Credtrans-2nd-exam-tsn-2016-2017.pdf

CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 December 13, 2016 PART VII: GUARANTY & SURETYSHIP (Article 2047-2084) I. NATURE AND EXTENT ARTICLE 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a) Classifications of a Guaranty A) In a Broad Sense (Article 2047, par. 1) 1. Personal Guaranty or Security - There is no object involved. You just have this person who acts a guaranty or surety and the creditor takes into consideration the reputation, credit and standing of the guarantor without preference to any other object. - Essentially unsecured because you only rely on the promise to pay or the personal commitment of the guarantor or the surety. 2. Real Securities - Contracts of pledge, mortgage and antichresis - There is a real contract of security because you have a property which acts a security or a collateral, not just a mere promise for the obligation. B) As to its origin (Art. 2051, par. 1.) 1. Conventional. — One constituted by agreement of the parties 2. Legal. — One imposed by virtue of a provision of law; or 3. Judicial. — One required by a court to guarantee the eventual right of one of the parties in a case. C) As to consideration (Art.2048.) 1. Gratuitous. — One where the guarantor does not receive any price or remuneration for acting as such or 2. Onerous. — One where the guarantor receives valuable consideration for his guaranty. D) As to the person guaranteed (Art. 2051, par. 2.) 1. Single. — One constituted solely to guarantee or secure performance by the debtor of the principal obligation; or 2. Double or sub-guaranty. — One constituted to secure the fulfillment by the guarantor of a prior guaranty. E) As to its scope and extent (Art. 2055, par. 2.) 1. Definite. — One where the guaranty is limited to the principal obligation only, or to a specific portion thereof; or 2. Indefinite or simple. — One where the guaranty includes not only the principal obligation but also all its accessories (e.g., interests) including judicial costs. Note: Guaranty may also be continuing or not. (see Art. 2053.) Contract of Guaranty and Suretyship  In both of these contracts, you have two (2) parties – the principal debtor or principal creditor and the guarantor or surety. Characteristics of a Guaranty 1. Consensual – perfected by mere consent. 2. Nominate – because the law provide as a name for it. 3. Accessory – cannot stand on its own; there must be a principal obligation 4. Subsidiary – takes effect only when the principal cannot pay his obligation 5. Not a primary obligation – the obligation is subject to a condition; when the principal debtor fails to pay or

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fulfill his condition; only when his condition is fulfilled that the obligation of the guarantor arises; Unilateral – because the obligation is only upon the guarantor; no obligation is imposed upon the creditor as he only has to wait if the principal debtor cannot pay; thereafter, you can now proceed to the guarantor. Guarantor must be distinct from the personal debtor – a person cannot be a personal guarantor of himself

Suretyship (Article 2047, par. 2) Suretyship may be defined as a relation which exists where one person (principal or obligor) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or other duty to a third person (obligee), who is entitled to but one performance, and as between the two who are bound, the one rather than the other should perform. The surety, engages to be answerable to a third person for the debt, default, or miscarriage of another known as the principal. If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is called a surety. Surety vs. Solidary Co-debtor (Escano vs. Ortigas) Surety (Fiador in solidum) Outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa.

Solidary Co-debtor Has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. What happened in the case of Escano vs. Ortigas? ESCAÑO vs. ORTIGAS (June 29, 2007) FACTS: In 1980, PDCP entered into a loan agreement with Falcon whereby the Ortigas group executed an Assumption of Solidary Liability binding their selves solidary liable with Falcon for the due and punctual payment of the said loan. In the meantime, two separate guaranties were executed to guarantee the payment of the same loan one of which was executed by petitioners Escaño, Silos et al (Escaño group). Two years later (1982), the Ortigas group assigned their shares to the Escano group in consideration that the Escaño group will assume all liabilities of the Ortigas group arising from their previous joint and several undertakings with Falcon, including those related to the loan with PDCP. Thus, a 1982 Undertaking was executed between the Escano group as "SURETIES," on one hand, and Ortigas group as "OBLIGORS," on the other. Nevertheless, Falcon defaulted in its payment causing PDCP to file a complaint for sum of money against Ortigas and the Escaño group. In his answer, Ortigas filed a cross-claim against his co-defendants Falcon and the Escaño group on the basis of the 1982 Undertaking. Later on, Ortigas entered into a compromise agreement with PDCP whereby he agreed to pay PDCP P1.3M as full satisfaction of the PDCP’s claim against him, in exchange that PDCP will release him from any liability or claim arising from the Falcon loan agreement. Nevertheless, he maintained his crossclaim against the Escaño group. Petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking. However, assuming that they are indeed liable, petitioners argue that they are only jointly liable and not solidarily since the Undertaking did not provide for

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 express solidarity pursuant to Article 1207 of the NCC. Ortigas countered that petitioners are solidarily liable for the Undertaking as the language used in the agreement clearly shows that it is a surety agreement between the obligors (Ortigas group) and the sureties (Escaño group). Ortigas points out that the Undertaking uses the word "SURETIES", which was repeated 13 times, in describing the parties. It is further contended that the principal objective of the parties in executing the Undertaking cannot be attained unless petitioners are solidarily liable since the Undertaking expressly seeks to relieve obligors of any and all liability arising from their said joint and several undertaking with Falcon," and for the "sureties" to "irrevocably agree and undertake to assume all of obligors said guarantees to PDCP." ISSUES: 1. W/N a contract of suretyship exists between the Escaño group and the Ortigas group. NO 2. W/N petitioners were solidarily liable on the basis of the 1982 undertaking. NO but they are jointly liable RULING: First issue A suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. As provided in Article 2047 in a surety agreement, the surety undertakes to be bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. In the case at bar, the mere utilization of the term "SURETIES" could not work to effect the Undertaking as a contract of surety, especially as it does not appear who exactly is the principal debtor whose obligation is "assured" or "guaranteed" by the surety. The use of the term "sureties" cannot be deemed as a conclusive indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas. Otherwise, it would lay down corresponding set of rights and obligations as between the "SURETIES" which petitioners and Matti did not clearly intend. Presumption of joint obligation In case of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence. The Undertaking does not contain any express stipulation that the petitioners agreed "to bind themselves jointly and severally" in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of obligations but he failed to discharge such burden. Distinction between surety and solidary co-debtor Surety Outside of his liability, he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa Even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right

Solidary co-debtor The creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt

The solidary debtor who effected the payment to the creditor may claim from his co-debtors only the share which corresponds to each,

to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

with the interest for the payment already made.

Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid

Second issue It is not impossible that as between Escaño, Silos and Matti, there was an agreement whereby in the event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the record. More consequentially, no such intention is reflected in the Undertaking itself, the very document that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to pay PDCP. A finding of solidary liability among the petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that establishes petitioners’ obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the obligation requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his payment to PDCP would still be accomplished through the complete execution of such a judgment.

Q: Is Ortigas deemed as a surety? A: No. No surety in this case. Q: Can the Ortigas group and the Escano group be considered as solidary co-debtors? A: No. They are only jointly liable. Discussion: When you discussed in your Obligations and Contracts, joint and solidary obligation, that is with regard to the creditor. When you say solidary obligation, anyone can be demanded to fulfill the performance or pay the full obligation in which thereafter the one who paid the obligation can seek reimbursement form his codebtors. In this instance, Ortigas stressed that he was the one who paid the obligation. But again there is no contract of surety Before alleging that suretyship exists, you to first identify what is the principal obligation, who is the principal debtor, who is the principal creditor. There is no allegation in this case as to what is the principal obligation and who is the principal debtor thereto. The action filed by Ortigas against the Escano group was essentially to seek for reimbursement. Reimbursement in what sense? Can we seek reimbursement for the total amount that he has paid? No because they are considered as joint. With regard to the Escano group, can they be held solidarily liable? No because they are also considered as joint debtors. The Undertaking does not contain any express stipulation that the petitioners agreed "to bind themselves jointly and

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 severally" in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint. In tandem with the nomenclature "SURETIES" accorded to petitioners and Matti in the Undertaking, however, this argument can only be viable if the obligations established in the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the Undertaking. Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor. Solidary Co-Debtor vs. Surety There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code. In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor "may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made." Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety. Nature of Surety’s Undertaking 1. Liability is contractual and accessory but direct. 2. Liability is limited by terms of contract. 3. Liability arises only if principal debtor is held liable. 4. Surety is not entitled to exhaustion. 5. Undertaking is to creditor, not to debtor. 6. Surety is not entitled to notice of principal’s default. 7. Prior demand by the creditor upon principal not required. 8. Surety is not exonerated by neglect of creditor to sue principal. What happened in the case of Asset Builders vs. Stronghold? ASSET BUILDERS vs. STRONGHOLD (October 18, 2010) FACTS: Petitioner ABC entered into a construction agreement with Lucky Star for the drilling of a production well. To guarantee faithful compliance, Lucky Star engaged respondent Stronghold, which issued two surety bonds in favor of petitioner. However, Lucky Star failed to complete the drilling work with the period agreed upon and despite demands for completion. This caused petitioner to rescind the contract and to demand for payment from Stronghold under the two bonds. The RTC ordered Lucky Star to pay petitioner but absolved respondent from liability. It ruled that the surety bond and performance bond executed by are in the nature of accessory contracts which depend for its existence upon another contract. Thus, when the agreement between Lucky Star and petitioner was rescinded, the surety and performance bond were automatically cancelled.

ISSUE: W/N Stronghold can be held liable as surety on the basis of the two bonds it executed in favor of petitioner. RULING: YES Respondent, along with its principal, Lucky Star, bound itself to petitioner when it executed in its favor surety and performance bonds. The contents of the said contracts clearly establish that the parties entered into a surety agreement as defined under Article 2047 of the NCC. Pursuant thereto, the surety undertakes to be bound solidarily with the principal obligor which makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. Notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. Suretyship, in essence, contains two types of relationship: 1. The principal relationship between the obligee (petitioner) and the obligor (Lucky Star), and 2. The accessory surety relationship between the principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. In this case, when Lucky Star failed to finish the drilling work within the agreed time frame despite petitioner’s demand for completion, it was already in delay. Due to this default, Lucky Star’s liability attached and, as a necessary consequence, respondent’s liability under the surety agreement arose. Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the P575k downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky Star for the repayment of the said amount to petitioner. The clause, "this bond is callable on demand," strongly speaks of respondent’s primary and direct responsibility to the petitioner.1avvphil Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can exercise the right to proceed against Lucky Star or respondent or both based on Article 1216. Contrary to the trial court’s ruling, respondent insurance company was not automatically released from any liability when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligor’s default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project. Without a doubt, Lucky Star’s unsatisfactory progress in the drilling work and its failure to complete it in due time amount to non-performance of its obligation. Q: What is the nature of his alleged liability? A: As a surety. Q: Who are the parties to the contract of suretyship?

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 A: The principal debtor is Lucky Star. The principal creditor is Asset Builders. The surety is Stronghold. Q: Is Stronghold liable as a surety? A: Yes. Discussion: Remember that a surety’s undertaking is contractual and accessory but direct. As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. Let it be stressed that notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. Respondent insurance company was not automatically released from any liability when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligor’s default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project. Without a doubt, Lucky Star’s unsatisfactory progress in the drilling work and its failure to complete it in due time amount to non-performance of its obligation. In fine, respondent should be answerable to petitioner on account of Lucky Star’s non-performance of its obligation as guaranteed by the performance bond. Finally, Article 1217 of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to reimbursement from Lucky Star for the amount it may be required to pay petitioner arising from its bonds. Now how do we distinguish a contract of guaranty from a contract of suretyship? CASTELLVI DE HIGGINS vs. SELLNER FACTS: Respondent Sellner wrote a letter to petitioner Mrs. Higgins if the promissory note executed by Keystone is not paid at maturity, then, within 15 days after notice of such default and upon surrender to him of the 3k shares of Keystone Mining Company stock, he will assume joint and several liability with Keystone. Petitioner Mrs. Higgins argues that Sellner is a surety while Sellner argues that he is merely a guarantor. ISSUE: W/N Sellner is a surety. RULING: NO but he is a mere guarantor Distinction between a surety and a guarantor Surety Guarantor Each promises to answer for the debt or default of another Assumes liability as a The liability as a regular regular party to the party to upon an undertaking independent agreement to pay the obligation if the primary pay or fails to do so

Charged as an original promissory Obligation is primary

Collateral undertaking Obligation is secondary

It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor. 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, Neither is Sellner jointly and severally liable with the principal debtors. When the note became due, it is admitted that the shares of stock used as collateral security were selling at par. Notice that the note had not been paid was not given to and when the Keystone stock was worthless. Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to discharge the guarantor. Q: Who is the principal debtor? A: Keystone Mining. Q: Who is the principal creditor? A: Macleod and Higgins. Q: Who is the alleged surety? A: Sellner. Discussion: A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the obligation if the primary payor fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. 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, Neither is Sellner jointly and severally liable with the principal debtors. With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a guarantor within the meaning of the provisions of the Civil Code.

JANUARY 05, 2017 Under Article 2047, the first contract refers to a contract of Guarantee and the second deals with a contract of suretyship emphasizing that the surety find himself solidarily liable with the principal debtor. But do recall that in the case of Espana vs. Ortigas, it was emphasized that the distinction of the liability of a solidary debtor from that of a surety. While the contract of suretyship is an accessory contract, the obligation of a solidary debtor generally arises from a principal obligation. Moreover, in surety, if you pay the obligation to the principal creditor can seek full reimbursement from the principal debtor. But a solidary debtor, if he pays the full

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 amount to the creditors, cannot pay the whole amount from the solidary debtor as he has his own proportionate share on the obligation. So a solidary debtor cannot be considered as a guarantor of his co-debtors. Nature sureties undertaking In the case of Asset vs. Stronghold, recall that the liability of the surety is contractual accessory but his liability to the creditor is direct, immediate, primary, and absolute. Further, his liability is limited by the terms of the contract and his liability will only arise if the principal debtor is liable. Moreover, a surety is not entitled to exhaustion which is granted to a guarantor. Also do remember that the undertaking of the surety is to the creditor and not the debtor. The surety is not even entitled to a notice of the principal’s default and to which prior demand of the creditor to the principal is not required. And lastly, the surety is not exonerated by the neglect of creditor to sue principal. In the case of Castellvi vs. Sellner, we have some distinctions between a contract of guarantee and suretyship. What are these distinctions? This was also emphasized in the case of Machetti vs. Hospicio de San Jose. MACHETTI vs. HOSPICIO DE SAN JOSE FACTS: Machetti entered into a contract with respondent Hospicio de San Jose for the construction of a building. As a condition of the contract, Machetti obtained the guarantee of Fidelity. However, Hospicio alleged that the work had not been carried out in accordance with the terms of the contract and that the workmanship was not of the standard required. Hence, Hospicio filed for damages against Machetti. Pending the resolution of the case, Machetti was declared insolvent thus suspending the proceedings. Hospicio now filed instead a claim against Fidelity alleging that he is a surety. ISSUE: W/N Fidelity is a surety. RULING: NO but a mere guarantor It is very true that notwithstanding the use of the words "guarantee" or "guaranty", circumstances may be shown which convert the contract into one of suretyship. However, such circumstances do not exist in the present case. On the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that it rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. While a surety undertakes to pay if the principal does not pay, 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. 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. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate. Discussion: Remember, what does insolvency mean? Insolvency means that that the debtor does not have sufficient assets to pay off its obligations as they become due. So what does it mean? It is still possible that the principal debtor still has assets. So remember that a guarantor can be held liable after the exhaustion of the assets of the principal debtor. What happens if the debtor is insolvent? Even if the court has already declared that the debtor is insolvent, you cannot immediately go after the guarantor.

Why? Kasi meron pa syang (the debtor) assets. And its possible that the creditior is among those that may be preferred in the liquidation of the assets of the debtor. Or kung hindi man sya preferred, he is one who may share pro rata in the remaining assets. Kung after iliquidate, wala talagang mapunta sa creditor, that is the time that you can go after the guarantor to which the benefit of expulsion has already been resorted to. Now in this case of Machetti, Fidelity is deemed as a guarantor. While is it true that the mere use of the word guarantee does not necessarily make the contract a contract of guarantee, circumstances maybe shown to consider such as a suretyship even if the word used is guarantee. However, in this contracts, there were no other circumstances which would indicate maybe liable as a surety. It appears that the contract is the guarantor’s separate undertaking in which the principal does not join. It rests on a separate consideration from the principal. And it is a collateral undertaking separate and distinct from the latter. These are distinguishing features of a contract of guarantee. As mentioned earlier, while the surety undertakes to pay if the principal does not pay, the guarantor only bind himself to pay if the principal cannot pay. So ang surety is the insurer of the debt. Guarantor is the insurer of the solvency of the debtor. Fidelity bound itself only to pay in the event that Machete cannot pay. So it cannot be compelled to pay unless it is shown that Machete is not able to pay. It may be proven by the return of the writ of execution. It is not sufficiently established by the mere fact that it has been declared insolvent in which the extent of the inability to pay is not determined until the final liquidation of the remaining properties of the principal debtor. GILAT SATELLITE vs. UCPB FACTS: One Virtual placed with GILAT a purchase order for various telecommunications equipment. To ensure the prompt payment of this amount, it obtained a surety bond from respondent UCPB. However, One Virtual failed to pay GILAT prompting the latter to write a demand letter for payment to UCPB. When UCPB failed to pay, GILAT filed a complaint against it to recover the amounts supposedly covered by the surety bond, plus interests and expenses. The CA ruled that the Purchase Agreement entered into between petitioner and One Virtual as the principal contract provides for an arbitration clause. Pursuant to the policy of the courts to encourage alternative dispute resolution methods, petitioner and One Virtual were ordered to proceed to arbitration. When the case was appealed, respondent argued that the Purchase Agreement, being the principal contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes. UCPB further argued that a surety contract is merely an accessory contract, which cannot exist without a valid obligation. Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt at is, the right to invoke the arbitration clause in the Purchase Agreement. ISSUE: W/N UCPB can invoke the arbitration clause as a surety. RULING: NO The acceptance of a surety agreement, does not change in any material way the creditor’s relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement. The respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that contract. An arbitration agreement being contractual in nature, it is binding only on the parties thereto, as well as their assigns and heirs. Arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this relief. Further, it can only be demanded by one who is a party to the arbitration agreement. Considering that neither petitioner nor One Virtual has asked for a referral, there is no

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 basis for the CA’s order to arbitrate. Furthermore, a referral to arbitration may only take place "if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter." Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration. Lastly, sureties do not insure the solvency of the debtor, but rather the debt itself. They are contracted precisely to mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the principal debtor. The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This is the reason why excussion cannot be invoked. To require the creditor to proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. Additional notes In order for the debtor (in this case, the surety) to be in default, it is necessary that the following requisites be present: 1. That the obligation be demandable and already liquidated; 2. That the debtor delays performance; and 3. That the creditor requires the performance judicially or extrajudicially. Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract, but because of the default and the necessity of judicial collection. In the absence of an agreement as to interests, the Court ordered UCPB to pay legal interest at the rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract. Discussion: So here, we have UCPB acting as a surety of the obligation of One Virtual in favour of Gilat Satelite. Now remember that here, UCPB becomes liable upon mere failure of the principal debtor, One Virtual, to make prompt payment. And Gilat Satelite would not be ordered to a separate claim against One Virtual before proceeding against the surety, UCPB. Remember the obligation of the surety is joint an solidary with the principal debtor. Its liability to the creditor or promise of the principal is said to be direct, primary, and absolute. So a surety is directly and equally bound with the principal. Therefore, a surety is NOT entitled to a separate notice of default or to the benefit of excussion. In fact, it can be sued separately or together with the principal debtor. With regard to the Arbitration clause, UCPB remains a stranger to the purchase agreement which involves the arbitration clause. Therefore, UCPB cannot invoke the said provision in its favor. Why? Because UCPB is not a party to the said contract. Further, the Supreme Court emphasized that the sureties do not ensure the solvencies of the debtors but the debt itself. So, the creditor has the right to directly proceed against either the principal debtor or the sureties. That’s why the benefit of excussion cannot be invoked. In practice, what usually happens is that the creditors sue both the principal debtor and the surety para isang kaso nalang. What about the interest? Respondents alleged that its failure to demand was due to the advise of One Virtual that petitioner allegedly breached its undertaking. However, record was bereft of proof to show that UCPB’s delay was justified by these circumstances. Having been held that the surety, upon demand, fails to pay, it can be held liable for interest even if the whole liability becomes more than the principal obligation because the increase in the liability is not because of the contract but rather the default or failure of the surety to pay upon demand and the necessity of judicial collection. So here the interest accrued from the time of extra-judicial demand. Notice that the interest rate here is 6% because the obligation arose NOT from a loan or forbearance of money. PALMARES vs. CA FACTS:

Respondent MB Lending extended a loan credit to spouses Azarraga. The loan was secured by a promissory note where petitioner Palmares bound herself solidarily liable. When the balance of the loan remained unpaid, respondent filed a complaint against petitioner to the exclusion of spouses Azarraga by reason of their insolvency. Palmares alleged that she offered to pay the balance of the loan, but it was respondent who refused to receive the same. The RTC ruled that the promissory note was a contract of adhesion and petitioner is only secondarily liable thereto. The CA reversed the decision and ruled that petitioner was a surety and even assuming that the promissory note was a contraction of adhesion, it is not void per se. Palmares appealed the decision arguing that he is only a guarantor for the following reasons: 1. The words "jointly and severally or solidarily liable" are technical and legal terms which are not fully appreciated by an ordinary layman like her; 2. The rule on reasonable construction applies to him; 3. The promissory note is a contract of adhesion since respondent alone prepared it; 4. Upon the grant of an extension for her to pay, her obligation was extinguished. ISSUE: W/N Palmares is a surety. RULING: YES Surety distinguished from guarantor Surety A surety is an insurer of the debt A suretyship is an undertaking that the debt shall be paid A surety promises to pay the principal's debt if the principal will not pay

A surety binds himself to perform if the principal does not, without regard to his ability to do so A surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default

Guarantor A guarantor is an insurer of the solvency of the debtor A guaranty, an undertaking that the debtor shall pay A guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so A guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor

She did understand "jointly and severally or solidarily liable" If there is no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. Petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety. Her contention is opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. Reasonable construction Petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor. To judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally considered. 1. When petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal. 2. Petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner. 3. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal makers. Contract of adhesion Even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The grant of extension In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve herein petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, herein respondent corporation, failing in which we cannot grant the relief prayed for.

on the other hand, does not contract that the principal will pay but simply that he is able to do so. A surety undertakes directly for the payment and so response le at once if the principal debtor defaults. A guarantor agrees to pay if by the use of due diligence, the debt cannot be made out of the principal debtor. Another defenses on the part of Palmares is that a contract if suretyship must be strictly construed. However the SC emphasized that such rule may only apply if it has been definitely ascertained that the contract is that of a suretyship and not a guarantee. Also, a surety is not entitled, as a matter of right, to be given notice of the principal’s default. Also take note, the fact that the creditor was lenient in demanding for the payment or performance of the obligation does not constitute an extension of time of payment to release a surety. When you talk about extension of time, there must be an agreement between the creditor and the principal debtor wherein the debtor is given additional time to pay within a definite period given. A mere delay on the part of the creditor is not the extension of time contemplated under the law. The mere fact that the corporation gave the principal debtors an extended period to comply with their obligation did not effectively absolve the surety, Palmares, from the consequences of her undertaking. So again, in these cases we have discussed the distinction between these two contracts. In a contract of guarantee, is not solidary with that of the principal debtor. Only if the principal debtor cannot pay and the creditor has exhausted the properties of the principal debtor and where there is no more property to answer the obligation, only then can the creditor go after the guarantor. Sa suretyship naman, the obligation of the surety is solidary to that of the principal debtor. So the creditor can proceed against the surety without the benefit of excussion. A surety is primarily liable. A guarantor is secondarily liable. Another distinction that you should take note of is in relation to the Statutes of Fraud. The Statute of Fraud does not apply to contracts of suretyship to which the surety is primarily liable. It is not a collateral undertaking or promise to pay the obligation of another person. It may be proven by mere oral evidence. While a guarantee must be in writing in order to be enforceable. Another distinction is with that of an endorser, contract of guarantee is a contract of security but an endorsement is not for security. It is a mode of transferring. In a contact of guarantee, the liability is more extensive than that of an endorser. The guarantor cannot be sued a promisor but an endorsement can be sued as such. Also distinguish warranty from guarantee. In warranty, there is an undertaking that the title, quality, and quantity of the subject matter is what has been represented in the deed. is what has been represented Sa guarantee naman, you do not refer to the quality or character of the subject matter. But rather we have a person who is bound to another for the fulfilment or payment of the obligation. What is only similar under these two is that both contain undertakings by one party to another to indemnify against some possible default or defence.

Discussion: So what do we have here. One of the defenses of Palmares is that the contract here was a contract of adhesion. We all know what is a contract of adehesion. It is a contract or a document prepared by one party and the other party merely affixes his signature signifying his adherence to the provisions therein. So take it or leave it. But remember that in several rulings of the SC the mere fact that the contaract is a contract of adhesion does not make it invalid per se. In numerous occasions, such contracts have binding effect and upheld. What is important is that the parties signing the contract clearly understood the provisions therein. In this instance, we have there that the co-maker is fully aware. It is clear and unequivocal that Palmares’ liability is that of a surety. This is also affirmed by the subsequent acts of Palmares. She admitted that she voluntarily signed it. The SC again emphasized that the surety is the insurer of the debt. On the other hand, the guarantor is the insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid while a guarantee is an undertaking that the debtor shall pay. A surety binds himself to perform if the principal debtor does not without regard to his ability to do so. A guarantor,

JANUARY 10, 2017 Recap: We started with 2047 already, and last meeting we have emphasized the distinctions bet. A contract of guaranty and a contract of suretyship again take note of this distinctions. We also mentioned Alaxai(?) with regard to the Statute of Frauds, the same is applicable to the contract of guaranty which means that the contract of guaranty must be in writing in order for it to be enforceable. That the promise of a surety or an original promisor may be proved by parol evidence. We already discussed the cases, Palmares and Gilat Satellite. Now let’s proceed to the next article.

Article 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 The general rule obviously is that guaranty is gratuitous unless stipulation by the parties that is considered onerous. Now we have also emphasized before, a contract of guaranty is an accessory contract. And being a contract, it must have all the essential elements for its validity. So you must have consent, object and consideration. Q: What’s the consideration in a contract of guaranty? Is it necessary for the guarantor to receive something in return for the contract of guaranty? WILLEX PLASTIC, INC. V. CA, INTERNATIONAL CORPORATE Facts: Inter Resin opened a letter of credit with Manila Banking. To secure payment, Inter Resin and IUCP executed two Continuing Surety Agreement in 1978 binding themselves solidarily liable to pay Manila Bank. Then in 1979, Inter Resin and Willex executed a Continuing Guaranty in favor of IUCP binding themselves solidarily liable to IUCP for the payment it made to Manila Bank. However, neither of them paid causing IUCP to file a claim against them. Willex argues that under the "Continuing Guaranty," 1.

2. 3.

4.

Its liability is for sums obtained by Inter-Resin from Interbank, not for sums paid by the latter to Manila bank for the account of Inter-Resin. Being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. It cannot be retroactively applied so as to secure payments made by Interbank under the two Continuing Surety Agreements since it must be applied prospectively. It cannot it cannot be proceeded against without first exhausting all property of Inter-Resin claiming the benefit of excussion.

Issue: W/N Willex may be held solidarily liable with Inter Resin for the amount paid by Interbank to Manila Bank. Held: YES As to the consideration The consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.

As to the contention of prospective application The parties to the "Continuing Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial from Interbank. Furthermore, by no means was it meant in the case of Diño vs. CA that in all instances a contrast of guaranty or suretyship should be prospective in application. Lastly, although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. As to the right of excussion There was an express renunciation of the right of excussion when the Continuing Guaranty provides that if default be made in the payment of the guaranteed, the principal may directly proceed against Willex in the same manner as if all such liabilities constituted are direct and primary. Not only this, Willex also

expressly bound itself solidarily liable with Inter-Resin under the agreement as expressed in the following terms, “We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S.”

Q: So by saying that there is a continuing guaranty, are we saying that Willex here now is a continuing guarantor? A: No maam, the intention of the parties is that of the suretyship. Q: What makes it a suretyship and not a contract of guaranty? It is very clear on the agreement: “Willex together with the Inter Resin agree jointly and severally guaranteed the prompt and punctual payment to the notes issued by the debtors...” Q: So here, when was the continuing guaranty is executed? A: It was executed in 1979. Q: When was the principal obligation demanded from Willex perfected? A: Perfected on the year 1981. Q: Can we just say, that it can refuse to pay on the account that it executed the continuing guaranty, it did not receive anything arising from the principal obligation, the loan from inter-resin? What’s the consideration of the accessory contract of guaranty or suretyship? A: The consideration of the principal contract ma’am is the same as that of the guaranty or suretyship. The consideration necessary to support a surety obligation need not pass directly to the surety, so it cannot be a defense on the part of the surety that it did not receive anything in exchange for agreeing as a guarantor or surety. A consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal." So take note of that in relation to Article 2048. Parties may agree to some consideration that the guarantor or surety may agree to be such in exchange for a consideration but even if the parties did not make such arrangement. Again, a contract of guaranty being an accessory contact is existence dependent upon the principal obligation. In the absence of its specific consideration agreed upon by the parties then the cause or consideration of the guaranty or suretyship is the same cause of the principal obligation. But of course if the principal contract has no cause or consideration principal contract is void, accessory contract of guaranty or suretyship is likewise void. Because again you already learn, accessory follows the principal.

Article 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. Remember the Civil Code was enacted 1950s, it emphasized that, patriarchal in nature, the right of the married woman to enter into a contract of guaranty. Remember with regard to the properties, the general rule applying the Family Code, to the absence of any stipulation it will be the absolute community of property. What would happen here? A married woman agree to be a guarantor of an obligation. If the principal debtor fails to pay then the married woman who acted as the guarantor and she has separate property then the contract of guaranty may refer to her separate and personal property of the married woman. But what if

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 the married woman has no separate property of her own, can the creditor go after the absolute community property of the spouses? Take note, it has to be taken in consideration whether the act being a guarantor of the married woman redounded to the benefit of the family. Then the principal obligation, the right to demand against the married woman is enforceable to the absolute community property. So it’s the same thing with regard to the husband. Husband also has a prohibition under the Civil Code to act as a guarantor or surety. Article 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of articles 1236 and 1237 shall apply. Now do remember that in a contract of guaranty or suretyship, you do not need the consent of the principal debtor for its validity. Essentially, it is only between the guarantor and the principal creditor. Consent of the principal debtor is not necessary to the validity of the guaranty and suretyship but again we take in to consideration what we have already learned in obligations and contracts under Articles 1236 and 1237.

Article 1236. 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 a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that 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. (1158a) So let us say Ysmael borrowed money from Emilio, si Ronald maraming pera “ako na magbayad sa utang ni Ysmael”. Kelangan pa ba nya magpaalam kay Ysmael na siya mag bayad? Hndi na. Pero ano ang effect nito? 1236 and 1237. First, Ronald cannot force Emilio to accept the payment, because again the 1 st paragraph is clear, not bound to accept payment by a third person who has no interest in the fulfillment of the obligation. But if Emilio accepts the payment, no problem, what are the rights available on the part of this third person Ronald paying the obligation of Ysmael? We take into consideration whether the payment is made with the knowledge or consent of the principal debtor. Here, you recall, beneficial reimbursement and subrogation.

Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title. It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823) Okay, so the first paragraph mentions what we have discussed before in relation to the classifications of a contract of guaranty. Second paragraph refers to what we call “double guaranty or subguaranty”. So you have a guarantor, who guarantees the performance of the principal obligation and the obligation of the guarantor is guaranteed by another person who is considered as a sub-guarantor.

Article 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a) This article, emphasized again that the contract of guaranty is an accessory contract. It cannot exist without a valid obligation. So valid contracts may include defective contracts which are nevertheless valid. The voidable contracts valid it can be annulled. Unenforceable contracts, valid but unenforceable. You also have rescsissible contracts valid but can be rescinded. These type of defective contracts can be the principal contracts subject of contract of surety and guaranty. Of course, the time of guaranty and suretyship was entered into, those defective contracts were still considered as valid. For example, it’s a voidable contract it has not yet annulled. Because otherwise, it has been annulled at the the time they entered into a contract of guaranty, wala ng valid contract to speak of. But of course if the prinicipal obligation is a void contract then you could not have a valid accessory contract of guaranty or suretyship. Now Article 2052, also tells us that the natural obligation maybe guaranteed. As you have already learned in natural obligation is an obligation not based on law but on equity and natural law. It does not grant the right of action to enforce their performance but after a voluntary fulfillment by the obligor, the authorized the retention of what has been delivered or by reason thereof. It cannot be enforce, but it may still be the object of a guaranty. Once there is performance, the debtor cannot demand to take back what he has given or paid. Now another important provision here in guaranty and suretyship is Article 2053:

Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) If Ronald pay against the will or without the knowledge of Ysmael, Ronald can seek a reimbursement to the extent Ysmael has benefited. Let us say 10,000 php pero naan a diay partial payment na 2,000 php pero gibayaran lahat yun ni Ronald. Siyempre si Emilio tinanggap nya ung whole 10,000 php. But can Ronald demand the whole 10,000 for reimbursement from Ysmael? On the part of Ysmael, he can raise a defense, na may partial payment na 2,000 php. Kung meron man ako obligation sayo only upto 8,000 php lang. To differentiate it, if Ronald paid with the consent of Ysmael, Ronald will be entitled to the rights available as the same as that of the creditor Emilio. For example, Ysmael executed a mortgage, pwede din yun mahabol ni Ronald. Or let us say, Carra who acted as surety or guarantor of Ysmael, ano mangyari yan? C Ronald who paid with the consent of Ysmael pede rin habulin ni Ronald si Carra as a guarantor or surety of the principal debtor. Again that’s the effect of subrogation to be distinguished from beneficial reimbursement if the third person who paid the obligation did so without consent or against the will of the principal debtor. So that is what is emphasized it there in 2050.

Article 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a) Article 2053 is in relation to contracts of continuing guaranty and suretyship. Q: What is contracts of continuing guaranty and suretyship? A: The surety or guarantor guarantees the liabilities that are already existing and all the future liabilities that are obtained. DINO vs. CA FACTS: In 1977 Uy Tiam Enterprises obtained a letter of credit from Metrobank. To secure the payment thereof, Norberto Uy and Jacinto Diño executed Continuing Suretyship in favor of Metrobank. Under the agreement, Norberto Uy agreed to pay Metrobank any indebtedness up to the aggregate sum of P300k while Diño agreed to be bound up to the aggregate sum of P800k. It was further stipulated that the Continuing Suretyship shall remain in full force and effect until written notice have been received by Metrobank that it has been revoked by the sureties.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 In 1979, when the same was paid, Uy Tiam obtained another letter of credit from Metrobank but without the participation of Norberto Uy and Jacinto Diño as they did not sign the document. Also, they were not asked to execute any suretyship to guarantee its payment. Neither did Metrobank or Uy Tiam inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in 1977 shall guarantee its payment. When Uy Tiam failed to pay, Metrobank demanded payment from Norberto Uy and Diño. However, they denied any liability alleging that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they cannot be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation. Even assuming that the agreements were in full force and effect at the time the 1979 credit was obtained, they cannot be held liable for an amount over and above what they guaranteed upon since the obligations of a surety cannot extend beyond what is stipulated in the agreement. Metrobank argued that Uy and Diño, as sureties, bound themselves as solidary obligors of Uy Tiam of both existing obligations and future ones. Furthermore, the agreement was in full force and effect at the time the letter of credit was obtained in 1979 since they, as sureties, did not exercise their right to revoke it by giving notice to the bank. ISSUE: W/N the Uy and Diño can be held liable as sureties for the 1979 credit by virtue of the Continuing Suretyship Agreement signed in 1977. RULING: YES but only for the amount they agreed to guarantee

Paragraph I of the Continuing Suretyship Agreement executed by Diño contains identical provisions except with respect to the guaranteed aggregate principal amount which is P800k. Also, the requirement of written notice for the revocation unequivocally reveal that the suretyship agreements are continuing in nature. Petitioners do not deny this. In fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce Metrobank to grant any application for credit accommodation Uy Tiam may desire to obtain. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank is notified of its revocation. Non-existence of obligation at the time agreement was executed It is true that a guaranty cannot exist without a valid obligation under Article 2052. However, the succeeding article provides that a guaranty may also be given as security for future debts, the amount of which is not yet known. Also, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. As to the amount of liability The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. The Continuing Suretyship Agreements signed by Uy and Diño fix the aggregate amount of their liability. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.

Continuing guaranty Payment of interest A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. Expression used The use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty.

Nevertheless, they are liable for payment of interest and judicial cost under Article 2055 of the CC. Creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. The payment thereof shall begin to run from the date when the complaint was filed in court. In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. Conclusion Since the complaint was filed on 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by Diño which stipulates an aggregate principal sum of not exceeding P800k, and partly covered by that of Uy which pegs his maximum liability at P300k. Uy and Diño are liable only up to the maximum limit of their respective Continuing Suretyship Agreement of the remaining unpaid balance Uy Tiam under the 1979 letter of credit together with the interest due thereon from the date of the filing of the

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 complaint as well as the adjudged attorney's fees and costs.

money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty.

Q: Here the principal obligation is perfected again on what date?

So here: either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, any and all such instruments in full force and effect until written notice shall have been received by the bank that it has been revoked by the Surety.

A: 1979 mam. Q: When was the contract of continuing suretyship executed by Uy and Dino? A: 1977 ma’am. Q: Can Uy and Dino still be held liable? Under the same continuing suretyship agreement? A: The SC held that YES, the Supreme Court define what is a continuing guaranty, it is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. Hence, where the contract of guaranty states that the same is to secure the advances made from time to time. The Guaranty will be construed to be a continuing ma’am. So in this case, it was not revoked, hence ma’am the continuing guaranty exists ma’am. Q: What provision or statement or terms in the continuing suretyship agreement executed by Uy and Dino made them liable to the 1979 obligation? A: It was also held by the SC, that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. Q: In this case, what where the specific terms used? A: In this case ma’am, the terms used, I will read nlang ma’am. “For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the Borrower”. Q: Is there any limitation on the said continuing suretyship agreement on the part of the liability of Uy and Dino? You have to take it to consideration because of the amount demanded from them? A: Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. So here the total is 815,000 so it is still within the limitation to the amount that they agreed to be guaranteed. Article 2053 emphasizes the validity of continuing suretyship or continuing guaranty even if at the time of its execution there is as yet, no principal obligation. In the case of Dino vs. CA, the SC discuss that the guarantee maybe given to secure even future debts, the amount of which may yet be known at the continuing guaranty is executed. The continuing guaranty or suretyship is one which is not limited to single transaction but a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities. The liability to be demanded from the guarantor or surety should be within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. Where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. Other terms: "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or

So, while it is true that the guaranty cannot exist without a valid obligation under 2052, again if what was entered into is a continuing suretyship or guaranty that is expressly covered and considered valid under Article 2053. Q: What’s the purpose? Why do parties enter into these types of contracts of continuing guaranty or suretyship? What happen in the case of Atok? ATOK vs. CA FACTS: In 1979, Sanyu Trading, spouses Halili and Bermudo (sureties) executed a Continuing Suretyship which provides that: They jointly and severally unconditionally guarantee to Atok Finance (creditor) the full, faithful and prompt payment and discharge of any and all indebtedness of Sanyu Chemical (principal). The word "indebtedness" includes any and all advances, debts, obligations and liabilities of Principal now or hereafter made, incurred or created, whether due or not due, absolute or contingent, liquidated or unliquidated, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. In 1981, Sanyu Chemical assigned its trade receivables to Atok Finance thru a Deed of Assignment. However, on the same year, Atok Finance filed an action against Sanyu Chemical and the sureties alleging that Sanyu Chemical failed to collect and remit the amount due under the trade receivables. Sanyu Chemical and the sureties alleged that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. The CA ruled that the Agreement cannot be enforced because (1) the contract, just like guaranty, cannot exist without a valid obligation; (2) although it may be given as security for future debt the obligation contemplated cannot be considered "future debt"; and (3) There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. ISSUE: W/N the sureties can be held liable under the Continuing Suretyship Agreement. RULING: YES It is true that a guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of the principal obligation. It is also true that Article 2052 of CC states that "a guarantee cannot exist without a valid obligation." However, a guaranty may also be given as security for future debts the amount of which is not yet known under Article 2053. Of course, a surety is not bound under any particular principal

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

P100k. When the promissory note was not paid, petitioner RCBC filed a complaint of sum of money against DAICOR, Enrique Go Sr. and Chua. Chua alleged that he cannot be held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf of DAICOR and in his own personal capacity.

Comprehensive or Continuing Surety Agreement Comprehensive or continuing surety agreements are in fact quite common place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor. With such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. This is precisely what happened in the case at bar. The obligations of the sureties under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment.

Q: What is the ruling of the court with regard to the contention of the private respondent that continuing suretyship agreement is null and void because there was no existing obligation to Atok Finance? A: The SC held that still such is misguided because it is covered under Article 2053. Here it is not necessary that a principal obligation exists at the time of the execution of the continuing suretyship agreement. Q: Again, what is the purpose of the parties in executing such kind of agreement? A: To secure future debts without executing further contracts. Unless revoked provided in their agreement. Here, Comprehensive or continuing surety agreements are in fact quite common place in present day financial and commercial practice. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each loan or financing or credit accommodation extended to the principal debtor. Less time, Less effort and much easier on both parties for the release of the loan or for the execution of the subsequent principal obligation. In this case, we also have a continuing suretyship agreement, considered valid. Even if at the time of its execution, no preexisting obligation was yet due. It is clear on the said agreement that it relates to any indebtedness including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. It’s very clear what we have here is a continuing suretyship agreement which is valid under Article 2053. We also have the case of RCBC vs. Judge Arro. RCBC vs. JUDGE ARRO FACTS: Chua and Enrique Go, Sr. executed Comprehensive Surety Agreements to guaranty any existing indebtedness of DAICOR and/or induce the bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower (DAICOR) upon which they held themselves liable provided that the liability shall not exceed the aggregate principal sum of

On the other hand, RCBC argued that by virtue of the execution of the comprehensive surety agreement, Chua is liable because said agreement covers not merely the promissory note subject of the complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur with petitioner. In other words petitioner argues that when Go and Chua signed the Comprehensive Continuing Agreement, they bound themselves as solidary debtors of DAICOR not only to existing obligations but to future ones. ISSUE: W/N Chua may be held liable to pay the promissory note, which he did not sign, pursuant to the Comprehensive Continuing Agreement. RULING: YES The comprehensive surety agreement was jointly executed by Enrique Go and Chua to cover existing as well as future obligations which DAICOR may incur with the petitioner bank, subject only to the proviso that their liability shall not exceed at any one time the aggregate principal sum of P100k. The agreement was executed obviously to induce petitioner to grant any application for a loan DAICOR may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination. At the time the promissory note was executed, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and Chua, even if he did not sign the promissory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that DAICOR is liable on the promissory note evidencing the indebtedness. The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by DAICOR as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which DAICOR may incur with petitioner, as is legally allowable under the Civil Code.

Q: What is the specific provision in the continuing suretyship agreement in refer to future obligations? A: “and/or in order to induce, you in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at he request or for the account of the Borrower” Q: In this case, there was another condition, aside from the limitation up to 100,000 php. When will the sureties, Go and Chua be liable for the obligation of Daicor? A: In this case, the condition that the borrower is liable as maker, drawer, indorser, acceptor or otherwise. The SC, Daicor is liable on the promissory note as maker of the promissory note.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Here, the guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination. It’s very clear again on the comprehensive surety agreement. To guaranty among others, any existing indebtedness, which already exists at the time of the constitution of the agreement, and/or induce the bank at any time or from time to time thereafter, so including future obligations, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, So, another thing that you would notice here in the cases, the suretyship agreement can be limited by the parties. There is an aggregate sum or principal to what extent they can act as a surety. In this case, 100,000 php. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness. Issuing the promissory note as the maker. Even if it is just an accessory obligation, again it is considered valid as it covers future debts as contemplated under Article 2053. Another case is Fortune Motors. FORTUNE MOTORS vs. CA In 1981, Chua and Rodrigueza each executed a Surety Undertaking where they absolutely, unconditionally and solidarily guaranteed to Filinvest the full, faithful and prompt performance, payment and discharge of any and all obligations and agreements of Fortune Motors under or with respect to any and all such contracts and any and all other agreements (whether by way of guaranty or otherwise) to Filinvest. In 1982, Fortune Motors and CARCO entered unto a Financing Agreement whereby CARCO delivered to Fortune Motors motor vehicles for resale. In turn, Fortune Motors executed trust receipts over said vehicles and accept drafts drawn by CARCO, which will discount the same together with the trust receipts and invoices and assign them in favor of Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement, Fortune Motors will report and remit the proceeds of any sale for cash or on terms to Filinvest immediately without necessity of demand. However, Fortune Motors failed to remit the proceeds or to return those unsold motor vehicles to Filinvest causing the latter to demand payment from Chua and Rodrigueza. Chua and Rodrigueza refused to pay alleging that the future debts which can be guaranteed under Article 2053 of the CC refer only to "debts existing at the time of the constitution of the guaranty but the amount thereof is unknown," and that a guaranty being an accessory obligation cannot exist without a principal obligation. Hence, the Surety Undertakings were null and void because, at the time they were executed, there was no principal obligation existing.

such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. The surety undertakings executed by Chua and Rodrigueza were continuing guaranties or suretyships covering all future obligations of Fortune Motors with Filinvest. This is evident from the written contract itself. Petitioners were aware of the purpose of the contract Moreover, Rodrigueza and Chua knew exactly where they stood at the time they executed their respective surety undertakings in favor of Fortune. Both sureties knew the purpose of the surety undertaking which they signed and they must have had an estimate of the amount involved at that time. Their undertaking by way of the surety contracts was critical in enabling Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the business of Fortune. Respondent Filinvest, for its part, relied on the surety contracts when it agreed to be the assignee of CARCO with respect to the liabilities of Fortune with CARCO. After benefiting therefrom, petitioners cannot now impugn the validity of the surety contracts on the ground that there was no preexisting obligation to be guaranteed at the time said surety contracts were executed. They cannot resort to equity to escape liability for their voluntary acts, and to heap injustice to Filinvest, which relied on their signed word. This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it can collect from Chua and/or Rodrigueza in case of Fortune's default. Filinvest relied upon the surety contracts when it demanded payment from the sureties of the unsettled liabilities of Fortune. A refusal to enforce said surety contracts would virtually sanction the perpetration of fraud or injustice.

Q: Chua and Rodriqueza are liable in what capacity surety or guarantor? A: as a surety ma’am. Q: What makes them a surety? What provision in the agreement makes them sureties? A: In the surety agreement ma’am there was a part: executed an undated Surety Undertaking whereunder they absolutely, unconditionally and solidarily guarantee(d) to Respondent Filinvest Credit Corporation (Respondent Filinvest) Q: What about their defense?

ISSUE: W/N a suretyship agreement may secure future obligations. RULING: YES

A: They contended that the surety undertakings were null and void because at the time they were executed, there was no principal obligation yet existing. RTC denied the motion. CA affirmed ruling.

Comprehensive or continuing surety agreements Q: What was the ruling of the SC in relation to that defense? Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing

A: SC ruled, a surety may secure future obligations. Since this case is similar to Atok finance and National Rice and Corn Corporation (NARIC) vs. Court of Appeals. What the petitioners undertook ma’am was a continuing guaranty or suretyship covering all future obligations of Fortune Motors with Filinvest Credit Corp.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 So here, they are considered as suretyship, they entered into a continuing suretyship agreement. The written contract stated: the words absolutely, unconditionally and solidarily guarantee(d) to Respondent Filinvest and its affiliated and subsidiary companies the full, faithful and prompt performance, payment and discharge of any and all obligations and agreements. Both sureties knew the purpose of the surety undertaking which they signed and they must have had an estimate of the amount involved at that time. So with Article 2053, the sureties and guaranties are not (inaudible) because at the time they signed they already knew they would answer for future debts as well. Their undertaking by way of the surety contracts was critical in enabling Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the business of Fortune.

consented. Consent is not necessary in order that assignment may fully produce legal effects. Hence, the duty to pay does not depend on the consent of the debtor. Otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtor's refusal to give consent. What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him. A creditor may, therefore, validly assign his credit and its accessories without the debtor's consent. The purpose of the notice is only to inform that debtor from the date of the assignment, payment should be made to the assignee and not to the original creditor. Therefore, the sureties are liable for the 6 drafts and the trust receipts.

SOUTH CITY HOMES vs. BA FINANCE In 1983, Fortune Motors, Palawan Lumber and South City Homes, represented by Chua, Tan, Rodrigueza, Baltazar, and Tablante (sureties) executed three Continuing Suretyship Agreements whereby they jointly and severally unconditionally guaranteed the full, faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors in favor of BA Finance. Six moths thereafter, CARCO drew 6 Drafts in its own favor, payable 30 days after sight, charged to the account of Fortune Motors. Thereafter, Fortune Motors executed trust receipts covering the motor vehicles delivered to it by CARCO under which it agreed to remit to CARCO the proceeds of any sale and immediately surrender the remaining unsold vehicles. The drafts and trust receipts were assigned to BA Finance under Deeds of Assignment executed by CARCO. When Fortune Motors failed to pay and remit the proceeds or return the motor vehicles unsold, BA Finance demanded payment from the sureties. Petitioners contend that the suretyship agreements are null and void for having been entered into without an existing principal obligation; and that being such sureties does not make them solidary debtors. They stressed that their obligations to the creditor (CARCO) was extinguished by the assignment of the drafts and trust receipts to BA Finance without their knowledge and consent, and pursuant to legal provision on conventional subrogation a novation was effected, thereby extinguishing the liability of the sureties. ISSUES: W/N there was a novation of the obligation as to extinguish the liabilities of the sureties. RULING: NO An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. As a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. Petitioners' obligations were not extinguished.

Note: They are held liable under the Continuing Surety Agreement. The ruling in Fortune Motors was reiterated. Please check the case.

The SC emphasized Article 2053 of the Civil Code which allows the suretyship agreement to secure future loan even if the amount is not yet known. A surety is not bound under any particular principal obligation until that principal obligation is born. As mentioned, no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. The SC also pointed out here the effect of an assignment of credit. So what happens in an assignment of credit? There is an agreement y virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the principal debtor. So, the third party, the assignee, steps into the shoes of the original creditor or the assignor. So with that, the obligations of the sureties were not extinguished by any assignment of credit. Consent is not necessary in order that assignment may fully produce legal effects and does not depend on the consent of the debtor. What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him. Notice here would be relevant as to effect of payment. Because if the principal debtor were not informed of the assignment of credit, and they paid to the original creditor, would that extinguish the obligation? YES, because they were not notified of the assignment. It would have been different if the assignment of credit has already taken place, the principal debtor were informed thereof but still they paid to the original creditor. In that instance, the original creditor is not entitled anymore to payment, and payment made to him does not extinguish the obligation. Remember, under Obligations and Contract, payment must be made to the creditor at the time of payment and not at the time of the constitution of the obligation. A creditor may, therefore, validly assign his credit and its accessories without the debtors consent.

In assignment, the debtor's consent is not essential for the validity of the assignment, his knowledge thereof affecting only the validity of the payment he might make.

Again, take note of the nature of a continuing guarantee or suretyship. It may be constituted upon a specific obligation but also future obligation, even those obligations which are not liquidated, not yet determined at the time of the execution of such continuing suretyship or guarantee.

Article 1626 also shows that payment of an obligation which is already existing does not depend on the consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall already be made to the new creditor from the time the debtor acquires knowledge of the assignment of the obligation.

However, at the time that it is demanded, the principal debtor and the sureties or guarantors, the amount is already fixed or ascertained, or demandable.

The law is clear that the debtor had the obligation to pay and should have paid from the date of notice whether or not he

What happens if the amount is not yet liquidated? You wait, noh? The parties liable will wait until the amount is liquidated. After

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 that, the creditor can now enforce against the guarantor the payment of the amount that has been determined. Also pointed out in Article 2053 last sentence, a conditional obligation can also be a subject of a guarantee. So the contract of guarantee could not be enforced unless the condition has already happened. Once it has been fulfilled, the obligation of the guarantor can now be enforced. If a condition is attached to the principal obligation, (?) as to be observed to the accessory contract of guarantee or suretyship.

Article 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.

So this a consequence of the suretyship or guarantee as to the excess of the contract. As such accessory contracts may constitute an amount that is less than the principal obligation but not more than the principal obligation. The principal obligation may be P1M, but in the contract of continuing suretyship, it may indicated that it is only up to the aggregate amount of P500,000. Pwede ‘yun. If the debt of the principal is only P10,000, the guarantor can guarantee up to P10,000 and even below. But you cannot guarantee more than P10,000 because, again, that would be an absurd situation wherein the accessory contract is more onerous than the principal obligation. But what happens if it is not a continuing guarantee and the principal obligation is P10,000 and it is simply a contract of suretyship or guarantee where you agree to be bound up to P20,000. Of course, the guarantor or surety cannot be demanded to pay the whole P20,000 kay P10,000 lang man ‘yung utang. But that does not make the guaranty or suretyship void. The obligation that can be enforced against the guarantor or surety will only be up to the principal obligation of P10,000. What if the obligation, let us say, is P150,000? And then we have a contract of guaranty or suretyship up to the amount of P100,000. What if nagbayad na si principal debtor ng P100,000? So out of the principal obligation, P50,000 nalang. Now, what if the creditor will now demand from the guarantor or surety na “uy di makabayad si principal debtor, magbayad ka na ng P50,000.” Can the surety or guarantor say na “ay di na ako magbayad kasi ‘yung P100,000 na limitation ko kay ‘yun na ang gibayaran ni principal debtor.” Is that an excuse available to the guarantor or surety? Of course not! Kasi mawala ‘yung essence sa accessory contract of guaranty or suretyship. So that argument is not valid. In fact, we can relate it to application of payment. In application of payment, saan muna i-apply ‘yung obligation? Choice ni debtor. Kung wala nag choose ang debtor, si creditor. Kung wala gichoose ang debtor and creditor, sa most onerous. So pwede mo siya i-relate doon. In relation to that, the payment shall be applied first to those which are more onerous. So in that P150,000, P100,000 is guaranteed and the P50,000 is not guaranteed. Then what will be the effect? So i-una mo siya apply sa walang security. Para ang P50,000 pwede mo pa ma collect sa guarantor or surety. PACIFIC BANKING v. IAC Robert Regala executed a Guarantor’s Undertaking in favor of Pacific Bank whereby he bound himself jointly and severally liable to pay any and all indebtedness, obligations, charges or liabilities due and incurred by his wife Celia with the use of the Pacificard issued to her by Pacific Bank.

terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release him from responsibility, it being understood that he fully agree to such charges, novation or extension, and that the agreement is a continuing one and shall subsist and bind him until the liabilities of his wife Celia have been fully satisfied or paid. When Celia failed to pay, Pacific Bank demanded payment from Robert. Robert admitted that he executed the Guarantor’s Undertaking but alleged that his liability is only limited to P2k per month. ISSUE: W/N Robert is liable under the Guarantor’s Undertaking. RULING: YES The undertaking signed by Roberto although denominated Guarantor's Undertaking, was in substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor. As a surety he bound himself jointly and severally with the debtor Celia to pay the Pacific Bank upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by Celia with the use of Pacificard or renewals thereof issued in her favor by Pacific Bank. This undertaking was also provided as a condition in the issuance of the Pacificard to Celia. As to the extent of liability It is true that under Article 2054 of the CC, 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. It is likewise not disputed by the parties that the credit limit granted to Celia was P2k per month and that Celia succeeded in using the card beyond the original period of its effectivity. However, Robert’s liability should not be limited to that extent since as surety of his wife, he expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard. Robert, in fact, made his commitment as a surety a continuing one. Robert had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known. A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship.

A guarantor’s undertaking which is actually a surety’s undertaking where the husband acted as a surety agreed to be jontly ans severally liable together with the wife with Pacific Bank in relation to the use of a Pacific credit card or renewals thereof. Even if the limit that was indicated is P2,000 per month, in the same undertaking it was provided that “any changes of or novation in the terms and conditions or any extension shall not in any manner release me/us (so that refer to the husband as well) it being understood that I fully agree to such charges, novation or

It was also agreed that any changes of or novation in the

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 extension, and that this understanding is a continuing one until the liabilities of Celia has been fully satisfied or paid.” So here the husband was deemed to be a surety of the said obligation. While it is true that Art 2054 provides that the guarantor may bind himself for less, but not for more than the principal debtor, it is also clear that the credit limit granted to Celia was P2,000 per month, but nevertheless, Celia succeeded in using the same beyond the its effectivity. With that, it cannot be limited to P2,000 per month as the husband expressly bound himself to the extent of the debtor’s indebtedness expressly waiving any discharge in case of any change or novation of the terms and conditions in connection of the issuance of the credit card. So the obligation on the part of Roberto here was a continuing surety binding upon himself until all the liabilities of Celia had been fully paid. MOLINO VS. SECURITY DINERS INTERNATIONAL The Security Diners issues two types of credit cards, the Regular (Local) Card and the Diamond (Edition) Card. One of the requirements for the issuance of either of these cards is that an applicant should have a surety. Hence, when Danilo applied for a Regular card, he got his sister-in-law Molino as his surety. Under the Surety Undertaking, Molino bound herself jointly and severally with Danilo to pay Security Diners all the obligations and charges including but not limited to fees, interest, attorney's fees and all other costs incurred by Danilo in connection with the use of the card. Further, any change or novation in the agreement or any extension of time granted by Security Diners to pay such obligations, charges and fees, shall not release her from the Surety Undertakings, it being understood that the undertaking is a continuing one and shall subsist and bind her until all such obligations, charges and fees have been fully paid and satisfied. Later on, Danilo’s card was upgraded Diamond card with the approval of Molino. However, he defaulted in payment causing Security Diners to demand payment from Molino. Molino contended that her liability under the Surety Undertaking is limited to P10k and that she did not expressly give her consent to be bound as surety under the upgraded card. The note she signed registering her approval to the same renders the Surety Undertaking she signed under the terms of the previous card without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit card by the principal debtor. Further, since the principal debtor, Danilo, was not held liable, having been dropped as a defendant, she could not be said to have incurred liability as surety. Being merely a surety, a pronouncement should first be made declaring the principal debtor liable before she herself can be proceeded against. ISSUE: W/N Molino is liable for the upgrade of the card pursuant to the Surety Undertaking. RULING: YES Novation, as a mode of extinguishing obligations. There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo, basically since it was committed with the intent of canceling and replacing the said card. However, the novation did not serve to release Molino from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. It must be noted that the extent of the credit cardholder's indebtedness, under the clear terms of the Guarantor's Undertaking that the surety signed with the credit card company. The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as being the

same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. There being no question that Danilo incurred debts in credit card advances, an obligation shared solidarily by petitioner, Security Diners was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo, until the obligation is fully satisfied. Petitioner is a graduate of business administration, and possesses considerable work experience in several banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged to.

Here, there was an allegation that novation made the obligation of the surety more onerous. In fact, it was alleged that upgrading of the card should not be covered by the surety. While it is concluded that the upgrade was a novation, it did not release the petitioner from her surety obligations because in the same surety undertaking, she expressly waived discharge in case of change or novation in the agreement. The SC emphasized several provisions in the surety’s undertaking emphasizing the extent of the liability of the sister-inlaw. She is a surety as she found herself jointly and severally with Danilo to pay SDIC. She declared that any change or novation in the Agreement or any extension to pay such obligation shall not release her from this Surety Undertaking. Even if there was novation, she’s not released because of the waiver. Moreover, the undertaking is a continuous one and shall subsist and bind her until all obligations have been fully paid. The indication of a credit limit, the P10,000, shall not relieve her of liability for all other amounts voluntarily incurred by the cardholder in excess of said credit limit. With these cases, so far, what is the lesson to be learned? When you sign a document acting as a co-maker and guarantor, the first thing that you should do is read it first. Who are usually the sureties or guarantors especially in a continuing agreement? You have officers of corporations. Usually what will happen is that they sign the contract as authorized representative of the corporation and in their personal capacity. With that, they can be held solidarily liable and it depends when we say continuing agreement. GATEWAY vs. ASIANBANK Gateway obtained an Domestic export packing loan from Asianbank. To secure payment thereof, Geronimo and Andrew executed separate but almost identical deeds of suretyship in favor of Asianbank. The undertaking provides that: 1.

2.

They warrant the due and faithful performance by the debtors of all obligations to be performed under any contracts evidencing indebtedness/obligations and any supplements, amendments, changes or modifications made thereto; Their liability shall be solidary, direct and immediate

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017

3.

and not contingent upon the pursuit by the Asianbank (creditor) of whatever remedies it may have against Gateway or the securities or liens it or they may possess; They agree to be and remain bound upon the suretyship, notwithstanding that all obligations of Gateway to Asianbank outstanding and unpaid at any time may exceed the aggregate principal sum of P10M.

Asianbank repeatedly extended the maturity of the loan granted to Gateway until it was consolidated with the Dollar Promissory Note under the Omnibus Credit Line. Nevertheless, Gateway still defaulted causing Asianbank to finally demand payment from Gateway and its sureties. Later on, Gateway was declared insolvent. As a result thereof, Geronimo prays that the claim against him be also extinguished. Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of Geronimo as a surety since claims against a surety may proceed independently from that against the principal debtor. Being such, Geronimo may not invoke the insolvency of Gateway as a defense to evade liability. Geronimo counters that his liability as a surety cannot be separated from Gateway’s liability. As surety, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved pursuant to Article 2054 of the CC. Otherwise, his liability becomes more onerous and burdensome since he is precluded as from seeking recourse against the insolvent corporation. Lastly, he argues that the deed of suretyship covers only the P10M export packing loan but not the additional loans consolidated under the Dollar Promissory Notes which maturity date was repeatedly extended by Asianbank without his knowledge and consent.

becomes insolvent or is unable to pay the obligation. This interpretation would defeat the very essence of a suretyship contract which, by definition, refers to an agreement where one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as the principal. As to the coverage of the suretyship agreement By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan transactions, they are, within the description or contemplation of the contract of guaranty. The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the express terms of the deed, he warranted payment of the P10M credit loan and the loan under the Dollar PN. Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the Domestic Bills Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan. The suretyship Geronimo assumed did not limit itself to a specific loan document to the exclusion of another. The suretyship document merely mentioned the Domestic Bills Purchased Line and Omnibus Credit Line as evidenced by "all notes, drafts contracted/incurred by Gateway in favor of Asianbank. Such credit facilities are not loans by themselves. Thus, the Deed of Suretyship was intended to secure future loans for which these facilities were opened in the first place. As to the grant of extensions Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is embedded in surety document itself. Geronimo verily waived his right to notice of the maturity of notes, drafts, overdraft, and other credit obligations for which Gateway shall become indebted. This waiver necessarily includes new agreements resulting from the novation of previous agreements due to changes in their maturity dates.

ISSUE: W/N Geronimo is held liable under the Surety Undertaking despite the insolvency of Gateway. No discussion. RULING: YES SECURITY BANK vs. CUENCA As to the insolvency proceeding A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal. Clearly, Asianbank’s right to collect payment for the full amount from Geronimo, as surety, exists independently of its right against Gateway as principal debtor. It could thus proceed against one of them or file separate actions against them to recover the principal debt covered by the deed on suretyship, subject to the rule prohibiting double recovery from the same cause. Hence, a suit against the surety, insofar as the surety’s solidary liability is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The transfer of Gateway’s property to the insolvency assignee, if this be the case, does not negate Geronimo’s right of subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that he may only recover a portion of the amount he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does not, however, render ineffectual, let alone invalidate, his suretyship. As to the extinguishment of his liability Article 2054 enunciates the rule that the obligation of a guarantor may be less, but cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be stretched to mean that a guarantor or surety is freed from liability as such guarantor or surety in the event the principal debtor

In 1980, Roldolfo Cuenca executed an Indemnity Agreement in favor of Security Bank binding himself solidarily liable with SMIC for the payment of an P8M credit loan facility and whatever amount including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodations upon demand and without the benefit of excussion. The loan shall effective until 30 November 1981 and that the bank reserves the right to amend any of the terms and conditions of the loan upon written notice to the Borrower. In 1985, Cuenca resigned as President and Chairman of SMIC. Subsequently, his shareholdings were sold in public auction and was bought by Angala. Meanwhile, SIMC repeatedly availed of its credit line and obtained 6 other loans with Security Bank evidenced by Promissory Notes. Later on, Security Bank and SMIC agreed to restructure the past due obligations of SMIC. This was done without notice to or the prior consent of Cuenca. The restructured loan provides that the P6M loan which was the only loan incurred prior to the expiration of the P8M-Credit Loan and the only one covered by the Indemnity Agreement was not segregated from but was instead lumped together with, the other loans which were not secured by said Indemnity Agreement. Pursuant thereto, SMIC executed promissory notes in 1989 covering the total principal amount of P12.2M.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 However, SMIC defaulted in its payment causing Security Bank to demand payment from Cuenca who refused to pay. Security Bank argues that there was no novation which resulted to the extinguishment of Cuenca’s obligation since the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. Further, the terms thereof were not more onerous. Not only this, Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same as provided under the Indemnity Agreement. Hence, the novation of the original credit accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old contract and birth of another one. ISSUE: W/N Cuenca may be held liable for the 1989 Agreement. RULING: NO As to novation The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit accommodation. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8M, the 1989 Agreement provided that the loan was P12.2M. The periods for payment were also different. Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code. As to the contention that 1989 Agreement was a mere renewal The 1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8M credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the CC. The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. As to the alleged waiver of consent An essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter’s obligation. While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8M limit and the November 30, 1981 term. It did not give the bank or SMIC any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower. Construction of suretyship agreements A contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety. It is a well-settled legal principle that if there is any doubt on the terms

and conditions of the surety agreement, the doubt should be resolved in favor of the surety. Ambiguous contracts are construed against the party who caused the ambiguity. In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver. Otherwise, his liability would thus be more burdensome than that of the SMIC. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal. Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations. Lastly, that the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately. Q: Now what was the limitation of the obligation here of Cuenca as a surety? A: the loan agreement in 1981 and beyond the limitation in the agreement Q: How about the ruling of the court that Cuenca here was no longer an employee. Can he use such defense wherein the surety at the time he acted as such executed the agreement was still the president, officer, or major stock holder of the corporation. But subsequently he was no longer a stockholder, will there be a release of the liability as a surety? A: No, maam. The obligation of the surety while he was an officer subsists even if he is no longer an officer. Q: So in this case, why did the SC rule that Cuenca was no longer liable as he was not an officer anymore? SC held “there was no logic for the bank to assume that he would still agree to act as a surety in the 1989 indebtedness because at that time, he was no longer an officer or stockholder of the debtor-corporation.” A: Because again you go back to the stipulations in the indemnity agreement. Least likely his obligations last up until 1981. In the execution of the 1989 agreement, it was said that the 1981 agreement was extinguished. In other words, hindi porke’t hindi na sya stockholder sa corporation, he would be immediately released of his obligation. We have to take that in the light of the circumstances in this case. When you sign a document, you sign as a surety, not because you are a stockholder or officer of the corporation. So here unlike in other agreements that there was an expressed waiver in the obligation, nothing indicated that there was any waiver to any change or any modification of said principal obligation. It was emphasized in this case that the surety agreement is strictly construed or any doubt would be resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material application in the loan agreement or notify him thereof. The Bank here cannot hold Cuenca liable for loans obtained in excess of the amount or beyond the period stipulated in the agreement absent of any stipulation that Cuenca will be notified or gave consent thereto.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 This is especially true here wherein respondent was no longer an officer or major stock holder. Parang additional fact or circumstance considered so that Cuenca was not held liable anymore. The 1989 loan agreement extinguished the 1981 credit accommodation. This is clear from the explicit provision of to liquidate the principal and the interest the earlier indebtedness. The 1989 loan agreement expressedly stated that is purpose was to liquidate not to renew or extend the outstanding indebtedness. Respondent did not sign the 1989 document which prejudice extended to the original 10million credit. It’s not really any extension but merely a posting was merely to the old obligation na naextinguish. It is fundamental in the law of suretyship that any agreement between the debtor and principal creditor, which essentially varies from the terms used in the first contract without the consent the surety will release the surety from liability. While respondent made himself liable to the credit accommodation. Such clause would be understood to be in the context of the 8 million limit and the 1981 term. It did not give respondent any license to modify the nature and scope of the original credit accommodation without informing or getting the consent of Cuenca.

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a)

Alright, 2055 is very clear that the contract of guaranty is not presumed. In other words, it must be expressed and cannot extend to more than what is stipulated. So, we have here the case of Piczon vs Piczon. PICZON vs. PICZON Sosing-Lobos Co. obtained a loan from Consuelo Piczon. Estaban Piczon, as the President of the company, bound himself as guarantor of the loan. When Sosing Lobos defaulted, Consuelo demanded payment from Esteban as surety including the payment of interest.

A contract of surety can not extend to more than what was stipulated. It is strictly construed against the creditor, every doubt resolved against enlarging the obligation of the surety.

ISSUE: W/N Esteban is a surety.

Here, the surety agreement contained an equivocal stipulation, no express stipulation compare this to another case which was the case of PhilAmGen. In that case, there was a clear stipulation that there was no stipulation as to the waiver.

Piczon expressly bound himself only as guarantor, and there are no circumstances in the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express pursuant to Article 2055 and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement is "guarantor”.

But in the present case, there was an expressed stipulation. At most, the alleged basis of the respondent is deemed uncertain and confers no clear obligation to Sta. Ines to notify the Bank of its indebtedness in the original obligation. A continuing guaranty is one which covers all transaction, including those arising in the future, as long as it is within the description or contemplation of the contract of guaranty until the expiration or termination thereof but still subject to the stipulations of the loan agreement as held in this case. Further, just because you are not a stockholder, it does not exonerate you from any liabilities because if you sign as a surety, you do so in your own personal capacity not because you are the officer or major stock holder. In this case, hindi siya liable dahil beyond the limitation yung obligation that is being demanded.

Art. 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.

RULING: NO but only a guarantor

He accepted the express assumption of liability by SosingLobos for the payment of the obligation in question, thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of the agreement, Piczon necessarily must have bound himself as insurer. As to the interest Piczon is also liable for 12% interest from the date of execution of the guaranty. In the case at bar, the "interest agreed upon" by the parties was to commence from the execution of said document. f the contract stipulates from what time interest will be counted, said stipulated time controls, and, therefore interest is payable from such time, and not from the date of the filing of the complaint.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826)

Q: So who is the principal debtor here?

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.

Q: Why could he (Esteban Piczon) be considered as a surety?

So in the cases of Pacific Banking and Molino that we already discussed, again, if there is an express waiver for any novation or change in the principal contract and to which the surety agreed to such novation, then you cannot subsequently question any change. For example in those cases, nag exceed sa limit noh, credit limit in the credit cards that were issued. Nevertheless, the securities in those cases were still held to be liable. Also, take note that with regard to contracts of securities, it must be strictly interpreted against the creditor and to which we have also discussed the case of Cuenca wherein in that case, it was stipulated that the 1989 loan agreement extinguished the previous obligation to which the surety secured and also we have taken into consideration the limits for each contracts of security, for example its only up to 8 million or its only for a limited period, then that should also be taken into consideration.

A: Sosing-Lobos and Co., Inc.

A: He is not considered as a surety here because under the terms of the contract, he expressly bound himself only as a guarantor. Q: So, when would it happen that a person is liable as a surety even if he is referred as a guarantor in an agreement? A: If he binds himself jointly and severally liable. Q:Alright, together with the principal debtor. But in this case, that circumstance is not present. Here Piczon expressly bound himself only as guarantor and there are no circumstances in the record from which it can deduce that his liability could be that of a surety. Under 2055, a guaranty must be expressed and it would be violative of the law to consider a party to be bound as a surety when the (??? noisy) used in the agreement is the guarantor. But again, the mere use of the word guarantor or guaranty does not necessarily mean that the person only bound himself only as a guarantor and not as a surety, if

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 there are circumstances that would point out that he bound himself solidarily liable with the principal debtor. So here, with regard to a contract of guaranty, there is no presumption as to its existence. The terms of the contract must be stipulated in such a way that there's no doubt that there exist a contract of a guaranty and that he promised or undertakes to answer for the obligation of another. In addition, with regards to the existence of a surety, if a person bound himself only to be a guarantor then he could not expressly bound himself to be a guarantor, it could not be interpreted that he bound himself solidarily liable with the principal debtor. Now with respect to the guarantor, he shall be obliged to pay for the costs only from the time when the guaranty was made and cannot be faulted for the delay of the debtor. As we have mentioned last time, if upon demand to the guarantor and he did not pay then he will be liable for all costs from the time the demand was made upon the guarantor. The guarantor could not be held liable for other costs incurred or interests incurred from the time the principal debtor was in delay, otherwise, that would be unfair to the said guarantor. So again, the guarantor shall answer only for such judicial costs as have been incurred after he has been judicially required to pay otherwise here, you would have a harsh necessity wherein the guarantor would be paying another's debt without any benefit whatsoever for himself. We also have the case of BA Finance. BA FINANCE vs. CA

weight. The representation of one who acts as agent cannot by itself serve as proof of his authority to act as agent or of the extent of his authority as agent. Wong's testimony that he had entered into similar transactions of guaranty in the past for and in behalf of the petitioner, lacks credence due to his failure to show documents or records of the alleged past transactions. The rule is clear that an agent who exceeds his authority is personally liable for damages. As to estoppel TRB had not shown any evidence aside from the testimony of the credit administrator that the disputed transaction of guaranty was in fact entered into the official records or files of petitioner corporation, which will show notice or knowledge on the latter's part and its consequent ratification of the said transaction. In the absence of clear proof, it would be unfair to hold petitioner corporation guilty of estoppel in allowing its credit administrator to act as though the latter had power to guarantee.

Q: What was the principal obligation here? A: Payment of the loan ma'am. Q: Who entered into that contract of loan? What was the document entered into by the Gaytano spouses? A: A deed of suretyship.

Renato Gaytano, doing business under the name Gebbs Int’l. obtained a P60k loan from Traders Royal Bank. As security for the payment of said loan, the Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly and severally to respondent bank the amount of the loan including interests, penalty and other bank charges. Wong as credit administrator of BA Finance, undertook to guarantee the loan of the Gaytano spouses.

Q: So, it's an accessory contract. What would be the principal obligation? Who entered into that contract of loan?

However, the Gaytanos refused to pay the balance of the loan causing TRB to file complaint for sum of money against the Gaytano spouses and petitioner BA Finance.

A: No ma'am.

BA Finance contends that the letter guaranty is ultra vires, and therefore unenforceable; that said letter-guaranty was issued by its employee beyond the scope of his authority since the petitioner itself is not even empowered by its articles of incorporation and by-laws to issue guaranties. Petitioner also submits that it is not guilty of estoppel to make it liable under the letter-guaranty because petitioner had no knowledge or notice of such letter-guaranty; that the allegation of Wong, credit administrator, that there was an audit was not supported by evidence of any audit report or record of such transaction in the office files. ISSUE: W/N BA Finance may be held liable as a guarantor. RULING: NO Although Wong was clearly authorized to approve loans even up to P350k without any security requirement, which is far above the amount subject of the guaranty in the amount of P60k, nothing in the said memorandum expressly vests on the credit administrator power to issue guarantees. We cannot agree with respondent's contention that the phrase "contingent commitment" set forth in the memorandum means guarantees. It has been held that a power of attorney or authority of an agent should not be inferred from the use of vague or general words. Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits. The sole allegation of the credit administrator in the absence of any other proof that he is authorized to bind petitioner in a contract of guaranty with third persons should not be given

A: Gebbs International ma'am. Q: Alright, Gaytano doing business under Gebbs International to which the Gaytano spouses executed a deed of suretyship. now under the facts of this case, can we say that there was a double guaranty or a double suretyship?

Q: Why not? Supposedly, what was the transaction or document executed here by Philip Wong? A: A contract of guaranty ma'am. Q: Specifically, it was alleged that Philip Wong, as credit administrator of BA Finance, guaranteed the loan, in this instance, the obligation of Gaytano spouses when they executed that deed of suretyship. But again here, was BA Finance liable? A: No, BA Finance was not liable ma'am because the letter of guaranty was invalid because it was beyond the authority of Philip Wong to issue guaranties. Alright, so here, although Wong was authorized to approve loans even up to P350,000 without any security requirement, nothing in the said memorandum expressly vests upon him as credit administrator the power to issue guaranties. The contention that there was this phrase contingent commitment does not mean that he had the authority to enter as a guarantor for and in behalf of BA Finance. Remember here, again applying 2055, guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits. Okay, is there a requirement that the acceptance here be made express or in writing? Now recall in your Obligations and Contracts that as to the creditor, the acceptance of a payment need not be express or in writing. But what about in the existence of a contract of guaranty? Is it required that the creditor accepts the contract of guaranty or the promise of guaranty by the guarantor? AGLIBOT vs. SANTIA

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Santia granted a P2.5M loan to Pacific Lending thru petitioner Aglibot. As a guaranty or security for the payment of the note, Aglibot issued and delivered to Santia 11 post-dated personal checks drawn from her own. However, the checks were dishonored upon presentment to the bank causing Santia to demand payment from Pacific and Aglibot and to file a criminal charge against Aglibot under BP 22. Aglibot admitted that she obtained a loan from Santia but claimed that she did so in behalf of Pacific, the true borrower. According to her, before granting the loan, Santia demanded and obtained from her a security for the repayment thereof in the form of the aforesaid checks, but with the understanding that upon remittance in cash of the face amount of the checks, Santia would correspondingly return to her each check so paid. But despite having already paid the said checks, Santia refused to return them to her, although he gave her assurance that he would not deposit them. Maintaining that she was a mere guarantor of the said debt of Pacific when she agreed to issue her own checks, Aglibot insists that Santia failed to exhaust all means to collect the debt from Pacific, the principal debtor, and therefore he cannot now be permitted to go after her subsidiary liability. In other words, she claims the benefit of excussion. ISSUE: W/N Aglibot is entitled to the benefit of excussion.

Accommodation party An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety — the accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The liability is immediate and direct. t is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument; nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party.

RULING: NO Benefit of excussion It is settled that the liability of the guarantor is only subsidiary, and all the properties of the principal debtor, PACIFIC, must first be exhausted before the guarantor may be held answerable for the debt. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, for obviously the ‘exhaustion of the principal’s property’, the benefit of which the guarantor claims, cannot even begin to take place before judgment has been obtained. This rule is contained in Article 2062 of the CC, which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances mentioned in Article 2059, then the action may be brought against both the guarantor and the principal debtor.

Unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value, such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor. Conclusions The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter on her checks without the need for Santia to first go after PACIFIC for the payment of its loan. It would have been otherwise had it been shown that Aglibot was a mere guarantor, except that since checks were issued ostensibly in payment for the loan, the provisions of the NIL must take primacy in application.

Application of Statute of Frauds The Court must, however, reject Aglibot’s claim for want of proof, in view of Article 1403(2) of the CC, embodying the Statute of Frauds. Under its provisions concerning a guaranty agreement, which is a promise to answer for the debt or default of another the law clearly requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified although under Article 1358 a contract of guaranty does not have to appear in a public document On the other hand, Article 2055 of the CC also provides that a guaranty is not presumed, but must be express, and cannot extend to more than what is stipulated therein. This is the obvious rationale why a contract of guarantee is unenforceable unless made in writing or evidenced by some writing. For as pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly, there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an agreement between her and PACIFIC resembling her guaranteeing its debt to Santia. And neither is there a showing that PACIFIC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own checks to Santia.

TEXAS COMPANY vs. ALONSO Facts: Leonor Bantug was an agent of Texas Company. On the other hand, Tomas Alonso bound himself joint-severally liable for the liability of Leonor in connection with the agency contract with the Texas Company. Tomas Alonso signed the following: For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete performance of same hereby waiving notice of non-performance by or demand upon said agent, and the consent to any and all extensions. On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc. for the recovery of money for the unpaid balance of the Leonora S. Bantug’s account. The CFI of Cebu sentenced Bantug and Alonso to pay jointly and severally to the Texas Company. The CA modified the judgment; Bantug was held solely liable for the payment of the aforesaid sum of money. Meanwhile, Tomas argues that the CA erred in holding that there was merely an offer of guaranty on the part of the respondent,

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Tomas Alonso, and that the latter cannot be held liable thereunder because he was never notified by the Texas Company of its acceptance.

guaranty, notice of acceptance is not required anymore. In this instance, why is it considered merely an offer of guaranty, and not an unconditional promise of guaranty?

Issue: WON there was merely an offer of guaranty on the part of Alonso.

A: Because it required a further action ma'am from the creditor before the obligation becomes fixed. Q: What is your basis?

Held: YES. The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia, while the petitioner invokes the case of National Bank vs. Escueta. In the first case, it was held that there was merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give effect to the bond. In the second case, the sureties were held liable under their surety agreement which was found to have been accepted by the creditor, and it was therein ruled that an acceptance need not always be express or in writing. For the purpose of this decision, it is not indispensable for us to invoke one or the other case above cited. The Court of Appeals found as a fact, and this is conclusive in this instance, that 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 individuals of 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 satisfactory hereto; 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 property party in interest, namely, the surety or guarantor. In this connection, we are likewise bound by the finding of the CA that there is no evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied acceptance, so as to justify the application of our decision in National Bank vs. Escueta. Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty. The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary, the reason being that the contract of guaranty is unilateral.

Q: Does it mean that for the perfection of the validity of a contract of a guaranty, there must be acceptance or notice of acceptance by the creditor? A: Yes ma'am. Q: Now, take note there must be a distinction from a offer of guaranty and from a - ? A: Acceptance? Q: No, because if it is an offer, notice of acceptance is required,. However, if what we have is an unconditional promise of

A: The bond in question was executed at the request of the petitioner, and Q: So would that be sufficient that it is merely an offer and not an unconditional promise of guaranty? What is the clause that you're referring to as the basis that this is merely an offer. Please read. A: 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 individuals of firms as joint and several sureties as shall be satisfactory to the Company. Alright, so in other words, by virtue of that provision it is clear here that what you have is merely an offer which requires acceptance for the guarantor to be liable as well on the obligation. Otherwise, if this was an unconditional promise of guaranty such notice of acceptance would not have been necessary. So here, the bond was subject to the petitioner's approval and this is clear in the additional security clause. Nakalagay diyan, 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 individuals of firms as joint and several sureties as shall be satisfactory to the Company. So, the bond will be still be subject to the approval of the petitioner here. If the petitioner is satisfied of such bond, notice of its acceptance or approval should necessarily given to the proper party in interest, namely the surety or the guarantor. So what we have here is merely an offer of proposition for a guaranty. Where there is a merely an offer or proposition for a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and unless there is a waiver of notice, until notice of such acceptance is given to or acquired by the guarantor or until he has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty. The acceptance need not necessarily be express or in writing but be may be indicated by acts amounting to acceptance. On the other hand, if the transaction is not merely an offer of guaranty but amounts to a direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of a guaranty, all that is necessary to make the promise binding is that the promisor should act upon it and notice of acceptance is not necessary., The reason being that a contract of guaranty is unilateral in nature. So take note, if it is merely an offer and there is no waiver, there must be notice of acceptance. Otherwise, if it is an unconditional promise, notice of acceptance is not necessary because a contract of guaranty is unilateral. What happened in the case of Visayan? VISAYAN SURETY vs. CA Facts: The spouses Danilo Ibajan and Mila Ambe Ibajan filed with the RTC a complaint against spouses Jun and Susan Bartolome, for replevin to recover from them the possession of an Isuzu jeepney, with damages. Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and unlawfully taken by defendants Jun and Susan Bartolome while parked at their residence. In line with this, filed a replevin bond through

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 petitioner Visayan Surety & Insurance Corporation. The contract of surety provided thus:

Q: So with the surety, to whom can Visayan Surety be made liable?

WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu, with branch office at Manila, jointly and severally bind ourselves in the sum of Three Hundred Thousand Pesos (P300,000.00) for the return of the property to the defendant, if the return thereof be adjudged, and for the payment to the defendant of such sum as he/she may recover from the plaintiff in the action.

A: To the defendant since the surety was filed by the plaintiff in this case. So if the plaintiff would lose in this case, then the defendant can invoke as to the bond filed by the plaintiff.

Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave of court to intervene, stating that he has a right superior to the plaintiffs over the ownership and possession of the subject vehicle which the court granted. Later, the trial court issued an order granting the motion to quash the writ of replevin and ordering plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan. The trial court issued a writ of replevin in favor of intervenor Dominador Ibajan but it was returned unsatisfied. Intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against plaintiffs bond. The RTC granted the motion. Issue: WON the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of respondents. Held: NO. Intervenor. An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof. A contract of surety is an agreement where a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third person called the oblige. Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal. The obligation of a surety cannot be extended by implication beyond its specified limits. When a surety executes a bond, it does not guarantee that the plaintiffs cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails. The extent of a suretys liability is determined only by the clause of the contract of suretyship. A contract of surety is not presumed; it cannot extend to more than what is stipulated. Since the obligation of the surety cannot be extended by implication, it follows that the surety cannot be held liable to the intervenor when the relationship and obligation of the surety is limited to the defendants specified in the contract of surety. Q: What do you mean by intervenor? A: An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof.

Alright, so what we have here, you have complainants who filed an action for replevin to recover the possession of a jeepney and the plaintiffs here, the Spouses Ibajan, filed a replevin bond, so that they can acquire possession of the property. Now the replevin bond will answer for damages in case it is found that the spouses are not really entitled to the possession of this property but rather it would still be spouses Bartolome that would be entitled thereto. However, it turns out that the registered owner is Dominador Ibajan, the father of the plaintiff Danilo, and therefore he has superior right to possess the property. He intervened in the said case and he is considered an intervenor because he is a person not originally impleaded as a party in the proceeding and nevertheless he has legal interest in the matter in litigation or in the success of either the parties or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof. Remember that with regard to the construction or interpretation of a contract of guaranty or suretyship, it is strictly interpreted against the creditor and in favor of the guarantor or surety and it is not to be extended beyond its terms or specified limits. So here, the surety agreement is an agreement where a party called the "surety" guaranties the performance with another party called the "principal or obligor" of an obligation undertaking in favor of a third person called the "obligee". The obligation here of Visayan surety cannot be extended by implication beyond its specified limits. The extent of a surety's liabilities is determined only by the clause of the contract of suretyship. In this case, it did not include to be answerable to Dominador Ibajan or to any other third person. A contract of surety, just like that of a guaranty, is not presumed and it cannot extend to more than what is stipulated. The surety cannot be held liable to the intervenor in this case when the relationship and obligation of the surety is limited to the defendants spouses Bartolome as specified in the contract of surety.

January 17, 2017 By Angel Deparine and Julian Sabrido Art. 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. These are the qualifications mentioned in 2056. When we talk about integrity, we are talking about the good reputation of the person. Capacity to bind himself --- that he is of legal age, that he has not been convicted with a crime that carries with it the penalty of civil interdiction.

Q: What is the basis that the RTC ordered the delivery of said jeepneys?

Sufficient property--- that these properties are equivalent to the amount of the debt involved.

A: The basis is that Dominador Ibajan was the registered owner of said jeepneys.

However, take note, that these requirements may be waived by the creditor. Even if not all these are present, the creditor can,

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 nevertheless, accept a person to act as a guarantor to a principal obligation. Absent one qualification does not make the contract of guarantee VOID, as long as accepted by the creditor. It is a contract between a creditor and guarantor. The second sentence of 2056 refers to jurisdiction. 

The place of performance- that is the court which has jurisdiction over the case in case litigation will commence. Of course when it comes to jurisdiction and venue with the regard to the case to be filed, then we have the Rules of Court.

Art. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. This emphasizes that if the qualifications in 2056 are present, this is at the time of inception of the contract of guarantee (??? Confusing ang sentence ni ma’am) If subsequently one of the requisites in 2056 is not present anymore, then it will not affect the validity of the contract of guarantee.

ESTATE OF HEMADY vs. LUZON SURETY CO., INC. [G.R. No. L-8437. November 28, 1956.]

The third exception to the transmissibility of obligations under Article 1311 exists when they are “not transmissible by operation of law”. By contract, the articles of the Civil Code that regulate guaranty or suretyship contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety. The lower court sought to infer such a limitation from Art. 2056, to the effect that “one who is obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees”. It will be noted, however, that the law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It is self-evident that once the contract has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted; and if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity. Based on article 2057, it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor it is his right, not his duty be may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death. Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to file against the estate a contingent claim for reimbursement. Discussion:

Facts: The Luzon Surety Co. had filed a claim against the Estate based on 20 different indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety (solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different creditors. The lower court dismissed the claims of Luzon Surety Co., on stating that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be guarantor.” The administratrix contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the claim cannot be considered contingent. Upon the death of Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may occur after Hemady’s death, are not chargeable to his estate because upon his death he ceased to be a guarantor. Issue: WON the liability of Hemday as a surety terminated upon his death. Held: NO. Under our law, therefore, the general rule is that a party’s contractual rights and obligations are transmissible to the successors. Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract. Luzon Surety merely expects a reimbursement of the moneys that it might have to disburse on account of the obligations of the principal debtors. Luzon Surety Co. was indifferent that the reimbursement should be made by Hemady himself.

Recall Oblicon Art 1311 regarding the Principle of Relativity. Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. Applying that provision, even if the surety Hemady already died, his estate could still be held liable. His death did not extinguish the obligation from the contract of surety. Once the contract has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted; and if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity 2056. This apparent that the supervening dishonesty of the guarantor, disappearance of his integrity, does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But this is optional as to the creditor, it is his right, not his duty, he may waive it if he chooses, and hold the guarantor to his bargain. The contracts of suretyship entered into by Hemady is not being rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability there under necessarily passed upon his death to his heirs. But again the heirs will only be liable to the extent of the share or the inheritance that they will received from the Estate of Hemady, beyond that they cannot be held personally liable to the creditor of Hemady.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 So, again, the requirements under 2056 are required only at the inception and perfection of the contract; and not required to continue to subsist afterwards. Even if the surety or guarantor becomes subsequently insolvent…or has been convicted involving dishonesty, it will not necessarily make the contract void. It will not operate to exonerate the guarantor of the eventual liability he has contracted the contract of guaranty continues. The creditor can choose to demand for another guarantor. YULIM INTL COMPANY LTD., JAMES YU, JONATHAN YU, AND ALMERICK TIENG LIM vs. INTL EXCHANGE BANK (NOW UNION BANK OF THE PHILIPPINES) G.R. No. 203133, February 18, 2015 Facts: iBank, a commercial bank, granted Yulim, a domestic partnership, an Omnibus Loan, as evidenced by a Credit Agreement which was secured by a Chattel Mortgage over Yulim’s inventories. As further guarantee, the partners, namely, James, Jonathan and Almerick, executed a Continuing Surety Agreement in favor of iBank. Yulim availed of its aforesaid credit facility with iBank and executed a PN to mature. Yulim defaulted on the said note. iBank sent demand letters to Yulim, through its President, James, and through Almerick, but without success. iBank then filed a Complaint for Sum of Money with Replevin against Yulim and its sureties. The RTC ordered Yulim alone to pay iBank and dismissed the complaint. The CA found the records bereft of any evidence to show that Yulim had fully settled its obligation to iBank, Accordingly, the appealed decision is MODIFIED in that [petitioners] James Yu, Jonathan Yu and A[l]merick Tieng Lim are hereby held jointly and severally liable with defendant-appellant Yulim for the payment o the monetary awards. The petitioners insist that they have paid their loan to iBank. They maintain that the letter of iBank to them, which “expressly stipulated that the petitioners shall execute a Deed of Assignment over one condominium unit xxx” was with the understanding that the Deed of Assignment, which they in fact executed, delivering also to iBank all the pertinent supporting documents, would serve to totally extinguish their loan obligation to iBank. In particular, the petitioners state that it was their understanding that upon approval by iBank of their Deed of Assignment, the same “shall be considered as full and final payment of the petitioners’ obligation.” They further assert that iBank’s May 4, 2001 letter expressly carried the said approval. Issue: WON James Yu et.al are liable as sureties. Held: Yes. Firstly, the individual petitioners do not deny that they executed the Continuing Surety Agreement, wherein they “jointly and severally with the PRINCIPAL [Yulim], hereby unconditionally and irrevocably guarantee full and complete payment when due, whether at stated maturity, by acceleration, or otherwise, of any and all credit accommodations that have been granted” to Yulim by iBank, including interest, fees, penalty and other charges. Under Article 2047 of the Civil Code, these words are said to describe a contract of suretyship. In a contract of suretyship, one lends his credit by joining in the principal debtor’s obligation so as to render himself directly and primarily responsible with him without reference to the solvency of the principal. According to the above Article, if a person binds himself solidarily with the principal debtor, the provisions of Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV of the Civil Code on joint and solidary obligations, shall be observed. Thus, where there is a concurrence of two or more creditors or of

two or more debtors in one and the same obligation, Article 1207 provides that among them, “[t]here is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” “A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.” And it is well settled that when the obligor or obligors undertake to be “jointly and severally” liable, it means that the obligation is solidary, as in this case. Article I of the Continuing Surety Agreement executed by the individual petitioners clearly provides that they bound themselves as sureties. Thereunder, in addition to binding themselves “jointly and severally” with Yulim to “unconditionally and irrevocably guarantee full and complete payment” of any and all credit accommodations that have been granted to Yulim, the petitioners further warrant that their liability as sureties “shall be direct, immediate and not contingent upon the pursuit [by] the BANK of whatever remedies it may have against the PRINCIPAL of other securities.” There can thus be no doubt that the individual petitioners have bound themselves to be solidarily liable with Yulim for the payment of its loan with iBank. As to the Deed of Assignment. What the letter accepted was only the collaterals provided for the loans, as well as the consolidation of the petitioners’ various PN’s under one PN for their aggregate amount of P4,246,310.00. Nowhere can it be remotely construed that the letter even intimates an understanding by iBank that the Deed of Assignment would serve to extinguish the petitioners’ loan. Otherwise, there would have been no need for iBank to mention therein the three “collaterals” or “supports” provided by the petitioners, namely, the Deed of Assignment, the Chattel Mortgage and the Continuing Surety Agreement executed by the individual petitioners. In fact, Section 2.01 of the Deed of Assignment expressly acknowledges that it is a mere “interim security for the repayment of any loan granted and those that may be granted in the future by the BANK to the ASSIGNOR and/or the BORROWER, for compliance with the terms and conditions of the relevant credit and/or loan documents thereof.”30 The condominium unit, then, is a mere temporary security, not a payment to settle their promissory notes. To stress, the assignment being in its essence a mortgage, it was but a security and not a satisfaction of the petitioners’ indebtedness.34 Article 125535 of the Civil Code invoked by the petitioners contemplates the existence of two or more creditors and involves the assignment of the entire debtor’s property, not a dacion en pago.36 Under Article 1245 of the Civil Code, “[d]ation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales.” Nowhere in the Deed of Assignment can it be remotely said that a sale of the condominium unit was contemplated by the parties, the consideration for which would consist of the amount of outstanding loan due to iBank from the petitioners. Discussion: It’s clear here that the petitioners are sureties jointly and severally liable due to the continuing surety agreement. Now they alleged that the obligation has already been extinguished since they executed a deed of assignment involving a condominium unit. However, while the contract was denominated as a deed of assignment, a careful examination of the contract would show that it was solely to act as a security.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Nowhere can it be remotely construed that the letter intimidates an understanding by iBank, that the deed of assignment would serve to extinguish the loan. Otherwise, there would be no need for ibank to mention therein in the deed the three collaterals or supports provided by the petitioners: the deed of assignment, mortgage and continuing surety agreement. So the deed of assignment was only an interim security for the repayment of any loan granted or those that may be granted in the future for compliance of the terms and conditions of the relevant credit and/or loan documents. So the condominium unit was not assigned as Dacion en Pago to the bank. It was a mere temporary security, not a payment to settle their promissory notes. This could also be further evidenced by the subsequent section of the Deed of Assignment that as soon as the title to the condo has been issued, they would execute a deed of real estate mortgage. So if there was really an intention to use that condo as a special form of payment to extinguish the obligation, there would have been no need for that section for the execution of the mortgage. The parties really intended to constitute that condo as a REM. Considering that the assignment, in its essence, is a mortgage and not a security and not a satisfaction of the petitioner’s indebtedness. Nowhere in the deed can it be remotely said that the sale of the condo was contemplated by the parties. The consideration for which consists of the amount outstanding loan due to the bank of the petitioners. So no dacion en pago.

II. EFFECTS OF GUARANTY BENEFIT OF EXCUSSION OR EXHAUSTION

Issue: WON Tanglao is liable for the remaining balance. Held: NO. Tanglao merely mortgaged his property and did not bind himself as a surety. David used said power of attorney only to mortgage the property and did not enter into contract of suretyship. Nothing is stated in the compormse agreement that Tanglao became David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this inference might be made, it would be insufficient to create an obligation of suretyship which, under the law, must be express and cannot be presumed. The only obligation which the compromise agreement has created to Tanglao, is that resulting from the mortgage of a property belonging to him to secure the payment of said P640. However, a foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for the recovery of the amount still owed by David. The Benefit of Excussion. At any rate, even granting that defendant Tanglao may be considered as a surety under the compromise agreement, the action does not yet lie against him on the ground that all the legal remedies against the debtor have not previously been. The plaintiff has in its favor a judgment against debtor David for the payment of debt. It does not appear that the execution of this judgment has been asked for and it shows that David has two pieces of property the value of which is in excess of the balance of the debt the payment of which is sought of Tanglao in his alleged capacity as surety. DISCUSSION The power of attorney was only to mortgage the property and they did not enter into a contract of suretyship.

Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

Do take note that this is a 1936 case, there is no clear distinction yet as between a surety and guarantor. So the usage of the surety here referred to that of a guarantor.

The Benefit of Excussion or the Benefit of Exhaustion.

So here the contract of surety or guaranty must be EXPRESS and cannot be presumed.

-The creditor shall first exhaust the available remedies before claiming from the guarantor. WISE & CO., INC. vs. DIONISIO P. TANGLAO Facts: Cornelio David was an agent of Wise & Co. David failed to liquidate to Wise & Co. Thereafter, Wise & Co. instituted civil case against Cornelio C. David for the recovery of a certain sum of money in the CFI. Wise & Co. obtained a preliminary attachment of David's property. To avoid the execution of said attachment, David succeeded in having his Attorney Tanglao execute, a power of attorney (Exhibit A) in his favor, with the following clause: To sign for me as guarantor for himself in his indebtedness to Wise & Company of Manila, which indebtedness appears xxx and to mortgage my lot, to guarantee the said obligations to the Wise & Company, Inc., of Manila. Subsequently, David made a compromise agreement with the Wise&Co. to pay for the sum of P640, payable at the rate of P80 per month and he pledged the lot owned by the Atty. Dionisio Tanglao as a guaranty for the balance. David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself to pay under the compromise agreement, leaving an unpaid balance of P296.53. Wise & Co. now institutes this case against Tanglao for the recovery of said balance of P296.53.

Here, Tanglao could not have contracted any personal responsibility for the payment of the sum of P640. At any rate, even granting that defendant Tanglao may be considered as a surety or a guarantor, with this case a guarantor, he action does not yet lie against him since he is entitled to the benefit or excussion; legal remedies against the debtor have not previously been exhausted. When we say ‘resorted to available legal remedies’, it’s not sufficient to just make a demand. You have to resort to all legal remedies against the debtor. As a general rule, you proceed first against the debtor, exhausting all the properties of the debtor and resorting to all the legal remedies against the said debtor.

PBCOM VS. CA, JOSEPH L.G. CHUA AND JALECO DEV’T, INC. Facts: On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety Agreement in favor of Philippine Bank of Communications (PBCOM) with Joseph L.G. Chua, as one of the sureties. Meanwhile, on March 6, 1981, Forte Merchant Finance, Inc., executed a Surety Agreement in favor of PBCOM with Joseph L.G. Chua again as one of the sureties. On October 24, 1983 Chua executed a Deed of Exchange transferring a parcel of land with improvements to JALECO Dev.,

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Inc. As a result, the title over the land was issued in the name of JALECO. Thereafter, on November 2, 1983, Chua sold 6,000 shares of JALECO to Mr. Chua Tiong King and another 6,000 shares of JALECO to Guillermo Jose, Jr. and Caw Le Ja Chua, wife of Chua sold the 6,000 share of JALECO to Chua Tiong King. In the meanwhile, for failure of both Fortune Motors and Forte Merchant Finance, Inc. to meet their respective financial obligations with PBCOM, the latter filed Civil Case against Fortune Motors, Joseph L. G. Chua et. al. and Civil Case against Forte Merchant Finance, Inc., Joseph L. G. Chua et. al. with the RTC, both for Sum of Money with Writ of Preliminary Attachment where PBCOM was able to obtain a notice of levy on the properties of Fortune Motors.

DISCUSSION It is not sufficient to say that as long as the debtor is insolvent you can now go after the guarantor. You must resort to all remedies against the debtor. In this case, while it is true that Chua is a surety to which the benefit of excussion is not available, I included this case to emphasize a remedy that is available to the creditor in relation to the benefit of excussion---which is accion pauliana. In this case, the only property of Chua was sold to JALECO, after the debts became due, and then the petitioner here had the right to file an annulment of the deed of exchange between Chua and JALECO, wherein Chua sold his only property to JALECO, to protect his interest, so as not to make the judgments in the two cases illusory.

When PBCOM was able to locate Chua's former property which was already transferred to JALECO by virtue of the Deed of Exchange dated October 24, 1983, PBCOM filed Civil Case for annulment of Deed of Exchange with the RTC.

Another instance here is that Chua continued to stay in the property and evidence contains that Chua and his immediate family controlled JALECO.

The CA said that the annulment case is premature since the main case against Fortune and Forte are still pending.

So the deed of exchange executed had for its subject the sale of the only property of Chua at the time when his financial obligations became due and demandable. Despite the sale, Chua continued to stay in the same property.

Chua admitted the Deed of Exchange in favor of JALECO and contended that it was done in good faith and in accordance with law.

Xxx

Issue: WON the annulment case is premature because if the pendency of the case against Fortune and Forte.

An accion pauliana can be resorted to, to rescind or impugn the contract or alienation made by debtor in fraud of the creditor. Xxx The creditor can file his action before proceeding against the creditor.

Held: NO. For failure of both Fortune Motors and Forte Merchant. to pay their obligations with the petitioner, the latter filed the two civil cases against Fortune Motors. and Forte Merchant and respondent Chua. The petitioner was granted a writ of attachment as a result of which properties belonging to Fortune Motorswere attached. It turned out, however, that the attached properties of Fortune Motors were already previously attached/mortgaged to prior lien holders. As regards Forte Merchant, it appears that it has no property to satisfy the debts it incurred with PBCOM. The record further shows that as regards Chua, the property subject of the Deed of Exchange between him and JALECO was his only property. Under these circumstances, the petitioner's petition for annulment of the deed of exchange on the ground that the deed was executed in fraud of creditors, despite the pendency of the two other civil cases is well-taken. As surety for the financial obligations of Fortune Motors and the Forte Merchant with the petitioner, respondent Chua bound himself solidarily liable with the two principal debtors. (Article 2047, Civil Code) The petitioner may therefore demand payment of the whole financial obligations of Fortune Motors and Forte Finance from Chua, if the petitioner chooses to go directly after him. Hence, since the only property of Chua was sold to JALECO after the debts became due, the petitioner has the right to file an annulment of the deed of exchange between Chua and JALECO wherein Chua sold his only property to JALECO to protect his interests and so as not to make the judgments in the two cases illusory. While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted. Parenthetically, the appellate court's observation that the petitioner's interests are sufficiently protected by a writ of attachment on the properties of Fortune Finance has neither legal nor factual basis.Discussion:

In application of the Benefit of Excussion, an accion pauliana must be first made before we proceed against the guarantor. PRUDENTIAL BANK vs.IAC, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI G.R. No. 74886 December 8, 1992 Facts: Philippine Rayon Mills Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries. Philippine Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. Nissho withdrew twelve drafts against the letter of credit which Prudential Bank paid to the Bank of Tokyo but only two of these drafts were accepted by Anacleto Chi, the president of Philippine Rayon. Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant- appellant which accepted delivery of the same. They executed, a trust receipt which was signed by Anacleto Chi to enable Philippine Rayon Mills to take delivery of the machines. At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant- appellant was able to take delivery of the textile machineries and installed the same. The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands for the payment of the said trust receipt yielded no result. Hence, the present action for the collection of money against Phil. Rayon and Anacleto R. Chi. In their respective answers, the defendants interposed that the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Issues: WON Chi is jointly and severally liable with Philippine Rayon. Held. NO. Chi is merely a guarantor. Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads: In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay xxxx PHILIPPINE RAYON MILLS, INC. (Sgd.) Anacleto R. Chi

action against Chi. Excussion is not a condition sine qua non for the institution of an action against a guarantor. However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories xxx; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay xxx DISCUSSION So, we have here Phil Rayon as the principal debtor, and we also have Chi who affixed his signature in tax receipt. However in affixing his signature, it did not make her a solidary liable with Phil Rayon. While it is true that they have that phrase ‘jointly and severally undertake’, who are the signatories in said document? It was only Chi. The intention of that is to have Solidary Guarantee Clause. Under the Solidary Guarantee Clause, the one who signs the contract is not necessarily solidary bound to the principal debtor. xxx

ANACLETO R. CHI The obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is asolidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety before a notary public is required to make the same a public document, a contract of guaranty does not have to appear in a public document.

The intention is that you have guarantors, and among themselves, they are solidarily bound. This is different from the obligation of a surety, because a surety is still solidarily bound together with the principal debtor. So, when you have a guarantor, you have benefit of excussion. You can have several guarantors, and you have the benefit of excussion to each and every one of them. It is also possible that between and among these guarantors, they are solidarily bound, wherein they (creditor?) would still be entitled to the benefit of excussion. But as long as 2058 is resorted to, na exhaust na lahat wala pa rin masingil, so pwede na masingil ang guarantors. Any one of them pwede na masingil ang whole amount because of the Solidary Guarantee Clause. But in this case, it is only Chi who signed. There is a provision on waiver of exhaustion. But the SC held this is ineffective because the space therein where the property may not be exhausted was not filled up. So the defense of exhaustion may be raised by the guarantor before he may be held for the obligation, which Chi did. Also here what we have is a contract of adhesion that was prepared by the bank, so with regard to the interpretation, any doubt will be strictly construed against the one who prepared the said contract. Here, even if it was only Chi who signed the clause it did not make his act and idle ceremony or render the clause totally meaningless. By his signing he became the sole guarantor to which he is entitled the benefit of excussion. Now also take note here excussion is not a condition sine qua non for the institution of an action against a guarantor. so in other words, the guarantor, can be impleaded as a party, in the claim for the collection of sum of money by the creditor. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense.

Issue: WON Chi is liable. Held: NO. The remaining issue to be resolved concerns the propriety of the dismissal of the case against Chi. Chi he cannot be bound as a simple guarantor pursuant to Article 2058 of the Civil Code. He cannot be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so. Simply stated, there is as yet no cause of

Art. 2059. The excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; (3) In case of insolvency of the debtor;

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 (4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative; (5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.

Now aside from the exceptions under 2059 we also have to take into consideration other provisions of the law.

GR: Guarantor shall be entitled the benefit of excussion. EXCEPTION: Artcle 2059. 1.

So you need not wait for the excussion of the properties of the principal debtor because it is already clear that you cannot pay. You can now proceed against the guarantor. It would be useless to proceed against the principal debtor.



Waiver (expressly renounces)  This benefit of excussion is a privilege granted to a guarantor. Like any other right, this can be waived. It is solely the guarantor can waive this right as this is a personal right. So this cannot be waived by the creditor. No specific form for this waiver as long as it is express.

2.

Insolvency Here, there is no need for a judicial decree or declaration of bankruptcy. However, the insolvency here must be actual. Recall the case of Machetti. wherein the mere declaration of insolvency is not sufficient to go after the guarantor. There must be first a final liquidation. Why? Because when we say that the debtor is insolvent it does not necessarily mean that he has no assets remaining at all. It is just that he may still have assets but are not sufficient to pay of all his obligations. So in the liquidation proceedings there will be concurrence and preference of credits. Restitution or liquidation of the remaining assets to pay off his obligations. Puwede preferred yung creditors, pabayarin siya. Puwede pro-rata ang creditor so may portion mabayaran si creditor. So therefore if that liquidation has still to take place then the creditor has no right yet to go after the guarantor just because the debtor has already been declared insolvent.

3.

Absconded Philippines

or

cannot

be

sued

within

the

It is not expected to the creditor should first proceed against his principal debtor because in this case it would not become impossible for him to enforce the court decision against the principal debtor since the principal debtor has left the country. Remember that court processes are jurisdictional. It cannot be enforced outside the Philippine territory unless what we have is subject matter involving res—property here in the Philippines. You have to consider the Rules of Court. But what if the debtor has no properties in the Philippines? Then it may be useless to go after him in another country and he cannot fulfill his obligation. Remember you cannot acquire jurisdiction under civil procedure, you cannot acquire jurisdiction against the debtor unless he has properties here in PH wherein you can acquire jurisdiction over the res or the thing. But, if there is no property then your action against him will be useless. Unless he has a manager or a representative then you can sue the manager or representative. 4.

Art 2084. A judicial bondsmen cannot demand the exhaustion of the property of the principal debtor. A sub surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety.

If he has bound himself solidarily He is now considered as a surety primarily liable with the debtor.

3.

Pledge or mortgage- because you have to resort first to the foreclosure of the property mortgaged. When we go to 2084, on judicial bondsmen and subsurety.

The principal debtor has not more property

1. There must be compliance with the requirements in article 2060. Art. 2060. In order that the guarantor may make use of the benefit of excussion he must set it up against the creditor upon the latter’s demand for payment for him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt.

Under 2059 we have therein the circumstances wherein the benefit of the excussion is not available to the guarantor. In those circumstances the principal creditor is not required to pursue all remedies against the principal debtor. Under 2060, as a pre requisite before the guarantor can avail of the benefit of excussion, the guarantor must set this up as a defense against the creditor. You allege it or interpose it as a defense kung maningil ang creditor sayo. Sabihin mo, oops, di pa ako magbayad kay meron pa ako benefit of excussion. Failure to interpose is essentially a waiver on your part. So if you are a guarantor and demand is made upon you, you must set this defense. If the guarantor did not set up his defense of the benefit of excussion then he is deemed to have waived it. The other one is if he fails to to point out specific properties of the principal debtor that are available in the Philippines to cover the amount of the debts. Requisites in 2060: (Before you can avail of the benefit of excussion of the guarantor: ) 1. He must allege this benefit. 2. If a demand is made against him he must set this as a defense, that there is no cause of action against him because he has the benefit of the excussion. 3. The guarantor must able to point out specific properties of the principal debtor available in the Philippines. So it does not cover properties that are located outside the Philippines. Why? Because it would be legally impossible for the creditor to proceed against this property. Chances are, the cost of going after this properties would be more than the amount of the obligation therefore rendering the action nugatory. It must be sufficient to cover the amount of debt, the properties must also be sufficient to cover the amount of debt. Even if the guarantor is able to set up the defense and points out the properties available in the Philippines, but the properties are not sufficient then it is not within the contemplation of 2060.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Also take note of the term “available”. The properties that we will point out must also be available. Meaning it is not subject of litigation or is not encumbered. BITANGA VS. PYRAMID G.R. No. 173526 August 28, 2008 Facts: On March 26, 1997, Pyramid Construction Engineering Corporation entered into an agreement with Macrogen Realty of which Benjamin Bitanga is the president. Pyramid is to construct in favor of Macrogen a commercial building. Pyramid commenced the construction project on May 1997. However, Macrogen Realty failed to settle Pyramid's progress billings, which resulted to the suspension of the work. Pyramid then instituted a case against Macrogen Realty seeking payment from the latter for the unpaid billings and project costs. Before the arbitration case could be set for trial, both parties entered into a compromise agreement whereby Macrogen Realty agreed to pay the total amount of P6,000,000 in six equal monthly installments. Bitanga guaranteed the obligations of Macrogen Realty under the compromise agreement by executing a Contract of Guaranty in favor of Pyramid, by virtue of which he irrevocably and unconditionally guaranteed the full and complete payment of the principal liability of Macrogen Realty. However, contrary to petitioner’s assurances, Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the Compromise Agreement. Hence, on 7 September 2000, respondent moved for the issuance of a writ of execution against Macrogen Realty, which was granted. On 29 November 2000, the sheriff filed a return stating that he was unable to locate any property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch. Respondent then made, on 3 January 2001, a written demand on petitioner, as guarantor of Macrogen Realty, to pay the P6,000,000.00, or to point out available properties of the Macrogen Realty within the Philippines sufficient to cover the obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were left unheeded. Bitanga argued that the benefit of excussion was still available to him as a guarantor since he had set it up prior to any judgment against him. According to him, respondent failed to exhaust all legal remedies to collect from Macrogen Realty the amount due under the Compromise Agreement, considering that Macrogen Realty still had uncollected credits which were more than enough to pay for the same. Issue: WON Benjamin Bitanga can avail himself of the benefit of excussion

It must be stressed that despite having been served a demand letter at his office, petitioner still failed to point out to the respondent’s properties 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. Worthy of note as well is the Sheriffs return stating that the only property of Macrogen Realty which he found was its deposit of P20,242.23 with the Planters Bank. Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the defense of excussion. Bitanga had not genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with the Planters Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or inability of the debtor to pay the amount of debt is proven by the return of the writ of execution that had not been unsatisfied.

DISCUSSION So here, we have Bitanga who acted as a guarantor. However, he cannot avail of the benefit of excussion. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted the property of the debtor and resoted to all the legal remedies against the debtor. As provided under Article 2060, the guarantor must set up the benefit of excussion against the creditor upon the latter’s demands for payment. Despite having been served a demand letter the petitioner still failed to point out properties of Macrogen Properties which shall cover its debt. With that, such failure on the petitioner’s part forecloses its right to set up the defence of exculsion. In addition, the last paragraph of 2059 is also applicable. Sheriff submitted that the only property of Macrogen Property is only P20,422 with the bank. So it may be presumed that the execution on the property of the principal debtor did not result to the satisfaction of the obligation kasi yun nalang yung property. And you have to take note na when it comes to corporation, it has a separate personality so you can not go after the personal assets of the corporators. JN DEVELOPMENT CORP., and SPS. RODRIGO and LEONOR STA. ANA vs. PHIL EXPORT AND FOREIGN LOAN GUARANTEE CORP G.R. No. 151060, August 31, 2005 Facts: JN Development Corporation and Traders Royal Bank entered into an agreement whereby TRB would extend to JN Credit Line for P2M. The loan was covered by several securities, including an REM from PhilGuarantee. With PhilGuarantee issuing a guarantee in favor of TRB, JN, petitioner spouses Sta. Ana and petitioner Narciso Cruz executed a Deed of Undertaking to assure repayment to PhilGuarantee.

Held: NO. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion.

JN failed to pay the loan to TRB upon maturity; thus, on Oct. 7, 1980, TRB requested PhilGuarantee to make good its guarantee. PhilGuarantee paid TRB. Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. Thereafter, PhilGuarantee filed a Complaint for collection of money and damages against herein petitioners.

Article 2060 of the Civil Code imposes a condition for the invocation of the defense of excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines suffiecent to cover the amount of the debt.

Held: YES. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise

Issue: WON petitioners are liable to reimburse PhilGuarantee.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 known as the benefit of excussion. It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor, as a condition precedent, must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor. The guarantor must set it up against the creditor upon the latters demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid. The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force. As to the extension of time. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified of or to give his consent to extensions obtained by the debtor. DISCUSSION Excussion may only be invoked where the legal remedies against the creditor has been expanded. He creditor must first obtain a judgement against the principal debtor before assuming to run after the guarantor. Obviously, exhaustion cannot even take place before judgment have been obtained. To which, in relation to 2016, we have stated that the guarantor must set up the defence of this benefit upon demand from guarantor. Again, excussion is a right granted to the guarantor by law and as such he may opt to make use of it or waive it. Phil Guarantee’s waiver of the benefit of excussion cannot prevent the petitioner from demanding reimbursement from the principal debtor. A guarantor is not precluded from waiving his right to be notified. Phil Guarantee did not invoke the benefit of excussion. There was only express renunciation of such benefit. And remember, it is only the guarantor who can invoke this benefit at his discretion. Phil Guarantee did not avail of the defenses. So naghanap lang talaga ng palusot ditto ang principal debtor. He could still be held liable.

Article 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. So here, the creditor failed to proceed against the properties of the principal debtor and went after the guarantor. However, despite being informed of the available properties by the guarantor, the creditor negligently refuses to proceed against this properties. Subsequently, the that debtor becomes insolvent, or

naunahan ng ibang creditor. What will be the effect of the negligence of the creditor? The creditor shall suffer the loss to the extent of such properties. So hindi nya na pwedeng balikan si guarantor because the guarantor complied with the requirements under Article 2060. Creditor will suffer the loss.

Article 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in article 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter. So the creditor files an action for collection of sum of money. It must be against the principal debtor. But there is no legal impediment that would join or implead the guarantor in the action. Ofcourse during the case, the guarantor must set up this defense of excussion. But as to the fact of filing, walang problema. What is required here is that the court must notify the guarantor of the action. Meaning, there is an obligation to notify the guarantor. He may also appear in the case. Notify lang yun. With that notification, the guarantor has two choices: to appear in the case or not to appear. If he appears, he may set up the defense of excussion. He can also set up defenses available for the principal debtor. In fact, even if he voluntarily appears in the case, the defense of excussion is NOT deemed waived. Do take note, however, that the guarantor CANNOT be sued alone before the principal debtor has been held liable. Pwede, pero principal debtor muna. Pero hindi pwede na hindi ka pa nagfile against the principal debtor, sa guarantor ka na agad.

Article 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor. Compromise is the more preferred mode. It is possible that a compromise can happen between the creditor and the principal debtor. And the rule is that it should benefit the guarantor. Kung ang 100K nagging 50K nalang, that should also benefit the guarantor. If despite the compromise agreement, then the guarantor shall be liable for the reduced amount. So the compromise may benefit but NOT prejudice the guarantor.

Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. This another article that deals with double guarantee. The obligations of a guarantor can alsobe guaranteed by a subguarantor to which the sub-guarantor may not be held liable without the benefit of excussion not only as against the creditor but also the guarantor. Articles applicable to the guarantor shall also be available to the sub-guarantor. Article 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor.

JANUARY 19, 2017 Article 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated. The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. What we have here is the benefit of division. What is the scenario here? You have several guarantors for only one debtor involving only one debt.

MIRA HERMANOS V. MANILA Petitioner Mira Hermanos delivered merchandise on consignment to respondent Manila Tobacconists to be sold by the latter. To secure the obligation, petitioner required respondent a bond of P3k which was executed by Provident Insurance. However, the business of respondent increased so that the merchandise it received from petitioner exceeded the P3k bond. Hence, an additional bond of P2k was executed by Manila Compañia with the same terms and conditions (except as to the amount) as the bond of the Provident. Upon final and complete liquidation, respondent has an unpaid balance of P2,272.79 to petitioner. When it failed to pay, petitioner demanded payment from the two surety companies. Provident paid only P1,363.67, which is 60% of the amount owed by respondent alleging that the remaining 40% should be paid by Manila Compañia. However, Manila Compañia refused to pay the balance contending that so long as the liability of the respondent did not exceed P3k, it was not bound to pay anything because its bond referred only to the obligation of the respondent in excess of P3k and up to P5k.

Illustration: ISSUE: W/N Provident Insurance is entitled to the benefit of division.

(90,000) Debtor

Creditor

G1

G2

G3

30K

30K

30K

Let’s us say the money borrowed by the debtor from the creditor is 90,000 pesos. There are 3 guarantors. Now as guarantors we know that their liability is subsidiary, the guarantor can go only after them as long as the assets of the debtor has already been exhausted, unless there is an exemption. Let us say “na exhaust na” “pwede na maningil si creditor” how much can the creditor collect from one guarantor? Can he force one of the creditors to pay for the entire 90,000 pesos? Because of the rule in 2065 for benefit of division, extend of liability of each guarantor is only 30,000 pesos. Notice here that what you have are guarantors but the nature of liability among them is joint. Of course the exemption here is if they have an agreement that they are solidarily bound to the obligation of the debtor. What do you mean that “solidary sila? Pwede ba yon guarantor pero solidary?” “Pwede, guarantor sila with regards sa debt ni debtor, so ang obligation nila when it comes to him is hindi solidary but subsidiary lang and accessory. But as to among themselves they are considered solidary debtors by their agreement wherein if the creditor after exhaustion of the properties of the debtor, if creditor demands from any of them(guarantors) they can compel them to pay for the entire 90,000 obligation, again that is if the have agreed to be solidary guarantors; but if in the absence of any agreement or stipulation that they are solidary guarantors, they would only be considered as joint guarantors of the principal debtor in which they cannot be compelled to pay more than their proportionate shares in the obligation of the principal debtor. Please take note of the benefit of division, “iba sya from excussion; both of them exist in a contract of guaranty pero the benefit of division exist when 1. You have several guarantors (at least 2); 2. Involving one debtor; 3. For one debt or obligation

RULING: NO The benefit of division refers to several sureties of only one debtor for the same debt. In the instant case, although the two bonds on their face appear to guarantee the same debt coextensively up to P2k — that of the Provident alone extending beyond that sum up to P3k — it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident guarantees only the first P3k while the Manila Compañia, only the excess over and above said amount up to P5k. Hence, the benefit of division does not apply in this case. Otherwise, there would have been no need for the additional bond of P2k if its purpose were to cover the first P2k already covered by the P3k bond of the Provident. If the purpose of the additional bond of P2k were to cover not the excess over and above P3k but the first P2k of the obligation of the principal debtor like the bond of P3k which covered only the first P3k of said obligation, then it would result that had the obligation of the respondent exceeded P3k, neither of the two bonds would have responded for the excess, which was precisely the event against which petitioner Mira Hermanos wanted to protect itself by demanding the additional bond of P2k. For instance, suppose that the obligation of the principal debtor Tobacconists amounted to P5k. If both bonds were co-extensive up to P2k, like what Provident is contending, the result would be that the first P2k of the obligation would have to be divided between and paid equally by the two surety companies, which should pay P1k each, and of the balance of P3k the Provident would have to pay only P1k more because its liability is limited to the first P3k, thus leaving the plaintiff in the lurch as to the excess of P2k. That was manifestly not the intention of the parties. As a matter of fact, when the Provident gave its bond and fixed the premiums thereon it assumed an obligation of P3k in solidum with the Tobacconists without any expectation of any benefit of division with any other surety. The additional bond of P2k 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. Take note of the facts in Mira, in this case you cannot apply benefit of division as provided in 2065. While you have here 2 sureties (2065 can be applicable for both guarantors and sureties) and one debtor which Manila Tobacconists, however the obligation guaranteed by Provident and Manila Compania de Seguros are different. For provident the first 3,000 and for Manila Compania “ang sobra sa 3,00” up to 5,000 pesos. In other words, you cannot apply here ‘yung rue of division. Do remember yung 3 requisites.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 3 requisites of the benefits of division: (1) (2) (3)

There must be one debtor; Several guarantors; and One obligation.

Do you remember that case we discussed last time? Prudential, yung isa lang yung nag perma. Yung intention nun is guarantor sila and they will be solidary an exemption to the benefit of division, since by agreement they gave their consent to be solidariliy be bound as guarantors. Requisites for 2065 to apply: (1) (2) (3)

There must be one debtor with several guarantors of the same obligation; It must be claimed by guarantor should the coguarantors __ in the manner; Solidarity must not have been expressly stipulated.

Take note that unlike the benefit of excussion, the benefit of division cannot be expressly renounced. In other words it Is either joint or solidary talaga ang obligation ng several guarantors or sureties, only solidary by agreement. If there is no agreement joint, as provided in 2065. Take note also that in regards to the guarantors themselves, they are co-guarantors hindi sila sub guarantors. With regard to these co-guarantors hindi required yung application ng 2060. What is 2060? Yun allege the right to the benefit of excussion, point out specific properties of the debtor available in the Philippines. Guarantor 1 cannot refuse to pay on the ground na mag point out sya ng properties ni guarantor 2 and 3. 2060 is not applicable to co-guarantors but you can apply it to sub-guarantors and of course the guarantor himself.

SECTION 2 Effects of Guaranty Between the Debtor and the Guarantor Article 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises: (1) The total amount of the debt; (2) The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor (3) The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) Damages, if they are due. 2066, we have here the rights of a guarantor. Take note that we have here the term indemnify, in other words here the right to collect what is covered of this indemnity is available only to a guarantor who pay. Remember a contract of guaranty is a contract of indemnity, in which the guarantor can recover only what he has paid, he cannot be indemnified by something he did not pay. Indemnity mean reimbursement. Now what can the guarantor recover or collect from the principal debtor. Obviously he can collect the total amount of the obligation because this is the amount the guarantor guaranteed to pay the creditor. No. 2 you are talking about legal interest, take note from the time the payment was made known to the debtor even though it did not earn interest to the creditor. In other words, here liable si debtor ng interest kay guarantor even if si guarantor hindi liable ng interest kay creditor. The interest covered here is of course not the interest in contemplation of a contract of loan which must be in writing, yung interest by stipulation. Legal interest in the sense of damages or in case of default or delay on the part of the payment. So what would happen here? The creditor was paid by the guarantor upon due date or wala nag collect si creditor ng interest for any delay. But the guarantor himself can collect for legal interest against the principal debtor from the time the guarantor made known to the debtor such payment. So even if

the guarantor did not pay interest to the creditor, he (guarantor) nevertheless notified the debtor of the payment, but despite notification wala nag bayad si debtor and therefore there is delay on his part. And delay will be liable for interest from the time of notice, legal interest shall now accrue in favor of the guarantor What’s the premise here? This is because kung hindi binayaran ni guarantor si creditor, the guarantor could have use the money for some other purpose (pinahiram sa and could have earned interest, could have bought something and enjoyed it) so that is the basis for the recovery of interest Also the right to be indemnified for expenses incurred, in this case despite notice to the debtor for the obligation, wala, because of that si guarantor nag barrow sya ng pera, liable xa ng interest dun sa hiniraman nya ng pera that would be considered interest expense on the part of the guarantor. Pwede rin nya rin yan ipa reimburse sa principal debtor. If he incuse expenses in collecting and demanding payment (travel expenses) those expenses can be part of the action for reimbursement, also for damages, dahil nag bayad si guarantor kay creditor tapos hindi sya agad binayaran ni debtor, what happened, the guarantor parang law student sleepless nights, mental anguish so he can be entitled for damages.

Article 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. What is involved in 2067 is that the guarantor paid with the knowledge of the principal debtor. If the guarantor guaranteed the obligation without the knowledge or the consent of the principal debtor, remember in our previous discussion he is entitled only to beneficial reimbursement kung wala syang consent from the principal debtor na e guaranty yon. But if the debtor gave his consent for that guarantor to guaranty his obligation such guarantor is entitled not just for beneficial reimbursement but he has the right to be subrogated to the rights that were previously available to the creditor. So all rights which the creditor had against the debtor, the guarantor is subrogated thereto (mortgage, pledge or penalty imposed by reason of agreement) the guarantor is entitled to such rights as held because of the benefit of subrogation. This rights use 2067, however are available to a paying guarantor because a contract of guaranty is a contract of indemnity. So the guarantor who pays is subrogated by virtue to all the right which the creditor had against the debtor and if he had compromise with the creditor he cannot demand reimbursement to the debtor more than what he has actually paid, now that provision is to prevent collusion between the creditor and the guarantor, in the sense na maka ginansya pa si guarantor kay he paid for a lesser amount doon sa creditor but he demanded for the original obligation from the principal debtor. Now, with regard to knowledge of principal debtor dito sa 2067, may knowledge and consent si debtor kay guarantor.

Article 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. When it comes to payment we have 2068; So what happens? The guarantor paid the obligation but did not tell the debtor that he will pay the obligation. What is the right available for the debtor? He may set up defenses which he could have enforced against the creditor at the time the obligation became due. Dahil hindi sinabihan ni guarantor si debtor na mag bayad na sya. Guarantor paid for the obligation in full, now he seeks reimbursement from the debtor, debtor refuses to pay on the ground that there was already payment or there was for example dation en pago or the obligation had already prescribed, this are defenses that can be used by the principal debtor as

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 against the guarantor. So that the guarantor cannot compel the principal debtor to pay. The guarantor has to suffer here. Why? Kasi nagpa hawod hawod nagpa hero hero. Again here what is involved in 2068 is that he (guarantor) did not notify the debtor of the payment; this is different from getting the consent of the debtor for you to guaranty the obligation, ditto sa 2068 it is still possible that you are entitled to subrogation because at the time you agreed to be a guarantor the principal debtor gave his consent thereto he has knowledge ang problema lang is that at the time of payment mag bayad kana hindi mo sya (debtor) sinabihan, ngayon si debtor nag bayad na or did not pay it because the obligation has already prescribed. Nevertheless, the guarantor cannot seek reimbursement from the debtor because of such defenses even if at the time he agreed to be a guarantor he has the consent of the principal debtor. So again it is possible that the guarantor acted as such with the knowledge and consent of the debtor but he did not inform the debtor at the time of payment, therefore debtor may set up as against the guarantor those he could have set up as against the principal creditor if the guarantor pay without notifying the debtor. It just shows here that the guarantor has the obligation to notify the debtor that he is going to pay kasi kungna notify nya then he will know if there is prescription or previous payment and therefore hindi na sya magbayad now if part of the obligation has already prescribe then yung part lang na yun ang hindi liable for reimbursement si principal debtor. The flaw that is covered in 2168 is that the debtor in not notified before the guarantor paid. But what if, gave consent, notified before payment, debtor did not say anything, upon reimbursement the principal debtor raises prescription so as not to incur liability. Can the guarantor compel him to pay considering na may consent and there was notification of payment? Not anymore. Its not there but you can apply principle of estoppel. So by his silence or by his acts he is deemed to have waived to raise these defenses.

Article 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor. Alright! So what do we have here? we have an exited guarantor. The obligation is not yet due, the principal creditor cannot obviously enforce the obligation or demand for the payment thereof. But the guarantor paid before the debt was due because as mentioned he is excited, of course even if the guarantor paid before the debt became due he cannot yet ask reimbursement from the debtor. Why? Because his payment was premature, so wala pa syang right to reimbursement. The guarantor simply has to wait until the obligation become due and demandable only exception is he can demand it from debtor if debtor ratifies such premature payment or such payment is made with the consent of the debtor, if it has been ratified by the debtor then this means that the debtor waived the benefit of the period and in other words pwede na maka seek ng reimbursement si guarantor sa kanya even if the obligation has not yet mature.

Article 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid. In relation to 2070 we go back to 2068, why notice to debtor is important one of the effects is that of 2010, as we had discussed in 2068, the guarantor must 1st notify the debtor so that the debtor may properly notify the guarantor of payment or his defences available , but in 2070 we have a guarantor who paid without notice of the debtor, so again the debtor does not know of such payment then anong nanyari? Nagbayad din si debtor kay creditor, si creditor naman tanggap lang din nang tanggap. In this

scenario, you will see that it is necessary that if you are the guarantor you notify the debtor of your intent to pay for the obligation. Such payment is for the benefit of the guarantor as well of the debtor, so that the debtor will not repeat payment. Now what happens if si guarantor nagbayad without notice to debtor and si debtor nagbayad din. Can the guarantor seek reimbursement from the debtor considering na he did not give notice to the debtor of his intended payment. Article 2070 tells us that the guarantor cannot seek reimbursement from debtor. Why? Because he did not advise debtor. Malay ba naman sa debtor na magbayad talaga si guarantor, debtor in good faith bayad din sya ng kanyang utang. What is the remedy here of the guarantor? The guarantor should go not against the principal debtor but rather sa creditor Solutio Indebiti payment by mistake , but article 2070 tells us that na its possible for guarantor to seek reimbursement from the debtor himself in case there is double payment as long as the following requisites are present

(1)

It must be a gratuitous guaranty –the guarantor acted as such without receiving any consideration, he agreed to be a guarantor just out of his liberality

(2)

The guarantor was prevented by a fortuitous event in notifying the debtor – so here there was urgency to pay the obligation and he cannot notify the debtor because there is a fortuitous event or he cannot contact (calamity, off communication system) but he wants to pay already because the obligation is due and demandable, nevertheless hindi nya na notify si principal debtor.

(3)

The creditor becomes insolvent – remember the 1st remedy here of the guarantor in case of double payment is to go after the principal creditor, seek for the return of the payment base on Solutio Indebiti. Now if it turns out na wala na palang property si creditor at the time the guarantor seeks return of the payment – the creditor becomes insolvent, as long as the guaranty is gratuitous and the guarantor was prevented by a fortuitous event from notifying the debtor and the creditor becomes insolvent – if all this are present then the guarantor can seek reimbursement from the principal debtor. Kulang ng isa the guarantor cannot seek reimbursement from the principal debtor.

Notice if you look at 2070 it does not matter kung sino ang unang nagbayad it is possible nauna nagbayad si guarantor and the subsequently si debtor. Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years; (6) If there are reasonable grounds to fear that the principal debtor intends to abscond; (7) If the principal debtor is in imminent danger of becoming insolvent. In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1843a) Alright, remember the general rule that a contract of guaranty is a contract of indemnity. Therefore it is only when the guarantor

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 proceed and collect against the principal debtor. For reimbursement to whatever he has made the expenses he has incurred and damages he has suffered kung meron. But under 2071. What we have here is a guarantor, who have not been paid. But the law clearly provides him the right to proceed against the principal debtor. Take note in 2071. While the guarantor is allowed to proceed against the principal debtor, it is not for reimbursement. Still cannot seek reimbursement, because he can only seek reimbursement if there has been payment. Wala pa naman sigurong tao na nag hingi ng reimbursement na hindi naman siya mismo ang nag labas ng pera. The proceeding here may be instituted by the guarantor after he has made liable. But again not before payment. What was the purpose in 2071? This enables the guarantor, by allowing him to proceed against the principal debtor despite wala pang nabayaran, enables the guarantor to take measures for the protection of his own interest in view of the probability that he would be called upon to pay. (1) Probably, he would be called upon to pay. He would be liable if he is sued for payment. In case of insolvency of the principal debtor, we know under 2059, that as to the guarantor, the benefit of excussion is not available anymore. Therefore, 2071 it is for protecting own interest (3) There is already breach of obligation with respect to the guarantor. There was an agreement that the guaranty was for a specific period. So it presupposes that within that agreed period that the principal debtor will pay. However, the period has lapsed/expired but the principal debtor did not pay. So 2071 gives the right to the guarantor to proceed against the principal debtor. (4) The obligation has become due and demandable because the period has already expired, again the guarantor is allowed to proceed against the debtor. (5) Gen. rule: after 10 yrs. if the obligation has no fixed period. Supposed to be, or rather, the obligations subject to a period, if it expires, it is covered under number 4. Pero kung walang period stipulated by the parties, the rule to be applied is 10 years. If the obligation cannot be performed until after 10 yrs. then what would happen is that after 10 yrs. it cannot be enforced. For example if they entered into a contract and the contract should be performed in the 11 yr. or after 10 yrs., so w/in the 10 yr. period the obligation cannot be enforced. (6) Here mag abscond or the reasonable grounds that the debtor intends to abscond. Intention is sufficient. Of course, if there is reasonable grounds that the debtor will abscond. To protect its own interest, he need not wait na maka layas c principal debtor, so 2071 is given as a remedy.

MANILA SURETY VS. BATU May 21, 1957 FACTS: Defendant Batu Construction, as principal, and the plaintiff Manila Surety, as surety, executed a surety bond for the sum of P8,812.00 to insure faithful performance of the former's obligation as contractor for the construction of the Bacarra Bridge. On the same date, Batu Constrction and the defendants Carlos Baquiran and Gonzales Amboy executed an indemnity agreement in favor of plaintiff Manila Surety which provides that: The defendants would "indemnify the COMPANY for any damage, loss, costs, or charges, or expenses of whatever kind and nature, including counsel or attorney's fees, which the COMPANY may, at any time, sustain or incur, as a consequence of having become surety upon the above mentioned bond; said attorney's fees shall not be less than fifteen (15%) per cent of the total amount claimed in any action which the COMPANY may institute against the undersigned (the defendants except Andres Tunac) in Court," and that "Said indemnity shall be paid to the COMPANY as soon as it has become liable for the payment of any amount, under the above-mentioned bond, whether or not it shall have paid such sum or sums of money, or any part thereof," Later on, however, plaintiff received a notice from the Director of Public Works the annulment of the construction contract because of its failure to make satisfactory progress in the execution of the works with the warning that any amount spent by the Government in the continuation of the work, in excess of the contract price, will be charged against the surety bond furnished by the plaintiff. Also, the laborers of the said construction project filed a complaint against Batu Construction and Manila Surety for unpaid wages amounting to P5,960.10. By reason thereof, plaintiff brought an action against the defendants alleging that defendants are in imminent danger of becoming insolvent and that they be ordered to deliver to the plaintiff such sufficient security as shall protect plaintiff from the any proceedings by the creditors on the Surety Bond. The defendants denied any liability alleging that they were not in imminent danger of insolvency, neither did they remove or dispose of their properties with intent to defraud their creditors. They further argued that there has been no liquidation yet of the expenses incurred in the construction of the Bacarra Bridge and not until after such liquidation shall have been made could their liability be determined and fixed. Lastly, they argued that the remedy provided for in the last paragraph of article 2071 of the NCC may be availed of by the guarantor only and not by a surety. ISSUES:

(7) Take note imminent danger of insolvency on the part of the principal debtor. So under number 7, the fact of insolvency is not required, imminent danger of becoming insolvent. Probability that the debtor will become insolvent, 2071 is an available remedy.

1.W/N a surety may avail of the remedy under the last paragraph of article 2071 of the NCC. YES

So what happens, what is the action here of the guarantor? What is his prayer? in other words in this complaint. The guarantor obviously cannot demand reimbursement. What he seeks under 2071 is either to

RULING: BOTH YES



release him from the guaranty or



demand another security to protect him from the proceedings

Remember however that the contract of guaranty is between the guarantor & the creditor. In case there is release, take note that release is not effective unless there is consent from the creditor. Without consent of the creditor, isang remedy lang ang maiwan: demand security to protect the guarantor from the said proceedings.

2.W/N plaintiff’s cause of action falls under Article 2071. YES

First issue The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of Article 2071 would be the fact that guaranty, like commodatum, is gratuitous. But guaranty could also be for a price or consideration as provided for in Article 2048. So, even if there should be a consideration or price paid to a guarantor for him to insure the performance of an obligation by the principal debtor, the provisions of article 2071 would still be available to the guarantor. In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for the surety maybe sued independently. Hence, he is an insurer of

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor. Such being the case, the provisions of Article 2071, under guaranty, are applicable and available to a surety. The reference in Article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the NCC, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty. Second issue The plaintiff's cause of action does not fall under: 1.Article 2071(2) because there is no proof of the defendants' insolvency. The fact that the contract was annulled because of lack of progress in the construction of the bridge is no proof of such insolvency. 2.Article 2071(3) because the defendants have not bound themselves to relieve the plaintiff from the guaranty within a specified period which already has expired, because the surety bond does not fix any period of time and the indemnity agreement stipulates one year extendible or renewable until the bond be completely cancelled by the person or entity in whose behalf the bond was executed or by a Court of competent jurisdiction. 3.Article 2071(4), because the debt has not become demandable by reason of the expiration of the period for payment. 4.Article 2071(5) because of the lapse of 10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not yet elapsed. 5,Article 2071(6), because there is no proof that there are reasonable grounds to fear that the principal debtor intends to abscond. 6.Article 2071(7), because the defendants, as principal debtors, are not in imminent danger of becoming insolvent, there being no proof to that effect. Nevertheless, the plaintiff's cause of action comes under Article 2071(1), because the action brought by the laborers for the collection of unpaid wages amounting to P5,960.10, is in connection with the construction of the Bacarra Bridge undertaken by the Batu Construction, and one of the defendants therein is the herein plaintiff Manila Surety. Article 2071(1) provides that the guarantor, even before having paid, may proceed against the principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor. Hence, the suit filed by the laboeres in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines. SC emphasized that the provisions of 2071 under guaranty are applicable and available to a surety. Even if the surety here has not yet paid the principal creditor, he can avail of the remedies under 2071—either to obtain release or ask for another security from the principal debtor.

Among the instances in 2071, plaintiff’s cause of action comes under par. 1 of 2071 because the action he brought for the collection of unpaid wages is in connection of the construction and one of the defendants is Manila Surety. Again, under par. 1, “when he is sued for payment.” Take note of the case of Special Steel v. Villareal (GR No. 143304, July 8, 2004). In this case, SC expressly stated that since there is no guaranty in the circumstances in this case, 2071 does not apply to a surety. It also held that the surety in this case could not just unilaterally withheld the respondents’ wages as a preliminary remedy under 2071. However, further readings of the decision of the court, it tackled on the remedy for a surety, which is by instituting an action to demand for security. The court here did not outrightly or expressly overturn the Manila Surety case. Although this case expressly stated that “2071 does not apply to a surety,” the 2 cases could still be reconciled. There is no conflict and 2071 should still be applicable because of that ruling in Special Steel wherein the remedy given to the surety is to file a separate civil action—which is the intention of 2071. I think the emphasis here is that the surety could not, in the same action, exercise the remedy that may have been available under 2071. They could only demand a security since there still no actual payment. What is the intention in 2071? To require a security from the principal debtor. So, I think that 2071 can still be applicable even in contracts of suretyship, not just in contracts of guaranty. Thus, although not expressly stated in this 2004 case, that can still be reconciled with the Manila Surety case. Recap: Benefit of division available to several guarantors of only one debtor of the same obligation. It must be claim on a timely manner. It is only available unless solidarity is expressly stipulated. 2066 the rights of the guarantor to what extent can he asked for indemnification. 2067 with regard to a guarantor who is entitled to subrogation. 2068 you relate that to 2070 with regard to the effect of absence of notice by the guarantor to the debtor for paying the creditor. 2069 the effect of the guarantor who paid before the obligation was due. And we have Article 2071, we have emphasized the proceeding here is not reimbursement, as the guarantor did not yet paid, do remember that the contract of guaranty is a contract of indemnity. Such indemnity takes place if the guarantor paid the principal creditor. But in 2071, the guarantor can file an action against the debtor even if he has not yet paid the creditor. The guarantor of course cannot demand reimbursement. So what does he entitled under 2071? To seek for release or for him to be release from the guaranty. Although we have emphasized that for this to take place it must be made to the consent of the creditor. Because again the debtor has no power to release the guarantor from the guaranty in the absence of the creditor’s consent. Because essentially, the contract of guaranty is between the creditor and the guarantor. Under 2071, aside from release with the consent of the creditor, if such cannot be sought he can nevertheless demand another security from the debtor to protect him from the proceedings. Now last meeting, we have discussed the case of Manila Surety, wherein Article 2071 is applicable to a contract of suretyship as well. Although we pointed out that in the Special Steel Case in 2004, there is statement there by the SC that it does not apply to the surety. Nevertheless, if you look at the decision, the remedy that was suggested there was to file an action instituting an action to demand security. So again, if you look at 2071 that is one of the things that the guarantor can demand from the debtor. So if we try to reconcile these two cases of Manila Surety and Special Steel case, essentially it just points out that for you to avail of Article 2071 you have to file a separate action. You cannot just withheld any property of the debtor in order to secure

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 the eventual payment of the guarantor to the creditor. So, again please try to read the case of Specialty Steel. TUASON vs. MACHUCA FACTS: Manila Compaña executed a bond of P9,663 in favor of Universal Trading Company (UTC) for the payment of its imported sundry goods. However, before paying the said sum, Manila Compaña obtained from UTC and Tuason Co. a solidary note for the same amount. As a consequence thereof, UTC and its president Machuca bound themselves solidarily to pay, reimburse, and refund to the company all such sums or amounts of money as it, or its representative, may pay or become bound to pay, upon its obligation with Manila Compaña whether or not it shall have actually paid such sum or sums or any part thereof. Manila Compaña paid the value of the sundry goods. Later on, however, UTC was declared insolvent causing Manila Compaña to file a complaint against Tuason recover the value of the note with interest in the total sum of P12,197.27. By final judgment, Tuason was ordered to pay Manila Compaña the said sum. On the other hand, Tuason sought recovery of the said sum to defendant Machuca plus attorney’s fees, court’s costs and sheriff fees plus interest in the total sum of P15,353.19. It must be noted, however, that plaintiff Tuason was not yet able to pay Manila Compaña the said sum. ISSUE: W/N Tuason may also recover the litigation expenses it incurred with Manila Compaña by virtue of the note executed by Machuca.

place. Is 2071 here applicable? Which is 1843 of the Old Civil Code. What is the remedy being sought? Release from guaranty or demand a security. But if you look at the action filed. It is not. What is the basis of the action? The agreement that the defendant bound himself to pay the plaintiff as soon as the latter may have become bound and liable whether or not he should have actually paid. So that must be the basis of the claim here. There was already a final judgement wherein the plaintiff is bound to pay the note executed in favor of Manila Compania de Seguros. So even if there no actual payment. Pwede na siya mag file ng action because of there express stipulation. Plaintiff became bound and liable by a final judgment to pay the value of the note to "Manila Compañia de Seguros." Also do take note here the issue of expenses where being claim. However in the regards the SC held that, that litigation was originated by the plaintiff having failed to fulfill its obligation with "Manila Compañia de Seguros," and it cannot charge the defendant with expenses which it was compelled to make by reason of its own fault. So only the principal obligation. Not the litigation expenses. Q: Now what are the distinctions of 2066 and 2071? Article 2066 contract of indemnity, a demand for reimbursement

available as a remedy after the guarantor has paid

RULING: NO a right of action after payment The action cannot be held to come under Article 1843 of the CC since the payment was not yet made by plaintiff Tuason. It is true that, under Article 1843, an action lies against the principal debtor even before the surety pays the debt, but it clearly appears in the complaint that this is not the action brought by plaintiff. At any rate this article does not provide for the reimbursement of any amount, as is sought by the plaintiff.la Nevertheless, Nevertheless, plaintiff Tuason is entitled to the relief sought. According to the document executed solidarily by Machuca and the UTC, defendant Machuca bound himself to pay the plaintiff as soon as the latter may have become bound and liable, whether or not it shall have actually paid. It is indisputable that the plaintiff became bound and liable by a final judgment to pay the value of the note it executed in favor of Manila Compañia. Hence, the plaintiff has the right to recover from the defendant the sum of P9,663, or the value of the note executed by the plaintiff in favor of Manila Compañia which the plaintiff is under obligation to pay by virtue of final judgment. However, the defendant cannot be obliged to pay the plaintiff the expenses incurred by it in the litigation between it and Manila Compañia. That litigation was originated by the plaintiff having failed to fulfill its obligation with Manila Compañia, and it cannot charge the defendant with expenses which it was compelled to make by reason of its own fault. It is entitled, however, to the expenses incurred by it in this action brought against the defendant, which are fixed at P1,653.65 as attorney's fees. Q: What is the relief that they are seeking from the court? A: That he will be reimbursed or refunded by the Universal Credit Company. But since the company became insolvent He is going against Antonio Machuca. Q: When you say reimbursement, has actual payment already taken place? A: None. Q: Is article 2071 be resorted? Is the remedy sort for covered in such article? What is the basis of his action? So here, you cannot have 2066, this is not an action for reimbursement. Why? Because actual payment has not yet taken

substantive right a right of action, which without the provisions of the other, might be worthless

Article 2071 Not reimbursement but for the release from the guaranty or security of the performance to protect the surety from obligations before the guarantor has paid but after he has become liable Preventive remedy before payment preliminary remedy seeks to obtain for the guarantor release from the guarantee or the security to protect him from any proceedings by the creditor and from the danger of insolvency by the debtor

KUENZLE vs. SUNCO FACTS: Plaintiff Kuenzle instituted an action against Chung Chu Sing for payment of debt. However, before the plaintiff could secure a judgment, defendant Tan Sunco instituted four separate actions against Chung Chu Sing alleging that he was a surety for Chung Chu Sing for the payment of certain merchandise purchased by the latter evidenced by four invoices in varying amounts. Chung Chu Sing confessed judgment in favor of Tan Sunco. Tan Sunco then caused to be levied upon under execution all of the property of Chung Chu Sing. Kuenzle moved to set aside the judgment on the ground that the four judgments were obtained by collusion and fraud, because the debtor did not owe anything to Tan Sunco at the time the four judgments were secured and that Tan Sunco had not yet paid the said sums for which he had become surety. ISSUE: W/N Article 1843 (now 2071) is applicable in this case. RULING: YES Article 1838 (now 2066) distinguished from Article 1843 (now 2071) Article 1838 (now 2066) Provides for the enforcement of the right of the surety against the debtor after he has paid the debt

Article 1843 (now 2071) Provides for the surety’s protection before he has paid but after he has become liable to do so

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Gives a right of action after payment In the nature of substantive right Gives a right of action which, without the provisions of the of the other, might be worthless.

The surety is past the point where a preliminary protective remedy is of any value to him.

Gives a protective remedy before payment In the nature of preliminary remedy Purposes of obtaining for the surety relief from the burden of his suretyship or a guaranty to defend him against any proceedings of the creditor and from the danger of insolvency of the debtor. To give to the surety a remedy in anticipation of the payment of the debt, which debt, being due, he could be called upon to pay at any time, it remains only to say, in this connection, that the only procedure known under our present practice to enforce that right is by action

Defendant Sunco availed himself of that right against the debtor. The methods he employed were unusual but the evidence adduced is entirely insufficient to establish such fraud and collusion that would justify the setting aside of judgment assailed. Nevertheless, while the surety has the right to obtain as he did the judgments against the principal debtor, he ought not to be allowed to realize the said judgments to the point of actual collection of the same until he has satisfied or caused to be satisfied the obligation which he assures. Otherwise, a great opportunity for collusion and improper practices between the surety and his principal would be offered which might result to the injury and prejudice of the creditor who holds the claim against them. In other words, Sunco shall not execute said judgments against the property of the judgment debtor until he has paid the debt for which he stands as surety. Q: Which provision is applicable here? 2066 or 2071? A: The article applicable here ma’am is 2071. So take note of the distinctions between Article 2066 previously 1838 and Article 2071 previously 1843. 2066, again, provides for the enforcement for the rights of the surety or guarantor against the debtor after he has paid the debt and Article 2071 provides for the protection after he has paid but after he has become liable to do so. Now on the other hand, 2066 is a right of action after payment. 2071 is a protective remedy before payment. 2066 is a substantive right while 2071 is a preliminary remedy. 2066 right of action which without the provisions of 2071 might be worthless. The remedy given by 2071 is to obtain relief from the burder of his suretyship or guaranty to defend him against any proceedings of the creditor from the danger of insolvency. 2066 has no such purpose, when the surety’s right under this article become available, he is past the point where a preliminary protective remedy is of any value to him. So the purpose of 2071, is to give surety a remedy in anticipation of the payment of the debt which if it becomes due he may called upon to pay at any time. The only procedure is to enforce that right despite action. As soon as he availed himself of that right under 2071 against the debtor. The methods employed are that unusual but not of themselves fraudulent. So, the action filed by Sunco is actually under 2071. However the SC emphasized, that while surety has the But while the surety has the right to obtain as he did the judgments against the principal debtor, he ought not to be allowed to realize the said judgments to the point of actual collection of the same until he has satisfied or caused to be satisfied the obligation the payment of which he assures. Otherwise, a great opportunity for collusion and improper practices between the surety and his principal would be offered which might result to the injury and prejudice of the creditor who holds the claim against them. So, Sunco shall not execute said judgments against the property of the judgment debtor until he has paid the debt for which he stands surety.

ARTICLE 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement. Here, we have a third person who is not a party to the contract, not the debtor, not the creditor, not the guarantor. But, he’s the person who request the guarantor to become as such. What would happen here? So let’s say Julian would borrow money from JC. So Julian debtor and JC creditor. Let us say, you have here, Vanessa concerned citizen, sabi nya “Uy hanap ako ng guarantor si Julian”. So she approaches Celeste as the guarantor sa utang ni Julian kay JC. So what do we have here, we have third person Vanessa who is not a party to the contract of guaranty not a party to the principal obligation. But 2072 gives a cause of action against her. To which she can be held liable. Again, because she made that request to another person to act as a guarantor. So if, Celeste makabayad siya kasi di nagbayad c Julian, meron course of action c Celeste against Vanessa. The third person cannot raise the defense that she cannot be sued because she is not a privy to the contract. 2072 is the basis, the law provides such a third person can be made liable. TIDCORP vs. ASIA PACES CORP Respondents Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered into a sub-contracting agreement with the Electrical Projects Company of Libya (ELPCO) To finance its working capital requirements, ASPAC obtained loans from foreign banks Banque Indosuez and PCI Capital. The loans were secured by several Letters of Guarantee issued by petitioner TIDCORP whereby it irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations to the foreign banks in the event of ASPAC’s default. However, as a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC, PICO, and ASPAC’s President, respondent Balderrama had to execute several Deeds of Undertaking, binding themselves to jointly and severally pay TIDCORP for whatever damages or liabilities it may incur under the Letters of Guarantee. In the same light, ASPAC, as principal debtor, entered into surety agreements (Surety Bonds) with Paramount, Phoenix, Mega Pacific and Fortune (bonding companies), as sureties, also holding themselves solidarily liable to TIDCORP, as creditor, for whatever damages or liabilities the latter may incur under the Letters of Guarantee. ASPAC eventually defaulted on its loan obligations. TIDCORP and its various creditor banks Banque Indosuez and PCI Capital, forged a Restructuring Agreement extending the maturity dates of the Letters of Guarantee. However, the bonding companies were not privy to the Restructuring Agreement and, hence, did not give their consent to the payment extensions granted by Banque Indosuez and PCI Capitalin favor of TIDCORP. Following new payment schedules, TIDCORP fully settled its obligations under the Letters of Guarantee to both Banque Indosuez and PCI Capital. TIDCOPR, in turn, filed a collection case against: (a) (b)

ASPAC, PICO, and Balderrama on account of their obligations under the deeds of undertaking; and The bonding companies on account of their obligations under the Surety Bonds seeking payment for the damages and liabilities it had incurred under the Letters of Guarantee.

The RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and Balderrama jointly and severally liable

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 to TIDCORP pursuant to the terms of the Deeds of Undertaking, but absolved the bonding companies from liability on the ground that the moratorium request and the consequent payment extensions granted by Banque Indosuez and PCI Capital in TIDCORP’s favor without their consent extinguished their obligations under the Surety Bonds pursuant to Article 2079. The CA upheld the decision but modified it to the extent of holding ASPAC, PICO, and Balderrama liable to TIDCORP for attorney’s fees since the payment of thereof was stipulated by the parties in the Deed of Undertaking. ISSUE: W/N the bonding companies’ liabilities to TIDCORP under the Surety Bonds were extinguished by virtue of the Restructuring Agreement. RULING: NO The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. In the case at bar, the payment extensions granted by the foreign banks to TIDCORP under the Restructuring Agreement did not have the effect of extinguishing the bonding companies’ obligations to TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions were made without their consent. This is because Article 2079 refers to a payment extension granted by the creditor to the principal debtor without the consent of the guarantor or surety. In this case, the Surety Bonds are suretyship contracts which secure the debt of ASPAC, the principal debtor, under the Deeds of Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur under the Letters of Guarantee, within the bounds of the bonds’ respective coverage periods and amounts. No payment extension was, however, granted by TIDCORP in favor of ASPAC in this regard. Hence, Article 2079 should not be applied with respect to the bonding companies’ liabilities to TIDCORP under the Surety Bonds. The payment extensions granted by the foreign banks pertain to TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP) irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations to the banks in the event of its (ASPAC) default. In other words, the Letters of Guarantee secured ASPAC’s loan agreements to the banks. Under this arrangement, TIDCORP therefore acted as a guarantor, with ASPAC as the principal debtor, and the banks as creditors. There are two sets of transactions that should be treated separately and distinctly from one another following the civil law principle of relativity of contracts "which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof." Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to the banks, the payments extensions (which conversely concern TIDCORP’s debt to the banks and not ASPAC’s debt to TIDCORP) would not deprive the bonding companies of their right to pay their creditor (TIDCORP) and to be immediately subrogated to the latter’s remedies against the principal debtor (ASPAC) upon the maturity date. It must be stressed that these payment extensions did not modify the terms of the Letters of Guarantee but only provided for a new payment scheme covering TIDCORP’s liability to the banks. In fine, considering the inoperability of Article 2079 in this case, the bonding companies’ liabilities to TIDCORP under the

Surety Bonds – except those issued by Paramount and covered by its Compromise Agreement with TIDCORP – have not been extinguished. Since these obligations arose and have been duly demanded within the coverage periods of all the Surety Bonds, TIDCORP’s claim is hereby granted.

SECTION 3 EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS ARTICLE 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionately owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent. Remember the benefit of division, we have at least 2 guarantors who are co-guarantors for the same debtor for one and the same obligation. Now as a guarantor for the benefit of division, you cannot compelled to pay the entire obligation. As you will only be held liable to pay your own share. So, as we have discussed before, if you have a creditor, lend money to the debtor the amount of 120,000 and you have 4 guarantors. Applying the benefit of division, each will only be held liable for 30,000. Now, 2073 tell us that if a guarantor made to pay for the whole obligation, then he can seek reimbursement for the other parties. Please take not when to apply 2073, payment has been made in virtue of judicial demand or the principal debtor is insolvent. In this instance if guarantor 1 is to pay the whole 120,000, he can seek reimbursement for the respective proportionate of his coguarantors which is 30,000 each. Remember he still has to shoulder his share. Now assuming, one of them is insolvent, si guarantor 4. Look at the second paragraph of 2073, his share shall be borne by the others including the payer of the same proportion. So notice this is different form your joint obligation general rules on obligations and contracts. Kasi the general rule on joint obligations, if one of the debtors is insolvent the others will not shoulder his share dba? But here 2073 is specific, so this is applicable, one of them pays and one of them turns out to be insolvent, his proportionate share would be shoulder by the rest. To which 30,000 share of the insolvent guarantor will be divided amongst the rest of the co-guarantors so tag 40,000 cla. Kung c guarantor 1 ang nagbayad sa whole 120,000 and c guarantor 4 ang insolvent, he can seek reimbursement from guarantor 2 and 3 for the 40,000 share. Again, take note, this is only applicable if payment has been made by virtue of a judicial demand or unless the principal debtor has already become insolvent. ARTICLE 2074. In case of the preceding guarantors may set up against the one who defenses which would have pertained to the against the creditor, and which are not purely debtor.

article, the copaid, the same principal debtor personal to the

So here, co-guarantors can raise a defense that may have been available to the principal debtor. For example, guarantor 1 may hold liable for 120,000 and then he will proceed reimbursement to guarantor 2 can raise the defenses of prescription, payment or other modes of distinguishing the principal obligation. Of course, these guarantors cannot set up defenses which are purely personal to the principal debtor. If the debtor was insane or minor at that time the obligation was entered into, then these coguarantors cannot raise those defenses when reimbursement has been sought from them under 2073. They can only raise

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 defenses which pertain to the obligation and not to the person of the principal debtor. ARTICLE 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the coguarantors in the same terms as the guarantor. So it’s possible here even if we have several guarantors, that one of them or all of them have sub-guarantors. Now, the guarantor should first be made to pay before the sub-guarantor should be held liable. So if, however, as an example here, G4 become insolvent. The sub guarantor will be the one, who becomes is hold into the place of the guarantor who is insolvent. To which he will be liable for the proportionate share.

EXTINGUISHMENT OF GUARANTY ARTICLE 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. Modes of extinguishment of obligations: 1. Payment or performance; 2. Loss of the thing due; 3. Condonation or remission of the debt; 4. Confusion or merger of the rights of creditor and debtor; 5. Compensation; and 6. Novation.

of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. In the present case, the liability of petitioner is contractual in nature, because it executed a performance bond. Whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. As a surety, petitioner is solidarily liable with Santos. The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. A: Can seek to the heirs of Santos. Q: To what extent?

So those modes along with the other modes of extinguishment of obligation such as happening of a resolutory condition, prescription, those are also applicable here to a contract of guaranty. Q: Death of the debtor? Would that extinguish the obligation? Why? A: No ma’am. Because generally ma’am, obligations arising from contracts are transmissible. Second, by stipulation of the parties or nature of the obligation making it transmissible or the law provides it so. STRONGHOLD vs. REPUBLIC FACTS: Respondent Republic-Asahi entered into a contract of construction with Santos, the proprietor of JDS. To guarantee the faithful and satisfactory performance of its undertakings, JDS posted a performance bond of P795k executed, jointly and severally with petitioner Stronghold. However, respondent rescinded the contract upon being dissatisfied with the progress of the work undertaken by JDS. Nevertheless, pursuant to Article XV of the contract, such rescission shall not be construed as a waiver of respondent’s right to recover damages from JDS and its sureties. As a result thereof, respondent sought payment of the bond from petitioner. Petitioner countered that it was automatically released from any liability under the bond upon the death of Santos as the bond principal. Even assuming that it was not the case, petitioner was released from liability under the performance bond because there was no liquidation, with the active participation and/or involvement of the surety and Santos hence, there was no ascertainment of their corresponding liabilities under the performance bond. In other words, respondent can no longer prove its claim for damages in view of the death of Santos.

A: To the extent of the estate of Santos ma’am. Do take note, general rule obligations are transmissible. Unless otherwise stipulated by parties, or by law, or nature of the obligations. Or the obligations are personal in nature. None of the exceptions are present on this case. Santos has liabilities that are not intransmissible. So his death could not be the cause of the extinguishment of his obligation. Which maybe pass through his estate. As such, Stronghold cannot use Santos’ Death and escape their obligation under the performance bond. Now also take note, as we have pointed out earlier, novation is a mode of extinguishing an obligation. Would it necessary extinguish as well the accessory contract of guaranty or suretyship? Now we have to take into consideration whether the novation constitutes a material alteration which varies the term of the principal contract without the consent of the guarantor or surety. If such is a material alteration, the surety or guarantor will be released from the liability as if it would constitute novation or change of the principal contract which is already extinguished. ARTICLE 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released. So what happen here? We have dacion en pago – Article 1245. As you have known, dacion en pago is a special form of payment and is also considered as a form of novation. Wherein the old obligation which is monetary in nature is extinguished by delivery of the property for extinguishing the obligation of course with the consent of creditor. Now, with that dacion en pago the delivery of the property, the principal obligation is extinguished, and being an accessory contract, the surety or guaranty is likewise extinguish.

RULING: NO

But what happens if the creditor is evicted from the property subject of that dacion en pago. Now the debt of course, is already extinguish, so wala na ung relationship under the new loan. With the eviction it will not revived the contract of guaranty or suretyship. In other words, the creditor, despite eviction cannot go after anymore the guarantor or surety.

As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the nature

This has to be taken into consideration by the creditor when he accepts property as a form of payment from the debtor. Because again, once he accepts this arrangement, dacion en pago, even if subsequently he would be evicted, he cannot go after the surety

ISSUE: W/N petitioner’s liability under the performance bond was automatically extinguished by the death of Santos, the principal.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 or guarantor anymore. But of course, he still has recourse against the principal debtor. ARTICLE 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. The creditor release one of the guarantors without the consent of the others, we have here the debtor and several guarantors. Then let us say, sabihan ni creditor kay Guarantor 1, wag muna bayaran ang share mo. What is the effect, will be the remaining co-guarantors be burden with the proportionate share of the first guarantor when he was realeased? Of course not. Because these co guarantors did not gave their consent to the release. They should not be prejudiced. In other words, if they would eventually be held liable, applying the benefit of division, they would only be liable for their proportionate share. Otherwise, if we allow it, it will be prejudicial. Again the scenario here, the release was made by the creditor in favor of one of the guarantors without the consent of the coguarantors. But of course, all of them give consent, then they will shoulder the proportionate share of the guarantor was released. If not all of them gave their convent, who will shoulder is those guarantors who gave their consent to such release. But it’s a different scenario of course, if what was release by the creditor is the principal debtor. Because if such will be so, the principal obligation is extinguished, accessory obligation of guaranty or suretyship is likewise extinguished. ARTICLE 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. SPOUSES TOH vs. SOLID BANK FACTS: Respondent Solid Bank extended an omnibus credit line in favor of FBPC embodied in a letter-advise. One of the documents essential for the credit facility was a Continuing Guaranty, which covers any and all existing indebtedness of, and such other loans and credit facilities which may be granted to FBPC. Petitionerspouses Toh and respondent-spouses Li signed the Continuing Guaranty, binding their selves solidarily liable to petitioner. It provides: The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties may be liable. It also contained a de facto acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteed by petitioners and respondents. And to strengthen said security, the Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility or any part thereof in such manner and upon such terms as the Bank may deem proper without notice to or further assent from the sureties. The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the written revocation thereof with notice to the Bank that may be executed by the sureties. Later on, respondent Bank received information that respondent-spouses Li had fraudulently departed from their conjugal home. Hence it demanded payment from petitioners

invoking the acceleration clause and the Continuing Guaranty. Petitioners argued that the Continuing Guaranty was void by virtue of the extension of the due dates of the letters of credit without the required 25% partial payment per extension; the approval of another letter of credit, L/C 93-0042, even after respondent-spouses Li had defaulted on their previous obligations; and, the unmistakable pattern of fraud. ISSUES: 1. W/N the Continuing Guaranty was valid. YES 2. W/N the unilateral extensions made by petitioner bank extinguished the liability of petitioner spouses Toh. YES RULING: BOTH YES First issue The Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document that enjoys the presumption of authenticity and due execution. Petitionerspouses Toh voluntarily affixed their signatures on the surety agreement and were thus at some given point in time willing to be liable under those forms. Nothing in the Continuing Guaranty restricts their contractual undertaking so long as they were corporate officers and stockholders of FBPC. In fact the obligations assumed by them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees and assigns," and that their commitment "shall remain in full force and effect until written notice shall have been received by the Bank that it has been revoked by the undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowed therein. Second issue However, even if the petitioner spouses Toh were bound to the surety agreement they signed, respondent bank is also bound to its representations in the "letter-advise" particularly as to the extension of the due dates of the letters of credit, which was subject to conditions as stipulated in the Continuing Guaranty. Although it was stipulated that respondent Bank "may at any time, or from time to time, in its discretion change the time payment," such waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letteradvise." Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by 15% marginal deposit extendible three times for a period of 30 days for each extension, subject to 25% partial payment per extension. any doubt on the terms and conditions of the surety agreement should be resolved in favor of the surety. It must be noted that petitioner spouses Toh are only accommodation sureties for they received nothing out of the security contract they signed. The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Article 2079 of the CC. This act of the Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid 5 letters of credit which the Bank did not extend, defer or put off, but comprises conscious, separate and binding agreements to extend the due date, as was admitted by the Bank itself. As a result of these illicit extensions, petitioner-spouses Toh are relieved of their obligations as sureties of respondent FBPC under Article 2079 of the CC.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017

Article 2079 is clear. Even the extensions granted by the creditor to the debtor, without the consent of the guarantor or surety, will release the guarantor or surety. But here, the surety bonds or suretyship contracts which secured the debts under the deeds of undertaking to pay.. So ano yung covered sa surety bonds? Obligation ng ASPAC as debtor to TIDCORP as the creditor, and then the surety companies are the sureties. No payment, however, or no extension granted by TIDCORP in favor of ASPAC in this regard. What are the extensions given here? The extensions given were, by virtue of which.. sino ang debtor? ASPAC. Sino ang creditor? PCI. and then you have TIDCORP as guarantor. And the obligation of TIDCORP in that transaction wherein the banks are the creditor. The coverage or the scope of their surety obligation (solidary obligation) is to which wherein TIDCORP is the creditor. What are covered in this extensions are those to which the creditor are the banks. It is said here that there are two sets of transactions, dated separately. The extension given in one, should not be given to the other. We have to emphasize what is the principal obligation involved in the extension. Is it the same one covered in the suretyship agreement. These payments in the extensions did not modify the terms. It provides only new payments covering TIDCORP's liability.. but again, it's not covered by the surety bond. (Maam: pls read the full text, don't rely on the digest) Under Article 2079, the extension is given to the debtor without the consent of the guarantor or the surety. The guaranty is extinguished because such extension is given without the consent of the guarantor or surety. It may be beyond the contemplation of the guarantor or surety, because later on the guarantor might become insolvent. When the debtor becomes insolvent, to whom will the guarantor proceed? So again, such extension without the consent shall be prejudicial to the guarantor. In effect, such kind of extension will release the guarantor and the surety from the obligation. So again, the extension must be without consent for the guarantor to be released. If the guarantor gave consent, or for example, as what was stated earlier, there was a waiver to any extension given in favor of the guarantor, it is implied that the guarantor or surety agreed to the extension, to which he will shoulder the risk until the grant of such extension. However, do take note that this extension is not applicable if there is a mere failure of the creditor to demand payment after the obligation has become due. So the extension contemplated here is not mere failure to collect. If there is mere failure to make demand, any extension of time will not release a guarantor from his obligation. The requirement here is there must be an agreement between the debtor and the creditor that the debtor is given a specific period of time to be able to pay his obligation. So it must be based on an agreement. So if the obligation is payable in installments, and an extension is given to one or two installments, it will not affect the liability of the surety or the guarantors. But, if for example, there is an acceleration clause, wherein default, failure to pay two installments, the obligation shall become due, and then the creditor extends or renews the period of payment for the debtor without the guarantor's consent, then you apply the first sentence in 2079. The guarantor is released from his obligation, no matter how short the extension is. In fact, you don't even take into consideration whether there is actual prejudice to the guarantor or surety by virtue of such extension. Extension by virtue of a new agreement without consent of the guarantor extinguishes the guaranty. ARTICLE 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. Two or more guarantors are entitled to the benefit of division, unless it is expressly stipulated that they will be solidarily liable. However, 2080 provides, whether they be joint or solidary, the

guarantors may be released when the creditor, through his act, cannot subrogate the guarantor to the rights, mortgages, and preferences of the said creditor. This presupposed that the guarantor acted with the knowledge and consent of the principal debtor. Why? Becau se we are talking about subrogation here. So kung hindi ma subrogate ang guarantors sa rights ng creditors, then you apply 2080, to which guarantors will be released. If in the first place, the guarantors are not entitled to subrogation, then 2080 is not applicable. So here, what would be an example? Let's say a mortgage was executed in favor of a creditor, and the creditor was negligent because he turned out that it was not in a public instrument, hindi yan ma foreclose, hindi yan basta basta mahabol ni creditor. So failure to comply with that requirement, debtor did not pay, creditor proceeded against the guarantors. But considering that the guarantors cannot be subrogated with the rights of the creditor, they can be released under 2080. What's the reason behind this provision? It should not prejudice the guarantors, and this would also avoid opportunity for collusion between the creditor and the debtor to prejudice the guarantors. PNB vs. MANILA SURETY FACTS: Petitioner PNB opened a letter of credit in favor of Edgington Oil for 8k tons of hot asphalt. Of this amount, 2k tons worth P279k were released and delivered to ATACO under a trust receipt guaranteed by respondent Manila Surety up to the amount of P75k. Later on, ATACO executed a deed of assignment authorizing petitioner bank to receive and collect from the Bureau of Public Works the amount to be applied as payment for the asphalt it owed. ATACO delivered to the Bureau asphalt amounting to P431,466.52. Of this amount petitioner collected P106,382.01 for 8 months until for unexplained reasons, petitioner ceased to collect. It was later found that that more moneys were payable to ATACO from the Public Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same purchase order to a total of P311,230.41. This caused petitioner to file a claim against the principal debtor (ATACO) and the surety (respondent) to recover the balance of P158,563.18. The CA found petitioner bank negligent in having stopped collecting from the Bureau the moneys falling due in favor of the principal debtor, ATACO before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the surety. Such negligence of petitioner bank resulted in the exoneration of respondent Manila Surety. Petitioner bank countered that the power of attorney it obtained from ATACO was merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the principal debtor. ISSUE: W/N petitioner’s negligence in collecting the debt exonerated respondent Manila Surety. RULING: YES The CA did not hold the Bank answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent is required to act with the care of a good father of a family and becomes liable for the damages which the principal may suffer through his non-performance. Certainly, the Bank could not expect that the Bank would

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 diligently perform its duty under its power of attorney, but because they could not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal debtor itself, and a fortiori reject any demands by the surety. Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code. The demand letter informing the debtor its outstanding balance was P156,374.83 has no bearing on the issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not being made. The fact remains that because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully supported by the evidence.

All the bonds, including judicial bonds are contractual in nature. They are merely as special class of contracts of guaranty, characterized by the fact that they are given in virtue of a judicial order. ARTICLE 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof. So we already know that guaranties and suretyships are contracts of personal security. And then we have pledges and mortgages which are contracts of real security. Now pledges and mortgages are sufficient to cover obligations with legal or judicial bonds as may be allowed. ARTICLE 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety. Ok, so a judicial bondsman is solidarily liable with the principal debtor. Sub-surety, is likewise solidarily liable. That means that these judicial bondsmen and sub-surety are not entitled to the benefit of exhaustion.

CONTRACT OF PLEDGE Maam: How was PNB negligent here? Ans: PNB was negligent because it did not collect from the Bureau. Maam: Why did it result to negligence? Why and how is 2080 applicable? What happened to the Bureau? PNB was allowed to collect from the Bureau. So here there was already an assignment with power of attorney from the principal debtor, ATACO, in favor of PNB. But here, to apply 2080, you have to consider how is it that the creditor is considered negligent? It already had the authority to collect from the bureau. But it was negligent in actually collecting from the bureau. In fact, at the time the assignment was executed, meron pang funds ang bureau, but PNB did not act upon it. And what happened? Other creditors were able to collect. So binigyan na sila ng power, wala silang ginawa. That is the precise situation covered in 2080. It allowed the assigned funds to be exhausted without notifying the surety, which the bank deprived the surety of any possibility of recoursing against the security. to which the bank exonerated the surety pursuant to Art. 2080. There was a letter that was sent by PNB to the debtor ATACO.. but it does not appear that any reply was made or that the demand was pressed. The fact remains that because ofthe bank's inactivity, other creditors were able to collect. So in effect, Manila Surety is released from its obligation applying Art. 2080. ARTICLE 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are personal to the debtor. Okay, this is similar to the previous articles, whatever defenses available to the principal debtor are also available to the guarantor. Prescription.. among others, you have 2068, 2074, and 2081. LEGAL AND JUDICIAL BONDS ARTICLE 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in article 2056 and in special laws. Okay, so we have here a bond. It is an undertaking that is sufficiently secured wherein the bondsman acts as a surety, maybe a corporation or a juridical person.

As we have discussed before, contracts of guaranty and suretyship are contracts of personal security. No property is involved to actually secure the payment or performance of the principal obligation. Although, we have mentioned that as a qualification for guaranty or surety, as well in bondsmen, you must have sufficient property. The security itself is not the properties, but the undertaking, or the promise of the guarantor to pay when the debtor cannot pay. Now, what about pledge? When it comes to pledge, or even mortgages, the property itself is the security, and not the promise of the owner of the property. So when we talk about pledge and mortgages, these are contracts of security. What is a contract of pledge? It is a contract of security but it is specifically a real security in the sense that what acts as a security is the property itself. So a contract of pledge, mortgage, antichresis, these are accessory contracts of real security for the property and not the promise of the owner acts as a security for the obligation. So a pledge is a contract by virtue of which the debtor delivers to the creditor or any 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 along with all its goods and accessories. So in this type of contract it may be a personal or movable property, or a document evidencing real or incorporeal rights acting as a security for the principal or for the fulfillment of the principal obligation. In case the obligation is not fulfilled, the creditor may proceed against the movable or incorporeal right. But if the obligation is paid, then the creditor is responsible for returning the property subject of the pledge, as well as its accessions and accessories must be returned to its owner. TYPES OF PLEDGE: 1. Voluntary or conventional pledge – a pledge is created by agreement of the parties. 2. Legal pledge – contracts of pledge created by operation of law. An example of which is in a contract of deposit, where the depositary retains the thing deposited. It is an example of a pledge by operation of law.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017

PARTIES IN A CONTRACT OF PLEDGE: 1. Pledgor 2. Pledgee CHARACTERISTICS OF A CONTRACT OF PLEDGE: 1. Real contract - it is a contract perfected by delivery of the subject matter and therefore it is a real contract 2.

Accessory contract - it is also an accessory contract, being a security arrangement, and it has no independent existence on its own as its validity depends on the validity of the principal obligation. Keep in mind that when an accessory contract is void, it does not automatically mean that the principal contract is also void. However when the principal contract is void, the principal is also void by virtue of the principle “the accessory follows the principal”

3.

Unilateral contract – for it creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfillment of the principal obligation

4.

Subsidiary contract – for the obligation does not arise until the fulfillment of the principal obligation that is secured

Now, in the absence of a separate consideration, we have the same consideration as that of the principal obligation. But the pledger may also be a third person, not necessarily the principal debtor. In that instance, what would be the cause or consideration? The principal obligation.

For it to be valid against 3rd persons, it must be registered.

ARTICLE 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. Essential requisites of a contract of pledge and mortgage This is in addition to the essential requisites of consent, object and consideration. 1. Contract is constitutes to secure the fulfillment of a principal obligation. Remember, both pledge and mortgage are accessory contracts, they cannot exist independently of the principal obligation, they derive their existence from the principal obligation. So if the principal obligation is void, you cannot have a valid pledge or mortgage. 2.

What are the objects of the pledge? It may be movables- car, jewelry, even cellphones, or laptops (Corporeal). You can also have documents evidencing incorporeal rights- securities or shares (incorporeal).

Why is it that ownership is required in this accessory contracts? Because in pledge or mortgage, these involves acts of disposition. Why? Because what will happen if there is failure to pay the principal obligation? These properties covered by the pledge or mortgage can be sold and the proceeds will be applied to the principal obligation.

Incorporeal/intangible properties – while it cannot be seen, it nevertheless exists by fiction of law. So for it to be a subject matter in a contract of pledge, what you deliver is the evidence of such security.

So here, we are talking about real securities. There are 4. The pledge, mortgage, chattel mortgage, and antichresis. In these contracts, the intention is to secure the performance of the principal obligation by subjecting these properties. You also have real estate mortgage. It is the same concept as pledge, as a security in a principal obligation, but the subject here is different. You have a real or immovable property, securing the fulfilment of the obligation. If the debtor cannot pay, then the creditor may proceed against the property, have it foreclosed, and apply the proceeds to the principal obligation. Now these Articles. 2085, and onwards.. pls take note, there are provisions that are common to both pledge and mortgage, and there are also provisions that are specifically applicable to pledge. So you have to take note the distinction between pledge and mortgage. Real Estate Mortgage The subject is a matter is an immovable Delivery is not required

Pledge Movable property or incorporeal rights Delivery to the creditor is required. Take note in a contract of pledge, when we say that delivery is necessary for the perfection of the contract, we are talking about ACTUAL

That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Only the absolute owner of the thing can be the pledgor or mortgagor. If you are just a lessee, you cannot mortgage the property. What is the effect if you are not the owner? Ofcourse, you will have a void pledge or mortgage.

2 KINDS OF MOVABLES/SUBJECT MATTER IN PLEDGE: 1. Corporeal/tangible properties 2.

DELIVERY, not construct delivery. Not valid as to 3rd persons if it is not in a public instrument which contains a description of the thing pledged and the date of the pledge

3.

That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. CALIBO vs. CA

FACTS: Respondent Pablo was the owner of a tractor, which he left in the safekeeping of his son Mike. Mike kept the tractor in the garage of the house he was leasing from petitioner. However, Mike defaulted in the payment of his rent and electric and water bills. Mike promised to settle his obligation to petitioner and offered the tractor as security. Later on, respondent Pablo sought claim and possession of the tractor. When petitioner refused to give the tractor, respondent instituted an action for replevin against petitioner. petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner asserts that the tractor was left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike Abella pays his obligations. Even if Mike was not the owner of the tractor, a principal-agent relationship may be implied between Mike and his father

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 respondent Pablo. Hence, Pablo was bound by the pledge, even if it were beyond the authority of his son to pledge the tractor, since he allowed his son to act as though he had full powers to do so.

tractor was delivered to Calibo not for safekeeping, but as a security for Mike’s obligation. What is the remedy here of Calibo? He can still go after the obligation of Mike, but Ofcourse, he cannot retain the tractor.

ISSUES: W/N there was a valid pledge of the tractor to petitioner. RULING: NO In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in that of a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: 1. The pledge is constituted to secure the fulfillment of a principal obligation; 2. The pledgor be the absolute owner of the thing pledged; and 3. The person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. The pledgor Mike was not the absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father who left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the absolute owner of the property, is absent in this case. Hence, there is no valid pledge. As to petitioner’s argument of agency, Article 1869 of CC provides that for an agency relationship to be deemed as implied, the principal must know that another person is acting on his behalf without authority. Here, respondent categorically stated that the only purpose for his leaving the subject tractor in the care and custody of Mike was for safekeeping, and definitely not for him to pledge or alienate the same. If it were true that Mike pledged respondent’s tractor to petitioner, then Mike was acting not only without respondent’s authority but without the latter's knowledge as well. Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. Again, in view of respondent’s lack of knowledge of Mike's pledging the tractor without any authority from him, it stands to reason that the former could not have allowed the latter to pledge the tractor as if he had full powers to do so. There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and of returning the same. Petitioner himself states that he received the tractor not to safely keep it but as a form of security for the payment of Mike’s obligations. There is no deposit where the principal purpose for receiving the object is not safekeeping. Q: Can we say that there is a contract of agency here? A: No maam. The court also said that there was no contract of agency. Q: can you see that there is a deposit here wherein the lessor will be allowed to retain the property? A: there was no contract of deposit here. Calibo did not receive the property for safekeeping, but as a form of security. So here, take note, there was no valid contract of pledge. There was a subject, the tractor, however, one of the requisites that the pledgor must be the absolute owner of the thing pledged is not present in this case. Mike, the son, was not the absolute owner of the tractor for it was owned by his father. So there was no valid contract of pledge. There can also be no contract of agency because the SC emphasized that there was no evidence that there was a contract of agency that was executed in favor of Mike by the father. Again, agency requires the consent of the principal. Obviously, there was also no valid deposit. The purpose of deposit is for safekeeping, and it is clear from the facts of the case that the

So again, take note of this 2nd requisite- the pledgor or mortgagor must be the absolute owner of the thing pledged. A pledge or motgage executed by one who is not an owner thereof is without legal existence. Now, also under 2085, under the 3rd paragraph, that it is not necessary that the pledgor or mortgagor is the principal debtor. What is important is that the pledgor or mortgagor is the absolute owner of the property. For this 3rd paragraph to apply, valid consent from the pledgor or mortgagor, who is the absolute owner of the thing pledged, must be present. The fact that the loan was solely for the benefit of the debtor would not invalidate the pledge or mortgage. Ofcourse, the creditor would be required to exercise due care and prudence in making proper inquiry as to whether the person is the absolute owner of the property. In this case, the pledgor or mortgagor shall not be liable, as will be discussed later on.. he cannot be further liable for any deficiency.. because the extent of this obligation is only to the value of the property pledged or mortgaged. THIRD REQUISITE: That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. As we have mentioned, in this contract of pledge and mortgage, are acts of ownership.. so they must have the capacity or authority to dispose of the thing. Free disposal means that the property must not be subject of any lien or encumbrance. Also relate this in a provision in the Revised Penal Code, estafa or other forms of deceit. Also there must be any pending case involving the property. It must not be a subject of any litigation. Now remember these are additional, essential requisites for a valid contract because we still of course have to have Consent, Object and Consideration. Plus these three absence of any of which will result into a void pledge or mortgage. Already I discussed the case of Calibo, How about the case of development? Development bank? DEVELOPMENT BANK V PRUDENTIAL BANK Litex executed trust receipts in favor of respondent Prudential Bank involving 5k spindles to be used for its textile mill. Later on, Litex obtained a foreign currency loan with petitioner DBP. As security thereof, Litex executed real estate and chattel mortgages in favor of DBP including the articles covered by the trust receipts. Upon learning of Litex’s rehabilitation, Prudential informed DBP that it was the absolute and juridical owner of the various items covered by the trust receipts and they were thus not part of the mortgaged assets that could be legally ceded to DBP. However, DBP extra-judicially foreclosed the mortgages including the articles claimed by Prudential and subsequently acquired ownership thereof. Nevertheless, DBP requested documents from Prudential to enable it to evaluate Prudential’s claim. However, without the knowledge of Prudential, DBP sold the Litex textile mill, as well as the machineries and equipment therein, to Lyon. As a result, Prudential filed a complaint for a sum of money with damages against DBP. Prudential argued that even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn over the proceeds to Prudential, being the party that advanced the payment for them. DPB argued that the transactions between Litex and

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Prudential were not trust receipt transactions because the spindles were procured by Litex not to sell them but or the exclusive use of its textile mills. The RTC ordered DBP, as a trustee ex maleficio, to pay Prudential. The CA further found that DBP was not a mortgagee in good faith. ISSUE: W/N the chattel mortgage executed by Litex in favor of DBP validly included the goods covered by the trust receipts. RULING: NO In a trust receipt transaction, the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale. Here, Litex was not engaged in the business of selling spinning machinery, its accessories and spare parts but in manufacturing and producing textile and various kinds of fabric. The articles were not released to Litex to be sold. Nor was the transfer of possession intended to be a preliminary step for the said goods to be ultimately or subsequently sold. Instead, the contemporaneous and subsequent acts of both Litex and Prudential showed that the imported articles were released to Litex to be installed in its textile mill and used in its business. DBP itself was aware of this. The articles were owned by Prudential and were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085(2) of the CC requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Further, Article 2085(3) mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Here, Litex had neither absolute ownership, nor free disposal, nor the authority to freely dispose of the articles. Hence, it could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. Since there can be no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. It must be noted that no one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential’s demand. By its failure to pay or return them despite Prudential’s repeated demands and by selling them to Lyon without Prudential’s knowledge and conformity, DBP became a trustee ex maleficio.

You have a mortgage, what would be the principal obligation? In relation to the mortgage

second requisite and that the pledgor should be the absolute owner of the thing which is pledged maam. In this case maam since there is a valid trust receipt agreement then the ownership of the spindle was that to prudential bank and not that to litex. So litex was not the absolute owner of the spindle so there was no valid mortgage. M: How about the allegation that the bank here is considered as a mortgagee or or purchaser in good faith. In this case maam the court held that actually the bank was not in good faith because at the time that it required. Yes ma’am because they know of the fact that those goods. . . “Cough Cough” “Cough” M: Why is it that DBP cannot be considered a mortgagee in good faith Because DBP had a knowledge that the goods had been under a trust receipt before the foreclosure of the sale. M: Okay Thank you. So here, again now emphasis on the second requisite under 2085 the pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged, in this instance we have a trust receipt transaction and we have emphasized what happens in this kind of transaction we have goods which are released by the entruster. who owns or holds absolute title or security interest for the said goods. The entruster here is prudential and the goods are released to the entrustee and the latter execution and delivery to the entruster of the trust receipt. So here the trust receipt evidences absolute title or a security interest for the goods. The execution of the trust receipt transaction of the goods or machineries covered therein are actually owned by prudential bank, which is only in the physical possession of litex textiles. And therefore even with the execution of the chattel mortgage involving the said equipment’s there can be no valid mortgage because those machineries were still owned by prudential bank. No valid mortgage, no valid foreclosure to which DBP cannot be considered in a purchaser in good faith because they were made aware of the trust receipts. M: What is a doctrine of a mortgagee in good faith? CAVITE DEV’T BANK vs. SPS LIM Rodolfo Guansing obtained a loan from petitioner CDC. As security thereof, Rodolfo mortgaged a parcel of land in favor of CDC. When Rodolfo defaulted in its payment, CDC foreclosed the mortgage and subsequently acquired title thereto. Later on, Lim offered to purchase the property from CDC. However, Lim discovered that Rodolfo fraudulently secured title over the subject property from his father Perfecto who successfully restored his previous title thereto. By virtue of the alleged misrepresentation of CDC, Lim filed an action for specific performance and damages against CDC. Petitioner alleged that it is a mortgagee in good faith as a mortgagee bank, it is not required to make a detailed investigation of the history of the title of the property given as security before accepting a mortgage. ISSUE: W/N CDC was a mortgagee in good faith. RULING: NO

The Principal Obligation was the payment of the 498. . . in favor of Prudential bank. M: You have a valid mortage? The Said Machineries The Supreme Court held that there was no valid mortgage applying Article 2085 of the Civil Code: Emphasizing on the

CDB's acceptance of Lim's offer to purchase, a contract of sale was perfected and, indeed, partially executed because of the partial payment of the purchase price. There is, however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its obligation as seller to deliver and transfer

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 ownership of the property.

Maam: Who is the Mortgagor here

Pursuant to Article 2085 of the CC, in a contract of mortgage or pledge, it is required that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan. Here, Rodolfo was not the owner of the mortgage land. Nemo dat quod non habet. One cannot give what one does not have. Hence, CDC did not validly acquire ownership thereof.

D: Rodolfo Maam, and Perfecto is the true owner.

Nevertheless, there could a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title. However, CDC cannot be considered as a mortgagee in good faith. While it is not expected to conduct an exhaustive investigation on the history of the mortgagor's title, it cannot be excused from the duty of exercising the due diligence required of banking institutions especially so if there might be circumstances apparent on the face of the certificate of title which could excite suspicion as to prompt inquiry. It is standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are real owners thereof, noting that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected with public interest. There is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo’s title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This self-executed deed should have placed CDB on guard against any possible defect in or question as to the mortgagor's title. Moreover, the alleged ocular inspection report by CDB's representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that persons were occupying the subject land other than Rodolfo and that said persons, who are the heirs of Perfecto, contest the title of Rodolfo. Therefore, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo must be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which, the property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed.

Maam: Is there a Valid Mortgage? D: None maam because the bank is not the real owner. Maam: The bank is not the real owner of the property? D: No the mortgagor is not the real owner of the property.

Maam: Now what about the issue, Is Cavite Development bank considered a mortgagor in good faith? D: No maam, as a banking institution it should exert not ordinary diligence but extra ordinary diligence in order to secure the title that the owner of the mortgaged property is the real owner of the property and in this case the court said that it appears not that Rodolfo guansing obtained his fraudulent title by executing a extrajudicial settlement of the estate where he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to the Property. This self-executed deed should have alerted the Bank against any possible defect in the mortgage. D: The Bank also did not have an ocular inspection over the property. M:Again a requirement here is that the mortgagor must be the owner of the property is required for a valid mortgage. Even if there was a title registered in the name of Rodolfo, it turned out he was not the true owner thereof because it was a fraudulently secured by Rodolfo. The title is merely an evidence of ownership but the mere fact you are in possession of the title does not mean you own the property mismo. Cavite alleged the defense that it is considered a mortgagee in good faith. The Doctrine of Mortgagee in Good Faith is based on the rule that all persons dealing with property covered by Torrens Certificate of Title are not required to go beyond what appears on the face of the title. Mortgagee has the right to rely on the face of the title. An innocent purchaser for value therefore, who relies on the title is protected. However the mortgagee bank cannot claim to be a mortgagee in good faith because he cannot be excused from exercising the due diligence required from Banking Institutions. It is a standard practice of Banking Institutions to send representatives to the premises of the land and investigate who the real owners are thereof. Also take note as we have discussed last time the third paragraph in 2085 wherein you can have 3rd persons who are not parties to the principal obligation who may secure the principal obligation by mortgaging or pledging their own property. It is not necessary that the pledgor or mortgagor is the principal debtor at the same time. What is required is that such pledgor or mortgagor is the absolute owner thereof. VDA DE JAYME vs. CA Spouses Jayme and Neri, the president of Asiancars, entered into a contract of lease covering one-half of the lot owned by spouses Jayme. It was stipulated that Asiancars may use the leased premises as a collateral to secure payment of a loan which Asiancars may obtain from any bank, provided that the proceeds of the loan shall be used solely for the construction of a building which, upon the termination of the lease or the voluntary surrender of the leased premises before the expiration of the contract, shall automatically become the property of the spouses Jayme. Later on, Asiancars obtained a loan from Metrobank. However, the entire lot was offered as collateral in a Deed of Real Estate Mortgage signed by spouses Jayme. Asiancar failed to settle the unpaid balance of its loan obligation causing Metrobank to foreclose the property. Upon learning of such, petitioner sought the annulment thereof alleging that Asiancars did not tell them that security of the loan was the entire lot. Hence, petitioner alleged that they

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 were deceived into signing the DREM when their intention as well as consent was only to be bound as guarantors and not mortgagors. Respondents deny that any fraud was employed since the spouses were fully advised and compensated for the use of their property as collateral. ISSUE: W/N the third party mortgage undertaken by spouses Jayme in favor of Neri was valid. RULING: YES The DREM entered into by the spouses Jayme partakes of a Third Party Mortgage under Article 2085(3) of the CC. Clearly, the law recognizes instances when persons not directly parties to a loan agreement may give as security their own properties for the principal transaction. In this case, the spouses should not be allowed to disclaim the validity of a transaction they voluntarily and knowingly entered into for the simple reason that such transaction turned out prejudicial to them later on. So long as valid consent was given, the fact that the loans were solely for the benefit of the debtor would not invalidate the mortgage with respect to petitioner’s property. In consenting thereto, even granting that petitioner may not be assuming personal liability for the debt, her property shall nevertheless secure and respond for the performance of the principal obligation. In this case, no fraud attended the execution of the deed of mortgage. With the assistance of a lawyer and consultation with their literate children, the spouses though illiterate could not feign ignorance of the stipulations in the deed. Patently, theirs was not a vitiated consent. It could not now be justifiably asserted that the Jayme spouses only intended to be bound as guarantors and not as mortgagors. In this jurisdiction, when the property of a third person which has been expressly mortgaged to guarantee an obligation to which the said person is a stranger, said property is directly and jointly liable for the fulfillment thereof, in the same manner as the mortgaged property of the debtor himself. In the case at bar, when Asiancars failed to pay its obligations with Metrobank, the properties given as security (one of them being the land owned by the Jaymes) became subject to foreclosure. When several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are liable for such balance. At the time of the foreclosure, Asiancars had a remaining balance. Thus, Metrobank had every right to effect the extrajudicial foreclosure of the mortgaged properties to satisfy its claim. Metrobank is also a purchaser in good faith. It had no knowledge of the stipulation in the lease contract. Although the same lease was registered and duly annotated on the TCT of the Lot, Metrobank was charged with constructive knowledge only of the fact of lease of the land and not of the specific provision stipulating transfer of ownership of the building to the Jaymes upon termination of the lease. There was no annotation on the title of any encumbrance. While the alienation was in violation of the stipulation in the lease contract between the Jaymes and Asiancars, Metrobank’s own rights could not be prejudiced by Asiancars’ actions unbeknownst to Metrobank. Thus, the transfer of the building in favor of Metrobank was p valid and binding.

their property. Although they cannot go after respondent, they have in their favor the undertaking executed by Neri and other members of his family. The undertaking also bound respondent Asiancars, as well as its officers who were signatories to the aforesaid Undertaking, to reimburse petitioners for the damages they suffered by reason of the mortgage.

So here we have the Spouses Jaime who executed a real estate mortgage in favor of the creditor Metrobank. This partakes the third party mortgage as mentioned in Last Paragraph 2085. So long as valid consent was given, the fact that the loans were solely for the benefit of the debtor would not invalidate the mortgage with respect to the petitioners property. The Law recognizes instances where persons not directly parties to a loan may give as security their own properties to the principal transaction. No fraud attended the execution of the deed of mortgage. The properties given as security, one of which was owned by the Spouses Jaime, became subject to a foreclosure. The Supreme Court also pointed out that the Metrobank is a Purchasor in Good Faith because it had no knowledge of the stipulation in the Contract although the lease was registered and duly annotated, Metrobank was only charged with the constructive knowledge of the lease and not of any specific provisions stipulating the transfer of ownership of the building to the Jaimes upon termination of the lease. No annotation of encumbrance was also made.

Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n) A guarantee cannot exist without a valid obligation nevertheless a guarantee may be constituted to guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation. Just like guarantee and suretyship, pledge and mortgage, the principal obligation must also be valid as they are mere accessory contracts. Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858)

MANILA BANKING vs. TEODORO In 1964, Teodoro Jr. executed a Deed of Assignment Receivables from the EEA in favor of petitioner bank. The Deed of Assignment provided that: 1.

2.

3.

It was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10k extended to respondents by petitioner bank as security for the payment of said sum and interest thereon; Respondents, as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned; The assignment would also stand as a continuing guaranty for future loans of respondents to petitioner bank and correspondingly the assignment shall also extend to all the accounts receivable, respondent shall also obtain in the future, until the consideration on the loans secured by respondents from petitioner bank shall have been fully paid by them.

In 1966, respondents entered into a contract with Emergency Employment Administration (EEA), now Philippine Fisheries Commission (PFC). By virtue thereof, petitioner bank extended loans to respondents Teodoro Sr. and his son Teodoro Jr.

Petitioners however, are not without recourse for the loss of

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 evidenced by 3 promissory notes they executed in favor of the bank in 1966. Petitioner banks took steps to collect from the PFC but no collection was effected. Hence, it filed its claim against respondents.

being the lesser transmission of rights and interests. An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee. Second issue

The respondents argue that petitioner’s claim is already considered paid by the Deed of Assignment which Teodoro Jr. executed. They further claim that the deed of assignment is a quitclaim in consideration of their indebtedness to petitioner bank and not mere guaranty. ISSUES: 1. 2.

W/N the assignment of receivables extinguish the loan obligations of respondents to petitioner. NO W/N petitioner must first exhaust all legal remedies against PFC before it can proceed against respondents for collections of loan under the promissory notes. NO

RULING: BOTH NO

The obligation of respondents under the promissory notes not having been released by the assignment of receivables, they remain as the principal debtors of petitioner bank rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the NCC does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor pursuant to Article 2087 of the NCC. In the instant case, respondents are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.

First issue Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. Its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment. In the case at bar, it is evident that the assignment of receivables executed by respondent in 1964 did not transfer the ownership of the receivables to petitioner bank and release respondents from their loans with the bank incurred under promissory notes. It did not result from a sale transaction nor was constituted by virtue of a dation in payment since at the time deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed in 1964 while the promissory notes in 1966. At most, it was a dation in payment for P10k, the amount of credit from petitioner bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10k. Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Obviously, the deed of assignment was intended as collateral security for the bank loans of respondents, as a continuing guaranty for whatever sums would be owing by them to petitioner, as stated in stipulation No. 9 of the deed. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter

Petitioner bank did try to collect on the pledged receivables. As the EEA which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same. The receivable became virtually worthless leaving respondents’ loans from petitioner bank unsecured. It is but proper that after their repeated demands made on respondents for the settlement of their obligations, petitioner bank should proceed against respondents. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged.

What do you mean by assignment, under the law? What is the effect if this deed of assignment is merely a pledge? Since it is only a pledge it is only as a security of an obligation which is the promissory note What happens to the Obligation? What is the action here of Manila Bank? You’re Correct there is only a deed of assignment where the intention is merely to constitute the pledge over the receivables covered therein. So what is the effect if it is a mere pledge? What is the action here? Filed by the bank against the debtors? What happens in a pledge? Is the Obligation extinguished? Since the obligation is not extinguished, the bank could not contend that the mere assignment of the receivables will extinguish the obligation in the said promissory note because it is acting as a collateral security. Do take note, what do we mean of assignment of credit? An agreement by which of which the owner of the credit, known as the assignor by legal cause such as sale dacion in payment exchange or donation and without the need of the consent of the debtor, transfers his credit and his accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor it may be in the form of sale or it may constitute a dacion in payment wherein you could have properties whether personal or real properties delivered to the creditor in lieu of the monetary obligation for the purpose of extinguishing the obligation, the deed of assignment covering the receivables covering from the emergency employment association did not

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 transfer the ownership of these receivables to the bank and release the appellants from their loans. It is clear that the deed of assignment was merely a security for the payment of the sum of interest in the promissory note. Again how do we interpret the contracts? Not by the language used by the parties in the document but by their intention. The supreme court also pointed out in that the interpretation of contracts that whether the transaction is a pledge or dacion in payment, the presumption is in favor of pledge and the latter being the lesser involving the lesser transmission of rights and interests. Property, personal property is merely used as a collateral or a security for the principal obligation. Walang transfer of ownership as compared to dacion in payment. Which has a greater transmission of rights kasi may transfer of ownership. So here the deed of assignment was intended as a collateral security for the bank loans of the appellants and as a continuing guarantee for whatever sums will be owing by defendants to plaintiff. In this case the bank demanded for the payment from the debtors and the debtors are still held liable because their obligations were not extinguished by those receivables covered in the deed of assignment as those merely acted as a security for their obligation. In relation to 2087 please take note of 2088 very important provision in relation to contracts of pledge and mortgage. 2088 states that the creditor cannot appropriate the things given by way of pledge or mortgage and dispose of them. Any stipulation to the contrary is null and void. This 2088 refers to what we have already learned before. Pactum Commissorium. What happens in Pactum Commissorium? Automatic appropriation of property to the creditor in case of the debtors default. Automatic appropriation is prohibited by 2088. HECHANOVA vs. ADIL Jose Servando obtained a loan worth P20k from his cousin, Pio Servando secured by a mortgaged of 3 parcels of land. The agreement was evidenced by a private document whereby it was stipulated that if Jose fails to redeem the property within 10 years, Pio shall become the sole owner thereof. Later on, Jose sold the 3 parcels of land to Hechanova by virtue of a deed of sale. Pio now sought the annulment of the sale or, in the alternative, that Jose be ordered to pay the loan plus interest and damages. Petitioner argued that Pio has no cause of action against them nor was he a real party in interest since as a mere mortgagee, he had no standing to question the validity of the sale. Further, the mortgage was embodied in a private document and not registered with the ROD. ISSUE: W/N Pio, as mortgagee, may question the validity of the sale. RULING: NO Pio has no cause of action and has no standing to question the validity of the deed of sale executed by the decease Jose in favor of Hechanova and Masa. No valid mortgage has been constituted Pio’s favor, the alleged deed of mortgage being a mere private document and not registered. Moreover, it contains a stipulation (pacto comisorio) which is null and void under Article 2088 of the CC. Even assuming that the property was validly mortgaged to Pio, his recourse was to foreclose the mortgage, not to seek annulment of the sale.

FEBRUARY 2, 2017 By: Manilyn Pascioles Article 2088 defines Pactum Commissorium. We have already learned what a pactum commissorium is. Q: Again what do you understand about this term? A: It means ma’am that the thing was pledged or mortgaged by way of securing an obligation in which it is provided that in case the debtor fails to pay within a certain period the thing pledged or mortgaged ma’am will automatically be appropriated to the creditor.

ALCANTARA VS. ALINEA Facts:
ALINEA and BELARMINO borrowed from ALCANTARA P480. It was agreed by them that in case of non-payment, it would be understood that the house and lot owned by ALINEA and shall be considered as absolutely sold to ALCANTARA for the said sum. Despite non-payment by ALINEA and BELARMINO, the latter failed to deliver the property. ALCANTARA filed a complaint praying that judgment be rendered in his behalf ordering ALINEA and BELARMINO to deliver to him the house and lot, among others. Issue: WON THE CONTRACT OF LOAN AND A PROMISE OF SALE OF A HOUSE AND LOT IS VALID. YES. Held:
Either one of the contracts are perfectly legal and both are authorized. No article of the Civil Code prohibits expressly, or by inference, that an agreement could not be made in the form in which the same has been executed. Contracts shall be binding, whatever may be the form in which they may have been executed, provided the essential conditions required for their validity exist. PACTUM COMMISSORIUM INDICATES THE EXISTENCE OF THE CONTRACTS OF MORTGAGE OR OF PLEDGE OR THAT OF ANTICHRESIS, none of which have coincided in the loan indicated herein. THE HOUSE AND LOT, DOES NOT APPEAR MORTGAGED IN FAVOR OF ALCANTARA, because in order to constitute a valid mortgage it is indispensable that the instrument be registered in the Register of Property and the document of contract does not constitute a mortgage, nor could it possibly be a mortgage, for the reason of said document is not vested with the character and conditions of a public instrument. There could also be NO PLEDGE, not being personal property, and notwithstanding the said double contract, ALINEA and BELARMINO continued in possession thereof and the said property has never been occupied by ALCANTARA. There is NO CONTRACT OF ANTICHRESIS, inasmuch as the ALCANTARA has never been in possession thereof, nor has he enjoyed the said property, nor for one moment ever received its rents. It was agreed between the parties herein that if ALINEA and BELARMINO should not pay the loan in January, 1905, the property belonging to the latter should remain sold for the aforesaid sum, and such agreement must be complied with,

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 inasmuch as there is no ground in law to oppose the compliance with that which has been agreed upon, having been so acknowledged by the obligated parties.

So here, again the reason of the prohibition against pactum commissorium arrangement is that it is contrary to law, public policy, and morals. It is ordinarily the loan is less than the value of the property that was pledged or mortgaged. On the part of the debtor, his/her choices are limited and sometimes they are really in need of money, they have no other option or better option but to agree to that automatic appropriation. So in the case of Alcantara vs Alinea, we have to take note that there is no pactum commissorium in this instance because the property does not appear to have been mortgaged because we our talking of real property here. It could not be considered as a pledge, not being a personal property. Neither was there a contract of antichresis. The property belonging to the defendant should remain sold for the said sum and agreement complied with as there is no ground to oppose the compliance which was agreed upon having been acknowledge by the parties. So what is prohibited is the automatic appropriation. If an act is still required for the parties to consummate the transfer of the property from the debtor to the creditor, then that is not a pactum commissorium. Because that additional act would mean that the appropriation is not automatic. Under Article 2088, we emphasize that there must be a pledge or mortgage. There are 2 requisites emphasized in the case of Uy Tong vs CA.

SPS. UY TONG VS. CA Facts:
Uy Tong and Kho Po Giok (SPOUSES) purchased from Bayanihan Automotive (BAYANIHAN) seven motorcycles for P47,700. This was evidenced by a written agreement, stating among others that if for any reason the SPS should fail to pay their obligation, BAYANIHAN shall become automatically the owner of the the SPS’ apartment with the only obligation on BAYANIHAN to pay P3,535, and in such event the SPS shall execute the corresponding Deed of absolute Sale in favor of the VENDOR and or the Assignment of Leasehold Rights (The SPS are owners of the apartment and the lease-hold rights over the land on which the building stands). The SPS failed to pay, prompting BAYANIHAN to file an action for specific performance. TC: In favor of BAYANIHAN. An order for execution pending appeal was issued. Thus, a deed of assignment was executed by the Sps. The latter also acknowledged their receipt of P3,000 paid by BAYANIHAN pursuant to the judgment. Despite the execution, SPS remained in possession of the premises, even after the expiration of the period in which they are allowed to stay. BAYANIHAN filed an ejectment case, which was dismissed, and subsequently, an action for recover of possession. Issue: WON THE DEED OF ASSIGNMENT IS NULL AND VOID BECAUSE IT IS IN THE NATURE OF A PACTUM COMMISSORIUM AND/OR WAS BORNE OUTOFTHESAME. No. Held: SPS: The agreement is in the nature of a pactum

commissorium which is null and void, hence, the deed of assignment which was borne out of the same agreement suffers the same fate. Article 2088 of the CC furnishes two elements for pactum commissorium: 1.

2.

that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of 
the principal obligation 
 that there should be a stipulation for an automatic 
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. 


There is NO BASIS FOR THE APPLICATION OF THE PACTUM COMMISSORIUM. First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks. Also, there is NO CASE OF AUTOMATIC APPROPRIATION of the property by BAYANIHAN. When the SPOUSES defaulted in their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment. Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the obligation. And even granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment. SPS: They must be exempted from the ruling of CA that their failure to deny the genuineness and due execution of the deed of assignment was deemed an admission thereof since the basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne out of pactum commissorio is not subject to ratification and its invalidity cannot be waived. The SPOUSES failed to deny under oath and specifically the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and due execution. Besides, they themselves admit that the contract was duly executed and that the same is genuine. SPS: They contend that the deed is unenforceable because the disposition portion of civil case requires BAYANIHAN to pay the SPS the sum of P 3,535. To buttress their claim of noncompliance, they invoke the receipt issued by them to show that BAYANIHAN was P535 short of the complete payment. UNMERITORIOUS. Inasmuch as the decision in the case imposed upon the parties correlative obligations which were simultaneously demandable so much so that if BAYANIHAN refused to comply with its obligation under the judgment to pay the sum of P 3,535 then it could not compel the SPS to comply with their own obligation to execute the deed of assignment over the subject premises. The fact that the SPS executed the deed of assignment with the assistance of their counsel leads to no other

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 conclusion that private respondent itself had paid the full amount.

ELEMENTS FOR PACTUM COMMISSORIUM 1.

2.

that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

In this case, there is no indication of any contract of mortgage entered into by the parties and there is no case of automatic appropriation of property because what happened here is that the Sps. Uy Tong elected to execute Deed of Assignment pursuant to a judgment. No automatic appropriation because it took the intervention of the Trial Court. The case was filed to exact the fulfilment of the obligation. In this connection, especially to those who have Sales, do not forget Article 1602 which refers to Equitable Mortgage. Even if what was executed before the court, for example is a Deed of Absolute Sale, and any of the circumstances is present, that despite the execution thereof the buyer still remains in possession of the property and it was sold for unusual amount. Then that would constitute as an equitable mortgage and there could be no automatic transfer by such deed of absolute sale, otherwise that would still be considered a pactum commissorium which again is prohibited under Article 2088. Now, why is it that parties or creditors resort to this arrangement of pactum commissorium or automatic appropriation or the execution or the execution of deed of sale instead of pledging or mortgaging the properties? Because it is easier for them as a form of security. If they would require for the execution of mortgage or pledge, they would still have to sell the properties and comply for the requirements for a valid public auction. Compare it to automatic appropriation or the execution of the deed of sale, it would be easier on the part of the creditor to effect payment to extinguish the obligation of the debtor. Now also do take note, that any waiver of Article 2088, is not valid and any stipulation to the contrary is null and void. In fact even if there is no vitiation of consent, even if the debtor himself voluntarily offer, that would still constitute a pactum commissorium under Article 2088.

obligation under the ARDA. Three years later, PHILNICO had defaulted in its payment. Before the last the deadline of the extended period of payment, PHILNICO filed a Complaint for Prohibition against Reversion of Shares with Prayer for Writ of Preliminary Injunction and/or Temporary Restraining Order, Suspension of Payment and Fixing of Period of Payment, against PMO, PPC, and the PPC Corporate Secretary.

Issue: WON THE ARDA ON IPSO FACTOOR AUTOMATIC REVERSION OF THE PPC SHARES OF STOCK TO PMO IN CASE OF DEFAULT BY PHILNICO CONSTITUTES PACTUM COMMISSORIUM. Yes. Held:
Pactum commissorium is among those contractual stipulations that are deemed contrary to law. It is defined as "a stipulation empowering the creditor to appropriate the thing given as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without further formality, such as foreclosure proceedings, and a public sale ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. There are two elements for pactum commissoriumto exist:
 1.

2.

Both elements of pactum commissorium are present in the instant case: 1.

2. PHILNICO VS. PMO Facts: Privatization and Management Office (PMO), Philnico Mining (PHILNICO) and Philnico Processing Corporation (PPC) executed an Amended and Restated Definitive Agreement (ARDA), which laid down the terms and conditions of the purchase and acquisition by PHILNICO from PMO of 22,500,000 shares of stock of PPC, as well as receivables of PMO from PPC. Under the ARDA, PHILNICO agreed to pay PMO the peso equivalent of US$333,762,000 as purchase price, payable in installments and in accordance with the schedule set out. It was agreed by the parties, PHILNICO shall pledge the shares to PMO and shall also pledge to PMO the Converted Shares and the New Shares as security for the payment of the purchase price upon the issuance of such shares in the name of PHILNICO. It was also stipulated that, in case of default, the title to the Existing Shares and the Converted Shares shall ipso facto revert to PMO without need of demand. On account of the huge financial cost of building a new nickel refinery plant, coupled with the economic problems, PMO, PHILNICO, and PPC executed an Amendment Agreement providing for the restructuring of the payment terms of the entire

that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation;
 that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period.

By virtue of the Pledge Agreement, PHILNICO pledged its PPC shares of stock in favor of PMO as security for the fulfillment of the former’s obligations under the ARDA and the Pledge Agreement itself; and There is automatic appropriation as under Section 8.02 of the ARDA, in the event of default by PHILNICO, title to the PPC shares of stock shall ipso facto revert from PHILNICO to PMO without need of demand.

CA: The ARDA and the Pledge Agreement are entirely separate and distinct contracts. Neither contract contains both elements of pactum commissorium: the ARDA solely has the second element, while the Pledge Agreement only has the first element. Thus, there is no pactum commissorium. UNMERITORIOUS. The agreement of the parties may be embodied in only one contract or in two or more separate writings. In case of the latter, the writings of the parties should be read and interpreted together in such a way as to render their intention effective. The agreement between PMO and PHILNICO is the sale of the PPC shares of stock by the former to the latter, to be secured by a pledge on the very same shares of stock. The ARDA and the Pledge Agreement herein, although executed in separate written instruments, are integral to one another. The Pledge Agreement secures, for the benefit of PMO, the performance by PHILNICO of its obligations under both the ARDA and the Pledge Agreement

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 itself. It is with the execution of the Pledge Agreement that PHILNICO turned over possession of its certificates of shares of stock in PPC to PMO. There had already been a shift in the relations of PMO and PHILNICO, from mere seller and buyer, to creditor-pledgee and debtor-pledgor. Having enjoyed the security and benefits of the Pledge Agreement, PMO cannot now insist on applying Section 8.02 of the ARDA and conveniently and arbitrarily exclude and/or ignore the Pledge Agreement so as to evade the prohibition against pactum commissorium. PMO: There is no valid Pledge Agreement, arguing that PHILNICO could not have validly pledged the PPC shares of stock because it is not yet the absolute owner of said shares. The sale of the PPC shares of stock to PHILNICO is subject to the resolutory condition of non-payment by PHILNICO of the installments due on the purchase price. UNMERITORIOUS. Among the requirements of a contract of pledge is that the pledgor is the absolute owner of the thing pledged. Based on the provisions of the ARDA, ownership of the PPC shares of stock had passed on to PHILNICO, hence, enabling PHILNICO to pledge the very same shares to PMO. PMO cannot maintain that the ownership of the PPC shares of stock did not pass on to PHILNICO, but in the same breath claim that non-payment by PHILNICO of the installments due on the purchase price is a resolutory condition for the contract of sale – these two arguments are actually contradictory. So that it could invoke the resolutory condition of nonpayment of an installment, PMO must necessarily concede that its contract with PHILNICO was a one of sale and that ownership of the PPC shares of stock had indeed passed on to PHILNICO. And even then, having lost ownership of the shares, PMO cannot automatically recover the same without taking steps to set aside the contract of sale.

Take note that the 2 elements of Pactum Commissorium are again emphasized in this case. As pointed out, remember that they even executed a Pledge Agreement, in which one of the requirements is that the pledgor must be the owner thereof. PMO is there for estopped to say otherwise that there was no transfer of ownership and that Philnico is not the owner thereof. The ownership of the shares stocks was passed on PIC, enabling PIC to pledge the said shares of stocks to PMO. The ARDA, PMO had transferred to PIC all rights, title, and interests in and to the PPC shares of stock, and delivered to PIC the certificates for said shares for cancellation and replacement of new certificates already in the name of PIC. In addition, the ARDA explicitly declares that PIC as buyer shall exercise all the rights, including the right to vote, of a shareholder in respect of the PPC shares of stock. PMO cannot maintain that the ownership of the PPC shares of stock did not pass on to PIC, but in the same breath claim that non-payment by PIC of the installments due on the purchase price is a resolutory condition for the contract of sale Take note also the distinction of Pactum Commissorium and Dation en pago. Pactum Commissorium VOID

There is an original contract of pledge, mortgage or antichresis

Dacion en Pago Valid special form of payment for properties alienated to the creditor by debtor in payment of the debt (Art 1245) There is just a simple obligation of a contract of loan and not necessarily an accessory contract of security

Property is alienated to the creditor for the payment of the debt. The property upon nonpayment is deemed automatically appropriated to the creditor if the principal debtor cannot pay

The creditor has other remedies.

Even if the parties agree to the Pactum Commissorium stipulation, or even if they mutually consent, still void. (Void WON there is consent)

Consent of both parties is required for its validity.

Do not confer title

Law on Sale is applied, there is a need of sale which confers title

It will not extinguish the obligation

Extinguishes the obligation

There is no automatic appropriation.

The creditor can refuse to accept the property offered as payment of the debt

SPS. ONG VS. ROBAN LENDING Facts:
Sps ONG obtained several loans from Roban Lending (ROBAN) for P4M secured by REM on their parcels of land. Subsequently, the parties amended the REM by consolidating the loan inclusive of charges which totaled P 5,916,117.50. On the same date, they executed a Dacion in Payment Agreement where Sps ONG assigned the properties covered by the properties subject to the REM to ROBAN in settlement of their total obligation. Sps ONG filed a complaint for declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium. ROBAN answered that if the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the REM then the allegation of Pactum Commissorium has no more legal leg to stand on. It also alleged that the Dacion in Payment is lawful and valid and that the accumulated charges and interest were reasonable and valid. RTC: No pactum commisorium. CA: Affirmed. Issue: WON THE AGREEMENT CONSTITUTES PACTUM COMMISSORIUM. YES. Held:
The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: 1.

2.

there should be a property mortgaged by way of security for the payment of the principal obligation, and 
 there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 case of non-payment of the principal obligation within the stipulated period 


In the case at bar, THE MEMORANDUM OF AGREEMENT AND THE DACION IN PAYMENT CONTAIN NO PROVISIONS FOR FORECLOSURE PROCEEDINGS NOR REDEMPTION. Under the Memorandum of Agreement, the failure by Sps ONG to pay their debt within the one-year period gives ROBAN the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by the same. ROBAN, in effect, automatically acquires ownership of the properties upon Sps ONG’s failure to pay their debt within the stipulated period. In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt. The Dacion in Payment did not extinguish Sps ONG’s obligation On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one year.

So again take note of the distinction of between Pactum Commissorium and Dacion en Pago What is the effect if we have a pactum commissorium? What is considered void is only the stipulation of automatic appropriation. The pledge and mortgage itself will still be valid, provided all the elements required for its validity are present. It can still be enforced, again provided that all the required elements for its validity are present. What is void is merely the automatic appropriation or forfeiture of property in favor of the creditor. Which means the remedy of the creditor is to foreclose the property and sell it to a public auction.

Article. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Article 2089 emphasizes that contracts of pledge and mortgage are indivisible. What are the effects if these contracts are indivisible? 1.

Let’s say that A borrowed money from B worth 100, 000.00 wherein a property is mortgage. Even if A has already paid 50,000.00 to the creditor B, A cannot seek release of that 50,000.00 by saying that pwede ba irelease ng creditor ang 50% ng property. So hindi pwede yun. The mortgage can be released upon full payment of the obligation because again it is indivisible in nature.

2.

Another effect, in case A dies and let us say that he has heirs(W,X,Y and Z), his estate can be held liable for his obligation. The liability of the heirs is only to the extent of what they have received. So kung 4 sila, tag ¼ sila sa share sa properry and sa obligation. What if W pays B 25,000.00, still he cannot seek release of that 25% of the property. Dapat bayaran nila ang full amount.

3.

What if B, the creditor, dies and he has heirs(C and D). What if A paid C 50,000.00. C cannot release the corresponding 50% of the mortgage property. Again because of the indivisible nature of mortgage or pledge.

Also emphasized in the same article, if for example the thing was mortgaged or pledged, for example 100,000.00. What if there was a pledged ring worth 75,000.00 and a watch worth 25,000.00. Same rule applies. Even if A has already paid 25,000 to B, A cannot ask for the return of the watch because again, contracts of pledge and mortgage are indivisible. It is a different thing if first, A borrowed from B 75,000 delivering the ring as security. Subsequently A borrowed another 25,000 from B delivering a watch as security. If A paid the 75,000, remember that the ring was constituted as security only for this obligation, so if such amount was paid, then A can seek for the return of the ring because these are two separate obligation. Those are the scenarios contemplated under Art. 2089. Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n)

So you should already know that solidarity is different from indivisibility. Indivisibility refers to subject or object while solidarity or joint refers to the juridical tie existing between the parties. So it does not mean that just because the tie between the parties is solidary it is divisible or when they are jointly liable it is divisible. Again these are not the same.

Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861)

Remember that a pledge or mortgage is an accessory contract, so it must secure a principal obligation which must be valid. So you could have as we mention before a natural obligation, unenforceable or voidable contracts and as mention in Art 2091, even those obligation which are subject to condition. What is important is that the principal obligation is valid. Obviously, illegal, void and non-existent or fictitious obligations cannot be a principal obligation of a pledge or mortgage.

Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

So for example sa pledge, for its validity the thing must be delivered to the pledgee/creditor. So what if there is only a promise to enter into pledge or mortgage? For example there is a promise to enter into a pledge but the thing was not yet delivered, that would still be considered a valid contract, a consensual

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 contract. But such could not be considered a pledge because of the absence of delivery. It is only a consensual contract with a promise to constitute a pledge. That is nevertheless enforceable but what we have there is only a personal action against the promisor. Unlike if you have already the essential requisites for a valid pledge or mortgage then you could have real action against the property covered by the said contracts of pledge or mortgage. A promise to constitute a contract of pledge or mortgage if accepted gives rise only a personal right binding upon the parties and does not create a real right over the property. Remember these two: personal right against a specific person and real right against the whole world. What exist in this instance is only a right of action to compel the fulfillment of the promise but there could be as yet no valid pledge or mortgage in the absence of its essential requisites. It is also referred in 2092 the right to compel in relation to such promise. Recall your Revised Penal Code where estafa may be committed by a person who pretends to be the owner of a real property and pledges or mortgages the same, and turns out that he is not the owner, or when he is the owner and represents that it is unencumbered, free from liens and encumbrances, then pledged or mortgaged the same to creditor/pledgee, but it turns out that it was already sold to a 3 rd party. With such instance, he can be liable for estafa under the RPC.

Court: ruled in favor of Pedro Martinez. An appeal was taken therefrom. Issue: WON there was a pledge. Held: No. The conclusion of the court below that the property was not delivered in accordance with the provisions of article 1863 of the CC is sustained by the proofs. It appears, however, that the document of pledge is a public document which contains an admission of indebtedness. In other words, while it is intended to be a pledge, it is also a credit which appears in a public document. Article 1924 (3)(a), is therefore applicable; and, said public document antedating the judgment of defendant Martinez, takes preference thereover. As the validity of the indebtedness of Aniversario. The validity of that document in so far as it shows an indebtedness have not, however, been determined. Anniversario is not a party to this action. No judgment can be rendered affecting her rights or liabilities under said instrument. Otherwise, it would be wholly unjust. That would be to require her to pay a debt which has not only not been shown to be enforceable against her but which, as a witness for the defendant Martinez on the trial of this cause, she expressly and vehemently repudiated as a valid claim against her.

February 7, 2017 B. Provisions Applicable Only to Pledge

SC emphasized the requirement of delivery for a valid contract of pledge.

Art. 2093. In Addition to the requisites prescribed in 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement.

Notice also that there was this document of credit which was a public document. Nonetheless, in the absence of delivery there could be no valid pledge.

In pledge and mortgage, aside from the essential element of consent, object, and consideration, we emphasize also the essential requisites under 2085— 2085. The following requisites are essential to the contracts of pledge and mortgage: 1. 2. 3.

That they be constituted to secure the fulfilment of a principal obligation That the pledger or mortgagor be the absolute owner of the thing pledged or mortgaged; that the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose;

In relation to pledge, we have the additional essential requisite which is DELIVERY. Meaning, pledge is a real contract since delivery is required for its perfection wherein the property itself must be placed in the possession of the creditor. In the absence of such delivery no valid contract of pledge is entered into. JOSE McMICKING vs. PEDRO MARTINEZ and GO G.R. No. L-5219 February 15, 1910 Facts: Some time during the year 1908, Pedro Martinez obtained judgment in the CFI against one Maria Aniversario. Thereafter, execution was issued upon said judgment and the sheriff levied upon a pailebot, Tomasa, alleged to be the property of said Maria Aniversario. Thereupon, Go Juna intervened and claimed a lien upon said boat by virtue of a pledge of the same to him by the said Maria Aniversario made on the 27th day of February, 1907, which said pledge was evidenced by a public instrument bearing that date. This present action was brought by the sheriff against Go Juna and Pedro Martinez to determine the rights of the parties. Pedro Martinez alleged as a defense that the pledge which said document was intended to constitute had not been made effective by delivery of the property pledged, as required by article 1863 of the CC, and therefore, there existed no preference in favor of Go Juna.

A pledge of personal property to secure an indebtedness is without force or effect UNLESS the property pledged is delivered to the pledgee or some third person agreed upon by the parties. In this case, although we have a public document, it may only b considered as an evidence of indebtedness BUT the pledge would still eb considered as VOID for failure of delivery. As an effect of such pledge in a public instrument, such debt is preferred over a judgment secured against the pledger subsequent to the date of the said public instrument. When talking about delivery, as a general rule, we are talking about actual possession. Thus, there must be ACTUAL DELIVERY of the personal property to which the creditor will hold possession of the thing, or to a third person by agreement.

SYMBOLIC/CONSTRUCTIVE DELIVERY Can you still have a valid contract of pledge even if there was no actual delivery? YES. When talking of pledge, it does not only cover personal properties, but it also involves intangible properties evidenced by a document or incorporeal rights evidenced by documents. Example: goods which are covered by Warehouse Receipts. As evidence of the goods being stored in the warehouse, the warehouseman issues a warehouse receipt. If said goods will be pledged to the creditor, instead of delivering the goods to the creditor, and the creditor storing it back to the sid warehouse, what is instead delivered to the creditor is the warehouse receipt. By virtue thereof, the delivery of the warehouse receipt will be sufficient to give rise to a perfected contract of pledge.

Art. 2094. All movables which are within commerce may be pledged, provided they are susceptible to possession. VALID SUBJECT MATTER IN PLEDGE Personal property. Things which are valid subject of pledge are those within commerce of men and susceptible of possession.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 You could have incorporeal rights as subject of pledge under 2095—

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts, and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Aside from warehouse receipts, you could also have negotiable instruments, bills of lading, bonds, etc. as valid subject matters of pledge. Take note that the subject of a pledge are not the document itself but the incorporeal rights covered by the said documents.

REQUIREMENTS FOR A PLEDGE TO BIND THIRD PERSONS Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Requisites for a pledge to bind third persons: 1. 2.

There must be a description of the thing pledged; The date of the pledge must appear on a public instrument.

Why is it that the pledge must describe the thing pledge, as well as the date? So that it would not be easy for the pledger to pledge the thing several times since the contract of pledge actually discloses such information. IMPORTANT: It must be in a public instrument. Therefore, it must be duly notarized. Take note that there must also be delivery to the creditor of the subject matter. When such details are in a public instrument, remember that you subscribe and swear to the truthfulness of what is indicated therein. What is the effect if this requirement is not complied with? CALTEX, INC, vs.CA and SEBTC G.R. No. 97753 August 10, 1992 Facts: Security Bank, a commercial banking institution issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00. Angel dela Cruz delivered the said certificates of time (CTDs) to Caltex in connection with his purchased of fuel products from the latter. Subsequently, Angel dela Cruz negotiated and obtained a loan from defendant bank. On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit which surrenders to defendant bank full control of the CTD and to apply the said time deposits to the payment of whatever amount due upon the maturity of the loan. SEBTC received a letter from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs. The loan of Angel dela Cruz with SEBTC matured and fell due. The latter set-off and applied the time deposits in question to the payment of the matured loan. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it. Issue: Who has the better right between Caltex and Security Bank in the CTDs?

Held: Caltex. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. Where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the NIL, shall be governed by the Art. 2095 and Art. 2096 of the Civil Code on pledge of incorporeal rights. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely.

What is the objective of this requirement? Essentially, it is to forestall fraud on the part of the debtor who will attempt to conceal his properties from creditors by alleging that his properties are already subject of a pledge.

Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledger or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. In pledge, there is no transfer of ownership. It is merely a lien over the thing; it is merely an encumbrance. It does not dispossess the pledger of the ownership over the thing as he still remains to be the owner. However, 2097 provides a condition that the pledgee must consent to the alienation. Remember, possession is in the hands of the creditor-pledgee. If there is a sale, there is a valid contract of sale and there is no need for a consent under 2097. BUT to bind the pledgee with regard to the sale, you must give such consent.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 In the absence of the consent of the pledgee on the sale and subsequent transfer of ownership, then he could not assert ownership over the said property subject of the pledge. Moreover, this is also relevant in the sense that even if there ahs already been a sale, the rights of the pledgee would still prevail over the rights of the buyer, PROVIDED that there is compliance with the requirement under 2095 (in a public instrument, c the date of the pledge, as well as the description of the thing pledged. ESTATE OF GEORGE LITTON vs. CIRIACO B. MENDOZA and COURT OF APPEALS G.R. No. L-49120 June 30, 1988 Facts: Mendoza issued two checks in favour of Tan. Tan had the two checks discounted but were later returned with words ‘stop payment’. It appears it was ordered by Mendoza for failure of the spouses to deposit sufficient funds for the check issued by the spouses in his favour.

Tan. Even if they executed a deed of assignment, it was really for the purpose of securing or guaranteeing Tan’s obligation in favor of Litton. The validity of such pledge is not in question. Such deed fulfills the requisite for a valid pledge or mortgage. After the execution of the deed of assignment, Mendoza and Tan entered into a compromise agreement. Remember, Tan has already pledged the credits due from Mendoza. With that, we apply article 2097. Although the pledgee, Litton, did not ipso facto become the creditor of Mendoza, the pledge being valid, the incorporeal right assigned by tan in favor of Litton can only be alienated by tan with due notice and consent of Litton or his duly authorized representative, none of which is present in this case. To allow the assignor, in this case Tan, to dispose or alienate the security without notice and consent of Litton, the very purpose of such pledge is rendered nugatory.

Tan sued Mendoza while the spouses brought an action for interpleader for not knowing whom to pay. Pendente lite, Tan assigned in favour of Littion, Sr his litigatious credit (in action of spouses) against Mendoza, duly submitted to the court, with notice to the parties.

It is also very important to note that Mendoza was already aware of the deed of assignment, which is actually a pledge in favor of Litton. Private respondent is estopped from entering a compromise agreement involving the same litigated credit without notice to and consent of the assignee because of knowledge on his part.

Mendoza entered into Compromise Agreement with Tan wherein the latter recognized that his claims against Mendoza had been settled and because of that, both waives any claim against the other; with a provision that it no way affects Tan’s right to go against the spouses.

Considering that this was already subject of the pledge, you could also relate this with what you have already learned under Obligations and Contracts that payment must be made to the creditor at the time of the payment for a valid extinguishment of the obligation.

Mendoza filed MFR saying that there was the compromise agreement which absolved him from liability.

RIGHTS AVAILABLE TO THE PLEDGEE

Tan opposed this saying the Compromise agreement was null and void because of the deed of assignment executed in favour of Litton, Sr.; he says that with such, he has no more right to alienate said credit; Issue: WON there was a valid compromise. Held: NO. The validity of pledge/guaranty in favour of Liiton has not been questioned. The deed of assignment fulfils the requirements of a valid pledge or mortgage. Although it is true that Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be read in consonance with Article 2097 of the same code. Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton, Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate the security without notice and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit. Moreover, under Article 1634, the debtor has a corresponding obligation to reimburse the assignee, Litton, Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the assignee, petitioner herein. Here, there was a deed of assignment executed by Tan in favor of Litton, the subject if which is the credit of Mendoza in favor of

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. Alright the right to retain b the pledge of the thing subject to pledge. Remember sa commudatum , no right to retain even if meron pang obligation except hidden flaws. But here the pledgee has the right to retain the thing as long as the debt has not been paid and once the obligation has been paid the pledge has now the obligation to return the thing to the pledgor, notwithstanding that the debtor has already contracted another debt (ex. Jewelries were delivered to secure the payment of a 100,000 obligation. Now subsequently nangutang nanaman si debtor ng another 50,000 pesos, nabayaran na ni debtor yung 100,000 pesos secured by the jewelry. In this case since there is already payment , the pledge has the obligation to return the jewelry to pledgor he cannot use as a ground na hindi ko pa esauli kasi may utang kappa na 50,000 pesos. Pwede ang gawin nila is they will enter into another contract of pledge wherein the 50,000 will be secured by that jewelry. But unless it has been stipulated that that thing pledge is subject to another obligation then upon full payment of the obligation to which the thing secures then the pledge should return the thing. Under 2098, the pledgee has the right to possess the thing. Once the debt has been paid, he has the obligation to return to the pledger the thing pledged notwithstanding that the debtor contracts another debt. Take note, for a valid pledge, you must secure a principal obligation. If the principal obligation has already been fully paid, the pledgee must return the property. Even if she still has another debt, UNLESS if they enter into another contract stipulating that the same property will now be used to secure the second obligation. The pledgee cannot say that he will continue to retain it once the principal obligation secured by the thing pledged has already been fulfilled.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 RIGHT TO RETENTION-Limited only to the principal obligation for which the pledge was created.

Art. 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has the right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in conformity with the provisions of this code. This refers to the obligation on the part of the creditor to take good care of the thing with the diligence of a good father of a family.

owner-pledgor to the extent that his obligation would be reduced, or extinguished. How about animals? Again, there is no transfer of ownership so the pledgor-owner continues to own including the fruits or the offspring of animals. This would therefore mean that animals are personal properties which could be the subject of a pledge. Under 2102 said offspring of the animals can still be subject to the pledge if there is no stipulation to the contrary.

Art. 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Remember, there is no transfer of ownership to the pledgee, so he cannot just sue it in any manner that he would want to. Not being the owner thereof, he has to subsequently return it. In the mean time, he has to take good care of it.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person.

If the thing requires preservation, expenses should be advanced by the pledgee but he is entitled to reimbursement.

This is till in line with the principle that in pledge there is no transfer of ownership. In this instance, what if the thing pledged is expropriated?

Art. 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. General Rule: Another obligation on the part of the creditorpledgee: he cannot deposit the thing to a third person. Exception: if there is a stipulation authorizing him to do so.

It is not that common that a personal property is expropriated, but there is no prohibition against it. If the same thing is expropriated, the pledgor would not be considered as the owner thereof. Under the 2nd paragraph, it emphasizes that the right of the pledgee is a real right—enforceable against third persons. Of course, there must be compliance with the requisites under 2096. The pledgee can file actions before the court to recover it or to defend it against third persons.

The pledgee shall be responsible for the acts of his agents or employees since their acts, in legal effect, are also deemed his acts.

Art. 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.

Art. 2101. The pledger has the same responsibility as a bailor in commodatum in the case under 1951.

What is being entrusted to the creditor-pledgee is the possession of the thing.

Recall 1951—

General rule: The pledgee cannot use the thing without consent or permission of the pledgor (similar rule with deposit). The same rule applies with the fruits, accessions, and accessories of the thing pledged.

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. The pledgee has the right to retain the thing until the pledgor reimburses him for the damages that he has suffered.

Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of the animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. Assuming that the thing pledged earns interest, dividends, or shares of stocks, who shall own these? Still, it is the pledgor being the owner of the thing. To the owner belongs the __ accession or accessory. Under 2102, the pledgee is given the right to apply these interests or dividends in payment of the loan or obligation. In effect, these interests or dividends would still redound to the benefit of the

Exception: If the use of the thing is allowed for a certain way, then the pledgee shall use the thing only in that way. If, however, it uses the thing in any other manner different from what they had stipulated, what is the remedy of the pledgor? He may ask that it be judicially or extrajudicially deposited, NOT demand he return of the thing pledged. When do you avail of the right to have the thing deposited? (1) (2) (3)

If the pledgee uses the thing pledged; You have the authority of the owner; If allowed to use it, but uses it in a manner different from what they agreed upon.

Instances that the owner may ask that the thing pledged be deposited judicially or extrajudicially: (1) (2) (3)

When creditor uses thing pledged without authority of the owner; (2104) When creditor misuses the thing in any other way; (2104) When thing pledged is in danger of being lost or impaired because of the negligence or willful act of the pledgee (2106)

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Art. 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. This emphasizes the rule that thing will not be returned unless there has been full payment. The debtor cannot ask for the return of the thing unless the debt has already been paid. 2104 does not demand the return of the thing but only to have it deposited. Therefore, the only reason for the return of the thing is the extinguishment of the obligation.

Art. 2106. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person.

Art. 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. The ground under 2107 and 2108 are the same. However, in 2108 does not provide that the pledgor demand the return of the thing in substitute of another thing. Rather, the pledgee is given the right to cause the thing pledged to be sold at a public sale. Under 2108, the thing pledges is in danger of destruction, impairment or diminution in value, still, without the fault of the pledgee. However, under 2108, the pledgee has the right to sell thing at the auction How can we reconcile 2110 and 2108? Which is preferred? 2018, kasi sabi dun sa 2107, without prejudice of the right of the pledgee under the provisions of the following article.

This is the third instance wherein the thing may be deposited. Cannot demand for the return of the thing, but the thing will only be deposited to a third person. This is in relation to the duty of the pledgee to take care of the thing with the diligence of a good father of a family. 2106 and 2104 provide for the instances wherein the pledgee can demand that the thing be deposited.

Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. DISTINGUISH 2106 FROM 2107 2106

2107

As to existence of fault

With the fault of pledgee

Without the fault of pledgee

As to remedy

Deposit the thing pledged with a third person

Pledgor may demand the return of the thing pledged, offering in place of the thing another thing in pledge which is of the same kind and not of inferior quality

Requisites for 2107 to apply: (1) (2) (3)

(4)

The pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged; No fault on the part of the pledgee; Pledgor is offering in place of the thing another thing in pledge which is of the same kind and not of inferior quality; and That the pledgee does not choose to exercise his right to cause the thing pledged to be sold at a public auction (2108).

Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) The right of the pledgee to have the thing sold at the public auction as provided in 2108 is superior than the right of the pledgor provided in 2107 to demand the return of the thing in substitute of another thing. Therefore, the pledgor can only exercise his right under 2107 if the pledgee does not exercise his right to sell the thing at the public auction as provided in 2108. To which he debtor may now demand the return of the thing, subject that he offers something in substitution. Take note that in 2108, if the pledgee decides to sell the property being sold, it will not yet extinguish the obligation. Why? Because the proceeds would then be used or acts as a security for the principal obligation. Kasi di pa man ito due and demandable. Bakit man ito binenta? Kasi in danger of destruction, impairment or diminution in value. So ibenta nalang and it will act as a security, because the obligation is not yet due. The pledgee will hold the proceeds in the meantime. Neither the acceptance by the pledger or owner nor the return of the thing pledge is necessary, the pledgee becoming a depositary. This is an instance wherein even if the pledgee continues to be in possession of the thing pledge, but the pledge is already deemed extinguished. Remember a pledge is a personal right on the part of the pledgee which he can waive. Here, the pledge makes a statement in writing that he renounces or abandons the pledge.

Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n)

Art. 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 To apply 2111, it must be an abandonment or renunciation in writing. Verbal is not applicable, although it is not required to be in a public instrument. In fact, it is not required even that the pledger be notified of such abandonment or renunciation. The pledge will be deemed extinguished even if the pledgee remains in possession of the thing pledged. Since wala nang pledge, what would be the obligation here of the pledgee? He would be made as a depositary subject to the obligations of the depositary. What is deemed abandoned here? It is only the pledge, to extinguish the pledge, not necessarily the principal obligation, unless otherwise stipulated.

Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) 2112 provides for the procedure to be observed by the creditor when he decides to sell the thing, when the obligation becomes due and demandable, and the debtor fails to pay his obligation. Here, the debtor is given the right to see the thing pledged at the public auction. Take of the requirement here that the pledgee must notify the owner of the thing pledge. It is not sufficient that there is a public auction. There must be notice as well, to the debtor and the owner of the thing pledge as provided under 21112. The sale is conducted by a notary public. It is extrajudicial in nature. Since it is a public auction, the people may bid, the highest bidder is given the thing pledge and the proceeds will be for the payment of the obligation. However, if at the first public auction the thing is not sold, to which there is only one bidder, the creditor-pledgee himself, there must be a second public auction. And if the thing is not yet sold, or you only have the creditor-pledgee as the only bidder, this time the said pledgee may appropriate the thing in payment of the obligation. There is no pactum commissorium here, because there is no automatic appropriation. Formalities under 2112: 1. 2. 3. 4.

debt is due and unpaid Sale is made in a public auction There must notice to the owner and the pledgor stating the amount due The sale must be made in the intervrntion of a notary public.

If you look at 2112, it only requires notice to the pledger and owner. It does not require posting of the notice of sale or publication. It is different when it comes to the extrajudicial foreclosure of mortgage. Notice to the pledgor and owner is sufficient. LIM TAY vs. CA Facts: Respondent-Appellee Sy Guiok secured a loan from Lim Tay payable within 6 months. To secure the payment of the aforesaid loan and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of Lim Tay whereby he pledged his 300 shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake. On the same date, Alfonso Sy Lim also secured a loan from Lim Tay payable in 6 months. To secure the payment of his loan, Sy Lim executed a "Contract of Pledge"

covering his 300 shares of stock in Respondent Corporation. Under said "Contracts of covenanted, inter alia, that:

Pledge,"

Guiok

and

Sy

Lim

3. In the event of the failure of the PLEDGOR to pay the amount within a period of 6 months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided; However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests. The petitioner filed a "Petition for Mandamus" against Respondent Corporation, with the SEC entitled "Lim Tay versus Go Fay & Company. Inc. Issue: WON Lim Tay is the owner of the shares. Petitioner's contention that he is the owner of the said shares is completely without merit. At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states: The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code: Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. As to Novation. Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 when the old and the new obligations are incompatible on every point." 27 In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600 shares, (b) petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any action to recover the shares since 1980. As to the Delivery of Shares. Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads: 2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereon accruing. This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article 2093 of the Civil Code, 29 which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and Article 2095, 30 which states that if the thing pledged are shares of stock, then the "instrument proving the right pledged" must be delivered to the creditor.

INSULAR LIFE VS. YOUNG January 16, 2002 Facts: Young obtained a short-term loan of P170,000,000.00 from Interbank for the purchase of shares of stocks. Young's loan from Interbank became due, causing his serious financial problem. Consequently, he engaged the services of Asian Oceanic, a domestic company owned and controlled by another petitioner, Insular Life, to look for possible sources of capital. Through the intervention of Asian Oceanic, Young and Insular Life entered into a Credit Agreement. Under its provisions, Insular Life extended a loan to Young in the amount of P200,000,000.00. To secure the loan, Young executed on the same day a Deed of Pledge over 1,324,864 shares which represented 99.82% of the outstanding capital stock of the Bank. The next day, he also executed a PN in favor of Insular. The Credit Agreement further provides that Insular Life shall have the prior right to purchase the Schedule I Shares (owned by Young) and the Schedule II Shares (owned by the other stockholders of the Bank). On October 21, 1991, Young signed a letter stating that due to business reverses, he shall not be able to pay his obligations under the Credit Agreement between him and Insular Life. Forthwith, Insular Life instructed its counsel to foreclose the pledge constituted upon the shares. The latter then sent Young a notice informing him of the sale of the shares in a public auction scheduled on October 28, 1991, and in the event that the shares are not sold, a second auction sale shall be held the next day, October 29. On October 28, 1991, only Insular Life submitted a bid, hence, the shares were not sold on that day. The next day, a second auction was held. Again, Insular Life was the sole bidder. Since the shares were not sold at the two public auctions, Insular Life appropriated to itself, not only the original 1,324,864 shares, but also the 250,000 shares subsequently issued by the Bank and delivered to Insular Life by way of pledge. Thus, Insular Life gave Young an acquittance of his entire claim. Thereafter, title to the said shares was consolidated in the name of Insular Life.

Young and his associates filed with the RTC a complaint against the Bank, Insular Life and its counsel, Atty. Jacinto Jimenez, petitioners, for annulment of notarial sale, specific performance and damages. The complaint alleges, inter alia, that the notarial sale conducted by petitioner Atty. Jacinto Jimenez is void as it does not comply with the requirement of notice of the second auction sale. Issue: WON the foreclosure sale is valid. Held: YES. Notably, the Deed of Pledge which secured the Credit Agreement between the parties, covered not only 1,324,864 shares which then constituted 99.82% of the total outstanding shares of petitioner Bank, but also the 250,000 shares subsequently issued. Consequently, when Young waived in his letter the period granted him under the said agreement and manifested his inability to pay his obligation, the loan extended by petitioner Insular Life became due and demandable. Definitely, petitioners merely exercised the right granted to them under the law, which is to foreclose the pledge constituted on the shares, in satisfaction of respondent Young's loan The Court of Appeals also erred in declaring that the auction sale is void since petitioners failed to send a separate notice for the second auction. Article 2112 of NCC provides for the law applicable to the auction sale Clearly, there is no prohibition contained in the law against the sending of one notice for the first and second public auction as was done here by petitioner Insular Life. The purpose of the law in requiring notice is to sufficiently apprise the debtor and the pledgor that the thing pledged to secure payment of the loan will be sold in a public auction and the proceeds thereof shall be applied to satisfy the debt. When petitioner Insular Life sent a notice to Young informing him of the public auction scheduled on October 28, 1991, and a second auction on the next day, October 29, in the event that the shares are not sold on the first auction, the purpose of the law was achieved. We thus reject respondents' argument that the term "second one" refers to a separate notice which requires the same formalities as the first notice.

Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n) Who can bid? Anybody – the public, the pledgee, even the pledgor. The pledgor or owner should have a better right if he should offer the same terms as the highest bidder. So only for the same terms. The pledgee or pledger may be allowed to bid but, not valid if he is the only bidder and related to article 2112. So if in the first auction sale, he is the only bidder, then there is no valid auction sale, a second may be conducted. If he remains to be the only bidder, then that is the time that he can appropriate the thing for himself and apply the proceeds to the obligation. Again, there is no pactum commissorium there because there is no automatic appropriation.

Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) If you are the highest bidder, the rule is you at once, you pay in cash to the pledgee or creditor.

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 The pledgee, however, may receive payment not in full or not in cash. But, as far as the debtor or the owner of the thing pledged is concerned, the principal obligation is deemed extinguished, as well as the pledge.

Art. 2115. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) Very important provision. What is the effect of such sale? It will extinguish the principal obligation, whether the price of the sale more or less than the amount due. What happens if there is an excess, or if there is a deficiency? MANILA SURETY vs. RODOLFO R. VELAYO G.R. No. L-21069 October 26, 1967

Facts: Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs. Since the execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the Civil Code. Issue: WON Velayo is liable for the balance. Held: No. Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable Q: How about the rule with regard to excess? What if the thing pledge is sold in excess of the principal obligation? what happens to the excess?

Why is it that the pledgee is not allowed to demand the deficiency anymore? The foreclosure sale of the thing pledged is only one of the remedies available to the pledgee. He may also file an action for collection for sum of money. In other words, he decides not to foreclose on the thing pledged. In an action for collection for sum of money, he can have the thing pledged attached. If he does so, he is not exercising his right as a pledgee. If the property pledged will be attached and the court finds that the decbtor is liable , then that property will eb sold through an execution sale and the proceeds will eb used to pay off the obligation. What deos that mean? On the part of the pledgee, he has to discern. Mas mabilis sa 2112, because it is an extrajudicial foreclosure. But he has to take into consideration if he can sell it, at the very least, equivalent to the principal obligation. Kapag alanganin siya, he may choose to file a collection of sum of money because he can really collect the amount form the debtor, to which he will just attach the property. Pag benta niyan sa execution sale, pwede niya pang mahabol yung interest.

Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Dalawang notice – before the sale and after the public auction. You let the pledger know that the pledge was done according to law, to which the pledgor must be advised promptly. This is to enable him to take steps for the protection of his rights if he has reasonable grounds to believe that the sale was not an honest one on the part of the pledgor. Art. 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable. (n) Who can discharge the principal obligation? The principal debtor makes the obligation. Third persons can pay the obligation. Remember in obligation and contracts, who can compel the creditor to accept payment? Debtor, his heirs or successors, assignees, and persons who have an interest in the obligation – that would include a third person. If a pledger, who is not the debtor, pays the obligation, he can compel the creditor to accept such payment, to which he can demand reimbursement from the debtor. Third person may be a person, who is not a debtor of the obligation, who has any right to the thing pledged and pay the obligation when the same is due and demandable.

Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) Here, for example, receivables. The debtor can pledge his receivables, and the pledgee can collect the amount due. To which the pledgee will now be obligated to apply the amount collected and received. However, the creditor-pledgee may receive the amount due. In other words, it is not obligatory on his part to collect and receive the amount. He has right, but not the obligation.

A: If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. Pwede may stipulation sa excess, pero sa deficiency, hindi pwede. Any stipulation will be void to compel the creditor to hold a honest public sale.

Art. 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n)

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CREDIT TRANSACTIONS Second Exam TSN SY 2016-2017 Let us say there are two things pledged for an amount loaned. Who has the right to choose which of the two will be sold first? As soon as the debt becomes due and demandable, and the debtor fails to pay, the creditor has the right to sell the things, and to choose which of them will be sold first. But the creditor can only sell such property as equal to the amount of the obligation. If for example one of the things pledged was sold for more than the amount of the obligation, the creditor does not have to sell the other thing anymore, since it is already sufficient to cover the obligation. The creditor, then, would have the obligation to return the other thing pledge not sold to the debtor.

Art. 2120. If a third party secures an obligation by pledging his own movable property under the provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to 2070, and articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) If you look at these articles, it does not cover the benefit of excussion or the benefit of remission. Said third person does not have the benefit of excussion or the benefit of remission. The articles cited refer to the right of indemnity available to the said pledger and whatever remedies the principal debtor can present against the creditor, as well as the defenses he can interpose against the creditor.

There has to be demand has to the amount for which the thing is to be obtained. Demand is required because in pledge by operation of law or legal pledge, there has to be a demand first to fix the period of payment. In contrast with conventional pledge, there is already a period for payment. After making the demand, and after fixing the period, if the sale is not made within the period stipulated in the demand, then the pledgee can sell the thing in a public auction. Take note of the distinctions between 2122 and 2112. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. However, although the debtor may demand the return of the thing, his obligation is not yet extinguished.

Art. 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) Pawnshop regulation Act is the primarily law with regards to pawnshops, and is regulated by the Bangko Sentral ng Pilipinas.

Art. 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) What we have here is a legal pledge. LEGAL PLEDGES— Article 546 – Where a possessor in good faith may retain the property until he is reimbursed for the necessary and useful expenses of the owner of the property. Right of the possessor in good faith is the same as that of a pledgee. He cannot be ordered to return the thing until there is full payment or reimbursement. The possessor in good faith may also sell the property if he is not paid the necessary and useful expenses. Article 1731 – He who has executed work upon a moveable has a right to retain it by way of pledge until he is paid. If he is not paid, he is given the right to sell the thing at a public auction applying the law on pledge. Article 1994 – On deposit. The depositary may retain the thing in pledge until full payment of what may be due him by reason of the deposit. Article 612 – Usufruct Article 1912 -1914 – Right to hold of the agent Article 1951—Excess will be returned to the debtor.

Art. 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)

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