A Compilation of Bar Questions and Suggested Answers Civil Law

UNIVERSITY OF ASIA AND THE PACIFIC
Institute of Law and Governance

School of Law
A COMPILATION OF BAR QUESTIONS AND SUGGESTED ANSWERS

CREDIT TRANSACTION
Semester AY 2018-2019
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Contents
CONTRACT OF LOAN ..................................................................................................................................... 0
COMMODATUM............................................................................................................................................ 3
SIMPLE LOAN .............................................................................................................................................. 10
DEPOSIT....................................................................................................................................................... 20
PERSONAL SECURITY: GUARANTY AND SURETYSHIP .................................................................................. 27
REAL SECURITY ............................................................................................................................................ 29
REAL ESTATE MORTGAGE ........................................................................................................................... 38
PLEDGE ........................................................................................................................................................ 55
LETTER OR CREDIT AND TRUST ................................................................................................................... 61
ANTICHRESIS ............................................................................................................................................... 67
CHATTEL MORTGAGE .................................................................................................................................. 71
FINANCIAL LEAESE ...................................................................................................................................... 87
ANTI MONEY LAUNDERING......................................................................................................................... 89
BANK SECRECY LAW .................................................................................................................................... 91
FINANCIAL DISTRESS - INSOLVENCY............................................................................................................ 95
TRUST RECEIPTS LAW................................................................................................................................ 101
TRUST RECEIPTS LAW................................................................................................................................ 109
WAREHOUSE RECEIPTS LAW .................................................................................................................... 110
CONTRACT OF LOAN
1996 BAR EXAMINATION

TOPIC: SIMPLE LOAN
QUESTION:
In the province, a farmer couple borrowed money from the local merchant. To guarantee payment,
they left the Torrens Title of their land with the merchant, for him to hold until they pay the loan.
Is there a:
a. Contract of pledge
b. Contract of mortgage
c. Contract of antichresis
d. None of the above? Explain.
SUGGESTED ANSWER : None of the above
a. In this case, there is no pledge. Under 2094 of the NCC, all movables, which are within
commerce, may be pledged, provided they are susceptible of possession. If at all, there was a
pledge of the paper or document constituting the Torrens Title, as a movable by itself, but not of
the land, which the title represents.
b. There is no mortgage because no deed or contract was executed in the manner required by
law for a mortgage (Arts. 2085 to 2092, NCC; 2124 to 2131, NCC). Specifically, under Article
2125, the law provides that it is indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry of Property. If the instrument is
not recorded, the mortgage is nevertheless binding between the parties.
c. There is no contract of antichresis because no right to the fruits of the property was given to
the creditor (Art. 2132 NCC). In this case, the farmer couple simply left the Torrens Title of their
land for the latter to hold.
d. A contract of simple loan was entered into with security arrangement agreed upon by the
parties, which is not one of those mentioned above.
1
QUESTION:
Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment,
Lito executed a chattel mortgage on a Toyota Avanza and a real estate mortgage on a 200-
square meter piece of property.
(A) Would it be legally significant - from the point of view of validity and enforceability - if
the loan and the mortgages were in public or private instruments? (6%)
SUGGESTED ANSWER:
As regards the loan, it is valid and enforceable whether it is in a public or a private instrument,
but the same is not true if the contract involves mortgages.
The laws do not require a contract of loan to be executed in a public instrument for its validity
and enforceability. A contract of loan, once constituted, is binding between the parties.
However, a mortgage on a personal property (in this case, the car) is required to be in a public
instrument to bind third persons, not for it to be valid and enforceable. On the other hand, a real
estate mortgage (in this case, the land) must be in a public instrument for its validity and
enforceability by virtue of Article 1358 of the New Civil Code. Under the law, if the contract
involves creation, transmission, modification or extinguishment of real rights over immovables, it
must appear in a public instrument. Thus, a chattel mortgage is still valid and enforceable even
if it is in a private instrument, but a real estate mortgage is validly constituted only if it is in a
public instrument. Article 2125 of the New Civil Code provides that it is indispensable, that the
document in which the mortgage appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the parties. The
article further provides that the persons in whose favor the law establishes a mortgage have no
other right than to demand the execution and the recording of the document in which the
mortgage is formalized.
Thus, unlike a simple loan or mutuum or a chattel mortgage, a contract of real estate mortgage,
to be valid and enforceable, must be executed in a public instrument and must be recorded in
the Registry of Property.
2
QUESTION:
B Bank, a large universal bank, regularly extends revolving credit lines to business establishments
under what it terms as socially responsible banking and private business partnership relations. All
loans that are extended to clients have a common "Escalation Clause," to wit: "B Bank hereby
reserves its right to make successive increases in interest rates in accordance with the bank's
adopted policies as approved by the Monetary Board; Provided that each successive increase
shall be with the written assent of the depositor.”
[a] X, a regular client of the bank, contends that the "Escalation Clause" is unfair, unconscionable
and contrary to law, morals, public policy and customs. Rule on the issue and explain. (2.5%)
[b] Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the right to
make reasonable increases in interest rates in accordance with bank policies as approved by the
Monetary Board; Provided, there shall be corresponding reasonable decreases in interest rates
as approved by the Monetary Board." Would this be valid? Explain. (2.5%)
SUGGESTED ANSWER:
[a] The “escalation clause” is valid because each successive increase shall be with the written
assent of the depositor. This stipulation does not violate the principle of mutuality of contracts and
it would only have been void if the supposed consent is given prior to the increase in interest rate.
[b] An escalation clause with a de-escalation clause is valid provided that the client’s consent is
still secured prior to any increase in interest rate; otherwise, the escalation clause is void.
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COMMODATUM
QUESTION:
A, upon request, loaned his passenger Jeepney to B to enable B to bring his sick wife from
Paniqui. Tarlac to the Philippine General Hospital in Manila for treatment. On the way back to
Paniqui, after leaving his wife at the hospital, people stopped the passenger Jeepney. B stopped
for them and allowed them to ride on board, accepting payment from them just as in the case of
ordinary passenger Jeepney’s plying their route. As B was crossing Bamban, there was an onrush
of Lahar from Mt Pinatubo, the Jeep that was loaned to him was wrecked.
1) What do you call the contract that was entered into by A and B with respect to the passenger
Jeepney that was
loaned by A to B to transport the latter's sick wife to Manila?
2) Is B obliged to pay A for the use of the passenger jeepney?
3) Is B liable to A for the loss of the
Jeepney?
SUGGESTED ANSWERS:
1) The contract is called "commodatum".

Article 1933 of the New Civil Code provides: Commodatum is a contract by which one of the
parties delivers to another something not consumable so that the latter may use it for a certain
time and return it.
In the case, A delivered his jeepney to B so that B may use it to bring his sick wife from Paniqui.
Tarlac to the Philippine General Hospital in Manila for treatment.
Therefore, there is commodatum.
2) No.
Article 1933 of the New Civil Code provides that commodatum is essentially gratuitous.
Therefore, B is not obliged to pay A for the use of the passenger Jeepney.
3) Yes.
Article 1942 of the New Civil Code provides that the bailee is 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.
In the case, B devoted the thing to a purpose different from that for which it has been loaned. B
allowed passengers to ride on board and accepted payment from them.
Therefore, B would be liable for the loss of the Jeepney.
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QUESTION:
1. Distinguish usufruct from commodatum and state whether these may be constituted
over consumable goods (2%)
2. Distinguish consensual from real contracts and name at least four (4) kinds of real
contracts under the present law. (3%)
SUGGESTED ANSWERS:
1. Usufruct is constituted by law, by contract, by testamentary succession, or by prescription (Art.

1933, Civil Code). Usufruct creates a real right to the fruits of another’s property, while
commodatum creates only a purely personal right to use another’s property, and requires a
stipulation to enable the bailee to “make use” of the fruits (Arts. 1939 & 1940, Civil Code).
Usufruct may be onerous while commodatum is always or essentially gratuitous (Arts. 1933 &
1935, Civil Code). The contract constituting usufruct is consensual, while commodatum is a real
contract (perfected only by delivery of the subject matter thereof). However, both involve the
enjoyment by a person of the property of another, differing only as to the extent and scope of such
enjoyment (jus fruendi in one and jus ustendi in the other); both may have a subject matter either
an immovable or a movable; and, both may be constituted over consumable goods (Arts. 574 &
1936, Civil Code).
A consumable thing may be the subject-matter of an abnormal usufruct but in a normal usufruct,
the subject-matter may be used only for exhibition. A commodatum of a consumable thing may
be only for the purpose of exhibiting, not consuming it.
2. Consensual contracts are those which are perfected by mere consent (Art. 1315, Civil Code).
Real contracts are those which are perfected by the delivery of the object of the obligation. (Art.
1316, Civil Code). Examples of real contracts are deposit, pledge, commodatum and simple loan
(mutuum).
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QUESTION
Distinguish briefly but clearly between: mutuum and commodatum
SUGGESTED ANSWER
In commodatum, one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. In mutuum, one of the parties delivers to
another money or other consumable things, upon the condition that the same amount of the
same kind and quality shall be paid. Commodatum is essentially gratuitous while mutuum may
be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the
ownership of the thing loaned, while in simple loan, ownership passes to the borrower.
Commodatum is purely personal in character; the death of lender or borrower extinguishes
commodatum. The death of the lender does not extinguish the loan.
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2005 Bar Examination

QUESTION:
Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the
understanding that the latter could use it for one year for his personal or family use while Pedro
works in Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned
up and the brakes repaired. He spent a total amount of P15,000.00. After using the vehicle for
two weeks, Tito discovered that it consumed too much fuel. To make up for the expenses, he
leased it to Annabelle. Two months later, Pedro returned to the Philippines and asked Tito to
return the van. Unfortunately, while being driven by Tito, the van was accidentally damaged by a
cargo truck without his fault.
1. Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%)
2. Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito?
Explain. (2%)
3. Does Pedro have the right to retrieve the van even before the lapse of one year? Explain.
(2%)
4. Who shall bear the expenses for the accidental damage caused by the cargo truck,
granting that the truck driver and truck owner are insolvent? Explain. (2%)
SUGGESTED ANSWER:
1. No. Z’s demand for the bank to re-convey X’s house to him or pay X’s loan plus interest is
legally infirm for Z only has a personal right against X by virtue of their unregistered chattel
mortgage. Z does not have a real right over X’s house and cannot defeat the bank’s claim as the
latter’s mortgage was annotated on the Torrens Certificate of Title. Moreover, the classification of
the house as movable property susceptible to chattel mortgage is only controlling for the parties
involved, in this case X and Z, and the bank can rely on the clean title of the house and lot. Without
the factual finding that the bank knew of or was grossly negligent in not inquiring about past
transactions on X’s house, the bank is a mortgagee in good faith. Therefore, Z has no right of
action against the bank as the latter had dealt with X in good faith and there is no privity of contract
between Z and the bank.
2. Tito must also pay for the ordinary expenses for the use and preservation of the thing loaned.
He must pay for the gasoline, oil, greasing and spraying. He cannot ask for reimbursement
because he has the obligation to return the identical thing to the bailor. Under Article 1941 of the
Civil Code, the bailee is obliged to pay for the ordinary expenses for the use and preservation of
the thing loaned.
3. No, Pedro does not have the right to retrieve the van before the lapse of one year. The parties
are mutually bound by the terms of the contract. Under the Civil Code, there are only 3 instances
when the bailor could validly ask for the return of the thing loaned even before the expiration of
the period. These are when: (1) a precarium contract was entered (Article 1947); (2) if the bailor
urgently needs the thing (Article 1946); and (3) if the bailee commits acts of ingratitude (Article
1948). Not one of the situations is present in this case.
4.Generally, extraordinary expenses arising on the occasion of the actual use of the thing loaned
by the bailee, even if incurred without fault of the bailee, shall be shouldered equally by the bailor
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and the bailee. (Art. 1949 of the Civil Code). However, if Pedro had an urgent need for the vehicle,
Tito would be in delay for failure to immediately return the same, then Tito would be held liable
for the extraordinary expenses.
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QUESTION:
1. The parties to a bailment are the:
a) Bailor;
b) Bailee;
c) Commodatario;
d) All of the above;
e) Letters a and b
SUGGESTED ANSWER:
e. Letters a and b
Art. 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third person.
However, the members of the bailee's household may make use of the thing loaned, unless there
is a stipulation to the contrary, or unless the nature of
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QUESTION AND SUGGESTED ANSWER
IV. Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz delivered the car,
Jose brought it to Mitsubishi Cubao for maintenance check up and incurred costs of P8,000.
Seeing the car's peeling and faded paint, Jose also had the car repainted for P10,000. Answer
the two questions below based on these common facts.
IV. (1) After the bar exams, Cruz asked for the return of his car. Jose said he would
return it as soon as Cruz has reimbursed him for the car maintenance and repainting
costs of P 18,000.
Is Jose's refusal justified? (1%)
(A) No, Jose's refusal is not justified. In this kind of contract, Jose is obliged to
pay for all the expenses incurred for the preservation of the thing loaned.
(B) Yes, Jose's refusal is justified. He is obliged to pay forall the ordinary and
extraordinary expenses, but subject to reimbursement from Cruz.
(C) Yes, Jose's refusal is justified. The principle of unjust enrichment warrants
the reimbursement of Jose's expenses.
(D) No, Jose's refusal is not justified. The expenses he incurred are useful for the
preservation of the thing loaned. It is Jose's obligation to shoulder these useful
expenses.
IV. (2) During the bar exam month, Jose lent the car to his girlfriend, Jolie, who parked
the car at the Mall of Asia's open parking lot, with the ignition key inside the car. Car
thieves broke into and took the car.
Is Jose liable to Cruz for the loss of the car due to Jolie's negligence? (1%)
(A) No, Jose is not liable to Cruz as the loss was not due to his fault or
negligence.
(B) No, Jose is not liable to Cruz. In the absence of any prohibition, Jose could
lend the car to Jolie. Since the loss was due to force majeure, neither Jose nor
Jolie is liable.
(C) Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's
consent, Jose must bear the consequent loss of the car.
(D) Yes, Jose is liable to Cruz. The contract between them is personal in nature.
Jose can neither lend nor lease the car to a third person
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SIMPLE LOAN
QUESTION
A) Define alternative and facultative obligations
B) Define joint and solidary obligations
C) A, B, and C borrowed Php 12,000 from X. This debt is evidenced by a promissory note
wherein the three bound themselves to pay the debt jointly and severally. However,
according to the note, A can be compelled to pay only on June 15, 1964, while C can be
compelled to pay only on June 15, 1966. One June 15, 1962, X made a demand upon A
to pay the entire indebtedness but the latter paid only Php 4,000.00. Subsequently,
because of A’s refusal to pay the balance, X brought an action against him for collection
of the amount. Will such an action prosper? Reasons.
SUGGESTED ANSWER
A) Alternative Obligations refer to those which comprehend several objects or prestations
which are due, but the payment or performance of one of them would be sufficient.
Facultative Obligations are those where only one object or prestation has been agreed
upon by the parties to the obligation, but the obligor may render another in substitution.
B) A joint obligation is defined as an obligation where there is a concurrence of several
creditors or debtors by virtue which each of the creditors has a right to demand, while
each of the debtors is bound to render compliance with his proportionate part of the
prestation which constitutes the object of the obligation. A solidary obligation is defined
as an obligation where there is a concurrence of several debtors or creditors by virtue
which each of the creditors has the right to demand, while each of the debtors is bound
to render entire compliance with the obligation.
C) The action will not prosper. It is true that the obligation is solidary. In solidary obligations
of this type however, the right of the creditor is limited to the recovery of the amount
owed by the debtor whose obligation has already matured, leaving in suspense his right
to recover the shares corresponding to the other debtors whose obligations have not yet
matured.
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QUESTION
A) Suppose that under an Obligation imposed by a final judgment, the liability of the
judgment debtor is to pay the amount of Php 6,000.00 but both the judgment debtor and
the judgment creditor subsequently entered into a contract reducing the liability of the
former to only pay Php 4,000.00, is there an implied novation which will have the effect
of extinguishing the judgment obligation and creating a modified obligatory relation?
Reasons.
SUGGESTED ANSWER
A) There is no implied novation in this case. There is no valid objection to the judgment
debtor and the judgment creditor in entering into an agreement regarding the monetary
obligation of the former under the judgment referred to. Payment by the judgment debtor
of the lesser amount of Php 4,000, accepted by the creditor without any protest or
objection and acknowledged by the latter as in full satisfaction of the money judgment,
completely extinguished the judgment debt and released the debtor from his liability.
Novation results in either two stipulations. One to extinguish an existing obligation, the
other to substitute a new one in its place. Fundamental it is that novation effects a
substitution or modification of an obligation by another or an extinguishment of one
obligation by the creation of another. In this case, there is no new or modified obligation
that arose out of Php 4,000 to the creditor. To sustain novation requires that it be
declared in explicit terms by agreement between the parties – or that there is complete
and substantial incompatibility between the two obligations.
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QUESTION
Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum interest.
However, the promissory note contained a proviso that the bank "reserves the right to
increase interest within the limits allowed by law," By virtue of such proviso, over the
objections of Samuel, the bank increased the interest rate periodically until it reached 48%
per annum. Finally, Samuel filed an action questioning the right of the bank to increase the
interest rate up to 48%. The bank raised the defense that the Central Bank of the
Philippines had already suspended the Usury Law. Will the action prosper or not? Why?
(5%)
SUGGESTED ANSWER
There is no implied novation in this case. There is no valid objection to the judgment Yes, the
action will prosper rendering such escalation clause void.
Article 1308 of the Civil Code provides the principle of autonomy of contract where it stated that
the parties can stipulate anything in a contract provided that it does not contrary to laws , morals
, good customs , public order or public policy
Article 1308 of the Civil code provides the principle of mutuality of contracts mentioning that a
contract cannot be left to the will of one of the parties
An escalation clause is a stipulation in a contract that allows for an increase or decrease in price
or wage.
The case of Sps. Almeda V CA 326 Phil. 309 (1996) provides that a party cannot unilaterally
increase the rate of interest and that an increase of interest of 18% to 68% is considered as
unconscionable.
In this case, while the interest ceiling by the Usury Law are no longer in force, such drastic
unilateral increase of interest would go against the mutuality of contracts thus, rendering the
interest void.
(orbiter dictum)
it could also be said to be unconcealable due to the interest rate of 18%- 48% due to the
similarities of the Sps. Alameda vs ca case
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2002BAR EXAMINATION
QUESTION
Carlos sues Dino for (a) collection on a promissory note for a loan, with no agreement on interest,
on which Dino defaulted, and (b) damages caused by Dino on his (Carlo’s) priceless
Michaelangelo painting on which Dino accidentally spilled acid while transporting it. The court
finds Dino liable on the promissory note and awards damages to Carlos for the damaged painting,
with interests for both awards. What rates of interest may the court impose with respect to both
awards? Explain.
SUGGESTED ANSWER
In the case of Dario Nacar v. Gallery Frames, et al.(Nacar), the Court established the following
guidelines:
“xxx II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code;
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
Thus, with regard to the collection on a promissory note for a loan, it being a forbearance of
money, the rate of interest shall be 6% per annum to be computed from default. As for the
damages to the painting, the interest rate shall be 6% on the amount finally adjudged by the Court,
the interest shall begin to run only from the date the judgment of the court is made. Finally, the
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interest rate of 6% per annum shall be imposed on the total amounts awarded by the Court from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
15
QUESTION
The parties in a contract of loan of money agreed that the yearly interest rate is 12% and
it can be increased If there is a law that would authorize the increase of interest rates.
Suppose OB, the lender, would increase by 5% the rate of interest to be paid by TY, the
borrower, without a law authorizing such increase, would OB’s action be just and valid?
Why? Has TY a remedy against the imposition of the rate increase? Explain.
SUGGESTED ANSWER
OB’s action is not just and valid. If the lender were to increase the interest rate by 5%, he would
violate the principle of mutuality of contracts. The parties particularly stipulated in their contract
of loan of money that the interest rate may be increased only if there is a law authorizing the
increase of interest rate. In the absence of a law authorizing the increase of interest rate, neither
of the parties may increase the interest rate. If all parties, by mutual agreement, decide to
change the terms and conditions to increase the interest rate in the absence of the law, then the
5% increase rate of interest may occur.
16
QUESTION
Distinguish briefly but clearly between: mutuum and commodatum
SUGGESTED ANSWER
In commodatum, one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. In mutuum, one of the parties delivers to
another money or other consumable things, upon the condition that the same amount of the
same kind and quality shall be paid. Commodatum is essentially gratuitous while mutuum may
be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the
ownership of the thing loaned, while in simple loan, ownership passes to the borrower.
Commodatum is purely personal in character; the death of lender or borrower extinguishes
commodatum. The death of the lender does not extinguish the loan.
17
QUESTION
: 76. The borrower in a contract of loan or mutuum must pay interest to the lender.
a) If there is an agreement in writing to the effect.
b) As a matter of course.
c) If the amount borrowed is very large.
d) If the lender so demands at the maturity date
SUGGESTED ANSWER
A) Under Art 1956, no interest shall be due unless it has been expressly stipulated in writing.
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QUESTION
Essay VI a) Siga-an granted a loan to Villanueva in the amount of P 540, 000.00. Such agreement
was not reduced to writing. Siga-an demanded interest which was paid by Villanueva in cash and
checks. The total amount Villanueva paid accumulated to P 1, 200, 000.00. Upon advice of her
lawyer, Villanueva demanded for the return of the excess amount of P 660, 000.00 which was
ignored by Siga-an.
1) Is the payment of interest valid? Explain. (3%)
SUGGESTED ANSWER
No. Under Art 1956, no interest shall be due unless it has been expressly stipulated in writing.
In this case, the agreement was not reduced to writing. Therefore, no interest is due.
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QUESTION
b. Distinguish commodatum from mutuum. (3%)
SUGGESTED ANSWER
(1) As to subject matter: The subject matter of commodatum is ordinarily non-consumable
while the subject matter of mutuum is either money or consumable;
(2) As to compensation: Commodatum is essentially gratuitous while mutuum may be
gratuitous or with a stipulation to pay interest;
(3) As to right in subject matter: In commodatum, there is no transmission fo ownership of
the thing loaned while in mutuum, the borrower acquires ownership of the thing
borrowed.
(4) As to duty of borrower: In commodatum, the same thing borrowed is required to be
returned while in mutuum, the borrower discharges himself, not by returning the identical
thing loaned, but by paying its equivalent in kind, quality and quantity. [Discussed in pp.
725-726, Vol. 1, Rabuya’s Civil Law Reviewer]
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DEPOSIT
QUESTION:
A secured a judgment by default against B for a sum of money. To satisfy the judgment, A
sought the garnishment of the Bank Deposit of B with China Bank. The Bank refused.
A) May a writ of garnishment be issued against the deposit of B? Reasons.
B) What are exceptions to the prohibition against disclosure of bank deposits?
SUGGESTED ANSWER:
A) Yes. A writ of garnishment may be issued against the bank deposit of B with China
Bank. The Law on Bank Secrecy only covers against inquiry or disclosure of information
relative to the funds or property in the custody of the bank.
B) Exceptions to prohibitions against disclosure of Bank Deposits Include:
a. Written permission of the depositor
b. In cases of impeachment
c. Orders of a competent court in cases of bribery or dereliction of duty or when the
money deposited or invested is the subject of a litigation.
d. Ant-Graft and Corruption Cases
e. When authorized by the Monetary Board if there is reasonable ground to believe
that fraud has been committed.
21
QUESTION:
X and Y staged a daring bank robbery in Manila at 10:30 AM in the morning of a regular business
day, and escaped with their loot of two (2) bags, each bag containing P50,000,00. During their
flight to elude the police, X and Y entered the nearby locked house of A, then working in his
Quezon City office. From A's house, X and Y stole a box containing cash totaling P50,000.00
which box A had been keeping in deposit for his friend B.
In their hurry, X and Y left in A's bedroom one (1) of the bags which they had taken from the bank.
With X and Y now at large and nowhere to be found, the bag containing P50.000.00 is now
claimed by B, by the Mayor of Manila, and by the bank.
B claims that the depository, A, by force majeure had obtained the bag of money in place of the
box of money deposited by B.
The Mayor of Manila, on the other hand, claims that the bag of money should be deposited with
the Office of the Mayor as required of the finder by the provisions of the Civil Code.
The bank resists the claims of B and the Mayor of Manila.
To whom should A deliver the bag of money? Decide with reasons.
SUGGESTED ANSWER:
A must deliver the bag of money to the bank.
Article 1990 of the New Civil Code provides that the depository who by force majaeure loses the
thing and receives money or another thing in its place shall deliver the sum to the depositor.
However, this is not applicable in this case. The said provision refers to another thing received in
substitution of the object deposited and is predicated upon something exchanged.
With this, A cannot deliver the bag of money left in his room to B. B has no right to claim the bag
of money. On the other hand, the Mayor of Manila has no right to claim the bag of money. Article
719 of the New Civil Code requires the finder to deposit the thing with the Mayor only when the
previous possessor is unknown. In the case, the previous possessor, the bank, was known.
Therefore, A must return the bag of money to the bank as the previous possessor and known
owner.
22
QUESTION:
CDC maintained a savings account with CBank. On orders of the MM Regional Trial Court, the
Sheriff garnished P50,000 of his account, to satisfy the judgement in favor of his creditor, MO.
CDC complained that the garnishment violated the Law on the Secrecy of Bank Deposits
because the existence of his savings account was disclosed to the public.
Is CDC’s complaint meritorious or not? Reason briefly.
SUGGESTED ANSWER
No. CDC’s complaint is not meritorious. Judgement creditors may cause the garnishment of
bank deposits of the judgement debtors under Section 9(c), Rule 39 of the 1997 Rules of Civil
Procedure. Garnishment of bank deposits does not violate the Law on Secrecy of Bank
Deposits. When a bank account is garnished, no real inquiry is made on the account and the
disclosure of the deposit made by the bank is purely incidental.
23
QUESTION:
1. A deposit made in compliance with a legal obligation is

a) An extrajudicial deposit;
b) A voluntary deposit;
c) A necessary deposit;
d) A deposit with a warehouseman;
e) Letters a and b
SUGGESTED ANSWER
. A necessary deposit
Art. 1996. A deposit is necessary:

(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events.
24
QUESTION:
VII.
Due to the continuous heavy rainfall, the major streets in Manila became flooded. This
compelled Cris to check-in at Square One Hotel. As soon as Cris got off from his Toyota Altis,
the Hotel’s parking attendant got the key of his car and gave him a valet parking customer’s
claim stub. The attendant parked his car at the basement of the hotel. Early in the morning, Cris
was informed by the hotel manager that his car was carnapped. (4%)
(A) What contract, if any, was perfected between Cris and the Hotel when Cris
surrendered the key of his car to the Hotel’s parking attendant?
(B) What is the liability, if any, of the Hotel for the loss of Cris’ car?
SUGGESTED ANSWER
. A. A contract of deposit.
In Triple-V Food Services Inc. v Filipino Merchandise Insurance Co., the Supreme Court ruled
that when a customer avails of a valet parking, the company is constituted as depositary.
Article 1962 of the Civil Code provides,
A deposit is constituted from the moment a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. xxx
Furthermore, Article 1998 of the Civil Code provides,
The deposit of effects made by travellers in hotels or inns shall also be regarded as necessary.
The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice
was given to them, or to their employees, of the effects brought by the guests and that, on the
part of the latter, they take the precautions which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
Hence, a contract of deposit was made between Cris and the hotel.
B. The hotel is liable for the cost of the car as actual damages.
Article 1999 of the Civil Code provides
The hotel-keeper is liable for the vehicles, animals and articles which have been introduced or
placed in the annexes of the hotel
25
QUESTION:
XIX.
Who enjoys the Right of Retention? (1%)
(A) Depositary until full payment of what may be due him in deposit.
(B) Lessee if he advances the expenses for the repair of the leased premises.
(C) Bailee if bailor owes him something.
(D) Builder in bad faith for the recovery of necessary and useful expenses.
SUGGESTED ANSWER
A.
Article 1994 of the Civil Code provides,
The depositary may retain the thing in pledge until the full payment of what may be due him by
reason of the deposit.
.
26
QUESTION:
X, a government official, has a number of bank accounts in T Bank containing millions of pesos.
He also opened several trust accounts in the same bank which specifically covered the placement
and/or investment of funds. X was later charged with graft and corruption before the
Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor filed a motion praying for a
court order authorizing it to look into the savings and trust accounts of X in T Bank. X opposed
the motion arguing that the trust accounts are not "deposits" under the Law on Secrecy of Bank
Deposits (Rep. Act No. 1405). Is the contention of X correct? Explain. (5%)
SUGGESTED ANSWER
. NO, X’s contention is wrong. Deposits according to the Law on Secrecy of Bank Deposits
include deposits of whatever nature and kind. As held in Ejercito v. Sandiganbayan, deposits
include funds deposited in the bank giving rise to a creditor-debtor relationship, as well as funds
in the bank like trust accounts. Therefore, X’s opposition to the Special Prosecutor’s Motion for a
Court Order to authorize it to look into the savings and trust accounts of X in T Bank on the ground
that the trust accounts are not "deposits" under the Law on Secrecy of Bank Deposits (Rep. Act
No. 1405) is without merit.
27
PERSONAL SECURITY: GUARANTY AND SURETYSHIP
QUESTION:
1) What is the difference between guaranty and suretyship?
SUGGESTED ANSWERS:
The difference between a guaranty and suretyship is that obligations in guaranties are secondary
or has subsidiary liability. While in suretyship, obligations are primary and may be primarily liable.
Also, the undertaking in guarantee is to pay if the principal debtor cannot pay. While in suretyship,
the undertaking is to pay if the principal debtor does not pay. Moreover, in guaranty, a guarantor
is entitled to the benefit of excussion, while in suretyship, the surety is not entitled to such benefit.
Furthermore, according to Article 2047, the guarantor insures the solvency of the principal debtor
while the surety insures the debt. More so, when the contract is a suretyship, the provisions of
the Civil Code on solidary obligations shall apply.
28
QUESTION:
Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin requested
his girlfriend Rosella to execute a document entitled “Continuing Guaranty
Agreement” whereby she expressly agreed to be solidarily liable for the obligation of
Kevin.
Can ABC Bank proceed directly against Rosella upon Kevin’s default even without
proceeding against Kevin first? Explain your answer. (3%)
SUGGESTED ANSWERS:
Yes, ABC Bank may proceed directly against Rosella upon Kevin’s default even without
proceeding against Kevin first because Rosella is a surety after she bound herself solidarily with
the principal debtor.
Notwithstanding the use of the word “guaranty” circumstances may be shown which convert the
contract into one of suretyship. Under the Civil Code, when the guarantor binds himself
solidarily with the principal debtor, the contract becomes one of suretyship and not of guaranty
proper. In a contract of suretyship, the liability of the surety is direct, primary and absolute. He is
directly and equally bound with the principal debtor. Such being the case, a creditor can go
directly against the surety although the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor. [Basis: Article 2047,
Civil Code; Ong v. PCIB, 448 SCRA 705; discussed in pp. 810-812, Vol. 2, Rabuya’s Civil Law
Reviewer] In this case, since Rosella is a surety, ABC Bank can go directly against her even
without proceeding against the principal debtor because the surety insures the debt, regardless
of whether or not the principal debtor is financially capable to fulfil his obligation.
29
REAL SECURITY

QUESTION:
A) State at least five features of the Revised Securities Act (B.P. No. 178) intended to
protect the investing public.
B) What are the classes of securities under the Revised Securities Act?
SUGGESTED ANSWER:
A) 5 features in the Revised Security Act intended to protect the investing public include:
1. The registration of, and permit to sell, securities before the same may be sold or
offered for sale. (Sec. 4)
2. Limitation of exempt securities only to non-speculative shares. (Sec. 5)
3. Confining of exempt transactions when the amount involved or the public offering is
limited in character. (Sec. 6)
4. Possible recovery of damages in favor of investors who are prejudiced by parties
responsible for non-disclosure or misdisclosure of material facts. (Sec. 12-13)
5. Criminal Liability for those found to be in violation of the Revised Security Act. (Sec.
56)
B) The Revised Securities Act classifies securities into:

a. Those that are required to be registered and permitted to be sold.
b. Those that are exempt from such registration and licensing owing to their non-
speculative nature. Hence, they are exempt securities.
c. Those that are exempt transactions because of the limited character of their
offering. (Sec. 4-6)
30

QUESTION:
On 20 December 1970, Juliet, a widow, borrowed from Romeo P4,000.00 and, as security
therefore, she executed a deed of mortgage over one of her two (2) registered lots which has a
market value of P15,000.00. The document and the certificate of title of the property were
delivered to Romeo.
On 2 June 1971, Juliet obtained an additional sum of P3,000.00 from Romeo. On this
date, however, Romeo caused the preparation of a deed of absolute sale of the above property,
to which Juliet affixed her signature without first reading the document. The consideration
indicated is P7,000.00. She thought that this document was similar to the first she signed. When
she reached home, her son X, after reading the duplicate copy of the deed, informed her that
what she signed was not a mortgage but a deed of absolute sale. On the following day, 3 June
1971, Juliet, accompanied by X, went back to Romeo and demanded the reformation it, Romeo
prepared and signed a document wherein, as vendee in the deed of sale above mentioned, he
obligated and bound himself to resell the land to Juliet or her heirs and successors for the same
consideration as reflected in the deed of sale (P7,000.00) within a period of two (2) years, or until
3 June 1973. It is further stated therein that should the Vendor (Juliet) fail to exercise her right to
redeem within the said period, the conveyance shall be deemed absolute and irrevocable. Romeo
did not take possession of the property. He did not pay the taxes thereon.
Juliet died in January 1973 without having repurchased the property. Her only surviving
heir, her son X, failed to repurchase the property on or before 3 June 1973. In 1975, Romeo sold
the property to Y for P50,000.00. Upon learning of the sale, X filed an action for the nullification
of the sale and for the recover of the property on the ground that the so-called deed of absolute
sale executed by his mother was merely an equitable mortgage, taking into account the
inadequacy of the price and the failure of Romeo to take possession of the property and to pay
the taxes thereon. Romeo and Y maintain that there was a valid absolute sale and that the
document signed by the former on 3 June 1973 was merely a promise to sell.
If you were the Judge, would you uphold the theory of X?
SUGGESTED ANSWER
No. According to Article 1602 of the New Civil Code, the instances when a contract shall
be presumed to be equitable mortgage are:
1. When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt or the performance of any other
obligation.
31
Equitable mortgages only arise when the sale contains the right to repurchase or when
such sale was contracted with the intention to merely constitute a security.
In this case, Juliet executed the deed of absolute sale on June 2, 1971. It was only after,
when X clarified that she executed such deed instead of a mortgage, that she was granted the
right to repurchase, specifically the next day. The contract of sale thus cannot be upheld as one
with the right to repurchase. Hence, Article 1602 will not apply and the contract is not an equitable
mortgage.
32
QUESTION:
Bruce is the registered owner, of a parcel of land with a building thereon and is in peaceful
possession thereof. He pays the real estate taxes and collects the rentals therefrom. Later,
Catalino, the only brother of Bruce, filed a petition where he, misrepresenting to be the attorney-
in-fact of Bruce and falsely alleging that the certificate of title was lost, succeeded in obtaining a
second owner’s duplicate copy of the title and then had the same transferred from his name
through a simulated deed of sale in his favor. Catalino then mortgaged the property to Desiderio
who had the mortgage annotated on the title. Upon learning of the fraudulent transaction, Bruce
filed a complaint against Catalino and Desiderio to have the title of Catalino and the mortgage in
favor of Desiderio declared null and void.
Will the complaint prosper, or will the title of Catalino and the mortgage to Desiderio by
sustained?
SUGGESTED ANSWER:
Yes. The complaint will prosper against both the title of Catalino and the mortgage to
Desiderio.
Both Article 1346 and Art. 1409(2) of the New Civil Code provide that absolutely simulated
or fictitious contracts are void and inexistant. In this case, the Transfer Certificate of title procured
by Catalino was issued on the basis of a simulated Deed of Sale. Thus, such title is void.
Article 2085 of the New Civil Code, in providing for the essential requisites of the contract
of mortgage, requires that the mortgagor be the absolute owner of the thing mortgaged. In this
case, Catalino was not the true owner of the parcel of land, with the second owner’s duplicate
copy of the title having been obtained through fraud. Hence, the mortgage is void.
In conclusion, the complaint will prosper.
33

QUESTION:
Question: In June 1988, X obtained a loan from A and executed with Y as solidary co-maker a
promissory note in favor of A for the sum of P200,000 with interest monthly within the first week
of each month beginning July 1988 until maturity in April 1989. To secure the payment of the loan,
X put up as security a chattel mortgage on his car, a Toyota Corolla sedan. Because of failure of
X and Y to pay the principal amount of the loan, the car was extrajudicially foreclosed. A acquired
the car at A’s highest bid of P120,000 during the auction sale.
After several fruitless letters of demand against X and Y, A sued Y alone for the discovery of
P80,000 constituting the deficiency.
Y resisted raising that Y should not be held liable for the deficiency of P80,000 because he was
not a co-mortgagor in the chattel mortgage of the car, which contract was executed by X alone
as owner and mortgagor.
Decide with reasons.
SUGGESTED ANSWER:
The defense of Y in untenable.
Suretyship is a contract whereby one person engages to a third person, for the debt, default of
miscarriage of the principl or obligor. A surety binds himself solidarily with the principal debtor.
Here, Y is a surety of X and the extrajudicial demand against the principal debtor is not
inconsistent with a judicial demand against the surety. This is because one can enter into a
suretyship and at the same time mortgage a property.
Thus, Y is solidarily liable with the principal debtor for the P80,000 deficiency.
34

QUESTION:
Define Securities.
SUGGESTED ANSWERS
Stocks, bonds notes, convertible debentures, warrants or other documents that represent a share
in a company or a debt owned by a company or government entity. Evidences of obligations to
pay money or of rights to participate in earnings and distribution of corporate assets. Instruments
giving to their legal holders rights to money or other property; they are therefore instruments,
which have intrinsic value and are recognized and used, as such in the regular channels of
commerce.
35

QUESTION:
As finance officer of K and Co., Victorino arranged a loan of P5 Million from PNB for the
corporation. However, he was required by the bank to sign a Continuing Surety Agreement to
secure the repayment of the loan. The corporation failed to pay the loan, and the bank obtained
a judgement against it and Victorino, jointly and severally. To enforce the judgement, the sheriff
levied on a farm owned by the conjugal partnership of Victorino and his wife Elsa. Is the levy
proper or not? (3%)
SUGGESTED ANSWER:
The levy is not proper.
An obligation contracted by the husband alone is chargeable against the conjugal partnership
only when it was contracted for the benefit of the family. When the obligation was contracted on
behalf of the family business the law presumed that such obligation will redound to the benefit of
the family. However, according to Ayala Investment v. Ching (286 SCRA 272), for the obligation
under the surety agreement to be chargeable against the partnership, it must be proven that the
family was benefited and that the benefit was a direct result of such agreement.
In the present case, the obligation was to guarantee the debt of a third party, the obligation is
presumed for the benefit of the third party. There was no showing that the surety agreement
redounded to the benefit of the family.
Thus, the enforcement of judgement on the conjugal partnership should be cancelled

QUESTION:
No. XIX. Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties
Inc. amounting to P270 Million. The loan was secured by a mortgage over a vast commercial lot
in the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Banko Sentral ng
Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrower’s limit of
25% of the bank’s net worth under a recent BSP Circular. In light of other previous similar
violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount of
the loan to Celestial Properties under pain of severe sanctions. When Industry Bank informed
Celestial Properties that it intended to reduce the loan by P50 Million, Celestial Properties
countered that the bank should first release a part of the collateral worth P50 Million. Industry
Bank rejected the counter-proposal, and referred the matter to you as counsel.
How would you advise Industry Bank to proceed, with its best interests in mind? (5%)
36
SUGGESTED ANSWER:
I shall advise Industry Bank that the mortgage is indivisible. Article 2089 of the Civil Code provides
that “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.” In this case, the collateral is a single commercial lot
in the Fort, covered by a single title and beings essentially indivisible in character. Therefore,
Celestial Properties cannot ask for a partial release of the mortgage so long as the loan has not
been completely paid.
37

QUESTION:
VI. Gary is a tobacco trader and also a lending investor. He sold tobacco leaves to Homer for
delivery within a month, although the period for delivery was not guaranteed. Despite Gary's
efforts to deliver on time, transportation problems and government red tape hindered his efforts
and he could only deliver after 30 days. Homer refused to accept the late delivery and to pay on
the ground that the agreed term had not been complied with.
As lending investor, Gary granted a Pl,000,000 loan to Isaac to be paid within two years from
execution of the contract. As security for the loan, Isaac promised to deliver to Gary his Toyota
Innova within seven (7) days, but Isaac failed to do so. Gary was thus compelled to demand
payment for the loan before the end of the agreed two-year term.
VI. (2) Can Gary compel Isaac to pay his loan even before the end of the two-year period? (1%)
SUGGESTED ANSWER:
(A) Yes, Gary can compel Isaac to immediately pay the loan. Non-compliance
with the promised guaranty or security renders the obligation immediately
demandable. Isaac lost his right to make use of the period.
(B) Yes, Gary can compel Isaac to immediately pay the loan. The delivery of the
Toyota Innova is a condition for the loan. Isaac's failure to deliver the car violated
the condition upon which the loan was granted. It is but fair for Gary to demand
immediate payment.
(C) No, Gary cannot compel Isaac to immediately pay the loan. The delivery of
the car as security for the loan is an accessory contract; the principal contract is
still the P 1,000,000 loan. Thus, Isaac can still make use of the period.
(D) No, Gary cannot compel Isaac to immediately pay the loan. Equity dictates
that Gary should have granted a reasonable extension of time for Isaac to deliver
his Toyota Innova. It would be unfair and burdensome for Isaac to pay
the P1,000,000 simply because the promised security was not delivered.
38
REAL ESTATE MORTGAGE
QUESTION
“X” mortgaged his land to the Philippine National Bank (PNB) to secure a promissory note. He
defaulted in the payment of the loan so that the land was sold at public auction on January 20,
1960, for P3,500 with the PNB as the highest bidder. On January 20 1970, “X” offered to redeem
the property in the amount to P3,500. He enclosed a postal money order for P1,000 as partial
payment and stated that the balance is to be paid in 12 monthly installments. The PNB then
discovered that the sheriff’s certificate of sale prepared after the public auction of the land was
not registered so that it cause the same to be registered on January 30, 1970. The PNB refused
the offer of “X” contending that the offer to redeem was beyond the one-year period provided
under Act No. 3135 and that it was not accompanied by an actual and simultaneous tender of the
entire repurchase price. In view of the refusal of the PNB, “X” filed an action to repurchase on
February 20, 1970. Will the action prosper? Give your reasons.
SUGGESTED ANSWERS
Yes, the action of “X” will prosper.
The mortgager whose real property has been sold for the full or partial payment of his obligation
to the mortgagee bank shall have the right within one year after the sale of the real estate to
redeem the property. Sub-section X311.5 of the Manual of Regulations for Bank as amended by
BSP Circular No. 337, Series of 2002 provides that the one-year redemption period should be
counted from the date of the registration of the certificate of sale with the Register of Deeds.
This is consistent with Section 6 of Act No. 3135 (“An Act to Regulate the Sale of Property under
Special Powers Inserted In or Annexed to Real-Estate Mortgages”) and Section 2(e) of Supreme
Court Circular A.M. No. 99-10-05 (as further amended on August 7, 2001) which provide that the
debtor-mortgager can redeem the property within one (1) year from the date the certificate of sale
is registered with the Register of Deeds.
In the case at bar, the property was sold at public auction on January 20, 1960 and “X” offered to
redeem the property on January 20, 1970. However, the sheriff’s certificate of sale prepared after
the public auction was not registered until January 30, 1970. Since the redemption period begins
from the date of registration of the certificate of sale with the Register of Deeds, the one-year
redemption period is counted from January 30, 1970 when the certificate of sale was registered
and not from January 20, 1960 when the property was sold at public auction.
Here, “X” filed an action to repurchase the property on February 20, 1970, which is within the one-
year prescribed period to redeem the property provided under Act No. 3135.
Hence, action of “X” to repurchase the property will prosper.
39
40
QUESTION
To secure the payment of his loan of P200,000.00, A executed in favor of the Angeles
Banking Corp., in one (1) document, a real estate mortgage over three (3) lots registered in his
name and a chattel mortgage over his three (3) cars and one (1) Isuzu cargo truck.
Upon his failure to pay the loan on due date, the bank foreclosed the mortgage on the
three (3) lots, which were subsequently sold for only P99,000.00 at the foreclosure sale.
Thereafter, the bank fled an ordinary action for the collection of the deficiency. A contended that
the mortgage contracted he executed was indivisible and consequently. The bank had no legal
right to foreclose only the real estate mortgage and leave out the chattel mortgage, and then sue
him for a supposed deficiency judgement.
If you were the Judge, would you sustain the contention of A?
SUGGESTED ANSWERS
If I were the Judge, I would dismiss A’s contention. In The Philippine Bank of Commerce
v. Macadaeg, the Supreme Court clarified that the mere embodiment of the real estate mortgage
and the chattel mortgage in one document does not fuse both securities into an indivisible whole.
In this case, despite both the real estate mortgage and chattel mortgage having been
executed in one document, they remain separate agreements because they differ in (1) subject
matter, and (2) governing legal provisions. Act. No. 3135 is the special law on extrajudicial
foreclosure of mortgage. Such law only covers real estate mortgages. Meanwhile, Act No. 1508
or The Chattel Mortgage Law governs foreclosure of chattel mortgages.
Angeles Banking Corp. had the right to foreclose the real estate mortgage and waive the
chattel mortgage, then file an ordinary action for the collection of the deficiency.
Hence, A’s contention should be dismissed.
41
QUESTION
(a) X borrowed money from Y and gave a piece of land as security by way of mortgage. It was
expressly agreed between the parties in the mortgage contract that upon nonpayment of the debt
on time by X, the mortgaged land would already belong to Y. If X defaulted in paying, would Y
now become the owner of the mortgaged land? Why? (3%)
(b) Suppose in the preceding question, the agreement between X and Y was that if X failed to pay
the mortgage debt on time, the debt shall be paid with the land mortgaged by X to Y. Would your
answer be the same as in the preceding question? Explain. (3%)
SUGGESTED ANSWERS
(a) NO, Y cannot become the owner of the mortgaged land. Article 2088 of the Civil Code of the
Philippines prohibits pactum commissorium and provides that “the creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.” In the case at bar, the stipulation in the contract for the automatic appropriation of
the piece of land to Y upon X’s failure to pay the loan is a pactum commissorium. Hence, the
contract is void.
(b) NO. In this case, such stipulation is valid. It is not a pactum ccommisorium but an agreement
called dacion en pago. It is a mode of extinguishing an existing obligation whereby property is
alienated to the creditor in satisfaction of a debt in money. The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor's debt.
42
QUESTION
Are the right of redemption and the equity of redemption given by law to a mortgagor the same?
Explain. (2%)
SUGGESTED ANSWERS
: NO. Equity of redemption is different from the right of redemption.
Equity of Redemption Right of Redemption

The right of the mortgagor after judgment in a The right of the mortgagor to redeem the
judicial foreclosure to redeem the property by property sold at an extra-judicial foreclosure
paying to the court the amount of the by paying to the buyer in the foreclosure sale
judgment debt before the sale or confirmation the amount paid by the buyer within one year
of the sale. from such sale.
43
QUESTION
Borrower obtained a loan against the security of a mortgage on a parcel of land. While the
mortgage was subsisting, borrower leased for fifty years the mortgaged property to Land
Development Company (LDC). The mortgagee was duly advised of the lease. Thereafter, LDC
constructed on the mortgaged property an office condominium.
Borrower defaulted on his loan and mortgagee foreclosed the mortgagee. At the foreclosure sale,
the mortgagee was awarded the property as the highest bidder. The corresponding Certificate of
Sale was executed and after the lapse of one year, title was consolidated in the name of
mortgagee.
Mortgagee then applied with the RTC for the issuance of a writ of possession not only over the
land but also the condominium building. The mortgagee contended that the mortgage included all
accessions, improvements and accessories found on the mortgaged property. LDC countered
that it had built on the mortgaged property with prior knowledge of mortgage which had received
formal notice of the lease.
(a) How would you resolve the dispute between the mortgagee and LDC) (3%)
(b) Is the mortgagee entitled to the lease rentals due from LDC under the lease
agreement? (3%)
SUGGESTED ANSWERS
(a) The mortgagee has a better right than LDC. The mortgage extends to the
improvements introduced on the land, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the
mortgagor or passes into the hands of a third person (Art 2127 NCC). The notice given
by LDC to the mortgagee was not enough to remove the building from coverage of the
mortgage considering that the building was built after the mortgage was constituted
and the notice was only as regards the lease and not as to the construction of the
building. Since the mortgagee was informed of the lease and did not object to it, the
mortgagee became bound by the terms of the lease when it acquired the property as
the highest bidder. Hence, the motgagee steps into the shoes of the mortgagor and
acquires the rights of the lessor under Art 1768 of the NCC. This provision gives the
lessor the right to appropriate the condominium building but after paying the lessee
half of the value of the building at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvement even though the land will suffer
damage thereby.
(b) The lease rentals belong to the mortgagor. However, the mortgage extends to rentals
not yet received when the obligation becomes due and the mortgagee may run after
said rentals for the payment of the mortgage debt.
44
QUESTION
(a) The mortgagee has a better right than LDC. The mortgage extends to the
improvements introduced on the land, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the
mortgagor or passes into the hands of a third person (Art 2127 NCC). The notice given
by LDC to the mortgagee was not enough to remove the building from coverage of the
mortgage considering that the building was built after the mortgage was constituted
and the notice was only as regards the lease and not as to the construction of the
building. Since the mortgagee was informed of the lease and did not object to it, the
mortgagee became bound by the terms of the lease when it acquired the property as
the highest bidder. Hence, the motgagee steps into the shoes of the mortgagor and
acquires the rights of the lessor under Art 1768 of the NCC. This provision gives the
lessor the right to appropriate the condominium building but after paying the lessee
half of the value of the building at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvement even though the land will suffer
damage thereby.
(b) The lease rentals belong to the mortgagor. However, the mortgage extends to rentals
not yet received when the obligation becomes due and the mortgagee may run after
said rentals for the payment of the mortgage debt.
SUGGESTED ANSWERS
Sylvia is not correct. According to Adille vs. CA (157 SCRA 455), redemption by one co-owner
inures to the benefit of all.
In the present case, the three daughters are the co-owners of the hacienda being the only heirs
of Ambrosio. When the property was foreclosed, the right of redemption belongs also to the three
daughters. When Sylvia redeemed the entire property before the lapse of the redemption period,
she also exercised the right of redemption of her co-owners on their behalf.
Therefore, Sylvia, who held the shares of her two sisters in the property, and all the fruits
corresponding thereto, was in trust for them. Sylvia, however, is entitled to be reimbursed the
shares of her two sisters in the redemption price.
45
QUESTION
Debtor A issued a promissory note in the amount of P10M in favor of commercial bank Y
secured by mortgage of his properties worth P30M. When A failed to pay his indebtedness,
despite demands made by bank Y, the latter instituted a collection suit to enforce payment of
the P10M account. Subsequently, bank Y also filed foreclosure proceedings against A for
security given for the account. If you were the judge, how would you resolve the two cases?
(5%)
SUGGESTED ANSWERS
Only the Collection suit will prosper. the Case of Bank of America V. American Realty Co. 321
SCRA 659 ruled that when one files a suit for the collection to enforce payment while there was
a real estate mortgage on the questioned property, the real estate mortgage is deemed
abandoned and the bank can no longer foreclose the previously mortgaged property.
In this case, the bank filed for both actions but since the collection suit was filed first , the bank
effectively abandoned the real estate mortgage thus can no longer file suite to foreclose the said
property.
46
QUESTION
XV.
A real estate mortgage may be foreclosed judicially or extrajudicially.
In what instance may a mortgagee extrajudicially foreclose a real estate mortgage? 5%

SUGGESTED ANSWERS
A mortgagee may extrajudicially foreclose a real estate mortgage when the right to foreclose
extrajudicially has been expressly stipulated in the deed of mortgage or there is a special
power in the real estate mortgage authorizing it. (Section 1, Act 3135).
47
QUESTION
Question: (86) The right of a mortgagor in a judicial foreclosure to redeem the mortgaged
property after his default in the performance of the conditions of the mortgage but before the
sale of the mortgaged property or confirmation of the sale by the court, is known as
(A) accion publiciana.

(B) equity of redemption.
(C) pacto de retro.
(D) right of redemption.
SUGGESTED ANSWERS
: (B) Equity of Redemption.
In Robles v. Yapcinco, equity of redemption is defined as “the right of the defendant mortgagor
to extinguish the mortgage and retain ownership of the property by paying the secured debt
within the 90-day period after the judgment becomes final, or even after the foreclosure sale but
prior to the confirmation of the sale.” Thus, such redemption of the mortgaged property before
its sale or confirmation of the sale by the court is known as equity of redemption.
48
QUESTION
Question 12. On X’s failure to pay his loan to ABC Bank, the latter foreclosed the Real Estate
Mortgage he executed in its favor. The auction sale was set for Dec. 1, 2010 with the notices of
sale published as the law required. The sale was, however, cancelled when Dec. 1, 2010 was
declared a holiday and re-scheduled to Jan. 10, 2011 without republication of notice. The
auction sale then proceeded on the new date. Under the circumstances, the auction sale is
(A) rescissible.
(B) unenforceable.
(C) void.
(D) voidable.
SUGGESTED ANSWERS
(C) The auction sale is void.
Act No. 3135 (“An Act to Regulate the Sale of Property under Special Powers Inserted or
Annexed”) provides for the formal requisites of posting and publication for an extrajudicial
foreclosure, absence of which renders the sale null and void. In Ouano v. CA, the Court
explained that if the original date of the sale stated in the notice of sale is transferred to another
date, there must be another posting and publication of the notice of sale for the new date,
otherwise, the sale will be considered invalid. Thus, as the sale was rescheduled from Dec. 1,
2010 to Jan. 10, 2011 without republication of notice, the requisites of posting and publication
were not properly complied with, rendering the auction sale void.
49
QUESTION
Question 67. X, at Y’s request, executed a Real Estate Mortgage (REM) on his (X’s) land to
secure Y's loan from Z. Z successfully foreclosed the REM when Y defaulted on the loan but
half of Y's obligation remained unpaid. May Z sue X to enforce his right to the deficiency?
(A) Yes, but solidarily with Y.

(B) Yes, since X’s is deemed to warrant that his land would cover the whole obligation.
(C) No, since it is the buyer at the auction sale who should answer for the deficiency.
(D) No, because X is not Z’s debtor.
SUGGESTED ANSWERS
(D) No, because X is not Z’s debtor.
Mortgage is an accessory obligation. X is not liable because as a mere mortgagor, he is not a

party to the principal obligation of Y to Z. X only constituted a real security, not a personal
security. Thus, X cannot be made to answer for the deficiency.
50
QUESTION
Multiple Choice 39. The following are the limitations on the right of ownership imposed by the
owner himself, except:
a) Will/Succession
b) Mortgage
c) Pledge
d) Lease
SUGGESTED ANSWERS
(A)
Art. 2098, Civil Code – The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is paid.
Art. 2126 – The mortgage directly and immediately subjects the property upon which it is imposed
whoever the possessor may be to the fulfillment of the obligation for whose security it was
constituted.
Art.1643 – In the lease of things, one of the parties binds himself to give to another the enjoyment
or use of a thing for a price certain, and for a period which may be definite or indefinite. However,
no lease for more than ninety-nine years shall be valid.
51
QUESTION
III. Amador obtained a loan of P300,000 from Basilio payable on March25, 2012. As security for
the payment of his loan, Amador constituted a mortgage on his residential house and lot in
Basilio's favor. Cacho, a good friend of Amador, guaranteed and obligated himself to pay
Basilio, in case Amador fails to pay his loan at maturity.
III. (1) If Amador fails to pay Basilio his loan on March 25, 2012, can Basilio compel
Cacho to pay? (1%)
52
2013 SUGGESTED ANSWERS
(A) No, Basilio cannot compel Cacho to pay because as guarantor, Cacho can
invoke the principle of excussion, i.e., all the assets of Basilio must first be
exhausted.
(B) No, Basilio cannot compel Cacho to pay because Basilio has not exhausted
the available remedies against Amador.
(C) Yes, Basilio can compel Cacho to pay because the nature of Cacho's
undertaking indicates that he has bound himself solidarily with Amador.
(D) Yes, Basilio can compel Cacho who bound himself to unconditionally pay in
case Amador fails to pay; thus the benefit of excussion will not apply.
QUESTION
III. (2) If Amador sells his residential house and lot to Diego, can Basilio foreclose the
real estate mortgage? (1%)
SUGGESTED ANSWERS
(A) Yes, Basilio can foreclose the real estate mortgage because real estate
mortgage creates a real right that attaches to the property.
(B) Yes, Basilio can foreclose the real estate mortgage. It is binding upon Diego
as the mortgage is embodied in a public instrument.
(C) No, Basilio cannot foreclose the real estate mortgage. The sale confers
ownership on the buyer, Diego, who must therefore consent.
(D) No, Basilio cannot foreclose the real estate mortgage. To deprive the new
owner of ownership and possession is unjustand inequitable.
53
QUESTION
former sold his titled lot in Quezon City with an area of three hundred (300) square meters to the
latter for the price of P300,000.00. The prevailing market value of the lot was P3,000.00 per
square meter. On March 20, 2008, they executed another "Agreement To Buy Back/Redeem
Property" where Ariel was given an option to repurchase the property on or before March 20,
2010 for the same price. Ariel, however, remained in actual possession of the lot. Since Noel did
not pay the taxes, Ariel paid the real property taxes to avoid a delinquency sale. On March 21,
2010, Ariel sent a letter to Noel, attaching thereto a manager's check for P300,000.00 manifesting
that he is redeeming the property. Noel rejected the redemption claiming that the DAS was a true
and valid sale representing the true intent of the parties. Ariel filed a suit for the nullification of the
DAS or the reformation of said agreement to that of a Loan with Real Estate Mortgage. He claims
the DAS and the redemption agreement constitute an equitable mortgage. Noel however claims
it is a valid sale with pacto de retro and Ariel clearly failed to redeem the property. As the RTC
judge, decide the case with reasons. (5%)
SUGGESTED ANSWERS
Ariel’s contention is with merit. The contract in the case is an equitable mortgage.
Jurisprudence provides that there are several badges of equitable mortgage in the contract such
as: 1. the price of a sale with right to repurchase is unusually inadequate; 2. The vendor remains
in possession of the property; and 3. The vendor binds himself to pay the taxes on the property
sold. From the facts of case at bar, it can be deduced that the real intention of the parties is for
the transaction to secure the payment of a debt or the performance of any other obligation.
Therefore, Ariel has the right to redeem the mortgaged property upon full payment of the debt.
54
QUESTION
Ellen entrusted her title over the lot where she is residing to Patrick, her nephew, for safekeeping
because of her poor eyesight. Patrick, a gambler, prepared a Special Power of Attorney
empowering him to mortgage the lot. Ellen's signature was forged. With the help of Julia who
represented herself as Ellen, Mega Bank granted a loan to Patrick secured by a mortgage on
Ellen's lot. Due to non-payment, Mega Bank foreclosed the mortgage and was declared the
highest bidder. Title was later registered in the name of the bank. When Ellen was notified that
she should vacate the premises, she filed a complaint to nullify the loan with mortgage, the auction
sale and the title of Mega Bank on the ground that the bank is not a mortgagee in good faith.
Decide the case with reasons. (5%)
SUGGESTED ANSWERS
Ellen’s complaint is with merit. According to the doctrine of “mortgagee in good faith”, in
situations where the mortgagor’s title is fraudulent, the mortgage contract and any foreclosure
sale arising therefrom will still be given effect by reason of public policy since buyers or
mortgagees dealing with property covered by a Torrens Certificate of Title are not required to go
beyond what appears on the face of the title. However, this rule does not apply to banks which
are required to observe a higher standard of diligence. A bank cannot assume that simply because
the title offered as security is on its face free of any encumbrances or lien, it is relieved of the
responsibility of taking further steps to verify the title and inspect the properties to be mortgaged.
As held in Arguelles v. Malarayat Rural Banks, it is the standard practice of banks before
approving a loan, to send representatives to the premises of the land offered as collateral to
investigate its real owners. Therefore, in the case at bar, the loan with mortgage, the auction sale,
and the title of Mega Bank shall be nullified because the mortgage was executed without the
consent of the owner, the bank failed to survey the mortgaged premise and find out that it was
being occupied by the owner, and the bank did not verify Julia’s real identity which led them to
believe that she is Ellen.
55
PLEDGE
QUESTION
Mr. Matunod lent Mr. Maganaka the amount of P100,000.00 as security of the
payment of said amount, Maganaka delivered to Matunod two rings in pledge.
When Maganaka failed to pay, Matunod foreclosed, and had the rings sold at
auction. The proceeds of the sale, after deducting expenses, amounted to only
P70,000.00.
a. May Matunod demand the deficiency from Maganaka? Explain.

b. Assume that the proceeds, after deducting expenses, had come up to
P150,000.00. Would Matunod have been entitled to the excess? Explain.
c. Suppose the rings, instead of being pledged, had been mortgaged to
Matunod, would Matunod have been entitled to the deficiency if the sale’s
proceeds were less than the indebtedness or to the excess, if the proceeds
were more? Explain.
SUGGESTED ANSWERS
(a) No. Article 2115 of the NCC provides that “if the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.” Hence, Matunod, as the creditor, cannot recover any deficiency from the sale
of the pledged rings of Maganaka.
(b) Yes. Allowing Maganaka to keep the excess would result to unjust enrichment under
Article 22 of the NCC. Hence, Matunod is entitled to the excess.
(c) Yes. Sec. 14 of Act No. 1508, also known as the Chattel Mortgage Law, provides that “the
proceeds of such sale shall be applied to the payment, first, of the costs and expenses of
keeping and sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgage, shall be paid to the mortgagor or
persons holding him on demand.” Hence, Matunod is entitled to the deficiency.
56
QUESTION
In 1982, Steve borrowed P400,000.00 from Danny, collateralized by a pledge of shares of stock
of Concepcion Corporation worth P800,000.00. In 1983, because of the economic crisis, the
value of the shares pledged fell to only P100,000.00. Can Danny demand that Steve surrender
the other shares worth P700,000.00?
SUGGESTED ANSWERS
Article 2115 of the Civil Code provides that: “The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper case. If the price of the sale is more than
the said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If
the price of the sale is less, neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.
Danny’s right as pledgee is to sell the pledged shares at a public sale and keep the proceeds as
collateral for the loan. There is no showing that the fall in the value of the pledged property was
attributable to the pledger's fault or fraud. On the contrary, the economic crisis was the culprit.
Had the pledgee been deceived as to the substance or quality of the pledged shares of stock,
he would have had the right to claim another thing in their place or to the immediate payment of
the obligation. This is not the case here.
Thus, Danny cannot recover the other shares worth P700,000. He can only recover the number
of shares agreed upon, not the value.
57
QUESTION
ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in XYZ Inc.
It was agreed that if the pledgor failed to pay the loan with 10% yearly interest within four
years, the pledgee is authorized to foreclose on the shares of stock. As required MNO
delivered possession of the shares to ABC with the understanding that the shares would
be returned to MNO upon payment of the loan. However, the loan was not paid on time.
A month after 4 years, may the shares of stock pledged be deemed owned by ABC or
not? Reason.
SUGGESTED ANSWERS
The shares of stock pledged cannot be owned by ABC. Article 2088 provides that the creditor
cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void. Upon default of MNO, the shares of stock must be
foreclosed. If the parties stipulate that ABC becomes the owner of the shares in case MNO
defaults on the loan, such stipulation is void for being a pactum commissorium. A pactum
commissorium is any agreement where the creditor automatically becomes the owner of things
given by way of pledge or mortgage or dispose of them in case of non-payment.
58
QUESTION
:Multiple Choice 39. The following are the limitations on the right of ownership imposed by the
a) Will/Succession
b) Mortgage
c) Pledge
d) Lease
SUGGESTED ANSWERS
(A)
constituted.
59

QUESTION
Donna pledged a set of diamond ring and earrings to Jane for P200,000.00. She was made
to sign an agreement that if she cannot pay her debt within six months, Jane could
immediately appropriate the jewelry for herself. After six months, Donna failed to pay. Jane
then displayed the earrings and ring set in her jewelry shop located in a mall. A buyer,
Juana, bought the jewelry set for P300,000.00.
a) Was the agreement which Donna signed with Jane valid? Explain with legal basis.
b) Can Donna redeem the jewelry set from Juana by paying the amount she owed Jane to
Juana? Explain with legal basis.
c) Give an example of a pledge created by operation of law.
SUGGESTED ANSWERS
(A) No, the agreement allowing automatic appropriation is void.
Under Article 2088 of the Civil Code, the creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them, and any stipulation to the contrary is null
and void. This automatic appropriation is commonly called pactum commissorium, and
based on jurisprudence, it has the following elements:
1. There must be a creditor-debtor relationship between the parties.
2. The property of the debtor was used as security of the loan, either as a mortgage
or a pledge
3. The agreement provides for automatic appropriation of the property upon failure to
pay the obligation.
In this case, all of the elements of pactum commissorium are present:

1. Jane and Donna have a creditor-debtor relationship.
2. Donna’s jewelry were given to Jane as a pledge.
3. Their agreement provides for automatic appropriation of the jewelry upon failure to
pay.
The agreement being a pactum commissorium, it is void under Article 2088 of the Civil
Code.
(B) Yes, she can redeem the jewelry.
Article 559 of the Civil Code provides that “The possession of movable property acquired
in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof, may recover it from the person in possession of the
same. If the possessor of a movable lost or which the owner has been unlawfully deprived,
has acquired it in good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.”
In this case, since the automatic appropriation of the jewelry is void for being pactum
commissorium, Donna was unlawfully deprived of her movable property. Therefore, she
is entitled to recover possession of the same. However, because Juana paid value for the
jewelry, Donna must reimburse her before she could possession.
60
(c) An example of legal pledge, also known as right of retention, is the one provided under
Article 612 of the Civil Code which states, “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.”
61
LETTER OR CREDIT AND TRUST

QUESTION:
XV:
Mars Trading, Inc. (MTI) imported various construction materials from Japan, under a
letter of credit-trust receipt (LC/TR) line provided by Filipinas Bank. When the goods arrived in
Manila, the same were released to MTI upon the latter’s execution of a trust receipt whereby MTI
undertook to hold the goods in trust for the bank. The trust receipt further provided that upon sale
of the goods, the entrustee (MTI) will turn over the proceeds of sale to the entrusting bank to the
extent of the amount of U.S. $100,000 owned by MTI to the bank on account of its importation,
which amount shall be paid in Philippine currency based on the rate of exchange prevailing at the
time of payment. MTI sold the goods six months later, during which time the peso-dollar rate of
exchange deteriorated substantially. MTI refused to pay Filipinas Bank contending that:
(a) the trust receipt stipulation to pay the peso equivalent of $100,000 violated the Uniform
Currency Act, rendering the trust receipt void, and
(b) assuming arguendo that such stipulations were enforceable, MIT should pay only on
the basis of the rate of exchange prevailing on the date when the goods were released.
Decide the case with reasons.
SUGGESTED ANSWERS:
(a) MTI is still liable since only the stipulation requiring payment on foreign currency is violative
of the Uniform Currency Act. The obligation itself under the law subsists, which can be discharged
by a payment in Philippine currency.
(b) The basis of payment would be the rate of exchange prevailing at the time of payment
since the obligation was incurred in foreign currency. Had the obligation been incurred in
Philippine currency then the rate of exchange at the time the obligation was incurred would have
been the basis of payment.
Note: The decisions on this point had not been that consistent. It is, therefore, suggested
that an answer stating that MTI should instead pay on the basis of the rate of exchange prevailing
on the date that the obligation was incurred should be acceptable. Considering that the obligation
may also be deemed as having been effectively incurred in the peso equivalent of the dollar L/C
62
at the time the trust receipt was issued, it could well be argued that payment in Philippine currency
should be measured at the rate prevailing at that time.
ALTERNATIVE ANSWER:
(a) The stipulation in the trust receipt to pay the peso equivalent of $100,000 does not
violate the Uniform Currency Act. The stipulation does not require payment in foreign currency
but in Philippine pesos.
Assuming for the sake of argument that such stipulation is invalid, it does not affect the
validity of the entire trust receipt, but only the stipulation itself.
(b) There is an express stipulation in the trust receipt that the obligation shall be paid in
Philippine currency based on the current rate of exchange prevailing at the time of payment.
Since the obligation was incurred in foreign currency, the rate prevailing at the time of payment
shall be govern.
63
QUESTION:
No.I. X Corporation entered into a contract with PT Construction Corp. for the latter to construct
and build a sugar mill with six (6) months. They agreed that in case of delay, PT Construction
Corp. will pay X Corporation P100,000 for every day of delay. To ensure payment of the agreed
amount of damages, PT Construction Corp. secured from Atlantic Bank a confirmed and
irrevocable letter of credit which was accepted by X Corporation in due time. One week before
the
expiration of the six (6) month period, PT Construction Corp. requested for an extension of time
to deliver claiming that the delay was due to the fault of X Corporation. A controversy as to the
cause of the delay which involved the workmanship of the building ensued. The controversy
remained unresolved. Despite the controversy, X Corporation presented a claim against Atlantic
Bank by executing a draft against the letter of credit.
(C) Can Atlantic Bank refuse payment due to the unresolved controversy? Explain. (3%)
(B) Can X Corporation claim directly from PT Construction Corp.? Explain. (3%)
SUGGESTED ANSWERS:
(A) No, Atlantic Bank cannot refuse payment. In a letter of credit, where the credit is stipulated
as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary,
provided that the stipulated documents are presented, and the conditions of the credit are
complied with. Under the “independence principle,” the issuing bank is not obligated to
ascertain compliance by the parties in the main contract. (Transfield Philippines, Inc. v.
Luzon Hydro Corporation, 443 SCRA 307 (2004)). In this case, an irrevocable letter of
credit is independent of the contract between X Corporation and PT Construction Corp.
Therefore, Atlantic Bank cannot refuse payment.
(B) Yes, X Corporation can claim directly from PT Construction Corp. The call upon the letter
of credit is not exclusive; it is merely an alternative remedy in case of delay due to the fault
of PT Construction Corp. (Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443
SCRA 307 (2004)).
64
QUESTION:
A standby letter of credit was issued by ABC Bank to secure the obligation of X Company to Y
Company. Under the standby letter of credit, if there is failure on the part of X Company to
perform its obligation, then Y Company will submit to ABC Bank a certificate of default (in the
form prescribed under the standby letter of credit) and ABC Bank will have to pay Y Company
the defaulted amount. Subsequently, Y Company submitted to ABC Bank a certificate of default
notwithstanding the fact that X Company was not in default. Can ABC Bank refuse to honor the
certificate of default? Explain.
SUGGESTED ANSWERS:
No, it cannot.
In Transfield Philippines v. Luzon Hydro Corporation, the Supreme Court clarified that in a standby
letter of credit, the beneficiary avoids that litigation burden and receives his money promptly upon
presentation of the required documents, even if the applicant has, in fact, performed and that the
beneficiary’s presentation of those documents is not rightful.
The remedy would be to sue the beneficiary but the beneficiary will keep the money in the
meantime.
In this case, Y Company presented a certificate of default. Therefore, ABC Bank has no other
choice but to honor the letter of credit.
65
QUESTION:
Is the Uniform Customs and Practice for Documentary Credits of the International Chamber of
Commerce applicable to commercial letters of credit issued by a domestic bank even if not
expressly mentioned in such letters of credit? What is the basis for your answer?
SUGGESTED ANSWERS:
The latest revision in 1997, UCP 600, need to be expressly adopted. However, UCP 500 need
not be expressly adopted.
In Bank of America, NT & SA v. Court of Appeals, which was decided in 1993, the Court confirmed
the applicability of the UCP. The governing revision at that time was UCP 500.
Since the Supreme Court has expressly recognized the applicability of UCP 500, it need not be
stipulated in letters of credit. On the other hand, the Supreme Court has not yet made
pronouncements as to the applicability of UCP 600. Therefore, it must be expressly adopted by
the parties if they deem the terms more favorable.
66
QUESTION:
PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount of P10 million for the
purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by PJ against
such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing,
China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in favor of ABC to
cover for the value of the ecodoors for its release to PJ. The terms of the Trust Receipt is that any
proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the ecodoors
were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from Scrap Metal
another 100 pieces of ecodoors but using another bank to issue a new Letter of Credit fully
covered by such proceeds.
PJ refused to pay the proceeds of the sale of the first set of ecodoors to ABC, claiming that the
ecodoors that were delivered were defective. It then instructed ABC not to negotiate the Letter of
Credit that was issued in favor of Scrap Metal.
[a] Explain what is a "Letter of Credit" as a financial device and a "Trust Receipt" as a security to
the Letter of Credit. (2.5%)
[b] As counsel of ABC, you are asked for advice on whether or not to grant the instruction of PJ.
What will be your advice? (2.5%)
SUGGESTED ANSWERS:
[a] According to Articles 567 and 568 of the Code of Commerce, letters of credit are those issued
by one merchant to another for the purpose of attending to a commercial transaction. The letter
of credit should be issued in favor of a definite person and not to order and be limited to a fixed
and specified amount, or to one or more determined amounts but within a maximum, the limits of
which has to be stated exactly.
[b] As counsel of ABC, I will advice not to grant the instruction of PJ Corporation. Applying the
independence principle, the obligation of the bank to pay the Scrap Metal Corporaton is not
dependent upon the fulfillment or non-fulfillment of the main contract underlying the letter of credit
but conditioned only on its submission of the stipulated documents to ABC Bank.
67
ANTICHRESIS
QUESTION:
What do you understand by ANTICHRESIS? How is it distinguished from pledge and mortgage?
SUGGESTED ANSWER:
According to Article 2132 of the Civil Code, antichresis is a contract whereby the creditor acquires
the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to
the payment of interest, if owing, and thereafter to the principal of his credit.
The elements of antichresis are as follows:

1. the existence of the principal obligation to be secured;
2. the property must be an immovable;
3. the person who will constitute the antichresis must have absolute owner of the immovable;
4. the person who will constitute the antichresis must have free disposal of the property;
5. the parties agree that the creditor acquires the right to receive the fruits of an immovable of
his debtor;
6. the debtor has the obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit; and
7. the amount of the principal and of the interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.
Antichresis distinguished from pledge:

1. Antichresis is a consensual contract while pledge is a real contract.
2. Antichresis involves immovable property while pledge involves personal property.
3. In antichresis, the interest and principal must be specified in writing. In pledge, the interest
and the principal need not be in writing but the date and description of the thing pledge must
be in a public instrument to affect third persons.
Antichresis distinguished from mortgage:

1. In antichresis, the creditor has the right to receive the fruits which will be applied to the interest
and principal. In mortgage, the creditor has the right to receive fruits.
2. In antichresis, the property involved is immovable property only. In chattel mortgage, the
property involved is personal property while in real estate mortgage, the property involved is
immovable property.
3. In antichresis, the interest and principal must be specified in writing for validity. In mortgage,
registration is required to bind third persons. However, it may still be valid even if the mortgage
is not in writing, subject to the remedies available to the mortgagee to compel execution of
the written instrument and registration.
4. In antichresis, the creditor is in possession of the property. In mortgage, the creditor-
mortgagee is generally not in the possession of the mortgaged property.
5. In antichresis, the creditor is pays taxes on the property unless there is a stipulation to the
contrary. In mortgage, the mortgagee is not obligated to pay the taxes on the property.
68
1995 BAR EXAMINATIONS
QUESTION:
Olivia owns a vast mango plantation which she can no longer properly manage due to a lingering
illness. Since she is indebted to Peter in the amount of Php 500, 000, she asks Peter to manage
the plantation and apply the harvest to the payment of her obligation to him, principal, and interest,
until her indebtedness shall have been fully paid. Peter agrees.
a. What kind of contract is entered into between Olivia and Peter? Explain.
b. What specific obligations are imposed by law on Peter as a consequence of their contract?
c. Does the law require any specific form for the validity of their Contract? Explain.
d. May Olivia re-acquire the plantation before her entire indebtedness shall have been fully paid?
Explain.
SUGGESTED ANSWER:
a. A contract of antichresis was entered into between Olivia and Peter. Under Art. 2132 of the
Civil Code, by a contract of antichresis the creditor acquires the right to receive the fruits of
an immovable of his debtor, with the obligation to apply them to the payment of the interest,
and thereafter to the principal of his credit.
b. Peter must pay taxes and charges upon the land and bear the necessary expenses for
preservation and repair which he may deduct from his fruits. Art. 2135 of the Civil Code states
that, “the creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and
charges upon the estate. He is also bound to bear the expenses necessary for its preservation
and repair. The sums spent for the purposes stated in this article shall be deducted from the
fruits.”
c. Yes, the law the law requires a specific form for the validity of their Contract. Under Art. 2134
of the Civil Code, the amount of the principal and interest must be specified in writing,
otherwise the antichresis will be void.
d. No, Olivia may not re-acquire the plantation before her entire indebtedness has been fully
paid. Art. 2136 of the NCC specifically provides that the debtor cannot re-acquire the
enjoyment of the immovable without first having totally paid what he owes the creditor.
However, under Art. 2135 of the NCC, it is potestative on the part of the creditor to do so in
order to exempt him from his obligation. The debtor cannot re-acquire the enjoyment unless
Peter compels Olivia to enter again the enjoyment of the property.
69

QUESTION:
2. A contract of antichresis is always
a) A written contract;
b) A contract with a stipulation that the debt will be paid
through receipt of the fruits of an immovable
c) Involves the payment of interests, if owing
d) All of the above
e) Letters a and b
SUGGESTED ANSWER:
d.) All of the above
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter to the principal of his credit.
Art. 2134. The amount of the principal and of the interest shall be specified in
writing; otherwise, the contract of antichresis shall be void.
70

QUESTION:
a. Distinguish antichresis from usufruct. (3%)
SUGGESTED ANSWER:
They are distinguished as follows:
(1) Antichresis is always a contract while usufruct need not arise from a contract because it
may also be constituted by law or by other acts inter vivos, such as donation, or in a last
will and testament, or by prescription.
(2) The subject matter of antichresis is always a real property while the subject matter of
usufruct may either be real property or personal property.
(3) Antichresis is an accessory contract or contract of security while usufruct is a real right.
(4) While in both, the fruits do not pertain to the owner, the usufructuary is entitled to
enjoy the fruits while the antichretic creditor has the obligation to apply the fruits to the
payment of the interest, if owing, and therefatre to the principal of the credit.
71
CHATTEL MORTGAGE

Mercantile Law
QUESTION:
Benedicto executed a chattel mortgage on a Mercedes-Benz car in favor of

Silverio. The mortgage was duly registered on August 15. Upon the failure of
Benedicto to pay the obligation secured by the chattel mortgage, Silverio filed, on
October 3, an action for replevin to take possession of the mortgaged car. It turned
out that as early as August 20, Leopoldo had already filed an action to recover a
sum of money against Benedicto. Even before the replevin case of Silverio could
be set for trial, Leopoldo caused a levy to be made on the Mercedes-Benz to satisfy
the money judgment which a court had awarded on October 10 against Benedicto
in favor of Leopoldo. Whose claim to the Mercedes-Benz car will prevail,
Leopoldo’s or Silverio’s? Explain.
SUGGESTED ANSWER:
Silverio’s claim will prevail. According to jurisprudence, there is a waiver of chattel

mortgage upon the filing of a suit for collection. Leopoldo filed an action to collect sum of
money instead of executing the mortgage in his favor, waiving his remedy of foreclosure
of the chattel mortgage. Hence, Silverio’s claim over the foreclosure of the car will
prevail.
72

QUESTION
No. XVI:
Eastern Motors, Inc. (EMI), an automotive dealer, sold a Toyota station wagon to Alran
Tuason, payable in 10 monthly installments. The installments were evidenced by a promissory
note and secured by a mortgage on the car. EMI assigned the credit to Island Finance
Corporation (IFC), subject to IFC’s right of recourse to EMI if the car buyer (Tuason) was unable
to pay the credit in full. Upon Tuason’s default, IFC foreclosed on the mortgage. Since a
deficiency remained, IFC sought to collect the same from EMI.
Is IFC justified in doing so? Reason out your answer.
ANSWER:
IFC is not justified in collecting the deficiency from EMI. An assignee is merely a
successor-in-interest of the assignor and, therefore, unless otherwise expressed in the deed of
assignment, the right of recourse stipulated in favor of IFC must be deemed confined only to a
case where the car buyer is unable to pay the credit in full. By foreclosing on the car, the right to
the deficiency is lost and no further amount is thus due from the car buyer.
Note: It is suggested that an answer which expresses that IFC may still go after EME
should also be given full credit if the reason advanced is that the Recto law (Art. 1484, Civil Code)
is one that governs the relation between the installment buyer and the seller or its assignees but
not necessarily between the assignor and the assignee, who are free to stipulate in their
respective covenants. The right of recourse against EMI may have also been considered as
referring to a situation where precisely no deficiency can further be collected from the installment
buyer.
73
QUESTION:
A, about to leave the country on a foreign assignment, entrusted to B his brand new car and its
certificate of registration. Falsifying A's signature. B sold A's car to C for P200,000.00. C then
registered the car in his name. To complete the needed amount, C borrowed P100.000.00 from
the savings and loan association in his office, constituting a chattel mortgage on the car. For
failure of C to pay the amount owed, the savings and loan association filed in the RTC a complaint
for collection with application for issuance of a writ of replevin to obtain possession of the vehicle
so that the chattel mortgage could be foreclosed. The RTC issued the writ of replevin. The car
was then seized from C and sold by the sheriff at public auction at which the savings and loan
association was the lone bidder. Accordingly, the car was sold to it. A few days later, A arrived
from his foreign assignment. Learning of what happened to his car, A sought to recover
possession and ownership of it from the savings and loan association. Can A recover his car from
the savings and loan association? Explain your answer.
SUGGESTED ANSWER:
Yes.
Based on the prevailing rulings of the Supreme Court, A can recover the car from the Savings
and Loan Association provided that he pays the price at which the Association bought the car at
a public auction.
In the case, there has been an unlawful deprivation by B of A of his car and, thus, A can recover
it from any person in possession thereof. But, since the Savings and Loan Association bought the
car at a public auction in good faith, A must reimburse the Savings and Loan Association the price
for which the car was purchased.
Therefore, A can recover his car.
74

QUESTION:
Vini constructed a building on a parcel of land he leased from Andrea. He chattel mortgaged the
land to Felicia. When he could not pay Felicia, Felicia initiated foreclosure proceedings. Vini
claimed that the building he had constructed on the leased land cannot be validly foreclosed
because the building was, by law, an immovable. Is Vini correct?
SUGGESTED ANSWER:
Yes. There can be no foreclosure on the building.
The court held in Tumalad v. Vicencio, 41 SCRA 143 (1971) that as a rule, “buildings cannot be
subject of chattel mortgage because they are real properties under Article 415(1) of the New
Civil Code even if they are houses of mixed materials or if the building is on a rented land.”
However, the chattel mortgage shall be considered void because as provided in Article 2085 (2),
“the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged.”
Even if the building cannot be foreclosed, the chattel mortgage in itself shall be considered void.
In this case, Vini is not the absolute owner of the land mortgaged because he merely leased the
said land from Andrea.
Thus, the chattel mortgage shall be considered void and there can be no foreclosure on the
building.
75
QUESTION:
Finding a 24-month payment plan attractive, Anjo purchased a Tamaraw FX from Toyota QC. He
paid a down payment of P100,000 and obtained financing for the balance from IOU Co. He
executed a chattel mortgage over the vehicle in favor of IOU. When Anjo defaulted, IOU
foreclosed the chattel mortgage, and sought to recover the deficiency. May IOU still recover the
deficiency? Explain.
SUGGESTED ANSWER:
No, IOU can no longer recover the deficiency. Under Art 1484 of the NCC, in a contract of sale of
personal property the price of which is payable in installments, the vendor may, among several
options, foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee’s failure to pay cover two or more installments. In such case, however, the vendor shall
have no further action against the purchaser to recover any unpaid balance of the price and any
agreement to the contrary is void.
Although the set of facts failed to state explicitly Anjo’s failure to pay 2 or more installment, it may
be safely presumed because the right of IOU Co to foreclose the chattel mortgage under the
circumstances is premised on Anjo’s failure to pay 2 or more installments. If it were not so, the
foreclosure would not have been valid.
76
QUESTION:
Ritz bought a new car on installments which provided for an acceleration clause in the event of
default. To secure payment of the unpaid installments, as and when due, he constituted two
chattel mortgages i.e. one over his very old car and the other covering the new car that he had
just bought, as aforesaid, on installments. After Ritz defaulted on three installments, the seller-
mortgagee foreclosed on the old car. The proceeds of the foreclosure were not enough to satisfy
the due obligation; hence, he similarly sought to foreclose on the new car. Would the seller-
mortgagee be legally justified in foreclosing on this second chattel mortgage?
SUGGESTED ANSWER:
No. The two (2) mortgages were executed to secure the payment of the unpaid installments for
the purchase of a new car. When the mortgage on the old car was foreclosed, the seller-
mortgagee is deemed to have renounced all other rights. A foreclosure of additional property, that
is, the new car covered by the second mortgage would be a nullity.
77

Civil Law
QUESTION:
Distinguish a contract of chattel mortgage from a contract of pledge. (2%)
SUGGESTED ANSWER:
Chattel Mortgage Pledge

Possession belongs to the creditor Possession belongs to the debtor
Formal contract Real contract
Must be recorded in a public instrument to Must be in a public instrument, describing the
bind third persons thing pledged and the date thereof to bind
their persons
78
Mercantile Law
QUESTION:
On December 1, 1996, Borrower executed a chattel mortgage in favor of the Bank to secure loan
of P3M. In due time the loan was paid.
On December 1, 1997, Borrower obtained another loan for P2M which the Bank granted under
the same security as that which secured the first loan.
For the second loan, Borrower merely delivered a promissory note; no new chattel mortgage
agreement was executed as the parties relied on a provision in the 1996 chattel mortgage
agreement which included future debts as among the obligations secured by the mortgage. The
provisions read:
“In case the Mortgagor executes subsequent promissory note or notes either s a renewal,
as an extension, or as an extension, or as a new loan, this mortgage shall also stand as
security for the payment of said promissory note or notes without necessity of executing
a new contract and this mortgage shall have the same force and effect as if the said
promissory note or notes were existing on date hereof”
As Borrower failed to pay the second loan, the Bank proceeded to foreclose the Chattel Mortgage.
Borrower sued the Bank claiming that the mortgage was no longer in force. Borrower claimed that
a fresh chattel mortgage should have been executed when the second loan was granted.
(a) Decide the case and ratiocinate. (4%)
(b) Suppose the chattel mortgage was not registered, would its validity and effectiveness be
impaired? Explain. (4%)
SUGGESTED ANSWER:
(a) The foreclosure of the chattel mortgage regarding the second loan is not valid. A chattel
mortgage cannot validly secure after-incurred obligation. The affidavit of good faith required under
the chattel mortgage law expressly provides that “the foregoing mortgage is made for securing
the obligation specified in the conditions hereof, and for no other purpose.” The after-incurred
obligation not being specified in the affidavit, is not secured by mortgage.
(b) YES. The chattel mortgage is not valid as against any person, except the mortgagor, his
executors and administrators.
79
Mercantile Law
QUESTION/S:
Debtor purchased a parcel of land from a realty company payable in five yearly installments.
Under the contract of sale, title to the lot would be transferred upon full payment of the purchase
price.
But even before full payment, debtor constructed a house on the lot. Sometime thereafter, debtor
mortgaged the house to secure his obligation arising from the issuance of a bond needed in the
conduct of his business. The mortgage was duly registered with the proper chattel mortgage
registry five years after completing payment of the purchase price, debtor obtained title to the lot.
And even as the chattel mortgage on the house was still subsisting, debtor mortgaged to a bank
the lot and improvement thereon to secure a loan. This real estate mortgage was duly registered
and annotated at the back of the title.
Due to business reverses, debtor failed to pay his creditors. The chattel mortgage was foreclosed
when the debtor failed to reimburse the surety company for payments made on the bond. In the
foreclosure sale, the surety company was awarded the house as the highest bidder.
Only after the foreclosure sale did the surety company learn of the real estate mortgage in favor
of the lending investor on the lot and the improvement thereon. Immediately, it filed a complaint
praying for the exclusion of the house from the real estate mortgage. It was submitted that as the
chattel mortgage was executed and registered ahead, it was superior to the real estate mortgage.
On the suggestion that a chattel mortgage on a house-a real property-was a nullity, the surety
company countered that when the chattel mortgage was executed, debtor was not yet the owner
of the lot on which the house was built. Accordingly, the house was a personal property and a
proper subject of a chattel mortgage.
(a) Discuss the validity of the position taken by the surety company. (3%)
(b) Who has a better claim to the house, the surety company or the lending investor?
Explain (3%)
(c) Would the position of the surety company be bolstered by the fact that it acquired title
in a foreclosure sale conducted by the Provincial Sheriff. Explain (3%)
SUGGESTED ANSWERS:
(a) The house is always a real property even though it was constructed on a land not
belonging to the builder. However, the parties may treat it as a personal property and
constitute a chattel mortgage thereon. Such mortgage shall be valid and binding but
only on the parties. It will not bind or affect third parties.
(b) The lending investor has a better claim to the house. The real estate mortgage
covering the house and lot was duly registered and binds the parties and third persons.
On the other hand, the chattel mortgage on the house securing the credit of the surety
80
company did not affect the rights of third parties such as the lending investor despite
registration of the chattel mortgage.
(c) NO, the chattel mortgage over the house which was foreclosed did not affect the rights
of third parties like the lending investor. Since the third parties are not bound by the
chattel mortgage, they are not also bound by any enforcement of its provisions. The
foreclosure of such chattel mortgage did not bolster or add anything to the position of
the surety company.
81

QUESTION:
X constructed a house on a lot, which he was leasing from  Y. Later, X executed a chattel mortgage
over said house in favor of Z as security for a loan obtained from the latter. Still later, X acquired
ownership of the land where his house was constructed, after which he mortgaged both house
and land in favor of a bank, which mortgage was annotated on the Torrens Certificate of Title.
When X failed to pay his loan to the bank, the latter, being the highest bidder at the foreclosure
sale, foreclosed the mortgage and acquired X’s house and lot. Learning of the proceedings
conducted by the bank, Z is now demanding that the bank re-convey to him X’s house or pay X’s
loan to him plus interests. Is Z’s demand against the bank valid and sustainable? Why? 5%
SUGGESTED ANSWER:
No. Z’s demand for the bank to re-convey X’s house to him or pay X’s loan plus interest is legally
infirm for Z only has a personal right against X by virtue of their unregistered chattel mortgage. Z
does not have a real right over X’s house and cannot defeat the bank’s claim as the latter’s
mortgage was annotated on the Torrens Certificate of Title. Moreover, the classification of the
house as movable property susceptible to chattel mortgage is only controlling for the parties
involved, in this case X and Z, and the bank can rely on the clean title of the house and lot. Without
the factual finding that the bank knew of or was grossly negligent in not inquiring about past
transactions on X’s house, the bank is a mortgagee in good faith. Therefore, Z has no right of
action against the bank as the latter had dealt with X in good faith and there is no privity of contract
between Z and the bank.
82
2009 BAR QUESTIONS
QUESTION:
Armando, a resident of Manila, borrowed P3-million from Bernardo, offering as security his 500
shares of stock worth P1.5-million in Xerxes Corporation, and his 2007BMW sedan, valued at P2-
million. The mortgage on the shares of stock was registered in the Office of the Register of Deeds
of Makati City where Xerxes Corporation has its principal office. The mortgage on the car was
registered in the Office of the Register of Deeds of Manila. Armando executed a single Affidavit
of Good Faith, covering both mortgages. Armando defaulted on the payment of his obligation;
thus, Bernardo foreclosed on the two chattel mortgages. Armando filed suit to nullify the
foreclosure and the mortgages, raising the following issues:
A. The execution of only one Affidavit of Good Faith for both mortgages invalidated the two
mortgages; (2%)
B. The mortgage on the shares of stocks should have been registered in the office of the
Register of Deeds of Manila where he resides, as well as in the stock and transfer book
of Xerxes Corporation. (3%) Rule on the foregoing issues with reasons
C. Assume that Bernardo extra-judicially foreclosed on the mortgages, and both the car and
the shares of stocks were sold at public auction. If the proceeds from such public sale
should be 1-million short of Armando’s total obligation, can Bernardo recover the
deficiency? Why or why not? (2%)
SUGGESTED ANSWERS:
A. No, according to the case of Lilius v. Manila Railroad Company, 62 Phil. 56, the execution
of only one Affidavit of Good Faith for both mortgages is not a ground to nullify the said
mortgages and the foreclosure thereof. Said mortgages are valid as between immediate
parties although they cannot bind third parties as to the case of Philippine Refining v.
Jarque, 61 Phil. 229.
B. Yes, according to Section 4 of Act No. 1508, the mortgage on the shares of stock should
be registered in the chattel mortgage registry in the Register of Deeds of Makati City where
the corporation has its principal office and also in the Register of Deeds of Manila where
the mortgagor resides. Registration of chattel mortgage in the stock and transfer book is
not required to make the chattel mortgage valid. Registration of dealings in the stock and
transfer book under Section 63 of the Corporation Code applies only to sale or disposition
of shares, and has no application to mortgages and other forms of encumbrances.
C. Yes, according to Section 3 of Act No. 1508, Bernardo can recover the deficiency. Chattels
are given as mere security, and not as payment or pledge.
83

Mercantile Law
QUESTION
32. X constituted a chattel mortgage on a car (valued at Php1 Million pesos) to secure a
P500,000.00 loan. For the mortgage to be valid, X should have
(A) the right to mortgage the car to the extent of half its value.
(B) ownership of the car.
(C) unqualified free disposal of his car.
(D) registered the car in his name.
SUGGESTED ANSWER:
(C) X should have unqualified free disposal of his car.
Art. 2085 (3) of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for that purpose.
In order for X to validly constitute a chattel mortgage on his car, the mortgage must comply with
the requisites under Art. 2085, namely that he be the absolute owner, and either have free
disposal of the property or be legally authorized for that purpose. These requisites concur when
one has unqualified free disposal of property, as Art. 428 of the Civil Code provides that the
owner has the right to enjoy and dispose of a thing, without other limitations than those
established by law. Thus, unqualified free disposal of property pertains to both ownership and
the ability to freely dispose of the property, and qualifies to fulfill the above requisites.
84

QUESTION:
No. XVII. On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30,
2008, secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained
another loan of P10,000 from Bob to be paid on February 15, 2008. He secured this by executing
a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al failed to pay. Bob
foreclosed the chattel mortgage but the car was bidded for P6,000 only. Al also failed to pay the
second loan due on February 15, 2008. Bob filed an action for collection of sum of money. Al filed
a motion to dismiss claiming that Bob should first foreclose the mortgage on The Honda
motorcycle before he can file the action for sum of money. Decide with reasons. (4%)
SUGGESTED ANSWER:
Bob has the legal right to file a collection suit for a sum of money without foreclosing on the chattel
mortgage on the motorcycle of Al. It has been ruled that “when the mortgage elects to file a suit
for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he clearly
manifests his lack of desire and interest to go after the mortgaged property.” (Cerna v. CA, 220
SCRA 517 (1193)). In this case, Bob has the prerogative to choose between the remedies
available to him. Therefore, Bob has the right to abandon the chattel mortgage and file instead an
action for collection of the sum of money.
85
QUESTION:
Multiple Choice 39. The following are the limitations on the right of ownership imposed by the
a) Will/Succession
b) Mortgage
c) Pledge
d) Lease
SUGGESTED ANSWER:
(A)
constituted.
86
87
FINANCIAL LEAESE

QUESTION:
Question No. II:
Jose Villa leased his house in Dasmarinas Village to Peter Booth, an executive of a New
York company with a branch office here. The lease contract, which had a term of three years,
stipulated that rentals shall be payable in U.S. dollars in New York to the lessor’s son who
happened to be residing in Manhattan. On the second year of the lease, Peter Booth resigned
from his company but decided to remain in the country and continue the lease. Since the
company was no longer paying his rentals, Booth informed his landlord, Villa, that he would
henceforth be paying his rentals in Philippine pesos out of his local earnings. Villa refused to
accept payment in pesos and insisted on the provisions of the lease contract stipulating payment
of rentals in U.S. dollars.
Is there a legal basis for the landlord’s position? Explain your answer.
SUGGESTED ANSWERS:
There is no legal basis for the landlord’s position. The Uniform Currency Act prohibits and renders
void a stipulation requiring payment of money obligations in foreign currency or in gold or in
Philippine currency measured in foreign currency or in gold. There are, to be sure, expressed
exceptions from the rule-the instant case, however, does not fall under any of those exceptions.
88
QUESTION:
VIII.
Alberto and Janine migrated to the United States of America, leaving behind their 4 children, one
of whom is Manny. They own a duplex apartment and allowed Manny to live In one of the units.
While in the United States, Alberto died. His widow and all his children executed an Extrajudicial
Settlement of Alberto's estate wherein the 2 door apartment was assigned by all the children to
their mother, Janine. Subsequently, she sold the property to George. The latter required Manny
to sign a prepared Lease Contract so that he and his family could continue occupying the unit.
Manny refused to sign the contract alleging that his parents allowed him and his family to continue
occupying the premises.
If you were George's counsel, what legal steps will you take? Explain. 5%
SUGGESTED ANSWERS:
As George’s counsel, I will give Manny a written demand to vacate within a definite period,
say 10 days. After the lapse of the 10-day period, I will file an action for unlawful detainer to
recover the possession of the apartment from Manny. Manny’s occupation of the premises
was by mere tolerance of his parents. When all the co-heirs/ co-owners assigned the 2-door
apartment to Janine in the extrajudicial partition, Janine became the sole owner of the same.
He continued to occupy it under the same familial agreement. Upon the sale of the property
to George, Manny’s lawful occupation of the property was terminated and Manny’s refusal
to sign the lease contract and to vacate the premises after the period to vacate lapsed made
his occupation unlawful, hence, entitling George to the remedy of unlawful detainer.
89
ANTI MONEY LAUNDERING

QUESTION:
IV.
Rudy is jobless but is reputed to be a jueteng operator. He has never been charged or convicted
of any crime. He maintains several bank accounts and has purchased five houses and lots for his
children from the Luansing Realty I Inc. Since he does not have any visible job, the company
reported his purchases to the Anti-Money Laundering Council (AMLC). Thereafter, AMLC charged
him with violation of the Anti-Money Laundering Law. Upon request of the AMLC, the bank
disclosed to it Rudy's bank deposits amounting to P100 Million. Subsequently, he was charged in
court for violation of the Anti-Money Laundering Law.
1. Can Rudy move to dismiss the case on the ground that he has no criminal record? 2.5%
2. To raise funds for his defense, Rudy sold the houses and lots to a friend. Can Luansing
Realty, Inc. be compelled to transfer to the buyer ownership of the houses and lots? 2.5%
Yes, Luansing Realty can be compelleted to transfer the ownership of the houses and lots.
In the absence of a freeze order on the subject houses and lots pending criminal
proceedings against Rudy, the ownership thereof may be validly transferred to another,
and Luansing Realty Inc., can be compelled to recognized the rights of the buyer as the
new owner. Section 7(6) in relation to section 10 of the Anti-Money Laundering Law
requires an Order from the Court of Appeals for the freezing of any money or property
believed to be the proceeds of any unlawful activity.
3. In disclosing Rudy's bank accounts to the AMLC, did the bank violate any law? 2.5%
4. Supposing the titles of the houses and lots are in possession of the Luansing Realty Inc.,
is it under obligation to deliver the titles to Rudy? 2.5%
SUGGESTED ANSWERS
1. No, Rudy cannot move to dismiss the case on the ground that he has no criminal record.
As with any other crime, the absence of a criminal record is not a defense against a charge
for violation of the Anti-Money Laundering Law. Moreover, having a criminal record is not
an element of Money Laundering Offense defined under Section 4 of the Anti-Money
Laundering Law.
2. Yes, Luansing Realty can be compelleted to transfer the ownership of the houses and lots.
In the absence of a freeze order on the subject houses and lots pending criminal
proceedings against Rudy, the ownership thereof may be validly transferred to another,
and Luansing Realty Inc., can be compelled to recognized the rights of the buyer as the
new owner. Section 7(6) in relation to section 10 of the Anti-Money Laundering Law
requires an Order from the Court of Appeals for the freezing of any money or property
believed to be the proceeds of any unlawful activity.
3. Yes, in disclosing Rudy's bank accounts to the AMLC, the bank violated the Republic Act
No. 1405 (Secretary of Bank Deposits Act), which considers all deposits of whatever
nature with banks or banking institutions as absolutely confidential and may not be
examined, inquired, or looked into by any person, government official, bureau or office
except upon the depositor’s written permission; in cases of impeachment; upon order of a
90
competent court in cases of bribery of, or dereliction of duty by public officials; and in cases
where the money deposited or invested is the subject matter of the litigation. The
disclosure was made before Rudy was charged in court for the violation of the Anti-Money
Laundering Law. Hence, his deposits were technically not yet the subject matter of the
litigation.
Moreover, under R.A. No. 9160, the AMLC may inquire into or examine any particular
deposit of investment with any banking institution upon order of any competent court for
violation of the said Act. In the case at bar, the AMLC merely requested for the disclosure;
it did not secure the requisite court order. The bank, therefore, was under no obligation to
disclose Rudy’s deposits.
4. Yes, Luansing Realty, Inc. is obliged to deliver the titles to Rudy. There being no freeze
order over the subject house and lots, Luansing Realty, Inc. is obliged to deliver the titles
to Rudy who is the owner the
91
BANK SECRECY LAW

Secrecy of Bank Deposits
QUESTION:
Michael withdrew without authority funds of the partnership in the amounts of Php 500, 000 and
USD 50, 000 for services he claims he rendered for the benefit of the partnership. He deposited
the Php 500, 000 in his personal peso current account with Prosperity Bank and the USD 50, 000
in his personal foreign currency savings account with Eastern Bank.
The partnership instituted an action in court against Michael, Prosperity Bank, and Eastern Bank
to compel Michael to return the subject funds to the partnership and pending litigation to order
both banks to disallow any withdrawal from his accounts.
At the initial hearing of the case, the court ordered Prosperity Bank to produce the records of
Michael’s peso current account, and Eastern Bank to produce the records of his foreign currency
savings account.
Can the Court compel Prosperity Bank and Eastern Bank to disclose the bank deposits of
Michael? Discuss Fully.
SUGGESTED ANSWER:
(a) Yes, with respect to the peso account. Sec. 2 of RA 1405 allows the disclosure of bank
deposits in case where the money deposited is the subject matter of litigation. It states
that, “all deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or
in cases of impeachment, or upon order of a competent court in cases of bribery or
dereliction of duty of public officials, or in cases where the money deposited or invested is
the subject matter of the litigation.”
Since the case filed against Michael is aimed at recovering the amount he withdrew from
the funds of the partnership, which amount he allegedly deposited in his account, a
disclosure of his bank deposits would be proper.
(b) No, with respect to the foreign currency account. Under the Foreign Currency Law, the
exemption to the prohibition against disclosure of information concerning bank deposits is
the written consent of the depositor. Under Section 8 of the same, it states that, “Secrecy
of foreign currency deposits. – All foreign currency deposits authorized under this Act, as
amended by PD No. 1035, as well as foreign currency deposits authorized under PD No.
1034, are hereby declared as and considered of an absolutely confidential nature and,
except upon the written permission of the depositor, in no instance shall foreign currency
92
deposits be examined, inquired or looked into by any person, government official, bureau
or office whether judicial or administrative or legislative, or any other entity whether public
or private; Provided, however, that said foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.”
In this case, foreign currency deposits maintained in the foreign currency deposit units
may only be inquired into with the written permission of the depositor.
93

Bank Secrecy Law
QUESTION:
#7:
An employee of a large manufacturing firm earns a salary which is just a bit more than what he
needs for a comfortable living. He is thus able to still maintain a P10,000 savings account, a
P20,000 checking account, a P30,000 money market placement and a P40,000 trust fund in a
medium-sized commercial bank.
(a) State which of the four accounts are deemed insured by the Philippine Deposit Insurance
Corporation
(b) State which of the above accounts are covered by the Law on Secrecy of Bank Deposits
SUGGESTED ANSWER:
(a) Republic Act 3591 entitled, An Act Establishing the Philippine Deposit Insurance
Corporation (PDIC) provides that the maximum deposit insurance coverage per depositor
per bank is of PHP500,000. It covers all types of bank deposits in member-banks whether
denominated in local or foreign currencies. All deposit accounts of a depositor in a closed
bank maintained in the same right and capacity shall be added together. A joint account
shall be insured separately from any individually-owned deposit account. Thus, the
P10,000 savings account and the P20,000 checking account are deemed insured by the
Philippine Deposit Insurance Corporation.
(b) Republic Act No. 1405, otherwise known as An Act Prohibiting Disclosure of or Inquiry
into, Deposits with any Banking Institution (“Bank Secrecy Law”), protects all deposits of
whatever nature in banks or banking institutions in the Philippines as well as investments
in government bond. Thus, The P10,000 savings account and the P20,000 checking
account are covered by the Law on Secrecy of Bank Deposits.
94
QUESTION:
XI.
Under Republic Act No.1405 (The Bank Secrecy Law), bank deposits are considered absolutely
confidential and may not be examined, inquired or looked into by any person, government official,
bureau or office. What are the exceptions? 5%
SUGGESTED ANSWERS:
The following are the exceptions to the secrecy of bank deposits under Section 2 of Republic
Act No.1405, viz: (1) upon written permission of the depositor; (2) in cases of impeachment;
(3) in cases where the money deposited or invested is the subject matter of the litigation; and
(4) upon order of a competent court in cases of bribery or dereliction of duty of public officials.
The following circumstances also constitute exceptions to the secrecy of bank deposits:
(1) upon order of the court in cases of unexplained wealth under section 8 of the Anti-Graft
and Corrupt Practices Act (PNB v. Ganayco, 15 SCRA 91, 1965);
(2) upon order of the Commissioner of Internal Revenue with respect to the bank deposits
pf a decedent for the purpose of determining the decedent’s gross estate (Sec. 6 [F]
[1], NIRC);
(3) upon order of the Commissioner of Internal Revenue with respect to the bank deposits
of a taxpayer who has filed an application for compromise of his tax liability under
Section 204 (A) (2) of the NIRC by reason of financial incapacity to pay his tax liability.
(4) in the case of unclaimed balances (Sec. 2, Act. 3936)
(5) without need of a court order, if the Anti-Money Laundering Council determines that a
particular deposit or investment with any banking institution is related to unlawful
activities.
(6) when the examination is made in the course of a special or general examination of a
bank and is specially authorized by the Monetary Board after being satisfied that there
is a reasonable ground to believe that a bank fraud or serious irregularity has been or
is being committed and that it is necessary to look into the deposit to establish such
fraud or irregularity;
(7) when examination is made by an independent auditor hired by the bank to conduct its
regular audit provided that examination is for audit purposes only and the results thereof
shall be for the exclusive use of the bank;
(8) upon order of the court in cases filed by the Ombudsman and upon the latter’s authority
to examine and have access to bank accounts and records (Marquez v. Desierto, 359
SCRA 772, 2001), in relation to sec. 15 (8), Rep. Act. No. 6770).
95
FINANCIAL DISTRESS - INSOLVENCY
QUESTION:
XVIII:
Union Corporation was declared insolvent by order of the court. All creditors of Union
were asked to file their claims and attend a meeting to elect the assignee in insolvency. Merchant
Finance Corporation (MFC) has a claim for P500,000, which is secured by a mortgage on a piece
of land worth P1 million. MFC seeks your advice as counsel whether it should participate in the
foregoing proceedings.
What advice would you give MFC?
SUGGESTED ANSWERS:
I would advice MFC that, having a contractual mortgage (the value of the mortgaged
property being well over the secured obligation), it should refrain from participating in the
proceedings and instead pursue its preferential right to foreclose the mortgage.
96
QUESTION:
A) 1. Distinguish between suspension of payments and insolvency.
2. Who has jurisdiction over suspension of payments filed by corporations,
partnerships, or association?
B) A Debtor who has been adjudged insolvent is given his discharge by the court after his
properties have been applied to his debts. A year later, with those debts still not fully
paid, he wins in the sweepstakes and comes into a large fortune. His creditors sue him
for the balance
SUGGESTED ANSWERS:
A) (1) Suspension of payment is where the debtor, who has sufficient assets but
who may be unable to meet his obligations when they fall due, may petition for more
time to settle the obligations. The debtor’s proposal must be approved by at least two-
thirds of the creditors representing at least three-fifths of the total liabilities of the debtor.
Insolvency by contrast, may be petitioned when the assets of the debtor are less than or
insufficient to answer for his total liabilities. Suspension of payment may be initiated only
by the debtor, while an insolvency petition may be filed by either the debtor (voluntary
insolvency) or at least three of his creditors whose aggregate credit is not less than Php
1000. There is no discharge in suspension of payment, but it is possible in insolvency
proceedings.
a. (2) In the case of corporations, partnerships, or associations, a suspension of
payment now falls under the jurisdiction of the Securities and Exchange
Commission (P.D. 902-A)
B) The suit will not prosper on debts that are properly discharged in insolvency. Those that
are not discharged include:
a. Taxes and assessments due to the government whether national or local.
b. Obligations arising from embezzlement or fraud
c. Obligations of any person liable to the insolvent debtor for the same debt
d. Alimony or claim for support
e. In general, debts that are not provable against the estate of the insolvent or not
listed in the schedule submitted by the insolvent debtor
97
QUESTION:
An insolvent debtor, after a lawful discharge following an adjudication of insolvency, is released
from, generally, all debts, claims, liabilities and demands which are nor have been proved against
his estate. Give five (5) obligations of the insolvent debtor that survive.
SUGGESTED ANSWERS:
The five (5) obligations of the insolvent debtor that survive are as follows:
(1) Taxes and assessments due the government, national or local;
(2) Obligations arising from embezzlement or fraud;
(3) Obligations of any person liable with the insolvent debtor or the same debt, either as a
solidary co-debtor, surety, guarantor, partner, indorser or otherwise;
(4) Alimony or claim for support; and
(5) Debts not provable against the estate (such as after-incurred obligations) of, or not
included in the schedule submitted by, the insolvent debtor.
98
QUESTION:
Give the basic requirement to be complied with by the Central Bank (Bangko Sentral ng Pilipinas)
before the Monetary Board can declare a bank insolvent, order it closed and forbid it from doing
further business in the Philippines.
SUGGESTED ANSWERS:
The basic requirements prescribed under Section 29 of Presidential Decree No. 1827 entitled
“Further Amending Republic Act Numbered Two Hundred Sixty-Five, as Amended, otherwise
known as "The Central Bank Act" provides that:
(a) There must be an examination by the head of the Department of Supervision or his
examiners or agents into the condition of the bank.
(b) The examination discloses that the condition of the bank is one of insolvency, or that its
continuance in business would involve probable loss to creditors or depositors.
99
QUESTION:
5. An assignee in a proceeding under the insolvency law does not have the duty of:
a) Suing to recover the properties of the estate of the insolvent debtor;

b) Selling property of the insolvent debtor
c) Ensuring that a debtor corporation operate the business efficiently
and effectively while the proceedings are pending
d) Collecting and discharging debts owed to the insolvent debtor.
SUGGESTED ANSWERS:
c. Ensuring that a debtor corporation operate the business efficiently and effectively while
the proceedings are pending
100
QUESTION:
In order to obtain approval of the proposed settlement of the debtor in an insolvency
proceeding:
a) The court must initiate the proposal

b) 2/3 of the number of creditors should agree to the settlement;
c) 3/5 of the number of creditors should agree to the settlement;
d) 1/3 of the number of creditors should agree to the settlement;
e) letters a and b.
SUGGESTED ANSWERS:
None of the choices is the correct answer. In order to obtain approval of the proposed
settlement, 2/3 of the number of creditors representing 3/5 of the total liabilities must approve the
same.
101
TRUST RECEIPTS LAW
QUESTION:
Mr. Noble, as the President of ABC Trading, Inc., executed a trust receipt in favor of BPI
Bank to secure the importation by his company of certain goods. After release and sale of the
imported goods, the proceeds from the sale were not turned over to BPI. Would BPI be justified
in filing a case for estafa against Noble?
SUGGESTED ANSWER
Yes. Section 13, or the Penalty Clause of the Trust Receipts Law provides:
The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa x x x.
In this case, Mr. Noble, as the entrustee, was bound to turn over the proceeds of the sale.
Because he did not turn over such proceeds to BPI, he shall be liable under the penalty clause.
Thus, BPI would be justified in filing a case for estafa against Noble.
102
QUESTION:
Bar Question #12
A buys goods from a foreign supplier using his credit line with a bank to pay or the goods. Upon
arrival of the goods at the pier, the bank requires A to sign a trust receipt before A is allowed to
take delivery of the goods. The trust receipt contains the usual language. A disposes of the goods
and receives payment but does not pay the bank. The bank files a criminal action against A for
violation of the Trust Receipts Law. A asserts that the trust receipt is only to secure his debt and
that a criminal action cannot lie against him because that would be violative of his constitutional
right against “imprisonment for non-payment of a debt.” Is he correct?
SUGGESTED ANSWER
No. Section 13 of the Presidential Decree (PD) No. 115 dated January 29, 1973 entitled Providing
for the regulation of Trust Receipts Transactions provides that “the failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt
to the extent of the amount owing to the entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation
or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or
other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.”
In other words, violation of a trust of receipt is criminal as it is punished as estafa under the said
law. There is a public policy involved which is to assure the entruster with the reimbursement of
the amount advanced or the balance thereof for the goods subject of the trust receipt. The
execution of the trust receipt or the use thereof promotes the smooth flow of commerce as it helps
the importer or buyer of the goods covered thereby.
103
QUESTION:
1. What acts or omissions are penalized under the Trust Receipts Law? 2.5%
SUGGESTED ANSWER
Failure of the entrustee to turn over the proceeds of the sale of the goods, documents, or
instrument covered by a trust receipt to the extent of amount of the amount owing to the
entruster or to return the goods, documents, or instruments if they were not sold or disposed
of in accordance with the terms of the trust receipt is penalized as estafa Article 315(1)(b) of
the Revised Penal Code (Sec. 13, P.D. No. 125).
QUESTION:
2. Is lack of intent to defraud a bar to the prosecution of these acts or omissions? 2.5%
SUGGESTED ANSWER
No, the lack of intent to defraud is not a bar to the prosecution of these acts or omissions.
The mere failure to account for or return the goods, documents, or instrument in question
gives rise to the crime, which is malum prohibitum (Ong v. Court of Appeals, 401 SRCRA
648, 2003).
104
QUESTION:
No. II. Tom Cruz obtained a loan of P1 Million from XYZ Bank to finance his purchase of 5,000
bags of fertilizer. He executed a trust receipt in favor of XYZ Bank over the 5,000 bags of fertilizer.
Tom Cruz withdrew the 5,000 bags from the warehouse to be transported to Lucena City where
his store was located. On the way, armed robbers took from Tom Cruz the 5,000 bags of fertilizer.
Tom Cruz now claims that his obligation to pay the loan to XYZ Bank is extinguished because the
loss was not due to his fault. Is Tom Cruz correct? Explain. (4%)
SUGGESTED ANSWER
No, Tom Cruz’s obligation to pay the loan covered by the trust receipts to XYZ Bank remains.
Section 10 of the Trust Receipt Law provides:
Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee.
Loss of goods, documents or instruments which are subject of a trust receipt, pending their
disposition irrespective of whether or not it was due to the fault or negligence of the entrustee,
shall not extinguish his obligation to the entruster for the value thereof.”
In this case, Cruz is the entrustee. The loss of the goods due to armed robbers does not warrant
extinguishment of his obligation since the fault of the entrustee is immaterial. Therefore, Tom
Cruz’s obligation to pay the loan covered by the trust receipts to XYZ is not extinguished by the
loss of goods.
105
QUESTION:
E received goods from T for display and sale in E's store. E was to turn over to T the proceeds
of any sale and return the ones unsold. To document their agreement, E executed a trust
receipt in T’s favor covering the goods. When E failed to turn over the proceeds from his sale of
the goods or return the ones unsold despite demand, he was charged in court for estafa. E
moved to dismiss on the ground that his liability is only civil. Is he correct?
(A) No, since he committed fraud when he promised to pay for the goods and did not.
(B) No, since his breach of the trust receipt agreement subjects him to both civil and criminal
liability for estafa.
(C) Yes, since E cannot be charged with estafa over goods covered a trust receipt.
(D) Yes, since it was merely a consignment sale and the buyer could not pay.
SUGGESTED ANSWER
(B) No, since his breach of the trust receipt agreement subjects him to both civil and criminal
liability for estafa.
Section 13 of the Trust Receipts Law (P.D. 115) provides that the entrustee may be criminally
liable for the crime of estafa under par. 1(b), Article 315 of the Revised Penal Code, or estafa
with abuse of confidence if he did not turn over the proceeds of the sale, if he did not return the
goods when lawfully demanded, or if he did not pay the value of the goods if the goods are not
meant for sale. In this case, the failure of E to turn over the proceeds from his sale of the goods
or return the unsold goods despite demands makes him liable for estafa with abuse of
confidence.
106
QUESTION:
Upon execution of a trust receipt over goods, the party who is obliged to release such goods
and who retains security interest on those goods, is called the
(A) holder.
(B) shipper.
(C) entrustee.
(D) entruster.
SUGGESTED ANSWER
(D) Entruster.
Section 4 of the Trust Receipts Law explains a trust receipt transaction as a transaction
“whereby the entruster, who owns or holds absolute title or security interests over certain
specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the entruster of a signed document called a
‘trust receipt’…” Thus, it is the entruster who releases the goods and retains security interest in
them.
107
QUESTION:
A. Maine Den, Inc. opened an irrevocable letter of credit with Fair Bank, in connection with
Maine Den, Inc.'s importation of spare parts for its textile mills. The imported parts were
released to Maine Den, Inc. after it executed a trust receipt in favor of Fair Bank. When
Maine Den, Inc. was unable to pay its obligation under the trust receipt, Fair Bank sued
Maine Den, Inc. for estafa under the Trust Receipts Law. The court, however, dismissed
the suit. Was the dismissal justified? Why or why not?
SUGGESTED ANSWER
Yes, the dismissal is justified.
The Trust Receipts Law (PD 115) Section 13 provides that “the failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt
to the extent of the amount owing to the entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code.”
However, the same section provides that, “If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities arising from the criminal offense.”
In this case, the criminal case for estafa was filed against the company itself and not the officers
or employees responsible for the failure to pay the trust receipt. Therefore, the dismissal is
justified.
108
QUESTION:
B. Does the rule "res perit domino" apply in trust receipt transactions? Explain.
SUGGESTED ANSWER
No, it does not.
Res perit domino means that the risk of loss is borne by the owner. Under Section 10 of the Trust
Receipts Law, provides that the risk of loss shall be borne by the entrustee. However, Section 9
of the Trust Receipts Law provides that the entrustee shall hold the goods, documents or
instruments in trust for the entruster and shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt. The entrustee, therefore, is not the owner of goods.
Since the entrustee is not the owner of the goods, but is still made to bear the risk of loss, res
perit domino does not apply.
109
TRUST RECEIPTS LAW

QUESTION
Dana Gianina purchased on a 36-month installment basis the latest model of the Nissan
Sentra Sedan car from the Jobel Cars, Inc. In addition to the advertised selling price, the latter
imposed finance charges consisting of interests, fees and service charges. It did not, however,
submit to Dana a written statement setting forth therein the information required by the Truth in
Lending Act (R.A. No. 3765). Nevertheless, the conditional deed of sale which the parties
executed mentioned that the total amount indicated therein included such finance charges.
a.) Has there been substantial compliance of the aforesaid Act?
b.) If your answer to the foregoing question is in the negative, what is the effect of the
violation on the contract?
c.) In the event of a violation of the Act, what remedies may be availed of by Dana?
SUGGESTED ANSWER
a.) No. According to Section 4 of the Truth in Lending Act, the creditor shall furnish to
each person to whom credit is extended, prior to the consummation of the transaction,
a clear statement in writing setting of, amongst others, the specific amounts in the
credit cost. In this case, Jobel Cars, Inc. did not submit to Dana a written statement
setting forth therein the information required by the Truth in Lending Act. Despite
mentioning the total amount in the conditional deed of sale, this cannot be considered
substantial compliance because the Act requires full disclosure of the credit cost. This
entails specifying the amounts due, which Jobel Cars, Inc. did not. Hence, there was
no substantial compliance.
b.) Section 6 of the Truth in Lending Act provides that a violation of such Act will not
affect the validity or enforceability of any contract or transactions.
c.) Section 6 of the Truth in Lending Act likewise provides for the remedies Dana may
avail of. Subsection (a) states that any creditor who fails to disclose any information in
violation of the Act shall be liable to the other party in the amount of P100 or in an
amount equal to twice the finance charged required by such creditor in connection with
such transaction, whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of the violation, in any
court of competent jurisdiction. In any action under this subsection in which any person
is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and
court costs as determined by the court.
Subsection (c) provides that Dana may also initiate a criminal charge against the
creditor, who may be fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
110
WAREHOUSE RECEIPTS LAW
QUESTION
When is a warehouseman bound to deliver the goods upon a demand made either by the
holder of the receipt for the goods or by the depositor?
SUGGESTED ANSWERS
Section 8 of the Warehouse Receipts Law provides that in the absence of some lawful
excuse provided by the Act, a warehouseman is bound to deliver the goods upon a demand made
either by the holder of a receipt for the goods or by the depositor; if such demand is accompanied
by (a) an offer to satisfy the warehouseman's lien, (b) an offer to surrender the receipt, if
negotiable, with such indorsements as would be necessary for the negotiation of the receipt, and
(c) a readiness and willingness to sign, when the goods are delivered, an acknowledgment that
they have been delivered, if such signature is requested by the warehouseman.
111
QUESTION
Mr. Bakal deposited with a warehouseman two crates of goods for which he received two
warehouse receipts (one for each crate)-one being a negotiable warehouse receipt and the
other a non-negotiable warehouse receipt. Title to both warehouse receipts were transferred on
December 1, 1985 to Mr. Tigas. The warehouseman was not notified of the transfer of receipts.
Meanwhile, Mr. Tapang, a judgment creditor of Mr. Bakal, served a notice of levy over the
goods on the warehouseman.
A) Between Mr. Tigas and Mr. bakal, who would have preference over the goods covered
by the negotiable warehouse receipt? Reasons.
B) Who would have preference over the goods covered by the non-negotiable warehouse
receipt? Reasons.
SUGGESTED ANSWERS
A) Mr. Tigas has preference over the goods covered by the Warehouse Receipt. In
negotiation, the transferee’s rights over the goods accrues from the moment of transfer
and the transferee there upon acquires the direct obligation of the warehousemen to
hold the goods for him.
B) Mr. Tapang would have preference over the goods in this case. The transferee of a non-
negotiable warehouse receipt merely acquires rights no better than those of the
transferor and the direct obligation of the warehousemen only upon notice of the
transfer. (Sec. 41-43, Warehouse Receipts Law)
112
QUESTION
A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence
the transaction, the Warehouse Company issued a receipt expressly providing that the goods be
delivered to the order of said merchant.
A month after, a creditor obtained judgment against the said merchant for a sum of money. The
sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the
deposited rice.
(a) What advice will you give the Warehouse Company? Explain (2%)
(b) Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis
of which it filed a claim with the sheriff. Would the rice mill have better rights to the rice
than the creditor? Explain your answer. (2%)
SUGGESTED ANSWERS
(a) The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and
a negotiable receipt was issued therefore. The rice cannot thereafter, while in the
possession of the Warehouse Company, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt be first surrendered to the
warehouseman, or its negotiation enjoined. The Warehouse Company cannot be
compelled to deliver the actual possession of the rice until the receipt is surrendered
to it or impounded by the court.
(b) Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than
the creditor. It is the rice mill that can surrender the receipt which is in its possession
and can comply with the other requirements which will oblige the warehouseman to
deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the
warehouseman’s liens and fees and other charges.
113
QUESTION
The authorized alteration of a warehouse receipt which does not change its tenor renders the
warehouseman liable according to the terms of the receipt
(A) in its original tenor if the alteration is material.

(B) in its original tenor.
(C) as altered if there is fraud.
D) as altered.
SUGGESTED ANSWERS
: (B) The warehouseman is liable according to the terms of the receipt in its original tenor.
Section 13 of the Warehouse Receipts Law provides that the alteration of a receipt shall not
excuse the warehouseman who issued it from any liability if such alteration was (a) immaterial,
(b) authorized, or (c) made without fraudulent intent. An alteration which does not change the
tenor of the warehouse receipt is immaterial, and thus renders the warehouseman liable
according to the original tenor of the receipt.
114
QUESTION
X, warehouseman, sent a text message to Y, to whom X had issued a warehouse receipt for Y's
500 sacks of corn, notifying him of the due date and time to settle the storage fees. The
message stated also that if Y does not settle the warehouse charges within 10 days, he will
advertise the goods for sale at a public auction. When Y ignored the demand, X sold 100 sacks
of corn at a public auction. For X’s failure to comply with the statutory requirement of written
notice to satisfy his lien, the sale of the 100 sacks of corn is
(A) voidable.
(B) rescissible.
(C) unenforceable.
(D) void.
SUGGESTED ANSWERS
D) The sale is void.
Section 33 of the Warehouse Receipts Law provides for the statutory requisite of written notice
prior to the satisfaction of the lien by sale. Failure to follow such formal requisite renders the
sale void. Thus, in the present case where such requisite was not followed, the sale of the 100
sacks of corn becomes void.
115
QUESTION
. X, creditor of Y, obtained a judgment in his favor in connection with Y's unpaid loan to him. The
court's sheriff then levied on the goods that Y stored in T's warehouse, for which the latter
issued a warehouse receipt. A month before the levy, however, Z bought the warehouse receipt
for value. Who has a better right over the goods?
(A) T, being the warehouseman with a lien on the goods

(B) Z, being a purchaser for value of the warehouse receipt
(C) X, being Y’s judgment creditor
(D) Y, being the owner of the goods
SUGGESTED ANSWERS
(B) Z, being a purchaser for value of the warehouse receipt.
Section 49 of the Warehouse Receipts Law states that “Where a negotiable receipt has been
issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has been negotiated, whether such
negotiation be prior or subsequent to the notification to the warehouseman who issued such
receipt of the seller's claim to a lien or right of stoppage in transitu.” Thus, Z, the purchaser of
the warehouse receipt for value in good faith, has the better right.

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UNIVERSITY OF ASIA AND THE PACIFIC

Institute of Law and Governance

A COMPILATION OF BAR QUESTIONS AND SUGGESTED ANSWERS

1996 BAR EXAMINATION

2013 BAR EXAMINATION

2016 BAR EXAMINATION

1993 BAR EXAMINATION

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1998 BAR EXAMINATION

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2004 BAR EXAMINATION

2005 Bar Examination

2007 BAR EXAMINATION

Art. 1939. Commodatum is purely personal in character. Consequently:

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Is Jose's refusal justified? (1%)

1988 BAR EXAMINATION

2001 BAR EXAMINATION

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

2004 BAR EXAMINATION

Distinguish briefly but clearly between: mutuum and commodatum

2012 BAR EXAMINATION

2017 BAR EXAMINATION

1988 BAR EXAMINATION

1992 BAR EXAMINATION

The bank resists the claims of B and the Mayor of Manila.

To whom should A deliver the bag of money? Decide with reasons.

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2004 BAR EXAMINATION

2007 BAR EXAMINATION

1. A deposit made in compliance with a legal obligation is

Art. 1996. A deposit is necessary:

2014 BAR EXAMINATION

Article 1962 of the Civil Code provides,

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2016 BAR EXAMINATION

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2010 BAR EXAMINATION

2017 BAR EXAMINATION

1988 BAR EXAMINATION

B) The Revised Securities Act classifies securities into:

1991 BAR EXAMINATION

1992 BAR EXAMINATION

Decide with reasons.

1996 BAR EXAMINATION

2000 BAR EXAMINATION

Thus, the enforcement of judgement on the conjugal partnership should be cancelled

2008 BAR EXAMINATION

2013 BAR EXAMINATION

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1989 BAR EXAMINATION

1991 BAR EXAMINATION

1999 BAR EXAMINATION

Equity of Redemption Right of Redemption

2000 BAR EXAMINATION

2001 BAR EXAMINATION

2006 BAR EXAMINATION

A real estate mortgage may be foreclosed judicially or extrajudicially.

In what instance may a mortgagee extrajudicially foreclose a real estate mortgage? 5%

2011 BAR EXAMINATION

(A) accion publiciana.