CREDIT PRE-FI

Contracts of Security

The same consideration that supports the

principal obligation supports the undertaking of
the security obligation.

Basis & Rationale

CASES:

Q: I am the debtor you are the creditor, at the same

time I am a creditor of X who owes me 500 pesos, If I
cannot collect from X, what are the remedies of the
creditor?

PACIFIC BAKING vs IAC

-

A: exercise subragatory rights. (wako kasabot, absent

ko ani, pero dini mugawas intro rani.)

Q: I owe you 1M and in order to avoid paying my

obligation, I fraudulently alienate some of my
properties. What are your remedy as creditor?

A: accion pauliana. because my action of fraudulently

alienating my property is prohibited by the civil code. A
recissible contract entered to defraud a creditor. You
can ask here the recission of the contract.
Q: what if I incur an additional obligation not from you,
can you prevent me from incurring an additional
obligation?

ZOBEL vs CA
-

A: you cannot.

Q: what if validly alienate some properties? Can you

still prevent me? As a creditor what will you do?

A: Ask a security from me.

Kinds of Security contracts
1.

2.

Personal Security

Ordinary Guarantee - When another

person binds himself to pay an
obligation, in case I cannot pay.

Suretyship - If a third person bind

himself SOLIDARY WITH ME in the
obligation (person is called a SURETY).
i. Considered as a Solidary debtor
and so you can go after the
surety for the entire payment.
Real Security

property put up as security of the

obligation

this does not mean that the property is

given for the payment of the obligation
for that would be a DATION in pago.

Here in case of default you will SELL

and apply the proceeds to the
obligation.

You do not become automatically the

owner of the property in case of default
because that is prohibited, that is
called, PACTUM COMMISSORIUM.

Cause

Since this is a security undertaking there is no

need for a separate consideration be given.

here, roselia here applied for a credit card, at the

time it was required that a person secures the
obligation of the credit card holder.
Then who better to support the obligation but the
loving and supporting husband. So he signed the
guarantors undertaking.
But in the undertaking he bound himself JOINTLY &
SEVERALLY, cause if you read the title the contract
which is guarantors undertaking you would think
that he bound himself subsidiary only as a
guarantor but in fact the terms say it was solidary.
SC RULED: You are not bound as a guarantor but
as a SURETY. You are principally liable.

spouses here obtained a loan from SOLIDBANK, to

purchase a barge, the loan were both secured by a
personal and real security.
You have a CONTINUING GUARANTEE & CHATTEL
MORTGAGE
Upon default solidbank went after zobel who
secured by zobel. ZObel argued you cannot claim
from us because we cannot be subrogated to the
bank because of the banks fault of failure to
register the mortgage. The mortgage therefore is
not effected.
SC RULED: Well you are right. You would have
been released from your obligation If you were a
GUARANTOR. BUT when you signed a CONTINUING
GUARANTEE you are actually to be bound as a
surety. The terms are

"For and in consideration of any existing

indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of
legal age, married and with business address x x x
(hereinafter called the Borrower), for the payment
of which the undersigned is now obligated to
you as surety and in order to induce you,..

take note of the title of the document in both

cases the word guaranty is found but yet in both
case the court found that it was in fact a surety
not as ordinary guarantors.

MACHETTI CASE
-

SC RULED: there are instances when a person

signs in a guarantors undertaking but really
undertaking of that as a surety. But that is not
found in the case because here the undertaking
was PURELY OF THAT OF A GUARANTOR not a
surety.

FOR EH 405 13-14

the guarantor only binds himself to pay if the

principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the
debtor. This latter liability is what the Fidelity and
Surety Company assumed in the present case.
The undertaking is perhaps not exactly that of a
fianza under the Civil Code, but is a perfectly valid
contract and must be given the legal effect if
ordinarily carries. The Fidelity and Surety
Company having bound itself to pay only the
event its principal, Machetti, cannot pay it follows
that it cannot be compelled to pay until it is shown
that Machetti is unable to pay.
GUARANTY

is a accessory, subsidiary, consensual and either

gratuitous or onerous contract.

Accessory because it cannot exist without a prior

VALID obligation secured by the guaranty.
Q. what if there is a recissible contract, can it be
secured by a guarantee?
A. YES. It is a valid contract although defective.
Valid until rescinded.

Subsidiary because the guarantor is liable only if

the debtor cannot pay unless the guarantor binds
himself as a surety.

Guaranty vs Surety
CASTELLVI vs SELLNER

SC RULED: Sellner is not bound with the principals

by the same instrument executed at the same
time and on the same consideration, but his
responsibility is a secondary one found in an
independent collateral agreement, his obligation is
that simply of a guarantor.

It does not mean that if the undertaking is

contained in the SAME document containing the
principal obligation that the undertaking is that of
a surety.

There can be instances when you have a principal

obligation secured by a ordinary guarantee only.

Usually, if you find a signature of a co-maker, then

the undertaking of the co-maker is that of a surety.
Example ani kana note sa mga teacers: teachers
gi seduce sa mga lending companies, so each
teacher would be co-maker of the other. So
nahitabo na matay ang us aka co-maker reclamo
usa na wala mankoi nadawat ana na utang.
WRONG. as a co-maker you are solidary liable.

SO THE POINT HERE IS THAT: it does not mean that

if it is an ordinary undertaking of guaranty that it

must be contained in the same document

containing the provisions of the principal
obligation. WHAT IS IMPT. That the undertaking is
CLEARLY SPECIFIED whether it is of an ordinary
guarantor or that of a surety.

Liability where company president signed as

guarantor

Q. Now if you are a President of a corporation that

obtained a loan from the bank, undersigned as a
guarantor and also signed as the president, separate
undertaking para dili libog. If the corporation defaults
on its obligation, can the president be held liable as a
SURETY? If you are the president and at the same time
a majority stockholder of the corporation and you
signed as guarantor, can you be held as a surety? Total
murag imo naman na ang corp kay kaw man maj.
Holder, it is as if you and the corporation are one, can
the creditor do that?
-

SC: NO. there mere fact that you are the president
and at the same time the majority stockholder,
does not automatically make you a surety if you
merely signed as a guarantor. Moreover, there is a
doctrine in corporation law called the DOCTRINE
OF SEPARATE ENTITY, which states that the debt of
the corp is not the debt of its officers or
stockholders even if majority stockholder.

SOLIDARY DEBTOR vs SOLIDARY GUARANTOR

Now even if a person binds himself solidary with the

principal debtor, and therefore he is govern by the
rules of solidary obligation, it does not erase the fact
that he is a guarantor.

If you are a surety and you pay the obligation you can
recover the entire amount from the debtor. Unlike the
rules of solidary obligation where a solidary debtor can
recover only the portion paid which is the share of the
co-debtor. In here, the solidary guarantor can recover
the ENTIRE amount from the debtor, in the sense that
he was not obligated in the original obligation. He is
just a solidary guarantor.

But we are more interested in this statement:

the solidary guarantor has an action for counter bond

while a solidary debtor is limited only to an action
contribution by the other co-debtor

WTH is a counter bond??

Ex. X owes you 1M, I bind myself solidary with X, I am
here a solidary guarantor, take note I am not a
principal debtor, it is X who is the principal debtor. Im
just a solidary guarantor.

So X owes you 1M. I secure his obligation, as a

guarantor. I called you over the phone ayaw ka
balaka, akoi mu guarantiya ana ana pud ka cge ha,
lawyers oath. So wala manka bayad, so you call me
and ask me to pay. Ana pud ka na joke rman to dko oi!
Wjud koi ndawat adto. Can you compel me to pay?

1.

is the undertaking valid? YES. Valid & Binding

BUT unenforceable usa sya sa Statute of Fraud.
It must be in writing for there to be
enforceability.

What is my right? TO RECOVER THE FULL AMOUNT

THAT I PAID if ever I am to be made to pay the
obligation.
2009 BAR QUESTION:

How will I be assured that I will be reimbursed?

Q. TRUE or FALES.
I will require X to put up another security that I can go
after in case I will not be reimbursed. So you have a
MAIN guaranty which I make in favor of X, and a SUBguaranty in my favor in case I will not be reimbursed.
This is a COUNTER BOND or INDEMNITY AGREEMENT.
Not essential to the surety ship, may be made before
or during the surety/guaranty.

An oral promise of guaranty is VALID and BINDING.

A. TRUE.

PHIL. GEN vs MUTUC

This is a case about a seaman, Phil gen. the guarantor

in favor of the seaman is going after the indemnity
debtors, because guarantor syah dri and there was a
indemnity agreement in his favor, and phil gen was
forced to pay the guaranty because the seaman
jumped shipped. So philgen tried to recover from the
indemnitors, this is actually an example of a COUNTER
BOND.

CONSENSUAL

Now, guaranty is a consensual contract just like a

contract of sale, not like a loan or deposit, which is a
real. It is therefore perfected the moment there is an
agreement between the guarantor and the creditor.
Debtors consent is not required to constitute a
guaranty, bahalag mag wild pana dra ang debtor dra. It
does not affect the validity of the contract.

GRATUITOUS or ONEROUS
The presumption is that if there is no mention of any
particular consideration to the guarantor then it is
gratuitous.
The guarantor cannot claim that he was not paid by the
agreed compensation therefore he is not bound. This is
in the case of PHIL. PRYCE ASSURANCE CORP. vs CA.
SEVERINO vs SEVERINO
The obligation secured here is the obligation of
Guillermo to pay his half sister and stepmother and this
was also secured by mr. chaos. When mr. severino
failed to pay the last installment, the sister sued mr.
chaos. So mr. chaos said I did not receive any
compensation for my undertaking so im not bound.
SC held: There is no requirement that you must be paid
a valuable consideration, you are bound because causa
that supports a principal obligation was supported,
which was obligation of mr. severino.

FOR EH 405 13-14

IF WITH CONSENT: then he is subrogated to the rights

of the creditor.
This same rule applies to guaranty.

KINDS
A.

By its origin
CONVENTIONAL- constituted by contract
LEGAL- required by substantive or procedural
law
JUDICIAL- required by a court from a litigant

B. By its extent
INDEFINITE or UNLIMITED or SIMPLE- cover the
principal obligation, accessories and cost
incurred after the guarantor has been judicially
asked to pay.

If the guaranty is given without the

knowledge or consent of the debtor,
Articles 1236 and 1237 apply.
A guarantor can recover from
the debtor what the former had to pay
the creditor, even if the guaranty was
without the debtors consent or against
his will, but the recovery will only be to
the extent that the debtor had been
benefited.

LIMITED- guaranty that excludes the accessory

obligation
Again, Guaranty can be constitute even without the
consent of the principal debtor because in the case of

By the person guaranteed

Guaranty proper

Sub-guaranty
(to
guarantee
guarantors solvency)
By the liability of the guarantor
NORMAL or ORDINARY- simple
guarantee proper; subsidiary
SOLIDARY- suretyship

the

guarantee;

A guarantor is the insurer of the solvency of the

debtor; binds himself to pay if the principal is
unable to pay.
A surety is the insurer of the debt; he
undertakes to pay if the principal does not pay.
MACHETTI vs HOSPICIO
Court said the guarantor is the insurer of the debtors
solvency. Whereas a surety is the insurer of the debt.
Meaning the liability of the guarantor only arises when
the debtor cannot pay.
The surety is the insurer of the debt. He is liable as
long as the debt is not paid. Regardless if the debtor
can pay or cannot. Liability is primary. For as long as
the debt is not paid he is liable.
In guaranty the guarantor will only pay if the debtor is
unable to pay. That is why he is called the insurer of
the insolvency of the debtor.
PNB vs LUZON

DE GUZMAN vs SANTOS
The principal debtor here refused to reimburse the
guarantor of the amount paid by the guarantor
because he never gave his consent to the undertaking.
SC HELD: NO. You were benefited. Even if the debtor
did not consent the debtor is still liable to the
guarantor.
RULE IF DEBTOR DOES NOT GIVE CONSENT: The
guarantor can only recover to the extent that the
debtor is benefited.
OBLICON: the creditor is not bound to accept payment
or performance by a third person who has no interest in
the fulfillment of the obligation, unless there is
stipulation to the contrary.
Whoever pays for another MAY DEMAND from the
DEBTOR WHAT HE HAS PAID, except if he paid without
the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been
BENEFICIAL to the debtor.

Court said where the surety bond appears that it states

that the surety binds itself jointly and severally with the
obiligor the liability is that of suretyship.
Q. X obtains several of jewelries from you, to be sold
and the proceeds to be turned over to you less
commission. I secure X obligation as a surety. Your
contract with X is agency. And X fails to account the
proceeds of the sale. File kag case against X ug estafa.
The question is, if I bound myself as a surety can you
also sue me for estafa?
A. in a case the court said NO. in other words, the
liability of the surety is purely civil. The surety cannot
be criminally held liable.
Q. X owes you 1M, I guaranteed the obligation as an
ordinary guarantor. X is declared in a state of
suspension of payments. The effect all action against X
is suspended. The question is, can the creditor go after
me the guarantor?
A. NO he cannot. The guarantor becomes liable only if
the debtor cannot pay. He can pay but the payment is
just suspended.

a.
Q. change a bit of the previous, I am now a surety not a
guarantor. Can you sue me?
A. Yes. Because my liability is primary.
Q.Remember that a guaranty is an accessory contract.
What happens if the principal obligation is
extinguished? X owes you 1M. I secure his obligation.
Then you condone his obligation. Can you collect from
me?

When must this integrity be possessed

by the guarantor? I am the guarantor,
you are the creditor, X is the debtor,
and after the constitution of the
guaranty, I am convicted of estafa.
What will you do?
i. You can demand for another
security. Because
Conviction of the guarantor
of
a
crime
involving
dishonesty has the same
effect as insolvency

A. NO. because the principal obligation is extinguished.

Integrity is a matter of opinion
and is required only at the time
of the perfection of the contract.
Its subsequent disappearance
makes it optional in the creditor
to demand another guarantor

Q. what if I secured the obligation as a security. Same

facts. Can you go after me?
A. NO. because the principal obligation is extinguished.
ORALS:
Q. is there any particular qualification required of a
guarantor? Is there any Minimum requirement to be a
guarantor?

A.
1.
2.

3.

He must be capable of contracting obligations

He must have sufficient property to answer for
the debt guaranteed. Must not be insolvent.
a. When is solvency of the guarantor
required?
i. At the point that the contract of
guaranty is constituted.
b. Now what happens if he becomes
insolvent after the constitution of the
guaranty
and
before
of
the
extinguishment
of
the
principal
obligation of the guaranty?
i. The creditor can require that
another
guaranty
be
constituted. Require the debtor
to provide another guaranty.
c. What if the debtor fails to provide
another guarantor? You have an
obligation with a period secured by a
guaranty then the guarantor becomes
insolvent, the creditor may demand
from the debtor to give another
security. In relation to that obligation
with a period, what is the remedy of
the creditor if the debtor fails to
provide with another guarantor?
i. He can consider the principal
obligation to be demandable at
once. Because the effect if the
debtor fails to provide a
security in relation to that
obligation with a period, THE
DEBTOR LOSES THE RIGHT
TO ENJOY THE BENEFIT OF
THE USE OF THE PERIOD,
therefore
the
obligation
becomes DEMANDABLE and
DUE.
He must possess integrity (honesty):

Q. If the guarantor is chosen by the creditor, must the

guarantor possess all qualification of a guarantor?
A. the guaranty is for the benefit of the creditor that is
why if the guarantor is chosen by the debtor he must
prove that he has all the qualification required. If chose
or proposed by the creditor himself, he may waive the
special qualifications.
Now since guaranty is a contract, then the 3 essential
elements of contract must be present. Consent, in a
contract of guaranty the consent of the creditor & the
guarantors is required.
TEXAS vs ALONZO
Q. Why was alonzo absolved from his undertaking as a
surety?
A. there was no acceptance by TEXAS of the guaranty
made by Alonzo for the contract.
Q. Cant it be inferred that when Alonzo signed the
undertaking that the contract of suretyship was already
perfected?
A. No. acceptance should not be inferred but must be
made in a specified form.
The bond in question was executed at the request of
the petitioner 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
herewith 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."
In view of the foregoing clause which should be the law
between the parties, it is obvious that, before a bond is
accepted by the petitioner, it has to be in such form
and amount and with such sureties as shall be

FOR EH 405 13-14

satisfactory thereto; in other words, the bond is subject

to petitioner's approval.
The logical implication arising from this requirement is
that, if the petitioner is 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.
So in this case Texas must have notified the
acceptance which they did not therefor Alonzo was not
held liable of the obligation of bantog the debtor.
Q.What is the effect on the suretyship as a contract if
texas did not manifest its satisfaction of Alonzo offer to
the undertaking?
A. the surety on the contract will not be valid because
there was no consent. So even if Alonzo consented to
act as a surety, texas did not manifest its consent to
the offer of Alonzo to act as surety so then there is no
consensual contract of surety that was constituted.

EFFECT OF
PREMIUM

PRINCIPAL

HAS

NOT

PAID

THE

Q. X owes you 1M but your require X to put up a

security for the payment of the obligation to pay 1M. X
approaches me to act as the surety. I said I will agree
provided you pay me a consideration for acting as your
surety. So X agreed to pay a tiny compensation of 50K.
so X issues me a check. So I signed the suretyship
agreement and I sent it to you and you accepted. The
check was then dishonored. Plus ni default pajud si X.
so ni demand naka sa ako for the obligation. Was the
surety valid considering that I was not paid?
A. Yes it is still valid. Payment of valuable consideration
to the guarantor to act as one is not essential to the
validity of the guaranty for as long as the creditor
accepted the surety. The causa in a security
undertaking is the same causa that supports the
principal obligation. It is not essential of the security
undertaking in a contract of guaranty that a guarantor
must receive the agreed compensation before he is
bound as long as there is consent already between the
guarantor and the creditor. The contract is already
perfected and the surety is already bound in his
undertaking. (Pryce vs CA)
DEBTS THAT MAY BE GUARANTEED
Q: Can a voidable contract be secured by a guarantee?
A: Yes. Because a voidable contract is valid until it is
vooiiideed. So all valid contracts even if defective can
be secured by a guarantee.

A: they were not liable because the municipal counsel

voided its previous resolution that awarded marasigan
the concession to harvest the bangus and it was in this
concession that there was a surety. So when the
contract was avoided it follows that the surety was
avoided.
Q: but the municipal reinstated the contract?
A: yes. But reinstatement does not carry with it the
revival of the guaranty so by declaring it void the
suretys life ended but what was revived was the
original contract.
Q: Can an accessory contract survive the death of the
principal contract?
A: No because the accessory contract is dependent on
the principal contract.
Q: is this absolute? Isnt there an instance that the
accessory survives the death of the principal contract?
A: YES. NO other instance that accessory survives. It is
absolute that accessory depends on the principal.
Q: isnt it that in Oblicon that extinguishment of the
principal carries with it the accessory, so therefore can
we not infer that revival of the principal carries with it
the revival of the accessory?
A: No. there must have been an express act of reviving
the accessory.
The fishing privilege contract entered into by the
plaintiff and the appellant M.M. on December 11, 1930,
not only was not consummated but was cancelled. This
being so, neither the appellant M.M. nor his sureties or
the other appellants were bound to comply with the
terms of their respective contracts of fishing privilege
and suretyship. This is so, particularly with respect to
the sureties-appellants, because suretyship cannot
exist without a valid obligation (art. 1824 of the Civil
Code), the obligation arising from a cancelled contract
not being a valid obligation.
The obligation whose compliance by the appellant M.M.
was guaranteed by the sureties-appellants A.S. and
G.L., was exclusively which should begin on January 1,
1931, not on the 14th of said month and year,
subsequent contract which the plaintiff and M.M. might
have entered into on or after January 14, 1931.
Guaranty is not presumed; it must be express
and cannot be extended beyond its specified
limits
Q: Must the debts be secured by the guaranty be
existing at the time of constitution of the guaranty?

Municipality of Gasan vs Marasigan

Q: in this case, sevilla and luna were the sureties for
marasigan. And yet, the court said they are not liable
as sureties. Why?

A: Not necessary. The guaranty maybe instituted for a

future debt.
Q: So when can the guarantor be held liable if guaranty
maybe constituted on a future debt?

A: he will only be liable once the debt is LIQUIDATED.

Q: so when is the debt considered liquidated?

A: A debt is liquidated when the amount is known or

is determinable by inspection of the terms and
conditions of the relevant promissory notes and related
documentation. Failure to furnish a debtor a detailed
statement of account does not ipso facto result in an
unliquidated obligation.

Q: what is that provision in the guaranty or the

suretyship undertaking that tells you that this
particular undertaking secures future obligation?

A: when there are such words such as any

indebtedness, or from time to time, which could mean
they securing future obligation which is nominated in
sign
by the
word CONTINUING
SURETYSHIP
AGREEMENT
or
COMPREHENSIVE
SURETYSHIP/Guarantee AGREEMENT

Q: when you have a comprehensive agreement, does

it cover present and future obligation? Can it apply also
previous incurred obligations?

A: Yes. Especially if it is stated in the suretyship

agreement.

You have here, an honorable member of the phil.

Senate. Nakadawat ni sya ug suwat from the senator
na nakasuwat:

TO: The ManagerMacondray & CompanyChina

Bank BuildingManila
Sir: This will introduce to you the bearers, Messrs.
Conrado Piring and Perfecto Pi;on, both well
known theater characters under the names of
"Pugak" and "Tugak", respectively.
I have been made to understand by them in their
representations to me that they wish to place an
order for the following items: 10 rolls Negative at
P157.00 each, and 100 rolls positive at P55.00
each of Dupont Release Positives Safety Basis for
use of their firm called "All Stars Productions"
under the management and control of Pugak and
Tugak payable within three (3) months time ending
April, 1954 and for which by their guaranty I
pledge payment.
Sincerely(Sgd.)RUPERTO
Senator

KANGLEON

then tugak and pugak failed to pay. Can they go after

the senator based on these letter?
SC here said YES. A contract of guaranty is not a formal
contract and shall be valid in whatever form it may be,
provided that it complies with the statute of frauds. So
court here considered the letter of senator kangleon as
a sufficient guarantor undertaking the basis of which
macondray extended credit to pugak.
GUARANTY & SURETY MUST BE EXPRESS AND
CANNOT BE PRESUMED
But even if guaranty need not be in a particular form to
be valid. Guaranty must be expressly agreed by the
parties and cannot be presumed.
WISE CO. vs TANGLAO

FORM

Now we said that guaranty is a consensual contract,

therefore agreement by the creditor and guarantor
already perfects the contract because a verbal
agreement to constitute a guaranty is valid and
binding. However, while it is valid and binding it is
unenforceable because it is a special promise to
answer for the default of another person and therefore
it is covered by the statute of frauds.

MACONDRAY vs PINON

David here was indebted to wise, and in order to avoid

attachment of his properties his lawyer gave a special
power of attorney authorizing david to sign for him as
guarantor & to constitute a mortgage over properties
owned by atty tanglao. So two authorities granted to
sign as guarantor to and in behalf of tanglao to bind
tanglao as guarantor and to bind him also as
mortgagor over properties owned by the lawyer.
But david actually signed ONLY A MORTGAGE
document. So he defaulted in his obligation to wise.
Now wise want to hold tanglao liable on his SPA.
SC said NO. the SPA is not the guarantors undertaking.
The SPA merely authorize david to sign the undertaking
and the mortgage pero ang na pirma kay ang
mortgage raman wala man apil ang guaranty.

FOR EH 405 13-14

THEREFORE tanglao cannot be held personally liable as

a guarantor. Court ruled here that guaranty must be
EXPRESS and cannot be presumed.
TERMS OF A CONTRACT OF SURETYSHIP
DETERMINE
THE
SURETYS
LIABILITY
AND
CANNOT EXTEND TO MORE THAN WHAT IS
STIPULATED THEREIN.
SOLON vs SOLON
Solon undertook to be the guarantor but mentioned as
surety to a debtor. To secure his undertaking as a
surety but actually a guarantor he mortgaged this
particular lot. When defaulted the creditor wanted to
include another lot which was not mention in the
undertaking.

P685.64, and to H.B. Arandia, in the sum of P820.00, or

a total of P1,505.64.
the surety contends: That the bond is void for being
contrary to public policy insofar as it requires the
surety to pay P10,000.00 regardless of the amount of
the salaries of the teachers. 3 It is claimed that to
enforce forfeiture of the bond for the full amount would
be to allow the Government to enrich itself since the
unpaid salaries of the teachers amount to P1,318.84
only. MOREOVER, that it cannot be made to answer for
more than the unpaid salaries of H. B. Arandia, which it
claimed amounted to P720.00 only, because Article
2054 states that
"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.

SC said NO you cannot do that. The terms of a contract

of suretyship determines the suretys liability and
cannot extend to what is stipulated therein. Therefore,
if the creditor should foreclose the mortgage then the
property included in the mortgage in only that property
and cannot include another property which is not
specifically stated in the guarantors undertaking.

SC HELD:

EFFECTS OF GUARANTY

We agree with this contention of the Government.

GENERALLY the guarantor cannot be liable for more

than the obligation of the debtor.

It must be remembered that, by the terms of the bond,

the surety guaranteed to the Government "compliance
(by the Foundation) with all obligations, including the
payment of the salaries of its teachers and employees,
past, present and future, and the payment of all other
obligations incurred by, or in behalf of said school."

Q: So in what instance can a guarantor be liable for

more than the obligation of the debtor?
A: Guaranty is Penal in nature & when surety is liable
for interest.
EXTENT OF LIABILTY WHEN THE BOND IS PENAL
IN NATURE
Q: give an example of guarantors undertaking, which
is penal in nature.
A: GENERAL INSURANCE VS REPUBLIC
FACTS: Central Luzon Educational Foundation, Inc. and
the General Insurance and Surety Corporation posted
in favor of the Department of Education a bond. On the
same day, the Central Luzon Educational Foundation,
Inc., Teofilo Sison and Jose M. Aruego executed an
indemnity agreement binding themselves jointly and
severally to indemnify the surety of "any damages,
prejudices, loss, costs, payments, advances and
expenses of whatever kind and nature, including
attorney's fees and legal costs, which the COMPANY
may, at any time sustain or incur, as well as to
reimburse to said COMPANY all sums and amounts of
money which the COMPANY or its representatives shall
or may pay or cause to be paid or become liable to
pay, on account of or arising from the execution of the
above mentioned Bond." the surety was withdrawing
and cancelling its bond.
It appears that on the date of execution of the bond,
the Foundation was indebted to two of its teachers for
salaries, to wit: to Remedios Laoag, in the sum of

"Should he have bound himself for more, his

obligations shall be reduced to the limits of that of
the debtor."

Now, it is not disputed that even before the execution

of the bond, the Foundation was already indebted to
two of its teachers for past salaries. From the moment,
therefore, the bond was executed, the right of the
Government to proceed against the bond accrued
because since then, there has been violation of the
terms of the bond regarding payment of past salaries
of teachers at the Sison and Aruego Colleges. the right
of the Government to collect on the bond arose while
the bond was in force, because, as earlier noted, even
before the execution of the bond, the principal had
already been in debt to its teachers.
There is nothing against public policy in forfeiting the
bond for the full amount. The bond is penal in nature.
Article 1226 of the Code states that in obligation 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, and the party to whom payment is to be
made is entitled to recover the sum stipulated without
need of proving damages because one of the primary
purposes of a penalty clause is to avoid such necessity.
What We said about the penal nature of the bond
would suffice to dispose of this claim. For whatever
may be the amount of salaries due the teachers, the
fact remains that the condition of the bond was
violated and so the surety became liable for the
penalty provided for therein.

OBLIGATION OF THE SURETY EARNS INTEREST

Q: X owes you 1M, I am the guarantor of his obligation,
and in the undertaking I bind myself to pay X 2M
incase X fails to pay his obligation of 1M. you accepted
it. Have we entered to a perfected contract of
guaranty?
A: it is valid but the amount to be recovered is reduced.
if X defaults in the obligation you can recover from me
1M only not 2M.
Q: X defaults in his obligation of 1M to you, in oblicon
once default interest kicks in. legal interest of 6% will
come in. then you demand from me as surety or
guarantor. Can the creditor demand from the guarantor
the interest on top of the 1M?

A: NO. because the debtor is also not liable to the date

certain.
Q: Can I pay prior to the maturity of the obligation
(surety sya)? The obligation is on ore before may 1.
Today is only jan. 9. No agreement for interest. Surety
pay now. Can I?
A: yes. The surety can pay the creditor. BUT if I pay
prior it becomes due and demandable I cannot yet
demand reimbursement from the debtor. Because the
obligation has not yet matured. Unless, if the debtor
ratifies the payment.

A: yes because it is one of the exceptions.

Q: Now when you demand payment of the loan and he
defaulted, we agreed that interest started to run. Who
is liable to pay that interest?
A.: the principal debtor.
Q: so when the surety paid the interest + the 1M did
the surety become liable for more than the liability of X
the debtor?
A: NO. because X is still liable for the interest because
it was his own default.

DUTY TO NOTIFY OF THE PAYMENT

Q: The Law Requires that I should inform X of the
payment otherwise can raise defenses and refuse to
reimburse me. The question is, WHEN MUST I NOTIFY
THE DEBTOR? Before I pay or After I pay?
A: logically, I should NOTIFY X before I pay. Kay
kung after muana palang si X nah na condone naman
ang obligation. You cannot recover from X but from the
creditor.
PRIVILEGES OF THE GUARANTOR

Q: so what interest are we talking about when you say

that the surety is liable for more than the liability of the
debtor?
A: LEGAL INTEREST of default of SURETY not of the
principal.
Q: when X debt matured you demanded from the
surety payment, because I am surety you can
immediately collect from me. But when the debt
matured the liability of X is 1M. but surety failed to
immediately pay. Am I liable to pay interest?

There are two privileges:

1. Benefit of Exhaustion/Excusion
2. Benefit of Division
Benefit of Exhaustion/Excusion
-

A: Yes the surety is liable

Q: Can the surety collect that from Debtor?
A: NO. because the fault of the running of the interest
is that of the surety. So this is an instance that the
surety is liable for more than the principal obligation
because the surety himself is in default.
WHEN TO PAY
Q: so when must the guarantor pay? Remember we are
talking here of an obligation with a period which is
secured by a guaranty. So when am I liable as a
guarantor?
A: On or after the expiration of the period.
Q: am I liable prior to the due date?

is simply the right granted to the guarantor to

demand that the creditor first exhaust all
properties of the debtor before the creditor can go
after him for payment. After all this is not the
guarantors obligation he merely secured the
payment of the obligation. He is not principally
obligated.
According to paras, the creditor must:
o
exhaust all the property of the debtor,
o he must resort to all the legal remedies
against the debtor,
o he must prove that the debtor is unable
to pay,
o and he must notify the guarantor of the
debtors inability to pay otherwise if the
guarantor is prejudiced due to lack of
notice he cannot be made to pay
unless there is a waiver on the part of
the guarantor.

PROCEDURE:
the creditor must file a case against the debtor
alone
the creditor then shall ask the court to notify the
guarantor of the action

FOR EH 405 13-14

but under the 1997 rules of court it should be the

defendant or the debtor who is allowed by law to
implead a third party which is the guarantor here.
BUT the practice now, is to implead both debtor
and guarantor, and when there is a judgment the
execution must first be satisfied against the debtor
before the guarantor

If the guarantor is impleaded, it is not enough that he

is heard. The law requires the benefit of exhaustion. He
must point to the creditor all levy able properties of the
debtor located within the Philippines only.
Levy able Properties in the Philippines this are
properties not exempt form execution. (those exempt
are: libraries of lawyers, family home and other
mentioned in rule 39 (preview sa pinka taas na rule sa
civpro))
So it is not enough that he invokes the privilege of
exhaustion, he must point to the creditor all levy able
properties of the creditor here in the Philippines.
HOW INABILITY TO PAY IS PROVED
MACHETTI VS HOSPICIO
Court said that one-way of proving the inability to pay
by the debtor is by the return of the writ of execution
which is unsatisfied or by other means.
Fidelity became liable as guarantor for Machetti in this
case because machetti was dropped as a party
because he was declared as insolvent. And by being
dropped from the case no judgement can be rendered
against him. gi declare pud si machetti na ug insolvent.
For the benefit of discussion for benefit of exhaustion,
the court is saying here that one way of proving that
the debtor cannot pay is the return of the writ of
execution unsatisfied. Here you cannot even obtain a
writ of execution because there is now judgment
against the principal debtor that can be executed
because again here machetti was dropped for being
insolvent but the case continued as the guarantor.
The court here said NO YOU CANNOT EXECUTE THE
JUDGMENT HERE AGAINST THE GUARANTOR. You must
prove first that you cannot collect from the debtor, and
one way of proving is the return of the writ of execution
unsatisfied, which was impossible in this case.
Fidelity & Surety Co. having bound itself to pay only in
the event its principal, Machetti cannot pay, it follows
that it cannot be compelled to pay until it is
shown that Machetti is unable to pay.
Such inability to pay 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
Machetti has been declared insolvent in an
insolvency proceeding in which the extent of the
insolvents liability to pay is not determined
until the final liquidation of his estate.

Q: now is it required that the surety or the guarantor be

afforded with the right to be heard before he held
liable?
A: Yes, Even if it is a surety or a guarantor.
EFFECT OF WRIT OF EXECUTION AGAINST SURETY
WHO WAS NOT IMPLEADED
TOWER ASSURANCE vs ORORAMA
The court here said that even if he bound itself
principally with the principal debtor, he still must be
afforded with the opportunity to be heard.
BUT a year after in the case of
FINMAN GENERAL ASSURANCE vs SALIK
The court said here that there is no requirement to be
afforded with the opportunity to be heard because its
relationship with the debtor is such that it is charged
with the knowledge of the liability of the debtor. So
there is no need to implead the surety.
But HOWEVER in this case the surety WAS ACTUALLY
IMPLEADED only that it defaulted that why it seemed
that it didnt have the opportunity to be heard. Gi
summons jud ni sya pero failed to file an answer. So
kung gi summon ka nya waka ni file og responsive
pleading, and so you were defaulted. You in fact denied
yourself the opportunity to be heard.
*SO bali pasabaot jud ni Judge ani i implead jud ang
guarantor or surety as form of notice.
WHEN
IS
AVAILABLE

THE

BENEFIT

OF

EXHAUSTION

It should be invoked the moment demand is

made upon him to pay.

If a case is filed her must invoke the privilege

before the judgment is rendered by the trial court.

If invoked ON APPEAL then it is too LATE already.

BAYLON vs CA
Not assign but it goes like this, X owes you 1M, G
guaranteed the obligation. When defaulted C creditor,
filed a case of collection against X and G. but X could
not be found so X could not be served with summon.
But G was served with summon. So G filed an answer.
The case proceeded against G only. Judgment was
renderd against G (murag sa machetti case). So G
invoked the benefit of exhaustion.
SC said that the judgment cannot be executed against
G. this is because the judgment was rendered against
the principal debtor who was not summoned in the
case. So how can the creditor prove that the creditor
cannot pay therefore no judgment against the principal
debtor.
JN DEVT CORP vs PHIL

10

It is like this, X owes C 1M. G guaranteed the payment.

When X defaulted. G paid. Then sought reimbursement
from X. then X said, you did not invoke the priv. of
exhaustion. Because of that daw X is not liable to
reimburse.
SC said that the privilege of exhaustion is given to the
guarantor. Since it is privilege, it is waive able. Best
way of showing it was waived is that the act of the
guarantor of paying without invoking it. That is why
the debtor cannot invoke this to avoid reimbursing the
guarantor.
WHEN THE
AVAILABLE

BENEFIT

OF

EXHAUSTION

NOT

1.
2.

waiver JN CASE
waiver by agreeing that liability is direct
and immediate - also in the TUPAZ case
where topaz waive the privilege when he
agreed that his liability in the guaranty is direct
and immediate. Without the creditor to take
any steps to exhaust or legal remedies of
execution.
3. Guarantor binds himself solidary a surety
cannot invoke exhaustion of the debtor
because creditor in surety ship the creditor
may go immediately against the surety.
4. Debtor is declared judicially insolvent there is proof that you cannot collect form the
debtor
5. Debtor cannot be sued in the Philippines
because he has absconded
6. Presumed that execution would not result
in the satisfaction of the judgment credit.
this is presumed when other previous writ of
execution were not satisfied so you cannot
expect na ma satisfy pana imo.
BITANGA vs PYRAMID
Court said It must be stressed that despite having
been served a demand letter at his office, petitioner
still failed to point out to the respondent properties of
Macrogen Realty sufficient to cover its debt as required
under Article 2060 of the Civil Code. Such failure on
petitioner's part forecloses his right to set up the
defense of excussion.
This emphasizes that requirement that it is not enough
for the guarantor to invoke the benefit of excusion he
must point out the creditor properties of the debtor.
After pointing out then kuwang pa. then he is liable to
pay under his undertaking as a guarantor.

Effect if one of the two guarantors paid half of

judgment debt.
De Guzman vs. Santos 63 Phil. 371 June 30, 1939
Under Article 1822
of the Civil Code, by
guaranty one person binds himself to pay or
perform
for a third person in case the latter should failed to do
so, and Article 1838 of the Civil
Code provides
that any guarantor who pays for the debtor shall be
indemnified by the latter even if the guaranty have
been undertaken without the debtors knowledge.
Applying the citedprovisions, it is obvious that Santos is
legally bound to pay the plaintiff what he has advanced
to Candelaria upon judgment, notwithstanding the fact
that the bond was given without his knowledge.
Defendants obligation to pay what the plaintiff
had advanced is further sanctioned by the general
provisions of the Civil Code regarding obligations.
Article 1158 of the Civil Code provides that the
payment made by any person whether he has an
interest in the performance of the obligation or not,
and whether the payment is known and approved by
the debtor or whether he is unaware of it, may be
recovered from said debtor.
Any person who makes a payment for the
account of another may recover from the debtor the
amount payment, unless it was made against the
express will of the latter. In the latter case, he can only
recover from the debtor in so far as the payment has
been beneficial to the latter. According to this legal
provision, it is evident that the defendant is bound to
pay to the plaintiff what the latter had advanced to
Candelaria, and this is more so because it appears that
although Lucero executed the bond without his,
knowledge, nevertheless he did not object thereto or
repudiate the same at any time.
And it cannot be logically deduced that the
defendant did not have knowledge of the bond, firstly,
because his properties were attached and attachment
could not have been levied without his knowledge, and
secondly, because said properties were returned to
him and in receiving them he was necessarily apprised
of the fact that a bond had been filed to discharge the
attachment. Judgment affirmed.
When division is not available
-

the benefit of division ceases in the same cases

and for the same causes as that of exhaustion.

Time to invoke benefit

-

same as for the benefit of exhaustion.

Benefit of Division

Rule if each and all guarantors secure the entire debt

General rule: when there are several guarantors for

one and the same debtor and debt, the obligation to
answer for the same is divided among all of them. The
creditor may only claim from each debtor his
corresponding share, unless solidarity has been
expressly stipulated.

Division applies if each and all guarantors secure

the entire debt; but not if each guarantors
answers for a separate portion.

FOR EH 405 13-14

11

SC Ruling:
Mira Hermanos vs. Manila Tobacconists

Facts:
By virtue of a written contract entered into
between Mira Hermanos, Inc., and Manila
Tobacconists, Inc., the former agreed to deliver to
the latter merchandise for sale on consignment
under certain specified terms and the latter
agreed to pay to the former on or before the 20th
day of each month the invoice value of all the
merchandise sold during the preceding month.
Mira Hermanos, Inc., required of the Manila
Tobacconists, Inc., a bond of P3,000, which was
executed by the Provident Insurance Co., on
September 2, 1939, to secure the fulfillment of the
obligation of the Tobacconists under the contract
up to the sum of P3,000.
In the month of October, 1940, the volume of the
business of the Tobacconists having increased so
that the merchandise received by it on
consignment from Mira Hermanos exceeded
P3,000 in value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and in
compliance with that requirement the defendant
Manila Compaia de Seguros, on October 16,
1940, executed a bond of P2,000 with the same
terms and conditions (except as to the amount) as
the bond of the Provident Insurance Co.
On June 1, 1941, a final and complete liquidation
was made of the transactions between Mira
Hermanos and the Tobacconists, as a result of
which there was found a balance due from the
latter to the former of P2,272.79, which
indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a
demand upon the two surety companies for the
payment of said sum.
The Provident Insurance Co., paid only the sum of
P1,363.67, which is 60% of the amount owned by
the Tobacconists to Mira Hermanos, alleging that
the remaining 40% should be paid by the other
surety, Manila Compaia de Seguros, in
accordance with article 1837 of the Civil Code. The
Manila Compaia de Seguros refused to pay the
balance, contending that so long as the liability of
the Tobacconists did not exceed P3,000, it was not
bound to pay anything because its bond referred
only to the obligation of the Tobacconists in excess
of P3,000 and up to P5,000.
Issue:

Whether or not Provident Insurance Co is entitled

to the "benefit of division" provided in article 1837
of the Civil Code

The "benefit of division" provided in article 1837 of

the Civil Code reads as follows:
Art. 1837. Should there be several sureties of only
one debtor for the same debt, the liability therefor
shall be divided among them all. The creditor can
claim from each surety only his proportional part
unless liability in solidum has been expressly
stipulated.
The right to the benefit of division against the cosureties for their respective shares ceases in the
same cases and for the same reason as that to an
exhaustion of property against the principal
debtor.
The statement of the trial court to the effect that
the bond of P3,000 responded for the obligation of
the Tobacconists up to the sum of P3,000 and the
bond of P2,000 responded for the obligation of the
Tobacconists only insofar as it might exceed
P3,000 and up to P5,000, is a finding of fact based
upon the undisputed testimony of the witnesses
called by the defendant Manila Compaia de
Seguros in support of its special defense
hereinbefore quoted. While on its face the bond
given by the Manila Compaia de Seguros
contains the same terms and conditions (except as
to the amount) as those of the bond given by the
Provident Insurance Co., nevertheless it was
pleaded by the Manila Compaia de Seguros and
found proven by the trial court .
The evidence upon which that finding is based is
not only undisputed but perfectly reasonable and
convincing. For, as the trial court observed, there
would have been no need for the additional bond
of P2,000 if its purpose were to cover the first
P2,000 already covered by the P3,000 bond of the
Provident Insurance Co. Indeed, we might add, if
the purpose of the additional bond of P2,000 were
to cover not the excess over and above P3,000 but
the first P2,000 of the obligation of the principal
debtor like the bond of P3,000 which covered only
the first P3,000 of said obligation, then it would
result that had the obligation of the Tobacconists
exceeded P3,000, neither of the two bonds would
have responded for the excess, and that was
precisely the event against which Mira Hermanos
wanted to protect itself by demanding the
additional bond of P2,000. When the Provident
gave its bond and fixed the premiums thereon it
assumed an obligation of P3,000 in solidum with
the Tobacconists without any expectation of any
benefit of division with any other surety. The
additional bond of P2,000 was, more than a year
later, required by the creditor of the principal
debtor for the protection of said creditor and
certainly not for the benefit of the original surety,
which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial
court's conclusion as to the real intent and
agreement of the parties with regard to the bond
of P2,000 given by the Manila Compaia de
Seguros, destroys at the same time the theory of

12

the appellant regarding the applicability of article

1837 of the Civil Code.
That article refers to several sureties of only one
debtor for the same debt. In the instant case, altho
the two bonds on their face appear to guarantee
the same debt co-extensively up to P2,000 that
of the Provident Insurance Co. alone extending
beyond that sum up to P3,000 it was pleaded
and conclusively proven that in reality said bonds,
or the two sureties, do not guarantee the same
debt because the Provident Insurance Co.
guarantees only the first P3,000 and the Manila
Compaia de Seguros, only the excess over and
above said amount up to P5,000. Article 1837
does not apply to this factual situation.

Defenses of the Guarantor

Defenses which pertain to the debtor:

files a case against X to be released from the guaranty.

Now C would be prejudiced if G would be released from
the guaranty because X is becoming insolvent and G is
being released the undertaking. What is the more
equitable action to file so as to not prejudice the rights
of C? kay if mu file ug motion to be released si G mu
file pud ug motion to intervene si C.
A: demand from the debtor a sub-guaranty or
indemnity agreement. Just like subject of PHILGEN vs
MUTUUC.
Instances when the guarantor can file an action to be
released from the guaranty or to demand for a security
to be demanded:
1. the debtor is endanger of becoming insolvent
2. the debtor would try to abscond
3. when a period to which guarantor is bound by
the contract he may seek relief if the period
has already expired
4. if the obligation does not state a maturity and
after 10 years the guarantor may seek to be
relieved from the obligation. Prescriptive period
for written obligations is 10 years to action has
by then already prescribed.

The guarantor may set up against the

creditor all defenses which pertains to the principal
debtor and are inherent in the debt; but not those
purely personal to the debtor.

Q: can the surety also invoke this right?

A: YES. This is also available to the surety despite being
solidary liable.

The surety may invoke fraud, violence,

prior payment, res judicata, prescription and others of
the same class.

RIGHTS OF THE GUARANTOR: After payment by

the guarantor
1.

Defenses
purely
personal;
minority,
incapacity and other vices of consent which the
principal debtor may waive; unless the guarantor was
ignorant of the vice as he could not the waive the
defect.

2.

to seek reimbursement from the principal

debtor
subrogated to the rights of the creditor

Defenses peculiar to guaranty:

Q: if he seeks reimbursement, what can he recover?

A:
1. he can recover the amount he paid
2. legal interest
3. expenses incurred
4. damages when circumstance shows.

Merger, novation, extension of time, etc.,

which invalidates the contract between the creditor
and the surety.

Q: from what point in time is he entitled to interest?

A: from the time notice of payment is given to the
debtor
*BASIG MUGAWAS Ning next topic.

EFFECT OF GUARANTY BETWEEN THE DEBTOR

AND THE GUARANTOR
RIGHTS OF THE GUARANTOR: Before payment by
the guarantor
1.

to
receive
compensation
unless
no
compensation si agreed upon by the parties.
2. To seek relief for security in certain instances
a. How?
i. By an action in court by either
relief or additional security
ii. Directed against the principal
debtor
Q: G guarantor, X debtor, C creditor. G learned that X
the debtor is endanger of becoming insolvent. So G

Q: when is it more advantageous to the debtor to seek

subrogatory rights rather than seek reimbursement?
A: when the debtor is already insolvent. Because,
under subrogation the person subrogated with the
rights of the creditor can go after the mortgage and
foreclose the mortgage. BUT YOU CANNOT go after the
mortgagor personally.
With respect to the mortgage the mortgagees right is
only to foreclose the mortgage unless the third party
mortgagor likewise personally binds himself to pay the
obligation.

FOR EH 405 13-14 13

Even so, it is more advantageous for the guarantor to

foreclose
the
mortgage
rather
than
seek
reimbursement if the debtor is insolvent.
BUT THE ULTIMATE REASON is that if you seek
reimbursement you are only an ORDINARY creditor, and
since this is an insolvency it is not guaranteed you will
be paid with the full amount PREFERRED creditors will
prevail over you. Huwat rka unsa salin. BUT if you step
in the shoes of the creditor and there is a mortgage
which make you a mortgagee over a certain property
you are considered a PREFERRED CREDITOR OVER
THAT PROPERTY. When the particular property is sold
you will be paid first, ang sobra other preferred
creditors and then pinaka salin I pa royal rumble sa
mga ordinary. Thus when insolvent and debtor exercise
subragatory action rather than reimbursement. (Basig
mu gawas ni, spider sense is tingling)
EFFECTS OF
GUARANTORS

GUARANTY

AS

BETWEEN

CO-

Scenario 2: w/ judicial demand by court or insolvency

of debtor

G1 Pays 150K

G2 pays G1 50K

G3 pays G1 50K
Scenario 3: w/ judicial demand by court or insolvency
of debtor + NA INSOLVENT SI G3

A: Yes. When one of the co-guarantors pays the entire

obligation due to judicial demand.
When several guarantors securing the same debt.
GR: Insolvency of one of the co-guarantors does not
result in the remaining guarantors shouldering the
particular share of that particular guarantor.
Also if one guarantor pays the entire obligation he
cannot seek reimbursement from the other coguarantors because he waives the right of division.
EX:
2.

one of the guarantor is ORDERED BY THE

COURT PAY THE OBLIGATION or
INSOLVENCY OF THE DEBTOR

then that co-guarantor cannot invoke the benefit of

division and therefore he must pay. So, although he
paid he can still recover his share from the other
guarantors.
Moreover if after paying one of the Co-guarantors
becomes insolvent the rest of the co-guarantors will
bear the insolvency of his co-guarantor.
Ex.
G1 50k
G2 50K
G3 - 50K
Total debt: 150K
Scenario 1: w/o judicial demand by court or insolvency

G1 pays 150K
G2 pays 75K
Bali gi tunga nlng nila ni G1 ug G2 kay way silbi
nman si G3

EXTINGUISHMENT OF GUARANTY

Q: If you have the benefit of division because you have

several creditors securing the same obligation. We said
that this privilege can be waived which is manifested
by one of the co-guarantors paying the entire
obligation. So if one does that he cannot seek
reimbursement from his co-guarantors because he
waived the benefit. Is there an instance where a coguarantor pays the entire obligation and yet entitled to
seek reimbursement from the other co-guarantors?

1.

G1 Pays 150K
CANNOT RECOVER FROM G2 & G3.

One of the modes of extinguishing guaranty is

the negligence on the part of the creditor. First
instance is, if through negligence the creditor
fails to expose the property of the debtor. The
scenario here is that the guarantor invokes the
benefit of exhaustion. Remember that such
benefit can be waived. In this instance the
guarantor did not claim the benefit.
o He invokes the benefit and pointed to
the creditor the alienable properties of
the debtor which are not exempt from
execution but through negligence, the
creditor did not exhaust the debtors
properties to apply to the payment of
the debtor.
o Later on the debtor becomes insolvent
and therefore the creditor could not
recover the full credit owing to each to
the extent the value of the property
which he did not levy. The guarantor is
released from the guaranty.
o If he failed to levy upon the property,
the value of which is more than enough
to recover the entire obligation, the
guaranty is totally extinguished.
The second instance of negligence on the part
of the creditor is where there are other
securities other than the guaranty.
o If the obligation is secured by a chattel
mortgage and guaranty. You have both
personal guaranty and real guaranty.
What is the right of the creditor with
respect to the chattel mortgage?
o In case of the default on the part of the
debtor, the creditor can foreclose the
mortgage by selling the property on a
public sale and apply the proceeds to
the payment of the principal obligation.
o But in chattel mortgage, it is required
that the mortgage must be registered

14

in the register of deeds. If it is not

registered then it is not a valid
mortgage then you cannot validly
foreclose it.
If the mortgage is not registered then
the one who Is interested in registering
the mortgage is the creditor, not the
debtor and the mortgagor because
mortgage is constituted for the benefit
of the creditor. So that he can collect in
the event that the debtor defaults.

If the creditor fails to foreclose the

mortgage, the guarantor cannot be
subrogated to the rights of the creditor
because the creditor has no right to
foreclose.
o So under Article 2080 of the NCC, if the
guarantor cannot be subrogated with
the rights of the creditor because of the
creditors fault then, the guarantor is
released from his undertaking to
instances of mortgages.
The other mode of extinguishing guaranty is if
the period of the principal obligation expires.
Remember that only obligations with a period
are secured either by guaranty or suretyship or
by real security. Because if it is a simple, pure
and
demandable
obligation
theres
no
requirement of security because you can
always claim money immediately.
o So, obligations that are secured are
obligations with a period.
o If the creditor extends the period of
performance or payment without the
consent of the guarantor, the guarantor
is released.
The problem arises when the debt is to be paid
on installments.
o Rule: Each installment is considered as
a separate and distinct obligation such
that default in one installment does not
result to a default in the subsequent
installment.
o In Villa vs Garcia case, payment of an
installment was extended but it was
subsequently paid. It was the later
installment that was not paid.
o Bosque is indebted to Villa. For the
amount payable, Bosque executed a
promissory note payable in three
installments, with France and Goulette
as sureties. The first installment was
paid on time. The second installment
was paid partially, and promissory
notes were executed for the remaining
balance.
France
and
Goulette
contended that they are released from
liability as sureties because of the

extension of time of the second

installment due.
o And the court said, you were released
from
your
undertaking
on
that
particular
installment
that
was
extended but thats academic because
that was already paid but you were not
released from your obligation over the
subsequent installments.
o You cannot invoke extension of period
in order to relieve you from the
obligation.
When can the guarantors be released from
their undertaking?
o If
the
obligations
is
paid
on
installments.
If
you
have
an
acceleration clause.
o If one installment is extended, you are
in
effect
extending
the
entire
obligation.
o If one installment is extended without
the consent of the guarantor, then the
guarantor is released from the entire
obligation.
o But if the guarantor consents to the
extension of the period, he is not
released.
In the case of Mutuc, Mutuc here is a seaman,
when he signed a contract, he was required to
put up a something like a performance ba by
PhilamGen. And then he jumped ship.
o The risk of PhilamGen to pay the bond
is high because of the seamen who
would jump ship. So Mutuc was
required to make a indemnity bond.
And the indemnity bond cannot be put
up by Mutuc because he is the debtor;
he had no property to offer to cover the
indemnity bond so here comes these
two friends who signed the indemnity
bond with Mutuc as co-makers (mao
ba? Sakto ba? Mao ni ako nadungog)
and then Mutuc jumped from the ship
so PhilamGen was obligated to pay the
bond. So PhilamGen is now seeking
reimbursement because that is the
right of the guarantor to seek
reimbursement from the debtor. The
other debtors refused to pay and there
was also violation of the agreement
and they extended the contract three
times. So they are released from the
obligation.
You read into the contract the extension of the
period in the contract without you signing the
contract; you are in effect consenting to the
extension. Hence you are still bound.

FOR EH 405 13-14 15

Another illustration of an extension of a period

is in the case of Prudencio Spouses vs CA. The
Prudencio sps here did not need the money;
they were just requested by a friend/relative
who was an atty-in-fact for a partnership; that
wanted to get a loan from the PNB but the PNB
would not grant the loan. The Prudencio sps
signed the promissory note on the condition
that the principal debtor would assign
receivables from the government in favor of
the PNB that could sufficiently cover the loan.
But what PNB did was to allow the principal
debtor to collect, instead of government paying
directly to the PNB, can be allowed to pay the
debtor.
o Even if the loan already matured PNB
still allowed the government to pay the
creditor of the principal debtor (sorry
wa nako kasabot hahaha)
o SC said, PNB in effect extended the
period of the note. The question here is
that
remember
under
the
NIL,
accommodation party is considered as
a surety of the party primarily liable or
of the party accommodated.
o The essence of the accommodation
party is that the accommodation party
does
not
receive
any
valuable
consideration for signing as such.
o It is given under NIL that the defense of
no valuable consideration cannot be
invoked by the accommodation party.
o But what made PNB not a holder in due
course because he is an immediate
party and it is through its own act that
it could not collect from the principal
debtor. So personal defenses can be
raised against the PNB. And the
spouses are then released from their
obligation.

PLEDGE
The second kind of security undertaking is what you
call real security undertaking and this includes pledge,
mortgage and antichresis.

Pledge
o I borrowed 20K from you to secure the
payment of my obligation I delivered to
you this computer to you in a pledge.
o Personal property is delivered to the
creditor or to a third person authorized
as a security for the payment of a
principal obligation.
How does pledge differ from chattel mortgage?

Both pledge and mortgage covers

personal property; in chattel mortgage
the property remains in the possession
in the mortgagor not necessarily that
the mortgagor owns the property
because a mortgagor can be a third
person(not sure sa last part! sorry tabian kaayu ko nasapawan sakung tingog
ang tingog ni maam sa recording
hahahaha!); and the pledger need not
be the debtor himself, he can be
another person. And the property
mortgaged is recorded in the chattel
mortgage registry.
If it involves real property then it is called real
mortgage or real estate mortgage. The real
property is subjected as a security for the
fulfillment of the principal obligation.
Characteristics common to pledge, chattel
mortgage and real mortgage:
o 1st. Constituted to secure the fulfillment
of a principal obligation; they are
accessory contracts.
o 2nd. Constituted by the absolute owner
of the thing mortgaged or pledge
because of the possibility that it will be
sold to satisfy payment of its principal
obligation (Under the law on sales, the
seller must be the owner of the
property being sold because the
contract of sale transfers ownership to
be buyer) unlike in commodatum
where the bailor need not be the
absolute owner of the thing bailed. If
the property subject of the pledge or
mortgage is sold to satisfy the principal
obligation necessarily, ownership is
transferred to the highest bidder.
Remember during foreclosure, it is the
property that is being alienated and the
proceeds of the property is used to
satisfy the principal obligation. If the
whole property itself is transferred to
the creditor, that is voyed.
In a case, the sps here objected to the
foreclosure of the mortgage, claiming that a
portion of the property being mortgaged was
already sold to them.
o Court here distinguished the contract
of sale and contract to sell. Court said
you only have a contract to sell which
means your seller here is still the
absolute of owner of the property.
Hence, mortgage was valid. If the
property was already sold under the
contract of sale, then there is nothing
more to mortgage.
o

16

In their contract with the seller, the

contract states that while the sps are
allowed to take possession of the
property, still the ownership (title) of
the property remains with Oakland (the
seller) .
The 1st requisite/characteristic of pledge,
mortgage is that it is constituted to secure the
fulfillment of a principal obligation. Not just like
guaranty, there need not be a separate
consideration paid to the mortgagor to
constitute the mortgage. Because the same
causa that supported the mortgage is the same
causa that supported the principal obligation.
In one case, the court said that a chattel
mortgage can be an accessory contract but
that fact alone does not make the a third-party
mortgagor bound for the principal (debtor?
Obligation? Wa ko kaklarooooo).
So A sues you 1m, I secured the obligation by
executing mortgage in As favor over my
property. I am the absolute owner of a parcel of
land. And I executed a mortgage in Xs
obligation to A. When X defaulted in the
payment of the obligation, A sent a demand
letter to me. Who is liable for the payment of
the obligation? Can you be held personally
liable over Xs obligation?
o As far as I am concerned, the action
you can file is the foreclosure of the
mortgage and you cannot hold me
personally liable like a guarantor or a
surety.
o A third-party mortgagor cannot be held
personally liable to pay the principal
obligation. It is only his property which
will be affected; which will be sold on a
public sale to answer to the principal
obligation.
But you have to qualify future obligation;
chattel mortgage cannot secure future
obligations.
Can mortgage be constituted to secure
obligations?
o Real mortgage can secure future
obligations. Just like guaranty.
What do you call that stipulation in the contract
of guaranty where the guarantor undertakes to
secure not only the current obligation but also
such other obligations that maybe incurred by
the debtor?
o Continuing Guaranty or Comprehensive
Guaranty
o The equivalent in mortgage or real
estate mortgage is the dragnet clause
or the blanket mortgage clause.
Even if you have a dragnet clause and
subsequently, an obligation is incurred by the
o

debtor and that particular obligation is secured

by a distinct security undertaking and even if
you have a prior dragnet clause then you go
after the security undertaking first to satisfy
this particular obligation. This is the reliance
on security test. (Take note, wala pa gawas
sa bar in relation to the dragnet clause.)
The 1st requisite/characteristic of pledge,
mortgage is that it is constituted by the
absolute owner. In DBP vs CA the property was
not owned by the mortgagor at the time of the
constitution of the mortgage. They only had an
approved
sales
application
from
the
government so they were awarded a title yet.
The court said, the mortgage is not valid
because the mortgagor is not the absolute
owner of the property mortgaged.
But there are properties which are not yet
covered by the Torrens system, but are only
evidenced by the tax declarations, etc. If the
bank forecloses the mortgage, can the
mortgagor question the mortgage? Or is it
valid?
o In Land Titles, tax declarations are not
conclusive evidence or absolute proof
of
ownership.
(does
not
prove
ownership diba?)
o
Maam: Okay ra siguro if walay
moreklamo?
But the NCC requires
absolute ownership and the tax
declaration is not the proof of absolute
ownership.
o If the mortgagor is not the absolute
owner of the property mortgaged, and
subsequently
the
property
was
foreclosed, then the foreclosure will be
declared void. If the foreclosure was
already concluded, and the property
awarded to the buyer will not be
transferred. He cannot invoke good
faith.
Constituted by the person having predisposal
or personally legally authorized to constitute
pledge or mortgage. In this case, yes, the
mortgagor was legally authorized that the
properties that would be subjected to the
mortgaged was listed in the SPA and the
property mortgaged was not among those in
the list, that person is not legally authorized in
that particular property. The mortgage is void.
If there is a foreclosure, the same is void. If the
property was already awarded to the highest
bidder, he cannot acquire title over the
property.
If you have a third-party pledger or third-party
mortgagor, unless he personally undertakes or
likewise undertakes to pay the principal
obligation then this third-party pledger or third-

FOR EH 405 13-14 17

party mortgagor cannot be liable for the

principal obligation.
Even if you register the mortgage (this is a
requirement for mortgages), that is still void if
the mortgagor is not the absolute owner of the
property mortgaged.
The pledge and mortgage are indivisible even if
the principal debt is divided.
Secured by a mortgage over four parcels of
land and you have a little dragnet clause here,;
first debtor obtained a loan from a creditor
500k and because you have a dragnet clause,
you obtained another obligation of 250k; and
then another loan of 500k. 500k was paid and
the value of each parcel is about 1m. Can
debtor who is also the mortgagor, demand that
the mortgage be partially released, one of the
parcels of the land because the remaining
parcels of land are enough to satisfy for the
balance of the obligation?
o No because that mortgage although
covering several parcels of land, it was
delivered indivisible. It cannot be
released for as long as the entire
obligation is not paid.
If the debtor dies, survived by heirs, so heir 1
pays a share in a debt to the creditor, can he
ask the creditor to release on part of the
mortgage in so far as the share of the party as
concerned?
o No, because of the indivisibility of the
mortgage.
Creditor dies and is survived by heirs 1, 2 and 3
and heir 1 receives his share in the credit
because he was paid partial payment from the
debtor. Can the debtor compel for the partial
release of the mortgage?
o No. The entire mortgage subsists for as
long as the entire obligation is not paid.
Remember that in guaranty there is a benefit
of exhaustion. Can the mortgagor invoke that
benefit?
o No.
In pledge and mortgage the property is
subjected as a security for the payment of the
principal obligation. Can the parties agree that
in case of default, the creditor becomes the
owner
of
the
property.
No,
pactum
commissorium is prohibited.
o Automatic appropriation of the property
secured to the creditor without
foreclosure during default of the
debtor. Pactum Commissorium
What happened in number two? (ha?) A
mortgage contract is signed and at the same
time, a deed of sale is signed at the time of the
constitution of the mortgage. And the provision
of the mortgage stipulates that in case the

obligation is not paid, deed of sale becomes

effective. No other act on the part of the
mortgagor to transfer ownership. This is
Pactum Commissorium.
Granting the creditor to enforce dacion en
pago, it was previously agreed at the time of
the constitution of the mortgage, and at the
time of the default, there is no other act of the
pledger or mortgagor, to transfer or to effect
the dacion en pago. This is Pactum
Commissorium.
But if the stipulation, the mortgagor, still has to
transfer
ownership,
NOT
Pactum
Commissorium.
Stipulation that the creditor still has to buy the
subject property mortgage. That is not
automatic appropriation.
A stipulation failure entitles the lender to the
sale of the house, not to make effect the deed
of sale that they signed. There is still a
subsequent act to be perfomed on the part of
the mortgagor. NOT Pactum Commissorium.
A promise to assign, still has to assign the
property
mortgaged,
NOT
Pactum
Commissorium.
Indivisibility of the mortgage does not apply if
properties are specifically assigned to a certain
portion of the obligation. Like this particular
parcel of land secures 100k, another land
secures 100m.
Is a promise to constitute the pledge or
mortgage (what?). I promise to deliver this
thing to you in pledge to secure payment of my
loan to you for 20k but I have not delivered the
thing but I promise. Ni-mature nalang wala pa
ko ka-pay. You cannot sell the thing in a public
sale as a pledgee because pledge is a real
contract. The delivery of the thing perfects the
contract of pledge. Hence, there was no
contract of pledge. You action is a personal
action to constitute the pledge (ah like specific
performance? er) if you only have a promise
to constitute the pledge/mortgage.
o Your right as a creditor is only a
personal right to compel the debtor to
constitute the pledge or the mortgage
because no mortgage or pledge has in
fact been constituted.

January 29, 2014

In a contract of pledge we are talking here of

voluntary pledge, so there must be delivery of
the thing either to the creditor or to a third
person by common agreement. Contract of
pledge is a real contract not a consensual
contract. Although there can be a consensual
contract to constitute pledge but if thats the
only contract that you perfected you cannot

18

effect the foreclosure sale later on should the

debtor default on the payment of the principal
obligation. You must have perfected contract of
pledge.
Rights of the pledgee in a consensual contract
to constitute the pledge:
o Right to specific performance that is to
compel the pledgor to deliver the thing
and once delivery is made the real
contract of pledge is perfected.
If it is constituted by the absolute owner of the
property, what if it is the stand of the owner
who delivers the movable to the creditor, is the
pledge perfected?
o No, unless he is authorized thats why
in this case involving a Cebuano and a
Boholano. Mike here is a tenant of Atty.
Calibo in Bohol who was not able to pay
the rentals and utilities of the dwelling
place that he was renting and to secure
his payment of the utang, he delivered
a tractor by way of pledge. Was there a
valid pledge?
o No, because the tractor did not belong
to Mike, it belongs to his father, Pablo
Abella. But since there was delivery of
the tractor to Atty. Calibo, was deposit
constituted?
o No contract of deposit, the delivery was
to secure the payment of the
obligation, the delivery was not for
purposes of safekeeping.
Parties to a contract of pledge: Pledgee and
Pledgor.
If the pledgor is a third person not the principal
debtor, he has the rights of a guarantor,
meaning
if
the
property
pledged
is
subsequently sold in a public sale to satisfy the
principal obligation, then the third-party
pledgor has the right to seek reimbursement
from the principal debtor.
Just like a guarantor (third party pledgor), he is
also subrogated to the rights of the creditor
which he can exercise against the debtor.
The object of pledge is movable because there
is a need to transfer possession from the
pledgor to either the creditor or to a third
person.
o But not all movables are subject to
pledge, it must be within the commerce
of man and susceptible of possession.
o So a shabu is a movable but cannot be
an object of pledge.
The object of pledge must be also be
susceptible of possession because there is a
need to transfer possession, thats why in the
case of Betita vs Ganzon, there was no valid
pledge because there was no transfer of

possession from Betita. Because the carabaos

where actually in possession of Tiburcio.
What are examples of incorporeal rights?
Stocks, you cannot see stocks but ownership of
stocks is evidenced by stocks certificate; or the
right to collect a credit. Kita kag utang?
Evidenced by a PN.
o The
stocks
certificate
and
the
promissory note can be delivered by
way of pledge.
If you have a negotiable PN it is required that it
must be duly indorsed, if it is payable to order;
bearer instrument, there is no need to indorse.
What is the effect ordinarily if you indorse a
negotiable PN and deliver it to the transferee?
o It transfers rights which the indorser
has to the transferee.
But if the PN was delivered only as a security
by way of pledge, the act of indorsement does
NOT transfer whatever title or right the
indorser has in favor of the pledgee. The
indorsement is merely required to facilitate the
sale of the PN later on.
Ikaw kuno maker sa PN bi, unya ikaw kunoy
holder sa PN and you use that PN as a security
for the payment of your obligation. So you
delivered that negotiable PN to your creditor
and the you defaulted in the payment of the
principal obligation, your creditor cannot sell
the note without being duly indorsed. Would
you as the pledgor voluntarily indorse the
note?
o Normally you would not. That is the
reason why upon delivery, a negotiable
document or instrument, must be
properly indorsed or for instance a
warehouse receipt is delivered to the
creditor by way of pledge, and since it
is a negotiable warehouse receipt, the
pledgor indorses the receipt. The
indorsement by the pledgor does not
transfer any right or any type of title of
the goods in favor of the pledgee.

Effect: The pledgor still bears

the risk of loss because he
remains the owner of the
goods.

Because
ordinarily
if
you
indorse a warehouse receipt,
you transfer whatever rights
you have over the goods in
favor of the transferee, BUT
here,
you
deliver
the
warehouse receipt only by way
of pledge, it is not a payment
of an obligation otherwise that
would have been dacion en
pago. This is pledge only where

FOR EH 405 13-14 19

the pledgee does not acquire

any title over the thing
pledged. He only has the right
to sell only in case of default in
the payment of the principal
obligation.
Another element of the contract of pledge is
consideration as far as the pledgor is
concerned.
o Liberality if there is no valuable
consideration paid, or the agreed
compensation.
o On
the
part
of
the
pledgee,
consideration of the principal credit
supports the pledge.
What form is required of the pledge in order to
bind the pledgor and the pledgee?
o No particular form or a particular
document to be executed by both
parties, for as long as there is a
delivery of the thing to the pledgee or
to a third person.
Is there a particular form required in order to
bind third persons?
o Yes, it must be made in a public
instrument. Notarized.
o What must be indicated in the public
document?

There must be a public

instrument
giving
the
description
of
the
thing
pledged and the date.
Even granting that there was delivery or
transfer of possession would not bind Betita
because the document of the pledge was a
private document.
Two kinds of pledge:
o Voluntary Pledge contractual pledge
o Legal Pledge created by provision of
law
Remember contract of deposit? What is the
right of the depositary if he has a claim against
the depositor? He has the right to retain the
thing until he is paid of his claim. Just like the
warehouseman where he can retain the thing if
he has an unsatisfied warehousemans claim.
That act of retention is actually legal pledge.
Remember necessary deposit? The right of the
hotel keeper if the guest fails to pay for the
accommodation? What is the right of the hotel
keeper?
o He can sequester the personal effects
of the guest with the right to sell the
effects within 30 days from demand.
That is legal pledge.
There is no voluntary delivery of the thing to
secure of an obligation but the thing is already
in the possession of the creditor with respect to

the depositary the thing is in the possession of

the depositary as a deposit in case of the
mechanic scene (???), but the thing is in the
possession of the creditor because he has
rendered work on that particular thing. The
thing is already in the possession of the hotel
keeper because the personal effects are
already in the premises of the hotel. So there is
no delivery from the debtor in order to
constitute the pledge, rather there is
sequestration with the creditor of the movable;
so that these movables can be sold to satisfy
the claim of the creditor.
What are the rights of the pledgee?
o In relation to his right to retain the
thing, he has no right to use.

He can only use when the right

to use the thing is expressly
granted and for preservation
purposes.
o Can he deposit the thing to another
person for safekeeping?

Generally no. He can only

deposit if he is authorized.
o He
has
the
right
to
seek
reimbursement from the pledgor for
the
necessary
expenses
for
preservation of the thing pledged; or if
he suffers damages because of the
defective nature of the thing which was
not communicated to him by the
pledgor.
o If the thing bears fruits or generates
income, he can compensate this
against the pledgor (we are taking
about antichresis already) if not, (what
is this right to institute actions for
recovery)... doesnt need file an action
to recover it from the pledgor you just
demand that thing otherwise, it is as if
there is no prosperity (ambot oi mao
jud ako madungog haha) of the
principal obligation and he can just
invoke Art 1198 of NCC.
o So another scenario, stolen but not
returned, he can file an action for the
recovery.
o If there is a case of eviction, if there is
danger of him being deprived of
possession because there is another
person claiming ownership he can
exercise his rights which pertain to the
pledgor.
o To cause the sale, the essence of the
pledge, in case of default on the
principal debtor. Two kinds of sale in
pledge:

20

Precautionary Sale happens

before the principal debtor has
defaulted
the
principal
obligation

Foreclosure Sale happens

after the principal debtor has
defaulted
the
principal
obligation
o To collect credits pledge. These are
incorporeal rights, intangible assets like
dividends.

If the PN matures before the

maturity of the obligation, he
may collect. (obligation, not a
right).

If he collects the credit, apply

the proceeds and pay the
surplus to the pledgor.

If he should collect a credit

before maturity and he applies
the proceeds to the payment of
the principal obligation and
there is a surplus, he is
obligated to return the surplus
because in case of foreclosure
sale there is no obligation to
return the surplus, unless
otherwise provided.

It is only in foreclosure sale

where there is no obligation to
return the surplus nor right to
collect the obligation.

In precautionary sale you can

recover the deficiency of the
surplus.
So precautionary sale is the sale of the thing if
there is a reasonable ground to fear a
destruction or diminution of the things value
without the fault of the pledgee. So the
pledgee can sell the thing. The proceeds will be
applied to the principal debt and the excess will
be returned to the pledgor.
If precautionary sale is made before or prior
the default foreclosure sale happens after
default. It can be either judicial or extrajudicial.
The law provides that in judicial foreclosure of a
pledge, the pledgee may proceed to a notary
public. Does it mean to say that the parties
may also agree that in case of default that the
pledgee needs not to go to the notary public to
cause the sale of the thing pledged?
o There is this Cebu case, pledge on
shares of stock of a corporation.
So the sale, if you proceed to the notary public,
it is a public sale. Notice is required to be sent
to the debtor and if there is a third party
pledgor, then the third party pledgor.

The pledgor can bid, in fact if his bid is equal to

that of the highest bidder, he is preferred; but
he cannot insist that the thing be awarded to
him if his bid is not equivalent to that of the
highest bidder.
The pledgee can bid; if he is the only bidder, he
cannot bid. If there are no other buyers except
the pledgee, the pledgee should not return the
thing yet to the pledgor, he can set for a
second sale.
To return of the thing He has the right to the
return of the thing pledged upon extinction of
the principal obligation.
(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.)
If the pledgee appropriates the thing pledge for
himself, charge the obligation, not only the
pledge but also the principal obligation,
regardless of the value of the thing.
If there was a successful public sale conducted
and the claim of the pledgee is 100k and the
proceeds of the sale is only 75k; remember
that the thing delivered was only a security, it
is not delivered as a payment of the obligation,
can the pledgee recover the deficiency?
o No
recovery
regardless
of
the
stipulation (that the pledgor will pay in
case of deficiency) to the contrary.
If the claim of the pledgee is 200k, the
proceeds, 280k, more than the claim. Can the
pledgor demand for the return of the excess?
There is an express stipulation that in case of
excess or surplus of the sale, the pledgee must
return the excess.
o In case of deficiency, NO recovery
regardless of the stipulation; in case of
excess, NO return of the excess unless
there is a stipulation.
o There can be recovery of the excess if
there is an express stipulation, but
never a recovery in deficiency.
o We are taking here of a foreclosure
sale.
If two or more things are pledged, the pledgee
may choose which he will cause to be sold; and
he can only sell so much or as many as are
sufficient to cover the principal obligation.
o This can be dangerous, remember
there is no obligation to return the
excess of the proceeds of the
foreclosure sale (unless expressly
stipulated).
o So if you are the lawyer for the pledgor,
would it be advisable to tell your client
to include if there is a document drawn

FOR EH 405 13-14 21

to induce the pledgee include this on

the provision that in case of sale the
pledgee or the creditor is obliged to
return to the pledgor the excess.
Include that! Advise that to your client.
(wa nako kasabot saku gi-type haha).
If at the time of the maturity of the
obligation, the value has already
depreciated, that if you sell you can
never acquire the price to cover the
entire obligation, if you are the lawyer
for the pledgee, what would you advise
to your client?

Sue for a specific performance

nalang not a public sale. You
just extinguish the pledge and
sue for specific performance
and attach this (the thing
pledged?) in addition to other
assets of the debtor.

January 30, 2014

So what is the degree of diligence required of

the pledgee?
o Ordinary Diligence. Diligence of a good
father of a family.

In relation to his obligation to preserve the

thing, can he use the thing?
o Generally no. Two instances where he
can use the thing:

When he is authorized to use

the thing.

For preservation purposes. The

use is necessary for the
preservation of the thing.

In relation to the obligation to preserve the

thing, if what is delivered in pledge is a pawn
ticket, but there is period to redeem the
pawned item, (if in default, the pawned item
will be auctioned), it is your obligation as a
pledgee to renew the pawn. If you renew the
pawn, you have to pay in advance the interest
right? So that is an expense that you can claim
from the pledgor.

The pledgee is bound by the acts of his agent

especially if damage is caused to the thing
caused by the negligence of the agent.

Just like the contract of deposit, can the

pledgee deposit the thing with another person?
o No, unless he is authorized.
o So in answering the exam, avoid the
use of if and it depends (gosh gihunt kos election, puro it depends ako
answer mao gamay score HUHUHU).

In case of reasonable ground to fear of

diminution of the value of the thing, or danger
to the thing is the obligation of the pledgee to
notify the pledgor of such fact and if the

danger of the loss or diminution in value of the

thing is without the fault of the pledgee; the
pledgor even if has the right to demand to
recover the thing of course with the
corresponding obligation to deliver the thing,
by way of replacement.
The second general obligation of the pledgee is
to return the thing.
o When must he return the thing? On the
termination of the principal obligation
and if he does not return the thing after
the extinguishment of the principal
obligation, then he is now holding the
thing now as a depositary for and
behalf of the pledgor. And he has now
the obligations of the depositary.
o And if prior to the extinguishment of
the principal obligation, the thing finds
its way to the pledgor, presumption is
that only the pledge is extinguished,
not the principal obligation; that the
pledgee voluntarily returned the thing
to the pledgor.

The same presumptions apply

if the thing is found in the
possession of a third person
after the constitution of the
pledge.
What are the rights of the pledgor?
o He is still the owner of the thing
pledged. Because he still owns the
thing, he bears the risk of loss. If the
pledgee uses the thing without the
authority and not necessary for the
preservation of the thing then the
pledgor can demand that the thing be
deposited with another person.
o If there is reasonable ground to fear a
loss, or destruction of diminution of the
value of the thing, the pledgor has the
right to demand the return of the thing
but with the corresponding obligation
to deliver another thing; but there is
also a corresponding right on the part
of the pledgee which is to sell the thing
pledge (precautionary sale). There are
two rights.

So there are two conflicting

rights here! Both rights cannot
be reconciled. If one demands
return, then one cannot sell. If
you sell then you cannot
return. So both cannot exercise
their respective rights at the
same time.

The question is whose right is

now preferred?

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Pledgees
right
to
precautionary sale (to
sell) is preferred.
In case of foreclosure sale, the pledgor has the
right to bid and in fact, his bid would be
preferred if his bid is equal to that of the
highest bidder.
Right to return
the thing upon the
extinguishment of the obligation.
The pledgor, who is a third-party pledgor has
the rights of a guarantor. So he can seek for
reimbursement from the principal debtor and
he is likewise subrogated to the rights of the
creditor.
What is his obligation to notify the pledgee of a
defect of a thing delivered by way of pledge?
Why? If the pledgee suffers damage because of
the defected nature of the thing, pledgor can
be held liable for the damage caused. The
pledgor must know of the defect of the thing.
This is different from the contract of the sale,
which knowledge of the defect is immaterial.
Extinguishment of pledge:
o With the extinguishment of the
principal obligation because pledge is
an accessory contract.
o Destruction or the loss of the thing
subject of the pledge regardless of who
is the author of the loss. If the loss is
because of the fault of the pledgee, the
pledge is still extinguished; but liable
for damages.
o Renunciation by the pledgee.

When you renounce a right, do

you receive something in
return? This is similar to
condonation.

Condonation is a gratuitous
abandonment by the creditor of
his claim against the debtor.

Because it is gratuitous, it is
similar to that of a donation
and because it is considered as
a donation it must comply with
the formal requirements of a
donation, then there must be
acceptance.

No valid donation when is there

is no acceptance.

What is required in order to

effect renunciation?

Notify the pledgor in writing.

Acceptance is not required.

Unlike condonation which

requires
acceptance,
renunciation of a pledge
as special provision of a
law,
there
is
no

requirement
of
acceptance.

Is there a need to return the

thing upon renunciation to the
pledgor?

No. It is not required that the

pledgee returns the thing to
the pledgor. So if he does not
return, and the thing remains
in
his
possession,
after
notifying the pledgor of his
renunciation of the thing and
then the obligation matures
and the debtor fails to pay the
obligation. Can he sell the
thing?
o No, because after he
renounces the pledge,
but prior to return of the
thing to the pledgor, he
holds the thing as a
depositary
for
the
pledgor
not
as
a
pledgee anymore.
There is no right of redemption in case of a
foreclosure sale in case of pledge, after the
foreclosure sale. There is only right of
redemption in case of mortgage of real
property (REM).
What is redemption here (in pledge)?
o Redemption here is paying the principal
obligation so that the thing should not
be sold in a public sale in case of
default.
It is not enough that in legal pledge the
creditor retains possession of the thing,
because there is no transfer of ownership. So
what does the creditor do to demand the
debtor to pay the obligation?
o In case of hotel keeper, sends a
demand to the guest.
o Depositary to depositor.
o In case of a wakokasabotnaword lien,
send the demand to the owner of the
thing.
Note that the sale must be made within 30
days, not after. So dont confuse this with the
rule in deposit, where the depositary knows
that the thing is stolen and know who the
owner is and there is a suspension of delivery
within 30 days and return is made after 30
days if there is no demand to return from the
owner. Here in pledge, the sale has to be made
within 30 days.
What happens when there is no sale made
within 30 days?
o The creditor must return the movable
to the respective owner.

FOR EH 405 13-14 23

The
question:
If
the
movables
previously sequestered are returned to
the debtor, does the creditor still have
the cause of action against the
creditor?
Example, you live in Golden Valley
hotel and you havent paid the room
rates and the hotel sequestered your
personal effects, sends a notice to you
care of USC Law in a registered mail.

So the hotel must sell the

personal effects within 30 days
if you do not pay.

After the 30 days no sale was

made, the obligation of the

hotel is to return the personal

effects to you.
The question is can the hotel still can
go after you?

Yes. Only the securities (are

terminated?!) but your credit to
the hotel remains.

Only the legal pledge is

extinguished, not the principal
obligation to pay the room
rates is not extinguished.

Good luck and God bless! :D

REMINDER:
FEB 9 EXAM SUN. 9:00 AM MOOT COURT

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