BENEFIT OF EXCUSSION

June 30, 2014 / Danielle Tan

WHAT IS THE BENEFIT OF EXCUSSION?
1. GUARANTOR is only secondarily liable.
2. All legal remedies against DEBTOR is exhausted
HOW TO INVOKE BENEFIT OF EXCUSSION?
It is not enough to assert the benefit, but there must be an ACTUAL IDENTIFICATION of the assets
(within the Philippines)
WHAT ARE THE EXCEPTIONS TO THE BENEFIT OF EXCUSSION?
1. GUARANTOR expressly announced it.
2. Bound himself solidarily with the DEBTOR
3. Insolvency of the DEBTOR
Insolvent when assets are not sufficient to offer the liabilities
There is no need for a judicial declaration or determination of insolvency
4. When the DEBTOR has absconded, OR cannot be sued within the Philippines unless he has left
the manager or representative.
There has to be an option. (absconded OR cannot be sued)
The policy is, make the BORROWER liable FIRST, and the GUARANTOR SECOND.
5. May be presumed when execution of property of PRINCIPAL DEBTOR would not result in the
satisfaction of the obligation.
6. Doesnt comply with Article 2060
7. Has judicial bondsman and sub-surety
8. Where a pledge or mortgage has been given by him as special security.
Let us assume the guarantor invoked the BENEFIT OF EXCUSSION; validly, the LENDER using that theory
sued the GUARANTOR. Whats the risk?
Its not just EXCUSSION, theres ACTUAL IDENTIFICATION of the assets. Then those assets, which could
have been sufficient to pay the obligation, will WIND UP the liability of the GUARANTOR. So lets say the
assets identified are worth 7M, the GUARANTOR may only wind up to 3M. Remember that rule. If the
GUARANTOR identified his assets, the LENDER should go after those assets. If the LENDER does not go
after those assets, that is the RISK of the LENDER and in case the other creditors and borrower get the
assets, the LENDER will have a reduction of its claim against the GUARANTOR.
This is our example. LENDER is gonna sue the BORROWER has the property. The BORROWER absconded.
Can the LENDERS go after the GUARANTOR?
NOT YET, because the exception is, CANNOT BE SUED. Yes the BORROWER absconded, but the
BORROWER can still be sued
How can the court acquire jurisdiction?
The LENDOR will cause to attach and the court will now acquire jurisdiction over this asset for the
satisfaction of the claim of the LENDOR is valid.
Lets say: LENDER has made an assessment. The exercise against the BORROWER will take long So the
LENDER wanted to do after the GUARANTOR. Can the LENDER do that?
No
The BORROWER defaulted. LENDER sued both. BORROWER, LENDER had an alternative prayer, a
relief asked from the court. BORROWER pays, or if BORROWER is in no position to pay, GUARANTOR
should pay. Can both GUARANTOR and BORROWER be sued with an alternative relief? A demand to pay
or should the BORROWER be in no position, GUARANTOR should pay pursuant to the GUARANTEE. Can
that be done?
No, because the provision he decided states that it should be an action only against the PRINCIPAL
DEBTOR. In fact the appearance by the GUARANTOR, in that proceeding will not bind the GUARANTOR,
there must be a separate guarantee against the GUARANTOR. SO go back to our first question, what is
the problem, the concern as a LENDER?
GUY: The money could have gotten right away.
Lets say you will be compensated by adding the 3 by way of (30:30) by way of damages. 6% is
enough. Lets say you compensate and you will get damages and interest (principal interest). SO interest
will continue to improve until payment. Whats your concern? Time- whats the problem with time? Its
not just the cost of money we will assume that in the end, assuming we have slow process, the court will
award to the LENDER an amount together with interest
Yeah there should be 100 M if its just 90 spent. Do you agree? Whats the concern? Yes, the money may
be gone. Whats the livelihood if you have this scenario? This is in cash. What could possible happen?
Hide the assets. It can be a warehouse to the cash under somebody elses name like what politicians do.
They buy assets and place it under the name of a relative. So you can risk, if its cash its very easy to
hide , you can hide it beyond the reach of the court. What if its property? You can have simulated sale
and it would be the burden of the LENDER to show that they are simulated. So you know how long a
litigation would last for a final judgement (33:37) and enforced by the lower court. Maybe 10 years,
..so youre done LENDER sued BORROWER after 10 yrs, ended with nothing.
Lets say its 1M. In the mean time, do you think GUARANTOR will wait out that 10 years? The moment
GUARANTOR learns that BORROWER is being sued, the GUARANTOR will ensure that the GUARANTOR is
judgement proof by the time LENDER proceeds against the GUARANTOR. Thats why the guarantee is
NOT a good security arrangement. Why?
GUY: .(34:40)
What is guarantee according to the law?
GUY:
Yes, the provisions are stacked up against the LENDER. First off, LENDER ..unless LENDER exhausts ALL
REMEDIES of the BORROWER. LENDER cannot sue them at the same time. If he can he needs to attach
the 10M in which case there is security for the BORROWER if BORROWER cant pay. What else? Of
course the length of time its not a pot of gold or end of the rainbow. Before you reach that, most likely
its hidden somewhere else. Thats why if you compare this with other _________, this is the weakest
form of security. Then say you have a big GUARANTOR (ex: Manny Pacquiao), that doesnt ensure
payment. It is a worry. *Scenario: GUARANTOR (500M) costs more than BORROWER (100M) What is the
problem if youre going after the GUARANTOR (500M)?
If I am the GUARANTOR lets say Im 65 yrs old, with a budget of 10-20M with a ______ to this case and
by that time Im dead, spent the entire 500M. So this 500M will be a big hurdle for the LENDER because
a lot of legal impediments will be thrown at the LENDER. Of course, this will be placed beyond the reach
of the LENDER. Whats the remedy then of the LENDER? So at the back of your mind youre the LENDER,
you have anticipated problems. What can you possibly do? Who will go away with this benefit?
GUY: Before you stop the contract
Lets say its a guarantee. What should you do then?
In whispers sue
Sue the BORROWER? Remember the money is here
GUY:
No. When youre collecting you are in no position to compromise. Take the chance. In this case, you sue
the GUARANTOR holding the exception. Just take the chance, Im suing the GUARANTOR and theres no
way I can find any other asset from the BORROWER Just take the chance. You think the GUARANTOR can
point the 5M worth of assets? Well thats a haircut the LENDER is willing to take but there is a 95M at
stake which can be collected from the GUARANTOR if the GUARANTOR is able to hide the assets. Its a
big risk, the moment the GUARANTOR identifies then thats the problem. So its a calculated risk based
on assessment of the actual available asset of the BORROWER.
What about compromise? Youre jumping to another point.
GUY:
Whats the rule about COMPROMISE? Compromise meaning the principal DEBTOR and the principal
CREDITOR
GUY:
And if it will not prejudice the GUARANTOR. The obligation may be modified from time to time and the
GUARANTOR gives its prior consent so that. Remember our usual discussion of a usual structure of a
GUARANTOR? You have a CREDITOR, you have a DEBTOR. DEBTOR has a ______ to the CREDITOR. It is
secured by the GUARANTOR and a surety shift and to have a counter part agreement. We have here, an
___________ agreement and there is a security given for the performance of the
_____________________. The security should be ensured by the DEBTOR so reinstate the mortgage by
the DEBTOR
GUY: It should be from another party than the DEBTOR because if he is able to cover..
Because if its secured by the property of the DEBTOR, before you reach this point, everything should
have been exhausted first so most likely the security will be given by 3
rd
party. Lets assume its a perfect
world, If DEBTOR defaults, CREDITOR can proceed against the GUARANTEE, GUARANTEE will pay and
GUARANTOR.(44:13) through the security so in effect it will be the DEBTOR paying the roundabout
way. ..(44:23) instead of DEBTOR paying directly. How? Through the 3
rd
party security. SO in this
case, the GUARANTOR is only lending its name, his reputation, a seal of approval for this excussion.
Lets say the LENDER defaulted. The parties entered and sued/demanded. The BORROWER __________
a compromise. The DEBTOR agreed to pay 50M and all the obligation will be extinguished with that
benefit of GUARANTOR. Will the compromise benefit the GUARANTOR?
The DEBTOR defaulted. CREDITOR and GUARANTOR entered a COMPROMISE. GUARANTOR will pay
110M. Can that be done? Its voluntary on the part of the GUARANTOR
DECLARO: Yes
No . Why do you pay 110 if you dont get full indemnity? It can be done but there wont be indemnity
So in an exam, a compromise between CREDITOR and GUARANTOR, there is a counter part provision
GUY: ..between GUARANTOR and CREDITOR even if theres (46:36)
If the GUARANTOR pays more, he cannot cover the excess. Thats part of the compromise. Is hat more in
favor of the DEBTOR. True or false? Ill repeat. If the CREDITOR is COMPROMISING the CREDITOR and he
cannot demand him more than what he has really paid. If he paid 110, he cannot get the P 10M, right? If
the GUARANTOR paid 50M, can the GUARANTOR get the entire 100? Because of the rule, the
compromise can benefit only the DEBTOR, cannot prejudice the DEBTOR, whether its over or less, it will
be the actual amount paid but not receiving the principal obligation, so the question now: is that rule
always for the benefit of the debtor? If the answer is TRUE, it is true in any circumstance.
GUY: FALSE
False? So youre saying that there may be an instance where it will work at the disadvantage of the
principal DEBTOR. In that case, if a GUARANTOR pays less, he may not recover more. If the GUARANTOR
pays more than the principal obligation, he cannot recover the excess. Because the compromise should
not prejudice the DEBTOR, thats the rule. Will that rule ALWAYS benefit the DEBTOR?
Lets focus on this situation. GUARANTOR, through a compromise, pays P 50M. Anything GUARANTOR
pays will have complete imdemnification. GUARANTOR cannot get P 100M right, is there a problem with
that? In our perfect but real world.
If youre the GUARANTOR, you get 50% discount. Whats the problem with this scenario? Whats being
removed by that scenario? There will always be complete indemnification. When do you act?
PEOPLE: Whats in it for me
It can be for the benefit of the DEBTOR but it can also work against the DEBTOR. In this scenario, lets
say the GUARANTOR is in the best position to get a compromise. The DEBTOR will then lose this
opportunity to get a 50% discount for the compromise.
For it to work, there must be a FEE for the P 50M pay. But thats not allowed right? So how do you do it?
You do another contract (between the GUARANTOR and the DEBTOR)! In this case, the GUARANTOR will
now act as a consultant, the consultants fee would be this incentive
CONTRACT: Debtor asks GUARANTOR to try to represent him with the CREDITOR, in trying to wiggle
down the amount. DEBTOR then gives GUARANTOR P X amount