V. Secured Transactions - VI. Guaranty/Surety - Coggle Diagram
V. Secured Transactions - VI. Guaranty/Surety
- Contract of security/Security Transaction.
A.Kinds of Secured Transactions
b. Real Security
- The encumbrance of a property (collateral), to be given to guarantee the fulfillment of an obligation, especially the assurance that a creditor will be rapid with money or credit extended to a debtor, often with interest.
- Common example of a real security. Here, the creditor acquires security interest in the collateral to secure a principal obligation.
Security Interest (PD 115 S. 3h)
- a property interest created by agreement or by operation of law to secure the performance of an obligation.
- Expanded the enumeration of personal properties.
a. Personal Security
- Contractual obligation for the repayment of a debt. This binds the PERSON. e.g. guaranty
- Accessory contract; the means by which the parties to a principal obligation ensure its enforcement, protect an interest in property, or ensure that the person to be made secure can be compensated for the loss.
Effects on Obligations
- If contract of security = secured obligation/secured principal. If not, unsecured.
Securities (RA 8799)
- Shares, participation or interests in a corporation, commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character.
Securities Regulation Code
- Bonds, notes and debentures while normally evidence of indebtedness and are the common commercial forms of contracts of loan, in the SRC they are called securities, regardless if it is actually secured or unsecured.
- Process by which loans and other debts with an expected cash payment stream (such as interest in mutuum) are sold on a without recourse basis by a seller to a special purpose entity (Issuer). The issuer gives securities (in the form of a bond/other instrument) that depend on the expected cash stream for repayment.
- Converting assets into securities for resale.
- Risk distribution, where risk is default or non-payment of the loans. This is done by aggregating the debts and issued the new securities backed by the aggregated debt. (tl;dr interest for everything pooled together pays for the securities
- In the event of a default, the creditor may choose between specific performance or the enforcement of the security. Default may be stipulated by the parties such as failure to preserve the security, etc.
Requisites for Security
DEMANDABLE AND LIQUIDATED
- refers to the principal obligation.
- debtor delays in the performance.
- creditor judicially or extrajudicially requires performance.
- Valid and binding on the parties. This declares the entire principal obligation immediately due and the security enforced.
Letters of Credit
- Business device for importers and merchants in solving financing problems.
A. General Concepts
B. Forms of Trust Receipts
- must be written or printed, containing the specified terms i.e. a formal contract.
C. Rights of Entruster
D. Rights of Purchaser
E. Obligations of Entrustee
(Secs. 9-10, 12-13 Revised Penal Code, Art. 315)
- Entrustee shall:
HOLD IN TRUST
- 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;
- receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt;
- insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
- keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;
- return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
TERMS AND CONDITIONS
- observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.
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Loss of Security Interest -
Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.
- The entruster shall be:
- entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt,
- to the return of the goods, documents or instruments in case of non-sale,
- and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.
- may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee,
- and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale,
- and the entruster may, at a public sale, become a purchaser.
- The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.
APPLICATION OF PROCEEDS
The proceeds of any such sale, whether public or private, shall be applied
to the payment of the expenses thereof;
. to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments;
. to the satisfaction of the entrustee's indebtedness to the entruster.
Responsibility for Sale by Entrustee (S.8)
- The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee.
Entrustor/ter (Usually bank) - Owner of the goods
Entrustee (Usually borrower from bank) - Seller of the goods
(Sec. 3 (j), 5-6)
(i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation, business trust or other association, and two more persons having a joint or common interest.
- A trust receipt need not be in any particular form, but every such receipt must substantially contain
- of the goods, documents or instruments subject of the trust receipt;
- invoice value of the goods and the amount of the draft to be paid by the entrustee;
or a commitment of the entrustee
in trust for the entruster the goods, documents or instruments therein described;
of them in the manner provided for in the trust receipt; and
to TURN OVER
the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein.
- The trust receipt may contain other terms and conditions agreed upon by the parties. Provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs.
- In the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding:
- In the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate
- on the date the proceeds of sale of the goods, documents or instruments are turned over to the entruster
- or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.
(Trust Receipts Law, Sec. 4)
Entruster - Owner of the goods
Entrustee - Seller of the goods
Trust Receipt Transaction
- Transaction between entruster and entrustee whereby former releases possession of goods to the entrustee. Latter binds himself to hold the goods/documents/instruments in trust for the entruster and to sell or dispose them with the obligation to turn over the proceeds + those unsold in accordance with the terms and conditions of the trust receipt.
- These specific rules govern in cases where the trust receipt covers goods and documents or, instruments.
Goods or Documents -
In the case of goods or documents,
to sell the goods or procure their sale; or
to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or
to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or
- In the case of instruments,
to sell or procure their sale or exchange; or
to deliver them to a principal; or
to effect the consummation of some transactions involving delivery to a depository or register; or
to effect their presentation, collection or renewal
When Not a Trust Receipt -
Sale by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has general property rights in the goods against the buyer OR or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.
- Goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a "security interest" in the goods as holder of a security title for the advances it had made to the entrustee.
Underlying Transaction - Loan.
A. General Concepts
- In effect, it is a security transaction intended to substitute the financial strength of the issuer such as a bank, for that of the applicant, in order to convince the beneficiary to transact with the applicant. (like a voucher)
B. Kinds of Letters of Credit
C. Rules of Strict Compliance
- Documents tendered by the beneficiary must strictly comply with the terms of the letter of credit.
D. Independence Principle
- The letter of credit constitutes a separate and distinct obligation. Independent of the underlying or principal obligation.
Flow of Demandability
Issuance of letter of credit
- payment required upon tender of the documents required by the beneficiary.
- This means that any breach of the principal obligation does not affect demandability of the letter of credit.
- the issuer does not incur liability for the principal obligation.
- , quantity, weight, quality, condition, packing, delivery, value, or existence of the goods represented by any documents
, or acts, or omission, solvency, performance, or standing of the consignor, the carriers, or the insurers of the goods, or any other persons.
XCPN (Feati Bank & Trust v. CA)
- Fraud exception rule. Untruthfulness of a certificate accompanying demand for payment may support an injunction against payment provided that the following elements are present:
- proof of fraud;
- fraud constitutes fraudulent abuse of the independent purpose of the letter of credit i.e. the documents submitted AND NOT fraud re: underlying obligation
- might follow if injunction is not granted or, recovery of damages would be seriously affected.
Need for Letter of Credit
- Seller gets paid. Buyer can receive the goods immediately, even prior to payment due to bank agreeing to pay the seller.
Ensures prompt payment. Underlying obligation is usually sale.
Form of Tender
- Must include all the documents required by the letter.
Acceptance of Tender
- If either the issuer or applicant accepts the tender by the beneficiary and B does not comply with what is required, the issuer acts on its own risk. This means that recovery of the money paid to the beneficiary against the applicant or the issuer is barred.
Kinds of Documents
- The honoring entity deals only with documents. Thus, it should presume that the document submitted is vital to the applicant by the mere fact that the document was required under the letter of credit. It cannot determine on its own the importance of the documents.
Commercial letters of Credit
- Commercial credit. Used in a contract of sale of goods between applicant (buyer) and the beneficiary (seller).
B2. Standby Letters of Credit
- Standby credit. Used as a guarantee/security for any kind of obligation i.e. monetary/non-monetary.
- Payable upon certificatio of the applicant's failure to perform the obligation.
Demandability (Transfield Phils v. Luzon Hydro)
- Commercial Credit is payable only upon presentation of the beneficiary of documents that show it has taken affirmative steps to comply with the contract of sale.
- convenient and relatively safe mode of dealing with the sale of goods to satisfy the seemingly irreconcilable interests of a seller-beneficiary who refuses to part with its goods before it is paid, and that of a buyer applicant who wants to have control of the goods before paying.”
(Code of Commerce, Arts. 567-568, Art. 2)
- Those issued by one merchant to another or for purpose of attending to a commercial transaction.
Essential Conditions (568)
- Absence of any of the two elements converts the letters into letters of recommendation.
ISSUED IN FAVOR
- of a determined person and not to order.
- to a fixed and specified amount, or to one or more indeterminate amounts, but all included in a maximum sum the limit of which must be exactly stated.
- Involves (3) parties, the issuer, the applicant, and the beneficiary.
- The issuer, upon applicant's request, agrees to honor a draft or other demand for payment by the beneficiary PROVIDED that the draft/demand complies with the conditions in the letter.
Compliance with Demand
- Issuer complies with the draft or demand regardless of whether or not the obligation between the beneficiary and the applicant is satisfied.
- only way to claim the goods is where bank/beneficiary releases the documents tendered, usually shipping documents or other way to claim the goods given to bank by seller.
Similar to escrow. To remedy situation where buyer and seller do not know each other.
A. General Concepts (2047, 1211, 1216, 2082,2056,2083)
- Here, person assumes liability for the debt, default or other failing of another party. Again, an accessory, personal security transaction.
B. Form (1403)
- A special promise to answer for the debt, default, or miscarriage of another. Under the statute of frauds, thus must be in writing and subscribed by the party charged or their agent.
C. Obligations Secured (2053)
D. Distinguished from Guaranty
E. Distinguished from Joint and Solidary Obligations (2066-67, 1217)
- Reimbursement of solidary debtor only for the share that corresponds to the co-debtor. The co-debtor is principally bound.
In Joint - Both principals; whereas surety one principal and one accessory.
Nature of Liability
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Will pay if debtor DOES NOT pay
Insure payment of the debt/performance of the obligation of the principal debtor,
Insure the solvency of the principal debtor
Will pay if debtor UNABLE to pay
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- Surety is unique, valid despite the absence of any direct consideration received by the surety. However, generally it must be supported by sufficient consideration but such consideration need not pass directly to the surety; sufficient that it go to the principal debtor alone.
Obligation of the Surety -
: Strictissimi juris applies, ergo only as far as the contract stipulates.
- Compensated sureties.
Future Contracts (2053)
- May be given for future debts or conditional obligations even if the amount is not known. However, must be liquidated to be demandable.
STIPULATION IN JOINT GUARANTORS (Tupaz v. BPI)
- The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt
DOUBT (Security Bank v. Cuenca)
- Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor
- A contract whereby a person binds himself to a creditor to fulfill the obligation of the principal debtor in case the latter fails to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
Nature of Liability
- Direct, primary and absolutely liable to the creditor. It is directly and equally bound with the principal.
- May be legal (by law) or judicial (by judicial order). But arises always as a consequence of a contract.
Legal Suretyship (2056, 2086)
- Here, the surety is called the bondsman. Must possess the same qualifications enumerated in 2056.
- person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees.
Article 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof. (1855)
Article 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety.
A. General Concepts (2047, 2051)
B. Form (2055)
- An accessory contract that is a special promise to answer for the debt, default or miscarriage of another. Thus, covered by the Statute of frauds. Must be in writing, otherwise unenforceable.
C. Consideration (2048) -
A guaranty is gratuitous, unless there is a stipulation to the contrary.
D. Obligations Secured (2052-2054)
E. Parties to a Guaranty (2056-2057, 2049, 2064-65)
F. Benefits of Excussion (2058-2064, 2081)
G. Right to Protection (2071)
- Guarantor may proceed against the principal debtor i.e. either:
- obtain a release from the guaranty and
- demand security that protects him from any proceedings by the creditor and from the danger of insolvency of the debtor even before paying in the following circumstances:
H. Right to Indemnification (2066, 2050, 1236, 2069-70, 2073)
- The substantive right of action of the guarantor, obtained after payment against the principal debtor. This requires that the contract of guaranty must have been entered into with the knowledge and consent of the principal debtor.
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- When he is sued for the payment;
- In case of insolvency of the principal debtor;
LAPSE OF PERIOD
- When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;
- When the debt has become demandable, by reason of the expiration of the period for payment;
- After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;
- if there are reasonable grounds to fear that the principal debtor intends to abscond;
DANGER OF INSOLVENCY
- If the principal debtor is in imminent danger of becoming insolvent.
- Even before payment.
Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (1830a)
Article 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832)
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- Right of the guarantor to demand that the creditor exhaust both:
- All properties of the principal debtor
- All legal remedies
Before the creditor may proceed against the guarantor. The benefit of excussion is always unimpaired even if judgment is rendered against the principal debtor and the guarantor in case of appearance by the guarantor. (2062)
How Creditor Enforces Guaranty (2062)
- Creditor brings an action against the principal debtor alone UNLESS 2059 applies.
- Creditor asks court to notify guarantor
- Guarantor may appear to plead defenses.
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Principal Debtor - Not really a party, as the contract of guaranty may be found in a separate instrument.
- person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees
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Article 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. (1828a)
Article 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor. (1829a)
Article 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n)
Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836)
Article 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. (1837)
. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824
A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a)
Article 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. (1826)
- Only up to the principal debtor's liability, no more. If more, reduce.
Void Contracts (2052)
- No guaranty. However, unenforceable and voidable may be the subject of guaranty.
Future Contracts (2053)
- May be given for future debts or conditional obligations even if the amount is not known. However, must be liquidated to be demandable.
- one which governs a course of dealing for an indefinite time or by a succession of credits. It is not limited to a single transaction but contemplates a prospective or future course of dealing, covering a series of transactions, which are within the stipulations of the contract of guaranty, until the expiration or termination thereof. Tl;dr grant of standing credit to the principal debtor to be used from time to time either indefinitely or within the period provided.
. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a)
- Obligation of the guarantor must be express and not presumed. Cannot extend to more than what is stipulated.
- Indefinite guaranty. Extends to the principal obligation, accessories and judicial costs.
- Only to a specified amount. However, if guaranty specifies a fixed amount but also provides for liability for interest and expenses, the latter amounts still control even if they exceed the stipulated amount.
. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)
. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823)
- A promise to answer for the payment of some debt or the performance of some duty in case of the failure of the person principally liable.
- A personal security transaction whereby the conditional obligation of the guarantor arises upon default of the principal.
- may be conventional, legal or judicial.