Bar 2024

Credit Transactions
Reviewer
Presented by
Atty. Jannet Regalado
Credit Transactions Bar 2024 Atty. Jannet Regalado

Contract
of Loan
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a loan in general?

A contract where:
One of the parties delivers to another, either something not consumable so that the latter may
use the same for a certain time and return i t — the contract is one of commodatum; or
One of the parties delivers to another money or other consumable thing upon the condition
that the same amount of the same kind and quality shall be paid—it is simply called a loan or a
mutuum (Art. 1933)*
Note: this contract is governed by the rules on the requisites and validity of contracts in a general
way

*New Civil Code unless stated otherwise

Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the kinds of loans?

Commodatum
Where the bailor delivers to the bailee a non-consumable thing so that the latter may use it for a
certain time and return it
XPN: consumable thing that is merely for exhibition

Mutuum
Where one of the parties delivers to another money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid
“Consumable thing”: a thing which cannot be used in a manner appropriate to their nature
without being consumed (Art. 418)
There is a transfer of ownership
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the differences between commodatum and mutuum?

Commodatum Mutuum

GR: Non-consumable and non-fungible

A s to object XPN: Consumable goods that are merely for Fungible and consumable (Arts. 418 and 1933)
exhibition (Art. 1936)

GR: Gratuitous
A s to cause Essentially gratuitous (Art. 1933) XPN: May be onerous when there is a stipulation
to pay interest

For use or temporary possession (Art. 1935) For consumption

A s to purpose

Involves real or personal property (Art. 1937) Involves personal property

A s to subject matter
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the differences between commodatum and mutuum?

Commodatum Mutuum

A s to ownership
The thing is retained by the bailor The ownership passes to the debtor
of the thing

There is no obligation to return the very

A s to return of
The same thing loaned same thing loaned but to pay the same
the thing
amount of the same kind and quality

A s to the risk of The risk is on the bailee even if the thing

loss The risk is on the bailor since he is the owner is lost because of a fortuitous event

A s to the time of GR: Upon the lapse of the agreed term of the contract Payment is deemed fulfillment of the
XPN: The bailor may demand the return of the thing loaned before
return obligation
the expiration of the term in case of urgent need (Art. 1946)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the elements of a

commodatum?
1.Delivery of a non-consumable thing; and
2. Obligation to return the thing (Art. 1933)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the characteristics of

commodatum?
1. Real contract – Delivery of the thing loaned is necessary for the perfection of the
contract (Art. 1316)
2. Nominate contract – It has been given a specific name by the Civil Code
3. Principal contract – Its existence is not dependent on another contract
4. Informal contract – No particular form is required
5. Gratuitous contract – The bailee does not pay the bailor for the use of the thing
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the kinds of

commodatum?
Ordinary commodatum
Use of the bailee is for a certain period of time (Art. 1933)

Precarium
The bailor may demand the thing loaned at will where:
There is no stipulation as to the duration of the contract or use of the thing loaned or;
Use of the thing is merely tolerated by the owner (Art. 1947)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the obligations of a

bailee in a commodatum?
1.Take good care of the thing with the diligence of a good father of a family (Art. 1163)
2. To use the thing loaned only for the purpose for which it was loaned and for no other
purpose (Arts. 1935, 1939[2], 1946)
3. To pay ordinary expenses for the use and preservation of the thing loaned (Art. 1941)
4. To pay a portion of extraordinary expenses arising from the actual use of the thing which
shall be borne by both the bailor and the bailee, even though the bailee acted without
fault, unless there is a contrary stipulation
5. To return and not to retain the thing loaned except for damages mentioned in Art. 1951,
(Arts. 1933, 1944, 1946)
Credit Transactions Bar 2024 Atty. Jannet Regalado

When is the bailee in a commodatum liable for the

loss of the thing which is the object of the contract
even if such loss is due to fortuitous event?
1.If he devotes the thing to any purpose different from that which it has been loaned
2. If he keeps it longer than the period stipulated, or after the accomplishment of the use
which the commodatum has been constituted
3. If he lends or leases the thing to a third person, who is not a member of his household
4. If, being able to save either the thing borrowed or his own thing, he chose to save the
latter (Art. 1942)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the right of retention?

The bailee has no right of retention even if the bailor owes him something
XPN: Hidden defects under Art. 1951 where the bailor who is aware of flaws did not advise
the bailee
In this situation, the bailee is liable to the bailee for damages suffered due to the
flaws
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the obligations of a

bailor in a commodatum?
1. To take good care of the thing with the diligence of a good father of a family (Arts. 1169)
2. To use the thing loaned only for the purpose for which it was loaned and for no other
purpose (Art. 1935 in relation to Arts. 1939[2] and 1946)
3. To pay a portion of extraordinary expenses arising from the actual use of the thing which
shall be borne by both the bailor and the bailee, even though the bailee acted
without fault, unless there is a stipulation to the contrary (Art. 1949[2])
4. To return and not to retain the thing loaned except for damages mentioned in Art.
1951 (Arts. 1933, 1944, 1946)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Simple
Loan
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the obligations of a

borrower in a simple loan or mutuum?
1.Pay the creditor an equal amount of the same kind and quality (Art. 1953)
2. On the period of payment:
a. If no period agreed upon, the amount is payable immediately;
b. If the parties intended a period but there is no specified date, the Court may fix the
period (Art. 1197);
c. The loan becomes payable immediately when the debtor loses the right to make use
of the period under Art. 1198;
d. Payment of interest if there is a stipulation in writing (Art. 1956)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the two kinds of

interest?
Monetary or conventional interest
Refers to the compensation set by the parties for the forbearance or use of money

Compensatory interest
Refers to the interest that may be imposed by the Courts or by law as penalty for damages
arising from delay in paying a fixed sum of money or delay in paying damages (Hun Hyung
Park v. Eung Won Choi, G.R. No. 220826 [2019])
Credit Transactions Bar 2024 Atty. Jannet Regalado

When will interest due and

unpaid earn interest?
GR: Interest due and unpaid shall earn interest
XPNs:
a. The interest due shall earn legal interest of 6 % per annum from the time it is judicially
demanded until fully paid, although the obligation may be silent on this matter (Art.
2212)
b. If there is an agreement to this effect (Art. 1959).
Note: Interest on interest refers to interest imposed on monetary or conventional interest
(Sps. Abella v. Sps. Abella, G.R. No. 195166 [2015])
Credit Transactions Bar 2024 Atty. Jannet Regalado

When should interest be paid?

No interest shall be due unless stipulated in writing (Art. 1956)
Credit Transactions Bar 2024 Atty. Jannet Regalado

When is interest due even if it is

not stipulated expressly?
1. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest,
which is 6 % (Art. 2209)
2. Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the rate of legal interest?

Effective July 1, 2013, the rate of interest for a loan or forbearance of any money, good or
credits and rate allowed in judgments, in the absence of an express contract as to such
rate interest shall be 6 % per annum (BSP Circular No. 799, 2013)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the guidelines in the imposition of legal

interest?
When the obligation is breached, and it consists in the payment of a sum of money (loans,
forbearance of money, goods, credits or judgements), and the debtor incurs in delay
The interest due should be that which has been stipulated in writing, provided it is not
excessive or unconscionable
In the absence of a stipulated reckoning date, it shall be computed from default
(extrajudicial or judicial demand under Art. 1169) until full payment without compounding
any interest unless such is stipulated by the parties, by regulation or law
Note: Interest due on the principal accruing as of judicial demand shall separately earn
legal interest based on the BSP’s prescribed interest rate from the time of judicial
demand until full payment
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the guidelines in the imposition of legal

interest?
When the obligation is breached, and it consists in the payment of a sum of money (loans,
forbearance of money, goods, credits or judgements), and the debtor incurs in delay
In the absence of stipulated interest, the rate of interest on the principal amount shall be the
BSP’s prevailing and prescribed interest which shall be computed from default (from judicial
or extrajudicial demand under Art. 1169) until full payment without compounding unless
compounded interest is expressly stipulated by law or regulation
Interest due on the principal as of the time of judicial demand shall separately earn legal
interest based on the BSP’s prevailing rate from the time of judicial demand until full
payment
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the guidelines in the imposition of legal

interest?
In case of breach in cases where the obligation is not one of a loan or forebearance of money,
goods, credits or judgment and such is breached
There shall be interest on the amount of damages awarded based on the Court’s discretion
at the prevailing rate of legal interest under Arts. 2210 and 2011
However, no interest shall be imposed on unliquidated claims/damages until the demand can
be established with reasonable certainty
Where the amount of the damages/claims is established with reasonable certainty, the
prevailing legal interest shall begin to run from the of extrajudicial or judicial demand
under Art. 1169, until full payment
When there is no certainty as to the time the demand was made, interest shall begin to
run only from the date of the Court’s decision until completion of payment
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the guidelines in the imposition of legal

interest?
Based on Lara’s Gifts v. Midtown Industrial Sales, G.R. No. 225433 (2019), the base for
computing interest shall be on the final judgment with respect to the principal amount without
compounding unless the latter is stipulated expressly by law or regulation.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the rules governing an award of interest

for unliquidated claims?
For liquidated claims
The compensatory interest due shall that which is stipulated by the parties in writing as the
penalty or compensatory interest rate, provided it is not unconscionable
In the absence of a stipulated penalty or compensatory interest rate, or if these rates are
unconscionable, the compensatory interest shall be 6 %
Interest on stipulated compensatory interest shall accrue at the stipulated interest rate
(compounded) from the stipulated reckoning point
In the absence of stipulated reckoning date, shall be computed from default, i.e., from
extrajudicial or judicial demand, until full payment
In the absence of a stipulated compounded interest rate of if this rate is unconscionable, legal
interest at the rate of 6 % shall apply from the time of judicial demand until full payment
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the rules governing an award of interest

for unliquidated claims?
For unliquidated claims
Compensatory interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6 % per annum
However, no compensatory interest shall be adjudged on unliquidated claims or damages until the
demand can be established with reasonable certainty
When such certainty cannot be established at the time demand is made, the interest shall
begin to run only from the date of judgment of the trial court until full payment
The actual base for the computation of interest shall, in any case, be on the principal amount
finally adjudged (Lara’s Gifts v. Midtown Industrial Sales, G.R. No. 225433 [2019])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a finance charge?

Refers to interest, fees, service charges, discounts, and such other charges incident
to the extension of credit under the “Truth in Lending Act”
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can an interest stipulated in an

agreement be modified?
Any change of the stipulated interest must be mutually agreed upon, otherwise, it is
not binding (Sps. Silos v. PNB, G.R. No. 181045 [2014])
Moreover, a party’s authority to unilaterally apply the prevailing market rate without
specifying the market-based reference and securing the written assent of the other
party violates the principle of mutuality of contracts, making the repriced monetary
interest void (Goldwell Properties Tagaytay Inc. v. Metropolitan Bank and Trust Co.,
G.R. No. 209837 [2021])
Credit Transactions Bar 2024 Atty. Jannet Regalado

After extrajudicial demand is made, should the time in which

an injunctive order preventing a party from paying was in
effect excluded in the computation of the legal interest?
No, the legal interest is still due during the time in which the injunction is in effect
In the absence of stipulation, the rate of interest shall be 6 % per annum to be computed from
default (ex. judicial or extrajudicial demand) subject to Art. 1169 (Equitable PCI Bank v. Manila
Adjusters & Surveyors, Inc., G.R. No. 166726 [2019])
Credit Transactions Bar 2024 Atty. Jannet Regalado

How can compounding of interest

be imposed?
It should be in a loan agreement in order to be valid
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when a usurious interest

is imposed in a loan agreement?
The stipulation on the usurious interest is void
However, the unpaid principal debt should still be paid as a valid obligation. (First
Metro Investment v. Este del Sol Mountain Reserve, Inc. G.R. No. 141811 [2001])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the difference between a floating

rate of interest and an escalation clause?
Escalation cause Floating rate of interest

Variable interest rate based on a reference rate

Stipulations which allow for the increase or
based on the market dynamics and the rate
decrease of the original fixed interest rate
agreed by the parties

By virtue of this clause, the method by which fixed

Means that the rate is not fixed
rates may be increased
Credit Transactions Bar 2024 Atty. Jannet Regalado

Guaranty and
Suretyship
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a contract of guaranty?

A contract whereby a guarantor binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so (Art. 2047[1])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the various classifications of guaranty?

a) Personal – Whereby a credit is given by the person who guarantees the fulfillment of the principal
Guaranty in the
obligation (Art. 2047)
broad sense
b) Real – Where the guaranty is property movable or immovable

a) Conventional – One constituted by agreement of the parties

b) Legal – One imposed by virtue of a provision of law
As to origin
c) Judicial – One required by a court to guarantee the eventual right of one of the parties to the case
(Art. 2051[1])

a) Gratuitous – One where the guarantor does not receive any price or remuneration for acting as such
As to
(Art. 2048)
consideration
b) Onerous – One where the guarantor receives valuable consideration

a) Single – One constituted solely to guarantee or secure the debtor of the principal obligation
As to person b) Double/sub-guaranty – One constituted to secure the fulfillment by the guarantor of a prior
guaranteed guarantee (Art. 2051[2])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the various classifications of guaranty?

As to whether it a) Continuing – One where it is given as security for future debts, the amount of which is not known yet
covers future b) Non-continuing – One where the contract does not stipulate that the security covers future debts
debts (Art. 2053)

a) Definite – one where the guaranty is limited to the principal obligation only, or to a specific portion
As to scope and thereof;
extent b) Indefinite – one where the guaranty includes not only the principal obligation but also the
accessories including judicial costs (Art. 2055[2])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the form required in a

contract of guaranty?
A guaranty is not presumed, it must be express and cannot extend to more than what is
stipulated therein (Art. 2055)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the remedy of the guarantor when a contract

of guaranty was entered into without the knowledge or
consent, or against the will of the principal debtor?
He can recover only insofar as the payment has been beneficial to the debtor (Art. 1236)
He cannot compel the creditor to subrogate him in the creditor’s rights such as those arising
from a mortgage, guaranty or penalty (Arts. 1237 and 2050)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What obligations may be secured by

a guaranty?
A guaranty cannot exist without a valid obligation
However, it may be constituted to guarantee:
a.The performance of a voidable or unenforceable contract;
b.The performance of a natural obligation (Art. 2052);
c . A s a security for future debts, the amount of which is not yet known (Art. 2053);
d.Over conditional obligations. (Art. 2053)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a continuing guaranty?

A guaranty may be given as a security for future debts, the amount of which is not yet known
(Art. 2053)
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 (Dino v. CA, G.R. No. 89775 [1992])
There can be a guarantee or suretyship for future debts despite the fact that the amount is not
yet ascertainable
However, the creditor cannot chase the guarantor when the debt is not fixed, demandable
and can be determined
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a double or sub-guaranty?

One constituted to guarantee the obligation of a guarantor
It should not be confounded with guaranty wherein several guarantors concur to pay the
obligation of a debtor who fails or does not pay
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the differences between a guaranty and suretyship?

Guaranty Suretyship

The surety assumes liability as a regular party to the

The liability depends upon an independent contract
agreement to pay the obligation if the principal
debtor fails to do so The surety is primarily liable in that he undertakes
A s to liability directly for the payment of the obligation without
The guarantor secondarily liable in that he reference to the solvency of the principal, and is
contracts to pay if, by the exercise of due therefore responsible once the latter defaults, without
diligence, the debt cannot be paid any demand by the creditor upon the principal
whatsoever or any notice of default

A s to the nature of The guarantor serves as the insurer of the

The surety is the insurer of the debt
what is insured solvency of the debtor
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the differences between a guaranty and suretyship?

Guaranty Suretyship

The guarantor does not contract that the

The surety will pay the creditor without qualification or
principal will pay but that said principal shall be
A s to nature of condition if the principal debtor does not pay
able to pay
responsibility

The main function assumed by the surety is greater than that of the guarantor

The guarantor can avail of the benefit of

A s to excussion excussion and division in case the creditor The surety cannot avail of this benefit
proceeds against him

A s to non- The guarantor is not responsible to take notice The surety is required to know every non-performance or
performance of the non-performance of the principal default of the principal
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can there be a claim against the

guarantor for unliquidated debts?
No, there can be no claim against the guarantor until the debt is liquidated (Art. 2053)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the extent of the guarantor’s

liability?
If the guaranty is definite, it is limited in whole or in part to the principal debt, to the exclusion
of accessories
If the guarantee is simple or indefinite, it shall comprise not only the principal obligation but
also its accessories, including judicial costs
For judicial costs, the guarantor shall only be liable for those costs incurred after he has been
judicially required to pay (Art. 2055)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when a guarantor binds

himself for more than the principal debt?
A guarantor may bind himself for less but not for more than the principal debt with respect to
the amount and the onerous nature of the conditions
Should he bind himself for more, his obligations shall be reduced to the limits of that of the
debtor (Art. 2054)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the qualifications of a guarantor?

1.Integrity;
2. Capacity to bind himself; and
3. Sufficient property to answer for the obligation which he guarantees (Arts. 2056-2057)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can the creditor demand another guarantor

in place of the original guarantor?
Yes, if the guarantor should be convicted in the first instance of a crime involving dishonesty or
should become insolvent
XPN: When the creditor has required and stipulated that a specified person should be the
guarantor (Art. 2057)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the benefits and rights of a

guarantor?
1.Excussion (Art. 2058)
2. Division (Art. 2065)
3. Right of reimbursement or indemnity (Art. 2066)
4. Right of Subrogation (Art. 2067)
5. Right to proceed against debtor before payment (Art. 2071)
6. Right to contribution of a guarantor who pays if there is solidary liability (Art. 2073)

Note: In all of the above, the action of the guarantor is to obtain release from the guaranty or to
demand a security that shall protect him from any suits or proceedings lodged by the creditor and
from the danger of insolvency of the debtor
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when a guaranty is undertaken

without the knowledge or against the debtor’s will?
A s to third persons who pay, the guarantor can recover only insofar as the payment has been
beneficial to the debtor (Art. 1236)
Said guarantor cannot compel the creditor to subrogate him in his rights (Art. 1237)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What if the guaranty is undertaken with

knowledge and consent of the debtor?
The third person is subrogated to all the rights which the creditor had against the debtor (Art.
2067)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can the liability of a guarantor exceed the

debtor’s principal obligation?
The guarantor cannot bind himself in a manner that exceeds the obligation of the debtor with
respect to the amount and the nature of the contract
If he binds himself to this effect, his liability shall be reduced to that of the debtor’s
obligation
However, the guarantor may always choose to commit for less that that of the principal
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the exceptions to above rules?

1.In the case of interests, lawyers’ fees and costs of litigation, these are recoverable
a.The creditor may chase the surety for these expenses as part of damages even in the
absence of stipulation and even if the surety would become exposed to liability for
payment for an amount more than the total amount in a bond
2.When the surety’s obligation to pay is a result of its failure to pay when demand was made and
for having compelled the creditor to go to the courts to get the payment it deserves
3 . A s for penalties, the surety can be held responsible if that is indicated in the bond because of
aforementioned violation
Credit Transactions Bar 2024 Atty. Jannet Regalado

When can a guarantor run against debtor

before payment?
GR: The guarantor has no basis to claim from the debtor until after it pays the obligation
XPN s under Art. 2071:
a.When guarantor is sued for the payment;
b.When the debtor agreed to be relieved from the guaranty within a specified period and this
period has expired;
c.When the debt has become demandable by reason of expiration of the period for payment;
d.In case of insolvency of the principal debtor;
e.After lapse of 10 years, when the principal has no fixed period for its maturity, unless it be of
such nature that it cannot be extinguished except within a period longer than 10 years;
f.Reasonable ground to fear the abscondment of the principal debtor;
g.If the principal debtor is in imminent danger of being insolvent.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the rights of a guarantor who pays the

creditor?
1. The right to be indemnified by the principal debtor and the payment includes:
a. total amount of the debt;
b. legal interest from the time the payment was made known to the debtor even if it did not
earn interest for the creditor;
c. expenses incurred by the guarantor after having notified the debtor that payment has been
demanded of him and d) damages, if due under Art. 2066
2. The right of subrogation under Art. 2067
3. The right to sue either the person requesting him to guarantee the debt of a third person or the
latter (Art. 2072)
4. The right to obtain or demand a security under Art. 2071
5. The right to raise defenses which the debtor would have interposed against the creditor except
those which are purely personal to the debtor (Art. 2074/2081)
Credit Transactions Bar 2024 Atty. Jannet Regalado

When does a co-guarantor have a right

to contribution?
1.When one guarantor has paid the debt to the creditor
2. When a payment was made because of judicial demand or when the principal debtor is
insolvent
3. When the guarantor who made a payment is asking for reimbursement from each of the co-
guarantors the particular share which is owing to him proportionately
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when a guaranty is undertaken

without the knowledge or against the debtor’s will?
● As to third persons who pay, the guarantor can recover only insofar as the payment has been
beneficial to the debtor. (Art. 1236)
● Said guarantor cannot compel the creditor to subrogate him in his rights
Credit Transactions Bar 2024 Atty. Jannet Regalado

Explain the right of the creditor to

excussion under Art. 2058
The rule is that there should first be an exhaustion of all legal remedies against the debtor.
It is not sufficient that the debtor appears to be insolvent
Note: Art. 2058 is not applicable to a suretyship
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens if the party waives

excussion?
The contract will no longer be a guaranty and will be considered a suretyship under Art.
2047 of the Civil Code (Trade Investment Development Corporation v. Philippine Veteran’s
Bank, G.R. No. 233850 [2019])
Credit Transactions Bar 2024 Atty. Jannet Regalado

Does a sub-guarantor enjoy the benefit of

excussion?
Yes, both shall enjoy the benefit with respect to the guarantor and to the principal debtor
under Art. 2064
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the exceptions to the benefit of excussion?

If the guarantor:
1.expressly waived or renounced it;
2. has bound itself, himself/herself solidarily with the debtor so the liability is one of a surety;
3. guarantees the solvency of the debtor in case the latter is insolvent;
4. did not set up the process of excussion against the creditor upon the latter’s demand for
payment from him, her or it;
5. absconded or cannot be sued within the Philippines unless he has left a representative
6. is a judicial bondsman or a sub-surety (Art. 2084)
7. when the debt is a natural or unenforceable obligation (Art. 2052)
8. if the guarantor does not set up such benefit against the creditor upon the latter’s demand
for payment from him (Art. 2060)
9. if it may be presumed that an execution on the property of the principal debtor would not
result in the satisfaction of the obligation (Art. 2059)
10. when the debt is a natural or an unenforceable obligation (Art. 2052)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the duties of the guarantor before

he may exercise the benefit of excussion?
1.He must set it up against the creditor upon the latter’s demand for payment from him;
2. He must point out to the creditor any available property of the debtor within Philippine
territory sufficient to cover the amount of the debt (Art. 2060)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens if the creditor fails to exhaust

the property pointed out by the guarantor?
The loss shall be suffered by the creditor to the extent of said property due to the insolvency
of the debtor due to negligence (Art. 2061)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the rights of the guarantor when

the creditor sues the principal debtor?
1. The guarantor must be notified of the action by the creditor against the principal debtor
alone;
2. The guarantor may set up such defenses as are granted him by the law; and
3. The guarantor has the right to be heard before an execution can be issued against him
where he is not a party to the case (Towers Assurance Corp. vs. Onorama Supermart, G.R. No.
L-4 5 8 4 8 [1977])
Credit Transactions Bar 2024 Atty. Jannet Regalado

What rights does the guarantor who pays

the creditor have?
1. The right to be indemnified by the principal debtor for: a) total amount of the debt; b) legal
interest from the time payment was made known to the debtor, even though it did not earn
interest for the creditor; b) the total amount of the debt; c) the expenses incurred by the
guarantor after having notified the debtor that payment had been demanded of him and d)
damages, if they are due (Art. 2066)
2. The right to subrogation (Art. 2067,)
3. The right to sue after the person requesting him to guarantee the debt of a third person or
the latter (Art. 2072)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the exceptions to the right of the

guarantor to be indemnified by the principal debtor?
1. When there is payment by a third person who does not intend to be reimbursed, which is
deemed a donation (Art. 1238)
2. Where the guaranty is constituted without the knowledge or against the will of the principal
debtor
a.The guarantor can recover only insofar as the payment has been beneficial to the debtor
(Art. 2050)
3. Where there is waiver on the part of the guarantor (De Leon, Credit)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when the guarantor pays

the debt without notifying the debtor?
The debtor may enforce against the guarantor all the defenses which he could have set up
against the creditor at the time payment was made (Art. 2068)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the rights of the guarantor

against the debtor?
1.Indemnification: total amount of debt, legal interest, expenses, damages (Art. 2066)
2. Subrogation
3. Ability to compromise
4. Right to obtain or demand a security (Art. 2071)
Credit Transactions Bar 2024 Atty. Jannet Regalado

When does an extension of the term

discharge the guarantor/surety?
1.For a definite period
2. By virtue of an agreement which is enforceable amongst the creditor and principal
3. When the surety did not consent or when there was a reservation of rights
Credit Transactions Bar 2024 Atty. Jannet Regalado

Real Estate
Mortgage
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the elements of a valid

real estate mortgage?
1. The existence of a valid obligation;
2. The mortgage was constituted to secure the fulfillment of the principal
obligation;
3.The mortgagor is the absolute owner of the thing or property mortgaged;
4.The mortgagor has free disposal of the property mortgaged OR
The mortgagor has legal authority to enter into the mortgage agreement
5.The thing subject to a mortgage may be disposed of or alienated in order that
the creditor be paid when the principal obligation becomes due;
6.The mortgage is contained in a public document which can be recorded in the
Registry of Property to be binding upon third parties.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What may be the object of a real

estate mortgage?
1. Immovables and
2. Alienable real rights under Art.2124 of the Civil Code
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the effect of a real estate

mortgage once constituted?
● The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation
for whose security it was imposed under Art. 2126 of the Civil Code
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can a mortgage credit be sold?

● Under Art. 2126 of the Civil Code, a mortgage credit may be alienated or assigned to
a third persons subject to the appropriate legal formalities.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the effect of a stipulation in a

mortgage contract forbidding the
owner from selling or alienating the
mortgaged property?
● Under Art. 2130 of the Civil Code, a stipulation forbidding the owner from alienating
the immovable mortgaged shall be void.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the effect of the invalidity of

the mortgage to the principal obligation?
● The main obligation remains to be valid and the mortgage remains to be proof
of the personal obligation.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the right of the creditor against a

transferee of a mortgage property?
● The creditor may actually claim from a third person in possession of a
mortgage immovable the payment of the part of a credit secured by a property
which said third person possesses under the terms and within the formalities
which the law states under Article 2130 of the Civil Code.
Credit Transactions Bar 2024 Atty. Jannet Regalado

Is registration of the mortgage necessary

for its validity?
● No, but registration is needed to bind third persons.
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can a co-owner mortgage a real

property?
● Yes, a co-owner of a property can sell the portion belonging to him/her under
Art. 493 of the Civil Code. However, the mortgage shall be confined to the
portion which may be allotted to him upon the co-ownership’s termination.
(Bulatao vs. Estonactoc, G.R. No. 235020, 2019)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Explain the concept of a mortgagee

in good faith.
● A mortgagee has a right to rely in good faith on the mortgagor’s certificate of
title of the property given as security in the absence of any sign that may
arouse suspicion and has no obligation to do a further investigation.
● The basis of this concept is the mirror doctrine which enunciates that every
person who deals with registered land may confidently and safely rely on the
correctness of the title covering the property and is not expected to look
beyond the title.
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can future property be mortgaged?

● It cannot as a general rule.
● To be able to mortgage future property, there must be a mortgage supplement after the
mortgagor acquires ownership of the properties or after those properties come into
existence.
● However, in the People’s Bank vs. Dahican case (G.R. No. L-17500, 1967), a stipulation
subjecting improvements which the mortgagor may subsequently acquire, install or use in
connection with the real property mortgaged belonging to the mortgagor is valid.
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the extent of the mortgage liability?

● GR: A mortgage is usually limited to the amount mentioned in the contract
● XPN: The amounts named as consideration in a contract of mortgage do not limit the amount
for which the mortgage may stand as security, if from the four corners of the contract or
the instrument, the intent to secure future and other indebtedness could be gathered.
(Ramos v. PNB, G.R. No. 178218, 2011)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a blanket mortgage OR

a dragnet clause
● Stipulation in the mortgage contract that extends or expands the coverage of a mortgage to
advances or loans other than those already obtained or specified in the contract.
● A mortgage with a dragnet clause is in the nature of a continuing guaranty.
● It constitutes an exception to the rule that an action to foreclose a mortgage must be
limited only to the amount mentioned in the mortgage contract. ( Panacan Lumber Co. v.
Solidbank Corporation, G.R. No. 226272, September 16, 2020)
● XPN: The amounts named as consideration in a contract of mortgage do not limit the amount
for which the mortgage may stand as security, if from the four corners of the contract or
the instrument, the intent to secure future and other indebtedness could be gathered.
(Ramos v. PNB, G.R. No. 178218, 2011)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Explain the concept of a dragnet clause.

Is it a valid clause?
● It is one which is particularly phrased or structured to cover or subsume all debts of a
past or future origin in the contract.
● It is a valid clause provided that the future debts secured by the real estate mortgage
must be specifically described in the contract.
Credit Transactions Bar 2024 Atty. Jannet Regalado

Is a dragnet clause in the nature of

a continuing guaranty?
● Yes. It is an exception to the rule that an action to foreclose a mortgage must
be limited to the amount mentioned in the mortgage contract. (PCSP vs. New
Dagupan Metro Gas Corp., G.R. No. 173171, 2012)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the difference between a dragnet

clause and an acceleration clause?
1.Dragnet clause
a. Stipulation in the mortgage contract that extends or expands the coverage of a mortgage
to advances or loans other than those already obtained or specified in the contract.
b. It may refer to past or future debts.

2. Acceleration clause
a. It is a stipulation which stipulates or states that in the event of the mortgagor’s default
in paying an installment debt, the whole of the unpaid sum shall be automatically due
and payable. (Luzon Development bank vs. Conquilla, 2005)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Explain the concept of “reliance on

security test.”
● When there are numerous obligations and collaterals, a mortgagor normally
acquires additional loans for which additional security is given.
● However, it could not be concluded that said loan was made in reliance solely
on the first/original security which contains the dragnet clause but actually,
on the new security provided.
● The dragnet clause in the first loan is to be considered as a continuing offer by
the borrower to acquire additional loans under the first security transaction.
So, when the lender accepted a different security, it did not accept the offer
per Prudential vs. Alviar case, G.R. No. 150197, 2005)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens when the mortgaged

property is transferred or sold to
another person?
● The transfer or sale does not have an effect upon the mortgage.
● As such, the transferee or buyer is bound to acknowledge and respect the mortgage.
(Garcia vs. Villar Case, G.R. No. 158891, 2012)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can a collateral or security be sold during

the pendency of the mortgage agreement?
● Yes, any proviso or stipulation that prohibits the owner from selling the mortgaged
property is void. (Art. 2130)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is a pactum commissorium?

● The mortgagee’s consolidation of ownership over the mortgage property upon the
mortgagor’s mere failure to pay the obligation is the essence of a pactum commisorium.
● The mortgagor’s default does not operate to automatically vest on the mortgagee the
ownership of the property mortgaged or encumbered. Such arrangements are contrary
to morals and public policies; thus, they are void. (Dacquel v. Sotelo, G.R. No. 203946,
August 04, 2021
Credit Transactions Bar 2024 Atty. Jannet Regalado

When is the remedy of foreclosure

available to the creditor?
● When the principal obligation is not paid when due.
● In this situation, the mortgagee has the right to foreclose that mortgage and to have
the property seized and sold and to apply the proceeds thereof to the payment of
the principal obligation. (Landrito vs. CA, G.R. No. 133079, August 9, 2005)
Credit Transactions Bar 2024 Atty. Jannet Regalado

Sum up the differences between judicial and extrajudicial foreclosure.

Credit Transactions Bar 2024 Atty. Jannet Regalado

Sum up the differences between judicial and extrajudicial foreclosure.

Credit Transactions Bar 2024 Atty. Jannet Regalado

Can the remedies of debt collection and

foreclosure be availed of simultaneously?
● These remedies are mutually exclusive.
● Both constitutes a demand for payment and the foreclosure arise from one cause
of action. Thus, the invocation or grant of one remedy precludes the other.
● The mortgage is subsidiary to the debt and both refer to one and the same
obligation. As such, there is only one cause of action for a single breach.
(see Pineda vs. De Vega, G.R. No. 233774, 2019)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the prescriptive period to recover

the deficiency after foreclosure?
● 10 years from the accrual of the right of action (Arts. 1142,1144 )
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the rule with respect to the

family home?
● Under Art. 155 of the Family Code, the family home is exempt from execution, forced sale
or attachment, except for debts secured by mortgages on the premises before or after
such constitution.
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can a mortgagee recover the deficiency?

● If the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure
of a mortgage, the mortgagee is entitled to ask for deficiency from the debtor.
(BPI Family Savings Bank v. Avenido, G.R. No. 175816, 2011)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the effect of a failure to

redeem the property?
● There shall be consolidation of title in favor of the purchaser who now acquires the right
of possession per Spouses Gatuslao. (Spouses Gatuslao vs. Yanson, G.R. No. 191540)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What happens if the price is inadequate

in a foreclosure sale?
● The purchaser becomes entitled to consolidation of the title
● Thus, they become entitled to the possession. (Spouses Gatuslao vs. Yanson, G.R. No. 191540)
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the effect of inadequacy of price

in a foreclosure sale?
● GR: The price is not an issue because there is the remedy of redemption.
● XPN: However, it the price is so inadequate, the Court may set aside the sale. ( Sulit vs. CA,
G.R. No. 11927, 1997).
Credit Transactions Bar 2024 Atty. Jannet Regalado

What are the kinds of redemption?

● There are two kinds - Equity of Redemption and Right of Redemption.
1. Equity of redemption applies to judicial foreclosures.
a. It is the right of the mortgagor to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage within the 90-120 period from the date of the
service of the order of foreclosure or even thereafter but before the confirmation of the sale.
(Top Rate International Services Inc. vs. IAC, G.R. No. 67496, July 7, 1986).
b. His rights are strictly subordinate to the superior lien of the first mortgagee.
2. On the other hand, the right of redemption applies to extrajudicial foreclosure of real mortgage.
a. The right of redemption is also available in judicial foreclosure in cases where the mortgagee is a
bank under R.A. 8791.
b. It is the right of the mortgagor to redeem the mortgaged property within one (1) year from the
date of registration of the certificate of sale under Act. No.3135, Sec. 6
Credit Transactions Bar 2024 Atty. Jannet Regalado

When can a writ of possession be issued?

● Only in an extrajudicial foreclosure and this must be requested or asked for within the
redemption period per Section 7, Act 3135.
● It can also be asked after the lapse of the redemption period based on the purchaser’s
right of ownership per the Torrecampo vs. Wealth Devt. Bank case (G.R. No. 221845).
Credit Transactions Bar 2024 Atty. Jannet Regalado

Can a creditor waive the security?

● Yes, the mortgagee may waive the security to foreclose his mortgage and file an action
for recovery of the debt.
● However, these remedies are alternative and not cumulative.
● The mortgagee can exercise the following options if the debtor-mortgagor dies:

1. Waive the mortgage and claim the entire debt from the mortgagor’s estate as an
ordinary claim.
2. Judicially foreclose the mortgage and prove the deficiency
3. Rely on the mortgage exclusively without filing a claim for deficiency
Credit Transactions Bar 2024 Atty. Jannet Regalado

What is the doctrine of indivisibility

of mortgage?
● GR: A mortgage is indivisible
● XPNs:
1. Where each one of several things guarantee a determinate portion of the credit;
2. When only a portion of the loan was released to the borrower.
3. Where there was a failure of consideration
Credit Transactions Bar 2024 Atty. Jannet Regalado

When does the doctrine of indivisibility

not apply?
● Once a mortgage is extinguished by reason of foreclosure.
● Nothing in the law prohibits a piece-meal redemption of properties sold at
one foreclosure procedure (Yap v. Dy, G.R. No. 171991, 2011)
Credit Transactions Bar 2024 Atty. Jannet Regalado

How should a redemption be done

or executed?
● In Torbela vs. Rosario, G.R. Nos. 140528 & 140553, the Supreme Court ruled that it
in redemption, it is not sufficient that a person offering to redeem manifests his
desire to do so.
● The statement of intention must be accompanied by an actual and simultaneous
tender of payment.
● If there be a disagreement over the redemption price, the redemptioner may
preserve his right through judicial action which must be filed within the
redemption period of one year.
Bar 2024

Credit Transactions
Reviewer
Presented by
Atty. Jannet Regalado