Credit Transactions Reviewer (ma'am Gwen Notes)

Credit Transactions Second Semester, AY 2007-2008 Lecture I: Common Provisions, Pledge, and Mortgage Prof. Gwen G. de Vera University of the Philippines Provisions Common to Pledge and Mortgage (Common Provisions), Articles 2085- 2092 Is a promise to constitute a pledge or mortgage valid? Yes. A promise to constitute a pledge or mortgage is valid; however, it gives rise only to a personal action between the contracting parties. (Art. 2092) What requisites are essential to constitute a valid pledge and mortgage? (a) That they be constituted to secure the fulfillment of a principal obligation; (b) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (c) That the persons constituting the pledge or mortgage have free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. (Art. 2085) ⇒ What kinds of obligations may be secured by a pledge and mortgage? ⇒ Generally, all kinds of obligations, be they pure or subject to a suspensive or resolutory condition, may be secured, subject to the rules below, as well as to principles peculiar to real estate mortgage and chattel mortgage. ⇒ Consistent with Art. 2085, Art. 2052 applies to contracts of pledge and mortgage, stating that these cannot exist without a valid obligation. ⇒ Nevertheless, voidable, unenforceable and natural obligations may likewise be secured. Which of the following is the appropriate remedy under a contract of pledge or mortgage? (a) disposition by the creditor of the thing given in pledge or mortgage (b) alienation of the thing for payment to the creditor (c) appropriation by the creditor of the thing (See Articles 2087 and 2088) May the pledgor or mortgagor obtain a release of the thing/s given by way of pledge or mortgage, to the extent that the principal obligation has been partially fulfilled? ⇒ As a general rule, this is not possible; a pledge or mortgage being indivisible.(Art. 2089) Is partial release possible, where there are several debtors who are not solidarily bound? ⇒ No. This is not possible. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable (Art. 2090)

PLEDGE, Articles 2093- 2123 What is a pledge? ⇒ A pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable, or document evidencing incorporeal rights, for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. It may be voluntary or conventional, and legal (or one created by law). Which of the following, in addition to the essential requisites under Art. 2085, is/are required to constitute a contract of pledge? (a) amount of the principal and of the interest shall be specified in writing; otherwise, the contract of pledge shall be void (b) description of the thing pledged and the date of the pledge must appear in a public instrument (c) the subject of the pledge must be recorded in the appropriate registry of property

(d) there must be a written instrument of pledge (e) the thing pledged must be placed in the possession of the creditor or a third person Is it correct to say that only actual delivery is sufficient to constitute a pledge? ⇒ No. Whether actual or constructive delivery is required depends on the peculiar nature of the things given in pledge. (see Yuliongsui v. PNB) What is the scope of a contract of pledge (subject of contract of pledge)? ⇒ Pledge may be constituted over movable property: (a) within the commerce of man and (b) susceptible of possession. It may also cover incorporeal rights. Future property may not be the subject of pledge. Pledge may extend to the fruits, income, dividends, or interests, subject to compensation, first as to interest, and/or application to principal. (There may be stipulation to the contrary.) ⇒ In case of pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (Arts. 2094, 2095) What is a rationale for requiring that a description of the property and date of the pledge be in a public instrument? ⇒ The rule is a substantive one, without which the pledge cannot bind third parties. One aim to is prevent fraud, particularly upon creditors, by a debtor who may attempt to conceal his property or remove them from his estate by simulating a pledge. (Review Caltex v. CA) ⇒ (Take note, further, that the creditor may bring actions pertaining to the owner of the thing pledged under Art. 2103 (a real right enforceable against third persons) only if the pledge is embodied in a public instrument, containing description of the thing and the date of the pledge.) May a pledge be created by operation of law? If so, in what instances? ⇒ Yes. A pledge may be created by operation of law. Examples are: (a) a possessor in good faith awaiting reimbursement (Art. 546); (b) under lease (contract for piece of work), one who has executed a work upon a movable has a right to retain it by way of pledge until he is paid (Art. 1731); and (c)in a deposit, where depositary may retain the thing in pledge until the full payment of what may be due him by reason of the pledge (Art. 1994). These are governed by provisions on pledge, as to possession, care, sale and termination. (Art. 2121) How is it different from a voluntary or contractual pledge? (a) Remainder of purchase price may be delivered to the obligor-pledgor. (b) When demand for return of thing may also be made (Art. 2122) What principal right/s is/are granted to the creditor in a contract of pledge? ⇒ 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. (Art. 2098) ⇒ Corollarily, the debtor is obliged not to ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in the proper case (Art. 2105) ⇒ Although, there is no transfer of ownership (Art. 2103), the creditor may bring actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. ⇒ Note that pledgor has same responsibility as bailor in case under Art. 1951. When, then, may the pledgor resort to return of the thing or other remedies? RETURN and OFFER ANOTHER THING SAME KIND ⇒ without prejudice to Art. 2108, when there are reasonable grounds to fear the destruction or impairment of the thing pledged, without fault of pledgee (Art. 2107)

DEPOSIT WITH THIRD PERSON ⇒ when through negligence or willful act of pledgee, the thing is in danger of being lost or impaired (Art. 2106) PUBLIC AUCTION - add to pledgor ⇒ when, through no fault of the pledgee, there is danger or destruction, impairment, or diminution in value of thing pledged, he may cause While

the thing is in possession of the creditor, what standard of care must be observed?

⇒ Diligence of a good father of a family. (Art. 2099) May the

creditor use the thing?

⇒ As a general rule, he may not use the thing. The exceptions are: (a) when authorized, or (b) when necessary for the preservation of the thing. (Art. 2104) What

is the remedy of the owner/pledgor in case of unauthorized use or misuse by the creditor?

⇒ Owner/pledgor may cause for the thing to be under judicial or extrajudicial deposit.

What then is the remedy of the pledgee in case there is danger of destruction, impairment, or diminution of value? ⇒ The pledgee may cause the thing to be sold in a public auction. (Art. 2108)

May the pledgee appropriate the proceeds (or resort to compensation) in satisfaction of the debt? ⇒ No. The proceeds are held by the pledgee as security in place of the thing sold.

Is it correct to conclude that, notwithstanding transfer of possession only and retention by owner/pledgor of ownership, that the owner of the thing cannot alienate the same? ⇒ No. This is incorrect. The thing may be alienated by the owner, with the pledgee’s consent. The purchaser then takes the thing subject to the pledge. It is consent of pledgee which operates as transfer. Pledgee retains ownership. (Note what may happen if there is no public instrument with description and date of pledge.)

What is the principal remedy of the creditor, whose credit has not been satisfied in due time? ⇒ Cause the sale of the thing in public auction. ⇒ The formalities/requisites for such a sale are: (a) (b) (c) (d)

The debt is due and unpaid. The sale must be at a public auction. There must be due notice to the pledgor and owner, stating the amount due. The sale must be made with intervention of Notary Public.

Conduct of the Sale (a) If two or more things are pledged, pledgee may choose which he will cause to be sold, unless there is stipulation to the contrary. Only as much of the things as are necessary for payment of debt may be sold. (b) Pledgor may bid (c) Owner may bid (d) Pledgee may bid, but his offer shall not be valid if he is the only bidder (e) All bids shall offer to pay purchase price (cash) at once. A non-conforming bid may be accepted, pledgee being deemed to have received the purchase price. (f) Pledgee may appropriate thing if after first and second auctions, the thing is not sold.

Effect of Sale

(a) The sale of the thing pledged extinguishes the principal obligation, whether the price is more or less than the amount due. (b) Price > Amount Due, debtor not entitled to excess, unless stipulated otherwise (c) Price < Amount Due, creditor not entitled to deficiency. Stipulation to the contrary is void.

Rights of Third Parties (including Third Party Pledgor) ⇒ Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable. (Creditor cannot refuse payment.) (Art. 2117) ⇒ A third party pledgor has same rights as guarantor under Arts. 2066 to 2070, Arts. 2077-2081. He shall not be prejudiced by any waiver of rights by the principal obligor.

Grounds to Extinguish Pledge (Apart from general causes such as prescription, payment, loss of the thing, etc.) ⇒ Sale/Auction of the thing ⇒ Principally by return of the thing given by way of pledge ⇒ Renunciation or abandonment, in writing, by the pledgee (although pledgee may continue in the possession to the thing, the nature of such possession shall be as depositary) MORTGAGE, Arts. 2124-2131

What is a mortgage? ⇒ Mortgage is a contract whereby the debtor secured to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property, which obligation shall be satisfied with the proceeds of the sale of the said property or rights, in case the said obligation is not complied with at the time stipulated. Chattel mortgage has a specific definition. Real Estate Mortgage Chattel Mortgage

In addition to the requisites under Art. 2085, what must be complied with in order to establish a valid mortgage as against third parties? ⇒ The document in which it appears must be recorded in the Registry of Property. (Note other requisites with respect to Chattel Mortgage.)

Does this mean that a mortgage must be in writing in order to be valid? ⇒ No. Indeed, the persons in whose favor the law establishes a mortgage have no other right than to demand the execution and recording of the document in which the mortgage is formalized.

What is the effect of a mortgage? ⇒ The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (Note that this is a significant concept, even in the treatment of mortgage under provisions on Concurrence and Preference of Credits.)

Effect of Mortgage, continued ⇒ By mortgage, property is thus identified or set apart from the mass of the property of the debtor mortgagor as security for the payment of money or fulfillment of an obligation, to answer the amount of indebtedness in case of non-payment. (Note further, this is the basic rationale for availability of deficiency to the creditor/mortgagee, unlike in the case of pledge.)

Is there transfer of ownership from mortgagor to mortgagee? NO.

Must there be delivery, actual or constructive, to constitute a mortgage? NO. Does this mean that the mortgaged property may be further alienated? ⇒ Yes. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (Art. 2130)

What may be the object of a mortgage? (a) (b) (c) (d)

Immovables Alienable real rights Movables (Chattel Mortgage) Mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received

What is the scope of a mortgage? ⇒ As a general rule, a mortgage must sufficiently describe the debt sought to be secured by mortgage unless it comes fairly within the terms of the mortgage. ⇒ A mortgage, however, may also cover past obligations and/or future advances, and be continuing in nature. The amounts specifically stated in the contract of mortgage do not limit the amount for which the mortgaged property may stand as security, if the intend to secure future loans or advances may be sufficiently determined from the instrument.

Examples of clauses recognized as allowing future loans/advances or past loans ⇒ “For the payment of the loan of PhP[specific amount] and such other loans or other advances already obtained or still to be obtained by mortgagors as makers.”

What is a dragnet clause? Also known as blanket clause ⇒ The previously discussed provisions are known in American jurisprudence, as well as in our own, as dragnet clause, specifically phrased to subsume all debts of past or future origin.

May a real estate mortgage cover “after acquired properties”? ⇒ Note that this questions is significant vis-à-vis the requirement that the mortgage must be constituted by the owner of the property; hence, the general disability to subject future property to a mortgage. (At best, it may be covered under a promise to constitute a mortgage.) ⇒ We learn from People’s Bank and Trust v. Dahican Lumber that, under the factual setting of that case, the parties may stipulate on after-acquired properties and that the character of the properties there were properly made the subject of the provision. ⇒ Note here the Supreme Court found an attempt to circumvent this provision ⇒ Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. ⇒ The case of Prudential v. Alviar teaches us important information regarding a “dragnet clause” ⇒ Also known as a “blanket clause” ⇒ Specifically phrased to subsume all debts of past or future origin ⇒ Carefully scrutinized and strictly construed ⇒ Enables the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. ⇒ A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. ⇒ Considered valid and legal ⇒ Amounts specified do not necessarily limit the amount for which the mortgage may stand as security ⇒ Intent to secure future and other indebtedness must be asceretained

⇒ The problem in Alviar - “If the parties intended that the “blanket mortgage clause” shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care.” ⇒ In Mojica v. Court of Appeals, the pertinent real estate mortgage contract states among others: “... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors …” ⇒ There the Supreme Court ruled that It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. ⇒ A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid. ⇒ Note that, consistent with Article 2085 of the Civil Code, a sale though unregistered, would take precedence over a registered mortgage, considering that the sale deprived the mortgagor of ownership (Flancia v. Court of Appeals, 457 SCRA 224) Foreclosure of Real Estate Mortgage May an assignee cause the foreclosure of mortgaged property. ⇒ We know the answer to this question is yes, as explained in Santiago v. Pioneer Savings, where the Supreme Court that FINASIA, as assignee may cause the foreclosure, considering that a mortgage directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted. Remedies ⇒ While we know that the principle remedy under a mortgage is foreclosure, we learn in Caltex v. IAC, that the secured creditor has two alternative remedies. ⇒ Where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The mortgagee may: 1) foreclosure the mortgage; or 2) file an ordinary action to collect the debt. ⇒ When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings. ⇒ On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor. Extrajudicial Foreclosure When applicable (a) Where there is a power of sale in the mortgage deed (b) Nature of an agency, not mere representation (c) Is not extinguished by death of the mortgagor (d) Does not prohibity mortgagee from bidding Notice Requirement ⇒ Posting of 20 days, 3 public places in city or municipality where property located, but need not be on property itself ⇒ Publication once a week for three consecutive weeks in newspaper of general circulation (not widest circulation) ⇒ Personal or other notice to any particular party not required, unless otherwise stipulated ⇒ The rule is statutory provisions governing public notice of foreclosure must be strictly complied with; even slight deviation will invalidate sale or, at the very least, render it voidable.

Sale ⇒ Within province, by public auction, without prior levy ⇒ Under direction of sheriff, judge, notary (see Supreme Court Circular) ⇒ Price need not be amount of debt or value of property ⇒ Creditor or representative may participate as bidder ⇒ Result of sale is certificate of sale to the purchaser Purchaser ⇒ Entitled to registration of certificate of sale ⇒ Acquires rights to property which owner-mortgagor has, subject to prior liens Right of redemption ⇒ Is the prerogative to re-acquire the property after registration of foreclosure sale ⇒ Is different from a right to repurchase ⇒ Vested in debtor, successor-in-interest, judicial creditor and lienholders subsequent to mortgage ⇒ Subsists for one year from registration of certificate of sale ⇒ Exercised by offer with tender (an action to repurchase has been construed as such offer) ⇒ Purchaser at public auction entitled to possession during period of redemption by filing a petition for issuance of writ of possession, upon filing of bond ⇒ Upon lapse of redemption period, purchaser is entitled to consolidate title by affidavit of consolidation at Register of Deeds and obtain possession by writ of possession or other action ⇒ Extrajudicial Foreclosure Deficiency Judgment ⇒ Has been defined as one for the balance of the indebtedness after applying the proceeds of the sale of the mortgaged property to such indebtedness and necessarily filed after foreclosure proceeding. ⇒ Remedies of mortgagor are (1) personal action or (2) foreclosure, each one affording complete relief; hence, mutually exclusive Judicial Foreclosure (Rule 68) When applicable ⇒ Where there is no special power in the mortgage permitting extrajudicial foreclosure ⇒ Where such power is granted, annotators are of opinion that it should not bar resort to judicial foreclosure ⇒ In petition for sale of property in antichresis ⇒ Note that chattel mortgage not mentioned under the rules, but J. Feria (ret.) is of the opinion that rules may apply to chattel mortgage Procedure ⇒ By action in court ⇒ Court renders judgment for (1) sum found due with order to pay the court or the judgment obligee, not less than 90 days and not more than 120 days from entry of judgment and (2) upon default, cause the sale ⇒ Motion to sell ⇒ Motion for order of confirmation of sale Equity of Redemption ⇒ It is the right of defendant mortgagor (in equity) to extinguish the mortgage and retain ownership by paying secured debt (or amount specified in judgment) witin the period under the Rule. This period is mandatory and cannot be changed by stipulation. ⇒ According to J. Feria, it may be exercised even after the sale but before confirmation of sale by the court. ⇒ Judicial Foreclosure ⇒ Effect of confirmation

Divests rights in the property and invests rights in the purchaser, subject to right of redemption under Rep. Act No. 337. Foreclosure ⇒ Foreclosure action prescribes in ten years. ⇒ An action to enforce a right arising from a mortgage should be made within ten (10) years from the time the right of action accrues; otherwise, it wall be barred by prescription and the mortgage creditor will lose his rights under the mortgage.

Chattel Mortgage (Act No. 1508, as amended) Definition and Nature ⇒ As defined under Article 2140 of the New Civil Code, a chattel mortgage is a security whereby personal property is recorded in the Chattel Mortgage Register as a security for the perfomance of an obligation. ⇒ Under Section 3 of Act No. 1508, a chattel mortgage is defined as a conditional sale of personal property as security for the payment of a debt or the performance of some other obligation. This definition was considered inaccurate by the Code of Commission, hence, the new definition. Chattel Mortgage (Act No. 1508) Subject Matter ⇒ Generally, movable. ⇒ Examples in jurisprudence include shares of stock, an interest in the business, machinery treated by the parties as personal property, vessels, motor vehicles, house of mixed materials, house built on rented land) Creation of Chattel Mortgage ⇒ Law provides for only one way of executing a valid chattel mortgage, that is registration of the personal property in the appropriate registry. However, it has been ruled that if the chattel mortgage is not so recorded, it is nevertheless binding between the parties. ⇒ Additionally, unlike in a deed of real estate mortgage, parties to a chattel mortgage are required to execute an Affidavit of Good Faith. What is an Affidavit of Good Faith? ⇒ It is an affidavit or oath substantially attesting to the following: (a) The chattel mortgage is being executed for not purpose other than to secure the obligation described in the deed; (b) The same is valid and binding in accordance with its terms; and (c) The same is not entered into for the purpose of fraud. Extent of Chattel Mortgage ⇒ In real estate mortgage, the mortgage may, under certain circumstances, extend to after-acquired property. In a chattel mortgage, however, there is a requirement that personal property being mortgaged is required to be described in the deed of chattel mortgage itself, so as to enable the parties thereto, or other person, after reasonable inquiry or investigation, to identify the said mortgaged chattels. This renders an “after-acquired property clause” of doubtful validity. But Torres v. Limjap teaches that it may extend to shifting stock. Foreclosure ⇒ The proceeds of the sale shall be applied to the payment, first, of the costs and expenses of keeping the chattel and sale thereof, and then to the payment of the demand or obligation secured by chattel mortgage. The residue, if any, shall be paid to persons holding subsequent mortgages in their order. Thereafter, if there be any balance still remaining, the same shall be delivered to the mortgagor. Deficiency ⇒ In the event the foreclosure sale proceeds is insufficient to cover the entire debt secured by the chattel mortgage, the mortgagor may maintain an action for recovery of deficiency. The rationale offered in support of this position is that, unlike a pledge, chattel mortgage is given as security and not as payment for the debt in case of default. ⇒ Exception is Article 1484 of the Civil Code, on sale of personal property in installments, where chattel mortgage constituted as security for the purchase price. Deposit Define a contract of deposit. ⇒ A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. It may be judicial or extrajudicial; in case of the latter, voluntary or necessary. What is a voluntary deposit? ⇒ A voluntary deposit is that wherein delivery is made by the will of the depositor. When is there a necessary deposit?

⇒ A deposit is necessary (a) When it is made in compliance with a legal obligation; (b) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events (c) Deposit of effects made by travellers in hotels or inns under Art. 1998 How may a deposit be validly constituted? ⇒ Perfection by delivery ⇒ Contract may be made orally or in writing Note, however, that an agreement to constitute a deposit is binding. Who are the parties to a contract of deposit? ⇒ Depositor and Depositary Note, however, this does not mean that the depositor is or must be the owner of the thing What is scope of deposit? ⇒ Covers only movables ⇒ Note, however, that movable as well as immovable may be the object of sequestration Are fixed, savings and current deposits of money in banks and similar institutions considered contracts of voluntary deposit? ⇒ Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning loan. What is the purpose of deposit? ⇒ Safekeeping ⇒ When the depositary has the permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping remains the principal purpose of the contract Rights and obligations of the depositary (a) Keep thing safely and return it, when required (b) Cannot deposit thing with third person, unless otherwise stipulated (c) May change way of typhoon, if it may be reasonably presumed depositor would consent, with notice (d) Collect interest when holding certificates, bonds, securities or instruments which earn interest (e) Cannot commingle, unless otherwise stipulated (f) Cannot use without express permission of depositor (unless necessary for preservation) (g) May retain thing IN PLEDGE until the full payment of what may be due him by reason of the deposit The depositary is liable for the loss of the thing through a fortuitous event: (a) If it is so stipulated; (b) If he uses the thing without the depositor’s permission; (c) If he delays its return; (d) If he allows others to use it, even though he himself may have been authorized to use the same Obligations of Depositor ⇒ Where gratuitous, reimburse the depositary for expenses incurred for preservation of the thing ⇒ Reimburse for loss arising from character of the thing deposited (exceptions in Art. 1993) Conditions of return ⇒ As a general rule, thing must be returned to the depositor upon demand, even though a specified period or time for return has been fixed ⇒ The thing deposited shall be returned with all its products, accessories and accessioins ⇒ Where delivered closed and sealed, return must be in same condition ⇒ If place was designated for return at the time the deposit was made, return must be made at such place, with depositor shouldering cost of transportation Let us say the depositor has made a demand for the return of the thing. May the depositary refuse to return on the ground that he doubts the depositor’s legal title to the thing? ⇒ No. He may not refuse. The depositary cannot demand that the depositor prove his ownership of the thing deposited. ⇒ If depositary discovers thing has been stolen and knows true owner - advise latter of deposit

⇒ If owner, so informed, does not claim within one month, depositary relieved of responsibility by returning thing to the depositor ⇒ If depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor - he may return the same Specific modes of extinguishing a deposit (a) Loss or destruction of thing (b) Where gratuitous, upon death of either party Necessary Deposit (specifically Articles 1998-2003) ⇒ Conditions of application of 1998 include notice to hotel-keeper or employees and traveller takes advice as to care and vigilance ⇒ Extends to vehicles, animals, and articles introduced or placed in annexes of hotel ⇒ Excludes loss or injury arising from (a) acts of guest; (b) character of thing; (c) force majeure; act of thief or robber who enters hotel, without use of arms or irresistible force NOT force majeure ⇒ Hotelkeeper with right of retention, as security for credits and supplies ⇒ Note that the hotel-keeper cannot free himself from liability by posting notices to the effect that he is not liable; any stipulation whereby responsibility under Articles 1998-2001 suppressed or diminished shall be void. Antichresis What is a contract of antichresis? ⇒ By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. How is a contract of antichresis validly established? ⇒ The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. Right/s and obligation/s of creditor ⇒ Right to receive fruits of an immovable for purposes of application ⇒ Obliged to pay taxes and charges upon the estate, unless otherwise stipulated ⇒ Bound to bear expenses necessary for its preservation and repair ⇒ May exempt himself from the two obligations above by compelling the debtor to enter again upon the enjoyment of the property, unless there is stipulation to the contrary Remedies May the creditor claim ownership of the real estate for non-payment of debt? ⇒ No. Any stipulation to this effect shall be void. ⇒ In the event of non-payment, the creditor may petition the court for the payment of the debt or the sale of real property. Rules on judicial foreclosure applies. Concurrence and Preference of Credits In what proceeding does concurrence and preference of credits properly apply? ⇒ Put simply, a proceeding in rem, where all interested persons, whether known or not may be bound by the proceedings, such as insolvency, liquidation of estate, or similar proceeding. When does concurrence of credits occur? ⇒ Concurrence occurs when the same specific property of the debtor or all of his property is subjected to claims of several creditors. Concurrence of credits raises no question of consequence where value of property or asset not sufficient. When property not sufficient, preference arises. ⇒ Where there is concurrence, credits stand equally, without priorty among themselves, and satisfied pro rata. Preference ⇒ Distinction should be made between a preference and a lien. A preference applies only to claims which to do not attach to specific properties. The right of first preference as regards unpaid wages does constitute a lien on the property of the insolvent debtor in favor of workers, but a preference in application.

Application (Classification of Credits) ⇒ Articles 2241 and 2242 are special preferred credits. Only taxes enjoy priority. Excess used to satisfy other credits, which are not preferred. Within provisions, credits are equal, concurrent and proportionate. ⇒ If asset not sufficient, special preferred may become ordinary preferred under 2244 ⇒ 2245 refers to common credits ⇒ Claims of workers become specially preferred only when under Article 2241 (6) or Article 2242 (3). RE: Art. 110 of Labor Code ⇒ Under Articles 2241 and 2242 of the Civil Code, a mortgage credit is a special preferred credit that enjoys preference with respect to a specific/determinate property of the debtor. On the other hand, the worker’s preference under Article 110 of the Labor Code is an ordinary preferred credit. The same has ho preference over the special preferred credits. Thus, the right of employees to be paid benefits due them from the properties of their employer cannot have any preference over the latter’s mortgage credit. Sample problem A debtor corporation in insolvency has the following creditors: (a) PC Stop - for various laptops and personal computers sold on credit, amounting to PhP450,000.00 (b) Rapid Din - for parts and repair service rendered on a company car in the amount of PhP20,000.00 (c) Employees engaged in manufacturing parts produced and sold by company for unpaid wages - PhP1M (d) Nik Nak - former employee and judgment creditor in illegal dismissal case for PhP 300,000.00 (e) BIR - unpaid VAT - PhP200,000.00 (f) LGU - unpaid real estate taxes - PhP80,000.00 (g) The Credit Company - loan of PhP2.5M Apply the rules on concurrence and preference of credits ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒

Claim of LGU is preferred under 2242, should be satisfied first as to the specific immovable Claim of Rapid Din is preferred under 2241, as to vehicle Claim of workers preferred under 2241, as to goods manufactured Following claims must be paid in following order - (2244) BIR for VAT Nik Nak’s claim The claim of the Credit Company, and PC Stop as unpaid seller are common credits and should be paid last. (Some annotators indicate that PC Stop claim may be considered preferred as to the equipment, per 2241, par. 3).