Atty.

Uribe Lecture Notes: Partnership Page 1 of 11

Introduction

(Note: About 80% of the questions in the bar for the past 25 years have been about pledge, chattel mortgage and real estate
mortgage. The remaining 20% covered loan and deposit. No question has yet been asked in guarantee and suretyship.)

One author would call these transactions as ‘bailment.’ However, are they really bailment? In a bailment, there is delivery of
property by one person to another in trust for a particular purpose with a contract, whether express or implied, that such will be
faithfully complied with and the property returned or at least accounted for after the purpose has been accomplished or upon demand.
So are credit transactions really bailment? If you consider some of these transactions, they are not bailment because nothing is
delivered by a party thereto to another, e.g. guarantee and suretyship. Also, in chattel mortgage and real estate mortgage, the standard
agreement does not include the delivery of the property mortgaged. The mortgagor continues to be in possession of the thing
mortgaged. Thus, these transactions appropriately called credit transactions.

Nevertheless, a lot of credit transactions are in the form of bailment or even considered as contractual bailment. For example,
commodatum is a form of bailment because a thing is delivered by the bailor to the bailee for the perfection of commodatum. Also, in
mutuum there is something delivered by the lender to the borrower for the perfection of mutuum. Also, in deposit and even in
antichresis. But again, the better name would be credit transactions because all these would involve credit. Credit meaning the
capacity of one party to be able to perform his obligation in the future. So in commodatum it would be the belief of the lender that the
borrower or the bailee would be able to return the thing at a later time. The same is true in mutuum.

Loan and deposit

Classification

There are two kinds of loan:

(1) Commodatum; and

(2) Mutuum.

Deposit on the other hand is classified as:

(1) Judicial deposit (sequestration).

(2) Extra-judicial deposit:
a. Voluntary deposit.
b. Necessary deposit.

Take note that in deposit, not all of them are contractual in character. The only contractual deposit is voluntary deposit.
Necessary deposit is constituted by operation of law, and judicial deposit is made upon the order of the court. (Note: These are
properly called transactions because not all of them are contracts.)

Principal contracts

All of these (commodatum, mutuum and voluntary deposit) are principal contracts as opposed to all other transactions in
credit transactions. For example, guarantee and suretyship are accessory contracts.

Perfection

As to perfection, commodatum, mutuum and deposit are real contracts. The only other real contract is pledge. Under 1316,
these contracts are perfected only upon the delivery of the thing which is the subject matter of the contract.

However, before such delivery, is there a perfected contract? Yes. The Supreme Court would consider that contract as a
perfected consensual contract to enter in to a contract of loan. So there is already an agreement binding upon the parties but the loan
itself is perfected only upon delivery of the thing. Thus, while these contracts are real contracts, the agreement to constitute a deposit,
mutuum, or commodatum is already valid and binding between the parties. (see 19341 and 19632)

1
Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of the contract.
2
Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing.
Atty. Uribe Lecture Notes: Partnership Page 2 of 11

So, if the contract has not yet been perfected but the agreement is binding, what would be the rights and obligations of the
parties? Definitely, there would be a right to demand for the delivery of thing to the other party because the agreement is valid and
binding between the parties. In case a party defaults, the defaulting party may be held liable for damages.

Consideration

Under the 2nd par. of 1933, commodatum is essentially gratuitous. In the case of Republic vs. Bagtas, Bagtas failed to return a
bull he borrowed because they perished during a crossfire between the AFP and the Hukbalahap. Bagtas argued that since the contract
entered into was commodatum, where ownership does not pass with the delivery of the thing to the borrower, it was the State who
should bear the loss. The Supreme Court noted that the transaction was not commodatum because a ‘breeding fee’ was paid by Bagtas.
Therefore, the Supreme Court held that the contract was not commodatum because commodatum is essentially gratuitous.

Under the 3rd par. of 1933 in relation to 1956, mutuum or simple loan is gratuitous unless there an express stipulation in
writing as to interest (also known as ‘compensatory interest’). For example, the parties may agree that the amount borrowed today
would have to be paid after one year. If there is no stipulation as to interest, then that simple loan is considered as a gratuitous loan.

Under 1956, interest must be expressly stipulated in writing to hold the borrower liable to pay the same. However, regardless
of whether there was a stipulation for the payment of compensatory interest, the moment the borrower debtor incurs in delay, he is still
liable to pay interest in the form of damages. In this case, interest is in the nature of damages and not compensation. Thus, only
compensatory interest must be expressly stipulated.

Unless otherwise agreed upon by the parties, the rate of interest in case of delay will be the legal rate of 12%, it being a
forbearance of money. The parties may stipulate a higher interest rate. However, notwithstanding the suspension of the Usury Law,
there is a limit on the rate they can agree upon. The Supreme Court has consistently ruled that while the Usury has been suspended,
this does not give the lender the right to demand for an interest rate which is unconscionable. According to the Supreme Court, an
interest of rate of 5.5% per month or 6% per month is unconscionable. In these cases where the stipulated interest rate is
unconscionable, the courts would impose the legal rate of 12% per annum.

Under 1965, deposit is also considered as gratuitous but it may also be onerous when:

(1) The parties agree on the contrary, e.g. payment of rentals; or

(2) The depositary is engaged in the business of storing goods.

Purely personal?

Are these contracts purely personal such that they would be extinguished by the death of one of the parties?

With regard to commodatum, yes. Under 1939, upon the death of either the bailee or the bailor, the contract is extinguished.
With regard to mutuum, no. If the creditor dies, his heirs would have the right to demand for the performance of the
obligation. On the other hand, if the debtor dies, his estate would be responsible for the performance of the obligation.

With regard to deposit, under 1995(2), it is purely personal only when it is gratuitous in character.

Subject matter

In commodatum, under 1937, the subject matter may be movable or immovable. You can even borrow a parcel of land or an
apartment without compensation. As a general rule, under 1935, only the use of the thing is included in commodatum. By way of
exception, under 1940, the parties may stipulate on the use of the fruits as well. Take note that this refers only to the ‘use’ of the fruits,
not a right thereto. The object, as a general rule, under 1933, should be non-consumable because the bailee has the obligation to return
the very same thing borrowed. By way of exception, under 1936, a consumable thing may be the valid subject of commodatum if the
purpose is not consumption, e.g. for exhibition. Also, the subject matter of commodatum is non-fungible since the borrower has to
return the very thing borrowed and may not replace it with another thing which is of similar kind.

In mutuum, the subject matter may only be movables. The subject matter may be consumable or non-consumable. Also,
under 1953, the subject matter is fungible. (Note: If what was borrowed was a codal book and what was to be returned was the same
codal book, it is commodatum. However, if what was to be returned was another codal book of the same edition, that is mutuum and
not barter since what was returned was the same kind.)

In deposit, you have to distinguish between judicial and extra-judicial deposit. In judicial deposit, under 2006, the subject
matter may be movable or immovable. In the extra-judicial deposit, the subject matter may only be movable. In both cases, the subject
Atty. Uribe Lecture Notes: Partnership Page 3 of 11

matter may be consumable or non-consumable. As a rule, the subject matter is non-fungible because the very same thing deposited
should be returned. By way of exception, under 1976, fungible things may be deposited as in deposit of grains because unless
otherwise prohibited by the depositor, the depositary may co-mingle the grains with others of similar kind.

Transfer of ownership

In commodatum only the use of the thing is given to the borrower. There is no transfer of ownership upon delivery. Thus, the
bailor need not be the owner of the property borrowed. However, in case of loss of the thing borrowed due to a fortuitous event, who
should bear the loss? As a general rule, the bailor or the owner bears the loss under the res perit domino rule. The exceptions are
provided for by 1942 wherein the bailee shall be liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has
been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from
responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of his household; or
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.

Bar Q: A allowed B, his neighbor, to borrow his jeep so that the latter could bring his wife to the hospital. B then brought his
wife to the hospital. While B was on his way home, he allowed some people to ride the jeep for a fee. Then the jeep was lost due to
‘lahar.’ May B be held liable for the loss of the jeep?

A: The transaction entered into is commodatum and the jeep was lost through a fortuitous event. Thus, as a rule, A should
bear the loss. However, under 1942(1), if the bailee devoted the thing to another purpose without the consent of the bailor, he will be
liable for the loss of the thing even if it was due to a fortuitous event.

Bar Q: A borrowed the car of his friend, B. A parked B’s car together with his cars in his garage. A’s garage was burned,
however he only had the opportunity to save his own car. Can A be held liable for the loss of B’s car?

A: Yes, under 1942(5).

If you remember the case of Republic vs. Bagtas, the Supreme Court ruled that even if a commodatum was entered into,
Bagtas would still be liable for the loss of the bull on two grounds:

(1) Bagtas kept the bull longer than the period stipulated (1942(2)); and
(2) There was an appraised value of the bull in the agreement (1942(3)).

In mutuum, ownership is transferred upon the delivery of the thing borrowed to the borrower. Therefore, the rule of res perit
domino applies.

Q: X borrowed money from the bank left with the cash. A few meters away from the bank, X was robbed. Can X still be held
liable for the loan?

A: Yes. At the time of the loss, even if robbery is considered a fortuitous event, X already owned the money. Therefore,
under the rule of res perit domino, X will bear the loss.

In deposit, there is no transfer of ownership despite delivery. The purpose of this transaction is only safekeeping. As a rule, if
the depositary was robbed of the things deposited with him, he cannot be held liable. Under the res perit domino rule, it will be the
owner who should bear the loss. The exceptions are provided for in 1979 wherein the depositary will bear the loss even if due to a
fortuitous event:

(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the same.

Some other concepts

Atty. Uribe Lecture Notes: Partnership Page 4 of 11

Precarium is a special kind of commodatum. In this kind of commodatum, the bailor can demand for the return of the thing at
any time (1947). (Note: It would be wrong to say that just because commodatum is gratuitous, then the bailor may demand the return
of the thing at any time. See 1946.) The commodatum shall be considered as precarium under these instances:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.

If there is a period agreed upon, the bailor has to respect the period. As a rule, he cannot demand for the return of the thing
within such period. By way of exception, the bailor can demand the return or temporary use of the thing under the following
circumstances:

(1) Under 1946, should he have an urgent need of the thing. During such time that the thing is returned, the commodatum is
suspended. However, once the urgent need ceases, the bailor should return the thing to the bailee.
(2) Under 1948, should the bailee commit an act of ingratitude specified under 765, specifically:
a. If the bailee should commit some offense against the person, the honor or the property of the bailor, or of his
wife or children under his parental authority;
b. If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he
should prove it, unless the crime or the act has been committed against the bailee himself, his wife or children
under his authority;
c. If he unduly refuses him support when the bailee is legally or morally bound to give support to the bailor.

In mutuum, as a rule, payment shall be made in Philippine Pesos. By way of exception, under RA 8183, the parties may agree
on a different currency.

In deposit, there is a concept known as ‘irregular deposit.’ (Note: Savings account deposit and current account deposit are
not irregular deposits. These are actually governed by the provisions on simple loan. According to the Supreme Court, these are only
in the nature of irregular deposits. They are not irregular deposits proper.) Irregular deposits refer to deposit transactions where:

(1) The depositary has the right to use the thing. As a rule, under 1977, the depositary is not allowed to make use of the
thing. By way of exception, under 1977, the depositor may allow such use. However, under 1978, safekeeping must still
be the principal purpose of the contract, otherwise it will be considered a lease, loan or commodatum as the case may be.
(2) The depositary has to make use of the thing for its preservation (1977). For example, a car must be used every now and
then to preserve it.

Types of guarantee

There are two types of guarantee:

(1) Personal (guarantee proper); and

(2) Real (pledge, real estate mortgage, chattel mortgage and antichresis).

In personal guarantee there is no specific property subjected to the claim of the creditor. It would involve only the personal
commitment of the guarantor or the surety. Whereas in real guarantee, specific property or properties are subjected to the claim of the
creditor in case of default of the principal debtor.

Personal guarantee

If the examination would mention the word guarantee with a property being subjected to the claim of the creditor, then you
can safely presume that this is guarantee proper. The purpose of these contracts is to secure the fulfillment of the obligation of another.

All of these concepts from guarantee, pledge, real estate mortgage, chattel mortgage and antichresis, they are accessory
contracts. That is, they depend on the existence of another contract for their validity.

Under 2051, guarantee is classified as:

(1) Conventional,
(2) Legal, or
(3) Judicial.
Atty. Uribe Lecture Notes: Partnership Page 5 of 11

Remember in deposit that if it is legal or judicial, it need not be contractual in character. Does the same hold true in
guarantee? No. All these kinds of guarantee are contractual in character. The distinction only refers why the guarantee is to be
executed.

If guarantee is entered into merely by the agreement of the parties, without any law necessitating such, then that is a
conventional guarantee. If a law exists requiring the guarantee, that is legal guarantee. For example, in construction agreements, the
law requires the contractor to put up a construction bond to answer for the claims of the laborer and the suppliers. Lastly, if the court
requires the delivery of a guarantee, that is judicial guarantee. For example, in attachment, the filing of the bond is required by the
Rules.

Who are the parties in these contracts? Only the guarantor and the creditor are the required parties to these contracts. A
contract of guarantee or suretyship may be entered into even without the knowledge or against the will of the principal debtor. Take
note that in these contracts, the guarantor or the surety is always a third person and never the principal debtor. A person cannot
contract and debt and secure it himself.

Aside from the contract of guarantee, there can be a contract sub-guarantee. This is a guarantee agreement entered into by the
guarantor and the guarantor of the guarantor. The sub-guarantor would secure the fulfillment of the obligation of the guarantor. So in
case the guarantor fails to fulfill his obligation, the sub-guarantor may be held liable. Others would refers to this as ‘double guarantee.’

There may be two or more guarantors in a guarantor agreement. They are referred to as co-guarantors.

As to perfection of these contracts, they are consensual. Upon the meeting of the minds upon the object and the
consideration, guarantee is perfected. However, since guarantee is a special promise to answer for the debt of another, under the
Statute of Frauds, this contract will be unenforceable if it is not in writing. Under 1403, a special promise to answer for the debt of
another is covered by the Statute of Frauds.

Guarantee is a gratuitous contracts unless there is a stipulation to the contrary.

Rights of the guarantor or surety before payment

The liable of the guarantor is only subsidiary because he has the benefit of excussion or the benefit exhaustion. Therefore,
under 2058, before the guarantor can be held liable as such, The creditor must have exhausted all of the properties of the debtor, and
resorted to all the legal remedies against the debtor. However, under 2060, in order for the guarantor can invoke this benefit, he has to
point out the remaining properties of the debtor. If no property can be pointed out, the guarantor is bereft of the benefit of excussion.

This right of excussion is not absolute. Under 2059, excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor (in this the party is called a surety);
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the
obligation.

In these cases, the guarantor shall be immediately liable upon the default of the principal debtor.

The sub-guarantor is also granted the benefit of excussion. Under 2064, the sub-guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal debtor.

With regard to co-guarantors they are granted the benefit of division. Under 2065, the obligation to answer for the debt is
divided among all the co-guarantor. As a general rule, a co-guarantor is liable only for his share. By way of exception, the co-
guarantors may have bound themselves solidarily. For example, four guarantors bound themselves to guarantee a debt of P100,000.00.
Without any stipulations as the nature of their liability and their share, they will have a joint obligation, each having an equal share in
the debt. Thus, each one of them may only be compelled to pay P25,000.00 as guarantors.

A surety is solidarily bound with the principal debtor. He cannot avail of the benefit of excussion. The Supreme Court has
ruled consistently that a guarantor is liable when the debtor cannot or is unable to pay; whereas a surety is liable when the debtor does
not pay, regardless of the latter’s capacity to pay. Thus, a surety is an insurer of the debt; whereas a guarantor is merely the insurer of
the solvency of the principal debtor.
Atty. Uribe Lecture Notes: Partnership Page 6 of 11

Rights of the guarantor or surety upon payment

As a rule, under 2067, when a guarantor or surety pays, he is subrogated in the rights of the creditor. That is, he can exercise
of all the rights which the creditor could have exercised against the principal debtor and other persons who secure the fulfillment of
the obligation. Take note, an obligation may be secure by more than one contract. For example: If A is indebted to B, three could be
three contracts to secure this obligation: (1) guarantee; (2) chattel mortgage; and (3) real estate mortgage. So if the principal debtor
fails to reimburse a guarantor or surety for the expenses he incurred in paying the debt, the latter would have the right to foreclose the
mortgage securing the obligation.

By way of exception, under 2050 in relation to 1236 and 1237, when the guarantee or surety was entered into without the
consent or against the consent of the principal debtor, the guarantor or surety who pays shall only be entitled to reimbursement up to
the extent that the principal debtor was benefited. (See also 20673, 20684, 20695 and 20706)

The last question here would pertain to a claim that a surety is a solidary debtor for when a guarantor binds himself solidarily
with the principal debtor he becomes a solidary debtor. Is this statement accurate? No. He does not become a solidary debtor. He
merely becomes a surety. Take note of the following:

(1) In a suretyship where the principal debtor had an agreement with the creditor for the extension of the period for payment
without the knowledge or consent of the guarantor, the surety is released. However, if there are two or more solidary
debtors and one of them entered into an agreement with the creditor for such an extension, the other solidary debtors who
had no knowledge or did not consent to such agreement are not released from the obligation.
(2) When a surety pays, as a rule he shall be subrogated in the rights of the creditor. However, when a solidary debtor pays,
he is not subrogated in the rights of the creditor, in fact the obligation is extinguished. Also, after a solidary debtor pays,
the obligation to reimburse him is only a joint obligation.

Thus, it is a mistake to consider a surety a solidary debtor. He only binds himself solidarily but it does not mean that he becomes a
solidary debtor.

Real Guarantee

The following constitute real guarantee:

(1) Pledge,
(2) Chattel mortgage,
(3) Real estate mortgage, and
(4) Antichresis

There are two kinds of pledge:

(1) Legal pledge; and

(2) Voluntary or conventional pledge.

Voluntary or conventional pledge is constituted by the agreement of the parties. On the other hand, Legal pledge is
constituted by operation of law. In legal pledge, if the debtor fails to pay the obligation, the creditor is given the right to retain the
thing in his possession and thereafter to have this thing sold in order to satisfy his claim. 2121, 1914, 2004 enumerates the kinds of
legal pledge:

(1) 546 – Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing
until he has been reimbursed therefor.

3
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid.
4
Art. 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the
creditor at the time the payment was made.
5
Art. 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor.
6
Art. 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the payment, repeats the payment, the former has no remedy
whatever against the debtor, but only against the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall reimburse the guarantor for the amount paid.
Atty. Uribe Lecture Notes: Partnership Page 7 of 11

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person
who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the
increase in value which the thing may have acquired by reason thereof.
(2) 1731 – He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.
(3) 1994 – The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the
deposit.
(4) 1914- The agent may retain in pledge the things which are the object of the agency until the principal effects the
reimbursement and pays the indemnity set forth in the two preceding articles.
(5) 2004 – The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel guests.
(6) 612 - Upon the termination of the usufruct, the thing in usufruct shall be delivered to the owner, without prejudice to the
right of retention pertaining to the usufructuary or his heirs for taxes and extraordinary expenses which should be
reimbursed. After the delivery has been made, the security or mortgage shall be cancelled.

In chattel mortgage, personal property is recorded as a security for the performance of the obligation.

In real estate mortgage, an immovable property is subjected to the claim of the creditor.

As regards antichresis, this is a peculiar security arrangement. By a contract of antichresis, the creditor acquires the right to
receive the fruits of the immovable delivered to him, with the obligation to apply the fruits first to the interest, if owing, and then to
the principal. Thus, this arrangement is not really a security arrangement. This, in a way, is a form of payment. The obligation may
actually be extinguished from the application of the fruits to the interest and to the principal.

Applicable laws on mortgage

With regard to mortgage, other applicable laws include Act 3135 on extra-judicial foreclosure and the Rules of Court on
judicial foreclosure.

The problem is with chattel mortgage. There are only a few provisions on chattel mortgage in the NCC but there is a Chattel
Mortgage Law (Act 1508) which was enacted before the NCC and which still exists today. However, in case of conflict, according to
the Supreme Court, the provisions of the NCC will prevail. Concretely, under the chattel mortgage law, chattel mortgage is considered
a conditional sale. However, under 21407, chattel mortgage is defined as a security arrangement. Also, under 2141, the provisions of
the NCC on pledge are applicable in chattel mortgage in so far as they are not in conflict with the chattel mortgage law. Thus, the
applicable laws on chattel mortgage are as follows:

(1) NCC provisions on chattel mortgage;

(2) Chattel Mortgage Law; and
(3) NCC provisions on pledge in far as they do not conflict with the Chattel Mortgage Law.

Essential requisites

As contracts, again, the consent of the parties, the object and the cause would have to be present. However, there are other
essential requisites.

With regard to consent, that which is require is consent of the pledgor/mortgagor and the pledgee/mortgagee. Thus, a pledge
or mortgage may be constituted without the knowledge or consent of the principal debtor. As distinguished from guarantee and
suretyship, the pledgor/mortgagor would normally be the principal debtor. However, under the 2nd par. of 2085, a third person may
bind himself to be the pledgor/mortgagor.

With regard to object, the object in all of these contracts is to secure the fulfillment of a principal obligation.

With regard to cause, the cause will depend on who executed the contract. If the principal debtor was the one who executed
the pledge or mortgage, then the cause of the principal obligation will be the very same reason why he executed the accessory
contract. On the other hand, if it was a third person who executed the pledge or mortgage, then the cause may be liberality or
compensation.

Aside from these three essential requisites, there are other requisites.
7
Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage.
Atty. Uribe Lecture Notes: Partnership Page 8 of 11

With regard to the objects of these contract:

(1) Pledge – movable.

(2) Chattel mortgage:
a. General rule – movable.
b. Exception - under the NCC provisions on property, there are certain immovables are considered as personalty. The
same is true under the Chattel Mortgage Law. E.g., growing crops and large cattle.
(3) Real estate mortgage – immovable.
(4) Antichresis - immovable.

Under 2085(2), another essential requisite in these contracts is that the pledgor/mortgagor must be the absolute of owner of
the thing pledged/mortgaged at the time of the constitution of the pledge/mortgage. In the case of Vda. de Bautista vs. Marcos, a
woman borrowed a sum of money from another lady and to secure the obligation a real estate mortgage was constituted over a parcel
of land which was then the subject of an application for a free patent. During the existence of the mortgage, the land was awarded to
the debtor. After the debtor defaulted on her payment, the creditor attempted to foreclose the mortgage. The Supreme Court held that
there could be no valid foreclosure of this mortgage because the mortgage was void. The mortgagor was not the absolute owner of the
land at the time of the constitution of the mortgage.

Future goods may not be pledged/mortgaged because at the time of the constitution of the pledge/mortgage, the
pledgor/mortgagor is not the absolute owner of the future goods. However, unless otherwise stipulated, a thing which was not yet in
existence at the time of the constitution of the pledge/mortgage may be covered by the pledge/mortgage. Concretely, if the thing
pledged was a carabao, and the carabao gives birth during the pledge, even the offspring is covered by the pledge. Under 2102, unless
otherwise stipulated, a pledge covers not only thing pledged but also its fruits, income or offspring. The offspring would still belong to
the pledgor but it is covered by the pledge. Thus, the pledgee will have the right to retain the offspring, such that if the debtor defaults,
the former has the right to sell the mother carabao and its offspring to satisfy his claim.

Chattel mortgage may cover goods sold at a supermarket. However, these goods, are by their nature, sold and replaced with
other goods. Thus, the goods which replace those covered by the chattel mortgage may not have been in existence at the time such
mortgage was constituted. The question then would be whether there can be a valid foreclosure over the goods which then present at
the time of foreclosure but were not present at the time of the constitution of the mortgage? Yes. They may not have been in existence
at the time of the chattel mortgage, thus they may not have been owned yet by the mortgagor at the time of the mortgage, but the
Supreme Court would tell us that these goods are merely goods in replacement or goods in substitution of those mortgaged. This
ruling would apply to businesses known as rotating businesses.

Under 2127, real estate mortgage covers the immovables, improvements, growing fruits and rent. The same applies to
antichresis.

Under 2085(3), another essential requisite is that the pledgor/mortgagor must have free disposal of the thing
pledged/mortgaged. Take note that the owner of a thing does not necessarily have free disposal. For example, the owner may be
suffering the penalty of civil interdiction or the courts may have prohibited the owner from disposing of such property.

Characteristics

Like guarantee and suretyship, contracts of real guarantee are accessory contracts. Thus, these cannot exist without a valid
obligation. Take note that under 2086 (in relation to 2052) and 2091, a pledge/mortgage may be constituted to secure the fulfillment of
a voidable or unenforceable contract, a natural obligation, or a conditional obligation. However, the law makes no mention of an
obligation with a term. So, may a pledge/mortgage secure the fulfillment of an obligation with a term? Yes. Pledge/mortgage normally
secures these kinds of obligations. E.g., obligations to pay a sum of money within 1 year.

Pledge/mortgage cannot exist without a valid obligation. However, may a pledge/mortgage cover an obligation which was
constituted after the constitution of the pledge/mortgage? For example: A borrowed from B P1M secured by a mortgage. After the
constitution of the loan and the execution of the mortgage, another P1M was borrowed by A from B. A was able to P1.5M leaving a
balance of P.5M. In case A fails to pay the balance, can B foreclose the mortgage? Yes. It is possible if the parties expressly stipulated
that the mortgage would also cover obligation which will be incurred by the same debtor with the same creditor. In guarantee, this is
called a continuing guarantee. This is normally stipulated in loan arrangements with banks.

Perfection
Atty. Uribe Lecture Notes: Partnership Page 9 of 11

A pledge is a real contract. As such, a pledge is perfected only upon the delivery of the thing pledged. However, under 2092,
a promise to constitute a pledge (or mortgage) gives rise to a personal action between the contracting parties.

What kind of delivery is required? In other words, would constructive delivery suffice in the perfection of a pledge? Yes. As
a rule, actual delivery is required. If the thing pledged is a carabao, the pledgor must deliver the carabao itself for the perfection of the
pledge. However, there are exceptions. In the case of Banco Filipino Espanol vs. Peterson, the Supreme Court ruled that constructive
delivery, like the delivery of keys to a warehouse where the goods are located, would suffice for the perfection of the pledge. Actual
delivery may be an unreasonable requirement because of the quantity of the goods involved. In the case of Yuliongsiu vs. PNB, where
three ships were pledged, the Supreme Court ruled that the pledge was perfected despite the lack of actual delivery. By the mere
execution of a public instrument where it was stated that while Yuliongsiu retains possession of the ships, PNB would have control
over the same. The contract of pledge was perfected because actual delivery would be an unreasonable requirement.

Why does perfection become important? Without a perfected pledge, once the debtor defaults, the creditor will have no right
to subject the thing to a public sale to satisfy his claim. A creditor cannot exercise the rights of a pledgee if the pledge has not been
perfected.

Form

Pledge is not a solemn or formal contract. While the law does not require a particular form for the validity of a pledge such
that mere delivery would suffice for the perfection of the pledge, a form is required to bind third persons to the pledge. Under 2096,
the pledge must be in a public instrument which is dated and specifically describes the property pledged in order to bind third persons.
This requirement is for the protection of the creditors of the pledgor.

Chattel mortgage is not a solemn or formal contract. While the law requires a chattel mortgage to be registered, according to
the Supreme Court, even if it were not so registered, it is binding between the parties. Thus, it is not really an indispensable
requirement. In fact, under 2092, a promise to constitute a mortgage fives rise to a personal action between the contracting parties. A
chattel mortgage also requires an affidavit of good faith. However, this is not a requisite for the validity of the chattel mortgage. This
is only necessary to bind third persons. However, in one case, the Supreme Court ruled that even if an affidavit of good faith was not
executed, the chattel mortgage would still bind a person who had actual knowledge that the mortgage was executed in good faith and
for value. (Note: This is consistent with the rulings of the Supreme Court that actual knowledge is equivalent to registration.)

Real estate mortgage is not a solemn or formal contract. Under 2125, although registration is indispensable, the lack thereof
would not affect the binding effect of the mortgage between the parties. In fact, the Supreme Court also ruled in a few cases that the
failure to register a real estate mortgage shall not bar the foreclosure of the mortgage, provided that the mortgage is contained in a
public instrument. While there can be no valid foreclosure of a mortgage contained in a private instrument, the mortgagee is not
without remedy. Under 1357, the mortgagee may require the mortgagor to execute the contract in the form required by law. Therefore,
form is really not a requirement for the validity of a real estate mortgage. At best, form is only required for the enforceability of this
contract.

Antichresis is definitely a solemn or formal contract. Under 2134, the agreement as to the principal and the interest must be
in writing, other wise the contract of antichresis is void.

Unilateral/Bilateral

Pledge is a unilateral contract. Upon the perfection of the pledge, only one of the parties will be obligated, i.e, the pledgee.
(Note: As a real contract, the premise is that upon perfection, the thing pledged has already been delivered to the pledgee.)

Rights and obligations of the creditor

In pledge, under 2104, as a rule, the pledgee has no right to use the thing pledge. The exceptions are:

(1) The creditor was authorized to use the thing pledged; or

(2) The preservation of the thing requires its use.

(Note: The rights of the creditor as to the use of the thing are the same in deposit)

In chattel mortgage and real estate mortgage, the creditor has no right to use the thing mortgaged. In a standard arrangement
of mortgage, nothing is delivered to the creditor; the mortgagor continues to be in possession of the thing mortgaged. Moreover, the
delivery of the thing mortgaged to the mortgagee by virtue of a stipulation of the parties does not affect the mortgage; it continues to
be such. This can be readily understood in the case of chattel mortgage where possession by the mortgagee of the thing mortgaged is
Atty. Uribe Lecture Notes: Partnership Page 10 of 11

necessary for foreclosure. Upon default of the mortgagor, if the thing mortgaged is not delivered to the mortgagee, the mortgagee will
have to replevy the thing mortgaged. So, to avoid this scenario, some chattel mortgages require the delivery of the thing to the
mortgagor.

In antichresis, the creditor has no right to use the thing. Under 2132, the creditor only acquires the right to receive the fruits
of the thing. In fact, under 2136, unless otherwise stipulated, the creditor may even return the thing to the debtor in order to exempt
himself from paying taxes and necessary expenses. In such case, the creditor remains to have the right to receive the fruits but the
possession of the thing is with the debtor.

Pactum commissorium

Pactum commissorium refers to a stipulation in a pledge/mortgage which transfers ownership of the thing pledged/mortgaged
to the pledgee/mortgagee upon the default of the pledgor/mortgagor. Under 2088, it is void. Take note however that only the
stipulation is void, not the entire pledge/mortgage.

This stipulation is void because the remedy of the creditor against the defaulting pledgor/mortgagor is not to appropriate the
thing but to have it sold in a public sale in case of pledge or in a foreclosure sale in case of mortgage ( 2087). However, there is a slight
modification in case of pledge. Under 2112, 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.

Nevertheless, a stipulation in a pledge/mortgage which states that upon the default of the pledgor/mortgagor, the thing
pledged/mortgaged shall be deemed sold to the pledgee/mortgagee where the price will be the unpaid balance is a valid stipulation.
According to the Supreme Court, it is not pactum commissorium. Atty. Uribe agrees. Remember, under the law on sales, even if the
thing is deemed sold upon default of the principal debtor, ownership does automatically pass. In sales, it is delivery which transfers
ownership. Thus, if the thing was in the possession of the pledgor/mortgagor, there will only be transfer of ownership upon the
delivery of the thing pledged/mortgaged. Therefore, this scenario is not covered by pactum commissorium.

In the case of Chu vs. CA, to secure the fulfillment of a monetary obligation, the debtor delivered deposit certificates to the
creditor. When the principal debtor defaulted, the creditor encashed the deposit certificates which were due and demandable. The
debtor claimed that the encashment of the deposit certificates was a pactum commissorium. The Supreme Court held that this was not
pactum commissorium. Deposit certificates pertain to money itself and not to a thing which has to be sold in order to realize a sum of
money for the satisfaction of the claim of the creditor.

Indivisibility principle

The indivisibility principle pertains to the indivisibility of the contract of pledge/mortgage. The principle does not pertain to
the divisibility/indivisibility of its object. Under such principle, until the entire indebtedness is fully paid, the pledge/mortgage will
continue to have full force and effect and the pledgor/mortgagor will have no right to demand the return of the thing
pledged/mortgaged, either in whole or in part. Under 2090, this will not be affected by the fact that the debtors are only jointly liable.

As a general rule, the indivisibility of the pledge/mortgage is not affected by the fact that several things were given in
pledge/mortgage.

Q: A borrowed P100,000.00 from X. To secure the fulfillment of his obligation, A delivered three things to B by way of
pledge: (1) a watch worth P50,000.00; (2) a ring worth P50,000.00; and (3) a necklace worth P20,000.00. A was able to pay
P50,000.00. Can A demand the return of the watch or the ring?

A: No, under the indivisibility principle.

Q: A, B and C borrowed P100,000.00 from X. By agreement, A, B and C’s share in the obligation was 50%, 30% and 20%,
respectively. To secure the fulfillment of the entire obligation, they delivered three things to X by way of pledge: (1) A delivered a
watch worth P50,000.00; (2) B delivered a ring worth P50,000.00; and (3) C delivered a necklace worth P20,000.00. A was able to
pay P50,000.00. Can A demand the return of the watch?

A: No, under the indivisibility principle.

By way of exception, the parties may have agreed that each one of the things given guarantees only a determinate portion of
the debt. In such case, the indivisibility principle will not apply.
Atty. Uribe Lecture Notes: Partnership Page 11 of 11

Q: A borrowed P100,000.00 from X. By agreement, A delivered three things to B: (1) a watch worth P50,000.00 to secure
P50,000.00; (2) a ring worth P50,000.00 to secure P30,000.00; and (3) a necklace worth P20,000.00 to secure P20,000.00. A was able
to pay P20,000.00. Can A demand the return of anything?

A: Yes, the necklace.

The indivisibility principle is not affected by the death of the debtor or the creditor.

Q: X borrowed P300,000.00 from Y. To secure the fulfillment of the obligation, X mortgaged three identical parcels of land.
After X died, his three children, A, B and C, separately inherited the mortgaged parcels of land. A paid P100,000.00 to Y. Can A
demand for the release of the mortgage on the property he inherited?

A: No, under the indivisibility principle.

Q: X borrowed P300,000.00 from Y. To secure the fulfillment of the obligation, X mortgaged three identical parcels of land.
After Y died, his three children, A, B and C, inherited the credit against X. X paid P100,000.00 to A. Can X demand for the release of
the mortgage on one of the properties?

A: No, under the indivisibility principle.

(See 20898 and 20909)

8
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been
paid.
From these provisions is 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.
9
Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.