safeguarding of
such effects.
xxx
121
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TRANSACTIONS
122
Art. 1975
The banks shall perform the services permitted under
sub-sections (a), (b) and (c) of this section as depositaries or as
agents.’ x x x.5 (emphasis supplied)
(3) Conditions 13 and 14 of the contract are void. — “Note
that the primary function is still found within the parameters
of a contract of deposit, i.e., the receiving in custody of funds,
documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from,
but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing
and, pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public
policy. The depositary’s responsibility for the safekeeping of
the objects deposited in the case at bar is governed by Title I,
Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. In the absence of
any stipulation prescribing the degree of diligence required,
that of a good father of a family is to be observed. Hence, any
stipulation exempting the depositary from any liability arising
from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law
and public policy.
In the instant case, petitioner maintains that conditions 13
and 14 of the questioned contract of lease of the safety deposit
box are void as they are contrary to law and public policy. We
find Ourselves in agreement with this proposition for indeed,
said provisions are inconsistent with the respondent Bank’s
responsibility as a depositary under Section 72(a) of the General
Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit: ‘The Bank shall use due
diligence that no unauthorized person shall be admitted to any
5
“Agents’’ refers to paragraphs (b) and (c) while “depositaries’’ refers to paragraph
(a).
Art. 1975
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
rented safe and beyond this, the Bank will not be responsible
for the contents of any safe rented from it.’
Furthermore, condition 13 stands on a wrong premise and
is contrary to the actual practice of the Bank. It is not correct
to assert that the Bank has neither the possession nor control
of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the
said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using
this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective.
It has been said:
‘With respect to property deposited in a safe-deposit box
by a customer of a safe-deposit company, the parties, since
the relation is a contractual one, may by special contract
define their respective duties or provide for increasing
or limiting the liability of the deposit company, provided
such contract is not in violation of law or public policy. It
must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations
implied by law from the relationship of the parties; liability
of the deposit company will not be enlarged or restricted
by words of doubtful meaning.
The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its
own fraud or negligence or that of its agents or servants,
and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safe-deposit
box cannot limit its liability for loss of the contents thereof
through its own negligence, the view has been taken
that such a lessor may limit its liability to some extent by
agreement or stipulation. (10 Am. Jur. 2d 448.)
(4) Bank was unaware of agreement between the joint renters.
— “In the instant case, the respondent Bank’s exoneration
cannot be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact
that no competent proof was presented to show that respondent
Bank was aware of the agreement between the petitioner
123
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TRANSACTIONS
124
Art. 1976
and the Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both
parties’ joint signatures, and that no evidence was submitted
to reveal that the loss of the certificates of title was due to the
fraud or negligence of the respondent Bank. This in turn flows
from this Court’s determination that the contract involved was
one of deposit.
Since both the petitioner and the Pugaos agreed that each
should have one (1) renter’s key, it was obvious that either
of them could ask the Bank for access to the safety deposit
box and, with the use of such key and the Bank’s own guard
key, could open the said box, without the other renter being
present. Since, however, the petitioner cannot be blamed for
the filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner
to pay the respondent Bank attorney’s fee.’’ (CA Agro-Industrial
Development Corp. vs. Court of Appeals, 219 SCRA 426 [1993].)
ART. 1976. Unless there is a stipulation to the contrary,
the depositary may commingle grain or other articles
of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in
the mass. (n)
Obligation not to commingle things
deposited if so stipulated.
As a rule, the depositary is permitted to commingle grain
or other articles of the same kind and quality. In such case, the
various depositors of the mingled goods shall own the entire
mass in common and each depositor shall be entitled to such
portion of the entire mass as the amount deposited by him bears
to the whole. (see Sec. 23, Warehouse Receipts Law.)
The depositary cannot commingle goods, even if they are of
the same kind and quality, if so stipulated.
EXAMPLE:
A received from B for deposit 30 cavans of rice, from C, 20
cavans, and from D, 10 cavans, the rice being of the same kind
and quality. In the absence of any contrary stipulation, A can
commingle the 60 cavans and B, C, and D would become the
Arts. 1977-1978
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
125
co-owners of the entire 60 cavans in the proportion of 1/2, 1/3,
and 1/6, respectively.
If the articles deposited which belong to the different
depositors are not of the same kind and quality, it is the duty of
the depositary to keep them separate or at least identifiable as
he must return to each depositor the identical article delivered.
ART. 1977. The depositary cannot make use of the
thing deposited without the express permission of the
depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
(1767a)
Obligation not to make use of thing
deposited unless authorized.
Deposit is for safekeeping of the subject matter and not for its
use. (see Art. 1978.)
The unauthorized use by the depositary would make him
liable for damages. But the depositary may make use of the thing
deposited even without the express permission of the depositor
where such use is necessary for its preservation but in such case
the use is limited for that purpose only. (see Art. 2104.) Thus, a
depositary may use a radio received in deposit occasionally to
prevent the accumulation of moisture.
ART. 1978. When the depositary has permission to
use the thing deposited, the contract loses the concept
of a deposit and becomes a loan or commodatum, except
where safekeeping is still the principal purpose of the
contract.
The permission shall not be presumed, and its existence must be proved. (1768a)
Effect if permission to use is given.
(1) Thing deposited, non-consumable. — If the thing deposited
is non-consumable and the depositary has permission to use the
126
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1978
thing, the contract loses the character of a deposit and acquires
that of a commodatum despite the fact that the parties may
have denominated it as a deposit, unless safekeeping is still the
principal purpose of the contract.
(2) Thing deposited, money or other consumable thing. — If the
thing deposited is money or other consumable thing, the permission to use it will result in its consumption and converts the
contract into a simple loan or mutuum. But if safekeeping is still
the principal purpose of the contract, it is still a deposit but an
irregular one; hence, it is called an irregular deposit. Bank deposits
are in the nature of irregular deposits but they are really loans
governed by the law on loans. (see Art. 1980.)
ILLUSTRATIVE CASE:
After failing to “return” money received “as a deposit without
interest,” debtors bound themselves to pay interest until refund was
made.
Facts: A and B received from C “as a deposit without
interest, the sum of P2,600.00, which they will return, jointly
and severally, on January 20, 1898.” When the obligation
became due, A and B begged C for an extension of time for
the payment thereof, binding themselves to pay interest at the
rate of 15% of the amount of their indebtedness, to which C
acceded.
Issue: Was the contract entered into by the parties a deposit
or a loan?
Held: In the second document, the contract was a real loan
of money with interest, notwithstanding that in the original
document it was called a deposit, so that when A and B bound
themselves to refund the P2,600.00 to C, they did not engage to
return the same money received. For this reason, the debtors
were lawfully authorized to make use of the amount deposited,
as they have done, as subsequently shown when asking for
an extension of the time for the return thereof, inasmuch as,
acknowledging that they have subjected C, their creditor, to
losses and damages, and being conscious that they had used,
for their own profit and gain, the money that they received
apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund
should be made.
Art. 1978
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
127
Such conduct on the part of A and B unquestionably
showed that the transaction was not a deposit but a real
contract of loan. (Javellana vs. Lim, 11 Phil. 141 [1908].)
Irregular deposit distinguished
from mutuum.
(1) Consumable thing demandable at will by depositor. — In
an irregular deposit (supra.), the consumable thing deposited
may be demanded at will by the irregular depositor for whose
benefit the deposit has been constituted, while in mutuum, the
lender is bound by the provisions of the contract and cannot
seek restitution until the time for payment, as provided in the
contract, has arisen;
(2) Benefit accrues to depositor only. — Another point of
difference consists in the fact that in an irregular deposit, the
only benefit is that which accrues to the depositor, while in a
loan, the essential cause for the transaction is the necessity of
the borrower. A loan with a stipulation to pay interest is for the
benefit of both parties (see Compania Agricola de Ultramar vs.
Nepomuceno, 55 Phil. 283 [1930]; Rogers vs. Smith, 10 Phil. 317
[1908].); and
(3) Depositor has preference over other creditors. — The third
one is that the depositor in an irregular deposit has preference
over other creditors with respect to the thing deposited6 (see Art.
2241[13].), while common creditors enjoy no preference in the
distribution of the debtor’s property. (see Art. 2245.)
ILLUSTRATIVE CASES:
1. Amount is received “as a deposit” but debtor binds himself
to pay interest.
Facts: L brought suit on the following contract:
“Received from L the sum of P3,000, gold (3,000 pesos) as a
deposit payable in two months” notice in advance with interest
at 6% per annum with a hypothecation of the goods now owned
6
Bank deposits are not preferred credits because they are considered simple loans.
(see Art. 1980.)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
128
Art. 1978
by me or which may be owned hereafter as security of the
payment.
(Signed) B”
Issue: Is the above document evidence of a deposit or of a
contract of loan?
Held: Although in the document a deposit is spoken
nevertheless, it clearly appears therefrom that the contract
was a loan and that was the intention of the parties. It is
unnecessary to resort to the cannon of interpretation to arrive at
this conclusion. The obligation of B to pay interest to L suffices
to cause the obligation to be considered a loan and makes it
likewise evident that it was the intention of the parties that B
should have a right to make use of the amount deposited, since
it was stipulated that the amount should be collected after
notice of two months in advance.
Such being the case, the contract lost the character of a
deposit and acquired that of a loan. (Gavieres vs. Tavera, 1 Phil.
71 [1901]; see also Javellana vs. Lim, 11 Phil. 141 [1908]; Delgado
vs. Bonnevie and Arandez, 23 Phil. 308 [1912]; Compania
Agricola vs. Nepomuceno, 55 Phil. 283 [1930].)
————
————
————
2. Depositary was allowed to mill the palay deposited and had
milled and appropriated it to his own use before his rice mill was
burned.
Facts: R delivered palay to Y, owner of rice mill, with the
understanding that Y was at liberty to convert it into rice and
dispose of it at his pleasure. The palay was mixed with that
of others. After sometime, the rice mill was burned with its
contents. It appeared that all of R’s palay had been milled and
disposed of long prior to the fire.
Issue: Is Y bound to account for its value?
Held: Yes. Even supposing that the palay may have been
delivered in the character of deposit, subject to future sale or
withdrawal at R’s (depositor’s) election, nevertheless, if it was
understood that Y (depositary) might mill the palay and he has,
in fact, appropriated it to his own use, he is, of course, bound
to account for its value. Under Article 1978, “the contract loses
the concept of a deposit and becomes a loan.” (Baron vs. David,
51 Phil. 1 [1927].)
Art. 1979
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
129
Permission to use not presumed.
In a deposit, the permission to use is not presumed except
when such use is necessary for the preservation of the thing
deposited (Art. 1977.) and the burden is on the depositary to
prove that permission has been given. (Art. 1978, 2nd par.)
ILLUSTRATIVE CASE:
Depositary appropriated to his personal benefit money deposited
which depositor failed to claim at once.
Facts: C received a sum of money from A and B as a deposit.
The document containing this obligation reads: “I have at the
disposal of A the sum of P2,498.00, the balance from B’s sugar.”
(Signed) C. C appropriated the money to his personal benefit
and was convicted of estafa in the Court of First Instance.
On appeal, C claimed that the money was delivered as a
loan. It appeared that A failed to claim at once the restitution of
the money.
Issue: Did this failure or delay imply permission to use the
money?
Held: No. In a loan, the lender transmits to the borrower
the use of the thing lent, while in a deposit, the use of the thing
is not transmitted but merely the possession for its custody or
safekeeping. That demand was not made for restitution of the
sum deposited, which could have been made on the same or
the next day after the certificate was signed, does not operate
against the depositor, or signify anything except the intention
not to press it.
Failure to claim at once or delay for some time in demanding
restitution of the thing deposited, which was immediately due,
does not imply such permission to use the thing deposited as
would convert the deposit into loan. (U.S. vs. Igpaura, 27 Phil.
619 [1913].)
ART. 1979. The depositary is liable for the loss of the
thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor’s permission;
130
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1980
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)
Liability for loss through fortuitous
event.
Generally, the depositary is not liable for loss through a
fortuitous event without his fault (see Art. 1174; Obejera vs. Iga
Sy, 76 Phil. 580 [1946].) The rule in this article is similar to Article
1942 which mentions the instances when the bailee is liable for
loss of the thing loaned even if it should be through a fortuitous
event.
ART. 1980. Fixed, savings, and current deposits of
money in banks and similar institutions shall be governed
by the provisions concerning simple loan. (n)
Relation between bank and depositor.
(1) Contract of loan. — Deposits of money in banks, whether
fixed, savings, and current, are really loans to a bank because the
bank can use the same for its ordinary transactions and for the
banking business in which it is engaged.7 (Tian Tiong Tick vs.
American Apothecaries, 65 Phil. 417 [1938]; Castro vs. Coll. of
Internal Revenue, 4 SCRA 1093 [1962]; People vs. Ong, 204 SCRA
942 [1991].)
Bank deposits8 are in the nature of irregular deposits; they are
7
“Banks are entities engaged in the lending of funds obtained through deposits from
the public. They borrow the public’s excess money (i.e., deposits) and lend out the same.
Banks, therefore, redistribute wealth in the economy by channeling idle savings to profitable investments.
Banks operate (and earn income) by extending credit facilities financed primarily by
deposits from the public. They plough back the bulk of said deposits into the economy
in the form of loans. Since banks deal with the public’s money, their viability depends
largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound
lending practices and good corporate governance.’’ (Banco de Oro-EPCI, Inc. vs. JAPRL
Dev. Corp., 551 SCRA 342 [2008].)
8
Ordinarily, a time deposit is defined as “one the payment of which cannot legally be
required within such a specified number of days,’’ while demand deposits are “all those
Art. 1980
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
131
really loans because they earn interest. (Bank of the Phil. Islands
vs. Court of Appeals, 232 SCRA 302 [1994]; Lucmen vs. Malaar,
511 SCRA 268 [2006].) Hence, such deposits are governed by
the provisions on mutuum or simple loan, and the rules on the
imposition of legal interest. (see Note 7, under Art. 1956.)9 While
the bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same money
that was deposited. (Guingona, Jr. vs. City Fiscal of Manila, 128
SCRA 577 [1984]; see Citibank N.A. vs. Cabomongan, 488 SCRA
517 [2006].)
(2) Relation of creditor and debtor. — Accordingly, the relation
between a depositor and a bank is that of a creditor and a debtor.
The depositor (creditor) lends the bank (debtor) money and
the bank agrees to pay the depositor on demand. The deposit
agreement between the bank and the depositor determines the
rights and obligations of the parties. Consequently:
(a) A bank’s failure to honor a deposit is failure to pay
its obligation as debtor and not a breach of trust arising
from a depositary’s failure to return the subject matter of the
deposit. (Serrano vs. Central Bank, 96 SCRA 96 [1980].) It will
not constitute estafa through misappropriation punishable
liabilities of the Bangko Sentral ng Pilipinas (BSP) and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand
by the presentation of the depositor’s check. “Central Bank regulations do not prohibit
demand deposits from earning interest. (BPI Family Savings Bank, Inc. vs. Metro Investment Corporation, 429 SCRA 30 [2004].) It is in the nature of joint accounts that anyone of
the depositors has access to the entire funds; hence, such funds are subject to ganishment
on account of the liability of them. The deposits can sort it out amongst themselves as to
the share of each. (Fernandez vs. Aniñon, 522 SCRA 1 [2007].)
9
It has been held that the obligation of a bank to pay interest on a deposit ceases the
moment the operations of the bank is completely suspended by the Central Bank. The
deposit is not entitled to interest during the period the bank is not allowed to operate
(Overseas Bank of Manila vs. Court of Appeals, 105 SCRA 49 [1981]; The Overseas Bank
of Manila vs. Cordero, 113 SCRA 303 [1982]; The Overseas Bank of Manila vs. Court of
Appeals, 113 SCRA 778 [1982].), and during the period of the bank’s forcible closure, it is
not liable to the Central Bank for interest on loans and advances made by the latter. When
called upon to deal with commercial banks and extend to them emergency loans and advances, the Central Bank deals with them not as an ordinary creditor engaged in business
but as an ultimate monetary authority of the government charged with the supervision
and preservation of the banking system. (Ramos vs. Central Bank of the Phils. & Commercial Bank of Manila, 137 SCRA 685 [1985].)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
132
Art. 1980
under Article 315 (par. 1[b].) of the Revised Penal Code.
(Guingona, Jr. vs. City Fiscal of Manila, supra.)
(b) The payment by a bank of the amount of a depositor’s
check is not a loan to the latter by the former which may
be satisfied by a subsequent deposit; but a payment by the
bank as debtor to the depositor as creditor. Such payment
extinguishes so much of the obligation of the bank as is
represented by the check paid or honored by the bank out
of the latter’s deposit. (Hilado vs. De La Costa, 83 Phil. 471
[1949].)
(c) The general rule is that a bank can compensate
or set off the deposit in its hands for the payment of any
indebtedness to it on the part of the depositor.10 (Gullas vs.
Phil. National Bank, 62 Phil. 519 [1935]; Republic vs. Court
of Appeals and Cuaycong, 65 SCRA 186 [1975]; Equitable
PCI Bank vs. Ng Sheung Ngor, 541 SCRA 223 [2007].) In a
true deposit, compensation is not allowed. (see Art. 1287.)
The money received is termed a “deposit,” although it is not
strictly so, as the depositor does not expect to receive the
identical money in return but an equivalent sum. (see Art.
1953.) The money is mingled with other money, the entire
amount forming a single fund from which depositors are
paid. (2 C.J. 628.)
(d) In the performance of its obligations, the drawee
bank is bound by its internal banking rules and regulations
and is liable to the depositor for fraud, negligence, or delay.
10
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
xxx
xxx
xxx
Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent
amount, even though the creditors and debtors are not aware of the compensation.
Art. 1980
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
133
(Gempesaw vs. Court of Appeals, 218 SCRA 5682 [1993]; see
Arts. 1170, 1172.) The award of exemplary damages, however, is unjustified in the absence of malice, bad faith or gross
negligence. But moral damages may be recovered even if the
bank’s negligence may not have been attended with malice and bad faith. (Tan vs. Court of Appeals, 239 SCRA 310
[1994].)
(e) The bank is engaged in business impressed with
public interest, and it is its duty to protect in return its many
clients and depositors who transact business with it with the
highest degree of care, more than that of a good father of the
family or of an ordinary business firm. It is its obligation to
see to it that all funds invested with it are properly accounted
for and duly posted in its ledger. In every case, the depositor
expects the bank to treat his account with utmost fidelity,
whether such account consists of only a few hundred pesos
or of millions, always having in mind the fiduciary nature of
their relationship.11 (City Trust Banking Corp. vs. Intermediate
Appellate Court, 232 SCRA 559 [1994]; Far East Bank and
Trust Co. vs. Querimit, 373 SCRA 665 [2002]; Consolidated
Bank and Trust Corporation vs. Court of Appeals, 410 SCRA
562 [2003]; Citibank vs. Cabamongan, 488 SCRA 517 [2006];
BPI Family Bank vs. Franco, 538 SCRA 184 [2007].) Like
a common carrier whose business is imbued with public
interest, a bank should exercise extraordinary diligence to
negate its liability to its depositors. (Solid Bank Corporation
vs. Tan, 520 SCRA 123 [2007].)
11
The Foreign Currency Deposit Act (R.A. No. 6426, as amended by Pres. Decree
No. 1246.) govern foreign currency deposits authorized under the Act. Under the Act,
there is only a single exception to the secrecy of such deposits, that is, the disclosure is
allowed only upon the written permission of the depositor. Where the accounts are in
US dollar deposits, the applicable law is R.A. No. 6426, not R.A. No. 1405, the Secrecy of
Bank Deposits Act. (Intengan vs. Court of Appeals, 377 SCRA 63 [2002]; see China Banking Corporation vs. Court of Appeals, 511 SCRA 110 [2006].) R.A. No. 8791 is the General
Banking Act of 2000.
The term “deposits’’ used in RA No. 1405 is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank. If the money deposited under an account may be used by banks for
authorized loans to third persons, them such account regardless of whether it creates a
creditor-debtor relationship between the depositor and the bank, falls under the category
of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country. (Ejercito vs. Sandiganbayan, 509 SCRA 190 [2006].)
134
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 1981-1982
It has been held that suspension of a bank which had fallen
into a “distressed financial situation” by order of the Central
Bank cannot excuse it from its obligations to depositors who had
nothing whatever to do with the Central Bank actuations or the
events leading to the bank’s distressed state. (Overseas Bank of
Manila vs. Court of Appeals, 172 SCRA 521 [1989].) But the bank
may not be liable to pay interest on the deposit during the period
of suspension. (Integrated Realty Corp. vs. Phil. National Bank,
174 SCRA 295 [1989]; Fidelity Savings and Mortgage Bank vs.
Cenzon, 184 SCRA 141 [1990].)
ART. 1981. When the thing deposited is delivered
closed and sealed, the depositary must return it in the
same condition, and he shall be liable for damages should
the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless
there is proof to the contrary.
As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible
opening is imputable to the depositary, should there be no
proof to the contrary. However, the courts may pass upon
the credibility of the depositor with respect to the value
claimed by him.
When the seal or lock is broken, with or without the
depositary’s fault, he shall keep the secret of the deposit.
(1769a)
ART. 1982. When it becomes necessary to open a
locked box or receptacle, the depositary is presumed authorized to do so, if the key has been delivered to him;
or when the instructions of the depositor as regards the
deposit cannot be executed without opening the box or
receptacle. (n)
Where thing deposited delivered
closed and sealed.
(1) Obligations of depositary. — Under Article 1981, the
depositary has the obligation to:
(a) return the thing deposited when delivered closed and
sealed, in the same condition (par. 1.);
Art. 1983
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
135
(b) pay for damages12 should the seal or lock be broken
through his fault (Ibid.) which is presumed unless proved
otherwise (par. 2.); and
(c) keep the secret of the deposit when the seal or lock is
broken, with or without his fault. (par. 3.)
(2) Reason for rule. — Without the rule in this article,
irresponsible depositaries may violate their trusts with impunity.
The depositor having constituted the deposit in reliance upon
the depositary’s fidelity, the most elementary sense of delicacy
should move the depositary to respect the secrets which the
depositor desires to keep and guard. (11 Manresa 700-701.)
Under paragraph 3, the courts may pass upon the credibility
of the depositor with respect to the value of the thing deposited.
In other words, the statement of the depositor is prima facie
evidence only. This is necessary in view of the natural tendency
to exaggerate values.
(3) When depositary justified to open. — The depositary is
authorized by Article 1982 to open the thing deposited which is
closed and sealed when there is (a) presumed authority; or (b)
necessity.
ART. 1983. The thing deposited shall be returned with
all its products, accessories and accessions.
Should the deposit consist of money, the provisions
relative to agents in Article 1896 shall be applied to the
depositary. (1770)
Obligation to return products, accessories,
and accessions.
The depositor is the owner or at least represents the owner
of the thing deposited. The depositary must, therefore, return
not only the thing itself but also all its products, accessions and
accessories which are a consequence of ownership. (see Art.
12
Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying the plaintiff for any loss suffered by him.
136
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 1984
1975.) Thus, the young of an animal which was deposited shall
be returned to the depositor.
Obligation to pay interest on sums
converted to personal use.
If what has been deposited is money, the depositary has no
right to make use thereof (Art. 1978.) and, therefore, he is not
liable to pay interest.
If the depositary be in delay or has used the money without
permission, he shall be liable for interest as indemnity. The
depositary owes interest on the sums he has applied to his own
use from the day on which he did so, and those which he still
owes after the extinguishment of the deposit.13
ART. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has
been stolen and who its true owner is, he must advise the
latter of the deposit.
If the owner, in spite of such information, does not
claim it within the period of one month, the depositary
shall be relieved of all responsibility by returning the thing
deposited to the depositor.
If the depositary has reasonable grounds to believe that
the thing has not been lawfully acquired by the depositor,
the former may return the same. (1771a)
Depositor need not prove
his ownership.
The depositary who receives the thing in deposit cannot
require that the depositor prove his ownership over the thing.
To constitute a deposit, it is not essential that the depositor be
the owner of the thing deposited. Furthermore, to acquire proof
13
Based on Article 1896, “agent’’ and “agency’’ are changed to “depositary’’ and
“deposit,’’ respectively.
Art. 1984
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
137
of ownership may open the door to fraud and bad faith, for the
depositary, on the pretense of requiring proof of ownership, may
be able to retain the thing. (see 11 Manresa 706.)
Where third person appears
to be owner.
In such a case, Article 1984 (pars. 2, 3, 4.) states the steps the
depositary should take to be relieved of all responsibility with
respect to the thing deposited.
Paragraphs 2 and 4 are similar except that for the application
of paragraph 2, two conditions must exist:
(1) the thing deposited must have been stolen; and
(2) the depositary knows who its true owner is. (see Art. 559,
par. 1.)
Effect of failure of owner to claim
within one month.
The period of one month provided in paragraph 3 is intended
merely for the protection of the depositary. If the thing is returned
to the depositor after one month, the true owner of the thing may
still recover it through other legal processes. In this connection,
the following observation has been made:
“It is not enough to declare the depositary exempt from
responsibility if the true owner does not claim the property
within 30 days. Suppose the depositary discovers the true owner
and notifies him, but the maker of the deposit demands its return
before the 30 days expire, can the depositary refuse to return the
thing deposited if the true owner has made no claim as yet?
Such course would be not only contrary to the nature of
deposit but also risky, because if for some other reason the owner
is precluded from claiming the thing as against the depositor, the
depositary who refuses to return will be liable for conversion.
Or is it intended that he should not be so liable.” (Justice J.B.L.
Reyes, “Observation on the new Civil Code,” XVI L.J. 138 [1951].)
Article 1984 is not clear on this point.
138
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TRANSACTIONS
Arts. 1985-1986
ART. 1985. When there are two or more depositors, if
they are not solidary, and the thing admits of division, each
one cannot demand more than his share.
When there is solidarity or the thing does not admit
of division, the provisions of Articles 1212 and 1214 shall
govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a)
Right of two or more depositors.
(1) Thing deposited divisible and depositors not solidary. — If the
thing deposited is divisible and there are two or more depositors
who are not solidary, each one can demand only his share
proportionate thereto. Thus, if A and B deposited 150 and 300
cavans of rice, respectively, A can demand only 150 cavans.
(2) Obligation solidary or thing deposited not divisible. — If the
obligation is solidary (i.e., the depositary can return the thing
deposited to any of the depositors), or if the thing is not divisible,
the rules on active solidarity (solidarity among creditors) shall
apply, to the effect that each one of the solidary depositors
(creditors) may do whatever may be useful to the others but
not anything which may be prejudicial to the latter (Art. 1212.),
and the depositary (debtor) may return the thing to any one of
the solidary depositors (creditors) unless a demand, judicial or
extrajudicial, for its return has been made by one of them in
which case delivery should be made to him. (Art. 1214.)
(3) Return to one of depositors stipulated. — If by stipulation the
thing should be returned to one of the depositors, the depositary
is bound to return it only to the person designated although he
has not made any demand for its return. In the example above,
if A and B are solidary or the thing deposited is a car which does
not admit of division, the depositor can return to either, in the
absence of a contrary stipulation.
ART. 1986. If the depositor should lose his capacity to
contract after having made the deposit, the thing cannot
be returned except to the persons who may have the
administration of his property and rights. (1773)
Art. 1987
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
139
Person to whom return must
be made.
(1) The depositary is obliged to return the thing deposited,
when required, to the depositor, to his heirs and successors, or to
the person who may have been designated in the contract. (Art.
1972.)
(2) If the depositor was incapacitated at the time of making
the deposit, the property must be returned to his guardian or
administrator or the person who made the deposit or to the
depositor himself should he acquire capacity. (Art. 1970.)
(3) Even if the depositor had capacity at the time of making
the deposit but he subsequently loses his capacity during the
deposit, the thing must be returned to his legal representative.
(Art. 1986.)
ART. 1987. If at the time the deposit was made a place
was designated for the return of the thing, the depositary must take the thing deposited to such place; but
the expenses for transportation shall be borne by the
depositor.
If no place has been designated for the return, it
shall be made where the thing deposited may be, even
if it should not be the same place where the deposit was
made, provided that there was no malice on the part of the
depositary. (1774)
Place of return.
The thing must be returned (1) at the place agreed upon by the
parties, and (2) in the absence of stipulation, at the place where
the thing deposited might be even if it should not be the same
place where the original deposit was made provided the transfer
was accomplished without malice on the part of the depositary.
Note that in the first case, the expenses for the transportation
shall be borne by the depositor. This is just because the deposit is
constituted for the benefit of the depositor and not the depositary
who assumes no more than the safekeeping and the return of the
thing. (Art. 1972.)
The rule in this article is similar to the general rule of law
regarding the place of payment. (see Art. 1251.)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
140
Art. 1988
EXAMPLE:
Suppose the deposit was made in the residence of A in
Manila and A transfers his residence to Pateros, Metro Manila
and he has to bring the thing deposited to his new place of
residence.
In the absence of a contrary stipulation, the place of return
is the residence of A in Pateros, Metro Manila, provided there
was no malice on the part of A.
ART. 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period or
time for such return may have been fixed.
This provision shall not apply when the thing is judicially attached while in the depositary’s possession, or
should he have been notified of the opposition of a third
person to the return or the removal of the thing deposited.
In these cases, the depositary must immediately inform
the depositor of the attachment or opposition. (1775)
Time of return.
As a rule, the depositor can demand the return of the thing
deposited at will and this is true whether a period has been
stipulated or not. In a deposit, whenever a period is agreed to,
the same is for the benefit of the depositor, but it may be validly
waived by him. (11 Manresa 687-688.) But the period is generally
binding upon the depositary.
If the deposit is for a compensation, the depositary is entitled
to the compensation corresponding to the entire period. In this
case, the period is also for the benefit of the depositary.
The rule in commodatum is different. (see Art. 1946.)
When depositary not obliged to return
thing deposited.
The right to immediate restitution is subject to the two cases
provided in the second paragraph. (see also Art. 1984, par. 2.)
In the first case, if the depositor returns the thing, he would
be disobeying the judicial order of attachment. In connection
with the second case, the following observation has been made:
Arts. 1989-1990
DEPOSIT
Voluntary Deposit/Obligations of the Depositary
141
“To permit the depositary to refuse to return the thing deposited simply because of the opposition of another, is a power very
prone to abuse and mischief. If at all, the depositary should only
be authorized in case of conflicting claims to consign the thing
in court through an action of interpleader.’’ (Justice J.B.L. Reyes
“Observations on the new Civil Code,” XVI L.J. 138 [1951].)
ART. 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons
for not keeping the thing deposited may, even before the
time designated, return it to the depositor; and if the latter
should refuse to receive it, the depositary may secure its
consignation from the court. (1776a)
Right of depositary to return thing
deposited.
(1) Deposit gratuitous. — The depositary may likewise return
the thing deposited notwithstanding that a period has been fixed
for the deposit if (a) the deposit is gratuitous and (b) justifiable
reasons (e.g., necessity of his going abroad) exist for its return.
In case the depositor refuses to receive the thing, the depositary
may deposit the thing at the disposal of judicial authority. (see
Art. 1258, par. 1.)
(2) Deposit for a valuable consideration. — If the deposit is for a
valuable consideration, the depositary has no right to return the
thing deposited before the expiration of the time designated even
if he should suffer inconvenience as a consequence. He is bound
by the period and restitution before its expiration constitutes a
breach of his obligation.
ART. 1990. If the depositary by force majeure or
government order loses the thing and receives money or
another thing in its place, he shall deliver the sum or other
thing to the depositor. (1777a)
Liability for loss by force majeure
or government order.
The depositary has the obligation to return the thing deposited. (Art. 1972.) But he is not liable for loss of the thing by force
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
142
Art. 1991
majeure or by government order. However, if in place of the thing
he receives money or another thing, he has the duty to deliver to
the depositor what he has received otherwise, he would enrich
himself at the expense of the depositor.
ART. 1991. The depositor’s heir who in good faith may
have sold the thing which he did not know was deposited,
shall only be bound to return the price he may have
received or to assign his right of action against the buyer
in case the price has not been paid him. (1778)
Alienation in good faith by depositary’s
heir.
The above article envisions a situation where the depositary
dies and the object of the deposit is left with his heir who, in good
faith, sells it. The obligation of the heir is limited to the return of
the price received or to assign the right to collect the same if it
has not been paid and not the real value of the thing. The rule is
based on considerations of equity. If the purchaser who acquired
the thing acted in bad faith, the depositor may bring an action
against him for its recovery.
If the heir acts in bad faith, he is liable for damages. The sale
or appropriation of the thing deposited constitutes estafa. (Art.
315, par. 1[b], Revised Penal Code.)
Note: The word “depositor’s” should be read as “depositary’s.”
EXAMPLE:
Believing in good faith that the thing deposited by A with
B, worth P10,000.00 belonged to B, C, heir of B, sold the thing
to D who paid him P8,000.00.
Under Article 1991, C is bound to return to A P8,000.00,
the price he received, and not P10,000.00 or C may assign to
A the right to collect from D the P8,000.00 if it has not been
paid. If C acted in bad faith, he is liable to pay A P10,000.00
plus damages which A may have suffered. C is also criminally
liable for estafa.
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143
SECTION 3. — Obligations of the Depositor
ART. 1992. If the deposit is gratuitous, the depositor is
obliged to reimburse the depositary for the expenses he
may have incurred for the preservation of the thing deposited. (1779a)
Obligation to pay expenses
of preservation.
(1) Deposit gratuitous. — The above article applies only if
the deposit is gratuitous. It rests on equity. The depositor would
have incurred them just the same had the thing remained with
him. Without the duty of reimbursement imposed by the article,
the depositor would be enriching himself at the expense of the
depositary. The rule is different in commodatum. (see Art. 1941.)
As the law makes no distinction, the right to reimbursement
covers all expenses for preservation, whether ordinary or
extraordinary. The law refers to necessary expenses. Useful
expenses or those for pure luxury or mere pleasure are not
covered.
(2) Deposit for compensation. — If the deposit is for a
valuable consideration, the expenses of preservation are borne
by the depositary because they are deemed included in the
compensation. There can, however, be a contrary stipulation.
ART. 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing
deposited, unless at the time of the constitution of the
deposit the former was not aware of, or was not expected
to know the dangerous character of the thing, or unless he
notified the depositary of the same, or the latter was aware
of it without advice from the depositor. (n)
143
144
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TRANSACTIONS
Arts. 1994-1995
Obligation to pay losses incurred due
to character of thing deposited.
As a rule, the depositary must be reimbursed for loss suffered
by him because of the character of the thing deposited. Under
the four (4) exceptions enumerated, the depositor is freed from
responsibility.
ART. 1994. The depositary may retain the thing in
pledge until the full payment of what may be due him by
reason of the deposit. (1780)
Depositary’s right of retention.
This article gives an example of a pledge created by the
operation of law. (see Art. 2121.) The thing retained serves as
security for the payment of what may be due to the depositary
by reason of the deposit. (see Arts. 1965, 1992, 1993.) The right
granted in this article is similar to that granted to the agent. (see
Art. 1914.)
The rule is different in commodatum. (see Arts. 1944, 1951.)
ART. 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of
either the depositor or the depositary. (n)
Causes of extinguishment of deposit.
The causes mentioned in Article 1995 are not exclusive. There
are other causes such as return of the thing, novation, merger,
expiration of the term, fulfillment of the resolutory condition,
etc. (see Art. 1231.)
Effect of death of depositor
or depositary.
(1) Deposit gratuitous. — If the deposit is gratuitous, the death
of either the depositor or depositary extinguishes the deposit.
Art. 1995
DEPOSIT
Voluntary Deposit/Obligations of the Depositor
145
(No. 2.) By the word “extinguished,” the law really means that
the depositary is not obliged to continue with the contract of
deposit.
(2) Deposit for compensation. — A deposit for a compensation
is not extinguished by the death of either party because, unlike
a gratuitous deposit, an onerous deposit is not personal in
nature. (see Art. 1411.) Hence, the rights and obligations arising
therefrom are transmissible to their respective heirs. (Art. 1178.)
But the heirs of either party have a right to terminate the deposit
even before the expiration of the term.
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146
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TRANSACTIONS
Chapter 3
NECESSARY DEPOSIT
ART. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other
similar events. (1781a)
ART. 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions of the
law establishing it, and in case of its deficiency, by the
rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article
shall be regulated by the provisions concerning voluntary
deposit and by Article 2168. (1782)
When deposit is necessary.
A deposit may be voluntary (Art. 1968.) or necessary.
(1) A voluntary deposit is made by the free will of the
depositor. (Art. 1968.) In a necessary deposit, this freedom of
choice is absent.
(2) Articles 1996 and 1997 mention two kinds of necessary
deposit. The third kind is that made by travellers in hotels or
inns. (Art. 1998.) The fourth kind is that made by passengers
with common carriers. (see Art. 1754.)
146
Arts. 1996-1997
DEPOSIT
Necessary Deposit
147
Necessary deposit in compliance
with a legal obligation.
The following are examples of such deposit:
(1) The judicial deposit of a thing the possession of which is
being disputed in a litigation by two or more persons (Art. 538.);
(2) The deposit with a bank or public institution of public
bonds or instruments of credit payable to order or bearer given
in usufruct when the usufructuary does not give proper security
for their conservation (Art. 586.);
(3) The deposit of a thing pledged when the creditor uses
the same without the authority of the owner or misuses it in any
other way (Art. 2104.);
(4) Those required in suits as provided in the Rules of Court;
and
(5) Those constituted to guarantee contracts with the government. In this last case, the deposit arises from an obligation of
public or administrative character.
A deposit made in compliance with law is governed primarily
by the provisions of such law, and in default thereof, by the rules
on voluntary deposit. (Art. 1997, par. 1.)
Necessary deposit made on the occasion
of any calamity.
(1) Deposit created by accident or fortuitous event. — In this type
of necessary deposit, the possession of movable property passes
from one person to another by accident or fortuitously through
force of circumstances and which the law imposes on the recipient
the obligations of a bailee. Here, the more immediate object is to
save the property rather than its safekeeping. Thus, if X saves Y’s
television set in a fire, X is supposed to be its depositary.
Such a quasi-bailment is ordinarily distinguished by the name
involuntary bailment or involuntary deposit. (see 6 Am. Jur. 177.)
There must be a causal relation between the calamity and the
constitution of the deposit. Another name given to it is “deposito
miserable.”1 (11 Manresa, 732.)
1
Depositum miserabile in Roman Law.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
148
Arts. 1998-1999
(2) Governing rules. — Aside from the provisions concerning
voluntary deposit, this kind shall be governed by Article 2168
(Art. 1997, par. 2.) which reads: “When during a fire, flood, storm
or other calamity, property is saved from destruction by another
person without the knowledge of the owner, the latter is bound
to pay the former just compensation.” Article 2168 establishes a
quasi-contract.2
ART. 1998. The deposit of effects made by travellers
in hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or
to their employees, of the effects brought by the guests
and that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. (1783)
ART. 1999. The hotel-keeper is liable for the vehicles,
animals and articles which have been introduced or placed
in the annexes of the hotel. (n)
Deposit by travellers in hotels
and inns.
Before keepers of hotels or inns may be held responsible
as depositaries with regard to the effects of their guests, the
following elements must concur:
(1) They have been previously informed about the effects
brought by the guests; and
(2) The latter have taken the precautions prescribed regarding
their safekeeping.3
2
By implication, the finder of lost personal property becomes the depositary (bailee)
of the property and holds it for the true owner. (see Arts. 719, 720, 7171; also Art. 438.) A
similar relationship exists when a person comes into possession of stolen property (see
Art. 559.) or of property by mistake. (see Arts. 2154, 2143.)
3
Art. 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of establishments. — In default of the persons criminally liable, innkeepers, tavernkeepers, and
any other persons or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or
special police regulations shall have been committed by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery
Arts. 1998-1999
DEPOSIT
Necessary Deposit
149
Extent of liability of keepers of hotels
and inns.
The liability is not limited to effects lost or damaged in the
hotel rooms which come under the term “baggage” or articles
such as clothing as are ordinarily used by travellers but include
those lost or damaged in hotel annexes such as vehicles in the
hotel’s garage.
The responsibility imposed extends to all those who offer
lodging for a compensation, whatever may be their character. (11
Manresa 759.)
Terms explained.
(1) The words “travellers” and “guests,” as used by law, are
synonymous. It refers to transients and not to boarders. Nontransients are governed by the rules on lease.
(2) The terms “hotel-keeper” and “inn-keeper” are also synonymous.
(a) Hotel. — It has been defined as “a building of many
rooms chiefly for overnight accommodation of transients
and several floors served by elevators, usually with a large
open street-level lobby containing easy chairs, with a variety
of compartments for eating, drinking, dancing, exhibitions,
and group meetings, with shops having both inside and
street-side entrances and offering for sale items of particular
interest to a traveller, or providing personal services, and
with telephone booths, writing tables, and wash rooms freely
available.” (Webster’s Third New Int. Dictionary, p. 1095.)
(b) Inn. — It has been defined as “a public house for the
lodging of travellers for compensation and until capacity is
reached; a place of public entertainment that does not provide
lodging.” (Ibid., p. 1165.)
or theft within their houses from guests lodging therein, or for the payment of the value
thereof, provided that such guests shall have notified in advance the innkeeper himself,
or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may
have given them with respect to the care of and vigilance over such goods. No liability
shall attach in case of robbery with violence against or intimidation of persons unless
committed by the inn-keeper’s employees. (Revised Penal Code.)
150
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Arts. 2000-2002
(c) Motel. — It has been defined as “an establishment
which provides lodging and parking and in which the rooms
are usually accessible from an outdoor parking area.” (Ibid.,
p. 1474.)
ART. 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the
personal property of the guests caused by the servants or
employees of the keepers of hotels or inns as well as by
strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on
the vigilance of the keeper of the hotel or inn shall be considered in determining the degree of care required of him.
(1784a)
ART. 2001. The act of a thief or robber, who has entered
the hotel is not deemed force majeure, unless it is done
with the use of arms or through an irresistible force. (n)
ART. 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guests, his family,
servants or visitors, or if the loss arises from the character
of the things brought into the hotel. (n)
When hotel-keeper liable.
In the following cases, the hotel-keeper is liable regardless of
the amount of care exercised:
(1) The loss or injury is caused by his servants or employees
as well as by strangers (Art. 2000.) provided that notice has been
given and proper precautions taken (Art. 1998.); and
(2) The loss is caused by the act of a thief or robber done
without the use of arms and irresistible force. (Art. 2001.) for in
this case, the hotel-keeper is apparently negligent.
When hotel-keeper not liable.
The hotel keeper is not liable in the following cases:
(1) The loss or injury is caused by force majeure, like flood,
fire (Art. 2000.), theft or robbery by a stranger (not by hotelkeeper’s servant or employee) with the use of arms or irresistible
force (Art. 2001.), etc., unless he is guilty of fault or negligence in
Arts. 2003-2004
DEPOSIT
Necessary Deposit
151
failing to provide against the loss or injury from his cause (see
Arts. 1170, 1174.);
(2) The loss is due to the acts of the guests, his family,
servants, or visitors (Art. 2002.); and
(3) The loss arises from the character of the things brought
into the hotel. (Ibid.)
ART. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is
not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void. (n)
Exemption or diminution of liability.
The rule in this article is similar to the rule on common carriers
which does not allow a common carrier to dispense with or limit
his responsibility by stipulation or by posting of notices. (see Art.
1760.) Such stipulation is deemed contrary to law, morals, and
public policy. (Art. 1306.)
(1) Hotel-keepers and inn-keepers in offering their accommodations to the public, practically volunteer as depositaries,
and as such, they should be subject to an extraordinary degree
of responsibility for the protection and safety of travellers who
have no alternative but rely on the good faith and care of those
with whom they take lodging. (Art. 2000.)
(2) Furthermore, inn-keepers, by the very nature of their
business, have supervision and control of their inns and the
premises thereof. As a matter of fact, authorities are to the effect
that it is not necessary in order to hold an inn-keeper liable
that the effects of the guests be actually delivered to him or his
employees; it is enough that they are within the inn. (De Los
Santos vs. Tan Khey, [CA] 580 O.G. 7693; 29 Am. Jur. 89-90.)
ART. 2004. The hotel-keeper has a right to retain the
things brought into the hotel by the guest, as a security
for credits on account of lodging, and supplies usually furnished to hotel guests. (n)
152
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Art. 2004
Hotel-keeper’s right to retain.
The right of retention recognized in this article is in the nature
of a pledge created by operation of law. (see Arts. 2121-2122.) It
is given to hotel-keepers to compensate them for the liabilities
imposed upon them by law. The bailee in commodatum may
likewise retain the thing loaned for damages by reason of defects
thereof. (Arts. 1944, 1951.)
Incidentally, the act of obtaining food or accommodation in
a hotel or inn without paying therefor constitutes estafa. (Arts.
315, Sec. 2[e], Revised Penal Code.)
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153
Chapter 4
SEQUESTRATION OR JUDICIAL DEPOSIT
ART. 2005. A judicial deposit or sequestration takes
place when an attachment or seizure of property in litigation is ordered. (1785)
ART. 2006. Movable as well as immovable property
may be the object of sequestration. (1786)
ART. 2007. The depositary of property or objects
sequestrated cannot be relieved of his responsibility until
the controversy which gave rise thereto has come to an
end, unless the court so orders. (1787a)
ART. 2008. The depositary of property sequestrated
is bound to comply, with respect to the same, with all the
obligations of a good father of a family. (1788)
When judicial deposit takes place.
A deposit may be constituted judicially or extrajudicially.
(Art. 1964.)
Judicial deposit or sequestration takes place when an attachment
or seizure of property in litigation is ordered by a court.1 (Art.
2005.) For example, properties may be attached by the sheriff
upon the filing of a complaint (Rule 57, Rules of Court.), or a
1
A notice of lis pendens is an announcement to the whole world that a particular real
property is in litigation and serves as a warning that one who acquires an interest over
said property does so at his own risk, or that he gambles on the result of the litigation. The
property subject of the litigation is not by that fact alone in custodia legis. It is only when
property is lawfully taken by virtue of legal process that it becomes in custodia legis, and
not otherwise. (Los Baños Rural Bank, Inc. vs. Africa, 384 SCRA 535 [2002]; Ladanga vs.
Aseneta, 471 SCRA 381 [2005].)
153
154
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Arts. 2005-2008
receiver (a disinterested party) may be appointed by the court
to administer and preserve the property in litigation2 (Rule 59,
ibid.), or personal property may be seized by the sheriff in suits of
replevin or manual delivery of personal property. (Rule 60, ibid.)
Nature and purpose of judicial deposit.
The deposit is judicial because it is auxiliary to a case pending
in court.3
The purpose is to maintain the status quo during the pendency
of the litigation or to insure the right of the parties to the property
in case of a favorable judgment.
Obligation of depositary of sequestrated
property.
The depositary of sequestrated property is the person
appointed by the court. (Art. 2007.) He has the obligation to take
care of the property with the diligence of a good father of a family
(Art. 2008.) and he may not be relieved of his responsibility until
the litigation is ended or the court so orders. (Art. 2007.)
2
Property subject of litigation is not by that fact alone in custodia legis. A thing is in
custodia legis, when it is shown that it has been and is subjected to the official custody of
a judicial or executive officer in pursuance of his execution of a legal writ. Only when
property is lawfully taken by virtue of legal process is it considered in the custody of the
law, and not otherwise. (Bagalihog vs. Fernandez, 108 Phil. 560 [1960]; Superline Transportation Co., Inc. vs. Phil. National Construction Co., 519 SCRA 432 [2007].)
3
In our jurisdiction, an escrow order may be issued by a court in the exercise of
its intrinsic power to issue orders and other ancillary writs and processes incidental or
reasonably necessary to the exercise of its main jurisdiction. Thus, the deposit of rentals
in escrow with a bank, receiver, or administrator, in the name of the court, is only an incident in the main proceeding — placing property in litigation under judicial possession.
The usual definition is that an escrow is a written instrument which by its terms imports a
legal obligation and which is deposited by the grantor, promisor, or obligor, or his agent
with a stranger or third party, to be kept by the depositary until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee,
promisee, or obligee. While originally, the doctrine of escrow applied only to deeds by
way of grant, or as otherwise stated, instruments for the conveyance of land, under modern theories of law, the term “escrow’’ is not limited in its application to deeds, but is
applied to the deposit of any written instrument with a third person. It is no longer open
to question that money may be delivered in escrow. (Province of Bataan vs. Villafuerte,
Jr., 367 SCRA 620 [2001].)
Art. 2009
DEPOSIT
Sequestration or Judicial Deposit
155
Judicial and extrajudicial deposits
distinguished.
The differences between judicial and extrajudicial deposits
are:
(1) Cause or origin. — judicial, by the will of the court;
extrajudicial, by the will of the parties; hence, there is a contract;
(2) Purpose. — judicial, as security and to secure the right of
a party to recover in case of a favorable judgment; extrajudicial,
custody and safekeeping of the thing;
(3) Subject matter. — judicial, either movable or immovable
property but generally immovable property; extrajudicial, only
movable property;
(4) Remuneration. — judicial, always remunerated (onerous);
extrajudicial, may be compensated or not, but generally
gratuitous; and
(5) In whose behalf it is held. — judicial, in behalf of the person
who, by the judgment, has a right; extrajudicial, in behalf of the
depositor or third person designated.
ART. 2009. As to matters not provided for in this Code,
judicial sequestration shall be governed by the Rules of
Court. (1789a)
Applicable law.
The law on judicial deposit is remedial or procedural in nature.
Hence, the Rules of Court are applicable. The relevant provisions
of the Rules of Court are Rule 57 (Preliminary Attachment), Rule
59 (Receivership), and Rule 60 (Replevin).
The Rules of Court provide also for attachment in criminal
cases. (Rule 127 thereof.)
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TRANSACTIONS
IV
THE WAREHOUSE RECEIPTS LAW
(Act No. 2137, as amended.)
(Secs. 1-61.)
INTRODUCTION
Scope of the law.
The Warehouse Receipts Law is a full and complete treatise
on the subject.
It covers all warehouses, whether public or private. (Citizen’s
State Bank of Vici vs. Galtig, 187 P. 217.), bonded or not. Thus, it
has been held to be applicable to warehousemen licensed under
Act No. 3893 (as amended by R.A. No. 247.), known as the General
Bonded Warehouse Act, of special application to those engaged
in the business of receiving commodities (e.g., palay and rice) for
storage. (see People vs. Goco, 35 O.G. 2618; also Phil. Tobacco
Flue Curing and Redrying Corp. vs. Pablo, 66 SCRA 136 [1975].)
When Civil Code applicable.
The Act applies to warehouse receipts issued by a warehouseman as defined in Section 58(a) of the Act, while the Civil Code,
to other cases where the receipts are not issued by a warehouseman as defined in said section.
Purposes of the law.
The law has been enacted:
(1) To regulate the status, rights, and liabilities of the parties
in a warehousing contract;
156
THE WAREHOUSE RECEIPTS LAW
Introduction
157
(2) To protect those who, in good faith and for value, acquire
negotiable warehouse receipts by negotiation;
(3) To render the title to, and right of possession of, property
stored in warehouses more easily convertible;
(4) To facilitate the use of warehouse receipts as documents
of title; and
(5) In order to accomplish these, to place a much greater
responsibility on the warehouseman. (93 C.J.S. 400.)
— oOo —
158
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TRANSACTIONS
Chapter 1
THE ISSUE OF WAREHOUSE
RECEIPTS
SECTION 1. Persons who may issue receipts. — Warehouse receipts may be issued by any warehouseman.
Who may issue warehouse receipt.
A warehouseman is a person lawfully engaged in the business
of storing goods for profit. (Sec. 58[a].) Under Section 1, only a
warehouseman may issue warehouse receipts. Hence, receipts
not issued by a warehouseman are not warehouse receipts
although in the form of warehouse receipt. (National Bank of
Commerce vs. Kansas City, 188 S.W. 117.)
But a duly authorized officer or agent of a warehouseman
may validly issue a warehouse receipt. (National Bank vs.
Producer’s Warehouse Association, 42 Phil. 609 [1922]; see Sec.
2[g].)
Meaning of warehouse.
The law does not define what “warehouse” is. As used,
however, in the Act, warehouse means the building or place where
goods are deposited and stored for profit. (see Sec. 2; also Sec. 2,
General Bonded Warehouse Act [Act No. 3893, as amended].)
SEC. 2. Form of receipts; essential terms. — Warehouse receipts need not be in any particular form but every such receipt must embody within its written or printed
terms:
(a) The location of the warehouse where the goods are
stored;
158
Sec. 2
THE WAREHOUSE RECEIPTS LAW
The Issue of Warehouse Receipts
159
(b) The date of issue of the receipt;
(c) The consecutive number of the receipt;
(d) A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified
person or his order;
(e) The rate of storage charges;
(f) A description of the goods or of the packages containing them;
(g) The signature of the warehouseman which may be
made by his authorized agent;
(h) If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in common
with others, the fact of such ownership; and
(i) A statement of the amount of advances made and
of liabilities incurred for which the warehouseman claims
as lien. If the precise amount of such advances made or of
such liabilities incurred is, at the same time of the issue of
the receipt, unknown to the warehouseman or to his agent
who issues it, a statement of the fact that advances have
been made or liabilities incurred and the purpose thereof
is sufficient.
A warehouseman shall be liable to any person injured
thereby for all damages caused by the omission from a
negotiable receipt of any of the terms herein required.
Definition and nature of warehouse
receipt.
(1) The Act does not also define a warehouse receipt.
(a) It has been defined as a written acknowledgment by a
warehouseman that he has received and holds certain goods
therein described in store for the person to whom it is issued.
(Vanett vs. Reilly-Hertz Automobile Co., 173 N.W. 466.)
(b) It has also been defined as a simple written contract
between the owner of the goods and the warehouseman to
pay the compensation for that service. (Hale vs. Milwaukee
Dock Co., 29 Wis. 482, 67 C.J. 463.)
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TRANSACTIONS
Sec. 2
A warehouse receipt is included in “document of title to
goods” as used by the Civil Code in its provisions relating to
sales. (see Art. 1936[1], Civil Code.)
(2) A warehouse receipt is a bilateral contract. It imports that
goods are in the hands of a warehouseman and is a symbolical
representation of the property itself.
(3) A warehouse receipt is not a negotiable instrument within
the meaning of the Negotiable Instruments Law in the technical
sense that a bill of exchange or promissory note is negotiable,
even though the Warehouse Receipts Act declares it negotiable.
Negotiability is provided for by the Act. (see 11 Am. Jur. 2d 35;
see Sec. 5.)
Form and contents of the receipt.
Although the Act does not require or specify any particular
form for warehouse receipts, it has provided for certain essential
terms which must be embodied in every warehouse receipt.
Together with their importance, they are enumerated below:
(1) Location of warehouse. — This requirement is for the
benefit of the holders of warehouse receipts to enable them to
determine where the goods are deposited especially when the
warehouseman has more than one warehouse located in different
places.
(2) Date of issue of receipt. — Although a warehouse receipt
is not essential to create a contract of storage (which is one of
deposit and is perfected at the time of delivery of the goods
deposited, Art. 1316, Civil Code.), the date of issue appearing
therein, indicates prima facie the date when the contract of deposit
is perfected and when the storage charges shall begin to run
against the depositor.
(3) Consecutive number of receipt. — The purpose of this
requirement is to identify each receipt with the goods for which
it was issued. There is no express requirement as to when the
consecutive numbering shall begin. Thus, a warehouseman may
issue a receipt numbered 99 although it is not, in fact, the ninetyninth receipt issued by such warehouseman. (Smith Bros. Co. vs.
Reicheimer & Co., 83 So. 255, 145 La. 1066.)
Sec. 2
THE WAREHOUSE RECEIPTS LAW
The Issue of Warehouse Receipts
161
(4) Person to whom goods are deliverable. — This requirement
determines the person or persons who shall prima facie be
entitled lawfully to the possession of the goods deposited. Thus,
if by the terms of the receipt the goods are to be delivered to
order or to bearer, then it is a negotiable warehouse receipt. The
requirement, however, does not determine the negotiability of
the receipt because notwithstanding the failure to use words
of negotiability, the receipt may still be considered negotiable.
This can be inferred from the last paragraph of the section.
(Manufacturers Mercantile Co. vs. Monarch Refrigerator Co., 107
N.E. 885; see Secs. 5, 7.)
(5) Rate of storage charges. — This states the consideration for
the contract from the view of the warehouseman. In the absence
of express agreement, the law presumes that the depositor shall
pay the customary or reasonable compensation for the services
of the warehouseman. (Devereux vs. Fleming, 53 F. 401.)
(6) Description of goods or packages. — The general object of
giving a description of the goods in the receipt is for identification
so that the identical property delivered to the warehouseman
may be delivered back by him upon the return of the warehouse
receipt. A warehouseman cannot be supposed to know the
contents of each package or box of merchandise which was
delivered to him, and so packed as to cover and conceal the
real nature of the goods delivered. All he can be fairly charged
with asserting by the mere acknowledgment of the receipt of
merchandise thus described is that the package or box in which
it is contained bears the same outward appearance as does the
package or box in which merchandise of the character described
is usually carried and that there is nothing unusual in the marks,
appearance, signs or character of the package or box from that in
which goods of the character described are usually transported,
and that he believes them to be as described. (Dean vs. Driggs, 33
N.E. 326.)
However, the mere fact that the goods deposited are incorrectly described does not make ineffective the receipt when the
identity of the goods is fully established by the evidence. In such
case, its indorsement and delivery shall constitute a sufficient
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TRANSACTIONS
Sec. 2
transfer of the title to the goods. (American Foreign Banking Corporation vs. Herridge, 49 Phil. 975 [1927].)
(7) Signature of warehouseman. — The warehouseman’s
signature furnishes the best evidence of the fact that the
warehouseman has received the goods described in the receipt
and has bound himself to assume all obligations in connection
therewith.
(8) Warehouseman’s ownership of or interest in goods. — The
purpose behind the provision is to prevent abuses which in the
past had arisen from warehousemen issuing receipts on their
goods. It seems wise that where they issue negotiable receipts in
this way, the document should carry notice of the fact on its face.
(Cowley Country National Bank vs. Rawlings Dobbs Elevator
Co., 152 Pac. 647.) Under Section 53, the omission to state his
ownership of the goods in the receipt issued by him, may render
the warehouseman criminally liable.
(9) Statement of advances made and liabilities incurred. — The
purpose of this requirement is to preserve the lien of the warehouseman over the goods stored or the proceeds thereof in his
hands. (see Secs. 27-30.) Of course, where the warehouseman
does not make any advance or does not incur any liability, there
would be nothing to state on the receipt concerning advances or
liabilities. (Smith Bros. Co., Ltd. vs. Reicheimer & Co., 145 La.
1066, 83 So. 255.)
Effect of omission of any of essential
terms.
The terms prescribed in Section 2 are required for the
protection of the depositor and those succeeding to his right.
(1) Validity of receipt not affected. — The omission of any of the
requirements will not affect the validity of the warehouse receipt.
(2) Warehouseman liable for damages. — It will only render
the warehouseman liable for damages to those injured by his
omission. (Wordson vs. Davenport Mill & Elevator Co., 13 P. [2d]
4778.)
(3) Negotiability of receipt not affected. — Neither is the
negotiability affected. Section 2 does not deal with negotiability
Sec. 3
THE WAREHOUSE RECEIPTS LAW
The Issue of Warehouse Receipts
163
of warehouse receipts. Note that the last paragraph of Section 2
refers expressly to “omission from a negotiable receipt of any of
the terms herein required” and not from a receipt which would
otherwise be negotiable. (Manufacturers Mercantile Co. vs.
Monarch Refrigerating Co., 107 N.E. 885.)
(4) Contract converted to ordinary deposit. — The issuance of
a warehouse receipt in the form provided by the law is merely
permissive and directory and not mandatory in the sense that if
the requirements are not observed, then the goods delivered for
storage become ordinary deposits. (Gonzales vs. Go Tiong and
Luzon Surety Co., 104 Phil. 492 [1958].)
SEC. 3. Form of receipts. — What terms may be inserted. — A warehouseman may insert in a receipt, issued by
him, any other terms and conditions provided that such
terms and conditions shall not:
(a) Be contrary to the provisions of this Act;
(b) In any wise impair his obligation to exercise that
degree of care in the safekeeping of the goods entrusted
to him which a reasonably careful man would exercise in
regard to similar goods of his own.
Terms that cannot be included
in a warehouse receipt.
Under Section 3, the warehouseman is given the power to
insert additional terms or conditions in receipts issued by him
subject to the two limitations stated in subsections (a) and (b).
Of course, in addition to those limitations, the stipulations in the
receipt must not be contrary to law, morals, good customs, public
order, or public policy. (Art. 1306, Civil Code.)
(1) Exemption from liability for misdelivery. — Under Subsection
(a), a warehouseman is not authorized to insert any term
exempting him from liability for misdelivery of goods because
such would be against Section 10 of the Act or for not giving
statutory notice in case of sale of goods because such would be
contrary to Sections 33 and 34.
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TRANSACTIONS
Secs. 4-5
(2) Exemption from liability for negligence. — Under Subsection
(b), the warehouseman cannot insert any term which would
relieve him from liability for his own negligence, such as “For
account and at the risk of the depositor.” The warehouseman is
required by law “to exercise that degree of care in the safekeeping
of the goods entrusted to him which a reasonable careful man
would exercise in regard to similar goods of his own.”
SEC. 4. Definition of non-negotiable receipt. — A receipt in which it is stated that the goods received will be
delivered to the depositor or to any other specified person,
is a non-negotiable receipt.
SEC. 5. Definition of negotiable receipt. — A receipt in
which it is stated that the goods received will be delivered
to the bearer or to the order of any person named in such
receipt is a negotiable receipt.
No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if inserted, shall
be void.
Meaning of “negotiable” under the Act.
The word “negotiable” is not used in the sense in which it
is applied to bills of exchange or promissory notes but only as
indicating that in the passage of warehouse receipts through the
channels of commerce, the law regards the property which they
describe as following them and gives to their regular transfer by
indorsement the effect of manual delivery of the things specified
in them. (Vanett vs. Reilly-Hertz Automobile Co., 173 N.W. 466.)
A warehouse receipt is in no sense a negotiable instrument
because it does not comply with Section 1(b) of Act No. 2031
(Negotiable Instruments Law) which requires an unconditional
promise or order to pay a sum certain in money. (93 C.J.S. 429.)
Article 1507 of the Civil Code is the same as Section 5 above
except for the use of “document of title” instead of “receipt” and
for paragraph 2 of Section 5 which is not contained in Article
1507 but in a more extended form in Article 1510.
Secs. 6-7
THE WAREHOUSE RECEIPTS LAW
The Issue of Warehouse Receipts
165
SEC. 6. Duplicate receipts must be so marked. — When
more than one negotiable receipt is issued for the same
goods, the word “duplicate” shall be plainly placed upon
the face of every such receipt, except the first one issued.
A warehouseman shall be liable for all damages caused by
his failure to do so to any one who purchased the subsequent receipt for value supposing it to be an original, even
though the purchase be after the delivery of the goods by
the warehouseman to the holder of the original receipt.
SEC. 7. Failure to mark “not negotiable.” — A nonnegotiable receipt shall have plainly placed upon its face
by the warehouseman issuing it “non-negotiable,” or “not
negotiable.” In case of the warehouseman’s failure to
do so, a holder of the receipt who purchased it for value
supposing it to be negotiable, may, at his option, treat
such receipt as imposing upon the warehouseman the
same liabilities he would have incurred had the receipt
been negotiable.
This section shall not apply, however, to letters, memoranda, or written acknowledgment of an informal character.
Application of Sections 6 and 7.
Section 6 refers only to negotiable receipts. Section 7 applies
only to non-negotiable receipts. (see Sec. 52, for criminal liability
of warehouseman.)
Effect of failure to mark “negotiable”
or “non-negotiable.”
(1) The word “negotiable” usually is written or printed on
the face of a negotiable warehouse receipt and the failure to so
mark it does not render it non-negotiable if it contains words of
negotiability. (Sec. 5.)
(2) In the case of non-negotiable receipts, the law imposes
upon the warehouseman the duty to mark them “non-negotiable”
or “not negotiable” otherwise they shall be considered negotiable
provided the holder of such unmarked receipt purchased it for
value supposing it to be negotiable.
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TRANSACTIONS
Secs. 6-7
Negotiability of warehouse receipts
enlarged.
Section 7 enlarges the negotiability of warehouse receipts.
It appears to give any warehouse receipt not marked “nonnegotiable” or “not negotiable” practically the same effect as a
receipt which, by its terms, is negotiable provided the holder of
such unmarked receipt acquired it for value supposing it to be
negotiable. (Roman vs. Asia Banking Corporation, 46 Phil. 705
[1924].)
This statement is, perhaps, too broad but it certainly applies
as against the unsecured creditors of the depositor. (Bank of P.I.
vs. Herridge, 47 Phil. 57 [1924].)
ILLUSTRATIVE CASE:
Buyer (depositor) of merchandise became insolvent, and unpaid
seller claimed that warehouse receipt (reciting that the merchandise
is deposited in warehouse “por orden” instead of “a la orden” of
depositor), issued by former to a person did not pass title.
Facts: A bought merchandise from B but did not pay for
them. A deposited the merchandise in his warehouse and
issued a receipt in blank and delivered it to C, a bank.
In the left margin of the face of the receipt, A certifies that
he is the sole owner of the merchandise therein described.
The receipt recites that the merchandise is deposited in the
warehouse “por orden” instead of “a la orden” or “sujeto a la
orden” of the depositor and it contains no other direct statement
showing whether the goods received are to be delivered to the
bearer, to a specified person, or to a specified person or his
order. It is not marked “non-negotiable” or “not negotiable.”
A became insolvent. B claimed that the transfer of the
receipt to C did not pass title.
Issue: Is the receipt negotiable or non-negotiable?
Held: (1) Mere clerical or grammatical error was committed.
— “It is obvious that the deposit evidenced by the receipt in
this case was intended to be made subject to the order of the
depositor and, therefore, negotiable. That the words ‘por orden’
are used instead of ‘a la orden’ is very evidently a clerical or
grammatical error. x x x The phrase must be construed to mean
Secs. 6-7
THE WAREHOUSE RECEIPTS LAW
The Issue of Warehouse Receipts
that A was the person authorized to indorse and deliver the
receipt; any other interpretation would mean that no one had
such power and the clause as well as the entire receipt would
be rendered nugatory.”
(2) Intention was to make receipt negotiable. — “Moreover,
the indorsement in blank of the receipt in controversy together
with its delivery by A to C took place on the very date of
the issuance of the warehouse receipt, thereby immediately
demonstrating the intention of A and C by the employment of
the phrase ‘por orden del A’ to make the receipt negotiable and
subject to the very transfer which he then and there made by
such indorsement in blank and delivery of the receipt to C.”
(Roman vs. Asia Banking Corporation, 46 Phil. 705 [1924].)
“As the owner of the goods, A had, of course, full control
over them while the title remained in him; we certainly
cannot assume that it is the intention to have the goods in the
warehouse subject to no one’s orders. That the receipts were
intended to be negotiable is further shown by the fact that
they were not marked ‘non-negotiable’ and that they were
transferred by the indorsement of the original holder, who was
also the warehouseman.
In his dual capacity of warehouseman and the original
holder of the receipt, A was the only party to the instrument at
the time of its execution and the interpretation he gave it at that
time must, therefore, be considered controlling as to its intent.”
(3) Depositor was insufficiently acquainted with Spanish
language. — “The rule is well known that whenever possible,
writings must be so construed as to give effect to their general
intent and so as to avoid absurdities. Applying this rule,
it is difficult to see how the phrase in question can be given
any other rational meaning than that suggested in the case
mentioned. (Roman case.)
It is true that the meaning would have been more
grammatically expressed by the word ‘a la orden’; the word
‘por’ preceding the word ‘orden’ is generally translated into
the English language as ‘by’ but ‘por’ also means ‘for’ or ‘for
the account of’ and it is often used in the latter sense. The
grammatical error of using it in connection with ‘orden’ in
the present case is one which might reasonably be expected
from a person insufficiently acquainted with the Spanish
language.”(Bank of P.I. vs. Herridge, 47 Phil. 57 [1924], where
167
168
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 6-7
the receipts issued also by A were identical in form with that
involved in the Roman case.)
Construction of warehouse receipts.
As instruments of credit, warehouse receipts play an
important role in modern commerce and the present day
tendency is towards a liberal construction of the law in favor of
the bona fide holders of such receipts. (Ibid.)
The rule, however, has no application to actions against any
party to the transactions other than a warehouseman. Thus,
the purchaser of a non-negotiable receipt not marked “nonnegotiable” or “not negotiable” from one who had stolen or
found it cannot interpose the defense against the owner of the
goods that the receipt is negotiable and has given him title to
the goods, the warehouseman not being a party to the action.
(Alexander Eccles & Co. vs. Munn, 210 S.W. 626.)
— oOo —
169
Chapter 2
OBLIGATIONS AND RIGHTS OF
WAREHOUSEMEN UPON THEIR RECEIPTS
SEC. 8. Obligation of warehouseman to deliver. — A
warehouseman, in the absence of some lawful excuse
provided by this Act, is bound to deliver the goods upon
a demand made either by the holder of a receipt for the
goods or by the depositor; if such demand is accompanied
with:
(a) An offer to satisfy the warehouseman’s lien;
(b) An offer to surrender the receipt, if negotiable with
such indorsements as would be necessary for the negotiation of the receipts; and
(c) A readiness and willingness to sign, when the
goods are delivered, an acknowledgment that they have
been delivered, if such signature is requested by the warehouseman.
In case the warehouseman refuses or fails to deliver
the goods in compliance with a demand by the holder or
depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a lawful excuse for such refusal.
Principal obligations of the warehouseman.
A warehouseman is essentially a depositary with respect
to the goods received and stored by him in his warehouse. The
following are the principal obligations of the warehouseman:
(1) to take care of the goods entrusted to his safekeeping
(Sec. 21.); and
169
170
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 8
(2) to deliver them to the holder of the receipt or the depositor
provided the conditions under Section 8 are fulfilled.
Necessity of demand.
Generally speaking, a demand should be made on the
warehouseman in order that the duty to deliver the goods
will arise. But where demand is evidently useless as when the
warehouseman has rendered it beyond his power to deliver the
goods (see Art. 1169[3], Civil Code.), demand is dispensed with.
Offer to satisfy warehouseman’s lien.
A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him
until the lien is satisfied. (Sec. 31.) He loses his lien upon the
goods by surrendering possession thereof. (Sec. 29[a].)
The offer to satisfy the warehouseman’s lien is, therefore,
required before the warehouseman is bound to deliver or return
the goods. When, however, an offer is vain or useless, a formal
tender is not required.
Offer to surrender and sign negotiable
receipt.
The offer to surrender the receipt is required for the protection
of the warehouseman since the receipt represents the goods
described therein. (see Sec. 11.) Furthermore, the warehouseman
will be criminally liable if he delivers the goods without obtaining
possession of such receipt. (Sec. 54.) The warehouseman’s right
to require production of the receipt as a condition precedent to
delivery is subject to waiver, as where he refuses to deliver on
grounds other than its non-production. (67 C.J. 532.)
If the receipt is negotiable, the demand for the delivery of
the goods must be accompanied by an offer to surrender the
receipt properly indorsed. If the receipt issued is not negotiable,
any person lawfully entitled to the possession of the goods (e.g.,
one with written authority from the owner) may be entitled to
delivery without surrender of the receipt. (Ibid.)
Sec. 8
THE WAREHOUSE RECEIPTS LAW
Obligations and Rights of Warehousemen Upon Their Receipts
171
Lawful excuses for refusal to deliver
goods.
Even if the demand is accompanied by the three conditions
provided in Section 8, a warehouseman may still refuse delivery
of goods covered by a warehouse receipt on some lawful excuses
provided in the Act. (see Secs. 10, 16, 18, 21, 31, 36.) But the
existence of a lawful excuse for such refusal is an affirmative
defense which the warehouseman must prove. (Sec. 8, par. 2.)
The fact that the warehouseman has a claim for unpaid
storage on certain property of the person seeking delivery does
not justify him in refusing delivery of other property on which
he has no such claim. (93 C.J.S. 482.)
ILLUSTRATIVE CASE:
Corporation appointed as manager of warehouse business of
another corporation pledged quedans of latter issued in name of
former as collateral with a bank which brought action to recover value
of goods.
Facts: W appointed M, another corporation, as general
manager of its warehouse business for a certain period, with
full power to manage its business, subject only to the control of
W’s board of directors. Under such power, M issued in its own
name the quedans of W and pledged them as collateral with B,
a bank, which received them in good faith.
B brought action to recover the value of the goods. W
alleged that the quedans were invalid and wrongfully issued
and that the goods were not in W’s warehouse.
Issue: Is W bound by the acts of M, its general manager, and
estopped to deny its authority to issue such quedans?
Held: Yes. W having alleged that the quedans were invalid
and wrongfully issued, and that the copra described was not in
its warehouse, was estopped to claim or assert that B did not
comply with any condition precedent. In this kind of action, a
person has no legal right to deny the existence of the instrument
on which it is based, and then claim that the plaintiff has not
complied with the provisions of the instrument. (Phil. National
Bank vs. Producers Warehouse Association, 42 Phil. 602 [1922].)
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TRANSACTIONS
Sec. 9
SEC. 9. Justification of warehouseman in delivering.
— A warehouseman is justified in delivering the goods,
subject to the provisions of the three following sections,
to one who is:
(a) The person lawfully entitled to the possession of
the goods, or his agent;
(b) A person who is either himself entitled to delivery
by the terms of a non-negotiable receipt issued for the
goods, or who has written authority from the person so
entitled either indorsed upon the receipt or written upon
another paper; or
(c) A person in possession of a negotiable receipt by
the terms of which the goods are deliverable to him or order, or to bearer, or which has been indorsed to him or in
blank by the person to whom delivery was promised by
the terms of the receipt or by his mediate or immediate
indorser.
Person to whom goods must
be delivered.
The warehouseman is justified in delivering the goods and,
therefore, will not be liable for misdelivery, to any person specified in Section 9.
(1) Person lawfully entitled to possession of goods or his agent. —
Under subsection (a), the warehouseman is justified in delivering
the goods to the person to whom a competent court has ordered
the delivery of the goods (see Secs. 14, 17.), or to an attaching
creditor (see Sec. 25.), or to the purchaser in case of sale of the
goods by the warehouseman to enforce his lien (see Sec. 33.) or
where the goods are perishable or hazardous. (see Sec. 34.)
(2) Person entitled to delivery under a non-negotiable receipt or
with written authority. — Under subsection (b), an authority is
sufficient as the section does not provide that the warehouseman
is justified in making delivery only on the written authority of the
party entitled to possession; and to give it that meaning would
open the door to fraud by enabling an unscrupulous owner to
repudiate his express verbal authorization and thereby reap the
fruits of his own wrong. Moreover, such construction would be
Sec. 10
THE WAREHOUSE RECEIPTS LAW
Obligations and Rights of Warehousemen Upon Their Receipts
173
giving the provision the effect of a rule of evidence or statute
of frauds under which the authority of the owner could not be
proved except by writing.
(3) Person in possession of a negotiable receipt. — Under subsection (c), the warehouseman is liable for misdelivery to a mere
possessor of a negotiable receipt by the terms of which the goods
covered by it are deliverable to the order of another, not being an
indorsee thereof.
In a case where the warehouseman delivered the goods
to one who acquired custody of the same through the use of
falsified delivery permit, it was held that the warehouseman
cannot sue for the value of the goods unless he had been sued by
the depositor or the consignee who are the real parties in interest,
not the warehouseman. The warehouseman is not the owner of
the goods. He would have a course of action had the depositor
or consignee sued him for damages or for recovery of the goods.
(Consolidated Terminals, Inc. vs. Artex Dev. Co., Inc., 63 SCRA
46 [1975].)
SEC. 10. Warehouseman’s liability for misdelivery. —
Where a warehouseman delivers the goods to one who is
not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all having a right of property or possession in the goods if he
delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section, and though
he delivered the goods as authorized by said subdivisions,
he shall be so liable, if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the
goods, not to make such delivery; or
(b) Had information that the delivery about to be made
was to one not lawfully entitled to the possession of the
goods.
Warehouseman’s liability for misdelivery.
(1) Liability similar to a bank paying a forged check. — The
liability of a warehouseman for delivering to a person other
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Secs. 11-12
than those specified in Section 9 is the same as that of a bank
paying a forged check. As the party liable for misdelivery, the
duty rests upon the warehouseman of devising appropriate
means by which deception can be avoided. The depositor is not
obliged to volunteer or offer any suggestion calculated to afford
protection to the warehouseman. (Osaka Boeki Kaishal Ltd. vs.
Luzon Brokerage, [CA] O.G. 5th Suppl. 130 [1941].)
(2) Liability as for conversion. — Where the delivery is otherwise than as authorized by subsections (b) and (c) of Section 9,
the liability of the warehouseman for misdelivery is as for conversion. Conversion is unauthorized assumption and exercise of
the right of ownership over goods belonging to another through
the alteration of their condition or the exclusion of the owner’s
right. (Bouvier’s Law Dictionary, p. 669.) And even if the warehouseman delivers the goods to the persons entitled under subsections (b) and (c) of Section 9, he may still be liable for conversion if prior to delivery, he had been requested not to make such
delivery (subsec. [a], Sec. 10.) or he had received notice of the
adverse claim or title of a third person. (subsec. [b], ibid.)
SEC. 11. Negotiable receipts must be cancelled when
goods delivered. — Except as provided in Section thirtysix, where a warehouseman delivers goods for which he
had issued a negotiable receipt, the negotiation of which
would transfer the right to the possession of the goods,
and fails to take up and cancel the receipt, he shall be liable
to any one who purchases for value in good faith such
receipt, for failure to deliver the goods to him, whether
such purchaser acquired title to the receipt before or after
the delivery of the goods by the warehouseman.
SEC. 12. Negotiable receipts must be cancelled or
marked when part of goods delivered. — Except as provided in Section thirty-six, where a warehouseman delivers part of the goods for which he had issued a negotiable
receipt and fails either to take up and cancel such receipt,
or to place plainly upon it a statement of what goods or
packages have been delivered, he shall be liable to any
one who purchases for value in good faith such receipt,
for failure to deliver all the goods specified in the receipt,
Sec. 13
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whether such purchaser acquired title to the receipt before or after the delivery of any portion of the goods by the
warehouseman.
Cancellation of receipts on delivery
of goods.
The above provisions are not applicable to non-negotiable
receipts because the warehouseman may make delivery without
requiring their surrender and cancellation.
Under Section 11, the receipt must be cancelled and under
Section 12, the receipt must be either cancelled or marked as
to the part of the goods delivered. Note that under Section 11,
the negotiable receipt must be one “the negotiation of which
would transfer the right to the possession of the goods.” So, the
warehouseman who delivers the goods to the real owner without
taking up and cancelling the receipt is not liable to the purchaser
for value in good faith of such receipt from a thief for failure to
deliver the goods to him as the thief has no title to the goods. (see
Sec. 41[a].)
SEC. 13. Altered receipts. — The alteration of a receipt
shall not excuse the warehouseman who issued it from
any liability if such alteration was:
(a) Immaterial;
(b) Authorized; or
(c) Made without fraudulent intent.
If the alteration was authorized, the warehouseman
shall be liable according to the terms of the receipt as altered. If the alteration was unauthorized but made without
fraudulent intent, the warehouseman shall be liable according to the terms of the receipt as they were before alteration.
Material and fraudulent alteration of a receipt shall not
excuse the warehouseman who issued it from liability to
deliver, according to the terms of the receipt as originally
issued, the goods for which it was issued but shall excuse
him from any other liability to the person who made the
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Sec. 13
alteration and to any person who took with notice of the alteration. Any purchaser of the receipt for value without notice of the alteration shall acquire the same rights against
the warehouseman which such purchaser would have acquired if the receipt had not been altered at the time of the
purchase.
Effects of alteration on liability
of warehouseman.
The liability of a warehouseman under a warehouse receipt
which has been altered depends on the nature of the alteration as
follows:
(1) Alteration immaterial. — If the alteration is immaterial (the
tenor of the receipt is not changed like the substitution of the real
name of a party), whether fraudulent or not, authorized or not,
the warehouseman is liable on the altered receipt according to its
original tenor;
(2) Alteration material. — If the alteration is material (the tenor
of the receipt is changed like the erasure of the name of a party
and the insertion of another), but authorized, the warehouseman
is liable according to the terms of the receipt as altered;
(3) Material alteration innocently made. — If the alteration
is material but innocently made though unauthorized, the
warehouseman is liable on the altered receipt according to its
original tenor; and
(4) Material alteration fraudulently made. — If the alteration
is material and fraudulently made, the warehouseman is liable
according to the original tenor of the receipt to a purchaser of
the receipt for value without notice, and even to the alterer and
subsequent purchasers with notice except that as regards to the
last two, the warehouseman’s liability is limited only to delivery
as he is excused from any liability. However, “it is difficult to
conceive what liability the draftsman intended to excuse.”
(Commissioner’s note.)
Under this section, it is clear that even a fraudulent alteration
cannot divest the title of the owner of stored goods and the
warehouseman is, therefore, liable to return them to the owner.
Sec. 14
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(Ibid.) But a bona fide holder acquires no right to the goods under
a negotiable receipt which has been lost or stolen or to which the
indorsement of the depositor has been forged. (93 C.J.S. 435.)
SEC. 14. Lost or destroyed receipts. — Where a negotiable receipt has been lost or destroyed, a court of competent jurisdiction may order the delivery of the goods upon
satisfactory proof of such loss or destruction and upon
the giving of a bond with sufficient sureties to be approved
by the court to protect the warehouseman from any liability or expense, which he or any person injured by such delivery may incur by reason of the original receipt remaining outstanding. The court may also in its discretion order
the payment of the warehouseman’s reasonable costs and
counsel fees.
The delivery of the goods under an order of the court as
provided in this section, shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt
has been or shall be negotiated for value without notice of
the proceedings or of the delivery of the goods.
Liability of warehouseman in case
of lost or destroyed receipts.
Under Sections 8 and 11, the warehouseman is not liable
for non-delivery without the surrender of the receipt. Indeed,
even if the receipt is claimed to have been lost or destroyed, it
is essential that the court shall pass upon the question and make
sure that the receipt is really lost or destroyed, before the goods
are delivered or a new receipt is issued for the rights of possible
innocent purchasers of the original receipt may be involved.
(Commissioner’s note; see Sec. 52.)
Under Section 14, a competent court may order the delivery
of the goods only (1) upon proof of the loss or destruction of the
receipt; and (2) upon the giving of a bond with sufficient sureties
to be approved by the court. Note, however, that by virtue of the
second paragraph, the warehouseman is still liable to a holder of
the receipt for value without notice since the warehouseman can
secure himself on the bond given.
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Secs. 15-16
SEC. 15. Effect of duplicate receipts. — A receipt upon
the face of which the word “duplicate” is plainly placed
is a representation and warranty by the warehouseman
that such receipt is an accurate copy of an original receipt
properly issued and uncancelled at the date of the issue of
the duplicate, but shall impose upon him no other liability.
Liability of warehouseman
as to duplicate.
When more than one negotiable receipt is issued for the
same goods, the word “duplicate” must be plainly placed by
the warehouseman upon the face of every such receipt, except
the one first issued. (Sec. 6.) In such case, the warehouseman
warrants (1) that the duplicate is an accurate copy of the original
receipt; and (2) such original receipt is uncancelled at the date of
the issue of the duplicate.
Except for breach of this warranty, the duplicate imposes
no other liability upon the warehouseman. It results that the
warehouseman may not be compelled to deliver the goods by
virtue of the duplicate only unless the procedure provided for in
Section 14 is followed.
SEC. 16. Warehouseman cannot set up title in himself. — No title or right to the possession of the goods, on
the part of the warehouseman, unless such title or right
is derived directly or indirectly from a transfer made by
the depositor at the time of or subsequent to the deposit
for storage, or from the warehouseman’s lien, shall excuse
the warehouseman from liability for refusing to deliver the
goods according to the terms of the receipt.
Ownership not a defense for refusal
to deliver.
The warehouseman cannot refuse to deliver the goods on
the ground that he has acquired title or right to the possession
of the same unless such title or right is derived (1) directly or
indirectly from a transfer made by the depositor at the time of
the deposit for storage or subsequent thereto; or (2) from the
warehouseman’s lien.
Secs. 17-18
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Section 16 is based on the doctrine of estoppel.
SEC. 17. Interpleader of adverse claimants. — If more
than one person claims the title or possession of the
goods, the warehouseman may, either as a defense to an
action brought against him for non-delivery of the goods,
or as an original suit, whichever is appropriate, require all
known claimants to interplead.
SEC. 18. Warehouseman has reasonable time to determine validity of claims. — If someone other than the depositor or person claiming under him has a claim to the
title or possession of the goods, and the warehouseman
has information of such claim, the warehouseman shall
be excused from liability for refusing to deliver the goods,
either to the depositor or person claiming under him or
to the adverse claimant, until the warehouseman has had
a reasonable time to ascertain the validity of the adverse
claim or to bring legal proceedings to compel all claimants
to interplead.
Duty of warehouseman where there
are several claimants.
If there are several claimants to the goods, the warehouseman
must determine within a reasonable time the validity of the
conflicting claims (Sec. 18.), and deliver to the person whom he
finds is entitled to the possession of the goods. However, he is
not excused from liability in case he makes a mistake. (see Sec.
10.)
For his own protection, the warehouseman must bring a
complaint in interpleader (Sec. 1, Rule 62, Rules of Court.) and
require the different claimants to litigate among themselves.
(Sec. 17.) In such case, the warehouseman will be relieved from
liability in delivering the goods to the person whom the court
finds to have a better right.
ILLUSTRATIVE CASE:
Arrastre operator who received into its custody shipment of cases
of milk for two consignees delivered cases more than as per markings
but less as per bill of lading to one of them.
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Sec. 19
Facts: A (arrastre operator) received into its custody a
shipment of 5,000 cases of milk, of which 3,171 cases were
marked for B, as consignee, and 1,829 cases were marked for
C, but, according to the bills of lading in A’s possession, B was
entitled only to 3,000 cases and C to 2,000 cases.
A actually delivered 1,913 cases to C which is only 87 cases
short of 2,000 cases as per bill of lading.
Issue: Is A liable to C for the undelivered cases of milk?
Held: Yes. The legal relationship between an arrastre
operator and the consignee is akin to that of a depositor and
warehouseman.
As custodian of the goods discharged from the vessel, it
was A’s duty like that of any other depositary to take good care
of the goods and to turn them over to the party entitled to their
possession. Under this particular set of circumstances, A should
have withheld delivery because of the discrepancy between
the bill of lading and the markings and conducted its own
investigation not unlike that under Section 18 of the Warehouse
Receipts Law, or called upon the parties to interplead such as
in case under Section 17 of the same law, in order to determine
the rightful owner of the goods. (Lu Kian vs. Manila Railroad Co.
and Manila Port Service, 19 SCRA 5 [1967].)
Liability of warehouseman
to rightful claimant.
Where a warehouseman does not compel interpleader in a
case requiring it, he is liable for refusal to deliver to the rightful
claimant, and where he neither interpleads nor investigates, he
will, after lapse of a reasonable time, be held guilty of conversion
as of the date of original demand for the goods. The question of
what constitutes a reasonable time is one of fact for determination
in accordance with the circumstances of the particular case.
Section 18 does not apply to cases where the warehouseman
himself makes a claim to the goods. (67 C.J. 536.)
SEC. 19. Adverse title is no defense except as above
provided. — Except as provided in the two preceding sections and in sections nine and thirty-six, no right or title
of a third person shall be a defense to an action brought
Sec. 20
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by the depositor or person claiming under him against the
warehouseman for failure to deliver the goods according
to the terms of the receipt.
Adverse title of third person not a defense
for refusal to deliver.
The warehouseman cannot set up title in himself as an
excuse for his failure or refusal to deliver the goods. (Sec. 16.)
Neither can the warehouseman, as a depositary for hire, set up
an adverse title in another as an excuse for his failure to deliver
property to his bailor on demand. (Wetherington vs. Laurens
Country Farmer’s Corp. Warehouse Co., 98 S.E. 228.)
The exceptions to the above rule are the cases provided for in
Sections 9, 17, 18, and 36.
SEC. 20. Liability of warehouseman for non-existence
or misdescription of goods. — A warehouseman shall be
liable to the holder of a receipt for damages caused by the
non-existence of the goods or by the failure of the goods
to correspond with the description thereof in the receipt at
the time of its issue. If, however, the goods are described
in a receipt merely by a statement of marks or labels upon
them, or upon packages containing them or by a statement
that the goods are said to be goods of a certain kind, or
that the packages containing the goods are said to contain
goods of a certain kind, or by words of like import, such
statements, if true, shall not make liable the warehouseman issuing the receipt, although the goods are not of the
kind which the marks or labels upon them indicate, or of
the kind they were said to be by the depositor.
Liability of warehouseman for non-existence
or misdescription of goods.
As a general rule, the warehouseman is under obligation to
deliver the identical property stored with him and if he fails to
do so, he is liable directly to the owner. (93 C.J.S. 472.)
As against a bona fide purchaser of a warehouseman receipt,
the warehouseman is estopped, whether the receipt is negotiable
or not, to deny that he has received the goods described in it.
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Sec. 21
(Ibid., 483.) But if the description consists merely of marks or
labels upon the goods or upon the packages containing them,
etc., the warehouseman is not liable even if the goods are not
of the kind as indicated in the marks or labels. “Anyone at all
familiar with the business of a warehouseman knows that he
could not transact business if he were required to examine the
contents of each package, barrel or box of merchandise which
was delivered to him and so packed as to cover and conceal the
real nature of the goods delivered.” (Dean vs. Driggs, 33 N.E.
326.)
SEC. 21. Liability for care of goods. — A warehouseman
shall be liable for any loss or injury to the goods caused
by his failure to exercise such care in regard to them as a
reasonably careful owner of similar goods would exercise,
but he shall not be liable, in the absence of an agreement
to the contrary, for any loss or injury to the goods which
could not have been avoided by the exercise of such care.
Liability of warehouseman for loss
due to lack of care.
The warehouseman is required to exercise ordinary or
reasonable care in the custody of the goods, that is, the care a
reasonably careful owner would exercise over similar goods of
his own. Such care is also known as “the diligence of a good
father of a family.” (Art. 1163, Civil Code.)
In the absence of any agreement to the contrary, the warehouseman is not liable for any loss or injury to the goods which
could not have been avoided by the exercise of such care. Of
course, what constitutes ordinary or reasonable care depends
upon the circumstances such as the character and value of the
property and the character and location of the warehouse. (93
C.J.S. 452.)
While the warehouseman may limit his liability to an agreed
value of the property received in case of loss, he cannot, however,
stipulate with the depositor that he would not be responsible for
any loss even if caused by his negligence. Such stipulation is void
under Section 3.
Secs. 22-24
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SEC. 22. Goods must be kept separate. — Except as
provided in the following section, a warehouseman shall
keep the goods so far separate from goods of other depositors and from other goods of the same depositor for
which a separate receipt has been issued, as to permit at
all times the identification and redelivery of the goods deposited.
SEC. 23. Fungible goods may be commingled if warehouseman authorized. — If authorized by agreement or by
custom, a warehouseman may mingle fungible goods with
other goods of the same kind and grade. In such case, the
various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled
to such portion thereof as the amount deposited by him
bears to the whole.
SEC. 24. Liability of warehouseman to depositors of
commingled goods. — The warehouseman shall be severally liable to each depositor for the care and redelivery of
his share of such mass to the same extent and under the
same circumstances as if the goods had been kept separate.
Commingling of deposited goods.
As a general rule, a warehouseman may not mingle goods
belonging to depositors. (Sec. 22.) In the case of fungible goods
(see Sec. 58.), like rice, sugar, etc., the warehouseman may mingle
them with the goods of the same kind and grade provided that
he is authorized by agreement or custom. (Sec. 23.) In that case,
the different owners become co-owners of the whole mass. (Sec.
24.)
Sections 22 and 23 are intended for the benefit of the holders
of the receipts and not for the benefit of the warehouseman. It
would, indeed, be strange if the warehouseman could escape
his liability to the owner of the goods by the simple process
of commingling them without authorization. (Bank of P.I. vs.
Herridge, 47 Phil. 57 [1924].)
Under the Civil Code, “unless there is stipulation to the
contrary, the depositary may commingle grain or other articles
of the same kind and quality.” (Art. 1976.)
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Sec. 25
SEC. 25. Attachment or levy upon goods for which a
negotiable receipt has been issued. — If goods are delivered to a warehouseman by the owner or by a person
whose act in conveying the title to them to a purchaser
in good faith for value would bind the owner, and a negotiable receipt is issued for them, they cannot thereafter,
while in the possession of the warehouseman, be attached
by garnishment, or otherwise, or be levied upon under an
execution, unless the receipt be first surrendered to the
warehouseman, or its negotiation enjoined. The warehouseman shall in no case be compelled to deliver up the
actual possession of the goods until the receipt is surrendered to him or impounded by the court.
Attachment or levy of negotiable
receipt.
The warehouseman has the direct obligation to hold possession of the goods for the original owner or for the person to
whom the negotiable receipt of title has been duly negotiated.
(see Sec. 41.) While in possession of such warehouseman, the
goods cannot be attached or levied upon under an execution unless:
(1) the document be first surrendered; or
(2) its negotiation is enjoined; or
(3) the document is impounded by the court.
Delivery of goods covered by an outstanding negotiable receipt.
The warehouseman cannot be compelled to deliver up the
possession of the goods until the receipt is surrendered to him or
impounded by the court. This prohibition is for the protection of
the warehouseman since he could be made liable to a subsequent
purchaser for value in good faith. (see Art. 1519 of the Civil Code
which is substantially the same as Sec. 25.)
Where depositor not owner.
The provisions of Section 25 do not apply if the person
depositing is not the owner of the goods (like a thief) or one who
Secs. 26-27
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185
has no right to convey title to the goods binding upon the owner.
Neither does it apply to actions for recovery or manual delivery
of goods by the real owner nor to cases where the attachment is
made before the issuance of the negotiable receipt of title.
The rights acquired by attaching creditors cannot be defeated
by the issuance of a negotiable receipt of title thereafter. (see
International Bredding Co. vs. Terminal Warehouse Co., 126 Atl.
902.)
SEC. 26. Creditor’s remedies to reach negotiable
receipts. — A creditor whose debtor is the owner of a
negotiable receipt shall be entitled to such aid from courts
of appropriate jurisdiction, by injunction and otherwise, in
attaching such receipt or in satisfying the claim by means
thereof as is allowed at law or in equity in these Islands
in regard to property which cannot readily be attached or
levied upon by ordinary legal process.
Remedies of creditor or owner
of negotiable receipt.
Here, what is attached by the creditor is the negotiable receipt
in the debtor’s possession and not the goods covered by such
receipt. (see Art. 1520 of the Civil Code which is substantially the
same as Sec. 26; also Secs. 32, 35.)
Inasmuch as the goods themselves in the warehouseman’s
possession cannot readily be attached or levied upon by ordinary
legal process, as limited by the preceding article, this article
expressly gives the court full power to aid by injunction and
otherwise a creditor seeking to get a negotiable receipt covering
such goods.
SEC. 27. What claims are included in the warehouseman’s lien. — Subject to the provisions of Section thirty, a
warehouseman shall have a lien on goods deposited or on
the proceeds thereof in his hands, for all lawful charges for
storage and preservation of the goods; also for all lawful
claims for money advanced, interest, insurance, transportation, labor, weighing, cooperating and other charges and
expenses in relation to such goods, also for all reason-
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Sec. 28
able charges and expenses for notice and advertisements
of sale, and for sale of the goods where default had been
made in satisfying the warehouseman’s lien.
Extent of warehouseman’s lien.
The warehouseman’s lien over the goods deposited with him
is his security, just like a pledge or mortgage, for the payment of
the charges, money advanced, and other expenses enumerated
in Section 27. The lien exists for the benefit of warehouseman as
defined in Section 58, and not a casual bailee (Alton vs. New York
Taxicab Co., 121 N.Y. Supp. 271.), and even though the receipt is
negotiable.
Section 30 prescribes the extent of lien when the receipt is
negotiable.
SEC. 28. Against what property the lien may be enforced. — Subject to the provisions of Section thirty, a
warehouseman’s lien may be enforced:
(a) Against all goods, whenever deposited, belonging
to the person who is liable as debtor for the claims in
regard to which the lien is asserted; and
(b) Against all goods belonging to others which have
been deposited at any time by the person who is liable as
debtor for the claims in regard to which the lien is asserted
if such person had been so entrusted with the possession
of the goods that a pledge of the same by him at the time
of the deposit to one who took the goods in good faith for
value would have been valid.
Goods subject to lien.
(1) Goods belonging to depositor or his principal. — Under
Section 28, the warehouseman may enforce his lien (a) against
the goods of the depositor who is liable to the warehouseman
as debtor whenever such goods are deposited; and (b) against
goods of other persons stored by the depositor who is liable to
the warehouseman as debtor with authority to make a valid
pledge.
Sec. 29
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The evident purpose of the law in the second case is to give
the warehouseman a lien for charges against the goods of persons
who are primarily liable for the charge incurred, and who by
their agreement create the relation of debtor and creditor. (67 C.J.
550.)
(2) Goods stored in fraud of true owner’s rights. — There is nothing in the Act giving a warehouseman a lien on goods belonging
to another and stored by a stranger in fraud of the true owner’s
rights. If such were the effect of the Act, then a warehouseman
could become a legalized receiver of stolen goods at least to the
extent of the charges. (Farrell vs. Harlem Terminal Storage Warehouse, 172 N.Y. [supp.] 306; see Sec. 31.)
SEC. 29. How the lien may be lost. — A warehouseman
loses his lien upon goods:
(a) By surrendering possession thereof; or
(b) By refusing to deliver the goods when a demand is
made with which he is bound to comply under the provisions of this Act.
Loss and waiver of lien upon goods.
(1) By surrendering possession of goods. — Under subsection
(a), a warehouseman loses his lien upon goods by voluntarily
surrendering the possession thereof without requiring payment
of his lien. It will be presumed that the lien has been waived
or abandoned where the warehouseman permits a depositor to
remove the goods but not where the property is taken without
the warehouseman’s consent or by force or under a legal process,
as by a replevin suit. (Zahner vs. Harnish, 24 S.W. [2d] 641.)
(a) Involuntarily parting with possession of goods ordinarily does not result in loss of his lien by a warehouseman.
(93. C.J.S. 59.)
(b) A warehouseman who has released his lien by the
surrender of the goods may not thereafter claim a lien on
other goods of the same depositor for unpaid charges on the
goods surrendered if the goods were delivered to him under
different bailments (covered by separate receipts). But he has
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Sec. 29
a lien on retained goods for charges on surrendered goods
where all goods were received under one and in the same
bailment. (Ibid.)
(2) By wrongfully refusing to deliver goods. — Under subsection
(b), the warehouseman also loses his lien by refusing to deliver the
goods where the holder of the receipt offers to comply with the
requirements of Section 8. The loss of the warehouseman’s lien,
however, does not necessarily mean the extinguishment of the
depositor’s obligation to pay the warehousing fees and charges
which continues to be a personal liability. In case the warehouse
receipt has been pledged as security, the depositor-pledgor, as
owner, not the pledgee, continues to be liable. The pledgee does
not become the owner of the goods covered by the receipt nor
can he appropriate the goods to himself. (see Art. 2088, Civil
Code.) The fact that the receipt was delivered and endorsed in
blank to the pledgee does not alter the situation, the purpose of
such indorsement being merely to transfer juridical possession of
the goods to the pledgee and to forestall any possible disposition
thereof on the part of the pledgor. (Phil. National Bank vs. Sayo,
Jr., 292 SCRA 202 [1998].)
Valid reasons for refusing to deliver goods.
Where a valid demand by the lawful holder of a warehouse
receipt for the delivery of goods is refused by the warehouseman
despite the absence of a lawful excuse provided by the law itself,
the warehouseman’s lien is thereafter concommitantly lost as to
what the law deems a valid demand. Section 8 enumerates what
must accompany a demand while as regards the reasons which a
warehouseman may invoke to legally refuse to effect delivery of
the goods covered by the receipt, these are:
(1) that the holder of the receipt does not satisfy the conditions
prescribed in Section 8;
(2) that the warehouseman has legal title in himself on the
goods, such title or right being derived directly or indirectly from
a transfer made by the depositor at the time of or subsequent to
the deposit for storage, or from the warehouseman’s lien (Sec.
16.);
Sec. 29
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(3) that the warehouseman has legally set up the title or right
of third persons as lawful defense for nondelivery of the goods
as follows:
(a) Where the warehouseman has been requested by or
on behalf of the person lawfully entitled to a right of property
of or possession in the goods, not to make such delivery
(Sec. 10.), in which case, the warehouseman may, either as a
defense to an action brought against him for nondelivery of
the goods, or as an original suit, whichever is appropriate,
require all known claimants to interplead (Sec. 17.);
(b) Where the warehouseman had information that the
delivery about to be made was to one not lawfully entitled
to the possession of the goods (Sec. 10.), in which case, the
warehouseman shall be excused from liability for refusing
to deliver the goods, either to the depositor or person
claiming under him or to the adverse claimant, until the
warehouseman has had a reasonable time to ascertain the
validity of the adverse claims or to bring legal proceedings to
compel all claimants to interplead (Sec. 18.); and
(c) Where the goods have already been lawfully sold to
third persons to satisfy a warehouseman’s lien, or have been
lawfully sold or disposed of because of their perishable or
hazardous nature (Sec. 36.);
(4) that the warehouseman having a lien valid against the
person demanding the goods refuses to deliver the goods to him
until the lien is satisfied (Sec. 31.); and
(5) that the failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand for delivery
and refusal, the goods were stolen or destroyed by fire, flood, etc.,
without any negligence on his part, unless he has contracted so
as to be liable in such case, or that the goods have been taken by
the mistake of a third person without the knowledge or implied
assent of the warehouseman, or some other justifiable ground for
non-delivery. (67 C.J. 532; Phil. National Bank vs. Sayo, Jr., supra,
citing 3 Teodorico C. Martin, Commentaries and Jurisprudence
on the Phil. Commercial Laws, 1989 ed., pp. 553-554.)
190
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 30-33
SEC. 30. Negotiable receipt must state charges for
which the lien is claimed. — If a negotiable receipt is issued
for goods, the warehouseman shall have no lien thereon,
except for charges for storage of those goods subsequent
to the date of the receipt, unless the receipt expressly enumerates other charges for which a lien is claimed. In such
case, there shall be lien for the charges enumerated so
far as they are within the terms of Section twenty-seven
although the amount of the charges so enumerated is not
stated in the receipt.
Lien where receipt negotiable.
With the exception of the charges for storage and preservation
of goods for which a negotiable receipt has been issued, the lien
exists only for the other charges expressly enumerated in the
receipt so far as they are written within the terms of Section 27
although the amount of the said charges is not stated.
As to claims not specified in the receipt, the warehouseman
shares pro rata with the other creditors of the depositor the balance
of the proceeds of the sale for the satisfaction of said claims (Secs.
33, 34.) after deducting the charges for storage.
SEC. 31. Warehouseman need not deliver until lien is
satisfied. — A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.
SEC. 32. Warehouseman’s lien does not preclude other remedies. — Whether a warehouseman has or has not a
lien upon the goods, he is entitled to all remedies allowed
by law to a creditor against a debtor for the collection from
the depositor of all the charges and advances which the
depositor has expressly or impliedly contracted with the
warehouseman to pay.
SEC. 33. Satisfaction of lien by sale. — A warehouseman’s lien for a claim which has become due may be satisfied as follows:
The warehouseman shall give a written notice to the
person on whose account the goods are held, and to any
other person known by the warehouseman to claim an in-
Sec. 33
THE WAREHOUSE RECEIPTS LAW
Obligations and Rights of Warehousemen Upon Their Receipts
terest in the goods. Such notice shall be given by delivery in person or by registered letter addressed to the last
known place of business or abode of the person to be notified. The notice shall contain:
(a) An itemized statement of the warehouseman’s
claim, showing the sum due at the time of the notice and
the date or dates when it became due;
(b) A brief description of the goods against which the
lien exists;
(c) A demand that the amount of the claim as stated in
the notice, of such further claim as shall accrue, shall be
paid on or before a day mentioned, not less than ten days
from the delivery of the notice if it is personally delivered,
or from the time when the notice shall reach its destination, according to the due course of post, if the notice is
sent by mail; and
(d) A statement that unless the claim is paid within the
time specified, the goods will be advertised for sale and
sold by auction at a specified time and place.
In accordance with the terms of a notice so given, a
sale of the goods by auction may be had to satisfy any
valid claim of the warehouseman for which he has a lien on
the goods. The sale shall be had in the place where the lien
was acquired, or, if such place is manifestly unsuitable for
the purpose, at the nearest suitable place. After the time
for the payment of the claim specified in the notice of the
depositor has elapsed, an advertisement of the sale, describing the goods to be sold, and stating the name of the
owner or person on whose account the goods are held,
and the time and place of the sale, shall be published once
a week for two consecutive weeks in a newspaper published in the place where such sale is to be held. The sale
shall not be held less than fifteen days from the time of
the first publication. If there is no newspaper published in
such place, the advertisement shall be posted at least ten
days before such sale in not less than six conspicuous
places therein.
From the proceeds of such sale, the warehouseman
shall satisfy his lien, including the reasonable charges
of notice, advertisement, and sale. The balance, if any, of
191
192
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 34-35
such proceeds shall be held by the warehouseman, and
delivered on demand to the person to whom he would have
been bound to deliver or justified in delivering the goods.
At any time before the goods are so sold, any person
claiming a right of property or possession therein may
pay the warehouseman the amount necessary to satisfy
his lien and to pay the reasonable expenses and liabilities
incurred in serving notices and advertising and preparing for the sale up to the time of such payment. The warehouseman shall deliver the goods to the person making
payment if he is a person entitled, under the provision of
this Act, to the possession of the goods on payment of
charges thereon. Otherwise, the warehouseman shall retain possession of the goods according to the terms of the
original contract of deposit.
SEC. 34. Perishable and hazardous goods. — If goods
are of a perishable nature, or by keeping will deteriorate
greatly in value, or by their odor, leakage, inflammability
or explosive nature, will be liable to injure other property,
the warehouseman may give such notice to the owner, or
to the person in whose name the goods are stored, as is
reasonable and possible under the circumstances, to satisfy the lien upon such goods, and to remove them from
the warehouse, and in the event of the failure of such persons to satisfy the lien and to remove the goods within the
time so specified, the warehouseman may sell the goods
at public or private sale without advertising. If the warehouseman, after a reasonable effort, is unable to sell such
goods, he may dispose of them in any lawful manner, and
shall incur no liability by reason thereof.
The proceeds of any sale made under the terms of this
section shall be disposed of in the same way as the proceeds of sales made under the terms of the preceding section.
SEC. 35. Other methods of enforcing lien. — The remedy for enforcing of a lien herein provided does not preclude any other remedies allowed by law for the enforcement of a lien against personal property nor bar the right
to recover so much of the warehouseman’s claim as shall
not be paid by the proceeds of the sale of the property.
Secs. 31-36
THE WAREHOUSE RECEIPTS LAW
Obligations and Rights of Warehousemen Upon Their Receipts
193
SEC. 36. Effect of sale. — After goods have been lawfully sold to satisfy a warehouseman’s lien, or have been
lawfully sold or disposed of because of their perishable or
hazardous nature, the warehouseman shall not thereafter
be liable for failure to deliver the goods to the depositor, or
owner of the goods, or to a holder of the receipt given for
the goods when they were deposited, even if such receipt
be negotiable.
Enforcement of warehouseman’s lien.
The remedies available to a warehouseman for enforcing his
lien are as follows:
(1) By refusing to deliver the goods until the lien is satisfied
(Sec. 31.);
(2) By causing the extrajudicial sale of the property and
applying the proceeds to the value of the lien (Secs. 33, 34.); and
(3) By filing a civil action for collection of the unpaid charges
or by way of counterclaim in an action to recover the property
from him. (93 C.J.S. 502.), or such other remedies allowed by
law for the enforcement of a lien against personal property (Sec.
35.), or to a creditor against his debtor, for the collection from
the depositor of all the charges which the depositor has bound
himself to pay. (Sec. 32.)
A warehouseman is entitled to all the remedies allowed by
law to a creditor against his debtor for the collection from the
depositor of all charges which the depositor is obliged to pay.1
(Sec. 32.), including remedies allowed by law for the enforcement
of a lien against personal property and recovery of any deficiency
in case it exists after sale of the property. (Sec. 35.)
Effect of sale of goods.
(1) In case of sale of goods, the warehouseman is not liable
for nondelivery even if the receipt given for the goods when they
1
Art. 1177. The creditors, after having pursued the property in possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the actions of the
latter for the same purpose, save those which are inherent in his person; they may also
impugn the acts which the debtor may have done to defraud them.
194
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 31-36
were deposited be negotiated. (Sec. 36.) This rule necessarily
qualifies the right of a purchaser of a negotiable receipt.
(Commissioners’ note.)
(2) Where the sale was made without the publication
required and before the time specified by the law (Sec. 33, par. 2.),
such sale is void and the purchaser of the goods acquires no title
in them. (Eastern Paper Mills Co., Inc. vs. Republic Warehousing
Corp., [CA] 71 O.G. 23 [1975].)
Acts for which warehouseman
is liable.
The following are acts for which a warehouseman may be
held liable:
(1) Failure to stamp “duplicate” on copies of a negotiable
receipt (Sec. 6.);
(2) Failure to place “non-negotiable” or “not negotiable” on
a non-negotiable receipt (Sec. 7.);
(3) Misdelivery of the goods (Sec. 10.);
(4) Failure to effect cancellation of a negotiable receipt upon
delivery of the goods (Sec. 11.);
(5) Issuing receipt for non-existing goods or misdescribed
goods (Sec. 20.);
(6) Failure to take care of the goods (Sec. 21.); and
(7) Failure to give notice in case of sale of goods to satisfy his
lien (Sec. 33.) or because the goods are perishable or hazardous.
(Sec. 34.)
— oOo —
195
Chapter 3
NEGOTIATION AND TRANSFER OF
RECEIPTS
SEC. 37. Negotiation of negotiable receipt by delivery.
— A negotiable receipt may be negotiated by delivery:
(a) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer; or
(b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of
the receipt has indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods
are deliverable to bearer or where a negotiable receipt has
been indorsed in blank or to bearer, any holder may indorse
the same to himself or to any other specified person, and
in such case the receipt shall thereafter be negotiated only
by the indorsement by such indorsee.
Negotiation of negotiable receipt.
The manner of transferring negotiable warehouse receipt by
negotiation is the same as in the negotiation of promissory notes
and bills of exchange under the Negotiable Instruments Law.
(Act No. 2031.)
(1) A negotiable warehouse receipt is negotiable by delivery
if the goods are deliverable to the bearer or when it is indorsed
in blank or to the bearer by the person to whose order the goods
are deliverable or by a subsequent indorsee. An indorsement
is in blank when the holder merely signs his name at the back
195
196
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 38-39
of the receipt without specifying to whom the goods are to be
delivered.
(2) If the receipt is specially indorsed, it becomes an order
receipt and negotiation can only be effected by the indorsement
of the indorsee. A special indorsement specifies the person to
whom or to whose order, the goods are to be delivered. (see
Article 1508 which is substantially the same as Sec. 37.)
SEC. 38. Negotiation of negotiable receipt by indorsement. — A negotiable receipt may be negotiated by the indorsement of the person to whose order the goods are,
by the terms of the receipt, deliverable. Such indorsement
may be in blank, to bearer, or to a specified person. If indorsed to a specified person, it may be again negotiated
by the indorsement of such person in blank, to bearer or
to another specified person. Subsequent negotiation may
be made in like manner.
Negotiation of negotiable receipt
by indorsement.
A negotiable document of title by the terms of which the
goods are deliverable to a person specified therein may be
negotiated only by the indorsement of such person.
(1) If indorsed in blank or to bearer, the document becomes
negotiable by delivery. (Sec. 37.)
(2) If indorsed to a specified person, it may be again
negotiated by the indorsement of such person in blank, to bearer
or to another specified person. Delivery alone is not sufficient.
(see Art. 1509 of the Civil Code which is substantially the same
as Sec. 38.)
SEC. 39. Transfer of receipt. — A receipt which is not
in such form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser or donee.
A non-negotiable receipt can not be negotiated, and
the indorsement of such a receipt gives the transferee no
additional right.
Sec. 40
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
197
Transfer of non-negotiable receipt.
The rights of a person to whom an order receipt has been
transferred by delivery without indorsement are stated in
Sections 42 (par. 1.) and 43.
A non-negotiable receipt of title cannot be negotiated.
Nevertheless, it can be transferred or assigned by delivery. In
such case, the transferee or assignee acquires only the rights
stated in Section 42. Even if the receipt is indorsed, the transferee
acquires no additional right. (see Art. 1511 of the Civil Code
which is substantially the same as Sec. 39.)
Advantages of a negotiable warehouse
receipt.
Some of the advantages of a negotiable warehouse receipt
over one which is non-negotiable are the following:
(1) It protects a purchaser for value and in good faith (Sec.
41.);
(2) The goods covered by the receipt cannot be garnished
or levied upon under execution unless it is surrendered, or
impounded, or its negotiation enjoined (Sec. 25.);
(3) In case of negotiation, the holder acquires the direct
obligation of the warehouseman to hold possession of the goods
for him without notice to such warehouseman (Sec. 41.); and
(4) The goods it covers are not subject to seller’s lien or
stoppage in transitu. (Sec. 49.)
SEC. 40. Who may negotiate a receipt. — A negotiable
receipt may be negotiated:
(a) By the owner thereof; or
(b) By any person to whom the possession or custody
of the receipt has been entrusted by the owner, if, by the
terms of the receipt, the warehouseman undertakes to deliver the goods to the order of the person to whom the possession or custody of the receipt has been entrusted, or if,
at the time of such entrusting, the receipt is in such form
that it may be negotiated by delivery.
198
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 41
Persons who negotiate a receipt.
It will be noticed that the provision does not give a power
to negotiate warehouse receipts equal to that allowed by law in
the case of bills of exchange and promissory notes inasmuch as
neither a thief nor a finder is within the terms of the section.
However, if the owner of the goods permits another to have
the possession or custody of negotiable receipts running to the
order of the latter or to be bearer, it is representation of title
upon which bona fide purchasers for value are entitled to rely
despite breaches of trust or violations of agreement on the part
of the apparent owner. As between two innocent persons, the
loss must fall upon him whose misplaced confidence made the
loss possible. (Siy Cong Bieng & Co. vs. Hongkong & Shanghai
Banking Corp., 56 Phil. 598 [1932]; see Art. 1512 of the Civil Code
which is substantially the same as Sec. 40.)
SEC. 41. Rights of person to whom a receipt has been
negotiated. — A person to whom a negotiable receipt has
been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a
purchaser in good faith for value, and also such title to
the goods as the depositor or person to whose order the
goods were to be delivered by the terms of the receipt had
or had ability to convey to a purchaser in good faith for
value; and
(b) The direct obligation of the warehouseman to hold
possession of the goods for him according to the terms of
the receipt as fully as if the warehouseman had contracted
directly with him.
Rights of person to whom receipt
has been negotiated.
This section specifies the rights of a person to whom a
negotiable warehouse receipt has been duly negotiated, either
by delivery, in the case of a receipt to bearer, or by indorsement
and delivery, in the case of a receipt to order. The rights acquired
by such person are:
Sec. 42
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
199
(1) The title of the person negotiating the receipt over the
goods covered by the receipt;
(2) The title of the person (depositor or owner) to whose
order by the terms of the receipt the goods were to be delivered,
over such goods; and
(3) The direct obligation of the warehouseman to hold
possession of the goods for him, as if the warehouseman directly
contracted with him.
One who purchases, therefore, a negotiable receipt issued to
a thief acquires no right over the goods as the thief has no right to
transfer notwithstanding that such purchaser is innocent. But the
purchaser acquires a good title where the owner, by his conduct,
is estopped from asserting his title. (see Art. 1513 of the Civil
Code which is substantially the same as Sec. 41.)
SEC. 42. Rights of person to whom receipt has been
transferred. — A person to whom a receipt has been transferred but not negotiated, acquires thereby, as against the
transferor, the title of the goods subject to the terms of any
agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer
to him of such receipt, and thereby to acquire the direct
obligation of the warehouseman to hold possession of the
goods for him according to the terms of the receipt.
Prior to the notification of the warehouseman by the
transferor or transferee of a non-negotiable receipt, the
title of the transferee to the goods and the right to acquire
the obligation of the warehouseman may be defeated by
the levy of an attachment or execution upon the goods by
the creditor of the transferor, or by a notification to the
warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by
the transferor.
Rights of person to whom receipt
has been transferred.
This section refers to the rights of a person to whom a negotiable warehouse receipt (not duly negotiated) has been trans-
200
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 43
ferred (par. 1.) or of the transferee of a non-negotiable document.
(pars. 2 and 3.) The rights of such person are:
(1) The title to the goods as against the transferor;
(2) The right to notify the warehouseman of the transfer
thereof; and
(3) The right, thereafter, to acquire the obligation of the warehouseman to hold the goods for him.
The right of the transferee is not absolute as it is subject to the
terms of any agreement with the transferor. He merely steps into
the shoes of the transferor.
Attachment of goods covered
by receipt.
(1) Receipt non-negotiable. — The transfer of a non-negotiable
document of title does not effect the delivery of the goods covered
by it. Accordingly, before notification, the warehouseman is not
bound to the transferee whose right may be defeated by a levy
of an attachment or execution upon the goods by the creditor of
the transferor or by a notification to such warehouseman of the
subsequent sale of the goods.
(2) Receipt negotiable. — If the receipt is negotiable, the
goods cannot be attached or be levied under an execution unless
the receipt be first surrendered to the warehouseman or its
negotiation enjoined. (see Art. 1514 of the Civil Code which is
substantially the same as Sec. 42.)
SEC. 43. Transfer of negotiable receipt without indorsement. — Where a negotiable receipt is transferred for
value by delivery, and the indorsement of the transferor is
essential for negotiation, the transferee acquires a right
against the transferor to compel him to indorse the receipt,
unless a contrary intention appears. The negotiation shall
take effect as of the time when the indorsement is actually
made.
Rights of transferee of a negotiable
receipt.
This section specifies the rights of a person to whom an order
Sec. 43
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
201
receipt, which may not properly be negotiated by mere delivery,
has been delivered, without indorsement.
They are:
(1) The right to the goods as against the transferor (Sec. 42.);
and
(2) The right to compel the transferor to indorse the receipt.
If the intention of the parties is that the receipt should be
merely transferred, the transferee has no right to require the
transferor to indorse the receipt.
Rule where receipt subsequently
indorsed.
For the purpose of determining whether the transferee is a
purchaser for value in good faith without notice (see Sec. 41.), the
negotiation shall take effect as of the time when the indorsement
is actually made, not at the time the receipt is delivered.
The reason for the rule is because the negotiation becomes
complete only at the time of indorsement. So if by that time
the purchaser already had notice that the title of the seller was
defective, he cannot be considered a purchaser in good faith
though he had no such notice when he bought the receipt. (see
Art. 1515 which is substantially the same as Sec. 43.)
Ownership of goods covered by receipt
negotiated or transferred.
(1) Indorsee or transferee. — For purposes of facilitating commercial transactions, the indorsee or transferee or a warehouse
receipt should be regarded as the owner of the goods covered
by it. In other words, as regard the indorser or transferor even
if he were the owner of the goods, he may not take possession
and dispose of the goods without the consent of the indorsee or
transferee of the warehouse receipt, and as regards third persons,
the holder of a warehouse receipt is the owner of the goods covered by it. (Martinez vs. Phil. National Bank, 93 Phil. 765 [1953].)
(2) Indorser or transferor. — Where a warehouse receipt is
indorsed or transferred to a creditor only to secure the payment of
202
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Sec. 44
a loan or debt, the indorsee or transferee does not automatically
become the owner of the goods covered by the warehouse receipt
but he merely retains the right to keep and with the consent of
the owner to sell them so as to satisfy the obligation from the
proceeds of the sale, this for the simple reason that the transaction
involved is not a sale but only a mortgage or pledge.
Therefore, if the property covered by the warehouse receipt is
lost without the fault of the mortgagee or pledgee or the indorsee
or transferee of the warehouse receipt, the said goods are to be
regarded as lost on account of the real owner, mortgagor or
pledgor. (Ibid.)
(3) Innocent third persons. — Where, however, the rights of
innocent third persons are involved, the indorsee-pledgee of a
warehouse receipt is considered the owner of the goods covered
by it whenever necessary for their protection. (see Sec. 41; Siy
Cong Bieng & Co., Inc. vs. Hongkong and Shanghai Banking
Corp., 56 Phil. 598 [1932]; Phil. Trust Co. vs. Phil. National Bank,
42 Phil. 413 [1921]; Bank of the Phil. Islands vs. Herridge, 47 Phil.
57 [1924]; Roman vs. Asia Banking Corp., 46 Phil. 705 [1924].)
SEC. 44. Warranties on sale of receipt. — A person who
for value, negotiates or transfers a receipt by indorsement
or delivery, including one who assigns for value a claim
secured by a receipt, unless a contrary intention appears,
warrants:
(a) That the receipt is genuine;
(b) That he has a legal right to negotiate or transfer it;
(c) That he has knowledge of no fact which would impair the validity or worth of the receipt; and
(d) That he has a right to transfer the title to the goods
and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been
implied, if the contract of the parties had been to transfer
without a receipt of the goods represented thereby.
Warranties on sale of receipt.
This section treats of the warranties or liabilities of a person
negotiating or transferring a receipt. They are similar to that of
Sec. 45
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
203
a person negotiating an instrument by delivery or by a qualified
indorsement under the Negotiable Instruments Law. (see Sec.
65, NIL.) The liability is limited only to a violation of the four
warranties set forth in Section 44. (see Sec. 45.) Thus, a person
negotiating or transferring a receipt could be held liable as
when, for example, the receipt was a forgery, or he had stolen
it, or he had knowledge that the receipt was invalid for want of
consideration, or that the goods have been damaged.
One who assigns for value a claim secured by a receipt of
title is also liable for the violation of any of the four warranties
enumerated unless a contrary intention appears. (see Art. 1516 of
the Civil Code which is substantially the same as Sec. 44.)
It is the duty of every indorsee to know that all previous
indorsements are genuine, otherwise, he will not acquire a valid
title to the instrument. (Great Eastern Life Ins. Co. vs. Hongkong
& Shanghai Banking Corporation, 43 Phil. 678 [1922].) Under the
Negotiable Instruments Law (see Secs. 65, 66.), the last indorser
warrants that all previous indorsements are genuine.
SEC. 45. Indorser not a guarantor. — The indorsement
of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations.
Liability of person negotiating
or transferring receipt.
The indorsement of negotiable instrument has a double
effect. It is at the same time a conveyance of the instrument
and a contract of the indorser with the indorsee that on certain
conditions the indorser will pay the instrument if the party
primarily liable fails to do so.
The indorsement of a warehouse receipt amounts merely
to a conveyance by the indorser, not a contract of guaranty.
(see 2 Williston on Sales, pp. 627-628.) Accordingly, an indorser
of a receipt shall not be liable to the holder if, for example, the
warehouseman fails to deliver the goods because they were lost
due to his fault or negligence. (see Art. 1517 of the Civil Code
which is substantially the same as Sec. 45.)
204
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 46-47
SEC. 46. No warranty implied from accepting payment
of a debt. — A mortgagee, pledgee or holder for security of
receipt who, in good faith, demands or receives payment
of the debt for which such receipt is security, whether from
a party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or
to warrant the genuineness of such receipt or the quantity
or quality of the goods therein described.
Liability of mortgagee, pledgee
or holder for security.
Under this section, a holder for security of a receipt who in
good faith accepts payment of the debt from a person does not
thereby warrant the genuineness of the receipt nor the quality or
quantity of the goods therein described.
Thus, if C receives from D a warehouse receipt as security for
D’s debt and C delivers it to T who pays him for D, C, assuming
he acts in good faith, is not liable to T in case T cannot obtain
possession of the goods because they do not exist or because the
receipt is not genuine.
SEC. 47. When negotiation not impaired by fraud, mistake or duress. — The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was
a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the receipt was
induced by fraud, mistake, or duress to entrust the possession or custody of the receipt to such person, if the
person to whom the receipt was negotiated, or a person to
whom the receipt was subsequently negotiated paid value
therefor, without notice of the breach of duty, or fraud, mistake or duress.
Validity of negotiation as against
real owner.
(1) Receipt acquired from owner’s agent. — As against the real
owner, a bona fide purchaser of a negotiable warehouse receipt
acquires title to the goods where he purchases from the owner’s
agent, within the actual or apparent scope of his authority; but
Sec. 47
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
205
not where the transfer is made by one other than the owner
without any ostensible authority to issue or negotiate the receipt.
(2) Lost or stolen receipt. — Where the receipt has been lost
or stolen, a bona fide transferee thereof from the thief or finder
acquires no title as against the real owner of the receipt, unless
the latter, by indorsing the receipt in blank and leaving it with
his agent, put it in the power of such agent to steal and negotiate
it. (see 93 C.J.S. 435.) It will be observed that one who takes by
trespass or a finder is not included within the description of
those who may negotiate. (Siy Cong Bieng & Co. vs. Hongkong
& Shanghai Bank, 56 Phil. 598 [1932].)
ILLUSTRATIVE CASE:
Buyer, without having paid for goods purchased, pledged to a
bank the negotiable quedans given by seller who brought action
against bank to recover the quedans or their value.
Facts: S sold hemp (abaca) to R for a certain price. Negotiable
quedans together with the covering invoice were sent by S to
R, without the latter having paid for the hemp. Subsequently, R
pledged the quedans to B (bank) to secure the payment of R’s
pre-existing debt. R died on the evening of the day the quedans
were delivered to B.
S brought action against B to recover the quedans or their
value.
Issue: When the quedans were negotiated, did B acquire
valid title to them?
Held: Yes. The quedans in question were negotiable in
form and pledged by R to B to secure the payment of the preexisting debt of R. They were issued in the name of R and were
duly indorsed by him in blank. It follows that on the delivery
of the quedans to the bank they were no longer the property
of R (indorser) unless he liquidated his debt with B. It is the
intention of the law to facilitate the use of warehouse receipts
as documents of title.
The clear import of Sections 40, 41, and 47 is that if the
owner of the goods permits another to have the possession or
custody of negotiable warehouse receipts running to the order
of the latter or to bearer, it is a representation of title upon
206
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 48-49
which bona fide purchasers for value are entitled to rely despite
breaches of trust or violation of agreement on the part of the
apparent owner. (Ibid.)
SEC. 48. Subsequent negotiation. — Where a person
having sold, mortgaged, or pledged goods which are in
a warehouse and for which a negotiable receipt has been
issued, or having sold, mortgaged, or pledged the negotiable receipt representing such goods, continues in possession of the negotiable receipt, the subsequent negotiation
thereof by the person under any sale, or other disposition
thereof to any person receiving the same in good faith, for
value and without notice of the previous sale, mortgage or
pledge, shall have the same effect as if the first purchaser
of the goods or receipt had expressly authorized the subsequent negotiation.
Effect of subsequent negotiation
by seller, etc.
This section imposes a duty upon the purchaser, mortgagee,
or pledgee of goods for which a negotiable receipt has been issued,
or of the negotiable receipt itself, to require the negotiation of the
receipt to him otherwise, his failure will have the same effect as
an express authorization on his part to the seller, mortgagor or
pledgor in possession of such receipt to make any subsequent
negotiation.
The subsequent purchaser, however, must have taken the
receipt in good faith and for value in order to acquire a better
right.
SEC. 49. Negotiation defeats vendor’s lien. — Where a
negotiable receipt has been issued for goods, no seller’s
lien or right of stoppage in transitu shall defeat the rights of
any purchaser for value in good faith to whom such receipt
has been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who
issued such receipt of the seller’s claim to a lien or right
of stoppage in transitu. Nor shall the warehouseman be
obliged to deliver or justified in delivering the goods to
an unpaid seller unless the receipt is first surrendered for
cancellation.
Sec. 49
THE WAREHOUSE RECEIPTS LAW
Negotiation and Transfer of Receipts
207
Indorsee’s right superior to vendor’s
lien.
Under this section, an innocent holder of a negotiable
warehouse receipt has a better right to the goods for which the
receipt is given than the vendor who has a vendor’s lien upon
such goods. (see Sec. 47.) So, the warehouseman is not obliged
to deliver or justified in delivering the goods to an unpaid seller
unless the receipt is first surrendered for cancellation. (Secs. 49,
54.)
The term “purchaser,” as used in Section 49, includes
mortgagee and pledgee. (see Sec. 58[a]; Roman vs. Asia Banking
Corporation, 46 Phil. 705 [1924].)
— oOo —
208
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TRANSACTIONS
Chapter 4
CRIMINAL OFFENSES
SEC. 50. Issue of receipt for goods not received. — A
warehouseman, or any officer, agent, or servant of a warehouseman, who issues or aids in issuing a receipt knowing that the goods for which such receipt issued have not
been actually received by such warehouseman, or are not
under his actual control at the time of issuing such receipt,
shall be guilty of a crime, and upon conviction shall be
punished for each offense by imprisonment not exceeding
five years, or by a fine not exceeding ten thousand pesos,
or by both.
Possession of goods by warehouseman.
Under Section 50, it is made an offense to issue a receipt
unless the property is actually in storage.
In accordance with the definition of warehouseman, generally,
warehouse receipts are issued for the goods or merchandise of
others stored with the warehouseman. (see Sec. 58[a].) But it is
essential to the validity of a warehouse receipt that the goods
or merchandise, for which the receipt is issued, shall be in the
warehouseman’s possession, that is, stored in his warehouse,
under his care and control at the time the receipt is issued, and a
receipt is a nullity as to goods described therein which are not in
existence, or not in the warehouse, when the receipt is given. (93
C.J.S. 421-422.)
SEC. 51. Issue of receipt containing false statement.
— A warehouseman, or any officer, agent or servant of a
warehouseman, who fraudulently issues or aids in fraudulently issuing a receipt for goods knowing that it contains
208
Secs. 52-54
THE WAREHOUSE RECEIPTS LAW
Criminal Offenses
any false statement, shall be guilty of a crime, and upon
conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding
two thousand pesos, or by both.
SEC. 52. Issue of duplicate receipt not so marked. — A
warehouseman or any officer, agent, or servant of a warehouseman, who issues or aids in issuing a duplicate or
additional negotiable receipt for goods knowing that a former negotiable receipt for the same goods or any part of
them is outstanding and uncancelled, without plainly placing upon the face thereof the word “Duplicate” except in
the case of a lost or destroyed receipt after proceedings as
provided for in Section fourteen, shall be guilty of a crime,
and upon conviction shall be punished for each offense
by imprisonment not exceeding five years, or by a fine not
exceeding ten thousand pesos, or by both.
SEC. 53. Issue for warehouseman’s goods of receipt
which does not state that fact. — Where they are deposited with or held by a warehouseman goods of which he
is owner, either solely or jointly or in common with others, such warehouseman, or any of his officers, agents,
or servants who, knowing this ownership, issues or aids
in issuing a negotiable receipt for such goods does not
state such ownership, shall be guilty of a crime, and upon
conviction, shall be punished for each offense by imprisonment not exceeding one year, or by a fine not exceeding
two thousand pesos, or by both.
SEC. 54. Delivery of goods without obtaining negotiable receipt. — A warehouseman, or any officer, agent, or
servant of a warehouseman, who delivers goods out of the
possession of such warehouseman, knowing that a negotiable receipt the negotiation of which would transfer the
right to the possession of such goods is outstanding and
uncancelled, without obtaining the possession of such receipt at or before the time of such delivery, shall, except in
the cases provided for in Sections fourteen and thirty-six,
be found guilty of a crime, and upon conviction shall be
punished for each offense by imprisonment not exceeding
one year, or by a fine not exceeding two thousand pesos,
or by both.
209
210
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 51-55
SEC. 55. Negotiation of receipt for mortgaged goods.
— Any person who deposits goods to which he has no
title, or upon which there is a lien or mortgage, and who
takes, for such goods a negotiable receipt which he afterwards negotiates for value with intent to deceive and without disclosing his want of title or the existence of the lien
or mortgage, shall be guilty of a crime, and upon conviction, shall be punished for each offense by imprisonment
not exceeding one year, or by a fine not exceeding two
thousand pesos, or by both.
Offenses criminally punishable
by the Act.
Sections 50, 51, 52, 53, 54, and 55 enumerate offenses which
are criminally punishable under the Act.
Ingredients of offense punished
by Section 54.
The offense punished under Section 54 consists of the
following ingredients:
(1) There is delivery of goods out of the possession of the
warehouseman, by the warehouseman himself or by any officer,
agent, or servant of the warehouseman;
(2) The person who causes the delivery has knowledge that
a negotiable receipt for the goods, which would transfer the right
to the possession thereof, is outstanding and uncancelled; and
(3) The person causing the delivery does so without obtaining
possession of the receipt at or before the time of delivery. (People
vs. Dichupa, [C.A.] 71 O.G. No. 8, p. 974, Feb. 24, 1975.)
Nature of criminal responsibility
under Section 54.
(1) Violation by the warehouseman himself. — Under Section 54,
may a warehouseman be held criminally liable, irrespective of
whether he is a warehouseman in name only, and irrespective of
whether the duties of a warehouseman are actually performed
by somebody else? No, if the accused had nothing to do with the
withdrawal of goods in question.
Secs. 51-55
THE WAREHOUSE RECEIPTS LAW
Criminal Offenses
211
(2) Violation by some other person. — A reading of Section 54
shows that persons other than the warehouseman may be held
liable for violations thereof. The disjunctive use of the word “or”
in the phrase “A warehouseman or any other officer, agent, or
servant of a warehouseman,” imparts an alternative sense. The
criminal responsibility punished by the law is individual, not
attributive, so that the warehouseman should not be punished
even for violations which some other officer, agent, or servant
of the warehouseman may have committed. It is fundamental
in criminal law that unless conspiracy be shown, no one should
be made to suffer for offenses committed by another. (People vs.
Dichupa, supra.)
(3) Possibility that right to goods sold has been transferred to a
third person. — In order that a warehouseman may be punished
under Section 54, for having delivered goods from his warehouse
to a person other than the one entitled thereto according to the
corresponding securities, it is not necessary that the right of
possession to such stored goods has been transferred to a third
person. It is sufficient that such right could have been transferred
to said third person in the course of his transactions with the
depositor in whose name the receipt of the stored goods was
issued. (People vs. Goco, 35 O.G. 2618, cited in T.C. Martin,
Commentaries and Jurisprudence on the Phil. Commercial Laws
[1961], pp. 467-468.)
— oOo —
212
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Chapter 5
INTERPRETATION
SEC. 56. Case not provided for in Act. — Any case not
provided for in this Act shall be governed by the provisions of existing legislation, or in default thereof, by the
rule of the law merchant.
History and meaning of law merchant.
The law merchant (or the custom of merchants) from which
developed the rules of bills and notes, sales of goods, partnerships,
guaranty, insurance, and agency, originated in the unwritten
customs of merchants in different commercial countries. It
consisted of usages of trade in different departments of commerce
proved in court and ratified by legal decisions, upon the
assumption that persons entering upon transactions in different
departments of trade dealt with each other on the footing of any
custom or usage generally prevailing in those departments, so
that the usage, is “engrafted upon or incorporated with’’ the law
and accordingly binding on the courts. (see Babb & Martin, op.
cit., pp. 5, 13-14.)
(1) From the thirteenth century, maritime and commercial
cases were determined in accordance with the customs of
merchants and by merchant courts. It was not until the eighteenth
century that merchants were encouraged, if not compelled,
to try their causes in the common law courts. (Ibid., 14.) The
usage adopted by the courts is the origin of the so-called “law
merchant” as to negotiable instruments. (10 C.J.S. 406.)
(2) The law merchant in the United States followed closely
that of England. With the tremendous extension of commerce
212
Secs. 57-58
THE WAREHOUSE RECEIPTS LAW
Interpretation
213
and its instrumentalities during the last quarter of the nineteenth
century, the imperative need of uniformity in the law of negotiable
instruments found expression in the Negotiable Instruments Law
of 1897, which has been adopted by every state in the Union, the
last being Georgia in 1924. (Babb & Martin, op. cit., pp. 14-15.)
SEC. 57. Name of Act. — This Act may be cited as the
Warehouse Receipts Act.
SEC. 58. Definitions. — (a) In this Act, unless the content or subject matter otherwise requires:
“Action” includes counterclaim, set-off, and suits in
equity as provided by law in these Islands.
“Delivery” means voluntary transfer of possession
from one person to another.
“Fungible goods” means goods of which any unit is,
from its nature or by mercantile custom, treated as the
equivalent of any other unit.
“Goods” means chattels or merchandise in storage, or
which has been or is about to be stored.
“Holder” of a receipt means a person who has both
actual possession of such receipts and a right of property
therein.
“Order” means an order by indorsement on the receipt.
“Owner” does not include mortgagee.
“Person” includes a corporation or partnership or two
or more persons having a joint or common interest.
To “purchase” includes to take as mortgage or as
pledge.
“Purchaser” includes mortgagee and pledgee.
“Receipt” means a warehouse receipt.
“Value” is any consideration sufficient to support
simple contract. An antecedent or pre-existing obligation,
whether for money or not, constitutes value where a
receipt is taken either in satisfaction thereof or as security
thereof.
214
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Secs. 59-61
“Warehouseman” means a person lawfully engaged in
the business of storing goods for profit.
(b) A thing is done “in good faith” within the meaning
of this Act when it is in fact done honestly, whether it be
done negligently or not.
SEC. 59. Application of Act. — The provisions of this
Act do not apply to receipts made and delivered prior to
the taking effect hereof.
SEC. 60. Repeals. — All acts and laws and parts thereof inconsistent with this Act are hereby repealed.
SEC. 61. Time when Act takes effect. — This Act shall
take effect ninety days after its publication in the Official
Gazette of the Philippines shall have been completed.
ENACTED: February 5, 1912.
— oOo —
215
V
GUARANTY AND SURETYSHIP*
(Arts. 2047-2084.)
Chapter 1
NATURE AND EXTENT OF GUARANTY
ART. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called
a suretyship. (1822a)
Definition of guaranty.
Guaranty, properly so-called, is defined in paragraph 1 of the
above article.
It is a contract between the guarantor and creditor.
In its broad sense, guaranty includes pledge and mortgage
because the purpose of guaranty may be accomplished not only
by securing the fulfillment of an obligation contracted by the
principal debtor through the personal guaranty of a third person
but also by furnishing to the creditor for his security, property
with authority to collect the debt from the proceeds of the same
in case of default. (see 11 Manresa 151-152.)
*Title XV, Book IV, Civil Code.
215
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
216
Art. 2047
Governing law.
With the enactment of the new Civil Code, the classification
of guaranty into commercial and civil (or non-commercial) has
been abolished. (see Art. 2270[2].)
Guaranty is now primarily regulated by Title XV of Book IV
(Arts. 2047-2084.) of the new Civil Code, subject to its transitional
provisions. (Arts. 2252-2259.)
Characteristics of the contract.
The following are its characteristics:
(1) It is accessory because it is dependent for its existence
upon the principal obligation guaranteed by it;
(2) It is subsidiary and conditional because it takes effect
only when the principal debtor fails in his obligation subject to
limitation (see Arts. 2053, 2058, 2063, 2065.);
(3) It is unilateral because —
(a) it gives rise only to a duty on the part of the guarantor
in relation to the creditor and not vice versa although after its
fulfillment, the principal debtor becomes liable to indemnify
the guarantor1 (Art. 2066.) but this is merely an incident of the
contract; and also because
(b) it may be entered into even without the intervention
of the principal debtor (Art. 2050.); and
(4) It is a contract which requires that the guarantor must
be a person distinct from the debtor because a person cannot
be the personal guarantor of himself. A person cannot be both
the primary debtor and the guarantor of his own debt as this
is inconsistent with the very purpose of a guarantee which is
for the creditor to proceed against a third person if the debtor
defaults in his obligation. (Velasquez vs. Solidbank Corporation,
550 SCRA 119 [2008].) However, in real guaranty, like pledge
(Art. 2093.) and mortgage (Art. 2124.), a person may guarantee
his own obligation with his personal or real properties. (see 12
Manresa 155-156.)
1
The contract between the guarantor and the debtor is called contract of indemnity.
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
217
Classification of guaranty.
(1) Guaranty in the broad sense:
(a) Personal — This refers to guaranty properly socalled or guaranty in the strict sense. (Art. 2047.) Here, the
guarantee is the credit given by the person who guarantees
the fulfillment of the principal obligation; or
(b) Real — Here, the guaranty is property, movable or
immovable. If immovable, the guaranty is in the form of
real mortgage (Art. 2124.) or antichresis (Art. 2132.) and
if movable, in the form of pledge (Art. 2093.) or chattel
mortgage. (Art. 2140.)
(2) As to its origin:
(a) Conventional. — One constituted by agreement of the
parties (Art. 2051, par. 1.);
(b) Legal. — One imposed by virtue of a provision of law
(Ibid.); or
(c) Judicial. — One required by a court to guarantee the
eventual right of one of the parties in a case. (Ibid.)
(3) As to consideration:
(a) Gratuitous. — One where the guarantor does not
receive any price or remuneration for acting as such (Art.
2048.); or
(b) Onerous. — One where the guarantor receives
valuable consideration for his guaranty. (Ibid.)
(4) As to the person guaranteed:
(a) Single. — One constituted solely to guarantee or
secure performance by the debtor of the principal obligation
(Art. 2051, par. 2.); or
(b) Double or sub-guaranty. — One constituted to secure
the fulfillment by the guarantor of a prior guaranty. (Ibid.)
(5) As to its scope and extent:
(a) Definite. — One where the guaranty is limited to the
principal obligation only, or to a specific portion thereof (Art.
2055, par. 2.); or
218
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2047
(b) Indefinite or simple. — One where the guaranty includes
not only the principal obligation but also all its accessories
(e.g., interests) including judicial costs. (Ibid.)
Note: Guaranty may also be continuing or not. (see Art.
2053.)
Law applicable to contract of suretyship.
Suretyship may be defined as a relation which exists where
one person (principal or obligor) has undertaken an obligation
and another person (surety) is also under a direct and primary
obligation or other duty to a third person (obligee), who is
entitled to but one performance, and as between the two who are
bound, the one rather than the other should perform. (see Agro
Conglomerates, Inc. vs. Court of Appeals, 348 SCRA 450 [2000].)
Specifically, suretyship is a contractual relation resulting
from an agreement whereby one person, the surety, engages to be
answerable to a third person for the debt, default, or miscarriage
of another known as the principal. (Garcia, Jr. vs. Court of
Appeals, 191 SCRA 493 [1990]; Visayan Surety & Insurance Corp.
vs. Court of Appeals, 364 SCRA 631 [2001].)
(1) The second paragraph of Article 2047 states the law
applicable to the contract of suretyship. It covers Articles 1207
to 1222, Title I (Obligations), Chapter 3 (Different Kinds of
Obligations), Section 4 (Joint and Solidary Obligations), Book IV
(Obligations and Contracts) of the Civil Code. If a person binds
himself solidarily with the principal debtor, the contract is called
suretyship and the guarantor is called a surety. (Phil. National
Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956].)
(2) In a solidary obligation, a solidary debtor is himself a
principal debtor. Hence, a solidary debtor cannot be considered a
guarantor of his co-debtor. Whenever applicable, the provisions
on guaranty (Arts. 2047-2048.) also apply to suretyship. (see
Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co.,
101 Phil. 494 [1957].) It has been held that the provisions of the
Civil Code on guaranty, other than the benefit of excussion, are
applicable and available to the surety. (Autocorp. Group vs. Intra
Strata Assurance Corp., 556 SCRA 250 [2008].)
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
219
Common law guaranty and suretyship.
Under the old Civil Code, it was held by the Supreme Court
that the civil law suretyship is nearly synonymous with the
common law guaranty, and the civil law relationship existing
between co-debtors liable in solidum is similar to the common
law suretyship.2 (Castellvi de Higgins and Higgins vs. Sellner, 41
Phil. 142 [1921].)
Where party binds himself solidarily
with principal debtor.
Since guaranty consists in an undertaking to secure the
fulfillment of an obligation contracted by another in case the latter
should fail to do so, it is quite possible for a guarantor to bind
himself solidarily with the principal debtor without affecting the
nature of the contract.
It all depends upon the terms of the contract or the intention
of the third person. Thus, if his intention is not to convert himself
into a principal debtor but merely to constitute himself as a
guarantor although binding himself solidarily with him, action
may be brought against him outright by reason of the said
solidarity but he retains his character as a guarantor and all the
rights inherent in a guarantor by reason of payment by him.
This case of guaranty under which guarantor binds himself
solidarily must not be confused with suretyship as contemplated
2
Nevertheless, a distinction must be made between a surety as a co-debtor under
a suretyship agreement and a joint and solidary co-debtor. As elucidated in Escaño vs.
Ortigas (526 SCRA 26 [2007]): [A] suretyship requires a separate debtor to whom the
surety is solidarily bound by way of an ancillary obligation of segregate identity from the
obligation between the principal debtor and the creditor. The suretyship does bind the
surety to the creditor, inasmuch as the latter is vested with the right to proceed against
the former to collect the credit in lieu of proceeding against the principal debtor for the
same obligation. At the same time, there is also a legal tie created between the surety
and the principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the principal debtor, such
obligation is extinguished. At the same time, the surety may seek reimbursement from
the principal debtor for the amount paid, for the surety does in fact “become subrogated
to all the rights and remedies of the creditor.” (see Diamond Builders Conglomeration vs.
Country Bankers Insurance Corporation, 540 SCRA 194 [2007].)
220
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2047
in the second paragraph of Article 2047.3 (see 11 Manresa 175-177;
Stevenson & Co., Ltd. vs. Climaco, [C.A.] 36 O.G. 1571.)
It has been held, however, that where a party signs a
promissory note as a co-maker and binds herself to be jointly
and severally or solidarily liable “with the principal maker of the
note in case, the latter defaults in the payment of the loan, such
undertaking of the said party is deemed to be that of a surety
as an insurer of the debt, not of a guarantor who warrants the
solvency of the debtor. (Palmares vs. Court of Appeals, 288 SCRA
422 [1998].)
Nature of surety’s undertaking.
(1) Liability is contractual and accessory but direct. — Suretyship is a contractual relation. The surety’s obligation is not an
original and direct one for the performance of his act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, his liability to the creditor or promisee of the
principal is said to be direct, immediate, primary and absolute.
In other words, he is directly, primarily, and equally bound
with the principal as original promisor although he possesses no
direct or personal interest over the latter’s obligations nor does
he receive any benefit therefrom (Garcia, Jr. vs. Court of Appeals,
191 SCRA 493 [1990]; Phil. National Bank vs. Pineda, 197 SCRA
1 [1991]; see Phil. National Bank vs. Court of Appeals, 198 SCRA
767 [1991]; Molino vs. Security Diners International Corporation,
363 SCRA 358 [2001]; Tiu Hiong Guan vs. Metropolitan Bank &
Trust Co., 498 SCRA 246 [2006].) and regardless of whether or not
the principal debtor is financially capable to fulfill his obligations.
(Suico Raltan & Buri Interiors, Inc. vs. Court of Appeals, 490
SCRA 560 [2006].) In law, a surety is considered as being the same
party as the debtor and their liabilities are interwoven as to be
inseparable. (Security Pacific Assurance Corporation vs. TriaInfante, 468 SCRA 527 [2005]; Garon vs. Project Movers Realty &
Dev. Corp., 520 SCRA 317 [2007].)
3
It is a common banking practice to require the “joint and solidary signature’’ (JSS)
of a major stockholder of a corporation or a corporate officer, as an additional security for
loans granted to corporations. (Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA
781 [2000]; see Tañedo vs. Allied Banking Corporations, 374 SCRA 100 [2002].)
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
221
In a 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. Court of Appeals, 288 SCRA 422 [1998].) 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. Court
of Appeals, 310 SCRA 377 [1999].)
(2) Liability is limited by terms of contract. — It is basic that
liability on a bond is contractual in nature and is ordinarily
restricted to the obligation expressly assumed therein. A contract
of surety is not presumed; it cannot extend to more than what is
stipulated. The extent of the surety’s liability is determined only
by the clause of the contract of suretyship as well as the conditions
stated in the bond. It cannot be extended by implication beyond
the terms of the contract. (Phil. Commercial and Industrial Bank
vs. Court of Appeals, 159 SCRA 24 [1988]; Umali vs. Court of
Appeals, 189 SCRA 529 [1990]; Phil. National Bank vs. Court
of Appeals, 198 SCRA 767 [1991]; Central Surety and Insurance
Company, Inc. vs. Ubay, 135 SCRA 58 [1985]; Trade & Investment
Dev. Corp. of the Phils. vs. Roblett Industrial Construction Corp.,
474 SCRA 510 [2005].)
A surety, however, is not released by a change in the contract
which does not have the effect of making its obligation more
onerous. (Intra Strata Assurance Corp. vs. Republic, 557 SCRA
363 [2008].)
(3) Liability arises only if principal debtor is held liable. — A
surety contract is made principally for the benefit of the creditorobligee and this is ensured by the solidary nature of the surety
undertaking. (Intra Strata Assurance Corp. vs. Republic, supra.)
The surety is “considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the obligation
of the latter,” or the liabilities of the two “are so interwoven and
dependent as to be inseparable.”
In other words, if the principal debtor and the surety are held
liable, their liability to pay the creditor would be solidary but
222
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2047
the nature of the surety’s undertaking is such that it does not
incur liability unless and until the principal debtor is held liable.
(Gov’t. of the Phils. vs. Tizon, 20 SCRA 1187 [1967]; Phil. National
Bank vs. Pineda, supra; Empire Insurance Company vs. National
Labor Relations Commission, 294 SCRA 263 [1998].)
(a) 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 [1990].) A
surety not given notice when the claim for damages against
the principal in the replevin bond was heard, is, however,
entitled, as a matter of procedural due process, to be heard
when the judgment for damages against, the principal is
sought to be enforced against the surety’s replevin bond.
(Malayan Insurance Co., Inc. vs. Salao, 90 SCRA 252 [1979];
Yu vs. Ngo Yet Te, 514 SCRA 423 [2007].)
(b) The creditor may sue, separately or together, the
principal debtor and the surety. (Nassco vs. Torrento, 20 SCRA
427 [1967].) Where there are several sureties, the obligee may
proceed against any one of them. (Art. 1216.) A creditor’s
right to proceed against the surely exists independently of
his right to proceed against the principal. Thus, a surety of a
distressed corporation can be sued separately to enforce his
liability as such, notwithstanding an order by the Securities
and Exchange Commission declaring the corporation under
a state of suspension of payment. (Gateway Electronics Corp.
vs. Asianbank Corp., 574 SCRA 698 [2008].)
(c) Except where required by the provisions of the
contract of suretyship, a demand or notice of default is not
required to fix the surety’s liability. (Umali vs. Court of
Appeals, supra.)
(d) An accommodation party, i.e., a person who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other persons” (Sec. 29, Negotiable
Instruments Law [Act No. 2031].), is liable on the instrument
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
223
to a holder for value, notwithstanding that such holder at the
time of taking the instrument knew such person to be only an
accommodation party (Ibid.), although he has the right, after
paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them is, in effect,
that of principal and surety, the accommodation party being
the surety. (People vs. Maniego, 148 SCRA 30 [1987].)
(e) A surety bond is void where there is no principal debtor.
While a surety binds himself to pay jointly and severally,
such an undertaking presupposes that the obligation is to be
enforceable against someone else besides the surety, and the
latter can always claim that it was never its/his intention to
be the sole person obligated thereby. (Manila Railroad Co.,
Inc. vs. Alvendia, 17 SCRA 154 [1986].) It has been held that
the supersedeas bonds in an ejectment case not signed by the
principal obligors, but only by the sureties were void as they
“do not evidence any principal obligation and are devoid
of consideration as to the sureties who have no privity with
the judgment creditor nor any liability to him.’’4 (Singson vs.
Babida, 79 SCRA 111 [1977].)
(4) Surety is not entitled to exhaustion. — A surety is not
entitled to the exhaustion of the properties of the principal
debtor. (see Art. 2059[2].) The reason is that a surety assumes a
solidary liability for the fulfillment of the principal obligation
(Towers Assurance Corp. vs. Ororama Supermart, 80 SCRA 262
[1977].) as an original promissor and debtor from the beginning.
But when demanded by the requirements of justice, the principal
obligor rather than the surety may be required to pay the insured
obligation such as where the former has the necessary amount it
got under the bond with which to comply with the terms thereof.
4
A surety bond is primarily a contract between the surety and the principal obligee,
and the signature of the surety is not only a representation by him of the existence of the
principal obligor but more importantly, an indubitable manifestation of his consent to
be liable in case of default by the principal obligor. In the absence of a law requiring the
signature of the principal obligor to a particular surety bond, the lack of such signature
should not affect the validity of the bond where the existence of the principal obligor is
not in issue.
224
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TRANSACTIONS
Art. 2047
(Association de Agricultores de Talisay-Silay, Inc. vs. TalisaySilay Milling Co., Inc., 88 SCRA 294 [1979].)
(5) Undertaking is to creditor, not to debtor. — Under a contract
of suretyship, the surety’s undertaking is that the principal shall
fulfill his obligation and that the surety shall be relieved of liability
when the obligation secured is performed. The principal cannot
claim that there has been a breach of the surety’s obligation to
him under the suretyship contract when the surety fails or refuses
to pay the debt for the principal’s account. And such failure or
refusal does not have the effect of relieving the principal of his
obligation to pay the premium on the bond furnished by the
surety in consideration of the premium, as long as the liability of
the surety to the obligee subsists.
In a contract of suretyship, unless otherwise expressly provided, the surety makes no covenant or agreement with the principal that it will fulfill the obligation guaranteed for the benefit of
the principal. Such 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
[1957].)
(6) Surety is not entitled to notice of principal’s default. —
Demand on the surety is not necessary before bringing suit
against them, since the commencement of the suit is a sufficient
demand. A surety is not even entitled, as a matter of right, to be
given notice of the principal’s default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of
the surety, his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect of
discharging the surety.
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 in the contract of suretyship. (Palmares vs. Court of
Appeals, supra.)
(7) Prior demand by the creditor upon principal not required.
— A creditor’s right to proceed against the surety alone exists
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
225
independently of his right to proceed against the principal where
both principal and surety are equally bound. (see Art. 1216.)
As soon as the principal is in default, the surety likewise is in
default. The proper remedy of the surety is to pay the debt and
pursue the principal for reimbursement. (Ibid.)
(8) Surety is not exonerated by neglect of creditor to sue principal.
— Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want
of diligence or forbearance does not affect the creditor’s rights
vis-á-vis the surety, unless the surety requires him by appropriate
notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the
principal’s request or without it, and whether it is yielded by
the creditor through sympathy or from an inclination to favor
the principal, or is only the result of passiveness. The neglect of
the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until
the principal becomes insolvent. And, in the absence of proof of
resultant injury, a surety is not discharged by the creditor’s mere
statement that the creditor will not look to the surety, or that he
need not trouble himself. The consequences of the delay, such as
the subsequent insolvency of the principal, or the fact that the
remedies against the principal may be lost by lapse of time, are
immaterial.
The raison de’étre for the rule is that there is nothing to prevent
the creditor from proceeding against the principal at any time. At
any rate, if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may
pay the debt himself and become subrogated to all the rights and
remedies of the creditor. (Ibid.)
Guaranty distinguished from suretyship.
A surety and a guarantor are alike in that each promises
to answer for the debt, default or miscarriage of another. In
our jurisdiction. there are distinctions between a surety and a
guarantor, as follows:
(1) A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the
226
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2047
liability of the guarantor depends upon an independent agreement to pay the obligation if the primary debtor fails to do so;5
(2) A surety is charged as an original promisor, while the
engagement of the guarantor is a collateral undertaking;
(3) The guarantor is secondarily or subsidiarily liable, i.e., he
contracts to pay if, by the use of due diligence, the debt cannot
be paid by the principal, while a surety is primarily liable, i.e.,
he undertakes directly for the payment without reference to
the solvency of the principal (regardless of whether or not the
principal is financially capable to fulfill his obligation), and is
so responsible at once if the latter makes default, without any
demand by the creditor upon the principal whatsoever or any
notice of default (see Castellvi de Higgins & Higgins vs. Sellner,
41 Phil. 142 [1921]; U.S. vs. Varadero dela Quinta, 40 Phil. 48
[1919]; see Palmares vs. Court of Appeals, 258 SCRA 422 [1998].);
(4) A surety is ordinarily, held to know every default of his
principal, while a guarantor is not bound to take notice of the
non-performance of his principal; and
(5) Usually, a surety will not be discharged either by the mere
indulgence of the creditor of the principal or by want of notice
of the default of the principal, no matter how much he may be
injured thereby, while a guarantor is often discharged by the
mere indulgence of the creditor of the principal, and is usually
not liable unless notified of the default of the principal. (Export
and Foreign Loan Guarantee Corp. vs. V.P. Eusebio Construction,
Inc., 434 SCRA 202 [2004].)
5
A surety is usually bound with his principal by the same instrument executed at the
same time and on the same consideration. On the other hand, the contract of guaranty is
the guarantor’s own undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original of his principal is not his contract.
(Phil. Export and Foreign Guarantee Loan Corp. vs. V.P. Eusebio Construction, Inc., infra.)
Although the surety contract is secondary to the principal obligation, the surety assumes
liability as a regular party to the undertaking. (Philippine Bank of Communications vs.
Lim, 455 SCRA 714 [2005].)
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
227
Guarantor not insurer of debt
guaranteed.
It would then follow that while a surety undertakes to pay if
the principal does not pay, without regard to his ability to do so,
the guarantor only binds himself to pay if the principal cannot
or unable to pay. One is the insurer of the debt itself, the other,
an insurer of the solvency of the debtor. (Machetti vs. Hospicio
de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922]; Ong
vs. Philippine Commercial International Bank, 448 SCRA 705
[2005].)
The essence of the obligation of the surety is to pay the
creditor without qualification if the principal debtor does not
pay. (Lirag Textile Mills, Inc. vs. Social Security System, 153 SCRA
338 [1987].) A guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is able to do so. So
the responsibility or obligation assumed by the surety is greater
or more onerous than that of a guarantor. (see Manila Surety &
Fidelity Co. vs. Batu Construction & Co., 101 Phil. 494 [1957];
Palmares vs. Court of Appeals, supra.)
EXAMPLE:
D is indebted to C in the amount of P10,000.00 with G as
guarantor. On the maturity of the obligation, D fails to pay.
C cannot compel G to pay unless the former “has exhausted
all the property of the debtor, and has resorted to all the legal
remedies” against D (Art. 2058.) because the obligation of G is
only secondary.
If, however, G is a surety instead of a guarantor, C can proceed against G immediately upon nonpayment by D without
the exhaustion of the property of D because as surety, he is primarily liable to C. It is not a defense by G that he has not been
informed by C of the demand for payment made on D.
ILLUSTRATIVE CASE:
If promissory note executed by debtor is not paid, promisor
undertakes to pay the same with interest after notice and surrender of
security held by creditor.
C brought action based on a letter written by “G” of the
following tenor:
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
228
Art. 2047
“Dear Sir. I hereby obligate and bind myself, my heirs,
successors, and assigns that if the promissory note executed by
D in your favor and due six months after the date for P10,000.00
is not fully paid at maturity with interest, I will, within 15
days after notice of such default, pay you in cash the sum of
P10,000.00 and interest upon your surrendering to me the 8,000
shares of stock of D held by you as security for the payment of
said note.”
(Sgd.) “G”
Issue: What was the status of G in the transaction — a surety
or a guarantor?
Held: The obligation assumed by G was that of a guarantor.
G was not bound with D by the same instrument executed at
the time and the same consideration, but his responsibility
was secondary, one founded on an independent collateral
agreement. Neither was he jointly and severally liable with D.
(Castellvi de Higgins and Higgins vs. Sellner, 41 Phil. 142 [1921].)
Terminology used by parties
not controlling.
The use of the term “guarantee” or “guarantor’’ however,
is not conclusive that the contract is one of guaranty. The word
“guarantee” is frequently employed in business transactions to
describe not the securing of the debt but an intention to be bound
by a primary or independent obligation. (38 Am. Jur. 2d 10001002.)
Thus, if the promisor says “I guarantee payment,” “I will see
you paid” or “I will pay if he does not pay,” or uses equivalent
words, the promise standing alone is collateral or subsidiary, yet
under all circumstances of the case, it may be adjudged original
or an independent one (Reiss vs. Memije, 15 Phil. 350 [1910].),
as where a corporation is referred to as guarantor but at the
same time the agreement specifically states that it is “jointly and
severally liable’’ with the principal obligor. (International Finance
Corp. vs. Imperial Textile Mills, Inc., 475 SCRA 149 [2005].) But
if from the language used and the circumstances, the intention
to be liable as a surety cannot be inferred, the promisor must be
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
229
deemed to have bound himself only as guarantor under the rule
of reasonable construction applicable to all contracts.
It is axiomatic that the written word “guarantor’’ prevails
over the typewritten word “witness.’’ In case of conflict, the
written prevails over the printed word. (De Los Santos vs. Vibar,
558 SCRA 437 [2008].)
ILLUSTRATIVE CASES:
1. Lumber was sold to a building contractor who had no
commercial standing on the sole credit of a person who told seller he
would “guarantee” payment.
Facts: S entered into a contract with D (building contractor)
for the repair of a house. D undertook to furnish the necessary
materials. Having no money and no credit, C refused to sell
lumber to D without payment in advance. S accompanied D to
C’s lumber yard and after satisfying C as to his (S’s) financial
responsibility, told C that he would “guarantee” payment for
the lumber.
The circumstances disclosed that the lumber was extended
by C solely and exclusively to S under a verbal agreement with
him. S admitted on the stand that D had no commercial credit
or standing in the community, and that C, after investigation,
absolutely refused to extend him any credit whatever upon any
conditions and that S was well aware of the fact.
C brought action against S for the purchase price of the
lumber delivered to D.
Issue: Did S assume liability as a guarantor or as an original
promisor?
Held: Upon the facts, it is evident that S used the word
“guaranteed” not in its technical sense but rather that after
satisfying C as to his own financial responsibility, he obligated
himself to pay for the lumber delivered to D for use in his
house. Hence, S is primarily liable for the price of the lumber.
If goods are sold upon the sole credit and responsibility
of the party who makes the promise then, even though they
be delivered to a third person, there is no liability of the third
person to which that of the party promising can be collateral
and consequently, such a promise to pay does not require a
writing or memorandum to be enforceable by action. (Reiss vs.
Memije, supra.)
230
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2047
Note: Under the Statute of Frauds (infra.), the promise of a
surety or original promisor may be proved by oral evidence.
————
————
————
2. “We hereby guarantee compliance with the terms and
conditions of the contract.”
Facts: By a written agreement, D undertook to construct a
building for C. One of the conditions was that D should obtain
the “guarantee” of FSC. The following indorsement appears
upon the contract: “For value received we hereby guarantee
compliance with the terms and conditions as outlined in the
above contract.
FSC.
(Sgd.) “Y, Vice President.”
Issue: Was the undertaking assumed by FSC that of
guarantor or surety?
Held: “It is true that notwithstanding the use of the words
“guarantee” or “guaranty,” circumstances may be shown
which convert the contract into one of suretyship but such
circumstances do not exist in the present case; on the contrary
it appears affirmatively that the contract is the guarantor’s
separate undertaking in which the principal does not join, that
it rests on a separate consideration moving from the principal,
and that although it is written in continuation of the contract for
the construction of the building, it is a collateral undertaking
separate and distinct from the latter.
All of these circumstances are distinguishing features of
contracts of guaranty.” (Machetti vs. Hospicio de San Jose and
Fidelity & Surety Co., 43 Phil. 297 [1922].)
————
————
————
3. President of a corporation bound himself “as guarantor” for
the loan contracted by him for corporation.
Facts: G executed an “Agreement of Loan” of the following
tenor:
“In my capacity as the President of X Corporation as controlling stockholder and at the same time as guarantor for the
same, I do by these presents contract a loan of P12,000.00, the
receipt of which is hereby acknowledged from Y Corporation,
for which I undertake, bind, and agree to use the loan as surety
cash deposit for registration with the Securities and Exchange
Art. 2047
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
231
Commission of the incorporation papers relative to X Corporation, and to pay the same amount with 12% interest to Y Corporation x x x.”
Issue: Should G be held as a surety instead of a guarantor?
Held: Under the terms of the contract, G expressly bound
himself only as guarantor. A guaranty must be express (Art.
2055.) and it would be violative of the law to consider a party to
be bound as surety when the very word used in the agreement
is “guarantor,” and there are no circumstances in the record
from which it can be deduced that his liability is that of a surety.
(Piczon vs. Piczon, 61 SCRA 67 [1974].)
Guaranty and indorsement distinguished.
There are well-defined distinctions between the contract of
an indorser and that of a guarantor of a commercial paper, to wit:
(1) The contract of indorsement is primarily that of transfer,
while the contract of guaranty is that of security;
(2) The liability of a guarantor is more extensive than that of
an indorser. 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 absolutely from
all liability thereon, whether he has suffered any actual damage
or not (see Secs. 65, 66, 71, Negotiable Instruments Law [Act No.
2031].), whereas failure in either or both of these particulars does
not, as a general rule, work an absolute discharge of a guarantor’s
liability, but he is discharged only to the extent of the loss which
he may have suffered in consequence thereof;
(3) A guarantor warrants the solvency of the promisor which
the indorser does not, he being answerable on a strict compliance
with the law by the holder, whether the promisor is solvent or
not; and
(4) A guarantor cannot be sued as promisor, but an indorser
may be sued. (see Sec. 84, ibid.)
The language employed and the other circumstances of the
particular transaction are the determining factors in ascertaining
whether a particular contract is one of indorsement and not of
guaranty, or vice versa. (28 C.J. 893-894.)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
232
Art. 2048
Guaranty and warranty distinguished.
Although contracts of guaranty and warranty (see Arts.
1546, 1547.6) have some corresponding features, in that each is
an undertaking by one party to another to indemnify or make
good the assured against some possible default or defect, in the
contemplation of the parties, there is, in strict legal contemplation,
difference between them.
The principal distinction is that a guaranty is a contract by
which a person is bound to another for the fulfillment of a promise or engagement of a third party, whereas a warranty is an undertaking that the title, quality, or quantity of the subject matter
of a contract is what it has been represented to be, and relates to
some agreement made ordinarily by the party who makes the
warranty. (38 C.J.S. 1134.)
ART. 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary. (n)
Guaranty generally gratuitous.
The general rule is that a guaranty is gratuitous. It is onerous
only when there is a stipulation to the contrary. (see Arts. 1933,
1956, 1965.)
Cause of contract of guaranty.
(1) Presence of cause which supports principal obligation. —
The cause of the contract is the same cause which supports the
6
Art. 1546. Any affirmation of fact or any promise by the seller relating to the thing
is an express warranty if the natural tendency of such affirmation or promise is to induce
the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No
affirmation of the value of the thing, nor any statement purporting to be a statement of
the seller’s opinion only, shall be construed as a warranty, unless the seller made such
affirmation or statement as an expert and it was relied upon by the buyer.
Art. 1547. In a contract of sale, unless a contrary intention appears, there is:
(1) An implied warranty on the part of the seller that he has a right to sell the thing
at the time when the ownership is to pass, and that the buyer shall from that time have
and enjoy the legal and peaceful possession of the thing;
(2) An implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer.
This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee or other person professing to sell by virtue of authority in fact or law, for the
sale of a thing in which a third person has legal or equitable interest.
Art. 2048
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
233
obligation as to the principal debtor. It is not necessary to prove
any consideration as between the guarantor or surety and the
creditor. The consideration which supports the obligation as to
the principal debtor is a sufficient consideration to support the
obligation of a guarantor or surety. (Pyle vs. Johnson, 9 Phil.
249 [1907]; Phil. Guaranty Co. vs. Dinio, 102 Phil. 991 [1958].)
Otherwise stated, a guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties. (Evangelista vs. Mercator Finance Corp., 409
SCRA 410 [2003].)
(2) Absence of direct consideration or benefit to guarantor. — The
peculiar nature of a guaranty or surety agreement is that it 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. While a contract of guaranty or
surety, like any other contract, must generally be supported
by a sufficient consideration, such consideration need not pass
directly to the guarantor or surety; a consideration moving to the
principal alone will suffice. For a “guarantor or surety is bound by
the same consideration that makes the contract effective between
the principal parties thereto.’’ (Rizal Commercial Banking Corp.
vs. Arro, 115 SCRA 777 [1982].)
The guarantor or surety, therefore, becomes liable for the debt
or duty of another although he possesses no direct or personal
interest over the obligation nor does he receive any benefit therefrom. (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493 [1990].) It
is never necessary that he should receive any part or benefit, if
such there be, accruing to the principal. (Willex Plastic Industries
Corp. vs. Court of Appeals, 256 SCRA 478 [1996].)
Where a surety bond has been accepted by the obligee, it
becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety. (Phil. Pryce
Assurance Corp. vs. Court of Appeals, 230 SCRA 164 [1994].)
ILLUSTRATIVE CASE:
In consideration of dismissal of suit by creditor against debtor,
the latter agreed to pay certain amount with another as guarantor.
234
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2049
Facts: Upon the death of X, who left considerable property,
a litigation ensued between C, X’s widow, and other heirs of
X. A compromise was effected by which D, a son of X, took
over the property pertaining to the estate of X at the same time
agreeing to pay P100,000.00 to C, payable, first, in P40,000.00
cash upon the execution of the document of compromise and
the balance, in three equal installments. G affixed his name as
guarantor.
Upon D’s failure to pay the balance, C instituted action
against D and G, the latter contending that he received nothing
for affixing his signature as guarantor to the contract and that
in effect the contract was lacking in consideration as to him.
Issue: Is there a consideration for the guaranty?
Held: (1) A guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties thereto. The compromise and dismissal of a
lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which C instituted against D was an
adequate consideration to support the promise on the part of D
to pay the sums stipulated in the contract subject of the action.
(2) It is neither necessary that the guarantor or surety
should receive any part of the benefit, if such there be accruing
to his principal. The true consideration of this contract was
the detriment suffered by C in the former action in dismissing
that proceeding and it is immaterial that no benefit may have
accrued either to the principal (D) or his guarantor (G). (Severino
and Vergara vs. Severino, 56 Phil. 185 [1931].)
ART. 2049. A married woman may guarantee an obligation without the husband’s consent, but shall not thereby
bind the conjugal partnership, except in cases provided by
law. (n)
Married woman as guarantor.
A married woman who acts as a guarantor ordinarily binds
only her separate property. (see Art. 145, Family Code.) However,
she may also bind the community or conjugal partnership
property with her husband’s consent, and even without the
consent of her husband, “in cases provided by law,” such as
Art. 2050
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
235
when the guaranty has redounded to the benefit of the family.
(see Arts. 70, 71, 94[3], 121[3], 122, ibid.)
There is no express prohibition against a married woman
acting as guarantor for her husband.
ART. 2050. If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of Articles 1236 and 1237 shall apply. (n)
Guaranty undertaken without knowledge
of debtor.
Guaranty is unilateral. It exists for the benefit of the creditor
and not for the benefit of the principal debtor who is not a party
to the contract of guaranty.
Furthermore, the creditor has every right to take all possible
measures to secure the payment of his credit. Hence, it can be
constituted without the knowledge and even against the will of
the principal debtor.
Rights of third person who pays.
The rights of a third person who pays or performs the
obligation of the debtor and one who guarantees the obligation
of the debtor are similar. Hence, the rules on payment apply.
A person who pays without the knowledge or against the
will of the debtor can recover only insofar as the payment has
been beneficial to the debtor (Art. 1236.) and he “cannot compel
the creditor to subrogate him in his (creditor’s) rights, such as
those arising from a mortgage, guaranty or penalty.” (Art. 1237.)
If he became a guarantor with the knowledge or consent of
the debtor, he “is subrogated by virtue thereof [the payment] to
all the rights which the creditor had against the debtor.” (Art.
2067.)
EXAMPLE:
D owes C P10,000.00. Without the knowledge of D, G
agrees to guarantee the obligation of D.
236
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2051-2052
If G pays C P10,000.00, he can ask reimbursement for
P10,000.00 from D. If P4,000.00 had already been paid by D, then
G is entitled to be reimbursed only for the amount of P6,000.00
because it is only to that amount that D has been benefited. G
can recover P4,000.00 from C who should not have accepted it.
It is but just that C reimburse G for any amount paid by him,
otherwise C would be unduly enriching himself at the evident
expense of G.
Suppose the obligation of D is secured by the mortgage on
a land owned by D. Payment by G without the knowledge or
against the will of D does not give G the right to foreclose the
mortgage because G has no right to subrogation.
ART. 2051. A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with
the latter’s consent, or without his knowledge, or even
over his objection. (1823)
Guaranty by reason of origin.
According to its origin or manner of creation, guaranty may
be conventional, legal, or judicial. (supra.) Judicial guaranty is
one constituted by decree of court not by virtue of a provision of
law or by virtue of an agreement of the parties.
Double or sub-guaranty.
Paragraph 2 refers to a double or sub-guaranty or one constituted to guarantee the obligation of a guarantor. It should not be
confounded with guaranty wherein several guarantors concur.
(see Arts. 2065, 2073.)
ART. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation. (1824a)
Art. 2052
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
237
Necessity of valid principal obligation.
Guaranty is an accessory contract. It is an indispensable
condition for its existence that there must be a principal obligation.
So, if the principal obligation is void it is also void. Note that
Article 2052 speaks about a valid obligation, as distinguished from
a void obligation, and not an existing or current obligation. This
distinction is made clear in the other provisions of Article 2052.
Under Article 2053, a guaranty may also be given as security for
future debts, the amount of which is not yet known. (Diño vs.
Court of Appeals, 216 SCRA 9 [1992].)
A signatory to a guaranty (surety) agreement is liable on
a promissory note for an unpaid loan obtained under that
agreement although he did not sign the promissory note. (Rizal
Commercial Banking Corp. vs. Cerro, 115 SCRA 777 [1982].)
ILLUSTRATIVE CASES:
1. Guarantors are being held liable under a bond filed to secure
compliance with a contract which was subsequently cancelled.
Facts: The municipality of Gasan granted to D fishing
privileges within its jurisdictional waters. To secure the
payment of the license fees for the said privilege, D filed a
bond subscribed by G and H who bound themselves to pay if
D failed to comply with the terms of the contract.
This contract was, however, declared by the Executive
Bureau to be illegal. Accepting this decision, the municipality
thereafter awarded the privilege to another person, who not
only failed to make the deposit required but formally yielded
the privilege granted to D or any other person selected by the
municipal authorities. The municipality then advised D that
the contract was to become effective.
In a case that subsequently arose, the municipality sought
to recover from D, G, and H an amount representing part of the
license fees which D failed to pay for the privilege granted him.
Issue: Are the contract and the bond valid and enforceable?
Held: No. The contract was not only not consummated
but was cancelled. It ceased to be valid from the time it was
cancelled and this being so, neither D nor G and H were bound
to comply with the terms of their respective contracts of fishing
238
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TRANSACTIONS
Art. 2052
privilege and guaranty. A guaranty cannot exist without a valid
obligation. (Municipality of Gasan vs. Marasigan, 63 Phil. 510
[1936].)
————
————
————
2. Surety company seeks recovery of renewal premiums on
bonds which were already null and void upon grant of tax exemption
to principal.
Facts: P withdrew from the Bureau of Customs shipments
of imported goods which were subject to customs duties
and other taxes after posting surety bonds to cover the taxes
due thereon pursuant to Republic Act No. 4086 because its
applications for tax exemptions for said goods were not then
approved by the Board of Industries.
In consideration of the obligation assumed by S (surety
company), P agreed to pay the premiums and cost of
documentary stamps in advance due on the bonds for each
period of (12) months beginning March, 1965 until “said bonds
and its renewals, extensions or substitutions be cancelled in
full by the person or entity guaranteed thereby, or by a court of
competent jurisdiction.”
Condition No. 2 of the original surety bonds reads: “That in
case the application (of P for tax exemption) is approved by the
Board of Industries, then this bond shall be null and void and
of no force and effect.” P stopped paying premiums and costs
of documentary stamps after it was granted tax exemption on
December 19, 1966. S maintains that it has renewed the surety
bonds in March, 1966, more or less eight (8) months, before the
application for tax exemptions was granted.
Issue: Is P liable for accrued premiums and costs of
documentary stamps on renewals of the surety bonds after the
grant of tax exemption to S?
Held: No. Suretyship cannot exist without a valid obligation.
The purported renewals were without consideration at all. S
incurred no risk from the time P’s tax exemption application
was approved. Any renewals were void from the beginning
because the cause or object of said renewals did not exist at the
time of the purported transaction. (Arts. 1409, 1352, and 1353,
Civil Code.) S would not possibly be liable for any violation
under the original surety bonds which were already void and
of no force and effect nor was there a need for a formal release
Art. 2052
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
239
of the surety bonds by the Board of Industries or the Bureau of
Customs.
By express stipulation of the parties themselves, the surety
bonds became null and void upon the grant of tax exemption.
(Plaridel Surety & Insurance Co. vs. Artex Development Company,
Inc., 120 SCRA 827 [1983].)
Guaranty of voidable, unenforceable,
and natural obligations.
A guaranty may secure the performance of a:
(1) voidable contract inasmuch as such contract is binding,
unless it is annulled by a proper action in court (see Art. 1390.7);
or
(2) an unenforceable contract (see Art. 1403.8) because such
contract is not void; or
7
Art. 1390. The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification. (n)
8
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number.
In the following cases, an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the
party charged, or by his agent; evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the
making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise
to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not
less than Five hundred pesos, unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things in action, or pay at the time
some part of the purchase money; but when a sale is made by auction and entry is made
by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and persons on whose account the
sale is made, it is a sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or for the sale
of real property or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
240
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Art. 2053
(3) a natural obligation so that the creditor may proceed
against the guarantor although he has no right of action against
the principal debtor for the reason that the latter’s obligation is not
civilly enforceable. (Art. 1423.9) When the debtor himself offers a
guaranty for his natural obligation, he impliedly recognizes his
liability, thereby transforming the obligation from natural into a
civil one.
ART. 2053. A guaranty may also 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.
(1825a)
Guaranty of future debts.
Such guaranty provided in the above provision is denominated as a continuing guaranty or suretyship.10 It is 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. It covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until
the expiration or termination thereof. (Diño vs. Court of Appeals,
9
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to
compel their performance. Natural obligations, not being based on positive law but on
equity and natural law, do not grant a right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof.
10
In Atok Finance Corp. vs. Court of Appeals (222 SCRA 232 [1993]), the Supreme Court
explained the nature of a continuing surety in this wise: “Comprehensive or continuing
surety agreements are in fact quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such
an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need
to execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor.”
A “continuing guarantee’’ cannot be considered as one of the adhesion where the
surety was free to reject it entirely.’’ (Tañedo vs. Allied Banking Corporation, 374 SCRA
111 [2002].)
Art. 2053
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
241
216 SCRA 9 [1992]; see Gateway Electronics Corp. vs. Asianbank
Corp., 574 SCRA 698 [2008].)
Future debts, even if the amount is not yet known, may be
guaranteed but there can be no claim against the guarantor until
the amount of the debt is ascertained or fixed and demandable.
The reason is that a contract of guaranty is subsidiary.
(1) To secure the payment of a loan at maturity. — A surety agreement by the terms of which the surety binds himself to guarantee
the punctual payment of a loan at maturity and all other obligations or indebtedness which may become due or owing to the
principal by the borrower, together with any and all expenses
which may be incurred by the principal in collecting such obligations or indebtedness provided that the liability of the surety
shall not exceed at any one time as a specified sum is a guaranty
of future debts. (Rizal Commercial Banking Corp. vs. Cerro, 115
SCRA 777 [1982].)
(2) To secure payment of any debt to be subsequently incurred. —
A continuing guaranty or surety is prospective in its operation
and is generally intended to provide security with respect
to future transactions for an indefinite time or until a certain
period. Hence, where the contract states that the guaranty is to
secure advances to be made “from time to time,’’ or obligations
“now in force or hereafter made,’’ it will be construed to be a
continuing one. In other jurisdictions, it has been held that the
use of particular words and expressions such as payment of “any
debt,’’ “any indebtedness,’’ or “any sum,’’ or the guaranty of
“any transaction,’’ or money to be furnished the principal debtor
“at any time,’’ or “on such time’’ that the principal debtor may
require, have been construed to indicate a continuing guaranty.
(Diño vs. Court of Appeals, 216 SCRA 9 [1992], citing 38 C.J.S.
1209; Fortune Motors [Phils.] Corp. vs. Court of Appeals,
267 SCRA 653 [1997]; South City Homes, Inc. vs. BA Finance
Corporation, 371 SCRA 603 [2001]; Philippine Blooming Mills,
Inc. vs. Court of Appeals, 413 SCRA 445 [2003].)
By no means, however, is it meant that in all instances a
contract of guaranty or suretyship, should be prospective in
application. (Willex Plastic Industries Corp. vs. Court of Appeals,
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
242
Art. 2053
256 SCRA 478 [1996].) A guaranty shall be 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. Court
of Appeals, supra.)
(3) To secure existing unliquidated debts. — “Future debts,” as
used above, 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. Of
course, a surety is not bound under any particular principal
obligation until that obligation is born. But there is no theoretical
or doctrinal difficulty in saying that the surety agreement itself is
valid and binding even before the principal obligation intended
to be secured thereby is born, any more than there would be
in saying that obligations which are subject to a condition
precedent (infra.) are valid and binding before the occurrence of
the condition precedent. (Atok Finance Corporation vs. Court of
Appeals, 222 SCRA 232 [1993].)
EXAMPLES:
(1) D and C are partners in business. G may guarantee
the payment by D of C’s share from the profit of the business
which has not yet been ascertained.
Under Article 2053, G cannot be liable to C before such
share is liquidated.
(2) C sold his land to D with G as guarantor for the
payment of the purchase price. It was agreed that C would give
to G the title papers showing that C is in fact the owner of the
land sold. D became insolvent.
In this case, G is liable only after the fulfillment of the
suspensive condition — the production of the proper papers.
(3) Suppose, in the second example, C was given two
(2) months within which to arrange and complete the papers
relating to the property with the understanding that in case of
failure of C to complete the title papers within said period, the
contract of sale shall be deemed automatically cancelled.
Art. 2054
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
243
In this case, the fulfillment of the condition subsequent
— the failure to complete the title papers within the period
stipulated — extinguishes the principal obligation of D to pay
the purchase price as well as the guaranty of G.
Guaranty of conditional obligations.
Obligations to be incurred in the future on the happening of
a condition are covered by the second sentence.
A guaranty may secure all kinds of obligations, be they pure
or subject to a suspensive or resolutory condition. (see Arts.
1179, 1180.) If the principal obligation is subject to a suspensive
condition, the guarantor is liable only after the fulfillment of the
condition. If it is subject to a resolutory condition, the happening
of the condition extinguishes both the principal obligation and
the guaranty.
A conditional obligation may also be secured for it is valid
and binding just like a pure one.
EXAMPLES:
(1) C sold his land to D with G as guarantor for the
payments of the purchase price. It was agreed that C would
give to G the title papers showing that C is, in fact, the owner
of the land sold. D became insolvent.
In this case, G is liable only after the fulfillment of the
suspensive condition — the production of the proper papers.
(2) Suppose, in the above example, C was given two (2)
months within which to arrange and complete the papers
relating to the property with the understanding that in case of
failure of C to complete the title papers within said period, the
contract of sale shall be deemed automatically cancelled.
In this case, the fulfillment of the condition subsequent
— the failure to complete the title papers within the period
stipulated — extinguishes the principal obligation of D to pay
the purchase price as well as the guaranty of C.
ART. 2054. A guarantor may bind himself for less, but
not for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
244
Art. 2054
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor. (1826)
Guarantor’s liability cannot exceed
principal obligation.
(1) Guaranty is a subsidiary and accessory contract. — Inasmuch
as a contract of guaranty is only a subsidiary and accessory
contract, 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. (see Art. 2055, par. 2.) But a
guarantor may bind himself for less than that of the principal.
(Ibid., par. 1.)
EXAMPLES:
(1) D borrowed from C P10,000.00. If G guarantees to
answer for P15,000.00, the guaranty is not rendered void but
he can be made to pay only P10,000.00 because his obligation
cannot exceed the limits of the principal obligation.
If the debt is not secured by a mortgage, and G mortgaged
his land in favor of C, the latter may not foreclose the mortgage
otherwise, G’s liability would be more onerous than that of A,
the principal debtor.
(2) D borrowed from C P15,000.00 with G limiting his
guarantee to P10,000.00. D was able to pay only P10,000.00.
In this case, C can still claim from G the balance of P5,000.00
by virtue of the latter’s guaranty. This is so because the
payment by D must be applied first to the unsecured portion
of P10,000.00 for as regards him, it is more onerous as to the
unsecured amount of P5,000.00.11
(2) Interest, judicial costs, and attorney’s fees as part of damages
may be recovered. — Creditors suing on a suretyship bond may,
however, recover from the surety as part of their damages, interest
at the legal rate, judicial costs (see Art. 2055.), and attorney’s fees
when appropriate (see Art. 2088.), even without stipulation and
even if the surety would thereby become liable to pay more than
11
See Arts. 1252-1254 which provide the rules on application of payments.
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
245
the total amount stipulated in the bond. (see Diño vs. Court of
Appeals, 216 SCRA 92 [1992]; see Republic vs. Court of Appeals,
G.R. No. 103073, March 13, 2001.)
(a) In this case, the surety is made to pay, not by reason
of the contract, but by reason of his failure to pay when
demanded and for having compelled the creditor to resort to
the courts to obtain payment.
(b) Interest does not run from the time the obligation
became due, but from the filing of the complaint (Plaridel
Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co.,
Inc., 100 Phil. 679 [1957]; Tagawa vs. Aldanese, 43 Phil. 852
[1922]; Commonwealth Insurance Corp. vs. Court of Appeals,
421 SCRA 367 [2004]; PNB vs. Luzon Surety Co., Inc., 68
SCRA 207 [1975]; Manila Surety & Fidelity Co., Inc. vs. Court
of Appeals, 191 SCRA 805 [1990].) or from the time demand
was made upon the surety until the principal obligation is
fully paid. (Asian Surety and Insurance Co., Inc. vs. Nolasco,
79 SCRA 472 [1977].)
(3) Penalty may be provided. — Similarly, a surety may be held
liable for the penalty provided for in a bond for violation of the
condition therein. (General Insurance & Surety Co. vs. Republic,
7 SCRA 4 [1963].)
Principal’s liability may exceed
guarantor’s obligation.
The measure of the guarantor’s or surety’s obligation is not,
however, the measure of the principal’s obligation. Thus, the
amount specified in a surety bond as the surety’s obligation
does not limit the extent of the damages that may be recovered
from the principal, the latter’s liability being governed by the
obligation he assumed under his contract. (Visayan Distributors,
Inc. vs. Flores, 92 Phil. 145 [1952].)
ART. 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is stipulated
therein.
If it be simple or indefinite, it shall comprise not only
the principal obligation, but also all its accessories, includ-
246
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Art. 2055
ing 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. (1827a)
Guaranty not presumed.
As a contract, guaranty requires the expression of consent on
the part of the guarantor to be bound. It cannot be presumed
because of the existence of a contract or principal obligation.
(Alvaran vs. Marquez, 11 Phil. 263 [1908].) Thus:
(1) 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. (Bank of the Phil. Islands vs. Coster,
47 Phil. 594 [1925].)
(2) In a case, the credit administrator was authorized by
petitioner corporation to approve loans up to P350,000 without
any security requirement. However, he issued a guaranty for a
loan of P60,000. Held: The guaranty was beyond the authority
of the credit administrator. The phrase “contingent commitment
set forth in the power of attorney’’ cannot be interpreted to
mean “guarantees.’’ The authority of the agent should not be
inferred from the use of vague or general words. Guaranty is not
presumed; it must be expressed. (BA Finance Corp. vs. Court of
Appeals, 211 SCRA 112 [1992].)
Reason for the rule.
Consideration of prudence in the interest of the guarantor
who in many cases finds himself under the harsh necessity of
paying another’s debt without benefit whatsoever for himself is
the reason for the rule. It is true that he who guarantees does
so in the confidence that the debtor can and will pay, but that
confidence could be wrong.
In prescribing the requisite that guaranty to be effective must
be expressly constituted, the law wants, not alone that there
be assurance that the guarantor had the true intention to bind
himself, but also to make certain that, on making it, he proceeded
with consciousness of what he was doing. (see 11 Manresa 234235.)
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
247
Guaranty covered by the Statute
of Frauds.
Guaranty must not only be expressed but must also be
reduced to writing. A contract of guaranty (not suretyship)
falls under the Statute of Frauds since it is “a special promise to
answer for the debt, default or miscarriage of another.”
It “shall be unenforceable by action, unless the same or some
note or memorandum thereof be in writing, and subscribed by
the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary
evidence of its contents.” (Art. 1403[2, a]; Macondray & Co., Inc.
vs. Piñon, 2 SCRA 1109 [1962].)
Under Article 1358 of the Civil Code, a contract of guaranty
need not appear in a public document to be valid or enforceable.
(see Art. 1356.)
Guaranty strictly construed.
Inasmuch as guaranty is a special obligation, it has to be
strictly interpreted against the creditor and in favor of the
guarantor and is not to be extended beyond its terms or specified
limits. (see Standard Oil Co. vs. Cho Chiong, 52 Phil. 612 [1928];
La Insular vs. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil.
567 [1919]; Director of Public Works vs. Sing Juco, 53 Phil. 204
[1929]; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967
[1966].)
If there is any doubt on the terms and conditions of the
guaranty or surety agreements, the doubt should be resolved in
favor of the guarantor or surety. (Phil. National Bank vs. Court of
Appeals, 198 SCRA 767 [1991].)
(1) Liability for obligation stipulated. — A guarantor is liable
only for the obligation of the debtor stipulated upon, and not to
obligations assumed previous to the execution of the guaranty
unless an intent to be so liable is clearly indicated. (El Vencedor
vs. Canlas, 44 Phil. 699 [1923].) This rule is a consequence of the
statutory directive that guaranty is not presumed, etc. (Art. 2055,
par. 1.)
248
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TRANSACTIONS
Art. 2055
To hold the guarantor liable for debts contracted prior to the
guaranty is, in effect, to make him answer for debts incurred
outside of the guaranteed period, and this cannot be done
without his express consent. (Traders Insurance & Surety Co. vs.
Dy Eng Geok, 104 Phil. 806 [1958].)
No liability attaches under a contract of suretyship for
defaults occurring before it is entered into unless an intent to be
liable is indicated. Although a contract of guaranty or suretyship
is ordinarily not to be construed as retrospective, the rule must
yield to the intention of the contracting parties as revealed by the
evidence. (Willex Plastic Industries Corp. vs. Court of Appeals,
256 SCRA 478 [1996]; Olbes vs. China Banking Corporation, 484
SCRA 330 [2006].)
(2) Guaranty to render accounting. — Also, a guaranty that the
debtor will render an accounting “cannot be extended to include
a guaranty that the money due the creditor will be delivered.”
(Uy Aloo vs. Cho Jan King, 27 Phil. 247 [1914].)
(3) Guaranty with a term subsequently cancelled. — Where
the contract guaranteed beginning on January 1 to run until
December 31 or the end of the year is subsequently cancelled,
the guarantor is not liable for non-compliance by the principal
debtor with a subsequent contract which the principal debtor
and the creditor might have entered into on or after January 1
without the guarantor’s intervention. (Municipality of Gasan vs.
Marasigan, 63 Phil. 510 [1936].)
(4) Liability of surety limited to a fixed period. — Where it is
stipulated under a contract of suretyship that the liability of the
surety “under this bond will expire 12 months from date hereof,”
limiting thereby the obligation of the surety to no more than the
period fixed, the surety cannot be bound, for a longer time, unless
the contract has been renewed. The surety must only be bound
in the manner and to the extent, and under the circumstances
which are set forth or which may be inferred from the contract
of guaranty or suretyship, and no farther. (Jollye vs. Barcelon
and Luzon Surety Co., Inc., 68 Phil. 164 [1939]; also Santos vs.
Mejia, 94 Phil. 211 [1953]; Solon vs. Solon, 64 Phil. 729 [1937]; La
Insular vs. Machuca Go Tauco, 39 Phil. 567 [1919]; Diño vs. Court
of Appeals, 216 SCRA 9 [1992].)
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
249
An agreement whereby the sureties bound themselves to
be liable in case of an extension or renewal of the bond without
the necessity of executing another indemnity agreement for the
purpose and without the necessity of being notified of such
extension or renewal is valid. There is nothing in it that militates
against the law, good customs, good morals, public order, or
public policy. (PhilAm General General Insurance Co., Inc. vs.
Mutuc, 61 SCRA 22 [1974]; Auto Group vs. Intra Strata Assurance
Corp., 556 SCRA 250 [2008].)
(5) Liability of surety to expire on maturity of principal obligation.
— Where, however, one of the conditions of the bond filed by the
surety provides that the latter’s liability will expire on the date
of the maturity of the principal obligation, which it interposed
as a defense to an action instituted therefor, such stipulation is
unfair and unreasonable for it practically nullifies the nature
of the undertaking it had assumed. As the terms of the bond
should be given a reasonable interpretation, it is logical to hold
that the liability of the surety attaches as soon as the principal
debtor defaults, and notice thereof is given the surety within a
reasonable time to enable it to take steps to protect its interest.
The surety has a remedy under the law which is to foreclose the
counterbond put up by the principal debtor. (Ongsiako vs. The
World Wide Insurance & Surety Co., Inc., 104 Phil. 61 [1958].)
(6) Liability of surety to pay in case of forfeiture of imported
goods. — Where the surety bound itself to pay the sum of money
mentioned in the bond “in the event that it should be finally
decided that the merchandise herein mentioned should be
forfeited to the Government,” the surety thus guaranteed, not
the legality of the importation, but, merely, the payment of the
appraised value of the goods imported and released, in the event
aforementioned. (Phil. International Surety Co., Inc. vs. Comm.
of Customs, 18 SCRA 1145 [1966].)
(7) Bond requires lessor to report to surety any violation by
lessee. — A bond requiring the lessor (creditor) to report to the
surety any violation by the lessee (debtor) of the lease contract
within five (5) days does not cover defaults incurred prior to the
acceptance by the lessor of the bond and the condition. A contract
of guaranty or suretyship is only prospective, and not retroactive
250
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TRANSACTIONS
Art. 2055
in operation unless a contrary intent is clearly shown. (Pastoral
vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].)
(8) Bond issued to secure defendant from possible damages as a
result of injunction. — A bond solely and expressly issued for the
purpose of securing the prayer for preliminary injunction filed by
the plaintiff and to secure the defendant for whatever damage he
may sustain as a result or by reason of the injunction, if the same
should be declared as wrongfully issued, cannot be executed to
satisfy the defendant’s mortgage claim against the plaintiff. (Jao
vs. Royal Financing Corp., 4 SCRA 1210 [1962].)
(9) Bond issued in favor of plaintiff who filed a case for collection.
— When a surety executes an attachment bond in favor of the
plaintiff who filed a case for collection of a sum of money, it does
not guarantee that the plaintiff’s cause of action is meritorious,
and that it will be responsible for all the costs that may be
adjudicated against its principal in case the action fails. Its
liability on the bond is not to be confounded with the liability of
the principal on the judgment.
The extent of a surety’s liability is determined only by the
clause of the contract of suretyship. It cannot be extended by
implication beyond the terms of the contract (Zenith Insurance
Corp. vs. Court of Appeals, 199 SCRA 485 [1982]; Phil. Commercial
and Industrial Bank vs. Court of Appeals, 159 SCRA 24 [1988].) or
what is stipulated. (Central Surety and Insurance Co. vs. Ubay,
135 SCRA 58 [1985].) Since the liability of the surety cannot be
extended by implication, it follows that the surety cannot be held
liable to the intervenor who did not sign the contract of surety
when the obligation of the surety is limited to the defendants
specified in the contract of surety. (Visayan Surety & Insurance
Corp. vs. Court of Appeals, 364 SCRA 631 [2001].)
But the surety’s liability may be increased beyond the
maximum of the bond by making it liable to pay interest because
of default and the necessity of judicial collection. (PNB vs. Luzon
Surety Co., Inc., 68 SCRA 207 [1975].)
(10) Contract requires that notice of principal’s default be given to
surety. — Except when required by the provisions of the contract
of suretyship, a demand or notice of default is not required to
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
251
fix the surety’s liability. Hence, where the contract stipulates that
notice of the principal’s default be given to the surety, generally
the failure to comply with the condition will prevent recovery
from the surety.
There are certain instances, however, when failure to comply
with the condition will not extinguish the surety’s liability such
as failure to give notice of slight defaults which are waived by
the obligee; or on mere suspicion of possible default; or where,
if a default exists, there is excuse or provision in the contract
exempting the surety from liability therefor; or where the surety
already has knowledge or is chargeable with knowledge of the
default. (Umali vs. Court of Appeals, 189 SCRA 529 [1990].)
ILLUSTRATIVE CASES:
1. At the time of the execution of bond to secure payment of
damages by principal debtor, guarantor had no knowledge that debtor
has already incurred liability.
Facts: An accounting between X Company and D, its agent
for the sale of merchandise, showed that D had failed to pay X
for merchandise of the value of P5,000.00. X thereupon refused
to continue to furnish D merchandise for sale unless he gives a
bond.
Subsequently, G executed a document in favor of X
whereby he bound himself “as surety and guarantor of D to
become liable in case of his inability to pay any such damages,
as X Company may suffer by reason of his failure to return such
goods and merchandise as D may be legally obliged to return.”
It did not appear that at the time of the execution of the
bond G had knowledge of the fact that D was indebted to X
in any sum whatever. X brought action on the bond for goods
furnished to D.
Issue: Should the bond respond for the debt contracted by
D prior to its execution?
Held: No. G was liable only for the value of goods furnished
to D subsequent to the execution of the bond. A contract of
suretyship or guaranty is ordinarily not retrospective and no
liability attaches for defaults occurring before it is entered into
unless an intent to be so liable is indicated either by express
words or by necessary implication.
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Art. 2055
G had a right to rely on the presumption that the suretyship
was prospective and to assume that the merchandise and
accounts for which he bound himself to respond related to
future transactions. (El Vencedor vs. Canlas, 44 Phil. 699 [1923];
see Manila Terminal Co., Inc. vs. Hiponia, 101 Phil. 509 [1957].)
————
————
————
2. At the time of the execution of bond to secure indebtedness
of principal debtor upon its current account with creditor (bank),
surety knew that a large portion of credit granted by creditor on such
account and secured by the bond had already been drawn by debtor.
Facts: The board of directors of corporation X authorized
its treasurer, G, to obtain for X a credit on current account for
P100,000.00 from the Bank of the P.I. The credit was granted and
X began to draw against it even before the formal document of
the agreement for the said credit was executed. Simultaneously
with the execution of said document a month and a half later,
G gave a bond “in his own name as surety” whereby he agreed
to be bound jointly and severally in the sum of P100,000.00.
X continued to draw against its credit with BPI until its
overdraft including interest, amounted to P84,900.00. BPI was
able to collect P43,100.00 from X as a result of an action brought
against X, leaving a balance of P45,700.00 due and unpaid. The
amount received from the bank subsequent to the date of the
bond was only P25,500.00 which is less than P43,100.00, the
amount already collected from X.
Issue: Did the bond cover the amounts received from BPI
prior to its date?
Held: Yes. It is very true that bonds or other contracts of
suretyship are ordinarily not to be construed retrospectively,
but that rule must yield to the intention of the contracting
parties as revealed by the evidence.
In the present case, the circumstances so clearly indicated
that the bond given by G was intended to cover all of the
indebtedness of X upon its current account with BPI. G was
director-treasurer of X and was familiar with its financial affairs.
X had only one current credit account, a fact which was known
to G, and there could be no doubt whatever that the bond was
intended by all the parties to cover the entire account. G well
knew that the time the bond was executed, a large portion of
the credit secured by the bond had already been utilized.
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
The situation would have been different if G at that time
had been ignorant of the fact. (Bank of the P.I. vs. Forester, 59 Phil.
843 [1926].)
————
————
————-
3. Aside from subscribing to a personal bond to guarantee
fulfillment of obligation of creditor’s agent, surety executed an
instrument assuming responsibility for account of creditor’s former
agent.
Facts: To guarantee the fulfillment of the obligation of D,
as agent of X, in the sale of the latter’s petroleum products,
G subscribed to a personal bond in the sum of P3,000.00. By
virtue of the agency, D received from X petroleum to the value
of P14,065.00 and made good to X the amount of P14,000.00
thus leaving a balance of P65.00.
On the same date when G subscribed the P3,000.00 bond,
G signed an instrument in favor of X in which he assumed
responsibility for all the accounts that might be owing to X by
its former agent.
Issue: Could G be held liable for the debt of the former
agent of X which D assumed in virtue of another contract of
which G was not even aware?
Held: No. Under the terms of the bond, G did not answer for
D, save for the latter’s acts by virtue of the contract of agreement
between D and X. A contract of suretyship or guaranty is to be
strictly interpreted and is not to be extended beyond its terms.
(Standard Oil Co. of New York vs. Cho Siong, 52 Phil. 612 [1928].)
————
————
————
4. Contract of lease calls for payment of rent of P23,000.00 “for
each year,” while bond guarantees payment only of P23,000.00 “for
the term of two years.”
Facts: By a lease contract, the municipality of Lemery
granted fishing privilege to D for a period of two years
beginning on January 1, 1921 and ending on December 31,
1922, for the sum of P23,000.00 for each year. Thereafter, G and
H, as bondsmen, executed a document which declared, among
other things, the lease by D of the privilege of fishing referred
to “for the value of P23,000.00 for the term of two years, from
January 1, 1921 to December 31, 1922.”
In said document, G and H obligated themselves jointly
and severally for the payment to the municipality of Lemery
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TRANSACTIONS
Art. 2055
the sum of P46,000.00 in case D, as grantee, shall fail to comply
with the conditions of the bond of which we are informed.” D
failed to pay the sum of P23,000.00 for the year 1922.
Issue: Did G and H bind themselves in the sum of P46,000.00
or P23,000.00?
Held: For P23,000.00. (1) The obligating clause of the
contract of guaranty is quite clear to the effect that the rent to
be paid for the privilege of fishery was P23,000.00 for the full
term of two years. It is true that G and H declared themselves
bound for P46,000.00, but as in all bonds this was only because
the bond was required to be made in double the amount of
the principal liability as an assurance of the performance of the
principal obligation.
(2) The payment of D of the full sum of P23,000.00 for the
year 1921 discharged G and H from all further liability. The
circumstance that the sum of P23,000.00 paid by A was applied
by the municipality to D’s indebtedness for the year 1921 was
without significance as against the sureties, since they were not
parties to the contract of lease and were liable only upon the
contract of suretyship (guaranty) which called for the payment
of only P23,000.00 by the principal. The obligation of a surety
must be express and cannot be extended by implication beyond
its specified limits.
Avancena, C.J., Dissenting: “G, in securing the fulfillment of
the conditions of the contract by D, knew that this contract was
for two years, as clearly stated in the bond which he signed,
and besides, he also knew that the obligation of the principal
obligor, D, was to pay P23,000.00 per year, for in the bond itself
G stated being aware of the conditions of the contract. Through
error, perhaps, it was stated in the bond that he was liable only
to the amount of P46,000.00, the amount of the obligation of
D for one year, because it was required that the bond be for
double the value of the obligation. He cannot, however, take
advantage of this mistake in the instant case which involves
only nonpayment for one year which, after all, is one of the two
years during which he secured the fulfillment of the contract of
the principal debtor D.” (Municipality of Lemery vs. Mendoza and
Blas, 48 Phil. 415 [1925].)
————
————
————
5. Contract of sale calls for payment of purchase price of
P13,000.00, while bond guarantees payment by purchaser only of
entire proceeds from his sale of merchandise purchased.
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
255
Facts: D purchased merchandise from C on credit and
agreed that D would apply the proceeds of its sale to the
discharge of his indebtedness in the amount of P13,000.00, the
purchase price. S, as surety for D, undertook that D would pay
over to C the entire proceeds from the sale of the merchandise.
Issue: Is S liable for the difference between the amount
realized from the sale of the merchandise and the purchase
price of the same?
Held: No. S did not undertake absolutely to pay the sum
of P13,000.00. His agreement was limited to respond for the
performance by D of his undertaking to deliver to C the total
proceeds of the sale of the merchandise for the invoice value
of which a promissory note was given by D. (Wise and Co. vs.
Kelly, 37 Phil. 696 [1918].)
Strictissimi juris rule applicable only
to accommodation surety.
The rule of strictissimi juris commonly refers to an accommodation surety.
The rationale of this doctrine is reasonable. An accommodation
surety 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.
(Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957]; Pastoral
vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].)
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. (see Palmares vs. Court of Appeals,
288 SCRA 292 [1998].)
Rule of strict construction not applicable
to compensated sureties.
The rule of strictissimi juris, ordinarily applied in relief of an
individual surety, is not applied in case of compensated sureties.
The presumption indulged in by the law in favor of guarantors
was premised on the fact that guarantees were originally
gratuitous obligations, which is not true at present, at least in the
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Art. 2055
great majority of cases. (PNB Luzon Surety Co., Inc., 68 SCRA 207
[1975].) The surety bond must be read in its entirety and together
with the principal contract. (National Power Corporation vs.
Court of Appeals, 145 SCRA 533 [1988].) If there is any ambiguity
in the surety bond, it should be interpreted against the surety
company that prepared it. (Pao Chuan Wei vs. Reposito, 103 Phil.
57 [1955]; Cosmopolitan Insurance Co., Inc. vs. Reyes, 15 SCRA
258 [1965].)
The rationale of this doctrine is also reasonable.
(1) Compensated corporate sureties are business associations
organized for the purpose of assuming classified risks in large
numbers, for profit and on an impersonal basis, through the
medium of standardized written contractual forms drawn by
its own representatives with the primary aim of protecting its
own interests. (Commission on Immigration vs. Asian Surety
and Insurance Co., Inc., 26 SCRA 680 [1969], citing Stearn’s The
Law of Suretyship, 4th ed., 402-403; National Marketing Corp.
vs. Marquez, 26 SCRA 772 [1969].)
(2) Furthermore, they are secured from all possible loss by
adequate counterbonds or indemnity agreements. (Reparations
Commission vs. Northern Lines, 34 SCRA 203 [1970]; Pastoral vs.
Mutual Security Insurance Corp., supra.)
(3) Although calling themselves as sureties, such corporations
are, in fact, insurers (see Secs. 2, 175-178, The Insurance Code of
1978 [Pres. Decree No. 1460].) and in determining their rights and
liabilities, the rules peculiar to suretyship do not apply. (Pacific
Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957].)
ILLUSTRATIVE CASES:
1. In the distributorship agreement secured by a bond,
distributor bound himself to sell and distribute products of another
“in Manila and Rizal Province.”
Facts: C and D entered into a distributorship agreement
whereby D bound himself to sell and distribute the products of
C in Manila and Rizal province. To guarantee the fulfillment of
D’s part of the contract, he put up a bond with S, a compensated
surety.
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
Nowhere in the agreement appears a restriction against D’s
acceptance of additional territories if he so desired.
Issue: Does the delivery of merchandise to D at a place
other than that appearing in the contract constitute a material
alteration of the same that would release S from its liability?
Held: No. (1) The mention of Manila and Rizal in said
agreement was designed more as a declaration or identification
of the places wherein D was expressly authorized and assigned
to sell C’s products which is no obstacle to D’s acceptance
of additional territories in order to fulfill his obligation. The
obligation of D remained the same — to settle his accounts
to C at the specified time. The addition or diminution of the
territories could by no means alter or affect that duty to make
payment on time and that is precisely D’s obligation secured
by the bond.
(2) A departure from the terms of contract will not have
the effect of discharging a compensated surety unless it appears
that such departure has resulted in injury, loss or prejudice to
the surety. It has been said that to allow compensated surety
companies to collect and retain premiums for their services,
graded according to the nature and extent of their risk, and then
to repudiate their obligations on slight pretexts which have no
relation to the risk, would be most unjust and immoral, and
would be a perversion of the wise and just rules designed for
the protection of voluntary sureties. (Pacific Tobacco Corp. vs.
Lorenzana, 102 Phil. 234 [1957].)
————
————
————
2. Liability under a bond is to expire a year before maturity of
principal obligation.
Facts: A stipulation in a bond is to the effect that the liability
thereunder would expire a year before the first installments of
the principal obligation had become due.
Issue: Is the stipulation valid?
Held: No. Referring to a stipulation in a bond to the
effect that the liability thereunder would expire on the date of
maturity of the principal obligation, the court declared that said
stipulation in effect nullified the nature of said bond and was
therefore, “unfair and unreasonable, as well as a subtle way of
making money thru trickery and deception.”
257
258
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TRANSACTIONS
Art. 2055
The situation in the case at bar is even worse, since the
surety contends that its bond expired about a year before the first
installments had become due. To accept this theory, the result
would be that the surety had never contracted any obligation
or assumed any liability in favor of the creditor (Reparation
Commission) in consequence of the execution of said bond
which is manifestly contrary to the intention of the parties.
The rule of strict construction of surety bonds does not
apply to corporate sureties. (Reparation Commission vs. Northern
Lines, Inc., 34 SCRA 203 [1970].)
Extent of guarantor’s liability.
(1) Where guaranty definite. — In this kind of guaranty, the
obligation of the guarantor under the terms of the contract is
limited in whole or in part to the principal debt, to the exclusion
of the accessories. (see 11 Manresa 196.) Thus, if the amount to
be paid or the service to be performed by the person guaranteed
is specified in a contract of guaranty, then the obligation of
the guarantor extends no further than the sum or services so
specified, and extrinsic facts cannot be resorted to for the purpose
of enlarging the limit if the guarantor was ignorant of such facts.
(38 C.J.S. 1211-1212.) Thus, even as a surety held himself liable
for a credit accommodation or any modification thereof, such
clause should be understood in the context of the loan limit and
its term. (Security Bank and Trust Co., Inc. vs. Cuenca, 341 SCRA
781 [2000].)
(2) Where guaranty indefinite or simple. — As provided in
Article 2055 (par. 2.), “it shall compromise 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.” If the terms of the contract of guaranty are
general and indefinite and do not specify in clear and express
manner that the liability of the guarantor is limited to the
principal obligation, in whole or in part, it extends not only to
the said principal obligation but also to all its accessories, they
being comprehended within the principal because the guaranty
has secured it with all its consequences. (see 11 Manresa 199.)
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
259
The reason for the rule is that the guarantor, in entering into
the contract, could have fixed the limits of his responsibility
solely to the strict terms of the principal obligation and if he did
not do so, it must be presumed that he wanted to be bound to the
extent so established. (Ibid., 242-243.) Thus, in a case, the surety
company was held jointly and severally liable with the principal
debtor to pay the sum of P5,000.00 plus legal interest from the
time of the filing of the complaint up to the time the surety
offered to pay, over the objection that under the bond the surety
was liable only for P5,000.00 for under Article 2055, paragraph
2 which the court said was clearly applicable, the liability of the
surety “shall comprise not only the principal obligation, but also
its accessories.” (Republic vs. Pal-Fox Lumber Co., 43 SCRA 365
[1972].)
Liability of guarantor for judicial costs.
The guarantor shall answer for such judicial costs only as
have been incurred after he has been judicially required to pay.
This limitation is just because a guarantor as such should not
be made responsible for whatever costs the debtor might have
capriciously occasioned. (11 Manresa 243-244.)
On the other hand, it is within the power of the guarantor
to relieve himself from responsibility of responding for such
judicial costs by making payment. From the time he had been
judicially required to pay, all of the costs that arise depend upon
his exclusive will and are, therefore, attributed to his fault if he
does not do so. (Ibid., 199.)
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 need to be prescribed because
he binds himself to nothing. (see Ibid., 239-240.)
(1) When necessary. — Where there is merely an offer of a
guaranty, or merely a conditional guaranty in the sense that it
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TRANSACTIONS
Art. 2055
requires action by the creditor before the obligation becomes fixed,
it does not become a binding obligation until it is accepted and
(unless there is a waiver of notice) 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. (National Bank
vs. Garcia, 47 Phil. 662 [1925]; 28 C.J. 901; 24 Am. Jur. 899.)
(a) The acceptance need not necessarily be express or
in writing, but may be indicated by acts amounting to an
acceptance. (National Bank vs. Escueta, 50 Phil. 591 [1927].)
In other words, the acceptance of the guaranty by the creditor
may be implied.
(b) The guarantor is entitled to notice in order that, being
secondarily liable, he may know the nature and extent of his
liability and have an opportunity of taking indemnity from
the principal obligor or of otherwise securing himself against
loss, and have a reasonable time in which to arrange for the
necessary funds to pay the amount of his guaranty, if the
principal defaults, and to avail himself of the appropriate
means in law and equity to compel the other parties to
discharge him from future responsibility. (28 C.J. 900;
National Bank vs. Garcia, supra.)
(2) When not necessary. — Where, upon the other hand, the
transaction is not merely an offer of guaranty, but it amounts
to direct or unconditional promise of guaranty, unless notice of
acceptance is made a condition of the guaranty, all that is necessary
to make the promise binding is that the promisee (creditor)
should act upon it, and notice of acceptance is not necessary the
reason being that the contract of guaranty is unilateral. (Texas
Co. vs. Alonso, 73 Phil. 90 [1941]; see Macondray and Co., Inc. vs.
Piñon, 2 SCRA 1109 [1962].)
ILLUSTRATIVE CASES:
1. Creditor retained document evidencing surety agreement
and on the strength of which, extended credit to principal debtor.
Facts: To secure the payment of any obligation D might
contract with Philippine National Bank, G and H signed a
surety (guaranty) agreement in favor of Philippine National
Art. 2055
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
Bank. The document evidencing the agreement was delivered
to Philippine National Bank which retained it without objection.
On the strength of said agreement, Philippine National
Bank extended credit to D.
Issue: Was there acceptance by Philippine National Bank of
the surety (guaranty) agreement?
Held: Yes. The facts sufficiently indicated such acceptance.
Such acceptance need not necessarily be express or in writing.
(National Bank vs. Escueta, 50 Phil. 991 [1927].)
————
————
————
2. Guarantor was never notified by creditor of the latter’s
acceptance of bond signed by the former to guarantee performance of
agency contract which required that bond had to be in such form and
amount “as shall be satisfactory” to the creditor.
Facts: G signed a bond whereby he guaranteed the faithful
performance of an agency contract of D with Texas Co. The
bond was executed at the request of Texas Co., by virtue of the
following clause of the agency contract: “Additional security —
The agent shall whenever requested by the company in addition
to the guaranty herein provided furnish further guaranty or
bond, conditioned upon the agent’s faithful performance of
this contract, in such form and amount and with such bank as
surety or with such individuals or firms as joint and several
sureties as shall be satisfactory to the company.”
G was never notified by Texas Co. of its acceptance,
and there was no evidence tending to show that G ever had
knowledge of any act on the part of Texas Co. amounting to an
implied acceptance.
Issue: Was there merely an offer of guaranty on the part of
G?
Held: Yes, and, therefore, in the absence of the acceptance of
the offer by Texas Co., G could not be held liable. The bond was
subject to the creditor’s approval. Before the bond would be
accepted, it had to be in such form and amount and with such
sureties, “as shall be satisfactory to the company.” The logical
implication arising from this requirement was that, if Texas Co.
was satisfied with any such bond, notice of its acceptance or
approval should necessarily be given to the proper party in
interest, namely the surety or guarantor. (Texas Company, Inc.
vs. Alonso, 73 Phil. 90 [1941].)
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TRANSACTIONS
————
————
Art. 2055
————
3. Creditor accepted a contract of suretyship to which he was
not a party.
Facts: A contract of suretyship was entered into between D,
as principal, and G and H as sureties whereby G and H bound
themselves jointly and severally to pay a certain amount which
D obligated himself to pay C (a third person).
For failure of D to pay C, the latter brought an action
against G and H under their contract of suretyship.
Issue: Can C maintain the action against G and H considering that he was not a party to the contract?
Held: Yes. The general rule is that a third person has no
rights and obligations under a contract to which he is a stranger.
However, when a contract, such as one of guaranty, contains a
stipulation in favor of a third person who accepted and acted
upon such stipulation before its revocation by the obligors,
said third person may demand its fulfillment. (see Art. 1311.)
In the present case, C accepted the contract of suretyship,
and upon the faith of it, allowed D to strip his (C’s) lands of
valuable plantings of hemp to secure the payment of the price
of which, the contract of suretyship was delivered by D to C.
There was no revocation of the contract before it was accepted
by C nor to any time before demand was made upon G and
H for the fulfillment thereof. (Poblete vs. Lo Singco, 44 Phil. 369
[1923].)
————
————
————
4. Creditor received copy of bond after the date he should have
complied the condition in the bond to report to surety default by
debtor.
Facts: The surety bond requires C (lessor) to report to the
surety any violation of the lease contract by D (lessee-debtor)
within five (5) days, otherwise, the bond will be null and void.
The bond was executed on October 22 and copy thereof was
received by the lessor on November 21. By then, D defaulted
in two (2) payments of the rentals, which defaults C should
have reported between October 6-10 and November 6-10, as
required by the bond, but C did so only on December 5.
Issue: Does C’s failure to notify the surety of D’s defaults
in between October 6-10 and November 6-10, and in notifying
Arts. 2056-2057
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
the surety only on December 5, constitute a violation of the
condition of the bond that exonerated the surety from liability?
Held: No. (1) By imposing on C the condition in question,
the surety made it necessary that C should accept the bond; and
C could not do so before learning of it. The rule is that where
the guaranty requires action by the creditor before obligation
becomes fixed, it is not binding until accepted. The rule is
grounded on common sense; otherwise, the debtor and the
guarantor could easily defraud the creditor by inserting in the
bond, conditions that would render it nugatory. The suretyship
contract, therefore, was not perfected and was not binding on
C until November 21, when he received a copy thereof and
tacitly accepted it.
(2) A contract of guaranty or suretyship is only prospective,
and not retroactive in operation unless a contrary intent is
clearly shown.
(3) The rule holding sureties to be favorites of the law,
and their contracts to be strictissimi juris does not apply to
compensated sureties. (Pastoral vs. Mutual Security Insurance
Corp., 14 SCRA 1011 [1965].)
ART. 2056. One who is obliged to furnish a guarantor
shall present a person who possesses integrity, capacity
to bind himself, and sufficient property to answer for the
obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where
this obligation is to be complied with. (1828a)
ART. 2057. If the guarantor should be convicted in
first instance of a crime involving dishonesty or should
become insolvent, the creditor may demand another who
has all the qualifications required in the preceding article.
The case is excepted where the creditor has required and
stipulated that a specified person should be the guarantor.
(1829a)
Qualifications of guarantor.
The qualifications of a guarantor are:
(1) He possesses integrity;
(2) He has capacity to bind himself; and
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TRANSACTIONS
Arts. 2056-2057
(3) He has sufficient property to answer for the obligation
which he guarantees.
It is evident that a guarantor without the above-mentioned
qualifications would be useless. Of course, the creditor can waive
the requirements. The second sentence of Article 2056 is based on
the principle that the accessory follows the principal. (see Art.
1251.)
Effect of subsequent loss of required
qualifications.
The qualifications need only be present at the time of the
perfection of the contract. So, the subsequent loss of integrity or
property or supervening incapacity of the guarantor (Art. 2057.)
would not operate to exonerate the guarantor of the eventual
liability he has contracted, and the contract of guaranty continues.
However, the creditor may demand another guarantor with
the proper qualifications. (Ibid.) But he may waive it if he chooses
and hold the guarantor to his bargain. (Estate of K.H. Hemady
vs. Luzon Surety Co., Inc., 100 Phil. 388 [1956].)
Note that Article 2057 requires conviction in the first instance
of a crime involving dishonesty; but a judicial declaration of
insolvency is not necessary in order for the creditor to have the
right to demand another guarantor.
ILLUSTRATIVE CASE:
Creditor (surety) filed a contingent claim against the estate of
surety (indemnitor) on bonds executed by the latter before his death.
Facts: L Surety Co. filed a claim against the Estate of H
on the different indemnity agreements or counterbonds, each
subscribed by a distinct principal and by the deceased H, a
surety (solidary guarantor) in all of them in consideration of L’s
having guaranteed the various principals in favor of different
creditors.
L prayed for allowance, as a contingent claim, of the value
of the counterbonds. The lower court dismissed the claim on
the ground that “whatever losses may occur after H’s death,
are not chargeable to his estate, because upon his death he
ceased to be a guarantor.”
Arts. 2056-2057
GUARANTY AND SURETYSHIP
Nature and Extent of Guaranty
265
Issue: Is a guarantor’s liability extinguished by his death?
Held: No. (1) Under the law (see Art. 1311.), the general
rule is that a party’s contractual rights and obligations are
transmissible to his successors. The articles of the Civil Code
that regulate guaranty and suretyship (Arts. 2047-2084.)
contain no provision that the guaranty is extinguished upon
the death of the guarantor or the surety.
(2) From Article 2057, it is immediately apparent that the
supervening incapacity of the guarantor (that is to say, the
disappearance of his integrity after he has become bound) does
not terminate the contract but merely entitles the creditor to
demand a replacement of the guarantor. But the step remains
optional in the creditor: it is his right, not his duty; he may waive
it if he chooses and hold the guarantor to his bargain. Article
2057 is incompatible with the proposition that the requirement
of integrity in the guarantor or surety makes the latter’s
undertaking strictly personal so linked to his individuality that
the guaranty automatically terminates upon his death.
(3) The contracts of suretyship entered into by H in favor
of L, not being intransmissible, his eventual liability thereunder
necessarily passed upon his death to his heirs. Such contracts
give rise to contingent claims provable against his estate under
Section 5, Rule 67 of the Rules of Court. L had, therefore, the
right to file against the Estate of H a contingent claim for
reimbursement. (Estate of Hemady vs. Luzon Surety Co., Inc., 100
Phil. 388 [1956].)
Selection of guarantor.
(1) Specified person stipulated as guarantor. — Where the
creditor has required and stipulated that a specified person
should be a guarantor, the substitution of guarantor may not be
demanded (Art. 2057.) because in such a case, the selection of the
guarantor is a term or condition of the agreement and as a party,
the creditor is, therefore, bound thereby. (see Arts. 1159, 1306.)
(2) Guarantor selected by the principal debtor. — Where the
guarantor is selected by the principal debtor, the latter answers
for the integrity, capacity, and solvency of the former because the
guarantor must possess the qualifications prescribed not only at
the moment the guaranty is given but also thereafter, until the
extinguishment of the debt.
266
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TRANSACTIONS
Arts. 2056-2057
(3) Guarantor personally designated by the creditor. — Where,
however, the guarantor is personally designated by the creditor,
it is because he considers him to have the qualifications for the
purpose, and the responsibility for the selection should, therefore,
fall upon him, and not on the debtor.
— oOo —
267
Chapter 2
EFFECTS OF GUARANTY
SECTION 1. — Effects of Guaranty Between the Guarantor
and the Creditor
ART. 2058. The guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor. (1830a)
Right of guarantor to benefit of excussion
or exhaustion.
(1) Guarantor only secondarily liable. — The rule contained
in the above article arises from the character of the contract of
guaranty which is accessory and subsidiary. The guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor only in case the latter should fail to do so (Art. 2047.)
and cannot do so. It is the rule that distinguishes guaranty
from suretyship. Conversely, if the principal debtor fulfills the
obligation guaranteed, the guarantor is discharged from any
responsibility.
(2) All legal remedies against debtor to be first exhausted. — To
warrant recourse against the guarantor for payment, it may not
be a sufficient reason that the debtor appears insolvent. Such
insolvency may be simulated. The law requires the creditor to
resort “to all legal remedies against the debtor” including the
bringing of actions for the rescission of fraudulent alienations of
property made by the debtor. (see Arts. 1177, 1380[3], 1387.) This
is what is otherwise known as the “benefit of excussion.’’
267
268
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2058
Article 2058 is not applicable to a contract of suretyship. (see
Arts. 2047, par. 2; 2059[2].)
ILLUSTRATIVE CASE:
Creditor filed action against guarantor to recover the balance of
judgment credit without asking for execution of judgment against
debtor.
Facts: G mortgaged two real properties belonging to him to
secure the payment of a judgment credit of P640.00 obtained by
C against D. As D paid only a part of the indebtedness, C filed
an action against G to recover the unpaid balance.
Issue: Is G liable for the balance?
Held: No. (1) G did not contract any personal responsibility
for the payment of the sum of P640.00. The only obligation
which he contracted was that resulting from the mortgage.
However, a foreclosure suit was not instituted against G but
a purely personal action for the recovery of the amount still
owned by D.
(2) At any rate, even granting that G may be considered
a surety (or guarantor), the action does not lie against him on
the ground that all the legal remedies against him have not
previously been exhausted. The execution of the judgment
against D has not been asked for and D has property sufficient
to pay the balance of the debt the payment of which is sought
of G in his alleged capacity as surety. (Wise & Co. vs. Tanglao, 63
Phil. 372 [1936].)
Right of creditor to secure judgment against
guarantor prior to exhaustion.
As a rule, an ordinary personal guarantor, not a pledgor or
mortgagor, may demand exhaustion of all the property of the
debtor before he can be compelled to pay. (Art. 2058.)
It has been held, however, that the creditor may, prior thereto,
secure a judgment against the guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him, until after the properties of the principal debtor shall
have been exhausted, to satisfy the latter’s obligation. (Southern
Motors, Inc. vs. Barbosa, 99 Phil. 263 [1956]; Tupaz vs. Court of
Appeals, 475 SCRA 398 [2005].)
Art. 2059
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Guarantor and the Creditor
269
Thus, there is nothing procedurally objectionable in impleading the guarantor as a co-defendant. As a matter of fact, the Rules
of Court on permissive joinder of parties (Rule 3, Sec. 6 thereof.)
explicitly allows it. This equity rule is based on trial convenience
and is designed to permit the joinder of plaintiffs or defendants
whenever there is a common question of law or fact, saving the
parties unnecessary work, trouble and expense. (Prudential Bank
vs. Intermediate Appellate Court, 216 SCRA 257 [1992].)
ART. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within
the Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in the satisfaction of the obligation. (1831a)
Exceptions to benefit of excussion.
In the following cases, the guarantor is not entitled to the
benefit of excussion:
(1) As provided in Article 2059;
(2) If he does not comply with Article 2060; and
(3) If he is a judicial bondsman and sub-surety (Art. 2084.);
(4) Where a pledge or mortgage has been given by him
as a special security. Guarantees without any such pledge or
mortgage are governed by Title XV of the Civil Code, whereas
pledges and mortgages fall under Title XVII thereof (Philamgen
Ins. Co., Inc. vs. Ramos, 16 SCRA 298 [1966]; Southern Motors,
Inc. vs. Barbosa, 99 Phil. 263 [1956].); and
(5) If he fails to interpose it as a defense before judgment is
rendered against him. (Saavedra vs. Price, 68 Phil. 699 [1939].)
270
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2059
Exceptions provided in Article 2059.
Article 2059 enumerates instances when the guarantor cannot
avail of the benefit of excussion.
(1) Right waived. — The benefit of excussion is a personal
right recognized in a guarantor. Its waiver is valid. (see Art. 6.)
It must, however, be made in express terms. Nothing prevents
a guarantor from paying the obligation once demand is made
on him without prejudice to his right to demand reimbursement
from the debtor. (Art. 2066.)
(2) Liability assumed that of surety. — If the guarantor binds
himself solidarily with the principal debtor, he becomes a
surety with primary liability as a solidary co-debtor. In effect,
he renounces in the contract itself the benefit of exhaustion.1 (see
Luzon Steel Corp. vs. Sia, 28 SCRA 58 [1969]; Gov’t. of the Phil.
Islands vs. Visayan Surety, 66 Phil. 326 [1938]; Imperial Insurance,
Inc. vs. De Los Angeles, 111 SCRA 24 [1982].)
(3) Insolvency of debtor proven by unsatisfied writ of execution.
— A guarantor guarantees the solvency of the debtor. Hence,
if the debtor becomes insolvent, the liability of the guarantor
arises as the debtor cannot fulfill his obligation. The insolvency
or inability to pay must be actual, and it may be proven by the
return of a writ of execution unsatisfied or by other means, but it
is not sufficiently established by the mere fact that the debtor has
been declared insolvent in insolvency proceedings, in which the
extent of the insolvent’s inability to pay is not determined until
the final liquidation of his estate. (Machette vs. Hospicio de San
Jose and Fidelity & Surety Co., 43 Phil. 297 [1922].)
(4) Debtor absconds or cannot be locally sued. — If the debtor
absconds or cannot be sued in the Philippines, then he cannot
fulfill his obligation unless, of course, he has left a manager or
representative. The creditor is not required to go after a debtor
who is hiding or cannot be sued in our courts, and to incur the
delays and expenses incident thereto.
1
Section 17, Rule 57 of the Rules of Court cannot be construed that an execution
against the debtor be first returned unsatisfied even if the bond were a solidary one, for a
procedural rule may not amend the substantive law expressed in the Civil Code.
Arts. 2060-2061
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Guarantor and the Creditor
271
(5) Resort to all legal remedies, a useless formality. — If the
creditor wants to hold the guarantor liable, he must resort to
all legal remedies against the debtor (this includes suit against
him) and exhaust his properties. (Art. 2058.) But if such judicial
action including execution would not satisfy the obligation, the
guarantor can no longer require the creditor to resort to all such
remedies against the debtor as the same would be but a useless
formality. Under No. (5) of Article 2059, it is not necessary that
the debtor be judicially declared insolvent or bankrupt.
ART. 2060. In order that the guarantor may make use
of the benefit of excussion, he must set it up against the
creditor upon the latter’s demand for payment from him,
and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount
of the debt. (1832)
ART. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is
negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. (1833a)
Duty of creditor to make prior demand
for payment from guarantor.
(1) When demand to be made. — The demand for payment by
the creditor upon the guarantor under Article 2060 can be made
only after judgment on the debt 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. It would be absurd and futile to point out
“saleable property of the debtor” before the judgment when it
cannot be seized or sold.
(2) Actual demand to be made. — Joining the guarantor in the
suit against the principal debtor is not the demand intended by
law. The fact that the guarantor was joined in such suit does not
necessarily mean that a demand has already been made upon
him. (see Viuda de Syquia vs. Jacinto, 60 Phil. 861 [1934]; Baylon
vs. Court of Appeals, 312 SCRA 502 [1990].)
272
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2060-2061
Duty of guarantor to set up benefit
of excussion.
Article 2060 imposes a condition for the invocation by the
guarantor of the benefit of excussion. It is not enough that the
guarantor claims the benefit of excussion. Under Article 2060,
as soon as he is required to pay, he must also point out to the
creditor available property (not in litigation or encumbered) of the
debtor within the Philippines. (Luzon Steel Corp. vs. Sia, 28 SCRA
58 [1969].) The failure of the guarantor to point out to the creditor
the debtor’s property sufficient to cover his debt forecloses his
right to set up the defense of excussion. (Bitanga vs. Pyramid
Construction Engineering Corp., 563 SCRA 544 [2008].)
(1) Property located abroad. — The excussion of property located
abroad would be a lengthy and extremely difficult proceeding
and would not conform with the purpose of guaranty to provide
the creditor with the means of obtaining the fulfillment of the
obligation guaranteed without hindrance or delays.
(2) Property not easily available. — The same thing may be said
of property which is not easily available. As the one most interested in the benefit of excussion, the guarantor should facilitate
its realization and the payment of the debt, whereby he will be
freed of his subsidiary obligation. The rule takes into account not
only the interests of the guarantor but also those of the creditor,
for without it, guaranty might become almost illusory. (12 Manresa 263-265; Arroyo vs. Jungsay, 34 Phil. 589 [1915].)
Duty of creditor to resort to all legal
remedies.
After the guarantor has fulfilled the conditions required for
making use of the benefit of exhaustion, it becomes the duty of
the creditor to exhaust all the property of the debtor pointed out
by the guarantor and to resort to all legal remedies against the
debtor (Art. 2058.); and if he fails to do so, he shall suffer the
loss, but only to the extent of the value of said property, for the
insolvency of the debtor. (Art. 2061.)
Obviously, the exhaustion of the principal debtor’s property
— the benefit of which the guarantor claims — cannot even
Art. 2062
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Guarantor and the Creditor
273
begin to take place before judgment has been obtained against
the debtor. (Baylon vs. Court of Appeals, 312 SCRA 502 [1999].)
The creditor must notify the guarantor of the debtor’s
inability to pay. (see Art. 2062.)
Joinder of guarantor and principal
as parties defendant.
(1) General Rule. — The guarantor, not being a joint contractor
with his principal, cannot as a general rule, be sued with his
principal. (see Art. 2062.)
(2) Exception. — Yet adherence to this rule is not required
where it would serve merely to delay the ultimate accounting
of the guarantor. Thus, in case, the court overruled the objection
that there was a misjoinder of parties defendant “it having
been proved that the principal is not able to perform a contract
which he has made and for which in a collateral agreement,
the guarantors become liable . . . no different result would be
attained if the plaintiff were forced to institute separate actions
against the principal and the guarantors.” (U.S. vs. Varadero De
La Quinta, 40 Phil. 48 [1919].)
ART. 2062. In every action by the creditor, which must
be against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court to
notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses
as are granted him by law. The benefit of excussion mentioned in Article 2058 shall always be unimpaired, even if
judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter.
(1834a)
Procedure when creditor sues.
(1) Sent against principal. — The creditor must sue the
principal alone. The guarantor cannot be sued with his principal,
much less alone except in the cases mentioned in Article 2059
where the guarantor is not entitled to the benefit of excussion. As
a rule, the creditor may hold the guarantor only after judgment
274
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2063
has been obtained against the principal debtor and the latter is
unable to pay.
(2) Notice to guarantor of the action. — The guarantor, however,
must be notified so that he may appear, if he so desires, and set up
defenses he may want to offer.
(a) If the guarantor appears, he is still given the benefit of
exhaustion even if judgment should be rendered against him
and the principal debtor. His voluntary appearance does not
constitute a renunciation of his right to excussion. (see Art.
2059[1].)
(b) If he does not appear, he cannot set up the defenses
which, by appearing, are allowed to him by law, and it may
no longer be possible for him to question the validity of the
judgment rendered against the debtor.
(4) Hearing before execution can be issued against guarantor. —
A guarantor is entitled to be heard before an execution can be
issued against him where he is not a party in the case involving
his principal. Notice and hearing constitute the essence of
procedural due process. (Towers Assurance Corp. vs. Ororama
Supermarket, 80 SCRA 313 [1970]; see Malayan Insurance Co.,
Inc. vs. Salas, 90 SCRA 252 [1979].)
ART. 2063. A compromise between the creditor and the
principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor
and the creditor benefits but does not prejudice the principal debtor. (1835a)
Effects of compromise.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced. (Art. 2028.)
(1) Where prejudicial. — A contract binds only the parties
thereto and not third persons. (Art. 1311.) Hence, a compromise
cannot prejudice the guarantor or the debtor, as the case may
be, when he is not a party to such compromise. Furthermore,
Art. 2064
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Guarantor and the Creditor
275
a guarantor may not bind himself for more than the principal
debtor both as regards the amount and the onerous nature of the
conditions. (Art. 2054, par. 2.)
(2) Where in the nature of a stipulation in favor of a third person.
— However, even if the guarantor or debtor is not a party to
such compromise, the same can benefit him as it is in the nature
of a stipulation in favor of a third person which the guarantor
or debtor may accept unless it has been revoked before his
acceptance. (Art. 1311, par. 2.)
EXAMPLE:
D owes C P10,000.00 with G as the guarantor.
If for one reason or another D and C agree to have the debt
reduced to P8,000.00, G, the guarantor, is liable to C for only
P8,000.00 if D does not pay C because the compromise benefits
G. If the amount instead is increased to P12,000.00, G is liable
only for P10,000.00 because the compromise cannot prejudice
him.
Now, if the agreement is between C and G whereby
D is given an extension of time within which to pay, such
extension accrues to the benefit of D, the principal debtor.
But a compromise between C and G shortening the period
for payment is not binding upon D because the same cannot
prejudice him.
ART. 2064. The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor
and to the principal debtor. (1836)
Sub-guarantor’s right to excussion.
A guarantor has the right to demand the exhaustion of the
properties of the principal debtor. (Art. 2958.)
A sub-guarantor enjoys the benefit of excussion not only
with respect to the principal debtor but also with respect to the
guarantor (see Art. 2051, par. 2.) for the reason that he stands
with respect to the guarantor on the same footing as the latter
does with respect to the principal debtor.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
276
Art. 2065
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. The creditor cannot
claim from the guarantors except the shares which they
are respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837)
Benefit of division among several
guarantors.
(1) In whose favor applicable. — In addition to the benefit of
exhaustion granted under Article 2058, this article entitles the
several guarantors of only one debtor and for the same debt, to
what is known as the benefit of division. This benefit cannot be
availed of it there are two or more debtors of one debt, even if
they are bound solidarily, each with different guarantors, or if
there be two or more guarantors of the same debtor but not only
for the same debt.
(2) Extent of liability of several guarantors. — Their liability is
only joint, that is, the obligation to answer for the debt is divided
among all of them. (see Art. 1208.) Therefore, the guarantors
are not liable to the creditor beyond the shares which they are
respectively bound to pay.
(3) Exceptions. — The exception to this rule is when solidarity
has been expressly stipulated. (see Art. 2047, par. 2.) The benefit
of division also ceases if any of the circumstances enumerated in
Article 2059 should take place, as would the benefit of exhaustion
of the debtor’s property. (see Cacho vs. Valles, 45 Phil. 107 [1923].)
EXAMPLES:
(1) If G and H are the guarantors of the debt of D to C in
the amount of P10,000.00, C can demand from G or H only onehalf of the obligation unless G and H had bound themselves
solidarily with D in which case they would be sureties and,
therefore, C can hold each of them responsible for the entire
amount of P10,000.00.
Art. 2065
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Guarantor and the Creditor
C may also demand from G or H the entire obligation in the
cases mentioned in Article 2059 as where G or H has expressly
renounced the benefit of division.
(2) If G and H are the guarantors of D and E (solidary
debtors), respectively, for the debt of P10,000.00 which D and
E borrowed from C, C can hold either G or H responsible as
guarantor for the entire amount of P10,000.00. Here, the debtors
are distinct and the guarantors are bound by distinct ties to
different debtors.
If the obligation of D and E is joint, there are actually two
debts, the debt of D for P5,000.00 and the debt of E for P5,000.00.
G, for instance, cannot demand that the claim of C for P5,000.00
against D be divided between G and H.
ILLUSTRATIVE CASE:
One bond guarantees up to first P3,000.00 and another, amount
in excess of P3,000.00 up to P2,000.00 and debtor failed to pay
P2,500.00
Facts: To secure the fulfillment of the obligation of D, up
to the sum of P3,000.00 under a contract with C who agreed
to deliver to D merchandise for sale on consignment under
certain specified terms, G (insurance company) executed a
bond of P3,000.00. The value of the merchandise received by
D having exceeded P3,000.00 in value, H (another insurance
company) executed a bond of P2,000.00 with the same terms
and conditions as the bond of G, the understanding between the
parties being that this bond would respond for the obligation
of D only insofar as it might exceed the amount of P3,000.00
secured by the bond of G.
C brought action against G and H for the amount of
P2,500.00 which D recognized but was unable to pay.
Issue: Is G entitled to the benefit of division?
Held: No. The benefit of division is applicable only where
there are several guarantors or sureties of only one debtor for
the same debt. In the instant case, although the two bonds on
their face appear to guarantee the same debt co-extensively
up to P2,000.00 — that of G alone extending beyond the sum
up to P3,000.00 — in reality said bonds, or G and H, do not
guarantee the same debt, because G guarantees only the first
P3,000.00 and H, only the excess over and above said amount
277
278
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2065
up to P5,000.00. Article 2065, therefore, does not apply to this
factual situation. (Mira Hermanos, Inc. vs. Manila Tobaconists,
Inc., 74 Phil. 367 [1943].)
Benefit of excussion among several
guarantors.
In order that a guarantor may set up the benefit of exhaustion
of the property of the debtor, he must point out to the creditor
available property of the debtor with which to satisfy the debt.
(Art. 2060.) But in order that the guarantor may be entitled to
the benefit of division, it is not required that he point out the
property of his co-guarantors.
The reason is obvious. The obligation of the guarantor with
respect to his co-guarantors is not subsidiary, but direct and does
not depend as to its origin on the solvency or insolvency of the
latter, although afterwards, if one of them should turn out to be
insolvent, his share has to be borne by the others. (Art. 2073, par.
2.)
Where, however, a creditor claims the share of a guarantor
from the others on the ground of insolvency (Art. 2065, par. 2.), the
latter can set up against the creditor the existence of the property
of the supposed insolvent, possessing the same conditions as are
required by Article 2060. (see 11 Manresa 295.)
— oOo —
279
SECTION 2. — Effects of Guaranty Between the
Debtor and the Guarantor
ART. 2066. The guarantor who pays for a debtor must
be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor, even though it did
not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded
of him;
(4) Damages, if they are due. (1838a)
Guaranty, a contract of indemnity.
Since the debtor is the one directly and principally liable, it is
just that the guarantor who makes payment must be indemnified
by said debtor. The indemnity comprises:
(1) Total amount of the debt. — It is evident that the guarantor
has 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. (Tuason, Tuason, Inc. vs. Machuca, 46
Phil. 561 [1924].) Of course, he cannot collect more than what he
has paid. (Saenz vs. Yap Chuan, 16 Phil. 76 [1910]; see Arts. 2054
and 2063.)
ILLUSTRATIVE CASE:
Debtor bound himself to pay guarantor as soon as the latter may
have become liable whether or not he shall have actually paid creditor.
279
280
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2066
Facts: G Company signed a note for P10,000.00 in favor of C
Company to guarantee a liability of D Company to C. In turn, D
and its president, E, the latter in his personal capacity, executed
a document wherein they bound themselves solidarily to
reimburse G all such sums as G may pay or become bound
to pay, upon its obligation to C, whether or not it shall have
actually paid such sums or any part thereof. D was declared
insolvent.
C brought action against G to recover the value of the note
and obtained final judgment. Later, G filed a complaint against
E to recover the amount which G was sentenced to pay C, plus
attorney’s fees, judicial costs and sheriff’s fees, and interest,
although G had not, in fact, paid the amount of the judgment.
Issue: Is G entitled to the relief sought in view of the above
facts?
Held: Yes. It is indisputable that D became bound by virtue
of the final judgment to pay the value of the note executed
by it in favor of C, and according to the document executed
solidarily by D and E, E bound himself to pay G as soon as
the latter may have become bound and liable, whether or not
it shall have actually paid. (Tuason, Tuason, Inc. vs. Machuca, 46
Phil. 561 [1924].)
(2) Legal interest thereon. — The guarantor is entitled to
legal interest from the time notice of payment of the debt was
made known to the debtor. The notice is, in effect, a demand so
that if the debtor does not pay immediately, he incurs in delay
(see Art. 1169.), and, hence, renders him liable for legal interest,
as indemnity, from then on. (see Art. 2209.) The liability is
increased not because of the contract but because of the default
and the necessity of judicial collection. (Phil. National Bank vs.
Luzon Surety Co., 68 SCRA 207 [1975].)
It is immaterial that the debt did not earn interest for
the creditor, because the guarantor’s right to legal interest is
granted by law by virtue of the payment he has made, and is
independent of the creditor’s right to claim interest which was
necessarily regulated by the stipulations between him and the
debtor.
(3) Expenses incurred by the guarantor. — The expenses
referred to are only those that the guarantor has to satisfy in
accordance with law as a consequence of the guaranty (see Art.
2055, par. 2.), not those which depend upon his will or own acts
Art. 2066
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
281
or his fault for these are his exclusive personal responsibility
and it is not just that they be shouldered by the debtor. (11
Manresa 305-306.) These expenses are limited to those incurred
by the guarantor after having notified the debtor that payment
has been demanded of him by the creditor.
The debtor is to blame for said expenses for it is within him
to free himself from the responsibility by making payment, and
if he does not do so, then they are attributable to his fault.
ILLUSTRATIVE CASE:
Debtor is being held liable by guarantor for expenses incurred by
the latter in litigation between him and creditor.
Facts: See preceding illustrative case.
Issue: Has G the right to recover from E more than the value
of the note executed by G in favor of C?
Held: E must not be held responsible for the expenses
incurred by G in the litigation between it and C. That litigation
was originated by G having failed to fulfill its obligation with
C and it cannot charge E with the expenses it was compelled
to make by reason of its own fault. It is entitled, however, to
the expenses incurred by it in the action brought by it against
E: interest on P10,000.00, the value of the note which it was
sentenced to pay, from the date of the filing of the complaint
until full payment thereof plus attorney’s fees. (Tuason, Tuason,
Inc. vs. Machuca, 46 Phil. 561 [1924], supra.)
(4) Damages, if they are due. — In other words, the guarantor
is entitled to recover damages only if they are due in accordance
with law. On this matter, the Code has not established any norm
for determining the same. Consequently, the general rules on
damages (Arts. 2195-2235.) shall apply. (see 11 Manresa 306.)
Exceptions to right to indemnity
or reimbursement.
The right to indemnity of the guarantor is subject to certain
exceptions or qualifications. (see Arts. 2068, 2069, 2070, and 2081;
see also Secs. 68 and 69, The Insolvency Law [Act No. 1956].)
(1) Where the guaranty is constituted without the knowledge
or against the will of the principal debtor, the guarantor can
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TRANSACTIONS
Art. 2067
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) The right to demand reimbursement is subject to waiver.
ART. 2067. The guarantor who pays is subrogated
by virtue thereof to all the rights which the creditor had
against the debtor.
If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has really
paid. (1839)
Guarantor’s right to subrogation.
(1) Effect of subrogation. — 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. (Art. 1303.) Simply stated, except only
for the change in the person of the creditor by the guarantor, the
obligation subsists in all respects as before payment.
The rights to indemnification and subrogation established
and granted to the guarantor by Articles 2066 and 2067 extend
as well to sureties as defined under Article 2047. (Escaño vs.
Ortigas, Jr., 526 SCRA 26 [2007].)
(2) Accrual, basis, and nature of right. — This right of
subrogation is necessary to enable the guarantor to enforce the
indemnity given in Article 2066.
(a) 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. (see Perez
vs. Barcia, 52 Phil. 197 [1928]; 11 Manresa 308-309.)
(b) The right of the guarantor who has paid a debt to
subrogation stands, not upon contract but upon the principles
of natural justice. (Somes vs. Molina, 9 Phil. 653 [1908].)
Art. 2067
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
283
(c) It is thus not a contractual right. The guarantor is subrogated, by virtue of the payment, to the rights of the creditor,
not those of the debtor. (Art. 2067, par. 2.) Thus, a guarantor
who has been obliged to contribute to the satisfaction of a
judgment rendered against him and the principal debtor cannot exercise the right of redemption of his principal with respect to real property belonging to the latter which was sold
by virtue of a writ of execution issued upon said payment.
(Urrutia & Co. vs. Morena and Reyes, 28 Phil. 261 [1914].)
(d) If the guarantor paid a smaller amount to the creditor
by virtue of a compromise, he cannot demand more than he
actually paid. (Art. 2067, par. 2; see Art. 2063.)
(3) When right not available. — The benefit of subrogation is
the means of effectuating the right of the guarantor to indemnity
or reimbursement. It cannot, therefore, be invoked in those cases
where the guarantor has no right to be reimbursed.
ILLUSTRATIVE CASES:
1. Guarantor seeks reimbursement for P20,000.00, the amount
of the bond executed by sub-guarantors, notwithstanding that he paid
only P8,000.00 of his bond.
Facts: By order of the court, X, as judicial administrator of
an estate, gave a bond to guarantee his administration. The
judicial bond was executed by X, G, and others jointly and
severally in favor of the Government for the sum of P60,000.00.
In turn, X and five (5) others, executed in favor of G another
bond as follows: A for P20,000.00; and B, C, D, and E, for
P5,000.00 each to guarantee the reimbursement of whatever
amounts which G might be required to pay by reason of the
judicial bond aforementioned.
As guarantor in solidum of X who was replaced by H as
the new administrator, G was ordered by the court to pay to
the estate the sum of P48,000.00. G paid to H P8,000.00, G still
owing P40,000.00 plus interest. X could not pay G.
In the suit instituted by G against X, A, B, C, D, and E, the
lower court absolved A from the claim by reason of the fact
that the share of the bond concerning him was executed by an
attorney in fact without sufficient authority for the purpose,
284
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TRANSACTIONS
Art. 2067
and ordered B, C, D, and E to pay G the sum of P2,000.00 each
and in equal shares, the costs. Thus, B, C, D, and E would be
paying the proportional share (P4,000.00 or P1,000.00 each) of
A in the P8,000.00 paid by G as well as A’s part of the costs.
Issue: Should B, C, D, and E reimburse G P5,000.00 each
or a total of P20,000.00 notwithstanding that G had paid only
P8,000.00 of his bond?
Held: No. (1) Guarantor’s right of reimbursement limited to
amount paid. — The right of subrogation cannot be interpreted
in such absolute terms as to include more than the surety
(guarantor) has paid, for, though it is true that he puts himself
in the place of the creditor and should have the same rights as
the latter in consequence of the subrogation, it is no less certain
that there would be an unjust enrichment to the prejudice of
the debtor, if the surety who pays for him were permitted to
claim more than what he paid.
Moreover, the benefit of subrogation is the means of utilizing the right of reimbursement, and he could not collect as
such, the excess from the rights and actions of the creditor over
and above the advance made by him. (citing 12 Manresa 304.)
(2) An action of subrogation is an action of indemnity. —
When the purse of the surety has suffered no detriment, to
sue the debtor in order that he provide funds for the surety
in expectancy of the action of the creditor, is not to ask an
indemnity, but to demand a guaranty to recover the loss when
it may occur, and this guaranty was already obtained by G
from X on the latter’s placing beforehand four (4) parties in his
stead in order that they may at the proper time insure him of
the restitution, the reimbursement of what he shall have paid.
The security or bond given by B, C, D, and E in favor of G
had no other purpose than, in case he should make payment,
to defend himself against the proceedings of the administrator
of the estate and from the danger of insolvency of the debtor X.
(see Art. 2071.)
In view of the foregoing, the amount to be paid by B, C, D,
and E to G was fixed at P1,000.00, with legal interest from the
date on which G paid to H, the new administrator, the sum of
P8,000.00 until its complete payment. They were also ordered
to pay the costs of the action in equal shares. The costs of the
Art. 2068
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
appeal were assessed against appellant G. (Saenz vs. Yap Chuan,
16 Phil. 76 [1910].)
————
————
————
2. After securing a judgment in a civil case based on a counterguaranty with a partial satisfaction of said judgment, surety caused
sale at public auction of shares pledged to it as additional security.
Facts: Two securities were given to S (Domestic Insurance)
for the faithful compliance of the obligation of P to pay
promissory note P executed in favor of C, namely, the counterguaranty agreement jointly executed by P, D and E, and the
second was the pledge of shares of stock made by F. S paid C,
thereby subrogating itself to the rights of the latter against P,
the maker of the note.
Subsequently, S sued P, D and F under the indemnity
agreement, obtaining a judgment with partial satisfaction,
by reason of which S caused the sale at public auction of the
pledged shares, with S acquiring them as the highest bidder.
Issue: When S instituted the civil action based on the
guaranty-agreement and obtained a favorable judgment, did
it abandon and waive its right or cause of action under the
pledge agreement?
Held: No. The indemnity agreement and the pledge agreement are two different securities, and as the creditor did not
avail of the remedy to obtain a personal judgment against the
debtor, it is not barred to enforce its claim against both securities. From the nature of the situation, S cannot prosecute its
claim against the two securities in one and the same action.
The foreclosure of the pledged shares would not require
an action in court, whereas it would be necessary if the claim
would be enforced under the indemnity agreement. Further, the
pledge of the shares of stock of F did not release the obligation
of the indemnitors. The pledge was an additional security for
the indemnification of damages and losses which S might and
did suffer, under the surety bond issued for P. (Gidwani vs.
Domestic Insurance Co. of the Philippines, 122 SCRA 732 [1983].)
ART. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the
defenses which he could have set up against the creditor
at the time the payment was made. (1840)
285
286
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TRANSACTIONS
Art. 2069
Effect of payment by guarantor
without notice to debtor.
If the guarantor should pay without notifying the debtor, the
latter may interpose against the guarantor, those defenses which
he could have set up against the creditor at the time the payment
was made. Thus, if the debtor has already paid the creditor, when
the guarantor pays, the debtor can set up against the guarantor
the defense of previous extinguishment of the obligation by
payment.
The guarantor cannot be allowed, through his own fault or
negligence, to prejudice or impair the rights or interests of the
debtor. (see Arts. 2069, 2070, 2074.)
ART. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period
unless the payment has been ratified by the debtor. (1841a)
Effect of payment by guarantor
before/after maturity.
(1) If the debtor’s obligation is with a period, it becomes
demandable only when the day fixed comes. (Art. 1193, par.
1.) The guarantor who pays before maturity is not entitled
to reimbursement since there is no necessity for accelerating
payment. A contract of guaranty being subsidiary in character,
the guarantor is not liable for the debt before it becomes due.
The debtor will be liable if the payment was made with his
consent or if the payment was subsequently ratified by him. The
ratification may be express or implied. In any case, the guarantor
can recover what he has paid upon the expiration of the period.
(2) Where demand on the guarantor was made during the
term of the guarantee, the fact that payment was actually made
after said term is not material. What is controlling is that default
and demand on guarantor had taken place while the guarantee
was still in force. (JN Dev. Corp. vs. Phil. Export and Foreign
Loan Guarantee Corp., 468 SCRA 555 [2005].)
Arts. 2070-2071
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
287
ART. 2070. If the guarantor has paid without notifying
the debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever
against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was
prevented by a fortuitous event from advising the debtor
of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.
(1842a)
Effect of repeat payment by debtor.
(1) General rule. — Before the guarantor pays the creditor, he
must first notify the debtor. (Art. 2068.) If he fails to give such
notice and the debtor repeats the payment, the guarantor’s only
remedy is to collect from the creditor, but he has no cause of
action against the debtor for the return of the amount paid by
him (guarantor) even if the creditor should become insolvent.
Being at fault for not advising the debtor, the guarantor must
bear the loss.
(2) Exception. — However, the guarantor may still claim
reimbursement from the debtor in spite of lack of notice if the
following conditions are present:
(a) the creditor becomes insolvent;
(b) the guarantor was prevented by fortuitous event to
advise the debtor of the payment; and
(c) the guaranty is gratuitous.
In a gratuitous guaranty, the guarantor receives nothing
and it would be unfair to deny him the right to recover from the
principal debtor. If the creditor is solvent, the guarantor must
still recover from him.
ART. 2071. The guarantor, even before having paid,
may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him
288
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TRANSACTIONS
Art. 2071
from the guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason
of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of
such nature that it cannot be extinguished except within a
period longer than ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor. (1843a)
Right of guarantor to proceed against
debtor before payment.
As a rule, the guarantor has no cause of action against the
debtor until after the former has paid the obligation. (Art. 2066.)
Article 2071 enumerates seven (7) instances when the
guarantor may proceed against the debtor even before payment,
and specifies the remedy to which the guarantor is entitled.
The purpose is to enable the guarantor to take measures for the
protection of his interest in view of the probability that he would
be called upon to pay the debt.
The provisions of Article 2071 are applicable and available
to the surety. (Manila Surety & Fidelity Co., Inc. vs. Batu
Construction & Co., 101 Phil. 494 [1957].)
Remedy to which guarantor entitled.
The guarantor cannot demand reimbursement for indemnity
because he has not paid the obligation. His remedy is to obtain
release from the guaranty or to demand a security that shall
protect him from any proceedings by the creditor, and against
Art. 2071
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
289
the danger of insolvency of the debtor. (see Perez vs. Barcia, 52
Phil. 197 [1928].) Remember that there are certain cases when the
guarantor cannot claim the benefit of excussion (see Art. 2059.)
and in such cases it is but proper that the guarantor be given the
right to proceed against the debtor.
The guarantor’s remedies are alternative. He has the right to
choose the action to bring.
Suit by guarantor against creditor
before payment.
The guarantor’s or surety’s action for release can only be
exercised against the principal debtor and not against the creditor.
The reason is plain. The creditor is not compellable to release
the guarantor (which is a property right) before payment of his
credit against his will. For the release of the guarantor imports
an extinction of his obligation to the creditor; it connotes,
therefore, either a remission or a novation by subrogation, and
either operation requires the creditor’s assent for its validity. (see
Arts. 1270 and 1301.) Especially should this be the case where
the principal debtor has become insolvent, for the purpose
of a guaranty is exactly to protect the creditor against such a
contingency. (Manila Surety & Fidelity Co., Inc. vs. Almeda
Trading, 34 SCRA 137 [1970].)
Absent the creditor’s consent, the principal debtor may only
proceed to protect the demanding guarantor by a counterbond
or counter-guaranty as is authorized by Article 2071. (Ibid.)
Article 2066 and Article 2071
distinguished.
In their purposes, Articles 2066 and 2071 are quite distinct
although in perfect harmony, the latter making more clearly
effective the purpose of the former.
(1) The first provides for the enforcement of the rights of
the guarantor against the debtor after he has paid the debt; the
second, for his protection before he has paid but after he has
become liable. The one gives a right of action after payment, the
other a protective remedy before payment.
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Art. 2071
(2) The one is a substantive right, the other of the nature of a
preliminary remedy.
(3) The one gives a right of action, which, without the provisions of the other, might be worthless. The remedy given in
Article 2071 seeks to obtain for the guarantor “release from the
guaranty or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of
the debtor.” Article 2066, strictly speaking, has no such purpose.
When the guarantor’s rights under this article become available,
he is past the point where a preliminary protective remedy is of
any value to him. (Kuenzle & Streiff vs. Tan Sunco, 16 Phil. 670
[1910].)
ILLUSTRATIVE CASES:
1. Guarantor who obtained judgment against debtor (his
principal), levied upon, before having paid the debt guaranteed,
property of the debtor who is a defendant in a suit filed by another
creditor for recovery of an indebtedness.
Facts: C instituted an action against D for the recovery of
an indebtedness. Before C could secure judgment, G brought
action against D for the payment of another obligation for
which G acted as guarantor. D confessed judgment in favor
of G. Immediately after obtaining judgment, G caused to be
levied upon under execution all the property of D.
C commenced action to set aside the judgment, claiming
it was obtained by the fraud and collusion, and that G had not
paid the debt for which as guarantor he obtained the judgment.
Issue: Is a guarantor who sues his principal before paying
the debt himself entitled to recover judgment for the debt?
Held: No. It being evident that the purpose of Article 2071
is to give to the guarantor a remedy in anticipation of the
payment of the debt, which debt being due, he could be called
upon to pay at any time, the only procedure to enforce that
right is by action. G availed himself of that right against D, the
debtor. The method employed by him to realize his end was
unusual but not of itself fraudulent. The evidence adduced
was held insufficient to establish fraud and collusion as would
justify a decision setting aside the judgment assailed.
Art. 2071
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
But while G has the right to obtain as he did the judgment
against the principal debtor, he ought not to be allowed to
realize on said judgment to the point of actual collection of
the same until he has satisfied or caused to be satisfied the
obligation, the payment of which he assures. Otherwise, a great
opportunity for collusion and improper practices between the
guarantor and his principal would be offered which might
result to the injury and prejudice of the creditor who holds the
claim against them.
In short, a guarantor who obtains judgment against his
principal cannot execute said judgment against the latter’s
property until he has paid the debt for which he stands as
guarantor. (Kuenzle & Streiff vs. Tan Sunco, supra.)
————
————
————
2. Guarantor brought action against principal debtor for
reimbursement but there was still a controversy as to whether or not
guarantor actually paid creditor.
Facts: G Indemnity Co. filed a complaint against D for
the recovery of P2,000.00 representing the amount of a loan
allegedly taken by D from PNB, the payment of which G
guaranteed with an indemnity bond, and for which D as
counter-guaranty executed in G’s favor a mortgage on a parcel
of land.
There exists a controversy in the complaint and answer
as to whether or not G had actually paid D’s obligation to the
PNB.
Issue: Is the action by the guarantor (or surety) against the
principal debtor for payment before the guarantor has paid the
creditor premature?
Held: Yes. The matter of whether or not the guarantor has
actually paid the creditor should be decided in the affirmative
before the guarantor can claim reimbursement from the
principal debtor. Under the last paragraph of Article 2071, a
guarantor who has not paid the creditor can proceed against
the principal debtor only for the purpose of obtaining release
from the guaranty or a security against an eventual insolvency
of the debtor. An action by the guarantor against the principal
debtor for payment, before the former has paid the creditor, is
premature. (General Indemnity Co., Inc. vs. Alvarez, 100 Phil. 1059
[1957]; see also Banzon vs. Cruz, 15 SCRA 475 [1972].)
291
292
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2071
Recovery by surety against indemnitor
even before payment.
(1) Indemnity agreement for benefit of surety. — An indemnity
agreement is not executed for the benefit of the creditor but
rather for the benefit of the surety; and if the indemnitor
(principal debtor) voluntarily agrees to its terms and conditions,
the obligations arising from the contract have the force of law.
(Mercantile Insurance Co., Inc. vs. Ysmael Jr. & Co., 169 SCRA 66
[1989].)
(2) Indemnity agreement may be against actual loss as well as
liability. — An indemnity agreement whereby the indemnitor
binds himself to indemnify the surety for any damage or prejudice
the latter may sustain under the surety bond, may provide for
indemnification not only against actual loss but against liability
as well. Such agreement is enforceable and not violative of any
public policy.
In a contract of indemnity against loss, an indemnitor will not
be liable until the person to be indemnified makes payment or
sustains loss, while in contract of indemnity against liability, the
indemnitor’s liability arises as soon as the liability of the person
to be indemnified has arisen without regard to whether or not he
has suffered actual loss. (Cochingyan, Jr. vs. R & B Surety & Ins.
Co., 151 SCRA 339 [1987]; Manila Surety & Fidelity Co., Inc. vs.
Court of Appeals, 191 SCRA 805 [1990].)
(3) Such agreement valid. — A stipulation, therefore, in an
indemnity agreement providing that the indemnitor shall pay the
surety as soon as the latter becomes liable to make payment to the
creditor under the terms of the bond, regardless of whether the
surety has made payment actually or not, is valid and enforceable,
and in accordance therewith, the surety may demand from the
indemnitor even before the creditor has paid. Hence, an action
by the surety against the principal debtor and the indemnitor
to enforce payment under such an agreement is not premature.
(Security Bank & Trust Co., Inc. vs. Globe Assurance Co., Inc.,
107 Phil. 733 [1960]; Cosmopolitan Insurance Co. vs. Reyes, 15
SCRA 258 [1965].)
And where the principal debtors are simultaneously the same
persons who executed the indemnity agreement, the position
Art. 2072
GUARANTY AND SURETYSHIP
Effects of Guaranty Between the Debtor and the Guarantor
293
occupied by them is that of a principal debtor and indemnitor at
the same time, and their liability being joint and several with the
surety, the creditor may proceed against either. The principle of
guarantee in Article 2071 does not apply, i.e., there is no more need
for the surety to exhaust all the properties of the principal debtors
before it may proceed against them. (Mercantile Insurance Co.,
Inc. vs. Ysmael, Jr. & Co., supra.)
ART. 2072. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present,
the guarantor who satisfies the debt may sue either the
person so requesting or the debtor for reimbursement. (n)
Guarantor of a third person
at request of another.
The guarantor who guarantees the debt of an absentee at
the request of another has a right to claim reimbursement, after
satisfying the debt either from: (1) the person who requested him
to be a guarantor; or (2) the debtor. (see Art. 2050.)
— oOo —
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TRANSACTIONS
SECTION 3. — Effects of Guaranty as Between
Co-guarantors
ART. 2073. When there are two or more guarantors of
the same debtor and for the same debt, the one among
them who has paid may demand of each of the others the
share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the
same proportion.
The provisions of this article shall not be applicable,
unless the payment has been made in virtue of a judicial
demand or unless the principal debtor is insolvent. (1844a)
Right to contribution of guarantor
who pays.
The obligation of several guarantors of the same debtor and
for the same debt is joint. (see Arts. 1207, 1208.) Each is bound to
pay only his proportionate share. (see Art. 2065.)
(1) Restrictions. — Article 2073 contemplates a situation which
arises when one guarantor has paid the debt to the creditor and is
seeking reimbursement from each of his co-guarantors the share
which is proportionately owing him. It is required, however,
that the payment must have been made (a) in virtue of a judicial
demand, or (b) because the principal debtor is insolvent. (par. 3.)
Without the requirement, the guarantor who pays the debt
under circumstances giving him the right to contribution may
proceed directly against his co-guarantors for their respective
shares, with the latter having to incur the trouble and expense
of claiming afterwards from the debtor what they have paid. On
the other hand, if the guarantor proceeds first against the debtor
(see Art. 2067, par. 1.) who, as a consequence, makes payment,
294
Art. 2074
GUARANTY AND SURETYSHIP
Effects of Guaranty as Between Co-guarantors
295
then not only the debtor but the co-guarantors as well would be
discharged at once from their obligations. In the cases specified,
the guarantor is perfectly justified in paying the debt because any
delay on his part may increase the liability for interest, expenses
and other items. (see Arts. 2055, par. 2; 2059[3, 5].)
(2) Effect of insolvency of any guarantor. — 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. (par. 2.) This follows the rule in solidary obligations.
(see Art. 1217, par. 2.)
(3) Accrual and basis of right. — The right of the guarantor
who has paid the debt in either of the cases specified to demand
proportionate contribution or reimbursement from his coguarantors is acquired ipso jure by the guarantor by virtue of said
payment without the need of obtaining from the creditor any
prior cession of rights to such guarantor.
EXAMPLE:
G, H, and I are D’s guarantors of a debt of P9,000.00 in
favor of C.
If D becomes insolvent, the right of G, H, and I to
proportionate division of their obligation ceases as far as C is
concerned. (Arts. 2065, par. 2; 2059[3].) C may demand payment
of the entire obligation from any of the guarantors. If G pays
the whole debt of P9,000.00 he can later demand from H and I
P3,000.00 each. But if H is insolvent, his share shall be borne by
G and I proportionately. Under paragraph 2, G can, therefore,
demand P4,500.00 from I.
If the benefit of division ceases for reasons other than the
insolvency of the principal debtor (Art. 2059[1, 2, 4, and 5].), the
right to reimbursement granted to G against H and I may only
be exercised if G makes payment in virtue of a judicial demand
by C.
ART. 2074. In the case of the preceding article, the
co-guarantors may set up against the one who paid, the
same defenses which would have pertained to the principal debtor against the creditor, and which are not purely
personal to the debtor. (1845)
COMMENTS AND CASES ON CREDIT
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296
Art. 2075
Defenses available to co-guarantors.
In the action filed by the paying guarantor against his coguarantors for their proportionate shares in the obligation, the
latter may avail themselves of all defenses which the debtor
would have interposed against the creditor but not those which
cannot be transmitted for being purely personal to the debtor.
(see Arts. 2068, 2081.)
EXAMPLE:
In the preceding example, if G sues H and I, the latter
may raise the defense of payment by D by virtue of which the
obligation was extinguished.
Other defenses such as fraud, prescription, remission,
illegality, etc. may also be set up because they are defenses
inherent in the obligation (see Art. 1222.2) the effect of which
is to nullify the obligation or render it effective. But if D was a
minor at the time the obligation was contracted, the defense of
minority is not available to H and I because it is personal to D.
ART. 2075. A sub-guarantor, in case of the insolvency
of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. (1846)
Liability of sub-guarantor in case
of insolvency of guarantor.
In case of the insolvency of the guarantor for whom he bound
himself, a sub-guarantor (Art. 2064.) is liable to the co-guarantors
in the same manner as the guarantor (see Art. 2074.) whom he
guaranteed.
2
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong
to the others, he may avail himself thereof only as regards that part of the debt for which
the latter are responsible.
Art. 2075
GUARANTY AND SURETYSHIP
Effects of Guaranty as Between Co-guarantors
EXAMPLE:
In the example given under Article 2073, if F is the guarantor
of I, and I becomes insolvent, F is liable to G for P3,000.00 or
P4,500.00 if H is also insolvent.
—oOo —
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Chapter 3
EXTINGUISHMENT OF GUARANTY
ART. 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the
same causes as all other obligations. (1847)
Causes of extinguishment of guaranty.
(1) Guaranty being accessory and subsidiary, it is also terminated when the principal obligation is extinguished. (see McConn vs. Associated Insurance & Surety Co., 4 SCRA 251 [1962].)
The causes of extinguishment of obligations, in general, it
will be recalled, are:
(a) payment or performance;
(b) loss of the thing due;
(c) condonation or remission of the debt;
(d) confusion or merger of the rights of the creditor and
debtor;
(e) compensation; and
(f) novation.
(2) Other causes of extinguishment of obligations are
annulment, rescission, fulfillment of a resolutory condition, and
prescription. (Art. 1231.) Death of the principal is not a defense
a surety can use to wipe out its monetary obligation under a
performance bond. The obligation is merely passed on to the
decedent’s estate. A surety’s liability to the creditor or promisee of
the principal is direct and primary like the principal. (Stronghold
Insurance Company, Inc. vs. Republic Asahi Glass Corporation,
492 SCRA 179 [2006].)
298
Art. 2076
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
299
(2) The guaranty itself may be directly extinguished although
the principal obligation still remains such as in the case of the
release of the guarantor made by the creditor. (see Art. 2078.)
Material alteration of principal
contract.
(1) Effect of material alteration. — It is fundamental in the
law of suretyship that any agreement between the creditor and
the principal debtor which essentially varies the terms of the
principal contract without the consent of the surety, will release
the surety from liability. (21 R.C.L., 1004; National Bank vs.
Veraguth, 50 Phil. 253 [1927]; Security Bank and Trust Co., Inc.
vs. Cuenca, 341 SCRA 781 [2000].) It is based on the rule that such
material alteration would constitute a novation or change of the
principal contract which is consequently extinguished. Upon
such extinguishment, the accessory contract to guaranty is also
terminated and the guarantor cannot be held liable on the new
contract to which he has not given his consent.
(2) When alteration material. — In short, the guarantor or surety
will not be released by a change in the principal contract where
such change does not have the effect of making its obligation
more onerous. (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145
[1952].) There must be change which imposes new obligation
or added burden on the party promising or which takes away
some obligation already imposed, changing the legal effect of the
original contract and not merely the form thereof. (NASSCO vs.
Torrento, 20 SCRA 427 [1967].)
(a) Thus, a novation where the credit of P40,000.00 is
increased by an additional P30,000.00 (National Bank vs.
Veraguth, 50 Phil. 253 [1927].); or where the principal debtor
is substituted (Barretto y Cia vs. Albo, 62 Phil. 593 [1935].);
or where the agency to sell granted to the debtor is extended
to places other than that covered by the contract of agency
(Asiatic Petroleum vs. Hizon, 45 Phil. 532 [1923]; but see
Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234 [1957].),
releases the guarantor who did not give consent thereto.
(b) In a case, the increase in the amount of loan from
P40,200 to P56,800 without the knowledge and consent of
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Art. 2076
the surety was held material and prejudicial to the surety
although its ability was limited to P10,000 because “the
increase in the amount of the debt proportionately decreased
the probability of the principal debtor being able to liquidate
the debt, thus, increasing the risk undertaken by the surety
to answer for the failure of the debtor to pay.” (Phil. National
Bank vs. Court of Appeals, 147 SCRA 273 [1987].)
(c) It has been held, however, that the increase in the
interest rates without the guarantor’s consent does not
release the guarantor where the creditor is demanding only
the original and not the increased rate of interest. (National
Bank vs. Escueta, 50 Phil. 991 [1927].)
(d) An assignment by the creditor without the knowledge
or consent of the surety is not a material alteration of the
contract sufficient to discharge the surety. (Phil. National
Bank vs. Macapanga Producers, Inc., 99 Phil. 180 [1956].)
(e) A change in the technical specifications of the items to
be purchased (diameter of the steel bars), but their amount,
length and quality remained unchanged, and, the period
for payment and the amount of liability of the principal
debtor and the surety were also untouched, is not material.
(NASSCO vs. Torrento, 20 SCRA 427 [1967].)
ILLUSTRATIVE CASES:
1. Pursuant to an agreement entered into without the
knowledge of surety, debtor delivered to creditor properties the value
of which surety bound itself to pay should debtor fail to return them.
Facts: In a civil case against D, for the recovery of a sum
of money, C obtained a preliminary attachment of certain
properties of the latter. Later, D secured the discharge of the
attachment by filing a bond posted by S for P2,000.00, the
condition of the bond being that, should C obtain a judgment
against D, the latter would return to the properties discharged
from attachment to the Sheriff, and should he fail to do so, S
would pay the value thereof.
C and D entered into an agreement, without the knowledge
of S whereby D delivered to C the properties in question to
be sold at public auction. C was the highest bidder and the
Art. 2076
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
properties were adjudicated to him. Eventually, C obtained
judgment against D for P2,000.00. C asked for execution against
S.
Issue: Is S released from its obligation as surety?
Held: Yes. The agreement between C and D subsequently
altered their juridical relations as to the properties discharged
from attachment and for the delivery of which S was a surety,
which alteration necessarily released S from its obligation
as surety. The properties having been turned over to C and
thereafter publicly sold and adjudicated to C under said
agreement, the obligation of D to return the properties in
satisfaction, of the judgment, was extinguished and compliance
therewith became impossible by C’s own act (see Art. 1266.),
thereby resulting in the release of the surety from its obligation
to pay the value of said properties. (J.V. House vs. Dela Costa, 68
Phil. 742 [1939].)
————
————
————
2. Respondent contends that the surety bonds executed by
it to guarantee the fulfillment of the obligation under a contract of
sale, had been extinguished by the deed of assignment subsequently
executed by it on the same date.
Facts: Petitioner CSIC, issued two surety bonds in behalf of
private respondent to guaranty the fulfillment of an obligation
under a contract of sale the latter had entered into with the
Singer Sewing Machine Company. In consideration of the
bonds, two indemnity agreements were executed by said
respondent followed by a deed of assignment executed on the
same date.
After respondent’s failure to comply with its obligation
under the contract of sale, petitioner was compelled to pay
under the surety bonds. When respondent failed to reimburse
it, petitioner filed a collection suit. Respondent opposed the
money claim, and asserted that the surety bonds and the
indemnity agreements had been extinguished by the execution
of the deed of assignment.
Issue: Was the obligation under the surety bonds automatically extinguished by the deed of assignment?
Held: No. The deed of assignment cannot be regarded as
an absolute conveyance whereby the obligation under the
surety bonds was automatically extinguished. Respondent’s
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TRANSACTIONS
Arts. 2077-2078
subsequent acts showed that the deed of assignment was
intended merely as a security for the issuance of the two bonds.
The Court found that partial payments were made after the
execution of the deed of assignment to satisfy the obligation
under the two surety bonds. Moreover, a second real estate
mortgage in favor of petitioner was executed by respondent.
These circumstances showed that no debt was extinguished
upon the execution of the deed of assignment, which was
intended merely as another security for the issuance of the
surety bonds. (Citizens Surety and Insurance Co., Inc. vs. Court of
Appeals, 162 SCRA 738 [1988].)
ART. 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he
should afterwards lose the same through eviction, the
guarantor is released. (1849)
Release by conveyance of property.
Usually, payment is made in money. But any substitute paid
in lieu of money which is accepted by the creditor extinguishes
the obligation and in consequence, the guaranty.
If the creditor accepts property in payment of a debt from the
debtor (Art. 1245.), the guarantor is relieved from responsibility.
This is also true even in case the creditor is subsequently evicted
from the property. Eviction revives the principal obligation but
not the guaranty. The creditor’s action against the debtor is for
eviction and this is different from what the guarantor guaranteed.
(see 12 Manresa 363-364.)
ART. 2078. A release made by the creditor in favor of
one of the guarantors, without the consent of the others,
benefits all to the extent of the share of the guarantor to
whom it has been granted. (1850)
Release of guarantor without consent
of others.
As a rule, the guarantors enjoy the benefit of division. (Art.
2065.) However, if any of them should be insolvent all the other
guarantors must bear his share. (Art. 2073.) A release made by
Art. 2079
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
303
the creditor in favor of one of the guarantors without the consent
of the others may thus prejudice the latter should a guarantor
become insolvent.
Under the above article, the release benefits all to the extent
of the share of the guarantor released. (see Araneta and Uy vs.
Commonwealth Insurance Co., 103 Phil. 522 [1958].)
EXAMPLE:
G, H, and I are guarantors for a debt of P9,000.00. If G is
released without the consent of H and I, then H and I will each
be liable for only P3,000.00 or 1/3. H and I are benefited to the
extent of P3,000.00, the share of G.
If the release is made with their consent, H and I will each
be responsible for P4,500.00 or 1/2. If G is released with the
consent only of H, H is liable for P6,000.00 and I, for P3,000.00.
ART. 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not
of itself constitute any extension of time referred to herein.
(1851a)
Release by extension of term granted
by creditor to debtor.
(1) Where release without consent of guarantor. — If the creditor
grants an extension of time to the debtor without the consent
of the guarantor (or surety), the latter is discharged from his
undertaking.
The reason for the rule is the necessity of avoiding prejudice
to the guarantor. The debtor (and/or indemnitors) may become
insolvent during the extension, thus depriving the guarantor of
his right to reimbursement. (12 Manresa 367.) The guarantor has
the right to pay his creditor and to be immediately subrogated
to the creditor’s remedies against the principal debtor upon the
maturity date. (Cochingyan, Jr. vs. R & B Surety and Insurance
Co., 151 SCRA 339 [1987]; Security Bank and Trust Co., Inc. vs.
Cuenca, 341 SCRA 781 [2000].)
304
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TRANSACTIONS
Art. 2079
(a) Payments due to debtor from third persons assigned to
creditor. — Where a surety signed a promissory note issued by
the principal debtor in favor of the creditor because of a deed
of assignment whereby the debtor assigned to the creditor all
payments to be received by the debtor from the third person,
it was held that the approval by the creditor of the release by
the third person of three (3) payments directly to the debtor
without any notice to the surety was a violation of the deed
of assignment. The creditor, in effect, received payments of
the said three (3) releases.
In approving the third payment after the promissory
note became due, the creditor, in effect, extended the term
of the payment of the note without the consent of the debtor,
an act clearly detrimental to the latter. (Prudencio vs. Court
of Appeals, 143 SCRA 7 [1986]; see Toh vs. Solid Bank
Corporation, 408 SCRA 544 [2003].)
(b) Where obligation payable in installments. — Where a
guarantor is liable for different payments, such as installments
for rents, or upon a series of promissory notes, an extension
of time as to one or more will not affect the liability of
the surety for the others. (Villa vs. Garcia Bosque, 49 Phil.
126 [1926].) But if the whole unpaid balance has become
automatically due (under an acceleration clause) for failure
to pay an installment, the act of the creditor of extending
the payment of said installment, without the guarantor’s
consent, discharges the guarantor because, in this case, the
extension constitutes, in fact, an extension of the payment of
the whole amount of the indebtedness. (Radio Corp. of the
Phils. vs. Roa, 62 Phil. 212 [1935.)
(c) Consent to extension waived in advance by guarantor. —
A guarantor may waive in advance his right to be notified of
or to give consent to the release by the creditor of securities
given or the extension of the time for payment. Such waiver
is not contrary to law, nor to public policy. (People’s Bank &
Trust Co. vs. Tambunting, 42 SCRA 119 [1971].) Thus, where
under the terms of the bond executed by a surety company it
had agreed to guarantee that a non-immigrant Chinese student “would actually depart from the Philippines on or be-
Art. 2079
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
305
fore April 7, 1958, or within such period as, in his discretion,
the Commissioner of Immigration or his authorized representative may properly allow,” this amounts to the surety’s
consent to all the extensions granted to the non-immigrant
student referred to. Similarly, the extensions of loans do not
release the surety where the “continuing guarantee’’ executed by the surety provides that he consents and agrees that
the bank “may, at any time or from time to time, extend or
change the time of payments and/or the manner, place or
terms of payment of all such instruments loans, advances,
credits, or other obligations guaranteed by the surety.’’ (Tañedo vs. Allied Banking Corporation, 344 SCRA 100 [2002].)
(d) Payment by guarantor after creditor’s demand. — The
benefit of excussion, as well as the requirement of consent
to extensions of payment are protective devices pertaining
to and conferred on the guarantor which the latter may
invoke as defenses to bar any unwarranted enforcement
of the guarantee. However, the guarantor may opt not to
avail of these defenses by paying the obligation according
to the tenor of the guarantee once demand is made on him
by the creditor. The principal debtor cannot raise against the
guarantor defenses which only the guarantor may invoke
against the creditor. (JN Dev. Corp. vs. Phil. Export and
Foreign Loan Guarantee Corp., 468 SCRA 555 [2005].)
(e) Extension not granted by creditor on the bond. —
Where, by the terms of a bond, the surety guaranteed to the
Government (Dept. of Education) compliance by a private
school “with all its obligations, including the payment of the
salaries of its teachers and employees” and an extension of
time was granted by the teachers, Article 2079 was held not
applicable as the (supposed) extension was not granted by the
Government, the creditor on the bond. (General Insurance &
Surety Corp. vs. Republic, 7 SCRA 4 [1963].)
(f) Extension granted to first-tier obligors. — Where under
the indemnity agreement, whereby the indemnitors bound
themselves jointly and severally to the surety for the faithful
compliance with the terms of the surety bond issued by the
surety in favor of the creditor to secure a credit line extended
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TRANSACTIONS
Art. 2079
to the principal debtor, the indemnitors remained simply
such bound to the surety but not to the creditor. Such creditor
cannot directly demand payment of the principal obligations
from the indemnitors. Hence, the first sentence of Article
2079 does not apply.
The indemnitors are second-tier parties so far as the
creditor is concerned and any extension of time granted by
the creditor to any of the first-tier obligors (the principal
debtor and the surety) cannot prejudice the second-tier
parties. (Cochingyan, Jr. vs. R & B Surety & Ins. Co., Inc., 151
SCRA 339 [1987].)
(2) Prejudice to guarantor and period of extension immaterial.
— It is unimportant whether the extension given has actually
proved prejudicial or not to the guarantor or surety. The rule
stated in Article 2079 is quite independent of the event. Nor does
it matter for how short a period the time of payment may have
been extended. The principle is the same whether the time is
long or short. The creditor must be in such a situation that when
the guarantor or surety comes to be substituted in his place by
paying the debt (see Art. 2067, par. 1.), he may have an immediate
right of action against the principal.
The suspension of the right to sue for a month, or even a day,
is as effectual to release the guarantor or surety, as a year or two
years. (21 R.C.L. 1018-1020; Radio Corp. of the Phils. vs. Roa,
supra.)
(3) Extension must be based on a new agreement. — The extension of the term must be based on some new agreement between
the creditor and the principal debtor by virtue of which the creditor deprives himself of his claim. Hence, the mere failure or neglect on the part of the creditor to enforce payment or to bring
an action upon a credit, as soon as the same or any part of it
matures, does not constitute an extension of the term of the obligation (Hongkong & Shanghai Bank vs. Aldecoa & Co., 30 Phil.
255 [1915].) and, therefore, the liability of the guarantor is not
extinguished.
The rule applies even if the debtor should become insolvent
subsequent to the maturity of the debt. (Bank of the Phil. Islands
Art. 2079
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
307
vs. Albadejo, 53 Phil. 141 [1929].) The reason is that the guarantor
would not be prejudiced since he could avail himself of the right
granted him under Article 2071, namely, to ask the debtor for a
release or to demand a security.
(4) Diligence on the part of creditor to enforce his claim generally
not required. — True, that if the creditor had done any act whereby
the guaranty was impaired in its value, or discharged, such an
act would have wholly or partially released the guarantor or
surety. But it is a recognized doctrine in the matter of suretyship
that with respect to the surety, the creditor is under no obligation
to display any diligence in the enforcement of his rights as a
creditor.
(a) The mere inaction, indulgence, passiveness, or delay
of the creditor in proceeding against the principal debtor,
or the fact that he did not enforce the guaranty or apply on
the payment of such funds as were available constitutes no
defense at all for the surety, unless the contract expressly
requires diligence and promptness on the part of the creditor.
The theory that the creditor’s laches may discharge the
surety, meaning by laches a negligent forbearance, is not
generally accepted. The courts almost universally consider it
essentially inconsistent with the relation of the parties to the
contract. (Clark vs. Sellner, 42 Phil. 384 [1921]; 21 R.C.L. 10321034.)
(b) The raison d’etre for the rule is that there is nothing to
prevent the creditor from proceeding against the principal
at any time. At any rate, if the surety is dissatisfied with the
degree of activity displayed by the creditor in the pursuit
of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor. The
leniency shown to a debtor in default, by delay permitted by
the creditor without change in the time when the debt might
be demanded, does not constitute an extension of the time of
payment, which would release the surety. (No. 3)
(c) In order to constitute an extension discharging the
surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the
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TRANSACTIONS
Art. 2080
principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with
respect to him. The contract must be one which precludes
the creditor from, or at least hinders him in, enforcing the
principal contract within the period during which he could
otherwise have enforced it, and precludes the surety from
paying the debt. (Palmares vs. Court of Appeals, 288 SCRA
422 [1998]; Filipinas Textile Mills, Inc. vs. Court of Appeals,
415 SCRA 635 [2003].)
(5) No cause of action against creditor for delay. — The law does
not even grant the surety the right to sue the creditor for delay, as
protection against the risks of possible insolvency of the debtor;
but in view of the efficacy of the action on the contract against the
surety, beginning with the date the obligation becomes due, his
vigilance must be exercised rather against the principal debtor.
(Shannon & Shannon vs. Phil. Lumber Trans. Co., 61 Phil. 872
[1935].)
ART. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some
act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter. (1852)
Release when guarantor cannot
be subrogated.
(1) Fault of creditor for non-subrogation. — The guarantor who
pays is entitled to be subrogated to all the rights of the creditor.
(Art. 2067.) If there can be no subrogation because of the fault
of the creditor, as when the creditor releases or fails to register
a mortgage, the guarantors are thereby released. The same rule
applies even though the guarantors be solidary.
The rule is founded on the principle of law that the act of one
cannot prejudice another. It also avoids opportunity for collusion
between the creditor and the debtor or a third person.
(2) Duty of creditor to account for his lien on principals’ property.
— If the creditor has acquired a lien upon the property of a
principal, the creditor at once becomes charged with the duty of
Art. 2080
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
309
retaining such security, or maintaining such lien in the interest
of the surety, and any release or impairment of this security as
a primary resource for the payment of a debt, will discharge the
surety to the extent of the value of the property or lien released
for there immediately arises a trust relation between the parties,
and the creditor as trustee is bound to account to the surety
for the value of the security in his hands. (Toh vs. Solid Bank
Corporation, 408 SCRA 544 [2003].)
ILLUSTRATIVE CASE:
(1) Creditor (assignee and agent) was negligent in its duty
under the power of attorney to collect sums due to debtor (assignor
and principal) from the latter’s debtors, thereby allowing such funds
to be exhausted by other creditors.
Facts: A (PNB) had opened a letter of credit and advanced
thereon P120,000.00 for 8,000 tons of hot asphalt in favor of P.
Of this amount, 3,000 tons worth P280,500.00 were released
and delivered to P under a trust receipt guaranteed by S (surety
company). To pay the asphalt, P constituted A, its assignee and
attorney-in-fact to receive and collect from D (Bureau of Public
Works), the amount aforesaid out of funds payable to A.
The assignment stipulated that the power of attorney shall
remain irrevocable until P’s total indebtedness to A has been
fully liquidated.
A regularly collected from D for about eight (8) months.
Thereafter, for unexplained reasons, A stopped collecting
from D, moneys falling due in favor of P before the debt was
fully collected, thereby allowing such funds to be taken and
exhausted by other creditors. A brought suit against P and S to
recover the balance of the indebtedness.
Issue: Is S exonerated from liability to A?
Held: Yes. Even if the assignment with power of attorney
from the principal debtor (P) was considered as a mere
additional security, still, by allowing the assigned funds to
be exhausted without notifying the surety (S), A deprived the
former of the possibility of taking recourse against the security.
A thereby exonerated S, pursuant to Article 2080. (Phil. National
Bank vs. Manila Surety & Fidelity Co., Inc., 14 SCRA 776 [1965].)
————
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Art. 2080
(2) Petitioner obligated itself as a surety of borrower under a
“Continuing Guaranty’’ executed in favor of lender-bank.
Facts: Respondent Spouses applied for a loan with
respondent SOLIDBANK. The loan was granted subject to the
condition that Spouses execute a chattel mortgage over the
three (3) vessels to be acquired by them and that a continuing
guarantee be executed by petitioner EZ, Inc. in favor of Solid
Bank.
The following, among others, are the pertinent stipulations,
in the “Continuing Guaranty:
“For and in consideration of any existing indebtedness
to you of Agro Brokers, a single proprietorship owned by
Mr. Raul Claveria for the payment of which the undersigned
is now obligated to you as surety and in order to induce
you, in your discretion, at any other manner, to, or at the
request or for the account of the borrower, x x x.
x x x If default be made in the payment of any of the
instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or
the undersigned should die, dissolve, fail in business, or
become insolvent, x x x, or if any funds or other property
of the Borrower, or of the undersigned which may be or
come into your possession or control or that of any third
party acting in your behalf as aforesaid should be attached
or distrained, or should be or become subject to any
mandatory order of court or other legal process, then, or
any time after the happening of any such event any or all of
the instruments of indebtedness or other obligations hereby
guaranteed shall, at your option become (for the purpose
of this guaranty) due and payable by the undersigned
forthwith without demand of notice x x x.’’
Spouses defaulted in the payment of the entire obligation
upon maturity. SOLIDBANK filed a complaint for sum of
money with a prayer for preliminary attachment against
Spouses and EZ, Inc.
Petitioner moved to dismiss the complaint on the ground
that its liability as guarantor of the loan was extinguished
pursuant to Article 2080 of the Civil Code of the Philippines.
It argued that it has lost its right to be subrogated to the first
chattel mortgage in view of SOLIDBANK’s failure to register
Art. 2080
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
the chattel mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article
2080 is not applicable because petitioner is not a guarantor
but a surety. The Court of Appeals affirmed the decision of the
Regional Trial Court in favor of SOLIDBANK.
Issues: (1) Whether Article 2080 is applicable to petitioner;
(2) Whether petitioner’s obligations to SOLIDBANK
under the continuing guaranty is that of a surety; and
(3) Whether the failure of SOLIDBANK to register
the chattel mortgage extinguish petitioner’s liability to
SOLIDBANK.
Held: (1) Guaranty and surety distinguished. — “Strictly
speaking, guaranty and surety are nearly related, and many
of the principles are common to both. However, under our
civil law, they may be distinguished thus: A surety is usually
bound with his principal by the same instrument, executed at
the same time, and on the same consideration. He is an original
promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will
not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor’s own
separate undertaking, in which the principal does not join. It
is usually entered into before or after that of the principal, and
is often supported on a separate consideration from that supporting the contract of the principal. The original contract of
his principal is not his contract, and he is not bound to take
notice of its non-performance. He is often discharged by the
mere indulgence of the creditor to the principal, and is usually
not liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in
that a guarantor is the insurer of the solvency of the debtor and
thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay
if the principal does not pay.’’
(2) Petitioner obligated itself as a surety. — “Based on the
aforementioned definitions, it appears that the contract executed
by petitioner in favor of SOLIDBANK, albeit denominated as a
“Continuing Guaranty,” is a contract of surety. The terms of the
311
312
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2080
contract categorically obligate petitioner as “surety” to induce
SOLIDBANK to extend credit to respondent spouses.
The contract clearly discloses that petitioner assumed
liability to SOLIDBANK, as a regular party to the undertaking
and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the respondent
spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses’ properties before it
can hold petitioner liable for the obligation.’’
(3) Terminology used not controlling. — “The use of the term
“guarantee” does not ipso facto mean that the contract is one
of guaranty. Authorities recognize that the word “guarantee”
is frequently employed in business transactions to describe
not the security of the debt but an intention to be bound by a
primary or independent obligation. (24 Am. Jur. 876, cited in De
Leon, Credit Transactions, 1984 ed., p. 187.) As aptly observed by
the trial court, the interpretation of a contract is not limited to
the title alone but to the contents and intention of the parties.
(4) Article 2080 not applicable where liability is as surety. —
“Having thus established that petitioner is a surety, Article
2080 of the Civil Code, relied upon by petitioner, finds no
application to the case at bar. In Bicol Savings and Loan Association
vs. Guinhawa (188 SCRA 647 [1990]), we have ruled that Article
2080 of the New Civil Code does not apply where the liability
is as a surety, not as a guarantor.’’
(5) Petitioner bound itself irrespective of existence of collateral.
— “But even assuming that Article 2080 is applicable,
SOLIDBANK’s failure to register the chattel mortgage did
not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound
itself to the contract irrespective of the existence of any collateral.
It even released SOLIDBANK from any fault or negligence that
may impair the contract. The pertinent portions of the contract
so provides:
x x x the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence, value
or condition of any collateral, x x x.
x x x No act or omission of any kind on your part in the premises
shall in any event affect or impair this guaranty, x x x.
Art. 2081
GUARANTY AND SURETYSHIP
Extinguishment of Guaranty
313
No reversible error was committed by the Court of Appeals
in rendering the assailed decision. ’’ (E. Zobel, Inc. vs. Court of
Appeals, 290 SCRA 1 [1998].)
ART. 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor
and are inherent in the debt; but not those that are purely
personal to the debtor. (1853)
Defenses available to guarantor
against creditor.
The defenses available to a debt as against a guarantor are
provided in Article 2068, and those available to co-guarantors in
Article 2074.
Article 2081 provides for the defenses, except those which
are purely personal to the debtor, that may be interposed by the
guarantor as against the creditor. Inasmuch as the guarantor
proceeded against takes the place of the debtor, it would be
absurd and unjust to deny him the defenses of the latter because
the guarantor who is only subsidiarily liable would be put in a
worse position than the debtor, the one principally liable.
— oOo —
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
314
Chapter 4
LEGAL AND JUDICIAL BONDS
ART. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have
the qualifications prescribed in Article 2056 and in special
laws. (1854a)
Meaning and form of bond.
A bond, when required by law, is commonly understood to
mean an undertaking that is sufficiently secured, and not cash
or currency. Of course, whatever surety bonds are submitted
are subject to any objections as to their sufficiency or as to the
solvency of the bondsman. (Comm. of Customs vs. Alikpala, 36
SCRA 208 [1970].)
Qualifications of personal bondsman.
A bondsman is a surety (Art. 2047, par. 2.) offered in virtue
of a provision of law or a judicial order. He must have the
qualifications required of a guarantor (Art. 2056.) and in special
laws like the Rules of Court (Secs. 12, 13, Rule 114, Rules of
Court.1);
1
Sec. 12. Qualifications of sureties in property bond. — The necessary qualifications of
sureties to a property bond shall be as follows:
(a) Each of them must be a resident owner of real estate with in the Philippines;
(b) Where there is only one surety, his real estate must be worth at least the amount
of the undertaking; and
(c) In case there are two or more sureties, they may justify severally in amounts
less than that expressed in the undertaking, if the entire sum justified to is equivalent to
the whole amount of bail demanded.
In all cases, every surety must be worth the amount specified in the undertaking
over and above all just debts, obligations and property exempt from execution.
314
Arts. 2083-2084
GUARANTY AND SURETYSHIP
Legal and Judicial Bonds
315
Nature of bonds.
All bonds including “judicial bonds” are contractual in
nature. Bonds exist only in consequence of a meeting of minds
under the conditions essential to a contract. (see Art. 1305.)
Judicial bonds constitute merely a special class of contracts of
guaranty, characterized by the fact that they are given “in virtue
. . . of a judicial order.” (Gerardo vs. Plaridel Surety and Ins., Co.,
100 Phil. 178 [1956].)
ART. 2083. If the person bound to give a bond in the
cases of the preceding article, should not be able to do so,
a pledge or mortgage considered sufficient to cover his
obligation shall be admitted in lieu thereof. (1855)
Pledge or mortgage in lieu of bond.
Guaranty or suretyship is a personal security. On the other
hand, pledge or mortgage is a property or real security. 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 be admitted in lieu thereof.
ART. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety.
Bondsman not entitled to excussion.
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. (see Almarza
vs. Salas, 47 Phil. 724 [1925].)
Effect of negligence of creditor.
The contract of suretyship is not that the creditor will see
that the principal debtor pays his debt or fulfills his contract,
but that the surety will see that the debtor pays or performs. (50
316
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2084
Am. Jur. 904.) Hence, mere negligence on the part of the creditor
in collecting from the debtor will not relieve the surety from
liability.
ILLUSTRATIVE CASE:
Creditor neglected to collect from principal debtor’s debtors,
contrary to its duty as holder of irrevocable power of attorney from
debtor.
Facts: See illustrative case under Article 2080.
A (PNB) contends that the power of attorney obtained from
P was merely an additional security in its favor and that it was
the duty of S (surety) and not that of the creditor (A), to see to
it that the obligor (P) fulfills its obligation, and that the creditor
owed the surety no duty of active diligence to collect any sum
from the principal debtor.
Issue: Is the argument of A tenable?
Held: No. A is not held answerable for negligence in failing
to collect from the principal debtor (P) but for its neglect in
collecting the sums due to the debtor from D (Bureau of Public
Works), contrary to its duty as holder of an exclusive and
irrevocable power of attorney to make such collections. (Arts.
1884, 1887.2) The power of A to collect was expressly made
irrevocable, so that D could very well refuse to make payments
to P, itself, and a fortiori reject any demands by S. (Phil. National
Bank vs. Manila Surety & Fidelity Co., Inc., 14 SCRA 776 [1965].)
— oOo —
2
Art. 1884. The agent is bound by his acceptance to carry out the agency, and is liable
for the damages which, through his non-performance, the principal may suffer. x x x.
Art. 1887. In the execution of the agency, the agent shall act in accordance with the
instructions of the principal.
In default thereof, he shall do all that a good father of a family would do, as required
by the nature of the business.
317
VI
PLEDGE*
(Arts. 2085-2123.)
Chapter 1
PROVISIONS COMMON TO PLEDGE
AND MORTGAGE
ART. 2085. The following requisites are essential to the
contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of
a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (1857)
ART. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)
ART. 2087. It is also of the essence of these contracts
that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated
for the payment to the creditor. (1858)
*Title XVI, Book IV, Civil Code.
317
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
318
Arts. 2085-2087
Definition of pledge.
Pledge is a contract by virtue of which the debtor delivers
to the creditor or to a third person a movable (Art. 2094.) or
document evidencing incorporeal rights (Art. 2095.) for the
purpose of securing the fulfillment 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.
Kinds of pledge.
Pledge may be either:
(1) Voluntary or conventional or one which is created by
agreement of the parties; or
(2) Legal or one which is created by operation of law. (see Art.
2121.)
Characteristics of the contract.
Pledge is:
(1) a real contract because 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) an accessory contract because it has no independent existence of its own;
(3) a unilateral contract because it creates an obligation solely
on the part of the creditor to return the thing subject thereof upon
the fulfillment of the principal obligation; and
(4) a subsidiary contract because the obligation incurred does
not arise until the fulfillment of the principal obligation which is
secured.
Cause or consideration in pledge.
Pledge is an accessory contract. Its cause insofar as the
pledgor is concerned is the principal obligation. But if he is not
the debtor (Art. 2085, par. 2.), the cause is the compensation
stipulated for the pledge or the mere liberality of the pledgor. As
an accessory contract, its validity would depend on the validity
of the principal obligation secured by it.
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
319
Essential requirements of pledge
and mortgage.
Pledge, mortgage (see Art. 2124.), chattel mortgage (Art.
2140.), and antichresis (Art. 2132.) are different species of that kind
of contracts which are all intended to secure the performance of
a principal and pre-existing obligation by specially subjecting to
such security, property or the fruits thereof. While they possess
certain common characteristics, each has certain special features
which are not present in the others.
(1) Common requisites. — Articles 2085 and 2087 enumerate
the essential requisites common to pledge and mortgage. Thus,
a mortgage executed before the mortgagor became the owner
of the property, such as before the issuance of a patent to the
mortgagor, is void and ineffective (Vda. de Bautista vs. Marcos,
3 SCRA 434 [1961].) In all these contracts, ownership of the thing
given as security is retained by the debtor.
A pledge or mortgage, being merely an accessory agreement,
its invalidity does not affect the principal contract of loan. While
void, it can still be considered as an instrument evidencing an
indebtedness. (Philippine National Bank vs. Banalao, 584 SCRA
95 [2009].)
(2) Necessity of delivery. — In addition to the said requisites,
the thing pledged must be delivered to the creditor or to a third
person by common agreement. (Art. 2093.) Without delivery
there can be no pledge because, precisely, in this delivery lies
the security of the pledge. (12 Manresa 411.) In a contract of
mortgage, the mortgagor, as a general rule, retains the possession
of the property mortgaged. (Legaspi vs. Celestial, 66 Phil. 372
[1938]; Cosio and de Rama vs. Palileo, 17 SCRA 196 [1966].)
Constituted to secure fulfillment
of a principal obligation.
Pledge and mortgage are purely accessory contracts like
guarantee. They cannot exist without a valid obligation. (Manila
Surety & Fidelity Co. vs. Velayo, 21 SCRA 515 [1957]; Abustan
vs. Ferrer, 12 SCRA 488 [1964].) However, they may guarantee a
voidable, unenforceable, or natural obligation. (Arts. 2086, 2052.)
320
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2085-2087
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was
used or what the form of the transfer was. It has been said that a
transfer of property by the debtor to a creditor, even if sufficient
on its face to make an absolute conveyance, should be treated as
a pledge (or mortgage) if the debt continues in existence and is
not discharged by the transfer. Thus:
(1) Assignment of stocks executed by debtor together with indemnity agreement. — In a case where the deed of assignment of stocks
executed by the principal debtor in favor of his surety speaks
of an outright sale, the fact that the debtor also executed an indemnity agreement (which connotes a continuing obligation of
debtor to surety) to indemnify the surety against all losses which
it may incur in consequence of it having become a surety upon a
bond in favor of the principal creditor was held as inconsistent
with the theory of an absolute sale and as proof (together with
other circumstances) that the parties intended the stock assignment as a pledge to complement the indemnity agreement and
thereby sufficiently guarantee the indemnification of the surety
should it be required to pay the creditor. (Lopez vs. Court of Appeals, 144 SCRA 671 [1982].)
(2) Assignment of rights executed to guarantee an obligation. — An
assignment of rights, receivables, title or interest under a contract
to guarantee an obligation is, in effect, a pledge or mortgage and
not an absolute conveyance of title which confers ownership on
the assignee. In case of doubt as to whether a transaction is a
pledge (or mortgage) or a dation in payment, the presumption
is in favor of pledge, the latter being the lesser transmission of
rights and interests. (Manila Banking Corp. vs. Teodoro, Jr., 169
SCRA 95 [1989].)
Constituted by the absolute owner.
(1) It is essential that the contract be constituted only by the
absolute owner of the thing pledged or mortgaged (see De Lara
vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs. Phil. National Bank, 96
Phil. 157 [1954].), or at least by the pledgor or mortgagor with
the authority or consent of the owner of the property pledged or
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
321
mortgaged.1 A pledge or mortgage constituted by an impostor
is void and the pledgee or mortgagee in such a case acquires no
right whatsoever in the property.2
(2) A foreclosure sale, though essentially a forced sale, is still
a sale in accordance with Article 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes obliged
to transfer the ownership of the thing sold to the highest bidder
who, in turn, is obliged to pay therefor the bid price in money
or its equivalent. Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure sale. This is
the reason why Article 2085 of the Civil Code, in providing for
the essential requisites of the contract of mortgage and pledge,
requires, among other things, that the mortgagor or pledgor
be the absolute owner of the thing pledged or mortgaged, in
anticipation of a possible foreclosure sale should the mortgagor
default in the payment of the loan. (Cavite Development Bank
vs. Lim, 324 SCRA 346 [2000].)
Property pledged or mortgaged.
(1) Future property. — Future property cannot be pledged or
mortgaged. (Dilag vs. Heirs of Resurreccion, 76 Phil. 650 [1946];
see Gen. Insurance & Surety Co. vs. Masakayan, 54 SCRA 120
[1973]; Vda. de Bautista vs. Marcos, 3 SCRA 434 [1961].)
(2) Property acquired subsequently. — A pledge or mortgage
executed by one who is not the owner of the property pledged
or mortgaged is without legal existence and registration cannot
validate it. (Phil. National Bank vs. Rocha, 55 Phil. 497 [1930].)
Thus, a mortgage executed before the mortgagor became the
1
“The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks x x x Banks indeed should exercise more care and
prudence in dealing with registered lands than private individuals for their business is
one affected with public interest, keeping in trust money belonging to their depositors
which they should guard against loss by not committing any act of negligence which
amounts to lack of good faith.’’ (Robles vs. Court of Appeals, 328 SCRA 97 [2000]; Tomas vs. Tomas, 98 SCRA 280 [1980].) It has been held that the due diligence required of
banks extends even to persons or institutions regularly engaged in the business of lending money secured by real estate mortgages. (Government Service Insurance System vs.
Santiago, 414 SCRA 563 [2003].)
2
See “Doctrine of mortgagee in good faith, under Article 2125.
322
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2085-2087
owner of the property, such as before the issuance of a patent
to the mortgagor, is void and ineffective. (Vda. de Bautista vs.
Marcos, 3 SCRA 434 [1961].) It is the registration and issuance of
the certificate of title that segregate public lands from the mass of
public domain and convert it into private property. (Development
Bank of the Phils. vs. Court of Appeals, 253 SCRA 414 [1996].)
(3) Transfer of motor vehicles registered subsequently. — The fact,
however, that the chattel mortgage of a car was executed on a
date earlier than the transfer of the registration certificate thereof
in the name of the buyer-mortgagor but after the perfection of
the contract of sale, does not render the said mortgage made by
the latter in favor of the seller invalid, because the registration of
the transfer of motor vehicles and of the certificates of license for
their use in the Motor Vehicles Offices (now Land Transportation
Office) merely constitutes an administrative proceeding which
does not bear any essential relation to the contract entered into
between the parties. (Montano vs. Lim Ang, 7 SCRA 250 [1963].)
(4) Share in a co-ownership. — Under Article 493 of the Civil
Code, “[e]ach co-owner shall have the full ownership of his part
and of the fruits and benefits pertaining thereto, and he may,
therefore, alienate, assign or mortgage it, and even substitute
another person in its enjoyment, except when personal rights are
involved. But the effect of the alienation or the mortgage, with
respect to the co-owners, shall be limited to the portion which
may be allotted to him in the division upon the termination of
the co-ownership.” Hence, a mortgage of a conjugal property by
one of the spouses is valid only as to one-half (1/2) of the entire
property. (Phil. National Bank vs. Court of Appeals, 98 SCRA 207
[1980].)
(5) Property covered by Torrens title. — Article 2085 which
requires that the mortgagor must have the free disposal of the
property or at least have legal authority to do so, does not apply
where the property involved is registered under the torrens
system. While it is true that under Article 2085 it is essential that
the mortgagor be the absolute owner of the property mortgaged,
a mortgagee has the right to rely upon what appears in the
certificate of title and does not have to inquire further. Stated
differently, an innocent purchaser for value (like mortgagee)
relying on a Torrens title issued is protected. (Duran vs. Inter-
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
323
mediate Appellate Court, 138 SCRA 491 [1985]; Cebuhat vs.
Court of Appeals, 366 SCRA 176 [2001].) This is the doctrine of
“the mortgagee in good faith.’’ The public interest in upholding
the indefeasibility of a certificate of title as evidence of lawful
ownership of the land or of any encumbrance thereon, protects a
buyer or mortgagee who, in good faith, relied upon what appears
on the face of the certificate of title. (Cavite Development Bank
vs. Lim, supra; Llanto vs. Alzona, 450 SCRA 288 [2005].)
The rule (see Note 1.) that persons dealing with registered
lands can rely solely on the certificate of title does not apply to
banks which should exercise more case and prudence in dealing
with registered lands, than private individuals, for their business
is one affected with public interest. If a bank failed to observe
due diligence in ascertaining the real owner of registered land
given as security for a loan especially where the amount thereof
is substantial, it cannot be considered a mortgagee in good faith.
This doctrine can well apply to the GSIS, a government corporation
created for the purpose of providing social security and insured
benefits to government employees, whose funds come from the
monthly contributions of its members. (Government Service
Insurance System vs. Court of Appeals, 287 SCRA 204 [1998];
see Cavite Development Bank vs. Lim, supra; Canlas vs. Court of
Appeals, 326 SCRA 415 [2000].)
ILLUSTRATIVE CASE:
The property in question was mortgaged by the registered owner,
the previous registered owner claiming that the sale thereof to the
former by the latter was a forgery.
Facts: A deed of sale of ten lots was made by D (daughter)
in favor of R (mother) who mortgaged the same property to
E in whose favor a certificate of sale was issued by the sheriff
after foreclosure proceedings and sale at public auction of the
property. D claims that the deed of sale in favor of R is a forgery.
At the time the mortgage was executed, E, in good faith,
actually believed R to be the owner, as evidenced by the
registration of the property in her name.
Issue: Is the mortgage made by R in favor of E valid?
324
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2085-2087
Held: Yes. “Even on the supposition that the sale was void,
the general rule that the direct result of a previous illegal contract cannot be valid (on the theory that the spring cannot rise
higher than its source) cannot apply here for we are confronted
with the functionings of the Torrens System of Registration.
The doctrine to follow is simple enough: A fraudulent or forged
document of sale may become the root of a valid title if the certificate of title has already been transferred from the name of
the owner to the name of the forger or the name indicated by
the forger.”
E was a buyer (mortgagee) in good faith and for value at
the time the mortgage was executed. The fact that at the time
of the foreclosure proceedings E may have already known of
D’s claim is immaterial. A mortgagee has the right to rely on
what appears in the certificate of title and, in the absence of
anything to excite suspicion, he is under no obligation to look
beyond the certificate and investigate the title of the mortgagor
appearing on the face of said certificate.
If the rule were otherwise, the efficacy and conclusiveness
of Torrens certificates of title would be futile and nugatory.
Where innocent third persons relying on the correctness of
the certificate of title issued, acquire rights over the property,
the court cannot disregard such rights and order the total
cancellation of the certificate for that would impair public
confidence in the certificate of title; otherwise, everyone
dealing with property registered under the Torrens System
would have to inquire in every instance as to whether the title
had been regularly or irregularly issued by the court. Indeed,
this is contrary to the evident purpose of the law. (Duran vs.
Intermediate Appellate Court, supra.)
Pledgor or mortgagor has free disposal
of property or has legal authority.
The act of pledging or mortgaging is an act of strict ownership
involving as it does an alienation or transmission of real rights
in property. Hence, the pledgor or mortgagor must have the
capacity or authority to dispose of the property.
(1) “Free disposal of the property” means that the property
must not be subject to any claim of a third person.
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
325
(2) “Capacity to dispose of property” means that the
pledgor or mortgagor has the capacity or the authority to make a
disposition of the property.
Thing pledged or mortgaged
may be alienated.
This is also the essence of pledge and mortgage because they
are constituted to secure the fulfillment of a principal obligation.
Although this condition is not expressly stated in the contract, it
is necessarily implied as an inherent element of the transaction of
mortgage or pledge. (see Afable vs. Ruiz, [CA] No. 17164-R, Dec.
7, 1959, 56 O.G. 3767.) So, the creditor does not automatically
become the owner if at the time stipulated the obligation is still
unfulfilled. (see Art. 2112.)
The only remedy given to the mortgagee or pledgee is to
have the security given sold at public auction and the proceeds of
the sale applied to the payment of the obligation secured by the
mortgage or pledge. (Martinez vs. Phil. National Bank, 93 Phil.
765 [1953].) The pledgor remains the owner during the pendency
of the pledge and prior to foreclosure and sale. (see Arts. 2103,
par. 1; 2112.)
In the sale of the property mortgaged or pledged, just as in any
ordinary contract of sale, there must be a “meeting of the minds”
with respect to the specific subject of the contract, i.e., that what
the vendor is selling is exactly what the vendee is purchasing.
In the absence of such understanding as to the identity of the
property being sold, no sale may be considered perfected. (see
Lang vs. Acting Prov. Sheriff of Surigao, 93 Phil. 661 [1953].)
Creditor not required to sue
to enforce his credit.
The pledgee or mortgagee is not obligated to file an
independent action for the enforcement of his credit. To do so
would be a nullification of his lien and would defeat the purpose
of the pledge or mortgage which is to give him preference over
the property given as security for the satisfaction of his credit.
(see Northern Motors, Inc. vs. Coquia, 68 SCRA 374 [1975].)
326
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2085-2087
Pledgor or mortgagor may be
a third person.
It is not necessary that the principal debtor should always be
the pledgor or mortgagor. (Art. 2085, par. 2.)
(1) Accommodation pledge or mortgage. — It is not necessarily
void simply because the accommodation pledgor or mortgagor
did not benefit from the same. Ordinarily, he is not himself a
recipient of the loan, otherwise that would be contrary to his
designation as such. It is not always necessary that he should
be appraised beforehand of the entire amount of the loan. (see
Belo vs. Philippine National Bank, 353 SCRA 359 [2001].) As
long as valid consent was given, the fact that the loan was solely
for the benefit of the debtor would not invalidate the pledge or
mortgage. (Lustan vs. Court of Appeals, 266 SCRA 663 [1997];
Vda. de Jayme vs. Court of Appeals, 390 SCRA 380 [2002].)
(2) Duty of mortgagee to make proper inquiry. — The creditor,
however, is required to exercise due care and prudence by making
proper inquiry where the debtor borrows money and mortgages
another person’s property to secure the loan without the consent
of the latter and he is guilty of negligence if he relied solely
on the representations made by the debtor, particularly where
the creditor is engaged in the banking business — a business
affected with public interest. (Rural Bank of Caloocan, Inc. vs.
Court of Appeals, 104 SCRA 151 [1981].) Where the mortgagee
acts with undue haste in granting mortgage loans and does not
ascertain the ownership of the lands being mortgaged, as well as
the authority of the supposed agent executing the mortgage, it
cannot be considered an innocent mortgagee. (Insurance Services
and Commercial Traders, Inc. vs. Court of Appeals, 341 SCRA
572 [2000].)
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. (Government Service Insurance System
vs. Court of Appeals, 170 SCRA 533 [1989].)
(3) Where mortgage gratuitous. — Where the contract of
mortgage (or pledge) is purely gratuitous, the same should be
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
327
strictly construed. In accordance with Article 1378 of the Civil
Code, said contract should be so interpreted as to effect “the
least transmission of rights or interests” as possible. (Buiser vs.
Cabrera, 81 Phil. 669 [1948].)
(4) Liability for deficiency. — The pledgor or mortgagor who
pledged or mortgaged his property to guarantee an indebtedness
of another person, 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. (See
Parson Hardware Co., Inc. vs. Acosta, [CA] Nos. 1943-44-R, May
5, 1949; Phil. Trust Co. vs. Echaves, 52 Phil. 852 [1929]; Bank of
America vs. American Realty Corporation, 321 SCRA 659 [1999];
see Wise & Co. vs. Tanglao, 63 Phil. 372 [1936], under Art. 2058.)
(a) He is not solidarily bound with the principal obligor.
Although pledge or mortgage may be an accessory contract,
that fact alone does not make a third party pledgor or
mortgagor solidarily bound with the principal debtor in
fulfilling the principal obligation. His liability extends only
to the property pledged or mortgaged. Should there be any
deficiency, the creditor has recourse on the principal debtor,
the signatory to the principal contract, who remains to be
primarily bound.
(b) A special power of attorney authorizing another to
mortgage one’s property as security of the former’s obligation does not of itself make the person executing the same a
co-mortgagor of the debtor. (Cerna vs. Court of Appeals, 220
SCRA 517 [1993].) Thus, it has been held that an accommodation mortgagor as such is not in any way liable for the payment of the loan or principal obligation of the debtor/borrower. His liability extends only up to the loan value of his
mortgaged property and not to the entire loan itself. Hence,
he may redeem his mortgaged property by paying only the
winning bid price thereof (plus interest and expenses thereon) at the public auction sale. (Belo vs. Philippine National
Bank, supra.)
328
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TRANSACTIONS
Arts. 2085-2087
ILLUSTRATIVE CASE:
Jewelry delivered to agent for sale on commission was pledged by
him without knowledge of owner to pawnshop which acted in good
faith.
Facts: P (principal) brought action for replevin of certain
jewelry owned by her which she delivered for sale on
commission to A (agent), and pledged without her knowledge
by A in the pawnshop of B, who refused to deliver the said
jewelry unless first redeemed. B acted in good faith in accepting
the pledge.
Issue: Has B the right to collect the sum loaned to A out of
the value of the said jewelry?
Held: No. The contract of pledge was null and void, since
A was not the owner of the jewelry pledged. “Between the
supposed good faith of B and the undisputed good faith of P,
the owner of the jewelry, neither law nor justice permit that the
latter, after being the victim of embezzlement, should have to
choose one of the two extremes of a dilemma, both of which
without legal ground or reason, are injurious and prejudicial to
his interests and rights, that is, she must either lose her jewelry
or pay a large sum received by the embezzler as a loan from B,
when P is not related to the latter by any legal or contractual
bond out of which legal obligations arise.
The business of pawnshops, in exchange for the high and
onerous interest which constitutes its enormous profits, is
always exposed to the contingency of receiving in pledge or
security for the loans, jewels and other articles that have been
robbed, stolen, or embezzled from their legitimate owners, and
as the owner of the pawnshop accepts the pledging of jewelry
from the first bearer who offers the same and asks for money
on it, without assuring himself whether such bearer is not the
owner thereof, he cannot, by such procedure, expect from the
law more preferential protection than the owner of the jewels
or other articles, who was deprived thereof by means of a
crime and is entitled to be excused by the courts.” (Arenas vs.
Raymundo, 19 Phil. 46 [1911].)
Note: The owner of personal property may recover the
possession of the same from a pawnshop where another person
had pledged it without authority to do so. Article 5993 applies
3
Art. 559. The possession of movable property acquired in good faith is equivalent
to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived
thereof, may recover it from the person in possession of the same.
Arts. 2085-2087
PLEDGE
Provisions Common to Pledge and Mortgage
329
and the defense that the pawnshop acquired possession of the
thing without notice of any defect in the title of the pledgor is
unavailing. The owner is not estopped from pursuing an action
against the pawnshop for the recovery of the possession of the
property.
Teehankee, J., concurring: The phrase “unlawfully deprived”
in Article 559 extends to all cases where there has been no
valid transmission of ownership, including the case where the
proprietor has entrusted the thing to a borrower, depositary, or
lessee who has sold the same. It is not used in the specific sense
of deprivation by robbery or theft. To recover the lost article,
the criminal conviction of the embezzler is not essential. (Dizon
vs. Suntay, 47 SCRA 160 [1972].)
Pledge and real mortgage distinguished.
The following are the distinctions.
(1) Pledge is constituted on movables (Art. 2094.), while
mortgage, on immovables. (Art. 2124.)
(2) In pledge, the property is delivered to the pledgee, or by
common consent to a third person (Art. 2093.), while in mortgage,
delivery is not necessary (Legaspi & Salcedo vs. Celestial, 66 Phil.
372 [1938].); and
(3) Pledge is not valid against third persons unless a
description of the thing pledged and the date of the pledge
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return
without reimbursing the price paid therefor.
Art. 104. What is included in civil liability. — The civil liability established in Articles
100, 101, 102, and 103 of this Code includes:
1.
Restitution;
2.
Reparation of the damage caused;
3.
Indemnification for consequential damages. (Rev. Penal Code)
Art. 105. Restitution — How made. — The restitution of the thing itself must be made
whenever possible, with allowance for any deterioration, or diminution of value as
determined by the court.
The thing itself shall be restored, even though it be found in the possession of a third
person who has acquired it by lawful means, saving to the latter his action against the
proper person who may be liable to him.
This provision is not applicable in a case in which the thing has been acquired by the
third person in the manner and under the requirements which, by law, bar an action for
its recovery. (Rev. Penal Code)
330
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TRANSACTIONS
Art. 2088
appear in a public instrument (Art. 2096.), while mortgage is not
valid against third persons if not registered. (Art. 2125.)
For definition of “mortgage,” see comments under Article
2124.
ART. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void. (1859a)
Right of creditor where debtor fails
to comply with his obligation.
The property given in pledge or mortgage stands as security
for the fulfillment of the principal obligation. (Art. 2085, par. 1.)
(1) Sale of subject properly with formalities required by law. —
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 (Art. 2087.) with the formalities
required by law in order to collect the amount of his claim from
the proceeds. (see Rango vs. Salmon, 15 Phil. 436 [1910]; Guanzon
vs. Argel, 33 SCRA 374 [1970]; Mahoney vs. Tuason, 39 Phil. 952
[1919].)
Upon failure of the mortgagor to pay his obligation within
the required period, the remedy of the mortgagee is to foreclose
the mortgage and if he wishes to secure a title to the mortgaged
property, he can buy it in the foreclosure sale. An action for consolidation of ownership is an inappropriate remedy on the part
of the mortgagee in equity. (Montevirgen vs. Court of Appeals,
112 SCRA 641 [1982]; Vergara vs. People, 450 SCRA 482 [2005].)
(2) Prohibition against appropriation of property. — The pledgor’s or mortgagor’s default does not operate to vest in the
pledgee or mortgagee the ownership of the property for any
such effect is against public policy. The creditor in a contract of
real security like pledge and mortgage, cannot appropriate to
himself without foreclosure the thing held as pledge or under
mortgage, nor can he dispose of the same as owner. (Art. 2088.)
The prohibition applies to an immovable which is the object of
the contract of antichresis. (see Art. 2137.) The act of the mortgagee, for example, in registering the property mortgaged in his
Art. 2088
PLEDGE
Provisions Common to Pledge and Mortgage
331
own name upon the mortgagor’s failure to redeem the property
would amount to the exercise of the privilege of a mortgagee in
a pactum commissorium. (Reyes vs. Sierra, 93 SCRA 472 [1979]; A.
Francisco Realty & Development Corp. vs. Court of Appeals, 298
SCRA 349 [1998].)
The only exception to pactum commissorium is provided in
Article 2112.
Prohibition against pactum commissorium.
(1) Stipulation null and void. — A stipulation whereby the
thing pledged or mortgaged or under antichresis (Art. 2137.)
shall automatically become the property of the creditor in the
event of nonpayment of the debt within the term fixed is known
as pactum commissorium or pacto commisorio which is forbidden
by law and declared null and void. (Art. 2088; see Vda. de Reyes
vs. De Leon, 20 SCRA 369 [1967]; Hechanova vs. Adil, 144 SCRA
450 [1986].) By such a stipulation, the creditor would be able to
acquire ownership of the property given as security without
need of public sale or foreclosure required by law.
“This forfeiture clause has traditionally been outlawed
because it is contrary to good morals and public policy.” (Report
of the Code Commission, p. 156.) The reason for the prohibition
is that the amount of the loan is ordinarily much less than the
real value of the thing pledged or mortgaged.
(2) Requisites. — There are two requisites or elements for
pactum commissorium to exist, namely:
(a) There should be a pledge, mortgage, or antichresis of
property by way of security for the payment of the principal
obligation; and
(b) There should be a stipulation for an automatic
appropriation by the creditor of the property in the event of
nonpayment of the obligation within the stipulated period.
(Uy Tong vs. Court of Appeals, 161 SCRA 383 [1988].)
It is immaterial that the questioned stipulation was voluntarily and freely entered into, pactum commissorium being void
for being prohibited by law. (Ong vs. Roban Lending Corporation, 557 SCRA 516 [2008].)
332
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TRANSACTIONS
Art. 2088
(3) Stipulation presupposes existence of security contact. —
Pactum commissorium referred to in Articles 2088 and 2137,
therefore, presupposes the existence of mortgage or pledge or
that of an antichresis. Thus, it has been held that there was no
pactum commissorium where pursuant to the contract of sale, the
sums already paid by the vendee were forfeited for his failure to
pay the stipulated installments in due time considering that the
person to whom the property was forfeited (vendor) was the real
and equitable owner of the same because title would not pass until
payment of the last installment. (see Caridad Estate vs. Santero,
71 Phil. 144 [1940].) There is also no pactum commissorium where
the alienation of the subject property was by way of security and
not by way of satisfying or extinguishing the debt of the debtor.
(Ong vs. Roban Lending Corp., supra.)
(4) Effect on security contract. — The vice of nullity which
vitiates such a stipulation does not affect substantially the
principal contract of pledge, mortgage, or antichresis with regard
to its validity and efficacy for the reason that the contract, having
been perfected, can subsist although the contracting parties
have not agreed as to manner the creditor can recover his credit
inasmuch as the law has expressly established the procedure in
order that he may recover the same, in case the debtor does not
comply with his obligation.
In short, the security contract remains valid; only the
prohibited stipulation is void. (Mahoney vs. Tuason, 39 Phil. 952
[1919].)
ILLUSTRATIVE CASES:
1. If sum loaned is not paid, property of debtor would be
considered as absolutely sold to creditor for said sum.
Facts: D borrowed money from C under the agreement that
if, at the expiration of the period stipulated, the sum loaned
should not be paid, it would be understood that the house and
lot owned by D, be considered as absolutely sold to C for the
said sum. No payment was made by D within the time fixed.
In view of the refusal of D to deliver the property, C brought
action to recover the property and rents from D.
Art. 2088
PLEDGE
Provisions Common to Pledge and Mortgage
Issue: Is the contract in question in the nature of a pactum
commissorium?
Held: No. We have in this case a contract of loan and a
promise of sale of property, the price of which should be the
amount loaned, if within a fixed period of time such amount
should not be paid by the debtor-vendor (D) of the property
to the creditor-vendee (C) of the same. The fact that the
parties have agreed at the same time, in such a manner that
the fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced
any change in the nature and legal conditions of either contract
or any essential defect which would tend to nullify them.
Pactum commissorium indicates the existence of the contracts of mortgage, or of pledge, or of antichresis, none of
which has coincided in the loan in question. The property does
not appear mortgaged. (see Art. 2125.) Said property could not
be pledged, not being personal property, and notwithstanding
the said double contract the debtor (D) continued in possession
thereof and the said property had never been occupied by the
creditor (C). Neither was there any contract of antichresis (see
Art. 2132.) by reason of said contract of loan inasmuch as C has
never been in possession thereof, nor has he enjoyed the said
property nor for one moment ever received its rents. (Alcantara
vs. Alinea, 8 Phil. 111 [1907].)
————
————
————
2. Buyer executed a deed of assignment in favor of seller of
property sold, pursuant to a judgment rendered in an action for
specific performance filed by seller.
Facts: B and S agreed on the sale of trucks by the latter to
the former. When B defaulted in the payment of the second
and third installments, S filed an action in court for specific
performance. The trial court rendered judgment for S and
ordered B to pay the balance of his obligation and in case of
failure to do so, to execute a deed of assignment pursuant to
the judgment.
Issue: Is the deed of assignment in the nature of a pactum
commissorium?
Held: No. There was no contract of pledge or mortgage
entered into by the parties; nor a case of automatic appropriation
of the property by S because it took the intervention of the trial
333
334
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2088
court to exact fulfillment of the obligation, which by its very
nature is “. . . anathema to the concept of pacto commissorio.”
And even granting that the original agreement between the
parties had the badges of pactum commissorium, the deed of
assignment does not suffer the same fate as it was executed
pursuant to a valid judgment as can be gleaned from its very
terms and conditions. (Uy Tong vs. Court of Appeals, 161 SCRA
383 [1988].)
Prohibition refers to stipulation authorizing
automatic appropriation.
What is prohibited by Article 2088 in connection with pacto
commissorio is the automatic appropriation by the creditor of the
thing pledged or mortgaged upon failure of the debtor to pay
his debt within the period agreed upon by virtue of authority or
right previously given the creditor. Thus:
(1) A stipulation providing that the mortgaged property
“shall be considered in full payment without further action in
court” in case of nonpayment is null and void being in the form
of pacto commissorio. (Reyes vs. Nebrija, 48 Phil. 639 [1926]; see
Northern Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392
[1973].)
(2) A stipulation in a purported pacto de retro sale (see VII,
note 2.) that the ownership over the property sold would automatically pass to the vendee in case no redemption was effected
within the stipulated period, is contrary to the nature of a true
pacto de retro sale, under which the vendee acquires ownership of
the thing sold immediately upon the execution of the sale, subject
only to the vendor’s right of redemption. The said stipulation is
a pactum commissorium which enables the mortgagee to acquire
ownership of the mortgaged property without need of foreclosure. It is void. Its insertion in the contract is an avowal of the
intention to mortgage, rather than to sell, the property. (Lanuza
vs. De Leon, 20 SCRA 369 [1969].)
Permissible stipulations.
(1) Subsequent modification of original contract. — The stipulations that are prohibited by Articles 2080 and 2137 (antichresis)
Art. 2088
PLEDGE
Provisions Common to Pledge and Mortgage
335
are those executed or made simultaneously with the original
contract, not those subsequently entered into. The principle does
not prohibit modification of the original contract by subsequent
agreement such as the parties may see fit to adopt. (Cojuangco
vs. Gonzales, 93 Phil. 718 [1953].)
(2) Subsequent voluntary cession of property. — The prohibition
does not include a subsequent voluntary act of the debtor making
cession of the property mortgaged in payment of the debt which
amounts in its legal effect to a novation of the original contract
and to a voluntary sale of the said property for the amount of the
debt. (Ocampo vs. Potenciano, [CA] 48 O.G. 2230.)
(3) Promise to assign or sell. — Neither is the prohibition
applicable to a promise to assign or sell said property in payment
of the obligation if, upon its maturity, it is not paid because
the title thereto remains in the debtor. The promise is merely a
personal obligation of the mortgagor and does not in any way
bind the property.
(a) The mortgagor can validly sell the property to a
third person and if there should be any action accruing to
the mortgagee, it would be a personal action for damages
against the mortgagor. (see, however, Bustamante vs. Rosel,
319 SCRA 413 [1999], infra.)
(b) If the vendee contributed to the breach of the contract
by the mortgagor, the former, together with the latter, may
also be held liable for damages; or if the vendee was guilty of
fraud which would be a ground for rescission of the sale in
his favor, the mortgagor and not the mortgagee would be the
party entitled to bring the action for annulment. (Guerrero
vs. Yuigo & Court of Appeals, 96 Phil. 77 [1954]; Dulay vs.
Aquiatin & Maximo,4 47 Phil. 951 [1925]; Tan Chun Tic vs.
4
In a dissenting opinion, Justice Street said: “It is not to be denied that a mortgagor of
property may transfer the mortgaged property to the creditor in satisfaction of the mortgage debt after the mortgage has fallen due. But such a transfer implies the independent
exercise of the power vested in the mortgagor, as owner . . . By virtue of this stipulation
(to the effect that in case the specified date should arrive and the debtor should be unable to pay the amount due, it should be paid with the property security), the debtor was
bound to transfer the property to the creditor in satisfaction of the mortgaged debt, the
mortgagor being unable at the time to pay the same. Said stipulation should be declared
336
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2088
West Coast Life Insurance Co. and Locsin, 54 Phil. 361 [1930].)
(4) Authority to take possession of property upon foreclosure. — A
stipulation authorizing the mortgagee, for the purpose therein
specified, to take possession of the mortgaged premises upon
foreclosure of a mortgage is not repugnant to either Article
2088 or Article 2137. On the contrary, such a stipulation is in
consonance with or analogous to the provisions of Articles 2132,
et seq. regarding antichresis and the provisions of the Rules of
Court (Rule 59.) regarding the appointment of a receiver as a
convenient and feasible means of preserving and administering
the property in litigation. (Agricultural and Industrial Bank vs.
Tambunting, 73 Phil. 555 [1942]; Development Bank of the Phils.
vs. Dayan, 582 SCRA 403 [2009].)
ILLUSTRATIVE CASES:
1. Mortgagor appoints mortgagee in deed of assignment as
attorney-in-fact with authority to dispose of mortgage properties in
case of default of mortgagor and to apply the proceeds in the payment
of loan.
Facts: C, a grantee of a Fishpond Lease Agreement from the
Government, obtained from DBP three (3) separate loans, each
of which was covered by a promissory note. Simultaneous with
the execution of the notes was the execution of “Assignment
of Leasehold Rights’’ by C, as borrower of the mortgaged
properties by way of security in the payment of the loans.
Condition No. 12 provides for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights in case of default by C
and to apply the proceeds to the payment of the loan.
Issue: (1) Whether the condition in question constitute
pactum commissorium.
invalid, as contrary to the spirit, if not the letter of Article 1859 (now Art. 2088), as well as
directly contrary to the general principles of jurisprudence applicable to the relation of
mortgagor and mortgagee. If a stipulation of this kind is valid, every mortgage in which
such stipulation is inserted will become self-executing and the debtor, upon making default in the payment of the debt, will be bound to transfer the property in satisfaction of
the mortgage, with the result that the right of redemption is lost from the mere fact that
the debtor is unable to pay at the date stipulated.”
Art. 2088
PLEDGE
Provisions Common to Pledge and Mortgage
(2) Whether the act of DBP in appropriating to itself C’s
leasehold rights with foreclosure proceedings was contrary to
Article 2088 and, therefore, invalid.
Held: (1) Elements of pactum commissorium are not present. —
“Condition No. 12 did not provide that the ownership over the
leasehold rights would automatically pass to DBP upon CUBA’s
failure to pay the loan on time. x x x This provision is a standard
condition in mortgage contracts and is in conformity with
Article 2087 of the Civil Code, which authorizes the mortgagee
to foreclose the mortgage and alienate the mortgaged property
for the payment of the principal obligation.’’
(2) DBP exceeded authority vested by condition. — “DBP,
however, exceeded the authority vested by condition No. 12 of
the deed of assignment. As admitted by it during the pre-trial,
it had “[w]ithout foreclosure proceedings, whether judicial or
extrajudicial . . . appropriated the [l]easehold [r]ights of plaintiff
Lydia Cuba over the fishpond in question.’’ Its contention that
it limited itself to mere administration by posting caretakers
is further belied by the deed of conditional sale it executed in
favor of CUBA. The deed stated:
‘WHEREAS, the Vendor [DBP] by virtue of a deed of
assignment executed in its favor by the herein vendees
[Cuba spouses] the former acquired all the rights and interest
of the latter over the above-described property;
xxx
xxx
The Title to the real estate property [sic] and all
improvements thereon shall remain in the name of the vendor
until after the purchase price, advances and interest shall
have been fully paid.’ (Emphasis supplied.)
It is obvious from the above-quoted paragraphs that DBP
had appropriated and taken ownership of CUBA’s leasehold
rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition No. 12 of the deed
of assignment to justify its act of appropriating the leasehold
rights. As stated earlier, condition No. 12 did not provide that
CUBA’s default would operate to vest in DBP ownership of the
said rights. Besides, an assignment to guarantee an obligation,
as in the present case, is virtually a mortgage and not an absolute
conveyance of title which confers ownership on the assignee.’’
(Development Bank of the Philippines vs. Court of Appeals, 284
SCRA 14 [1998].)
337
338
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
————
————
Art. 2088
————
2. The lender is given the option to buy at a certain price the
property given as collateral in the event the borrower fails to pay.
Facts: Respondent C (lender) entered into a loan agreement
with petitioner B (borrower) and her late husband, under,
among others, the following terms and conditions:
“2. That the borrowers were desirous to borrow the
sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS from the LENDER, for a period of two (2) years,
counted from March 1, 1987, with an interest of EIGHTEEN
PERCENT (18%) per annum, and to guaranty the payment
thereof, they are putting as a collateral SEVENTY (70)
SQUARE METERS portion, inclusive of the apartment
therein, of the aforestated parcel of land, however, in the
event the borrowers fail to pay, the lender has the option
to buy or purchase the collateral for a total consideration
of TWO HUNDRED THOUSAND (P200,000.00) PESOS,
inclusive of the borrowed amount and interest therein.’’
When the loan was about to mature on March 1, 1989, C
proposed to buy at the pre-set price of P200,000 the collateral
given to guarantee the payment of the loan, but B refused
to sell. On March 1, 1989, B tendered payment of the loan
to C which the latter refused to accept, insisting B’s signing
a prepared deed of absolute sale. C consigned the amount of
P47,500 with the trial court with which C filed a complaint for
specific performance. In arriving at the amount deposited, C
considered the principal loan of P100,000 and 18% interest per
annum thereon, which amounted to P52,500, leaving a balance
of P47,500 from the amount of P200,000. On the other hand, B
filed a petition for consignation and deposited the amount of
P153,000 with the trial court.
Issue: Whether the stipulation in the loan contract was
valid and enforceable.
Held: (1) Stipulation embraced in concept of pactum
commissorium. — “B did not fail to pay the loan. x x x when C
refused to accept payment, B consigned the amount with the
trial court. x x x
A scrutiny of the stipulation of the parties reveals a subtle
intention of the creditor to acquire the property given as
Art. 2088
PLEDGE
Provisions Common to Pledge and Mortgage
339
security for the loan. This is embraced in the concept of pactum
commissorium, which is proscribed by law.
The elements of pactum commissorium are as follows: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.”
(2) Intent to appropriate property given as collateral appears
to be evident. — “A significant task in contract interpretation is
the ascertainment of the intention of the parties and looking
into the words used by the parties to project that intention.
In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event of
non-payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.’’
(3) Duty of court to protect necessitious borrowers. — “All
persons in need of money are liable to enter into contractual
relationships whatever the condition if only to alleviate their
financial burden albeit temporarily. Hence, courts are duty
bound to exercise caution in the interpretation and resolution
of contracts lest the lenders devour the borrowers like vultures
do with their prey.’’ (Bustamante vs. Rosel, 319 SCRA 413 [1999].)
Note: Here, the agreement between the parties was not a
sale with right of repurchase, but a loan with interest of 18% per
annum for a period of two (2) years and if B fails to pay, C was
given the option to purchase the property given as collateral for
P200,000. There was no stipulation for automatic appropriation
by C of the property in case of non-payment of the loan within
the stipulated period.
Risk of loss of property pledged
or mortgaged.
As the pledgee or mortgagee does not become the owner of
the property pledged or mortgaged and the ownership thereof
remains with the debtor, therefore, under the maxim, res perit
domino suo, the debtor-owner bears the loss of the property.
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TRANSACTIONS
Arts. 2089-2090
The principal obligation is not extinguished by the loss of the
pledged or mortgaged property. (Warner, Barnes, & Co., Ltd. vs.
Flores, 1 SCRA 881 [1961].)
ART. 2089. A pledge or mortgage is indivisible, even
though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part of the
debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor’s heir who received his share
of the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which,
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate portion of
the credit.
The debtor, in this case, shall have the right to the extinguishment of the pledge or mortgage as the portion of
the debt for which each thing is specially answerable is
satisfied. (1860)
ART. 2090. The indivisibility of a pledge or mortgage is
not affected by the fact that the debtors are not solidarily
liable. (n)
Pledge or mortgage indivisible.
A pledge or mortgage is one and indivisible as to the contracting parties (National Bank vs. Agudelo, 58 Phil. 655 [1933].) and
the rule applies even if the obligation is joint and not solidary.
(Arts. 2090, 1207, 1208.) Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the pledge or
mortgage. (Gonzales vs. GSIS, 107 SCRA 492 [1981].) As a consequence of this indivisibility:
(1) Single thing. — Every portion of the property pledged
or mortgaged is answerable for the whole obligation as soon as
it falls due. (see Phil. National Bank vs. Amores, 155 SCRA 445
[1987].)
Arts. 2089-2090
PLEDGE
Provisions Common to Pledge and Mortgage
341
(2) Several things. — When several things are pledged or
mortgaged to secure the same debt in its entirety, all of them are
liable for the totality of the debt and the creditor does not have
to divide his action by distributing the debt, among the various
things pledged or mortgaged. Even when only a part of the debt
remains unpaid, all the things are liable for such balance. The
debtor cannot ask for the release of one or some of the several
properties pledged or mortgaged (or any portion thereof) or
the proportionate extinguishment of the pledge or mortgage
unless and until the debt secured has been fully paid. (Dayrit
vs. Court of Appeals, 36 SCRA 548 [1970]; Vda. De Jayme vs.
Court of Appeals, 390 SCRA 380 [2002]; see Yap vs. Philippine
Commercial International Bank, 485 SCRA 56 [2006].)
(3) Debtor’s heir/creditor’s heir. — The debtor’s heir who has
paid a part of the debt cannot ask for the proportionate extinction
of the pledge or mortgage (par. 2.) nor can the creditor’s heir who
has received his share of the debt return the pledge or cancel the
mortgage if the debt is not completely satisfied. (par. 3.)
Exceptions to rule of indivisibility.
(1) Where each one of several things guarantees determinate
portion of credit. — The exception is where there are several things
given in pledge or mortgage and each one of them guarantees
only a determinate portion of the credit. (pars. 3 and 4.) Actually
it is not an exception because in such a case, there would be as
many pledges or mortgages as there are things given in pledge
or mortgage.
EXAMPLES:
(1) A borrowed from B P20,000.00 and to guarantee
payment, A pledged his diamond ring worth P15,000.00 and a
pair of earrings worth P5,000.00.
If A pays P15,000.00, he cannot ask for the return of the
ring because both the ring and the earrings are given to secure
payment of the entire obligation of P20,000.00. This is because
the pledge is indivisible. B may cause the sale of either or both
for the payment of his credit. (see Art. 2112.) The same is true if
A dies leaving W and X as his heirs and W pays P15,000.00 to B.
342
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TRANSACTIONS
Arts. 2089-2090
If the creditors are B and C, and A pays B P15,000.00, B
cannot return the ring to the prejudice of C who has not
received his share. The same is true if B is the only creditor and
he dies leaving Y and Z as his heirs and A pays Y P15,000.00.
However, if it was agreed that the ring was given to secure
the payment of P15,000.00 and the earrings, the balance of
P5,000.00, and A (or his heir W) pays P15,000.00, A can demand
the return of the ring.
(2) A and B are jointly liable to C in the sum of P20,000.00
secured by A’s ring worth P15,000.00 and B’s watch worth
P5,000.00. If A pays P15,000.00, he cannot demand the return
of the ring even if their liability is only joint or proportionate
because pledge is indivisible. Indivisibility is not the same as
solidarity. The former refers to the object or prestation of the
obligation, while the latter, to the legal tie of the obligation.
(2) Where only portion of loan was released. — The rule of
indivisibility of the mortgage as outlined by Article 2089
presupposes several heirs of the debtor or creditor. It was held
not applicable to a situation where out of an P80,000.00 loan
agreement entered into by a bank and a borrower, only P17,000.00
was released, such that the real estate mortgage on the loan
became unenforceable to the extent of P63,000.00 or 78.75% and
subsists as a security only for the P17,000.00 debt or 21.25%.
In other words, in case of default by the borrower, the
mortgage can be foreclosed only to the extent of 21.25%. Thus,
if the mortgage covers 100 hectares of land, the foreclosure shall
extend to 21.25 hectares only. (Central Bank of the Phils. vs. Court
of Appeals, 139 SCRA 46 [1985].)
(3) Where there was failure of consideration. — Neither does
it apply where there was failure of consideration on the part
of the mortgagee as where the mortgagee (bank) took over
the management of the borrowing corporation as one of the
conditions for the granting of the loan, and said corporation
was led to bankruptcy thru mismanagement, thereby defeating
the very purpose of the loan, for it is as if the loan was never
delivered. (Rose Packing Co., Inc. vs. Court of Appeals, 167
SCRA 309 [1988].)
Arts. 2089-2090
PLEDGE
Provisions Common to Pledge and Mortgage
343
(4) Where there is no debtor-creditor relationship. — Although a
mortgage (or pledge) is indivisible as to the contracting parties
and as to their successors in interest, it is not so with respect to
a third person who did not take part in the constitution thereof
either personally or through an agent. (Philippine National
Bank vs. Agudelo, 58 Phil. 655 [1933].) From the wordings of
the law (Art. 2089, par. 1.), indivisibility arises only when there
is a debt, that is, there is a debtor-creditor relationship. The
indivisibility concept is not applicable to the right of redemption
of an accommodation mortgagor and his assignee with respect to
whom this relationship is not present. Thus, in a case where the
mortgage covers four (4) parcels of residential lots belonging to
the debtor-mortgagor and an agricultural land belonging to the
accommodation mortgagor who assigned her right to redeem
to petitioners, it was held that petitioners, being total strangers
to said lots, lack legal personality to redeem the same. Fair play
and justice demand that petitioners, who are not indebted to the
mortgagee, redeem only the property belonging to their assignor.
(Belo vs. Philippine National Bank, 353 SCRA 350 [2001].)
Foreclosure of mortgage constituted
on several properties.
The rule that real property, consisting of several lots, should
be sold separately, applies to sales in execution (Sec. 19, Rule 39,
Rules of Court.) and not to foreclosure of mortgages.
(1) A mortgage, even if constituted on two or more
properties, is one and indivisible (Art. 2089.), that is, it cannot be
divided among the different properties, and the mortgagee has
the right to have the properties either or both, jointly or singly,
sold to satisfy his claim. (Villar vs. Javier de Paderanga, 97 Phil.
604 [1955]; Aquino vs. Macondray & Co., Inc., 97 Phil. 731 [1955];
Phil. National Bank vs. Mallorca, 21 SCRA 694 [1967].)
(2) And even assuming that the rule cited applies to
foreclosure sales, the sale of the mortgagor’s properties cannot
be set aside in the absence of evidence to show that a better price
could have been obtained if they were sold separately, or the sale
of one or some alone would bring sufficient proceeds to satisfy
344
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Arts. 2091-2092
the mortgage credit. (Villar vs. Javier and Paderanga, supra;
Hernan vs. La Urbana, 59 Phil. 621 [1936]; Tria vs. Villareal, 69
Phil. 478 [1940].)
Where real mortgage and chattel mortgage
in one instrument.
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.
Both remain distinct agreements, differing not only in the
subject matter of the contract, but also in the governing legal
provisions. 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 [1960]; De La Rama vs.
Sajo, 45 Phil. 703 [1924]; Solomon vs. Dantes, 63 Phil. 522 [1936];
Bachrach Motor Co. vs. Icarangal, 68 Phil. 287 [1939].)
ART. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition. (1861)
All kinds of obligations can be secured
by pledge or mortgage.
Any kind of obligation, whether pure or conditional, may be
secured by a contract of pledge or mortgage. The same applies in
guaranty which may also secure a conditional obligation. (Art.
2053, see Arts. 2086, 2052.)
The pledge agreement may stipulate that the pledge will
also stand as security for any future advancements or renewals
thereof that the pledgor may procure from the pledgee. (China
Banking Corp. vs. Court of Appeals, 270 SCRA 503 [1997].)
ART. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal respon-
Art. 2092
PLEDGE
Provisions Common to Pledge and Mortgage
345
sibility incurred by him who defrauds another, by offering
in pledge or mortgage as unencumbered, things which he
knew were subject to some burden, or by misrepresenting
himself to be the owner of the same. (1862)
Promise to constitute pledge or mortgage
creates no real right.
A promise to constitute a pledge or mortgage, if accepted,
gives rise only to a personal right binding upon the parties and
creates no real right in the property. In other words, what exists is
only a right of action to compel the fulfillment of the promise but
there is no pledge or mortgage yet. (see Mitsui Bussan Kaisha vs.
Hongkong & Shanghai Bank, 36 Phil. 27 [1917].)
It has been held that the creditor can enforce an agreement
to constitute a mortgage together with the right to recover the
indebtedness they being in no wise inconsistent with each other.
(Laplana vs. Garchitorena Chereau, 48 Phil. 163 [1925].)
Criminal responsibility of pledgor
or mortgagor.
Under the Revised Penal Code, estafa is committed by a
person who, pretending to be the owner of any real property,
shall convey, sell, encumber or mortgage the same or knowing
that the real property is encumbered shall dispose of the same as
unencumbered. (Art. 316[1, 2] thereof.)
It is essential that fraud or deceit be practised upon the
vendee at the time of the sale.
— oOo —
346
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TRANSACTIONS
Chapter 2
PROVISIONS APPLICABLE ONLY TO
PLEDGE*
ART. 2093. In addition to the requisites prescribed in
Article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement. (1863)
Transfer of possession essential
in pledge.
A pledge is a real contract which requires delivery for its
perfection. (Art. 1316.)
(1) To constitute contract. — An agreement to constitute a
pledge only gives rise to a personal action between the contracting
parties. (Art. 2092.) Unless the movable given as security by way
of pledge be delivered to and placed in the possession of the
creditor or of a third person designated by common agreement,
the creditor acquires no right to the property because pledge is
merely a lien and possession is indispensable to the right of a lien.
(U.S. vs. Terrell, 2 Phil. 222 [1903].) Without delivery, therefore,
there cannot be a pledge. (McMicking vs. Martinez, 15 Phil. 204
[1910].)
(2) To affect third persons. — Article 2096 (infra.) has been
interpreted in the sense that for the contract to affect third
persons, apart from being in a public instrument, possession of
the thing pledged must, in addition, be delivered to the pledgee.
(Ong vs. Intermediate Appellate Court, 201 SCRA 543 [1991].)
*The Pawnshop Regulations Act (Pres. Decree No. 114.) regulates the establishment
and operation of pawnshops. (see Appendix 10.)
346
Art. 2093
PLEDGE
Provisions Applicable Only to Pledge
347
Type of delivery depends upon nature
of thing pledged.
(1) Actual delivery. — The delivery of possession referred
to in Article 2093 as essential to the validity of a pledge means
actual possession of the property pledged and a mere symbolic
delivery is not sufficient. Thus, where the animal pledged by A
to B were actually in the possession of C and nothing was stated
in the contract that C was by common consent made by the
depositary of B who never took possession of the animal, it was
held that no pledge had been constituted. (Betita vs. Ganzon, 49
Phil. 87 [1926].)
(2) Constructive delivery. — It has been held, however, in an
earlier case, that the symbolical transfer of the goods by means of
the delivery of the keys to the warehouse where the goods were
stored was sufficient to show that the depositary appointed by
common consent of the parties was legally placed in possession
of the goods, since the owner, as pledgor, could no longer dispose
of the same, the pledgee being the only one authorized to do so
through the depositary and special agent who represented him.
(Banco Español-Filipino vs. Peterson, 17 Phil. 409 [1910].)
Whether or not a symbolic or constructive delivery is sufficient to validate a pledge would depend on the peculiar nature
of the thing pledged.
ILLUSTRATIVE CASE:
Because vessels pledged remained in pledgor’s possession, merely
“subject to the order of the pledgee,” pledgor contended that pledge
was not effective.
Facts: D borrowed money from C. As security, D executed
a contract of pledge over his vessels which, however, were not
actually delivered to C but remained in D’s possession “who
shall hold said property subject to the order of the Pledgee.” D
defaulted.
Pursuant to the terms of the pledge, C took possession of
the vessels and sold the same. D contended that the pledge
was not effective because there was only constructive and not
actual delivery of the vessels to C.
Issue: Is the contention of D tenable?
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
348
Arts. 2094-2095
Held: No. “In Betita vs. Ganzon, the objects pledged —
carabaos — were easily capable of actual, manual delivery unto
the pledgee. In Banco Español vs. Peterson, the objects pledged
— goods contained in a warehouse — were hardly capable of
actual, manual delivery in the sense that it was impractical as
a whole for the particular transaction and would have been an
unreasonable requirement. Thus, for purposes of showing the
transfer of control to the pledgee, delivery to him of the keys
to the warehouse sufficed. In other words, the type of delivery
will depend upon the nature and the peculiar circumstances of
each case.
The parties here agreed that the vessels be delivered by the
‘pledgor to the pledgee who shall hold said property subject to
the order of the pledgee.’ Considering the circumstances of the
case and the nature of the objects pledged, i.e., vessels used in
maritime business, such delivery is sufficient.” (Yuliongsui vs.
Phil. National Bank, 22 SCRA 585 [1968].)
ART. 2094. All movables which are within commerce
may be pledged, provided they are susceptible of possession. (1864)
ART. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds,
warehouse receipts and similar documents may also be
pledged. The instrument proving the right pledged shall
be delivered to the creditor, and if negotiable, must be indorsed. (n)
Subject matter of pledge.
(1) “In the very nature of things, a pledge (or chattel mortgage) is confined and limited to personal property (Arts. 416,
417.1) and it cannot be extended or made to apply to real prop1
Art. 416. The following things are deemed to be personal property:
(1) Those movables susceptible of appropriation which are not included in the
preceding article;
(2) Real property which by any special provision of law is considered as personalty;
(3) Forces of nature which are brought under control by science; and
(4) In general, all things which can be transported from place to place without
impairment of the real property to which they are fixed.
Art. 2096
PLEDGE
Provisions Applicable Only to Pledge
349
erty.” (Pacific Commercial vs. National Bank, 49 Phil. 236 [1926].)
The movable must be within the commerce of men and susceptible of possession. (Art. 2094.)
(2) Incorporeal rights evidenced by documents whether
negotiable or not may also be pledged. The document must be
delivered to the creditor; if negotiable, it must be indorsed in
favor of the creditor. (Art. 2095.)
ART. 2096. A pledge shall not take effect against third
persons if a description of the thing pledged and the date
of the pledge do not appear in a public instrument. (1865a)
Public instrument necessary
to bind third persons.
(1) Contents of public instrument. — Even if all the essential
requisites provided in Articles 2085 and 2093 are present, the
contract of pledge is not effective against third persons unless
in addition to delivery of the thing pledged, it is embodied in
a public instrument (i.e., one attested and certified by a public
officer authorized by law to administer oath, such as a notary
public) wherein it shall appear the description of the thing
pledged; and the date of the pledge. Article 2096 prescribes
a requirement without which the contract of pledge cannot
adversely affect third persons, such as, for example, the innocent
buyer of the thing pledged notwithstanding that the pledgee
has already taken possession of the same. (Ocejo Perez & Co. vs.
International Bank, 37 Phil. 631 [1918]; Bachrach Motor Co. vs.
Lacson Ledesma, 64 Phil. 681 [1937].)
(2) Object of the requirement. — The object is to forestall fraud,
because a debtor may attempt to conceal his property from his
creditors when he sees it in danger of execution by simulating a
pledge thereof with an accomplice. (Tec Bi & Co. vs. Chartered
Art. 417. The following are also considered as personal property:
(1) Obligations and actions which have for their object movables or demandable
sums; and
(2) Shares of stock of agricultural, commercial and industrial entities, although
they may have real estate.
350
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2097
Bank of India, 41 Phil. 576 [1921].) The requirement is not a mere
rule of adjective law prescribing the mode whereby proof may be
made of the date of the pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a
contract of pledge cannot affect third persons adversely. (Caltex
[Phils.], Inc. vs. Court of Appeals, 212 SCRA 448 [1992].)
ART. 2097. With the consent of the pledgee, the thing
pledged may be alienated by the pledgor or owner, subject
to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee
consents to the alienation, but the latter shall continue in
possession. (n)
Alienation by the pledgor of thing
pledged.
The pledgor retains his ownership of the thing pledged. He
may, therefore, sell the same provided the pledgee consents to
the sale. As soon as the pledgee gives his consent, the ownership
of the thing pledged is transferred to the vendee subject to the
rights of the pledgee, namely, that the thing sold may be alienated
to satisfy the obligation (Art. 2112.) and that the pledgee must
continue in possession during the existence of the pledge. (Arts.
2093, 2098.) But the pledge would not bind or adversely affect
third persons unless Article 2096 has been followed.
“The second part of Article 2097 furnishes one of those cases in
the Code where ownership is transferred without actual delivery
of the thing alienated.” (Report of the Code Commission, p. 156.)
ILLUSTRATIVE CASE:
Plaintiff in a case, who has previously assigned in favor of his
creditor his litigated credit in said case, by a deed of assignment which
was duly submitted to the court, entered into a compromise agreement thereafter releasing the defendant therein from his claim without notice to his assignee.
Facts: T brought an action against M for the collection of
a sum of money. While the case was pending resolution, T
assigned in favor of L by way of securing or guaranteeing T’s
Art. 2097
PLEDGE
Provisions Applicable Only to Pledge
351
obligation to L his litigated credit against M duly submitted
to the court with notice to the parties. The lower court ruled
in favor of T. Subsequently, pending resolution of the appeal
of M to the Court of Appeals, M entered into a compromise
agreement with T wherein T acknowledged that all his claims
against M had been settled.
After the Court of Appeals rendered a decision affirming
in toto the decision of the lower court, M filed a motion
for reconsideration praying that said decision be set aside,
principally anchored upon the ground that a compromise
agreement was entered into between him and T which, in
effect, released M from liability. The validity of the guarantee
or pledge in favor of L has not been questioned and it appears
that the deed of assignment fulfills the requisites of a valid
pledge or mortgage.
Issue: Is the compromise agreement valid?
Held: No. Although M may validly alienate the litigated
credit under Article 1634,2 said provision should not be taken to
mean as a grant of an absolute right on the part of the assignor
(T) to indiscriminately dispose of the thing or the right given
as security. It should be read in consonance with Article 2097.
Although the pledgee or assignee (L) did not ipso facto become
the creditor of M, the pledge being valid, the incorporeal right
assigned by T in favor of L can only be alienated by T with due
notice to and consent of L or his duly authorized representative.
To allow the assignor to dispose of or alienate the security
without notice to and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit.
Moreover, under Article 1634, the debtor (M) has a corresponding obligation to reimburse the assignee (L) for the price the latter paid or for the value given in consideration for the deed of
assignment. Failing in this, the alienation of the litigated credit
made by T in favor of M by way of a compromise agreement
does not bind L.
2
Art. 1634. When a credit or other incorporeal in litigation is sold, the debtor shall
have a right to extinguish it by reimbursing the assignee for the price the latter paid
therefor, the judicial costs incurred by him, and the interest on the price from the day on
which the same was paid.
A credit or other incorporeal right shall be considered in litigation from the time the
complaint concerning the same answered.
The debtor may exercise his right within thirty days from the date the assignee
demands payment from him.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
352
Art. 2098
Furthermore, having knowledge of the assignment, M
was estopped from entering into the compromise agreement
without notice to and consent of L, more so, in the light of
the fact that no reimbursement has ever been made in favor
of L as required under Article 1634. M acted in bad faith and
in connivance with T so as to defraud L in entering into the
compromise agreement. (Estate of G. Litton vs. Mendoza, 163
SCRA 246 [1988].)
ART. 2098. The contract of pledge gives a right to the
creditor to retain the thing in his possession or in that of a
third person to whom it has been delivered, until the debt
is paid. (1866a)
Right of pledgee to retain thing
pledged.
As has been stated, the possession of the pledgee constitutes
his security. Hence, the debtor cannot demand for its return until
the debt secured by it is paid. (see Art. 2105; see Serrano vs. Court
of Appeals, 196 SCRA 107 [1991].) But the right of retention is
limited only to the fulfillment of the principal obligation for
which the pledge was created.
EXAMPLE:
D owes C P500.00. As security, D pledged his diamond
ring. Later, D again borrowed P200.00.
C has a right to retain the thing until the P500.00 is paid. But
C cannot retain the thing until he has been paid the remaining
debt of P200.00. C’s right of retention is limited to the payment
of the P500.00 for which the ring was given in pledge.
Under the old Civil Code (Art. 1866, par. 2.), the creditor is
granted the right to retain the property pledged as a security
for any other obligation of the debtor. The provision has been
eliminated. “It is thought that this provision is unjust. If the
creditor wants the original pledge to apply also to the new claim,
he should so demand at the time the latter obligation is entered
into. It cannot be fairly presumed that the debtor consented to
the new pledge.” (Report of the Code Commission, p. 156.)
Art. 2099
PLEDGE
Provisions Applicable Only to Pledge
353
ART. 2099. The creditor shall take care of the thing
pledged with the diligence of a good father of a family; he
has the right to the reimbursement of the expenses made
for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this Code. (1867)
Obligation of pledgee to take due
care of thing pledged.
Upon fulfillment of the principal obligation, the pledgee must
return the thing pledged. Having possession of the property, he
has the obligation to take care of the same with the diligence of a
good father of the family. (Art. 1163.) He is, however, entitled to
reimbursement of the expenses incurred for its preservation.
In case of the loss or deterioration of the thing pledged due to
fortuitous event, the pledgee cannot be held responsible but he
is liable for loss or deterioration by reason of fraud, negligence,
delay or violation of the terms of the contract. (Arts. 1174, 1170.)
ILLUSTRATIVE CASE:
Pledged pawn ticket was lost for failure of creditor to renew loan
of debtor with pawnshop.
Facts: C took from D a pawn ticket in pledge to secure an
obligation. The pledge was lost for failure of C to renew the
loan of D with the pawnbroker.
Issue: Is C bound to renew the ticket from time to time, by
the payment of the interest or premium?
Held: Yes. The ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket. It results that one
who takes a pawn ticket in pledge acquires domination over
the pledge.
Article 2099 contemplates that the pledgee (C) may have to
undertake expenses in order to prevent the pledge from being
lost; and these expenses the pledgee is entitled to recover from
the pledgor (D). This follows that where, in a case like this, the
pledge is lost by the failure of C to renew the loan, he is liable
for the resulting damage. This duty of C is not destroyed by the
fact that he has obtained a judgment for the debt of D which
was secured by the pledge.
354
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TRANSACTIONS
Arts. 2100-2102
The duty to use the diligence of a good father of a family
in caring for the thing pledged subsists as long as the same
remains in the power of the pledgee. (Cruz and Serrano vs. Chua
A.H. Lee, 54 Phil. 10 [1929].)
ART. 2100. The pledgee cannot deposit the thing
pledged with a third person, unless there is a stipulation
authorizing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged. (n)
Obligation of pledgee not to deposit
thing pledged with another.
While the pledgee is entitled to retain the possession of
the thing pledged until the debt is paid (Art. 2098.), he is
not authorized to transfer possession to a third person. The
prohibition is necessary for the protection of the pledgor or the
owner of the thing pledged.
The exception is when there is stipulation authorizing him to
do so. (Art. 2100; see Art. 2093.)
Responsibility of pledgee for acts
of his employees or agents.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged (Art. 2100, par. 2.)
because their acts are, in legal effect, deemed his.
ART. 2101. The pledgor has the same responsibility as
a bailor in commodatum in the case under Article 1951. (n)
Responsibility of pledgee for flaws
of thing pledged.
Please see comments under Article 1951.
ART. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but
Art. 2103
PLEDGE
Provisions Applicable Only to Pledge
355
if none are owing him, or insofar as the amount may exceed
that which is due, he shall apply it to the principal. Unless
there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but
shall be subject to the pledge, if there is no stipulation to
the contrary. (1868a)
Right of pledgee to compensate earnings
of pledge with debt.
The pledgee has no right to use the thing pledged or to
appropriate the fruits thereof without the authority of the owner.
(Art. 2104; see Art. 1977.) But the pledgee can apply the fruits,
income, dividends, or interests earned or produced by the thing
pledged to the payment of interest, if owing, and thereafter to the
principal of his credit. (see Art. 2132.)
Unless there is a stipulation to the contrary, the interest
and earnings of the right pledged and in case of animals, their
offsprings (see Art. 2127.), are included in the pledge.
EXAMPLE:
D borrowed from C P1,000.00 at 12% interest, with
certificates of stocks as security. The interest is payable six
months after the execution of the contract.
If the stocks earn dividends, the same shall also be subject
to the pledge if there is no stipulation to the contrary. C shall
apply such dividends to the interest, if any, owing him after
six months. If none is owing him or insofar as the dividends
may exceed the interest due, C shall credit it to the principal of
P1,000.00 when it matures.
ART. 2103. Unless the thing pledged is expropriated,
the debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to recover
it from, or defend it against a third person. (1869)
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Art. 2104
Right of pledgee against third persons.
Except as provided in Article 2112, the pledgor remains
the owner of the property pledged. The creditor to whom the
property pledged has been delivered is obliged to take care of
it with the diligence of a good father of a family. (Art. 2099.) He
is authorized to bring such action as pertaining to the owner in
order to recover it or defend it, against claims of third persons.
Furthermore, unless given the right, the creditor might be
prejudiced by the negligence of the owner.
The right of a pledgee is a real right enforceable against third
persons but it is necessary that the contract of pledge be embodied
in a public instrument which shall contain a description of the
thing pledged and the date of the pledge. (Art. 2096.)
ART. 2104. The creditor cannot use the thing pledged,
without the authority of the owner, and if he should do so,
or should misuse the thing in any other way, the owner
may ask that it be judicially or extrajudicially deposited.
When the preservation of the thing pledged requires its
use, it must be used by the creditor but only for that purpose. (1870a)
Obligation of pledgee not to use thing
pledged.
The pledgee who is in possession of the thing pledged has no
right to make use of it without permission from the owner. This
is the same rule in deposit. (see Art. 1977.) It is in consequence of
the fact that the pledgor in parting with his property transmits
only possession but not ownership.
If, however, the thing pledged is of such a character that use
is necessary in properly caring for it, then it becomes his duty
to use it so that it will not suffer from its disuse. If from the use
of the property profits are derived, the pledgee must account
therefor to the pledgor, and apply the net proceeds of such use to
the payment of his claim. (see 21 R.C.L. 665.)
Arts. 2105-2106
PLEDGE
Provisions Applicable Only to Pledge
357
Right of pledgor to ask that thing
pledged be deposited.
In the following cases, the owner may ask that the thing
pledged be deposited judicially or extrajudicially:
(1) if the creditor uses the thing without authority;
(2) if he misuses the thing in any other way; or
(3) if the thing is in danger of being lost or impaired because
of the negligence or willful act of the pledgee. (Art. 2106.)
ART. 2105. The debtor cannot ask for the return of the
thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest, with expenses in
a proper case. (1871)
Right of pledgor to demand return
of thing pledged.
The thing pledged stands as security for the fulfillment of
the pledgor’s obligation. Hence, he cannot ask for its return until
said obligation is fully paid including interest due thereon and
expenses incurred for its preservation. (Art. 2099.) Prescription
will not begin to run on the action to demand the return of
the thing pledged while the obligation subsists, neither will
the possession of the pledgee as such ripen into ownership by
prescription because such possession is not in the concept of an
owner. (Art. 1118.)
As an exception to this rule, the pledgor is allowed to
substitute the thing pledged which is in danger of destruction
or impairment with another thing of the same kind and quality.
(Art. 2107.)
ART. 2106. If through the negligence or willfull act of
the pledgee, the thing pledged is in danger of being lost or
impaired, the pledgor may require that it be deposited with
a third person. (n)
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Art. 2107
Right of pledgor to ask for deposit
of thing pledged.
The pledgee has the duty to preserve the thing pledged with
the diligence of a good father of a family. (Art. 2099.) If the thing
should be exposed to loss or impairment through the negligence
or willful act of the pledgee, the pledgor may demand that it
be deposited with a third person. The pledgor may also require
such deposit should the pledgee use the thing without authority
or misuse it in any other way. (Art. 2104.)
“Articles 2106 to 2108 formulate rules applicable when
the thing pledged is in danger of destruction or impairment.”
(Report of the Code Commission, p. 157.)
ART. 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without
the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge,
provided the latter is of the same kind as the former and
not of inferior quality, and without prejudice to the right of
the pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without
delay, of any danger to the thing pledged. (n)
Right of pledgor to substitute thing
pledged.
Two remedies are actually granted by Article 2107, to wit: to
the pledgor, the right to demand the return of the thing pledged
upon offering another thing in pledge; and to the pledgee, the
right to cause the same to be sold at a public sale. (Art. 2108.)
The following are the requisites for the application of Article
2017:
(1) The pledgor has reasonable grounds to fear the destruction
or impairment of the thing 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;
and
Arts. 2108-2109
PLEDGE
Provisions Applicable Only to Pledge
359
(4) The pledgee does not choose to exercise his right to cause
the thing pledged to be sold at public auction. (Ibid.)
ART. 2108. If, without the fault of the pledgee, there is
danger of destruction, impairment, or diminution in value
of the thing pledged, he may cause the same to be sold at
a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the
thing originally pledged. (n)
Right of pledgee to cause sale
of thing pledged.
The pledgee’s right to have the thing pledged sold at public
sale granted under the above article is superior to that given to
the pledgor to substitute the thing pledged under Article 2107.
The law says the pledgor is given the right “without prejudice to
the right of the pledgee.” (Art. 2107.)
The sale must be a “public sale.” The pledgee shall keep the
proceeds of the sale as security for the fulfillment of the principal
obligation. In other words, they shall belong to the pledgor.
ART. 2109. If the creditor is deceived on the substance
or quality of the thing pledged, he may either claim another
thing in its stead, or demand immediate payment of the
principal obligation. (n)
Right of pledgee to demand substitute
or immediate payment.
This article grants two remedies to the pledgee, in case he is
deceived as to the substance or quality of the thing pledged:
(1) to claim another thing in pledge; and
(2) to demand immediate payment of the principal obligation.
The remedies are alternative, that is, he is privileged to choose
only one and not both.
“Article 2109 is of evident fairness to both parties.” (Report
of the Code Commission, p. 157.)
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Art. 2110
ART. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing
is in the possession of the pledgor or owner, there is a
prima facie presumption that the same has been returned
by the pledgee. This same presumption exists if the thing
pledged is in the possession of a third person who has
received it from the pledgor or owner after the constitution
of the pledge. (n)
Extinguishment of pledge by return
of thing pledged.
One of the essential requisites of pledge is that the object
be placed in the possession of the creditor, or of a third person
by common agreement. (Art. 2093.) Hence, the pledge is
extinguished if the object is returned by the pledgee, and this
is true notwithstanding any stipulation that the pledge would
continue although the pledgee is no longer in possession.
The pledge is also extinguished by payment of the debt (see
Art. 2105.), by renunciation or abandonment of the pledge (Art.
2111.), and by the sale of the thing pledged at public auction. (see
Art. 2115.)
Presumption of extinguishment
of pledge.
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.
The presumption may be rebutted by evidence to the contrary,
as for example, that the return was merely for the substitution of
the thing pledged (Art. 2105.), or that the thing was stolen and
given by the thief to the pledgor or owner. There is authority
supporting the proposition that the pledgee can temporarily
entrust the physical possession of the chattel pledged (e.g.,
vessels) to the pledgor without invalidating the pledge. In such
a case, the pledgor is regarded as holding the pledged property
Arts. 2111-2112
PLEDGE
Provisions Applicable Only to Pledge
361
merely as trustee for the pledgee. (Yuliongsui vs. Phil. National
Bank, 22 SCRA 585 [1968].)
Be it noted that when the thing pledged is later found in the
hands of the pledgor or the owner, only the accessory obligation
of pledge is presumed remitted, not the principal obligation
itself. (Art. 1274.)
ART. 2111. A statement in writing by the pledgee that
he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing
pledged is necessary, the pledgee becoming a depositary.
(n)
Extinguishment of pledge by renunciation
or abandonment.
The pledge is a personal right of the pledgee which may be
waived. (Art. 6.) Under Article 2111, renunciation or abandonment must be in writing to extinguish the pledge, and such
renunciation is not conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing pledged. The waiver transforms the pledgee into a depositary with the rights and
obligations of one. The principal debt, however, is not affected by
the waiver of the pledge. But the waiver of the principal obligation carries with it that of the pledge. (see Art. 1273.)
Under this article, the thing pledged remains in the possession
of the pledgee. Hence, the waiver must be in writing. Under
Article 2110, the pledge is extinguished even in the absence of
waiver if the thing pledged is returned to the pledgor.
Other causes of extinguishment of pledge are prescription,
loss of the thing, merger, compensation, novation, etc. (see Art.
1231.)
ART. 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public
to the sale of the thing pledged. This sale shall be made
at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first
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Art. 2112
auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there
is no sale either, the creditor may appropriate the thing
pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a)
Right of pledgee to cause sale
of thing pledged.
One of the essential requisites of pledge is that the object
pledged may be alienated for the payment to the creditor when
the principal obligation becomes due. (Art. 2087.)
The formalities required for such sale under the above article
are as follows:
(1) The debt is due and unpaid;
(2) The sale must be at a public auction;
(3) There must be notice to the pledgor and owner, stating
the amount due; and
(4) The sale must be made with the intervention of a notary
public.
Note that Article 2112 does not require posting of the notice
of sale and publication. Notification to the pledgor and the
owner of the thing pledged is sufficient. Only a notary public can
conduct a public auction after proper notice is sent to the pledgor
and owner of the thing pledged. The sale is actually extrajudicial
in character without intervention by the courts.
“The public auction before a Notary Public is regulated in
Articles 2112 to 2115.” (Report of the Code Commission, p. 157.)
No provision in the Rules of Court or in any law requires
that pledged properties sold at public auction be sold separately.
(Paray vs. Rodriguez, 479 SCRA 571 [2006].)
Right of pledgee to appropriate
thing pledged.
The pledgee may appropriate the thing pledged if after
the first and second auctions, the thing is not sold. This is an
exception to the prohibition against pacto commisorio. (Art. 2088.)
Arts. 2113-2115
PLEDGE
Provisions Applicable Only to Pledge
363
If the creditor appropriates the thing, it shall be considered
as full payment for his entire claim. He is thus obliged to give an
acquittance for the same. The debtor is not entitled to the excess
in case the value of the thing pledged is more than the principal
obligation. (see Art. 2115.)
ART. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he
should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be
valid if he is the only bidder. (n)
Right of pledgor and pledgee to bid
at public sale.
If the debt is not paid and a public sale takes place, both the
pledgor and the pledgee may bid. The pledgor shall be preferred
if he offers the same terms as the highest bidder, the rule is just
considering that all the things belong to him.
To avoid fraud, the pledgee is not allowed to acquire the
thing pledged if he is the only bidder.
ART. 2114. All bids at the public auction shall offer to
pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have received the purchase
price, as far as the pledgor or owner is concerned. (n)
Bid must be for cash.
All bids, including that of the pledgor, must be for cash. If
the pledgee accepts a bid other than for cash, the pledgor or
owner has the right to consider that the pledgee has received the
purchase price in cash.
ART. 2115. 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. If the price
of the sale is more than said amount, the debtor shall not
be entitled to the excess, unless it is otherwise agreed.
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Art. 2115
If the price of the sale is less, neither shall the creditor
be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary. (n)
Effect of sale of thing pledged.
The sale of the thing pledged extinguishes the principal
obligation whether the price of the sale is more or less than the
amount due.
(1) 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.
(2) In the same way, if the price of the sale is less, neither is the
creditor entitled to recover the deficiency. A contrary stipulation
is void.
(a) The reason is to compel the creditor to hold an honest
public sale.
(b) Furthermore, the creditor should see to it, which he
usually does, that he loans only as much as he is likely to
realize at a public sale. (see Report of Code Commission, p.
1571; see Manila Surety & Fidelity Co., Inc. vs. Velayo, 21
SCRA 515 [1967].)
The provisions of Article 2115 “are in line with the policy of
Act No. 4112 (Adding Article 1454-A to the present Code) which
forbids the recovery of the deficiency in case of the execution of
a chattel mortgage.” (Ibid.)
Right of debtor to excess.
As a general rule, therefore, the debtor is not entitled to
the excess unless there is an agreement to the contrary. This is
obviously to compensate the creditor for his risk of not being able
to recover the deficiency in case the thing pledged is sold below
the amount of the principal obligation. The rule is nevertheless
unfair since the obligation is fully satisfied. (see Art. 2121.) In
effect, the rule would amount to a pacto commisorio which is
prohibited. (Art. 2088.)
Under the Chattel Mortgage Law, the mortgagor is entitled
to recover the excess of the proceeds of the sale in foreclosure
Arts. 2116-2117
PLEDGE
Provisions Applicable Only to Pledge
365
proceedings. (Sec. 14, Act No. 1508; see Art. 2141; Phil. National
Bank vs. Manila Investment & Construction, Inc., 38 SCRA 462
[1971].)
Right of creditor to recover deficiency.
In the case of the creditor, he is not entitled to recover the
deficiency in all cases. By electing to sell the thing pledged,
instead of suing on the principal obligation, the creditor waives
any other remedy, and must abide by the results of the sale.
The creditor may sue on the principal obligation instead of
electing to sell the thing pledged, and in such case, he may recover
the deficiency from the debtor. (Manila Surety and Fidelity Co.,
Inc. vs. Velayo, 21 SCRA 515 [1967].)
ART. 2116. After the public auction, the pledgee shall
promptly advise the pledgor or owner of the result thereof.
(n)
Obligation of pledgee to advise pledgor
or owner of result of sale.
The purpose of this article is to enable the pledgor or owner to
take steps for the protection of his rights where he has reasonable
grounds to believe that the sale was not an honest one.
ART. 2117. Any third person who has any right in or to
the thing pledged may satisfy the principal obligation as
soon as the latter becomes due and demandable. (n)
Right of third person to satisfy
obligation.
As a general rule, the creditor is not bound to accept payment
or performance by a third person who has no interest in the
fulfillment of the obligation. (Art. 1236.)
Under this article, a third person who has any right in or to
the thing pledged (as when the pledgor has contracted to sell it to
him) may pay the debt as soon as it becomes due and demandable
and the creditor cannot refuse to accept the payment.
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Arts. 2118-2120
ART. 2118. If a credit which has been pledged becomes
due before it is redeemed, the pledgee may collect and
receive the amount due. He shall apply the same to the
payment of his claim, and deliver the surplus, should there
be any, to the pledgor. (n)
Right of pledgee to collect and receive
amount due on credit pledged.
It would seem that under this article, it is not obligatory for
the pledgee to collect and receive the amount due on the credit
pledged. He is given merely the right to do so.
However, in view of Article 2009 which imposes upon him
the obligation to take care of the thing pledged with the diligence
of a good father of a family, he has the duty to collect if delay
would endanger the recovery of the credit.
ART. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there
is a stipulation to the contrary. He may demand the sale of
only as many of the things as are necessary for the payment of the debt. (n)
Right of pledgee to choose which of several
things pledged shall be sold.
The right of choice given to the pledgee as to which of
the things pledged he shall cause to be sold is limited only by
stipulation. After sufficient property has been sold to satisfy the
obligation plus interests and expenses (Art. 2115.), no more shall
be sold.
Usually the value of the property pledged exceeds the
amount of the debt guaranteed.
ART. 2120. If a third person secures an obligation by
pledging his own movable property under the provisions
of Article 2085 he shall have the same rights as a guarantor
under Articles 2066 to 2070, and Articles 2077 to 2081. He
is not prejudiced by any waiver of defense by the principal
obligor. (n)
Arts. 2121-2122
PLEDGE
Provisions Applicable Only to Pledge
367
Right of third person who pledged
his own property.
A third person who is not a party to the principal obligation
may secure the latter by pledging his own property. (Art. 2085,
par. 2.) The law grants him the same rights as a guarantor (see
Arts. 2066-2070, 2077-2081.) and he cannot be prejudiced by any
waiver of defense by the principal debtor.
ART. 2121. Pledges created by operation of law, such
as those referred to in Articles 546, 1731, and 1994, are
governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses,
the remainder of the price of the sale shall be delivered to
the obligor. (n)
ART. 2122. A thing under a pledge by operation of law
may be sold only after demand of the amount for which the
thing is retained. The public auction shall take place within
one month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within
such period, the debtor may require the return of the thing.
(n)
Instances of pledges by operation
of law.
Articles 546, 1731, and 1994 referred to in Article 2121 are
instances of legal pledges or pledges which are created by
operation of law. Herein below are the provisions of the first two
articles:
“Art. 546. Necessary expenses shall be refunded to every
possessor, but only the possessor in good faith may retain the
thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor
in good faith with the same right of retention, the person
who has defeated him in the possession having the option
of refunding the amount of the expenses or of paying the
increase in value which the thing may have acquired by
reason thereof.”
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Arts. 2121-2122
“Art. 1731. He who has executed work upon a movable
has a right to retain it by way of pledge until he is paid.”
Other examples are:
“Art. 1914. The agent may retain in pledge the things
which are the object of the agency until the principal effects
the reimbursement and pays the indemnity set forth in the
two preceding articles.”
“Art. 1707. The laborer’s wages shall be a lien on the
goods manufactured or the work done.”
Articles 1994 refers to a depositary. Article 2004 is also an
instance of a legal pledge and refers to a hotelkeeper.
Rules in cases of pledge by operation
of law.
(1) The provisions on the possession (see Art. 2098.), care (see
Art. 2099.), and sale of the thing pledged (see Art. 2112.) as well
as on the extinguishment of the thing pledged (see Arts. 2110,
2111.) governing conventional pledges are applicable to pledges
created by operation of law. Unlike, however, in conventional
pledge where the debtor is not entitled to the excess unless it is
otherwise agreed (Art. 2115.), in legal pledge, the remainder of
the price of the sale after payment of the debt and expenses, shall
be delivered to the debtor. (Art. 2121.)
(2) In legal pledge, there is no definite period for the payment
of the principal obligation. The pledgee must, therefore, make a
demand for the payment of the amount due him. Without such
demand, he cannot exercise the right of sale at public auction.
(Art. 2112.) The pledgee must proceed with the sale within one
month after demand; otherwise, the debtor may require him to
return the thing retained. (Art. 2122.)
The new rules on pledges created by operation of law dealt
with in Articles 2121 and 2122 “are necessary because the [former]
code [was] silent on how the thing should be disposed of in case
of its retention by the creditor in accordance with law.” (Reports
of the Code Commission, pp. 157-158.)
Art. 2123
PLEDGE
Provisions Applicable Only to Pledge
369
ART. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured
by pledges, the special laws and regulations concerning
them shall be observed, and subsidiarily, the provisions of
this Title. (1873a)
Rules as to pawnshops and other
establishments.
The Title referred to is Title XVI on “Pledge, Mortgage, and
Antichresis,” covering Articles 2085 to 2141.
Presidential Decree No. 114 regulates the establishment and
operation of pawnshops. (see Appendix 10.)
— oOo —
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VII
REAL MORTGAGE
(Arts. 2124-2131.)
Chapter 3
MORTGAGE*
ART. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws,
imposed upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage. (1874a)
Definition of mortgage.
Mortgage (otherwise known as “real estate mortgage” or
“real mortgage’’) is a contract whereby the debtor secures to
the creditor the fulfillment of a principal obligation, specially
subjecting to such security immovable property or real rights
over immovable property which obligation shall be satisfied
with the proceeds of the sale of said property or rights in case the
said obligation is not complied with at the time stipulated.
Characteristics of mortgage.
It is a real, accessory, and subsidiary contract. It is also unilateral
because it creates only an obligation on the part of the creditor
who must free the property from the encumbrance once the
obligation is fulfilled.
*Title XVI, Book IV, Civil Code.
370
Art. 2124
REAL MORTGAGE
371
The essence of a contract of mortgage is that a property has
been identified or set apart from the mass of the property of the
debtor-mortgagor as security for the fulfillment of his obligation,
in case of default of payment. (China Banking Corporation vs.
Court of Appeals, 265 SCRA 327 [1996]; Ocampo vs. Land Bank
of the Phils., 591 SCRA 562 [2009].)
ILLUSTRATIVE CASE:
Stipulation in a mortgage gives mortgagee the option to purchase
mortgaged property.
Facts: To secure a loan in the amount of P1,800.00, D
mortgaged his parcel of land to C, giving the latter the option
to “purchase said land absolutely on any date within the twoyear of this mortgage” at the agreed price of P3,900.00.
Issue: Having seasonably advised D that he had decided to
buy the land in question, is C entitled to specific performance?
Held: Yes. While the stipulation is a mortgage and contains the customary stipulation concerning redemption by
the mortgagor (D), it carries the added special provision
aforequoted which renders D’s right to redeem defeasible at
the election of C.
There is nothing illegal or immoral in this. It is simply
an option to buy sanctioned by Article 1479.1 In this case, D’s
promise to sell is supported by the same consideration as that
of the mortgage itself, which is distinct from that which would
support the sale, an additional amount having been agreed
upon to make up the entire price of P3,900.00, should the
option be exercised.
D’s promise was in the nature of a continuing offer, nonwithdrawable during a period of two years which upon
acceptance by C gave rise to a perfected contract of purchase
and sale. (Soriano vs. Bautista, 6 SCRA 946 [1962].)
Possession of property mortgaged.
In a contract of mortgage, the mortgagor-debtor, as a general
1
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct
from the price.
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Art. 2124
rule, retains possession of the property mortgaged as security for
the payment of the sum borrowed from the mortgagee-creditor,
because by the mortgage, the debtor merely subjects the property
to a lien but ownership thereof is not parted with. The debtor
pays the creditor a certain percent thereof as interest on his
principal by way of compensation for his sacrifice in depriving
himself of the use of said money and the enjoyment of its fruits,
in order to give them to the mortgagor.
Since it is the mortgagor in a contract of mortgage who is
entitled to the possession of the subject property, it follows that
one’s status as mortgagee cannot be the basis of possession.
(Recebido vs. People, 346 SCRA 881 [2000].) In a case (Lao vs.
Court of Appeals, 275 SCRA 237 [1997].), the private respondent
bought the subject property from petitioner’s family corporation
by a deed of sale but the real transaction was found to be loan
secured by a mortgage. It was held that being a mere mortgagee,
private respondent has no right to eject petitioner. As creditor
and mortgagee, private respondent “x x x cannot appropriate the
things given by way of pledge or mortgage or dispose of them.
Any stipulation to the contrary is null and void.’’ (Art. 2088.)
It is not, however, an essential requisite of the contract of
mortgage that the property mortgaged remains in the possession
of the mortgagor. (see Art. 2085.) Hence, the mortgagor may
deliver said property to the mortgagee, without thereby altering
the nature of the contract.
Payment of interest on mortgage credit.
It is not also an essential requisite of the contract of mortgage
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.
The interest may be in the form of fruits of the mortgaged
property, without the contract’s losing thereby its character of
a mortgage contract. (Legaspi vs. Celestial, 66 Phil. 372 [1938].)
In such case, the mortgagee shall be subject to the obligation of
an antichresis creditor. (see Macapinlac vs. Gutierrez Repide, 43
Phil. 770 [1922].) But if it is expressly agreed that the creditor
shall apply the fruits of the property, “to the payment of interest,
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REAL MORTGAGE
373
if owing, and thereafter to the principal of his credit,” the contract
is a true antichresis as defined in Article 2132.
Cause or consideration in mortgage.
As mortgage is an accessory contract, its consideration
is the same as of the principal contract from which it receives
its life, and without which it cannot exist as an independent
contract, although the obligation thereby secured is incurred
by a third person and, therefore, it will be valid if the principal
obligation is valid, and cannot be avoided on the ground of lack
of consideration. (China Banking Corp. vs. Lichauco, 46 Phil. 460
[1924]; Banco de Oro vs. Bayuga, 93 SCRA 443 [1979].) Being an
accessory contract, its validity would depend on the validity of
the debt secured by it.
In a case, a corporate borrower was granted a loan on
condition that its operation shall be run by the lending bank
and consultancy firm but the people designated to manage the
corporation misspent proceeds of the loan by taking advantage of
the positions that they were occupying in the corporation which
resulted in the latter’s devastation instead of its rehabilitation.
It was held that it is as if the loan was never delivered and thus,
there was failure on the part of the mortgagee bank to deliver the
consideration for which the mortgage was executed. The contract
of a loan being invalid, the accessory contract of mortgage was
null and void. (Filipinas Marble Corporation vs. Intermediate
Appellate Court, 142 SCRA 180 [1986].)
The mortgage must sufficiently describe the debt sought to
be secured. An obligation is not secured by a mortgage unless it
comes fairly within its terms. (Viola vs. Equitable PCI Bank, Inc.,
572 SCRA 245 [2008].)
Kinds of mortgage.
A mortgage may be:
(1) Voluntary. — one which is agreed to between the parties
or constituted by the will of the owner of the property on which
it is created (Art. 138, Spanish Mortgage Law.); or
(2) Legal. — one required by law to be executed in favor of
certain persons (see Art. 2125, par. 2; Arts. 2082, 2083.); or
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(3) Equitable. — one which, although it lacks the proper
formalities or other requisites of a mortgage required by law,
nevertheless reveals the intention of the parties to burden real
property as a security for a debt, and contains nothing impossible
or contrary to law.
An equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to be defeated
by requiring compliance with the formalities necessary to the
validity of a voluntary real estate mortgage. (Rosales vs. Suba,
408 SCRA 664 [2003].)
The provisions in the Civil Code governing equitable mortgages are found in Articles 1365, 1450, 1454, 1602, 1603, 1604, and
1607. The instances when a contract regardless of its nomenclature may be presumed to be an equitable mortgage are enumerated in Article 1602.2 The Code Commission which prepared the
2
Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
(1) When the price of a sale with right to repurchase is usually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the performance of
any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by
the vendee as rent or otherwise shall be considered as interest which shall be subject to
the usury laws.
Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase
shall be construed as an equitable mortgage.
Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to
be an absolute sale.
It has been held that an arrangement where the ownership of the land is supposedly
transferred to the buyer who provides for the funds to redeem the property from the bank
but nonetheless allows the seller to later on buy back the property is in the nature of an
equitable mortgage governed by Articles 1602 and 1604. (Bacuñgan vs. Court of Appeals,
574 SCRA 642 [2008].)
Note: For the presumption in Article 1602 to arise, it must appear that the parties
entered into a contract of sale and that their intention was not to effect a sale in favor of
the supposed vendee but to secure an existing debt of the supposed vendor by way of
mortgage of the subject property. The presence of even one of the circumstances enumerated in Article 1602 is sufficient to make a contract of sale with right to repurchase an equitable mortgage. Parol evidence is admissible to prove that the instrument was in truth
and in fact given merely as a security for the payment of a loan. There is no conclusive
test to determine whether a deed purporting to be a pacto de retro or an absolute sale on its
Art. 2124
REAL MORTGAGE
375
draft of our present Civil Code, has made these observations on
the above provisions:
“It is a matter of common knowledge that in practically
all of the so-called contracts of sale with right of repurchase,
the real intention of the parties is that the pretended purchase
price is money loaned, and in order to secure the payment of
the loan a contract purporting to be a sale with pacto de retro
is drawn up.”
“x x x it is well-known that the practice in these so-called
contracts of sale with pacto de retro is to draw up another
contract purporting to be a lease of the property to the
supposed vendor who pays in money or in crops as so-called
rent. It is, however, no secret to anyone that this simulated
rent is, in truth and in fact, interest on the money loaned.
In many instances, the interest is usurious. Thus, the Usury
Law is also circumvented.” (Report of the Code Commission,
p. 63; for cases on equitable mortgage, see Comments and
Cases on Sales and Lease, 2005 ed., by the same author.)
Subject matter of mortgage.
The objects of contract of mortgage are immovables (Art.
415.3) and alienable real rights imposed upon immovables.
face is in reality a loan secured by a mortgage. The decisive factor, however, in evaluating
whether or not the agreement is really a loan agreement secured by a mortgage, is the
intention of the parties, as shown not necessarily by the terminology used in the contract
but by all the surrounding circumstances (Sps. Reyes vs. Court of Appeals, 339 SCRA 97
[2000]; Arrofo vs. Quiño, 449 SCRA 284 [2005].) The owner of the property may disprove
the contract by means of parol evidence if the same does not express the true intent of
the parties provided that the nature of the agreement is placed in issue by the pleadings
filed with the trial court. (Ramos vs. Sarao, 451 SCRA 103 [2005]; Madrigal vs. Court of
Appeals, 456 SCRA 247 [2005].)
3
Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that
it cannot be separated therefrom without breaking the material or deterioration of the
object;
(4) Statues, reliefs, paintings, or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it reveals the
intention to attach them permanently to the tenements;
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(Art. 2124.) A real right over real property is real property. (Art.
414[10].) Hence, a mortgage on real property is in itself a real
property.
The inclusion of “buildings” under Article 415 of the Civil
Code, separate and distinct from the land means that a building is by itself an immovable property. While a mortgage of land
necessarily includes, in the absence of stipulation, the improvements thereon, a building by itself may be mortgaged apart from
the land on which it is built. Possessory rights over said property
before title is vested on the grantee may be validly transferred or
conveyed as in a deed of mortgage. (Prudential Bank vs. Panis,
153 SCRA 390 [1987]; Nartales vs. GSIS, 156 SCRA 205 [1987];
Soriano vs. Galit, 411 SCRA 631 [2003].)
The objects of pledge and chattel mortgage are movables.
(Arts. 2094, 2140.)
Future property cannot be object
of mortgage.
Future property cannot be object of a contract of mortgage.
(Art. 2085[2].) Thus, a stipulation in a contract of mortgage
whereby the mortgagor also constituted a mortgage in favor of
the mortgagee and his assignees “on any other property he then
might have and those he might acquire in the future” did not
constitute a valid mortgage on the properties acquired subsequent
to the constitution of the mortgage because the mortgagor could
(5) Machinery, receptacles, instruments or implements intended by the owner of
the tenement for an industry or works which may be carried on in a building or on a piece
of land, and which tend directly to meet the needs of the said industry or works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of
similar nature, in case their owner has placed them or preserves them with the intention
to have them permanently attached to the land, and forming a permanent part of it; the
animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the
bed, and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over immovable property.
Art. 2125
REAL MORTGAGE
377
not legally mortgage any property he did not yet own. (Dilag vs.
Heirs of Resurreccion, 70 Phil. 650 [1940].)
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 [1967], infra;
see Art. 2127.)
ART. 2125. In addition to the requisites stated in Article
2085, it is indispensable, in order that a mortgage may be
validly constituted, that the document in which it appears
be recorded in the Registry of Property. If the instrument
is not recorded, the mortgage is nevertheless binding
between the parties.
The persons in whose favor 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. (1875a)
Essential requisites of mortgage.
In addition to the requisites stated as common to pledge and
mortgage (Arts. 2085, 2087.), it is indispensable in order that a
mortgage may be validly constituted that it appears in a public
document duly recorded in the Registry of Property. (see Gaotian
vs. Gaffud, 24 SCRA 706 [1969].) A duly executed mortgage is
presumed to be valid until the contrary is shown. To the party
attacking, rests the burden of proving its invalidity due to
fraud, duress or illegality. The right to attack the validity of a
mortgage may be lost by a waiver of defects and objections, or by
unreasonable delay to act amounting to ratification. (San Juan vs.
Court of Appeals, 363 SCRA 387 [2001].)
(1) Where mortgage in a private document. — No valid mortgage
is constituted where the alleged deed of mortgage is a mere
private document and, therefore, is not registered. (Hechanova
vs. Adil, 144 SCRA 450 [1986].) The creditor may recover the loan,
although the mortgage document evidencing the loan was nonregistrable being a purely private document. He has the right to
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compel the debtor to execute a contract of mortgage in a public
instrument. (see Arts. 1357, 1358.)
(2) Where mortgage not registered. — However, an additional
provision is made that if the instrument of mortgage is not
recorded, the mortgage is nevertheless binding between the
parties.” (Report of the Code Commission, p. 158.) In other
words, registration only operates as a notice of the mortgage to
others but neither adds to its validity nor converts an invalid
mortgage into a valid one between the parties. (Samanilla vs.
Cajucom, 107 Phil. 432 [1960].)
Hence, an order for foreclosure cannot be refused on the
ground that the mortgage had not been registered (Mobil
Philippines, Inc. vs. Diocares, 29 SCRA 656 [1969].) provided no
innocent third parties are involved. (see Tan vs. Valdehueza, 66
SCRA 61 [1975].)
Under the Old Civil Code (Art. 1875 thereof.), an unrecorded
mortgage was not valid and binding even between the contracting
parties themselves.
(3) Where mortgage registered under Act No. 3344. — The
registration of a mortgage over real property under Act No.
3344 (see Appendix 7-B.) is without prejudice to the better right
of third parties. Thus, an unregistered pacto de retro sale over a
house is superior to a recorded mortgage over the same house of
a later date. (Lanuza vs. De Leon, 20 SCRA 369 [1967].)
Doctrine of mortgagee in good faith.
(1) Reliance in good faith on certificate of title of mortgagor. — A
mortgagee has a right to rely in good faith on the certificate of
title of the mortgagor of the property given as security and in the
absence of any sign that might arouse suspicion, has no obligation
to undertake further investigation. Hence, even if the mortgagor
is not the rightful owner of, or does not have a valid title to, the
mortgaged property, the mortgagee in good faith is nonetheless
entitled to protection. This is the doctrine of “mortgagee in good
faith.”
The doctrine is based on the rule that all persons dealing
with the property covered by a Torrens Certificate of Title,
Art. 2125
REAL MORTGAGE
379
as buyers or mortgagees, are not required to go beyond what
appears on the face of the title. The public interest in upholding
the indefeasibility of a certificate of title, as evidence of lawful
ownership of the land or of any encumbrance thereon, protects a
buyer or mortgagee who, in good faith, relied upon what appears
on the face of the certificate of title.
(2) Title in name of mortgagor, not of rightful owner. — This
doctrine presupposes, however, that the mortgagor, who is
not the rightful owner of the property, has already succeeded
in obtaining a Torrens title over the property in his name and
that, after obtaining the said title, he succeeds in mortgaging
the property to another who relies on what appears on the said
title. The innocent purchaser (mortgagee in this case) for value
protected by law is one who purchases a titled land by virtue of
a deed executed by the registered owner.
The doctrine does not apply to a situation where the title is still
in the name of the rightful owner and the mortgagor is a different
person pretending to be the owner. In such a case, the mortgagee
is not an innocent mortgagee for value and the registered owner
will generally not lose his title. (Ereña vs. Querrer-Kauffman,
192 SCRA 298 [2006]; see Cavite Development Bank vs. Lim, 324
SCRA 346 [2000]; Bank of Commerce vs. San Pablo, Jr., 522 SCRA
713 [2007].)
(3) Duty of mortgagee to look beyond certificate of title. — As a
general rule, where there is nothing on the certificate of title to
indicate any cloud or vice in the ownership of the property, or any
encumbrance thereon, the purchaser is not required to explore
further than what the Torrens Title upon its face indicates in quest
for any hidden defect or inchoate right that may subsequently
defeat his right thereto.
This rule, however, admits of an exception as where the
purchaser or mortgagee has knowledge of a defect or lack of title
in the vendor, or the mortgagee does not directly deal with the
registered owner of real property. (Abad vs. Guimba, 465 SCRA
356 [2005].) or that he was aware of sufficient facts to induce a
reasonably prudent man to inquire into the status of a property in
litigation. When the purchaser or mortgagee is a bank or financing
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Art. 2125
institution, the general rule that a purchaser or mortgagee of
land is not required to look further than what appears on the
face of the title does not apply. (Premiere Development Bank vs.
Court of Appeals, 453 SCRA 630 [2005]; Dela Merced vs. GSIS,
365 SCRA 365 [2001]; Sunshine Finance and Investment Corp. vs.
Intermediate Appellate Court, 203 SCRA 210 [1996]; Philippine
National Bank vs. Office of the President, 252 SCRA 5 [1996].)
(4) Greater care and diligence required of mortgagee-bank. — A
mortgagee-bank is expected to exercise greater care and prudence before entering into a mortgage contract even those involving registered lands in its dealings than private individuals
as their business is impressed with public interest. It is a matter
of judicial notice that before a bank grants a loan on the security
of land it first undertakes a careful examination of title of the
applicant as well as a physical and on-the-spot investigation of
the land itself offered as security. A bank that failed to observe
due diligence cannot be accorded the status of a bona fide mortgagee. (Navarro vs. Laguna Development Bank, 398 SCRA 227
[2003]; Ursal vs. Court of Appeals, 473 SCRA 52 [2005]; Rural
Bank of Siaton vs. Macajitos, 495 SCRA 127 [2005]; Erasustada,
Jr. vs. Court of Appeals, 495 SCRA 319 [2006]; Mercado vs. Allied
Banking Corporation, 528 SCRA 444 [2007]; Metropolitan Bank &
Trust Company vs. SLGT Holdings, Inc., 533 SCRA 316 [2007].)
The due diligence required of banks extends even to persons
regularly engaged in the business of lending money secured by
real estate mortgages. (Cruz vs. Bancom Finance Corporation,
379 SCRA 490 [2002]; Agag vs. Alpha Financing Corp., 407 SCRA
602 [2003]; Premiere Development Bank vs. Court of Appeals,
453 SCRA 630 [2005]; Philippine National Bank vs. Heirs of G.
Militar, 494 SCRA 308 [2006]; Tio vs. Abayata, 556 SCRA 175
[2008].)
Thus, in granting a loan, a bank should not have content
merely with a clean title, considering the presence of circumstances (i.e., loan was to be used for a real estate development
project, other funds could have been used to finance the project,
the property or any part thereof was already intended to be subject of any other contract involving buyers or potential buyers)
indicating the need for a thorough investigation of the existence
Art. 2125
REAL MORTGAGE
381
of buyers and the submission by the mortgagor of certified true
copies of relevant-documents and verification of their authenticity. (Development Bank of the Phils. vs. Capulong, 577 SCRA 582
[2009].)
Right in case of legal mortgages.
The second paragraph refers to legal mortgages. It is in conformity with the rule established under the law on “Form of Contracts” which gives to the contracting parties the right to compel
each other to observe the form required by law like the execution
of a document or other special forms provided the contract between them is valid and enforceable. (see Arts. 1357, 1358.)
Registration of mortgage.
(1) Mortgagee entitled to registration of mortgage as a matter
of right. — Once a mortgage has been signed in due form, the
mortgagee is entitled to its registration as a matter of right. By
executing the mortgage, the mortgagor is understood to have
given his consent to its registration, and he cannot be permitted
to revoke it unilaterally. The validity or compliance of contracts
cannot be left to the will of one of the contracting parties. (see
Art. 1308.)
The reasoning that inasmuch as a mortgage is a voluntary
transaction, the Register of Deeds has no authority to register it
without the consent of both parties is fallacious. It confuses the
execution of the mortgage with its registration. It is the execution
of the mortgage that is voluntary. (Gonzales vs. Basa, Jr., 73 Phil.
704 [1942].)
(2) Proceedings for registration do not determine validity of mortgage or its effect. — Registration is a mere ministerial act by which
a deed, contract or instrument is sought to be inscribed in the
records of the Office of the Register of Deeds and annotated at
the back of the certificate of title covering the land subject of the
deed, contract or instrument.
(a) It is not a declaration by the state that such an instrument is a valid and subsisting interest in land. It is merely a
declaration that the record of the title appears to be burdened
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Art. 2125
with the mortgage described. The mere fact that a mortgage
was registered does not stop any party to it from setting up
that it has no force and effect (Agricultural Credit Cooperative Association of Hinigaran vs. Yusay, 107 Phil. 791 [1960].)
and ask for the avoidance of the deed and the cancellation of
its registration.
(b) But until such action is filed and decided, it would be
too dangerous to the rights of the mortgagee to deny registration of his mortgage because his rights can easily be defeated
by a transfer or conveyance of the mortgaged property to an
innocent third person. If the purpose of registration is merely
to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before,
registration. It must follow as a necessary consequence that
registration must first be allowed and its validity or effect
litigated afterwards. (Samanilla vs. Cajucom, 107 Phil. 432
[1960].)
Actual knowledge of defect of title is equivalent to notice
of registration. (RFC vs. Javillonar, 107 Phil. 664 [1960].)
(3) Registration without prejudice to better right of third parties.
— A registered mortgage right over property previously sold is
inferior to the buyer’s unregistered right. The unrecorded sale
is preferred for the reason that if the original owner (seller) had
parted with his ownership of the thing sold then he no longer
had ownership and free disposal of the thing so as to be able to
mortgage it. Registration is of no moment since it is understood
to be without prejudice to the better right of third parties. (State
Investment House, Inc. vs. Court of Appeals, 254 SCRA 368
[1996].)
A registered mortgage, however, is superior to a contract to
sell, subject to any liabilities the owner (vendor/mortgagor) may
have incurred in favor of the buyer. In a contract to sell, title is
retained by the vendor until full payment of the price. (Flancia
vs. Court of Appeals, 457 SCRA 224 [2005].)
(4) Registrability of encumbrance acquired subsequent to the
mortgage. — Where the mortgage deed has been duly registered,
said deed forms part of the records for the registration of the
Art. 2125
REAL MORTGAGE
383
property mortgaged. So, in a proceeding for the annotation of
an encumbrance (e.g., leasehold rights) over the same property
subsequently acquired, which annotation is opposed by the
mortgagee, the latter need not introduce the mortgage deed in
evidence to prove its existence.
Where the mortgage deed contains a prohibition against
encumbrance of the mortgaged land, without the mortgagee’s
consent, rights over the same property, which came into existence
after the execution of the deed, cannot be annotated as an adverse
claim on the title of the land over the mortgagee’s opposition.
(Rivera vs. Peña, 1 SCRA 747 [1961].)
(5) Registrability of mortgage by surviving spouse of his/her
undivided share of conjugal property. — The mortgage by the
wife, after the death of her husband, of her rights, interest and
participation in an undivided one-half share of the conjugal
partnership (or community property) is legal and valid, and
should, therefore, be registered, registration being an essential
requirement in order that the mortgage may be validly
constituted. Registration will, in no way, affect the rights of the
deceased husband’s creditors, if any, or of his heirs, for their
interest is limited to the husband’s half of the estate not covered
by the mortgage.
Neither would the mortgage affect the debts, if any, of the
conjugal partnership, their payment being provided for by
law before the one-half share of the wife-mortgagor is finally
determined. (Taningco vs. Register of Deeds, 5 SCRA 381 [1962].)
(6) Subsequent registration of an adverse claim. — Settled is the
doctrine that a prior registration of a lien creates a preference;
hence, the subsequent annotation of an adverse claim cannot
defeat the rights of the mortgagee or the purchaser at the auction
sale whose rights were derived from a prior mortgage validly
registered. A contrary rule will make a prior registration of a
mortgage or any lien nugatory or meaningless. The doctrine
applies with greater force in a case where the annotation of the
notice of lis pendens was made not only after the registration of
the mortgage but also, and much later, after the conclusion of the
foreclosure sale. (Phil. Veterans Bank vs. Monillas, 550 SCRA 251
[2008]; see No. [3] which refers to prior unrecorded sale.)
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Art. 2126
Effect of invalidity of mortgage
on principal obligation.
(1) Principal obligation remains valid. — Where a mortgage is
not valid, e.g., it is executed by one who is not the owner of the
property (Art. 2085[2].), or the consideration of the contract is
simulated (Arts. 1345, 1352.) or false (Art. 1353.), the principal
obligation which it guarantees is not rendered null and void.
That obligation matures and becomes demandable in accordance
with the stipulation pertaining to it.
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.
(2) Mortgage deed remains as evidence of a personal obligation.
— In case of nullity, 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.
(De Jesus vs. Abastillas, 6 C.A. Rep. 789; Compania General de
Tabacos vs. Jeanjaquet, 12 Phil. 195 [1908]; Lim Julian vs. Lutero,
49 Phil. 703 [1926]; Lozano vs. Tan Suico, 23 Phil. 16 [1912];
Development Bank of the Phils. vs. Court of Appeals, 249 SCRA
331 [1995].)
The mortgage derives its vitality from the validity of the
principal obligation; hence, the invalidity of the stipulation on
interest does not render void the ancillary mortgage contract.
(Carpo vs. Chua, 471 SCRA 471 [2005].)
ART. 2126. The mortgage directly and immediately
subjects the property upon which it is imposed, whoever
the possessor may be, to the fulfillment of the obligation
for whose security it was constituted. (1876)
Effect of mortgage.
(1) Creates real right. — Article 2126 means, in other words,
that a registered mortgage creates right in rem, a real right, a lien
inseparable from the property mortgaged, which is enforceable
against the whole world, affording specific security for the
satisfaction of a debt. The personality of the owner is disregarded.
Art. 2126
REAL MORTGAGE
385
Until discharged upon payment of the obligation, it follows the
property wherever it goes and subsists notwithstanding changes
of ownership. (see Art. 2129.)
(a) Therefore, if the mortgagor sells the mortgaged
property, the property remains subject to the fulfillment of the
obligation secured by it. (see Bonnevie vs. Court of Appeals,
125 SCRA 122 [1983].) All subsequent purchasers of the
property must respect the mortgage, whether the transfer to
them be with or without the consent of the mortgagee. But the
mortgage must be registered (Art. 2125.) or, if not registered,
the buyer must know of its existence (see Phil. National Bank
vs. Mallorca, 21 SCRA 694 [1967]; Consolidated Bank & Trust
Corp. vs. Court of Appeals, 193 SCRA 158 [1991]; Asuncion
vs. Evangelista, 316 SCRA 848 [1999].), his knowledge of the
prior unregistered mortgage having the effect of registration
as to him. The mortgagor may not be the principal debtor.
(Art. 2085, 2nd par.)
(b) Again, the mortgagee has a right to rely in good faith
on what appears on the certificate of title of the mortgagor to
the property given as security and in the absence of anything
to excite suspicion, he is under no obligation to look beyond
the certificate and investigate the title of the mortgagor
appearing on the face of the certificate. Accordingly, the
right or lien of an innocent mortgagee for value upon the
mortgaged property must be respected and protected,
even if the mortgagor obtained his title through fraud. The
remedy of the persons prejudiced is to bring an action for
damages against the person who caused the fraud and if
the latter is insolvent, an action against the Treasurer of the
Philippines may be filed for the recovery of damages against
the Assurance Fund. (Philippine National Bank vs. Court of
Appeals, 187 SCRA 735 [1990]; Cebu International Finance
Corp. vs. Court of Appeals, 268 SCRA 178 [1997].)
(c) Until an action for expropriation has been completed
and terminated, ownership over the property being
expropriated remains with the registered owner who can
exercise all rights pertaining to an owner, including the right
to mortgage the property or even to dispose of it. Any person
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Art. 2126
who deals with a property subject of an expropriation does so
at his own risk, taking into account the ultimate possibility of
losing it in favor of the State through expropriation. (Republic
vs. Lim, 462 SCRA 265 [2005].)
(d) While an innocent mortgagee is not expected to
conduct an exhaustive investigation on the history of the
mortgagor’s title, in the case of a banking institution, as
noted earlier, a mortgagee must exercise a greater degree of
diligence before entering into said contract. Judicial notice is
taken of the standard practice for banks, before approving
a loan, to send representatives to the premises of the land
offered as collateral and to investigate who the real owner
thereof. (Development Bank of the Phils. vs. Court of
Appeals, 331 SCRA 267 [2000]; Rural Bank of Sta. Ignacia, Inc.
vs. Dimatulac, 401 SCRA 742 [2003]; Home Bankers Savings
& Trust Co. vs. Court of Appeals, 457 SCRA 167 [2005].)
(e) Under ordinary circumstances, if a person is the first
mortgagee over a property which was sold in an auction
sale by the second mortgagee, the only right left to him is
to collect his mortgage credit from the purchaser thereof
during the sale conducted. This is so because a “mortgage
directly and immediately subjects the property on which it is
constituted whoever the possessor may be, x x x.’’ This step
need not be taken where the second mortgagee is also the first
mortgagee of the same property given as security by the same
mortgagor for two (2) separate loans and it purchased the
subject property with full knowledge that it had a mortgage
thereon. Under Article 1275 of the Civil Code, obligations
are extinguished by the merger of the rights of the creditor
and debtor. (Valmonte vs. Court of Appeals, 303 SCRA 278
[1999].)
(f) In a suit to nullify an existing torrens certificate of
title (TCT) in which a real estate mortgage is annotated, the
mortgagee is an indispensable party. In such suit, a decision
cancelling the TCT and the mortgage annotation is subject
to a petition for annulment of judgment, because the nonjoinder of the mortgagee deprived the court of jurisdiction to
pass upon the controversy. A mortgage affects the land itself
Art. 2126
REAL MORTGAGE
387
and not merely the TCT covering it. The nullification of the
TCT would adversely affect the rights of the mortgagee over
the mortgaged property because they would no longer be
known and respected by third parties, considering that a real
mortgage is a real right and a real property by itself. (Metropolitan Bank and Trust Co. vs. Alejo, 364 SCRA 812 [2001].)
(g) Under B.P. Blg. 877 “no lessor or his successor-ininterest shall be entitled to eject the lessee upon the ground
that the leased premises has been sold or mortgaged to a
third person regardless of whether the lease or mortgage is
registered or not.’’ (Sec. 5, last par. thereof.)
ILLUSTRATIVE CASE:
Land, subject matter of sale, was previously mortgaged by
seller and then subsequently sold to another as highest bidder at the
foreclosure sale.
Facts: P bought a parcel of land from S and the sale was
recorded in the Office of the Register of Deeds. Prior to the
sale, S had already mortgaged the land to C, which mortgage
was also registered. For failure of S to pay the mortgage debt,
C foreclosed the mortgage, and the land was sold to D as the
highest bidder.
D opposed the application for registration filed by P.
Issue: In whose name should the land be registered, D or P?
Held: In D, but subject to P’s equitable right of redemption
which right should be exercised within three months4 (see Sec.
2, Rule 68, Rules of Court.) from the date the decision becomes
final. P’s equity of redemption is, of course, registerable, but
only as an encumbrance on a registered title of ownership. P
does not become the owner of the land until he has exercised
his right to redeem. Before such redemption, the registration of
the land in P’s name would be subject to the objection that it is
premature, if not altogether anomalous. (Santiago vs. Dionisio,
92 Phil. 495 [1953].)
4
“x x x within a period of not less than ninety (90) days nor more than one hundred
twenty (120) days from the entry of judgment x x x.’’ (as amended by the Supreme Court,
April 8, 1997.)
388
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2126
(2) Creates merely on encumbrance. — A mortgage is merely
a security for a debt, an encumbrance upon the property and
does not extinguish the title of the debtor who does not lose
his principal attribute as owner, that is, the right to dispose.
(McCullough vs. Veloso & Serna, 46 Phil. 1 [1924].) Indeed, the
law considers void any stipulation forbidding the owner from
alienating the immovable mortgaged. (Art. 2130.)
(a) A mortgage does not involve a transfer, cession or
conveyance of property but only constitutes a lien thereon.5
It 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. (Lagrosa vs.
Court of Appeals, 312 SCRA 298 [1999].) A mortgage does
not give a mortgagee a right to the possession of the property
unless the mortgage should contain some provision to that
effect. (Isaguirre vs. De Lara, 332 SCRA 803 [2000].)
(b) What is divested from the mortgagor is only his full
right as owner thereof to dispose of and sell the property,
that is, the mortgagor does not have the unconditional power
to absolutely sell the property since the same is encumbered
by a lien of a third person. Actually, what is delimited is not
the mortgagor’s jus disponendi, as an attribute of ownership,
but merely the rights conferred by such act of disposal which
may correspondingly be restricted. (Medida vs. Court of
Appeals, 208 SCRA 887 [1992].)
(c) 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. (Guanzon vs. Argel, 33
5
The mortgagor or mortgagee may take out a separate insurance policy on the mortgaged property in his own name only and in his favor alone. Section 8 of the Insurance
Code (Pres. Decree No. 1460, as amended.) provides: “Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that
the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee,
the insurance is deemed to be upon the interest of the mortgagor, who does not cease to
be a party to the original contract, and any act of his prior to the loss which would otherwise avoid the insurance, will have the same effect, although the property is in the hands
of the mortgagee, but any act which, under the contract of insurance, is to be performed
by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor.
Art. 2126
REAL MORTGAGE
389
SCRA 474 [1970].) It is basic and fundamental that the first
mortgagee has superior rights over junior mortgagees or
attaching creditors. (Rizal Commercial Banking Corporation
vs. Court of Appeals, 289 SCRA 292 [1998].)
(d) The mortgagor’s default does not operate to vest in
the mortgagee the ownership of the encumbered property.
His failure to redeem the property does not automatically
vest ownership of the property to the mortgagee which
would grant the latter the right to appropriate the property or
dispose of it for such effect is against public policy enunciated
by Article 2088 which prohibits pactum commissorium. (Reyes
vs. Sierre, 93 SCRA 472 [1979]; Oronce vs. Court of Appeals,
298 SCRA 133 [1998]; Ramirez vs. Court of Appeals, 409
SCRA 133 [2003].)
(e) Since the mortgagor remains as the absolute owner
of the property during the redemption period and has the
free disposal of his property, there would be compliance with
Article 2085 of the Civil Code for the constitution of another
mortgage on the property. To hold otherwise would create
the inequitable situation wherein the mortgagor would be
deprived of the opportunity, which may be his last recourse,
to raise funds wherewith to timely redeem his property
through another mortgage thereon. (Medida vs. Court of
Appeals, supra.)
(f) By mortgaging his property, a debtor merely subjects
it to a lien but ownership thereof is not parted with. In a case,
the grantee of a parcel of land executed a deed of sale with
mortgage in favor of the City of Manila as grantor-mortgagee.
Later, he assigned his rights to the property with the assignee
agreeing to shoulder all the obligations including the
payment of amortization to the City of Manila. The assignee,
in turn, transferred his right and interest to another. The deed
of sale with mortgage contains a prohibition against selling
the property within the five-year period imposed by the City
of Manila. The assignment involves no transfer of ownership
but merely effects the transfer of rights which the assignor
has at the time to the assignee. It did not operate to efface
liens or restrictions burdening the right assigned because an
390
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2127
assignee cannot acquire a greater right than that pertaining
to the assignor. (Casabuena vs. Court of Appeals, 286 SCRA
594 [1998].)
(g) Upon payment of the mortgage debt, there is no more
mortgage, and, therefore, there is more no basis or reason for
the mortgagee’s refusal to return the certificate of title to the
mortgagor. (De Los Santos vs. Court of Appeals, 278 SCRA
629 [1997].)
(h) In a sale with assumption of mortgage, the assumption
of mortgage is a condition to the seller’s consent so that
without the approval of the mortgagee, no sale is perfected
(see Art. 1181.); the seller remains the owner and mortgagor
of the property. (Ramos vs. Court of Appeals, 279 SCRA 118
[1997].)
(i) An action to compel the mortgagee to accept payment
and for the consequent cancellation of a real estate mortgage
is a personal action if the mortgagee has not foreclosed the
mortgage and the mortgagor is in possession of the premises
since neither the mortgagor’s title to nor possession of the
property is in question. (Far East Bank and Trust Co. vs.
Plaza, 407 SCRA 306 [2003].)
ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents
or income 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, with the
declarations, amplifications and limitations established by
law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.
(1877)
Extent of mortgage.
A real estate mortgage constituted on immovable property
is not limited to the property itself but also extends to all its
accessions, improvements, growing fruits and rents or income
(see Art. 2102.) as well as to the proceeds of insurance should
the property be destroyed, or the expropriation value of the
Art. 2127
REAL MORTGAGE
391
property should it be expropriated. The law is predicated on the
assumption that the ownership of such accessions and accessories
and improvements subsequently introduced also belongs to the
mortgagor is the owner of the principal. (Castro, Jr. vs. Court of
Appeals, 250 SCRA 661 [1995].)
To exclude them, it is necessary that there be an express
stipulation to that effect. Thus, the following are deemed included
in a mortgage of real property:
(1) new plantings;
(2) fruits, except those collected before the obligation falls
due, and those removed and stored when it falls due;
(3) accrued and unpaid rents as well as those which should
have to be paid while the credit remains wholly unsatisfied (Hijos
de I. de la Rama vs. Betia, 54 Phil. 991 [1930]; National Bank vs.
Alejano, 55 Phil. 811 [1931].);
(4) buildings, machinery and accessories belonging to the
mortgage debtor installed on a mortgaged sugar central (Cu
Unjieng & Hijos vs. Mabalacat Sugar Co., 58 Phil. 439 [1933].);
(5) all objects permanently attached to a mortgaged land or
building, although they may have been placed there after the
execution of the mortgage are also included (Bischoff vs. Pomar,
12 Phil. 690 [1909]; Manahan vs. Cruz, 61 SCRA 137 [1974]; Cea
vs. Villanueva, 18 Phil. 538 [1911].); and
(6) a more costly building erected in place of the mortgaged
building which was torn down by the debtor. (Phil. Sugar Estates
Dev. Co. vs. Campos, 36 Phil. 85 [1917].) But if the mortgaged
estate passes into the hands of a third person, the mortgage
does not extend to any machinery, object, chattel or construction
which he may have brought or placed there and which such third
person may remove whenever it is convenient for him to do so.
(Art. 112, Spanish Mortgage Law.)
Stipulation in mortgage contract including
after-acquired properties.
(1) Stipulation valid; purpose. — In a case, the deed of
mortgage contains a provision that “all property of every nature
392
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2127
and description taken in exchange or replacement, as well as all
buildings, machineries, fixtures, tools, equipments and others
that the mortgagor may acquire, construct, install, attach, or
use in its lumber concession shall immediately be and become
subject to the lien of this mortgage in the same manner and to the
extent as if now included therein.”
This kind of stipulation is common and indeed, logical, in all
cases where the properties given as collateral are perishable or
subject to inevitable wear and tear or were intended to be sold or
to be used but with the understanding, express or implied, that
they shall be replaced with others to be thereafter acquired by
the mortgagor. Such stipulation is neither unlawful nor immoral,
its obvious purpose being to maintain, to the extent allowed by
the circumstances, the original value of the properties given as
security. (People’s Bank & Trust Co. vs. Dahican Lumber Co., 20
SCRA 84 [1967]; Torres vs. Limjap, 56 Phils. 141 [1931]; Mendoza
vs. Court of Appeals, G.R. No. 116710, June 25, 2001.)
(2) Attachment of lien retroactive. — When a mortgage is made
to include new or future improvements on registered land, said
lien attaches and vests not at the time said improvements are
constructed but on the date of the recording and registration of
the deed of mortgage. (Luzon Lumber & Hardware Co., Inc. vs.
Quiambao, 94 Phil. 663 [1954].)
Mortgage with “dragnet’’ clauses to secure future
advancements.
(1) Stipulation necessary to secure future advancements. — As a
general rule, an action to foreclose a mortgage must be limited
to the amount mentioned in the mortgage. But the amounts
named as consideration in a contract of mortgage do not limit the
amount for which the mortgaged may stand as security, if from
the four corners of the instrument the intent to secure future
loans or advancements and other indebtedness can be gathered
(Arangco vs. Baloso, 49 SCRA 296 [1973]; Republic Planters
Bank vs. Sarmiento, 53 SCRA 303 [2007].), as for example, “for
the payment of loan of P20,000.00 and such other loans or
other advances already obtained or still to be obtained by the
mortgagors as makers. x x x’’ (Mojica vs. Court of Appeals, 201
SCRA 517 [1991].) or “x x x as well as those that the mortgagee
Art. 2127
REAL MORTGAGE
393
may extend to the mortgagor’’ which clearly means that the
mortgage is not limited to just the fixed amount but also covers
other credit accommodations in excess thereof. Such stipulation
is valid and binding between the parties. (Ajax Marketing &
Dev. Corp. vs. Court of Appeals, 248 SCRA 222 [1995]; China
Banking Corporation vs. Court of Appeals, 265 SCRA 327 [1996];
Quintanilla vs. Court of Appeals, 279 SCRA 397 [1997].)
(2) Usefulness of mortgage with a “dragnet clause.’’ — A
mortgage given to secure future advancements enables the
parties to provide continuous dealings, the nature or extent
of which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a new
security on each new transaction. A “dragnet clause” operates as
a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute
additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et cetera.
(Prudential Bank vs. Alviar, supra; Union Bank of the Phils. vs.
Court of Appeals, 471 SCRA 751 [2005]; Cuyco vs. Cuyco, 487
SCRA 693 [2006]; Producers Bank of the Philippines vs. Excelsa
Industries, Inc., 587 SCRA 370 [2009].)
(3) Construction of mortgage with a “dragnet’’ clause. — The
stipulation mentioned above to secure future and other indebtedness is known as the “blanket’’ mortgage clause, also known
in American jurisprudence as a “dragnet’’ clause. It is one which
is specifically phrased to subsume all debts of past or future origin.
(a) Such dragnet clauses are “carefully scrutinized
and strictly construed’’ particularly where the mortgage
contract is one of adhesion, that is, it was prepared solely by
the mortgagee and the only participation of the mortgagor
was the affixing of his signature or “adhesion’’ thereto, in
order to shield the wary or weaker party from deceptive
schemes contained in ready-made convenants.6 (Premiere
6
Art. 24. In all contractual, property or other relations, when one of the parties is at
a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection.
394
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2127
Development Bank vs. Central Surety & Insurance Co., Inc.,
579 SCRA 359 [2009].)
Thus, in a case where the sole issue was whether in the
foreclosure of a real estate mortgage, the penalties stipulated
in two (2) promissory notes secured by the mortgage may be
charged against the mortgagors as part of the sums secured
although the mortgage contract does not mention the said
penalties, it was held that construing the silence or ambiguity
against the petitioner bank, no penalty was intended to be
included in the amount covered by the mortgage and,
therefore, proceeding by the general rule, such penalty
cannot be recovered on the foreclosure of the mortgage. A
mortgage must sufficiently describe the debt sought to be
secured, and an obligation is not secured by a mortgage
unless it comes fairly within the terms of the mortgage. (Phil.
Bank of Communications vs. Court of Appeals, 253 SCRA
241 [1996]; Prudential Bank vs. Alviar, 464 SCRA 353 [2005];
Republic Planters Bank vs. Sarmiento, supra.)
(b) Where the plain terms of the mortgage evidence the
intention of the mortgagor to secure a larger amount, the
action to foreclose may be for the larger amount. In such
case, the specific amount mentioned in the mortgage is not
controlling. (Lim Julian vs. Lutero, 49 Phil. 703 [1926].) But
where the obligation is not a series of indeterminate sums
incurred over a period of time but two specific amounts
procured in a single instance, what applies is the general
rule stated above (Phil. Bank of Communications vs. Court
of Appeals, 253 SCRA 241 [1996].), that an action to foreclose
a mortgage must be limited to the amount mentioned in the
mortgage.
(4) Mortgage, a continuing security. — A mortgage (or pledge)
given to secure future advancements is a continuing security and
is not discharged by the repayment of the amount named in the
mortgage, until the full amount of the advancements are paid.
Under such contracts which are common in the Philippines and
elsewhere in agricultural countries, the mortgagor (agriculturist)
is permitted to take the money as it is needed and thus avoid the
Arts. 2128-2129
REAL MORTGAGE
395
necessity of paying interest until the necessity for its use actually
arises. (Ibid.; China Banking Corporation vs. Court of Appeals,
supra.)
In fact, it has also been held that “where the annotation on the
back of a certificate of title about a first mortgage states ‘that the
mortgage secured the payment of a certain sum of money plus
interest plus other obligations arising thereunder,’ there was no
necessity for any notation of the later loans on the mortgagor’s
title. It was incumbent upon any subsequent mortgagee or
encumbrance of the property in question to examine the books
and records of the bank, as first mortgagee regarding the credit
standing of the debtor.” (Mojica vs. Court of Appeals, supra;
Tady-Y vs. Phil. National Bank, 12 SCRA 19 [1964].)
ART. 2128. The mortgage credit may be alienated or
assigned to a third person, in whole or in part, with the
formalities required by law. (1878)
Alienation or assignment of mortgage
credit.
The mortgage credit (the right of the mortgagee) is a real right
and directly and immediately subjects the mortgaged property to
the fulfillment of the principal obligation. Such real right may be
alienated or assigned to a third person, in whole or in part, by the
mortgagee who is the owner of said right and the assignee may
foreclose the mortgage in case of nonpayment of the mortgage
indebtedness. (Santiago vs. Pioneer Savings and Loan Bank, 157
SCRA 100 [1988].)
The alienation or assignment is valid even if it is not registered.
Registration is necessary only to affect third persons.
ART. 2129. The creditor may claim from a third person
in possession of the mortgaged property, the payment of
the part of the credit secured by the property which said
third person possesses, in the terms and with the formalities which the law establishes. (1879)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
396
Art. 2130
Right of creditor against transferee
of mortgaged property.
The fact that the mortgagor has transferred the mortgaged
property to a third person does not relieve him from his obligation to pay the debt to the mortgage creditor in the absence of novation. (McCullough & Co. vs. Veloso & Serna, 41 Phil. 1 [1921].)
The mortgage on the property may still be foreclosed despite the
transfer.
A recorded real estate mortgage is merely an accessory contract. It is inseparable from the property subject thereto regardless of who its owner may subsequently be. (Republic vs. Lim,
462 SCRA 265 [2005].)
The mortgage credit being a real right which follows the
property, the creditor may demand from any possessor the
payment only of the part of the credit secured by said property. It
is necessary, however, that prior demand for payment must have
been made on the debtor and the latter failed to pay. (Bank of the
Phil. Islands vs. Concepcion & Hijos, Inc., 53 Phil. 906 [1929].)
EXAMPLE:
A mortgaged his land worth P500,000.00 in favor of B to
secure A’s debt of P600,000.00. A then sold the land to C.
In this case, the obligation of A to pay the debt is not
affected by the transfer. On the due date of the obligation,
B may demand payment from A and if A fails to pay, B may
foreclose the mortgage. (see Art. 2131.) B has the right to claim
from C the payment of P500,000.00 which is part of the credit
secured by the property sold to C.
C is not liable for any deficiency in the absence of a contrary
stipulation. “The spirit of the law is to let the obligation of
the debtor to pay the debt to stand although the property
mortgaged to secure the payment of said debt may have been
transferred to a third person.” (Ibid.)
The remedy of C is to proceed against A.
ART. 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void. (n)
Art. 2131
REAL MORTGAGE
397
Stipulation forbidding alienation
of mortgaged property.
The law considers void any stipulation forbidding the owner
from alienating the mortgaged property. “Such a prohibition
would be contrary to the public good inasmuch as the transmission
of property should not be unduly impeded.” (Report of the
Code Commission, p. 158.) The mortgagee can simply withhold
his consent and thereby prevent the mortgagor from selling
the property. This creates an unconscionable advantage for the
mortgagee and amounts to a virtual prohibition on the owner to
sell his mortgaged property. (Litonjua vs. L & R Corporation, 320
SCRA 405 [1999].)
However, if the mortgagor alienates the property, the transferee is bound to respect the encumbrance because being a real
right, the property remains subject to the fulfillment of the obligation for whose guaranty it was constituted. (Art. 2126.)
Stipulation granting right of first refusal.
There is nothing wrong in a stipulation granting the mortgagee the right of first refusal over the mortgaged property in the
event the mortgagor decides to sell the same.
The right of first refusal has long been recognized as valid in
our jurisdiction. The consideration for the loan-mortgage may
be said to include the consideration for the right of first refusal.
Thus, while the mortgagor has every right to sell the mortgaged
property without securing the consent of the mortgagee, he has
the obligation under a right of first refusal provision which is
perfectly valid, to notify the mortgagee of his intention to sell the
property and give him priority over other buyers. A sale made
in violation of the mortgagee’s contractual right of first refusal
is rescissible. The buyer is presumed to have been notified
thereof by the registration of the mortgage deed containing such
stipulation, which equates to notice to the whole world. (Litonjua
vs. L & R Corporation, supra.)
ART. 2131. The form, extent and consequences of a
mortgage, both as to its constitution, modification and
398
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
extinguishment, and as to the other matters not included
in this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law. (1880a)
Laws governing mortgage.
As to other matters not included in Chapter 3 of the Civil
Code, the Land Registration Law (Act No. 496, as amended.)
and the Revised Administrative Code, more particularly Section
194, as amended by Act No. 3344, govern the form, extent,
and consequences of a mortgage, and also its constitution,
modification and extinguishment. (see Phil. Bank of Commerce
vs. De Vera, 6 SCRA 1026 [1962].)
Note: Presidential Decree No. 892 has discontinued the Spanish mortgage system of registration. This discontinuance was
reiterated in Presidential Decree No. 1529, the Property Registration Decree, which superseded the Land Registration Law.
As to aliens becoming mortgagees, the pertinent law is
Republic Act No. 4882.
Meaning of foreclosure (of mortgage).
Foreclosure is the remedy available to the mortgagee by
which he subjects the mortgaged property to the satisfaction of
the obligation to secure which the mortgage was given. (59 C.J.S.
482.)
It presupposes something more than a mere demand to surrender possession of the object of the mortgage. (Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977].) It denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself. (Development Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978].)
Validity and effect of foreclosure.
Foreclosure is but a necessary consequence of non-payment
of a mortgage indebtedness. As a rule, the mortgage can be
foreclosed only when the debt remains unpaid at the time it is
due. (Producers Bank of the Phils. vs. Court of Appeals, 365 SCRA
326 [2001].) It is valid only when the debtor is in default in the
Art. 2131
REAL MORTGAGE
399
payment of his obligation. (see Bicol Savings and Loan Association
vs. Court of Appeals, 171 SCRA 630 [1989]; see Gobonseng, Jr.
vs. Court of Appeals, 246 SCRA 472 [1995]; Selegna Management
and Development Corp. vs. United Coconut Planters Bank, 489
SCRA 125 [2006].) The right of foreclosure cannot be exercised
by any person other than the creditor-mortgagee or his assigns.7
(Borromeo vs. Court of Appeals, 550 SCRA 269 [2008].)
(1) In a real estate mortgage, when the principal obligation
is not paid when due, the mortgagee has the right to foreclose
the mortgage and to have the property seized and sold with a
view to applying the proceeds to the payment of the principal
obligation. (Commodity Financing Co., Inc. vs. Jimenez, 91
SCRA 57 [1979].) Foreclosure must be limited to the amount
mentioned in the mortgage document. (Landrito, Jr. vs. Court
of Appeals, 466 SCRA 107 [2005].)As a general rule, a demand
before foreclosure is essential. (see Art. 1169.)
(2) A mortgage contract may contain an acceleration clause
which is a stipulation stating that, on the occasion of the mortgagor’s default, the whole sum remaining unpaid automatically
becomes due and payable. The failure of the mortgagor to pay
any installment will trigger the activation of the acceleration
clause and give the mortgagee the right to foreclose the mortgage against the contention of prematurity. (Luzon Development
Bank vs. Conquilla, 470 SCRA 533 [2005].)
(3) The essence of a contract of mortgage indebtedness is that
a property has been identified or set apart from the mass of the
property of the debtor-mortgagor as security for the payment of
money or the fulfillment of an obligation to answer the amount
of indebtedness in case of default of payment. (Fiestan vs. Court
of Appeals, 185 SCRA 751 [1990]; China Banking Corp. vs. Court
of Appeals, 265 SCRA 327 [1996].)
7
A mortgage-creditor has single cause of action against a mortgage-debtor, which
is to recover the debt, but he has the option of either filing a personal action for collection of sum of money or instituting a real action to foreclose on the mortgage security.
Nevertheless, a creditor who elects to foreclose may yet file an independent civil action
for recovery whatever deficiency may remain. (Tanchan vs. Allied Banking Corp., 571
SCRA 512 [2008].)
400
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
The power to foreclose a mortgage or not resides in the
mortgagee. (Valmonte vs. Court of Appeals, 303 SCRA 278
[1999].)
(4) Once the proceeds have been applied to the payment of
the obligation, the debtor cannot anymore be required to pay,
unless, of course, there is a deficiency between the amount of
the loan and the foreclosure sale price, because the obligation
has already been extinguished. (State Investment House, Inc. vs.
Court of Appeals, 215 SCRA 734 [1992].)
(5) The rule is that statutory provisions governing public
notice of foreclosure sales must be strictly complied with, and
even slight deviations therefrom will invalidate the sale or render
it at least voidable. (Tambunting vs. Court of Appeals, 167 SCRA
16 [1988]; Roxas vs. Court of Appeals, 221 SCRA 729 [1993].)
(6) The only rights which a mortgagor can legally transfer,
cede and convey after the foreclosure of his property are the right
to redeem the same and the possession, use, and enjoyment of
the same during the period of redemption. (GSIS vs. Court of
Appeals, 377 SCRA 54 [2002]; Litonjua vs. L & R Corporation, 320
SCRA 405 [1999].)
(7) The mortgagee may take steps to recover the mortgaged
property to enable him to enforce or protect his foreclosure right.
If he is unable to obtain possession for its sale on foreclosure,
he must bring a civil action either to recover such possession as
a preliminary step to the sale, or to obtain judicial foreclosure.
(Uypitching vs. Quiamco, 510 SCRA 172 [2006].)
(8) Foreclosure proceedings have in their favor the presumption of regularity and the burden of evidence to rebut the same
is on the party that seeks to challenge the proceedings. (Consuelo Metal Corp. vs. Planters Development Bank, 555 SCRA 465
[2008].)
An allegation that the mortgagee committed fraudulent acts
in the constitution of a real estate mortgage is actually an attack on
the mortgage contract and not just a foreclosure of the mortgage.
The nullity of the foreclosure is a necessary consequence of the
invalidity of the mortgage. A general prayer in the complaint “for
Art. 2131
REAL MORTGAGE
401
other reliefs equitable and just in the premises’’ justifies the grant
of a relief not otherwise specifically prayed for if warranted by
the facts alleged in the complaint and the evidence introduced.
(United Overseas Bank vs. Rosemoor Mining and Development
Cor., 534 SCRA 528 [2007].)
Kinds of foreclosure.
Foreclosure may be effected either judicially or extrajudicially,
that is, by ordinary action by the mortgagee or by foreclosure by
the mortgagee under power of sale contained in the mortgage.
These two (2) types of foreclosure sale are to be distinguished
from an ordinary execution sale which is governed by the pertinent provisions of Rule 39 of the Rules of Court on “Execution,
Satisfaction and Effect of Judgments.’’
Each of these three (3) common types of forced sales arising
from a failure to pay a mortgage debt, peculiarly has its own
requirements. The parties are not precluded from imposing
additional requirements. (Concepcion vs. Court of Appeals, 274
SCRA 614 [1997].)
Judicial foreclosure under the Rules of Court.
This is governed by Rule 68 of the Rules of Court. (see
Appendix 3.)
(1) Judicial action for the purpose. — A mortgage may be foreclosed judicially by bringing an action for that purpose, in the
proper court which has jurisdiction over the area wherein the
real property involved or a portion thereof, is situated. (see Sec.
1, Rule 4, Rules of Court.)
(2) Order to mortgagor to pay mortgage debt. — If the court finds
the complaint to be well-founded, it shall order the mortgagor
to pay the amount due upon the mortgage debt or obligation
with interest and other charges within a period of not less than
90 days nor more than 120 days from the entry of judgment. (Sec.
2, Rule 68, Ibid.)
(3) Sale to highest bidder at public auction. — If the mortgagor
fails to pay at the time directed in the order, the court, upon
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Art. 2131
motion, shall order the property to be sold to the highest bidder
at public auction. (Sec. 3, Ibid.)
(4) Confirmation of sale. — The sale when confirmed by an
order of the court, also upon motion, shall operate to divest the
rights of all parties to the action and to vest their rights in the
purchaser subject to such right of redemption as may be allowed
by law. (Ibid.)
Before the confirmation of a judicial foreclosure sale, the court
retains control of the proceedings by exercising a sound discretion
in regard to it, either granting or withholding confirmation as the
rights and interests of the parties and the ends of justice may
require. From this standpoint, any order which neither sets aside
nor confirms the foreclosure is merely interlocutory in character.
(Salazar vs. De Torres, 108 Phil. 209 [1960].)
(5) Execution of judgment. — No judgment rendered in an
action for foreclosure or mortgage can be executed otherwise
than in the manner prescribed by the law on mortgages, because
parties to an action are not authorized to change the procedure
which it prescribed. (Piano vs. Cayanong, 7 SCRA 397 [1963].)
It has been held that the proper remedy to seek reversal of
a judgment in an action for foreclosure of real estate mortgage
is not a petition for annulment of judgment but an appeal from
the judgment itself or from the order confirming the sale of the
foreclosed real estate. After failing to avail of appeal without
sufficient justification, the mortgagor cannot conveniently resort
to the action for annulment for otherwise he would benefit
from his own inaction and negligence. (Agbada vs. Inter-Urban
Developers, Inc., 389 SCRA 430 [2002].)
(6) Application of proceeds of sale. — The proceeds of the sale
shall be applied to the payment of the:
(a) costs of the sale;
(b) the amount due the mortgagee;
(c) claims of junior encumbrancers or persons holding
subsequent mortgages in the order of their priority; and
(d) the balance if any, shall be paid to the mortgagor or
his duly authorized agent, or to the person entitled to it. (Sec.
4, Rule 68, Rules of Court.)
Art. 2131
REAL MORTGAGE
403
If the mortgagee is retaining more of the proceeds of the sale
than he is entitled to, this fact alone will not affect the validity
of the foreclosure sale but simply gives the mortgagor a cause
of action to recover such surplus. The mortgagee who has been
ordered by the court to return the surplus, but fails to do so, may
be cited for contempt. (Sulit vs. Court of Appeals, 268 SCRA 441
[1997].)
(7) Execution of sheriff’s certificate. — In judicial foreclosures,
the “foreclosure” is not complete until the sheriff’s certificate
is executed, acknowledged and recorded. In the absence of a
Certificate of Sale, no title passes by the foreclosure proceedings
to the vendee. It is only when the foreclosure proceedings are
completed and the mortgaged property sold to the purchaser
that all interests of the mortgagor are cut off from the property.
Therefore, the mortgagor is liable for additional interests properly
chargeable on the balance of the mortgage indebtedness during
the period from the notice of sale to actual sale. This principle
is applicable to extrajudicial foreclosures. (Development Bank of
the Phils. vs. Zaragoza, 84 SCRA 668 [1978].)
A sheriff’s report on the auction sale is clothed with the
presumption of regularity especially where no objection has
been raised against it. (Sayson vs. Luna, 433 SCRA 502 [2004].)
Extrajudicial foreclosure under Act
No. 3135.
This is governed by Act No. 3135, as amended. (see Appendix
2.)8 This law prescribes a procedure which effectively safeguards
the rights of both debtor and creditor. Thus, its construction
(or interpretation) must be equally and mutually beneficial to
both parties. (Phil. National Bank vs. Cabatingan, 557 SCRA 426
[2008].)
(1) Express authority to sell given to mortgagee. — The law covers
only real estate mortgages. It is intended merely to regulate the
8
In A.M. No. 99-10-05-0 that took effect on January 15, 2000 and further amended by
Resolutions of January 30, 2001 and August 7, 2001, the Supreme Court in an en banc resolution clarified the procedure for extrajudicial foreclosure of both real estate mortgage
under Act No. 3135, as amended, and chattel mortgage under Act No. 1508, as amended,
whether the sale is conducted by a sheriff or notary public. SC Circular No. 7-2002 prescribes the guidelines for the enforcement of the Resolution.
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Art. 2131
extrajudicial sale of the property mortgaged if and when the
mortgagee is given a special power or express authority to do
so in the deed itself or in a document annexed thereto. (Luna vs.
Encarnacion, 91 Phil. 531 [1952]; Ponce de Leon vs. Rehabilitation
Finance Corp., 36 SCRA 289 [1970].) It is a special law that governs
particularly extrajudicial foreclosure sales which are proper only
when so provided in the real estate mortgage contract as the title
itself of the Act suggests and as provided in Section 1 thereof.
(Casano vs. Magat, 374 SCRA 508 [2002].)
(a) It has been held that foreclosures made extrajudicially
by the Philippine National Bank are governed by Act No.
3135 in relation to Sections 29, 30, and 34, Rule 39 of the Rules
of Court, and not by the PNB charter. (Phil. National Bank vs.
Court of Appeals, 140 SCRA 360 [1985].) Note: PNB is now a
private bank.
(b) Where there are two loans, it is immaterial whether
the real estate mortgaged is also a security for the earlier
loan, for the foreclosure rule would still be valid insofar as
the later loan is concerned where the mortgagors themselves
admit that the later loan is already due and demandable and
that the real estate is security for said loan. (Reynoso IV vs.
Commercial Credit Corp., 169 SCRA 60 [1989].)
(2) Authority not extinguished by death of mortgagor or mortgagee.
— A mortgage may be foreclosed extrajudicially where there
is inserted in the contract a clause giving the mortgagee the
power, upon default of the debtor, to foreclose the mortgage by
an extrajudicial sale of the mortgaged property. (Sec. 1, Act No.
3135, as amended by Act No. 4148.) 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. Phil. National Bank, 17 SCRA 833 [1966].)
(3) Public sale after proper notice. — Statutory provisions governing publication of notice of mortgage foreclosure sales must
be strictly complied with, and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable. The purpose of the publication of the Notice Sheriff’s Sale
is to inform all interested parties of the date, time, and place of
Art. 2131
REAL MORTGAGE
405
the foreclosure sale of the real property subject thereof. (Spouses
Suico vs. Philippine National Bank, 531 SCRA 514 [2007].)
The sale, which cannot be made legally outside of the province in which the property is situated (Sec. 2, Act No. 3135.), shall
be made at public auction (Sec. 4, Ibid.; see Langkaan Realty Development Corporation, Inc. vs. United Coconut Planters Bank,
347 SCRA 542 [2000].) after the giving of proper notice which
consists in the posting of the notice of the sale in at least three (3)
public places at the municipality or city where each mortgaged
property is situated and the publication thereof in a newspaper
of general circulation in said municipality or city. (Sec. 3, Ibid.)
(4) Public sale at different places/on different dates. — The indivisibility of a real estate mortgage is not violated by conducting
two separate foreclosure proceedings on mortgaged properties
located in different cities or municipalities as long as each parcel of land is answerable for the entire debt. (Yu vs. Philippine
Commercial International Bank, 485 SCRA 56 [2006].) Nothing is
mentioned in Section 3 about the public auction of a real estate
being held on two different dates. (LBC Bank vs. Marquez, 478
SCRA 160 [2006].)
(5) Publication of notice of auction sale. — Publication is
required to give the foreclosure sale a reasonably wide publicity
such that those interested might attend the public sale. (Ouano
vs. Court of Appeals, 398 SCRA 525 [2003].)
(a) Publication mandatory. — Failure to comply with the
statutory requirements as to publication of notice of auction
sale constitutes a jurisdictional defect which invalidates the
sale or at least render the sale voidable. Even slight deviations
therefrom are not allowed. (Lucena vs. Court of Appeals, 313
SCRA 47 [1999].) A sale held after the scheduled date indicated
in the notice of sale is void. (Development Bank of the Phils.
vs. Aguirre, 364 SCRA 755 [2001]; Masantol Rural Bank, Inc.
vs. Court of Appeals, 204 SCRA 752 [1991].) Question of
non-compliance with notice of publication requirements is
a factual issue. (Tamayo, Jr. vs. Heirs of G. Dominguez, 498
SCRA 342 [2006].)
(b) Contents of notice. — The notice of sheriff’s sale to be
valid, must contain the correct number of the certificate of
406
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Art. 2131
title and the correct technical description of the real property
to be sold. Under normal conditions, the failure to advertise
a mortgage foreclosure sale in compliance with statutory
requirements constitutes a jurisdictional defect invalidating
the sale, and a substantial error or omission in a notice of sale
will render the notice insufficient and vitiate the sale. (San
Jose vs. Court of Appeals, 225 SCRA 450 [1993].)
However, the requisite publication of notices is not so
all-embracing as to deny justified exceptions thereto under
appropriate situations. (Olizon vs. Court of Appeals, 236
SCRA 148 [1994].) The validity of a notice of sale is not
affected by immaterial errors not calculated to deter or
mislead bidders. Thus, the mere discrepancy between the
amount of the obligation as reflected in the notice of sale and
the amount actually due and collected during the bidding
does not constitute a substantial error that should invalidate
the notice. (K-Phil., Inc. vs. Metropolitan Bank & Trust Co.,
569 SCRA 459 [2008].)
(c) Object of notice. — The object of a notice of sale is not so
much to notify the mortgagor as to inform the public generally
of the nature and condition of the property sold, and of the
time, place and terms of the sale. Notices are given for the
purpose of securing bidders and to prevent a sacrifice of the
property. If these objects are attained, immaterial errors and
mistakes will not affect the sufficiency of the notice. (Olizon
vs. Court of Appeals, supra; Philippine National Bank vs.
Nepomuceno Productions, Inc., 394 SCRA 405 [2002]; Spouses
Suico vs. Philippine National Bank, 531 SCRA 514 [2007].)
Publication in a newspaper of general circulation is required
to achieve a “reasonably wide publicity’’ of the auction sale.
(Olizon vs. Court of Appeals, supra.; Metropolitan Bank &
Trust Company vs. Penafiel, 380 SCRA 352 [2009].)
(d) Personal notice to mortgagor not generally required. —
Section 3 of Act No. 3135 (Appendix 2.) which contains the
requirement on notice in extrajudicial foreclosure sales, does
not require personal notice or any particular notice on the
mortgagor (Government Service and Insurance System vs.
Court of Appeals, 170 SCRA 533 [1989]; Bohanan vs. Court
of Appeals, 256 SCRA 355 [1996]; Philippine National Bank
Art. 2131
REAL MORTGAGE
407
vs. Rabat, 344 SCRA 706 [2000].) much less on his successorsin-interest (Cruz vs. Court of Appeals, 191 SCRA 170 [1991];
Gravina vs. Court of Appeals, 220 SCRA 178 [1993].), where
there is no contractual stipulation therefor. (Phil. National
Bank vs. International Corporate Bank, 199 SCRA 508 [1991];
Concepcion vs. Court of Appeals, 274 SCRA 614 [1997];
Tamayo vs. Heirs of G. Dominguez, supra.)
Hence, unless required in the mortgage contract, the
lack of personal notice to the mortgagor is not a ground to
set aside a foreclosure sale. Such notice is not necessary as
publication of notice in a newspaper is more than sufficient
compliance. (Villavicencio vs. Mojares, 398 SCRA 314 [2003];
Olizon vs. Court of Appeals, supra; Metropolitan Bank and
Trust Company vs. Wong, 359 SCRA 608 [2001]; Ardiente vs.
Province Sheriff, 436 SCRA 655 [2004].)
(e) Notice to executing mortgagee-creditor not provided
by law. — There is no provision in the law on extrajudicial
foreclosure of real estate mortgage to the effect that notice be
given to the executing mortgagee-creditor. This is explained
by the fact that it is the creditor who causes the mortgaged
property to be sold and the date of sale is fixed upon his
instruction because it is he who causes the sale and controls
its details. (L.F. Lang vs. Prov. Sheriff of Surigao, 93 Phil. 661
[1953]; LBC Bank vs. Marquez, 478 SCRA 160 [2006].)
(f) Posting of notice on mortgaged property not required. —
Neither does Section 3 of Act No. 3135 require posting of the
notice of sale on the mortgaged property. It merely requires
that the notice of sale be posted in at least three (3) public
places in the city or municipality where the property is
situated, to wit: the Sheriff’s Office, the Assessor’s Office, and
the Register of Deeds which are certainly the public places
contemplated by law as these are the places where people
interested in purchasing real estate congregate.9 (Fortune
9
Under Section 5 of R.A. No. 720 (Rural Banks Act), as amended by R.A. No. 7939,
the posting of a notice of the foreclosure of the real estate mortgage in at least three of the
most conspicuous public places not only in the municipality but also in the barrio where
the land mortgaged is situated during the 60-day period immediately preceding the public auction is mandatory. (Guanco vs. Antolo, 497 SCRA 273 [2006].)
408
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Art. 2131
Motor [Phils.] vs. Metropolitan Bank & Trust Co., 265 SCRA
72 [1996]; see Tagunicar vs. Lorna Express Credit Corp., 483
SCRA 486 [2006].)
(g) Certificate of posting not required. — A certificate of
posting is not required, much less considered indispensable,
for the validity of a foreclosure sale under Act No. 3135.
Hence, the fact alone that there is no certificate of posting
attached to the sheriff’s records is not sufficient to prove the
lack of posting. Such certificate is significant only when it
becomes necessary to prove compliance with the required
notice of posting. Thus, in a case, the absence of the affidavit
of publication was considered fatal because no equally
convincing and competent proof of compliance was offered
to compensate for its non-presentation. (Bohanan vs. Court of
Appeals, supra; Tambunting vs. Court of Appeals, 167 SCRA
16 [1988]; Sulit vs. Court of Appeals, 268 SCRA 441 [1997];
Cristobal vs. Court of Appeals, 328 SCRA 256 [2000].)
What the law requires is the posting of the notice of sale and
not the execution of the certificate of posting. (Development
Bank of the Philippines vs. Court of Appeals, 403 SCRA 460
[2003].)
(h) Burden of proving non-compliance with notice-posting
requirement upon mortgagor. — Foreclosure proceedings have
in their favor the presumption of regularity. (Union Bank of
the Phils. vs. Court of Appeals, 471 SCRA 751 [2005].) The
mortgagor who alleges non-compliance with the publication
requirement and the posting in public places of the notice
of sale has the burden of proving the factum probandum.
Finding by the lower court that there was compliance with
the statutory requirements is binding upon the Supreme
Court the question of non-compliance with the notice and
publication requirements being a factual issue. (Reyes
vs. Court of Appeals, 107 SCRA 126 [1981]; Bonnevie vs.
Court of Appeals, supra; Valmonte vs. Court of Appeals,
303 SCRA 278 [1999]; Cristobal vs. Court of Appeals, supra;
Philippine National Bank vs. Rabat, supra; Langkaan Realty
Development, Inc. vs. United Coconut Planters Bank, 347
SCRA 541 [2000].)
Art. 2131
REAL MORTGAGE
409
(i) Publication of notice of sale in newspaper of general circulation sufficient compliance. — The statutory requirements
of posting and publication are mandated not for the mortgagor’s benefit, but for the public or third persons. As such,
they are imbued with public policy considerations and any
waiver thereon would be inconsistent with the intent and letter of Act No. 3135. To allow the parties to waive the posting and publication requirements, would result in converting
into a private sale what ought to be a public auction. (Philippine National Bank vs. Nepomuceno Productions, Inc., 394
SCRA 405 [2002]; Ouano vs. Court of Appeals, 398 SCRA 525
[2003].)
It has been held, however, that the failure to post a
notice is not per se a ground for invalidating a foreclosure
sale provided that the notice thereof is duly published in a
newspaper of general circulation. (Development Bank of the
Phils. vs. Aguirre, 364 SCRA 755 [2001].) The publication of
the notice of sale in a newspaper of general circulation alone
is more than sufficient compliance with the notice-posting
requirement of the law considering that such newspaper,
which is distributed nationwide, has a readership of more
people than notice posted in a public bulletin board, no
matter how strategic its location may be, which caters only to
a limited few. Hence, a foreclosure sale cannot be annulled for
alleged failure to comply with the notice requirement where
what is lacking is only the posting of the notice in three (3)
public places, and not the publication thereof in a newspaper
of general circulation, especially where there is no showing
that the property was sold for a price far below its value, or of
collusion between the sheriff who conducted the sale and the
mortgagee. (Olizon vs. Court of Appeals,10 supra; Cristobal vs.
Court of Appeals, supra; Baluyut vs. Poblete, 514 SCRA 370
[2007].)
10
Olizon has not actually dispensed with the posting requirement: “What prompted
the Court to dispense with the posting requirement is the ‘unusual nature of the attendant facts and the peculiarity of the confluent circumstances’ involved in said case where
the extrajudicial foreclosure sought to be annulled was conducted more than 15 years
ago, thus, even on the equitable ground of laches, the Olizons’ action for annulment of
foreclosure proceedings and certificate of sale was bound to fail.’’ (Metropolitan Bank
and Trust Co. vs. Wong, G.R. No. 120859, June 26, 2001.)
410
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Art. 2131
(j) When newspaper of general circulation. — To be a newspaper of general circulation, it is enough that it is published
for the dissemination of local news and general information,
that it has a bona fide subscription list of paying subscribers,
and that it is published at regular intervals. Over and above
all these, the newspaper must be available to the public in
general, and not just to a select few chosen by the publisher,
othewise the precise objective of publishing the notice of sale
in the newspaper will not be realized. It must not be devoted
to the interests or published for the entertainment of a particular class, profession, trade, calling, race or religious denomination. It need not have the largest circulation as long
as it is of general circulation in the place where the property
to be foreclosed is located, whether conducted by a sheriff
or a notary public. (Metropolitan Bank & Trust Co., Inc. vs.
Penafiel, supra.; Fortune Motor [Phils.] vs. Metropolitan Bank
& Trust Co., supra; Perez vs. Perez, 454 SCRA 72 [2005].)
Neither P.D. No. 1079 (Appendix 4.) nor Act No. 3135
requires that the newspaper which publishes judicial notices
should be a daily newspaper. (Ibid.)
(k) Formalities of levy not required. — The formalities of
a levy11 are not required before an extrajudicially foreclosed
property can be sold at public auction. (Fiestan vs. Court of
Appeals, 185 SCRA 751 [1990].)
(l) Notice to bidder of all bids offered at auction sale not required.
— Neither is there a law which requires the auctioning sheriff
to inform a bidder of all bids offered before the actual sale.
11
Levy means the essential act or acts by which an officer sets apart or appropriates a
part or the whole of the property of the judgment debtor for purposes of the prospective
execution sale. The object of a levy is to take property into the custody of the law, and
thereby renders it liable to the lien of the execution, and put it out of the power of the
judgment debtor to divert it to any other use or purpose. To effect a levy upon a realty,
the sheriff is required to do two (2) specific things: (1) file with the register of deeds a
copy of the order of attachment or execution, together with the description of the attached property and notice of attachment or execution; and (2) leave with the occupant of
the property copy of the same order, description and notice. These are prerequisites to a
valid levy, non-compliance with any of which is fatal. (Cagayan de Oro Coliseum, Inc. vs.
Court of Appeals, 320 SCRA 731 [1999].) On the other hand, an execution sale is a sale by a
sheriff or other ministerial officer under the authority of a writ of execution which he has
levied on the property of the debtor. (Caja vs. Nanquit, 438 SCRA 174 [2004].)
Art. 2131
REAL MORTGAGE
411
(Rural Bank of San Mateo, Inc. vs. Intermediate Appellate
Court, 146 SCRA 205 [1986].)
(m) Section 4 of Act No. 3135 provides that the sale must
take place “between the hours of nine in the morning and
four in the afternoon.’’ A sale at public auction held within
the intervening period provided by the law (i.e., at any time
from 9:00 a.m. until 4:00 p.m.) is valid without regard to the
duration or length of time it took the questioner to conduct
the proceeding. (Phil. National Bank vs. Cabatingan, 557
SCRA 426 [2008].)
(6) Payment of cash by highest bidder. — Where the highest
bidder is the mortgagee and the amount of his bid represented
the total mortgage debt, it is not necessary for him to pay cash
although Section 5 of Act No. 3135 requires that the creditor must
bid “under the same condition as any other bidder.” It would
serve no purpose for the sheriff to go through the ceremony of
receiving the money and paying it back to the creditor. (Ruiz vs.
Sheriff of Manila, 34 SCRA 83 [1970].)
In case of a surplus in the purchase price, the mortgagee must
account for the proceeds as if the price were paid in cash, and in
an action against the mortgagee to recover the surplus, the latter
cannot raise the defense that no actual cash was received. (Sulit
vs. Court of Appeals, supra.)
(7) Surplus proceeds from foreclosure sale. — By their very
nature, surplus money arising from a sale of real property like
land under foreclosure stands in the same place of the land itself
with respect to liens thereon or vested right therein. They are
constructively, at least, real property and belong to the mortgagor
or his assigns.
(a) Surplus money, in case of foreclosure sale, gains
much significance when there are junior encumbrancers
on the mortgaged property. When there are several liens
upon the property, the surplus money must be applied to
their discharge in the order of their priority. The lien of the
junior mortgagee on the property, after satisfying any prior
mortgage, is transferred to the surplus fund.
(b) A senior mortgagee who realizes more than the
amount of his debt on a foreclosure sale is regarded, although
COMMENTS AND CASES ON CREDIT
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412
Art. 2131
not in a purely equitable sense, as a trustee for the benefit of
the mortgagor and junior encumbrancers. (Ibid.) A mortgagee
who exercises the power of sale contained in a mortgage
is considered a custodian of the fund and, being bound to
apply it properly, is liable to the persons entitled thereto. He
is under obligation to return the excess of the bid price to the
mortgagor. (LCK Industries, Inc. vs. Planters Development
Bank, 538 SCRA 634 [2007].)
(8) Redemption of property sold. — The debtor (natural person)
has the right to redeem the property sold within the term of
one year from and after the date of the sale.12 (Sec. 6, Act No.
3135.) The reckoning date in cases of registered land is from the
registration of the certificate of sale since it is only from the date
that the sale takes effect as a conveyance. (Jose vs. Blue, 42 SCRA
351 [1971]; Gorospe vs. Santos, 69 SCRA 191 [1976]; General vs.
Barrameda, 60 SCRA 182 [1976].) In the case of juridical persons
(corporations and partnerships), they have the right to redeem
the property until, but not after the registration of the certificate
of foreclosure sale which in no case shall be more than three (3)
months after foreclosure, which ever is earlier, as provided in
Section 47 of R.A. No. 8791, the General Banking Law of 2000.
Rule 39 of the Rules of Court is a rule of procedure with
general application, while Act No. 3135 is a specific legislative
enactment particularly applicable to extrajudicial foreclosure
sale. Rule 39 applies only to ordinary execution sale. If at all, Rule
39 applies to extrajudicial foreclosure sale but only on the manner
of redemption and computation of interest. (Abaca Corp. of the
Phils. vs. Garcia, 272 SCRA 475 [1997].)
(9) Remedy of party aggrieved by foreclosure. — Under Section 8,
of Act No. 3135 (Appendix 2.) the debtor may, in the proceedings
in which possession was requested, petition that the sale be set
aside and the writ of possession cancelled, because the mortgage
was not violated or the sale was not made in accordance with
12
“Every conveyance of lands acquired under the free patent or homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow or legal
heirs, within a period of five years from the date of the conveyance” (Sec. 119, C.A. No.
141 [Public Land Law] as amended.) or foreclosure sale. (Tupas vs. Damasco, 132 SCRA
593 [1984].)
Art. 2131
REAL MORTGAGE
413
the provisions thereof. (GSIS vs. Court of Appeals, 266 SCRA 187
[1997].) He may ask for the annulment of the foreclosure sale on
the ground that:
(a) There was fraud, collusion, accident, mutual mistake,
breach of trust or misconduct by the purchaser;
(b) The sale had not been fairly and regularly conducted;
or
(c) The price was inadequate and the inadequacy was so
great as to shock the conscience of the court. (United Coconut
Planters Bank vs. Spouses Beluso, 530 SCRA 567 [2007].)
(10) Republication. — Republication in the manner prescribed
by Act No. 3135 is necessary for the validity of a postponed
extrajudicial foreclosure sale. Another publication is required
in case the auction sale is rescheduled, and the absence of such
republication invalidates the foreclosure sale. The parties have
no right to waive the publication requirement. (Development
Bank of the Philippines vs. Court of Appeals, supra; Ouano vs.
Court of Appeals, supra.)
Right of mortgagee to recover
deficiency.
(1) Mortgage merely a security, not a satisfaction of an obligation.
— If there be a balance due to the mortgagee after applying the
proceeds of the sale, the mortgagee is entitled to recover the
deficiency. (Development Bank of the Phils. vs. Mirang, 66 SCRA
141 [1975].) In judicial foreclosure, the Rules of Court specifically
gives the mortgagee the right to claim for deficiency in case
deficiency exists (Sec. 6, Rule 68.) while Act No. 3135 governing
extrajudicial foreclosures of mortgage does not give a mortgagee
the right to recover deficiency after the public auction sale,
neither does it expressly or impliedly prohibit such recovery.13
13
In respect to pledge (Art. 2115.) and to chattel mortgage on the thing sold in installments (Art. 1484[3].), the law expressly forecloses the right of the creditors to sue for any
deficiency resulting from the sale of the security given to guarantee the obligation. While
silent as to the mortgagee’s right to recover deficiency, Act No. 3135, does not prohibit its
recovery. Accordingly, it has been held that a deficiency claim arising from the extrajudicial foreclosure is allowed. (Philippine National Bank vs. Court of Appeals, 308 SCRA
229 [1999], citing cases; Cuñada vs. Drilon, 432 SCRA 618 [2004]; Suico Rattan & Buri
Interiors, Inc. vs. Court of Appeals, 490 SCRA 560 [2006].)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
414
Art. 2131
To recover deficiency, the extrajudicial foreclosure must be valid.
(Development Bank of the Philippines vs. Licuanan, 516 SCRA
644 [2007].)
In both judicial and extrajudicial foreclosures, the principle is
the same, that the mortgage is but a security and not a satisfaction
of the indebtedness. It is of no importance whether the buyer or
the highest bidder in the public auction is the creditor himself.
(Phil. Bank of Commerce vs. De Vera, 6 SCRA 1026 [1962];
Development Bank of the Phils. vs. Mirang, supra; Development
Bank of the Phils. vs. Zaragoza, 84 SCRA 668 [1978]; see Prudential
Bank vs. Martinez, 189 SCRA 612 [1990].)
Where a third person is the mortgagor, he is not liable for any
deficiency in the absence of a contrary stipulation. The action
for the recovery of such deficiency must be directed against the
debtor.
(2) Action for recovery of deficiency. — If the deficiency is
embodied in a judgment, it is referred to as deficiency judgment.
(see Art. 2115.) It is the settled rule that a mortgagee may recover
any deficiency in the mortgage account which is not realized in
a foreclosure sale and that an independent civil action for the
recovery of deficiency may be filed even during the period of
redemption. (Tarnate vs. Court of Appeals, 241 SCRA 254 [1995].)
Once the auction sale of the mortgaged property is effected and
the resulting deficiency is ascertained, the mortgagee-creditor is
then and there entitled to secure a deficiency judgment which
may immediately be executed, whether or not the mortgagor is
still entitled to redeem the property sold. (Development Bank of
the Phils. vs. Vda. de Moll, 43 SCRA 82 [1972].)
(3) Prescriptive period of action. — The action to recover a
deficiency after foreclosure prescribes after ten (10) years from the
time the right of action accrues as provided in Article 1144(2) of
the Civil Code.14 The mortgagee in both real and chattel mortgages
14
Art. 1144. The following actions must be brought within ten years from the time
the right of action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment. (a)
Art. 2131
REAL MORTGAGE
415
has, by law, the right to claim for the deficiency resulting from
the price obtained in the sale of the property at public auction.
Correlatively, the mortgagor has the corresponding obligation
created by law to pay such deficiency.
It can also be said that the action can be governed by Article
1144(1) if the mortgagee, in suing for the deficiency, is merely
seeking to enforce the written promissory note secured by the
mortgage. Finally, the suit is in the nature of a mortgage action
because its purpose is precisely to enforce the mortgage contract.
Such being the case, Article 1142 of the Civil Code15 is likewise
applicable. (Development Bank of the Phils. vs. Toneldan, 101
SCRA 171 [1980]; Quirino Gonzales Logging Concessionaire vs.
Court of Appeals, 402 SCRA 181 [2003].)
Nature of judicial foreclosure
proceeding.
(1) An action quasi in rem. — A proceeding for judicial
foreclosure of mortgage16 is an action quasi in rem. It is based on
a personal claim against a specific property of the defendant. Its
purpose is to have the property seized and sold by court order
to the end that the proceeds thereof be applied to the payment of
plaintiff’s claim. (Ocampo vs. Domalanta, 20 SCRA 1136 [1967].)
A judgment ordering a foreclosure sale is conditioned upon a
15
Art. 1142. A mortgage action prescribes after ten years. (1964a)
Section 2(a), Rule 4 of the Rules of Court provides that “[a]ctions affecting title
to, or for recovery of possession, or for partition or condemnation of, or foreclosure of
mortgage on, real property, shall be commenced and tried in the province where the
property or any part thereof lies.” The rule mentions an action for foreclosure of a real
estate mortgage but does not mention an action for the cancellation of a real mortgage.
The latter action is primarily to compel the mortgagee to accept payment of the mortgage
debt and to release the mortgage. It does not involve the title to the mortgaged property.
It is a personal action and not a real action. (Hernandez vs. Rural Bank of Lucena, Inc.,
81 SCRA 75 [1978].)
Note: Section 2(a) is now Section 1 which reads:
“Venue of real actions. — Actions affecting title to or possession of real property, or
interest therein shall be commenced and tried in the proper court which has jurisdiction
over the area wherein the real property involved, or a portion thereof, is located.
Forcible entry and detainer actions shall be commenced and tried in the municipal
trial court of the municipality or city wherein the real property involved or a portion
thereof, is situated.’’
16
416
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
finding on the correct amount of the unpaid mortgage debt and
the failure of the mortgagor to pay the said amount. (Heirs of Z.
Espiritu vs. Landrito, 520 SCRA 383 [2007].)
(2) Result or incident of failure to pay indebtedness. — An action
for the foreclosure of mortgage seeks to reach the property and
subject it to the payment of a principal obligation. The principal
obligation is the money indebtedness, and the subjection of
the property is only resorted to upon failure to pay the debt.
Hence, the money indebtedness is the principal thing, not the
foreclosure of the property which is only the result or an incident
of the failure to pay the indebtedness. (Salvador vs. Locsin, 93
Phil. 225 [1953].)
Therefore, the fact that the property mortgaged is destroyed is
not a ground to reduce the indebtedness secured. (Development
Bank of the Phils. vs. Mirang, supra.)
(3) Survives death of mortgagor. — An action for the foreclosure of a mortgage is an action which survives the death of the
mortgagor because the claim against him is not a pure money
claim but an action to enforce a mortgage lien. Being so, the judgment rendered therein may be enforced by a writ of execution.
The action may be prosecuted by the interested person
against the executor or administrator independently of the testate
or intestate proceedings for the settlement of the mortgagor’s
estate “for the reason that such claims cannot in any just sense
be considered claims against the estate, but the right to subject
specific property to the claim arises from the contract of the
debtor whereby he has during life set aside certain property for
its payment, and such property does not, except in so far as its
value may exceed the debt, belong to the estate.” (Testamentaria
de Don Amadeo Matute Olave vs. Canlas, 4 SCRA 463 [1962];
Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978].)
Nature of power of foreclosure
by extrajudicial sale.
(1) Conferred for mortgagee’s protection. — The power to foreclose is not an ordinary agency that contemplates exclusively the
representation of the principal by the agent but is primarily an
Art. 2131
REAL MORTGAGE
417
authority conferred upon the mortgagee for the latter’s own protection.
(2) An ancillary stipulation. — It is an ancillary stipulation
supported by the same cause or consideration for the mortgage
and forms an essential and inseparable part of the bilateral
agreement. The sale proscribed by a special power to mortgage
under Article 187917 is a voluntary and independent contract, and
not an auction sale resulting from extrajudicial foreclosure which
is precipitated by the default of the mortgagor. (Perez vs. Phil.
National Bank, 17 SCRA 833 [1966]; Bicol Savings and Loan Assn.
vs. Court of Appeals, 171 SCRA 630 [1989]; Fiestan vs. Court of
Appeals, 185 SCRA 751 [1990].)
The extrajudicial foreclosure is proper only when so provided
under a special power inserted in or attached to the mortgage
contract. (Sec. 1, Act No. 3135, as amended.) The duty to examine
an application for extrajudicial foreclosure to determine whether
it incorporates a special power authorizing the mortgagee to
extrajudicially foreclose a mortgage in the event non-payment of
the debt devolves upon the clerk of court. (Paguyo vs. Gatbunton,
523 SCRA 156 [2007].)
(3) A prerogative of the mortgagee. — The power to decide to
foreclose or not is the prerogative of the mortgagee. After this,
the act of the auctioning sheriff is governed by the provisions
of Act No. 3135, as amended, and not by the instructions of
the mortgagee. (Rural Bank of San Mateo, Inc. vs. Intermediate
Appellate Court, 146 SCRA 205 [1986].)
ILLUSTRATIVE CASES:
1. The public auction sale was held on April 11, 1961, which
was the next business day after the scheduled date of the sale on April
10, 1961, a special public holiday.
Facts: See above.
Issue: Is the sale valid?
17
Art. 1879. A special power to sell excludes the power to mortgage; and a special
power to mortgage does not include the power to sell.
418
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
Held: No, it not having been carried out in accordance with
Section 3 of Act No. 3135. (see Appendix 2.) Under Section 31 of
the Revised Administrative Code which ordains “Pretermission
of holiday. — Where the day, or the last day, for doing any act
required or permitted by law falls on a holiday, the act may be
done on the next succeeding business day,” the pretermission
applies only when the last day of a given period for doing an
act falls on a holiday. It does not apply to a day fixed by an
office or officer of the government for an act to be done, as
distinguished from a period of time within which an act should
be done, which may be on any day within that specified period.
For example, if a party is required by law to file his answer
to a complaint within fifteen (15) days from receipt of summons
and the last day falls on a holiday, the last day is deemed moved
to the next succeeding business day. But if the court fixes the
trial of a case on a certain day but the said date is subsequently
declared a public holiday, the trial thereof is not automatically
transferred to the next succeeding business day.
Since April 10, 1961 was not the day or the last day set
by law for the extrajudicial foreclosure sale, nor the last day
of a given period, but a date fixed by the deputy sheriff, the
aforesaid sale cannot legally be made on the next succeeding
business day without the notice of the sale on that day being
posted as prescribed in Section 9, Act No. 3135.” (Rural Bank of
Caloocan, Inc. vs. Court of Appeals, 104 SCRA 151 [1981].)
————
————
————
2. Extrajudicial foreclosure sale of mortgaged land was conducted by the sheriff without first effecting a levy on the mortgaged
property.
Facts: Upon failure of petitioners to redeem the mortgaged
land within one (1) year, their TCT was cancelled by the Register
of Deeds and in lieu thereof, another TCT was issued to DBP
(mortgagee) upon presentation of a duly executed affidavit of
consolidation of ownership. P, purchaser from DBP, mortgaged
the lot to PNB. Since petitioners were still in possession of the
property, the Provincial Sheriff ordered them to vacate the
same.
Petitioners seek to annul the extrajudicial foreclosure sale
in favor of DBP on the ground that it was conducted by the
Provincial Sheriff without first effecting a levy on said property
Art. 2131
REAL MORTGAGE
before selling the same at the public auction sale. They maintain that the extrajudicial foreclosure being null and void by
virtue of lack of a valid levy, the certificate of sale issued to
DBP cannot transfer ownership over the lot in question and
consequently, the deed of sale in favor of P and the real estate
mortgage constituted by the latter in favor of PNB are likewise
null and void.
Issue: Are the formalities of a levy required before an
extrajudicial foreclosure of property can be effected?
Held: No. (1) Three different kinds of sale under the law. — “The
formalities of a levy, as an essential requisite of a valid execution
sale under Section 1518 of Rule 39 and a valid attachment lien
under Rule 57 of the Rules of Court, are not basic requirements
before an extrajudicially foreclosed property can be sold at
public auction. At the outset, distinction should be made of the
three different kinds of sale under the law: namely, an ordinary
execution sale, a judicial foreclosure sale, and an extrajudicial
foreclosure sale, because a different set of laws applies to each
class of sale mentioned.
An ordinary execution sale is governed by the pertinent
provisions of Rule 39 of the Rules of Court. Rule 68 of the Rules
of Court applies in cases of judicial foreclosure sale. On the
other hand, Act No. 3135, as amended by Act No. 4118, applies
in cases of extrajudicial foreclosure.’’
(2) Act No. 3135 governs extrajudicial foreclosure sale. —
“The case at bar, as the facts disclose, involves an extrajudicial foreclosure sale. In the mortgage contract, petitioners, as
mortgagors had appointed DBP, for the purpose of extrajudicial foreclosure, ‘as his attorney-in-fact to sell the property
mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose x x x. In case of foreclosure, the mortgagor
hereby consents to the appointment of the mortgagee or any of
his employees as receiver, without any bond, to take charge of
the mortgaged property at once, and to hold possession of the
same x x x.’
There is no justifiable basis, therefore, to apply by analogy
the provisions of Rule 39 of the Rules of Court on ordinary
18
Now Section 9.
419
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
420
Art. 2131
execution sale, particularly Section 15 thereof as well as
the jurisprudence under said provision, to an extrajudicial
foreclosure sale conducted under the provisions of Act No.
3135, as amended. Act No. 3135, as amended, being a special
law governing extrajudicial foreclosure proceedings, the same
must govern as against the provisions on ordinary execution
sale under Rule 39 of the Rules of Court.’’
(3) Requirement of levy not applicable. — “In that sense, the
case of Appari vs. Court of Appeals, 13 SCRA 611 (1965), cited
by petitioners, must be distinguished from the instant case. On
the question of what should be done in the event the highest
bid made for the property at the extrajudicial foreclosure sale
is in excess of the mortgage debt, this Court applied the rule
and practice in a judicial foreclosure sale to an extrajudicial
foreclosure sale in a similar case considering that the governing
provisions of law as mandated by Section 6 of Act No. 3135,
as amended, specifically Sections 29, 30, and 3419 of Rule 39 of
the Rules of Court (previously Sections 464, 465 and 466 of the
Code of Civil Procedure) are silent on the matter.
The said ruling cannot, however, be construed as the legal
basis for applying the requirement of a levy under Section
15 of Rule 39 of the Rules of Court before an extrajudicially
foreclosed property can be sold at public auction when none
is expressly required under Act No. 3135, as amended. Levy, as
understood under Section 15, Rule 39 of the Rules of Court in
relation to execution of money judgments, has been defined by
this Court as the act whereby a sheriff sets apart or appropriates
for the purpose of satisfying the command of the writ, a part or
the whole of the judgment-debtor’s property.’’
(4) Essence of a contract of mortgage indebtedness. — “In
extrajudicial foreclosure of mortgage, the property sought to be
foreclosed need not be identified or set apart by the sheriff from
the whole mass of property of the mortgagor for the purpose
of satisfying the mortgage indebtedness. For, the essence of
a contract of mortgage indebtedness is that a property has
been identified or set apart from the mass of the property of
the debtor-mortgagor as security for the payment of money
or the fulfillment of an obligation to answer the amount of
indebtedness, in case of default or payment.
19
Now Sections 27, 28, and 32, respectively.
Art. 2131
REAL MORTGAGE
421
By virtue of the special power inserted or attached to
the mortgage contract, the mortgagor has authorized the
mortgagee-creditor or any other person authorized to act for
him to sell said property in accordance with the formalities
required under Act No. 3135, as amended.” (Fiestan vs. Court
Appeals, 185 SCRA 75 [1909].)
(5) Need not be expressed in a particular form. — Although a
power of sale will not be recognized as contained in a mortgage
unless it is given by express grant and in clear and implicit
terms, and that there can be no implied power to that effect, it
is generally held that no particular formality is required in the
creation of the power of sale. Any words are sufficient which
evince an intention that the sale may be made upon default or
other contingency. (59 C.J.S. 885; Tan Chat vs. C.N. Hodges, 98
Phil. 928 [1956].)
Stipulation of upset price in mortgage
contract void.
A stipulation in a mortgage of real property fixing a “tipo” or
upset price, i.e., the minimum price at which the property shall
be sold, to become operative in the event of a foreclosure sale at
public auction, 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. (Banco
Español-Filipino vs. Donaldson, Sim & Co., 5 Phil. 418 [1906];
Yangco vs. Cruz Herrera, 11 Phil. 402 [1908]; Bank of the Phil.
Islands vs. Yulo, 31 Phil. 476 [1915].)
It is debatable whether the rule still applies where the purchaser happens to be the creditor or mortgagee himself. The
mortgagor can argue that the stipulation should be binding on
the mortgagee on the principle of estoppel. (Art. 1431.)
Effect of inadequacy of price
in foreclosure sale.
(1) General rule; exception. — 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. (Velasquez vs. Coronel, 5
422
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
SCRA 985 [1962]; Philippine National Bank vs. Court of Appeals,
308 SCRA 229 [1999].) Mere inadequacy of the price obtained at
the sheriff’s sale will not be sufficient to annul or set aside the
foreclosure sale unless “the price is so inadequate as to shock the
conscience of the court” taking into consideration the peculiar
circumstances attendant thereto. (National Bank vs. Gonzales, 45
Phil. 693 [1924]; Director of Lands vs. Abarca, 61 Phil. 70 [1934];
Jalandoni vs. Ledesma, 64 Phil. 1058 [1937]; Sulit vs. Court of
Appeals, 268 SCRA 441 [1997]; United Coconut Planters Bank vs.
Spouses Beluso, 530 SCRA 567 [2007].)
(2) At a nominal cost. — Mortgagors whose properties are
foreclosed and are purchased by the mortgagee as highest bidder
at the auction sale are decidedly at a great disadvantage because
almost invariably, mortgagors forfeit their properties at a great
loss as they are purchased at a nominal cost by the mortgagee
himself, who ordinarily bids in no more than his credit or the
balance thereof at the auction sale. That is the reason why the
law gives them a chance to redeem their properties within a fixed
period. (General vs. Barrameda, 69 SCRA 182 [1976].)
(3) Less than its fair market value. — In fact, the property may
be sold for less than its fair market value upon the theory that the
lesser the price the easier for the owner to effect the redemption
so that the low price even works to his advantage. (Development
Bank of the Phils. vs. Moll, 43 SCRA 82 [1972]; Vda. de Gordon
vs. Court of Appeals, 109 SCRA 388 [1981]; Prudential Bank vs.
Martinez, 189 SCRA 612 [1990]; Suico Rattan & Buri Interiors,
Inc. vs. CA, 490 SCRA 560 [2006].) In several cases where the
mortgaged properties were sold for even less than one-third (1/3)
of their value, our Supreme Court has seen fit not to disturb such
sales. (see National Bank vs. Gonzales, supra; Tria vs. Villareal,
69 Phil. 478 [1940]; Medina vs. Phil. National Bank, 56 Phil. 651
[1932]; Bank of the P.I. vs. Green, 52 Phil. 491 [1928].)
Section 29 of Rule 39 of the Rules of Court provides that the
redemption price should be equivalent to “the amount of the
purchase price, with 1% interest per month up to the time of
redemption x x x.’’
(4) Bid price at the public auction. — The value of the mortgaged
property has no bearing on the bid price at the public auction,
Art. 2131
REAL MORTGAGE
423
provided that the public auction was regularly and honestly
conducted. (Escudero vs. Ticson, 7 C.A. Rep. 139.) In the absence
of any irregularity in the foreclosure proceeding, the sale cannot
be nullified on the mere allegation of a disparity in the bid price
and the property’s fair market value. (Hi-Cement Corporation
vs. Insular Bank of Asia and America, 534 SCRA 269 [2007].)
The fact that the mortgagee eventually acquired the mortgaged property and that the bid price was low is not a valid
reason for the mortgagor to refuse to pay the remaining balance
of the obligation for settled is the rule that a mortgage is simply
a surety and not a satisfaction of indebtedness. (Suico Rattan &
Buri Interiors, Inc. vs. Court of Appeals, supra.)
Waiver of security by mortgagee.
(1) Personal action to recover indebtedness. — The mortgagee
may institute either a personal action for debt or a real action
to foreclose the mortgage. He may waive the right to foreclose
his mortgage and maintain a personal action for recovery of the
indebtedness. In either case, he is entitled to obtain a deficiency
judgment for whatever sum might be due after the liquidation
of the property covered by the mortgage. There is no statutory
provision in our jurisdiction prohibiting a personal action to
recover a sum of money even though a mortgage has been given
as security for the payment of the same. (Hijos de I. de la Rama
vs. Sajo, 45 Phil. 703 [1924]; Solomon and Lachica vs. Dantes,
63 Phil. 522 [1937]; BPI Family Savings Bank, Inc. vs. Vda. De
Cosculluela, 493 SCRA 472 [2006].)
(2) Remedy alternative, not cumulative or successive. — The
mortgagee cannot have both remedies. He has only one cause of
action, i.e., non-payment of the mortgage debt; hence, he cannot
split up his cause of action by filing a complaint for payment of
the debt, and another complaint for foreclosure. (Caltex Phils.
vs. Intermediate Appellate Court, 176 SCRA 741 [1989]; Bank of
America vs. American Realty Corporation, 321 SCRA 659 [1999].)
As to extrajudicial foreclosure, the mortgagee is deemed to have
elected such remedy upon filing with the proper office of the
sheriff of the petition for the sale of the property in accordance
with Act No. 3135, as amended.
424
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(3) Options in case of death of debtor. — The rule is that a
secured creditor holding a real estate mortgage has three (3)
distinct, independent, and mutually exclusive remedies that can
be alternatively pursued by him for the satisfaction of his credit
in case the mortgagor dies,20 to wit:
(a) to waive the mortgage and claim the entire debt from
the estate of the mortgagor as an ordinary claim;
(b) to foreclose the mortgage judicially and prove any
deficiency as an ordinary claim; and
(c) to rely on the mortgage exclusively, foreclosing the
same at any time before it is barred by prescription without right
to file a claim for any deficiency. (Perez vs. Philippine National
Bank, 17 SCRA 833 [1966]; Jacob vs. Court of Appeals, 184
20
Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by mortgage or other collateral security, may abandon the security and
prosecute his claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his
security, by action in court, making the executor or administrator a party defendant, and
if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the
property pledged, in the foreclosure or other proceeding to realize upon the security, he
may claim his deficiency judgment in the manner provided in the preceding section; or
he may rely upon his mortgage or other security alone, and foreclose the same at any time
within the period of the statute of limitations, and in that event he shall not be admitted
as a creditor, and shall receive no share in the distribution of the other assets of the estate;
but nothing herein contained shall prohibit the executor or administrator from redeeming the property mortgaged or pledged, by paying the debt for which it is held as a security, under the direction of the court, if the court shall adjudge it to be the best interest of
the estate that such redemption shall be made. (Rule 86, Rules of Court.)
This section gives to the mortgagee three distinct alternative remedies. The third
alternative, i.e., to foreclose without action at any time within the period allowed by the
statute of limitations, is evidently, a foreclosure under power of sale contained in the
mortgage. (see Perez vs. Philippine National Bank, 17 SCRA 833 [1966].) It refers to a
case where the mortgagor is already dead at the time the mortgagee decides to enforce
his mortgage lien. (concurring opinion of Justice R.C. Aquino in Spouses Manalansan vs.
Castañeda, Jr., 83 SCRA 777 [1978].) If the creditor elects to abandon the security given
him by his mortgage, he forfeits his rights to bring an action upon the security in another
separate and distinct action. (Osorio vs. Agustin, 25 Phil. 404 [1913]; see Davao vs. Court
of Appeals, 154 SCRA 446 [1987].)
When the mortgagee-creditor files a criminal case for violation of B.P. Blg. 22 (Bouncing Checks Law), his civil action for the recovery of the amount of the dishonored check
is impliedly instituted pursuant to Section 1(b), Rule 111 of the Rules of Court; hence, he
is barred from subsequently resorting to an action for foreclosure. (Chieng vs. Santos, 531
SCRA 730 [2007].)
Art. 2131
REAL MORTGAGE
425
SCRA 294 [1990]; Maglaque vs. Planters Development Bank,
307 SCRA 156 [1999].)
The third option includes extrajudicial foreclosure which
bars any subsequent deficiency claim against the estate of the
deceased. (Philippine National Bank vs. Court of Appeals, 360
SCRA 370 [2001].)
A mortgagee-creditor is not synonymous to a judgment creditor. While the law expects a mortgagee-creditor to inquire as a
reasonably prudent man would regarding the encumbrances
on the property in question, no such knowledge is imputed to a
judgment creditor who merely seeks the satisfaction of the judgment awarded in his favor. (DSM Construction & Development
Corp. vs. Court of Appeals, 478 SCRA 618 [2006].)
Foreclosure retroacts to date of registration
of mortgage.
The character of being an innocent mortgagee continues
up to the date of actual foreclosure and sale at public auction.
(Gonzales vs. Intermediate Appellate Court, 157 SCRA 587
[1988].) A foreclosure sale retroacts to the date of the 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 Corp. vs. Intermediate
Appellate Court, 151 SCRA 577 [1987].)
Accordingly, a notice of adverse claim by a third party
annotated after the registration of the mortgage but before the
foreclosure and sale at public auction of the property subject
thereto cannot affect the rights of the mortgagee. The fact that
the foreclosure of the mortgage and the consequent public
auction may have been effected long after the annotation of
the adverse claim is of no moment, because the foreclosure sale
retroacts to the date of registration of the mortgage. (Bank of the
Phil. Islands vs. Noblejas, 105 Phil. 418 [1959].) Simply put, it no
longer matters that the annotation of the sheriff’s certificate of
sale and the affidavit of consolidation of ownership was made
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
426
Art. 2131
subsequent to the annotation of the notice of lis pendens. (Phil.
Veterans Bank vs. Monillas, 550 SCRA 251 [2008].)
Meaning of redemption (of foreclosed
property).
Redemption may be defined as a 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. (59 C.J.S. 813.)
In general, the concept of redemption is to allow the owner
to repurchase or buy back, within a certain period and for a
certain amount, a property that has been sold due to debt, tax, or
encumbrance. (Iligan Bay Manufacturing Corp. vs. Dy, 524 SCRA
55 [2007].)
It is allowed in cases of foreclosures in favor of banking and
credit institutions and in extrajudicial foreclosures.
Kinds of redemption.
They are:
(1) Equity of redemption or the right of the mortgagor in case
of judicial foreclosure to redeem the mortgaged property after his
default in the performance of the conditions of the mortgage but
before the confirmation of the sale of the mortgaged property (see
Top-Rate International Services, Inc. vs. Intermediate Appellate
Court, 142 SCRA 467 [1986].); and
(2) Right of redemption or the right of the mortgagor in case
of extrajudicial foreclosure to redeem the mortgaged property
within a certain period from and after it was sold for the
satisfaction of the mortgage debt.21
21
“The right to redeem becomes functus officio on the date of its expiry, and its exercise after the period is not really one of redemption but a repurchase. Distinction must
be made because redemption is by force of law; the purchaser at public auction is bound
to accept redemption. Repurchase, however, of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the
property but no law will compel him to do so. And, he is not bound by the bid price; it is
entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner.’’ (Nalino vs. Intermediate Appellate Court, 197 SCRA 323 [1991];
Vda. De Urbano vs. GSIS, 367 SCRA 672 [2001].)
Art. 2131
REAL MORTGAGE
427
Equity of redemption.
(1) Exercised before confirmation of sale. — In judicial foreclosure,
the mortgagor may exercise his equity of redemption before but
not after the sale is confirmed by the court. It is simply the right of
the defendant mortgagor to extinguish the mortgage and retain
ownership of the property by paying the secured debt within the
90-day period after the judgment becomes final in accordance
with Rule 68, or even after the foreclosure sale but prior to its
confirmation. (see Secs. 2, 3, Rule 68, Rules of Court; Raymundo
vs. Sunico, 25 Phil. 365 [1913]; Rosales vs. Suba, 408 SCRA 664
[2003].)
Where the foreclosure is judicially effected, no equivalent
right of redemption exists. (Limpin vs. Intermediate Appellate,
166 SCRA 87 [1987].)
(2) Acquired by second mortgagee. — A second mortgagee
acquires only the equity of redemption vested in the mortgagor,
and his rights are strictly subordinate to the superior lien of the
first mortgagee. (Sun Life Assurance Co. of Canada vs. Gonzales
Diaz, 52 Phil. 271 [1928]; Piano vs. Cayanong, 7 SCRA 397 [1963].)
(3) Taking physical possession not necessary for levy. — To levy
upon the mortgagor’s equity of redemption, it is not necessary
for the sheriff to take physical possession of the mortgaged
property. Levying upon the property is distinguishable from
levying on the mortgagor’s interest in it. Being an incorporeal or
intangible right, the value of an equity of redemption can neither
be quantified nor equated with the actual value of the property
upon which it may be exercised. (Top-Rate International Services,
Inc. vs. Intermediate Appellate Court, supra.)
(4) Levy by means of a writ of execution. — The mortgagor’s
equity of redemption can be levied upon by means of a writ
of execution,22 with the result that this interest will pass to the
22
Levying upon the property itself is distinguishible from levying on a person’s interest in it. To levy upon a mortgagor’s incorporeal right or equity of redemption, it is
not necessary for the sheriff to take physical possession of the mortgaged property. Such
interest can be levied upon by means of a writ of execution. (Northern Motors, Inc. vs.
Coquia, 66 SCRA 415 [1975]; Looyuko vs. Court of Appeals, 361 SCRA 150 [2001].)
428
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
purchaser at the execution sale. (Blouse Potenciano vs. Mariano,
96 SCRA 463 [1980].)
In a case, it was held that the fact that the mortgage was a
security for only P10,000.00 did not render void the foreclosure
sale ordered by the lower court for the satisfaction of the sum
of P16,778.84, for the mortgagors could have stopped the
foreclosure, if they wanted to, by paying the P10,000.00 to the
mortgagee before the auction sale was held and they failed to do
so. (Alfaro vs. Llanes & Company, 77 SCRA 6 [1977].)
(5) Remedy of mortgagee to obtain possession. — If a mortgagee
cannot obtain possession of the mortgaged property for its sale
on foreclosure, he must bring a civil action either to recover such
possession as a preliminary step to the sale or to obtain judicial
foreclosure. Replevin is, of course, the appropriate action to
recover possession preliminary to the extrajudicial foreclosure of
a chattel mortgage. It is not only the owner but a person “entitled
to the possession’’ of the property can institute a replevin suit.
(Filinvest Credit Corp. vs. Court of Appeals, 248 SCRA 549
[1995].)
Properly speaking, a mere mortgagee of property is not yet
a transferee. He becomes a transferee only after acquiring the
property in the foreclosure sale and subsequently consolidates
his title to it. A mortgagee in bad faith, being aware of the title
of the mortgagor, is a transferee in pendente lite (see Sec. 47[b],
Rule 39, Rules of Court.) who stands exactly in the shoes of the
transferor, and his title is subject to the incidents and results of
the pending litigation involving the property. (The Malayan
Bank vs. Lagrama, 357 SCRA 429 [2001].)
Right of redemption.
(1) Period within which to exercise right. — What is extant in
extrajudicial foreclosure is the right of redemption. In all cases
of extrajudicial sale, the (individual) mortgagor may redeem the
property at any time within the term of one year from and after
the date of the sale (Sec. 6, Act No. 3135.), i.e., date of registration
of the certificate of sale with the appropriate Registry of Deeds.
(Sec. 28, Rule 39, Rules of Court; Reyes vs. Tolentino, 42 SCRA
365 [1971]; Sta. Ignacia Rural Bank, Inc. vs. Court of Appeals, 230
SCRA 513 [1994].)
Art. 2131
REAL MORTGAGE
429
(a) The filing of an action by the redemptioner to enforce
his right to redeem does not suspend the running of the
statutory period to redeem the property, nor bar the purchaser
at public auction from procuring a writ of possession after
the period had lapsed, without prejudice to the final outcome
of the action to enforce the right of redemption. (Pahang
vs. Vestil, 434 SCRA 139 [2004]; Ong vs. CA, 333 SCRA 189
[2000].) Neither is the period suspended by the institution of
an action to annul the foreclosure sale. (Metropolitan Bank &
Trust Co. vs. Tan, 569 SCRA 814 [2008].)
(b) The existence of the right of redemption operates to
depress the market value of the land until the period expires
and to render that period indefinite because of the suit with
either party unable to foresee when the final judgment will
terminate the action, would render nugatory the period fixed
by law for making the redemption and virtually paralyze any
efforts of the purchaser to realize the value of his land. (BPI
Family Savings Bank, Inc. vs. Veloso, 436 SCRA 1 [2004].)
Under Article 13 of the Civil Code, a year is understood to
be 365 days. Thus, where the certificate of sale was registered
on September 2, 1968, the one-year redemption expired
on September 3, 1969. (Bonnevie vs. Court of Appeals, 125
SCRA 122 [1983].) In another case, the certificate of sale
was registered on August 24, 1983. Excluding the first day
and counting from August 25, 1983 (under par. 3 of Art. 13,
Civil Code), and 1984 being a leap year, it was held that the
mortgagor had only until August 23, 1984 within which to
redeem the foreclosed property in accordance with law. (State
Investment House, Inc. vs. Court of Appeals, 215 SCRA 734
[1992].) Note: The Administrative Code of 1987 (Exec. Order
No. 292), however, provides that “year’’ shall be understood
to be 12 calendar months, and “month,’’ of 30 days unless it
refers to a specific calendar month (Chap. viii, Bk. 1, Sec. 31
thereof.)
(c) By an amendment by the General Banking Law of
2000 (R.A. No. 8791.), enacted on May 23, 2000, juridical
mortgagors like partnerships and corporations are barred
from the right of redemption of mortgaged property sold
430
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
pursuant to an extrajudicial foreclosure, after the registration
of the certificate of foreclosure with the applicable Register of
Deeds.
Section 47 (par. 2.) of the Act provides:
“Notwithstanding Act No. 3135, juridical persons whose
property is being sold pursuant to an extrajudicial foreclosure,
shall have the right to redeem the property in accordance
with this provision until, but not after the registration of the
certificate of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three (3) months
after foreclosure, whichever is earlier. Owners of property that
has been sold in a foreclosure sale prior to the effectivity of
this Act retain their redemption rights until their expiration.’’
Note that under the amendatory provision, the right of oneyear redemption of juridical mortgagors shall be retained but
only if the foreclosure sale took place before the effectivity of
the Act. This amendment is open to constitutional objection of
being violative of the equal protection guarantee (Sec. 1, Art. III,
Constitution.) for it discriminates against corporate or juridical
mortgagors and the prohibition against impairment of the
obligation of contracts (Sec. 10, Ibid.) because it takes from them
a vested right of redemption acquired under a contract executed
prior to the effectivity of the new law.
Before, they have one (1) year to redeem, reckoned from
the registration of the sale with the registry of deeds. R.A. No.
8791 now limits the redemption period to only three (3) months,
to begin from the date of the foreclosure sale but not after the
registration of the certificate of foreclosure sale which ever comes
first. The shorter period is also provided in Supreme Court En
Banc Resolution A.M. No. 99-10-05-0, dated August 7, 2001.
(supra.)
(2) Effect of failure to exercise right. — Title to the property sold
under a mortgage foreclosure remains with the mortgagor or his
grantee until the expiration of the redemption period. The right
of the purchaser at the foreclosure sale is merely inchoate until
after the period of redemption has expired without the right
being exercised. (Medida vs. Court of Appeals, 208 SCRA 887
Art. 2131
REAL MORTGAGE
431
[1992]; Philippine Commercial International Bank vs. Court of
Appeals, 344 SCRA 596 [2000].)
(a) If no redemption is made within the prescribed
period, the purchaser becomes the absolute owner of the
property. He has the absolute right to a writ of possession
(infra.) which is the final process to carry out or consummate
the extrajudicial foreclosure. Henceforth, the mortgagor loses
his right over the property. (Bernardez vs. Reyes, 201 SCRA
648 [1991].)
(b) The one-year period for the exercise of the right of
redemption is subject to the provisions of special laws. The
statutory period of redemption is only directory and can
be extended by agreement of the parties but two requisites
must be established, namely: (a) voluntary agreement of the
parties to extend the redemption period; and (b) the debtor’s
commitment to pay the redemption price on a fixed date.
(Development Bank of the Phils. vs. West Negros College,
Inc., 429 SCRA 50 [2004]; Gojudo vs. Traders Royal Bank, 485
SCRA 108 [2006].)
(3) Effect of exercise of right. — What actually is effected where
redemption is seasonably exercised by the judgment or mortgage
debtor is not the recovery of the property which ownership is
never lost.
(a) The redemption by the debtor eliminates but from his
title the lien created by the levy or attachment or judgment or
registration of the mortgage thereon. The redemption defeats
the inchoate right of the purchaser and restores the property
to the same condition as if no sale had been made. Further,
it does not give to the mortgagor a new title, but merely
restores to him the title freed of the encumbrance of the lien
foreclosed. (Medida vs. Court of Appeals, supra.)
(b) The exercise of the right of redemption is an implied
admission of the regularity of the foreclosure sale and estops
the mortgagor from later impugning its validity on that
ground. Redemption is inconsistent with the claim of the
invalidity of the sale. (Aclon vs. Court of Appeals, 387 SCRA
415 [2002].)
432
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(4) Where mortgaged property sold to a third party. — 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. Under the Rules of Court (Rule 39, Sec.
31.), the judgment debtor remains in possession of the property
foreclosed and sold, during the period of redemption, but he
cannot make a conveyance of the ownership of the property as
said ownership belongs to the purchaser at the foreclosure sale.
(Dizon vs. Gaborro, 83 SCRA 688 [1978].)
Suppose, the mortgaged property is sold by the mortgagee
after foreclosure? In a case, the question to be determined is
whether the mortgagor should redeem or repurchase the mortgaged property from the mortgagee bank, the highest bidder in
the foreclosure sale, or from the purchaser of the property which
was sold by the bank because the amount to be paid by the mortgagor as consideration for the repurchase would depend upon
whether the mortgagor should repurchase from the bank or the
purchaser.
It was held that the mortgagor is entitled to repurchase from
the mortgagee bank and the amount to be paid therefor should be
only “such amount as may correspond to the principal obligation
and the accumulated interest up to and including the time of
actual repurchase. The high tribunal rationalized that a different
ruling would render it easy for the buyer at the foreclosure
sale to render nugatory the right to repurchase granted by law
to the mortgagor by making a conveyance of the property for
an amount beyond the capacity of the mortgagor to pay. 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. Court of Appeals, 230 SCRA
513 [1994]; Philippine National Bank vs. Landeta, 18 SCRA 272
[1967]; Villaflor vs. Barreto, 92 Phil. 297 [1952].)
(5) Where sale not registered and made without consent of
mortgagee. — Where the mortgagor, two days after the execution
of the mortgage to a bank, executed in favor of a third party a
Deed of Sale with Assumption of Mortgage, no consent having
Art. 2131
REAL MORTGAGE
433
been secured from the bank to the sale which was not registered
so that the title remained in the name of the mortgagor, it was
held that the buyer was not validly substituted as debtor, and
hence, had no right to redeem. The mortgagee-bank was charged
with the obligation to recognize the right of redemption only of
the mortgagor. (Bonnevie vs. Court of Appeals, supra.)
(6) Where extrajudicial foreclosure effected with fraud. — An
extrajudicial foreclosure effected with fraud is null and void
ab initio. Consequently, the consolidation of ownership of the
subject property to the mortgagee as the highest bidder and its
subsequent resale to a third party (who was a buyer in bad faith)
are also without legal force and effect. The mortgagor is entitled
to the equitable remedy of redemption. (Community Savings
and Loan Association, Inc. vs. Court of Appeals, 153 SCRA 564
[1987].)
Confirmation by court of auction sale
in judicial foreclosure.
(1) Equity of redemption. — The equity of redemption is
different from and should not be confused with the right of
redemption. The latter in relation to a mortgage — understood in
the sense of a prerogative to re-acquire mortgaged property after
registration of the foreclosure sale — exists only in the case of
extrajudicial foreclosure of mortgage. No such right is recognized
in a judicial foreclosure except only where the mortgagee is the
Philippine National Bank or a banking institution. (infra.)
(2) Procedure. — The mortgagor’s equity of redemption is
simply the right of the mortgagor to extinguish the mortgage
and retain ownership of the property by paying the secured
debt within the 120-day period from the entry of judgment in
accordance with Section 2, Rule 68 of the Rules of Court (see
Appendix 3.), or even after the foreclosure sale but prior to its
confirmation. (see Limpin vs. Intermediate Appellate Court, 166
SCRA 87 [1988]; Huerta Alba Resort, Inc. vs. Court of Appeals,
339 SCRA 534 [2000].) The procedure, however, can be modified
by a valid agreement of the parties, such as in a compromise
agreement, wherein the parties specifically agree on the amounts
to be paid, when they should be paid, and the effects of non-
434
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
payment or violation of the terms of their agreement. (Cruz vs.
Intermediate Appellate Court, 169 SCRA 9 [1969].)
(3) Effect and nature. — In judicial foreclosure of real estate
mortgage, the general rule is that the mortgagor cannot exercise
his right of redemption after the sale is confirmed. (Raymundo
vs. Sunico, 25 Phil. 365 [1913]; Benedicto vs. Yulo, 26 Phil. 160
[1913].)
Confirmation of the sale of mortgaged real property cuts off
all the rights or interests of the mortgagor and of the mortgagee
and persons holding under him, and with them the equity of
redemption in the property and vests them in the purchaser.
Confirmation retroacts to the date of the sale. It is final order,
not interlocutory. (Ocampo vs. Domalanta, 20 SCRA 1136 [1967];
Binalbagan Estate, Inc. vs. Gatuslao, 76 Phil. 128 [1946]; Villar vs.
Javier, 97 Phil. 604 [1955]; Lonzome vs. Amores, 134 SCRA 380
[1985].) However, if the property has been mortgaged in favor
of the Philippine National Bank, redemption is allowed within
one year from the confirmation of the sale.23 (Gonzales vs. Phil.
National Bank, 48 Phil. 824 [1926].)
(4) Control of court over proceedings before confirmation. — A
foreclosure sale is not complete until it is confirmed and before
such confirmation, the court retains control of the proceedings
by exercising sound discretion in regard to it either granting
or withholding confirmation as the rights and interests of the
parties and the ends of justice may require. Thus, the court may
grant the judgment debtor or mortgagor an opportunity to pay
the proceeds of the sale and thereby refrain from confirming it.
The subsequent sale by the purchaser to a third person of the
mortgaged property does not prevent the court from granting
the mortgagor a period within which to redeem the property by
paying the judgment debt and the expenses of the sale and costs.
The acceptance of a bid at the foreclosure sale confers no title
on the purchaser who is nothing more than a preferred bidder,
until the sale has been validly confirmed by the court. But in case
23
Under its Revised Charter (Pres. Decree No. 694.), the period is within one (1) year
from the registration of the foreclosure (judicial or extrajudicial) sale. (see Sec. 25 thereof.)
Art. 2131
REAL MORTGAGE
435
where the statutory one-year period for exercising the right of
redemption has expired and the mortgaged property was sold
by the mortgagee-bank (as the only bidder in the auction sale) to
a third person who was not a party in the foreclosure proceeding,
it was held that the trial court should give such third person a
chance to be heard before allowing the mortgagor to redeem the
property. (Rural Bank of Oroquieta vs. Court of Appeals, 101
SCRA 5 [1980].)
(5) Requirement of notice and hearing. — In order that a foreclosure sale may be validly confirmed by the court, it is necessary
that a hearing be given the interested parties, at which they may
have an opportunity to show cause why the sale should not be
confirmed. Notice and hearing of a motion for confirmation of
sale are essential to the validity of the order of confirmation, not
only to enable the interested parties to resist the motion but also
to inform them of the time when their right of redemption is cut
off. An order of confirmation, void for lack of notice and hearing,
may be set aside anytime and the mortgagor may still redeem the
mortgaged property. (Ibid.)
Nature of mortgagor’s right
of redemption.
After foreclosure and sale of the mortgaged property, the
mortgage indebtedness is extinguished except to the extent
that there is a deficiency. What remains is the right vested by
law in favor of the mortgagor to redeem the property within the
prescribed period.
(1) An absolute privilege. — This right of redemption is an
absolute privilege, the exercise of which is entirely dependent
upon the will and discretion of the redemptioner.
(a) There is, thus, no legal obligation to exercise the right
of redemption. Should the mortgagor choose not to exercise
it, nobody can compel him to do so nor will such choice give
rise to a cause in favor of the purchaser at the auction sale.
In fact, the relationship between the said purchaser and the
redemptioner is not even that of creditor and debtor.
436
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(b) Redemption being optional and not compulsory, a
formal offer to redeem, accompanied by a bona fide tender of
the redemption price within the prescribed period of redemption is only essential to preserve the right of redemption for
future enforcement even beyond such period. But where the
right to redeem is exercised thru the filing of judicial action,
within the period of redemption, such filing is equivalent to
a formal offer to redeem and have the effect of preserving
the right of redemption. (Tolentino vs. Court of Appeals, 106
SCRA 513 [1981]; Tioseco vs. Court of Appeals, 143 SCRA 705
[1986]; Belisareo vs. Intermediate Appellate Court, 165 SCRA
101 [1988].)
In sum, the formal offer to redeem is not a distinct step or
condition sine qua non to the filing of the action in court for the
valid exercise of the right of legal redemption. What constitutes
a condition precedent is either a formal offer to redeem or the
filing of an action in court together with the consignation of the
redemption price within the reglementary period. (Lee Chuy
Realty Corp. vs. Court of Appeals, 250 SCRA 596 [1995].)
(2) A mere statutory privilege. — The right of redemption is a
mere statutory privilege; hence, it must be exercised in the mode
and within the period prescribed by the statute. (Mateo vs. Court
of Appeals, 99 Phil. 1042 [1956].)
(a) The general rule in redemption is that in making
a repurchase, it is not sufficient that a person offering to
redeem makes a manifestation of his desire to repurchase;
his intention must be accompanied by an actual and
simultaneous tender of payment of the full amount of the
repurchase price, which constitutes the legal use of exercise
of the right to repurchase. The exception is where the right
to redeem is exercised through the filing of a judicial action.
(See State Investment House, Inc. vs. Court of Appeals, 215
SCRA 734 [1992].)
The filing of an action to enforce redemption within the
period of redemption is equivalent to a formal offer to redeem
and should the court allow the redemption, the redemptioner should then pay the amount already determined. (Pahang
vs. Vestil, 434 SCRA 139 [2004].)
Art. 2131
REAL MORTGAGE
437
(b) The right on redemption is liberally construed in favor of the original owner of the property. The policy of the
law is 1) to aid rather than to defeat him in the exercise of his
right of redemption (Tioseco vs. Court of Appeals, supra; Tibajia vs. Court of Appeals, 193 SCRA 581 [1991].), regardless
of whether the redemptioner is a co-owner (see Art. 1623.) or
mortgagor although perhaps with unequal force and effect
since each is given a fixed but different period (Lee Chuy, Realty Corp. vs. Court of Appeals, supra.), and 2) to look upon
redemption with favor and interpret liberally the rule on redemption. (De los Reyes vs. Intermediate Appellate Court,
176 SCRA 394 [1989]; Serrano vs. Court of Appeals, 417 SCRA
415 [2003]; Iligan Bay Manufacturing Corp. vs. Dy, 524 SCRA
55 [2007].)
Thus, in a case, inasmuch as the tender of the redemption
price (P337,580.00) based on the computation of the sheriff
was timely and in good faith, and the deficiency (P8,500.00)
in said price (P346,080.00) is not substantial, the Supreme
Court gave the debtor-mortgagor, in the interest of justice, 15
days from the time the decision became final, to complete the
redemption as provided in Section 26, Rule 39 of the Rules
of Court. (Bodiongan vs. Court of Appeals, 248 SCRA 496
[1995].)
(c) A dacion en pago was executed by the mortgagors in
favor of the mortgagee in lieu of the foreclosure of the property mortgaged when the former failed to pay their loan obligations, held: By executing a dacion, the sellers (mortgagors)
effectively waived the redemption period normally given a
mortgagor. (First Global Realty and Development Corporation vs. San Agustin, 377 SCRA 341 [2002].)
(3) Involves title to foreclosed property. — An action to redeem
by the mortgage debtor affects his title to the foreclosed property.
If the action is seasonably made, it seeks to erase from the title of
the judgment or mortgage debtor the lien created by registration
of the mortgage and sale. If not made seasonably, it may seek to
recover ownership to the property since the purchaser’s inchoate
title to the property becomes consolidated after expiration of the
redemption period. Either way, redemption involves the title to
438
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
the foreclosed property. It is a real action. (Commodities Storage
& Ice Plant Corp. vs. Court of Appeals, 274 SCRA 439 [1997].)
Requisites for valid redemption.
Pursuant to Section 28, Rule 39 of the Rules of Court (see Sec.
6, Act No. 3135, Appendix 2.), and subject to the provisions of
special laws (see Canque vs. Court of Appeals, 275 SCRA 741
[1997].), the requisites for valid redemption are:
(1) The redemption must be made within one (1) year from
the date of the registration of the certificate of sale,24 not from
the date of the foreclosure sale. The existence of the right of
redemption operates to depress the market value of the property
until the period expires, and to render the period indefinite would
render nugatory the period fixed by statute. (Estanislao, Jr. vs.
Court of Appeals, 362 SCRA 229 [2001]; Basbas vs. Entena, 28
SCRA 665 [1965].) The period of redemption is not a prescriptive
period but a condition precedent provided by law to restrict the
right of the person exercising redemption. (Landrito, Jr. vs. Court
of Appeals, 466 SCRA 107 [2005].)
(2) Payment of the purchase price of the property plus 1%
interest per month together with the taxes thereon, if any, paid
by the purchaser and the amount of his prior lien, if any, with the
same rate of interest computed from the date of registration of
the sale, up to the time of redemption; and
(3) Written notice of the redemption must be served on the
officer who made the sale and a duplicate filed with the proper
Register of Deeds. (Rosales vs. Yboa, 120 SCRA 869 [1983].)
24
What is the redemptioner’s option when the redemption period is about to expire
and the redemption cannot take place on account of disagreement over the redemption
price? According to jurisprudence, the redemptioner faced with such a problem may
preserve his right of redemption through judicial action which in every case must be
filed within the one-year period of redemption. The filing of the court action to enforce
redemption, being equivalent to a formal offer to redeem, would have the effect of
preserving his redemptive rights and “freezing” the expiration of the one-year period.
This is a fair interpretation provided the action is filed on time and in good faith, the
redemption price is finally determined and paid within a reasonable time, and the rights
of the parties are respected. (Hi-Yield Realty, Inc. vs. Court of Appeals, 388 SCRA 655
[2002]; Banco Filipino Savings and Mortgage Bank vs. Court of Appeals, 463 SCRA 64
[2005].)
Art. 2131
REAL MORTGAGE
439
(4) In judicial foreclosure, the general rule is that the mortgagor of real estate can no longer exercise his right of redemption
after the sale is confirmed by the court.
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. Court of Appeals, 219 SCRA
598 [1993].)
(5) The mortgagor or his assignee is required to tender
payment within the prescribed period to make said redemption
valid, or to preserve the right of redemption for future
enforcement beyond such period of redemption.
(a) Where the right to redeem is exercised through judicial
action within the reglementary period the offer to redeem,
accompanied by the a bona fide tender of the redemption
price, while proper, may be unessential. The filing of a court
action to enforce redemption, being equivalent to a formal
offer to redeem, would have the effect of “freezing’’ the
expiration of the one-year period. (Heirs of N.J. Quisumbing
vs. Philippine National Bank, 576 SCRA 762 [2009].)
(b) The tender of payment must be for the full amount
of the purchase price; otherwise, to allow payment by
installments would be to allow the indefinite extension of
the redemption period. (Estanislao, Jr. vs. Court of Appeals,
362 SCRA 229 [2001].) The statement of intention to redeem
must be accompanied by an actual and simultaneous tender
of payment or else validly consigned in court; otherwise,
the rule on the redemption period fixed by law can easily be
circumvented. Redemption within the period allowed by law
is not a matter of intent but a question of payment or valid
tender of the full redemption price within the said period.
(BPI Family Savings Bank vs. Veloso, 436 SCRA 1 [2004];
Banco Filipino Savings and Mortgage Bank vs. Court of
Appeals, 463 SCRA 64 [2005]; Tolentino vs. Court of Appeals,
517 SCRA 732 [2007]; Metropolitan Bank & Trust Co. vs. Tan,
569 SCRA 814 [2008].)
440
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
Although it is required that full payment of the redemption
price be made within the redemption period, the rule on
redemption is actually liberally construed in favor of the original
owner of the property. (Ysmael vs. Court of Appeals, 318 SCRA
215 [1999].)
Payment of redemption money.
(1) To whom it may be made. — The payment of the redemption
money “may be made to the purchaser or redemptioner, or for
him to the officer who made the sale.” (Sec. 29, Rule 39, Rules
of Court; Reyes-Gregorio vs. Reyes, 27 SCRA 427 [1969].) It may
be made to the sheriff. (Reyes vs. Chavoso, 27 SCRA 1253 [1969];
Reyes vs. De los Santos, 50 SCRA 431 [1973].)
(2) Medium of payment. — Article 124925 of the Civil Code
which expressly provides for the medium in the “payment of
debts” is not applicable. The redemption is not rendered invalid
by the fact that the sheriff accepted a check for the amount
necessary to make a redemption instead of requiring payment
in money. If he sees fit to do so, he may require payment to be
made in lawful money, but in accepting a check, he undoubtedly
places himself in a position where he can be held liable to the
purchaser at the public auction if any damage has been suffered
by the latter as a result of the medium in which payment was
made. But this cannot affect the validity of the payment.26
25
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal tender
in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
26
Sec. 21. Judgment obligee as purchaser — When the purchaser is the judgment obligee, and no third-party claim has been filed, he need not pay the amount of the bid if it
does not exceed the amount of his judgment. It it does, he shall pay only the excess. (Rule
39, Rules of Court.) Under Section 21, there is no requirement to pay the bid in cash.
What the Rule emphasizes is that in the absence of a third party claim, the purchaser in
an execution sale need not pay his bid if it does not exceed the amount of the judgment,
otherwise, he shall only pay the excess. By implication, if there is a third party claim, the
purchaser should pay the amount of his bid without, however, requiring that it be made
in cash. (Villavicencio vs. Mojares, 398 SCRA 314 [2003].)
Art. 2131
REAL MORTGAGE
441
The check as a medium of payment in commercial transactions
is too firmly established by usage to permit of any doubt upon
this point at the present day. No importance may thus be attached
to the circumstance that a stop-payment order was issued against
said check the day following the deposit, for the same will not
militate against the right to redeem, in the same manner that a
withdrawal of the redemption money being deposited cannot be
deemed to have forfeited the right to redeem, such redemption
being optional and not compulsory. (Tolentino vs. Court of
Appeals, supra.)
The Supreme Court has already sanctioned redemption by
check. (Co vs. Philippine National Bank, 114 SCRA 842 [1982].)
Amount payable.
(1) Purchase price. — In the redemption of mortgaged property, the rule is that the amount payable is no longer the judgment
debt but the purchase price at the auction sale. Thus, where 17
parcels of land were sold at public auction for P82,598, the eight
(8) parcels sold for P17,017 may be released by paying the latter
amount. (Dulay vs. Cariaga, 123 SCRA 794 [1983].) Similarly, attorney’s fees awarded by the trial court shall not be added to the
redemption price because the amount payable is no longer the
judgment debt but that which is stated in Section 30, Rule 39 of
the Rules of Court. (Bodiongan vs. Court of Appeals, 248 SCRA
496 [1995].)
The rule does not apply where a balance or residue due to the
mortgagor from the proceeds of the auction sale is not received
for one reason or another, by the mortgagor without his fault.
In such case, the amount payable is the purchase price less such
balance.
The ruling in DBP vs. Mirang (66 SCRA 141 [1975]), wherein
the mortgagor was ordered to pay his entire indebtedness before
the redemption was allowed is not controlling because of the
different factual settings. The charter of the mortgagee (DBP)
requires the payment of such amount. In the redemption of the
mortgaged property, no charter requires the payment of sums of
money other than those provided for under Section 30 of Rule
442
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TRANSACTIONS
Art. 2131
39. Redemption of properties mortgaged with the Philippine
National Bank and the Development Bank of the Philippines and
foreclosed either judicially or extrajudicially are governed by
special laws which provide for the payment of all the amounts
owed by the debtor. This special protection given to government
lending institutions is not accorded to judgment creditors in
ordinary civil actions.27 (see Dulay vs. Cariaga, supra.)
(2) Amount fixed by the court. — Under Section 78 of the
former General Banking Act (R.A. No. 337, as amended.) in the
event of foreclosure, whether judicially or extrajudicially, of any
mortgage on real estate which is security for any loan granted,
the mortgagor or debtor whose real property has been sold for
the full or partial payment of his obligation shall have the right,
within one year after the sale of the real estate, to redeem the
property by paying “the amount fixed by the court in the order
of execution, or the amount due under the mortgage deed,’’ with
interest thereon at the rate specified in the mortgage, and all the
costs, and expenses incurred by the bank or institution from
the sale and custody of said property less the income derived
therefrom.
Thus, in a situation where the mortgagee was a bank,
banking or credit institution, the General Banking Act was the
applicable law in determining the redemption price, to wit: the
amount fixed by the court or the amount due under the mortgage
deed, as the case may be, plus interest, costs and expenses, less
the income received from the property. This was true although
the foreclosure was done pursuant to Act No. 3135. Section 78
partakes of the nature of an amendment to Act No. 3135 insofar
as the redemption price is concerned. A credit institution is a
financial intermediary engaged in quasi-banking functions.
(Sy vs. Court of Appeals, 172 SCRA 125 [1989]; De Leon vs.
Rehabilitation Finance Corp., 146 SCRA 862 [1970]; see Union
27
Redemption of properties mortgaged with the Development Bank of the Philippines and foreclosed either judicially or extra-judicially is governed by special laws
which provide for the payment of all the amounts owed by the debtor. This special protection given to a government lending institution is not accorded to judgment creditors
in ordinary civil actions. (Development Bank of the Philippines vs. West Negros College,
Inc., 391 SCRA 330 [2002], citing Dulay.)
Art. 2131
REAL MORTGAGE
443
Bank of the Philippines vs. Court of Appeals, G.R. No. 134068,
June 25, 2001.)
Section 47 of the General Banking Law of 2000 (R.A. No.
8791.) now requires the mortgagor or debtor to pay “the amount
due under the mortgage deed, x x x’’ deleting the phrase “the
amount fixed by the court in the order of execution.’’
(3) One percent (1%) interest per month. — In case of
extrajudicial foreclosure under Act No. 3135 in relation to Rule
39, Section 28 of the Rules of Court, the redemptioner is bound
to pay only 1% interest per month from the date of registration
of the certificate sale up to the time of redemption rather than the
interest stipulated in the contract of loan. This is so because when
the foreclosure proceedings are completed and the mortgaged
property is sold to the purchaser, then all interests of the
mortgagor are cut off from the property. Prior to the completion
of foreclosure, the mortgagor is liable for the interests on the
mortgage. (Phil. National Bank vs. Court of Appeals, 140 SCRA
360 [1985]; Development Bank of the Phils. vs. Zaragoza, supra.)
(4) Necessary expenses incurred by the purchaser/taxes. — The
purchaser is entitled to reimbursement of the reasonable cost of
improvements made by him to preserve the property during the
period of redemption (see Flores vs. Lim, 50 Phil. 738 [1927].),
as well as the amount of any assessments or taxes which the
purchaser may have paid on the property after the purchase,
including interest of 1% per month.
(5) Rentals received by purchaser. — Before its amendments,
Section 34, Rule 39 of the Rules of Court allowed a purchaser,
from the time of the sale until a redemption is made, to receive the
rentals of the property sold “when such property is in the possession
of a tenant.’’ He is, however, accountable to the mortgagor or
judgment debtor, as the case may be, for the amounts so received
and the same will be duly credited against the redemption
price when said mortgagor or debtor effects the redemption.
(Tambunting vs. Court of Appeals, 167 SCRA 16 [1988].) But
the purchaser at the foreclosure sale cannot claim back rentals
from the mortgagor during the period of redemption where the
property was possessed not by a tenant, but by the mortgagor
444
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(judgment debtor) for the latter may possess the property
without having to pay rents for the use thereof. (Bernardez vs.
Reyes, 201 SCRA 548 [1991]; see Quintin vs. Espe, 1 SCRA 1004
[1961]; Velasco vs. Rosenberg’s, Inc., 32 Phil. 72 [1915].)
Section 34 is now Section 32 which explicitly provides that
the purchaser or redemptioner shall not be entitled to receive the
rents, earnings and income of the property sold on execution, or
the value of the use and occupation thereof when such property
is in the possession of a tenant which rents, etc. “shall belong
to the judgment obligor until the expiration of the period of
redemption.’’
(6) In case of surplus in the purchase price. — It would be highly
iniquitous if the amount required for redemption is based on
the purchase price which is unjustifiably higher than the real
amount of the mortgage obligation. Such a construction will
be prejudicial to the substantive rights of the mortgagor and it
could even effectively prevent him from exercising his right of
redemption. Where the redemptioner chooses to exercise his
right of redemption, it is the policy of the law to aid rather than
to defeat his right. (Sulit vs. Court of Appeals, 268 SCRA 441
[1997].)
Rights of persons with subordinate
interest.
(1) Mortgagor’s equity of redemption before foreclosure. — A
second or junior mortgagee acquires only the equity of redemption
vested in the mortgagor, and his rights are strictly subordinate to
the superior lien of the first mortgagee. (Sun Life Assurance Co.
of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928].) Thus, a second
mortgagee has to wait until after the debtor’s obligation to the
first mortgagee has been fully settled. (Alpha Insurance & Surety
Co., Inc. vs. Reyes , 106 SCRA 274 [1981]; Top-Rate International
Services, Inc. vs. Intermediate Appellate Court, 142 SCRA 467
[1986].)
(2) Mortgagor’s right of redemption after foreclosure. — When
the debt becomes demandable, the first mortgagee is entitled to
have the mortgaged property sold in order to apply the proceeds
Art. 2131
REAL MORTGAGE
445
to the payment of his credit. In all cases in which an extrajudicial
sale is made, any person having a lien on the property subsequent
to the mortgage may redeem the same at any time within the
term of one year from and after the date of sale. (see Sec. 6, Act
No. 3135.) After the foreclosure sale, there remains in the second
mortgagee a mere right of redemption; and only this right passes
to him by virtue of the second mortgage. His remedy is limited
to the right to redeem by paying off the debt secured by the first
mortgage. (see Tizon vs. Valdez and Morales, 48 Phil. 910 [1926].)
An attaching creditor may succeed to the incidental rights
to which the debtor was entitled by reason of his ownership
of the property, as for example, a right to redeem from a prior
mortgagee. (Consolidated Bank and Trust Corp. vs. Intermediate
Appellate Court, 150 SCRA 951 [1987].)
(3) Payment of his credit from excess of proceeds of auction sale.
— Aside from the right of repurchase, the second mortgagee
is entitled, under the mortgage constituted in his favor, to the
payment of his credit the excess of the proceeds of the auction
sale, after covering the mortgagor’s obligations to the first
mortgagee. (Tady-Y vs. Phil. National Bank, 12 SCRA 19 [1964];
El Hogar Filipino vs. National Bank, 64 Phil. 582 [1937].)
In case the credit of the first mortgagee has absorbed the
entire proceeds of the sale, the second mortgage is extinguished
with it because said mortgage cannot be enforced by the second
mortgagee beyond the total value of the mortgaged property.
Consequently, the property passes to the purchaser free from the
second mortgage. (Ibid.)
(4) Where persons with subordinate interest not made defendants.
— All persons having or claiming an interest in the mortgaged
property subordinate in right to that of the holder of the mortgage
should be made defendants in the action for the foreclosure
of the mortgage. The requirement, however, for joinder of the
person claiming an interest subordinate to the mortgage sought
to be foreclosed (see Sec. 1, Rule 68, Rules of Court.) is not
mandatory in character but merely directory, in the sense that
failure to comply therewith will not invalidate the (judicial)
foreclosure proceedings. A subordinate lien holder is a proper,
even a necessary, but not an indispensable, party to a foreclosure
446
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TRANSACTIONS
Art. 2131
proceeding. (Looyuko vs. Court of Appeals, 361 SCRA 150 [2001];
Monzon vs. Relova, 565 SCRA 514 [2008].)
(a) The effect of the failure of the mortgagee to implead
a subordinate lien-holder or subsequent purchaser or both
is to render the foreclosure ineffective as against them, with
the result that there remains in their favor the unforeclosed
equity of redemption. (Sec. 2, Rule 68, Rules of Court.) The lien
on the equity of redemption is not affected by the decree of
foreclosure.
(b) A second mortgagee merely takes what is called an
“equity of redemption’’ and thus, a second mortgagee has to
wait until after the debtor’s obligation to the first mortgagee
has been fully settled. The rights of a second mortgagee are
strictly subordinate to the superior lien of the first mortgagee.
The proper foreclosure of the first mortgage gives not only the
first mortgagor, but also subsequent lien holders, the right to
redeem the property within the statutory period. (Ramirez
vs. Court of Appeals, 219 SCRA 598 [1993].)
The failure of the registered second mortgagee to exercise
his equity of redemption on property foreclosed by the first
mortgagee divests him of his right to claim title against
an unrecorded assignee of right of redemption of the first
mortgagee who redeemed the same.
(c) A separate foreclosure proceeding should be brought
to require the mortgagor’s successor-in-interest or junior
lien-holders to redeem from the first mortgagee, or the party
requiring title to the mortgaged property at the judicial
foreclosure sale, within 90 days under penalty of losing that
prerogative to redeem. (Limpin vs. Intermediate Appellate
Court, 166 SCRA 87 [1988].) But the foreclosure is valid as
between the parties. (Santiago vs. Dionisio, 92 Phil. 495
[1952].)
(5) Where irregularities attended foreclosure. — Upon a proper
foreclosure of a first mortgage, all liens subordinate to the
mortgage are likewise foreclosed, and the purchaser at public
auction held pursuant thereto acquires title free from the
subordinate liens. Ordinarily, therefore, and unless representation
is duly presented at the time of the cancellation of the certificate
Art. 2131
REAL MORTGAGE
447
of title by reason of the foreclosure of the superior mortgage lien,
that irregularities attended the foreclosure, such as lack of notice
to or non-inclusion of inferior lienholders in the foreclosure suit
or proceeding, the Register of Deeds is authorized, even without
court order, to issue the new title without carrying over the
annotations of subordinate liens.
(a) This does not prejudice, however, the right, if any, of
inferior lien holders to question, in an appropriate ordinary
action, the legality of the foreclosure proceedings or the effect
of the alleged lack of notice to them of such foreclosure. (G.
Puyat & Sons, Inc. vs. Phil. National Bank, 4 SCRA 1275
[1962].)
(b) Even in instances of this nature, it has been held
that the failure to so notify or include inferior lienholders
does not invalidate the foreclosure proceedings (Somes vs.
Gov’t., 62 Phil. 432 [1935].) but at most will leave the equity
of redemption unforeclosed as against such lienholders.
(Santiago vs. Dionisio, supra; Sun Life Assurance Co. of
Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]; Gov’t. vs.
Cajigas, 55 Phil. 567 [1931].)
(6) Unpaid seller of property. — It has been held that the mortgagee’s act of including in the foreclosure the unpaid goods and
merchandise earlier sold on credit and delivered to the mortgagor and which the mortgagee acquired at the foreclosure sale,
does not make said mortgagee an obligor to pay for such unpaid
goods, ownership of which has been acquired by the mortgagor.
The seller has no cause of action against the mortgagee because
the obligation to pay for the goods remains with the mortgagor
as buyer. (Philippine National Bank vs. Court of Appeals, 367
SCRA 198 [2001].)
This ruling can very well apply where the subject matter of
the mortgage is real property.
Equity of redemption in judicial
foreclosure.
(1) Period for exercise. — In a judicial foreclosure of mortgages
under Rule 68 of the Rules of Court, there is no right of redemption
448
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
after the judicial sale is confirmed. There is only the equity of
redemption in favor of the mortgagor consisting in the right to
redeem the mortgaged property within the ninety-day period
from the order of foreclosure (Sun Life Association Company of
Canada vs. Gonzales Diaz, supra.), or even thereafter but before
confirmation of the sale. (Anderson vs. Reyes, 54 Phil. 944 [1930];
Grimalt vs. Velasquez, 36 Phil. 936 [1917]; Villar vs. Javier, 97
Phil. 604 [1955].)
(2) Reckoning of ninety-day period. — The ninety-day period
granted the mortgage debtor within which to pay the amount
of the mortgage in Section 2, Rule 68 of the Rules of Court, is
counted “from the date of the service of such order.” The order
referred to in the Rule is the order requiring the debtor to pay the
judgment within ninety days. (Herrera vs. Arellano, 97 Phil. 776
[1955].) This provision cannot be literally complied with in case
the mortgagor appeals from the lower court’s judgment.
It would seem that the period for the payment to the court
of the mortgage debt should be reckoned from “the date of the
entry of judgment.” (Concurring Opinion, Justice R.C. Aquino,
Spouses Manalansan vs. Castañeda, Jr., 83 SCRA 777 [1978].)
(3) Where period never began to run. — Where the original
judgment of the court required payment within ninety days but
this same judgment was expressly held in abeyance, the ninetyday period never began to run. In such case, the remedy of the
mortgage creditor is to seek another order of the court directing
the payment of the judgment within ninety days therefrom
and the sale of the property mortgaged in case of failure of the
mortgagor to comply therewith. (Herrera vs. Arellano, supra.)
(4) Period given, a substantive right. — The period given in the
rule is not merely a procedural requirement . It is a substantive
right granted to the mortgage debtor as the last opportunity
to pay the debt and save his mortgaged property from final
disposition at the foreclosure sale. It is one of the two steps
necessary to destroy what in law is known as the mortgagor’s
“equity of redemption,” the other being the sale. It may not be
omitted. An order for the sale of mortgaged property within the
ninety-day period would be a denial of a substantial right and
void. (Ibid.)
Art. 2131
REAL MORTGAGE
449
Persons entitled to exercise right
of redemption.
(1) Mortgagor or one in privity of title with mortgagor. — The
matter of redemption is wholly statutory. Only such persons
can redeem as are authorized to do so by statute. As a general
principle, if one is in privity of title with the mortgagor, and he
has such an interest that he would be a loser by the foreclosure,
he may redeem. (De Castro vs. Intermediate Appellate Court,
165 SCRA 654 [1988].)
(2) Successor-in-interest. — The right of redemption provided
for in Section 6 of Act No. 3135 (see Appendix 2.), like any other
property right, may be transferred or assigned by its owner. The
transferee of such right stands in the position of a successor-ininterest of the mortgagor within the purview of Section 29, Rule
39 of the Rules of Court which is also applicable to redemption
of real property sold on extrajudicial foreclosure of mortgage by
virtue of said Section 6 of Act No. 3135. The right of redemption
is especially conferred by Section 29, Rule 39 of the Rules of Court
on the judgment debtor and his successors-in-interest.
The term “successor-in-interest” includes:
(a) one to whom the debtor has transferred his right of
redemption; or
(b) one to whom the debtor has conveyed his interest in
the property for the purpose of redemption; or
(c) one who succeeds to the interest of the debtor by
operation of law; or
(d) one or more joint debtors who were joint owners of
the property sold; or
(e) one with a joint interest in the property, or his spouse,
or heirs.
Such successor-in-interest is subrogated to the position of the
debtor-mortgagor and is bound by exactly the same conditions
that bound the latter. (Gorospe vs. Santos, 69 SCRA 191 [1976];
Sy vs. Court of Appeals, 172 SCRA 125 [1989].) So, redemption
is proper where made by the debtor, grantee, or assignee for the
benefit of creditors, or assignee or trustee in solvency proceedings
(De Castro vs. Intermediate Appellate Court, supra.), or vendee
450
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TRANSACTIONS
Art. 2131
of the mortgage-debtor. (Litonjua vs. L & R Corporation, 320
SCRA 405 [1999].) A compulsory heir to the judgment debtor
qualifies as a successor-in-interest who can redeem property
sold on execution. (Villanueva vs. Malaya, 330 SCRA 278 [2000];
China Banking Corporation vs. Court of Appeals, 364 SCRA 638
[2001].)
(3) Under the Rules of Court. — When real property is sold
on execution of a judgment, the same may be redeemed by the
following persons:
(a) the judgment debtor, or his successor-in-interest in
the whole or any part of the property; or
(b) a creditor having a lien by attachment, judgment
or mortgage on the property sold or some part thereof,
subsequent to the judgment under which the property was
sold. Such a redeeming creditor is termed a redemptioner.
(Sec. 29, Rule 39, Rules of Court.)
The redemption may be made by one acting in behalf of
the judgment debtor as long as the latter does not oppose the
former’s capacity to act as such. The policy of the law is to aid
rather than to defeat the right of redemption. (Tioseco vs. Court
of Appeals, 143 SCRA 705 [1986].) To give due course to such
redemption would better serve the ends of justice. (Tibajia vs.
Court of Appeals, 193 SCRA 581 [1991].)
Registration of transfer of right
of redemption.
The transfer of the right of redemption from the original
debtor-mortgagor need not be registered with the Register of
Deeds to enable the transferee or assignee to exercise the same.
(1) Where redemption is proper, the purchaser at the
foreclosure sale cannot refuse to allow the same, considering
that his right over the property is purely inchoate until after
the period of redemption has elapsed without the right being
exercised by those allowed by law.
(2) Besides, public policy demands that the original debtormortgagor or his successor-in-interest should, as much as
possible, be allowed to redeem a foreclosed property. (Ibid.)
Art. 2131
REAL MORTGAGE
451
ILLUSTRATIVE CASE:
Purchaser from mortgagor of a portion of mortgaged parcels of
land, claims right to redeem entirety of said property.
Facts: D mortgaged four (4) contiguous parcels of land
covered by TCT No. 17011 to C (Phil. National Bank), which
mortgage was duly annotated on the title. More than a year
later, D sold to B a portion (about 381.44 sq.m.) of the same
land. The sale was not registered. Another TCT No. 24761 was
issued to C in view of the failure of D to redeem the property
within one (1) year after foreclosure.
Prior to expiration of said period, B offered to purchase
the property from C who rejected the offer. B maintains that
as successor-in-interest of the mortgage debtor (D), in part of
the property and, therefore, qualified to redeem, he should be
declared entitled to repurchase the entirety of said property.
Issue: Has B the right to redeem all the parcels of land?
Held: No. B has, at best, a personal right to demand from
D (who had repurchased the land from C while the case was
pending) a status of co-ownership over said property because
the deed of sale in his favor had not been registered, and the
portion covered by said deed had not been surveyed so that
the precise boundaries thereof had not been delimited by metes
and bounds much less segregated from the mass of D’s property
covered by the TCT’s aforementioned. Inasmuch as, even if B
had managed to redeem the whole property, so much thereof
as exceeded the portion sold to him by D could have been
repurchased by D and the title to said property has meanwhile
reverted fully to the latter, it follows that B is entitled to no
more than the consummation of the sale made in his favor.
B is declared co-owner of the land in question to the extent
of the interest conveyed to him, subject to his right to partition
said property. (Dimasacat vs. Court of Appeals, 27 SCRA 101
[1969].)
Rights and obligations of mortgagee
in possession.
A mortgagee in possession, as this term is used in American
equity jurisprudence, is “one who has lawfully acquired actual
or constructive possession of the premises mortgaged to him,
standing upon his rights as mortgagee and not claiming under
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TRANSACTIONS
Art. 2131
another title, for the purpose of enforcing his security upon such
property or making its income help to pay his debt.’’ (27 Cyc.
1237, cited in Diaz vs. De Mendezona, 48 Phil. 666 [1926].)
(1) Similar to those of an antichresis creditor. — As such mortgagee in possession, his rights and obligations are similar to those
of an antichresis creditor. (Art. 2132.) He is entitled to retain such
possession until the indebtedness is satisfied and the property
redeemed. (Macapinlac vs. Gutierrez Repide, 43 Phil. 770 [1922];
Cosio and de Rama vs. Palileo, 17 SCRA 196 [1966].)
Thus, a creditor with a lien on real property who takes
possession thereof with the consent of the debtor holds it as
an “antichresis creditor with the right to collect the credit with
interest from the fruits, returning to the antichretic debtor, the
balance, if any, after deducting the expense.” (Enriquez vs.
Phil. National Bank, 55 Phil. 414 [1930]; see Arts. 2132-2139.)
The mortgagee has to account for the fruits received. (Diego vs.
Fernando, 109 Phil. 143 [1960].)
(2) Without right to reimbursement for useful expenses. — Generally, however, a mortgagee in possession of mortgaged property who introduces improvements thereon is not entitled to reimbursement for the value thereof upon the redemption of the
mortgage, for according to Article 2125 (par. 2.), “the persons in
whose favor the law establishes a mortgage have no other right
than to demand execution and the recording of the document in
which the mortgage is formalized.”
To hold otherwise would render redemption oppressive, if
not nugatory, as a scheming mortgagee could then put so much
improvements thereon, until the debtor-mortgagor is “improved
out” of his property by his failure to pay the increased redemption
costs. (Gardner vs. Court of Appeals, 80 SCRA 399 [1977].)
ILLUSTRATIVE CASE:
Mortgagee who had foreclosed disputed property was not allowed
to redeem mortgaged property sold at public auction in another civil
suit against the mortgagor within the one-year period.
Facts: On February 1, 1957, R mortgaged two parcels of
land to E to secure a loan. The mortgage was foreclosed on
Art. 2131
REAL MORTGAGE
453
January 19, 1959, after which E took possession of the property.
On March 3, 1980, R sold the property to E. In the meanwhile,
on February 29, 1959, the disputed property was levied upon
and sold at public auction to satisfy a judgment for money
against R, in favor of X, rendered on June 18, 1956. The highest
bidder was Y.
On February 27, 1960, within one year after the auction
sale, E offered to redeem the property but Y refused to accept
the amount deposited with the sheriff. E withdrew the deposit
on March 11, 1960 after R had sold the property to her. On
March 14, 1960, the sheriff issued a deed of conveyance to Y
who obtained a writ of possession on April 11, 1960.
Issue: Who has a better right to the property, E or Y?
Held: E. The mortgage was foreclosed on January 1959 after
which E took possession of the property. When it was sold at
public auction on February 28, 1959, R as judgment debtor was
no longer the owner; ownership having been acquired by E on
January 19, 1959. At the very best, E should have been allowed
to redeem the property. The mortgage executed on February 1,
1957 was subsequent to the judgment against R, rendered on
June 18, 1956. (Lim vs. Court of Appeals, 137 SCRA 782 [1985].)
Vendee’s right to possession of mortgaged
property sold.
(1) Contingent. — Before the expiration date of the redemption period, the vendee’s right to possession (or continued possession) of the property sold is contingent upon the failure of the
mortgagor to redeem.
(2) Final. — After the redemption period is terminated,
the right to redeem is barred, the mortgagor is divested of his
rights to the mortgaged property sold, and the vendee’s right of
possession of the property becomes final.
In case of non-redemption, the purchaser at the foreclosure
sale shall file with the Register of Deeds either a final deed of sale
executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage or his sworn statement
attesting to the fact of non-redemption. The Register of Deeds
shall thereupon issue a new certificate in favor of the purchaser
after the owner’s duplicate certificate shall have been previous-
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TRANSACTIONS
Art. 2131
ly delivered and cancelled. (Pres. Decree No. 1529, Sec. 63[b].)
Thus, upon failure to redeem the foreclosed realty, consolidation
of title becomes a matter of right on the part of the auction buyer,
and the issuance of a certificate of title in favor of the purchaser
becomes ministerial upon the Register of Deeds. (Union Bank of
the Philippines vs. Court of Appeals, 311 SCRA 795 [1999].)
Right of purchaser to writ of possession.
A writ of possession is generally understood to be an order by
a court whereby the sheriff is commanded to place in possession
of real or personal property the person entitled thereto such as
when a property is extrajudicially foreclosed.28
(1) The issuance of the writ to a purchaser in an extrajudicial
foreclosure is merely a ministerial function (A.G. Development
Corporation vs. Court of Appeals, 281 SCRA 155 [1997]; Suico
Industrial Corporation vs. Court of Appeals, 301 SCRA 212
[1999]; Mamerto Marquez Foundation, Inc. vs. Pizarro, 448
SCRA 140 [2005]; see Security Bank Corporation vs. Gonzalbo,
485 SCRA 136 [2006]; see Mendoza vs. Salinas, 514 SCRA 414
[2007].) The law and jurisprudence are clear that both during and
after the period of redemption, the purchaser at the foreclosure
sale is entitled as of right to a writ of possession, regardless
of whether or not there is a pending suit for annulment of the
mortgage or the foreclosure itself (without prejudice, of course,
to the eventual outcome of said case.)
(2) As a rule, any question regarding the validity of the
mortgage or its foreclosure is not a legal ground for refusing the
28
A writ of possession may be issued under the following instances: (1) in land registration proceedings under Section 17 of Act No. 496, now Pres. Decree No. 1529, The
Property Registration Decree; (2) in a judicial foreclosure, provided the debtor is in possession of the mortgaged realty and no third person, not a party to the foreclosure suit,
had intervened; (3) in an extrajudicial foreclosure of a real estate mortgage under Section
7 of Act No. 3135; and (4) in execution sales (last part. of Section 33, Rule 39 of the Rules
of Court.). (Philippine National Bank vs. Sanao Marketing Corporation, 465 SCRA 287
[2005]; Maglente vs. Baltazar-Padilla, 517 SCRA 643 [2007].) An order granting a writ of
possession under Act No. 3135 is a final order; hence, appealable. The order of possession shall continue in effect during the pendency of the appeal. (Bank of the Philippine
Islands vs. Tarampi, 573 SCRA 537 [2008].) The issuance of the writ in connection with a
complaint for expropriation under Rule 65 of the Rules of Court is, however, interlocutory in nature. (San Fernando Rural Bank, Inc. vs. Pampanga Omnibus Dev. Corp., 520
SCRA 564 [2007].)
Art. 2131
REAL MORTGAGE
455
issuance of the writ. Hence, an injunction to prohibit the issuance
of the writ is entirely out of place.29 (Kho vs. Court of Appeals, 203
SCRA 160 [1991]; Veloso vs. Intermediate Appellate Court, 205
SCRA 227 [1992]; see Ong vs. Court of Appeals, 333 SCRA 189
[2000]; Samson vs. Rivera, 428 SCRA 7595 [2004]; Development
Bank of the Phils. vs. Gatal, 452 SCRA 697 [2005]; Espiridion vs.
Court of Appeals, 490 SCRA 273 [2006]; Metropolitan Bank &
Trust Co. vs. Tan, 555 SCRA 502 [2008].)
(3) Any objection on the validity of the sale and the writ
issued pursuant thereto should be threshed out in a subsequent
proceeding under Section 8 of Act No. 3135 before the Regional
Trial Court. Even then, under Section 8, the order of possession
shall continue in effect during the pendency of appeal
(4) The right of the applicant or a subsequent purchaser to
request for the issuance of a writ of possession never prescribes.
(Rodil vs. Benedicto, 95 SCRA 137 [1980]; Paderes vs. Court of
Appeals, 463 SCRA 504 [2005].)
Right before lapse of redemption period.
In cases of extrajudicial foreclosure sales of real estate mortgages, the issuance of a writ possession is governed by Section 730
of Act No. 3135. (see Appendix 2.)
(1) Said provision 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 (De Garcia vs. San Jose, 94 Phil. 625 [1954].) The duty of the trial court
to grant the writ is ministerial. Such writ issues as a matter of
course upon the filing of the proper motion and the approval of
the corresponding bond.
29
The period of redemption is not interrupted by the filing of an action assailing
the validity of the mortgage. To rule otherwise would constitute a dangerous precedent.
A likely offshoot of such a ruling is the institution of frivolous suits for annulment of
mortgage intended merely to give the mortgagor more time to redeem the mortgaged
property. (Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June 25,
2001; see VACA vs. Court of Appeals, 234 SCRA 146 [1994].)
30
The procedure under Section 7 may be availed of by a purchaser after the redemption period has expired without redemption having been made. (China Banking Corp. vs.
Lozada, 557 SCRA 177 [2008].)
456
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(2) Any question regarding the regularity and validity of
the writ shall, as well as the consequent cancellation of the writ,
is to be determined in a subsequent proceeding as outlined in
Section 8 (infra.) of Act No. 3135. Such question cannot be raised
to oppose the issuance of the writ, since the proceeding is ex
parte. (Samson vs. Rivera, 428 SCRA 759 [2004]; Idolor vs. Court
of Appeals, 450 SCRA 396 [2005]; Philippine National Bank vs.
Sanao Marketing Corporation, 465 SCRA 287 [2005].)
(3) The bond is required to protect the rights of the mortgagor
so that he may be indemnified in case it be shown that the
foreclosure sale was not justified (see Sec. 8, Act No. 3135.), i.e., it
was conducted without complying with the requirements of the
law or without the mortgagor violating the mortgage contract.
Right after lapse of redemption period.
If a writ of possession may be issued even before the
redemption period has expired on the ex parte application of the
purchaser, with greater reason could such writ be issued after
the time for redemption has expired, without redemption having
been made (Rivera vs. Court of First Instance of Nueva Ecija,
61 Phil. 201 [1935]; Ramos vs. Mañalac, 89 Phil. 270 [1951]; Del
Rosario vs. Yatco, [CA] No. 20055-R [1957]; see also Marcelo Steel
Corp. vs. Court of Appeals, 54 SCRA 89 [1973] and Banco Filipino
Savings and Mortgage Bank vs. Intermediate Appellate Court, 142
SCRA 44 [1986].), especially where a new title has already been
issued in the name of the purchaser. (GSIS vs. Court of Appeals,
145 SCRA 341 [1986].) The purchaser at public auction has only
to file a petition for issuance of the writ pursuant to Section 33
(see Note 31.), Rule 39 of the Rules of Court. (Development Bank
of the Phils. vs. Gatal, 452 SCRA 697 [2005].)
(1) Nature of petition/motion for issuance of writ. — The petition
and/or motion for the issuance of a writ of possession is summary in nature and a non-litigious proceeding authorized in an
extrajudicial foreclosure of mortgage pursuant to Act No. 3135,
as amended. It is brought for the benefit of one party only, and
without notice to, or consent by, any person adversely interested.
There is no necessity of giving notice to the mortgagor who had
Art. 2131
REAL MORTGAGE
457
lost all interests in the mortgaged property when he failed to redeem the same. (De Vera vs. Agloro, 448 SCRA 203 [2005]; Idolor
vs. Court of Appeals, supra; Dayot vs. Shell Chemical [Phil.], Inc.,
525 SCRA 535 [2007]; Sagabarria vs. Philippine Business Bank,
593 SCRA 645 [2009]; Motos vs. Real Bank, Inc., 593 SCRA 216
[2009].)
The order for the issuance of the writ is simply an incident in
the transfer of title in the name of the petitioner. The trial court
is mandated and it is its ministerial duty to issue the writ upon
a finding of the lapse of the statutory period for redemption,
the effect of which is to make the right of the purchaser to the
possession of the property absolute. (Pahang vs. Vestil, 434 SCRA
139 [2004]; Idolor vs. Court of Appeals, 450 SCRA 396 [2005];
Dayot vs. Shell Chemical Co. [Phil.], Inc., 525 SCRA 535 [2007].)
The possession of the property becomes an absolute right of the
purchaser as confirmed owner. (Oliveros vs. Presiding Judge,
RTC, 532 SCRA 109 [2007].)
(2) Right of purchaser to a conveyance and to possession. —
The rule is that after the redemption period has expired, the
purchaser of the property has the right to a conveyance and to
be placed in possession thereof. (PDCP Development Bank vs.
Vestil, 264 SCRA 467 [1996]; see Secs. 27, 28, 29, 33, Rule 39, Rules
of Court.) The posting of a bond is no longer needed. (Esperidion
vs. Court of Appeals, 490 SCRA 273 [2006].) To obtain possession,
the vendee or purchaser may either ask for a writ of possession
or bring an appropriate independent action, such as a suit for
ejectment. (Javelosa vs. Court of Appeals, 265 SCRA 493 [1996].)
The right to possession is based simply on the purchaser’s
ownership of the property. Thus, the mere filing of an ex parte
motion for the issuance of a writ of possession would suffice.
(Green Asia Construction & Development Corp. vs. Court of
Appeals, 508 SCRA 79 [2006]; Maluwat vs. Metropolitan Bank
& Trust Co., 532 SCRA 124 [2007].) Upon the expiration of the
redemption period, without the mortgagor having made use
of his right of redemption, ownership of the property becomes
consolidated in the purchaser. (Ley vs. Union Bank of the Phils.,
520 SCRA 369 [2007].)
458
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
(3) Right of purchaser to aid of court. — The purchaser of the
property sold is entitled to the aid of the court in effecting its
delivery, the reason being that upon expiration of the redemption
period (or confirmation of the sale), the ownership of the property
is transferred to him. (Barrameda vs. Gontang, 19 SCRA 387
[1967].)
(a) Upon proper application and proof of title, the
issuance of the writ of possession becomes a ministerial duty
of the court (F. David Enterprises vs. Insular Bank of Asia and
America, 191 SCRA 516 [1990]; Vda. de Zaballero vs. Court
of Appeals, 229 SCRA 810 [1994]; see Sec. 1, Act No. 3135.),
and the relief is granted ex parte without giving the person
against whom the relief is sought an opportunity to be heard.
(Oliveros vs. Presiding Judge, RTC, 532 SCRA 109 [2007].)
(b) The purchaser is not obliged to bring a separate and
independent suit for possession. But to give effect to his
right of possession, he must invoke the aid of the courts and
ask for a writ of possession. He cannot simply take the law
into his own hands and enter the property without judicial
authorization. (Joven vs. Court of Appeals, 212 SCRA 700
[1992]; see Manalo vs. Court of Appeals, 366 SCRA 752 [2001];
Alarilla vs. Ocampo, 417 SCRA 485 [2003].)
(c) As adverted to earlier, the pendency of an action
questioning the validity of a mortgage or its foreclosure cannot
bar the issuance of the writ of possession particularly after
title to the property has been consolidated in the mortgagee
as the purchaser at the public auction, without prejudice to
the outcome of the action. (Union Bank of the Phils. vs. Court
of Appeals, 359 SCRA 480 [2001]; Lam vs. Metropolitan Bank
and Trust Company, 546 SCRA 200 [2008].)
(d) The motion for issuance of the writ can proceed independently. Its issuance does not bar a separate case for annulment of mortgage and foreclosure sale and, therefore, the ex
parte nature of the proceeding does not deny due process to
the mortgagor. (Carlos vs. CA, 537 SCRA 247 [2007].)
(e) No bond is required of the purchaser after the
redemption period if the property is not redeemed. To impose
Art. 2131
REAL MORTGAGE
459
a bond requirement upon the purchaser who has become the
absolute owner of the foreclosed property purchased would
be unreasonable if not illogical, for if there are any rights to
be protected, they are those of the purchaser who, as owner,
has a superior right over said property against all other
persons. (United Coconut Planters Bank vs. Reyes, 193 SCRA
756 [1991].)
(4) Suspension of implementation of writ. — Accordingly, where
a writ of possession has been issued by a court, it is the inescapable duty of the sheriff to enforce the writ. The sheriff has no
authority to give a grace period, and it would be gross error for
the court which is mandated by law to give effect to such right,
to suspend the implementation of the writ of possession which
should issue as a matter of course. Once the writ of possession
has been issued, the court has no alternative but to enforce the
writ without delay.
Where the reason given by a judge in issuing the order of
suspension of the writ of possession was not specified in the order,
but stated only in general terms, as “humanitarian reasons,” the
court did not act within the bounds of law, especially if such
order was issued motu proprio and without the purchaser being
afforded the right to present his side. (Phil. National Bank vs.
Adil, 118 SCRA 110 [1982].)
(5) Where mortgaged property under lease. — A mortgagee
who has foreclosed upon the mortgaged real property and has
purchased the same at the foreclosure sale can be granted a writ
of possession over the property despite the fact that the premises
are in the possession of a lessee thereof and whose lease has not
as yet been terminated, unless the lease had been previously
registered in the Registry of Property31 or unless despite nonregistration, the mortgagee had prior knowledge of the existence
and duration of the lease, actual knowledge being equivalent to
registration. (Ibasco vs. Caguioa, 143 SCRA 538 [1986].)
31
Art. 1648. Every lease of real estate may be recorded in the Registry of Property.
Unless a lease is recorded, it shall not be binding upon third persons.
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
460
Art. 2131
(6) Where mortgagor refuses to surrender property sold. — In case
of refusal to surrender the possession of the property sold by
the sheriff on the part of the debtor or mortgagor, the purchaser
cannot merely file petition for a writ of possession.32 The remedy
is to file an ordinary action for the recovery of possession in
order that the debtor may be given an opportunity to be heard
not only regarding possession but also regarding the obligation
covered by the mortgage. The purchaser cannot take possession
of the property by force either directly or through the sheriff.
The reason for this is that the creditor’s right of possession is
conditioned upon the fact of default, and the existence of this
fact may naturally be the subject of controversy. (Luna vs.
Encarnacion, 91 Phil. 531 [1952].)
(7) Where third party in actual possession. — The writ of
possession issues as a matter of course even without the filing
and approval of a bond after consolidation of ownership and the
issuance of a new transfer certificate of title in the name of the
purchaser. But the rule is not without exception. Under Section
35, Rule 39 of the Rules of Court, which is made suppletory to the
extrajudicial foreclosure of real estate mortgages by Section 6 of
Act 3135, as amended, the possession of the mortgaged property
may be awarded to a purchaser in the extrajudicial foreclosure
unless a third party is actually holding the property adversely
to the judgment debtor. Under Article 433 of the Civil Code, one
who claims to be the owner of a property possessed by another
must bring the appropriate judicial action for its physical
recovery. The term “judicial process” could mean no less than
an ejectment suit or reivindicatory action in which ownership
claims of the contending parties may be properly heard and
32
In the case of Mabale vs. Apalisok (88 SCRA 234 [1979]), it was held that the writ of
possession is available “(1) in a land registration proceeding, which is a proceeding in rem
(Sec. 17, Act No. 496 [Land Registration Act]; Estipona vs. Navarro, 69 SCRA 285 [1976].);
(2) in an extrajudicial foreclosure of a realty mortgage (Sec. 7, Act No. 3155.); (3) in a judicial foreclosure of a mortgage, a quasi in rem proceeding provided that the mortgagor is
in possession of the mortgaged realty and no third person, not a party to the foreclosure
suit, had intervened; and (4) in execution sales. (last par., Sec. 35, Rule 39, Rules of Court.)
Since the instant case does not fall among the cases mentioned above, the issuance of the
writ of possession was not proper.” (see Cometa vs. Intermediate Appellate Court, 151
SCRA 563 [1987]; Canlas vs. Court of Appeals, 164 SCRA 160 [1988].)
Art. 2131
REAL MORTGAGE
461
adjudicated. An ex parte petition for issuance of a possessory writ
under Section 7 of Act 3135, as amended, is not, strictly speaking,
a “judicial process” as contemplated in Article 433. The reason
for the limitation is that the writ does not issue in case of doubt.
(Phil. National Bank vs. Court of Appeals, 374 SCRA 22 [2002];
Development Bank of the Phils. vs. Prime Neighborhood Assoc.,
587 SCRA 582 [2009].)
Issuance of writ before lapse
of redemption period.
(1) Where bond filed by purchaser. — As already pointed out,
the purchaser at the auction sale is entitled to a writ of possession
pending the lapse of the redemption period upon petition in the
form of an ex parte motion and upon the posting of a bond. In
such case, “no discretion is left to the court.” There is, therefore,
no necessity for the purchaser to file an ejectment case. (Banco
Filipino Savings & Mortgage Bank vs. Pardo, 151 SCRA 481
[1987]; see Mirasol vs. Intermediate Appellate Court, 162 SCRA
306 [1960].)
The requirement of a bond is a consequence of the inchoate
character of the right of the purchaser during the redemption
period inasmuch during said period full ownership has not yet
vested on the creditor-mortgagee. After the one-year period and
no redemption was made. The mortgagor loses all interest over
the mortgaged property.
The rationale for the ministerial issuance of a writ of possession is to put the foreclosure buyer in possession of the property
sold without delay, since the right of possession is founded on
ownership of the property. (Bukidnon Doctors’ Hospital, Inc. vs.
Metropolitan Bank & Trust Co., 463 SCRA 222 [2005].) The purchaser of the property sold at public auction is entitled to the aid
of the court in effecting its delivery the reason being that upon
the expiration of the redemption period (or confirmation of sale),
the ownership of the property is transferred to him. (Barrameda
vs. Gontang, 19 SCRA 387 [1967].) But where a lease agreement is
subsequently entered into by the mortgagor and the mortgagee
462
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
after the expiration of the redemption period and the consolidation of title in the name of the latter, a case for ejectment or
unlawful detainer, not a motion for a writ of motion for a writ of
possession is the proper remedy in order to evict from the questioned premises a mortgagor-turned-lessee. What applies is no
longer the law on foreclosure but the law on lease. (Bukidnon
Doctors’ Hospital, Inc. vs. Metropolitan Bank & Trust Co., supra.)
(2) Remedy of mortgagor. — Any question regarding the
regularity and validity of the sale as well as the consequent
cancellation of the writ of possession is to be determined in a
subsequent proceeding as outlined in Section 8 of Act No. 3135.
It cannot be raised as a justification for opposing the issuance of
the writ of possession since, under the Act, the proceeding for
this is ex parte. (Sulit vs. Court of Appeals, 268 SCRA 441 [1997];
Suico Industrial Corporation vs. Court of Appeals, 301 SCRA 212
[1999]; De Gracia vs. San Jose, 94 Phil. 623 [1954]; Camacho vs.
Phil. National Bank, 363 SCRA 352 [2001].)
(a) The only remedy of the mortgagor is to question
the validity of the sale as provided in Section 8 of Act No.
3135 (see Appendix 2.), namely, by a petition to set aside
the sale and to cancel the writ of possession, which should
be disposed of in accordance with the summary procedure
prescribed in Section 112 of Act No. 496, the Land Registration
Act,33 provided the petition is filed “not later than thirty days
after the purchaser was given possession.” (De los Angeles
vs. Court of Appeals, 60 SCRA 116 [1974]; De Garcia vs. San
Jose, 94 Phil. 675 [1954]; see De Ramos vs. Court of Appeals,
213 SCRA 207 [1992].)
(b) Section 8 of Act No. 3135 lists the exclusive grounds
for the petition, namely, 1) that the mortgage was not violated,
and, 2) that the sale was not made in accordance with the
provisions of Act No. 3135. Any question regarding validity
of the mortgage or its foreclosure cannot be a legal ground
for refusing the issuance of a writ of possession. (Green Asia
33
Section 112 of the former Act, now Section 108 of the Property Registration Decree
(Pres. Decree No. 1529.), is entitled “Erasures and Alterations.’’
Art. 2131
REAL MORTGAGE
463
Construction & Development Corp. vs. Court of Appeals,
508 SCRA 79 [2006].)
Regardless of whether or not there is a pending suit
for annulment of the mortgage or the foreclosure itself, the
purchaser is entitled to a writ of possession, without prejudice
to the eventual outcome of the said case. (Jehi Construction
Corp. vs. Bank of the Phil. Islands, 524 SCRA 522 [2007].)
(c) Section 8 of Act No. 3135 is clear that the purchaser
must first be placed in possession of the mortgaged property
pending proceedings assailing the issuance of the writ of
possession. If the trial court later finds merit in the petition to
set aside the writ, it shall dispose in favor of the mortgagor
the bond furnished by the purchaser. Thereafter “either
of the parties may appeal from the order of the judge in
accordance with Section 14 of Act No. 496’’ which provides
that “every order, decision, and decree of the Court of the
Land Registration may be reviewed . . . . in the same manner
as an order, decision, decree or judgment of a Court of First
Instance might be reviewed.’’34
The rationale for the mandate is to allow the purchaser
to have possession of the foreclosed property without delay
such possession being founded on his right of ownership.
(Ong vs. Court of Appeals, 333 SCRA 189 [2000]; see Dayrit
vs. Philippine Bank of Communications, 386 SCRA 117
[2002].)
(d) Section 8 of Act No. 3135 mandates that even if an
appeal is interposed from an order granting a petition
for a writ of possession, such order shall continue to be in
effect during the pendency of the appeal. (Sps. Santiago vs.
Merchant Rural Bank of Talavera, Inc., 453 SCRA 756 [2005].)
Absent grave abuse of discretion, the soundness of an order
granting the writ of possession is a matter of judgment with
respect to which the remedy is ordinary appeal instead of
34
There is no more Court of Land Registration. The Court of First Instance (CFI) is
now known as Regional Trial Court (RTC).
464
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
a petition for certiorari. (Philippine National Bank vs. Sanao
Marketing Corporation, 465 SCRA 287 [2005].)
(e) Section 8 of Act No. 3135 affords both parties an expeditious way to resolve any conflict regarding the writ of
possession alone issued by reason of a extrajudicial foreclosure. It should be distinguished from those cases (e.g., Jose vs.
Zulueta, 2 SCRA 574 [1961]; Matute vs. Court of Appeals, 26
SCRA 768 [1969]; Romero, Jr. vs. Court of Appeals, 40 SCRA
172 [1971]; Belfront Surety & Insurance Company vs. People,
111 SCRA 385 [1982].) which involved writs of possession issued in the course of the execution of judgment. (see Mallari
vs. Banco Filipino Savings & Mortgage Bank, 563 SCRA 664
[2008].)
Where rights of third persons involved.
(1) Claimants with interest adverse to mortgagor. — Under
Sections 27 to 29 and Section 3335 of Rule 39 of the Rules of Court
which are made applicable by Section 6 of Act No. 3135 (see
Appendix 2.), in case of an extrajudicial foreclosure of a real estate
mortgage, the possession of the property sold may be given to
the purchaser by the sheriff after the period of redemption had
expired, unless a third person is actually holding the property
adversely to the mortgagor or judgment debtor (Clapano vs.
Gapultos, 132 SCRA 429 [1985]; China Banking Corp. vs. Lozada,
35
Sec. 33. Deed and possession to be given at expiration of redemption period; by whom
executed or given. — If no redemption be made within one (1) year from the date of registration of the certificate of sale, the purchaser is entitled to a conveyance and possession
of the property; or, if so redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the time or redemption has
expired, the last redemptioner, is entitled to the conveyance and possession; but in all
cases, the judgment debtor shall have the entire period of one (1) year from the date of the
registration of the sale to redeem the property. The deed shall be executed by the officer
making the sale or by his successor in office, and in the latter case shall have the same
validity as though the officer making the sale had continued in office and executed it.
Upon the expiration of the right of redemption, the purchaser or redemptioner, shall
be substituted to and acquire all the rights, title, interest and claim of the judgment debtor
to the property as of the time of the levy. The possession of the property shall be given
to the purchaser or last redemptioner by the same officer unless a third party is actually
holding the property adversely to the judgment debtor.
Art. 2131
REAL MORTGAGE
465
557 SCRA 177 [2008].) in which case an ordinary action is
necessary to recover possession from such third person.
(a) It is implicit in Section 7 of Act No. 3135 that it is ministerial upon the court to issue an ex parte writ of possession
in favor of the purchaser in a foreclosure sale of a mortgaged
property provided no rights of third persons are involved.
(ITC Service and Leasing Corp. & Acceptance vs. Nera, 19
SCRA 181 [1967]; Barican vs. Intermediate Appellate Court,
162 SCRA 358 [1988]; Joven vs. Court of Appeals, 212 SCRA
700 [1992].)
This obligation of a court to issue the writ ceases to be
ministerial once it appears that there is a third party in possession of the foreclosed property who is claiming a right
adverse to that of the debtor-mortgagor and is a stranger
to the foreclosure proceedings in which the ex parte writ of
possession was applied for. He may not be dispossessed on
the strength of a mere ex parte possessory writ, since to do
so would be tantamount to his summary ejectment, in violation of the basic tenets of due process. For this exception to
apply, the property must be possessed by a third party and
such possession must be adverse to the debtor-mortgagor.
(Philippine National Bank vs. Court of Appeals, 374 SCRA 22
[2002]; Policarpio vs. Active Bank, 566 SCRA 27 [2008]; Penson vs. Maranan, 491 SCRA 396 [2006]; Heirs of D.N. Nicolas
vs. Metropolitan Bank & Trust Company, 532 SCRA 38 [2007];
Top Art Shirt Mftg., Inc. vs. Metropolitan Bank & Trust Co.,
595 SCRA 323 [2009].)
(b) Section 16, Rule 39 of the Rules of Court, bestows
upon third parties claiming rights to properties under
execution the right to protect their interests by interposing
a third-party claim in the same case, or by instituting
a separate reinvindicatory action against the executing
creditor. Proceedings to resolve the possession of third-party
claimants may proceed independently of the action which
said claimants may bring to enforce or protect their claim of
ownership over the property. (Bon-Mar Realty & Sport Corp.
vs. De Guzman, 563 SCRA 737 [2008].)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
466
Art. 2131
(c) A proceeding for the issuance of a writ of possession
is a mere incident in the transfer of title. The court may not
grant the writ through a mere motion where title is in doubt.
The actual possession under claim of ownership raises a
disputable presumption of ownership. The true owner must
resort to judicial process for the recovery of the property.
(Ibid.)
(d) As adverted to earlier, an ex-parte petition for issuance
of a possessory writ under Section 7 of Act No. 3135 is not,
strictly speaking, a “judicial process’’ as contemplated above.
Even if the same may be considered a judicial proceeding for
the enforcement of one’s right of possession as purchaser
in a foreclosure sale, it is not an ordinary suit filed in court,
by which one party “sues another for the enforcement or
protection of a right, or the prevention or redress of a wrong.’’
(Philippine National Bank vs. Court of Appeals, supra., Idolor
vs. Court of Appeals, 450 SCRA 396 [2005].) It is in the nature
of an ex parte motion in which the court hears only one side.
(Metropolitan Bank & Trust Co. vs. Bance, 553 SCRA 507
[2008].) The issuance of a writ of possession is not a judgment
on the merits. (Primetown Property Group, Inc. vs. Juntilla,
459 SCRA 683 [2005].)
(e) Such petition, in the form of an ex parte motion,36 is
a non-litigious proceeding and summary in nature as well
authorized in an extrajudicial foreclosure of mortgage pursuant to Act 3135, as amended. Unlike a judicial foreclosure of
real estate mortgage under Rule 68 of the Rules of Court, any
property brought within the ambit of the Act is foreclosed by
36
What distinguishes a “motion’’ from a “petition’’ or other pleading is not its form
or the title given by the party executing it, but rather its purpose. The office of a motion
is not to initiate new litigation, but to bring a material but incidental matter arising in the
progress of the case in which the motion is filed. A motion is not an independent right
or remedy, but is confined to incidental matters in the progress of a cause. It relates to
some question that is collateral to the main object of the action and is connected with and
dependent upon the principal remedy. An application for a writ of possession is a mere
incident in the registration proceeding. Hence, although it is denominated as a “petition,”
it may be in substance merely a “motion.’’ (Arquiza vs. Court of Appeals, 459 SCRA 753
[2005].)
Art. 2131
REAL MORTGAGE
467
the filing of a petition, not with any court of justice, but with
the office of the sheriff of the province (or city) where the
sale is to be made. As such, a third person in possession of an
extrajudicially foreclosed realty, who claims a right superior
to that of the original mortgagor, will have no opportunity to
be heard on his claim in a proceeding of this nature. It stands
to reason, therefore, that such third person may not be dispossessed on the strength of a mere ex-parte possessory writ,
since to do so would be tantamount to his summary ejectment, in violation of the basic tenets of due process. (Ibid.)
(f) Section 16, Rule 39, reserves to adverse third parties
the remedies of 1) terceria to determine whether the sheriff has
rightly or wrongly taken hold of the property not belonging
to the judgment debtor or obligor and 2) an independent
“separate action” to vindicate their claim of ownership and/
or possession over the foreclosed property.
Under Section 16, a third party claimant or stranger to
the foreclosure suit, like respondents herein, can opt to file
a remedy known as terceria against the sheriff or officer
effecting the writ by serving on him an affidavit of his title
and a copy thereof upon the judgment creditor. By the terceria,
the officer shall not be bound to keep the property and could
be answerable for damages. A third-party claimant may also
resort to an independent “separate action,” the object of which
is the recovery of ownership or possession of the property
seized by the sheriff, as well as damages arising from wrongful
seizure and detention of the property despite the third-party
claim. If a “separate action” is the recourse, the third-party
claimant must institute in a forum of competent jurisdiction
an action, distinct and separate from the action in which the
judgment is being enforced, even before or without need of
filing a claim in the court that issued the writ. Both remedies
are cumulative and may be availed of independently of or
separately from the other. Availment of the terceria is not a
condition sine qua non to the institution of a “separate action.”
(China Banking Corporation vs. Ordinario, 399 SCRA 430
[2003].)
468
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TRANSACTIONS
Art. 2131
(g) The judge to whom an application for the writ is filed
need not look into the validity of the mortgage or the manner
of its foreclosure. No discretion is left to the judge. Any
question regarding the cancellation of the writ or in respect
of the validity and regularity of the public sale, should be
determined in a subsequent proceeding as outlined in
Section 8 of Act No. 3135. (Charlease Finance Corporation vs.
Ma, 409 SCRA 250 [2003]; Philippine National Bank vs. Sanao
Marketing Corporation, 465 SCRA 287 [2005].)
(h) An ordinary civil action may be consolidated with a
petition for a writ of possession although the latter is an ex
parte proceeding to thresh out thoroughly all related issues
in the interest of a more expeditious and less expensive
resolution of the controversy. (Philippine Savings Bank vs.
Manalac, Jr., 457 SCRA 203 [2005].)
(i) A purchaser or mortgagee cannot close his eyes to
facts which should put a reasonable man upon his guard, and
then claim that he acted in good faith under the belief that
there was no defect in the title of the vendor or mortgagor.
Banks, their business being impressed with public interest,
are expected to exercise more care and prudence than private
individuals in their dealings, even those involving registered
lands. Hence, for merely relying on the certificate of title and
for its failure to ascertain the status of the mortgaged property
as is the standard operating procedure in the operation of a
bank, it cannot be said that a bank is a mortgagee in good
faith. (Consolidated Rural Bank vs. Court of Appeals, 448
SCRA 347 [2005].) The general rule that a mortgagee or
purchaser of land need not look beyond the four corners of
the title is inapplicable.
(2) Successor-in-interest of mortgagor. — The purchaser, as
absolute owner, is entitled to the possession of the property
bought and cannot be excluded therefrom by one who merely
claims to be a successor-in-interest of the mortgagor and whose
possession is, therefore, not adverse to the mortgagor unless it
is adjudged that the alleged successor has a better right to the
property than the purchaser.
Art. 2131
REAL MORTGAGE
469
(a) Stated differently, the purchaser’s right of possession
is recognized only as against the mortgagor or judgment
debtor and his successor-in-interest but not against persons
whose right of possession is adverse to the latter. A separate
and independent action is not necessary to recover possession where no rights of third persons are involved. (Roxas
vs. Buan, 167 SCRA 43 [1988]; IFC Service Leasing and Acceptance Corp. vs. Nera, 19 SCRA 181 [1967].)
(b) In the case of a chattel mortgage, an ordinary action
is necessary to recover possession of the mortgaged chattel
in case of the refusal of the mortgagor to surrender it. (Luna
vs. Encarnacion, 91 Phil. 531 [1952].) The Chattel Mortgage
Law (Appendix 5.) does not contain any provision similar
to Section 6 of Act No. 3135. (IFC Service Leasing and
Acceptance Corp. vs. Nera, supra.)
(3) Lessee of agricultural land. — The agricultural lessee’s preemptive right to buy the land he cultivates, as well as his right to
redeem the land, if sold to a third person without his knowledge,
under Sections 11 and 12, respectively, of the Code of Agrarian
Reforms, is statutory in character and attaches to the particular
landholding by operation of law. It is superior to the mortgagee
of land. The remedy of the mortgagee is not against the land nor
the agricultural lessee but against the mortgagee-landowner.
(Cuiaño vs. Court of Appeals, 237 SCRA 122 [1994].)
(4) Buyer of condominium unit. — Under the Subdivision and
Condominium Buyers’ Protective Decree. (Sec. 25, Pres. Decree
No. 957.), upon full payment by the buyer, the seller is dutybound to deliver the title of the unit to the buyer. Even with a
valid mortgage on the lot, the seller is still bound to redeem said
mortgage without any cost to the buyer apart from the balance
of the purchase price if any, and registration fees. Where the
condominium buyer is found to have superior right to the unit
over the loan funder’s and the mortgage in favor of the latter
which foreclosed the mortgage, is found to be contrary to said
law (Sec. 18 thereof.), the proper remedy is to annul mortgage
foreclosure sale and the condominium certificate of title issued
470
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
in favor of the highest bidder. (De Vera, Jr. vs. Court of Appeals,
367 SCRA 534 [2001].)
ILLUSTRATIVE CASE:
The mortgagee-buyer of foreclosed property was ordered by
the trial court to execute a deed of sale in favor of the vendee of the
property from the mortgagor; the foreclosure sale took place after the
institution of case by the vendee against vendor (mortgagor).
Facts: Notwithstanding the absence of a deed of sale, private
respondents AL and PA entered into and took possession of a
parcel of land sold to him by DL. AL and PA later paid the
balance of the purchase price of the lot.
Subsequently in 1982, DL mortgaged the property to
petitioner MB. As DL failed to pay his indebtedness, the
mortgage was foreclosed and the property was sold with MB
as the highest bidder. DL failed to redeem the property.
In 1983, AL and PA filed a complaint for specific performance
to compel DL to execute the necessary deed of absolute sale in
their favor. Impleaded were it attorney in fact of DL, and MB
who alleged that it was a mortgagee in good faith.
Issue: Whether or not petitioner bank may be compelled to
execute a deed of reconveyance transferring the parcel of land
mortgaged to petitioner in favor of private respondents.
Held: Yes. (1) MB took title to the mortgaged property pendente
lite. — “Both the trial court and the Court of Appeals correctly
held that petitioner bank was a transferee pendente lite whose
title was subject to the incidents and results of the pending
litigation. Petitioner bank contends that it constituted the
mortgage more than a year before the private respondents’
action for specific performance was filed and the fact that
the foreclosure and public auction sale took place after the
institution of the case is immaterial since the foreclosure sale
retroacts to the date of the constitution of the mortgage.
Petitioner bank argues that it was a purchaser for value
long before the filing of the case and, therefore, it cannot be
considered a transferee pendente lite. This argument is specious.
Petitioner acquired the property only after the filing of private
respondents’ case for specific performance. When the mortgage
was constituted, petitioner was not yet, properly speaking, a
Art. 2131
REAL MORTGAGE
transferee, being a mere mortgagee of the property. Only when
petitioner acquired the property in the foreclosure sale and
subsequently consolidated its title did it become the transferee
of the property. Thus, petitioner bank is a transferee pendente
lite of the property in litigation within the contemplation of
Rule 39, Sec. 47(b). As such, it is bound by the decision against
Demetrio Llego.’’
(2) Transferee pendente lite stands in shoes of transferor. —
“A transferee pendente lite stands exactly in the shoes of the
transferor and is bound by any judgment or decree which may
be rendered for or against the transferor; his title is subject to the
incidents and results of the pending litigation, and his transfer
certificate of title will, in that respect, afford him no special
protection. Petitioner bank may thus be properly ordered to
execute the necessary deed of reconveyance in favor of private
respondents. The remedy left to petitioner is to pursue its claim
against Llego and his Attorney-in-Fact Ceferino Tan by filing
the appropriate action to recover the unpaid indebtedness.’’
(3) MB acted in bad faith. — Petitioner insists that it is not
a transferee pendente lite because it was a purchaser for value
long before the case for specific performance was filed. The
contention is without merit. Even if it is not a transferee pendente
lite, petitioner nevertheless cannot claim a right superior to that
of private respondents because petitioner acted in bad faith
when it foreclosed and acquired the property. As the Court
of Appeals pointed out, petitioner was aware of the charge of
fraud against Demetrio Llego in mortgaging the property to it
despite the previous sale thereof to private respondent Agustin
Lagrama. The trial court found the existence of fraud in the
transaction and declared private respondents to be the absolute
owners of the property. x x x’’
(4) Petitioner’s reliance in case of St. Dominic Corp. vs.
Intermediate Appellate Court (151 SCRA 577 [1987]) misplaced. —
“The facts of that case are different from those of the case at bar.
xxx
In the case of St. Dominic, when the property in question
was mortgaged to Manufacturer’s Bank, the title showed that
it was valid, regular, and free from any lien or encumbrance.
When it was later foreclosed and sold at public auction and
a new transfer certificate of title was issued to the buyer, the
notice of lis pendens was not carried over to the new title. And,
471
472
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2131
when the property was sold to petitioner St. Dominic Corp.,
which was again issued TCT No. 22337, no notice of any lien or
encumbrance appeared on the title. These factual circumstances
led the Court to conclude that the mortgagee bank and its
subsequent transferrees had acted in good faith. It is obvious
that the case of St. Dominic Corp. vs. Intermediate Appellate Court
cannot be invoked in this case where both the trial court and
the Court of Appeals found that petitioner bank did not act in
good faith in acquiring title to the property.’’ (Malayan Bank vs.
Lagrama, 357 SCRA 429 [2001].)
— oOo —
473
VIII
ANTICHRESIS*
(Arts. 2132-2139.)
Chapter 4
ANTICHRESIS
ART. 2132. By the contract of antichresis the creditor
acquires the right to receive the fruits of an immovable of
his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. (1881)
Definition of the contract
of antichresis.
The above article defines the contract of antichresis.
Characteristics of the contract.
Antichresis is:
(1) an accessory contract because it secures the performance
of a principal obligation. Manresa, however, believes that it is an
independent contract (see 12 Manresa 547.); and
(2) a formal contract because it must be in a specified form to
be valid, i.e., “in writing.” (Art. 2134.)
*Title XVI, Book IV, Civil Code.
473
474
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2132
Delivery of property.
Antichresis requires the delivery by the debtor of the property
given as security to the creditor. But such delivery is required
only in order that the creditor may receive the fruits and not that
the contract shall be binding.
The contract does not cover the immovable but only its fruits.
Right of creditor to the fruits.
Antichresis normally covers all the fruits of the encumbered
property, but the law gives the parties the freedom to stipulate
otherwise. (see Art. 1306.) The reduction of the amount of fruits
available to the creditor does not vary the nature of the contract.
(Villanueva vs. Ipondo, [CA] No. 885-R [1947], 44 O.G. 4377.)
Obligation to pay interest not essential.
The obligation to pay interest is not of the essence of the
contract of antichresis, any more than it is indispensable in a
contract of loan.
The words “if owing” (interest) reveal that it is not essential
that the loan should earn interest in order that it can be guaranteed
with a 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. (Javier vs. Valliser, [CA] No. 2648-R, April 29, 1950;
Sta. Rosa vs. Noble, 35 O.G. 27241.)
ILLUSTRATIVE CASE:
In consideration of the payment of mortgagor’s indebtedness to
mortgagee, payor was given possession of mortgaged property until
he is fully reimbursed.
Facts: After the foreclosure by DBP (mortgagee) of the
mortgage on the property of A (mortgagor), the latter entered
into a contract with B entitled “Deed of Sale with Assumption
of Mortgagee.” Under the contract, B would assume and pay
the indebtedness of A to DBP and in consideration therefor, B
was given the possession, the enjoyment and use of the lands
Art. 2132
ANTICHRESIS
475
until A can reimburse fully B the amounts paid by the latter to
DBP.
Issue: What is the nature of the contract entered into
between A and B?
Held: The agreement between A and B is one of those
innominate contracts under Article 1307 of the New Civil Code
whereby A and B agreed “to give and to do” certain rights and
obligations respecting the lands and the mortgage debts of A
which would be acceptable to the bank, but partaking of the
nature of antichresis insofar as the principal parties A and B,
are concerned. (Dizon vs. Gaborro, 83 SCRA 688 [1978].)
Antichresis and pledge compared.
The distinctions are as follows:
(1) Antichresis refers to real property, while pledge, to personal property; and
(2) Antichresis is perfected by mere consent, while pledge is
perfected by the delivery of the thing pledged; and
(3) Antichresis is a consensual contract, while pledge is a real
contract.
Both are similar in that the debtor loses control of the subject
matter of the contract.
Antichresis and real mortgage compared.
The following are the distinctions:
(1) In antichresis, the property is delivered to the creditor,
while in mortgage, the debtor usually retains possession of the
property;
(2) In antichresis, the creditor acquires only the right to
receive the fruits of the property; hence, it does not produce a
real right, while in mortgage, the creditor does not have any
right to receive the fruits, but mortgage creates a real right over
the property which is enforceable against the whole world;
(3) In antichresis, the creditor, unless there is a stipulation
to the contrary, is obliged to pay the taxes and charges upon the
476
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2132
estate (Art. 2135.), while in mortgage, the creditor has no such
obligation; and
(4) In antichresis, it is expressly stipulated that the creditor
given possession of the property shall apply the fruits thereof to
the payment of interest, if owing, and thereafter to the principal
of the credit, while in a mortgage, there is no such obligation on
the part of the mortgagee.
Both are similar in that the subject matter is real property. Like
pledge and mortgage, antichresis gives a real and not merely a
personal right if it is registered in the Registry of Property. (12
Manresa 547-548.)
Application of the fruits to interest
and then to principal.
It is not an essential requisite to a mortgage that possession of
mortgaged premises be retained by the mortgagor.
To be antichresis, it must be expressly agreed between
creditor and debtor that the former, having been given possession
of the properties given as security, is to apply their fruits to the
payment of interest, if owing, and thereafter to the principal of
his credit (Art. 2132.); so that if a contract of loan with security
does not stipulate the payment of interest but provides for
the delivery to the creditor by the debtor of the real property
constituted as security for the payment therefor, in order that the
creditor may administer the same and avail himself of its fruits,
without stating that said fruits are to be applied to the payment
of the interest, if any, and afterwards to that of the principal of
the credit, the contract shall be considered to be one of mortgage
and not of antichresis. (Legaspi and Salcedo vs. Celestial, 66 Phil.
372 [1938]; Alojado vs. Lim Siongco, 51 Phil. 339 [1927]; Diego
vs. Fernando, 109 Phil. 143 [1960]; Adrid vs. Morga, 108 Phil. 927
[1960].)
In a case, the court held the contract as one of mortgage in
view of the existence of three provisions which are indicative of
the contract of mortgage: (1) The agreement that the full amount
of the indebtedness must be returned to the lenders before the
borrowers could demand the return of the property, which is
contrary to an antichretic contract wherein the products of the
Arts. 2133-2135
ANTICHRESIS
477
land should be applied to the interest and then to the principal;
(2) the use of the term “mortgage” in various parts of the contract;
and (3) the agreement that the lenders are not to pay rentals on
the property in consideration of the fact that the borrowers do not
pay interest on the sum which they obtained as a loan. (Verzosa
vs. Bucag, [Unrep.] 97 Phil. 996 [1955].)
ART. 2133. The actual market value of the fruits at the
time of the application thereof to the interest and principal
shall be the measure of such application. (n)
Measure of application of fruits
to interest and principal.
The contract does not cover the immovable but only its fruits.
The fruits of the immovable which is the object of the antichresis
must be appraised at their actual market value at the time of the
application. (see Art. 2138.) “The foregoing rule will forestall the
use of antichresis for purposes of usury.” (Report of the Code
Commission, p. 158.)
ART. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of
antichresis shall be void. (n)
Form of the contract.
Article 2134 is an instance when the law requires that a
contract be in some form in order that it may be valid (Art. 1356.)
and not only to affect third persons. Even if the antichresis is
void, the principal obligation, however, is still valid.
This article, like Articles 2133 and 2138, is intended to forestall
the use of antichresis for purposes of usury. (see Report of the
Code Commission, p. 158.)
ART. 2135. The creditor, unless there is a stipulation to
the contrary, is obliged to pay the taxes and charges upon
the estate.
He is also bound to bear the expenses necessary for
its preservation and repair.
478
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2136
The sums spent for the purposes stated in this article
shall be deducted from the fruits. (1882.)
Obligations of the antichretic creditor.
The creditor acquires, by virtue of the contract of antichresis,
the right to enjoy the fruits of the property delivered to him. (Art.
2132.) This right carries two obligations (pars. 1 and 2.) which
are the necessary consequences of the contract because they arise
from its very nature.
(1) Payment of taxes and charges upon the estate. — The creditor
is obliged, unless there is a stipulation to the contrary, to pay the
taxes and charges upon the estate. If he does not pay the taxes,
he is by law (Art. 1170.) required to pay indemnity for damages
to the debtor. (Pando vs. Gimenez, 54 Phil. 459 [1980].) Where the
debtor has paid for the taxes on the property which the creditor
should have paid, the amount is to be applied to the payment of
the debt, and the debtor is entitled to the return of the property
free from all encumbrances if he, in effect, by advancing the
taxes, had already discharged the debt. (Rosales vs. Tanseco, 90
Phil. 459 [1951].)
(2) Application of the fruits of the estate. — Another obligation
of the creditor is to apply the fruits, after receiving them, to the
interest, if owing, and thereafter to the principal (Art. 2132.) in
accordance with the provisions of Article 2133 or 2138; hence,
the duty of the creditor to render an account of said fruits to the
debtor, and the corresponding right of the latter to apply the said
fruits to the debt. (Barretto vs. Barretto, 37 Phil. 234 [1917]; Diaz
and Rubillos vs. De Mendezona, 48 Phil. 666 [1926]; Macapinlac
vs. Gutierrez Repide, 43 Phil. 770 [1922].)
The sums spent by the creditor in fulfillment of the obligations
under the article shall be charged against the fruits of the property.
ART. 2136. The debtor cannot reacquire the enjoyment
of the immovable without first having totally paid what he
owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article, may
Art. 2137
ANTICHRESIS
479
always compel the debtor to enter again upon the enjoyment of the property, except when there is a stipulation to
the contrary. (1883)
Right of antichretic debtor to reacquire
enjoyment of property.
The property delivered stands as a security for the payment
of the obligation of the debtor in antichresis. Hence, the debtor
cannot demand its return until the debt is totally paid. (see Arts.
2098, 2105; see Macapinlac vs. Gutierrez Repide, supra.)
However, if the creditor does not want to pay the taxes and
incur the expenses necessary for the preservation and repair of
the property (Art. 2135.), he may compel the debtor to reacquire
the enjoyment of the same except when there is a contrary
stipulation. (Art. 2136.)
ART. 2137. The creditor does not acquire the ownership of the real estate for nonpayment of the debt within
the period agreed upon.
Every stipulation to the contrary shall be void. But the
creditor may petition the court for the payment of the debt
or the sale of the real property. In this case, the Rules of
Court on the foreclosure of mortgages shall apply. (1884a)
Remedy of creditor in case of nonpayment
of debt.
If the debt is not paid, it is clear enough that the creditor
does not acquire ownership of the real estate since what was
transferred is not the ownership but merely the right to receive
its fruits. (Art. 2132.) A stipulation authorizing the antichretic
creditor to appropriate the property upon the nonpayment of the
debt within the period agreed upon is void. (see Art. 2088.)
The remedy of the creditor is (1) to bring an action for specific
performance; or (2) to petition for the sale of the real property as
in a foreclosure of mortgages under Rule 68 of the Rules of Court.
The parties, however, may agree on an extrajudicial foreclosure
in the same manner as they are allowed in contracts of mortgage
480
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2138
and pledge. (see Art. 1307; Tavera vs. El Hogar Filipino, Inc., 68
Phil. 712 [1939].)
Acquisition by creditor of property
by prescription.
The creditor in antichresis and his successors-in-interest
cannot ordinarily acquire by prescription the land given to him,
any agreement to the contrary being void. (Valencia vs. Alcala, 42
Phil. 177 [1921]; Bernardo vs. Barretto, 37 Phil. 234 [1917]; Trillana
vs. Manansala, 96 Phil. 865 [1955].)
Possession, for the purpose of acquisitive prescription, must
be in the concept of an owner. (Art. 1118.) The possession of
an antichretic creditor is not in the concept of an owner. (Art.
2132.) He is a mere holder placed in possession of the land by the
debtor, the owner. (Ramirez vs. Court of Appeals, 144 SCRA 292
[1986]; see Art. 540.) He cannot acquire the ownership of the real
estate subject of the antichresis unless he repudiates his status as
an antichretic creditor.
ART. 2138. The contracting parties may stipulate that
the interest upon the debt be compensated with the fruits
of the property which is the object of the antichresis,
provided that if the value of the fruits should exceed the
amount of interest allowed by the laws against usury, the
excess shall be applied to the principal. (1885a)
Interest in antichresis subject
to the Usury Law.
The antichretic creditor is under obligation to apply the fruits
of the property in satisfaction, first, of whatever interest on the
debt is due, and secondly, to the payment of the principal. (Art.
2132.)
The fruits must be appraised on the basis of their actual
market value at the time of the application. (Art. 2133.) If their
value should exceed the amount of interest allowed by the Usury
Law, the excess shall be applied to the principal.
Note: The rate of interest on loan or forbearance of money,
Art. 2139
ANTICHRESIS
481
goods, or credit is no longer subject to any ceiling prescribed
under the Usury Law. (see II–The Usury Law, supra.)
ART. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable to this contract. (1886a)
Applicability of certain articles.
Please see comments under Article 2085 and Articles 2089 to
2091 which are provisions on pledge and mortgage.
— oOo —
482
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TRANSACTIONS
IX
CHATTEL MORTGAGE
(Arts. 2140-2141.)
Chapter 5
CHATTEL MORTGAGE*
ART. 2140. By a chattel mortgage, personal property is
recorded in the Chattel Mortgage Register as a security for
the performance of an obligation. If the movable, instead
of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage. (n)
Definition of chattel mortgage.
Chattel mortgage is that contract by virtue of which personal
property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.
Under the old law (Sec. 3, Act No. 1508 [The Chattel Mortgage Law]; Appendix 5.), a chattel mortgage is considered a conditional sale which the Code Commission considered inaccurate
(see Serra vs. Rodriguez, 56 SCRA 538 [1974].); hence, the new
definition. (see Report of the Code Commission, p. 158.)
The foregoing article also makes a distinction between a
chattel mortgage and a pledge. (Ibid.; Art. 2140, last sentence.)
*Title XVI, Book IV, Civil Code.
482
Art. 2140
CHATTEL MORTGAGE
483
Characteristics of chattel mortgage.
Chattel mortgage is:
(1) an accessory contract because it is for the purpose of
securing the performance of a principal obligation;
(2) a formal contract because of its validity, registration in
the Chattel Mortgage Register is indispensable (see, however,
Filipinas Marble Corp. vs. Intermediate Appellate Court, 142
SCRA 180 [1986].); and
(3) a unilateral contract because it produces only obligations
on the part of the creditor to free the thing from the encumbrance
on fulfillment of the obligation.
Chattel mortgage and pledge distinguished.
The following are the distinctions:
(1) In chattel mortgage, the delivery of the personal property
to the mortgagee is not necessary, while in pledge, such delivery
is necessary;
(2) In chattel mortgage, the registration of the same in the
Chattel Mortgage Register is required by law, while in pledge,
registration in the Registry of Property is not necessary;
(3) The procedure for the sale of the thing given as security is
different. In chattel mortgage, the procedure is found in Section
14 of Act No. 1508, as amended, while in pledge, it is found in
Article 2112 of the Civil Code;
(4) In chattel mortgage, if the property is foreclosed, the
excess over the amount due goes to the debtor (Sec. 14, Act No.
1508.), while in pledge, if the property is sold, the debtor is not
entitled to the excess unless it is otherwise agreed (Art. 2125.) or
except in the case of a legal pledge (Art. 2121.); and
(5) In chattel mortgage, if the property is foreclosed and
there is a deficiency, the creditor is entitled to recover the
deficiency from the debtor (Ablaza vs. Ignacio, [Unrep.] 103 Phil.
1151 [1958].) except if the chattel mortgage is a security for the
purchase of personal property in installments. (see Art. 1484.)
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
484
Art. 2141
In pledge, if the property is sold, and there is a deficiency, the
creditor is not entitled to recover the deficiency notwithstanding
any stipulation to the contrary. (Art. 2115.)
Similarities between chattel mortgage
and pledge.
They are:
(1) Both are executed to secure performance of a principal
obligation;
(2) Both are constituted only on personal property;
(3) Both are indivisible;
(4) Both constitute a lien on the property;
(5) In both cases, the creditor cannot appropriate the property
to himself in payment of the debt;
(6) In both cases, when the debtor defaults, the property
must be sold for the payment of the creditor; and
(7) Both are extinguished by the fulfillment of the principal
obligation or by the destruction of the property pledged or
mortgaged.
ART. 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel Mortgage
Law, shall be applicable to chattel mortgages. (n)
Laws governing chattel mortgage.
The laws principally governing chattel mortgages are: (1) the
Chattel Mortgage Law, Act No. 1508, as amended (see Appendix
5.); (2) the Civil Code (see Phil. National Bank vs. Manila
Investment & Construction, Inc., 38 SCRA 462 [1971]; Garrido
vs. Tuazon, 24 SCRA 727 [1968].); (3) the Revised Administrative
Code; and (4) the Revised Penal Code.
The Ship Mortgage Decree of 1978 (Pres. Decree No. 1521.)
governs the mortgage of vessels of domestic ownership. (see
Appendix 7.)
Art. 2141
CHATTEL MORTGAGE
485
Offenses involving chattel mortgage.
Under the Revised Penal Code, the following acts are
punishable:
(1) Knowingly removing any personal property mortgaged
under the Chattel Mortgage Law to any province or city other
than the one in which it was located at the time of the execution
of the mortgage without the written consent of the mortgagee;
and
(2) Selling or pledging personal property already mortgaged,
or any part thereof, under the terms of the Chattel Mortgage Law
without the consent of the mortgagee written on the back of the
mortgage and duly recorded in the Chattel Mortgage Register.
(Art. 319, Revised Penal Code.)
An essential element common to the two acts punished
under Article 319 of the Revised Penal Code is that the property
removed or repledged, as the case may be, should be the same
or identical property that was mortgaged or pledged before
such removal or pledging. (People vs. Chupeco, 10 SCRA 640
[1964].) The mortgagor is not relieved of criminal liability even
if the mortgage indebtedness is thereafter paid in full (U.S. vs.
Kilayko, 32 Phil. 61 [1915].), or the mortgagor-seller informed the
purchaser that the thing sold had been mortgaged. (People vs.
Alvares, 45 Phil. 472 [1923].)
But the sale is valid although no written consent was
obtained from the mortgagee but the mortgagor lays himself
open to criminal prosecution. (Servicewide Specialists, Inc. vs.
Intermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs.
Court of Appeals, 198 SCRA 826 [1991].)
Applicability of provisions on pledge.
It is clear from Article 2141 that the provisions of the Civil
Code on pledge shall apply to a chattel mortgage only insofar
as they are not in conflict with any provision of the Chattel
Mortgage Law; otherwise, the provisions of the latter will apply.
It has been ruled that “the provisions of the Chattel Mortgage
Law with regard to the effects of the foreclosure of a chattel
486
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Art. 2141
mortgage are precisely contrary to the provisions of Article 2115 of
the Civil Code.’’ (Phil. National Bank vs. Manila Investment and
Construction, Inc., 38 SCRA 462 [1971].) And “accordingly, the
chattel mortgage creditor may maintain an action for deficiency.”
(Garrido vs. Tuason, 24 SCRA 727 [1968]; Phil. National Bank vs.
Manila Investment and Construction Co., supra.)
Note: Actually, the Chattel Mortgage Law is silent on the
matter of recovering deficiency after the foreclosure sale of the
mortgaged chattel.
Subject matter of chattel mortgage.
The subject matter of chattel mortgage must always be
personal or movable property. (Art. 2140; Sec. 2, Act No. 1508.)
Certain deviations, however, have been allowed for various
reasons. The following have been held mortgageable under the
Chattel Mortgage Law:
(1) Shares of stock in a corporation (Monserrat vs. Ceron, 58
Phil. 469 [1933].); but if the owner of the shares is not domiciled
in the same province where the corporation is domiciled, the
registration must be made in both provinces. (Chua Guan vs.
Samahang Magsasaka, Inc., 62 Phil. 472 [1935].)
(2) An interest in business, for it is personal property capable
of appropriation. (Strochecker vs. Ramirez, 44 Phil. 933 [1923].)
(3) Machinery treated by the parties as personal property
subsequently installed on leased land. (Davao Sawmill Co.,
Inc. vs. Castillo, 61 Phil. 709 [1935].) Thus, the nature of the
machineries in dispute (i.e., that they were heavy, bolted or
cemented on the real property mortgaged) does not make them
ipso facto immovable under Article 415(3) and (5) of the Civil
Code. Machinery and equipment, appearing to be immobile, may
be treated by the parties as chattels to secure an obligation under
the principle of estoppel. An immovable may be considered a
personal property, if there is a stipulation as when it is used as
security in the payment of an obligation where a chattel mortgage
is executed over it. (Tsai vs. Court of Appeals, 366 SCRA 324
[2001].)
Art. 2141
CHATTEL MORTGAGE
487
Where, however, the parties had treated the “after acquired
properties” as real property by expressly agreeing that they
shall automatically become subject to the lien of the real estate
mortgage, this characterization impresses upon the properties
the character determined by the parties who must be held in
estoppel to question it. Such “after-acquired properties” must be
deemed to have been immobilized with the result that it is not
necessary to register them a second time as chattel mortgages to
affect third parties. The fact that the mortgagor (lumber company)
is not the owner of the land (area of its lumber concession) is
not important since the parties had characterized the said “afteracquired properties” as real property. (People’s Bank and Trust
Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967]; see GSIS vs.
Calsons, Inc., 23 SCRA 891 [1968]; Art. 415[5].)
(4) Vessels but it is essential that the mortgage is recorded
in the office of the Philippine Coast Guard of the port of
documentation of such vessels (Pres. Decree No. 1521 [The Ship
Mortgage Decree], Sec. 5[a]; Appendix 6; see Philippine Refining
Co., Inc. vs. Jarque, 61 Phil. 229 [1935].) to be effective as to third
persons. It is not necessary that it be recorded in the office of
the register of deeds. (Rubiso and Gelito vs. Rivera, 37 Phil. 72
[1917]; Arroyo vs. Yu de Sane, 54 Phil. 511 [1930].)
(5) Motor vehicles but the mortgage must also be registered
in the Land Transportation Commission (now Land Transportation Office) and with respect to vehicles used for public services,
the mortgage must also carry the approval of the Public Service
Commission (now Land Transportation Franchising and Regulatory Board) to make it effective against the public and the Commission. (Montoya vs. Ignacio, 94 Phil. 182 [1953].)
The recording provisions of the Revised Motor Vehicles
Law (now Land Transportation and Traffic Code) are merely
complimentary to those of the Chattel Mortgage Law. A mortgage
of any motor vehicle in order to affect third persons should not
only be registered in the Chattel Mortgage Registry, but the same
should also be recorded in the Motor Vehicles Office (now Land
Transportation Office) as required by said law. The failure of the
mortgagee to report the mortgage executed in his favor has the
488
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TRANSACTIONS
Art. 2141
effect of making said mortgage ineffective against a purchaser
in good faith who registers his purchase of the same vehicle in
the Motor Vehicles Office. (Borlough vs. Fortune Enterprises, Inc.
and Court of Appeals, 100 Phil. 1063 [1957]; see Montano vs. Lim,
7 SCRA 250 [1963]; Aleman vs. De Catera, 1 SCRA 776 [1961]; Uy
vs. Zamora, 13 SCRA 508 [1968].)
(6) House of mixed materials “which by its very nature is
considered personal property” and because it was so expressly
designated by the parties. (Luna vs. Encarnacion, 91 Phil. 531
[1952].)
(7) House intended to be demolished for what are really mortgaged in this case are the materials thereof and they are, therefore, personal property. (3 Manresa 19.)
(8) House built on rented land, where not only because the
deed of mortgage considered it as such, but also because it did
not form part of the land, for it is settled that an object placed on
land by one who had only a temporary right to the same, such
as the lessee or usufructuary, does not become immobilized by
attachment. The view that parties to a deed of chattel mortgage
may agree to consider a house as personal property for the
purpose of said contract is, however, good only insofar as the
contracting parties are concerned. It is based, partly, upon the
principle of estoppel. (Evangelista vs. Abad, [CA] 36 O.G. 2913;
Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630 [1923];
Tumalad vs. Vicencio, 41 SCRA 143 [1971]; Navarro vs. Pineda, 9
SCRA 631 [1963]; Piansay vs. David, 12 SCRA 227 [1964].)
But the mere fact that a house, whether it is erected by the
owner of the land or by the usufructuary or lessee, was the subject
of a chattel mortgage and was considered as personal property
by the parties does not make said house personal for purposes
of the notice to be given for its sale at public auction. This ruling
is demanded by the need for a definite, orderly and well-defined
regulation for official and public guidance and which would
prevent confusion and misunderstanding. Sales on execution
affect the public and third persons. (Evangelista vs. Alto Surety
& Insurance Co., Inc., 103 Phil. 401 [1958]; Navarro vs. Pineda, 9
SCRA 63 [1963]; see Sec. 16, Rule 39, Rules of Court.)
Art. 2141
CHATTEL MORTGAGE
489
(9) If a house of strong materials may be considered as personal
property for purposes of executing a chattel mortgage as long
as the parties to the contract so agree and no innocent third
party will be prejudiced thereby, there is absolutely no reason
why a machinery which is movable in its nature and becomes
immobilized only by destination or purpose may not be likewise
treated as such. (Makati Leasing and Finance Corp. vs. Weaver
Textiles Mills, Inc., 122 SCRA 296 [1983].)
But the registration of a building of strong materials produces
no effect as far as the building is concerned. (Leung Yee vs. Strong
Machinery Co., 37 Phil. 644 [1918].) As a building is an immovable
property, it cannot be divested of its character of a realty by the
fact that it belongs to another. If the status of the building were to
depend on the ownership of the land, a situation would be created
where a permanent fixture changes its nature or character as the
ownership of the land changes hands. As personal properties
could only be the subject of a chattel mortgage, the execution of
a chattel mortgage on a building is invalid and a nullity, and the
registration of the document in the chattel mortgage register is
merely a futile act and cannot affect the rights of a subsequent
real estate mortgagee of the same property. (Associated Insurance
& Surety Co., Inc. vs. Iya, 103 Phil. 971 [1958].)
Mortgage of improvements on land.
(1) Chattel mortgage. — For purposes of the Chattel Mortgage
Law, both growing crops and large cattle (Sec. 7, pars. 2 and 3, Act
No. 1508.) are personal property and, therefore, capable of being
mortgaged although they would be considered as immovable
property under the conditions stated in Article 415, Nos. (2) and
(6) of the Civil Code. There is no conflict between the Chattel
Mortgage Law and the Civil Code because Article 416(2) of the
Civil Code classifies as personal property “Real property which
by any special provisions of law is considered as personalty.”
(2) Real estate mortgage. — Although the parties to a contract
may treat certain improvements and crops as chattels, insofar as
they are concerned, it is now settled in our jurisdiction that, in
general, and so far as the public is concerned, such improvements,
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
490
Art. 2141
if falling under the provisions of Article 4151 of the Civil Code are
immovable property. As a consequence, a mortgage constituted
on said improvements must be susceptible of registration as a real
estate mortgage and of annotation on the certificate of title to the
land of which they form part, although the land itself may not be
subject to said encumbrance. (Tolentino vs. Baltazar, 1 SCRA 822
[1961].)
No absolute criterion between personal
and real property.
Articles 4152 and 4163 of the Civil Code which mention what
are deemed real property and personal property, respectively,
supply no absolute criterion for discriminating between the two
kinds of property for purposes of the application of the Chattel
Mortgage Law. Said articles state rules which, considered as a
general doctrine, are laws in this jurisdiction.
(1) It must not be forgotten that, under given conditions,
property may have character different from that imputed to it in
said articles.
(2) It is undeniable that the parties to a contract may, by
agreement, treat as personal property that which by nature
would be real property; and it is a familiar phenomenon to see
things classed as real property for purposes of taxation which on
general principles might be considered as personal property.
(3) Other situations are constantly arising in which the
proper classification of one thing or another as real or personal
property may be said to be doubtful. (Standard Oil Co. of New
York vs. Jaramillo, 44 Phil. 630 [1923].)
Subject matter to be described
and identified.
Section 7 of the Chattel Mortgage Law does not demand a
minute and specific description of every chattel mortgaged in
1
See note 2.
See note 3 under Article 2124.
3
See note 1 under Articles 2094 and 2095.
2
Art. 2141
CHATTEL MORTGAGE
491
the deed of mortgage, but only requires that the description
of the mortgaged property be such as to enable the parties to
the mortgage or any other person to identify the same after a
reasonable investigation and inquiry (Saldaña vs. Phil. Guaranty
Co., Inc., 106 Phil. 919 [1960].); otherwise, the mortgage is invalid.
The identification of the mortgaged property was held
impossible from the following description:
(1) “A store No. 79 on Magallanes Street, Municipality
of Cebu, formerly belonging to T. Thakurdas, with all the
merchandise effects, wares and other bazaar goods contained in
the said store.”
(2) “A store No. 9 on Real Street, Iloilo, Panay, P.I., formerly
belonging to Guillermo Asayas, with all the merchandise effects,
wares and other bazaar goods contained in the said store.”
(Giberson vs. A.N. Jureidini Bros., 44 Phil. 216 [1922].)
(3) The provision in a deed of mortgage that “all property of
every nature and description, taken in exchange or replacement,
as well as all buildings, machineries, fixtures, tools, equipment,
and other property that may be acquired by the mortgagor and
installed for use in its lumber concession would be subject to the
mortgage lien.” (People’s Bank & Trust Co. vs. Dahican Lumber
Co., 26 SCRA 84 [1967].)
In a case where the thing was described as the half interest
of the debtor in the drug business known as “Antigua Botica
Ramirez,” owned by a certain person therein named and the
mortgagor, with the exact and definite location of the same being
stated, it was held that description meets the requirements of the
law. (Strochecker vs. Ramirez, 44 Phil. 933 [1923].)
Extent of chattel mortgage.
Section 7, paragraph 4 of Act No. 1508 provides:
“A chattel mortgage shall be deemed to cover only
the property described therein and not like or substituted
property thereafter acquired by the mortgagor and placed in
the same depositary as the property originally mortgaged,
anything in the mortgage to the contrary notwithstanding.”
492
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
(1) Coverage extends only to property described therein. — The
limitation found in this provision makes reference to “like or
substituted property thereafter acquired . . .” not to those already
existing and originally included at the date of the constitution
of the mortgage. A contrary view would unduly impose a more
rigid condition than what the law prescribes which is that
the description be only such as to enable identification after a
reasonable inquiry and investigation. (Saldaña vs. Phil. Guaranty
Co., Inc., 106 Phil. 919 [1960]; see Tsai vs. Court of Appeals, 366
SCRA 324 [2001].)
The above-quoted provision does not apply “to stores open
to the public for retail business where the goods are constantly
sold and substituted with new stock, such as drugstores, grocery
stores, dry goods stores, etc.; otherwise, “it would be practically
impossible to constitute a mortgage on such stores without
closing them contrary to the very spirit and purpose of the Act.
Such a construction would bring about a handicap to trade and
business, would restrain the circulation of capital, and would
defeat the purpose for which the law was enacted, to wit: the
promotion of business and the economic development of the
country. x x x’’
(2) Stipulation including after-acquired property. — A stipulation
in the mortgage, extending its scope and effect to after-acquired
property is valid and binding x x x where the after-acquired
property is in renewal of, or in substitution for, goods on hand
when the mortgage was executed, or is purchased with the
proceeds of the sale of such goods, etc. (Torres vs. Limjap, 56
Phil. 141 [1931]; Northern Motors, Inc. vs. Coquia, 66 SCRA 415
[1975]; 11 C.J. 436.) Where the facts, taken together, evince the
conclusion that the parties’ intention is to treat the controverted
properties (i.e., machineries) as chattels (although they appear to
be immobile), a fortiori, the after — acquired properties, which are
of the same description as the properties enumerated (under the
title “List of Machineries and Equipment’’) in the contract (“Real
Estate Mortgage and Chattel Mortgage’’) must also be treated as
chattels. (Tsai vs. Court of Appeals, 366 SCRA 324 [2001].)
Art. 2141
CHATTEL MORTGAGE
493
Chattel mortgage of after-incurred obligations.
A pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts
are accurately described. A chattel mortgage, however, can only
cover obligations existing at the time the mortgage is constituted.
Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment
that can be compelled upon, the security itself, however, does
not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either
by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel
Mortgage Law.
Refusal on the part of the borrower to execute such agreement
so as to cover the after-incurred obligation can constitute an act
of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy
of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought
to be foreclosed. (Acme Shoe Rubber & Plastic Corp. vs. Court of
Appeals, 260 SCRA 714 [1996].)
Creation of a chattel mortgage.
The law as it now stands provides for only one way for
executing a valid chattel mortgage, i.e., the registration of the
personal property in the Chattel Mortgage Register as security
for the performance of an obligation.4 (Art. 2140; see Art. 2085.)
Under the Chattel Mortgage Law, if the property is situated in
a different province from that in which the mortgagor resides,
the registration must be in both registers (Sec. 4, Act No. 1508.);
otherwise, the chattel mortgage is void.
It has been ruled that if the chattel mortgage is not recorded,
it is nevertheless binding between the parties. (see Filipinas
Marble Corp. vs. Intermediate Appellate Court, 142 SCRA 180
[1986]; Art. 2125; see however, Art. 2140.)
4
See Appendix 7-C.
494
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TRANSACTIONS
Art. 2141
Period within which registration
should be made.
The law does not provide any specific time within which a
chattel mortgage should be recorded in the Chattel Mortgage
Register.
It has been held that “the law is substantially and sufficiently
complied with where the registration is made by the mortgagee
before the mortgagor has complied with his principal obligation
and no right of innocent third persons is prejudiced. This view is
more in accord with practical justice, for the law does not intend
that its provisions be used as a shield to avoid performance of
an obligation under what would otherwise be a valid contract.”
(Ledesma vs. Perez, 2 C.A. Rep. 126.)
Effect of registration.
(1) Creates 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 whenever it goes. The registration gives the
mortgagee symbolical possession. (Northern Motors, Inc. vs.
Coquia, 68 SCRA 374 [1975].) To protect him from the debtor’s
possible disposal of the property, the chattel mortgage is made
effective against third persons by the process of registration.
(Phil. National Bank vs. RBL Enterprises, Inc., 430 SCRA 299
[2004].)
(a) That the chattel mortgagee has the symbolical
possession and that he has preferential right to have physical
possession is inferable from Article 319 of the Revised Penal
Code (supra.) which penalizes wrongful removal, sale, or
pledge of the mortgaged chattel without the written consent
of the mortgagee. (In re Du Tec Chuan, 34 Phil. 488 [1915],
cited in Northern Motors, Inc. vs. Coquia, supra; Allied
Banking Corporation vs. Salas, 168 SCRA 414 [1988].)
(b) Therefore, the lien of a chattel mortgagee over the
mortgaged property is superior to the levy made on the
same by the assignee of the unsecured judgment creditor
of the chattel mortgagor. The theory that the breach by
the mortgagor of the chattel mortgage should not affect
Art. 2141
CHATTEL MORTGAGE
495
the assignee because he is not a privy to such contract is
untenable. A judgment-creditor can only attach the equity or
right of redemption of the mortgagor. (Northern Motors, Inc.
vs. Coquia, 66 SCRA 415 [1975].)
(c) Although the rule that “a mortgagee has the right to
rely in good faith on the certificate of title of the mortgagor
to the property given as a security and in the absence of
any sign that might arouse suspicion, has no obligation to
undertake further investigation,’’ generally pertains to real
property, particularly registered land, it may also be applied
by analogy to personal property, specifically vessels or ships,
since shipowners are likewise required by law to register their
vessels with the Philippine Coast Guard. (Cebu International
Finance Corp. vs. Court of Appeals, 268 SCRA 178 [1997]; see
Appendix 6.)
(2) Adds nothing to mortgage. — The efficacy of the act of
recording a chattel mortgage consists in the fact that it operates
as a constructive notice of the existence of the contract, and the
legal effects of the contract must be discovered in the instrument
itself in relation with the fact of notice. Registration adds nothing
to the instrument, considered as a source of title and affects
nobody’s rights except as a species of notice. (Standard Oil Co. of
New York vs. Jaramillo, 44 Phil. 630 [1923].)
Registration of assignment of mortgage
not required.
Applying by analogy Article 2128 of the Civil Code to a
chattel mortgage, it appears that a chattel mortgage credit may be
alienated or assigned to a third person. (Servicewide Specialists,
Inc. vs. Court of Appeals, 320 SCRA 478 [1999].)
There is no law expressly requiring the recording of the assignment of a mortgage. While such assignment may be recorded, the law is permissive and not mandatory.5
5
The assignee is subrogated to the rights and obligations of the assignor-mortgagee
with respect to the chattel mortgage constituted in favor of the latter. Consequently, the
assignee is bound by the terms and conditions of the chattel mortgage executed between
the mortgagor and the mortgagee. (BA Finance Corp. vs. Court of Appeals, 201 SCRA
157 [1991].)
496
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TRANSACTIONS
Art. 2141
It is clear then that the debtor is protected if he pays his creditor
without actual knowledge that the debt has been assigned. (see
Art. 1626.) Such notice must be actual, and the recording of the
assignment will not operate as constructive notice to the debtor.
(Sison and Sison vs. Yap Tico and Avancena, 37 Phil. 584 [1918].)
Duty of Register of Deeds ministerial.
The duties of a register of deeds in respect to the registration
of chattel mortgages are of a purely ministerial character.
There is no provision of law which confers upon the Register
of Deeds any judicial or quasi-judicial power to determine
the nature of any document of which registration is sought as
a chattel mortgage. It is his duty to accept the proper fee and
place the instrument on record, leaving the effects of registration
to be determined by the court if such question should arise for
legal determination. Thus, he cannot refuse registration on the
ground only that the interests mortgaged do not appear to be
personal property, within the meaning of the Chattel Mortgage
Law. (Standard Oil Co. of New York vs. Jaramillo, supra.)
Affidavit of good faith required.
The affidavit of good faith is an 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, Ibid.)
(1) Effect of absence. — The Chattel Mortgage Law, in Section
5, in describing what shall be deemed sufficient to constitute
a good chattel mortgage, includes the requirement of an
affidavit of good faith appended to the mortgage and recorded
therewith. But the absence of the affidavit vitiates a mortgage
only as against third persons without notice like creditors and
subsequent encumbrancers. (Lilius vs. Manila Railroad Co., 62
Phil. 50 [1935]; Phil. Refining Co. vs. Jarque, 61 Phil. 229 [1935];
Giberson vs. A.N. Jurreidini Bros., 44 Phil. 216 [1922].)
Art. 2141
CHATTEL MORTGAGE
497
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. (Cebu International
Finance Corp. vs. Court of Appeals, supra.)
(2) Where mortgage includes debt thereafter to be contracted.
— It is obvious that the debt referred to in the law is a current,
not an obligation that is yet merely contemplated. A deed of
chattel mortgage is void where it provides that the security
stated therein “is for the payment of any and all obligations
hereinbefore contracted and which may hereafter be contracted
by the mortgagor in favor of the mortgagee.” A mortgage that
contains 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 [1982].)
As already stated elsewhere, a chattel mortgage can only
cover obligations existing at the time the mortgage is constituted.
Once said obligations are paid, there can be no foreclosure in new
loans concluded after the execution of the chattel mortgage since
there is no longer any mortgage.
ILLUSTRATIVE CASE:
Transferee from first mortgagee of mortgage credit increased the
credit in favor of mortgagor after execution of second mortgage on
same personal property in favor of second mortgagee.
Facts: X Co. had a mortgage credit against Y Co. for the sum
of P14,000.00 secured by a first chattel mortgage. Z Co. also had
a mortgage credit for the amount of P30,000.00 secured by a
second chattel mortgage on the same personal property. After
this second mortgage has been executed, the payment of the
mortgage credit of X Co. became due, which credit had been
reduced to the sum of P8,000.00 through partial payments.
W acquired said mortgage credit and increased it by
P6,000.00.
Issue: Who has a preferential right to the mortgaged
property — Z Co., the second mortgagee, or W, the transferee?
498
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
Held: Z Co. X Co., at the time of the transfer of its mortgage
right to W, had a preferential right over that of Z Co. for the
remainder of the amount of the credit, that is P8,000.00. Z Co.
had a preferential right to the rest of the value of the mortgaged
property after deducting the remaining mortgage credit of X
Co.
The increase of P6,000.00 made by W in favor of Y Co. and
the extension of the mortgage thereto are not only subordinate
to the mortgage credit of Z Co., being subsequent in time of
registration, but said increase in security is also void. The
increase of the mortgage security becomes a new mortgage in
itself, inasmuch as the original mortgage did not contain any
stipulation in regard to the increase of the mortgage credit, and
even if it did, said increase would take effect only from the date
of the increase.
In accordance with the provisions of Section 5, the parties
to the original deed swore that the same was mortgaged “to
secure the obligation specified therein and for no other purpose.”
Neither the increase in question, nor the extension of the
mortgage to secure the payment of the same, is specified in
the deed. “Where the Statute provides that the parties to a
chattel mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the mortgage,
it is obvious that a valid mortgage cannot be made to secure a
debt to be thereafter contracted.” (Belgian Catholic Missionaries
vs. Magallanes Press, 49 Phil. 647 [1926].)
Right of redemption.
(1) When the condition of a chattel mortgage is broken the
following may redeem:
(a) the mortgagor;
(b) a person holding a subsequent mortgage; or
(c) a subsequent attaching creditor.
(2) 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.
(3) The redemption is made by paying or delivering to the
mortgagee the amount due on such mortgage and the costs and
Art. 2141
CHATTEL MORTGAGE
499
expenses incurred by such breach of condition before the sale
thereof. (Sec. 13, Act No. 1508.) Upon the sale of personal property
at the foreclosure (or execution) sale, all rights of ownership
leave the mortgagor (judgment debtor) and become vested in
the purchaser. There is no right to redeem personal property. (see
Lee vs. Trocino, 561 SCRA 178 [2008].)
Right acquired by second mortgagee
and subsequent purchaser.
(1) Before payment of debt. — After a chattel mortgage is
executed, there remains in the mortgagor a mere right of
redemption and only this right passes to the second mortgagee
in case of a second mortgage. As between the first and second
mortgagees, therefore, the latter can only recover the property
from the former by paying him the mortgage debt. Even
when the second mortgagee goes through the formality of an
extrajudicial foreclosure, the purchaser acquires no more than the
right of redemption from the first mortgagee. (Tizon vs. Valdez
and Morales, 48 Phil. 910 [1926]; see Northern Motors, Inc. vs.
Coquia, 66 SCRA 415 [1975].)
(2) After payment of debt. — If the only leviable or attachable
interest of a chattel mortgagor in a mortgaged property is his
right of redemption, it follows that the judgment or attaching
creditor who purchased the property at the execution sale could
not acquire anything except such right of redemption. He is not
entitled to the actual possession and delivery of the property
without first paying the mortgage debt. (Ibid.)
Right of mortgagee to possession.
(1) After default. — When default occurs and the creditor
desires to foreclose, the right of the creditor to take the mortgaged
property is clearly implied from the provision which gives him
the right to sell.
(2) Before default. — A chattel mortgagee is not entitled to
the possession of the property upon the execution of the chattel
mortgage for otherwise, the contract becomes a pledge and
ceases to be a chattel mortgage. (Art. 2093.)
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(3) Where mortgagor refuses to surrender possession. — Where
the debtor refuses to yield the property, the creditor’s remedy is
to institute an action either to effect a judicial foreclosure directly
or to secure possession as a preliminary to the sale contemplated
in Section 14 of Act No. 1508.
(a) Mortgagee’s right of possession conditioned upon fact of
default. — The creditor cannot lawfully take the property
by force against the will of the debtor. The reason is that the
creditor’s right of possession is conditioned upon the fact of
default, and the existence of this fact may naturally be the
subject of controversy.
(b) Sheriff mere agent of mortgagee. — Nor can the public
officer, such as a sheriff, upon whom the law places the
responsibility of conducting the sale, seize the property
where the creditor could not, as it is manifest that such officer
proceeding under the authority or the language of Section 14
becomes the mere agent of the creditor. The conclusion is thus
clear that for the recovery of possession, where the right is
disputed, the creditor must proceed along the usual channels
by action in court. (Bachrach Motors Co. vs. Summers, 42
Phil. 3 [1921]; Bataan Hardwood Corp. vs. Dy Pac & Co., Inc.,
43 SCRA 450 [1972].)
(c) Sheriff without authority to seize mortgaged property. —
It is not required in case of such default and the mortgagor
refuses upon demand to surrender possession of the
mortgaged chattel, for the mortgagee before he can file an
action for replevin or for judicial foreclosure, to first ask the
sheriff to foreclose the mortgage or take possession of the
property. Such a procedure is completely unnecessary not
only because the sheriff has no authority in the first instance
to seize the mortgaged property but also because it would
certainly be an exercise in futility. (Northern Motors, Inc. vs.
Herrera and Taguba, 49 SCRA 392 [1973].)
(d) Recoverable expenses against mortgagor. — Where the
mortgagor plainly refuses to deliver the chattel subject of the
mortgage upon his failure to pay two or more installments,
or if he conceals the chattel to place it beyond the reach of the
Art. 2141
CHATTEL MORTGAGE
501
mortgagee, it logically follows as a matter of common sense,
that the necessary expenses incurred in the prosecution by
the mortgagee of the action for replevin so that he can regain
possession of the chattel should be borne by the mortgagor.
Recoverable expenses would include expenses properly
incurred in effecting seizure of the chattel and reasonable
attorney’s fees in prosecuting the action for replevin. (Agustin
vs. Court of Appeals, 271 SCRA 457 [1997].)
(4) Where right of mortgage conceded/disputed. — Where the
right of the plaintiff to the possession of the specific property
is so conceded or evident, the action need only be maintained
against him who so possesses the property. Persons having a
special right of property in the goods the recovery of which is
sought, such as a chattel mortgagee, may maintain an action for
replevin therefor. Where the mortgage authorizes the mortgagee
to take possession of the property on default, he may maintain an
action to recover possession of the mortgaged chattels from the
mortgagor or from any person in whose hands he may find them.
In effect then, the mortgagee, upon the mortgagor’s default, is
constituted an attorney-in-fact of the mortgagor enabling such
mortgagee to act for and in behalf of the owner.
Accordingly, that the defendant is not privy to the chattel
mortgage should be inconsequential. By the fact that the object
of replevin is traced to his possession, one can properly be a
defendant in an action for replevin. It is here assumed that the
plaintiff’s right to possess the thing is not or cannot be disputed.
In case the right of possession on the part of the plaintiff, or his
authority to claim such possession or that of his principal, is put
to great doubt (a contending party might contest the legal basis
for plaintiff’s cause of action or an adverse and independent
claim of ownership or right of possession is raised by that
party), it could become essential to have other persons involved
and accordingly impleaded for a complete determination and
resolution of the controversy. (BA Finance Corp. vs. Court of
Appeals, 258 SCRA 102 [1996].)
(5) Where third-party claims title. — Under Section 14, Rule 57
of the Rules of Court, a third party claimant to a property levied
upon by a writ of attachment must make an affidavit showing
502
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
that he has a title thereto or right to the possession thereof.
This provision excludes a chattel mortgagee because a chattel
mortgage is merely a security for a loan (Art. 2140.) and does not
transfer title to the property mortgaged to the chattel mortgagee.
(Serra vs. Rodriguez, 56 SCRA 538 [1974].)
(6) Where claimant is an unpaid seller. — In a case, the issue
presented is whether the Philippine National Bank is liable to
pay for unpaid goods and merchandise supplied by Remington
Industrial Sales Corporation to Marinduque Mining and
Industrial Corporation by way of sales on credit simply because
the goods and merchandise were included in the foreclosure of
Marinduque’s property mortgaged to the Philippine National
Bank. Remington’s claim is for unpaid purchases of construction
materials and other merchandise that it supplied to MMIC
during the period from July 16, 1982 to October 4, 1983. The claim
was only against MMIC. However, on August 31, 1984, PNB
foreclosed its chattel and real estate mortgages on the property
of MMIC constituted as security for its loans secured from PNB:
Held: “The foreclosure was an exercise of a legal right granted to
PNB. The contract between Remington and MMIC was one of
sale on credit which commenced July 16, 1982 to October 4, 1983.
The goods and merchandise, subject of the sale were delivered to
the MMIC. Remington was an unpaid seller.
When PNB foreclosed the assets of MMIC on August 31, 1984,
the goods and merchandise sold by Remington to PNB were in
the actual possession and control of MMIC and were included
in the foreclosure sale. Remington, however, had relinquished
ownership of the merchandise sold to MMIC and the fact the
goods were delivered to MMIC transferred ownership over the
same to the latter. Thus, MMIC’s possession of the goods and
merchandise was in the concept of owner and when the PNB
foreclosed the mortgages on MMIC’s property, real and personal,
MMIC was the owner of the goods and merchandise sold to it
on credit. The failure of MMIC to pay the purchase price of the
goods does not ipso facto revert ownership of the goods to the
seller unless the sale was first invalidated. PNB’s act of including
in its foreclosure the unpaid goods and merchandise sold to
MMIC and which PNB acquired at the auction sale did not make
Art. 2141
CHATTEL MORTGAGE
503
PNB an obligor to pay for such unpaid goods. Consequently,
Remington has no cause of action against PNB for recovery of
the value of the goods and merchandise. PNB caused Remington
no injury. The obligation to pay remains with MMIC. If there
was any damage to Remington resulting from the inclusion of
the unpaid goods and merchandise in the foreclosure, it was
damnum absque injuria.’’ (Philippine National Bank vs. Court of
Appeals, 367 SCRA 198 [2001].)
Foreclosure of chattel mortgage.
After payment of the debt or the performance of the condition
specified in the Chattel Mortgage (Sec. 3, Act No. 1508.), the
mortgagee must discharge the mortgage in the manner provided
by law otherwise, he may be held liable for damages by any
person entitled to redeem the mortgage. (Sec. 8, Ibid.)
(1) Public sale. — If the mortgagor defaults in the payment of
the secured debt or otherwise fails to comply with the conditions
of the mortgage, the creditor has no right to appropriate to
himself the personal property (Arts. 2141, 2088.) because he is
permitted only to recover his credit from the proceeds of the sale
of the property at public auction through a public officer in the
manner prescribed in Section 14 of Act No. 1508. (Mahoney vs.
Tuason, 39 Phil. 951 [1919]; Esguerra vs. Court of Appeals, 173
SCRA 1 [1989].)
(a) Section 14 allows the mortgagee to have the property
mortgaged sold in almost the same manner as that allowed
by Act No. 3135 which governs the extrajudicial foreclosure
of real estate mortgage. It is necessary that the requirements
of the law relative to notice and registration are complied
with. (Tumalad vs. Vicencio, 41 SCRA 143 [1971]; Luna vs.
Encarnacion, 91 Phil. 531 [1952].)
(b) The mere fact that the mortgagee was the sole bidder
for the mortgaged property in the public sale does not warrant
the conclusion that the transaction was attended with fraud.
Fraud is a serious allegation that requires full and convincing
evidence. (PAMECA Wood Treatment Plant, Inc. vs. Court of
Appeals, 310 SCRA 281 [1999].)
504
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TRANSACTIONS
Art. 2141
Note: Supreme Court Administrative Order No. 3 (Oct. 19,
1984) as amended by Administrative Order No. 99-10-05-0,
Jan. 15, 2000), makes its provisions uniformly applicable to all
extrajudicial foreclosure of both real estate mortgage under Act
No. 3135, as amended and chattel mortgage under Act No. 1508,
as amended, whether conducted under the direction of the Sheriff
or a notary public. (See Procedure in extrajudicial foreclosure
sales, VII-Real Mortgage.)
(2) Private sale. — There is nothing illegal, immoral, or against
public order in an agreement for the private sale of the personal
properties covered by the chattel mortgage. (see Art. 1306.) The
mortgagor is in estoppel to question it except on the ground of
fraud or duress. (Phil. National Bank vs. Manila Investment &
Construction, Inc., 38 SCRA 462 [1971].)
Period to foreclose mortgage.
(1) Chattel mortgage. — 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. (see Sec.
14, Act No. 1508.)
The 30-day period to foreclose a chattel mortgage is the
minimum period after violation of the mortgage condition
for the mortgage creditor to cause the sale at public auction of
the mortgaged chattel with at least ten (10)-days notice to the
mortgagor and posting of public notice of time, place, and
purpose of such sale, and is a period of grace 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 [1969].)
(2) Real estate mortgage. — In real estate mortgages, in case
of judicial foreclosure, the grace period for the mortgagor to pay
the amount due is not less than 90 days nor more than 120 days
from the entry of judgment on foreclosure. In default of such
payment, the property shall be sold at public auction to satisfy
the judgment. (Sec. 2, Rule 68, Rules of Court.)
Art. 2141
CHATTEL MORTGAGE
505
Civil action to recover credit.
(1) Independent action for enforcement of credit not required. —
The mortgagee is not obligated to file an independent action
for the enforcement of his credit. To require him to do so would
be nullification of his lien and would defeat the purpose of
the chattel mortgage which is to give him preference over the
mortgage chattels for the satisfaction of his credit. (Northern
Motors, Inc. vs. Coquia, 68 SCRA 374 [1975]; see Art. 2087.) As
signatory to a valid and subsisting promissory note secured by a
chattel mortgage, the mortgagor is the one primarily and directly
liable to the mortgagee for the amount of the loan. It is not a
defense that he has transferred the possession or ownership of
the mortgaged property (motor vehicle) to the seller (car dealer)
thereof. (Friend vs. Development Bank of the Phils., 476 SCRA
453 [2005].)
(2) Mortgage lien deemed abandoned by obtaining a personal
judgment. — A mortgagee who sues and obtains a personal
judgment against a mortgagor upon his credit waives thereby
his right to enforce the mortgage securing it. By instituting a civil
action to recover the amount of the loan from the mortgagor and
by securing a judgment in his favor, the mortgagee abandons
his mortgage lien on the mortgaged chattel (Movido vs.
Rehabilitation Finance Corp., 105 Phil. 886 [1959].) for he thereby
clearly manifests his lack of desire and interest to go after the
mortgaged property as security for the principal obligation.
(Cerna vs. Court of Appeals, 220 SCRA 517 [1993].)
Ordinary action to recover possession
of chattel.
In case of refusal of the mortgagor to surrender the possession
of the mortgaged chattel sold by the sheriff, the remedy of
the purchaser is to bring an ordinary action for recovery of
possession, instead of merely asking for a writ of possession, in
order to give the mortgagor the opportunity to be heard not only
regarding possession but also regarding the obligation covered
by the mortgage. (Luna vs. Encarnacion, supra.)
The Chattel Mortgage Law does not contain provisions similar
to Sections 6 and 7 of Act No. 3135 (see Appendix 2.) governing
506
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
extrajudicial foreclosure of real estate mortgages, which make
the provisions of Rule 39 of the Rules of Court on redemption in
case of execution sales applicable to an extrajudicial foreclosure
of a real estate mortgage. (IFC Service Leasing and Acceptance
Corp. vs. Nera, 19 SCRA 181 [1967].)
Action for replevin as a remedy.
(1) Nature of remedy. — Replevin, broadly understood, is both
a form of principal remedy and of a provisional relief. It may
refer either to the action itself, i.e., to regain the possession of
personal chattels being wrongfully detained from the plaintiff
by another, or to the provisional remedy that would allow the
plaintiff to retain the thing during the pendency of the action
and hold it pendente lite. The action is primarily possessory in
nature and generally determines nothing more than the right of
possession.
Replevin is so usually described as a mixed action, being
partly in rem and partly in personam — in rem insofar as the
recovery of specific property is concerned, and in personam as
regards to damages involved. As an action in rem, the gist of the
replevin action is the right of the plaintiff to obtain possession of
specific personal property by reason of his being the owner or
of his having a special interest therein. (B.A. Finance Corp. vs.
Court of Appeals, 258 SCRA 102 [1996].)
(2) Where right of possession is not disputed. — Where the right
of the plaintiff to the possession of the specific property is so
conceded or evident, the action need only be maintained against
him who so possesses the property. There can be no question
that persons having a special right of property in the goods the
recovery of which is sought, such as a chattel mortgagee, may
maintain an action for replevin therefor. Where the mortgage
authorizes the mortgagee to take possession of the property on
default, he may maintain an action to recover possession of the
mortgaged chattels from the mortgagor or from any person in
whose hands he may find them.
In effect then, the mortgagee, upon the mortgagor’s default,
is constituted an attorney-in-fact of the mortgagor enabling such
Art. 2141
CHATTEL MORTGAGE
507
mortgagee to act for and in behalf of the owner. Accordingly,
that the defendant is not privy to the chattel mortgage should be
inconsequential. By the fact that the object of replevin is traced to
his possession, one properly can be a defendant in an action for
replevin. It is here assumed that the plaintiff’s right to possess
the thing is not or cannot be disputed. (Ibid.)
(3) Where right of possession disputed. — In case the right of
possession on the part of the plaintiff, or his authority to claim
such possession or that of his principal, is put to great doubt (a
contending party might contest the legal basis for plaintiff’s cause
of action or an adverse and independent claim of ownership
or right of possession is raised by that party), it could become
essential to have other persons involved and accordingly
impleaded for a complete determination and resolution of the
controversy. (Ibid.)
Since the mortgagee’s right of possession is conditioned
upon the actual fact of default which itself may be controverted,
the inclusion of other parties, like the debtor or the mortgagor
himself, may be required in order to allow a full and conclusive
determination of the case. When the mortgagee seeks a replevin
in order to effect the eventual foreclosure of the mortgage, it is
not only the existence of, but also the mortgagor’s default on, the
chattel mortgage that, among other things, can properly uphold
the right to replevy the property. The burden to establish a valid
justification for such action lies with the plaintiff. An adverse
possessor, who is not the mortgagor, cannot just be deprived
of his possession, let alone be bound by the terms of the chattel
mortgage contract, simply because the mortgagee brings up an
action for replevin. (Servicewide Specialists, Inc. vs. Court of
Appeals, 318 SCRA 493 [1999].)
(4) Matters to be established. — A chattel mortgagee, unlike
a pledgee, need not be in, nor entitled to, the possession of
the property unless and until the mortgagor defaults and the
mortgagee thereupon seeks to foreclose thereon. Since the
mortgagee’s right of possession is conditioned upon the actual
fact of default which itself may be controverted, the inclusion of
other parties, like the debtor or the mortgagor himself, may be
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COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
required in order to allow a full and conclusive determination of
the case.
When the mortgagee seeks a replevin in order to effect the
eventual foreclosure of the mortgage, it is not only the existence
of, but also the mortgagor’s default on, the chattel mortgage that,
among other things, can properly uphold the right to replevy
the property. The burden to establish a valid justification for that
action lies with the plaintiff. An adverse possessor, who is not the
mortgagor, cannot just be deprived of his possession, let alone
be bound by the terms of the chattel mortgage contract, simply
because the mortgagee brings up an action for replevin. (Ibid.)
Right of mortgagee to recover
deficiency.
(1) Where mortgage foreclosed. — The creditor may maintain
an action for the deficiency although the Chattel Mortgage
Law is silent on this point. (see Ablaza vs. Ignacio, [Unrep.] 103
Phil. 1151 [1958]; Garrido vs. Tuason, 24 SCRA 727 [1968]; Phil.
National Bank vs. Manila Investment & Construction, Inc., supra;
Bank of the Phil. Islands vs. Olutanga Lumber Co., 47 Phil. 20
[1924].) The reason is that a chattel mortgage is only given as
a security and not as payment for the debt in case of failure of
payment. (Bicol Savings & Loan Assn. vs. Guinhawa, 188 SCRA
642 [1990].)
Both the Chattel Mortgage Law and Act No. 3135 governing
extrajudicial foreclosure of real estate mortgage, do not contain
any provision, expressly or impliedly, precluding the mortgagee
from recovering deficiency of the principal obligation. (Superlines
Transportation Company, Inc. vs. ICC Leasing & Financing
Corporation, 398 SCRA 508 [2003].) In our jurisdiction, when
the law intends to foreclose the right of a creditor to sue for any
deficiency resulting from a foreclosure of a security given to
guarantee an obligation, it so expressly provides such as with
respect to sale of thing pledged (see Art. 2115.) and foreclosure of
chattel mortgage on personal property sold on installment basis.
(see Art. 1484[3], note 6.)
The action may be brought within ten (10) years from the
time the cause of action accrues, even if it is not upon a written
Art. 2141
CHATTEL MORTGAGE
509
contract because the obligation of the mortgagor to pay the
deficiency is one created by law (see Art. 1144[1, 2], Civil Code.),
and furthermore, the action is in the nature of a mortgage action
(see Art. 1142, Ibid.) because its purpose is precisely to enforce
the mortgage contract. (Development Bank of the Phils. vs.
Tomeldan, 101 SCRA [1980].)
(2) Where mortgage constituted as security for purchase of personal property payable in installments. — If the chattel mortgage is
constituted, whether by the debtor-vendee or a third person, as
security for the purchase of personal property payable in installments, no deficiency judgment can be asked and any agreement
to the contrary shall be void. (Art. 1484.6)
Once the vendor of personal property sold on installment has
foreclosed the chattel mortgage on the thing sold, he is precluded
from proceeding against the security put up by a third person
for if the latter should be compelled to pay the balance of the
purchase price, he will, in turn, be entitled to recover what he has
paid from the debtor-vendee (see Art. 2066.); so that ultimately,
it will be the vendee who will be made to bear the payment of
the balance of the price, despite the earlier foreclosure of the
chattel mortgage given by him, thereby indirectly subverting the
protection given by Article 1484. (Pascual vs. Universal Motors,
Inc., 61 SCRA 121 [1974].)
The remedies granted by Article 1484 are alternative, not
cumulative, and exclusive, that is, the exercise of one would
bar the exercise of the others. (see Borbon II vs. Servicewide
Specialists, Inc., 258 SCRA 634 [1996].)
6
Art. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee’s failure to pay cover two or more installments. In this case, he shall
have no further action against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.
Article 1484 is specifically applicable to a sale of personal property the price of
which is payable in installments. Paragraph (3) of Article 1484 expressly bars any further
action against the purchaser to recover any unpaid balance where the vendor opts to
foreclose the chattel mortgage on the thing sold.
510
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2141
(3) Where mortgaged property subsequently attached and sold.
— The chattel mortgagee is entitled to deficiency judgment
in an action for specific performance (Art. 1484[1].) where the
mortgaged property is subsequently attached and sold. The
execution sale in such case is not a foreclosure sale. (Industrial
Finance Corp. vs. Ramirez, 77 SCRA 152 [1977]; Palma vs. Court
of Appeals, 232 SCRA 714 [1994].)
Application of proceeds of sale.
The proceeds of the sale are to be applied to the payment of
the following:
(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; and
(4) The balance, if any, shall be paid to the mortgagor, or
person holding under him. (Sec. 14, Act No. 1508.)
In pledge, the sale of the thing pledged extinguishes the
entire principal obligation such that the pledgor may no longer
recover the proceeds of the sale in excess of the amount of the
principal obligation. Section 14 of the Chattel Mortgage Law, on
the other hand, expressly entitles the mortgagor to the balance
of the proceeds upon satisfaction of the principal obligation
and costs. Since the Chattel Mortgage Law bars the creditormortgagee from retaining the excess of the sale proceeds, there is
a corollary obligation on the part of the debtor-mortgagor to pay
the deficiency in case of a reduction in the price at public auction.
(PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 310
SCRA 281 [1999].)
— oOo —
511
X
CONCURRENCE AND
PREFERENCE OF CREDITS*
(Arts. 2236-2251.)
Features of Title XIX of the Civil Code.
According to the Code Commission, “the Title on ‘Concurrence and Preference of Credits’ is characterized by four features:
(1) The liens and mortgages with respect to specific movable
and immovable property have been increased;
(2) The proposed Civil Code1 and the Insolvency Law have
been brought into harmony;
(3) Preferred claims as to the free property of the insolvent
have also been augmented; and
(4) The order of preference, laid down in Articles 19262 and
19273 of the present Civil Code,4 among claims with respect to
specific personal and real property has been abolished, except that
taxes must first be satisfied.” (Report of the Code Commission,
pp. 163-164.)
Scope of Title XIX.
Title XIX applies to other creditor-debtor relationships.
*Title XIX, Book IV, Civil Code.
1
New Civil Code.
2
Now, Articles 2246-2247.
3
Now, Articles 2248-2249.
4
Old Civil Code.
511
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
512
Nothing in the Civil Code indicates that its provisions on
concurrence and preference of credits are applicable only to
the insolvent debtor. If those provisions are intended only to
insolvency cases, then other creditor-debtor relationships where
there are concurrence and preference of credits, would be left
without governing rules, a view that would render purposeless
the laws on insolvency. (Barretto vs. Villanueva, 1 SCRA 288
[1961].)
The provisions are applicable to liquidation proceedings.
(Cordova vs. Reyes, etc., Law Offices, 526 SCRA 300 [2007].)
Meaning of concurrence of credits.
Concurrence of credits implies the possession by two or more
creditors of equal rights or privileges over the same property or
all of the property of a debtor.
Meaning of preference of credit.
Preference of credit is the right held by a creditor to be preferred
in the payment of his claim above others (i.e., to be paid first) out
of the debtor’s assets.5
Nature and effect of preference.
(1) A preference is an exception to the general rule. For this
reason, the law as to preferences is strictly construed. (Roman vs.
Herridge, 47 Phil. 98 [1924].)
(2) Preference does not create an interest in property. It creates
simply a right of one creditor to be paid first the proceeds of the
sale of property as against another creditor. It creates no lien on
5
Consummation of electronic transactions with banks. — Electronic transactions made
through networking among banks, or linkages thereof with other entities or network and
vice versa shall be deemed consummated upon the actual dispensing of cash or the debit
of one account and the corresponding credit to another, whether such transaction is initiated by the depositor or by an authorized collecting party. The obligation of one bank,
entity, or person similarly to another arising therefrom shall be considered absolute and
shall not be subjected to the process of preference of credit. (Sec. 16, R.A. No. 8792, the
Electronic Commerce Act of 2000.) The foregoing shall apply only to transactions utilizing the automated teller machine switching network. (No. 16, Implementing Rules and
Regulations of the Act.)
CONCURRENCE AND PREFERENCE OF CREDITS
513
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 [1915].)
(3) The law does not give the creditor who has a preference,
a right to take the property or sell it as against another creditor. It
is not a question of who takes or sells; it is one of the application
of the proceeds after the sale — of payment of the debt. (Ibid.)
(4) The right of preference is one which can be made effective
only by being asserted and maintained. If the right claimed is
not asserted and maintained, it is lost. Unless the property has
actually been seized by one creditor and a right of preference in
application of the proceeds of the sale thereof has been asserted
by another, an action to obtain a declaration of preference will
not lie. If the property has not been seized, it is open to seizure
by another. (Ibid.)
(5) Where a creditor released his levy, leaving the property
in possession of the debtor, thereby indicating that he did not
intend to press his claim further as to that specific property, after
that act, his claim to preference, if one had been asserted by him,
could not exist because he had ceased to contest. He did not
maintain. He, in effect, abandoned, at least at that moment, any
claim of preference. (Ibid.)
When rules on preference of credits
applicable.
The rules on preference of credits apply only where two or
more creditors have separate and distinct claims against the same
debtor who has an insufficient property. Indeed, it is a matter of
necessity and logic that the question of preference should arise
only when the debtor’s assets are insufficient to pay his debts in
full. For, if debtor A is able to pay all his three creditors B, C, and
D, no need shall arise in determining which of the three creditors
shall be paid first or whether they shall be paid out of the proceeds
of a specific property. (Pacific Farms, Inc. vs. Esguerra, 30 SCRA
684 [1969].)
Indubitably, the preferential right of credit attains significance
only after the properties of the debtor have been inventoried
514
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
and liquidated, and the claims held by his various creditors
have been established. (Barretto vs. Villanueva, 6 SCRA 928
[1962]; Philippine Savings Bank vs. Lantin, 124 SCRA 476 [1983];
Development Bank of the Phils. vs. National Labor Relations
Commission, 183 SCRA 328 [1990].)
Preference of credit and lien
distinguished.
A distinction should be made between a preference of credit
and lien.
A preference applies only to claims which do not attach
to specific properties. A lien creates a charge on a particular
property. Thus, the right of first preference as regards unpaid
wages recognized by Article 110 of the Labor Code (see Arts. 2237,
2244.) does not constitute a lien on the property of the insolvent
debtor in favor of workers. It is but a preference of credit in
their favor, a preference in application. It is a method adopted
to determine and specify the order in which credits should be
paid in the final distribution of the proceeds of the insolvent’s
assets. It is a right to a first preference in the discharge of the
funds of the judgment debtor. (Development Bank of the Phils.
vs. National Labor Relations Commission, supra; and 236 SCRA
117 [1994]; see however, Philippine National Bank vs. Cruz, 180
SCRA 206 [1989], infra.; Barayoga vs. Asset Privatization Trust,
473 SCRA 690 [2005].)
Credits must be due.
The Title on “Concurrence and Preference of Credits” refers
to credits which are already due. That is why it opens with the
mention of the “fulfillment of his obligations” in Article 2236
which does not take place except when the obligations are already
demandable. (see Jacinto vs. De Leon, 51 Phil. 992 [1928].)
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Chapter 1
GENERAL PROVISIONS
ART. 2236. The debtor is liable with all his property,
present and future, for the fulfillment of his obligations,
subject to the exemptions provided by law. (1911a)
Liability of debtor’s property
for his obligations.
The creditors have the right to pursue the property in
possession of the debtor to satisfy their claims. They are given
the right to exercise all the rights and bring all the actions of the
latter for the same purpose, save those which are inherent in his
person; and impugn the acts which the debtor may have done to
defraud them. (Art. 1177.)
As a rule, a debtor is liable with all his property, present and
future, for the fulfillment of his obligations. To this rule, the law
provides for property which are exempt from such fulfillment.
Exempt property.
(1) Present property. — With respect to present property of the
debtor, exemptions are established in the following provisions:
“Art. 152. The family home, constituted jointly by the
husband and the wife or by an unmarried head of a family, is
the dwelling house where they and their family reside, and
the land on which it is situated. (Family Code [Exec. Order
No. 209, as amended].)
Art. 153. The family home is deemed constituted on
a house and lot from the time it is occupied as a family
515
516
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
Art. 2236
residence. From the time of its constitution and so long as
any of its beneficiaries actually resides therein, the family
home continues to be such and is exempt from execution,
forced sale or attachment except as hereinafter provided and
to the extent allowed by law. (Ibid.)
Art. 154. The beneficiaries of a family home are:
(1) The husband and wife, or an unmarried person who
is the head of a family; and
(2) Their parents, ascendants, descendants, brothers and
sisters, whether the relationship be legitimate or illegitimate,
who are living in the family home and who depend upon the
head of the family for legal support. (Ibid.)
Art. 155. The family home shall be exempt from execution,
forced sale or attachment, except:
(1) For non-payment of taxes;
(2) For debts incurred prior to the constitution of the
family home;
(3) For debts secured by mortgages on the premises
before or after such constitution; and
(4) For debts due to laborers, mechanics, architects,
builders, materialmen and others who have rendered service
or furnished material for the construction of the building.
(Ibid.)
Art. 205. The right to receive support under this Title [VIII]
as well as any money or property obtained as such support
shall not be levied upon on attachment or execution.” (Ibid.)
“Sec. 13. Property exempt from execution. — Except as
otherwise expressly provided by law, the following property,
and no other, shall be exempt from execution.
(a) The judgment obligor’s family home as provided
by law or the homestead in which he resides, and land
necessarily used in connection therewith;
(b) Ordinary tools and implements personally used by
him in his trade, employment, or livelihood;
Art. 2236
CONCURRENCE AND PREFERENCE OF CREDITS
General Provisions
517
(c) Three horses, or three cows, or three carabaos, or
other beasts of burden, such as the judgment obligor may
select, necessarily used by him in his ordinary occupation;
(d) His necessary clothing, and articles for ordinary personal use, excluding jewelry;
(e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment debtor may
select, of a value not exceeding one hundred thousand pesos;
(f) Provisions for individual or family use sufficient for
four months;
(g) The professional libraries of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three
hundred thousand pesos in value;
(h) One fishing boat and accessories, not exceeding
the total value of one hundred thousand pesos, owned by
a fisherman and by the lawful use of which he earns his
livelihood;
(i) So much of the salaries, wages, or earnings of the
judgment debtor for his personal services within the four
months preceding the levy as are necessary for the support
of his family;
(j) Lettered gravestones;
(k) Moneys, benefits, privileges, or annuities accruing or
in any manner growing out of any life insurance;
(l) The right to receive legal support, or money or
property obtained as such support, or any pension or gratuity
from the government;
(m) Properties especially exempted by law.
But no article or species of property mentioned in this
section shall be exempt from execution issued upon a
judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.” (Rule 39, Rules of Court.)
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TRANSACTIONS
Art. 2237
“Sec. 118. Exception in favor of the Government or any of
its branches, units, or institutions, land acquired under free
patent or homestead provisions shall not . . . become liable to
the satisfaction of any debt contracted prior to the expiration
of said period [a term of five years from and after the date of
the issuance of the patent or grant] . . .” (The Public Land Act
[C.A. No. 141, as amended].)
(2) Future property. — With respect to his 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], infra.)
(3) Property in custodia legis and of public dominion. — Property
under legal custody (Springer vs. Odlin, 3 Phil. 344 [1903].) and
those owned by municipal corporations necessary for governmental purposes (Viuda de Tan Toco vs. Municipal Council of
Iloilo, 49 Phil. 52 [1926].) have been held exempt from attachment or execution.
ART. 2237. Insolvency shall be governed by special
laws insofar as they are not inconsistent with this Code.
(n)
Insolvency governed by special laws.
By virtue of the above provisions, the Civil Code prevails in
case of conflict with special laws on insolvency unless otherwise
provided in the latter. The Insolvency Law is Act No. 1956, as
amended. (infra.)
Under the Labor Code (Art. 110, Pres. Decree No. 442, as
amended by R.A. No. 6715.), “in the event of bankruptcy or
liquidation of an employer’s business, his workers shall enjoy
first preference as regards unpaid wages and other monetary
claims, any provision of law to the contrary notwithstanding.
Such unpaid wages and other monetary claims, shall be paid in
full before claims of the government and other creditors may be
paid.” The amendment expands the workers’ preference to cover
Arts. 2238-2239
CONCURRENCE AND PREFERENCE OF CREDITS
General Provisions
519
not only unpaid wages but also other monetary claims to which
even the claims of the Government must be deemed subordinate.
(Development Bank of the Phils. vs. National Labor Relations
Commission, 183 SCRA 328 [1990] and 242 SCRA 59 [1995]; see
Art. 2244.)
Insolvency proceedings, as well as liquidation proceedings
have only one aim — to conserve all the remaining assets of the
insolvent/liquidated person/corporation for distribution to the
creditors, after payment of taxes.
ART. 2238. So long as the conjugal partnership or absolute community subsists, its property shall not be among
the assets to be taken possession of by the assignee for
the payment of the insolvent debtor’s obligations, except
insofar as the latter have redounded to the benefit of the
family. If it is the husband who is insolvent, the administration of the conjugal partnership or absolute community
may, by order of the court, be transferred to the wife or to
a third person other than the assignee. (n)
Exemption of conjugal partnership or
absolute community property.
The assets of the conjugal partnership or the absolute
community do not pass to the assignee in insolvency elected by
the creditors or appointed by the court as they do not belong to
the individual spouses, but a distinct entity: the partnership or
the community. The exemption applies provided that:
(1) the partnership or community subsists; and
(2) the obligations of the insolvent spouse have not redounded to the benefit of the family.
The insolvency of the husband does not have the effect of
dissolving the conjugal partnership or the absolute community.
(Art. 2238, 2nd sentence.)
ART. 2239. If there is property, other than that mentioned in the precedin