SGS QUESTIONS: (and other notes from class appear in this CREDIT: is the debtors ABILITY to borrow money
borrow money by virtue of
box)
1. Which is the best security transaction that should govern the
situation?
2. What would you do if you were counsel for:
a. Debtor
b. Creditor
c. Others who may be parties/involved
(surety/guarantor/etc)
3. In a case, what would the remedy have been (for the losing
party)?
INTRODUCTION: THE CONCEPT OF CREDIT
A. Credit, Debt and Security
- Credit, which means belief or trust is from Latin
Credere = I believe/to trust or to believe
- Greek law: non-payment of a debt was categorized as a
capital crime similar to murder
- Roman law: creditor was allowed to seize the debtor and sell
or kill him in foreclosure, since a sum of money owed was
equated with human life
- Judaic law: creditor was allowed to take the children of the
debtor for nonpayment of a debt
- Constitutional mandate now: No person shall be
imprisoned for debt ! shows that concepts of credit
and debt have been dramatically altered
- Concept of security was devised to have a rational and
kinder, system of ensuring the payment of debt security
is a transaction by which a creditor mitigates the risk of non-
payment of debt by equating a sum of money owed with
property or another persons undertaking to pay
- Without credit, and without a rational system of dealing with
non-payment of debt, trade and commerce would not have
flourished in the 14th to 19th century
- By the 20th century, modern-day merchants were translating
concepts of credit, debt and security into increasingly
complicated and sophisticated transactions required by the
global economy
B, Credit and Credit Transactions Defined
RA 3765, Sec. 3 (2) "Credit" means any loan, mortgage, deed
of trust, advance, or discount; any conditional sales contract;
any contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which part
or all of the price is payable subsequent to the making of such
sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any
option, demand, lien, pledge, or other claim against, or for the
delivery of, property or money; any purchase, or other
acquisition of, or any credit upon the security of, any obligation
of claim arising out of any of the foregoing; and any transaction
or series of transactions having a similar purpose or effect.
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the confidence or trust reposed by the creditor that the debtor
will pay what he promised.
It mitigates the risk of loss using SECURITY.
- Civil Code does not have a definition of credit
- Under the Truth in Lending Act, RA No. 3765, Sec. 3(2):
"Credit" means any loan, mortgage, deed of trust,
advance, or discount; any conditional sales contract; any
contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which
part or all of the price is payable subsequent to the making
of such sale or contract; any rental-purchase contract; any
contract or arrangement for the hire, bailment, or leasing of
property; any option, demand, lien, pledge, or other claim
against, or for the delivery of, property or money; any
purchase, or other acquisition of, or any credit upon the
security of, any obligation of claim arising out of any of the
foregoing; and any transaction or series of transactions
having a similar purpose or effect. ! this is primarily an
enumeration
- Jurisprudence defined credit as a sum credited on the
books of a company to a person who appears to be entitled
to it. It presupposes a creditor-debtor relationship, and may
be said to imply ability, by reason of property or estates, to
make a promised payment It is the correlative to debt or
indebtedness, that which is due to any person, as
distinguished from that which he owes.
- Debt has been defined as a demand for an amount actually
ascertained. There must be an ascertained amount and not
a mere unliquidated demand or liability, a certain sum that a
person may recover in numero and not to be repaired in
damages
People v. Concepcion (1922)
Plaintiff: People of the Phils.
Defendant: Venancio Concepcion
Concept: Credit & Credit Transactions Defined
Doctrine:
Credit is the ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay what he
may promise. Loan, on the other hand, is the delivery by one
party and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to repay the
sum of money, upon an agreement, express or implied, to repay
the sum loaned, with or without interest.
Brief Facts:
Concepcion, president of PNB, issued a special authorization for
an extension of credit in favor of copartnership Puno y
Concepcion, with his wife being one of the copartners. The line
of credit was issued with no other securities demanded. He was
charged with violation of Sec. 35 of Act No. 2747, which prohibits
the granting of loans to members of the board of directors of the
bank, and was found guilty.
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ISSUES:
WON the grant of a line of credit of P300k by the defendant to
the copartnership
1. a loan within the meaning of Sec. 35? (NO)
2. a loan or a discount? (LOAN)
3. an indirect loan within the meaning of Sec. 35? (YES)
4. WON defendant may be convicted of the offense even if the
same were already repealed before the information was filed
and judgment was rendered (YES)
5. was covered of the prohibition by the law? (YES)
6. WON good faith is a defense (NO)
RATIO:
1. NO; record shows that authority was not for a loan
but only for a concession of credit
- Court finds that the documents on the record only speak of
credit (credito), and not of a loan (prestamo).
- Credit is the ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay
what he may promise.
- Loan, on the other hand, is the delivery by one party and
the receipt by the other party of a given sum of money,
upon an agreement, express or implied, to repay the sum of
money, upon an agreement, express or implied, to repay
the sum loaned, with or without interest.
- However, the Court also points out that the concession of a
credit necessarily results to the grant of loans up to the limit
of the amount fixed in the credit.
- Definition provides a conceptual framework for
understanding credit in relation to credit transactions
- J. Malcolm borrowed from Bouviers Law Dictionary and
defined credit as a persons ability to borrow money by
virtue of the confidence or trust reposed by a lender that he
will pay what he may promise.
- Credit, therefore, is an evaluation, made in the present, by
virtue of the trust and confidence reposed by a creditor,
of a debtors future worth or ability.
- All obligations, that is, the juridical necessity to give, to do
or not to do, that arise as a consequence of this evaluation,
are credit transactions.
2. The grant was one of loan and is therefore covered
by the penal provision.
- A 1916 ruling by the Insular Auditor held that the provision
prohibits loans but not discount transactions; it now, then,
becomes important to determine the nature of the
transaction in question.
- The grant by the defendant was a loan and NOT a discount
transaction:
o Discounts (1) involves a deduction of the interest in
advance, and (2) is written on a double-name paper
o The transaction however, did not involve such a
deduction at the said point in time and was written on a
single-name paper. These are characteristic of a loan.
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3. YES; it constitutes an indirect loan.
- What may not be done directly, cannot be done indirectly.
- The object of Congress in enacting the provision in the said
question was to prevent the director of a bank from being
tempted to serve his financial interests.
- Making the grant of credit in question to a copartnership
where the defendants own wife is a shareholder is an
indirect circumvention of the provision and therefore, also
falls under its prohibition; it amounts to an indirect loan by
the defendant to himself.
4. YES; he may still be convicted
- The past cases of US v. Cuna, Ong Chang Wing and Kwong
Fok v. US, etc., have already ruled that the repeal of the
penal provision for which a defendant is being held
responsible for, does not deprive the courts of their
jurisdiction to try the case and sentence him the appropriate
penalty, if found guilty.
5. YES; the provision covers him.
- While the provision talks of the National Bank being
prohibited to do a certain act, such prohibition extends to
the board of directors, and to each director, separately and
individually.
- Defendant, being the President of the bank is, therefore,
properly covered by the provision as well.
6. NO; good faith is not a defense
- The Court holds that since the penal provision in question is
malum prohibitum, it does not matter if the defendant acted
in good faith or that the loans that came about from the
extension of credit were already paid. The law punishes the
very commission of the crime and not the intent behind it,
on account of public interest and policy.
DISPOSITIVE: CFI affirmed.
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C. Commercial Credit Transactions LOAN

COC, Art. 1 The following are merchants for the purposes of I. THE CONCEPT OF LOAN
this Code:
1. Those who, having legal capacity to trade, customarily The concept of loan is a question of civility. It came from Roman
devote themselves thereto. cdasia law, a contract of neighborliness.
2. Commercial or industrial associations which are formed in
accordance with this Code. A. General Concepts

COC, Art. 2 Commercial transactions, be they performed by
merchants or not, whether they are specified in this Code or
not, shall be governed by the provisions contained in the
same; in the absence of such provisions, by the commercial
customs generally observed in each place; and in the absence
of both, by those of the common law.
Commercial transactions shall be considered those
enumerated in this Code and any others of a similar character.
COC, Art. 3 The legal presumption of a customary
engagement in commerce exists from the time the person who
desires to trade gives notice through circulars, newspapers,
handbills, posters exhibited to the public, or in any other
manner whatsoever, of an establishment, the purpose of which
is to conduct any commercial transaction.
- Most credit transactions are commercial in nature, generally
entered into by merchants
- Commercial credit transactions usually take the form of
ready-made contracts contracts of adhesion,
agreements where one party imposes a ready-made form of
contract on the other who is free to reject it entirely, or if it
adheres, to give its consent; just as binding as ordinary
contracts; in case of ambiguity, it will be construed against
the party who prepared it
D. Relevance of Trust and Confidence
- Money: anything generally accepted as payment in a
transaction, recognized as a standard of value, and
authorized or adopted by a State as part of its currency. It is
viewed as trust inscribed, a matter of belief in the State
issuing it. Money approximates absolute credit as it
represents the trust and confidence reposed in the State
- A common view arose (only those with money could procure
more money on credit): by 2007, debtors lured by deferred
payment terms failed to make payments; securities became
worthless; 21st cen. witnessed first global credit crisis
- By late 20th century microfinance and microcredit gained
recognition as poverty alleviation strategies. As a credit and
savings mobilization program exclusively for the poor, the
avowed purpose is to improve their asset base and expand
their access to savings.
o Underlying credit transaction quite simply a loan is
unique because of the small amount of money involved,
the general absence of security over property, and the
partnering of private and public sector entities
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Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
Art. 1305 A contract is a meeting of minds between two
persons whereby one binds himself, with respect to the other,
to give something or to render some service.
- Art. 1933 defines loan as a contract where one party
delivers to another either something not consumable so
that the latter may use the same for a certain time and
return it (commodatum), or money or other
consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid
(mutuum)
- A loan is an obligation that always arises from a contract
- A loan, whether commodatum or mutuum, is a contract
for permissive use
The source of the obligation is a contract.
Essential Elements:
Mutuum Commodatum
Object Consumable or Non-consumable
money
Consideration Creditor: Liberality Bailor: Liberality
Debtor: Permissive Bailee: Permissive
use use
Consent Consent
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1. Obligation to Deliver
Art. 1934 An accepted promise to deliver something by way
of commodatum or simple loan is binding upon parties, but
the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract.
- Primary obligation of the creditor in a loan is the delivery,
that is, the formal act of transferring, or the giving or
yielding of possession or control, of property for permissive
use by the debtor
- Reason why a loan is considered a real contract, a
contract in which property passes from one party to another,
requiring something more than mere consent
- Delivery is essential for perfection
The obligation to DELIVER makes it a REAL CONTRACT
because it is perfected upon the delivery of the object.
Consent is still necessary because consent is still an essential
element of a CONTRACT.
MUTUUM: Obligations of the Parties
- Creditor: To DELIVER
- Debtor: To PAY the same amount of the same kind and
quality
COMMODATUM: Obligations of the Parties
- Bailor: To DELIVER
- Bailee: To RETURN
Difference in the obligation of the DEBTOR arises from the
nature of the object of the contract:
- CONSUMABLE (mutuum): consumed by its use
- NON-CONSUMABLE (commodatum): not consumed by its
use
Garcia v. Thio (2007) Corona
Petitioners: Carolyn Garcia
Respondents: Rica Marie Thio
Concept: Loan - Obligations to Deliver
Doctrine:
A loan is a real contract, not consensual, and is perfected only
upon the delivery of the object of the contract. Delivery is the
act by which the res or substance thereof is placed within the
actual or constructive possession or control of another.
Brief Facts:
Garcia gave Thio 2 crossed checks in Feb and June 1995, and
Thio gave Garcia amounts of money for several months
thereafter. Garcia filed a complaint for sum of money and
damages against Thio, alleging that Thio borrowed money from
her but failed to pay on the maturity dates. Thio denied
contracting the 2 loans, and alleged that it was a Santiago who
contracted the loans and Thio was merely tasked to deliver said
checks to her.
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ISSUE: WON there was a contract of loan; if so, W it was Thio or
Santiago who borrowed money from Garcia [YES, Thio]
RATIO: YES, there was a contract of loan, where Thio
borrowed money from Garcia.
(On existence of a loan)
- A loan is a real contract, not consensual, and is perfected
only upon the delivery of the object of the contract
o Art. 1934: An accepted promise to deliver something by
way of commodatum or simple loan is binding upon
parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the
object of the contract. (n)
o Upon delivery of the object of the contract of loan
(money received by the debtor when the checks were
encashed), the debtor acquires ownership of such
money or loan proceeds and is bound to pay the
creditor an actual amount
- Undisputed that the checks were delivered to Thio, but the
checks were crossed and payable, not to Thio, but to
Santiago
(On identity of borrower)
- Garcia: Thio insisted that both checks be made payable to
Santiago; and once Thio received the checks, she had
possession and control of them such that she had the choice
to either forward them to Santiago (who was already her
debtor), to retain them or to return them to Garcia
- SC: We agree with Garcia
o Delivery is the act by which the res or substance
thereof is placed within the actual or constructive
possession or control of another
o Although she did not physically receive the proceeds,
the instruments were placed in her control and
possession under an arrangement whereby she actually
re-lent the amounts to Santiago
- Several factors that support conclusion that instruments
were placed in Thios control and possession:
o That Garcia did not personally know Santiago, and it
was highly improbable that Garcia would grant 2 loans
to a complete stranger without requiring promissory
notes or acknowledgment of the debt. Thio already had
transactions with Santiago back then
o A friend of both Garcia and Thio testified that Thios
plan was for Garcia to lend her money at 3% monthly
interest, after which Thio would lend the same amount
to Santiago at 5% and realize profit of 2%
o Thio admitted issuing her own checks in the amount of
P76,000, but she merely accommodated Garcias
request that Thio use her own checks since Garcia was
not personally acquainted with Santiago; difficult to
believe Thio would put herself in a position where she
would be compelled to pay interest, from her own
funds, for loans she allegedly did not contract
o In petition for insolvency by Santiago, Thio (not Garcia)
was listed as one of Santiagos creditors
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 o Thio never presented Santiago as a witness to Commodatum Mutuum
corroborate story Non-consumable, whether Money or other consumable
- SC: Thio should be liable for the principal amounts of the movable or immovable property
loans (US$100,000 and P500,000) but she shouldnt be liable Purpose of the delivery by the Purpose of the delivery by the
for the 3% and 4% monthly interest because there was no creditor is for the permissive creditor is for the permissive
written proof of the interest payable except for the verbal use of the property by the use of the property by the
agreement AND Art. 1956 states that [n]o interest shall be debtor for a certain time debtor by taking ownership
due unless it has been expressly stipulated in writing (use of consumable property
(On interest) results in its extinguishment)
- No stipulated interest, but there can be legal interest Creditor retains ownership Debtor takes ownership
pursuant to Art. 2209 (breach of an obligation which consists Obligation on the part of the Consequent obligation of the
in the payment of a sum of money, i.e., a loan or debtor to return the very same debtor is to pay the same
forbearance of money) in the amount of 12% per annum property to the creditor amount, or kind and quality to
o 12% from Nov. 21, 1995, when Thio received Garcias the creditor
demand letter
3. Consideration of a Loan
DISPOSITIVE: Petition GRANTED.
Art. 1933 By the contract of loan, one of the parties delivers
Garcia v. Thio to another, either something not consumable so that the latter
From one crossed check, there are 2 contracts of loan: may use the same for a certain time and return it, in which case
1. Garcia giving check to Thio: delivery the contract is called a commodatum; or money or other
2. Thio passes on to Santiago (presumably) consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
2. Object of a Loan contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter Simple loan may be gratuitous or with a stipulation to pay
may use the same for a certain time and return it, in which case interest.
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount In commodatum the bailor retains the ownership of the thing
of the same kind and quality shall be paid, in which case the loaned, while in simple loan, ownership passes to the
contract is simply called a loan or mutuum. borrower.
Commodatum is essentially gratuitous.
- Contract of loan is a reciprocal obligation, not a unilateral
Simple loan may be gratuitous or with a stipulation to pay contract
interest. - The promise of the debtor to pay is the consideration of the
obligation of the creditor to furnish the loan
In commodatum the bailor retains the ownership of the thing - COMMODATUM: essentially gratuitous, that is, the only
loaned, while in simple loan, ownership passes to the consideration for the creditor is always liberality
borrower. - MUTUUM: may be gratuitous or with a stipulation to pay
interest
Art. 418 Movable property is either consumable or
nonconsumable. To the first class belong those movables
which cannot be used in a manner appropriate to their nature
without their being consumed; to the second class belong all
the others.

- Object is either property that is non-consumable, or

money or other consumable property:

Consumable object is extinguished by its use.

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4. Obligation to Return or Pay B. Contract to Loan

Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
Art. 1934 An accepted promise to deliver something by way
of commodatum or simple loan is binding upon parties, but
the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract.
Contract to loan and contract of loan, distinguished.
Contract To Loan Contract Of Loan
Consensual contract perfected Real contract perfected upon
by mere consent delivery
A binding obligation arising Once the debtor in a contracts
from contract between a to loan delivers the property
debtor, the party who promises to the creditor, a contract of
to deliver the property, and the loan is perfected and the roles
creditor, the party who of the parties are reversed
accepted the promise

Art. 1232 Payment means not only the delivery of money but
also the performance, in any other manner, of an obligation.
Art. 1233 A debt shall not be understood to have been paid
unless the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be.
Saura Import and Export Co. Inc. v. Development Bank of the
Philippines (1972) Makalintal, J.
Plaintiff-appellee: Saura Import & Export Co., Inc.
Defendant-appellant: Development Bank of the Philippines
(DBP)
Concept: Contract to Loan

- COMMODATUM: Primary obligation of the debtor is to Doctrine:

return the very same property delivered
- MUTUUM: Obligation of the debtor is to pay the same
amount, or kind and quality to the creditor
MUTUUM
May be gratuitous or may have
a stipulation to pay interest
Obligation of the debtor is to
pay the same amount, kind
and quality to the creditor
Consumable/fungible
Returned upon the expiration
of the term only
For consumption
Personal property
Debtor bears risk of loss
Ownership passes to the
debtor
(From A2015 Reviewer)
COMMODATUM
Essentially gratuitous wherein
the only consideration for the
creditor is always liberality
Primary obligation of the
debtor is to return
Non-consumable/non-fungible
Returned in case of urgent
need and commission of any
acts of ingratitude, even
before expiration of term
For use or temporary
possession
Any property
Bailor bears risk of loss
Ownesrhip retained by bailor
An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract. There was an offer and
acceptance (a perfected consensual contract to loan).
Brief Facts:
Saura applied to the Rehabilitation Finance Corp. (before its
conversion into DBP) for an industrial loan of P500k with a
mortgage as security, which RFC approved. Later, Saura wrote to
RFC requesting a modification, while RFCs Board of Governors
reexamined the advisability of financing the project. Eventually,
despite the initial cancellation of the loan (per Sauras request),
the loan was reinstated with a proviso that a certification from
the DANR was required based on the original intention of the
loan. Saura wrote to RFC saying that the raw materials would be
unavailable, but RFC reiterated that the basis of the approval
was the use of raw materials. Negotiations came to a standstill,
and Saura requested that the mortgage be cancelled. 9 years
later, Saura filed a complaint for damages for RFCs failure to
comply with its obligations.
ISSUES:
1. WON there was a perfected contract (YES)
2. WON RFC failed to fulfill its obligation thereby entitling
Saura Inc. to a claim for damages (NO)

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RATIO:
1. There was a perfected consensual contract
- Art. 1954: An accepted promise to deliver something by
way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall
not be perfected until the delivery of the object of the
contract
- There was an offer and acceptance the application of
Saura Inc. was approved and the corresponding
mortgage was executed and registered
2. Obligation was extinguished by mutual desistance
of parties
- It is undisputed that RFC entertained the loan
application of Saura Inc. on the assumption that it will
utilize local raw materials
- Saura Inc. realized that it could not meet the conditions
- When RFC turned down Saura Inc.s request to permit
the use of imported raw materials, the negotiations
reached an impasse
- And so, Saura Inc. requested for the cancellation of the
mortgage executed in favor of RFC
- The action taken by both parties was in the nature of
mutual desistance which is a mode of extinguishing
obligations
- Subsequent conduct of Saura Inc. confirms desistance
o Its request for cancellation of mortgage did not
contain any reservation of rights it believed it might
have against RFC
o It even applied with DBP for another loan to
finance a rice and corn project, which application
was disapproved
DISPOSITIVE: Judgment appealed from is reversed and
complaint is dismissed
There is a perfected consensual contract to loan. Its breach can
give rise to damages.
This case shows the importance of definite acceptance of an
offer, as opposed to a counter-offer, for the perfection of the
consensual contract to loan.
Court cites mutual desistance between the parties.
BPI Investment Corp v. CA and ALS Mgmt. (2002)
Petitioner: BPI Investment Corp (BPI)
Public Respondent: Court of Appeals
Private Respondent: ALS Management & Devt Corp.
Concept: Contract to Loan
Doctrine:
A contract of loan is a real contract, perfected by the delivery of
the object of the contract.
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Brief Facts:
Roa obtained a loan from Ayala (BPIs predecessor) for the
construction of a house and lot, with the house and lot securing
the loan by a mortgage. Roa sold the house and lot to ALS and
Litonjua, with the latter assuming the balance of Roas debt to
Ayala. Ayala proposed to grant a P500k loan to ALS and Litonjua
which would be applied to Roas debt (that they assumed), which
the 2 parties accepted. ALS updated Roas debt by paying
P190k, reducing the balance to P457k, to which the P500k loan
was applied. BPI initiated foreclosure proceedings for failure to
pay the mortgage indebtedness. ALS claimed that they were not
behind on payments, and that the amortization period began
when the P500k loan was actually released, not the stipulated
date. Both lower courts held that the perfection of the loan
occurred when the P500k was released.
ISSUE:
WON a contract of loan is a consensual contract, per the ruling
in Bonnevie v. CA (NO)
RATIO: A contract of loan is a real contract, perfected
by delivery of the object of the contract.
- What the Court declared as a consensual contract in
Bonnevie was not a contract OF loan but a contract TO
loan; it was an accepted promise to deliver something by
way of simple loan.
o A contract to loan does not constitute the real contract of
loan, which requires delivery of the object and gives rise
to obligations only on the part of the borrower.
- In the present case, what is involved is a contract of loan.
And such contract was only perfected on September 1982,
when BPI released the balance of the P500k loan after
applying it to the debt. And following the parties intent on
how amortization should proceed, ALS was only required to
pay amortization on October 1982, a month after the
contracts perfection.
- The Court also agrees with the contention of ALS that a
contract of loan is a reciprocal obligation. And one of the
rules regarding reciprocal obligations is that neither party
incurs in delay if the other is not ready to comply. It is only
when one party has performed his obligation that he can
demand the performance of the other partys obligation. If
the latter fails, that is when delay sets in.
o While the mortgage deed does state that the
amortization were supposed to begin on May 1981, it was
not until September 1982 that the loan was released. BPI,
then, could not have demanded that ALS start to pay its
amortization since it had not even released the loan at
the time of May 1981.
DISPOSITIVE: CA affirmed.
Following the money:
Bank --(loan)-> ALS&Litonjua --(sale)-> Roa --(loan payment)->
bank
7
Pantaleon v. American Express International, Inc. (2010) Brion
Petitioner-Plaintiff: Polo S. Pantaleon
Respondent-Defendant: American Express International Inc.
(AMEX)
Concept: Contract to Loan
Doctrine:
Focusing particularly on the LOAN contract, the new creditor-
debtor relationship will only exist once there is offer (holder
swipes the card for his payment) and acceptance (company
approves the use of the credit card for the transaction). Only
after the company approves the purchase requests that the
parties enter into a binding loan contracts, pursuant to Article
1319, NCC.
Brief Facts:
Pantaleon was a holder of an AMEX card. While he and his family
were in Europe, they experienced difficulty transacting with the
Coster Diamond House. They were on a guided tour, and during
the stopover at the Diamond House, they were supposed to be
ready to leave by 9:30. However, when they tried to purchase,
the transaction took 78 minutes, delaying their tour group and
missing the next destination. Upon request for an apology,
AMEX refused, so Pantaleon filed an action for damages. In
2009, the Court ruled that AMEX was guilty of mora solvendi,
then this MR was filed.
ISSUE:
WON AMX is liable for damages for violation of the credit card
membership agreement (NO)
The Nature of Credit Card Transactions
- A credit card is defined as any card, plate, coupon book, or
other credit device existing for the purpose of obtaining
money, goods, property, labor or services or anything of
value on credit.
- Every credit card transaction involves 3 contracts:
o SALES contract between the holder and the
store/business which accepted the credit card
o LOAN contract between the holder and the credit card
company
o PROMISE to pay between credit card company and the
aforementioned store/business
- Now, as to the relationship of the holder of the credit card
and the company, there are two opposing schools of
thought, represented by two rulings from American
jurisprudence:
o City Scores Co. v. Henderson: That a credit card is
issued only amounts to an offer to extend an open line
of credit. The offer may be withdrawn and such
withdrawal is not a breach and violates no rights. Each
use of the credit card is considered as a separate offer
and acceptance.
o Gray v. American Express: The card issuance is a
binding contract between the holder and the company.
However, in this Gray case, the holder pays an annual
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fee for the privilege of being a cardholder of the
company, unlike the City Scores case.
- As a rule, we adhere to the Gray ruling where the
relationship between holder and company is contractual in
nature and bound by the terms and conditions found in the
card membership agreement, which provides the rights and
liabilities of a credit card company to its cardholders and
vice-versa.
o Due to practice, the rule on contract of adhesion is
applied and such terms are construed strictly against
the companies since they are the ones who draft the
card membership agreement.
RATIO: NO, AMEX is not liable.
- Pantaleon presumes that he has two privileges as
cardholder of AMEX: first, for AMEX to approve his charges
since he has no preset spending limit and second, even if
AMEX were to reject the same, it was still obligated to act
on his charges within a specific period of time.
- While the Court notes that we follow the Gray ruling, it
distinguished that there is a separate creditor-debtor
relationship (besides that of acceptance by the cardholder
of the terms of the card membership) that arises ONLY after
a credit card company has approved the charge request of
the holder.
o The first one merely an agreement to provide credit
facility to the cardholder while the latter involves the
actual credit loaned by the company to the holder, in
view of the 3 contracts involved: the SALES contract,
the LOAN contract and the PROMISE to pay.
o Focusing particularly on the LOAN contract, the new
creditor-debtor relationship will only exist once there is
offer (holder swipes the card for his payment) and
acceptance (company approves the use of the credit
card for the transaction). Only after the company
approves the purchase requests that the parties enter
into a binding loan contracts, pursuant to Article 1319,
NCC.
- Now, under Par. 10 of the card membership agreement, it is
clearly stated that AMEX reserves the right to deny
authorization for any requested charge. Hence, the first
privilege claimed by Pantaleon does not exist; AMEX is
under no obligation to approve any and all charges made
by its card holders.
- There being no obligation to approve, there can also be no
delay, per Article 1169, NCC. Hence, the second privilege
claimed also must be rejected. To be in delay, the first
requisite is that the obligation must be liquidated and
demandable. However, since no such obligation exists in
the first place, no delay can exist as well. The use of a credit
card to pay for a purchase is only an offer to the credit card
company to enter a loan agreement with the cardholder.
- Even if in the past, Pantaleons charge requests were always
approved timely, it could not have been done in this case
since every time Pantaleon has a charge request, the
company would still have to evaluate whether they will
approve it, based on the credit history/charge pattern of
8
 Pantaleon. And in this specific case, the amount was
problematic since it did not fit his credit history.
- Also, no specific provision of law exists that requires credit
card companies to act on all charge requests within a
specifically defined period of time. As a general rule, a
practice or custom is not a source of a legally demandable
or enforceable right.
- Neither was there any provision in the credit card
membership agreement that obligates AMEX to act on all
cardholder purchase requests within a specifically defined
period of time.
DISPOSITIVE: CA affirmed.
Pantaleon v. AMEX
This is a flawed analysis by the SC.
Focus on the loan agreement between the credit card issuer and
the credit card holder.
- There was a contract of loan (upon approval), which was
perfected upon delivery. Delivery occurs WHEN money is
delivered to the merchant.
- If there is no delivery, it should not be considered a contract
of loan UNLESS it has been shown that there was
constructive delivery to Pantaleon.
- In reality, there was no delivery (physically) to Pantaleon.
II. COMMODATUM
A. General Concepts
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
Art. 1935 The bailee in commodatum acquires the used of
the thing loaned but not its fruits; if any compensation is to be
paid by him who acquires the use, the contract ceases to be a
commodatum.
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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 the
thing forbids such use.
- Commodatum is the gratuitous lending of goods to be
used by the borrower and then return undamaged to the
lender.
Commodatum is entered into regularly in ordinary life.
It came from Roman law as one of the contracts of
neighborliness.
It is a contract where the creditor (or bailor) gratuitously delivers
to the debtor (or bailee) non-consumable property so that the
latter may use the same for a certain time and return it.
Two Kinds of Commodatum:
1. Ordinary Commodatum (Art. 1933)
2. Precarium one whereby the bailor may demand the thing
loaned at will; exists in cases where:
a. Neither the duration of the contract nor the use to
which the thing loaned should be devoted has been
stipulated
b. If the use of the thing is merely tolerated by the owner
(Art. 1947)
1. Consideration in Commodatum
- It is a contract that is essentially gratuitous in nature,
- The liberality on the part of the bailor is the consideration
for the contract.
- It is for this reason that this contract is highly personal
and that the death of either party will suffice in its
extinguishment.
- Once a compensation to be paid by the bailee exists, the
contract ceases to be one of commodatum and becomes
some other contract (ex. lease).
9
2. Object of Commodatum issued by Doronilla in the amount of P212,000 (P12K
more than what was deposited)
Art. 1937 Movable or immovable property may be the object o Moreover, Vives sued Sanchez for failure to recover this
of commodatum. money ! shows that the transaction was not merely
gratuitous, but had a business angle
- VIVES: The transaction is not a mutuum but an
Art. 1936 Consumable goods may be the subject of
accommodation, since he didnt part with the ownership of
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition. his money; he asked his wife to open the account, and he
retained some degree of control because of his wife who
was made a signatory and in whose possession the
- GR: The object of commodatum is a non-consumable
passbook was given
property, whether movable or immovable
- SC: No error by the CA when it ruled that the transaction
- EX: The object may be a consumable if the purpose of
was a commodatum and not a mutuum
the contract is NOT the consumption of the object (i.e.,
- Art. 1933, NCC distinguishes the two kinds of loans:
display).
o Art. 1933: By the contract of loan, one of the parties
delivers to another, either something not consumable
Producers Bank v. CA (2003) Callejo, Sr.
so that the latter may use the same for a certain time
Petitioners: Producers Bank of the Philippines (now First
and return it, in which case the contract is called a
International Bank)
commodatum; or money or other consumable thing,
Respondents: CA and Franklin Vives
upon the condition that the same amount of the same
Concept: Object of Commodatum
kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Doctrine:
Commodatum is essentially gratuitous.
The object of a commodatum is non-consumable thing.
Simple loan may be gratuitous or with a stipulation to
However, there are instances when a commodatum may have for
pay interest.
its object a consumable thing. If consumable goods are loaned
In commodatum the bailor retains the ownership of the
only for the purposes of exhibition, or when the intention
thing loaned, while in simple loan, ownership passes to
of the parties is to lend consumable goods and to have the
the borrower. (1740a)
very same goods returned at the end of the period agreed
o Provision seems to imply that if the subject is a
upon, the loan is a commodatum, not a mutuum
consumable thing, such as money, the contract would
be a mutuum
Brief Facts:
- BUT there are instances where a commodatum may have for
Vives was asked for help by Sanchez in incorporating Col.
its object a consumable thing
Doronillas business. Sanchez asked Vives to deposit money in
o Art. 1936: Consumable goods may be the subject of
Sterelas (the companys) bank account for purposes of
commodatum if the purpose of the contract is not the
incorporation, but assured Vives that he could withdraw the
consumption of the object, as when it is merely for
money within a months time. Vives issued a check, relying on
exhibition. (n)
the assurances and representations of Sanchez and Doronilla,
o SC: If consumable goods are loaned only for the
and Vives wife deposited the check. Vives filed a complaint for
purposes of exhibition, or when the intention of
recovery of sum of money.
the parties is to lend consumable goods and to have
the very same goods returned at the end of the
ISSUE/S:
period agreed upon, the loan is a commodatum, not a
1. W the transaction between Vives and Doronilla is a simple
mutuum
loan (mutuum) or commodatum [COMMODATUM]
- Rule is that the intention of the parties shall be accorded
2. WON Mr. Atienza could be faulted for allowing Doronilla to
primordial consideration in determining the actual character
withdraw from the savings account [YES]
of a contract. In case of doubt, the contemporaneous and
3. WON Producers should be held liable to Vives [YES]
subsequent acts of the parties shall be considered in such
determination
RATIO: No merit in the petition.
- Vives agreed to deposit his money specifically for the
1. The transaction between Vives and Doronilla is
purpose of making it appear that said firm had sufficient
commodatum.
capitalization for incorporation, with the promise that the
- PRODUCERS: The transaction is a simple loan (mutuum)
amount shall be returned within thirty (30) days.
because all the elements are present:
o He merely accommodated Doronilla by lending his
o First, what was delivered was money, a consumable
money without consideration, as favor to Sanchez
thing
o But it WAS CLEAR that the money would not be
o Second, the transaction was onerous as Doronilla was
removed from Sterelas savings account and would be
obliged to pay interest, as evidenced by the check
returned to Vives after thirty (30) days

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- Doronillas attempt to return the P200,000 with an additional
P12,000, allegedly representing interest on the mutuum, did
not convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties
o P12,000 also corresponds to the fruits of the lending of
the P200,000
o Art. 1935: The bailee in commodatum acquires the used
of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the
use, the contract ceases to be a commodatum. (1941a)
o It was proper for Doronilla to remit to Vives the interest
2. Mr. Atienza should be faulted for allowing
Doronilla to withdraw the money from the savings
account.
- PRODUCERS: Mr. Atienza cannot be faulted for allowing
Doronilla to withdraw because he was the sole proprietor of
the company, and who alone had legal title to the savings
account
- VIVES: Mr. Atienza connived with Doronilla in defrauding
him since it was Atienza who facilitated the opening of the
account as well as the approval of the authority to debit the
account
- Producers rules for savings deposits written on the
passbook states that neither a deposit nor a withdrawal will
be permitted except upon the production of the depositor
savings bank book BUT Doronilla was permitted to
withdraw even without presenting the passbook, not
just once, but several times
- Both CA and TC found that Atienza allowed the withdrawals
because he was party to Doronillas scheme to defraud
Vives
o It was made in the branch where Atienza was a key
officer because it will be easier for them to get a
certification
o Atienza knew that the money didnt belong to Doronilla
or Sterela because of the coordination he had with
Doronilla AND because he was explicitly told by Mrs.
Vives that the money belonged to her and her husband
and the deposit was just to accommodate Doronilla
o Although the only ones empowered to withdraw from
the savings account were Mrs. Vives and Sanchez
(authorized signatories), it was admitted by Atienza that
the procedure wasnt followed because Sterela was
owned by Doronilla, and Doronilla had the full authority
to withdraw
o It was an accepted practice to present the passbook
whenever a withdrawal is made in a savings deposit, but
the procedure was dispensed with; instead, a
certification for a duplicate passbook was issued
because the original was allegedly surrendered to a
branch, but the original was never surrendered because
it remained in the possession of Mrs. Vives
- SC: Atienzas active participation in the perpetration of the
fraud and deception caused the laws; he committed
wrongful acts
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3. Producers should be held solidarily liable with
Doronilla and Dumagpi as Atienzas employer.
- PRODUCERS: It cannot be held liable for the return of the
P200,000 because it is not privy to the transaction between
Vives and Dornilla; since there was no wrongful act or
omission on its part, it cannot be held liable for actual,
moral, or exemplary damages and attorneys fees
- VIVES: Producers should be liable for the return of the
money because of Mr. Atienzas behavior
- Under Art. 2180, ERs shall be primarily and solidarily liable
for damages caused be their EEs acting within the scope of
their assigned tasks
- SC: Atienza was an EE of Producers and was acting within
the scope of his authority as Asst. Branch Manager when he
assisted Doronilla, which were done in furtherance of
Producers interests, while violating some of its rules
- SC: Under Art. 2180, Producers should be held liable for the
return since it failed to prove that it exercised due diligence
to prevent the unauthorized withdrawals and that it was not
negligent in the selection and supervision of Atienza
DISPOSITIVE: Petition DENIED.
Producers Bank v. CA
THIS IS WRONG.
Reasons why it was considered a Commodatum:
1. Purpose of the contract: for the corporation
2. P12,000 are the fruits ! it is not for the bailee, so it pertains
to the bailor and was rightly returned
3. Vives would be able to retrieve the money
SGS says this is a MUTUUM because the obligation is to repay
the owner. Ownership passes to Doronilla in order for the him to
present it to the SEC (as proof). Inevitably, he becomes the
owner. The result of the case wouldve still been the same
because the obligation wouldve still been to repay Vives.
Questions from A2015 reviewer:
1. If the object of the commodatum was money, then was it
the intention of the parties for the bailee to return the very
same notes delivered?
2. If the bailor in commodatum retained ownership of the
money delivered, then what was the relationship between
Sterela and Producers Bank?
3. Is the use of money for purposes of incorporation even if
only for accommodation, the same as exhibition?
4. How is the case reconciled with Art. 1980, which provides
that fixed, savings, and current deposits of money in banks
are governed by the provisions on mutuum?
11
B. Parties to a Commodatum
- The parties to a contract of commodatum are called the
bailor (creditor) and the bailee (debtor).
- These terms find their root from the common law concept of
bailment, where there is a delivery of personal property by
the bailor to the bailee who shall hold the same for a certain
purpose under an express or implied contract.
1. Ownership by Bailor
Art. 1938 The bailor in commodatum need not be the owner
of the thing loaned.
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
- The bailor in a commodatum need NOT be the owner of the
property being loaned.
- However, as against the bailee, the bailor shall be
considered to have retained ownership over the property
loaned.
A commodatum MUST BE gratuitous.
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2. Use by Bailee
Art. 1935 The bailee in commodatum acquires the used of
the thing loaned but not its fruits; if any compensation is to be
paid by him who acquires the use, the contract ceases to be a
commodatum.
Art. 1940 A stipulation that the bailee may make use of the
fruits of the thing loaned is valid.
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 the
thing forbids such use. (n)
- GR: The bailee acquires the permissive use of the property
loaned but NOT its fruits.
- EX: Unless the parties stipulate otherwise; such stipulation
is considered valid.
- GR: The contract of commodatum is personal in character
and the bailee cannot lend nor lease the property loaned to
a third person
- EX: However, members of the bailees household may
make use of the property loaned.
- EX to EX: Unless there is a stipulation to the contrary or
the nature of the property forbids its use by anyone other
than the bailee.
3. Solidary Liability of Bailees
Art. 1945 When there are two or more bailees to whom a
thing is loaned in the same contract, they are liable solidarily.
12
C. Liability for Expenses and Damages
1. Ordinary Expenses
Art. 1941 The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
Art. 1943 The bailee does not answer for the deterioration of
the thing loaned due only to the use thereof and without his
fault.
- Having acquired the permissive use of the property loaned,
the bailee is the one liable for ordinary expenses for its use
and preservation.
- However, the bailee is not liable for ordinary wear and tear
or deterioration of the property.
- While there was no obligation to pay rent, the agreement
was still not essentially gratuitous as it imposed an
obligation upon Guevarra to maintain the property in good
condition
- The effects of the agreement are also different from that of
a commodatum
- Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would
result in the termination of the lease. The tenants
withholding of the property would then be unlawful
- Even assuming that the relationship was a commodatum,
Guevarra as bailee would still have the duty to return
possession of the property
- The obligation to deliver or to return attaches to contracts
for safekeeping, or contracts of commission, administration,
and commodatum

Pajuyo v. CA (2004) Carpio, J.

DISPOSITIVE: Petition granted
Petitioner: Colito T. Pajuyo
Respondents: CA and Eddie Guevarra
In a commodatum, there is permissive use of the property
Concept: Commodatum; liability for expenses and damages;
loaned and the obligation to return the very same property. It is
ordinary expences
the bailee who is liable for the ordinary expenses for its use and
preservation. This does not mean that the bailee is only liable for
Doctrine:
deterioration of the property due to the use and without fault.
The imposition of an obligation makes the contract different
Bailee will be liable for property loaned that will suffer ordinary
from a commodatum. A contract that is not essentially gratuitous
wear and tear that arises from actual use by the bailee.
is not a commodatum.

Pajuyo v. CA
Brief Facts:
A commodatum MUST BE gratuitous. In this case, there was an
Pajuyo, who paid P400 for rights over land to Perez, constructed
obligation to maintain the cleanliness and orderliness of the
a house of light materials on said land and resided there with his
house. The obligation to maintain cleanliness and orderliness of
family. Pajuyo and Guevarra executed an agreement whereby
the property loaned was equated/considered by the Court
Guevarra would live in the house for free, provided Guevarra
with/as compensation. The contract was considered a
would maintain the cleanliness and orderliness of the house, and
commodatum, which is essentially gratuitous.
that he would vacate upon demand. Pajuyo demanded Guevarra
Question: How is this case reconciled with Art. 1941?
to vacate but the latter refused, so Pajuyo filed an ejectment
case against Guevarra.

ISSUE:
WON the agreement between the parties is a commodatum
(NO)

RATIO: The agreement is not a contract of

commodatum as it was not purely gratuitous
- Aside from being essentially gratuitous, a commodatum
involves the use of a thing belonging to another for a certain
period
o Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or
after accomplishment of the use for which the
commodatum is constituted
o If the bailor should have urgent need of the thing, he
may demand its return for temporary use
o If the use of the thing is merely tolerated by the bailor,
he can demand the return of the thing at will, in which
case the contractual relation is called a precarium, a
kind of commodatum
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2. Extraordinary Expenses
Art. 1949 The bailor shall refund the extraordinary expenses
during the contract for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge of the
bailor before incurring them, except when they are so urgent
that the reply to the notification cannot be awaited without
danger.
If the extraordinary expenses arise on the occasion of the
actual use of the thing by the bailee, even though he acted
without fault, they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to the contrary.
- GR: Since the bailor retains the ownership of the property,
he is liable for the extraordinary expenses for the
preservation of the property.
- EX: The bailor is not liable for these expenses if the bailee
incurs them without informing the bailor before incurring
them.
- EX to EX: If the need for these extraordinary expenses are
so urgent that waiting for the bailors approval would
endanger the property loaned, then the general rule applies
(bailor is liable)
- GR: As for the extraordinary expenses arising from use,
both bailor and bailee are liable.
- EX: Unless it is stipulated otherwise
o Because bailor retains ownership of the property
loaned and the bailee acquires its use
3. Other Expenses
Art. 1950 If, for the purpose of making use of the thing, the
bailee incurs expenses other than those referred to in Articles
1941 and 1949, he is not entitled to reimbursement.
- The bailee is liable for all other expenses incurred for
purposes of making use of the property loaned, other than
ordinary and extraordinary expenses for use and
preservation
Question: What would these other expenses cover?
4. Abandonment by Bailor
Art. 1952 The bailor cannot exempt himself from the payment
of expenses or damages by abandoning the thing to the
bailee.
- The bailee has a right to compel the bailor to pay for the
pertinent expenses
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5. Right of Retention by Bailee
Art. 1944 The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even though it
may be by reason of expenses. However, the bailee has a right
of retention for damages mentioned in Article 1951.
Art. 1951 The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable
to the latter for the damages which he may suffer by reason
thereof.
- The primary obligation on the part of the bailee is to return
the property loaned.
- GR: Bailee has no right of retention over the property
loaned if the bailor refuses to pay for expenses and
damages that pertain to it. The former has a right of action
to demand payment for such expenses incurred
- EX: When the bailor, knowing the flaws of the property
loaned, does not advise the bailee of the same, and the
bailee suffers damages by reason thereof, bailee shall have
a right of retention over the property until the bailor answers
for damages.
- The object of the right to retention is to guarantee payment
of what may be due.
- It has an accessory character, which means it is an accessory
to a principal obligation, which is the payment of the
incurred expenses.
- Such right is considered not as a coercive measure to oblige
the debtor to pay, but as a means of obtaining
compensation for the debt and as a means of extinguishing
an obligation
14
D. Liability for Loss
Art. 1942 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;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted;
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exemption the bailee from
responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a
member of his household;
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter.
- GR: Since the bailor retains ownership of the property
loaned, generally, it is the bailor who bears the liability for
loss of the property loaned due to fortuitous events.
- EX: However, such liability whether due to fortuitous events
or not is shifted to bailee in the following instances:
o If bailee devotes the property to a different purpose, for
this constitutes breach of the conditions of the
commodatum
o If the bailee keeps the property after the accomplishment
of the stated use, for this amounts to delay.
o If the bailee keeps the property longer than the
stipulated period, also delay.
o If the property loaned was delivered with an appraised
value, unless there is a stipulation that exempts the bailee
from loss due to fortuitous event.
o If the bailee lends or leases the property to a third person
that is not a member of the household, for this also
constitute breach.
o If being able to save the property loaned or property
owned by the bailee, the bailee chooses to save the
latter. Since the consideration of a commodatum is the
liberality of the bailor, this amounts to an act of
ingratitude.
Art. 1942(5) amounts to ingratitude. Similar to donation because
liberality is also the consideration.
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Republic v. Bagtas (1962)
Plaintiff: Republic of the Phils.
Defendant: Felicidad Bagtas
Concept: Liability for Loss
Doctrine:
The bailee is liable for the loss of the thing, if he keeps it longer
that the stipulated period and if the thing loaned was delivered
with an appraisal of its value (unless a stipulation provides that
the bailee is exempt from liability in case of a fortuitous event),
among others.
Brief Facts:
Jose Bagtas borrowed from the Republic 3 bulls, subject to
charging of breeding fees. When the contract expired, there was
a request to renew it, but the Sec. of Agriculture and Natural
Resources approved only the renewal of the contract for 1 bull,
while the other 2 were requested to be returned. Bagtas was
compelled to return the bulls or pay their value. The TC ruled
that Jose should pay the value of the bulls and the unpaid
breeding fees. The Republic moved ex parte for a writ of
execution, which was granted. Bagtas (Felicidad), administratrix
of deceased Jose, alleged that the bulls were already returned
(but 1 bull was killed during the Hukbalahap raid).
ISSUE:
WON Felicidad is still liable under the writ of execution (YES)
RATIO: Felicidad is liable for the loss of the third bull.
- The Court found that it is true that the other two bulls were
already returned to the plaintiff. Hence, she cannot be held
liable for them.
- For the third bull, she contends that its death was caused by
force majeure. Now, since the contract was one of
commodatum, the Republic retained of ownership and
therefore bears the loss on its own.
- This contention was found by the Court to be without merit.
o If it was indeed a contract of commodatum, then the
contract should essentially be gratuitous. However, there
was a breeding fee, a form of compensation. The Court
then considered the contract to be one of lease and not
of commodatum.
o And even if it was a contract of commodatum, Felicidad
would have still been held liable under Art 1942, which
states that the bailee is liable for the loss of the thing, if
he keeps it longer that the stipulated period and if the
thing loaned was delivered with an appraisal of its value
(unless a stipulation provides that the bailee is exempt
from liability in case of a fortuitous event), among others.
o The original period off the loan was only from May 1948
to May 1949 and was renewed for one year to end May
1950, with respect to one bull. But they kept the bull until
1953, when it was gunned down during the raid.
Moreover, the bulls were loaned with an appraisal of their
value. There was also no stipulation exempting the bailee
from liability from loss through fortuitous event.
15
- Felicidads contention that the court lost jurisdiction over
Jose when his civil personality ceased to exist due to his
death, is untenable. Moreover, their counsel failed to inform
the trial court of his death, as was required by the rules of
civil procedure. The notice by the probate court and its
publication in a newspaper was not sufficient notice, as per
the rule.
- However, the Court ruled that that the demand for the
payment of the value of the third bull should be presented
in the intestate proceedings
DISPOSITIVE: Writ of execution appealed from is SET ASIDE.
Republic v. Bagtas
The contract here was not a commodatum, but the SC made
pronouncements on the case based on the concepts in a
commodatum.
E. Obligation to Return
Art. 1946 The bailor cannot demand the return of the thing
loaned till after the expiration of the period stipulated, or after
the accomplishment of the use for which the commodatum has
been constituted. However, if in the meantime, he should have
urgent need of the thing, he may demand its return or
temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession
of the bailor.
Art. 1947 The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following
cases:
(1) If neither the duration of the contract nor the use to which
the thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
Art. 1948 The bailor may demand the immediate return of the
thing if the bailee commits any act of ingratitude specified in
Article 765.
- GR: The primary obligation of the bailee in a commodatum
of returning the property only arises:
o After the expiration of the period stipulated.
o After the accomplishment of the use for which the
commodatum was constituted.
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- EX: The bailor may demand for the return of the property
loaned at any time if:
o The bailor has an urgent need for the property, in which
case he may:
" Demand the return of the property, thereby
extinguishing the commodatum; or
" Demand the temporary use of the property,
suspending the commodatum while the property is in
the possession of the bailor.
o If the commodatum is a precarium, (whereby one allows
another the use of a thing or the exercise of a right
gratuitously till revocation) or a contractual relation where
the bailor may demand the property loaned at will,
specifically if
" Neither the duration nor the use has been stipulated.
" Where the use of the bailee is merely tolerated by the
bailor.
o If the bailee commits any acts of ingratitude:
" The bailee commits some offense against the person,
the honor, or property of the bailor, or the bailors
wife, or the children under parental authority.
" The bailee imputes to the bailor any criminal offense,
or any act involving moral turpitude, even though it
be proved, unless the crime or act has been
committed against the bailee, or the bailees wife, or
children under parental authority.
" The bailee unduly refuses the bailor support when the
former is legally or morally bound to give support to
the latter.
Quintos v. Beck (1939) Imperial
Plaintiffs-Appellants: Margarita Quintos and Angel Ansaldo
Defendant-Appellee: Beck
Concept: Commodatum Obligation to Return
Doctrine:
Under a contract of commodatum, a party assumes the
obligation to return the object upon demand. Placing them at
the disposal of the demanding party is not compliance with this
obligation.
Brief Facts:
Bent was a tenant of Quintos in her house. When their contract
of lease was novated, Quintos gratuitously granted Beck the use
of the furniture, subject to the condition that Beck would return
them upon demand. Later, Quintos sold the property so Sps.
Lopez, notifying Beck and giving him 60 days to vacate the
premises and return the furniture. Beck informed them that he
could not give up 3 gas heaters and 4 electric lamps because he
would use them until the expiry of the lease. When Beck
informed them that they may proceed to recover the properties
at the house, Quintos refused to get them in view of the fact that
Beck refused to make delivery of them.
ISSUE:
WON Beck breached the contract between them (YES)
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RATIO: YES, Beck breached the contract.
- To decide the case, it is only necessary to decide whether
Beck complied with his obligation to return the furniture
upon the plaintiffs demand.
- The contract between the two of them is one of
commodatum, because under it, Quintos gratuitously
granted the use of the furniture to Beck, reserving for
himself the ownership thereof, and at the same time, bound
Beck to return them upon Quintos demand.
- The obligation assumed by Beck upon the demand of
Quintos means that he should return all of the furniture to
the plaintiff at the latters residence or house, which he
failed to do.
- The obligation was not complied with by merely placing the
furniture at the disposal of Quintos and even retained for his
benefit 3 gas heaters and 4 electric lamps.
- Quintos cannot also be legally compelled to bear the
expenses of the deposit made by Beck since the latter was
not entitled to place the furniture on deposit; nor is the
former under any duty to accept the offer to return the
furniture, because Beck refused to return all of them.
- Costs borne by Beck because Quintos is winning party.
DISPOSITIVE: CFI reversed
Quintos v. Beck
There were 3 contracts involved:
1. A contract of lease: Quintos to Beck
2. A contract of sale: Quintos to Sps. Lopez
3. A contract of commodatum: Quintos to Beck
Here, there was a perfected contract of commodatum because
there was delivery. Therefore, the obligation to return arose.
Legal advice to Beck: Constructive notice that the objects are
under the DISPOSAL AND CONTROL of Quintos, and that the
latter may take over and take possession at any time.
III. SIMPLE LOAN
A contract of simple loan is the most common credit
transaction.
The most common object is money.
Interest is the consideration paid for the permissive use of the
money.
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A. General Concepts
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
Art. 1953 A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind
and quality.
Art. 1954 A contract whereby one person transfers the
ownership of non-fungible things to another with the
obligation on the part of the latter to give things of the same
kind, quantity, and quality shall be considered a barter.
Art. 1980 Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.
Act 2137, Sec. 58 (a) "Fungible goods" means goods of
which any unit is, from its nature by mercantile custom, treated
as the equivalent of any other unit.
- Simple loan, mutuum, or loan for consumption the
creditor delivers to the debtor money or other consumable
property upon the condition that the same amount of the
same kind and quality shall be paid.
- Borrower acquires ownership of the money or consumable
property for the permissive use of the property loaned. As
owner, the borrower can dispose of the property loaned and
this act of disposition will not be considered
misappropriation.
- The use of the property generally results in its
extinguishment, which is why the obligation of the borrower
is to pay an equal amount of the same kind and quality,
effectively replacing or substituting the property loaned
- It is for this reason that the provisions on simple loan also
refer to the object of a simple loan as fungible property,
that is, property commercially interchangeable with other
property of the same kind.
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- In a simple loan, the primary purpose of the contract is
still the permissive use of the money or consumable
property.
o Since the use of a consumable property generally
results in its consumption, ownership is transferred as a
necessary consequence of the permissive use of the
property loaned.
- If the primary purpose of the contract is the transfer of
ownership of a non-fungible property and payment is made
by giving something of the same kind, quantity, and quality,
it is a contract of barter.
- The most common of all commercial credit transactions is a
simple loan: the deposit by a depositor of money in a fixed,
savings, or current deposit account with a bank.
o Fixed deposit account: Interest on a fixed deposit is
paid in accordance with the prices displayed in all bank
branches. Interest is payable at maturity date.
o Savings deposit account: If you have a credit balance in
a savings account you may be entitled to receive
interest depending on the type of account. The rate of
interest may be fixed or varied as the bank determines.
o Current deposit account: Interest is not payable on a
current account unless specified otherwise for the
particular type of current account.
Fungible goods
People v. Puig and Porras (2008) Chico-Nazario, J.
Petitioners: People of the Philippines
Respondents: Teresita Puig and Romeo Porras
Concept: Simple loan; general concepts
Doctrine:
The relationship between bankds and depositors has been held
to be that of creditor and debtor. A bank acquires ownership of
the money deposited by its clients; hence, it is the bank, and not
its depositors, who is the real party-in-interest in a complaint for
Qualified Theft against the banks cashier and bookkeeper.
Brief Facts:
112 cases of Qualified Theft was filed by the Rural Bank of
Pototan, Inc. against Puig and Porras but was dismissed by the
judge due to lack of probable cause. The judge found that the
element of taking without the consent of the owners was
lacking since it is the depositors-clients, and not the bank, who
are the owners of the money stolen, and are the real parties-in-
interest.
ISSUES:
1. WON the bank acquires ownership of the money deposited
by its clients, thereby rendering it as the real party-in-
interest in the complaint for Qualified Theft filed against its
cashier and bookkeeper (YES)
2. WON the information sufficiently alleged the abuse of trust
and confidence (YES)
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RATIO:
1. Yes; the bank acquires ownership of the money
deposited by its clients and hence is the real
party-in-interest in the criminal case
- As correctly pointed out by petitioner, the bank is the owner
of the monies allegedly misappropriated
o Art. 1953 NCC: A person who receives a loan of
money or any other fungible thing acquires ownership
thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
o Art. 1980 NCC: Fixed, savings, and current deposits
of money in banks and similar institutions shall be
governed by the provisions concerning simple loans.
- Hence, the element of taking without the consent of
owners was sufficiently alleged in the information
- The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of
confidence, to the damage and prejudice of the Bank,
without particularly referring to it as owner of the money
deposits, as sufficient to make out a case of Qualified Theft
2. Yes; the exact phrase dependence, guardianship
or vigilance between the respondents and the
offended party that would have created a high
degree of confidence between them which the
respondents could have abused, need not be
alleged in the information
- It is beyond doubt that tellers, cashiers, bookkeepers and
other employees of a Bank who come into possession of the
monies deposited therein enjoy the confidence reposed in
them by their employer.
- It is sufficient that the following be alleged in the complaint
or information:
o The positions held by Puig and Porras
o That the crime was committed with grave abuse of
confidence, with intent to gain and without the
knowledge and consent of the Bank
DISPOSITIVE: Petition for Review on Certiorari granted. RTC
order reversed. RTC Judge in criminal case ordered to proceed
with the trial.
Fungible things are those which are capable of being substituted
by others of the same kind, not having a distinct individuality.
There are qualifications as to the object to make them of the
same kind and quality.
People v. Puig and Porras
The depositor is actually the CREDITOR of the bank. The bank
owns the money.
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BPI Family Bank v. Franco Nachura, J. Basis of Mutuum (Simple Commodatum
Petitioner: BPI Family Bank (BPI) Comparison Loan)
Respondent: Amado Franco Object Money or other Ordinarily non-
Concept: Simple Loan; General Concepts consumable thing consumable
Ownership of Ownership is Ownership is
Doctrine: the thing transferred to the retained by the
In the contract of simple loan, the debtor acquires ownership of borrower lender
the money or consumable loaned. This ownership, however, has Cause Gratuitous or onerous Essentially gratuitous
the obligation to pay what has been loaned.. (w/stipulation to pay
interest)
Brief Facts: Thing to be Borrower need only Borrower must return
Franco opened an account with BPI. When it was learned that returned pay the same maount the same thing
the funds for these accounts were purportedly the result of of the same kind and loaned
unauthorized transfers, BPI refused to release the funds to quality
Franco, claiming ownership over such funds. Subject Only personal property May involve real or
matter personal property
ISSUE: Purpose Loan for consumption Loan for use or
WON Franco had a right to amount in the frozen accounts? (YES) temporary
possession
RATIO: YES. Franco was entitled to those amounts. When to Lender may not Bailor may demand
- BPI: The bank owns the amounts. The situation applicable, return demand its return the return of the
therefore, is that of an owner of a personal property whose before the lapse of the thing loaned before
possession he regains after it was stolen, pursuant to Art. term agreed upon the expiration of the
559. term in case of
- SC: Theory is incorrect and Art. 559 is inapplicable as well. urgent need
o What is involved in Art. 559 is a specific/determinate Who bears Borrower suffers the Loss of the subject
thing. In this case, the property involved is money,
risk of loss loss (even if caused matter is suffered by
which is generic and fungible; it is capable of being
exclusively by a the bailor since he is
substituted by others of the same kind and does not
fortuitous event and the owner
have distinct individuality he is not therefore
o BPI, therefore, only claims ownership of the discharged from his
equivalent amount of money, unlike the situation
duty to pay
contemplated in the said article, which involves an
Nature Not purely personal Purely personal
owner trying to recover a distinct movable from the
(From A2015 reviewer)
current possessor.
o Money, by its very function, is to pass from hand to
Basis Mutuum Commodatum Barter
hand as a medium of exchange, without other evidence
(Simple Loan)
of its title.
Subject Money or any Personal or real Non-
- SC: BPI does own the money, but not as a
matter other fungible property fungible or
consequence of the unauthorized transfer of FMICs
things/personal (generally non- non-
deposit. Rather, it is a consequence of the cont ract
property consumable) consumable
of simple loan or mutuum, between BPI (bank) and
things
Franco (account holder).
Obligation Pay or deliver Return the The
o BPI is the debtor and Franco is the creditor, in this
of the the same kind identical thing equivalent
contract of simple loan.
bailee or quality borrowed when thing is
o And since the relationship of BPI and Franco is
loaned to the the time has given in
governed by the provisions on the contract of simple
bailee expired or the return for
loan, BPIs ownership of the amounts comes with a
purpose has what has
corresponding obligation to pay Franco the amount
been served been
equal to what he deposited, upon the latters demand.
received
o Thus, Franco had every right, as the creditor, to expect
Nature of May be Always Onerous
that the checks he issued would be honored. And
the gratuitous gratuitous
consequently, BPI had no right to dishonor the checks
contract
as they had the obligation to pay the amount
demanded when such demand was made. (From A2015 reviewer)

DISPOSITIVE: Decision AFFIRMED with MODIFICATION.

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B. Obligation to Pay bearing or discounted government or corporate
securities.
Art. 1955 The obligation of a person who borrows money - An investor who purchases a bond is lending
shall be governed by the provisions of Articles 1249 and 1250 money to the issuer, and the bond represents the
of this Code. issuers contractual promise to pay interest and
repay principal according to specific terms.
If what was loaned is a fungible thing other than money, the 3) Debenture an instrument acknowledging a debt
debtor owes another thing of the same kind, quantity and secured only by the issuers earning power and not by a
quality, even if it should change in value. In case it is lien, or legal right or interest that a creditor has, on any
impossible to deliver the same kind, its value at the time of the specific asset, or an unsecured bond.
perfection of the loan shall be paid.
Notes, bonds, and debentures are all promises to pay. They are
Art. 1249 The payment of debts in money shall be made in evidence of indebtedness and are commercial forms of contracts
the currency stipulated, and if it is not possible to deliver such of simple loan.
currency, then in the currency which is legal tender in the
Philippines. NOTE BOND DEBENTURE
Promise to pay Promise to pay Promise to pay
The delivery of promissory notes payable to order, or bills of To specified To holder To holder
exchange or other mercantile documents shall produce the person
effect of payment only when they have been cashed, or when On demand or on The principal at
through the fault of the creditor they have been impaired. a specified date maturity and
specified sums at
In the meantime, the action derived from the original specific intervals
obligation shall be held in the abeyance.
C. Interest
Art. 1250 In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency SGS classifies interest as:
at the time of the establishment of the obligation shall be the 1. Conventional by agreement
basis of payment, unless there is an agreement to the contrary. - Interest on interest
2. Compensatory seeks to make the party whole
- The primary obligation of the borrower is to pay.
INTEREST RULES:
- If the object of the simple loan is money (principal), then
- GR: Must be expressly stipulated in writing (what is
the general rules on payment in money apply.
stipulated is a rate or fixed amount, or even in kind)
o The value of payment in money, or payment of the
- XPN: No rate, but with express stipulation ! legal interest
principal, is generally determined at the time of the
(which is currently at 6%)
establishment of the obligation, that is, the time of the
delivery of the principal.
Beda Reviewer Notes (From A2015)
- If the object of the simple loan is any other consumable
Interest
property, then the borrower owes payment in kind, that
Compensation allowed by law or fixed by the parties for the loan
is, another property of the same kind, quantity and quality.
or forbearance of money, goods, or credits
o The value of payment in kind is determined at the time
of perfection of the simple loan, that is, the time of
Requisites for Demandability
delivery of the object of the simple loan.
1. Must be expressly stipulated
- The obligation to pay may be evidenced by a written
- XPNS:
promise to pay. The following are evidences of
o Indemnity for damages
indebtedness and are the commercial forms that contracts
o Interest accruing from unpaid interest
of simple loan take:
2. Must be lawful
1) Note a written promise by the maker to the payee or
3. Must be in writing
to bearer, or a written promise to pay a specified
amount to a certain person on demand or on a
Compound Interest
specified date
- GR: Unpaid interest shall not interest
2) Bond a written promise by the issuer to pay money to
- XPN:
the holders, or a written promise, issued by a
o When judicially demanded
government or corporation to holders, to pay the
o When there is an express stipulation (must be in writing
principal amount of the loan at maturity and a specified
in view of Art. 1956)
sum of money usually at specific intervals. Interest-

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1. Conventional Interest
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan 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.
Art. 1956 No interest shall be due unless it has been
expressly stipulated in writing.
Art. 1253 If the debt produces interest, payment of the
principal shall not be deemed to have been made until the
interests have been covered.
Art. 1958 In the determination of the interest, if it is payable
in kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment.
Art. 1960 If the borrower pays interest when there has been
no stipulation therefor, the provisions of this Code concerning
solutio indebiti, or natural obligations, shall be applied, as the
case may be.
Art. 2154 If something is received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises
Art. 1423 Obligations are civil or natural. Civil obligations give
a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered
by reason thereof. Some natural obligations are set forth in the
following articles.
Act 2655, Sec. 1 The rate of interest for the loan or
forbearance of any money goods, or credits and the rate
allowed in judgments, in the absence of express contract as to
such rate of interest, shall be six per centum per annum or such
rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance
with the authority hereby granted.
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Central Bank Circular 416-74 By virtue of the authority
granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the "Usury Law," the Monetary Board, in
its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be
twelve per cent (12 %) per annum.
This Circular shall take effect immediately.
Act 2655, Sec. 7 All covenants and stipulations contained in
conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods or
other things, whereupon or whereby there shall be stipulated,
charged, demanded, reserved, secured, taken, or received,
directly or indirectly, a higher rate or greater sum or value for
the loan or renewal or forbearance of money, goods, or credits
than is hereinbefore allowed, shall be void: Provided, however,
That no merely clerical error in the computation of interest,
made without intent to evade any of the provisions of this Act,
shall render a contract void: Provided, further, That parties to a
loan agreement, the proceeds of which may be availed of
partially or fully at some future time, may stipulate that the rate
of interest agreed upon at the time the loan agreement is
entered into, which rate shall not exceed the maximum
allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the
Monetary Board: And Provided, finally, That nothing herein
contained shall be construed to prevent the purchase by an
innocent purchaser of a negotiable mercantile paper, usurious
or otherwise, for valuable consideration before maturity, when
there has been no intention on the part of said purchaser to
evade the provisions of this Act and said purchase was not a
part of the original usurious transaction. In any case, however,
the maker of said note shall have the right to recover from said
original holder the whole interest paid by him thereon and, in
case of litigation, also the costs and such attorney's fees as
may be allowed by the court.
Sec. 7-a Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that the
rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased by
law or by the Monetary Board: Provided, That such stipulation
shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the
event that the applicable maximum rate of interest is reduced
by law or by the Monetary Board: Provided, further, That the
adjustment in the rate of interest agreed upon shall take effect
on or after the effectivity of the increase or decrease in the
maximum rate of interest.
21
Simple Loan
- May be gratuitous or onerous
- Onerous: compensation to be paid by borrower is called
interest
Interest
- Payable in money or payable in kind
o Payable in money: a stated amount or a computed
amount based on an interest rate (percentage of the
principal payable for a given period)
o Payable in kind: value appraised at the time of payment
Conditions for Payment of Interest to Be Allowed:
1. There is an express stipulation for the payment of
interest, and
2. The stipulation for the payment of interest is in writing
If the conditions do not concur and the borrower pays interest:
- If the borrower paid by mistake, the creditor is obliged to
return what was delivered
- If the borrower voluntarily paid, the creditor is authorized to
retain
Conventional Interest
- Interest paid as compensation in simple loan
- It is the interest agreed to by the parties themselves as
distinguished from that prescribed by law
Monetary Interest (Regular Interest)
- Conventional interest in a simple loan of money
- Payment of both principal and interest is made in money
gradually extinguishing the loan
- It is viewed as the cost of money
Usury Law (Act No. 2655) applies the concept of interest to:
1. The loan of money, goods, or credits, which must be
understood as simple loan or mutuum; and
2. The forbearance, that is, the act of refraining, tolerating or
abstaining from enforcing a right or obligation of money,
goods, or credits, even if the principal obligation or
agreements is not a simple loan
The applicable interest to the 2 enumerated above shall be
determined as follows:
1. Conventional interest: If there is an interest amount or
rate stipulated, then the interest stipulated
2. Legal interest: If there is no stipulation on interest
amount or rate then the interest prescribed by statute
Escalation Clauses
- Clauses in long-term credit transactions that authorize the
increase in conventional interest rates as a means of
maintaining fiscal stability and retaining the value of money
- GR: they are valid as they do not contravene public policy
- XPN: unconsented increase in interest rates, which
transgresses the principle of mutuality of contracts
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- To avoid one-sidedness, there must be a de-escalation
clause that authorizes a corresponding reduction in the
interest rates
- To be valid, the clause cannot give the creditor the
unbridled right to adjust interest rates unilaterally; it must
still be the result of an agreement or a meeting of the minds
on the actual increase in interest rates
ESCALATION CLAUSES
- Not per se invalid
- J. Serenos Concurring Opinion laid down 3 rules:
1. As a matter of equity and consistent with P.D. 1684, the
escalation clause must be paired with a DE-
ESCALATION CLAUSE
2. The escalation clause must be PEGGED to the
PREVAILING MARKET RATES (not merely a generalized
reference to any increase or decrease in the interest
rate in the event of a law or Central Bank regulation
3. Proposed modification must be the RESULT OF AN
AGREEMENT between the parties
Spouses Juico v China Banking Corp (2013) Villarama, Jr., J.
Petitioner: Sps. Juico
Respondents: China Banking Corporation
Concept: Conventional Interest
Doctrine:
Escalation clauses are valid provided that changes made shall
be mutually agreed upon by both parties to not violate the
principle of mutuality essential to contracts.
Brief Facts:
Sps. Juico obtained a loan from China Banking Corp secured by
a Real Estate Mortgaged on the spouses property in White
Plains, QC. Spouses failed to pay amortization due upon
demand, and the mortgaged property was foreclosed. The Bank
filed an action for the collection of sum of money for the
deficiency after applying the proceeds of the foreclosure.
ISSUE:
WON the Bank unilaterally increased the interest rates (YES)
RATIO: NO; the bank did not comply with the notice
requirement, violating the rule on mutuality of
contracts
- Article 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will of
one of them. Article 1956 of the Civil Code likewise ordains
that "no interest shall be due unless it has been expressly
stipulated in writing."
- The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality.
22
- Escalation clauses refer to stipulations allowing an increase
in the interest rate agreed upon by the contracting parties.
The Court has long recognized that there is nothing
inherently wrong with escalation clauses, which are valid
stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term
contracts. Such stipulations are not void per se.
- Nevertheless, an escalation clause "which grants the
creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the
debtor of the right to assent to an important modification in
the agreement" is void. A stipulation of such nature violates
the principle of mutuality of contracts.
- In Banco Filipino Savings & Mortgage Bank v. Navarro, the
Court ruled that escalation clauses in general are
considered valid, we ruled that Banco Filipino may not
increase the interest on respondent borrowers loan,
pursuant to Circular No. 494 issued by the Monetary Board
on January 2, 1976, because said circular is not a law
although it has the force and effect of law and the escalation
clause has no provision for reduction of the stipulated
interest in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board" (de-
escalation clause).
- Subsequently, in Insular Bank of Asia and America v.
Spouses Salazar, the Court reiterated that escalation clauses
are valid stipulations but their enforceability are subject to
certain conditions. The increase of interest rate from 19% to
21% per annum made by petitioner bank was disallowed
because it did not comply with the guidelines adopted by
the Monetary Board to govern interest rate adjustments by
banks.
- In 1996, the Court invalidated escalation clauses authorizing
PNB to raise the stipulated interest rate at any time without
notice, within the limits allowed by law. The Court observed
that there was no attempt made by PNB to secure the
conformity of respondent borrower to the successive
increases in the interest rate. The borrowers assent to the
increases cannot be implied from their lack of response to
the letters sent by PNB, informing them of the increases.
- It is now settled that an escalation clause is void where the
creditor unilaterally determines and imposes an increase in
the stipulated rate of interest without the express
conformity of the debtor. Such unbridled right given to
creditors to adjust the interest independently and upwardly
would completely take away from the debtors the right to
assent to an important modification in their agreement and
would also negate the element of mutuality in their
contracts. While a ceiling on interest rates under the Usury
Law was already lifted under Central Bank Circular No. 905,
nothing therein "grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets."35
- The two promissory notes signed by petitioners
provide:IWe hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may be,
the interest rate/service charge presently stipulated in this
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note without any advance notice to me/us in the event a law
or Central Bank regulation is passed or promulgated by the
Central Bank of the Philippines or appropriate government
entities, increasing or decreasing such interest rate or
service charge.
- Such escalation clause is similar to that involved in the case
of Floirendo, Jr. v. Metropolitan Bank and Trust Company
where this Court ruled: The provision in the promissory note
authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest
and/or bank charges "without advance notice" to
petitioner, "in the event of change in the interest rate
prescribed by law or the Monetary Board of the Central
Bank of the Philippines," does not give respondent bank
unrestrained freedom to charge any rate other than that
which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the
will of respondent bank alone. It violates the essence of
mutuality of the contract.38
- Escalation clauses are not basically wrong or legally
objectionable as long as they are not solely potestative but
based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of
private respondent.
- Here, the escalation clause in the promissory notes
authorizing the respondent to adjust the rate of interest on
the basis of a law or regulation issued by the Central Bank of
the Philippines, should be read together with the statement
after the first paragraph where no rate of interest was fixed
as it would be based on prevailing market rates. While the
latter is not strictly an escalation clause, its clear import was
that interest rates would vary as determined by prevailing
market rates. Evidently, the parties intended the interest on
petitioners loan, including any upward or downward
adjustment, to be determined by the prevailing market rates
and not dictated by respondents policy.
- There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory
notes. In fact, petitioner Ignacio, a physician engaged in the
medical supply business, admitted having understood his
obligations before signing them. At no time did petitioners
protest the new rates imposed on their loan even when their
property was foreclosed by respondent.
- This notwithstanding, we hold that the escalation clause is
still void because it grants respondent the power to impose
an increased rate of interest without a written notice to
petitioners and their written consent. Respondents monthly
telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing
statement based on the new imposed interest with
corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must also
be signed by the petitioners to indicate their conformity to
the new rates. Modifications in the rate of interest for loans
pursuant to an escalation clause must be the result of an
agreement between the parties.
23
- Based on the August 29, 2000 demand letter of China Bank,
petitioners total principal obligation under the two
promissory notes which they failed to settle is P10,355,000.
However, due to China Banks unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty
charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners
balance ballooned to P19,201,776.63. Note that the original
amount of principal loan almost doubled in only 16 months.
The Court also finds the penalty charges imposed excessive
and arbitrary, hence the same is hereby reduced to 1% per
month or 12% per annum.
- Petitioners Statement of Account, as of February 23, 2001,
the date of the foreclosure proceedings, should thus be
modified as follows: In the case at bar, it is explicitly
provided that all correspondence relative to the mortgage
shall be sent to the mortgagor. However, no such notice was
sent by the bank to the spouses.
- In spite of said breach, however, the spouses may not
recover the property sold since the Asaje Realty appears to
be an innocent purchaser in good faith. It purchases the
property when the title was already in the name of the bank
and was under no obligation to look beyond what appears
therein.
DISPOSITIVE: Petition Partially Granted
CONCURRING OPINION: Sereno, J.
SERENO, J.:
Sereno clarifies that not all escalation clauses in loan agreements
are void per se. It is actually the rule that "escalation clauses are
valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term
contracts." In The Consolidated Bank and Trust Corporation v.
Court of Appeals, citing Polotan, Sr. v. Court of Appeals, this
Court already accepted that, given the fluctuating economic
conditions, practical reasons allow banks to stipulate that
interest rates on a loan will not be fixed and will instead depend
on market conditions. In adjudging so, we differentiated a valid
escalation clause from an otherwise invalid proviso in this wise.
Neither was error when the lower court and the Court of Appeals
set aside as invalid the floating rate of interest exhorted by
petitioner to be applicable. The pertinent provision in the trust
receipt agreement of the parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in
the interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rate, and to pay additionally the
penalty of I% per month until the amount/s or installments/s due
and unpaid under the trust receipt on the reverse side hereof
is/are fully paid.
The respondent Court of Appeals that the foregoing stipulation
is invalid, there being no reference rate set either by it or by the
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Central Bank, leaving the determination thereof at the sole will
and control of petitioner.
While it may be acceptable, for practical reasons given the
fluctuating economic conditions, for banks to stipulate that
interest rates on a loan not be fixed and instead be made
dependent upon prevailing market conditions, there should
always be a reference rate upon which to peg such variable
interest rates. An example of such a valid variable interest rate
was found in Polotan, Sr. v. Court of Appeals. In that case, the
contractual provision stating that "if there occurs any change in
the prevailing market rates, the new interest rate shall be the
guiding rate in computing the interest due on the outstanding
obligation without need of serving notice to the Cardholder
other than the required posting on the monthly statement
served to the Cardholder" was considered valid. The
aforequoted provision was upheld notwithstanding that it may
partake of the nature of an escalation clause, because at the
same time it provides for the decrease in the interest rate in case
the prevailing market rates dictate its reduction. In other words,
unlike the stipulation subject of the instant case, the interest rate
involved in the Polotan case is designed to be based on the
prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to "any increase or decrease
in the interest rate," without more, cannot be accepted by this
Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an
outstanding loan.
Evidently, the point of difference in the cited escalation clauses
lies in the use of the phrase "any increase or decrease in the
interest rate" without reference to the prevailing market rate
actually imposed by the regulations of the Central Bank.
Based on jurisprudence, therefore, these points must be
considered by creditors and debtors in the drafting of valid
escalation clauses. Firstly, as a matter of equity and consistent
with P.O. No. 1684, the escalation clause must be paired with a
de-escalation clause. Secondly, so as not to violate the principle
of mutuality, the escalation must be pegged to the prevailing
market rates, and not merely make a generalized reference to
"any increase or decrease in the interest rate" in the event a law
or a Central Bank regulation is passed. Thirdly, consistent with
the nature of contracts, the proposed modification must be the
result of an agreement between the parties. In this way, our
credit system would be facilitated by firm loan provisions that
not only aid fiscal stability, but also avoid numerous disputes and
litigations between creditors and debtors.
24
Sps. Juico v. China Banking Corp.
- There is no dispute as to the loan or as to the mortgage
- It is difficult to dispute the principal, but it is ALWAYS the
interest that is always the bone of contention
Banco Filipino Sps. Juico
No de-escalation With de-escalation clause
Violates mutuality principle Violates mutuality principle
Increased based on Circular Increased without following a
(invalidated in its law or Central Bank Circular
implementation because it (no pegging)
based it on a circular, NOT a
law)
Advise of maam: PEG A MARGIN; Follow Polotan, follow a
margin
Spouses Silos v. PNB (2014) Del Castillo
Petitioner: Sps. Eduardo and Lydia Silos
Respondent: Philippine National Bank
Concept: Conventional Interest
Doctrine:
Escalation clauses providing for unilateral increases made by one
party violates the principle of mutuality of contracts. Although
these provisions are deemed part of the contract, there cannot
be a unilateral increase by one party because there must still be
assent by the other party. In a loan contract, since interest rates
are an essential part, any changes to it must be mutually
assented to by both parties.
Brief Facts:
Spouses Silos secured a credit line with PNB involving a Credit
Agreement and a mortgage to secure such an agreement. The
spouses also issued several promissory notes to cover their
payment. In all documents, there were escalation
clauses/provisions allowing PNB to increase or reduce interest
rates unilaterally. These were found to be violative of the
principle of the mutuality of contracts.
ISSUE:
WON the interest rate provision in the Credit Agreement and
the Amendment to Credit Agreement is null and void for giving
PNB the sole power to fix the rates [YES]
RATIO: The provision giving PNB the sole unilateral
determination to fix the interest is void.
- Spouses: The provision relegates to PNB the sole power to
fix the rates based on arbitrary criteria and the promissory
notes were left blank for PNB to unilaterally fill ! violates
the principle of mutuality of contracts
- PNB: Since the Credit Agreement and promissory notes
contained both an escalation clause and a de-escalation
clause, the bank did not violate the principle of mutuality;
plus, the parties mutually agreed, as shown by the
continuous payment without protest by the spouses
- Spouses: Principle of estoppel doesnt apply because no
estoppel can proceed from an illegal act
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- PNB: Spouses are estopped because they failed to question
the imposed rates and they continued to pay without
opposition
- In a number of decided cases, the Court struck down
provisions in credit documents issued by PNB to, or
required of, its borrowers which allow the bank to increase
or decrease interest rates within the limits allowed by law
at any time depending on whatever policy it may adopt in
the future
a) PNB v. CA (1991): stipulation and similar ones were
declared in violation of Art. 1308 NCC
b) PNB v. CA (1994): again invalidated
- Bank relied on the escalation clause, which is
authorized by Sec. 2 of PD 1684, which amended
Act No. 2655 (The Usury Law)
- Sec. 1 of PD 1684 also empowered the Monetary
Board to prescribe maximum rates of interest for
loans and certain forbearances and the Central
Bank Circular (issued by the Monetary Board)
provides that the rate of interest shall not be
subject to any ceiling prescribed under or pursuant
to the Usury Law
- Court here held that while PD 1684 and CB Circular
No. 905 allowed contracting parties to stipulate
freely regarding adjustments in the interest rate,
the law and circular did not authorize either
party to unilaterally raise the interest rate
without the others consent
- There can be no contract in the true sense in the
absence of the element of agreement or of mutual
assent of the parties
- Contract changes must be made with the consent
of the contracting parties, especially when it affects
an important aspect of the agreement; rate of
interest is always a vital component of loan
contracts
- Cannot countenance PNBs posturing that the
escalation clause gives it unbridled right to
unilaterally upwardly adjust the interest because it
would take away the respondents right to assent
to an important modification in their agreement
and would negate the element of mutuality of
contracts
c) Sps. Almeda v. CA (1996): court invalidated the same
provisions as in the instant cases Credit Agreement
- Here, PNB unilaterally altered the terms of its
contract by increasing the interest rates on the loan
without the prior assent of the petitioners
- Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely
potestative but based on reasonable and valid
grounds
25
 d) PNB v. CA (1996):
- The Court in Banco Filipino Savings & Mortgage
Bank v. Navarro said that there must be a de-
escalation clause to mitigate the one-sidedness of
the escalation clause because of concern for the
unequal status of borrowers vis--vis the banks and
any increase in the rate of interest made pursuant
to an escalation clause must be the result of
agreement between the parties
- Court, citing a PNB v. CA case, declared that
increases unilaterally imposed by PNB are in
violation of the principle of mutuality as embodied
in Art. 1308, NCC
- Court cited another PNB v. CA case which stated
that while the Usury Law ceiling on rates was lifted,
nothing could be read as granting the bank carte
blanche authority to raise interest rates to levels
which would either enslave its borrowers or lead to
a hemorrhaging of their assets; Court found that
there was no attempt by PNB there to secure the
conformity of the borrowers, and the assent to the
increases CANNOT be implied from the lack of
response to the letters of PNB informing them of
increases
e) New Sampaguita Builders Construction, Inc. v. PNB
(2004): court said that excessive interests, penalties and
other charges not revealed in disclosure statements
issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in
Lending Act
f) PNB v. Sps. Rocamora (2009): above pronouncements
were reiterated to debunk PNBs repeated reliance on
its invalidated contract stipulations
- PNBs argument that the spouses failure to contest
the increased interest rates amounted to implied
acceptance increase should fail
- All the cases, including the present one, involve identical or
similar provisions
- SC: These stipulations must be once more invalidated, as
was done in previous cases. The common denominator in
these cases is the lack of agreement of the parties to the
imposed interest rates
o Lack of consent: spouses signed the promissory notes
in blank (credible testimony by Lydia)
o PNB Branch Manager even admitted that interest rates
were fixed solely by its Treasury Department, and the
factors considered do not include factors which affect
PNBs borrowers
o PNBs method of fixing interest rates is arbitrary based
on one-sided, indeterminate, and subjective criteria
- SC: any modification in the contract, such as the interest
rates, must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if
not the most important component. Thus, any modification
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thereof must be mutually agreed upon; otherwise, it has no
binding effect.
o The stipulations here dont even provide that the
parties will agree upon the interest rate they are
worded in such a way that the borrower shall agree to
whatever interest rate PNB fixes (ABSURD)
- SC: with the present credit agreement, the element of
consent or agreement by the borrower is now completely
lacking, which makes respondents unlawful act all the more
reprehensible.
- SC: petitioners are correct in arguing that estoppel should
not apply to them, for estoppel cannot be predicated on
an illegal act.
o Since PNB violated the Truth in Lending Act (RA 3765),
which was enacted to protect citizens from a lack of
awareness of the true cost of credit to the user by using
a full disclosure of such cost
o By requiring the spouses to sign the documents and
notes in blank, and then unilaterally filling them up later
on, PNB violated the Truth in Lending Act, and was
remiss in its disclosure obligations
o BUT the 1-year period to file a case prescribed already
- SC: Cannot subscribe to PNBs argument that in every
repricing, the spouses are given the right to question the
interest rates ! if only one questions PNBs practice, the
rest will still be victim to the questionable practice and the
Court cannot condone this
- Since the escalation clause is annulled, the principal amount
of the loan is subject to the original or stipulated rate of
interest, and upon maturity, the amount due shall be subject
to legal interest at the rate of 12% per annum
o Interests to be applied first to the payment of the
stipulated or legal and unpaid interest, and later, to the
capital or principal
o Because only the interest rates are found to be
improper, the obligation to pay interest subsists, fixed
at the legal rate of 12% per annum (only until June 30,
2013). Starting July 1, 2013, it shall be 6% per annum,
pursuant to Nacar v. Gallery Frames and Monetary
Board Circular No. 799
DISPOSITIVE: Petition granted. CA Decision ANNULLED and
SET ASIDE.
26
Procedure outlined by the SC for the remand to the lower court
for proper accounting and computation:
1. The 1st Promissory Note with the 19.5% interest rate is
deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th
promissory notes) shall carry an interest rate of only 12% per
annum.104 Thus, interest payment made in excess of 12%
on the 2nd promissory note shall immediately be applied to
the principal, and the principal shall be accordingly
reduced. The reduced principal shall then be subjected to
the 12%105 interest on the 3rd promissory note, and the
excess over 12% interest payment on the 3rd promissory
note shall again be applied to the principal, which shall
again be reduced accordingly. The reduced principal shall
then be subjected to the 12% interest on the 4th promissory
note, and the excess over 12% interest payment on the 4th
promissory note shall again be applied to the principal,
which shall again be reduced accordingly. And so on and so
forth;
3. After the above procedure is carried out, the trial court shall
be able to conclude if petitioners a) still have an
OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL
OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall
then be subjected to a 12% per annum interest from
October 28, 1997 until January 14, 1999, which is the date of
the auction sale;
5. Such outstanding balance/obligation shall also be charged
a 24% per annum penalty from August 14, 1997 until January
14, 1999. But from this total penalty, the petitioners
previous payment of penalties in the amount of P202,000.00
made on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties
(5.), and the final and executory award of 1% attorneys fees
shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.)
and 1% attorneys fees (6.) shall be DEDUCTED from the bid
price of P4,324,172.96. The penalties (5.) are not included
because they are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the
outstanding balance (3.), interest (4.), and 1% attorneys fees
(6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to
TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in
(2.), it turns out that petitioners made an OVERPAYMENT,
the interest (4.), penalties (5.), and the award of 1%
attorneys fees (6.) shall be DEDUCTED from the
overpayment. There is no outstanding balance/obligation
precisely because petitioners have paid beyond the amount
of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.),
penalties (5.), and award of 1% attorneys fees (6.), the
excess shall be RETURNED to the petitioners, with legal
interest, under the principle of solutio indebiti;107
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12. Likewise, if the overpayment exceeds the total amount of
interest (4.) and award of 1% attorneys fees (6.), the trial
court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of
1% attorneys fees (6.) exceed petitioners overpayment,
then the excess shall be DEDUCTED from the bid price of
P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the
interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED
TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to
TCTs T-14250 and T-16208. The outstanding penalties, if
any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it
turns out that the petitioners made payments exceeding what
they actually owe by way of principal, interest, and attorneys
fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the
contrary, respondent must refund the excess to petitioners. In
such case, the extrajudicial foreclosure and sale of the properties
shall be declared null and void for obvious lack of basis, the case
being one of solutio indebiti instead. If, on the other hand, it
turns out that petitioners overpayments in interests do not
exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period
for redemption has expired. Its only obligation will be to return
the difference between its bid price (P4,324,172.96) and
petitioners total obligation outstanding except penalties
after applying the latters overpayments.
Sps. Silos v. PNB
- Lack of an agreement violates the mutuality of contracts
- Depends on its own policy (solely on the will of the PNB;
purely potestative) ! no pegging
- Only some had de-escalation clauses
- Signed in blank by the spouses
Valid de-escalation clauses
- In Solidbank
o There is a de-escalation
o It is pegged (but Maam is iffy about among others)
o Consent (prepayment)
- In Polotan benchmark for valid escalation clauses
o Change = increase/decrease
o Pegged at prevailing market rate (3%)
- PEGGING: at any other rate fixed by a third party
Question: Is it enough to get assent/consent from the signing if
other 2 requisites are present?
SGS: Consent can be manifested upon signing, PROVIDED
escalation clause is very clear and leaves no doubt (there is
margin/tracking) and notice would be enough
27
PNB v. CA and Ambrosio Padilla (1991) Grino-Aquino, J
Petitioner: Philippine National Bank
Respondents: CA and Ambrosio Padilla
Concept: Simple Loan; interest
Doctrine:
- In order for an escalation clause to be valid, the ff. must
concur:
(1) That there can be an increase in interest if increased by
law or by the Monetary Board
(2) It must include a provision for reduction of the interest
in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board
- Increases in interest rate shall likewise not be made oftener
than once every 12 months.
- Unilateral increases is likewise violative of mutuality of
contracts.
Brief Facts:
Padilla contracted a loan with PNB for P1.8M. He was charged
with 18% interest per annum. Upon renewal of his loan, PNB
informed him that the interest will be increased to 32%. Padilla
did not express his conformity to said increase. PNB further
increased the interest rate to 41% and again to 48%. Said
increases were all made within 4 months. Padilla filed a
complaint against PNB, contending that said unilateral increases
were illegal and not valid or binding to him
ISSUE:
WON the unilateral increases of interest were valid (NO)
RATIO: PNB cannot unilaterally increase interest rates.
It is likewise prohibited from increasing interest rates
more than once within a period of 12 months.
! PD 116 grants the Monetary Board of the Central Bank the
authority to increase rates of interest for loans or renewals
thereof but expressly provided that such changes shall not
be made oftener than once every twelve months
o PNB increase interest rates 3 times; if the Monetary
Board itself was not authorized to make changes
oftener than once in a year, even less so may a bank
which is subordinate to the Board
! Even if Padilla did agree in the Deed of Real Estate
Mortgage that the interest rate may be increased to such
increase within the rate allowed by law, as the Board of
Directors of PNB may prescribe, no law was ever passed in
July to November 1984 increasing the intrest rates on loans
or renewals thereof to 32%, 41% and 48% per annum, and
no documents were executed and delivered by Padilla to
effectuate the increase (such documents were agreed upon
by the parties to be made prerequisites for any increase in
interest)
! The escalation clause agreed upon by the parties was
likewise invalid as it did not contain a de-escalation clause
that permits a decrease in interest rate. In order for an
escalation clause to be valid, the ff. must concur:
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(1) That there can be an increase in interest if increased by
law or by the Monetary Board
(2) It must include a provision for reduction of the interest
in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board
! The unilateral increases is likewise violative of the mutuality
of contracts
o Art. 1308 CC: The contract must bind both
contracting parties; its validity or compliance cannot be
left to the will of one of them
! The increases were likewise violative of their Credit
Agreement which provided that its terms may be amended
only by an instrument in writing signed by the party to be
bound as burdened by such amendment.
! The increases also contravene Art. 1956 CC which
provides that no interest shall be due unless it has been
expressly stipulated in writing
o Padilla never agreed in writing to pay the interest
increases beyong 24%
DISPOSITIVE: CA Affirmed
PNB v. CA (1994) Puno, J.
Petitioner: Philippine National Bank
Respondents: CA, Remedios Jayme-Fernandez and Amado
Fernandez
Concept: Simple Loan; interest
Doctrine:
Increase in interest rate cannot be made without both parties
agreeing to it.
Brief Facts:
Fernandez obtained two loans from PNB with 12% interest per
annum. PNB unilaterally increased the interest rate to 25%; and
again to 30%; and again to 42%. Fernandez filed a complaint
against PNB contending that said increases were unilaterally
made and this illegal.
ISSUE:
WON unilateral increases of interest were valid (NO)
RATIO: The unilateral increases made by PNB is
violative of the mutuality of contracts
- The validity of escalation clauses is affirmed by PD 1684.
o Said PD provides that parties may stipulate that interest
rates may be increased in the event that the applicable
max. rate of interest is increased by law or by the
Monetary Board
o Said increases shall be valid only if there is also a
stipulation that the rate of interest shall be reduced in
the event that the applicable max. rate of interest is
reduced by law or by the Monetary Board.
- Central Bank Circular No 905, Series of 1982 provides that
the rate of interest on any loan or forbearance shall not be
subject to any ceiling prescribed under or prescribed
pursuant to the Usury Law
28
- PD 1684 and CB Circular No. 905 allowed contracting
parties to freely stipulate interest rate which they may agree
to increase or decrease. However, changes in interest rates
cannot be made unilaterally as the same would violate the
mutuality of contracts under Art. 1308
o There can be no contract in the true sense in the
absence of the element of agreement
o Similarly, contract charges must be made with the
consent of the contracting parties
- Sps. Fernandez are likewise not estopped from assailing the
unilateral increases made by PNB; their silence cannot be
construed as an acceptance
- Circumstances do not show that Fernandez agreed to the
proposed increases in interest rate
DISPOSITIVE: CA affirmed.
Sps. Almeda v. CA (1997) Kapunan, J.
Petitioner: Sps. Almeda
Respondents: Court of Appeals; and Philippine National Bank
(PNB)
Concept: Interest
Doctrine:
While escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but are
based on reasonable and valid grounds
Brief Facts:
Sps. Almeda loaned P18M from PNB. Credit agreement
provided for an escalation clause. PNB raised the original 21%
interest rate to as high as 68% within 4 years.
ISSUE:
WON PNB authorized to increase the interest rate to as high as
68% (NO)
RATIO: NO; such increases contravene the mutuality
principle of contracts, Art. 1956, as well as the terms
and conditions of its own credit agreement
- The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality.
- Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable
result is void, and any stipulation regarding the validity or
compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid
- In the case at bar, it is clear that PNB unilaterally altered the
terms of its contract by increasing the interest rate without
the prior assent of the spouses. Besides, Art. 1956 explicitly
provides that interest shall only be due if it is stipulated in
writing. What has been stipulated in writing from a
perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound
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merely to pay 21% interest, subject to a possible escalation
or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by
law; and 3) upon agreement.
- PNB also violated the terms of its own credit agreement
with the spouses. By express provision, Section 9.01
provides that its terms may be amended only by an
instrument in writing signed by the party to be bound as
burdened by such amendment.
- Central Bank Circular No. 905 which lifted the Usury Law
ceiling - cannot be used by bank as carte blanche authority
to raise interest rates to such an unbelievable and
burdensome amount.
- While escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but
are based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only the increases of the interest
rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no
valid and reasonable standards upon which the increases
are anchored.
DISPOSITIVE: CA reversed. PNB unilateral increases null and
void. REMANDED to TC.
!
PNB v. CA (1996) Mendoza, J.
Petitioner: PNB
Respondents: Court of Appeals; Sps. Bascos
Concept: Interest
Doctrine:
Escalation clauses are valid provided that changes made shall
be mutually agreed upon by both parties to not violate the
principle of mutuality essential to contracts.
Brief Facts:
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory
note executed to secure the loan, the spouses authorized the
bank to increase the interest rate without advance notice if the
Central Bank increases the interest rate. The bank increased the
interest rate thrice, spouses eventually defaulted, and the real
estate mortgage they executed was foreclosed and sold to
another corporation.
ISSUE:
WON the increases made by PNB are valid (NO)
RATIO: NO; the absence of a de-escalation clause is
not only against P.D. 1684 but it made the clause so
one-sided as to make it unreasonable.
- Following the decision laid down in Banco Filipino Savings
v. Navarro, there must be a de-escalation clause to mitigate
the one-sidedness of the escalation clause.
- Furthermore, any increase in the rate of interest made
pursuant to an escalation clause must be the result of an
agreement between the parties.
29
- In the case at bar, there was no attempt made by the PNB
to secure the conformity of the spouses to the successive
increases made. Their assent cannot be implied from their
lack of response to the letters PNB sent, informing them of
the increases. No one receiving a proposal to change a
contract is obliged to answer the proposal.
DISPOSITIVE: CA affirmed
! interest balances served as the bases for subsequent pro-
New Sampaguita Builders v PNB (2004) Panganiban., J.
Petitioner: New Sampaguita Builders Inc.
Respondents: Philippine National Bank
Concept: Conventional Interest
Doctrine:
One-sided impositions do not have the force of law between the
parties, because such impositions are not based on the parties
essential equality. Although escalation clauses are valid in
maintaining fiscal stability and retaining the value of money on
long-term contracts, giving respondent an unbridled right to
adjust the interest independently and upwardly would
completely take away from petitioners the right to assent to an
important modification in their agreement and would also
negate the element of mutuality in their contracts. The clause
cited earlier made the fulfillment of the contracts dependent
exclusively upon the uncontrolled will of respondent and was
therefore void.
Brief Facts: Sampaguita loaned money from PNB. PNB
unilaterally increased rates of interest in the loan w/o informing
Sampaguita. PNB claimed they were authorized to do it as there
was a clause in the agreement that they may do so. Besides,
Usury law was no longer in force.
ISSUES:
1. WON the loan accounts are bloated (YES)
2. WON PNB could unilaterally increase interest rates (NO)
RATIO:
1. There is no deficiency; there is actually an
overpayment of more than 3M based on the
computation of the SC.
- The excessive interest rates in the Statements of Account
sent to petitioners are reduced to 19.5 percent and 21.5
percent, as stipulated in the Promissory Notes;
- upon loan conversion, these rates are further reduced to the
legal rate of 12 percent. Payments made by petitioners are
pro-rated, the charges on penalty and insurance eliminated,
and the resulting total unpaid principal and interest of
P6,582,077.70 as of the date of public auction is then
subjected to 1 percent attorney's fees.
- The total outstanding obligation is compared to the bid
price. On the basis of these rates and the comparison made,
the deficiency claim receivable amounting to P2,172,476.43
in fact vanishes.
- Instead, there is an overpayment by more than P3 million
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- First, the payments were applied to debts that were already
due. Thus, when the first payment was made and applied on
January 5, 1990, all Promissory Notes were already due.
- Second, payments of the principal were not made until the
interests had been covered. For instance, the first payment
on January 15, 1990 had initially been applied to all interests
due on the notes, before deductions were made from their
respective principal amounts. The resulting decrease in
ratings.
- Third, payments were proportionately applied to all
interests that were due and of the same nature and burden.
- Fourth, since there was no stipulation on capitalization, no
interests due and unpaid were added to the principal;
hence, such interests did not earn any additional interest.
The simple not compounded method of interest
calculation was used on all Notes until the date of public
auction.
- In fine, under solutio indebiti or payment by mistake, there
is no deficiency receivable in favor of PNB, but rather an
excess claim or surplus payable by respondent; this excess
should immediately be returned to petitioner-spouses or
their assigns not to mention the buildings and
improvements on and the fruits of the property to the
end that no one may be unjustly enriched or benefited at
the expense of another.
- Such surplus is in the amount of P3,686,101.52
2. Sampaguitas accessory duty to pay interest did not
give PNB unrestrained freedom to charge any rate
other than that, which was agreed upon.
- No interest shall be due, unless expressly stipulated in
writing. It would be the zenith of farcicality to specify and
agree upon rates that could be subsequently upgraded at
whim by only one party to the agreement. The unilateral
determination and imposition of increased rates is
violative of the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code.
- One-sided impositions do not have the force of law
between the parties, because such impositions are not
based on the parties essential equality. Although escalation
clauses are valid in maintaining fiscal stability and retaining
the value of money on long-term contracts, giving
respondent an unbridled right to adjust the interest
independently and upwardly would completely take away
from petitioners the right to assent to an important
modification in their agreement and would also negate the
element of mutuality in their contracts. The clause cited
earlier made the fulfillment of the contracts dependent
exclusively upon the uncontrolled will of respondent and
was therefore void.
- Besides, the pro forma promissory notes have the character
of a contract of adhesion, where the parties do not bargain
on equal footing, the weaker partys [the debtors]
participation being reduced to the alternative to take it or
leave it.
30
- Circular that lifted the ceiling of interest rates of usury law
did not authorize either party to unilaterally raise the
interest rate without the others consent. The interest
ranging from 26 percent to 35 percent in the statements of
account -- must be equitably reduced for being iniquitous,
unconscionable and exorbitant.
- Rates found to be iniquitous or unconscionable are void, as
if it there were no express contract thereon. Above all, it is
undoubtedly against public policy to charge excessively for
the use of money.
- It cannot be argued that assent to the increases can be
implied either from the June 18, 1991 request of petitioners
for loan restructuring or from their lack of response to the
statements of account sent by respondent. Such request
does not indicate any agreement to an interest increase;
there can be no implied waiver of a right when there is no
clear, unequivocal and decisive act showing such purpose.
Besides, the statements were not letters of information sent
to secure their conformity; and even if we were to presume
these as an offer, there was no acceptance.
- No one receiving a proposal to modify a loan contract,
especially interest -- a vital component -- is obliged to
answer the proposal. Besides, PNB did not comply with its
own stipulation that should the loan not be paid 2 years
after release of money then it shall be converted to a
medium term loan.
- Court applied 12% interest rate instead for being a
forbearance of money (there were some pieces of evidence
presented by PNB in court that Sampaguita objected to.
Lower courts overruled the objections but SC said the
objections were correct and the evidence should not have
been admitted. i.e. contract wasnt signed by the parties, a
part of the contract wasnt properly annexed/no reference
was made in the main contract.)
- In addition to the preceding discussion, it is then useless to
labor the point that the increase in rates violates the
impairment clause of the Constitution, because the sole
purpose of this provision is to safeguard the integrity of
valid contractual agreements against unwarranted
interference by the State in the form of laws. Private
individuals intrusions on interest rates is governed by
statutory enactments like the Civil Code.
DISPOSITIVE: Petition set aside.
! 12% rate agreed upon.
! o SC: Our computation + examination of PNBs ledgers
! point that this statement is incorrect; PNB clearly
!
!
!
! DISPOSITIVE: Decision AFFIRMED with MODIFICATION.
! Complaint dismissed.
!
!
!
!
!
!
!
!
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PNB v. Spouses Rocamora (2009) Brion, J.
Petitioner: Phil. National Bank (PNB)
Respondent: Spouses Agustin and Pilar Rocamora
Concept: Simple Loan; Interest; Conventional Interest
Doctrine:
While an escalation clause may be valid, it does not sanction a
unilateral increase of the interest rates. Parties must still come to
an agreement to such an increase. Otherwise, such increase will
not have a binding effect.
Brief Facts:
Spouses Rocamora contracted a P100k loan from PNB. They
executed two mortgages as security for the loan. These
mortgages contained an escalation clause and a de-escalation
clause as well. When the spouses became unable to pay, PNB
foreclosed the mortgages and filed a suit for the deficiency
judgment.
ISSUE:
WON the principle of mutuality of contracts was violated by PNB
(YES)
RATIO: YES, PNB violated the principle of mutuality of
contracts in its unilateral increase of the interest rates.
- PNB: The escalation clauses were valid; they met the
standards set in Banco Filipino Savings and Mortgage Bank
v. Navarro, as the clauses also contained a de-escalation
clause
- SC: Presence of valid escalation clauses still do NOT
authorize unilateral increase of interest rates, in observance
of the mutuality principle of contracts.
o Any increase in the interest rate pursuant to an
escalation clause MUST be the result of parties
agreement thereto.
o Otherwise, it carries no binding effect.
o The presence of de-escalation clauses is not
determinative of the increases validity; it is the consent
of both parties thereto that gives it effectivity.
o Failure of the spouses Rocamora to contest the
increases that PNB made cannot is NOT consent
thereto. No one receiving a proposal to change a
contract is obliged to answer the proposal.
- PNB: The amount being claimed was a result of the original
imposed more than 12% to get to this amount.
31
Concepcion v. CA (1997) Vitug, J.
Petitioner: Sps. Concepcion
Respondents: Court of Appeals; Home Savings Bank and Trust
Company (now Insular Life); and Asaje Realty Corporation
Concept: Conventional Interest
Doctrine:
Escalation clauses are valid provided that changes made shall
be mutually agreed upon by both parties to not violate the
principle of mutuality essential to contracts.
Brief Facts:
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory
note executed to secure the loan, the spouses authorized the
bank to increase the interest rate without advance notice if the
Central Bank increases the interest rate. The bank increased the
interest rate thrice, spouses eventually defaulted, and the real
estate mortgage they executed was foreclosed and sold to
another corporation.
ISSUES:
1. WON HSTBC complied with the requirements of an
extrajudicial foreclosure (NO)
2. WON HSTBC may unilaterally increase the interest rates
pursuant to the provision in the loan agreement (NO)
RATIO:
1. NO; the bank did not comply with notice
requirement provided in their mortgage contract.
- General Rule: Extrajudicial foreclosure, as provided for in
Sec. 3, Act. No. 3135, only requires that (1there be posting
of notices of sale in 3 public places, and (2) publication of
the same in a newspaper of general circulation. However,
parties are not precluded from providing additional
requirements.
- In the case at bar, it is explicitly provided that all
correspondence relative to the mortgage shall be sent to
the mortgagor. However, no such notice was sent by the
bank to the spouses.
- In spite of said breach, however, the spouses may not
recover the property sold since the Asaje Realty appears to
be an innocent purchaser in good faith. It purchases the
property when the title was already in the name of the bank
and was under no obligation to look beyond what appears
therein.
2. NO; it violates the mutuality of contracts provided
for in Art. 1308, NCC
- The validity of escalation or escalator clauses in
contracts was already upheld in the case of Banco Filipino
Savings and Mortgage Bank v. Navarro. In that case, SC
ruled that such clauses is not substantively unconscionable
and are widely used in commercial contracts in an effort to
maintain fiscal stability and to retain real dollar value to
the price terms of long term contracts.
- However, the SC elaborated in PNB v. CA that contract
changes must be made with the consent of the contracting
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parties to be valid. The minds of all parties must meet as to
the proposed modification especially when it affects an
important aspect of the agreement. In case of loan
contracts, the rate of interests is always a vital component.
Thus, any change must be mutually agreed upon to create a
binding effect.
- A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of
the contracting parties is void for being violative of the
principle of mutuality essential in contracts.
- Even arguendo, that the spouses are bound with the
aforementioned provision in the promissory note in allowing
increase in the interest rate without advance notice, the
escalation should still be subject, as also provided, to a
corresponding increase by the Central Bank of its rediscount
rate, or of the interest rate on savings and time deposit, or
of interest rate on such loans.
- A perusal of the notices sent by the bank would reveal that
it provides no sufficient justification for the unilateral
increases since it shows no corresponding increase made by
the Central Bank during each time. In fact, the notice only
provides vague excuses for the increase such as prevailing
business and economic condition.
DISPOSITIVE: CFI affirmed with modification that HSBTC shall
pay spouses the excess, if any, of the bid price it received from
Asaje Realty for the foreclosed property over and above the
unpaid balance of the loan computed at the original interest
rate. REMANDED to TC for determinations
Concepcion v. CA
Amortization came from the word mort, meaning death !
to deaden the loan (killing the loan slowly)
Frias v. San Diego-Sison (2007) Austria-Martinez, J.
Petitioner: Bobie Rose Frias, represented by her Attorney-in-
fact, Marie Fujita
Defendant: Flora San Diego-Sison
Concept: Conventional Interest
Doctrine:
The agreement between the parties is the law between them
and must be respected. If the terms are clear, their literal
meaning must be given. Also, the provisions of an agreement
must be taken in the context of the entire agreement. An
agreement to pay interest continues for so long as the debtor
continues in possession of the principal; otherwise, it would
constitute unjust enrichment.
Brief Facts:
Frias and San Diego-Sison (SDS) entered into a MOA over a
house and lot for a consideration of P3-M. The MOA involved
two 6-month periods: first, for SDS to decide WON to buy the
property; second, for Frias to pay back the money if SDS decides
not to buy the property. If SDS decides not to buy the house and
lot, Frias must pay back the P3-M with interest only for the
second 6-month period.
32
ISSUE:
WON the compounded bank interest should be limited to 6
months as contained in the MOA (NO)
RATIO: The compounded bank interest should not be
limited to just 6 months, but should be imposed until
fully paid.
- Frias contends:
o That the interest, whether at 32% or 25% per annum
which should run from June 7, 1991 until fully paid is
contrary to the MOA
o That the MOA provides that if San Diego-Sison would
decide not to purchase the property, Frias has the
period of another 6 months to pay the loan with the
compounded bank interest for the last 6
months only
o That the CAs ruling that a loan always bears interest
otherwise it is not a loan is contrary to Art. 1956 of the
NCC, which provides that no interest shall be due
unless it has been expressly stipulated in writing
- SC: We are not persuaded:
o The CAs conclusion that a loan always bears interest
otherwise it is not a loan, is flawed since a simple loan
may be gratuitous or with a stipulation to pay interest
o NO ERROR in awarding 25% interest per annum on the
P2-M loan even beyond the second 6 months stipulated
period
- The MOA is the law between the parties, and in resolving an
issue based upon a contract, the contract must first be
examined, especially the provisions which are relevant to
the controversy
o GR: If the terms are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning
of its stipulations shall prevail AND the various
stipulations of the contract shall be interpreted
together, attributing to the doubtful ones that sense
which may result from all of them taken jointly
- The phrase for the last six months only should be taken in
context of the entire agreement; SC agrees with CA that:
o The agreement speaks of 2 periods of 6 months each
o First 6-month period: for San Diego-Sison to make up
her mind WON to purchase the property
o Second 6-month period: for Frias to pay the P2-M loan
in the event San Diego-Sison decides not to buy the
property, in which case the interest will be charged for
the last six months only, referring to the second 6-
month period
o No interest for the first 6-month period, while San
Diego-Sison makes up her mind; interest would only be
charged for the second period of 6 months after she
decides not to buy the property
o Nothing in the agreement suggests that interest will be
charged for 6 months only even if it takes Frias an
eternity to pay the loan
- The agreement does not mean that interest will no longer
be charged after the second 6-month period since the
stipulation was made on the logical and reasonable
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expectation that such amount would be paid within the date
stipulated. Since Frias failed to pay the amount, the
monetary interest for the last 6 months continued to accrue
until actual payment of the loaned amount
o Payment of regular interest constitutes the price or cost
of the use of money and until the principal sum due is
returned to the creditor, regular interest continues to
accrue since the debtor continues to use such principal
amount
o For the debtor to continue in possession without
payment of the monetary interest would constitute
unjust enrichment
- The parties stipulated that the loaned amount shall earn
compounded bank interests; per certification by Prudential
Bank, the interest rate for loans in 1991 ranged from 25% to
32% per annum, which was no longer assailed by Frias !
The interest at 25% per annum for a P2-M loan is fair and
reasonable
DISPOSITIVE: CA affirmed with modification. Attorneys fees
deleted.
Frias v. San Diego-Sison
The MOA contains several different contracts, one of which is an
OPTION CONTRACT, which has a separate consideration from
the purchase price.
2. Interest on Interest
Art. 1959 Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new
interest.
Art. 2212 Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent
upon this point.
It is a subset of conventional interest
GR: Interest will NOT earn interest
XPNs:
1. Parties stipulate (compounded interest)
- Principal: P5,000
- Conventional: 2% per annum
- Interest on interest: (add unpaid 2% to 1st principal) =
new principal
- Amounts to compounding of interest
2. Judicial demand (filing of a complaint)
- Principal: P5,000
- Conventional: 2% per annum
- Interest on interest: legal interest (now 6% multiplied by
2%)
Note: For this to apply, there must first be CONVENTIONAL
INTEREST
33
GR: Conventional interest is paid on the principal only (simple
interest)
XPN: Interest on interest
Interest on interest
- Compensation for interest that is due and unpaid
- GR: not demandable
- XPN: demandable if:
o There is conventional interest (express stipulation in
writing to pay interest), AND
o Any or both of the following instances:
" When by stipulation of the parties, compounding
or capitalizing of interest is agreed upon
(compound interest)
" When interest that is due and unpaid is judicially
demanded, whether or not there is an agreement
or stipulation to this effect (judicial demand is
reckoned from date of filing of a complaint, and
the rate shall be 12%)
3. Compensatory, Penalty, or Indemnity Interest
Art. 1169 Those obliged to deliver or to do something incur
in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other
begins.
Art. 1226 In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
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Art. 2209 If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six per cent per
annum.
Art. 2213 Interest cannot be recovered upon unliquidated
claims or damages, except when the demand can be
established with reasonably certainty.
Art. 2226 Liquidated damages are those agreed upon by the
parties to a contract, to be paid in case of breach thereof.
Art. 2227 Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.
Compensatory interest
- Also called penalty interest or indemnity interest
- It is the indemnity for damages arising from delay on the
part of the debtor of an obligation consisting in the
payment of a sum of money
- Interest allowed by law in the absence of a promise to pay,
as compensation for delay in paying a fixed sum
- Does not need to be expressly stipulated in writing, but
parties may stipulate on compensatory interest through a
penalty or penal clause
- It may be equitably reduced by the court if it is iniquitous or
unconscionable
Penal clause
- It is an accessory obligation of the debtor to assume greater
liability in case of breach
- It strengthens the coercive nature of the principal
obligation; it provides, in effect, liquidated damages
resulting from breach
- Debtor is bound to pay without the necessity of proof
LEGAL INTEREST
Delegated interest to the Central Bank from Congress
There must be EXPRESS stipulation for interest but actual rate is
not provided.
34
Eastern Shipping Lines v. CA Vitug, J.
Petitioner: Eastern Shipping Lines (ESL)
Respondents: CA and Mercantile Insurance Company (MIC)
Concept: Simple Loan: Interest; Compensatory, Penalty or
Indemnity Interest
Doctrine:
When an obligation, not constituting a loan or forbearance of
money, is breached, the interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. 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. It becomes 12 % when the judgment of the court
awarding a sum of money becomes final and executory.
Brief Facts:
Insurer-subrogee Mercantile sued carrier Eastern Shipping
because one drum from the shipment was damaged. Eastern
questions the grant of interest on Mercantiles claim which was
12% from the date of filing of the complaint because
Mercantiles claim was unliquidated.
ISSUE:
What are the applicable rules on interest?
RATIO: Eastern Shipping Rule on Interest:
- Obligation (regardless of its source) is breached and
contravenor is held liable
o Provisions under Title 18 on "Damages" of the CC
govern in determining the measure of recoverable
damages
- On rate of interest and accrual in the concept of actual and
compensatory damages
o 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
" earn legal interest from the time it is judicially
demanded
" absence of stipulation-> 12% per annum to be
computed from from judicial or extrajudicial
demand subject to the Article 1169 CC
o When an obligation, not constituting a loan or
forbearance of money, is breached
" interest on the amount of damages awarded may
be imposed at the discretion of the court at the
rate of 6% per annum
" General rule-> No interest adjudged on
unliquidated claims or damages
" Exception-> When or until the demand can be
established with reasonable certainty
Where the demand is established with
reasonable certainty, interest shall begin to
run from the time the claim is made judicially
or extrajudicially
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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
- When the judgment of the court awarding a sum of money
becomes final and executory
o o rate of legal interest shall be 12% per annum
from such finality until its satisfaction because interim
period is deemed to be by then an equivalent to a
forbearance of credit
Siga-an v. Villanueva (2009) Chico-Nazario, J.
Petitioner: Sebastian Siga-an
Respondent: Alicia Villanueva
Concept: Compensatory, Penalty or Indemnity Interest
Doctrine:
In the absence of stipulation regarding interest to be paid,
interest may still be charged pursuant to Art. 2209 and Art. 2212,
which covers situations when interest is imposed as penalty or
damages for breach of contractual obligations and NOT as
compensation for use or forbearance of money.
Brief Facts:
Villanueva borrowed money from Siga-an, but their agreement
was not reduced in writing and there was no stipulation for the
payment of interest. She repaid him with interest, but he was
unsatisfied, and coerced her to pay more. She eventually
demanded a refund of the excess payment since she was not
obligated to pay the same.
ISSUES:
1. WON interest is due to Siga-an (NO)
2. WON the principle of solutio indebiti applies (YES)
RATIO:
1. NO, Villanueva is not obligated to pay interest to
Siga-an.
- Interest is a compensation fixed by the parties for the use
or forbearance of money, referred to as monetary
interest
o Interest imposed by law or by courts as penalty or
indemnity for damages is called compensatory
interest
o The right to interest arises only by virtue of a contract or
by virtue of damages for delay or failure to pay the
principal loan on which interest is demanded
- Art. 1956, NCC, refers to monetary interest, and specifically
mandates that no interest shall be due unless it has been
expressly stipulated in writing
o Payment of monetary interest is allowed only with the
concurrence of the two conditions:
1. There was an express stipulation for the
payment of interest; and
2. The agreement for the payment of interest was
reduced in writing
35
 o The collection of interest without any stipulation in
writing is prohibited by law
- Siga-an and Villanueva did not agree on the payment of
interest, neither was there convincing proof of written
agreement between the two; there was no verbal or written
agreement for her to pay interest on the loan; monetary
interest is due only if there was an express stipulation in
writing for the payment of interest
o Villanuevas explanation that the promissory note was
borne out of Siga-ans threats and his making her copy
the promissory note in her own handwriting was not
rebutted by Siga-an ! this cannot pertain to an express
stipulation of interest or written agreement of interest
o The agreed 7% interest admitted by Villanueva in her
testimony in the BP 22 cases was not ruled upon by the
RTC; what the RTC found was that the parties never
intended the payment of interest and what Villanueva
testified to was that after paying the total amount of the
loan, Siga-an ordered her to pay the interest ! this was
not a categorical declaration that she and Siga-an
made an express stipulation in writing as regards
payment of interest
- (relevant to syllabus topic) Instances when interest may
be imposed even in the absence of stipulation:
o Art. 2209, NCC, which states that if the obligation
consists in the payment of a sum of money, and the
debtor incurs in delay, a legal interest of 12% per
annum may be imposed as indemnity for damages
if no stipulation on the payment of interest was agreed
upon
o Art. 2212, NCC provides that interest due shall earn
legal interest from the time it is judicially demanded,
although the obligation may be silent on this point.
o The interest under these two instances may be imposed
only as a penalty or damages for breach of
contractual obligations; it cannot be charged as
compensation for the use or forbearance of money, i.e.,
these apply only to compensatory interest and not to
monetary interest (case at bar involves monetary
interest)
o Compensatory interest is not chargeable here because
it was not duly proven that Villanueva defaulted in
paying the loan PLUS no interest was due on the loan
because there was no written agreement as regards
payment of interest
2. YES, the principle of solutio indebiti applies.
- Under Art. 1960, NCC, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions
of the CC concerning solutio indebiti shall be applied
o Art. 2154, NCC, explains the principle, which provides
that if something is received when there is no right to
demand it, and it was unduly delivered through
mistake, the obligation to return it arises
" A creditor-debtor relationship is created under a
quasi-contract, whereby the payor becomes the
creditor who then has the right to demand the
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return of payment made by mistake, and the
person who has no right to receive such payment
becomes obligated to return the same
" It harks back to the ancient principle that no one
shall enrich himself unjustly at the expense of
another
" It applies where: 1) a payment is made when there
exists no binding relation between the payor, who
has no duty to pay, and the person who received
the payment; and 2) the payment is made through
mistake, and not through liberality or some other
cause
- Villanueva paid interest to Siga-an, but she was under no
duty to make such payment because there was no express
stipulation in writing to that effect
o There was no binding relation between the two parties
as regards the payment of interest and the payment
was clearly a mistake
o Since Siga-an received something when there was no
right to demand it, he has an obligation to return it
- The reimbursable amount is P335,000 (the excess P160,000
from the amount paid by checks, and P175,000 paid in cash
as admitted by Siga-an in his Reply Affidavit)
- Although Villanueva was convicted for violating BP 22, it
doesnt affect the ruling because the two checks amounting
to P700,000 (to cover the P540,000 loan) were not among
the checks found to be dishonored or bounced
(Other amounts to be received by Villanueva)
- Damages awarded: moral (150,000), exemplary (P50,000),
attorneys fees (25% of amount paid as interest)
- The RTC and CA imposed a 12% rate of legal interest on the
amount refundable computed from Mar. 3, 1998 until full
payment ! this is erroneous
o In Eastern Shipping Lines v. CA, it was held that 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 rate of 6%
per annum; when the judgment of the court awarding a
sum of money becomes final and executory, the rate of
legal interest, whether for loan/forbearance of money
or not, shall be 12% per annum from such finality until
its satisfaction (interim period equivalent to forbearance
of credit)
o Siga-ans obligation arose from a quasi-contract of
solutio indebiti, not a loan or forbearance: 6% per
annum imposed on amount to be refunded as well as
on the damages from extrajudicial demand on Mar. 3,
1998 up to finality of this decision ! interest shall
become 12% per annum from finality of the Decision up
to its satisfaction
DISPOSITIVE: Decision of the CA AFFIRMED with
MODIFICATIONS.
Siga-an v. Villanueva
Compensatory interest based on solutio indebiti
36
Ligutan v. CA (2002) Vitug, J.
Petitioner-Defendant: Tolomeo Ligutan & Leonidas dela
Llana
Respondents-Plaintiffs: Court of Appeals; Security Bank and
Trust Company
Concept: Compensatory, Penalty or Indemnity Interest
Doctrine:
Penalty clauses may be validly agreed to by parties provided
they do not contravene law, morals, good customs, public order,
or public policy. However, the courts may equitably reduce such
penalty if it is iniquitous or unconscionable or if the principal
obligation has been partly or irregularly complied with.
Brief Facts:
Ligutan et al., loaned P120, 000 from Security Bank, covered by
promissory note binding themselves to pay 15% interest per
annum upon maturity and to pay a penalty of 5% per month in
case of default. They also agreed to pay 10% of the total amount
due as attorneys fees in case a suit for collection would be filed.
Ligutan et. al defaulted.
ISSUES:
1. WON penalty clause agreed upon by parties is valid (YES)
2. WON the 15% interest rate is reasonable (YES)
RATIO:
1. YES. A penalty clause is expressly recognized by
law, and may be validly agreed upon by parties,
but may still be equitably reduced by the courts as
the case may be.
- SBTC: The penalty sought to be deleted was even
insufficient to fully cover and compensate for the cost of
money brought about by the radical devaluation and
decrease in the purchasing power of the peso, vis--vis the
US dollar, considering the time frame of its occurrence.
Furthermore, there was no partial compliance since only P5,
584 had been paid out of the entire loan of P120, 000.
- SC: A penalty clause, as expressly recognized by law in Art.
1226, is an accessory undertaking to assume greater liability
on the part of an obligor in case of breach. It functions to
strengthen the coercive force of the obligation and to
provide a stipulated indemnity as liquidated damages
resulting from such breach.
- While parties may validly agree to such terms and
conditions, a stipulated penalty may nevertheless be
equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly
or irregularly complied with, in relation to Art. 2227 and Art.
1229.
- The determination of WON a penalty is reasonable or
iniquitous can be partly subjective and partly objective, and
dependent on such factors such as the type, extent, and
purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, etc.,
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the application of which is addressed largely to the sound
discretion of the court.
- CA decision affirmed, in reducing the penalty rate form
5% to 3% given the circumstances and the repeated acts of
breach by Ligutan and dela Llana of their contractual
obligation
2. YES. Said interest rate does not appear as being
excessive.
- A penalty stipulation is not necessarily preclusive of interest,
the two being distinct concepts which may be separately
demanded. The essence or rationale for the payment of
interest is not exactly the same as that of a penalty.
DISPOSITIVE: CA affirmed
Ligutan v. CA
Penalty clause is coercive ! do not have to prove damages
anymore
Estores v. Spouses Supangan (2012) Del Castillo, J.
Petitioner: Hermojina Estores
Respondents: Spouses Arturo and Laura Supangan
Concept: Compensatory, Penalty or Indemnity Interest
Doctrine:
Interest may be imposed even in the absence of stipulation in
the contract. In obligations arising out of a loan or forbearance
of money, goods or credits, the applicable rate of interest is 12%
per annum from the date of demand. Such interest is deemed a
compensatory interest which serves as an indemnification for
Estores continued use of their money, despite demand for its
return.
Brief Facts:
Estores and Spouses Supangan entered into a Conditional Deed
of Sale. Estores, as vendor, failed to fulfill the conditions in the
contract and was thereby adjudged to be in breach thereof.
Estores was ordered to pay the spouses the principal amount of
P3.5M with an interest of 6% compounded annually starting
Sept. 27, 2000 (date of formal demand) until its full payment.
Estores now contests the propriety of the imposition of interest
as the same was not expressly stipulated in their contract.
ISSUES:
1. WON the imposition of interest was proper even in the
absence of stipulation in the contract (YES)
2. What interest rate should be applied (12%)
37
RATIO:
1. Yes; interest may be imposed even in the absence
of stipulation in the contract
- Art. 2210 CC: Interest may, in the discretion of the court,
be allowed upon damages awarded for breach of contract.
- There is no question that Estores is legally obligated to
return the P3.5M because of her failure to fulfill her
obligations under the contract, despite demand
- Estores is already in default of her obligation to return said
amount from the date of demand which was made on Sept.
27, 2000.
- The interest must then be computed from said date
2. The interest at the rate of 12% is applicable since
the obligation arises out of a loan or a
forbearance of money, goods or credits.
- General rule: the applicable interest shall be computed in
accordance with the stipulation of the parties. Absent any
stipulation, the applicable interest shall be 12% per annum
or 6% per annum, as the case may be
o Art. 2209: If the obligation consists in the payment of
a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to
the contrary, shall be the payment of interest agreed
upon, and in the absence of stipulation, the legal
interest, which is 6% per annum.
o Central Bank Circular No. 416, series of 1974:
When the obligation arises out of a loan or
forbearance of money, goods or credits, the
applicable rate of interest shall be 12% per annum
- In the instant case, 12% is applicable since the
obligation herein involved arises out of a loan or
forbearance of money, goods or credits. 6% is
applicable in all other cases.
o The contract involved in this case is admittedly not a
loan but a Conditional Deed of Sale. However, the
contract provides that the vendor must return the
payment made by the vendee if the conditions are not
fulfilled.
o Estores failed to return the money and is considered in
default from the time demand was made on Sept. 27,
2000.
o Crismina Garments, Inc. v. CA: forbearance was
defined as a contractual obligation of lender or
creditor to refrain during a given period of time, from
requiring the borrower or debtor to repay a loan or
debt then due and payable
" This definition described a loan where a debtor is
given a period within which to pay a loan or debt.
In such a case, forbearance of money, goods or
credits will have no distinct definition from a
loan.
" The court believes however, that the same is
meant to have a separate meaning from a loan,
otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined
in the CC.
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o Forbearance of money, goods, or credits refer to
arrangements other than loan agreements, where a
person acquiesces to the temporary use of his money,
goods or credits pending happening of certain events
or fulfillment of certain conditions.
- The instant case involves a forbearance of money
o In the instant case, Sps. Supangan parted with
their money even before the conditions were
fulfilled
o They have therefore allowed or granted
forbearance to Estores to use their money
pending fulfillment of the conditions. They were
deprived of the use of their money for the period
pending fulfillment of the conditions and when
those conditions were breached, they are entitled
not only to the return of the principal amount
paid, but also to compensation for the use of their
money. And the compensation for the use of their
money, absent any stipulation, should be the
same rate of legal interest applicable to a loan
since the use or deprivation of funds is similar to a
loan.
o Estores unwarranted withholding of the money
which rightfully pertains to the spouses amounts
to forbearance of money which can be considered
as an involuntary loan.
- The accrual of interest shall be reckoned from the date of
extrajudicial demand which was on Sept. 27, 2000; the said
date was satisfactorily established. (If it werent, accrual of
interest is reckoned from the date of judicial demand)
- Eastern Shippine Lines, Inc. v. CA: 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 imposes, as follows:
o 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.
o Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded.
o In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e.,
form judicial or extrajudicial demand under and
subject to the provisions of Art. 1169 CC
o When the judgment of the court awarding the sum of
money becomes final and executory, the rate of legal
interest, whether the case involves a loan or
forbearance of money, goods or credits, or any other
case, shall be 12% per annum from such finality until
satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance or credit.
DISPOSITIVE: Petition for Review DENIED. CA Decision
AFFIRMED with MODIFICATIONS.
38
Estores v. Sps. Supangan
This is a PROBLEMATIC DECISION AGAIN.
- Forbearance of money
- Money owed must earn 12%
- There was already a definition of forbearance in Crismina
Garments, but this case changed the meaning of
forbearance
o Crismina Garments
" Loan is a type of forbearance
" Creditor refrains from collecting on debt
o Estores
" Loan is different from a forbearance
" Creditor acquiesces (temporary) use
- It is required that the obligations are due, but here, in this
case, NOT YET DUE
- The 120 days = acquiescence to the use
- J. del Castillo called this forbearance an involuntary loan
BUT, by definition, this is NOT a loan because there is NO
INVOLUNTARY LOAN for want of consent
Nacar v Gallery Frames (2013) Peralta., J.
Petitioner: Dario Nacar
Respondents: Gallery Frames and/or Felipe Bordey Jr.
Concept: Conventional Interest
Doctrine:
When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest 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.
- Recently, however, the Bangko Sentral ng Pilipinas
Brief Facts:
Dario Nacar filed a labor case against Gallery Frames and its
owner Felipe Bordey, Jr. Nacar alleged that he was dismissed
without cause by Gallery Frames on January 24, 1997. On
October 15, 1998, the Labor Arbiter (LA) found Gallery Frames
guilty of illegal dismissal hence the Arbiter awarded Nacar
P158,919.92 in damages consisting of backwages and separation
pay. Nacar filed a motion with the LA to recomputed his
backwages
ISSUE:
WON the Labor Arbiter was correct in the computation of
interest in the form of actual or compensatory damages (NO).
RATIO: When the judgment of the court awarding a
sum of money becomes final and executory, the rate of
legal interestshall 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.
- 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
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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 12% 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 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of
Circular No. 905, Series of 1982 and, accordingly, issued
Circular No. 799,35 Series of 2013, effective July 1, 2013.
Specifically, the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the
case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay
upon extra-judicial demand or upon judicial demand
whichever is appropriate and subject to the provisions
of Article 1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
39
 2. Non-Monetary Obligations (such as the case Exercise
at bar) Here are the values:
a. If already liquidated, rate of interest shall be 6% per Conventional: 16%
annum, demandable from date of judicial or extra-judicial Penalty: 6%
demand (Art. 1169, Civil Code) Principal: P
b. If unliquidated, no interest Situation: Neither principal, penalty, interest paid. Calculate the
Except: When later on established with certainty. Interest total amount due.
shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed 1. How to calculate conventional interest (conv)
that the amount of damages is already ascertained. 16P x period
Period: time of maturity (from date it is due until final
3. Compounded Interest judgment)
- This is applicable to both monetary and non-monetary 2. How to calculate penalty
obligations .06P x period
- 6% per annum computed against award of damages Period: from demand (time it is due and not paid) until
(interest) granted by the court. To be computed from the finality of judgment
date when the courts decision becomes final and executory 3. How to calculate interest on interest (IOI)
until the award is fully satisfied by the losing party. Unpaid interest: either stipulation or legal interest (6%)
Period: from filing until finality of judgment
4. The 6% per annum rate of legal interest shall be 4. How to calculate total
applied prospectively: [P + conv + penalty + IOI] x LI
- Final and executory judgments awarding damages prior to Period: From finality of judgment until paid
July 1, 2013 shall apply the 12% rate;
- Final and executory judgments awarding damages on or Note: See RCBC v. Alpha Ready to Wear
after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall still
incur the 6% rate.

DISPOSITIVE: Order of CA reversed and set aside.

Nacar v. Gallery Frames

- This is a restatement of Eastern Shipping Lines
- Formulation of rules for computation of interest
- Rules on compensatory interest:
1. Any obligation, when breached, gives rise to damages
2. Interest as compensatory
a. Sum of money (loan/forbearance)
- If there is a stipulation on penalty
o With rate: apply the rate
o No rate: apply legal interest
- If there is no stipulation on penalty
o Conventional ! legal interest
- WON there is a stipulation, it will earn legal
interest upon demand
b. Damages
- If demand is certain
o From moment of demand
- If demand is uncertain
o Ascertain first: from moment ascertained
- WON certain, it will earn legal interest

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4. Finance Charges
RA 3765
Sec. 4 Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations
prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service
to be acquired;
(2) the amounts, if any, to be credited as down payment and/or
trade-in;
(3) the difference between the amounts set forth under clauses
(1) and (2);
(4) the charges, individually itemized, which are paid or to be
paid by such person in connection with the transaction but
which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total amount to
be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
Sec. 6 (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall
be liable to such person 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.
(b) Except as specified in subsection (a) of this section, nothing
contained in this Act or any regulation contained in this Act or
any regulation thereunder shall affect the validity or
enforceability of any contract or transactions.
(c) Any person who willfully violates any provision of this Act or
any regulation issued thereunder shall 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.
(d) No punishment or penalty provided by this Act shall apply
to the Philippine Government or any agency or any political
subdivision thereof.
(e) A final judgment hereafter rendered in any criminal
proceeding under this Act to the effect that a defendant has
willfully violated this Act shall be prima facie evidence against
such defendant in an action or proceeding brought by any
other party against such defendant under this Act as to all
matters respecting which said judgment would be an estoppel
as between the parties thereto.
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A Finance Charge not only refers to conventional interest, but
also includes fees, service charges, discounts, and such other
charges incident to the extension of credit as the Monetary
Board of the Central Bank of the Philippines may by regulation
prescribe.
UCPB v. Sps. Samuel and Odette Beluso (2007) Chico-Nazario
Petitioner: United Coconut Planters Bank (UCPB)
Respondents: Samuel and Odette Beluso (Spouses Beluso)
Concept: Interest; Finance Charges
Doctrine:
Determining interest in reference to the DBD retail rate or by the
branch head violates the mutuality of contracts. Interest
determined by such practice is void. When interest provision is
void, the legal rate applies.
Brief Facts:
Spouses Beluso had a loan with UCPB, secured by a parcel of
land, wherein the latter would determine interest in reference to
the DBD retail rate or by the branch head. The spouses availed
of the credit line and entered into loans evidenced b promissory
notes. Eventually, the spouses defaulted and were unable to
make payments, so the bank foreclosed on the property. The
spouses filed a petition for annulment against UCPB.
ISSUES:
1. WON the interest rates used were valid (NO)
2. WON there was an error in the re-computation of the debt
(YES)
3. WON the compounding of interest is valid. (YES)
4. WON the liability for violation in Truth in Lending Act was
validly imposed. (YES)
RATIO:
1. No, the stipulated interest rates were void.
- RTC and CA: held that the interest rates used were invalid
for not being numerically quantified on the face of the
promissory notes.
- UCPB: argued that this was not so because the interest was
determined in reference to the DBD retail rate. The
provision providing for such reference must also be read
with the stipulation on interest rate review.
o claimed that the reference was valid and was akin to
prevailing rates and prime rates allowed in the case of
Polotan vs. Court of Appeals.
o argued that even if the provision that the head of the
branch may determine the rate is void, the separability
clause of the contract would save the other provisions
from being affected.
41
- SC: no merit in these contentions for the following reasons:
o The provision on interest rates violated the mutuality of
contracts as provided under Article 1308 of the Civil
Code.
" cited the case of Philippine National Bank vs. Court
of Appeals where there was a similar factual milieu,
i.e., the bank having the power to review and raise
the interest rate without and the debtor having on
say or whatsoever. In that case, the provision on
interest rate was declared void.
" in this case, the provision on interest rate was
dependent solely on UCPB for if either the two
choices in the interest rate provision presented an
opportunity for UCPB to fix the rate at will, the
bank can easily choose such an option, hence it
violated the mutuality of contracts.
" the provision that the rate may be determined by
the branch head gave the bank an unfettered
discretion on what rate to use, and the
determination referencing the DBD retail rate was
not akin to the prevailing rates or prime rates
allowed in the Polotan case, for in the latter case,
there was a fixed margin over the reference rate,
which was absent in this case, hence, again, it gave
the bank unfettered discretion.
" the clause on interest rate review violated the
mutuality of contracts, for the bank could give as
much weight as it desired to the enumeration
considerations.
o The provision on interest rates violated the Truth in
Lending Act. For not having numerically quantified the
interest and other charges, the provision failed to
disclose the true finance charges in connection with the
extensions of credit, which is a form of deception
prohibited under the said act and the Court could not
countenance.
- The interest rate stipulated being void, the legal rate of 12%
would apply.
2. Yes, there was error in the re-computation of the
debt.
- UCPB: claimed that the interest charges, penalty charges,
and attorneys fees had been erroneously excluded by the
RTC and the Court of Appeals.
- Spouses Beluso: argued that since the demand for
collection made by UCPB was for a considerably bigger
amount that the proper amount, the demand was void,
hence, there would have been no default, and so interests
and penalties would not commence to run.
- SC: agreed with UCPB.
o default commences upon judicial or extrajudicial
demand. The Amount demanded in excess of the
proper amount does not nullify a demand, which
remains valid with respect to the proper amount. A
contrary ruling would put commercial transactions in
disarray, as validity of demands would be dependent
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on the exactness of the computations, which are too
often contested.
o since there was a valid demand, the interests and
penalties began to run at the point where UCPB first
made demand.
o the RTC actually recognized that the legal interest
should be imposed.
o spouses Beluso even originally asked the RTC to
impose the legal rate in their original pleading.
o although the Court recognized that there was an error
in the re-computation, the rate of penalty to be
imposed when the original contract was to be followed
was considered iniquitous for it was already over and
above the compounded interest imposed in the
contract.
o iniquitous or unconscionable rates of penalty may also
be reduced by the courts.
3. Yes, compounding of interest is valid.
- the provision was neither nullified by the RTC or the Court
of Appeals, nor assailed by the spouses Beluso in their
original petition.
- compounding of interest had also been declared legal by
the Court in Tan vs. Court of Appeals.
4. Yes, the liability under the Truth in Lending Act
was validly imposed.
- Section 6 (a) of the Truth in Lending Act provides that action
to recover penalty under said section may be brought by
person injured within one year from the date of the
occurrence of the violation in any court of competent
jurisdiction.
o UCPB: argued that since the spouses Beluso did not
specifically allege violation of the act, then the penalty
could not be imposed.
o SC: said that it is not the title of the pleadings or
allegations which are controlling, but the contents of
the allegations themselves.
- when the spouses Beluso alleged that contract did not
provide for the quantity of interest, it was implied that they
were alleging a violation of the act.
o UCPB: argued that since violations of the Truth in
Lending Act are criminal offenses, allegations cannot
be implied.
o SC: said that UCPB failed to distinguish between
Section 6 (a) and Section 6 (c). The first imposes a civil
penalty and the latter, a criminal penalty. The spouses
Beluso may choose which remedy to pursue.
- UCPB: argued that its right to due process was violated for
the action was filed in the wrong venue.
- SC: said that the joinder of causes of action under the act,
as provided under Section 5 thereof, was to be made in the
RTC. This was so in this case.
DISPOSITIVE: The petition was partly granted. The stipulated
interest rate was void, but there was error in the re-computation
of the debt.
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5. Usury
a. General Concepts
Art. 1175 Usurious transactions shall be governed by special
laws.
Art. 1957 Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury
shall be void. The borrower may recover in accordance with the
laws on usury.
Art. 1961 Usurious contracts shall be governed by the Usury
Law and other special laws, so far as they are not inconsistent
with this Code.
Act 2655
Sec. 1 The rate of interest for the loan or forbearance of any
money goods, or credits and the rate allowed in judgments, in
the absence of express contract as to such rate of interest, shall
be six per centum per annum or such rate as may be
prescribed by the Monetary Board of the Central Bank of the
Philippines for that purpose in accordance with the authority
hereby granted.
Sec. 1-a The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the loan or
renewal thereof or the forbearance of any money, goods or
credits, and to change such rate or rates whenever warranted
by prevailing economic and social conditions.
In the exercise of the authority herein granted, the Monetary
Board may prescribe higher maximum rates for loans of low
priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops finance companies and other
similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The
Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial
intermediaries.
Sec. 4-a The Monetary Board may eliminate, exempt from, or
suspend the effectivity of, interest rate ceilings on certain types
of loans or renewals thereof or forbearances of money, goods,
or credit, whenever warranted by prevailing economic and
social conditions.
Sec. 4-b In the exercise of its authority to fix the maximum
rate or rates of interest under this Act, the Monetary Board
shall be guided by the following:
1. The existing economic conditions in the country and the
general requirements of the national economy;
2. The supply of and demand for credit;
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3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board may
adopt.
Sec. 5 In computing the interest on any obligation, promissory
note or other instrument or contract, compound interest shall
not be reckoned, except by agreement: Provided, That
whenever compound interest is agreed upon, the effective rate
of interest charged by the creditor shall not exceed the
equivalent of the maximum rate prescribed by the Monetary
Board, or, in default thereof, whenever the debt is judicially
claimed, in which last case it shall draw six per centum per
annum interest or such rate as may be prescribed by the
Monetary Board. No person or corporation shall require
interest to be paid in advance for a period of more than one
year: Provided, however, That whenever interest is paid in
advance, the effective rate of interest charged by the creditor
shall not exceed the equivalent of the maximum rate
prescribed by the Monetary Board.
Sec. 9-a The Monetary Board shall promulgate such rules and
regulations as may be necessary to implement effectively the
provisions of this Act.
Central Bank Circular No. 905-82, Sec. 1 The rate of
interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or
credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
- Historically, the lending of money at an interest was frowned
upon. An example of this was the view of Christian law that
usury is a sin and a ground for excommunication.
- Under Roman law, a ceiling was imposed for interest rate that
may be charged. It was very close to the modern-day legal
interest rate of 12%
- In our jurisdiction, the Civil Code and Act. 2655 (or the
Usury Law) declares usury, or the lending of money at
interest in excess of the maximum rates allowed by
law, as an illegal act.
- However, Central Bank Circular No. 905 has effectively lifted
the ceilings on interest rates; usury, in effect, is legally non-
existent.
- The circular, however, did not repeal the Civil Code
provisions on usury nor did it repeal the Usury Law; it merely
suspended the operation of both.
43
Advocates for Truth in Lending, Inc. and Olaguer v. Bangko
Sentral Monetary Board (2013) Reyes
Petitioner: Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer (ATL)
Respondents: Bangko Sentral Monetary Board
Concept: Usury; General Concepts
Doctrine:
See notes below on the application of interest rate as provided
in the Eastern Shipping Lines Case.
Brief Facts:
The Monetary Board issued CB Circular No. 905, which provided
that the rate of interest shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law. Pres. Ramos
signed RA 7653, which replaced the CB with the Bangko Sentral.
ATL filed a petition for certiorari to prohibit the Monetary Board
of the Bangko Sentral from implementing CB Circular No. 905.
ISSUES:
1. WON the Monetary Board of the Central Bank was within
the bounds of law when it issued CB Circular 905. (YES)
2. WON the Monetary Board of the Bangko Sentral may
continue to implement CB Circular 905. (YES)
RATIO:
1. Yes, the Monetary Board of the Central Bank was
within the bounds of law.
- ATL: argued that the Monetary Board of the Central Bank
committed an act without the bounds of law for it was only
authorized to prescribe or set the maximum rates of interest
and nothing in PD 1684 authorized it to lift or suspend the
limits of interest on all credit transactions. The CB was also
promulgated without the benefit of a public hearing.
- SC: admitted that the CB suspended the Usury Law.
However, the Court did not find anything illegal or
unconstitutional in this suspension.
o a law cannot be repealed by a circular issued by an
executive agency, for only a law can repeal a law. This
principle was not violated by the CB, for it merely
suspended the usury law.
o implementation of the CB does not mean that banks or
financial institutions may demand any rate of interest.
Iniquitous rates may be declared void.
2. Yes, the Monetary Board of the Bangko Sentral
may continue implement CB Circular 905.
- ATL: argued that even if the Monetary Board of the Central
Bank had the power to suspend the Usury Law, this power
was not vested in the Monetary Board of the Bangko
Sentral, for RA 7653 expressly repealed RA 265 and did not
reenact Section 109 thereof.
- SC: said that Section 109 covered only loans extended by
banks, whereas Section 1-a of the Usury Law applies to all
loans or renewals thereof.
o had RA 7653 intended to repeal Section 1-a of Act 2655
(Usury Law), it would have been so stated.
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o implied repeal is not taken lightly by the court. In the
absence of an express repeal, a subsequent law cannot
be construed as repealing a prior law unless an
irreconcilable inconsistency and repugnancy exists. The
Court found no such thing between the Usury Law and
RA 7653.
DISPOSITIVE: Deny petition.
Notes on application of interest (from Eastern
Shipping Lines vs. Court of Appeals):
1) For breach of obligations consisting of payment of a sum of
money.
a) Apply rate as stipulated.
b) If rate is not stipulated, but interest is intended, apply
legal rate of 12% per annum.
c) Interest due shall earn legal interest from judicial
demand.
2) For breach of obligations other than sum of money.
a) 6% per annum at the discretion of the court.
b) Interest applied from demand when liquidated,
otherwise, from promulgation of judgment.
3) When judgment becomes final, 12%.
b. Usurious Acts
Act 2655
Sec. 2 No person or corporation shall directly or indirectly
take or receive in money or other property, real or personal, or
choses in action, a higher rate of interest or greater sum or
value, including commissions, premiums, fines and penalties,
for the loan or renewal thereof or forbearance of money,
goods, or credits, where such loan or renewal or forbearance is
secured in whole or in part by a mortgage upon real estate the
title to which is duly registered, or by any document conveying
such real estate or an interest therein, than twelve per centum
per annum or the maximum rate prescribed by the Monetary
Board and in force at the time the loan or renewal thereof or
forbearance is granted: Provided, That the rate of interest
under this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may
likewise apply to loans secured by other types of security as
may be specified by the Monetary Board.
Sec. 3 No person or corporation shall directly or indirectly
demand, take, receive or agree to charge in money or other
property, real or personal, a higher rate or greater sum or value
for the loan or forbearance of money, goods, or credits where
such loan or forbearance is not secured as provided in Section
two hereof, than fourteen per centum per annum or the
maximum rate or rates prescribed by the Monetary Board and
in force at the time the loan or forbearance is granted.
44
Sec. 4 No pawnbroker or pawnbroker's agent shall directly or
indirectly stipulate, charge, demand, take or receive any higher
rate or greater sum or value for any loan or forbearance than
two and one-half per centum per month when the sum lent is
less than one hundred pesos; two per centum per month when
the sum lent is one hundred pesos or more, but not exceeding
five hundred pesos; and fourteen per centum per annum when
it is more than the amount last mentioned; or the maximum
rate or rates prescribed by the Monetary Board and in force at
the time the loan or forbearance is granted. A pawnbroker or
pawnbroker's agent shall be considered such, for the benefits
of this Act, only if he be duly licensed and has an establishment
open to the public.
It shall be unlawful for a pawnbroker or pawnbroker's agent to
divide the pawn offered by a person into two or more fractions
in order to collect greater interest than the permitted by this
section.
It shall also be unlawful for a pawnbroker or pawnbroker's
agent to require the pawner to pay an additional charge as
insurance premium for the safekeeping and conservation of
the article pawned.
- The Usury Law is only applicable in a case of loan or
forbearance of money, goods, or credit.
- It does NOT apply to other contracts, such as conditional
sales based on installment plans.
o The increase in the price is not considered a mere pretext
to cover a usurious loan.
o Such increase when the sale is on credit, is called a time
price differential and is not the interest within the
meaning of the Usury Law
o It serves to cover expenses in such sales on credit and
also encourages cash sales.
c. Remedies
Art. 1413 Interest paid in excess of the interest allowed by the
usury laws may be recovered by the debtor, with interest
thereon from the date of the payment.
Act 2655
Sec. 6 Any person or corporation who, for any such loan or
renewal thereof or forbearance, shall have paid or delivered a
higher rate or greater sum or value than is hereinbefore
allowed to be taken or received, may recover the whole
interest, commissions, premiums penalties and surcharges paid
or delivered with costs and attorneys' fees in such sum as may
be allowed by the court in an action against the person or
corporation who took or received them if such action is
brought within two years after such payment or delivery:
Provided, however, That the creditor shall not be obliged to
return the interest, commissions and premiums for a period of
not more than one year collected by him in advance when the
debtor shall have paid the obligation before it is due, provided
such interest, and commissions and premiums do not exceed
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the rates fixed in this Act.
Sec. 7 All covenants and stipulations contained in
conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods or
other things, whereupon or whereby there shall be stipulated,
charged, demanded, reserved, secured, taken, or received,
directly or indirectly, a higher rate or greater sum or value for
the loan or renewal or forbearance of money, goods, or credits
than is hereinbefore allowed, shall be void: Provided, however,
That no merely clerical error in the computation of interest,
made without intent to evade any of the provisions of this Act,
shall render a contract void: Provided, further, That parties to a
loan agreement, the proceeds of which may be availed of
partially or fully at some future time, may stipulate that the rate
of interest agreed upon at the time the loan agreement is
entered into, which rate shall not exceed the maximum
allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the
Monetary Board: And Provided, finally, That nothing herein
contained shall be construed to prevent the purchase by an
innocent purchaser of a negotiable mercantile paper, usurious
or otherwise, for valuable consideration before maturity, when
there has been no intention on the part of said purchaser to
evade the provisions of this Act and said purchase was not a
part of the original usurious transaction. In any case, however,
the maker of said note shall have the right to recover from said
original holder the whole interest paid by him thereon and, in
case of litigation, also the costs and such attorney's fees as
may be allowed by the court.
Sec. 8 All loans under which payment is to be made in
agricultural products or seed or in any other kind of
commodities shall also be null and void unless they provide
that such products or seed or other commodities shall 6e
appraised at the time when the obligation falls due at the
current local market price: Provided, That unless otherwise
stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence of not
less than two witnesses, any contract advancing money to be
repaid later in agricultural products or seed or any other kind
of commodities shall be understood to be a loan, and any
person or corporation having paid otherwise shall be entitled
in case action is brought within two years after such payment
or delivery to recover all the products or seed delivered as
interest, or the value thereof, together with the costs and
attorney's fees in such sum as may be allowed by the court.
Nothing contained in this section shall be construed to prevent
the lender from taking interest for the money lent, provided
such interest be not in excess of the rates herein fixed.
45
Sec. 9 The person or corporation sued shall file its answer in 2) Remedy of Creditor
writing under oath to any complaint brought or filed against
said person or corporation before a competent court to - The nullity of the usurious interest stipulated does not bar
recover the money or other personal or real property, seeds or the creditor from collecting the principal amount of the loan
agricultural products, charged or received in violation of the from the debtor.
provisions of this Act. The lack of taking an oath to an answer - The principal amount, therefore, may still be recovered
to a complaint will mean the admission of the facts contained through judicial action. And in case of such demand, and the
in the latter. debtor incurs in delay, then the principal amount shall earn
interest from date of the demand.
Sec. 9-a The Monetary Board shall promulgate such rules and
regulations as may be necessary to implement effectively the DEPOSIT
provisions of this Act.
I. THE CONCEPT OF DEPOSIT
Sec. 10 Without prejudice to the proper civil action violation
of this Act and the implementing rules and regulations Art. 1962 A deposit is constituted from the moment a person
promulgated by the Monetary Board shall be subject to receives a thing belonging to another, with the obligation of
criminal prosecution and the guilty person shall, upon safely keeping it and of returning the same. If the safekeeping
conviction, be sentenced to a fine of not less than fifty pesos of the thing delivered is not the principal purpose of the
nor more than five hundred pesos, or to imprisonment for not contract, there is no deposit but some other contract.
less than thirty days nor more than one year, or both, in the
discretion of the court, and to return the entire sum received as Art. 1964 A deposit may be constituted judicially or
interest from the party aggrieved, and in the case of non- extrajudicially.
payment, to suffer subsidiary imprisonment at the rate of one
day for every two pesos: Provided, That in case of
Art. 1967 An extrajudicial deposit is either voluntary or
corporations, associations, societies, or companies the
necessary.
manager, administrator or gerent or the person who has
charge of the management or administration of the business
- A deposit is an obligation constituted from the moment of
shall be criminally responsible for any violation of this Act.
delivery of the property belonging to another for the
purpose of safekeeping and eventual return.
- The Usury Law is only applicable in a case of loan or
- It may be judicial, extrajudicial, voluntary and necessary.
forbearance of money, goods, or credit.
- The principal obligation in any kind of deposit is the
- It does NOT apply to other contracts, such as conditional
safekeeping of the thing and its eventual return.
sales based on installment plans.
o The increase in the price is not considered a mere pretext
Sources of deposit: not just by contract
to cover a usurious loan.
o Such increase when the sale is on credit, is called a time
Object:
price differential and is not the interest within the
GR: movable
meaning of the Usury Law
XPN: judicial deposit can involve even immovable
o It serves to cover expenses in such sales on credit and
also encourages cash sales.
Obligation:
1. Depositary: safekeeping then return
1) Remedy of Debtor
2. Depositor: transfer object

- Should the debtor pay under the usurious agreement, his

Deposit: If there is a stipulation on penalty
remedy is to recover the amount he paid as interest under
- Roman law concept of depositum, a contract of
such usurious agreement.
neighborliness, which is the gratuitous deposit of goods for
- There is no conflict between Sec. 6 of the Usury Law and Art.
the benefit of the depositor
1413 of the Civil Code; both allow for the recovery of the
- It is an obligation constituted from the moment of delivery
whole interest paid under the usurious interest.
of property belonging to another for the purpose of
o Art. 1413 only adds that the whole interest to be
safekeeping and eventual return
recovered shall be recovered with interest, accruing from
- Principal obligation and distinguishing characteristic is the
the date of payment.
safekeeping and its eventual return
- Sec. 9 of the Usury does not apply when the defendant is the
one alleging usury.

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Types of Deposit: - An extrajudicial deposit that arises out of a contract
1. Judicial the obligation arises as a consequence of law, o Thus, meeting if the minds is required between the
allowing the issuance of a judicial order constituting a depositor and the chosen depositary.-
deposit o A deposit is a real contract, requiring delivery for its
2. Extrajudicial perfection
a. Voluntary obligation arises as a consequence of a o May be oral or written, may be gratuitous or onerous
contract o A contract to deposit, or an agreement to constitute a
b. Necessary obligation arises as a consequence of law deposit, is a valid consensual contract.
or quasi-contract
BPI v. IAC (1988) Cortes, J.
Deposit Mutuum Petitioner: Bank of the Philippine Islands
For safekeeping or custody For consumption Respondent: Intermediate Appellate Court and Rizaldy
Depositor can demand return Period to return must be Zshornack
at any time respected by lender Concept: Voluntary Deposit
Compensation is essentially Compensation may be
gratuitous (except by mutual gratuitous, or with a Doctrine:
agreement) stipulation to pay interest In a deposit, the safekeeping of the object is the principal
Any property Fungible thing purpose. This is constituted from the moment a person receives
Depositor and depositary Lender and borrower a thing belonging to another, with the obligation of safely
relationship relationship keeping it and of returning the same. The intention and the
subsequent acts of the parties determine the nature of the
arrangement between the parties.
II. VOLUNTARY DEPOSIT
Brief Facts:
Zshornack entrusted $3,000 to COMTRUST for safekeeping.
A. General Concepts
When the amount was requested to be returned, the bank
refused, alleging that the amount was already credited to
Art. 1963 An agreement to constitute a deposit is binding,
Zshornacks account. Zshornack filed a complaint against
but the deposit itself is not perfected until the delivery of the
COMTRUST for the recovery of the $3,000.
thing.

Art. 1968 A voluntary deposit is that wherein the delivery is
made by the will of the depositor. A deposit may also be made
by two or more persons each of whom believes himself entitled
to the thing deposited with a third person, who shall deliver it
in a proper case to the one to whom it belongs.
Art. 1969 A contract of deposit may be entered into orally or
in writing.
Art. 1965 A deposit is a gratuitous contract, except when
there is an agreement to the contrary, or unless the depositary
is engaged in the business of storing goods.
Art. 1966 Only movable things may be the object of a
deposit.
Art. 1995 A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
ISSUES:
1. W the delivery of the cash was to sell it at prevailing
currency rates or for safekeeping (SAFEKEEPING)
2. WON the bank is liable (NO)
RATIO:
1. The delivery was for safekeeping.
- Document states that the US$3,000.00 was received by the
bank for safekeeping
o Subsequent acts also show that the intent of the parties
was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time ! he did demand
the return on May 10, 1976 (over 5 months later)
o This arrangement is that contract defined under Art.
1962: 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. If the safekeeping of the thing delivered is not
the principal purposes of the contract, there is no
deposit but some other contract.

(2) In case of a gratuitous deposit, upon the death of either the

depositor or the depositary.

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- Object of the contract between Zshornack and
COMTRUST was foreign exchange
o Transaction governed by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange
Transactions, which provide the following
" Transactions shall NOT be effected when they are
owned by and in the name of banks: money
expressed in foreign currencies
" All receipts of foreign exchange shall be sold daily
to the Central Bank within one business day
following the receipt of such foreign exchange
o Document and subsequent acts show that they
intended to safekeep the foreign exchange, and return
it later to Zshornack
o Parties did not intend to sell the US dollars to the
Central Bank within one business day from receipt;
otherwise, contract of depositum would never have
been entered into at all
- The mere safekeeping of the greenbacks, without selling
them to the Central Bank within one business day from the
receipt, is a transaction which is not authorized by CB
Circular No. 20 and makes it fall under the general class of
prohibited transactions
o Art. 5 of the NCC provides that it is void, having been
executed against the provisions of a ISSUES:
mandatory/prohibitory law
o It affords neither of the parties a cause of action ! pari
delicto
2. No, the bank is NOT liable. Since the nullity arises
from an illegal act, the parties will be left as they
are, as a result of being in pari delicto.
- BPI: It is not liable because it is Garcia who is personally
liable, having exceeded his powers when he entered into
the transaction
- SC: Bank did not question the document, which is an
actionable document, thereby admitting Garcias authority,
and the banks power, to enter into the contract
o Stranger deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate
officers; reasonable that the corporation should be
required, if it denies its authority, to state such defense
in his answer
o To absolve a corporation every time an officer enters
into a contract beyond corporate powers, is to cast
corporations in so perfect a mold that transgressions
and wrongs by such artificial beings become impossible
- When the nullity proceeds from the illegality of the cause
or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
cause of action against each other. (Art. 1411)
- Only remedy is for the State to prosecute the parties
DISPOSITIVE: AFFIRMED with MODIFICATIONS.
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BPI v. IAC
SGS: Remember this case contract of deposit
Triple-V Food Services Inc. v. Filipino Merchants Insurance Co.
(2005) Nachura, J.
Petitioner: Triple-V Food Services Inc.
Respondent: Filipino Merchants Insurance Company (FMIC)
Concept: Deposit; Voluntary Deposit; General Concepts
Doctrine:
In a contract of deposit, the depositary receives an object
belonging to the depositor, and has the obligation of safely
keeping the object and returning the same to the latter. The
contract of deposit may be constituted without consideration. It
is a real contract, perfected upon the delivery of the object by
the depositor to the depositary.
Brief Facts:
De Asis, an employee of Crispa Textile Inc., dined at Triple-Vs
Kamayan Restaurant. She availed of the valet parking service of
the restaurant for the company car assigned to her. However,
after dining, the car was discovered to be lost and could not be
recovered. Covered under a policy, Crispa Textile was
indemnified by FMIC; in turn, FMIC was subrogated into Crispas
rights and filed suit against Triple-V for the loss of the car.
1. WON Triple-V was liable (YES)
2. WON the provision in the parking ticket served as a valid
waiver (NO)
RATIO:
1. YES. Triple-V is liable under the contract of
deposit.
- When De Asis availed of the valet service of Triple-V in its
restaurant, De Asis expected the safe return of the vehicle at
the end of her meal. Triple-V, therefore, was constituted as a
depositary of the said car.
o In a contract of deposit, the depositary receives
an object belonging to another (depositor), with the
obligation of safely keeping and returning the
said object.
o A deposit may be constituted even without any
consideration; the depositary need not be paid a fee
before the obligation attaches.
- Triple-V clearly failed in complying with its obligation as the
depositary of the car. Hence, its liability.
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2. NO. There was no waiver. Art. 1977 The depositary cannot make use of the thing
- SC: The ticket was a contract of adhesion since Triple-V deposited without the express permission of the depositor.
alone prepared it. While they are valid by nature, the Court
will not hesitate to rule out blind adherence thereto if they Otherwise, he shall be liable for damages.
prove to be one-sided under the attendant fact and
circumstances. However, when the preservation of the thing deposited
- De Asis deposited the car partly of Triple-Vs enticement for requires its use, it must be used but only for that purpose.
customers: providing a safe parking space within which to
leave their vehicles while they dine.
Art. 1978 When the depositary has permission to use the
- De Asis having fully entrusted the vehicle, she fully expects
thing deposited, the contract loses the concept of a deposit
the safe return of the vehicle after her visit in Kamayan was
and becomes a loan or commodatum, except where
over.
safekeeping is still the principal purpose of the contract.
- Hence, Triple-V cannot be allowed to use the ticket as a
shield from any esponsibility for any loss or damage to
The permission shall not be presumed, and its existence must
vehicles or to the valuables contained therein.
be proved.

DISPOSITIVE: RTC and CA affirmed.

Art. 1981 When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition,
Triple-V v. Filipino Merchants
and he shall be liable for damages should the seal or lock be
Are all contracts for parking contracts of deposit? Or are there
broken through his fault.
critical factors in the case that, if not present in another situation,
would lead to a different conclusion?
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
If not valet parking, it is a contract of lease (use of space)
because no transfer of object and expectation is different just
As regards the value of the thing deposited, the statement of
to use the space
the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
A valet is a contract of deposit.
contrary. However, the courts may pass upon the credibility of
the depositor with respect to the value claimed by him.
B. Obligation to Safekeep

When the seal or lock is broken, with or without the

1. Way of the Deposit
depositary's fault, he shall keep the secret of the deposit.

Art. 1974 The depositary may change the way of the deposit
if under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts
of the situation. However, before the depositary may make
such change, he shall notify the depositor thereof and wait for
his decision, unless delay would cause danger.
Art. 1982 When it becomes necessary to open a locked box
or receptacle, the depositary is presumed authorized to do so,
if the key has been delivered to him; or when the instructions
of the depositor as regards the deposit cannot be executed
without opening the box or receptacle.

Way of the Deposit

Art. 1975 The depositary holding certificates, bonds,
- Delivery in a specific manner to the depositary by the
securities or instruments which earn interest shall be bound to
depositor of the object of the deposit for safekeeping
collect the latter when it becomes due, and to take such steps
as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to
law.

The above provision shall not apply to contracts for the rent of
safety deposit boxes.

Art. 1976 Unless there is a stipulation to the contrary, the

depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall own
or have a proportionate interest in the mass.

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Rules to be Followed by the Depositary
a) The depositary may not change the way of the deposit
unless:
1. There is a presumption of consent based on the
circumstances, and
2. The depositary notifies the depositor and waits for the
decision. The obligation to notify does not apply if
delay would cause danger to the object of the deposit
b) The depositary must:
1. Collect the interest of certificates, bonds, securities or
instruments when they become due, and
2. Must take necessary measures to preserve their value
and corresponding rights. This obligation does not
apply if the certificates, bonds, securities or instruments
are kept pursuant to a contract for the rent of safety
deposit boxes.
c) The depositary may commingle grain or other articles of the
same kind and quality unless there is a stipulation to the
contrary
d) The depositary cannot use the thing deposited unless:
1. There is express and proven permission of the
depositor, in which case the deposit is considered an
irregular deposit. In this first exception, the principal
purpose of the irregular deposit is still safekeeping. If
safekeeping is not the principal purpose, then the
contract is not a deposit and may be a loan.
2. The preservation of the object of the deposit requires
its use. In this second exception, use of the object by
the depositary is for the limited purpose of
preservation.
e) The depositary must return a closed and sealed object in
the same condition and must keep the secret of the deposit
if the seal or lock is broken
f) The depositary may open a locked box or receptacle only if:
1. There is express authority, since the parties are free to
stipulate on this.
2. There is presumed authority, such as when the key to
the lock has been delivered, or the instructions of the
depositor as regards the deposit cannot be executed
without opening the box or receptacle.
CA Agro-Industrial Development Corporation v. CA (1993)
Davide, Jr., J
Petitioner: CA Agro-Industrial Development Corp.
Respondents: CA and Security Bank and Trust Company
Concept: Voluntary deposit; Obligation to safekeep
Doctrine:
Banking institutions who receive in custody funds, documents,
and valuable objects, and rent safety deposit boxes for
safeguarding of such effects are depositaries. The primary
function is still found within the parameters of a contract of
deposit. The renting out of the safety deposit boxes is not
independent from, but related to this principal function.
Stipulations exempting a depositary from liability in case of loss
are contrary to law and public policy.
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Brief Facts:
Agro-Industrial and Sps. Pugao rented a safety deposit box from
Security Bank which was kept in the latters possession.
Certificates of title of 2 lots sold by Pugaos to Agro-Industrial
were kept in the box until Agro-Industrial has fully paid the
purchase price of the sale. In order for the box to be opened, a
key in the possession of the renters and the guard key in the
possession of the bank were needed. Joint signatures of the
renters were likewise required. When Agro-Industrial and the
Pugaos went to the bank to have the safety deposit box opened,
it was found that its contents were missing. Agro-Industrial
missed out on an offer to purchase said lots due to the delay in
the reconstitution of titles. As a result, it sued the bank for
damages. The bank invokes the conditions in their lease
agreement of the safety deposit box, wherein the bank explicitly
declared that it is not a depositary of the contents and assumes
no liability in connection therewith.
ISSUES:
1. WON the contract for rent od a safety deposit box is a
contract of lease (NO)
2. WON the stipulation that the bank should not be held liable
for any loss is valid (NO)
RATIO:
1. No. The contract is a special kind of deposit.
- The questioned contract is not an ordinary contract of lease
o It cannot be characterized as an ordinary lease contract
because the full and absolute possession and control of
the safety deposit box was not given to the renters.
o The guard key of the box remained with the bank and
without this key, neither of the renters could open the
box
o The bank could not likewise open the box without the
renters key
- Neither could Art. 1975 (cited by the CA in its decision) be
invoked as an argument against the deposit theory because
clearly, the first paragraph of such provision cannot apply to
a depositary of certificates, bonds, securities, or instruments
which earn interest if such documents are kept in a rented
safety deposit box which the depositary cannot open
without the renter being present.
- It cannot be considered as an ordinary contract of deposit
as the absolute control and possession over the thing
deposited is not given to the depositary
- However, we adopt the prevailing rule in the US that banks
who rent out safety deposit boxes are depositaries
o Sec. 72 of the General Banking Act 23 provides
that banking institutions who receive in custody funds,
documents, and valuable objects, and rent safety
deposit boxes for safeguarding of such effects are
depositaries
o The primary function is still found within the parameters
of a contract of deposit
o The renting out of the safety deposit boxes is not
independent from, but related to this principal function
50
2. No. Such is contrary to law and public policy
- A contract of deposit may be entered into orally or in writing
and parties thereto may establish such stipulations they may
deem convenient provided they are not contrary to law,
morals, good customs, public order or public policy
- The responsibility of the depositary is governed by Title I,
Book IV CC (Obligations and Contracts)
o Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of the
agreement
o In the absence of any stipulation prescribing the degree
of diligence required, that of a good father of a family is
to be observed
o Hence, any stipulation exempting the depositary from
any liability arising from the loss of the thing deposited
on account of fraud, negligence or delay would be void
for being contrary to law and public policy
- It is not correct to assert that the bank has neither the
possession nor control of the contents of the box since the
said box itself is located in its premises and under its
absolute control. Moreover, the guard key is in the
possession of the bank and the renters cannot open the box
without the same.
DISPOSITIVE: Petition for review partially granted by deleting
award of attorneys fees
CA Agro-Industrial v. CA
The object of the deposit: titles
The SDB = the way of the deposit
- There is no effect on the contract of deposit because what is
affected is only the way of the deposit
Roman Catholic Bishop of Jaro v. De la Pena(1913) Powell, J.
Petitioner: Bishop of Jaro
Respondents: Gregorio de la Pena, as administrator of the
estate of Father Agustin dela Pena
Concept: Obligation to Safekeep
Doctrine:
Fortuitous events constitute a defense, with the effect of
relieving the debtor of his obligation to the creditor.
Brief Facts:
Fr. De la Pena was a made a trustee by the Bishop of Jaro to
collect and safekeep funds to be used for the construction of a
leper hospital. He then deposited the collected money in his
personal account. When war and the revolution broke out, he
was arrested as a political prisoner and his funds in the account
were confiscated by the government, as it was allegedly being
used for revolutionary purposes. Bishop wants the estate of the
trustee to repay the trust-money which was also confiscated by
the US armed forces.
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ISSUE:
WON estate of Fr. Agustin is obliged to pay back the P6, 641
(trust-money) which was part of the money confiscated by the
government (NO)
RATIO:
NO; the confiscation of the U.S. government is a
fortuitous event which has the effect of excusing the
debtor (Fr. Agustin) to comply with his obligation
- The Roman maxim of major casus est, cui humana infirmitas
resistere non pottest is effected by the Civil Code in Art.
1105 (now Art. 1174, NCC) which governs the rule on
fortuitous events.
- By placing the money in the bank and mixing it with his
personal funds, De la Pena did not assume an obligation
different from that under which he would have lain if such
deposit had not been made, nor did he make himself liable
to repay at all hazards.
- In the case at bar, that the money had been confiscated by
the government is considered a fortuitous event for it is an
event which could not be foreseen, or which having been
foreseen were inevitable.
- The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility, and
such deposit did not make him a debtor who must respond
at all hazards.
- There is no need to consider the question of WON he was
negligent in depositing them instead of leaving them at his
house, or WON he was negligent in depositing them in his
personal account instead of a separate account as trustee,
since there was no law prohibiting him from
depositing it as he did and there was no law which
changed his responsibility by reason of the
deposit.
DISPOSITIVE: CFI reversed. The money was forcibly taken
from the bank by the U.S armed forces; thus, Fr. Agustin was not
responsible for its loss.
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DISSENT: J. Trent
- The sum of P6, 641, being part of a trust fund, was then
clothed with all the immunities and protection the law seeks
to invest trust funds. However, when he mixed them with his
personal account, he unclothed it of all the protection it
had.
- If the money was deposited in a separate account as trustee
or agent, it may be presumed that the military would not
have confiscated for the reason that they were looking for
insurgent funds only.
- Citing US v Thomas, trustees may be held liable even for
fortuitous events in cases where they mix the trust-money
with their own, whereby it loses its identity, and they
become mere debtors.
- While the majority is correct in saying that there is no law
prohibiting the act of mixing trust-money with personal
account, the very nature of the trust itself prohibits such act,
since the position of trustee is one of trust.
51
- While there is no showing that Fr. De la Pena used the trust-
money for personal purposes, considering the considerable
length of time intervened from time of deposit until
confiscation, as well as the records stating that several
withdrawals and deposits have been made, the facts
strongly indicate that he had as a matter of fat been using
the money in violation of the trust imposed in him.
Roman Catholic Bishop of Jaro v. De La Pena
The Judge would hold the Father liable because he lost the
thing and violated the deposit
The counsel should advise him to open another account, saying
it is owned by the Bishop, with the Father acting as agent
2.Liability for Loss and Damage
Art. 1972 The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by
the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
Art. 1973 Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is liable
for the loss if he deposited the thing with a person who is
manifestly careless or unfit. The depositary is responsible for
the negligence of his employees.
Art. 1977 The depositary cannot make use of the thing
deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
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Art. 1981 When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition,
and he shall be liable for damages should the seal or lock be
broken through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of
the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the deposit.
Art. 1979 The depositary is liable for the loss of the thing
through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may
have been authorized to use the same.
Art. 1990 If the depositary by force majeure or government
order loses the thing and receives money or another thing in
its place, he shall deliver the sum or other thing to the
depositor
Art. 1993 The depositor shall reimburse the depositary for
any loss arising from the character of the thing deposited,
unless at the time of the constitution of the deposit the former
was not aware of, or was not expected to know the dangerous
character of the thing, or unless he notified the depositary of
the same, or the latter was aware of it without advice from the
depositor.
- Purpose of safekeeping is the distinguishing characteristic
of a contract of deposit
- Responsibility for loss and damage are subject to specific
rules under the Civil Code
52
a. Liability of Depositary
Responsibility for loss and damage will attach to the
DEPOSITARY if:
1. The depositary deposits the object with a third person,
unless there is a stipulation allowing it.
2. If deposit with a third person is allowed, the depositary
deposits the thing with a person who is manifestly careless
or unfit.
3. The employees of the depositary are negligent.
4. The depositary uses the object of the deposit, unless
there was express permission of the depositor, or the use
was necessary for the limited purpose of preservation.
5. The seal or lock of a thing delivered closed and sealed is
broken through the fault of the depositary. Fault is
presumed, unless there is proof to the contrary. If the
forcible opening of a thing delivered closed and sealed is
imputable to the depositary, the value of the thing
deposited shall be based on the statement of the depositor,
unless:
a. There is contrary proof, and
b. The courts determine otherwise based on the credibility
of the depositor.
6. Even in case of a fortuitous event, depositary is liable if:
a. It has been stipulated,
b. The depositary uses the thing without the depositors
permission,
c. The depositary delays the return of the object of the
deposit, or
d. The depositary allows others to use it, even though the
depositary may have been authorized to use the same.
7. Even if the depositary is not liable, if the depositary
loses the thing by force majeure or government order, but
receives money or a replacement, the depositary shall
deliver the money or replacement to the depositor.
b. Liability of Depositor (only instance of liability)
- Responsibility for loss or damage will attach to the
depositor ONLY IF the depositor delivers a thing the
character of which causes any loss to the depositary, unless:
1. At the time of the constitution of the deposit the
depositor was not aware of, or was not expected to
know the dangerous character of the thing, or
2. The depositor notified the depositary of the
dangerous character, or the depositary was in any case
aware of the character.
c. Liability for Expenses
Art. 1992 If the deposit is gratuitous, the depositor is obliged
to reimburse the depositary for the expenses he may have
incurred for the preservation of the thing deposited.
- If the deposit is gratuitous, the depositor bears the
expenses for the preservation of the thing deposited
- If the deposit is onerous, the depositary bears the
expenses of preservation
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C. Obligation to Return
1. By Whom and To Whom
Art. 1972 The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by
the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
Art. 1970 If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall be
subject to all the obligations of a depositary, and may be
compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by the
latter himself if he should acquire capacity.
Art. 1971 If the deposit has been made by a capacitated
person with another who is not, the depositor shall only have
an action to recover the thing deposited while it is still in the
possession of the depositary, or to compel the latter to pay
him the amount by which he may have enriched or benefited
himself with the thing or its price. However, if a third person
who acquired the thing acted in bad faith, the depositor may
bring an action against him for its recovery.
Art. 1984 The depositary cannot demand that the depositor
prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been
stolen and who its true owner is, he must advise the latter of
the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be
relieved of all responsibility by returning the thing deposited to
the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the
former may return the same.
Art. 1985 When there are two or more depositors, if they are
not solidary, and the thing admits of division, each one cannot
demand more than his share.
When there is solidarity or the thing does not admit of division,
the provisions of Articles 1212 and 1214 shall govern. However,
if there is a stipulation that the thing should be returned to one
of the depositors, the depositary shall return it only to the
person designated
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 2. What to Return
Art. 1212 Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be Art. 1983 The thing deposited shall be returned with all its
prejudicial to the latter. products, accessories and accessions.

Art. 1214 The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has been
made by one of them, payment should be made to him.
Art. 1986 If the depositor should lose his capacity to contract
after having made the deposit, the thing cannot be returned
except to the persons who may have the administration of his
property and rights.
Art. 1991 The depositor's heir who in good faith may have
sold the thing which he did not know was deposited, shall only
be bound to return the price he may have received or to assign
his right of action against the buyer in case the price has not
been paid him.
Should the deposit consist of money, the provisions relative to
agents in article 1896 shall be applied to the depositary.
Art. 1986 If the depositor should lose his capacity to contract
after having made the deposit, the thing cannot be returned
except to the persons who may have the administration of his
property and rights.
- Thing itself
- Plus all its products, accessories and accessions
- Interest on sums applied to depositarys own use from day
on which he did so and on those which he still owes after
extinguishment of agency
3. Where to Return

SGS: Art. 1991 should read The depositarys heir

Art. 1987 If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take
To whom:
the thing deposited to such place; but the expenses for
1. Depositor; or
transportation shall be borne by the depositor.
2. Heirs and successors; or
3. Person designated in the contract
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
On issues of capacity to contract:
same place where the deposit was made, provided that there
1. If depositor is incapacitated, depository must return to (Art.
was no malice on the part of the depositary.
1970):
a. Guardian or administrator of the depositor
b. Depositor if he should acquire capacity - Place designated; expenses to be borne by depositor
2. If depositor loses capacity to contract after depositing, - No designated place: where thing deposited may be, even
depositor must return to persons who may have if not where deposit was made
administration of depositors property and rights

When there are two or more solidary depositors OR

when the thing is not divisible:
1. If there is a stipulation to return to one of the depositors,
depository shall return it only to the person designated
2. If there is no stipulation:
a. But there is a demand, judicial or extrajudicial, payment
should be made to him
b. If there is no demand, depositary may pay any one of
the depositors

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4. When to Return III. NECESSARY DEPOSIT

Art. 1988 The thing deposited must be returned to the A. General Concepts
depositor upon demand, even though a specified period or
time for such return may have been fixed. Art. 1964 A deposit may be constituted judicially or
extrajudicially.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he Art. 1967 An extrajudicial deposit is either voluntary or
have been notified of the opposition of a third person to the necessary.
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
Art. 1996 A deposit is necessary:
attachment or opposition.

(1) When it is made in compliance with a legal obligation;

Art. 1989 Unless the deposit is for a valuable consideration,
the depositary who may have justifiable reasons for not (2) When it takes place on the occasion of any calamity, such as
keeping the thing deposited may, even before the time fire, storm, flood, pillage, shipwreck, or other similar events.
designated, return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its consignation
Art. 1966 Only movable things may be the object of a
from the court.
deposit.

- Principal purpose of delivering object to depository:

A deposit may be constituted:
safekeeping
- Judicially
- One of the primary obligations: return object upon demand
- Extrajudicially
- GR: Return upon demand, even though a specified period
o Voluntary
or time has been fixed
o Necessary
- XPN:
" In compliance with a legal obligation
o Thing deposited is judicially attached while in the
" Takes place on the occasion of any calamity
depositarys possession; or
o Depository was notified of the opposition of a third
NECESSARY DEPOSIT
person to the return or the removal of the thing
- Extrajudicial deposit constituted over movable property as a
deposited
consequence of law or quasi-contract, so that no unjust
- For the above exceptions, depository must immediately
enrichment will result from the juridical relation
inform the depositor of the attachment or the opposition,
but it does not imply that obligation to return ceases
B. Examples of Necessary Deposit
o They are exceptions to return upon demand
o Depository may take measures to protect itself, such as
1. Compliance with a Legal Obligation
seeking appropriate protective measures from a court

Art. 1996 A deposit is necessary:

5. Right to Retention

(1) When it is made in compliance with a legal obligation;

Art. 1994 The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
(2) When it takes place on the occasion of any calamity, such as
deposit.
fire, storm, flood, pillage, shipwreck, or other similar events.

- Depository has a right of retention as a means or device

Art. 1997 The deposit referred to in No. 1 of the preceding
for the depository to be able to obtain payment of what
article shall be governed by the provisions of the law
may be due
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.

The deposit mentioned in No. 2 of the preceding article shall

be regulated by the provisions concerning voluntary deposit
and by Article 2168

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2. On the Occasion of a Calamity
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.
Art. 1997 The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall
be regulated by the provisions concerning voluntary deposit
and by Article 2168.
Art. 2168 When during a fire, flood, storm, or other calamity,
property is saved from destruction by another person without
the knowledge of the owner, the latter is bound to pay the
former just compensation.
- If it is saved from destruction during a calamity without the
knowledge of the owner, the owner is bound to pay the one
who saved just compensation
- Person who saves movable property from destruction is
considered by law as the depositary
- Owner of the property is bound to pay just compensation
and is considered by law as the depositor
3. Passenger Baggage with Common Carriers
Art. 1754 The provisions of Articles 1733 to 1753 shall apply
to the passenger's baggage which is not in his personal
custody or in that of his employee. As to other baggage, the
rules in Articles 1998 and 2000 to 2003 concerning the
responsibility of hotel-keepers shall be applicable.
- Common carriers: persons, corporations, firms or
associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public
- Law on common carriers governs baggage not in the
custody of the passenger or the passengers employees !
requires extraordinary diligence in the vigilance over goods
- Passenger baggage deposited with the common carrier is
considered a necessary deposit, subjecting the common
carrier, considered by law as the depository, to the same
rules on necessary deposit as hotels or inns
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4. Hotels or Inns
Art. 1998 The deposit of effects made by the 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.
Art. 1999 The hotel-keeper is liable for the vehicles, animals
and articles which have been introduced or placed in the
annexes of the hotel.
Art. 2000 The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotels or inns as well as strangers; but not that
which may proceed from any force majeure. The fact that
travellers are constrained to rely on the vigilance of the keeper
of the hotels or inns shall be considered in determining the
degree of care required of him.
Art. 2001 The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force.
Art. 2002 The hotel-keeper is not liable for compensation if
the loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arises from the character of the things
brought into the hotel.
Art. 2003 The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void.
Art. 2004 The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel
guests.
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YHT Realty Corporation vs. Court of Appeals Tinga, J.
Petitioners: YHT Realty Corporation (YHT), Erlinda Lainez
(Lainez) and Anicia Payam (Payam)
Respondents: Court of Appeals (CA) and Maurice McLoughlin
(McLoughlin)
Concept: Deposits with Hotels or Inns
Doctrine:
Disclaimer of liability by a hotel or inn or items deposited with it
contravenes Article 2003 of the Civil Code. The hotel or inn can
only be exculpated from liability when loss occurs through force
majeure, which in case of stolen items, when the stealing is done
with the use of arms or through an irresistible force, or when the
loss is due to acts of the guest, his family or visitors, but in the
latter case, only when there is no concurrent negligence on part
of the hotel or inn.
Brief Facts:
Tropicana, owned by YHT, rents safety deposit boxes to its
guests, disclaiming, through the rental agreement, liability for
lost items. On two occasions, McLoughlin lost money placed
within the safety deposit box rented by him from the hotel.
ISSUES:
1. Whether or not the conclusion anent the loss and the
finding of negligence on part of YHT was supported by
evidence. Yes.
2. Whether or not YHT, Lainez, and Payam can disclaim liability
under paragraph 2 of the terms on the rental of the safety
deposit box. No.
RATIO:
1. Yes, the conclusion anent the loss and the finding
of negligence were supported by evidence.
- RTC (affirmed by CA): these were sufficiently shown by
McLoughlins direct and straightforward manner of testifying
in court. If he had not lost his dollars, he would not have
gone through the trouble and personal inconvenience of
seeking aid and assistance from the Office of the President,
DOJ, police authorities, and the City Fiscals Office.
o As to the loss prior the one where a confrontation took
place, considering the admission of Lainez, and Payam
that they allowed Tan to open the box, it was logical
and reasonable to presume that his personal assets
were taken by Tan through the cooperation of Payam
and Lainez.
- SC: the petition was a review through Rule 45, and the
thrust of said rule is the resolution only of questions of law
and any peripheral factual question addressed to the Court
is beyond the bounds of this mode of review.
o As to the finding of negligence, since the safety deposit
box cannot be opened through the personal request of
a registered guest and with assistance from the
management, with more reason that access to safety
deposit box should be denied if the one requesting is a
stranger. Thus, in case of loss, the inevitable conclusion
is that the management had at least a hand in its
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consummation, unless the reason for the loss is force
majeure, which in case something is stolen, force
majeure only occurs when the stealing is done with the
use of arms or through an irresistible force.
o The management also failed to notify McLoughlin of
the incident and waited for him to discover the taking
before it disclosed the matter to him.
o That Tan was close to McLoughlin was not a defense.
Mere close companionship and intimacy are not
enough to warrant the conclusion that Tan was his wife
or that she was authorized to have access to the safety
deposit box.
o That Tan was a visitor of McLoughlin was also not a
defense. While Article 2002 of the Civil Code provides
that the hotel-keeper is not liable for compensation if
the loss is due to the acts of the guest, his family,
servants or visitors, this is only the case when there is no
concurrent negligence on part of the hotel. Tropicana
was negligent.
2. No, YHT, Lainez, and Payam cannot disclaim
liability under paragraph 2 of the terms on the
rental of the safety deposit box.
- SC: The paragraph contravenes Article 2003 of the Civil
Code, which provides that the hotel-keeper cannot free
himself from responsibility by posting notices to the effect
that he is not liable for the articles brought by the guest and
that any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be
void.
o The provision is an expression of public policy. The
hotel business like the common carriers business is
imbued with public interest. Hotelkeepers are bound to
provide not only lodging for hotel guests but also
security to their persons and belongings. These twin
duties are the essence of the business and cannot be
negated or diluted by any contrary stipulation.
o To hold hotelkeepers or innkeepers liable for the
effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees.
It is enough that such effects are within the hotel or inn.
Thus, a fortiori, liability should be enforced when the
missing items are taken without the guests knowledge
and consent from a safety deposit box provided by the
hotel itself.
DISPOSITIVE: Affirm CA decision.
YHT Realty Corp. v. CA
Is this a VOLUNTARY or a NECESSARY deposit?
57
IV. JUDICIAL DEPOSIT
Art. 1964 A deposit may be constituted judicially or
extrajudicially.
Art. 2005 A judicial deposit or sequestration takes place when
an attachment or seizure of property in litigation is ordered.
Art. 2006 Movable as well as immovable property may be the
object of sequestration.
Art. 2007 The depositary of property or objects sequestrated
cannot be relieved of his responsibility until the controversy
which gave rise thereto has come to an end, unless the court
so orders.
Art. 2008 The depositary of property sequestrated is bound
to comply, with respect to the same, with all the obligations of
a good father of a family.
Art. 2009 As to matters not provided for in this Code, judicial
sequestration shall be governed by the Rules of Court
- A judicial deposit or sequestration is a deposit
constituted by judicial order, as a consequence of litigation.
- It is suppletorily governed by the provisions of the Rules of
Court on attachment and seizure of the property.
- Unlike the general rule on deposit, judicial deposit is the
only type of deposit that may have for its object an
immovable property.
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V. WAREHOUSE RECEIPTS
A. General Concepts
Act 2137, Sec. 1 Persons who may issue receipts
Warehouse receipts may be issued by any warehouseman.
Act 2137, Sec. 2 Form of receipts; essential terms
Warehouse receipts need not be in any particular form but
every such receipt must embody within its written or printed
terms:
(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered
to the bearer, to a specified person or to a specified person or
his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing
them,
(g) The signature of the warehouseman which may be made by
his authorized agent,
(h) If the receipt is issued for goods of which the
warehouseman is owner, either solely or jointly or in common
with others, the fact of such ownership, and
(i) A statement of the amount of advances made and of
liabilities incurred for which the warehouseman claims a lien. If
the precise amount of such advances made or of such liabilities
incurred is, at the time of the issue of, unknown to the
warehouseman or to his agent who issues it, a statement of the
fact that advances have been made or liabilities incurred and
the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby
for all damages caused by the omission from a negotiable
receipt of any of the terms herein required.
Act 2137, Sec. 3 Form of receipts. What terms may be
inserted A warehouseman may insert in a receipt issued by
him any other terms and conditions provided that such terms
and conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of
care in the safe-keeping of the goods entrusted to him which is
reasonably careful man would exercise in regard to similar
goods of his own.
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Act 2137, Sec. 4 Definition of non-negotiable receipt A
receipt in which it is stated that the goods received will be
delivered to the depositor or to any other specified person, is a
non-negotiable receipt.
Act 2137, Sec. 5 Definition of negotiable receipt A
receipt in which it is stated that the goods received will be
delivered to the bearer or to the order of any person named in
such receipt is a negotiable receipt.
No provision shall be inserted in a negotiable receipt that it is
non-negotiable. Such provision, if inserted shall be void.
Act 2137, Sec. 6 Duplicate receipts must be so marked
When more than one negotiable receipt is issued for the same
goods, the word "duplicate" shall be plainly placed upon the
face of every such receipt, except the first one issued. A
warehouseman shall be liable for all damages caused by his
failure so to do to any one who purchased the subsequent
receipt for value supposing it to be an original, even though
the purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt.
Act 2137, Sec. 7 Failure to mark "non-negotiable" A non-
negotiable receipt shall have plainly placed upon its face by
the warehouseman issuing it "non-negotiable," or "not
negotiable." In case of the warehouseman's failure so to do, a
holder of the receipt who purchased it for value supposing it to
be negotiable, may, at his option, treat such receipt as
imposing upon the warehouseman the same liabilities he
would have incurred had the receipt been negotiable.
This section shall not apply, however, to letters, memoranda,
or written acknowledgment of an informal character.
- It is a formal contract because although the law states
that a warehouse receipt need not be in a particular form,
the Warehouse Receipts Law requires that it must be
written and must contain specific terms.
B. Obligations and Rights of a Warehouseman
1. Obligation to Deliver
Act 2137, Sec. 8 Obligation of warehousemen to deliver
A warehouseman, in the absence of some lawful excuse
provided by this Act, 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 with:
(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
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(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.
In case the warehouseman refuses or fails to deliver the goods
in compliance with a demand by the holder or depositor so
accompanied, the burden shall be upon the warehouseman to
establish the existence of a lawful excuse for such refusal.
Act 2137, Sec. 9 Justification of warehouseman in delivering
A warehouseman is justified in delivering the goods, subject
to the provisions of the three following sections, to one who is:
(a) The person lawfully entitled to the possession of the goods,
or his agent;
(b) A person who is either himself entitled to delivery by the
terms of a non-negotiable receipt issued for the goods, or who
has written authority from the person so entitled either
indorsed upon the receipt or written upon another paper; or
(c) A person in possession of a negotiable receipt by the terms
of which the goods are deliverable to him or order, or to
bearer, or which has been indorsed to him or in blank by the
person to whom delivery was promised by the terms of the
receipt or by his mediate or immediate indorser.
Act 2137, Sec. 10 Warehouseman's liability for misdelivery
Where a warehouseman delivers the goods to one who is
not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all having a
right of property or possession in the goods if he delivered
the goods otherwise than as authorized by subdivisions (b) and
(c) of the preceding section, and though he delivered the
goods as authorized by said subdivisions, he shall be so liable,
if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully
entitled to a right of property or possession in the goods, not
to make such deliver; or
(b) Had information that the delivery about to be made was to
one not lawfully entitled to the possession of the goods.
Act 2137, Sec. 11 Negotiable receipt must be cancelled
when goods delivered Except as provided in section thirty-
six, where a warehouseman delivers goods for which he had
issued a negotiable receipt, the negotiation of which would
transfer the right to the possession of the goods, and fails to
take up and cancel the receipt, he shall be liable to any one
who purchases for value in good faith such receipt, for failure
to deliver the goods to him, whether such purchaser acquired
title to the receipt before or after the delivery of the goods by
the warehouseman.
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Act 2137, Sec. 12 Negotiable receipts must be cancelled or
marked when part of goods delivered Except as provided in
section thirty-six, where a warehouseman delivers part of the
goods for which he had issued a negotiable receipt and fails
either to take up and cancel such receipt or to place plainly
upon it a statement of what goods or packages have been
delivered, he shall be liable to any one who purchases for value
in good faith such receipt, for failure to deliver all the goods
specified in the receipt, whether such purchaser acquired title
to the receipt before or after the delivery of any portion of the
goods by the warehouseman.
Act 2137, Sec. 13 Altered receipts 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.
If the alteration was authorized, the warehouseman shall be
liable according to the terms of the receipt as altered. If the
alteration was unauthorized but made without fraudulent
intent, the warehouseman shall be liable according to the
terms of the receipt as they were before alteration.
Material and fraudulent alteration of a receipt shall not excuse
the warehouseman who issued it from liability to deliver
according to the terms of the receipt as originally issued, the
goods for which it was issued but shall excuse him from any
other liability to the person who made the alteration and to any
person who took with notice of the alteration. Any purchaser
of the receipt for value without notice of the alteration shall
acquire the same rights against the warehouseman which such
purchaser would have acquired if the receipt had not been
altered at the time of purchase.
Act 2137, Sec. 14 Lost or destroyed receipts Where a
negotiable receipt has been lost or destroyed, a court of
competent jurisdiction may order the delivery of the goods
upon satisfactory proof of such loss or destruction and upon
the giving of a bond with sufficient sureties to be approved by
the court to protect the warehouseman from any liability or
expense, which he or any person injured by such delivery may
incur by reason of the original receipt remaining outstanding.
The court may also in its discretion order the payment of the
warehouseman's reasonable costs and counsel fees.
The delivery of the goods under an order of the court as
provided in this section, shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt has
been or shall be negotiated for value without notice of the
proceedings or of the delivery of the goods.
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Act 2137, Sec. 15 Effect of duplicate receipts A receipt
upon the face of which the word "duplicate" is plainly placed is
a representation and warranty by the warehouseman that such
receipt is an accurate copy of an original receipt properly
issued and uncanceled at the date of the issue of the
duplicate, but shall impose upon him no other liability.
Act 2137, Sec. 16 Warehouseman cannot set up title in
himself No title or right to the possession of the goods, on
the part of the warehouseman, unless such title or right is
derived directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the deposit for
storage, or from the warehouseman's lien, shall excuse the
warehouseman from liability for refusing to deliver the goods
according to the terms of the receipt.
Act 2137, Sec. 17 Interpleader of adverse claimants If
more than one person claims the title or possession of the
goods, the warehouseman may, either as a defense to an
action brought against him for non-delivery of the goods or as
an original suit, whichever is appropriate, require all known
claimants to interplead.
Act 2137, Sec. 18 Warehouseman has reasonable time to
determine validity of claims If someone other than the
depositor or person claiming under him has a claim to the title
or possession of goods, and the warehouseman has
information of such claim, the warehouseman shall be excused
from liability for refusing to deliver the goods, either to the
depositor or person claiming under him or to the adverse
claimant until the warehouseman has had a reasonable time to
ascertain the validity of the adverse claim or to bring legal
proceedings to compel claimants to interplead.
Act 2137, Sec. 19 Adverse title is no defense except as
above provided Except as provided in the two preceding
sections and in sections nine and thirty-six, no right or title of a
third person shall be a defense to an action brought by the
depositor or person claiming under him against the
warehouseman for failure to deliver the goods according to
the terms of the receipt.
Act 2137, Sec. 36 Effect of sale After goods have been
lawfully sold to satisfy a warehouseman's lien, or have been
lawfully sold or disposed of because of their perishable or
hazardous nature, the warehouseman shall not thereafter be
liable for failure to deliver the goods to the depositor or owner
of the goods or to a holder of the receipt given for the goods
when they were deposited, even if such receipt be negotiable.
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Act 2137, Sec.58 Definitions (a) In this Act, unless the
content or subject matter otherwise requires:
"Action" includes counterclaim, set-off, and suits in equity as
provided by law in these islands.
"Delivery" means voluntary transfer of possession from one
person to another.
"Fungible goods" means goods of which any unit is, from its
nature by mercantile custom, treated as the equivalent of any
other unit.
"Goods" means chattels or merchandise in storage or which
has been or is about to be stored.
"Holder" of a receipt means a person who has both actual
possession of such receipt and a right of property therein.
"Order" means an order by indorsement on the receipt.
"Owner" does not include mortgagee.
"Person" includes a corporation or partnership or two or more
persons having a joint or common interest.
To "purchase" includes to take as mortgagee or as pledgee.
"Receipt" means a warehouse receipt.
"Value" is any consideration sufficient to support a simple
contract. An antecedent or pre-existing obligation, whether
for money or not, constitutes value where a receipt is taken
either in satisfaction thereof or as security therefor.
"Warehouseman" means a person lawfully engaged in the
business of storing goods for profit.
(b) A thing is done "in good faith" within the meaning of this
Act when it is in fact done honestly, whether it be done
negligently or not.
- The obligation of the warehouseman to deliver is not the
delivery required for the perfection of real contracts, but is
similar to the obligation of the depositary to return.
- Because of the commercial nature of the transactions of a
warehouseman, this obligation is subjected to stricter rules.
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2. Liability for Goods
Act 2137, Sec. 20 Liability for non-existence or
misdescription of goods A warehouseman shall be liable to
the holder of a receipt for damages caused by the non-
existence of the goods or by the failure of the goods to
correspond with the description thereof in the receipt at the
time of its issue. If, however, the goods are described in a
receipt merely by a statement of marks or labels upon them or
upon packages containing them or by a statement that the
goods are said to be goods of a certain kind or that the
packages containing the goods are said to contain goods of a
certain kind or by words of like purport, such statements, if
true, shall not make liable the warehouseman issuing the
receipt, although the goods are not of the kind which the
marks or labels upon them indicate or of the kind they were
said to be by the depositor.
Act 2137, Sec. 21 Liability for care of goods A
warehouseman shall be liable for any loss or injury to the
goods caused by his failure to exercise such care in regard to
them as reasonably careful owner of similar goods would
exercise, but he shall not be liable, in the absence of an
agreement to the contrary, for any loss or injury to the goods
which could not have been avoided by the exercise of such
care.
Act 2137, Sec. 22 Goods must be kept separate Except
as provided in the following section, a warehouseman shall
keep the goods so far separate from goods of other depositors
and from other goods of the same depositor for which a
separate receipt has been issued, as to permit at all times the
identification and redelivery of the goods deposited.
Act 2137, Sec. 23 Fungible goods may be commingled if
warehouseman authorized If authorized by agreement or by
custom, a warehouseman may mingle fungible goods with
other goods of the same kind and grade. In such case, the
various depositors of the mingled goods shall own the entire
mass in common and each depositor shall be entitled to such
portion thereof as the amount deposited by him bears to the
whole.
Act 2137, Sec. 24 Liability of warehouseman to depositors of
commingled goods The warehouseman shall be severally
liable to each depositor for the care and redelivery of his share
of such mass to the same extent and under the same
circumstances as if the goods had been kept separate.
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Act 2137, Sec. 25 Attachment or levy upon goods for which
a negotiable receipt has been issued If goods are delivered
to a warehouseman by the owner or by a person whose act in
conveying the title to them to a purchaser in good faith for
value would bind the owner, and a negotiable receipt is issued
for them, they can not thereafter, while in the possession of the
warehouseman, 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 warehouseman shall in no case be compelled to deliver up
the actual possession of the goods until the receipt is
surrendered to him or impounded by the court.
Act 2137, Sec. 26 Creditor's remedies to reach negotiable
receipts A creditor whose debtor is the owner of a
negotiable receipt shall be entitled to such aid from courts of
appropriate jurisdiction, by injunction and otherwise, in
attaching such receipt or in satisfying the claim by means
thereof as is allowed at law or in equity in these islands in
regard to property which can not readily be attached or levied
upon by ordinary legal process.
- The liability of a warehouseman for the goods stored is
similar to the liability of the depositary for the safekeeping
of the property deposited.
- The rules on warehousemans liability for goods take into
consideration the commercial nature of the credit
transaction.
3. Warehousemans Lien
Act 2137, Sec. 31 Warehouseman need not deliver until lien
is satisfied A warehouseman having a lien valid against the
person demanding the goods may refuse to deliver the goods
to him until the lien is satisfied.
Act 2137, Sec. 32 Warehouseman's lien does not preclude
other remedies Whether a warehouseman has or has not a
lien upon the goods, he is entitled to all remedies allowed by
law to a creditor against a debtor for the collection from the
depositor of all charges and advances which the depositor has
expressly or impliedly contracted with the warehouseman to
pay.
Act 2137, Sec. 33 Satisfaction of lien by sale A
warehouseman's lien for a claim which has become due may
be satisfied as follows:
(a) An itemized statement of the warehouseman's claim,
showing the sum due at the time of the notice and the date or
dates when it becomes due,
(b) A brief description of the goods against which the lien
exists,
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(c) A demand that the amount of the claim as stated in the
notice of such further claim as shall accrue, shall be paid on or
before a day mentioned, not less than ten days from the
delivery of the notice if it is personally delivered, or from the
time when the notice shall reach its destination, according to
the due course of post, if the notice is sent by mail,
(d) A statement that unless the claim is paid within the time
specified, the goods will be advertised for sale and sold by
auction at a specified time and place.
In accordance with the terms of a notice so given, a sale of the
goods by auction may be had to satisfy any valid claim of the
warehouseman for which he has a lien on the goods. The sale
shall be had in the place where the lien was acquired, or, if
such place is manifestly unsuitable for the purpose of the claim
specified in the notice to the depositor has elapsed, and
advertisement of the sale, describing the goods to be sold,
and stating the name of the owner or person on whose
account the goods are held, and the time and place of the
sale, shall be published once a week for two consecutive weeks
in a newspaper published in the place where such sale is to be
held. The sale shall not be held less than fifteen days from the
time of the first publication. If there is no newspaper published
in such place, the advertisement shall be posted at least ten
days before such sale in not less than six conspicuous places
therein.
From the proceeds of such sale, the warehouseman shall
satisfy his lien including the reasonable charges of notice,
advertisement and sale. The balance, if any, of such proceeds
shall be held by the warehouseman and delivered on demand
to the person to whom he would have been bound to deliver
or justified in delivering goods.
At any time before the goods are so sold, any person claiming
a right of property or possession therein may pay the
warehouseman the amount necessary to satisfy his lien and to
pay the reasonable expenses and liabilities incurred in serving
notices and advertising and preparing for the sale up to the
time of such payment. The warehouseman shall deliver the
goods to the person making payment if he is a person entitled,
under the provision of this Act, to the possession of the goods
on payment of charges thereon. Otherwise, the
warehouseman shall retain the possession of the goods
according to the terms of the original contract of deposit.
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Act 2137, Sec. 34 Perishable and hazardous goods If
goods are of a perishable nature, or by keeping will deteriorate
greatly in value, or, by their order, leakage, inflammability, or
explosive nature, will be liable to injure other property , the
warehouseman may give such notice to the owner or to the
person in whose names the goods are stored, as is reasonable
and possible under the circumstances, to satisfy the lien upon
such goods and to remove them from the warehouse and in
the event of the failure of such person to satisfy the lien and to
receive the goods within the time so specified, the
warehouseman may sell the goods at public or private sale
without advertising. If the warehouseman, after a reasonable
effort, is unable to sell such goods, he may dispose of them in
any lawful manner and shall incur no liability by reason thereof.
Act 2137, Sec. 35 Other methods of enforcing lien The
remedy for enforcing a lien herein provided does not preclude
any other remedies allowed by law for the enforcement of a
lien against personal property nor bar the right to recover so
much of the warehouseman's claim as shall not be paid by the
proceeds of the sale of the property.
Act 2137, Sec. 36 Effect of sale After goods have been
lawfully sold to satisfy a warehouseman's lien, or have been
lawfully sold or disposed of because of their perishable or
hazardous nature, the warehouseman shall not thereafter be
liable for failure to deliver the goods to the depositor or owner
of the goods or to a holder of the receipt given for the goods
when they were deposited, even if such receipt be negotiable.
The warehousemans lien is the warehousemans legal right
or interest in the depositors property. It is similar to the
depositorys right of retention under the NCC, which is a means
or device by which the depositary is able to obtain payment of
what may be due because of the deposit.
C. Negotiation and Transfer
Act 2137, Sec. 37 Negotiation of negotiable receipt of
delivery A negotiable receipt may be negotiated by
delivery:
(a) Where, by terms of the receipt, the warehouseman
undertakes to deliver the goods to the bearer, or
(b) Where, by the terms of the receipt, the warehouseman
undertakes to deliver the goods to the order of a specified
person, and such person or a subsequent indorsee of the
receipt has indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are
deliverable to bearer or where a negotiable receipt has been
indorsed in blank or to bearer, any holder may indorse the
same to himself or to any other specified person, and, in such
case, the receipt shall thereafter be negotiated only by the
indorsement of such indorsee.
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Act 2137, Sec. 38 Negotiation of negotiable receipt by
indorsement A negotiable receipt may be negotiated by the
indorsement of the person to whose order the goods are, by
the terms of the receipt, deliverable. Such indorsement may
be in blank, to bearer or to a specified person. If indorsed to a
specified person, it may be again negotiated by the
indorsement of such person in blank, to bearer or to another
specified person. Subsequent negotiation may be made in like
manner.
Act 2137, Sec. 39 Transfer of receipt A receipt which is
not in such form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser or donee.
A non-negotiable receipt can not be negotiated, and the
indorsement of such a receipt gives the transferee no
additional right.
Act 2137, Sec. 40 Who may negotiate a receipt A
negotiable receipt may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the
receipt has been entrusted by the owner, if, by the terms of the
receipt, the warehouseman undertakes to deliver the goods to
the order of the person to whom the possession or custody of
the receipt has been entrusted, or if, at the time of such
entrusting, the receipt is in such form that it may be negotiated
by delivery.
Act 2137, Sec. 41 Rights of person to whom a receipt has
been negotiated A person to whom a negotiable receipt
has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the
receipt to him had or had ability to convey to a purchaser in
good faith for value, and also such title to the goods as the
depositor or person to whose order the goods were to be
delivered by the terms of the receipt had or had ability to
convey to a purchaser in good faith for value, and
(b) The direct obligation of the warehouseman to hold
possession of the goods for him according to the terms of the
receipt as fully as if the warehouseman and contracted directly
with him.
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Act 2137, Sec. 42 Rights of person to whom receipt has
been transferred A person to whom a receipt has been
transferred but not negotiated acquires thereby, as against the
transferor, the title of the goods subject to the terms of any
agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the
right to notify the warehouseman of the transfer to him of such
receipt and thereby to acquire the direct obligation of the
warehouseman to hold possession of the goods for him
according to the terms of the receipt.
Prior to the notification of the warehouseman by the transferor
or transferee of a non-negotiable receipt, the title of the
transferee to the goods and the right to acquire the obligation
of the warehouseman may be defeated by the levy of an
attachment or execution upon the goods by a creditor of the
transferor or by a notification to the warehouseman by the
transferor or a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor.
Act 2137, Sec. 43 Transfer of negotiable receipt without
indorsement Where a negotiable receipt is transferred for
value by delivery and the indorsement of the transferor is
essential for negotiation, the transferee acquires a right against
the transferor to compel him to indorse the receipt unless a
contrary intention appears. The negotiation shall take effect as
of the time when the indorsement is actually made.
Act 2137, Sec. 44 Warranties of a sale of receipt A person
who, for value, negotiates or transfers a receipt by indorsement
or delivery, including one who assigns for value a claim secured
by a receipt, unless a contrary intention appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the
validity or worth of the receipt, and
(d) That he has a right to transfer the title to the goods and that
the goods are merchantable or fit for a particular purpose
whenever such warranties would have been implied, if the
contract of the parties had been to transfer without a receipt of
the goods represented thereby.
Act 2137, Sec. 45 Indorser not a guarantor The
indorsement of a receipt shall not make the indorser liable for
any failure on the part of the warehouseman or previous
indorsers of the receipt to fulfill their respective obligations.
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Act 2137, Sec. 46 No warranty implied from accepting
payment of a debt A mortgagee, pledgee, or holder for
security of a receipt who, in good faith, demands or receives
payment of the debt for which such receipt is security, whether
from a party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or to
warrant the genuineness of such receipt or the quantity or
quality of the goods therein described.
Act 2137, Sec. 47 When negotiation not impaired by fraud,
mistake or duress The validity of the negotiation of a receipt
is not impaired by the fact that such negotiation was a breach
of duty on the part of the person making the negotiation or by
the fact that the owner of the receipt was induced by fraud,
mistake or duress or to entrust the possession or custody of
the receipt to such person, if the person to whom the receipt
was negotiated or a person to whom the receipt was
subsequently negotiated paid value therefor, without notice of
the breach of duty, or fraud, mistake or duress.
Act 2137, Sec. 48 Subsequent negotiation Where a
person having sold, mortgaged, or pledged goods which are
in warehouse and for which a negotiable receipt has been
issued, or having sold, mortgaged, or pledged the negotiable
receipt representing such goods, continues in possession of
the negotiable receipt, the subsequent negotiation thereof by
the person under any sale or other disposition thereof to any
person receiving the same in good faith, for value and without
notice of the previous sale, mortgage or pledge, shall have the
same effect as if the first purchaser of the goods or receipt had
expressly authorized the subsequent negotiation.
Act 2137, Sec. 49 Negotiation defeats vendor's lien
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. Nor shall the warehouseman be obliged
to deliver or justified in delivering the goods to an unpaid
seller unless the receipt is first surrendered for cancellation.
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D. Criminal Liability
Act 2137, Sec. 50 Issue of receipt for goods not received
A warehouseman, or an officer, agent, or servant of a
warehouseman who issues or aids in issuing a receipt knowing
that the goods for which such receipt is issued have not been
actually received by such warehouseman, or are not under his
actual control at the time of issuing such receipt, shall be guilty
of a crime, and, upon conviction, shall be punished for each
offense by imprisonment not exceeding five years, or by a fine
not exceeding ten thousand pesos, or both.
Act 2137, Sec. 51 Issue of receipt containing false statement
A warehouseman, or any officer, agent or servant of a
warehouseman who fraudulently issues or aids in fraudulently
issuing a receipt for goods knowing that it contains any false
statement, shall be guilty of a crime, and upon conviction, shall
be punished for each offense by imprisonment not exceeding
one year, or by a fine not exceeding two thousand pesos, or by
both.
Act 2137, Sec. 52 Issue of duplicate receipt not so marked
A warehouse, or any officer, agent, or servant of a
warehouseman who issues or aids in issuing a duplicate or
additional negotiable receipt for goods knowing that a former
negotiable receipt for the same goods or any part of them is
outstanding and uncanceled, without plainly placing upon the
face thereof the word "duplicate" except in the case of a lost
or destroyed receipt after proceedings are provided for in
section fourteen, shall be guilty of a crime, and, upon
conviction, shall be punished for each offense by imprisonment
not exceeding five years, or by a fine not exceeding ten
thousand pesos, or by both.
Act 2137, Sec. 53 Issue for warehouseman's goods or
receipts which do not state that fact Where they are
deposited with or held by a warehouseman goods of which he
is owner, either solely or jointly or in common with others, such
warehouseman, or any of his officers, agents, or servants who,
knowing this ownership, issues or aids in issuing a negotiable
receipt for such goods which does not state such ownership,
shall be guilty of a crime, and, upon conviction, shall be
punished for each offense by imprisonment not exceeding one
year, or by a fine not exceeding two thousand pesos, or by
both.
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Act 2137, Sec. 54 Delivery of goods without obtaining
negotiable receipt A warehouseman, or any officer, agent,
or servant of a warehouseman, who delivers goods out of the
possession of such warehouseman, knowing that a negotiable
receipt the negotiation of which would transfer the right to the
possession of such goods is outstanding and uncanceled,
without obtaining the possession of such receipt at or before
the time of such delivery, shall, except in the cases provided
for in sections fourteen and thirty-six, be found guilty of a
crime, and, upon conviction, shall be punished for each offense
by imprisonment not exceeding one year, or by a fine not
exceeding two thousand pesos, or by both.
Act 2137, Sec. 55 Negotiation of receipt for mortgaged
goods. Any person who deposits goods to which he has no
title, or upon which there is a lien or mortgage, and who takes
for such goods a negotiable receipt which he afterwards
negotiates for value with intent to deceive and without
disclosing his want of title or the existence of the lien or
mortgage, shall be guilty of a crime, and, upon conviction, shall
be punished for each offense by imprisonment not exceeding
one year, or by a fine not exceeding two thousand pesos, or by
both.
A fundamental distinction between special commercial laws on
credit transactions and their Civil Code counterparts, such as the
Warehouse Receipts Law in relation to deposits, is the inclusion
of provisions criminalizing certain acts and omissions relating to
the credit transaction.
E. General Bonded Warehouses
Act 3893
Sec. 1 This Act shall be known by the short title of "BONDED
WAREHOUSE ACT."
Sec. 2 As used in this Act, the term "warehouse" shall be
deemed to mean every building, structure, or other protected
inclosure in which rice is kept for storage. The term "rice" shall
be deemed to mean either palay in bundles, or in grains, or
clean rice, or both. "Person" including corporation or
partnership or two or more persons having joint or common
interest; "warehouseman" means a person engaged in the
business receiving rice for storage; and "receipt" means any
receipt issued by a warehouseman for rice delivered to him.
For the purpose of this Act, the business of receiving rice for
storage shall include (1) any contract or transaction wherein the
warehouseman is obligated to return the very same rice
delivered to him or pay its value;(2) any contract or transaction
wherein the rice delivered is to be milled for and on account of
the owner thereof; (3) any contract or transaction wherein the
rice delivered is commingled with the rice delivered by or
belonging to other persons and the warehouseman is
obligated to return the rice of the same kind or pay its value.
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Sec. 3 No person shall engage in the business of receiving
rice for storage without first securing a license therefore from
the Director of the Bureau of Commerce and Industry. Said
license shall be annual and shall expire on the thirty-first day of
December.
Sec. 4 Any person applying for a license to engage in the
business of receiving rice for storage shall set forth in the
application the place or places where the business and
warehouse are to be established or located and the maximum
quantity of rice to be received. The application shall be
accompanied by a cash bond or a bond secured by real estate
or signed by a duly authorized bonding company, the amount
of which shall be fixed by the Director of the Bureau of
Commerce and Industry at not less than thirty-three and one
third percent of the market value of the maximum quantity or
rice to be received. Said bond shall be so conditioned as to
respond for the market value of the rice actually delivered and
received at any time the warehouseman is unable to return the
rice or to pay its value. The bond shall be approved by the
Director of the Bureau of Commerce and Industry before
issuing a license under this Act, to satisfy himself concerning
the sufficiency of such bond, and to determine whether the
warehouse for which such license is applied for is suitable for
the proper storage of rice.
Sec. 5 Whenever the Director of the Bureau of Commerce
and Industry shall determine that a bond approved by him, is
or any cause, has become insufficient, he may require an
additional bond or bonds to be given by the warehouseman
concerned, conforming with the requirements of the preceding
section, and unless the same be given within the time fixed by
a written demand therefor the license of such warehouse may
be suspended or revoked.
Sec. 6 Every person licensed under this Act to engage in the
business of receiving rice for storage shall insure the rice so
received and stored against fire.
Sec. 7 Any person injured by the breach of any obligation to
secure which a bond is given, under the provisions of this Act,
shall be entitled to sue on the bond in his own name in any
court of competent jurisdiction to recover the damages he may
have sustained by such breach. Nothing contained herein shall
except any property of assets of any warehouseman from
being sued on in case the bond given is not sufficient to
respond for the full market value of the rice received by such
warehouseman.
Sec. 8 Every warehouseman licensed under this Act shall
receive for storage, so far as his license and the capacity of his
warehouse permit, any rice, of the kind customarily stored
therein by him, which may be tendered to him in a suitable
condition for warehousing, in the usual manner and in the
ordinary and usual course of business, without making any
discrimination between persons desiring to avail themselves of
warehouse facilities.
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Sec. 9 Every warehouseman licensed under this Act shall keep
a complete record of the rice received by him, of the receipts
issued therefor of the withdrawals, of the liquidations and of all
receipts returned to and cancelled by him. He shall make
reports to the Director of Bureau of Commerce and Industry
concerning his warehouse and the conditions, contents,
operations, and business thereof in such form and at such time
as the said Director may require, and shall conduct said
warehouse in all other respects in compliance with this Act and
the rules and regulations made in accordance therewith.
Sec. 10 The Director of Bureau of Commerce and Industry
shall from time to time make such rules and regulations as he
may deem necessary for the efficient execution of the
provisions of this Act.
Sec. 11 Any person engaging in the business of receiving rice
for storage in violation of Section three of this Act shall be
deemed guilty of misdemeanor, and upon conviction thereof
shall be punished by imprisonment of not less than one month
or by a fine of not more than five thousand pesos, or both, in
the discretion of the court.
Sec. 12 Any warehouseman licensed under this Act receiving
a quantity of rice greater than that specified in his application
and license, shall, upon conviction, be fined double the market
value of the rice so received in excess of the quantity of rice he
is authorized to receive.
Sec. 13 Any person entering into connivance or combination
with any warehouseman that is not licensed under this Act, with
the purpose of evading the provisions of section three of this
Act, shall be deemed guilty of misdemeanor, and upon
conviction thereof, shall be fined not more than two hundred
pesos or imprisonment for not more than one months, or both,
in the discretion of the court.
Sec. 14 The Director of the Bureau of Commerce and Industry
may, after opportunity for hearing has been afforded to the
license concerned, suspend or revoke any license issued to any
warehouseman, conducting a warehouse under this Act, for
any violation or failure to comply with any provision of this Act
or of the rules and regulations made by virtue thereof.
Sec. 15 This Act shall not be applicable to cooperative
marketing associations of rice producers organized under Act
Numbered Three Thousand Four Hundred and Twenty-five
known as the "Cooperative Marketing Law," provided such
associations shall not receive, for storage, rice from non-
members which is greater in quantity than one-half of the total
quantity of rice received from members, at any time.
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Sec. 16 If any clause, sentence, or paragraph, or part of this
Act shall, for any reason, be adjusted by any court of
competent jurisdiction to be invalid, such judgment shall not
affect, impair, or invalidate the remainder thereof, but shall be
confined in his operation to the clause, sentence, paragraph or
part thereof directly involved in the controversy in which such
judgment shall have been rendered.
Sec. 17 This Act shall take effect on January First, nineteen
hundred and thirty-two.
Purpose: to regulate the business of receiving commodities for
storage in order to protect persons who may want to avail
themselves of warehouse facilities and to encourage the
establishment of more warehouses.
The business: includes entering into any contract or
transaction wherein:
a. The warehouseman is obligated to return the very same
commodity to the person depositing or pay its value;
b. The commodity delivered is to be milled for the owner
thereof;
c. The commodity delivered is commingled with the
commodity belonging to other persons, and the
warehouseman is obligated to return the commodity of the
same kind or to pay its value.
Duties of the bonded warehouseman:
a. To insure the commodity received for storage against fire;
b. To receive for storage any commodity of the kind
customarily stored by him in the warehouse so far as his
license and the capacity of his warehouse will permit,
without making any discrimination between the persons
desiring to avail themselves of warehouse facilities;
c. To keep a complete record of all commodities received by
him, of the receipts issued therefor, of the withdrawals, of
the liquidation, and of all the receipts returned to and
cancelled by him.
Philippine National Bank v. Se (1996) Hermosisima, Jr., J.
Petitioner: Philippine National Bank
Respondents: Hon. Benito C. Se Jr. & Noahs Ark Sugar
Refinery
Concept: General Bonded Warehouses Act
Doctrine:
Where the judgment creditor makes an unconditional
presentment of warehouse receipts for delivery of sugar stocks
against the warehouseman, it thereby admits the existence and
validity of the terms, conditions and stipulations written on the
face of the warehouse receipts, including the unqualified
recognition of the payment of warehousemans lien for storage
fees and preservation expenses.
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Brief Facts:
In accordance with Act No. 2137, the Warehouse Receipts Law,
Noahs Ark Sugar Refinery issued on several dates, 5 Warehouse
Receipts (Quedans). These were endorsed and negotiated to
Ramos and Zoleta. They failed to pay their loans upon maturity
so PNB wrote to Noahs Ark Sugar Refinery demanding delivery
of the sugar stocks covered by the quedans endorsed to it by
Zoleta and Ramos. Noahs Ark Sugar Refinery refused. PNB filed
a complaint for Specific Performance with Damages and
Application for Writ of Attachment.
ISSUE:
WON PNB is liable for warehousemans lien (YES)
RATIO: YES; prior judgment holding that a party is a
warehouseman obligated to deliver sugar stocks
covered by thewarehouse receipts does not
necessarily carry with it a denial of its lien over the
same sugar stocks.
- Under the subject Warehouse Receipts provision, storage
fees are chargeable. PNB is legally bound to stand by the
express terms and conditions on the face of the Warehouse
Receipts as to the payment of storage fees. Even in the
absence of such a provision, law and equity dictate the
payment of the warehousemans lien pursuant to Sections
27 and 31 of the Warehouse Receipts Law (R.A. 2137)
- to wit: SECTION 27. What claims are included in the
warehousemans lien. Subject to the provisions of section
thirty, a warehouseman shall have lien on goods deposited
or on the proceeds thereof in his hands, for all lawful
charges for storage and preservation of the goods; also for
all lawful claims for money advanced, interest, insurance,
transportation, labor, weighing coopering and other
charges and expenses in relation to such goods; also for all
reasonable charges and expenses for notice, and
advertisement of sale, and for sale of the goods where
default has been made in satisfying the warehousemans
lien.
- SECTION 31. Warehouseman need not deliver until lien is
satisfied. A warehouseman having a lien valid against the
person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.
- After being declared as the warehouseman, Noahs Ark
cannot legally be deprived of their right to enforce their
claim for warehousemans lien, for reasonable storage fees
and preservation expenses. Pursuant to Section 31 the
goods under storage may not be delivered until said lien is
satisfied.
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- Considering that PNB does not deny the existence, validity
and genuineness of the Warehouse Receipts on which it
anchors its claim for payment against Noahs Ark, it cannot
disclaim liability for the payment of the storage fees
stipulated therein. PNB is in estoppel in disclaiming liability
for the payment of storage fees due the PRs as
warehouseman while claiming to be entitled to the sugar
stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of
the sugar stocks. The unconditional presentment of the
receipts by PNB for payment against PRs on the strength of
the provisions of the Warehouse Receipts Law (R.A. 2137)
carried with it the admission of the existence and validity of
the terms, conditions and stipulations written on the face of
the Warehouse Receipts, including the unqualified
recognition of the payment of warehousemans lien for
storage fees and preservation expenses.
- PNB may not now retrieve the sugar stocks without paying
the lien due Noahs Ark as ware houseman.
- RULE: While the PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected
only upon payment of the storage fees. Imperative is the
right of the warehouseman to demand payment of his lien
at this juncture, because, in accordance with Section 29 of
the Warehouse Receipts Law, the warehouseman loses his
lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman
surrenders the possession of the goods without requiring
payment of his lien, because a warehousemans lien is
possessory in nature.
DISPOSITIVE. Petition dismissed for lack of merit
SECURITY TRANSACTIONS
I. THE CONCEPT OF SECURITY
A. General Concepts
CONTRACT OF SECURITY (Security Transaction)
- 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 (secured
creditor) can be compensated for loss
- It is an accessory obligation that mitigates the risk that
the debtor will default on a principal obligation
- If the principal obligation is ensured by a contract of security
= secured obligation
- If the principal obligation is NOT ensured by a contract of
security = unsecured obligation
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1. Distinguished from Securities
RA 8799, Sec. 3 Definition of Terms - 3.1. "Securities" are
shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced
by a certificate, contract, instruments, whether written or
electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation
in a profit sharing agreement, certifies of deposit for a future
subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by
the Commission.
SECURITIES
- From the Securities Regulation Code (SRC) (RA 8799)
- Sec. 3.1 Securities are shares, participation or interests
in a corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character
o It includes bonds, debentures, notes, evidences of
indebtedness, asset-backed securities
- Bonds, notes, and debentures are evidences of
indebtedness and are the common commercial forms that
contracts of loan take BUT in the SRC, these contracts of
simple loan or mutuum are securities, whether secured or
unsecured
SECURITY SECURITIES
Civil Code Securities Regulation Code
Accessory obligation Principal obligation
Decrease/mitigate loss
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2. Distinguished From Securitization
SECURITIZATION
- Process by which loans and other debts with an expected
cash payment stream (interest on simple loans) are sold on a
without recourse basis by a seller to a special purpose entity
(the issuer) which in turn issues securities (bond or other
instrument) that depend, for their repayment, on the
expected cash payment stream
- To securitize is to convert assets into securities for resale
in the financial market
- It is a process of distributing the risk of default or non-
payment of loans and other debts by aggregating these
debts and then issuing new securities backed by the
aggregated debt
- Securities issued by the special purpose entity (issuer) are
called asset-backed securities
- Contracts of loan and expected principal and interest
payments, sold by the original creditors to a special purpose
entity, are aggregated into tranches based on risk and
packaged as new securities
o Securities with higher risks provide higher yields
- Unlike a security transaction that mitigates risk,
securitization distributes the risk of default or non-
payment to those willing to assume it
SECURITIZATION SECURITY TRANSACTION
Distributes the risk of default Mitigates risk
or non-payment to those
willing to assume it
B. Events of Default
- Essential condition of a security transaction: if the
principal obligation is duly complied with, then, proceeding
from its accessory character, the security is automatically
extinguished
o Once the principal obligation is complied with, the
security transaction becomes, ipso facto, null and void
o If the principal obligation becomes due and the debtor
defaults, the creditor may elect:
" To bring an ordinary action for specific
performance of the principal obligation; or
" As a secured creditor, elect to enforce the
security
- Enforcement of the security is proper in case of mora
solvendi (debtors default) or in case of delay in the
fulfillment of the principal obligation by a cause imputable
to the debtor
REQUISITES FOR DEFAULT:
1. Principal obligation is demandable and liquidated
" Demandable enforceable in Court
" Liquidated existence and amount are determined or
determinable
2. Debtor delays performance
3. Creditor judicially or extrajudicially requires the debtors
performance
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- In credit transactions, it is customary for parties to define
other events of default (for the principal obligation) such
as, but not limited to, failure to submit required reports,
maintain and file appropriate tax returns, and maintain and
preserve the security
- In the event of a default that occurs and is continuing, then
the creditor is given the right to declare, or accelerate, all
outstanding obligations as immediately due and payable
o Acceleration clause is valid and binding on the
parties and the creditor is justified in invoking it to
declare the entire principal obligation immediately due
and payable, and to enforce the security
C. Kinds of Security Transactions
1. Personal Security Transactions
PERSONAL SECURITY TRANSACTION
- Contractual obligation for the repayment of a debt binding
a person, as distinguished from property
- It is an obligation of a person, natural or juridical, other than
the principal debtor to ensure the fulfillment of a principal
obligation
- Example: guaranty, where the faithful performance of the
obligation by the principal debtor is secured by the
personal commitment of another
2. Real Security Transactions
REAL SECURITY TRANSACTION
- Encumbrance of property (collateral) given to guarantee
the fulfillment of an obligation, especially the assurance that
a creditor will be repaid with money or credit extended to a
debtor, usually with interest
- Example: mortgage (Latin: dead security), where the
creditor acquires a security interest in the collateral for
purposes of securing the fulfillment of the principal
obligation
o Security interest is a property interest created by
agreement or by operation of law to secure the
performance of an obligation
" According to PD 115, Sec. 3(h): it is a property
interest in goods, documents or instruments to
secure performance of an obligation and includes
title, whether or not expressed to be absolute,
whenever such title is in substance taken or
retained for security only
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3. In the Context of Insolvency
RA 10142, Sec. 4 Definition of Terms - As used in this Act,
the term:
(p) Insolvent shall refer to the financial condition of a debtor
that is generally unable to pay its or his liabilities as they fall
due in the ordinary course of business or has liabilities that are
greater than its or his assets.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(kk) Secured creditor shall refer to a creditor with a secured
claim.
(ll) Secured party shall refer to a secured creditor or the agent
or representative of such secured creditor.
(pp) Unsecured claim shall refer to a claim that is not secured
by a lien.
(qq) Unsecured creditor shall refer to a creditor with an
unsecured claim.
(t) Lien shall refer to a statutory or contractual claim or judicial
charge on real or personal property that legality entities a
creditor to resort to said property for payment of the claim or
debt secured by such lien.
Financial Rehabilitation and Insolvency Act of 2010
- Sec. 4(p): Condition of being INSOLVENT is the financial
condition of a debtor that is generally unable to pay its or
his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his
assets
o Liabilities refers to monetary claims against the
debtor
- Sec. 4(ll) classifies creditors:
o Secured party: secured creditor or agent or
representative of such secured creditor
o Secured creditor: creditor with a secured claim
o Secured claim: claim that is secured by a lien
o Unsecured creditor: creditor with an unsecured
claim
o Unsecured claim: claim that is not secured by a lien
o Lien: statutory or contractual claim or judicial charge
on real or personal property that legally entitles a
creditor to resort to said property for payment of the
claim or debt secured
- In the context of insolvency:
o A secured creditor is a creditor that has in its favor a
real security transaction, that is, a claim secured by a
statutory, contractual or judicial charge on real or
personal property (collateral) that legally entitles a
creditor to resort to the property for payment of its claim
o An unsecured creditor is a creditor who only has in its
favor a personal security transaction
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II. LETTERS OF CREDIT
A. General Concepts
CoC, Art. 567 Letters of credit are those issued by one
merchant to another, or for purpose of attending to a
commercial transaction.
CoC, Art. 568 The essential conditions of letters of credit
shall be:
1. To be issued in favor of a determined person and not to
order.
2. To be limited 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.
Letters of credit which do not have one of these conditions
shall be considered simply as letters of recommendation.
CoC, Art. 2 Commercial transactions, be they performed by
merchants or not, whether they are specified in this Code or
not, shall be governed by the provisions contained in the
same; in the absence of such provisions, by the commercial
customs generally observed in each place; and in the absence
of both, by those of the common law. LET05cd
Commercial transactions shall be considered those
enumerated in this Code and any others of a similar character.
- A letter of credit is an instrument that involves three parties:
the issuer (usually a bank), the applicant, and the
beneficiary
o Under this instrument, the issuer, at the applicants
request, agrees to honor a draft or other
demand for payment made by the beneficiary,
provided that the draft or demand by the beneficiary
complies with the specified conditions under the letter.
o The issuer shall honor the draft or demand regardless of
whether any underlying obligation between the applicant
and beneficiary is satisfied.
- Our Code of Commerce, under Art. 567, further defines it as
an instrument issued by one merchant to another, or
for attending to a commercial transaction.
- Its effect, as a security transaction, is to substitute the
financial strength of the issuer (usually a bank) for that of
the applicant, in order to convince the beneficiary to
transact with the latter.
o Having such letter of credit, the beneficiary is assured
that he/she may call upon such instrument as
security, in case the applicant fails to perform his
obligation.
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Transfield Phils. v. Luzon Hydro Corp., et al (2004) Tinga, J.
Petitioner: Transfield Philippines, Inc. (TPI)
Respondent: Luzon Hydro Corp (LHC), Australia and New
Zealand Banking Grp. Limited (ANZ), and Security Bank Corp.
(SBC)
Concept: Security Transactions; Letters of Credit; General
Concepts
Doctrine:
The independence principle of letters of credit means that (1)
assures the beneficiary of prompt payment, notwithstanding any
breach of the main contract and (2) precludes the bank from
determining whether the main contract (sales or non-sale) is
actually accomplished or not. Both the bank and beneficiary may
invoke this principle to their benefit.
Brief Facts:
TPI and LHC entered into a turnkey contract wherein TPI is
obligated to build a power plant. To secure the obligation, TPI
executed two letters of credit in favor of LHC, which the former
opened in two banks (one letter each). When TPI failed to
complete the project on the target date, LHC attempted to draw
upon the funds under the letter of credit. There still being
ongoing proceedings on the issue of whether TPI was in delay,
TPI sought to retrain LHC from drawing upon the letters of
credit.
ISSUES:
1. WON LHC can withdraw the funds under the letters of
credit, by invoking independence principle of letters of
credit (YES)
2. WON LHC can withdraw the funds even before the
arbitration proceedings are resolved (YES)
3. WON the banks are justified in releasing the amounts
despite TPIs notice to them (YES)
On Letters of Credit
- A letter of credit is a written instrument whereby the
writer requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the
addressee.
- It is a financial device developed by merchants as a
convenient and relatively safe mode of dealing
with sales of goods in a manner that satisfies the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying.
- It serves to reduce the risk of nonpayment of the purchase
price.
- However, they may also be used in non-sale settings
(such as in this instant case). These credits used in non-sale
transactions are called standby credits.
- Gaining acceptability in international trade transactions, the
ICC has periodically published updates on the Uniform
Customs and Practices (UCP) for Documentary credits to
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standardize practices in the area of letters of credit. As a
result, most letters of credit incorporate the UCP provisions.
- In the past cases of BPI v. De Reny Fabric and Bank of
America v. CA, the SC has ruled that there being no specific
provisions in the Code of Commerce and other statutes, the
UCP is applicable under the principle that usages and
customs generally observed shall be followed.
- Now, Art. 3 of the UCP, provides that credits, by their
nature, are separate transactions from the sales contract or
any other type of contracts that they may be based on;
hence, banks are in no way concerned or bound by such
contracts.
o Consequently, the undertaking of the bank (as the
addressee) to pay, accept and pay drafts, or negotiate
and/or fulfill any other obligation under the letter of
credit is not subject to claims or defenses by the
applicant, resulting from his relationships with the
issuing bank or the beneficiary.
o In the same token, a beneficiary can in no case avail
himself of the contractual relationships existing
between the banks or between the applicant and the
issuing bank.
o Thus the engagement of the issuing bank is to pay the
beneficiary of the credit once the draft and the required
documents are presented to it. The so-called
independence principle (1) assures the beneficiary of
prompt payment, notwithstanding any breach of the
main contract and (2) precludes the bank from
determining whether the main contract (sales or non-
sale) is actually accomplished or not.
o Under this independence principle, the banks assume
no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any
documents or superimposed theron, nor do they
assume any liability responsibility for the description,
quantity, weight, quality, condition, packing, delivery,
value, or existence of the goods.
- The independence of the letter of credit may be: (1)
independence in toto where the credit is independent from
the justification aspect and is a separate obligation from the
underlying agreement, or (2) independence only with respet
as to the justification aspect, which is identical with the same
obligations in the underlying agreement.
o In both cases, payment may be enjoined if in the light
of the purpose of credit, its payment would constitute
fraudulent abuse of the credit.
RATIO:
1. YES. LHC can invoke the independence principle
and withdraw the funds.
- TPI: The independence principle is a defense that only the
issuing bank may interpose.
- LHC: It is against common sense to deny the benefit of an
independent contract for whom the benefit is intended,
which is the beneficiary.
- SC: Given the irrevocable nature of the letter of credit, the
banks undertaking to pay the beneficiary once documents
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 are presented is definite and binding. This obligation is
independent of the related and originating contract (the
turnkey contract).
o Bearing this in mind, TPIs argument is untenable, as it
would render nugatory the purpose for which letters of
credit are used in commercial transactions. The
independence principle works to the benefit of both
the issuing bank and the beneficiary.
o Letters of credit, from the point of view of the writer,
serves as a security, which he may confidently present
to convince the beneficiary to enter into the
transaction. On the other hand, from the point of the of
the beneficiary, the letter of credit assures the latter
that he may call on it when the commercial transaction
fails or when the writer fails to perform his part of the
obligation.
2. YES. There was NO need to wait for the
proceedings before the CIAC and ICC to be
resolved.
- SC: To wait for the proceedings to be resolved before LHC
could call upon the letters of credit is to convert the letters
of credit into a mere guaranty.
o Jurisprudence has already clearly distinguished the two,
in that a settlement of a dispute is not a pre-requisite
for the release of funds under a letter of credit.
- The Court, citing Prof. John F. Dolan:
o The surety and the letter of credit share the same
purpose: ensure against the obligors non-performance.
o In a traditional surety, however, there is a need to
determine first if the obligor really defaulted (usually
resulting in litigation) and after that, a need to
determine the cost of performance which the surety will
undertake to pay.
o The letter of credit, meanwhile, entitles the beneficiary
to promptly receive payment in the event of non-
performance and that he shall receive such payment
before any litigation with the obligor.
o In a surety, the financial burden during litigation is with
the beneficiary. The surety holds the money and the
beneficiary bears most of the cost of the delay in the
performance.
o A letter of credit reverses the financial burden; the
beneficiary may receive payment even before litigation,
as soon as he presents the required document. He is
entitled to receive those payments even if it is later on
determined after litigation that the obligor did in fact
performed the obligation. In such case, the obligor
becomes entitled to sue the beneficiary in tort, in
contract or in breach of warranty.
3. YES. The banks performed their obligation,
pursuant to the letter of credit.
- SC: Given the nature and purpose of the letter of credit, the
banks were left with little to no alternative but to honor
LHCs call upon the letter of credit.
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- Furthermore, LHC was entitled to call upon the letters of
credit to begin with, under the provisions of the turnkey
contract.
o 8.7.2 The Employer may, without prejudice to any
other method of recovery, deduct the amount of such
damages from any monies due, or to become due to
the Contractor and/or by drawing on the Security.
o Following the rule that the terms of a perfected
contract constitute law between the parties, the
provision should be upheld as it reveals the intention of
the parties to make the letters of credit answerable for
the liquidated damages brought own by the delay in
the performance.
o Hence, even without the independence principle, LHC
is entitled to the amounts under the letter of credit.
DISPOSITIVE: RTC and CA affirmed. Petition dismissed.
B. Kinds of Letters of Credit
1. Commercial Letters of Credit
- This kind of letter of credit, also known as a commercial
letter of credit or, simply, commercial credit, is
utilized in a contract of sale of goods between the
applicant (buyer) and the beneficiary (seller).
- The Court, in Transfield Phils v. Luzon Hydro, explained that
this kind of letter of credit was developed by merchants as a
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.
- Commercial credits, being involved in a contract of sale of
goods, becomes payable only upon the presentation
by the seller-beneficiary of documents that show it
has taken affirmative steps to comply with the
contract of sale.
2. Standby Letters of Credit
- This kind of letter of credit, also known as a standby letter
of credit, or, simply, standby credit, is used as a
guarantee or security for either a monetary or non-
monetary obligation.
- In a standby credit arrangement, the issuer agrees to
pay the creditor-beneficiary if the debtor-applicant
defaults or fails to perform the obligation.
- The standby credit becomes payable upon certification
of the debtor-applicants default or failure to
perform the obligation.
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C. Rule of Strict Compliance
- Under this rule, the documents tendered by the
beneficiary must strictly conform to the terms of
the letter of credit.
o The tender of documents must include all the
documents required by the letter.
- Should the honoring entity accept the tender by the
beneficiary, but such tender does not comply with what is
required (i.e., a faulty tender), then the issuer acts on its own
risk and may not thereafter recover from the applicant or the
issuer, as the case may be, the money it paid to the
beneficiary.
- An honoring entity deals only with the documents; it is not in
a position to determine whether the documents required by
the letter of credit is important or superfluous to the
applicant.
o As a rule, the honoring entity should assume that the
document is of vital importance to the applicant by the
mere fact that it was specified as a required document
under the letter of credit.
D. Independence Principle
- The independence principle is a rule on letters of credit
that:
o Assures the beneficiary of prompt payment, independent
of any breach of the principal obligation, the reason by
which the letter of credit was procured
o Precludes the issuer from making a determination
whether the principal obligation is actually accomplished
or not.
- Under this principle, the letter of credit is a separate and
distinct obligation with respect to the principal obligation
for which the letter of credit was constituted.
o The settlement of a dispute between the parties is not a
pre-requisite for the release of funds under a letter of
credit.
- The independence principle only admits of one exception:
the fraud exception rule.
o Under this exception, the falsity of a certificate
accompanying the demand for payment under a letter of
credit may qualify as fraud, sufficient to support an
injunction against the payment, upon showing of
three requisites.
- GR: The issuer of the letter of credit shall make payment
upon the tender of documents required by the beneficiary,
and it shall assume NO liability or responsibility:
o For the form, sufficiency, accuracy, genuineness,
falsification, or legal effect of any documents, or for the
general or particular conditions stipulated in the
documents or superimposed thereon
o For the description, quantity, weight, quality, condition,
packing, delivery, value, or existence of the goods
represented by any documents
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o For the food faith, or acts, or omission, solvency,
performance, or standing of the consignor, the carriers, or
the insurers of the goods, or any other persons.
- EX: Fraud Exception Rule; an injunction against the payment
will be granted upon the showing of all of the following
requisites:
o Clear proof of fraud
o Such fraud constitutes a fraudulent abuse of the
independent purpose of the letter of credit, and not only
fraud under the principal obligation
o A showing that irreparable injury might follow if injunction
is not granted, or that recovery of damages would be
seriously affected.
III. TRUST RECEIPTS
A. General Concepts
PD 115, Sec. 3 Definition of terms As used in this Decree,
unless the context otherwise requires, the term
(a) "Document" shall mean written or printed evidence of title
to goods.
(b) "Entrustee" shall refer to the person having or taking
possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such
person for the purpose or purposes specified in the trust
receipt agreement.
(c) "Entruster" shall refer to the person holding title over the
goods, documents, or instruments subject of a trust receipt
transaction, and any successor in interest of such person.
(d) "Goods" shall include chattels and personal property other
than: money, things in action, or things so affixed to land as to
become a part thereof.
(e) "Instrument" means any negotiable instrument as defined
in the Negotiable Instrument Law; any certificate of stock, or
bond or debenture for the payment of money issued by a
public or private corporation, or any certificate of deposit,
participation certificate or receipt, any credit or investment
instrument of a sort marketed in the ordinary course of
business or finance, whereby the entrustee, after the issuance
of the trust receipt, appears by virtue of possession and the
face of the instrument to be the owner. "Instrument" shall not
include a document as defined in this Decree.
(f) "Purchase" means taking by sale, conditional sale, lease,
mortgage, or pledge, legal or equitable.
(g) "Purchaser" means any person taking by purchase.
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(h) "Security Interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained
for security only.
(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.
(j) "Trust Receipt" shall refer to the written or printed
document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying with
the provisions of this Decree. No further formality of execution
or authentication shall be necessary to the validity of a trust
receipt.
(k) "Value" means any consideration sufficient to support a
simple contract.
PD 115, Sec. 4 What constitutes a trust receipt transaction
A trust receipt transaction, within the meaning of this Decree,
is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this
Decree as entrustee, 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" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) 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 (c) to load,
unload, ship or tranship or otherwise deal with them in a
manner preliminary or necessary to their sale; or
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2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving
delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in
the business of selling goods, documents or instruments for
profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or
instruments, 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.
Trust Receipt
- Convenient business device that assists importers and
merchants
Trust Receipt Transaction
- A real security transaction
- A person who owns or holds absolute title or security
interests over certain specified goods, documents or
instruments (entruster) releases the same to the possession
of another person (entrustee)
- The entrustee binds himself to hold the goods, documents
or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments,
with the obligation to turn over to the entruster the
proceeds thereof, or the goods, documents or instruments
themselves, if they are unsold or otherwise not disposed of,
in accordance with the terms and conditions in the trust
receipt
B. Form of Trust Receipts
PD 115, Sec. 5 Form of trust receipts; contents A trust
receipt need not be in any particular form, but every such
receipt must substantially contain (a) a description of the
goods, documents or instruments subject of the trust receipt;
(2) the total invoice value of the goods and the amount of the
draft to be paid by the entrustee; (3) an undertaking or a
commitment of the entrustee (a) to hold in trust for the
entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in
the trust receipt; and (c) 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.
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The trust receipt may contain other terms and conditions
agreed upon by the parties in addition to those hereinabove
enumerated 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.
PD 115, Sec. 6 Currency in which a trust receipt may be
denominated A trust receipt may be denominated 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: Provided,
however, That 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 held in trust by the entrustee 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.
- A trust receipt is a formal contract
- Although the law states that it need not be in any particular
form, the Trust Receipts Law requires that it must be written
or printed and must contain specific terms
C. Rights of Entruster
PD 115, Sec. 7 Rights of the entruster 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, or 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.
The entruster 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 proceeds of any such sale, whether public or
private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee's indebtedness to the
entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency. Notice of sale shall be
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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.
PD 115, Sec. 8 Entruster not responsible on sale by
entrustee. 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.
D. Obligations of Entrustee
PD 115, Sec. 9 Obligations of the entrustee The entrustee
shall (1) 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; (2) 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; (3) insure the
goods for their total value against loss from fire, theft, pilferage
or other casualties; (4) keep said goods or proceeds thereof
whether in money or whatever form, separate and capable of
identification as property of the entruster; (5) return the goods,
documents or instruments in the event of non-sale or upon
demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of
this Decree.
PD 115, Sec. 10 Liability of entrustee for loss The risk of
loss shall be borne by the entrustee. Loss of goods, documents
or instruments which are the 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.
PD 115, Sec. 11 Rights of purchaser for value and in good
faith 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.
PD 115, Sec. 12 Validity of entruster's security interest as
against creditors The entruster's security interest in goods,
documents, or instruments pursuant to the written terms of a
trust receipt shall be valid as against all creditors of the
entrustee for the duration of the trust receipt agreement.
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PD 115, Sec. 13 Penalty clause 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.
E. Rights of Purchaser
PD 115, Sec. 11 Rights of purchaser for value and in good
faith 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.
Colinares v. CA (2000) Davide, Jr., J.
Petitioner: Melvin Colinares and Lordino Veloso
Respondent: CA and People of the Philippines
Concept: Trust Receipts; Rights of the Purchaser
Doctrine:
The ownership of merchandise in a trust receipts transaction
remains vested in the person who had advanced payment until
he has been paid in full. He acquires a security interest in the
goods as holder of a security title for the advances made to the
entrustee. He takes full title to the goods at the very beginning
and continues to hold that title as his indispensable security
until the goods are sold and the vendee is called upon to pay for
them.
(Note: This is under Sec. 11, which provides that a purchaser for
value and in good faith is free from the entrusters security
interest. However, this wasnt discussed in the ratio, so maybe
its about security, in general, under PD No. 115)
Brief Facts:
Colinares and Veloso contracted with the Carmelite Sisters to
renovate their convent. The contractors obtained several
materials from CM Builders, and, the day after, applied for a
commercial letter of credit with the PBC to cover the invoice of
the goods. They were made to sign a pro-forma trust receipt as
security. Despite demands, they failed to pay, so PBC charged
them with the violation of PD No. 115 (Trust Receipts Law).
Lower court and CA convicted the two. SC reversed, held that
the transaction was NOT a trust receipt transaction, but a simple
loan.
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ISSUE:
W the transaction was a trust receipt transaction or a simple loan
(SIMPLE LOAN)
RATIO: The transaction was a simple loan, not a trust
receipt agreement.
- Sec. 4, PD No. 115 defines a trust receipt transaction
as any transaction by and between a person referred to as
the entruster, and another person referred to as the
entrustee, whereby the entruster who owns or holds
absolute title or security interest over certain specified
goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and
delivery to the entruster of a signed document called a
trust receipt wherein the entrustee binds himself to
hold the designated goods, documents or instruments with
the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, documents
or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt
- Two possible situations in a trust receipt transaction:
o Money received under the obligation involving the duty
to deliver it (entregaria) to the owner of the
merchandise sold
o Merchandise received under the obligation to return
it (devolvera) to the owner
- Failure of the entrustee to turn over the proceeds of the
sale, covered by the trust receipt to the entruster OR to
return the goods if they were not disposed of in accordance
with the terms of the trust receipt shall be punishable as
estafa under Art. 315 (1) of the RPC without need of
proving intent to defraud
- SC: Transaction was NOT a trust receipt
o Colinares and Veloso received the merchandise from
CM Builders on Oct. 30, 1979 (ownership was already
transferred to be used for the construction project)
o ONE DAY LATER, they applied to the bank for a loan to
pay for the merchandise
o This belies what normally happens in a pure trust
receipt transaction where goods are owned by the bank
and only released to the importer in trust subsequent to
the grant of the loan
" Bank acquires a security interest in the goods as
holder of a security title for the advances it made
to the entrustee
" Ownership remains with the person who had
advanced the payment until he has been paid in
full or if the merchandise has been sold, the
proceeds should be turned over to him
" To secure that the bank shall be paid, it takes full
title to the goods at the very beginning and
continues to hold that title as his
indispensable security until the goods are sold and
the vendee is called to pay for them
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 " Importer has never owned the goods and is not
able to deliver possession
" Trust receipts partake of the nature of a conditional
sale where the importer becomes absolute owner
as soon as he pays the price
o Trust receipts were intended to aid in financing
importers and retail dealers who do not have sufficient
funds or resources to finance the importation or
purchase of merchandise and who may not be able to
acquire credit except through utilization, as collateral,
of the merchandise imported or purchased
o Antecedent acts in a trust receipt transaction:
application and approval of the letter of credit, making
of the marginal deposit, and the effective importation
of the goods
o Trust Receipts Law does not seek to enforce payment
but punishes the dishonesty and abuse of confidence in
the handling of money or goods
o Here, NO dishonesty nor abuse of confidence because
they continually endeavored to meet their obligations
(several receipts issued by PBC acknowledging
payment)
" They did not employ an artifice in dealing with PBC
and they never evaded payment nor attempted to
abscond
" They are not importers acquiring the goods for re-
sale
" They are contractors who obtained fungible goods
for their construction project; title over the
construction materials never passed to the bank
(directly to Colinares and Veloso)
- Practice of banks making borrowers sign trust receipts to
facilitate the collection of loans and placing them under
threats of criminal prosecution should they be unable to pay
may be unjust and inequitable, if not reprehensible
o These are contracts of adhesion
o This leaves poor and hapless borrowers at the mercy of
banks and is prone to misinterpretation (as what
happened in this case)
DISPOSITIVE: Decision REVERSED and SET ASIDE.
Colinares v. CA
What would the remedy have been?
Letters of Credit distinguished from Trust Receipt
LETTERS OF CREDIT TRUST RECEIPT
Code of Commerce PD 115
Benefits the Benefits the bank/protects
supplier/protects the seller the bank
No assurance that bank will So bank can be assured to be
be paid paid
No criminal penalties Has a criminal penalty (estafa)
Only a credit extension Bank owns the goods
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IV. GUARANTY
A. General Concepts
Art. 2047 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.
Art. 2048 A guaranty is gratuitous, unless there is a stipulation
to the contrary.
Art. 2051 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.
Guaranty
- a promise to answer for the payment of some debt or the
performance of some duty, in case of the failure of another
who is liable in the first instance.
- A personal security transaction that involves the conditional
obligation of a person (guarantor) to fulfill a principal
obligation in favor of a creditor, in case the debtor fails to
do so.
- Obligation of the guarantor always a rise as a consequence
of a contract
- It may be conventional, legal, or judicial.
B. Form of Guaranty
Art. 2055 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.
Art. 1403 The following contracts are unenforceable, unless
they are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or
who has acted beyond his powers;
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(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing,
and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:
C. Obligations Secured
Art. 2052.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.

(a) An agreement that by its terms is not to be performed
within a year from the making thereof;
(b) A special promise to answer for the debt, default, or
miscarriage of another;
Art. 2053 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.

Art. 2054 A guarantor may bind himself for less, but not for
(c) An agreement made in consideration of marriage, other
more than the principal debtor, both as regards the amount
than a mutual promise to marry;
and the onerous nature of the conditions.

(d) An agreement for the sale of goods, chattels or things in

Should he have bound himself for more, his obligations shall
action, at a price not less than five hundred pesos, unless the
be reduced to the limits of that of the debtor.
buyer accept and receive part of such goods and chattels, or
the evidences, or some of them, of such things in action or pay
- Guaranty cannot exist if the principal obligation is void, but
at the time some part of the purchase money; but when a sale
it can exist even if the contract is voidable or unenforceable.
is made by auction and entry is made by the auctioneer in his
- It can also secure future debt, even if the amount due is not
sales book, at the time of the sale, of the amount and kind of
yet known. In this case, the guarantor will not be liable until
property sold, terms of sale, price, names of the purchasers
the amount is known. It can also secure a future obligation.
and person on whose account the sale is made, it is a sufficient
- Article 2053 is the basis for continuing guaranty, i.e., one
memorandum;
which governs a course of dealing for an indefinite time or
by a succession of credits. It is not limited to a single
(e) An agreement of the leasing for a longer period than one
transaction but contemplates a prospective or future course
year, or for the sale of real property or of an interest therein;
of dealing, covering a series of transactions, which are within
the stipulations of the contract of guaranty, until the
(f) A representation as to the credit of a third person.
expiration or termination thereof.
- The object of a continuing guaranty is to grant to the
(3) Those where both parties are incapable of giving consent to
principal debtor a standing credit to be used from time to
a contract.
time either indefinitely or until a certain period.
- Terms used for continuing guaranty: any debt, any
indebtedness, any sum, any transaction, money to be
- Guaranty: a special promise to answer for debt, default, or
furnished the principal debtor from time to time, at any
miscarriage of another.
time, on such time
- It is covered by the Statute of Frauds.
- It is an accessory contract.
D. Parties to a Guaranty
- The obligation of the guarantor must be express and not
presumed and it cannot extend to more than what is
Art. 2056 One who is obliged to furnish a guarantor shall
stipulated.
present a person who possesses integrity, capacity to bind
- Simple or indefinite guaranty: that which extends to
himself, and sufficient property to answer for the obligation
the principal obligation as well as accessories and judicial
which he guarantees. The guarantor shall be subject to the
costs.
jurisdiction of the court of the place where this obligation is to
- Definite guaranty: that which extends only to a specified
be complied with.
amount.
- If the guaranty specifies a fixed amount but nevertheless
also provides for liability for interest and expenses, the Art. 2057 If the guarantor should be convicted in first instance
guarantor will be liable for the latter amounts even if these of a crime involving dishonesty or should become insolvent,
exceed the specified fixed amount. 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.

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Art. 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.
Art. 2064 The guarantor of a guarantor shall enjoy the benefit
of excussion, both with respect to the guarantor and to the
principal debtor.
Art. 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.
- There are at least three parties to a guaranty
o The creditor
o The debtor of the principal obligation
o The guarantor
- A sub-guarantor is a guarantor of a guarantor
- A co-guarantor is one of several guarantors of only one
debtor for the same debt
- Qualifications of a guarantor
1. A guarantor must possess integrity, capacity to contract
and sufficient property for the guaranteed obligation.
Loss of these qualifications gives the creditor the right
to demand a new guarantor unless the creditor had
stipulated a specified person to act as guarantor.
A married woman requires the consent of her husband to bind
conjugal property.
E. Benefit of Excussion
Art. 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.
Art. 2059 The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation.
Art. 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.
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Art. 2061 The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent
in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
resulting from such negligence.
Art. 2062 In every action by the creditor, which must be
against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court to
notify the guarantor of the action. The guarantor may appear
so that he may, if he so desire, set up such defenses as are
granted him by law. The benefit of excussion mentioned in
Article 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the
guarantor in case of appearance by the latter.
Art. 2063 A compromise between the creditor and the
principal debtor benefits the guarantor but does not prejudice
him. That which is entered into between the guarantor and the
creditor benefits but does not prejudice the principal debtor.
Art. 2064 The guarantor of a guarantor shall enjoy the benefit
of excussion, both with respect to the guarantor and to the
principal debtor.
- The benefit of excussion (or exhaustion or exclusion) is the
right of the guarantor to demand that the creditor first:
1. Exhaust all of the properties of the principal debtor,
AND
2. Resort to all legal remedies against the principal
debtorbefore the guarantor is liable to fulfill the
obligation of the principal debtor. It is the
distinguishing mark of guaranty.
- For the creditor to enforce the guaranty:
1. The creditor must bring an action against the principal
debtor alone, except in the cases mentioned in Art.
2059.
2. The creditor shall ask the court to notify the guarantor
of the action.
3. The guarantor may appear so that it may, if it so
desires, set up such defenses as are granted by law.
The benefit of excussion shall always be unimpaired,
even if judgment should be rendered against the
principal debtor and the guarantor in case of
appearance by the latter.
4. In order that the guarantor may make use of the benefit
of excussion, it must:
- Set it up against the creditor upon demand for
payment, AND
- Point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover
the amount of the debt.
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Tupaz IV & Tupaz v. CA and BPI (2005)
Petitioners: Jose C. Tupaz IV and Petronila C. Tupax
Respondents: CA and Bank of the Philippine Islands
Concept: Security Transactions; Guaranty
Doctrine:
A corporate officer who signs a trust receipt containing a solidary
guaranty clause merely binds himself as a guarantor and not a
surety. The solidary liability is not with the principal debtor, but
with other guarantors who sign the trust receipt. Nonetheless,
when the trust receipt contains a waiver of excussion, the
guarantor can no longer demand for the assets of the principal
debtor to be exhausted before payment by the former can be
had.
Brief Facts:
Jose and Petronila, corporate officers of El Oro Corporation,
obtained letters of credit from BPI to finance the purchase of raw
materials for the manufacture of survival bolos. To secure the
debt, two trust receipts were signed. The first was signed by
Jose alone, in his personal capacity. The second was signed by
Jose and Petronila, in their capacity as corporate officers. In the
trust receipts, the signatories bound themselves jointly and
severally to pay the debt of El Oro Corporation. El Oro
defaulted in its obligation, prompting BPI to file a case for estafa
against Jose and Petronila. The two were acquitted of the
criminal charge but were ordered to pay the corresponding
amounts due under their obligation as sureties of El Oro.
ISSUES:
1. Whether Jose and Petronila bound themselves personally
liable for El Oro Corporations debts under the trust
receipts (ONLY JOSE IS PERSONALLY LIABLE IN THE FIRST
TRUST RECEIPT)
2. What is the nature of Joses liability (THAT OF A
GUARANTOR)
3. WON BPIs suit against Jose stands despite the Courts
finding that he is liable as a guarantor only (YES)
RATIO:
1. Jose is personally liable for El Oro Corporations
debt under trust receipt dated Sept. 30, 1981
- Trust receipt #1 dated Sept. 30, 1981
o Jose signed alone, in his personal capacity
o He did not indicate that he was signing as El Oro
Corporations Vice-President for Operations
o Hence, he bound himself personally liable for the
corporations debt
o Petronila is not liable under this trust receipt
- Trust receipt #2 dated Oct. 9, 1981
o Jose and Petronila signed as officers of El Oro
Corporation
o Under their signatures appeared their respective
corporate positions (Vice President Operations; Vice
President Treasurer)
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o By signing in such capacity, they did not bind
themselves personally liable for El Oro Corporations
obligation
o A corporate representative who signs a solidary
guaranty clause in a trust receipt does not undertake to
guarantee personally the payment of the corporations
debts (Ong. V. CA)
2. Jose bound himself as a guarantor of El Oro
Corporations debt. He is not a surety who is
solidarily liable.
- Trust receipt dated Sept. 30, 1981 reads as follows:
o To the Bank of the Philippine Islands
In consideration of your releasing to _____________
under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree
and promise to pay to you, on demand, whatever
sum or sums of money which you may call upon me/us
to pay to you, arising out of, pertaining to, and/or in any
way connected with, this Trust Receipt, in the event of
default and/or non-fulfillment in any respect of this
undertaking on the part of the said __________________
I/we further agree that my/our liability in this
guarantee shall be DIRECT AND IMMEDIATE,
without any need whatsoever on your part to
take any steps or exhaust any legal remedies
that you may have against the said __________________
before making demand upon me/us.
- Lower Courts interpreted this to mean that Jose bound
himself solidarily liable with El Oro CorporationTHIS IS
ERROR!
- Prudential Bank v. IAC the court interpreted a substantially
identical clause and ruled that a corporate officer signing
the same is merely liable as a guarantor
o The phrase without any need whatsoever on
your part to take any steps or exhaust any
legal remedies found at the end of the trust
receipt speaks of a waiver of exhaustion
" The defense of exhaustion (excussion) may be
raised by a guarantor before he may be held
liable for the obligation
" The inclusion of said waiver of exhaustion
could only mean that the Jose is signing is a
guarantor
o I/We, jointly and severally, agree and
promise to pay to you is actually a solidary
guaranty clause
" Signatories are not binding themselves
solidarily with the principal debtor, but with
other guarantors who sign the same
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3. Although Jose is a mere guarantor, he is still liable
to pay without the necessity of exhausting the
assets of El Oro Corporation
- Excussion is not a pre-requisite to secure judgment against
a guarantor
o The guarantor can still demand deferment of the
execution of judgment against him until after the assets
of the principal debtor shall have been exhausted
- The benefit of excussion may be waived
o Jose waived the benefit of excussion when he
agreed his liability in the gauranty shall be DIRECT
AND IMMEDIATE without any need whatsoever on the
part of BPI to take any steps to exhaust any legal
remedies
- As guarantor, he is liable to pay the principal debt as well as
other accessory liabilities
o The trust receipt provided for payment of:
" Attorneys fees (10% of total amount due)
" Interest (7% per annum)
o The letters of credit are subject to interest (18% per
annum)
DISPOSITIVE: GRANT the petition in part. AFFIRM the CA
Decision and Resolution with MODIFICATIONS.
Tupaz v. CA
There is solidarity with each other (co-guarantors) BUT not with
the creditor.
There is a guarantee but there is a WAIVER of the benefit of
excussion. Since it is waived, there is no longer a need to
proceed against the debtor before proceeding against the
guarantor.
Reasons why Tupaz was made liable to the bank even before
excussion is resorted to:
1. Excussion is not a pre-requisite to secure judgment against
a guarantor.
2. The benefit of excussion may be waived (which was present
in this case)
There is still a remedy for the guarantor, which is to demand
deferment of the execution of the judgment against it until after
the assets of the principal debtor is exhausted.
This case is basis for saying that a creditor may secure judgment
against a guarantor even before excussion is resorted to.
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F. Right to Protection
Art. 2071 The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) 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;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.
- Right to Protection: right of the guarantor as against
the principal debtor to:
1. Obtain release from guaranty, or
2. Demand security
- Purpose: for guarantor to protect itself from
1. Any proceeding by the creditor
2. The danger of insolvency of the debtor
This right is exercised by the guarantor as against the principal
debtor.
Since a guarantor binds himself to the creditor, it is also only the
creditor that can release the guarantor from its guaranty.
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G. Right to Indemnification
Art. 2066 The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn
interest for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him;
(4) Damages, if they are due.
Art. 2050 If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the
provisions of Articles 1236 and 1237 shall apply.
Art. 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what
he has paid, except that if he paid without the knowledge or
against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
Art. 2069 If the debt was for a period and the guarantor paid
it before it became due, he cannot demand reimbursement of
the debtor until the expiration of the period unless the
payment has been ratified by the debtor.
Art. 2070 If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment, repeats
the payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the guarantor was prevented by a
fortuitous event from advising the debtor of the payment, and
the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.
Art. 2072 If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.
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- In guaranty, there is also a legal tie created between the
guarantor and principal debtor to which the principal
creditor is not privy
- Right to indemnification is the substantive right of action of
the guarantor, after it has paid the principal debt, as against
the principal debtor, to recover:
1. the totality of the debt
2. the legal interests thereon from the time the payment
was made known to the debtor, even though it did not
earn interest from the creditor
3. the expenses incurred by the guarantor after having
notified the debtor that payment had been demanded
of it, and
4. damages, if they are due
- the right to indemnification is more than a real right to
reimbursement of what was paid
- but for the right to exist in favor of the guarantor, contract of
guaranty must have been entered into with the knowledge
and consent of the principal debtor
It is not just reimbursement, but involves indemnification.
H. Right to Subrogation
Guarantor steps into the shoes of the creditor. However, this
right only arises when the guarantor has already paid the
principal debt and the contract of guaranty was enetered with
the knowledge and consent of the principal debtor.
Art. 2067 The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
Art. 2050 If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the
provisions of Articles 1236 and 1237 shall apply.
Art. 1237 Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter, cannot compel the
creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty, or penalty.
Art. 2068 If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the defenses
which he could have set up against the creditor at the time the
payment was made.
Art. 2080 The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter.
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- Right of subrogation is the right of the guarantor who pays,
as against the principal debtor, to be substituted to all the
rights and remedies and securities that the creditor had
against the principal debtor
- Contract of guaranty must have been entered into with the
knowledge and consent of the principal debtor
- 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.
I. Rights of Co-Guarantors
1. Benefit of Division
Art. 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.
Art. 2078 A release made by the creditor in favor of one of
the guarantors, without the consent of the others, benefits all
to the extent of the share of the guarantor to whom it has been
granted.
- There is co-guaranty when two or more persons answer for
the same debt of the same debtor
- Among co-guarantors, the benefit of division is the right of a
co-guarantor, as against a creditor, to pay only the divided
share that it is bound to pay
- The benefit of division will cease and the creditor may claim
the entire amount from the co-guarantor if:
a. The co-guarantor against whom the creditor is making
the claim has expressly renounced the benefit of
division
b. The co-guarantor has bound itself solidarily with the co-
guarantor
c. In case of insolvency of the co-guarantor
d. When a co-guarantor has absconded, or cannot be
sued within the Philippines unless it has left a manager
or representative
e. If it may be presumed that an execution on the
property of the co-guarantor would not result in the
satisfaction of the obligation
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2. Right to Reimbursement
Art. 2073 When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has
paid may demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same
proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or
unless the principal debtor is insolvent.
Art. 2074 In the case of the preceding article, the co-
guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal debtor
against the creditor, and which are not purely personal to the
debtor.
Art. 2075 A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.
- The right to reimbursement is the right of the co-guarantor
who pays as against the other co-guarantors to recover the
shares due from the co-guarantors, but only if the following
conditions concur:
a. There are 2 or more guarantors of the same debtor and
fro the same debt
b. One of the co-guarantors has paid
c. Payment is made by virtue of a judicial demand or the
principal debtor is insolvent
- If any of the co-guarantors is insolvent, the share of the
insolvent co-guarantor shall be born by the other co-
guarantors, including the co-guarantor paying, in the same
proportion as that established in the co-guaranty
Allegedly 2 ways of looking at Art .2078:
1. The amount of the benefit of release will be divided among
all debtors; or
2. The other co-guarantors may seek reimbursement from the
co-guarantor that was released.
Insolvency of debtor & one of co-guarantors paid creditor ! the
remedy of co-guarantor is to go against principal debtor
RIGHT OF GUARANTOR
Against Creditor: Benefit of excussion
Against Debtor: Protection, indemnification, subrogation
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J. Extinguishment and Right of Release
Art. 2076 The obligation of the guarantor is extinguished at
the same time as that of the debtor, and for the same causes
as all other obligations.
Art. 2077 If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
released.
Art. 2079 An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extention of time referred to herein.
Art. 2080 The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter.
Extinguishment by payment or performance of principal
obligation.
The guaranty is also consequently extinguished once the
principal obligation is extinguished.
V. SURETY
A. General Concepts
Art. 2047 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)
Art. 1211 Solidarity may exist although the creditors and the
debtors may not be bound in the same manner and by the same
periods and conditions. (1140)
Art. 1216 Novation, compensation, confusion or remission of
the debt, made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as
he who collects the debt, shall be liable to the others for the
share in the obligation corresponding to them. (1143)
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Art. 2082 The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications
prescribed in article 2056 and in special laws. (1854a)
Art. 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)
Art. 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)
Art. 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.
SURETYSHIP
- Legal relation that arises when one party assumes liability
for a debt, default or other failing of a second party
- A contractual relation
- Results from an agreement whereby one person (surety)
engages to be answerable for the debt, default or
miscarriage of another (principal or principal debtor)
- A personal security transaction that involves the
obligation of the surety to fulfill a principal obligation in
case the principal debtor, to whom the surety is solidarily
bound, does not do so
Suretyship as an accessory, ancillary or collateral
obligation
- Obligation is not an original and direct one, but merely
accessory or collateral to the obligation contracted by the
principal debtor
- Surety is solidarily bound, but the liability is
consequent upon the liability of the principal debtor and is
so dependent on that of the principal debtor (considered in
law as the same party)
- If principal debtor is liable, liability of the surety would be
solidary
- Nature of suretys undertaking: no liability unless the
principal debtor is liable
Suretys Liability
- To the creditor is direct, primary and absolute
- Surety is directly and equally bound with the principal
- Surety becomes LIABLE for the debt or duty of another
although it possesses no direct or personal interest
over the obligations nor does it receive benefit therefrom
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Obligations of Surety
- The obligations always arise as a consequence of a
contract, whether it is legal or judicial
o Legal: offered in virtue of a provision of law
o Judicial: offered in virtue of a judicial order
- In a legal and judicial suretyship, the surety (bondsman)
must possess the qualifications required of a guarantor:
o Integrity
o Capacity to bind itself
o Sufficient property to answer for the obligation which it
guarantees
B. Form of Surety
Art. 1403 The following contracts are unenforceable, unless
they are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or who
has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within
a year from the making thereof;
(b) A special promise to answer for the debt, default,
or miscarriage of another;
(c) An agreement made in consideration of marriage, other than
a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in
action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at
the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales
book, at the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers and person
on whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer period than one
year, or for the sale of real property or of an interest therein;
( f ) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a
contract.
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SURETY
- Constitutes a special promise to answer for the debt,
default, or miscarriage of another
- Under the Statute of Frauds, the agreement, note, or
memorandum must be:
o In writing; and
o Subscribed by the party charged or by his agent
- If it does not comply with the above requisites, it shall be
unenforceable
C. Obligations Secured
Art. 2053 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)
On the Consideration in a Contract of Suretyship
- Peculiar nature of a suretyship: it is valid despite the
absence of any direct consideration received by the surety
either from the principal debtor or the creditor
- Generally, it must be supported by a sufficient consideration
o Consideration need not pass directly to the surety
o If it goes to the principal debtor alone, this will suffice
On the Extend of the Obligation of the Surety
- Obligation of the surety cannot be extended by implication
beyond its specified limits (terms of the contract)
- To the extent, and in the manner, and under the
circumstances pointed out in the obligation, the surety is
bound, and no farther
- GR: Contracts are strictissimi juris (Law Dictionary: of the
strictest right or law)
o XPN: Compensated sureties
o Why the XPN? Formerly, parties became sureties, not
for hire but as a matter of accommodation
o Strictissimi juris has no application to sureties organized
for the purpose of conducting an indemnity business at
established rates of compensation
- Aside from the contract of suretyship being the law between
the parties and confining the obligations of the surety to
what is stipulated, Art. 2053 applies to suretyships as well
- Applies to a continuing surety
o CONTINUING SURETY: 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
surety, until the expiration or termination thereof
" Applies to a succession of liabilities for which the
surety becomes liable as they accrue
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Security Bank and Trust Company, Inc. vs. Cuenca (2000) surety should be extinguished pursuant to Art. 2079, as he
Panganiban, J. did not sign or consent to the restructuring agreement.
Petitioner: SBTC
Respondents: Rodolfo M. Cuenca DISPOSITIVE: CA affirmed
Concept: Surety Obligations Secured
SBTC v. Cuenca
Doctrine: This is a consensual CONTRACT TO LOAN
Suretyship Agreements, being accessory obligations, shall also
be extinguished when the principal obligation is also Make sure solidary liability is with the co-principal debtor, not
extinguished. with the co-guarantors

Brief Facts: There is a surety, which is valid. No benefit of excussion.

SBTC granted a credit line to SIMC for P8M, secured by an
Indemnity Agreement wherein Cuenca, as President, held No more principal obligation for which to be liable.
himself solidarily liable. After Cuenca sold his shares, SIMC and
SBTC agreed to restructure its obligations, to allow the former to D. Distinguished from Standby Letter of Credit
make several more loans. When SIMC defaulted, SBTC filed suit
against both SIMC and Cuenca pursuant to the Indemnity Suretyship Standby Letter of
Agreement. Credit
Purpose Both ensure against the debtors
ISSUE: nonperformance
WON the 1989 Loan agreement novated the 1981 CAM and Obligation Obligation is to Obligation is to pay
Cuencas liability under the Indemnity Agreement (YES) complete debtors in the event of
performance nonperformance
RATIO: YES. The purpose of the restructured loan Requisites for Fact of debtors Submission of the
agreement was to extinguish the original credit obligation to non-performance required
accommodation. arise must first be documents as stated
- Requisites of Novation: established, in the letter of credit
o There is a previous valid obligation usually through
o The parties concerned agree to a new contract litigation
o The old contract is extinguished Benefit to Benefit to creditor is Benefit to the creditor
o There is a valid new contract. Creditor that surety will is that he will
- That the 1989 Loan Agreement extinguishes the original perform if the receive payment in
credit accommodation is evident from its express provision debtor does not the event of non-
to liquidate the principal and the interest of the earlier performance, ahead
indebtedness. of any litigation
- The former manager of the Loans and Discounts Who bears Financial burden is Financial burden is
Department of SBTC also testified that the proceeds of the financial on the creditor reversed since the
1989 Loan Agreement was used to pay-off the original burden while there is creditor is assured of
indebtedness. litigation to payment ahead of any
- Incompatibilities between the 1989 Loan Agreement and determine if the litigation.
1980 Credit Accommodation: debtor really is in
o Limit of CAM P8M; while amount of Loan was P12.2 M default and if so, the
o Periods of payment also different. costs of
o Loan agreement also contained conditions not found in performance
the earlier obligation, such as delivering additional
documents and writings as may be necessary and that
SURETYSHIP
SIMC shall not create any mortgage or encumbrance - Legal relation that arises when one party assumes liability
on any asset that it owned, nor would it participate in
for a debt, default or other failing of a second party
any merger or consolidation.
- A contractual relation
- As the 1989 Loan Agreement extinguished the credit
- Results from an agreement whereby one person (surety)
accommodation, the Indemnity Agreement, an accessory
engages to be answerable for the debt, default or
obligation, was also necessarily extinguished pursuant to miscarriage of another (principal or principal debtor)
Art. 1296.
- A personal security transaction that involves the
- Even arguendo that the Loan agreement merely extends the
obligation of the surety to fulfill a principal obligation in
original credit accommodation, Cuencas obligation as a
case the principal debtor, to whom the surety is solidarily
bound, does not do so

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STANDBY LETTER OF CREDIT (an instrument) When obligation Obligation to pay Obligation to pay
- This kind of letter of credit, also known as a standby letter arises arises when the arises once
of credit, or, simply, standby credit, is used as a principal debtor creditor has
guarantee or security for either a monetary or non- defaults in his exhausted all of
monetary obligation. performance principal
- In a standby credit arrangement, the issuer agrees to debtors
pay the creditor-beneficiary if the debtor-applicant property and
defaults or fails to perform the obligation. after all
- The standby credit becomes payable upon certification remedies
of the debtor-applicants default or failure to against the
perform the obligation. latter has been
resorted to.
E. Distinguished from Guaranty
Estrella Palmares vs. Court of Appeals and M.B. Lending
Art. 2047 By guaranty a person, called the guarantor, binds CorporationRegalado, J.
himself to the creditor to fulfill the obligation of the principal Petitioner: Estrella Palmares
debtor in case the latter should fail to do so. Respondent: Court of Appeals (CA) and M.B. Lending
Corporation (MB)
If a person binds himself solidarily with the principal debtor, the Concept: Surety Distinguished from Guaranty
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (1822a) Doctrine:
In a guaranty, a person called the guarantor binds himself to the
Suretyship Guaranty creditor to fulfill the obligation of the principal debtor in case the
Purpose Insure the Insure the latter should fail to do so. If a person binds himself solidarily with
payment of the solvency of the the principal debtor, the contract is called a suretyship. See also
debt/performance principal debtor the text in italics below.
of the obligation of
the principal debtor Brief Facts:
Obligation Surety will pay if the Guarantor will pay Palmares signed as co-maker of a promissory note with Osmea
debtor does not if debtor is and Azarraga. She bound herself to pay the obligation jointly
pay unable to pay and severally. She also bound herself to pay in case Osmea and
Nature of Liability Direct, primary, Enjoys the Azarraga defaulted.
and absolute benefit of
liability to the excussion; ISSUES:
creditor creditor must first 1. W Palmares signed as a surety or as a guarantor. (She
exhaust all signed as a surety.)
properties of the 2. WON Palmares was liable. (YES)
principal debtor
and resort to all RATIO:
remedies 1. Palmares signed as a surety.
against the - Palmares: contended that while paragraph 2 provides that
principal debtor she was jointly and severally liable with the principal makers,
before going after under paragraph 3, her liability was actually that of a
the guarantor. guarantor because she bound herself to fulfill the obligation
only in case the principal debtor should fail to do so, which
is the essence of the contract of guaranty.
Debtors Solvency Obligated to pay Debtor must be
regardless of insolvent before o Averred that the words jointly and severally were
solvency or guarantor can be technical and legal terms not fully appreciated by an
ordinary layman such as she, a 65 year-old housewife,
insolvency of the obligated to pay
who entered into the transaction without fully realizing
debtor;. The only
the nature and extent of her liability. The words used in
determining factor
is debtors paragraph 3 are easier to comprehend.
o The law looks upon the contract of suretyship with a
nonperformance
jealous eye and the rule is that the obligation of the
surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar
nature of a surety agreement.

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 o The promissory note was a contract of adhesion
prepared by MB and any apparent ambiguity should be
strictly construed against MB.
- SC: Article 2047 of the Civil Code provides that by
guarantee, 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 contract is called a
suretyship.
o The contract must be interpreted literally since it was
clear and left no doubt as to the intention of the
parties. Palmares expressly bound herself to be jointly
and severally or solidarily liable with the principal maker
of the note. Her liability is that of a surety.
o Her pretensions that the terms jointly and severally or
solidarily liable could not be easily understood was
diametrically opposed to her manifestation in the
contract that she fully understood the contents and was
fully aware of her solidary liability. She admitted to
signing voluntarily, hence she could not be heard to
claim otherwise.
o A surety is an insurer of the debt, whereas a guarantor
is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated
differently, a surety promises to pay the principals debt
if the principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the principal,
may proceed against the guarantor if the principal is
unable to pay. A surety binds himself to perform if the
principal does not, without regard to his ability to do
so. A guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is able to
do so. In other words, a surety undertakes directly for
the payment and is so responsible at once if the
principal debtor makes default, while guarantor
contracts to pay if, by the use of due diligence, the
debt cannot be made out of the principal debtor.
Quintessentially, the undertaking to pay upon default of
the principal debtor does not automatically remove it
from the ambit of a contract of suretyship.
o It has not been shown, either in the contract or the
pleadings, that MB agreed to proceed against Palmares
only if and when the default principal has become
insolvent. A contract of suretyship is that wherein one
lends his credit by joining in the principal debtors
obligation, so as to render himself directly and primarily
responsible with him, and without reference to the
solvency of the principal.
o The rule of strictissimi juristhat the liability of the
surety, under his contract, as thus interpreted and
construed, is not to be extended beyond its strict
meaningdid not apply because it only does after it
has been definitely ascertained that the contract is one
of suretyship and not a contract of guaranty. It cannot
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be used as an aid in determining whether a partys
undertaking is that of a surety or a guarantor.
o Several acts by the petitioner also showed that the
contract was that of suretyship. When petitioner was
informed about the failure of the principal debtor to
pay, she immediately offered to settle the account.
Petitioner also presented receipts of payments already
made, which were all issued in her name and of the
Azarraga spouses. The concomitant and simultaneous
compliance of Palmares obligation with that of her
principals only goes to show that, from the very start,
petitioner considered herself equally bound by the
contract.
o A surety usually enters into the same obligation as that
of his principal, and the signatures of both usually
appear upon the same instrument, and the same
consideration usually supports the obligation for both
the principal and the surety. This was so in this case.
2. Yes, Palmares was liable.
- Palmares: There was fraud on part of MB and there was
misapprehension of her part.
- SC: Claim of fraud was unavailing since Palmares only
presented her own uncorroborated and, expectedly, self-
serving allegations. Having entered into a contract
voluntarily, Palmares was stopped to assert that she did so
under misapprehension or ignorance of the legal effect of
the contract. Mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her of liability.
o In the absence of a statutory or contractual
requirement, it is not necessary that payment or
performance of the obligation be first demanded of the
principal. It is not a requisite, before proceeding
against the sureties, that the principal be called on to
account.
o A surety is liable as much as his principal is liable and
absolutely liable as soon as default is made, without any
demand upon the principal whatsoever (Is the Court
saying that default in a contract of surety means
ordinary delay and not the default as contemplated by
the Civil Code?) or any notice of default.
- Palmares: There was neither demand upon her nor notice
of the principals default.
- SC: Demand on the sureties is not necessary before brining
a suit against them, since the commencement of the suit is a
sufficient demand.
o A surety is not even entitled, as a matter of right, to be
given notice of the principals default. The creditor
owes no duty of active diligence to take care of the
interest of the surety. The creditors mere failure to give
information to the surety of the default of the principal
cannot have the effect of discharging the surety. The
surety is bound to take notice of the principals default
and to perform the obligation. The surety cannot
complaint that the creditor has not notified him in the
absence of a special agreement to that effect in the
contract of suretyship.
88
- Palmares: Questioned the propriety of filing a complaint
solely against her to the exclusion of the principal debtors
who allegedly were the only ones who benefitted from the
proceeds of the loan.
- SC: Palmares, as surety, was solidarily liable. The creditor
can sue any of the solidarily liable, each or several, for the
entire obligation.
- Palmares: Failure to sue her immediately exonerated her.
- SC: Mere failure to immediately sue Palmares did not
release her from liability. Mere want of diligence or
forbearance does not affect the creditors rights vis--vis the
surety, unless the surety requires him by appropriate notice
to sue on the obligation. Even neglect of the creditor to sue
the principal does not absolve surety.
o In order to constitute an extension discharging the
surety it should appear that: 1) the extension was for a
definite period, pursuant to an enforceable agreement
between principal and creditor; and 2) it was made
without the consent of the surety or with a reservation
of rights with respect to him. These requirements were
not shown to exist. In fact, if the facts are reviewed, it
was Palmaress acts that caused the collection period to
be prolonged.
DISPOSITIVE: CA decision affirmed with modification.
Palmares v. CA
Creditor can go after the surety or the debtor or both.
E. Zobel v CA (1998) Martinez, J.
Petitioner: E. Zobel
Respondents: SOLIDBANK
Concept: Surety Distinguished from Guaranty
Doctrine:
The use of the term "guarantee" does not ipso facto mean that
the contract is one of guaranty.
Brief Facts:
Respondent spouses applied for a loan with respondent
SOLIDBANK. The loan was granted subject to the condition that
spouses execute a chattel mortgage over the 3 vessels to be
acquired by them, and that a continuing guarantee be executed
by petitioner EZ, Inc. in favor of Solid Bank. The spouses
defaulted in payment of the entire obligation upon maturity.
SolidBank filed a complaint for the sum of money against EZ
Zobel. Zobel moved to dismiss the complaint on the ground that
its liability as guarantor of the loan was extinguished pursuant to
Article 2080.
ISSUE:
WON Zobel, under the Continuing Guaranty, obligated
himself as a surety (YES).
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RATIO:
1. YES; The use of the term "guarantee" does not
ipso facto mean that the contract is one of
guaranty.
- Under A contract of surety is an accessory promise by which
a person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the
debtor does not. A contract of guaranty, on the other hand,
is a collateral undertaking to pay the debt of another in case
the latter does not pay the debt.
- Strictly speaking, guaranty and surety are nearly related, and
many of the principles are common to both. However, under
our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument,
executed at the same time, and on the same consideration.
He is an original promissor and debtor from the beginning,
and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of
notice of the default of the principal, no matter how much
he may be injured thereby.
- On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of
the principal, and is often supported on a separate
consideration from that supporting the contract of the
principal. He is often discharged by the mere indulgence of
the creditor to the principal, and is usually not liable unless
notified of the default of the principals.
- Based on the aforementioned definitions, it appears that
the contract executed by petitioner in favor of SOLIDBANK,
albeit denominated as a "Continuing Guaranty," is a
contract of surety. The terms of the contract categorically
obligates petitioner as "surety" to induce SOLIDBANK to
extend credit to respondent spouses. This can be seen in
the following stipulations.to wit: ...undersigned is now
obligated to you as surety and in order to induce you..; ...!
the undersigned agrees to guarantee, and does hereby
guarantee, the punctual payment, at maturity or upon
demand, to you of any and all such instruments, loans,
advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or owing to
you by the Borrower..
- The contract clearly discloses that petitioner assumed
liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It
bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to
all other legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for the
obligation.
DISPOSITIVE. Petition dismissed for lack of merit
E. Zobel v. CA
Art. 2080 does not apply to a surety
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International Finance Corporation v. Imperial Textile Mills, Inc.
(2005) Panganiban
Petitioner: International Finance Corporation (IFC)
Respondent: Imperial Textile Mills, Inc. (ITM)
Concept: Surety: Distinguished from Guaranty
Doctrine:
Although denominated as a Guarantee Agreement, ITM has
bound itself solidarily with PPIC. Under Art. 2047, when the
guarantor binds itself solidarily, it becomes a suretyship and the
provisions on Joint and Solidary Obligations will apply. The
creditor may then proceed against any of the solidary debtors or
some or all of them simultaneously for so long as the debt has
not been fulfilled. A suretyship, as compared to a guaranty
involves a situation where the guarantor is solidarily liable to the
creditor.
Brief Facts:
IFC granted a loan to PPIC in the amount of US$7-M. IFC
contracted with ITM and Grandtex to secure the loan granted to
PPIC, denominating it as a Guarantee Agreement and using the
words guarantor and guarantee. When PPIC defaulted and
an extrajudicial foreclosure of the mortgage was unable to satisfy
the outstanding obligation, IFC filed a complaint against PPIC
and ITM for the balance.
ISSUE:
WON ITM is a surety, and thus solidarily liable with PPIC for loan
payment (YES)
RATIO: YES, ITM is a surety. It is solidarily liable with
PPIC for the payment of its loan.
- 2 Contracts involved: 1) Loan Agreement (IFC and PPIC); 2)
Guarantee Agreement (ITM & Grandtex and IFC)
- IFC: Under the Guarantee Agreement, ITM bound itself as
surety to PPICs obligations proceeding from the Loan
Agreement
- ITM: By the terms of the Guarantee Agreement, it was
merely a guarantor, not a surety
- The premise of the Guarantee Agreement:
o (A) By an Agreement of even date herewith between
IFC and PHILIPPINE POLYAMIDE INDUSTRIAL
CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC
agrees to extend to the Company a loan (herein called
the Loan) of seven million dollars ($7,000,000) on the
terms therein set forth, including a provision that all or
part of the Loan may be disbursed in a currency other
than dollars, but only on condition that the
Guarantors agree to guarantee the obligations
of the Company in respect of the Loan as
hereinafter provided.
o (B) The Guarantors, in order to induce IFC to enter
into the Loan Agreement, and in consideration of IFC
entering into said Agreement, have agreed so to
guarantee such obligations of the Company.
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- The obligations of the guarantors are meticulously
expressed:
o Section 2.01. The Guarantors jointly and severally,
irrevocably, absolutely and unconditionally
guarantee, as primary obligors and not as
sureties merely, the due and punctual payment of
the principal of, and interest and commitment charge
on, the Loan, and the principal of, and interest on, the
Notes, whether at stated maturity or upon prematuring,
all as set forth in the Loan Agreement and in the
Notes.
- SC: The Agreement uses guarantee and guarantors but
the Court is not convinced that the use of the two words
limits the Contract to a mere guaranty because the
stipulations show otherwise
o The Agreement stated that the corporation was
jointly and severally liable
o To emphasize the nature of that liability, Contract
stated that ITM was a primary obligor, not a mere
surety
o At bottom, and to all legal intents and purposes, it was
a surety
o ITM bound itself to be solidarily liable with PPIC for the
latters obligations under the Loan Agreement with IFC;
it brought itself to the level of PPIC and could not be
deemed merely secondarily liable
o Initially, it was a stranger to the Loan Agreement, but its
liability commenced when it guaranteed PPICs
obligation
o Became a surety when it bound itself solidarily with
the principal obligor
" Art. 2047 By guaranty, a person, called the
guarantor binds himself to the creditor to fulfill the
obligation of the principal in case the latter should
fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Sec. 4, Chap. 3,
Title I of this Book shall be observed. In such case
the contract shall be called suretyship.
" The cited provisions refer to Arts. 1207 to 1222,
NCC on Joint and Solidary Obligations, and what is
relevant is Art. 1216
" Art. 1216 The creditor may proceed against any
one of the solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so
long as the debt has not been fully collected.
o Pursuant to Art. 1216, IFC was justified in taking action
directly against ITM
- SC: There is no ambiguity in the provisions of the
Guarantee Agreement
o When qualified by the term jointly and severally, the
use of the word guarantor to refer to a surety does
not violate the law
90
 o Art. 2047 (see above) provides that a suretyship is
created when a guarantor binds itself solidarily with the
principal obligor
o The phrase as primary obligor and not merely as
surety stresses that ITM is being placed on the same
level as PPIC ! the words emphasize the nature of the
liability, which the law characterizes as suretyship
o Use of the word guarantee does not ipso facto make
the contract one of guaranty; very terms of a contract
govern the obligations of the parties
- Execution of the Agreement was a condition precedent for
the approval of the loan; IFC required a higher degree of
liability from ITM in case PPIC committed a breach; ITM
agreed with the Sec. 2.01 stipulation and is now estopped
from feigning ignorance
- CA: denied solidary liability on the theory that the parties
would not have executed a Guarantee Agreement if they
intended to name ITM as a primary obligor; that ITMs
undertaking was collateral to and distinct from the Loan
Agreement
o SC: A suretyship is merely an accessory or a collateral to
a principal obligation; however, the liability of the
surety is direct, primary and absolute, or equivalent to
that of a regular party to the undertaking
" Surety becomes liable to the debt and duty of the
principal even without possessing a direct or
personal interest in the obligations
DISPOSITIVE: Petition GRANTED and the assailed decision is
MODIFIED. ITM is declared a surety to PPIC and is ordered to
pay IFC the same amounts.
IFC v. ITM
This case serves only to emphasize liability
Phil. Blooming Mills & Ching v. CA (2003) Carpio, J.
Petitioners: Phil. Blooming Mills (PBM) and Alfredo Ching
Respondents: Court of Appeals and Traders Royal Bank (TRB)
Concept: Surety; Distinguished from Guaranty
Doctrine:
A continuing suretyship is one which covers all transactions,
including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until
the expiration or termination thereof.
Brief Facts:
Ching, Senior VP of PBM, bound himself, in his personal
capacity, to be the surety of PBM in its transactions with TRB.
PBM defaulted and was placed under receivership by the SEC.
TRB now proceeds against Ching as the surety of PBM in a
separate suit while Ching contends that since PBM was placed
under receivership, the regular courts have no jurisdiction over
his case.
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ISSUES:
1. WON Ching could be held liable for the obligations that
were constituted after the execution of the deed of
suretyship (YES)
2. WON Ching may still be held liable for his undertaking under
the trust receipts when TRB prevented their fulfillment (YES)
3. WON TRB may collect a larger amount from Ching as surety
of PBM than the amount in the SEC-approved rehabilitation
plan (YES)
RATIO:
1. YES. Ching is still liable for these obligations
- SC: This appeal is, in effect, a disguised motion for
reconsideration of the earlier ruling in Traders Royal Bank v.
CA.
- The SC has already ruled that Chings liability as surety is
separate from that of the liability of PBM which has already
been under the rehabilitation proceedings under the SEC.
- Under Art. 1216 of the Civil Code, Ching can be sued
separately to enforce his liability as surety.
- As for the obligations being constituted after the execution
of the deed, the SC held that under Art. 2053 of the Civil
Code, there can be a surety for future debts
- Dio v. CA: A continuing suretyship is one which covers all
transactions, including those arising in the future, which are
within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.
- The very instrument of the deed of suretyship states that
Ching shall answer for amounts that PBM may now be
indebted or may hereafter become indebted to TRB.
2. YES. Ching is still liable under the trust receipts
- Ching is still liable for the amounts under these
corresponding trust receipts and letters of credit since he
has not shown proof of payment or settlement with TRB.
- TRB was empowered by express provisions in the trust
receipts and also by the provisions of PD 115 (Trust Receipts
Law) to take possession of the merchandise covered by the
trust receipts.
- Under. Sec. 7 of PD 115, once the entruster (in this case,
TRB) has taken possession, it may sell the merchandise and
the proceeds of such sale shall be applied to the expenses
that the entruster made for retaking and keeping the
merchandise, as well as the indebtedness of the entrustee.
Should there be any surplus, the entrustee shall be entitled
to them. But if there is any deficiency between the
indebtedness and the proceeds, the entrustee shall be
liable to pay the same.
- Thus, even if TRB took the merchandise covered by the trust
receipts, Ching remains liable.
91
3. YES. TRB may collect a larger amount and is not
bound by the amount set in the rehabilitation plan.
- Ching: Under Art. 1222 of the Civil Code, wherein the surety
is allowed to raise the defenses personal to the debtor, he
argues that he is entitled to a reduction of his liability in view
of the reduced amount that TRB is set to receive under the
rehabilitation plan.
- SC: Chings theory is incorrect. Under Art. 1216 of the Civil
Code, TRB is entitled to pursue against Ching the full
amount of PBMs loan.
- SC: TRB proceeded in the transaction with PBM in light of
the fact that Ching undertook to pay the amount as surety,
should PBM fail to pay what it owed TRB. This is Chings
very purpose as surety. Hence, it cannot use PBMs failure to
pay to justify a reduced liability.
Art. 2067 The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid. (1839)
Art. 1217 Payment made by one of the solidary debtors
extinguishes the obligation. If two or more solidary debtors offer
to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only
the share which corresponds to each, with the interest for the
payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded.

DISPOSITIVE: CA affirmed. When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
PBM v. CA obligation, such share shall be borne by all his co-debtors, in
1st debt: 10M proportion to the debt of each. (1145a)
Final debt: 19M
Debt after receivership: 1.3M
Surety Joint and Solidary
Debtor
Ching has to pay 20M to bank (creditor)
Has a right to indemnification Has a right to reimbursement
and subrogation as against the as against his co-debtors
Ching can only go after PBM for 2M (principal debtor) because it
principal debtor
is under receivership
Entitled to the total amount of Entitled to be reimbursed for
the debt he has paid and to be the share that corresponds to
Ching, as asurety, assumes the risk it is a RISK THAT YOU
subrogated to all the rights that each co-debtor
HAVE TO BEAR (as counsel, advise your client surety of that fact)
the creditor had against the
principal debtor
F. Distinguished from Joint and Solidary Obligations
Suretyship is an accessory,
ancillary or collateral obligation
Art. 2047 By guaranty a person, called the guarantor, binds
Since this is an Person is still bound as part of
himself to the creditor to fulfill the obligation of the principal
ancillary/accessory obligation, the principal obligation
debtor in case the latter should fail to do so.
not part of principal obligation
Requires a PRINCIPAL There is already a PRINCIPAL
If a person binds himself solidarily with the principal debtor, the
obligation obligation
provisions of Section 4, Chapter 3, Title I of this Book shall be
Right of indemnification Right of reimbursement
observed. In such case the contract is called a suretyship. (1822a)

Art. 2066 The guarantor who pays for a debtor must be

indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt;

(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;

(3) The expenses incurred by the guarantor after having notified

the debtor that payment had been demanded of him;

(4) Damages, if they are due. (1838a)

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!
Escano & Silos v. Ortigas Jr. (2007) Tinga, J.
Petitioners: Salvador P. Escao and Mario M. Silos
Respondent: Rafael Ortigas
Concept: Surety; distinguished from joint and solidary
obligations
Doctrine:
- In cases where there are several obligors, in the absence of
an express stipulation that liability is solidary, it is presumed
the liability is merely joint, unless the nature of the
obligation requires solidarity.
- Art. 1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his co-
debtors only the share which corresponds to each
with the interest for the payment already made. Such
solidary debtor will not be able to recover from the co-
debtors the full amount already paid to the creditor,
because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to
the particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily
bound with the principal debtor to the creditor, the surety
who does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from the
principal debtor. Such right to full reimbursement falls within
the other rights, actions and benefits which pertain to the
surety by reason of the subsidiary obligation assumed by
the surety.
Brief Facts:
Escao, Silos, and Matti, executed an Undertaking whereby they
designated themselves as sureties of Ortigas et al. who in turn
guaranteed the loan obligation of Falcon from PDCP. Falcon
defaulted in the payment of its obligation prompting PDCP to
file a complaint for collection of a sum of money against Escao
et al. (sureties) and Ortigas et al. (principal obligors). Ortigas
amicably settled with PDCP, paying P1.3M as his share in the
obligation. He now files a complaint against Escao et al. to
reimburse him of what he paid.
ISSUE:
WON Escao and Silos bound themselves to be solidarily liable
under the 1982 Undertaking (NO; JOINTLY ONLY)
RATIO: No. Escao and Silos are merely jointly liable
as the Undertaking did not provide for express
solidarity. The nature of the obligation likewise does
not require solidarity.
- Art. 1207 CC: there is solidary liability only when the
obligation expressly so states, or when the law or the nature
of the obligation requires solidarity
- Art. 1210 CC: the indivisibility of an obligation does not
necessarily give rise to solidarity, nor does solidarity itself
imply indivisibility
- Absent any express stipulation for solidarity, the
presumption is that the liability is JOINT
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- The mere fact that Escao et al. identified themselves as
Sureties in the Undertaking does not render them
solidarily liable
- In order for the conclusion of Ortigas to hold (that the
designation surety conclusively entails a suretyship
agreement), the Court would have to be satisfied that
among Escao, Silos, and Matti, there is one who stand as
the principal debtor to Ortigas and another as surety who
has the right to full reimbursement from the principal debtor
or debtorsHOWEVER, such is not the case
- The Court is likewise not convinced that the nature of the
obligation requires solidarity
o Even if the liability of Escao et al. were merely joint,
the full relief and reimbursement of Ortigas arising from
his payment to PDCP would still be accomplished
through complete execution of such judgment
Discussion on suretyship vis--vis solidary obligation
- Art. 2047 provides for the definition of surety
o 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.
- A suretyship requires a principal debtor to whom the surety
is solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the
principal debtor and the creditor
o The suretyship does bind the surety to the creditor,
inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu
of proceeding against the principal debtor for the same
obligation
o There is also a legal tie created between the surety and
the principal debtor to which the creditor is not privy to
o The moment the surety fully answers to the creditor for
the obligation created by the principal debtor, such
obligation is extinguished
o Surety may seek reimbursement from the principal
debtor for the amount paid, for the surety does in fact
become subrogated to all the rights and remedies of
the creditor
- Suretyship vs. Solidary Obligation
o Dr. Tolentino: A surety, outside of the liability he
assumes to pay the debt before the property of the
principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him
by reason of the fiansa; while a solidary co-debtor has
no other rights than those bestowed upon him in
Section 4, Chapter 3, Title 1, Book IV of the CC
o In the case of joint several debtors, Art. 1217 makes
plain that the solidary debtor who effected the payment
to the creditor may claim from his co-debtors only the
share which corresponds to each with the interest
for the payment already made
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 " Such solidary debtor will not be able to recover
from the co-debtors the full amount already paid
to the creditor, because the right to recovery
extends only to the proportional share of the other
co-debtors, and not as to the particular
proportional share of the solidary debtor who
already paid
o In contrast, even as the surety is solidarily bound with
the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from
the principal debtor. Such right to full reimbursement
falls within the other rights, actions and benefits which
pertain to the surety by reason of the subsidiary
obligation assumed by the surety
- The right to full reimbursement by the surety comes from
Art. 2066 which assures that the guarantor who pays for a
debtor must be indemnified by the latter. Further, Art.
2067 establishes that the guarantor who pays is subrogated
by virtue thereof to all the rights which the creditor had
against the debtor
o Both articles pertain to guarantors
o However, the reference in the second paragraph of Art.
2047 to the provisions of Sec. 4, Chapter 3, Title 1, Book
IV of the CC, on solidary obligations does not mean
that suretyship is withdrawn from the applicable
provisions governing guaranty
o For if that were not the implication, there would be no
material difference between the surety as defined
under Art. 2047 and the joint and several debtors, for
both classes of obligors would be governed by exactly
the same rules and limitations
DISPOSITIVE: Escao, Silos, and Matti JOINTLY liable to
Ortigas for P1.3M
VI. PLEDGE AND MORTGAGE
A. General Concepts
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 the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
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Art. 2087 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor. (1858)
- Security transactions constituted to secure the fulfillment of
a principal obligation
- Unlike guaranty and surety, a pledge and mortgage are real
security transactions
- Essence: when the principal obligation becomes due, the
property pledged or mortgaged (the collateral) may be
alienated for purposes of payment to the creditor of the
principal obligation
- It is essential that the pledgor or mortgagor be the absolute
owner of the collateral and that it have the free disposal of
the property; or that it be legally authorized to constitute
the pledge or mortgage, otherwise the same is void
- A pledge or mortgage is void and ineffective if it were
constituted over future property
- However, the law allows third persons, which are not parties
to the principal obligation, to secure the latter by pledging
or mortgaging their own property
- Pledgo or mortgagor remains the owner of the collateral; no
title passes to the creditor
- If there may have been delivery of the collateral, the delivery
is only to secure the fulfillment of the principal obligation
and does not empower the creditor to convey the collateral
in favor of another person
Essential Elements 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 the
purpose
4. Collateral may be ALIENATED AS PAYMENT of the
principal obligation
Essence of Pledge and Mortgage (Art. 2087): When the
principal obligation becomes due, the thing pledged or
mortgaged may be alientated for the payment to the creditor.
Nature: Real security transaction.
Purpose: To secure the fultfillment of a principal obligation.
When Contracts of Pledge/Mortgage are Void:
1. Pledgor or mortgagor is NOT the absolute owner of the
thing pledged/mortgaged
2. Pledgor or mortgagor has NO free disposal of the property
3. In the absence of right of free disposition, pledgor or
mortgagor is not legally authorized to constitute the
pledge/mortgage
4. Pledge/mortgage constituted over future property
94
Who may constitute the pledge/mortgage?
1. Principal debtor
2. Third persons (third party pledgers/third party mortgagors)
Who owns the thing pledged/mortgaged?
Pledgor/mortgagor, but they need not be the principal obligor
The creditor does not have the right to dispose of the collateral
Right to donate, sell, pledge or mortgage are attributes of
ownership. Since debtor remains the owner, creditor cannot
dispose of the collateral.
B. Obligations Secured
Art. 2086 The provisions of article 2052 are applicable to a
pledge or mortgage. (n)
Art. 2052 A guaranty [pledge or mortgage] 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. (1824a)
Art. 2091 The contract of pledge or mortgage may secure all
kinds of obligations, be they pure or subject to a suspensive or
resolutory condition. (1861)
- As accessory obligations, the validity of a pledge and
mortgage is dependent on the existence of a valid principal
obligation, whether the latter is voidable, unenforceable,
natural, pure, or conditional.
- The consideration of a pledge or mortgage is the very
consideration of the principal contract, from which they
receive their right, and without which they cannot exist as
independent contracts.
Pledge or Mortgage is an ACCESSORY OBLIGATION:
- Pledge or mortgage cannot exist without a valid obligation
- Validity dependent on existence of a VALID obligation
- CONSIDERATION in pledge and mortgage is the
consideration of principal contract
Pledge or Mortgage is a Guarantee to:
1. Performance of voidable or unenforceable contract
2. Natural obligation
Pledge or Mortgage may secure ALL kinds of
obligations:
1. Pure
2. Subject to suspensive condition
3. Subject to resolutory condition
Note: Obligation is at least not void
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C. Contract to Pledge or to Mortgage
Art. 2092 A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting parties,
without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some
burden, or by misrepresenting himself to be the owner of the
same. (1862)
- A promise to constitute a pledge or mortgage is a valid
consensual contract.
Contract to Pledge or Mortgage: Promise to constitute a
pledge or mortgage; it is a valid consensual contract
For what: specific performance to constitute the pledge or
mortgage
When liability arises:
- When a person defrauds another by offering in pledge or
mortgage as unencumbered, things which he knew were
subject to some burden
- When a person misrepresents himself to be the owner of the
thing described above
D. Remedies of Pledgee and Mortgagee
- The creditor (the pledgee or mortgagee) may institute a
foreclosure, either to gain title, or to force a sale, in order
to satisfy the unpaid obligation secured by the collateral. A
foreclosure is a legal proceeding to terminate a pledgors
or mortgagors interest in the collateral
- Generally, the contract and a statute may authorize a
power-of-sale foreclosure, or the sale of the collateral
at a non-judicial public sale by a public official, the creditor,
or trustee.
- If the principal obligation becomes due and the debtor
defaults, the pledgee or mortgagee may elect to do two
things:
o To foreclose the pledge or mortgage, in accordance
with its terms; or
" Foreclosure: means/legal proceedings by which
property is ALIENATED for payment ! governed
by the rules depending on the kind of
pledge/mortgage ! look to the law that governs
the contract
o To elect and waive the security and bring an action for
specific performance to recover the indebtedness.
- The remedies are available are alternative and not
cumulative, and the election of one remedy operates as a
waiver of the other.
Right to Election: Pledgee or mortgagee may pursue EITHER
of 2 remedies, but not both. Remedies available to pledgee or
mortgagee are ALTERNATIVE. Election of 1 operates as waiver
of another.
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E. Indivisibility of a Pledge or Mortgage
Art. 2089 A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest of the
debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge
or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of
the other heirs who have not been paid.
From these provisions is excepted the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment
of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied. (1860)
Art. 2090 The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable. (n)
- Indivisibility of a pledge or mortgage is understood
in the sense that each and every parcel of the collateral
answers for the totality of the debt.
- It proscribes the foreclosure of only a portion of the
collateral or a number of the several properties pledged
or mortgaged corresponding to the unpaid portion of the
debt where before the foreclosure proceedings the debtor
partially paid the total outstanding obligation.
- A debtor who has partially fulfilled the obligation/ 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.
- Intended for the protection of the pledgee and
mortgagee, as it refers to the release of the pledge or
mortgage which secures the satisfaction of the
indebtedness and naturally presupposes that the pledge or
mortgage exists.
- But Art. 2089 presupposes several heirs of the debtor or
creditor and does not apply in the absence of such
stipulation.
Doctrine of Indivisibility of Pledge or M ortgage: Each
and every parcel of the collateral answers for the totality of the
debt
- Indivisibility applies even if the debtors are NOT solidarily
liable
- Once the pledge or mortgage is extinguished by a
complete foreclosure, the doctrine of indivisibility ceases to
apply because with the full payment of the debt, there is
nothing more to secure
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Purpose of indivisibility: To protect the pledgee or
mortgagee
When is Art. 2089 applicable? When the debtor or creditor
has several heirs
GR: There can be no release of any portion of the collateral
unless the loan has been fully paid
- No proportionate extinguishment of the pledge or
mortgage even if there is partial payment
- No partial foreclosure of only a portion of the collateral or a
number of several properties pledged or mortgaged
corresponding to the unpaid portion of the debt
XPN: When there are several things given in mortgage or
pledge and each one of them guarantees only a determinate
portion of the credit
F. Pactum Commissorium
Art. 2087 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor. (1858)
Art. 2088 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. (1859a)
- The essence of a pledge or mortgage is that when the
debtor defaults in the fulfillment of the obligation, the
collateral may be alienated for purposes of payment to the
creditor. However, the law requires resort to a legal
proceeding (foreclosure) to terminate the debtors (pledger
or mortgagor) ownership of the collateral.
- A stipulation that allows the creditor to appropriate or
otherwise dispose of the collateral, in contravention of the
provisions of foreclosure, is considered a pactum
commissorium or pacto comisorio, and is null and void.
- For there to be a case of pactum commissorium, it is first
necessary that a pledge or mortgage does exist and is valid.
No pledge or mortgage, no pactum commissorium.
1. Elements
a. There is property pledged or mortgaged
(collateral) by way of security for the payment of the
principal obligation, and
b. There is a stipulation for automatic appropriation
by the creditor of the collateral in case of non-payment
of the principal obligation within the stipulated period.
- A case of pactum commissorrum is null and void for being
contrary to law and public policy, as it contravenes the
express prohibition stated in Art. 2088. [Editors Note]
- When the debtor defaults, the creditor is merely entitled to
forecloses, but he is not authorized to appropriate the
collateral in order to recover the amount due.
96
- Nevertheless, a pledger or mortgageor may validly sell the
collateral to the pledgee or mortgagee for the amount of
the debt, when the latter becomes due, if the parties
stipulate upon the sale, or mere promise to sell, of the
collateral should the obligation secured by it not be
complied with in time, stipulating the conditions of the
alienation;
2. Effect on Pledge or Mortgage
- The nullity of the pactum commissorium does not
substantially affect the validity of the contract of pledge or
mortgage, and it subsists although the parties have not
agreed on the manner by which the creditor shall recover its
credit.
- In such cases, the provisions of the law on foreclosure sale
shall apply.
DBP v. CA (1998) Davide, J.
Petitioner: Development Bank of the Philippines
Respondents: Court of Appeals; Lydia Cuba
Concept: Pactum Commissorium
Doctrine:
For a mortgage to be considered as pactum commissorium, thus
void, the two requisites must be present: (1) that there should be
a property mortgaged by way of security for the payment of the
principal obligation; and (2) that there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged.
Brief facts:
Cubas loan from DBP was secured by two deeds of assignment
over her fishpond leasehold rights granted by the government.
When she defaulted on her payments, DBP appropriated said
rights without foreclosure proceedings and sold it in a public
bidding. Cuba contends that this violates the prohibition on
pactum commissorium provided in Art. 2088
ISSUE:
WON this was a case of pactum commisorium (NO)
RATIO: NO. The elements of pactum commissorium
are missing.
- Elements of pactum commissorium
o There should be a property mortgaged by way of
security for the payment of the principal obligation
o There should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within
the stipulated period.
- Condition No. 12 did not provide that the ownership over
rights would automatically pass to DBP upon default; it
merely provided for the appointment of DBP as attorney-in-
fact with authority, among other things, to sell or otherwise
dispose of the said rights, in case of default, and to apply
the proceeds to the payment of the loan.
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- Aforementioned provision is actually a standard condition in
mortgage contracts and is in conformity with Art. 2087.
- HOWEVER, DBP exceeded the authority vested with it
under said condition when it appropriated the rights without
foreclosure proceedings. Condition No. 12 does not provide
that default would operate to vest DBP ownership of the
leasehold rights of Cuba.
- DBPs act of appropriating was violative of Art. 2088, which
forbids a creditor from appropriating, or disposing of, the
thing given as security for the payment of a debt.
- Estoppel could also not be used as defense by DBP as
estoppel cannot give validity to an at that is prohibited by
law or against public policy.
- Instead of taking ownership upon default, DBP should have
foreclosed the mortgage.
DISPOSITIVE: CA reversed. Remanded to Trial Court
DBP v. CA
There is a valid stipulation, but DBP did not follow the stipulation
Natalia P. Bustamante vs. Spouses Rodito F. Rosel and Normal
A. RoselPardo, J.
Petitioner: Natalia P. Bustamante
Respondents: Rodito F. Rosel and Norma A. Rosel (Spouses
Rosel)
Concept: Pactum Commissorium
Doctrine:
The elements of pactum commissorium are as follows: 1) there
should be a property mortgaged by way of security for the
payment of the principal obligation, and 2) there should be a
stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.
Brief Facts:
The Bustamantes borrowed money from the Rosels. The loan
was secured by collateral (land). It was stipulated that in case of
non-payment, the Rosels could purchase the land, with the
unpaid principal and interest considered as downpayment.
ISSUE:
Whether or not the spouses Rosel had the right to enforce the
sale of the collateral. No.
RATIO: No, the spouses Rosel had no right to enforce
the sale of the collateral.
- SC: The sale of the collateral is an obligation with a
suspensive condition. It is dependent upon the happening
of an event, without which the obligation to sell does not
arise. Since the event did not occur, the spouses Rosel had
no right to demand the sale.
o Furthermore, while the Court acknowledges the
principle of freedom to contract, contractual provisions
must not be contrary to law, morals, good customs,
public order, or public policy.
97
 o A scrutiny of the stipulation of the parties reveals the
subtle intention of the spouses Rosel to acquire the
property given as security for the loan. This is embraced
in the concept of pactum commissorium, which is
prohibited by law.
o The elements of pactum commissorium are as follows:
1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and
2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within
the stipulated period.
o In Nakpil vs. Intermediate Appellate Court, the
Supreme Court said:
" The arrangement entered into between the
parties, whereby Pulong Maulap was to be
considered sold to him (respondent) xxx in case
petitioner fails to reimburse Valdes, must then be
construed as tantamount to pactum
commissorium which is expressly prohibited by
Art. 2088 of the Civil Code. For, there was to be
automatic appropriation of the property by Valdes
in the event of failure of petitioner to pay the value
of the advances. Thus, contrary to respondents
manifestation, all the elements of a pactum
commissorium were present: there was a creditor-
debtor relationship between the parties; the
property was used as security for the loan; and
there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner.
- In this case, the intent to appropariate the property given as
collateral in favor of the creditor appears to be evident, for
the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same
amount as the loan. In effect, the creditor acquires the
collateral in the event of non-payment of the loan. This is
within the concept of pactum commissorium. Such
stipulation is void.
DISPOSITVE: Motion for reconsideration granted.
Bustamante v. Rosel
To be a valid stipulation, it should have a separate consideration
apart from the purchase price.
Ong v Roban (2008) Carpio-Morales, J.
Petitioner: Wilfredo N. Ong and Edna Shiela Paguio-Ong
Respondents: Roban Lending Corporation
Concept: Pactum Commissorium
Doctrine:
Lack of provisions for foreclosure proceedings may be evidence
of pactum commissorium
Brief Facts:
Sps. Ong obtained obtained several loans from respondent
Roban Lending Corporation. These loans were secured by real
estate mortgage on Spouses Ongs parcel of lands. Ong and
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Roban executed several agreements - dacion in payment
wherein spouses Ong assigned their mortgaged properties to
Roban to settle their total obligation and Memorandum of
Agreement (MOA). Spouses On.g filed a complaint to declare
the mortgage contract, dacion in payment agreement, and MOA
void. Spouses Ong allege that the dacion in payment agreement
is pactum commissorium
ISSUE:
WON the dacion in payment agreement entered into by
Spouses Ong and Roban constitutes pactum commissorium
(YES)
RATIO: YES; the elements of pactum commissorium
were present in the case
- The Court found that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which
is prohibited under Article 2088 of the Civil Code which
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
- The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.
- In the case at bar, Memorandum of Agreement and the
Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the Ong spouses to pay their
debt within the one-year period gives respondent the right
to enforce the Dacion in Payment transferring to it
ownership of the properties covered by TCT No. 297840.
Respondent, in effect, automatically acquires ownership of
the properties upon Spouses Ongs failure to pay their debt
within the stipulated period.
- In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
- Here, the alienation of the properties was by way of security,
and not by way of satisfying the debt. The Dacion in
Payment did not extinguish Spouses Ongs obligation to
Roban. On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in
Payment, petitioners had to execute a promissory note for
P5, 916, 117.50 which they were to pay within one year
DISPOSITIVE: CA reversed
Ong v. Roban
There was a valid dacion entered into, which extinguishes the
obligation:
- Debt due and demandable
- Default
98
G. Equitable Mortgage
Art. 1602 The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(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.
In any of the foregoing cases, any money, fruits, or other benefit
to be received by the vendee as rent or otherwise shall be
considered as interest which shall be subject to the usury laws.
(n)
Art. 1603 In case of doubt, a contract purporting to be a sale
with right to repurchase shall be construed as an equitable
mortgage. (n)
Art. 1604 The provisions of article 1602 shall also apply to a
contract purporting to be an absolute sale. (n)
Art. 1605 In the cases referred to in articles 1602 and 1604, the
apparent vendor may ask for the reformation of the instrument.
(n)
- Equitable mortgage: a contract, which, although lacking
in some formality, or form or words, or other requisites by a
statute, nevertheless reveals the intention of the parties to
charge property as security for a debt, but contains nothing
impossible or contrary to law.
- Essential requisites of an equitable mortgage:
1) The parties entered into a contract denominated as a
contract of sale; and
2) Their true intention was to secure an existing debt by
way of mortgage.
- Why does the law provide for equitable
mortgages? It is to prevent the circumvention of the laws
on usury and the prohibition against pactum commissrium.
Pacto de retro sales have been frequently used to conceal
the true nature of the contract, i.e., a loan secured by a
mortgage.
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- What quantum of evidence is needed to prove an
equitable mortgage? It may be proven in court by the
apparent vendor or vendor a retro to be one of a loan with
mortgage through, as with any civil case, preponderance of
evidence. Parole evidence becomes competent and
admissible.
Presumption that there is an equitable mortgage:
1. When the price of a sale with right to repurchase is
unusually inadequate;
- Not the true consideration; actually the loan
2. When the vendor remains in possession as lessee or
otherwise;
- Attribute of ownership
- If ownership was transferred, possession wouldv been
transferred
- Be suspicious when attributes of ownership are
divorced from each other
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;
- Goes against the right of a vendee a retro
- Would normally want absolute title
4. When the purchaser retains for himself a part of the
purchase price;
- Essentially, an interest for the loan
5. When the vendor binds himself to pay the taxes on the
thing sold;
- Owner pays taxes
- Attribute of ownership
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
Note: Equitable mortgage is not a type of mortgage
99
VII. PLEDGE
A. General Concepts
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 the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
Art. 2087 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor. (1858)
Art. 2123 With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be observed,
and subsidiarily, the provisions of this Title. (1873a)
- Pledge or conventional pledge (pignus in Roman
law): a real security transaction constituted to secure the
fulfillment of a principal obligation by the absolute owner
(the pledgor) of a movable property who has free disposal
of the property, or in the absence thereof, is legally
authorized for the purpose, subjecting the pledged
property (or collateral) to the condition that when the
principal obligation becomes due, the collateral may be
alienated for payment to the creditor.
- How is pledge perfected? It is perfected by mere
delivery of the movable property to the creditor (the
pledge) or to a third person.
- In case of doubt as to whether a transaction is a pledge or
dacin en pago, the presumption is that it is a pledge.
- As with respect to whether or not a transaction is a pledge
or a dacion in payment, the presumption is that it is pledge
(lesser transmission of rights according to the Supreme
Court; greater reciprocity of rights according to Maam)
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B. Form of Pledge
Art. 2096 A pledge shall not take effect against third persons if
a description of the thing pledged and the date of the pledge
do not appear in a public instrument. (1865a)
- To bind third parties, a description of the collateral and the
date of the pledge must appear in a public instrument
The public instrument must be presented before a notary public.
C. Obligations Secured
- A pledge may exceptionally secure after-incurred obligation
so long as these debts that are yet to be contracted (or
future debts) are accurately described.
- Dragnet clause: a stipulation specifically phrased to
subsume all debts, whether past or future.
o It is carefully and strictly construed, although the
pledge containing such provision is valid and legal.
- The amounts stated as consideration in the pledge do not
limit the amounts for which the pledge may stand as security
if from the four corners of the whole instrument the intent to
secure future and other indebtedness can be gathered.
- A pledge given to secure future debts is a continuing
security and is not discharged by repayment of the amount
named in the pledge, until the full amount of the principal
obligation is paid.
D. Object of Pledge
Art. 2094 All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
Art. 2095 Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed. (n)
Art. 416 The following things are deemed to be personal
property:
(1) Those movables susceptible of appropriation which are not
included in the preceding article;
(2) Real property which by any special provision of law is
considered as personalty;
(3) Forces of nature which are brought under control by science;
and
(4) In general, all things which can be transported from place to
place without impairment of the real property to which they are
fixed. (335a)
100
Art. 417 The following are also considered as personal
property:
(1) Obligations and actions which have for their object movables
or demandable sums; and
(2) Shares of stock of agricultural, commercial and industrial
entities, although they may have real estate. (336a)
- What can be pledged? Any of the following can be
pledged:
1) Movables within commerce and susceptible of
possession
2) Incorporeal rights evidenced by:
- Negotiable instruments
- Bills of lading
- Shares of stock
- Bonds
- Warehouse receipts
- And similar documents
E. Ownership of Collateral
Art. 2103 Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to
the owner of the thing pledged in order to recover it from, or
defend it against a third person. (1869)
Art. 2102 If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing
him, or insofar as the amount may exceed that which is due, he
shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of
the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
Art. 2101 The pledgor has the same responsibility as a bailor in
commodatum in the case under article 1951. (n)
Art. 1951 The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable to
the latter for the damages which he may suffer by reason
thereof. (1752)
Art. 2108 If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.
(n)
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Art. 2112 The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the
thing pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if
at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged
to give an acquittance for his entire claim. (1872a)
Art. 2097 With the consent of the pledgee, the thing pledged
may be alienated by the pledgor or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee consents to the
alienation, but the latter shall continue in possession. (n)
- It is essential that the pledgor be the absolute owner of the
collateral and that it have the free disposal of the property,
or, in the absence of the right of free disposition, that it be
legally authorized to constitute the pledge.
- The pledgor continues to be the owner of the collateral
unless the following occur:
1) Expropriation of the collateral
2) Sale by public auction under Articles 2108 and 2112
3) Voluntary sale under Article 2097
- The pledgors right to alienate is restricted by the
requirement imposed by law for the consent of the pledge
to the alienation. Ownership passes to buyer when pledge
grants consent, otherwise, the sale is invalid.
GR: Ownership remains with pledgor
XPN: Pledgor loses ownership when:
1. Expropriation
2. Public auction
3. Notarial sale
- Extrajudicial
- Foreclosure
4. Voluntary sale
- If no consent, no transfer of ownership
- Ownership only transferred by consent
101
Estate of George Litton v. Mendoza (1988) Gancayco, J.
Petitioner: Estate of George Littion
Respondent: Ciriaco B. Mendoza & CA
Concept: Pledge: Ownership of Collateral
Doctrine:
In guaranteeing an obligation, the pledgor remains the owner of
the collateral (what is pledged; in this case, the litigatious credit).
However, this right of ownership (and the right to alienate
pursuant to said ownership) is not absolute because of the
restriction provided by law under Art. 2097, NCC, requiring the
consent of the pledgee to the alienation. Ownership of said
collateral is only upon the granting of the consent by the
pledgee. Absent such consent, the sale (or assignment) is
invalidated.
Brief Facts:
Tan brought an action against Mendoza for the collection of a
sum of money in relation to the credit granted by Tan to
facilitate the sale to the Bernals of textile materials. Pending the
resolution of the case, he assigned his litigatious credit (in the
amount of P76,000) to George Litton, Sr. to secure his obligation
to Litton, Sr. Later, Tan and Mendoza entered into a compromise
agreement waiving all rights and actions (including the right
assigned to Litton, Sr.) against each other and declaring
Mendoza absolved from liability. When the compromise
agreement was approved, Mendoza sought to have the CA
resolution holding him liable set aside.
ISSUES:
1. WON the compromise agreement was valid (NO)
2. WON Mendoza is estopped from invoking the compromise
agreement as a ground for dismissing the action against
him (YES)
RATIO:
1. NO. The compromise agreement was invalid
because the alienation of the security without
notice and consent of the assignee will render
nugatory the very purpose of a pledge or
assignment of credit.
- Estate: Compromise agreement should be set aside
because previous thereto, Tan (one of the compromising
parties) executed a deed of assignment in favor of George
Litton, Sr. involving the same litigated credit
- The purpose of a compromise is to replace and terminate
controverted claims; courts encourage the same, and a
compromise once approved by final order of the court has
the force of res judicata between parties and should not be
disturbed except for vices of consent or forgery
- The validity of the guaranty or pledge in favor of Litton has
not been questioned; it fulfills the requisites of a valid
pledge or mortgage, pursuant to Art. 2085, NCC
o 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;
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(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 the purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property. (1857)
- Although Tan may validly alienate the litigatious credit
pursuant to Art. 1634 (NCC), it should not be taken to mean
as a grant of an absolute right on the part of Tan to
indiscriminately dispose of the thing or the right given as
security by way of a compromise agreement
o SC: This right should be read in consonance with Art.
2097, NCC
" Art. 2097, NCC: With the consent of the
pledgee, the thing pledged may be alienated by
the pledger or owner, subject to the pledge. The
ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee
consents to the alienation, but the latter shall
continue in possession.
" Although the pledgee/assignee, Litton, Sr., did not
ipso facto become the creditor of Mendoze, the
pledge being valid, the incorporeal right assigned
by Tan in favor of Litton can only be alienated with
due notice to and consent of Litton, Sr.
" To allow the assignor to dispose of or alienate the
security without notice and consent of the assignee
will render nugatory the very purpose of a pledge
or an assignment of credit
o Under Art. 1634, the debtor has a corresponding
obligation to reimburse the assignee, Litton, Sr. for the
price he paid or for the value given as consideration for
the deed of assignment; failing this, the alienation of
the litigated credit made by Tan in favor of Mendoza by
way of a compromise agreement does not bind the
assignee, Litton (now, his Estate)
" Art. 1634: When a credit or other incorporeal
right in litigation is sold, the debtor shall have a
right to extinguish it by reimbursing the assignee
for the price the latter paid therefor, the judicial
costs incurred by him, and the interest on the price
from the day on which the same was paid. A credit
or other incorporeal right shall be considered in
litigation from the time the complaint concerning
the same is answered. The debtor may exercise his
right within thirty days from the date the assignee
demands payment from him.
102
2. YES, Mendoza had knowledge of the deed of
assignment. Now, he is estopped from invoking
the compromise agreement (which violates the
deed of assignment) from absolving himself of
liability.
- Mendoza has been fully aware of the deed of assignment
executed by Tan in favor of Litton, Sr. because the deed was
duly submitted to the CFI Manila in a Civil Case where
C.B.M. Products is one of the defendants and the parties
were notified through their counsel (Mendoza is the
President of C.B.M.)
- His contention that he is not aware of the deed of
assignment deserves scant consideration from the Court
- The Estate has also pointed out that Mendoza (and his
counsel) were served with a copy of the deed of assignment,
which allegation remains uncontroverted
- SC: Mendoza is now estopped from entering into a
compromise agreement involving the same litigated credit
without notice to and consent of the assignee, especially
because no reimbursement was made in favor of Litton
o Mendoza acted in bad faith and in connivance with
assignor Tan in entering into the compromise
agreement to defraud Litton, Sr.
DISPOSITIVE: Petition is GRANTED.CA resolution is SET
ASIDE.
Estate of Litton v. Mendoza
Principal Obligation: between Tan and Litton
Security: Litigations credit
F. Rights of Third Party Pledgor
Art. 2120 If a third party secures an obligation by pledging his
own movable property under the provisions of article 2085 he
shall have the same rights as a guarantor under articles 2066 to
2070, and articles 2077 to 2081. He is not prejudiced by any
waiver of defense by the principal obligor. (n)
Art. 2117 Any third person who has any right in or to the thing
pledged may satisfy the principal obligation as soon as the latter
becomes due and demandable. (n)
Art. 2066 The pledgor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;
(3) The expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of him;
(4) Damages, if they are due. (1838a)
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Art. 2067 The pledgorr who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid. (1839)
Art. 2068 If the pledgor should pay without notifying the
debtor, the latter may enforce against him all the defenses which
he could have set up against the creditor at the time the
payment was made. (1840)
Art. 2069 If the debt was for a period and the pledgor paid it
before it became due, he cannot demand reimbursement of the
debtor until the expiration of the period unless the payment has
been ratified by the debtor. (1841a)
Art. 2070 If the pledgor has paid without notifying the debtor,
and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the pledgor was prevented by a fortuitous
event from advising the debtor of the payment, and the creditor
becomes insolvent, the debtor shall reimburse the pledgor for
the amount paid. (1842a)
Art. 2079 An extension granted to the debtor by the creditor
without the consent of the pledgor extinguishes the guaranty.
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of time referred to herein. (1851a)
Art. 2080 The pledgors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter. (1852)
Art. 2081 The pledgor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent
in the debt; but not those that are personal to the debtor. (1853)
- Although the principal debtor may be the pledgor, the law
allows third persons (or third party pledgors), which are not
parties to the principal obligation, to secure the latter by
pledging their own property.
- Third party pledgor: one who is not a party to the
principal obligation but secures the latter by pledging his
own property.
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G. Right to Possession
Art. 2093 In addition to the requisites prescribed in article
2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement. (1863)
Art. 2110 If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to
the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge. (n)
- The primary obligation of the pledgor is the delivery, i.e.,
the formal act of transferring, or the giving or yielding of
possession or control, of the collateral.
- A pledge is a real contract.
- If the creditor returns the thing pledged, the pledge is
extinguished.
Possession lies with the pledgee
No transfer of possession, no pledge
Pledgee must have possession
1. Right of Retention
Art. 2098 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. (1866a)
Art. 2109 If the creditor is deceived on the substance or quality
of the thing pledged, he may either claim another thing in its
stead, or demand immediate payment of the principal
obligation. (n)
Art. 2099 The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and is
liable for its loss or deterioration, in conformity with the
provisions of this Code. (1867)
Art. 2100 The pledgee cannot deposit the thing pledged with a
third person, unless there is a stipulation authorizing him to do
so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged. (n)
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Art. 2104 The creditor cannot use the thing pledged, without
the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it be
judicially or extrajudicially deposited. When the preservation of
the thing pledged requires its use, it must be used by the
creditor but only for that purpose. (1870a)
Art. 2106 If through the negligence or wilful act of the pledgee,
the thing pledged is in danger of being lost or impaired, the
pledgor may require that it be deposited with a third person. (n)
- Possession by the pledgee of the collateral constitutes the
pledge.
- The right of retention is a means or device by which the
pledgee is able to obtain payment of the principal
obligation.
Severance of ownership and possession
Logical rules provided by the Civil Code
Similar to rights involved in deposit
2. Right to Payment
Art. 2102 If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing
him, or insofar as the amount may exceed that which is due, he
shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of
the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
Art. 2118 If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his
claim, and deliver the surplus, should there be any, to the
pledgor. (n)
- In case of certain types of collateral, Articles 2102 and 2118
give the pledgee not only the right to possession but also
the right to payment of the principal obligation without the
need of a foreclosure sale.
- Those mentioned in the said articles are used to
compensate for the interest, then to the principal. If the
principal is fully paid as a result, the pledge is extinguished.
- If the collateral earns or produces fruits, income, dividends,
or interests, the pledge, as a general rule, extends to the
interests and earnings.
- But the law allows the creditor to compensate what he
receives as fruits, income, dividends or interests with the
interest owed under the principal obligation
104
- If no interest is due or if the amount received exceeds the
interest due, then the creditor is allowed to apply the same
to the principal that is die
- The result is the payment of the obligation
Manila Banking Corp. v. Teodoro, Jr. and Teodoro Bidin, J.
Plaintiff-Appellee: The Manila Banking Corp. (MBC)
Defendant-Appellants: Anastacio Teodoro, Jr. and Grace
Anna Teodoro
Concept: Pledge; Right to Possession; Right to Payment
Contracts: 3 Promissory Notes, and a Deed of Assignment of
Receivables (later considered as one of pledge)
Doctrine:
Even if the instrument allows for the full alienation of the title
and rights, it may still be considered as a contract of pledge if
the debt continues in existence and is not discharged by the
transfer, and that accordingly, the use of the terms ordinarily
importing conveyance, of absolute ownership will not be given
that effect in such a transaction if they are also commonly used
in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear
and ambiguous language or other circumstances excluding an
intent to pledge.
Brief Facts:
Initially, the Teodoros and MBC entered into an agreement
where the Teodoros assigned its title and rights over credit
against EEA (now PFC) to MBC, in order to be able to make
loans from the MBC. Two years later, the Teodoros made such
loans, as evidenced by promissory notes. When the Teodoros
failed to pay, MBC tried to collect money from the PFC. When it
failed, MBC went after the Teodoros. Now the Teodoros are
claiming that by the virtue of the assignment of credit, their
obligation had been extinguished.
ISSUES:
1. WON the assignment of the amounts receivables has the
effect of payment of all the loans evidenced by the 3
promissory notes
2. WON MBC must first exhaust all legal remedies against the
Phil. Fisheries Commission before it can proceed
Obiter: Assignment of Credit
- An assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or
donation, and without the need of the consent of the debtor,
transfers his credit and its accessory rights to another, known
as the assignee, who acquires the power to enforce it to the
same extent as the assignor could have enforced it against
the debtor.
- It may be in the form of a sale but may also be a dacion en
pago (it is made in order to obtain release from ones debt
by assigning to the creditor a credit which he has against a
third person), or even a donation. It may also be done by way
of guaranty.
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- The character it may assume determines its requisites and
effects, its regulation, and the capacity of the of the parties
to execute it; in every case, the obligations between the
assignor and assignee will depend upon the judicial relation
which is the basis of the assignment.
RATIO
1. No. The deed was merely a contract of security by
way of pledge and not a mode of payment through
dacion en pago
- The deed of assignment executed did not transfer ownership
over the receivables from the Teodoros to MBC.
o The deed provided that it was for and in consideration
of certain credits, loans, overdrafts, and their credit
accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security
o It was further stipulated that the deed shall act as a
continuing guaranty for future loans.
- Teodoros: Deed contained terms that they remise, release
and quitclaim their rights, title and interest in favor of MBC.
Hence it should be considered payment and not merely
security/guaranty.
- SC: Character of the transaction is determined not by
language but by intention.
o Lopez v. CA, quoting AmJur: even though a transfer, if
regarded by itself, appears to have been absolute, its
object and character might still be qualified and
explained by a contemporaneous writing declaring it to
have been a deposit of the property as collateral security.
It has been said that a transfer of property by the debtor
to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if
the debt continues in existence and is not discharged by
the transfer, and that accordingly, the use of the terms
ordinarily importing conveyance, of absolute ownership
will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and
ambiguous language or other circumstances excluding an
intent to pledge.
- Also, it cannot be dacion en pago because at the time the
deed was executed (1964), the loans were not in existence
yet, which would only have been contracted two years later
after the execution of the deed (1966).
o Even if the deed were considered to be a form of
payment, there was no obligation to be extinguished yet.
o Moreover, it is imperative that the deed should have
stated expressly and unequivocally that it was executed in
order to extinguish an existing obligation, for it do so, or
that the old and new obligations be, on every point,
incompatible with each other.
- Intent reveals that the deed was for security and not for
payment.
o In cases where there is doubt as to whether a transaction
is a pledge or dacion en pago, the presumption is in favor
of pledge, there being lesser transmission of rights.
105
2. No. MBC need not have exhausted all legal
remedies against the Phil. Fisheries Commission.
- The obligation of the Teodoros not having been
extinguished yet by the deed of assignment, they remain as
the principal debtors and not guarantors.
- The deed merely guarantees the obligation and does not
make them guarantors.
o Hence, they cannot avail of the benefit of excussion.
- The essence of pledge is that when the principal obligation
becomes due, the things in which the pledge consists may
be alienated for payment to the creditor (Art. 2087).
o The Teodoros being the principal debtors and the
pledgors, MBC may resort to them directly.
- MBC did try to collect the amounts receivable from the PFC
but had to course it to the Office of the President, which
denied their claim. Hence the deed of assignment acting as a
guarantee for the loan, became worthless. It is only proper
thereafter that the Teodoros settle their accounts, given the
repeated demands for payment made by MBC.
DISPOSITIVE: Appeal is DISMISSED for lack of merit.
CONCURRING: Feliciano, J.
- While the ponencia stated that the character of the
transactions between the parties is not determined by the
language used in the document but by their intention, it
must be noted that intent is determined, in the first instance,
by the very language used.
- The language of the deed contains terms that intend to
effect a complete alienation of title and rights over the
amounts receivable, from the Teodoros to MBC.
o Terms like remise, release and quitclaim were used.
o The Teodoros were even to be considered as agents of
the assignee (MBC) when it comes to the collection of the
amounts.
- However, while the form itself is sufficient to effect a
complete alienation, these terms have to be read and
considered with the rest of the other parts of the contract.
o In this case, there was other language evincing intent to
pass the title on for the limited purpose of securing
another principal obligation owed by the Teodoros to
MBC.
o The title does move between the parties but such title is
defeasible being designed to collateralize the principal
obligation.
- A complete alienation of the title was made for the
convenience of MBC.
o If the conveyance was not complete, MBC would have
been forced to treat it as one of pledge or of chattel
mortgage.
o MBC, if it wanted to proceed upon the security, would
still have needed to go through foreclosure proceedings,
as pactum commissorium is prohibited.
" Pactum Commissorium - a mortgagee or pledgee is
prohibited from simply taking and appropriating the
personal property turned over to him as security for
the payment of a principal obligation
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o Though the said deed of assignment by way of security
avoids the necessity of going through public
sale/foreclosure imposed by the prohibition on pactum
commisorium, by, in effect, placing the sale of the
collateral up front.
- Had the terms that the deed was also executed as a security
arrangement, then the deed would have taken effect only as
a complete alienation of rights and would have become a
mode of payment/dacion en pago, as the Teodoros have
been contending.
- In order that an absolute conveyance of title to the credits
being assigned be treated or qualified as a security,
language to such effect must be found in the document
itself.
- It should also be noted that the deed in question in this case
simply follows a form in standard use in commercial banking.
Manila Banking v. Teodoro
No point in going after the security because now defunct.
Chu v. CA (1989) Grino-Aquino, J.
Petitioners: Victoria Yau Chu and husband Michael Chu
Respondents: Family Savings Bank and/or CAMS Trading
Enterprise, Inc.
Concept: Pledge; Right to Possession; Right to Payment
Doctrine:
Where the security for the debt is also money deposited in the
bank, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtors overdue obligation, with the
latters consent.
Brief Facts:
Mrs. Chu assigned her time deposit certificates to CAMS
Trading as collateral for cement she purchased from the latter,
on credit. When she defaulted in payment, CAMS Trading
encashed the time deposit certificates, with Mrs. Chus
conformity. However, after the encashment, Mrs. Chu demanded
its restoration, arguing that the encashment is a pacto
commissorio prohibited by law.
ISSUES:
1. WON the encashment of her time deposit certificates was a
pacto commissorio and hence, must be annulled (NO)
2. WON the debts have been paid, as claimed by Mrs. Chu
(NO)
106
RATIO:
1. No. The encashment is not a pacto commissorio
and hence, valid
- A pacto commissorio is a provision for automatic
appropriation of the pledged or mortgaged property by the
creditor in payment of the loan upon its maturity.
- The prohibition is intended to protect the obligor, pledgor,
or mortgagor against being overreached by his creditor who
holds a pledge or mortgage over property whose value is
much more than the debt
- Where the security for the debt is also money deposited in
the bank, the amount of which is even less than the debt, it
was not illegal for the creditor to encash the time deposit
certificates to pay the debtors overdue obligation, with the
latters consent
2. Payment was not proven by evidence
- Mrs. Chu signed on July 18, 1980 a letter admitting her
indebtedness to be in the sum of P404,500
- She presented receipts for payments prior to July 18, 1980
- There is no proof of payment made by her thereafter to
reduce or extinguish her debt
DISPOSITIVE: Petition denied.
Chu v. CA
Money for money
Why will you bid for money? It is illogical to bid for cash.
Citibank, N.A. vs. Sabeniano (2006) Chico-Nazario, J.
Petitioners: Citibank; and Investors Finance Corporation
(FNCB)
Respondents: Modesta Sabeniano
Concept: Pledge
Doctrine:
Under Art. 2118, credit which has been pledged, which becomes
due before it is redeemed by the pledger, may be collected by
the pledgee and receive the amount of due.
Brief Facts:
Sabeniano obtained several loans from Citibank, totaling
P1.92M, secured by a Declaration of Pledge for her dollar
accounts in Geneva, and Deeds of Assignment for her money
market placements. When she defaulted, Citibank off-set her
balance with her account deposit in said bank, with the money
market placements pursuant to the Deed of Assignment, and her
dollar accounts per the Declaration of Pledge. Sabeniano filed a
complaint questioning the propriety of the off-set made by the
bank.
ISSUES:
WON the off-set made by the bank is valid with regard to:
1. Savings Account with Citibank PH (YES)
2. Money Market Placements with FNCB Finance (YES)
3. Dollar Accounts with Citibank- Geneva (NO)
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RATIO:
1. YES. This is a case of Legal Compensation
expressly provided for under Art. 1278-1279, NCC
- Art. 1279 provides the requisites necessary for there to be
legal compensation:
o That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other;
o That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
o That the two debts be due;
o That they be liquidated and demandable;
o That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
- All of said requirements are met in the case at bar:
(a) Citibank was creditor of Sabeniano for her outstanding
loans, and at the same time, she was a creditor of the
bank, as far as her deposit account was concerned,
since bank deposits, should be considered as a simple
loan by the depositor to the banking institution.
(b) Both debts consisted in sums of money.
(c) At the time, all of her PNs had matured and became
demandable, while her savings account was
demandable anytime.
(d) No retention or controversy over the Ps and the deposit
account.
- Compensation takes place by operation of law; therefore,
even in the absence of an expressed authority from
Sabeniano, Citibank had the right to effect the partial
compensation or off-set her outstanding loans with the
deposit account amounting to P31, 079.
2. YES. Off-set was made pursuant to the Deed of
Assignment she executed in favor of Citibank
- There can be no legal compensation with regards to the
money market placements as Sabeniano was the creditor
and FNCB Finance the debtor; while, as the to the
outstanding loans, Citibank was the creditor and she was
the debtor. The first requirement under Art. 1278 is not
present.
- What Citibank actually did was to exercise the rights to the
proceeds of her money market placements by virtue of the
Deeds of Assignment executed in its favor.
- As said deed was notarized, it carries with it the
presumption that it was duly executed, and the burden fell
to Sabeniano to present evidence of any defect or
irregularity in its execution. This, however, she failed to do,
as she presented nothing but her bare denial of its
execution.
- (LOOK AT FACT # 2) Citibank was only acting upon the
authority granted it under the Deeds when it used the
proceeds of the PNs, paid by FNCB, to partly pay for her
outstanding loans.
107
- This was not a case of legal compensation or offset under
Art. 1278, but rather, it partly extinguished her obligations
through the application of the security given by her for her
loans. Although the said documents were entitled
Deeds of Assignment, they were in reality more
of a pledge by Sabeniano to Citibank for her credit
due from FNCB Finance by virtue of her money
market placements. It was effected under Art. 2118,
NCC.
- The principal amounts and interests earned by the money
market placements, amounting to P1.02M has been applied
to her outstanding loans.
3. NO.
- Citibank: As there still remained a balance of P1.06M in
her outstanding loan, it proceeded to applying Sabenianos
dollar accounts with Citibank-Geneva against her balance,
pursuant to a Declaration of Pledge supposedly executed
by her in its favor.
- SC: The Declaration of Pledge is exceedingly suspicious
and irregular:
(a) It is not notarized: SC would think that Citibank
would take greater cautionary measures with the
preparation and execution of said document because it
involved the deposits of Sabeniano with a Citibank
branch in another country. As it is not notarized, it could
not enjoy the same prima facie presumption of due
execution that is extended to notarized documents,
and Citibank must discharge the burden of proving due
execution and authenticity.
(b) Bank was unable to establish the date when it
was actually executed: The photocopy that Citibank
PH submitted was undated. The original copy that
Citibank-Geneva forwarded bore the note 24
September 1979. Sabeniano, however, presented her
passport and plane tickets to prove that she was out of
the country on the said date and could not have signed
the pledge. As Citibank could not provide an
explanation as to how and why the said date was
written on the pledge, SC shall abide by the
presumption that the written document is truly dated.
(c) Declaration of Pledge is irregularly filled -out:
The pledge was in a standard printed form constituted
in favor of Citibank. However, in the space which should
have named the pledger, the name of Citibank was
typewritten, to wit
The pledge right herewith constituted shall secure all
claims which the Bank now has or in the future acquires
against Citibank N.A., Manila xxx
The pledge, therefore, made no sense, the pledger and
pledgee being the same entity. Even if it was made as
an honest mistake, considering the value of such a
document, the mistake as to a significant detail in the
pledge could only be committed with gross
carelessness on the part of Citibank, and raised serious
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doubts as to the authenticity and due execution of the
same. Said document had passed through several bank
officers in the country and abroad, yet surprisingly and
implausibly, no one noticed such a glaring mistake.
(d) Sabeniano claimed that her signature was a
forgery: In such a claim, the best evidence rule
applies. Without the original document containing the
alleged forged signature, one cannot make a definitive
comparison which would establish forgery. It also failed
to present any evidence to convince SC that it had
exerted diligent efforts to secure the original copy; nor
did it proffer the reason why Citibank-Geneva
obstinately refused to give it back. Thus, there is no
justification to allow the presentation of a mere
photocopy in lieu of the original.
- Without the Declaration of Pledge, Citibank had
not authority to demand the remittance of her
dollar accounts. It cannot effect legal compensation
since Citibank-Geneva is a distinct and separate entity.
Thus, the 1st requisite under Art. 1278 is again missing.
- Therefore, remittance of Sabenianos dollar accounts from
Citibank-Geneva was illegal, and null and void. Citibank is
obligated to return to respondent US$149,632.99.
- Sabeniano still obligated to pay P1.06M for the balance of
her outstanding loans.
DISPOSITIVE: Petition partly granted.
Citibank v. Sabeniano
This is the case on right to payment.
There were several loans. The remedy of Citibank:
1. Savings account of Citibank:
- Legal Compensation
- Arts. 1278-1279
2. Money market placement with FNCB:
- Deed of Assignment
- Art. 2118 pledge
3. Dollar deposits with Citibank Geneva:
- Declaration of Pledge
- Invalid pledge
- If pledge were valid, Citibank could proceed against
Sabeniano under Art. 2118
108
H. Return of Collateral
Art. 2105 The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
(1871)
Art. 2107 If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the fault
of the pledgee, the pledgor may demand the return of the thing,
upon offering another thing in pledge, provided the latter is of
the same kind as the former and not of inferior quality, and
without prejudice to the right of the pledgee under the
provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of
any danger to the thing pledged. (n)
Art. 2108 If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale. The
proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.
(n)
Art. 2110 If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to
the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge. (n)
Art. 2111 A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish the
pledge. For this purpose, neither the acceptance by the pledgor
or owner, nor the return of the thing pledged is necessary, the
pledgee becoming a depositary. (n)
I. Foreclosure of Pledge
Art. 2112 The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the
thing pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if
at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged
to give an acquittance for his entire claim. (1872a)
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Art. 2119 If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the debt.
(n)
1. Who May Bid
Art. 2113 At the public auction, the pledgor or owner may bid.
He shall, moreover, have a better right if he should offer the
same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is
the only bidder. (n)
Art. 2114 All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee
is deemed to have been received the purchase price, as far as
the pledgor or owner is concerned. (n)
2. Effect of Notarial Sale
a. Extinction of Principal Obligation
Art. 2115 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
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. (n)
Art. 2116 After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
- The essence of the pledge is its accessory character
b. Right of Redemption
- Statutory right granted to the owner of collateral to
repurchase the collateral even after confirmation of a
foreclosure sale but within the periods prescribed by law
- Effectively eliminates the lien created on the title to the
collateral
- But the right of redemption doesnt exist preternaturally, in
this jurisdiction, there is no statute that vests a right of
redemption over personal property
109
Paray and Espeleta vs. RodriguezTig
Petitioners: Bonifacio and Faustina Paray (Spouses Paray) and
Vidal Espeleta (Espeleta)
Respondents: Abdulia C. Rodriguez, Miguela Jariol, Leonora
Nolasco, Dolores Soberano, Julia Generoso, Teresita R.
Natividad, Genoveva R. Soronio (Respondents)
Concept: Right of Redemption (Pledge)
Doctrine: Things pledged are not subject to redemption. The
buyer of the thing pledged automatically becomes the owner.
Brief Facts: Pursuant to a court order allowing foreclosure, the
spouses Paray foreclosed the pledged constituted to secure the
loans of the respondents. Before the foreclosure sale, the
respondents tried to tender payment, but the same was not
accepted, and foreclosure was made. Respondents sued the
spouses Paray. CA ruled that the tender of payment must be
treated as redemption following the policy of liberal
interpretation/construction of redemption rules. CA also said
that the buyer of a foreclosed thing pledged does not become
ipso facto the owner of the thing.
ISSUES:
1. Whether or not the consignation made by the respondents
extinguished their principal loan obligations and the pledge
contracts. (NO)
2. Whether or not the buyer at a public auction of pledged
property ipso facto becomes the owner of the property
sold. (YES)
3. Whether or not the procedure in the auction sale was faulty.
(NO)
RULING:
1. No, the principal loan obligations and the pledge
contracts were not extinguish because the tender
of payment and consignations could not be
treated as redemption and that the amounts
tendered were insufficient to cover the interests
due.
- A pledge is an accessory contract, and is necessarily
discharged if the principal obligation is extinguished.
- The right of redemption involves payments made by the
debtors after the foreclosure of their properties, and not
those made or attempted to be made before the
foreclosure sale.
- The sale in this case was an extrajudicial sale, specifically a
notarial sale, as distinguished from a judicial sale as typified
by an execution sale. The foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in
due time, is to proceed before a notary public to the sale of
the thing pledged.
- The fact the judgment of the RTC during the first attempt to
foreclose read giving due course to the foreclosure
does not mean that it was judicial in character. While it did
authorize the sale by public auction, such declaration could
not detract from the fact that the sale so authorized is
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actually extrajudicial in character. It did not direct the sale
by public auction, but instead upheld the right of the
spouses Paray to conduct such sale at their own volition.
- While the Courrt of Appeals asserted that pledged
property, necessarily personal in character, may be
redeemed after being sold at public auction, no law or
jurisprudence establishes or affirms such right. The right to
redeem does not exist preternaturally. It is not predicated
on proprietary right, instead, it is a bare statutory privilege
to be exercised only by persons named in the statute. The
right to redeem mortgaged real property sold extrajudicially
is established by RA 3135, but the said law does not extend
the same benefit to personal property. Act No. 1508, the
Chattel Mortgage law, governs the extrajudicial sale of
mortgaged personal property, but the statute is definitely
silent on redemption of personal property extrajudicially
sold. Section 39 of the 1997 Rules of Civil Procedure, relied
upon by the Court of Appeals, utters that the right of
redemption applies to real properties, not personal
properties, sold on execution.
- The Supreme Court, as early as 1927, rejected the
proposition that personal property may be covered by the
right of redemption. In Sibal vs. Valdez, the Court ruled that
sugar cane crops are personal property and are not subject
to the right of redemption.
- Since the pledged shares are not subject to redemption, the
Court of Appeals had no business invoking and applying the
inexistent right of redemption.
- If the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides
the right of the creditor to retain possession of the pledged
items until the debt is paid. Article 2105 clarifies that the
debtor cannot ask for return of the thing pledged against
the creditors will, unless and until he has paid the debt and
its interest. The Civil Code also establishes the right of the
pledgee to foreclose the pledge.
- The consignations did not discharge the respondents from
the loan and the pledge agreements. The amounts
consigned could answer for their respective principal loan
obligations, but were not sufficient to cover the interests
due on these loans, which were pegged at 5% per month.
- The respondents, save for Soberano, never challenged the
interest rate in the Supreme Court. It was mentioned in the
RTC decision, but it was held that it was doubtful whether
the interests were exorbitant or excessively usurious for
usury has become legally inexistent. Because of the
foregoing, the Court found no reason to disagree that in
order that the consignation could have the effect of
extinguishing the pledge contracts, the amounts should
cover not just the principal loans, but also the interests
thereon.
- The spouses Parays right to proceed was also affirmed not
only by law, but also by a final court judgment. Any ruling
enjoining them from exercising such right would have the
effect of superseding a final and executor judgment.
110
- The respondents may have saved themselves much trouble
if they simply participated in the auction sale, as they are
permitted to bid themselves on their pledged properties.
2. Yes, the buyer is ipso facto rendered the owner.
- It was argued that the buyer does not become ipso factor
the owner of the pledged property sold because the
pledgor has a one-year period to redeem the property.
However, since the right to redeem is inexistent in pledge,
the buyer, thus, automatically become the owner.
3. No, the auction was not tainted with irregularity.
- CA: Since there were several pledgeors, the shares should
have been sold in different lots identifying the owners
thereof, and the amount of proceeds applied to their loans
so that they would know how much to spend for
redemption.
- SC: this was rendered non-issue by the fact that there can
be no right to redemption in the first place. There are no
provisions in the Rules of Court or in any law that require
pledged properties to be sold at auction separately.
o It is the pledgee, not the pledgeor, who has the right to
choose which items should be sold if two or more
things are pledged. There is no option given to
pledgeors under the Civil Code. There is also no
prohibition that the pledgee of several different pledge
contracts should not auction all of the pledged
properties on a single occasion or that the buyer should
not pay a single purchase price.
o A different ruling, however, would obtain if at the
auction, a bidder expressed the desire to bid on a
different number or portion of pledged shares. In such
case, there may lie the need to ascertain with
particularity which of the shares are covered by the bid
price, since not all shares may be sold at the auction
and correspondingly not all of the pledge contracts
extinguished. The same situation would lie if one or
some of the owners of the pledged property
participated in the auction, bidding only on their
respective pledged property.
DISPOSITIVE: CA decision reversed.
Paray v. Rodriguez
Right of redemption is a statutory right found in law. There is no
law for redemption of a pledge.
NCC provides no right of redemption. ROC are procedural rules,
not a law.
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c. Right to Surplus or Deficiency
Art. 2115 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
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. (n)
- If stipulated in the contract of pledge, the debtor may
recover the excess of the price of the sale over the amount
of the principal obligation
- But by electing to sell the collateral, instead of suing on the
principal obligation, the creditor waives any other remedy,
and must abide by the results of the foreclosure sale with no
right to recover any deficiency
J. Legal Pledges
Art. 2121 Pledges created by operation of law, such as those
referred to in articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing
as well as on the termination of the pledge. However, after
payment of the debt and expenses, the remainder of the price of
the sale shall be delivered to the obligor. (n)
- Pledges that arise by operation of law
- Grants pledgee the right of retention over the property as a
means or device by which the pledgee is able to obtain
payment of what may be due
1. Examples of Legal Pledges
Art. 1944 The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even though it may
be by reason of expenses. However, the bailee has a right of
retention for damages mentioned in article 1951. (1747a)
Art. 1951 The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable to
the latter for the damages which he may suffer by reason
thereof. (1752)
Art. 1994 The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
deposit. (1780)
Art. 2004 The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel
guests. (n)
111
Art. 546 Necessary expenses shall be refunded to every
possessor; but only the possessor in good faith may retain the
thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good
faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding
the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof. (453a)
Art. 1731 He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid. (1600)
- Article 1731 Articulates the concept of a mechanics lien,
which is akin to a warehousemans lien, in that by way of
pledge, the repairman has the right to retain possession of
the movable until he is paid.
- However, said right of retention is conditioned upon the
execution of work upon the movable
- Creation of mechanics lien does not depend upon non-
payment by the owner
- Rather, the contractor creates his own lien by performing
the work or furnishing the materials
2. Foreclosure of Legal Pledge
Art. 2122 A thing under a pledge by operation of law may be
sold only after demand of the amount for which the thing is
retained. The public auction shall take place within one month
after such demand. If, without just grounds, the creditor does
not cause the public sale to be held within such period, the
debtor may require the return of the thing. (n)
Art. 2121 Pledges created by operation of law, such as those
referred to in articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing
as well as on the termination of the pledge. However, after
payment of the debt and expenses, the remainder of the price of
the sale shall be delivered to the obligor. (n)
- Demand is essential prior to the foreclosure of a legal
pledge
- Public sale must be conducted within one month after
demand
- Proceeds of public sale shall be used to pay debts and
expenses, and the surplus to be delivered to the debtor
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VIII. CHATTEL MORTGAGE
A. General Concepts
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 the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
Art. 2087 It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor. (1858)
Art. 2140 By a chattel mortgage, personal property is recorded
in the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage. (n)
Art. 2141 The provisions of this Code on pledge, insofar as they
are not in conflict with the Chattel Mortgage Law shall be
applicable to chattel mortgages. (n)
Chattel Mortgage
o Is a real security transaction constituted to secure
the fulfillment of a principal obligation by the absolute
owner (the mortgagor) of personal property who
has free disposal of the property, and in the absence
thereof, is legally authorized for the purpose
o Is perfected by the recording of the personal
property in the Chattel Mortgage Register as a security
o Subjects the collateral to the condition that when the
principal obligation becomes due, the collateral may be
alienated for payment to the creditor (the mortgagee)
- Art. 2140: adheres to the equitable concept of a chattel
mortgage; preserves the distinction between pledge and
chattel mortgage
- Act of recording grants the chattel mortgagee the
symbolic possession of the collateral
- In commercial transactions, it greatly facilitates the sale of
goods and merchandise; sales of merchandise would be
sluggish and insubstantial if a chattel mortgage did not
adequately protect sellers against the defaults and
delinquencies of buyers
112
Old definition of Chattel Mortgage (repealed by the CC)
- A conditional sale of personal property as security for the
payment of a debt, or the performance of some other
obligation specified therein, the condition being that the
sale shall be void upon the seller paying the purchaser a
sum of money or doing some other act named. If the
condition is performed according to the terms the
mortgage and sale immediately becomes void, and the
mortgagee is thereby divested of his title.
- Originally regarded as a conditional sale of personal
property, similar to a pacto de retro sale
PCI Leasing and Finance vs. Trojan Metal IndustriesCarpio, J.
Petitioner: PCI Leasing and Finance
Respondents: Trojan Metal Industries (TMI)
Concept: Chattel Mortgage General Concepts
Doctrine:
Upon default, creditor-mortgagee was entitled to seize the
mortgaged properties, not as owner, but as creditor-mortgagee,
for the purpose of foreclosing the chattel mortgage.
Brief Facts:
TMI came to PCI to seek a loan. Instead of extending a loan, PCI
offered to buy various equipment TMI owned, in exchange for
P2.8M. Deeds of sale were executed and both parties entered
into a lease agreement.
ISSUE:
WON the sale with lease agreement the parties entered into was
a financial lease (NO).
RATIO: No, the sale with lease agreement was a
simple loan secured by a chattel mortgage.
- PCI: transaction between the parties was a sale and
leaseback financing arrangement, which is not contrary to
law, morals, good customs, public order or public policy;
guaranty deposit should be forfeited in its favor, as provided
in the lease agreement
- TMI: transfer of ownership to PCI was never the intention of
the parties; guaranty deposit will only be forfeited if TMI
returned the leased equipment to PCI before expiration of
the lease agreement. Since TMI never returned the lease
property voluntarily, but through writ of replevin, the
guaranty deposit should not be forfeited.
- SC: In a true financial leasing, whether under RA 5980 or RA
8556, a finance company purchases on behalf of a cash-
strapped lessee the equipment the latter wants to buy, but,
due to financial limitations, is incapable of doing so. The
finance company then leases the equipment to the lessee in
exchange for the latter's periodic payment of a fixed
amount of rental.
o Here, TMI already owned the subject equipment before
it transacted with PCI. Therefore the transaction
between the parties cannot be deemed to be in the
nature of a financial leasing as defined in law.
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o In Cebu Contractors Consortium v CA, where the client
already owned the equipment, but needed additional
working capital and the finance company purchased
such equipment with the intention of leasing it back to
him, the lease agreement was simulated to disguise the
true transaction that was a loan with security.
o Intention of the parties was not to enable the client to
acquire and use the equipment, but to extend to him a
loan.
o Similarly, in Investors Finance Corporation v. CA, a
borrower came to Investors Finance Corporation (IFC)
to secure a loan with his heavy equipment and
machinery as collateral. The parties executed
documents where IFC was made to appear as the
owner of the equipment and the borrower as the
lessee. As consideration for the lease, the borrower-
lessee was to pay monthly amortizations over a period
of 36 months. The parties executed a lease agreement
covering various equipment described in the lease
schedules attached to the lease agreement. As security,
the borrower-lessee also executed a continuing
guaranty.
o In Investors Finance Corporation v. Court of Appeals,
the transaction between the parties was held not to be
a true financial leasing because the intention of the
parties was not to enable the borrower-lessee to
acquire and use the heavy equipment and machinery,
which already belonged to him, but to extend to him a
loan to use as capital for his construction and logging
businesses. The Court held that the lease agreement
was simulated to disguise the true transaction between
the parties, which was a simple loan secured by heavy
equipment and machinery owned by the borrower-
lessee. The Court differentiated between a true
financial leasing and a loan with mortgage in the guise
of a lease. The Court said that financial leasing
contemplates the extension of credit to assist a buyer in
acquiring movable property, which he can use and
eventually own. If the movable property already
belonged to the borrower-lessee, the transaction
between the parties, according to the Court, was a loan
with mortgage in the guise of a lease.
o Financial leasing contemplates the extension of credit
to assist a buyer in acquiring movable property which
he can use and eventually own.
- The transaction between the parties was simply a loan
secured by chattel mortgage. Thus upon TMI's default, PCI
was entitled to seize the mortgaged equipment, not as
owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage.
- PCI's sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the
exercise of its right to foreclose the chattel mortgage as
creditor-mortagee.
DISPOSITVE: CA affirmed with modification
113
B. Form of Chattel Mortgage
Act No. 1508, Sec. 4 Validity. A chattel mortgage shall not
be valid against any person except the mortgagor, his executors
or administrators, unless the possession of the property is
delivered to and retained by the mortgagee or unless the
mortgage is recorded in the office of the register of deeds of the
province in which the mortgagor resides at the time of making
the same, or, if he resides without the Philippine Islands, in the
province in which the property is situated: Provided, however,
That if the property is situated in a different province from that in
which the mortgagor resides, the mortgage shall be recorded in
the office of the register of deeds of both the province in which
the mortgagor resides and that in which the property is situated,
and for the purposes of this Act the city of Manila shall be
deemed to be a province.
Act No. 1508, Sec. 5 Form. A chattel mortgage shall be
deemed to be sufficient when made substantially in accordance
with the following form, and shall be signed by the person or
persons executing the same, in the presence of two witnesses,
who shall sign the mortgage as witnesses to the execution
thereof, and each mortgagor and mortgagee, or, in the absence
of the mortgagee, his agent or attorney, shall make and
subscribe an affidavit in substance as hereinafter set forth, which
affidavit, signed by the parties to the mortgage as above stated,
and the certificate of the oath signed by the authority
administering the same, shall be appended to such mortgage
and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of ______19____ by
_______________, a resident of the municipality of
______________, Province of ____________, Philippine Islands
mortgagor, to ____________, a resident of the municipality of
___________, Province of ______________, Philippine Islands,
mortgagee, witnesseth:
"That the said mortgagor hereby conveys and mortgages to the
said mortgagee all of the following-described personal property
situated in the municipality of ______________, Province of
____________ and now in the possession of said mortgagor, to
wit:
(Here insert specific description of the property mortgaged.)
"This mortgage is given as security for the payment to the said
______, mortgagee, of promissory notes for the sum of
____________ pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per centum per
annum, according to the terms of __________, certain promissory
notes, dated _________, and in the words and figures following
(here insert copy of the note or notes secured).
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"(If the mortgage is given for the performance of some other
obligation aside from the payment of promissory notes, describe
correctly but concisely the obligation to be performed.)
"The conditions of this obligation are such that if the mortgagor,
his heirs, executors, or administrators shall well and truly perform
the full obligation (or obligations) above stated according to the
terms thereof, then this obligation shall be null and void.
"Executed at the municipality of _________, in the Province of
________, this _____ day of 19_____
____________________
(Signature of mortgagor.)
"In the presence of
"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing mortgage is made for
the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same
is a just and valid obligation, and one not entered into for the
purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally
appeared ____________, the parties who signed the foregoing
affidavit and made oath to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case
may be.)
Act No. 1508, Sec. 6 Corporations. When a corporation is
a party to such mortgage the affidavit required may be made
and subscribed by a director, trustee, cashier, treasurer, or
manager thereof, or by a person authorized on the part of such
corporation to make or to receive such mortgage. When a
partnership is a party to the mortgage the affidavit may be made
and subscribed by one member thereof.
114
- To be valid against any person:
o Recorded in the office of the register of deeds:
" Resident: Province in which the mortgagor resides
at the time of making the same
" Non-resident: Province in which the property is
situated
" If property is situated in a different province from
which the mortgagor resides: Both the province in
which the mortgagor resides and in which the
property is situated
- Form (see Sec. 5, Act No. 1508)
o Signed by the person or persons executing the same
o In the presence of two witnesses, who shall sign as
witnesses to the execution
o Each mortgagor and mortgagee, or, in the absence of
the mortgagee, his agent or attorney, shall make and
subscribe an affidavit in substance, signed by the
parties
o Certificate of oath signed by the authority
administering the same
o Appended to the mortgage and recorded
- When a corporation is a party: affidavit may be made and
subscribed by a director, trustee, cashier, treasurer, or
manager thereof, or by a person authorized
- When a partnership is a party: affidavit may be made and
subscribed by one member
Unrecorded Chattel Mortgage is not valid against any
person except:
- Mortgagor
- Executor
- Administrator
Note: These 3 have the right to compel compliance wit hthe
formalities required by law.
C. Obligations Secured
Act No. 1508, Sec. 5 Form. xxx
FORM OF OATH.
"We severally swear that the foregoing mortgage is made for
the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same
is a just and valid obligation, and one not entered into for the
purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally
appeared ____________, the parties who signed the foregoing
affidavit and made oath to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace (now municipal judge), or
other officer, as the case may be.)
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Affidavit of Good Faith
- Unique requirement, required to be executed by the parties
under the Chattel Mortgage Law
- Affidavit states that the chattel mortgage is:
1. Made solely for the purpose of securing the obligation
specified in the chattel mortgage, and
2. The principal obligation is a just and valid obligation,
and one not entered into for the purpose of fraud
Increase or Extension of Chattel Mortgage
- Becomes a new chattel mortgage in itself
- Will take effect only from the date the same are made (not
from original CM)
Obligations Secured
- Unlike a pledge, can only cover obligations existing at the
time the mortgage is constituted
- Cannot secure after-incurred obligations even if these
future debts are accurately described
- Cannot be made to secure a debt to be thereafter
contracted because the law provides that the parties must
make oath that the debt is a just debt, honestly due and
owing from the mortgagor to the mortgagee
- An increase or an extension of the chattel mortgage
obligation becomes a new chattel mortgage in itself,
and will take effect only from the date the same are made
and NOT from the date of the original chattel mortgage
Contract to Mortgage
- If it includes future debts is a binding commitment
- But chattel mortgage itself, is not perfected until after an
agreement covering the newly contracted debt is executed
conformably with the form prescribed
- Refusal of the debtor to execute the agreement to cover the
after-incurred obligation may consist in an event of default
of the contract to mortgage
o Remedy of foreclosure will only cover the debts existing
at the time of constitution of the contract of chattel
mortgage
ACME Shoe, Rubber & Plastic Corp. v. CA (1996) Vitug, J.
Petitioner: Acme Shoe, Rubber & Plastic Corporation and
Chua Pac
Respondent: CA, Producers bank of the Philippines and
Regional Sheriff of Caloocan City
Concept: Chattel Mortgage: Obligations Secured
Doctrine:
A chattel mortgage can only cover obligations existing at the
time the mortgage is constituted. A promise to include debts yet
to be contracted can be a binding commitment that can be
compelled upon, but the security itself does not come into
existence until a new chattel mortgage is created or the old one
is amended conformably with the Chattel Mortgage Law.
115
Brief Facts:
Acme obtained a loan worth P3-M from Producers Bank, with
Chua Pac executing a Chattel Mortgage Agreement to secure
said loan. In the Agreement, there was a stipulation providing for
the mortgage securing subsequent/future loans. Later, Acme
obtained 2 more loans from Producers, fully paying the first and
defaulting in the second. The Bank applied for the extrajudicial
foreclosure of the mortgage, which was opposed by Acme.
ISSUE:
WON Producers could validly foreclose the chattel mortgage
executed by Acme (NO)
RATIO: NO, Producers could not validly foreclose the
chattel mortgage because the chattel mortgage
ceased to exist coincidentally with the payment of the
P3-M loan.
- Contracts of security are either personal or real:
a. Contracts of personal security: the faithful
performance of the obligation by the principal debtor is
secured by the personal commitment of another
- Guarantor secures the guaranty
- Surety secures the suretyship
b. Contracts of real security: the fulfillment of the
obligation is secured by an encumbrance of
property
- In pledge, the movable property is placed in the
possession of the creditor
- In a chattel mortgage, a corresponding deed is
executed substantially in the form prescribed by
law
- In real estate mortgage, a public instrument is
executed encumbering the real property covered
- In antichresis, a written instrument grants the
creditor the right to receive the fruits of an
immovable property with the obligation to apply
such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit
- In all the abovementioned, the essential
condition is that if the principal obligation
becomes due and the debtor defaults, then the
property encumbered can be alienated for the
payment of the obligation, but that should the
obligation be duly paid, then the contract is
automatically extinguished proceeding from the
accessory character of the agreement
- Once the obligation is complied with, the contract
of security becomes, ipso facto, null and void
- While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as
these future debts are accurately described, a chattel
mortgage, however, can only cover obligations
existing at the time the mortgage is constituted
o A promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security
itself, however, does not come into existence or arise
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until after a chattel mortgage agreement covering the
newly contracted debt is executed either by concluding
a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the
Chattel Mortgage Law (Act No. 1508)
o Refusal on the part of the borrower to execute the
agreement to cover the after-incurred obligation can
constitute an act of default on the pat of the
borrower (whereon the promise is written) BUT the
remedy of foreclosure can only cover the debts
extant at the time of constitution and during
the life of the chattel mortgage sought to be
foreclosed
- A chattel mortgage must comply substantially with the form
prescribed in the Chattel Mortgage Law
o Affidavit of good faith (Sec. 5), but if not appended,
would still be valid between the parties
o Parties must execute an oath that xxx(the) mortgage is
made for the purpose of securing the obligation
specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of
fraud Civil Code by Aquino & Grio-Aquino
o Debt referred to in the law is a current, not an
obligation that is yet merely contemplated
- SC: The only obligation specified in the chattel mortgage
contract was the P3-M loan which Acme has fully paid ! By
virtue of Sec. 3 of the Chattel Mortgage Law, the payment
of the obligation rendered the chattel mortgage void or
terminated
o Belgian Catholic Missionaries, Inc. v. Magallanes Press,
Inc. et al.: A mortgage that contains a stipulation in
regard to future advances in the credit will take effect
only from the date the same are made and not from the
date of the mortgage.
o Since the 1978 mortgage ceased to exist coincidentally
with the full payment of the P3-MM loan, there was no
longer any chattel mortgage that could cover
the new loans that were concluded thereafter
DISPOSITIVE: Decisions of appellate court and the lower court
are set aside without prejudice to the appropriate legal recourse
by private respondent as may still be warranted as an unsecured
creditor. No costs.
Acme Shoe v. CA
What would the remedy of Producers be to fix the CM? Remove
the clause without the necessity of executing a new contract
! to have valid contract to mortgage, and may include after-
acquired properties
116
D. Object of Chattel Mortgage
Art. 2124 Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage. (1874a)
Art. 416 The following things are deemed to be personal
property:
(1) Those movables susceptible of appropriation which are not
included in the preceding article;
(2) Real property which by any special provision of law is
considered as personalty;
(3) Forces of nature which are brought under control by science;
and
(4) In general, all things which can be transported from place to
place without impairment of the real property to which they are
fixed. (335a)
Art. 417 The following are also considered as personal
property:
(1) Obligations and actions which have for their object movables
or demandable sums; and
(2) Shares of stock of agricultural, commercial and industrial
entities, although they may have real estate. (336a)
Act No. 1508, Sec. 2 All personal property shall be subject to
mortgage, agreeably to the provisions of this Act, and a
mortgage executed in pursuance thereof shall be termed chattel
mortgage.
GR: Movable/Personal properties are the object of a chattel
mortgage.
EX: Jurisprudence provides that immovable/real properties may
be the object of a chattel mortgage when (1) parties validly
agree/consent to treat them as movable/personal properties,
and (2) no third persons are prejudiced by such an agreement.
(Makati Leasing and Finance Corp v. Wearever Textile Mills,
citing Tumalad v. Vicencio).
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Makati Leasing and Finance Corp v. Wearever Textile Mills De
Castro, J.
Petitioner: Makati Leasing and Finance Corp. (MLFC)
Respondents: Wearever Textile Mills Inc. (WTM) and Court of
Appeals
Concept: Chattel Mortgage; Object of Chattel Mortgage
Doctrine:
Parties may treat real property as personal property for a chattel
mortgage, as long as (1) they validly agree/consent to it, and (2)
no third persons are prejudiced by such an arrangement.
Brief Facts:
When WTM defaulted on its obligation to MLFC, MLFC sought
to execute the deed of chattel mortgage (subject of which was
an immobilized machine) securing the obligation. The CFI found
for MLFC and issued a writ of replevin. However, the CA
reversed the CFI and ruled that the immobilized machine is n
invalid subject of the writ and of the chattel mortgage.
ISSUES:
1. WON the machine may be the valid subject of the writ and
the chattel mortgage (YES)
2. WON WTM is estopped from arguing that the machine is
realty (YES)
RATIO:
1. YES. The property was treated as personalty;
hence, WTM is estopped to claim otherwise.
- SC: Tumalad v. Vicencio is highly applicable in this case.
- Tumalad v. Vicencio: Although there is no specific
statement referring to the subject [real property] as personal
property, yet by ceding, selling or transferring a property by
way of chattel mortgage defendants-appellants could only
have meant to convey the [real property] as chattel, or at
least, intended to treat the same as such, so that they should
not now be allowed to make an inconsistent stand by
claiming otherwise.
- SC: There is no legal justification why the above case should
not apply to the current case.
o As long as parties to the contract validly agree and no
third persons are prejudiced, they may treat immobilized
machinery, which is a real property, as personalty.
o Moreover, machinery, by its nature, is really a
movable/personalty and becomes immovable/realty only
when it is immobilized by destination or purpose.
- WTM: Tumalad does not apply because, in that case, the
house treated as chattel was on a land that did not belong to
the owners of the house.
o SC: Argument is untenable. The law makes no distinction
as to the ownership over the land on where the house is
built. Hence, no distinctions should be laid down.
- Standard Oil Co. of NY v. Jaramillo: Parties to a contract may
treat as personal property that which by nature would
actually be real property, as long as no interest of third
parties would be prejudiced thereby.
117
2. YES. WTM is estopped from claiming that machine
is not personal property
- WTM: Never agreed nor represented that machine was
personal property. Was only required and dictated to sign
the deed of chattel mortgage, which was in blank form at the
time it was signed.
- SC: Such allegation is not proven.
o Moreover, it would only be a ground for a voidable
contract and not a contract void ab initio.
o No action for annulment was filed.
o WTM actually benefitted from the deed as it was able to
enter into financial accommodations with MLFC.
o Hence, it is estopped from taking a contrary position as
to the deed.
DISPOSITIVE: Petition granted. CA reversed and CFI affirmed.
1. Reasonable Description Rule
Act No. 1508, Sec. 7 Descriptions of property. The
description of the mortgaged property shall be such as to
enable the parties to the mortgage, or any other person, after
reasonable inquiry and investigation, to identify the same.
If the property mortgaged be large cattle," as defined by section
one of Act Numbered Eleven and forty-seven, (Now section 511
of the Administrative Code) and the amendments thereof, the
description of said property in the mortgage shall contain the
brands, class, sex, age, knots of radiated hair commonly known
as remolinos, or cowlicks, and other marks of ownership as
described and set forth in the certificate of ownership of said
animal or animals, together with the number and place of issue
of such certificates of ownership.
If growing crops be mortgaged the mortgage may contain an
agreement stipulating that the mortgagor binds himself properly
to tend, care for and protect the crop while growing, and
faithfully and without delay to harvest the same, and that in
default of the performance of such duties the mortgage may
enter upon the premises, take all the necessary measures for the
protection of said crop, and retain possession thereof and sell
the same, and from the proceeds of such sale pay all expenses
incurred in caring for, harvesting, and selling the crop and the
amount of the indebtedness or obligation secured by the
mortgage, and the surplus thereof, if any shall be paid to the
mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository
as the property originally mortgaged, anything in the mortgage
to the contrary notwithstanding.
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- Sec. 7 of Act 1508 (Chattel Mortgage Law) does NOT require
a specific and thorough definition.
- The Reasonable Description Rule under the said provision
only requires that the description must enable the parties to
identify the collateral, after reasonable inquiry and
investigation.
2. After Acquired Properties
Act No. 1508, Sec. 7 Descriptions of property. The
description of the mortgaged property shall be such as to
enable the parties to the mortgage, or any other person, after
reasonable inquiry and investigation, to identify the same.
If the property mortgaged be large cattle," as defined by section
one of Act Numbered Eleven and forty-seven, (Now section 511
of the Administrative Code) and the amendments thereof, the
description of said property in the mortgage shall contain the
brands, class, sex, age, knots of radiated hair commonly known
as remolinos, or cowlicks, and other marks of ownership as
described and set forth in the certificate of ownership of said
animal or animals, together with the number and place of issue
of such certificates of ownership.
If growing crops be mortgaged the mortgage may contain an
agreement stipulating that the mortgagor binds himself properly
to tend, care for and protect the crop while growing, and
faithfully and without delay to harvest the same, and that in
default of the performance of such duties the mortgage may
enter upon the premises, take all the necessary measures for the
protection of said crop, and retain possession thereof and sell
the same, and from the proceeds of such sale pay all expenses
incurred in caring for, harvesting, and selling the crop and the
amount of the indebtedness or obligation secured by the
mortgage, and the surplus thereof, if any shall be paid to the
mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository
as the property originally mortgaged, anything in the mortgage
to the contrary notwithstanding.
118
GR: A chattel mortgage will only cover the property described
therein, and shall not cover property acquired after its execution.
EX: However, Sec. 7 allows for a stipulation in the chattel
mortgage that the mortgagor may sell the chattel that is covered
by the mortgage, and is thereafter obligated to replace, renew
or substitute the sold chattel with other property thereafter
acquired. Such provision is valid and binding and effectively
widens the scope of a chattel mortgage to after acquired
properties.
- The purpose of allowing such a provision is to promote
economic and business transactions.
- Had it not been allowed, it would have been impossible to
constitute a chattel mortgage over, for example, a retail
store, the stocked goods of which are bought and sold
frequently, without requiring them to close down. This is
contrary to the purpose of the Chattel Mortgage Law.
- It is only required that the chattel mortgage expressly
stipulate that such after acquired properties are included
under the coverage of the chattel mortgage.
Exceptions:
1. Stipulation in a chattel mortgage authorizing the
mortgagor to sell the property and to replace, renew or
substitute them with other property
- Based on jurisprudence only, not statute. Be careful
when using it. If you want to include after-acquired
property, the solution: there must be stipulation in the
mortgage to contract to the effect that will compel the
mortgagor to enter into a NEW MORTGAGE
CONTRACT each time (contract to mortgage)
2. Retail stores where property is constantly sold and
substituted when there is stipulation to such effect
- Would be impossible to constitute a chattel mortgage
on such stores without closing them, contrary to the
purpose for which the Chattel Mortgage Law was
enacted.
- Purpose: promotion of business and economic
development.
Note: This is a case where jurisprudence amends the law.
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E. Ownership of Collateral
- It is essential that (1) the mortgagor be the absolute owner
of the collateral, and (2) that the mortgagor have the free
disposal of the collateral OR, if it does not have such right
to freely dispose of the collateral, be legally authorized to
constitute the mortgage.
- A mortgagor retains the right to alienate the collateral.
- However, such right is restrained by requirements imposed
by law: the mortgagor MUST obtain the consent of the
mortgagee to make such alienation.
o Otherwise, he shall be liable under RPC Art. 319, Par. 2
(Sale or Pledge of Mortgaged Property)
SGS: While it is already established that failure to obtain consent
of the mortgagee with respect to the alienation will affect
criminal liability, how does it affect the validity of the alienation
(ex. sale) to a third person?
Dy v. CA (1991) Gutierrez, Jr., J
Petitioner: Perfecto Dy, Jr.
Respondent: Gelac Trading Inc. and Antonio Gonzales
Concept: Chattel mortgage; ownership of collateral
Doctrine:
The mortgagor who gave the property as security under a
chattel mortgage did not part with the ownership of the same.
Hence, the mortgagor could validly alienate the property
mortgaged but sale can only bind the mortgagee if the same be
done with the latters consent.
Brief Facts:
Wilfredo purchased a tractor and truck through financing
extended by Libra Finance. He sold the tractor to his brother
Perfecto, who assumed the mortgage debt with the consent of
Libra. After the consummation of the sale through the execution
of a Deed of Absolute Sale in favor of perfecto, the tractor was
seized by the provincial sheriff of Cebu to satisfy the judgment
debt of Wilfredo in a civil case filed against the latter by Gelac
Trading. Perfecto is now questioning the validity of the seizure of
the tractor, claiming that he and not Wilfredo was the owner of
the same at the time it was taken into custody by the sheriff,
hence could not be levied upon to satisfy a judgment against
Wilfredo.
ISSUES:
1. WON Wilfredo had the right to alienate the tractor which
was mortgaged to Libra (YES) and WON the sale binds Libra
(YES)
2. Who was the owner of the tractor at the time it was seized
and levied by the sheriff (PERFECTO)
3. WON the sheriff validly levied upon the tractor for the
satisfaction of the judgment debt of Wilfredo (NO)
119
RATIO:
1. The mortgagor who gave the property as security
under a chattel mortgage did not part with the
ownership of the same. Hence, the mortgagor
could validly alienate the property mortgaged but
the sale can only bind the mortgagee if the same
be done with the latters consent. The written
consent of Libra was obtained in this case
therefore, the sale and assumption of mortgage is
binding not only between the brothers, but to
Libra, as mortgagee, as well
- Service Specialists Inc. v. Intermediate Appellate Court
o Chattel mortgagor continues to be the owner of the
property thus, has the power to alienate the same
o However, he is under pain of penal liability (Article 319,
par. 2 RPC1) to secure the consent of the mortgagee
o The instruments of mortgage are binding not only upon
parties executing them but also upon those who later,
by purchase or otherwise, acquire the properties
referred to therein
o The absence of the written consent of the mortgagee
to the sale affects not the validity of the sale, but only
the penal liability of the mortgagor and the binding
effect of such sale on the mortgagee under the Deed of
Chattel Mortgage
- In a letter dated Aug. 27, 1979, Libra allowed Perfecto to
purchase the tractor and assume the mortgage debt of
Wilfredo therefore, the sale was binding between the
brothers and to Libra as well
- While it is true that Wilfredo was not in actual possession
and control of the tractor (the same being in the possession
and control of Libra as preliminary step to foreclosure)
Wilfredos right of ownership was not divested from him
upon his default
o Mortgaged property continues to belong to mortgagor
and the only remedy given to the mortgagee is to have
said property sold at public auction and proceeds of
the sale applied to the payment of the debt secured by
the mortgagee
- There is no showing that Libra has already foreclosed the
mortgaged and that it was the new owner of the property
- Libra gave its consent to the sale and was aware of the
transfer of rights to Perfecto
o Where a third person purchases the mortgaged
property, he automatically steps into the shoes of the
original mortgagor; his right of ownership shall be
subject to the mortgage
o Perfecto was fully aware of the mortgage and even
volunteered to assume the remaining balance of the
mortgage debt of Wilfredo which Libra undeniably
agreed to
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
Art. 319. Removal, sale or pledge of mortgaged property. The penalty or arresto
xxx
(2) Any mortgagor who shall sell or pledge personal property already pledged, or
any part thereof, under the terms of the Chattel Mortgage Law, without the consent
of the mortgagee written on the back of the mortgage and noted on the record
hereof in the office of the Register of Deeds of the province where such property is
located.
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2. Perfecto is the owner at the time the tractor was
seized and levied as there has been constructive
delivery to him before the execution of judgment
by the sheriff
- Actual delivery could not be made because the tractor was
still in the possession of Libra pending the clearance of the
check issued in payment for the loan
- Libra was in possession of the tractor due to Wilfredos
failure to pay the amortization as preliminary step to
foreclose
o As mortgagee, Libra has the right to foreclose upon
default by the mortgagor
o The law implies that the mortgagee is entitled to
possess the mortgaged property because possession is
necessary in order to enable him to have the property
sold
- However, there was constructive delivery to Perfecto
upon the execution of the Deed of Absolute Sale pursuant
to Article 1498 CC and upon the consent or agreement of
Wilfredo and Perfecto when the thing sold cannot be
immediately transferred to the possession of Perfecto
(Traditio Longa Manu under Art. 1499 CC) as the same was
pending release by Libra
o Article 1498. When the sale is made through a public
instrument, the execution thereof shall be equivalent to
the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear
or cannot clearly be inferred.
o Article 1499. The delivery of movable property may
likewise be made by the mere consent or agreement of
the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the time
of the sale, or if the latter already had it in his
possession for any other reason.
- The consummation of the sale did not depend upon the
encashment of the check issued as payment of the loan to
Libra. The sale was consummated upon the execution of the
public instrument
o The payment of the check was actually intended to
extinguish the mortgage obligation so that the tractor
could be released to the Perfecto
o It was never intended nor could it be considered as
payment of the purchase price because the relationship
between Libra and Perfecto is not one of sale but still
mortgage. The transaction between the brothers (sale)
is distinct and apart from the transaction between Libra
and Perfecto (mortgage)
- Timeline:
o Sept. 4, 1979 Wilfredo executed a Deed of Absolute
Sale in favor of Perfecto
o Dec. 1979 Tractor levied upon by the sheriff
- Hence, the tractor was no longer owned by Wilfredo when it
was levied upon by the sheriff
3. No, as Wilfredo was no longer the owner of the
tractor at the time of execution
120
- Well settled is the rule that only properties owned by the
judgment debtor and which are not exempt from execution
should be levied upon
- Power of the court in the execution of its judgment extends
only over properties belonging to the judgment debtor
DISPOSITIVE: Petition granted.
Dy v. CA
Wherever the property is, the lien follows.
How to Reconcile Dy and Servicewide
You can use both cases (as both are still good law) for either
statement. However, SGS believes that it is necessary to obtain
the consent in a mortgage in order to protect said mortgagee.
Servicewide
Property: Holden Torana
Owner: C.R. Tecson ! Sps. Ponce ! Conrado Tecson
Credit: Chattel mortgage & assignment
Owner: C.R. Tecson ! Filinvest ! Servicewide
To assign a credit, do you need to the consent of the debtor?
No, notice only, so that the debtor knows whom to pay. This
case is the legal basis to say consent is required.
GR: Consent of assignee (of the mortgage) is needed if the
debtor wishes to sell the property. Art. 2097, WRT 2141.
Without the consent of the mortgagee, there is no transfer of
ownership; sale is ineffectual.
Dy
There is a statement in Dy citing 1989 Servicewide that says lack
of consent does not affect the validity of the sale. This case is
the legal basis to say consent is NOT required.
SGS:
In pledge, consent is needed to transfer ownership in order to
protect the pledgee. Possessor is the pledgee, so consent is
needed even if said pledgee is in possession.
In chattel mortgage, property is personal. Possessor is the
mortgagor. Consent is needed (and even more important)
because possession is NOT with the mortgagee. It is all the
more important in a mortgage to obtain the consent.
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F. Foreclosure of Chattel Mortgage
Act No. 1508, Sec. 8 Failure of mortgagee to discharge the
mortgage. If the mortgagee, assign, administrator, executor,
or either of them, after performance of the condition before or
after the breach thereof, or after tender of the performance of
the condition, at or after the time fixed for the performance,
does not within ten days after being requested thereto by any
person entitled to redeem, discharge the mortgage in the
manner provided by law, the person entitled to redeem may
recover of the person whose duty it is to discharge the same
twenty pesos for his neglect and all damages occasioned
thereby in an action in any court having jurisdiction of the
subject-matter thereof.
Act No. 1508, Sec. 14 Sale of property at public auction;
Officer's return; Fees; Disposition of proceeds. The
mortgagee, his executor, administrator, or assign, may, after
thirty days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public
places in such municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in
writing directed to him or left at his abode, if within the
municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the register of deeds where the mortgage is recorded,
and the register of deeds shall record the same. The fees of the
officer for selling the property shall be the same as in the case of
sale on execution as provided in Act Numbered One hundred
and ninety, (Now Rule 141, sec. 7 ROC) and the amendments
thereto, and the fees of the register of deeds for registering the
officer's return shall be taxed as a part of the costs of sale, which
the officer shall pay to the register of deeds. The return shall
particularly describe the articles sold, and state the amount
received for each article, and shall operate as a discharge of the
lien thereon created by the mortgage. 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 mortgages, shall be paid to
the mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as
required by section sixteen of Act Numbered Eleven hundred
and forty-seven (Now Section 523 of the Admin. Code) shall be
issued by the treasurer of the municipality where the sale was
held to the purchaser thereof.
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A.M. No. 99-10-05-0 August 7, 2001
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE
In line with the responsibility of an Executive Judge under
Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, included in
which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex-Office Sheriff, and his staff, and the
issuance of commissions to notaries public and enforcement of
their duties under the law, the following procedures are hereby
prescribed in extrajudicial foreclosure of mortgages:
1. All applications for extra-judicial foreclosure of mortgage
whether under the direction of the sheriff or a notary public,
pursuant to Act 3135, as amended by Act 4118, and Act 1508, as
amended, shall be filed with the Executive Judge, through the
Clerk of court who is also the Ex-Officio Sheriff.
2. Upon receipt of an application for extra-judicial foreclosure of
mortgage, it shall be the duty of the Clerk of Court to:
a) receive and docket said application and to stamp thereon the
corresponding file number, date and time of filing;
b) collect the filing fees therefore pursuant to rule 141, Section
7(c), as amended by A.M. No. 00-2-01-SC, and issue the
corresponding official receipt;
c) examine, in case of real estate mortgage foreclosure, whether
the applicant has complied with all the requirements before the
public auction is conducted under the direction of the sheriff or
a notary public, pursuant to Sec. 4 of Act 3135, as amended;
d) sign and issue the certificate of sale, subject to the approval
of the Executive Judge, or in his absence, the Vice-Executive
Judge. No certificate of sale shall be issued in favor of the
highest bidder until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as amended by A.M. No.
00-2-01-SC, shall have been paid; Provided, that in no case shall
the amount payable under Rule 141, Section 9(1), as amended,
exceed P100,000.00;
e) after the certificate of sale has been issued to the highest
bidder, keep the complete records, while awaiting any
redemption within a period of one (1) year from date of
registration of the certificate of sale with the Register of Deeds
concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons
whose property is sold pursuant to an extra-judicial foreclosure,
shall have the right to redeem the property until, but not after,
the registration of the certificate of foreclosure sale which in no
case shall be more than three (3) months after foreclosure,
whichever is earlier, as provided in Section 47 of Republic Act
No. 8791 (as amended, Res. Of August 7, 2001).
Where the application concerns the extrajudicial foreclosure of
mortgages of real estates and/or chattels in different locations
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covering one indebtedness, only one filing fee corresponding to
such indebtedness shall be collected. The collecting Clerk of
Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness,
the filing fees collected, the mortgages sought to be foreclosed,
the real estates and/or chattels mortgaged and their respective
locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places
where the other properties are located and of allowing the
extrajudicial foreclosures to proceed thereat.
3. The notices of auction sale in extrajudicial foreclosure for
publication by the sheriff or by a notary public shall be published
in a newspaper of general circulation pursuant to Section 1,
Presidential Decree No. 1079, dated January 2, 1977, and non-
compliance therewith shall constitute a violation of Section 6
thereof.
4. The Executive Judge shall, with the assistance of the Clerk of
Court, raffle applications for extrajudicial foreclosure of
mortgage under the direction of the sheriff among all sheriffs,
including those assigned to the Office of the Clerk of Court and
Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff or
the notary public who conducted the sale to the Clerk of Court
before the issuance of the certificate of sale.
This Resolution amends or modifies accordingly Administrative
Order No. 3 issued by then Chief Justice Enrique M. Fernando
on 19 October 1984 and Administrative Circular No. 3-98 issued
by the Chief Justice Andres R. Narvasa on 5 February 1998.
The Court Administrator may issue the necessary guidelines for
the effective enforcement of this Resolution.
The Clerk of Court shall cause the publication of this Resolution
in a nuewspaper of general circulation not later than August 14,
2001 and furnish copies thereof to the Integrated Bar of the
Philippines.
- If the principal obligation becomes due and the debtor
defaults, the creditor, as mortgagee, may elect to
foreclose the collateral, by causing its alienation in
accordance with the procedures allowed by law.
- The Chattel Mortgage Law authorizes the extrajudicial
foreclosure of chattel mortgage.
Creditors rights in case of default:
1. Extrajudicial foreclosure OR
2. Specific performance
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PROCEDURE:
1. File with the executive judge through the clerk of court (but
it is the sheriff who conducts the sale)
- You file with the executive judge in order to avail of the
services of the sheriff
2. Notice requirement #1 (posting): 10 days before the sale
(post in 2 or more public places in the municipality where
the collateral is located or where the mortgagor resides)
- Usually posted in the bulletin board
3. Notice requirement #2 (personal notice): 10 days before
sale, sheriff must notify: a) mortgagor; b) person holding
under him (assignee of mortgagor); c) persons holding
subsequent mortgages personally or by mail
- Effected: personally, abode, or mail
- A person holding under mortgagor is a successor-in-
interest
4. Equity of redemption or grace period: Wait for 30 days from
time of default
5. Public sale is conducted (where property
situated/mortgagor resides), then sheriff should make a
return
- The return operates to discharge the lien
6. Payment of the proceeds (in order)
a. Costs and expenses of sale
b. Payment of demand/obligation secured by mortgage
(principal obligation)
c. Residue shall be paid to persons holding subsequent
mortgages (principal obligation of 2nd/3rd/etc
mortgages)
d. Balance: mortgagor/person holding under him
7. Winning bidder acquires ownership
a. 1st mortgagee: has the right to foreclose, and the
exercise of the right to foreclose wipes out any lien until
it is the only one that subsists
b. 2nd mortgagee: has an inferior right to the first
mortgagee, and can only participate in the proceeds to
put an end to the claim against the debtor
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1. Equity of Redemption
Act No. 1508, Sec. 13 When the condition of a chattel
mortgage is broken, a mortgagor or person holding a
subsequent mortgage, or a subsequent attaching creditor may
redeem the same by paying or delivering to the mortgagee the
amount due on such mortgage and the reasonable costs and
expenses incurred by such breach of condition before the sale
thereof. An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and entitled to
foreclose the mortgage in the same manner that the mortgagee
could foreclose it by the terms of this Act.
Act No. 1508, Sec. 14 Sale of property at public auction;
Officer's return; Fees; Disposition of proceeds. The
mortgagee, his executor, administrator, or assign, may, after
thirty days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public
places in such municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in
writing directed to him or left at his abode, if within the
municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the register of deeds where the mortgage is recorded,
and the register of deeds shall record the same. The fees of the
officer for selling the property shall be the same as in the case of
sale on execution as provided in Act Numbered One hundred
and ninety, (Now Rule 141, section 7 of the Rules of Court) and
the amendments thereto, and the fees of the register of deeds
for registering the officer's return shall be taxed as a part of the
costs of sale, which the officer shall pay to the register of deeds.
The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. 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 mortgages, shall be paid to the mortgagor or person
holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as
required by section sixteen of Act Numbered Eleven hundred
and forty-seven (Now Section 523 of the Administrative Code)
shall be issued by the treasurer of the municipality where the
sale was held to the purchaser thereof.
123
- The redemption cited in Section 13 of the Chattel Mortgage
Law partakes of an equity of redemption.
- Equity of Redemption
o The right of the mortgagor in default to recover the
collateral before a foreclosure sale by paying the
principal, interest, and other costs that are due, thereby
alleviating, as a matter of equity, the severity of the
legal rule on default (Blacks Law Dictionary, Ninth
Edition)
o The right of the mortgagor to extinguish the mortgage
and retain ownership of the collateral after default in
the performance of the principal obligation but before
the foreclosure sale of the collateral, by paying the
principal obligation within a grace period of 30 days
granted by the Chattel Mortgage Law
- If the equity of redemption is exercised not by the
mortgagor but by a subsequent attaching creditor,
who effectively pays the mortgagee, the rights acquired by
the attaching creditor are the rights that pertain to the
mortgagee, granting the attaching creditor the right to
foreclose the chattel mortgage.
2. Right of Redemption
Rizal Commercial Banking Corporation v. Royal Cargo
Corporation (2009) Carpio-Morales, J.
Petitioners: Rizal Commercial Banking Corporation (RCBC)
Respondents: Royal Cargo Corporation (ROYAL)
Concept: Foreclosure of Chattel Mortgage Right of
Redemption
Doctrine:
An equity of redemption under Sec. 13 of CM law, is different
from the right to redemption under Sec. 14. An equity of
redemption may be exercised only after default of the
mortgagor in the performance of the conditions in the mortgage
but before the sale of the property.
Brief Facts:
Upon Terrymanilas petition for voluntary insolvency, RCBC was
granted permission to foreclose the chattel mortgage executed
over Terrymanilas assets. A foreclosure sale subsequently
happened, in which RCBC was the winning bidder. ROYAL filed
an annulment of said foreclosure sale, as it included some of the
properties of Terrymanila it had already attached to secure a
judgment award against it, and that RCBC failed to notify them
of the auction sale pursuant to Sec. 14 of the CM law.

- Right of Redemption ISSUE:

o Different from Equity of Redemption WON ROYAL was entitled to notice of the foreclosure sale (YES)
o Right of the mortgagor to repurchase the collateral
even after confirmation of a foreclosure sale but within RATIO: YES. As ROYAL attached Terrmanilas equity
the periods prescribed by law redemption, it had to be informed of the date of sale
o It is a statutory right of a mortgagor in default to of the mortgaged assets for it to exercise such equity
reclaim, regain or recover the collateral after the of redemption over some of the foreclosed properties.
foreclosure sale - Sec. 13 of the Chattel Mortgage Law allows the would-be-
- In this jurisdiction, there is no statute that vests the redemptioner thereunder to remove the mortgage property
right of redemption over personal property only before its sale, to wit:
- Under the Chattel Mortgage Law, the mortgagor has only
an equity of redemption but no right of redemption Sec. 13. When the condition of a chattel mortgage is
over property sold broken, a mortgagor or person holding a subsequent
mortgage, or a subsequent attaching creditor may redeem
Mortgagor = owner of the property the same by paying or delivering to the mortgagee the
BUT at the point of foreclosure, the right of the owner is SO amount due on such mortgage and the reasonable costs
DIMINISHED that it is REDUCED to an EQUITY OF and expenses incurred by such breach of condition before
REDEMPTION. the sale thereof. An attaching creditor who so redeems shall
The winning bidder acquires ALL RIGHTS at the foreclosure sale. be subrogated to the rights of the mortgagee and entitled
to foreclose the mortgage in the same manner that the
EQUITY OF RIGHT OF REDEMPTION mortgagee could foreclose it by the terms of this Act.
REDEMPTION
Right of mortgagor to Right of mortgagor to - The redemption cited in Sec. 13 partakes of an equity of
redeem the property after repurchase the mortgaged redemption, which is the right of the mortgagor to redeem
default but before sale property within 1 year from the mortgage property after his default in the
date of registration of performance of the conditions of the mortgage but before
certificate of sale the sale of the property to clear it from the
Applies to extrajudicial Applies only to encumbrance of the mortgage.
foreclosure of chattel extrajudicial foreclosure of - It is not the same as right of redemption which is the
mortgage and judicial real estate mortgage right of the mortgagor to redeem the mortgaged property
foreclosure of real estate after registration of the foreclosure sale, and even after
mortgage confirmation of the sale.

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- In attaching some of Terrymanilas assets to secure the
satisfaction of the P296, 662 judgment, what ROYAL
effectively attached was Terrymanilas equity of redemption.
That its claim is much lower that the P1.5M actual bid of
RCBC at the auction sale does not defeat its equity of
redemption.
- Having thus attached Terrymanilas equity of redemption,
ROYAL had to be informed of the date of sale of the
mortgaged assets for it to exercise such equity of
redemption over some of the foreclosed properties, as
provided for in Sec. 13.
- Thus, even prior to receiving a mailed notice of the auction
sale, ROYAL was already put on notice of the impending
foreclosure sale when it filed a motion for reconsideration of
the Bataan RTC order which authorized the foreclosure of
the CM. It could have expediently exercised its
equity of redemption when it received the denial
of the M4R. Despite this opportunity, however, ROYAL
chose to be technically shrewd about its chances, preferring
instead to seek annulment of the auction sale, which was the
result of the foreclosure of the mortgage, which it had
earlier opposed before the insolvency court. ROYALs
negligence or omission to exercise its equity of
redemption within a reasonable time, warrants a
presumption that it had either abandoned it or
opted not to assert it.
- Parenthetically, ROYAL has not shown it was prejudiced by
the auction sale since it has already been determined by the
insolvency court that even if the mortgaged properties were
foreclosed, there were still sufficient, unencumbered assets
of Terrymanila to cover the obligations owing to other
creditors.
- In any case, even if ROYAL did participate in the auction
sale and matched RCBCs bid, the superiority of the latters
lien over the mortgaged assets would preclude ROYAL from
recovering the chattels.
- It bears noting that the CM in favor of RCBC was registered
more than 2 years before the issuance of a writ of
attachment over some of Terrymanilas chattels in favor
ROYAL. This is significant in determining who between the
two should be given preference over the subject properties.
Since the registration of a CM is an effective and
binding notice of its existence and creates a real
right or lien that follows the property wherever it
may be, the right of ROYAL, as an attaching creditor or as
a purchaser, had it purchased them at the auction sale, is
subordinate to the lien of the mortgagee RCBC who has in
its favor a valid chattel mortgage.
DISPOSITIVE: CA reversed. Foreclosure sale valid.
RCBC v. Royal
Attachment is a provisional remedy whereby the debtor answers
for obligations with all attachments (in the case if creditor wins)
Attaching creditor is subrogated into the rights of the first
mortgagee.
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3. Right to Possession
- A mortgagee, unlike a pledgee, is generally not in
possession of the collateral unless and until the
principal debtor defaults and the mortgagee seeks to
foreclose.
- The chattel mortgage contract constitutes the mortgagee,
upon the principal debtors default, as an attorney-in-fact
of the mortgagor, enabling the mortgagee to act for and in
behalf of the owner of the collateral
o The mortgagee is authorized to take possession of the
collateral on default of the principal debtor
o Foreclosure is not a condition sine qua non to taking
possession
o When possessor of collateral refuses to yield
possession, the mortgage has the right to maintain an
action to recover possession, or replevy, the collateral,
from the mortgagor or from any person in possession
- Replevin possessory in nature and determines nothing
more than the right of possession; only the person in
possession needs to be impleaded
- Section 14 of the Chattel Mortgage Law does not require
that foreclosure of the collateral is caused before instituting
an action for replevin
o Rationale: right of possession of the collateral is
conditioned upon fact of actual default of debtor, and
this may be subject to controversy, hence foreclosure
cannot be the first recourse since the sheriff has no duty
or authority in the first instance to seize the collateral,
but also because whenever the sheriff proceeds under
Section 14, he becomes a mere agent of the
mortgagee. In this case, an action to recover
possession or replevin should be instituted first.
Servicewide Specialists vs. CAPurisima, J.
Petitioner: Servicewide Specialists, Inc. (Servicewide)
Respondents: Court of Appeals (CA), Hilda Tee (Tee), and
Alberto M. Villafraca (Villafranca)
Concept: Right to Possession (Chattel Mortgage)
Doctrine: In an action for replevin arising from a chattel
mortgage, if the plaintiffs right to possess the thing is not or
cannot be disputed, then it is enough to file the complaint
against the possessor of the thing mortgaged; otherwise, other
persons need to be impleaded. Plaintiffs right to possession is
in controversy, for example, when ownership rights to the thing
or default of the mortgagor is disputed.
Brief Facts: Laus bought a motor vehicle on credit, issuing
therefor a promissory note secured by a chattel mortgage over
the vehicle. Laus failed to pay despite demands from
Servicewide. Servicewide, for the purpose of foreclosing the
mortgage, filed a replevin suit against Tee, alleged possessor of
the motor vehicle, who was later substituted by Villafranca, who
alleged that he owned the motor vehicle. Laus was not
impleaded in the suit for replevin.
125
ISSUE:
WON in a case for replevin arising from a chattel mortgage, it is
enough to file the complaint against the possessor of the thing
mortgaged. It depends on the circumstances, as shown below.
RATIO: If the plaintiffs right to possess the thing is
not or cannot be disputed, then it is enough to file the
complaint against the possessor of the thing
mortgaged; otherwise, other persons need to be
impleaded.
- Rule 60 ROC requires that an applicant for replevin must
show that he is the owner of the property claimed,
particularly describing it, or is entitled to the possession
thereof. Where the right of the plaintiff to possession is so
conceded or evident, the action need only be maintained
against him who so possesses the property. In rem actio est
per quam rem nostram quae ab alio possidetur petimus, et
semper adversus eum est qui rem possidet. (By action upon
the thing, one asks for a thing in the possession of another,
and it is always against him who possesses the thing.)
- Northern Motors, Inc. vs. Herrera: persons having a
special right of property in the goods the recovery of which
is sought, such as a chattel mortgage, may maintain an
action for replevin therefor. [the mortgagee] may maintain
an action to recover possession of the mortgaged chattels
from the mortgagor or from any person in whose hands he
may find them.
- In default of the mortgagor, the mortgagee is thereby
constituted as attorney-in-fact of the mortgagor, enabling
the mortgagee to act for and in behalf of the owner. That
the defendant is not privy to the chattel mortgage should
be inconsequential. By the fact that the object of replevin is
traced to his possession, one can properly be a defendant in
an action for replevin. It is here assumed that the plaintiffs
right to possess the thing is not or cannot be disputed.
- In case the right of possession of the plaintiff, or his
authority to claim possession or that of his principal, is put
to great doubt, it could become essential to have other
persons involved and impleaded for a complete
determination and resolution of the controversy.
- In a suit for replevin, a clear right of possession must be
established. Foreclosure under a chattel mortgage may be
commenced only once there is default on part of the
mortgagor of his obligation. It is essential to show the
existence of the chattel mortgage and the default of the
mortgagor. Since the mortgagees right of possession is
conditioned upon the actual fact of default which itself may
be controverted, the inclusion of other parties, like the
debtor or mortgagor himself, may be required in order to
allow a full and conclusive determination of the case. An
adverse possessor, who is not the mortgagor, cannot just be
deprived of his possession, let alone be bound by the terms
of the chattel mortgage contract, simply because the
mortgagee brings up an action for replevin.
- Applying the rules above: It is not disputed that there was
an adverse and independent claim of ownership by
Villafranca, but this is a question of fact which cannot be
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entertained under Rule 45. Leticia Laus is an indispensible
party (for the purpose of ascertaining her default) and
should have been impleaded in the complaint for replevin
and damages.
DISPOSITIVE: Petition is denied and the Decision of the CA
affirmed.
Servicewide Specialists v. CA
Only extrajudicial foreclosure, so you go to court to gain
possession (replevin).
SGS: Dont just go after the possessor, but go after the
defaulting mortgagor as well. The moment of default is the
moment the mortgagee obtains his rights.
4. Right to Surplus or Deficiency
Act No. 1508, Sec. 14 Sale of property at public auction;
Officer's return; Fees; Disposition of proceeds. The
mortgagee, his executor, administrator, or assign, may, after
thirty days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated,
provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public
places in such municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in
writing directed to him or left at his abode, if within the
municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the register of deeds where the mortgage is recorded,
and the register of deeds shall record the same. The fees of the
officer for selling the property shall be the same as in the case of
sale on execution as provided in Act Numbered One hundred
and ninety, (Now Rule 141, section 7 of the Rules of Court) and
the amendments thereto, and the fees of the register of deeds
for registering the officer's return shall be taxed as a part of the
costs of sale, which the officer shall pay to the register of deeds.
The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. 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 mortgages, shall be paid to the mortgagor or person
holding under him on demand.
126
If the sale includes any "large cattle," a certificate of transfer as
required by section sixteen of Act Numbered Eleven hundred
and forty-seven (Now Section 523 of the Administrative Code)
shall be issued by the treasurer of the municipality where the
sale was held to the purchaser thereof.
- Mortgagor is entitled to the balance (or surplus) of the price
of sale over the amounts required to be paid under Section
14
- In case of insufficient proceeds, the mortgagor is likewise
liable to pay the deficiency (although the law is silent on the
matter)
2 Rights of Subsequent Mortgagees:
1. Right to residue of the proceeds
2. Right to equity of redemption
Note: No real right of foreclosure. When all else fails, they only
have the right to demand specific performance.
When Foreclosure is Made by Subsequent Mortgagee:
- First mortgagee will still have the right to foreclose again
- Therefore, the buyer in the foreclosure of the subsequent
mortgage acquires no right
- First mortgage will always defeat others; hence, there is no
use in foreclosing subsequent mortgages
PAMECA Wood Treatment Plant Inc vs. Court of Appeals
Gonzaga-Reyes, J.
Petitioner: PAMECA, Herminio and Victoria Teves, Hiram Dida
Pulido
Respondents: Development Bank of the Philippines
Concept: Chattel Mortgage
Doctrine: Since the Chattel Mortgage Law bars the creditor-
mortgagee from retaining the excess of the sale proceeds there
is a corollary obligation on the part of the debtor-mortgagee to
pay the deficiency in case of a reduction in the price at public
auction
Brief Facts: Pameca loaned P2mil from DBP and executed a
promissory note, secured by its inventory of furniture and
equipment. A monthbefore the mortgage contract, its supposed
market value was P2.5mil. They defaulted so DBP extrajudicially
foreclosed on thechattels. It was the only bidder so it was able to
buy it for around P322,000. Then for the deficiency, it filed a
complaint against Pameca and its solidary debtors (Teveses and
Pulido) according to the promissory note it signed.
ISSUE:
WON NCC 1484 and 2115 should be applied by analogy (NO)
RATIO: No, these provisions are inconsistent with the
Chattel Mortgage Law
- Pameca argues that NCC 1484 and 2115 should be applied
by analogy reading the spirit of the law
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- Petitioners are not the first to posit the theory of the
applicability of Article 2115 to foreclosures of chattel
mortgage.
- In the leading case of Ablaza vs. Ignacio, the lower court
dismissed the complaint for collection of deficiency
judgment in view of Art. 2141 of the CC, which provides that
the provisions of the Civil Code on pledge shall also apply
to chattel mortgages, insofar as they are not in conflict with
the Chattel Mortgage Law. It was the lower courts opinion
that, by virtue of Art. 2141, the provisions of Art. 2115 which
deny the creditor-pledgee the right to recover deficiency in
case the proceeds of the foreclosure sale are less than the
amount of the principal obligation, will apply.
- In the said case, the Court reversed the ruling of the lower
court and held that the provisions of the Chattel Mortgage
Law regarding the effects of foreclosure of chattel
mortgage, being contrary to the provisions of Article 2115,
Article 2115 in relation to Article 2141, may not be applied
to the case.
- Section 14 of Act No. 1508, as amended, or the
Chattel Mortgage Law, states:
The officer making the sale shall, within thirty days
thereafter, make in writing a return of his doings and file the
same in the office of the Registry of Deeds where the
mortgage is recorded, and the Register of Deeds shall
record the same. The fees of the officer for selling the
property shall be the same as the case of sale on execution
as provided in Act Numbered One Hundred and Ninety,
and the amendments thereto, and the fees of the Register
of Deeds for registering the officers return shall be taxed as
a part of the costs of sale, which the officer shall pay to the
Register of Deeds. The return shall particularly describe the
articles sold, and state the amount received for each article,
and shall operate as a discharge of the lien thereon created
by the mortgage. 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 under
him on demand.
- It is clear from the above provision that the effects of
foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115.
- Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the
pledgor may no longer recover proceeds of the sale in
excess of the amount of the principal obligation, Section 14
of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction
of the principal obligation and costs.!
- Since the Chattel Mortgage Law bars the creditor-
mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-
mortgagee to pay the deficiency in case of a reduction in
the price at public auction!
127
- Neither did the Court find tenable the application by Art. 2087 It is also of the essence of these contracts that when
analogy of Article 1484 of the Civil Code to the instant case. the principal obligation becomes due, the things in which the
- As pointed out by the trial court, the said article applies pledge or mortgage consists may be alienated for the payment
clearly and solely to the sale of personal property the price to the creditor.
of which is payable in installments. Although Article 1484,
paragraph (3) expressly bars any further action against the - It is a real security transaction constituted to secure the
purchaser to recover an unpaid balance of the price, where fulfillment of a principal obligation by the absolute owner
the vendor opts to foreclose the chattel mortgage on the (the mortgagor) of immovable or alienable real rights, which
thing sold, should the vendees failure to pay cover two or has free disposal of the property, and in the absence
more installments, this provision is specifically applicable to thereof, is legally authorized for the purpose; subjecting the
a sale on installments. mortgaged property (or collateral) to the condition that
when the principal obligation becomes due, the collateral
DISPOSITIVE: CA affirmed may be alienated for payment to the creditor (the
mortgagee)
PAMECA v. CA
The remedies in a mortgage are alternative: A real security transaction is an encumbrance of property
- Specific performance; or given to guarantee the fulfillment of an obligation
- Foreclosure
Note: Choosing one will bar recourse to another REQUISITES
1. Principal obligation
COA here: Claim for deficiency, so it doesnt violate the rule on 2. Absolute ownership over the property
alternative remedies 3. Free disposal with legal authority
4. Written document recorded in the Registry of Deeds must
SGS: Suppose there is a situation where there is a principal be notarized
obligation that is secured by: 1) surety and 2) chattel mortgage (a a. Attach a TCT/OCT to identify the metes and bounds
lien) b. Recorded
Question 1: Which would you rely on first?
Chattel mortgage first because there is a lien on the property. CHATTEL MORTGAGE REM
You can invoke PAMECA to claim the deficiency. Thing mortgaged must be Thing mortgaged must be
personal or movable real or immovable property
Question 2: If it is a pledge with a surety as security? property
It depends on the value of the object of the pledge and the
Affidavit of Good Faith Not required
capacity of the surety to pay.
required
If the value of the object is sufficient, pledge first.
Mortgagor cannot alienate Mortgagor can alienate the
If the value is insufficient, then surety first.
the thing mortgaged without thing mortgaged without
If the surety is not capacitated, pledge.
written consent of consent of mortgagee and
If the surety is capacitated, surety.
mortgagee any such prohibition is void
Can secure future obligations Cannot secure future
IX. REAL ESTATE MORTGAGE
obligations
No right of redemption There is a right of
A. General Concepts
redemption in extrajudicial
foreclosure and in judicial
Art. 2085 The following requisites are essential to the contracts foreclosure by banks
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 the purpose.

Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.

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B. Form of Real Estate Mortgage
Art. 2125 In addition to the requisites stated in Article 2085, 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.
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.
Art. 2131 The form, extent and consequences of a mortgage,
both as to its constitution, modification and extinguishment, and
as to other matters not included in this Chapter, shall be
governed by the provisions of the Mortgage Law and of the
Land Registration Law.
- To bind third parties, a real estate mortgage must be
recorded in the Registry of Property.
- An unregistered or unrecorded real estate
mortgage still binds the parties to the mortgage, but it
only gives the mortgagee the right to demand the
execution and recording of the real estate mortgage.
It must be in a written document.
Even if not required in law, have it notarized.
may stand as security, provided that the instrument reveals
the intention to secure future and other indebtedness.
- A real estate mortgage given to secure future debts is a
continuing security and is not discharged by repayment
of the amount named in the real estate mortgage, until the
full amount of the principal obligation is paid.
Prudential Bank v. Alviar (2005) Tinga, J.
Petitioner: Prudential Bank
Respondent: Don A. Alviar and Georgia B. Alviar
Concept: Real Estate Mortgage: Obligations Secured
Doctrine:
Mortgages given to secure future advancements, or those with
blanket mortgage clauses and dragnet clauses are valid and
legal contracts. The mortgage will not secure subsequent
obligations if such obligations have separate securities provided.
The SC followed the 2nd school of thought that a blanket
mortgage clause will not secure a note that secures in its
entirety a subsequent obligation. The blanket mortgage
clause will only secure the portion not covered by the security
of the subsequent obligation.
Brief Facts:
Sps. contracted a loan amounting to P250,000 from Prudential
Bank, secured by a real estate mortgage with a blanket
mortgage clause. Several other loans were contracted by the
spouses with their own securities. Prudential applied for the
foreclosure of the real estate mortgage for the failure of the
spouses to pay 3 loans evidenced by 3 promissory notes (Loans
1-3).

An unrecorded REM: right to demand execution/recording.

ISSUES:
An unregistered REM: still valid but it only binds the parties.
1. WON the blanket mortgage clause is valid (YES)
2. WON the blanket mortgage clause applies even to
C. Obligations Secured
subsequent advancements for which other securities were
intended, specifically, PN BD#76/C-345 covering Loan # 2
- General Rule: Real Estate Mortgage is limited to the
(NO)
principal obligations mentioned in the contract of real
estate mortgage.
RATIO:
o Literal accuracy in describing the obligations is not
1. Yes, the blanket mortgage clause is valid and
required, but the description must be correct and full
was intended to cover not just the P250,000 loan
enough to direct the attention to the sources of the
but also future credit facilities and advancements.
correct information, and must not mislead or deceive.
- Prudential: The blanket mortgage clause or dragnet
o Terms of the contract must be sufficiently clear to put
clause is valid, relying on several cases which upheld the
all parties who may have occasion to deal with the
validity of mortgage contracts securing future
collateral upon inquiry.
advancements
- Exceptions: It may also secure future advancements or
- Spouses: The blanket mortgage clause would apply only
future debts so long as these debts that are yet to be
to loans obtained jointly by the spouses, and not to loans
contracted are also accurately described.
obtained by other parties
- Thus, most real estate mortgages contain a stipulation
- SC: A blanket mortgage clause, also known as a dragnet
known as dragnet or blanket mortgage clause, which
clause in AmJur, is one which is specifically phrased to
is specifically phrased to subsume all debts, whether past or
subsume all debts of past or future origins; these
future. (Future debts and after-incurred obligations)
are carefully scrutinized and strictly construed
- Dragnet clause shall be carefully and strictly construed.
o Mortgages of this character enable the parties the
- The amount stated as consideration in the mortgage
provide continuous dealings, the nature or extent of
contract do not limit the amounts for which the mortgage
which may not be known or anticipated at the time, and

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 they avoid the expense and inconvenience of executing
a new security on each new transaction
o A dragnet clause operates as a convenience and
accommodation to the borrowers makes available
additional funds without having to execute additional
security documents ! saves time, travel, loan closing
costs, costs of extra legal services, recording fees, etc.
o Jurisprudence has settled that mortgages given to
secure future advancements are valid and legal
contracts, and the amounts named as consideration
do not limit the amount for which the mortgage may
stand as security if from the 4 corners of the instrument,
the intent to secure future and other indebtedness can
be gathered
That for and in consideration of certain loans, overdraft
and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________
hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or
all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of
land which are described in the list inserted on the
back of this document, and/or appended hereto,
together with all the buildings and improvements now
existing or which may hereafter be erected or
constructed thereon, of which the Mortgagor declares
that he/it is the absolute owner free from all liens and
incumbrances
- SC: Parties intended the real estate mortgage to secure
not only the P250,000 loan but also future credit
facilities and advancements that may be obtained
o Terms above are clear and unambiguous neither need
nor excuse to construe it otherwise
2. NO, there is a need to respect the existence of the
other security given for a subsequent obligatio n.
- Prudential: It expressly covers not only the P250,000 loan,
but also the 2 other promissory notes included
- Spouses: The dragnet clause cannot be applied to
subsequent loans extended to Don Alviar and Donalco
Trading, Inc. since these are covered by separate PNs that
expressly provide for a different form of security
- SC: The PN issued to Donalco Trading, Inc. is considered
EXCLUDED from the coverage (see start of ratio)
- Under American Jurisprudence, 2 schools of thought have
emerged on the question: WON the blanket mortgage
clause applies even to subsequent advancements for which
other securities were intended:
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1) A dragnet clause so worded as to be broad enough
to cover all other debts in addition to the one
specifically secured will be construed to cover a
different, although such other debt is secured by
another mortgage
2) A mortgage with such a clause will not secure a note
that expresses on its face that it is otherwise secured as
to its entirety, at least to anything other than a
deficiency after exhausting the security specified
therein, such deficiency being an indebtedness within
the meaning of the mortgage, in the absence of a
special contract excluding it from the arrangement !
BETTER POSITION
- Since the parties conformed to the blanket mortgage
clause or dragnet clause, it is reasonable to conclude
that they also agreed to an implied understanding that
subsequent loans need not be secured by other securities,
as the subsequent loans will be secured by the first
mortgage
o The sufficiency of the first security is a corollary
component of the dragnet clause
o Reliance on the security test when the
mortgagor takes another loan for which another
security was given and it could not be inferred that such
loan was made in reliance solely on the original security
with the dragnet clause, but rather, on the new
security given
o Rationale, according to the California court, was that
the dragnet clause in the first security instrument
constituted a continuing offer by the borrower to
secure further loans under the security of the first
security instrument, and that when the lender accepted
a different security, he did not accept the offer
o In some instances, it has been held that in the absence
of clear, supportive evidence of a contrary intention, a
mortgage containing a dragnet clause will not be
extended to cover future advances unless the
document evidencing the subsequent advance refers to
the mortgage as providing security therefor
- SC: While the existence and validity of the dragnet clause
cannot be denied, there is a need to respect the existence
of the other security given for PN BD#76/C-345
DISPOSITIVE: Petition DENIED.
Prudential Bank v. Alviar
Remember this case for the RELIANCE ON SECURITY TEST and
for the dragnet & blanket security clause.
130

D. Object of Real Estate Mortgage
Art. 2124 Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage.
Art. 415 The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered
to the soil;
(2) Trees, plants, and growing fruits, while they are attached to
the land or form an integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in
such a way that it cannot be separated therefrom without
breaking the material or deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by the owner of
the immovable in such a manner that it reveals the intention to
attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended
by the owner of the tenement for an industry or works which may
be carried on in a building or on a piece of land, and which tend
directly to meet the needs of the said industry or works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or
breeding places of similar nature, in case their owner has placed
them or preserves them with the intention to have them
permanently attached to the land, and forming a permanent part
of it; the animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof
forms part of the bed, and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by
their nature and object to remain at a fixed place on a river, lake,
or coast;
(10) Contracts for public works, and servitudes and other real
rights over immovable property.
- Alienable real rights includes rights, title and interest
in a contract of lease, as well as the rights, title, and interest
acquired in the land on which the building was constructed.
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- Consequently, an assignment by way of guaranty of
such rights is a real estate mortgage, inasmuch as it is
executed to guarantee a principal obligation.
- Although dominated an assignment, since its purpose is to
guarantee a principal obligation, and it is not an absolute
conveyance of title that confers ownership on the assignee,
then it is a mortgage; especially if it is stipulated that if the
assignor should comply with a principal obligation, the
assignment would become null and void, otherwise it would
remain in full force.
1. After Acquired Properties
- Stipulation in a registered real estate mortgage that all
property taken in exchange or replacement by the
mortgagor (after acquired property) shall become
subject to the mortgage is binding ! real estate mortgage
need not be registered a second time in order to bind the
after-acquired properties and affect third parties
Property taken in exchange or replacement must be specifically
for substitution or replacement.
Peoples Bank and Trust Co. v. Dahican Lumber Co. (1967)
Dizon, J.
Plaintiff-Appellants: Peoples Bank and Trust Co. (PBTC) and
Atlantic, Gulf and Pacific Co. of Manila (AGPM)
Defendant-Appellants: Dahican Lumber Co (DALCO),
Dahican American Lumber Corp (DAMCO), and Connell Bros.
Co.
Concept: REM; Object of REM; After Acquired Properties
Doctrine:
Stipulations that after acquired properties are to be
immediately subject to the lien are not unjust nor immoral; they
are commonplace and actually logical when the collateral is
perishable, subject to wear and tear or is intended for resale.
Brief Facts:
DALCO executed 2 deeds of mortgage in favor of AGP on the
one hand and PBTC on the other, in view of its obligations to
both. In both deeds of mortgage, it was stated that properties
acquired thereafter would be immediately subject to the lien
under the 2 deeds of mortgage. After the execution of the 2
deeds, DALCO bought machines, parts and supplies, allegedly
from Connell and DAMCO. Later on, DALCO rescinded the sale
it had with Connell and DAMCO. AGP and PBTC protested,
arguing that they were already covered by the lien.
ISSUES:
1. WON the after-acquired properties are subject to and
covered by the deed of mortgage (YES)
2. WON they were binding even if not registered under the
Chattel Mortgage Law (YES)
131
RATIO:
1. YES. The after acquired properties were subject
to and covered by the mortgages.
- The provision was clear and binding: all property of
every naturetaken in exchange or replacementshall
immediately be and become subject to the lien.
- Such a stipulation is common and logical in cases where
the collateral is perishable or subject to wear and tear.
- Such a stipulation is neither unlawful nor immoral since
its purpose is to maintain the security.
2. YES. They were still binding even if not registered
under the Chattel Mortgage Law
- The stipulation on after acquired properties belies the
argument of DALCO that it was required to register
them under the Chattel Mortgage Law.
- SC: That law is inapplicable under this case since the
after acquired properties were immobilized, pursuant
to Art. 415 (5) and Art. 2127.
- Berkenkotter v. Cu Unjieng and Cu Unjieng v. Mabalacat
Sugar Co.: machineries destined for the purpose of an
industry become immobilized and considered as
real/immovable property.
- The after acquired properties in this case must be
deemed as immobilized since they were purchased in
addition to and/or as replacement for machines and
supplies that DALCO already had.
- Davao Sawmill Co. v. Castillo, cited by DALCO is
inapplicable; the case involved machinery being treated
as personal property in a chattel mortgage while the
present case treated the after acquired properties as
real properties.
- Also, it was ruled in Davao Sawmill that while under the
general law of Puerto Rico machinery placed on property
by a tenant does not become immobilized, yet, when
the tenant places it there pursuant to contract that it
shall belong to the owner, it then becomes immobilized
as to that tenant and even as against his assignees and
creditors.
- In this case, the provision on after acquired properties
stated that such would be immediately subject to the
lien. Pursuant to this provision, DALCO is barred from
arguing that the properties were not yet immobilized.
DISPOSITIVE: Modified.
Peoples Bank v. Dahican
Failed rescission ! mortgage would follow
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2. Effect and Extent
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. 2127 The mortgage extends to the natural accessions, to
the improvements, growing fruits, and the rents or income not
yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor
from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in
the possession of the mortgagor, or it passes into the hands of a
third person.
Art. 2129 The creditor may claim from a third person in
possession of the mortgaged property, the payment of the part
of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law
establishes.
- Under Art. 2126, a registered or recorded real estate
mortgage is a right in rem
- Right in rem: a lien or legal right or interest that a creditor
has in anothers property whoever its owner may be
- The real estate mortgage is inseparable from the collateral
and until discharged, follows the property
- The sale of the property cannot affect or release the
mortgage; the purchaser of the collateral is bound to
acknowledge and respect the encumbrance, whether the
transfer to them has the consent of the mortgagee or not
Star Two (SPV-AMC) Inc. v. Paper City Corp. Perez, J.
Petitioner: Star Two (SPV-AMC) Inc. (note: it substituted RCBC
in this action)
Respondent: Paper City Corp. of the Phils.(PC)
Concept: Real Estate Mortgage; Object of Real Estate
Mortgage; Effect and Extent
Doctrine:
1. Much as real property may be considered as personalty for a
chattel mortgage, the reverse is also true; personalty may
be the subject of a real estate mortgage.
2. Accessory follows the principal.
3. Bischoff v. Pomar and Cia. General de Tabacos: Even if the
machinery were not expressly included in the mortgage, the
(old) Mortgage Law provides that chattels permanently
located in a building, either useful or ornamental, or for the
service of some industry even though they were placed there
after the creation of the mortgage, shall be deemed part of
the mortgage, provided they belong to the owner of the
mortgaged land.
132
Brief Facts:
PC entered into a loan agreement with RCBC, secured by chattel
mortgages over its machineries. Later on, this was novated into
an Mortgage Trust Indenture with 2 more banks and now
secured by real estate mortgages over the lands and buildings
of PC. When PC defaulted, an extrajudicial foreclosure sale was
executed. A dispute arose when PC moved to take the
machineries out of the foreclosed lands and buildings,
contending that they were not part of the real estate mortgage
and consequently, not covered by the foreclosure. RCBC argued
otherwise.
ISSUE:
WON the machines in question were included when the
mortgaged lands and buildings which contained them were
foreclosed (YES)
RATIO: YES. The machines were covered by the real
estate mortgages and were included in the
extrajudicial foreclosure sale.
- The original MTIs and the subsequent amendment and
supplements contained the following pertinent terms:
Original MTI
it will assign, transfer and convey as it has hereby
ASSIGNED, TRANSFERRED and CONVEYED by way of a
registered first mortgage unto [RCBC] . . . the various parcels
of land covered by several Transfer Certificates of Title issued
by the Registry of Deeds, including the buildings and
existing improvements thereon, as well as of the
machinery and equipment more particularly described and
listed that is to say, the real and personal properties listed in
Annexes "A" and "B" hereof of which the MORTGAGOR is the
lawful and registered owner
Deed of Amendment
by way of a first mortgage and for pari-passu and pro-rata
benefit of the existing and new creditors, various
machineries and equipment owned by the [Paper
City], located in and bolted to and forming part of the
following, generally describes as . . . more particularly
described and listed in Annexes "A" and "B" which are
attached and made integral parts of this Amendment. The
machineries and equipment listed in Annexes "A"
and "B" form part of the improvements listed above
and located on the parcels of land subject of the
Mortgage Trust Indenture and the Real Estate
Mortgage.
Second Supplement
to be secured against the existing properties
composed of land, building, machineries and
equipment and inventories more particularly described in
Annexes "A" and "B" of the INDENTURE
Third Supplement
there shall be added to the collateral pool subject of the
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Indenture properties of the [Paper City] composed of newly
constructed two (2)-storey building, other land
improvements and machinery and equipment all of
which are located at the existing Plant Site in Valenzuela,
Metro Manila and more particularly described in Annex "A"
hereof
- From the foregoing, it has been repeatedly stipulated by
the parties that the mortgaged properties are the various
parcels of land AND the existing improvements thereon, as
well as the machineries and equipment.
- Gateway Electronics v. Landbank of the Phils: Contracting
parties may establish any agreement, term, and condition
they may deem advisable, provided they are not contrary to
law, morals or public policy.
- Norton Resources and Devt Corp. v. All Asia Bank Corp,
reiterating Benguet Corp v. Cabildo: Where the written
terms of the contract are not ambiguous and can only be
read one way, the court will interpret the contract as a
matter of law.
o SC: Doctrine applies in this case, since the MTI +
succeeding additions to it are clear.
o The MTI was clear that the machines contained by the
lands and buildings mortgage were included. This cannot
be interpreted in any other way.
- Granting in this case that even if it were not expressly
provided that the machines would be covered, law and
jurisprudence provide that they will still be included.
o NCC Art. 2217 provides that the mortgage extends to the
natural accessions and improvements, among others.
o Bischoff v. Pomar and Cia. General de Tabacos: Even if
the machinery were not expressly included in the
mortgage, the (old) Mortgage Law provides that chattels
permanently located in a building, either useful or
ornamental, or for the service of some industry even
though they were placed there after the creation of the
mortgage, shall be deemed part of the mortgage,
provided they belong to the owner of the mortgaged
land.
o Cu Unjieng v. Mabalacat Sugar Co.: Reiterated the legal
truism that the accessory follows the principal.
- CA was incorrect in appreciating the MTI and the additions
thereto; they sufficiently state that the machineries were
included
- Moreover, the real estate mortgage over the machineries
and equipment is fully supported by the fact that under
NCC Art. 415 (5) , immobilized machinery are considered as
real property and, hence, is the proper subject of a real
estate mortgage.
DISPOSITIVE: Petition granted. CA reversed and RTC
affirmed.
Star-Two v. Paper City
GR: Accessory follows the principal (property: real estate)
Art. 2217: The mortgage extends to the natural accessions and
improvements.
133
E. Right to Alienate Real Estate Mortgage Credit
Art. 2128 The mortgage credit may be alienated or assigned to
a third person, in whole or in part, with the formalities required
by law.
Art. 1625 An assignment of a credit, right or action shall
produce no effect as against third person, unless it appears in a
public instrument, or the instrument is recorded in the Registry
of Property in case the assignment involves real property.
- Why (b) is a violation of Art. 2130: it achieves the same intent
and purpose of a stipulation forbidding the mortgagor from
alienating the collateral.
- A stipulation prohibiting the mortgagor from entering into
second or subsequent mortgages is valid since there is no
law forbidding it
- A grant of right of first refusal in favor of the mortgagee is
valid
- Consideration for the real estate mortgage is the same for
the right of first refusal

Right to Alienate - The right is in favor of the mortgagor.

Art. 1627 The assignment of a credit includes all the accessory
rights, such as a guaranty, mortgage, pledge or preference.
When there is a threat of foreclosure, mortgagor may opt to sell
his property (more beneficial since he may dictate the price, as
- Right to alienate the real estate mortgage credit: opposed to a foreclosure sale where bidding may not go as well)
the right of the mortgagee to assign its rights under the
principal obligation secured by the real estate mortgage REM CM
- The mortgagee does not become the owner of the
CC states that the right of the Failure to obtain consent of
collateral, but it owns the real estate mortgage credit and
mortgagor subsists and there mortgagee:
may alienate or assign it to a third person
CANNOT be a pactum de Dy: Failure to obtain consent,
non alienando alienation is valid but will
The right to alienate mortgage credit is not present in the result in penalties
Chattel Mortgage Law. Servicewide: Consent is
necessary, applied the
F. Right to Alienate Collateral provisions on pledge

Art. 2085 The following requisites are essential to the contracts

of pledge and mortgage: Garcia v. Villar (2012) Leonardo-De Castro, J.
Petitioner: Pablo P. Garcia
(1) That they be constituted to secure the fulfillment of a Respondent: Yolanda Valdez Villar
principal obligation; Concept: Real Estate Mortgage; Right to Alienate Collateral

(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 the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
Art. 2130 A stipulation forbidding the owner from alienating
the immovable mortgaged shall be void.
- The mortgagor remains to be the owner of the collateral
and retains the right to dispose (jus disponendi), as an
attribute of ownership
- Pactum de non alienando (Sp. pacto de non alienando) is
prohibited by Art. 2130
- Pactum de non alienando:
a) Stipulations forbidding the mortgagor from selling the
collateral, and
b) Stipulations forbidding the mortgagor from selling the
collateral without the consent of the mortgagee
Doctrine:
The mortgagor in a Real Estate Mortgage retains ownership over
the mortgaged property and may validly alienate the same. A
stipulation forbidding the alienation of the immovable
mortgaged shall be void.
Brief Facts:
Galas and Pingol obtained a loan from Villar and secured
payment by virtue of a Real Estate Mortgage constituted over
real property Galas owned. Galas and Pingol obtained another
loan from Garcia and mortgaged the same real property
previously mortgaged to Villar. Thereafter, Galas sold the
subject property to Villar. Garcia filed a complaint for foreclosure
and damages against Villar, alleging that the sale was invalid, it
being done without his prior consent.
ISSUES:
1. WON the second mortgage to Garcia was valid (YES)
2. WON the sale of the subject property to Villar was valid
(YES)
3. WON the sale of the subject property to Villar was in
violation of the prohibition on pactum commissorium (NO)
4. WON Garcias action to foreclose of mortgage on the
subject property can prosper (YES)

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RATIO:
1. Yes, the second mortgage was valid.
- The restriction on further encumbrances without the
mortgagees prior consent was not contained in the Deed of
Real Estate Mortgage executed in favor of Villar but was
merely annotated on Galas TCT
o As the Deed became the basis for the annotation on
Galas title, its terms and conditions take precedence
over the standard, stamped annotation placed on her
title
o If it were the intention of the parties to impose such
restriction, they would have and should have stipulated
such in the Deed of Real Estate Mortgage itself
2. Yes, the sale to Villar was valid.
- The Deed of Real Estate Mortgage likewise did not
proscribe the sale of the subject property during the lifetime
of the mortgages
- It merely provided for the options Villar may undertake in
case Galas or Pingol fail to pay their loan
- Nonetheless, such proscription would have been void, as it
is not allowed under Art. 2130, CC:
o A stipulation forbidding the owner from
alienating the immovable mortgaged shall be
void.
3. No. The prohibition on pactum commissorium was
not violated.
- The stipulation referred to by Garcia reads as follows:
Power of Attorney of MORTGAGEE. Effective upon the
breach of any condition of this Mortgage, and in addition to the
remedies herein stipulated, the MORTGAGEE is likewise
appointed attorney-in-fact of the MORTGAGOR with full power
and authority to take actual possession of the mortgaged
properties, to sell, lease any of the mortgaged properties, to
collect rents, to execute deeds of sale, lease, or agreement that
may be deemed convenient, to make repairs or improvements
on the mortgaged properties and to pay the same, and perform
any other act which the MORTGAGEE may deem convenient for
the proper administration of the mortgaged properties.
- Elements of Pactum Commissorium:
(1) There should be a property mortgaged by way of
security for the payment of the principal obligation
(2) There should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
case of non-payment
- The power of attorney provision did not provide that the
ownership of the subject property would automatically pass
to Villar upon Galas failure to pay the loan on time
o What it granted was the mere appointment of Villar as
attorney-in-fact, with authority to sell or otherwise
dispose of the subject property, and the apply the
proceeds to the payment of the loan
o This provision is customary in mortgage contracts, and
is in conformity with Art. 2087, CC:
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" It is also of the essence of these contracts
that when the principal obligation becomes
due, the things in which the pledge or
mortgage consists may be alienated for the
payment to the creditor.
- Galas decision to eventually sell the property to Villar for an
additional P1,500,000 was well within the scope of her rights
as the owner of the subject property
o The property was transferred to Villar by virtue of
another and separate contract, which is the Deed of
Sale
o Garcia never alleged that the transfer was automatic
upon Galas failure to pay or that the sale was simulated
to cover up such automatic transfer
4. Yes, Garcias right to foreclose subsisted despite
the transfer of ownership of the property to Villar.
- The real nature of a mortgage is described in Art. 2126,
CC:
o 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.
- A mortgage is a real right, which follows the property even
after subsequent transfers by the mortgagor
- A registered mortgage lien is considered inseparable from
the property inasmuch as it is a right in rem
- A sale or transfer of the mortgaged property cannot affect
or release the mortgage
- Thus, the purchaser or transferee is necessarily bound to
acknowledge and respect the encumbrance
- It may still be foreclosed despite transfer, as provided by
Art. 2129, CC:
o The creditor may claim from a third person in
possession of the mortgaged property, the
payment of the part of the credit secured by
the property which said third person
possesses, in terms and with the formalities
which the law established.
- However, Vilar, in buying the subject property with notice
that it was mortgaged, only undertook to pay such
mortgage or allow the subect property be sold
upon failure of the mortgage creditor to obtain
payment from the principal debtor once the debt
matures. Villar did not obligate herseld to replace
the debtor in the principal obligation, and could
not do so in law without the creditors consent, as
the same constitutes a novation
o Art. 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but
not without the consent of the creditor.
- Obligation to pay the mortgage indebtedness
REMAINS WITH THE ORIGINAL DEBTORS, GALAS
AND PINGOL
135
- E.C. McCullough & Co. v. Veloso:
o The obligation of the new possessor to pay the debt
originated only from the right of the creditor to
demand payment of him, it being necessary that a
demand for payment should have previously been
made upon the debtor and the latter should have failed
to pay. And even if these requirements were complied
with, still the third possessor might abandon the
property mortgaged, and in that case it is considered to
be in the possession of the debtor.
- Rodriguez v. Reyes:
o The maxim "caveat emptor " applies only to execution
sales, and this was not one such. The mere fact that the
purchaser of an immovable has notice that the acquired
realty is encumbered with a mortgage does not render
him liable for the payment of the debt guaranteed by
the mortgage, in the absence of stipulation or
condition that he is to assume payment of the
mortgage debt. The reason is plain: the mortgage is
merely an encumbrance on the property, entitling the
mortgagee to have the property foreclosed, i.e., sold, in
case the principal obligor does not pay the mortgage
debt, and apply the proceeds of the sale to the
satisfaction of his credit. Mortgage is merely an
accessory undertaking for the convenience and security
of the mortgage creditor, and exists independently of
the obligation to pay the debt secured by it. The
mortgagee, if he is so minded, can waive the mortgage
security and proceed to collect the principal debt by
personal action against the original mortgagor.
- Garcia has no cause of action against Villar in the absence of
evidence to show that the second mortgage executed in
favor of Garcia has been violated by his debtors, Galas and
Pingol, i.e., that Garcia has made a demand on said debtors
for the payment of the obligation and failed to pay
DISPOSITIVE: CA affirmed.
Garcia v. Villar
The same property is securing 2 mortgages. Still satisfies the
elements of a mortgage.
SGS: The lawyer of Garcia misread Art. 2129.
G. Foreclosure of Real Estate Mortgage
- If the principal obligation becomes due and the debtor
defaults, the creditor, as mortgagee, may elect to foreclose
the collateral
- Foreclosure of a real estate mortgage may be judicial or
extrajudicial
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1. Judicial Foreclosure
a. Complaint for Foreclosure
Rule 68, Sec. 1 Complaint in action for foreclosure In an
action for the foreclosure of a mortgage or other encumbrance
upon real estate, the complaint shall set forth the date and due
execution of the mortgage; its assignments, if any; the names
and residences of the mortgagor and the mortgagee; a
description of the mortgaged property; a statement of the date
of the note or other documentary evidence of the obligation
secured by the mortgage, the amount claimed to be unpaid
thereon; and the names and residences of all persons having or
claiming an interest in the property subordinate in right to that
of the holder of the mortgage, all of whom shall be made
defendants in the action.
A judicial foreclosure is initiated by a complaint.
The complaint must contain:
- Date and due execution of mortgage
- Assignments, if any
- Names and residences of the mortgagors and the
mortgagee
- Description of mortgaged property
- Date of note or other documentary evidence regarding the
mortgage
- Unpaid amount
- Names and residences of all persons having or claiming an
interest in the property with subordinate right to the
mortgagor
b. Judgment on Foreclosure
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale
If upon the trial in such action the court shall find the facts set
forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation,
including interest and other charges as approved by the court,
and costs, and shall render judgment for the sum so found due
and order that the same be paid to the court or to the judgment
obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment,
and that in default of such payment the property shall be sold at
public auction to satisfy the judgment.
136
Korea Exchange Bank vs. Filkor Business Integrated, Inc. (2002)
Quisumbing J.
Petitioners: Korea Exchange Bank
Respondents: Filkor Business Integrated; Kim Eung Joe; Lee
Han San
Concept: Foreclosure of Real Estate Mortgage Judgment on
Foreclosure, Rules of Court
Doctrine: It is a basic principle in Civil Procedure that what
determines the nature of an action are the allegations in the
complaint and the reliefs sought. If the complaint sufficiently
complies with the requirements for REM foreclosure in the Rules,
then the action should be treated as one for foreclosure.
Brief Facts: For Filkors failure to pay the loan, Korea Exchange
filed a complaint with TC, seeking payment of the formers
obligation and the foreclosure and sale of the REM executed
between the two. TC rendered judgment, ordering the payment
of the obligation but did not order the foreclosure in case of
non-payment, as it treated the complaint as one for collection of
a sum of money and not an action for foreclosure. As such, it
held that the bank has in effect waived its right to foreclose the
mortgaged property.
ISSUE:
WON complaint before the TC was an action for foreclosure of
REM, or an action for collection of a sum of money (action for
foreclosure)
RATIO: A look at the complaint and the prayer sought
for by the bank reveals that the action it filed was one
for foreclosure of the REM and not a collection suit
- To resolve the issue, SC looked at the complaint filed by the
bank:
To secure payment of the obligations of defendant
Corporation under the First to the Twenty-Seventh Cause of
Action, on February 9, 1996, defendant Corporation
executed a Real Estate Mortgage by virtue of which it
mortgaged to plaintiff the improvements standing on Block
13, Lot 1, Cavite Export Processing Zone, Rosario, Cavite,
belonging to defendant Corporation covered by Tax
Declaration No. 5906-1 and consisting of a one-story
building called warehouse and spooling area, the
guardhouse, the cutting/sewing area building and the
packing area building.
- This allegation satisfies in part the requirement of Sec. 1,
Rule 68 of 1997 Rules of Civil Procedure on foreclosure of
real estate mortgage.
SECTION 1. Complaint in action for foreclosure. In an
action for the foreclosure of a mortgage or other
encumbrance upon real estate, the complaint shall set forth
the date and due execution of the mortgage; its
assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the
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mortgaged property; a statement of the date of the note or
other documentary evidence of the obligation secured by
the mortgage, the amount claimed to be unpaid thereon;
and the names and residences of all persons having or
claiming an interest in the property subordinate in right to
that of the holder of the mortgage, all of whom shall be
made defendants in the action.
- In said complaint, the date and execution of the real estate
mortgage are alleged. The properties mortgaged are stated
and described therein as well. In addition, the names and
residence of the mortgagee and mortgagor are also
alleged, while the dates of the obligations secured by the
mortgage and the amounts unpaid thereon are alleged in
the first to twenty-seventh causes of action.
- Moreover, the very prayed of the complaint reads as follows:
Ordering that the property mortgaged be foreclosed and
sold at public auction in case defendants fail to pay plaintiff
within ninety (90) days from entry of judgment.
- Banks allegations in its complaint, and its prayer that the
mortgaged property be foreclosed and sold at public
auction, indicate that petitioners action was one for
foreclosure of real estate mortgage. We have consistently
ruled that what determines the nature of an action, as well
as which court or body has jurisdiction over it, are the
allegations of the complaint and the character of the relief
sought.
- In addition, we find no indication whatsoever that petitioner
had waived its rights under the real estate mortgage
executed in its favor.
- Thus, the trial court erred in concluding that the bank had
abandoned its mortgage lien on Filkors property, and that
what it had filed was an action for collection of a sum of
money.
- As the action was one for foreclosure of REM, it was
incumbent upon the TC to order that the mortgaged
property be foreclosed and sold at public auction in the
event that Filkor fails to pay its outstanding obligations,
pursuant to Sec. 2, Rule 68:
SEC. 2. Judgment on foreclosure for payment or sale.-
If upon the trial in such action the court shall find the
facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the
mortgage debt or obligation, including interest and
other charges as approved by the court, and costs, and
shall render judgment for the sum so found due and
order that the same be paid to the court or to the
judgment obligee within a period of not less than
ninety (90) days nor more than one hundred twenty
(120) days from entry of judgment, and that in default of
such payment the property shall be sold at public
auction to satisfy the judgment.
DISPOSITIVE: TC reversed.
137
c. Equity of Redemption
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale
If upon the trial in such action the court shall find the facts set
forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation,
including interest and other charges as approved by the court,
and costs, and shall render judgment for the sum so found due
and order that the same be paid to the court or to the judgment
obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment,
and that in default of such payment the property shall be sold at
public auction to satisfy the judgment.
Equity of Redemption: the right of the mortgagor to
extinguish the collateral and retain ownership of it.
- Exercised after default in the performance of the condition
of the mortgage but before the foreclosure sale of the
collateral
- Exercised by paying the mortgage obligation
- Period is no less than 90 days but no more than 120 days
from the entry of judgment (Rule 68, Sec. 2)
Equity of Redemption on Mortgagors Successors -In-
Interest
All junior lien-holders acquire the right to subordinate to the
superior lien of the 1st mortgagee.
Unforeclosed Equity of Redemption
A decree of foreclosure where junior lien-holders are not parties,
the equity of redemption in their favor remains unforeclosed and
unaffected
A separate foreclosure proceeding should be brought to require
them to redeem from the first mortgagee under penalty of
losing the prerogative to redeem
Whose rights are defeated? Mortgagees right to foreclose
(or assignees)
d. Foreclosure Sale
Rule 68, Sec. 3 Sale of mortgaged property; effect When
the defendant, after being directed to do so as provided in the
next preceding section, fails to pay the amount of the judgment
within the period specified therein, the court, upon motion, shall
order the property to be sold in the manner and under the
provisions of Rule 39 and other regulations governing sales of
real estate under execution. Such sale shall not affect the rights
of persons holding prior encumbrances upon the property or a
part thereof, and when confirmed by an order of the court, also
upon motion, it shall operate to divest the rights in the property
of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be
allowed by law.
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Upon the finality of the order of confirmation or upon the
expiration of the period of redemption when allowed by law, the
purchaser at the auction sale or last redemptioner, if any, shall
be entitled to the possession of the property unless a third party
is actually holding the same adversely to the judgment obligor.
The said purchaser or last redemptioner may secure a writ of
possession, upon motion, from the court which ordered the
foreclosure.
Rule 68, Sec. 4 Disposition of proceeds of sale The amount
realized from the foreclosure sale of the mortgaged property
shall, after deducting the costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due, the same
shall be paid to junior encumbrancers in the order of their
priority, to be ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after payment
to them, then to the mortgagor or his duly authorized agent, or
to the person entitled to it
Rule 68, Sec. 5 How sale to proceed in case the debt is not all
due If the debt for which the mortgage or encumbrance was
held is not all due as provided in the judgment, as soon as a
sufficient portion of the property has been sold to pay the total
amount and the costs due, the sale shall terminate; and
afterwards, as often as more becomes due for principal or
interest and other valid charges, the court may, on motion, order
more to be sold. But if the property cannot be sold in portions
without prejudice to the parties, the whole shall be ordered to
be sold in the first instance, and the entire debt and costs shall
be paid, if the proceeds of the sale be sufficient therefor, there
being a rebate of interest where such rebate is proper.
Rule 68, Sec. 7 Registration A certified copy of the final
order of the court confirming the sale shall be registered in the
registry of deeds. If no right of redemption exists, the certificate
of title in the name of the mortgagor shall be cancelled, and a
new one issued in the name of the purchaser.
Where a right of redemption exists, the certificate of title in the
name of the mortgagor shall not be cancelled, but the certificate
of sale and the order confirming the sale shall be registered and
a brief memorandum thereof made by the registrar of deeds
upon the certificate of title. In the event the property is
redeemed, the deed of redemption shall be registered with the
registry of deeds, and a brief memorandum thereof shall be
made by the registrar of deeds on said certificate of title.
If the property is not redeemed, the final deed of sale executed
by the sheriff in favor of the purchaser at the foreclosure sale
shall be registered with the registry of deeds; whereupon the
certificate of title in the name of the mortgagor shall be
cancelled and a new one issued in the name of the purchaser.
138
Rule 68, Sec. 8 Applicability of other provisions The
provisions of sections 31, 32 and 34 of Rule 39 shall be
applicable to the judicial foreclosure of real estate mortgages
under this Rule insofar as the former are not inconsistent with or
may serve to supplement the provisions of the latter
Rule 39, Sec. 31 Manner of using premises pending
redemption; waste restrained Until the expiration of the time
allowed for redemption, the court may, as in other proper cases,
restrain the commission of waste on the property by injunction,
on the application of the purchaser or the judgment obligee,
with or without notice; but it is not waste for a person in
possession of the property at the time of the sale, or entitled to
possession afterwards, during the period allowed for
redemption, to continue to use it in the same manner in which it
was previously used; or to use it in the ordinary course of
husbandry; or to make the necessary repairs to buildings thereon
while he occupies the property.
Rule 39, Sec. 32 Rents, earnings and income of property
pending redemption The purchaser or a redemptioner shall
not be entitled to receive the rents, earnings and income of the
property sold on execution, or the value of the use and
occupation thereof when such property is in the possession of a
tenant. All rents, earnings and income derived from the property
pending redemption shall belong to the judgment obligor until
the expiration of his period of redemption.
Rule 39, Sec. 34 Recovery of price if sale not effective; revival
of judgment If the purchaser of real property sold on
execution, or his successor in interest, fails to recover the
possession thereof, or is evicted therefrom, in consequence of
irregularities in the proceedings concerning the sale, or because
the judgment has been reserved or set aside, or because the
property sold was exempt from execution, or because a third
person has vindicated his claim, to the property, he may on
motion in the same action or in a separate action recover from
the judgment obligee the price paid, with interest, or so much
thereof as has not been delivered to the judgment obligor; or he
may, on motion, have the original judgment revived in his name
for the whole price with interest, or so much thereof as has been
delivered to the
judgment obligor. The judgment so revived shall have the same
force and effect as an original judgment would have as of the
date of the revival and no more.
PROCEDURE
1. Demand by the creditor or failure to pay within the period
2. File a complaint for foreclosure of mortgage, indicating:
a. Date and due execution of the mortgage
b. Its assignments, if any
c. Names and residences of mortgagor and mortgagee
d. Description of the mortgaged property
e. Statement of the date of the note or other
documentary evidence of the obligation secured by the
mortgage
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f. Amount claimed to be paid thereon
g. Names and residences of all persons having or claiming
an interest in the property subordinate to the
mortgagee (they shall be made defendants)
- How will you know who they are? They will be
annotated at the back of the title
3. If the court finds the facts in the complaint to be true, it
shall:
a. Ascertain amount due to the plaintiff (judgment oblige)
b. Order that the same be paid to the court or judgment
oblige within a period of not less than 90 days and not
more than 120 days (equity of redemption)
- An order presupposes a trial was conducted
- 90-120 days = period of grace
4. Equity of redemption expires (assuming judgment obligor
did not pay)
5. Sale will be conducted, where the purchaser is the highest
bidder
- Acceptance of a bid at the foreclosure sale confers no
title on the purchaser
- Until the court has validly confirmed the foreclosure
sale, the purchaser is nothing more than a preferred
bidder
6. A hearing will be conducted for interested parties to show
cause why the sale should not be confirmed
7. Court will issue a confirmation order (upon MOTION) (Rule
68, Sec. 3)
- The order of confirmation operates to divest the
mortgagors rights in the property and vests it in the
purchaser, subject only to right of redemption (if it
exists)
- Purchaser acquires certain rights
8. Finality of confirmation order or expiration of redemption
period (if there is a right of redemption)
- Consequence: purchaser is entitled to possession
unless a third party is actually holding the same
adversely to the judgment obligor (mortgagor). In such
a case, the possession will also have to be litigated
9. Proceeds of the sale paid in this order:
a. Costs of the sale
b. Mortgage debt specified in the contract
c. Junior encumbrancers in order of priority
d. Mortgagor
10. Registration: at the Register of Deeds, present the final
order of court confirming the sale
a. No right of redemption: Certificate of title is
cancelled and a new one issued in the name of the
purchaser
b. Right of redemption exists:
i. Certificate is not cancelled: (1) certificate of sale and
(2) confirmation order are registered and a brief
memo made by registrar of deeds
ii. Redeemed: deed of redemption registered
iii. Not redeemed: final deed of sale registered and
new certificate of title issued
11. Move for the court to render judgment on deficiency, if any
139
e. Right of Redemption
Right of Redemption is a statutory right. In order to claim it,
there must be a specific law that exceptionally allows it (a
statutory right).
- Look to a law. The Rules cannot grant this right.
This right is defeated by the inchoate rights of a purchaser over
the property.
RA 8791 (General Banking Law of 2000)
- In a judicial foreclosure by a bank/quasi-bank or trust entity,
the mortgagor shall have the right within 1 year after the
sale of the collateral to redeem the property by paying the
amount due under the mortgage deed with interest and all
costs and expenses incurred by the bank from the sale less
costs for custody of the property less income (rent) derived
therefrom)
Huerta Alba Resort, Inc. vs. Court of Appeals Pursima, J.
Petitioner: Huerta Alba Resort, Inc. (Huerta Alba)
Respondents: Court of Appeals (CA) and Syndicated
Management Group, Inc. (SMGI)
Doctrine:
Generally, the right of redemption exists only in extrajudicial
foreclosures. In case of judicial foreclosures, there exists only an
equity of redemption. However, even if the foreclosure is
judicial, the right of redemption exists when the mortgagee is
the PNB, a bank, a banking institution, or a credit institution. The
right of redemption under Sec. 78 of RA 337 is a compulsory
counterclaim that must be averred in the answer. Failing to
invoke it in a timely fashion shall bar a person from claiming its
benefits in later part of proceedings. (See further discussion
based on the cited case of Limpin vs. IAC below)
Brief Facts:
Huerta Albas mortgaged properties were judicially foreclosed.
In a series of proceedings it did not invoke its right of
redemption under Sec. 78 of RA 337. After the foreclosure sale
was confirmed, it invoked for the first time its right of
redemption under the said provision.
ISSUE:
WON Huerta Alba had the right of redemption. (NO)
RATIO: Huerta Alba only had the equity of
redemption. It could not claim the right of redemption
because it failed to invoke the right in a timely
fashion.
- Huerta Alba: theorized that it invoked the right in a timely
fashion, i.e., after the confirmation by the court of the
foreclosure sale and within one year from the date of the
registration of the certificate of sale.
- SC: It was too late for petitioner to invoke the right of
redemption. It failed to assert the right in several crucial
stages of the proceedings.
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o When are these crucial stages?
" On September 7, 1994, when Huerta Alba filed an
ex-parte motion for clarification, it failed to allege
that SMGIs predecessor in interest was a credit
institution. It merely asked for clarification whether
the sale was execution sale or judicial foreclosure.
" On October 13, 1994, when it presented an
exception to the order and motion to set aside
order of the trial court, Huerta Alba was silent
regarding its right of redemption. It merely claimed
that an order by the trial court altered a prior order.
" On February 10, 1995, when the trial court
confirmed the foreclosure sale, nothing was heard
from Huerta Alba regarding its right of
redemption. It did not invite attention to its stance
that SMGIs predecessor in interest was a credit
institution.
- If Huerta Alba acted in good faith, it would have ventilated
before the CA its alleged right under Section 78 of RA 337,
but it never did.
- The earliest opportunity to invoke the right of redemption
would have been when it submitted its answer to the action
for judicial foreclosure.
- Following the ruling in Limpin vs. IAC, when the foreclosure
sale is confirmed by an order of the court, it shall operate to
divest the rights of all the parties to the action and to vest
their rights in the purchaser, subject to such rights of
redemption as may be allowed by law.
- The right of redemption, in this case, hinged on the factual
issue of whether Intercon was a bank, banking institution, or
credit institution. It is in the nature of a compulsory
counterclaim, which should have been averred in the
answer.
- The very purpose of a counterclaim would have been served
had the petitioner alleged in its answer its purported right
under Section 78 of RA 337. The rules of counterclaim are
designed to enable the disposition of a whole controversy
of interested parties conflicting claims, at one time and in
one action.
- The failure of petitioner to seasonably assert its alleged
right under Section 78 of RA 337 precluded it from doing so
in a later stage of the case. Estoppel may be successfully
invoked if the party fails to raise the question in the early
stages of the proceedings.
DISPOSITIVE: Petition DENIED. CA ruling affirmed.
Discussion on equity of redemption and right of
redemption (as enunciated in the cited case of Limpin
vs. IAC):
- Right of redemption: a prerogative to re-acquire
mortgaged property after registration of the foreclosure
sale
- The right of redemption in relation to a mortgage exists
only in the case of the extrajudicial foreclosure of the
mortgage.
140
- There is no right of redemption recognized in a judicial
foreclosure except only where the mortgagee is either of
the following:
o The Philippine National Bank
o A bank or a banking institution or a credit institution
- When redemption is granted by law in case of judicial
foreclosure, the right to redeem the property soldafter
confirmation by the court of the foreclosure salemay be
exercised within a period of one year from the date of
registration of the certificate of sale in the registry of
property.
- When a mortgage is extrajudicially foreclosed, Act 3135
grants a right of redemption within one year from the
registration of the sheriffs certificate of foreclosure sale.
- When the foreclosure is judicially affected, and the entity is
not the PNB, a bank, a banking institution, or a credit
institution, only the equity of redemption exists.
- Equity of redemption: 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, in accordance with
RULE 68 of ROC, or even after the foreclosure sale BUT prior
to its confirmation.
- After the order of confirmation, no redemption can be
made any longer. The order of confirmation operates to
divest the rights of all the parties to the action and to vest
their rights in the purchaser.
Herta Alba v. CA
There was no exercise of the equity of redemption. This case
involved a judicial foreclosure sale.
f. Right to Surplus or Deficiency
Rule 68, Sec. 4 Disposition of proceeds of sale The amount
realized from the foreclosure sale of the mortgaged property
shall, after deducting the costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due, the same
shall be paid to junior encumbrancers in the order of their
priority, to be ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after payment
to them, then to the mortgagor or his duly authorized agent, or
to the person entitled to it.
Rule 68, Sec. 6 Deficiency judgment If upon the sale of any
real property as provided in the next preceding section there be
a balance due to the plaintiff after applying the proceeds of the
sale, the court, upon motion, shall render judgment against the
defendant for any such balance for which, by the record of the
case, he may be personally liable to the plaintiff, upon which
execution may issue immediately if the balance is all due at the
time of the rendition of the judgment; otherwise, the plaintiff
shall be entitled to execution at such time as the balance
remaining becomes due under the terms of the original contract,
which time shall be stated in the judgment.
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Rule 86, Sec. 7 Mortgage debt due from estate A creditor
holding a claim against the deceased secured by mortgage or
other collateral security, may abandon the security and
prosecute his claim in the manner provided in this rule, and
share in the general distribution of the assets of the estate; or he
may foreclose his mortgage or realize upon his security, by
action in court, making the executor or administrator a party
defendant, and if there is a judgment for a deficiency, after the
sale of the mortgaged premises, or the property pledged, in the
foreclosure or other proceedings to realize upon the security, he
may claim his deficiency judgment in the manner provided in the
preceding section; or he may rely upon his mortgage or other
security alone, and foreclose the same at any time within the
period of the statute of limitations, and in that event he shall not
be admitted as a creditor, and shall receive no share in the
distribution of the other assets of the estate; but nothing herein
contained shall prohibit the executor or administrator from
redeeming the property mortgaged or pledged, by paying the
debt for which it is held as security, under the direction of the
court, if the court shall adjudge it to be for the best interest of
the estate that such redemption shall be made.
Mortgagor: entitled to surplus
Mortgagee: entitled to deficiency judgment (by Motion for
Deficiency Judgment for the balance)
The right to recover deficiencies by the mortgagee extends to
the judicial foreclosure of mortgage arising out of a settlement
of an estate (Rule 86), and it gives the mortgagee 3 distinct,
independent and mutually exclusive remedies:
1. Waive mortgage and claim the principal obligation from the
estate as an ordinary claim
2. Judicial foreclosure and prove deficiency as an ordinary
claim
3. Rely on the mortgage exclusively without the right to
deficiency
FOR DEFICIENCIES:
1. Against the MORTGAGOR: Action for Deficiency Judgment
2. Against the mortgagors ESTATE:
a. ORDINARY CLAIM: of his principal obligation from the
estate; operates as a waiver of the mortgage
b. JUDICIAL FORECLOSURE of mortgage: any deficiency
by ordinary claim
c. EXTRAJUDICIAL FORECLOSURE alone: no deficiency
This does not apply to 2nd mortgages because the 2nd mortgage
is not a full mortgage.
141
2. Extrajudicial Foreclosure
a. Special Powers
Act No. 3135, Sec. 1 When a sale is made under a special
power inserted in or attached to any real-estate mortgage
hereafter made as security for the payment of money or the
fulfillment of any other obligation, the provisions of the following
election shall govern as to the manner in which the sale and
redemption shall be effected, whether or not provision for the
same is made in the power.
- Mortgagee has the right to foreclose a real estate
mortgage upon the mortgagors failure to pay his obligation
- This right must be exercised according to its clear mandate
requirements of the law must be complied with, otherwise,
valid exercise of the right ends
Extrajudicial foreclosure
- May be exercised only if there is a special power inserted
or attached to the document in which the REM appears, and
only in accordance with the provisions of Act No. 3135
thereon the corresponding file number, date and time of
filing;
b) collect the filing fees therefore pursuant to rule 141,
Section 7(c), as amended by A.M. No. 00-2-01-SC, and
issue the corresponding official receipt;
c) examine, in case of real estate mortgage foreclosure,
whether the applicant has complied with all the
requirements before the public auction is conducted
under the direction of the sheriff or a notary public,
pursuant to Sec. 4 of Act 3135, as amended;
d) sign and issue the certificate of sale, subject to the
approval of the Executive Judge, or in his absence, the
Vice-Executive Judge. No certificate of sale shall be
issued in favor of the highest bidder until all fees
provided for in the aforementioned sections and in Rule
141, Section 9(1), as amended by A.M. No. 00-2-01-SC,
shall have been paid; Provided, that in no case shall the
amount payable under Rule 141, Section 9(1), as
amended, exceed P100,000.00;

The SPA is not a pactum commissorium. It is a special power e) after the certificate of sale has been issued to the
required to extrajudicially foreclose. highest bidder, keep the complete records, while
awaiting any redemption within a period of one (1) year
b. Foreclosure Sale from date of registration of the certificate of sale with the
Register of Deeds concerned, after which, the records
Act No. 3135, Sec. 2 Said sale cannot be made legally shall be archived. Notwithstanding the foregoing
outside of the province in which the property sold is situated; provision, juridical persons whose property is sold
and in case the place within said province in which the sale is to pursuant to an extra-judicial foreclosure, shall have the
be made is subject to stipulation, such sale shall be made in said right to redeem the property until, but not after, the
place or in the municipal building of the municipality in which registration of the certificate of foreclosure sale which in
the property or part thereof is situated. no case shall be more than three (3) months after
foreclosure, whichever is earlier, as provided in Section 47
of Republic Act No. 8791 (as amended, Res. Of August 7,
A.M. No. 99-10-05-0, as amended
2001).
Procedure In Extra-Judicial Foreclosure Of Mortgage
Where the application concerns the extrajudicial foreclosure of
In line with the responsibility of an Executive Judge under
mortgages of real estates and/or chattels in different locations
Administrative Order No. 6, dated June 30, 1975, for the
covering one indebtedness, only one filing fee corresponding to
management of courts within his administrative area, included in
such indebtedness shall be collected. The collecting Clerk of
which is the task of supervising directly the work of the Clerk of
Court shall, apart from the official receipt of the fees, issue a
Court, who is also the Ex-Office Sheriff, and his staff, and the
certificate of payment indicating the amount of indebtedness,
issuance of commissions to notaries public and enforcement of
the filing fees collected, the mortgages sought to be foreclosed,
their duties under the law, the following procedures are hereby
the real estates and/or chattels mortgaged and their respective
prescribed in extrajudicial foreclosure of mortgages:
locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places
1. All applications for extra-judicial foreclosure of mortgage
where the other properties are located and of allowing the
whether under the direction of the sheriff or a notary public,
extrajudicial foreclosures to proceed thereat.
pursuant to Act 3135, as amended by Act 4118, and Act 1508,
as amended, shall be filed with the Executive Judge, through
3. The notices of auction sale in extrajudicial foreclosure for
the Clerk of court who is also the Ex-Officio Sheriff.
publication by the sheriff or by a notary public shall be
published in a newspaper of general circulation pursuant to
2. Upon receipt of an application for extra-judicial foreclosure
Section 1, Presidential Decree No. 1079, dated January 2,
of mortgage, it shall be the duty of the Clerk of Court to:
1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.
a) receive and docket said application and to stamp
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 4. The Executive Judge shall, with the assistance of the Clerk
of Court, raffle applications for extrajudicial foreclosure of
mortgage under the direction of the sheriff among all
sheriffs, including those assigned to the Office of the Clerk of
Court and Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff
or the notary public who conducted the sale to the Clerk of
Court before the issuance of the certificate of sale.
WHERE: Province in which the property is situated
- As stipulated (within the province) or
- In the municipal building of the municipality in which the
property or part of it is located
NOTICE:
- For all: 3 public places of the municipality or city (for at least
20 days)
- If property > P400: newspaper of general circulation (once a
week for 3 consecutive weeks)
PROCEDURE:
1. Apply for extrajudicial foreclosure sale filed with the
executive judge through the clerk of court
2. Duties of the clerk of court:
a. Ensure SPA is inserted/attached to the deed of REM
b. Docket the application
c. Collect filing fee and issue a receipt
XPN: Coperatives, thrift banks, rural banks
d. Issue certificate of payment if collateral is located
separately and covers only 1 indebtedness
3. Raffle among the sheriffs with the supervision of the
executive judge
4. Duties of sheriff assigned
a. Prepare notice of extrajudicial sale
b. Cause publication
c. Executive judge will distribute copies to newspaper
companies for publication
d. Debtor-mortgagor need not be served a copy of notice
unless the mortgage contract requires it (case of Grand
Farms)
e. For loans < P100,000 by rural/thrift banks: no more
need for publication, only notice posted for 60 days in
conspicuous areas of municipality where property is
located (municipal building, municipal public market,
rural bank, barangay hall)
1) Requirements of Notice
Notice
- Its object is to inform the public of the nature and condition
of the collateral to be sold (and the time, place and terms of
the sale)
- For the purpose of securing bidders and to prevent a
sacrifice of the collateral
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GR: Under normal circumstances, statutory provisions governing
posting of notice of REM foreclosure sales must be strictly
complied with
- Even slight deviations will invalidate the notice and render
the sale voidable
- Examples:
o If the sheriff sells the collateral without the required
notice, and induced by the mortgagee, and the
purchaser is the mortgagee, the sale is absolutely
void and no title passes
o If mistakes or omissions occur in the notice of sale,
calculated to deter or mislead bidders, to depreciate
the value of the property, or to prevent it from bringing
a fair price, such mistakes will be fatal to the validity
of the notice and the consequent foreclosure sale
XPN: If the objectives are attained, immaterial errors and
mistakes may not affect the sufficiency of the notice
- Examples:
o If what is lacking is the posting in three public places,
not the publication in a newspaper of general
circulation, and considering the attendant
circumstances, the publication of the notice of
sale in a newspaper general circulation alone
has been held to be more than sufficient
compliance with the notice-posting
requirement of the law, specifically if the objectives
are attained and there is no showing that the collateral
was sold for a price far below its value to insinuate any
bad faith, nor that there was collusion
o There is a greater probability that a notice published in
a newspaper of general circulation, which is distributed
nationwide, shall be read by more people than a notice
posted in a public bulletin board, no matter how
strategic its location
Grand Farms, Inc. vs. CA (1991) Regalado, J.
Petitioners: Grand Farms, Inc. & Philippine Shares Corporation
Respondents: CA; Esperanza Echiverri, as Clerk of Court & Ex-
officio Sheriff; Sergio Cabrera as Deputy Sheriff-in-Charge; and
Banco Filipino Savings and Mortgage Bank.
Concept: Requirement of Notice
Doctrine:
The need of personal notice to the mortgagor, while not
generally required by law, could be validly stipulated in the
mortgage contract, and the failure to comply with such is fatal to
the foreclosure proceedings.
Brief Facts:
Grand Farms sought to annul the foreclosure proceedings
instituted by Banco Filipino. Banco Filipino impliedly admitted
that no personal notice was sent to Grand Farms, although it
argues that notice by publication in a newspaper of general
circulation is sufficient. Grand Farms claims that this lack of
notice violates paragraph (k) of the mortgage contract, and is
fatal to the foreclosure proceedings. Consequently, it filed a
motion for summary judgment.
143
ISSUE: the payment of the loan to prevent foreclosure or
WON a summary judgment may be promulgated by the TC, to subsequently arrange for redemption of the
given that there was no notice of foreclosure sent by the property foreclosed.
mortgagee to the mortgagor (YES) - As it was the respondent bank which caused the formulation
and preparation of the printed mortgage contract, any
RATIO: YES obscurity should be construed against it.
- The real test, therefore, of a motion for summary judgment
is whether the pleadings, affidavits and exhibits in support DISPOSITIVE: Petition granted. Case is remanded to TC for
of the motion are sufficient to overcome the opposing summary judgment.
papers and to justify a finding as a matter of law that there is
no defense to the action or that the claim is clearly 2) Conduct of Sale
meritorious. Applying said criteria to the case at bar,
we find that the present action is ripe for summary Act No. 3135, Sec. 4 The sale shall be made at public
judgment. auction, between the hours or nine in the morning and four in
- Banco Filipino tacitly admitted in its answer to the request the afternoon; and shall be under the direction of the sheriff of
for admission that it did not send any formal notice of the province, the justice or auxiliary justice of the peace of the
foreclosure to petitioners. Stated otherwise, there has been municipality in which such sale has to be made, or a notary
no denial the bank that no personal notice of the public of said municipality, who shall be entitled to collect a fee
extrajudicial foreclosure was ever sent to Grand Farms. This of five pesos each day of actual work performed, in addition to
omission, by itself, rendered th e foreclosure his expenses.
defective and irregular for being contrary to the
express provisions of the mortgage contract. There Act No. 3135, Sec. 5 At any sale, the creditor, trustee, or
is thus no further necessity to inquire into the
other persons authorized to act for the creditor, may participate
other issues cited by the trial court, for the
in the bidding and purchase under the same conditions as any
foreclosure may be annulled solely on the basis of
other bidder, unless the contrary has been expressly provided in
such defect. the mortgage or trust deed under which the sale is made.
- While Banco Filipino was constituted as their attorney-in-
fact by Grand Farms, the inclusion of the aforequoted
A.M. No. 99-10-05-0
paragraph (k) in the mortgage contract
(AS FURTHER AMENDED, AUGUST 7, 2001)
nonetheless rendered personal notice to the latter
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
indispensable.
MORTGAGE
- Paragraph (k) is an additional stipulation between the
parties, forming the law between them and as it is not
In line with the responsibility of an Executive Judge under
contrary to law, morals, good customs, and public policy,
Administrative Order No. 6, dated June 30, 1975, for the
the same should be complied with faithfully.
management of courts within his administrative area, included in
- Thus, while publication of the foreclosure
which is the task of supervising directly the work of the Clerk of
proceedings in the newspaper of general
Court, who is also the Ex-Office Sheriff, and his staff, and the
circulation was complied with, personal notice is
issuance of commissions to notaries public and enforcement of
still required when the same was mutually agreed
their duties under the law, the following procedures are hereby
upon by the parties as additional condition of the
prescribed in extrajudicial foreclosure of mortgages:
mortgage contract. Such failure of the bank to
comply with the stipulation is fatal to its cause.
1. All applications for extra-judicial foreclosure of mortgage
- The CA ruling that paragraph (k) was intended only to
whether under the direction of the sheriff or a notary public,
indicate the address of the mortgagor should be rejected,
pursuant to Act 3135, as amended by Act 4118, and Act 1508, as
as the SC interpreted an identically worded
amended, shall be filed with the Executive Judge, through the
provision in Community Savings & Loan
Clerk of court who is also the Ex-Officio Sheriff.
Association, Inc. as a valid stipulation obligating
the mortgagee-bank to send personal notice of
2. Upon receipt of an application for extra-judicial foreclosure of
foreclosure to mortgagor.
mortgage, it shall be the duty of the Clerk of Court to:
- There is also no irreconcilable conflict between paragraphs
(b), (d), and (k). The notices respectively mentioned in
a) receive and docket said application and to stamp thereon the
paragraphs (d) and (k) are addressed to the particular
corresponding file number, date and time of filing;
purposes contemplated therein, while those mentioned
in paragraph (k) are specific and additional
b) collect the filing fees therefore pursuant to rule 141, Section
requirements intended for the mortgagors so that,
7(c), as amended by A.M. No. 00-2-01-SC, and issue the
thus apprised, they may take the necessary legal
corresponding official receipt;
steps for the protection of their interests such as

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c) examine, in case of real estate mortgage foreclosure, whether
the applicant has complied with all the requirements before the
public auction is conducted under the direction of the sheriff or
a notary public, pursuant to Sec. 4 of Act 3135, as amended;
d) sign and issue the certificate of sale, subject to the approval
of the Executive Judge, or in his absence, the Vice-Executive
Judge. No certificate of sale shall be issued in favor of the
highest bidder until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as amended by A.M. No.
00-2-01-SC, shall have been paid; Provided, that in no case shall
the amount payable under Rule 141, Section 9(1), as amended,
exceed P100,000.00;
e) after the certificate of sale has been issued to the highest
bidder, keep the complete records, while awaiting any
redemption within a period of one (1) year from date of
registration of the certificate of sale with the Register of Deeds
concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons
whose property is sold pursuant to an extra-judicial foreclosure,
shall have the right to redeem the property until, but not after,
the registration of the certificate of foreclosure sale which in no
case shall be more than three (3) months after foreclosure,
whichever is earlier, as provided in Section 47 of Republic Act
No. 8791 (as amended, Res. Of August 7, 2001).
Where the application concerns the extrajudicial foreclosure of
mortgages of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to
such indebtedness shall be collected. The collecting Clerk of
Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness,
the filing fees collected, the mortgages sought to be foreclosed,
the real estates and/or chattels mortgaged and their respective
locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places
where the other properties are located and of allowing the
extrajudicial foreclosures to proceed thereat.
3. The notices of auction sale in extrajudicial foreclosure for
publication by the sheriff or by a notary public shall be published
in a newspaper of general circulation pursuant to Section 1,
Presidential Decree No. 1079, dated January 2, 1977, and non-
compliance therewith shall constitute a violation of Section 6
thereof.
4. The Executive Judge shall, with the assistance of the Clerk of
Court, raffle applications for extrajudicial foreclosure of
mortgage under the direction of the sheriff among all sheriffs,
including those assigned to the Office of the Clerk of Court and
Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff or
the notary public who conducted the sale to the Clerk of Court
before the issuance of the certificate of sale.
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How: By public auction, with the supervision of the sheriff,
justice/auxillary justice of municipality, or notary public
When: Between 9 AM and 4 PM
Where:
- GR: In the province in which the real property is situated
- XPN: When the place within said province is subject of
stipulation, sale shall be made in the place in the municipal
building of the municipality in which the property or part
thereof is situated
Conducted by whom:
1. Sheriff of the province;
2. Justice or auxiliary justice of the peace of the
municipality in which such sale has to be made;
3. Notary public of said municipality entitled to a fee of
P5 each day, in addition to his expenses
Who may participate:
GR: (they are in the same condition as any other
bidder)
1. Creditor
2. Trustee
3. Other persons authorized to act for the creditor (agent)
XPN: Contrary has been expressly provided in the mortgage or
trust deed
How Conducted:
1. Bidding: Through sealed bids, submitted to the Sheriff
- In case of a tie, open bidding shall be conducted
between the highest bidders
2. Payment: In cash or in managers check (in Philippine
currency), within 5 days from notice
3. Fees: Collected by the Clerk of Court, NON-REFUNDABLE
(even if property subsequently redeemed)
4. Report: Sheriff or notary public shall report name/s of the
bidder/s to the Clerk of Court
5. Certificate of Sale: Issued and signed by the Clerk of
Court upon presentation of the appropriate receipts
- Subject to approval of the Exec. Judge (in his absence,
Vice-Executive Judge)
Rabat v. PNB (2012) Bersamin, J.
Petitioner: Spouses Francisco and Merced Rabat
Respondent: Philippine National Bank
Concept: Real Estate Mortgage: Extrajudicial Foreclosure
Conduct of Sale
Doctrine:
Inadequacy of the price in an extrajudicial foreclosure does not
invalidate the sale, and said sale is still valid. If the proceeds of
the sale are insufficient to satisfy the principal obligation, the
mortgagee is entitled to the deficiency owing it.
145
Brief Facts:
A loan accommodation of P4-M was granted to the Sps. Rabat
by PNB, with a REM securing said obligation. The aggregate
amount of the spouses loan was P3,517,380 (as evidenced by
promissory notes). The spouses failed to pay the balance when it
became due, so PNB filed a petition for the extrajudicial
foreclosure of the REM. At the 2 auction sales, PNB was the
highest bidder with a bid of P3,874,800. As the proceeds were
insufficient (entire obligation amounted to P14,745,398.25), PNB
sent demand letters to the spouses, and when they failed to
comply, PNB filed a complaint for sum of money. The Sps. Rabat
filed a counterclaim, questioning the validity of the auction sales,
and the RTC and CA initially declared the 2 auction sales void.
On remand from the SC, the CA declared the auction sales valid
and ruled that the PNB was entitled to be paid the remainder of
the obligation still owing it because of the inadequacy of the
auction proceeds.
ISSUES:
1. WON the inadequacy of the bid price invalidated the forced
sale (NO)
2. WON PNB is entitled to recover any deficiency (YES)
RATIO: No merit in the appeal.
1. NO, the inadequacy of the bid price at a forced
sale, unlike in an ordinary sale, is immaterial and
does not nullify the sale.
- A forced sale is considered more beneficial to the mortgage
debtor because it makes redemption of the property easier
- BPI v. Reyes: Inadequacy of price at a forced sale is
immaterial and doesnt nullify a sale since, in a forced sale, a
low price is more beneficial to the mortgage debtor for it
makes redemption of the property easier
o Cited The National Loan and Investment Board v.
Meneses: Inadequacy of the price of the sale is not
of itself sufficient to annul said sale, where there has
been strict compliance with all the requisites marked
out by law to obtain the highest possible price, and
where there is no showing that a better price is
obtainable
o Cited Hulst v. PR Builders, Inc.: Where there is a right to
redeem, inadequacy of price should not be material
because the judgment debtor may re-acquire the
property or else sell his right to redeem and thus
recover any loss he claims to have suffered by reason of
the price obtained at the execution sale. Thus,
respondent stood to gain rather than be harmed by the
low sale value of the auctioned properties because it
possesses the right of redemption
o Since the mode of forced sale was an extrajudicial
foreclosure of REM, governed by Act No. 3135, law
reveals nothing to the effect that there should be a
minimum bid price or that the winning bid should be
equal to the appraised value of the foreclosed property
" What is provided is that the mortgage debtor is
given the opportunity to redeem the foreclosed
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property within the term of one year from and
after the date of the sale
- SC: PNBs bid price might not even be said to be
outrageously low as to be shocking to the conscience; as
the CA noted, that bid price was almost equal to both the
P4-M applied for as a loan, and the total sum of P3,517,380
actually availed of by the spouses
2. YES, PNB had the legal right to recover the
deficiency amount.
- In PNB v. CA, SC held:
o If the proceeds of the sale are insufficient to cover the
debt in an extrajudicial foreclosure of the mortgage,
the mortgagee is entitled to claim the deficiency from
the debtor
o When the Legislature intends to deny the right to sue
for any deficiency resulting from foreclosure of security
given to guarantee an obligation, it expressly provides
(pledges Art. 2115 and chattel mortgages on things
sold on installment basis Art. 1484(3))
o Act No. 3135, governing extrajudicial foreclosure of
mortgages, while silent as to the mortgagees right to
recover, does not, on the other hand, prohibit recovery
of deficiency. Accordingly, it has been held that a
deficiency claim arising from the extrajudicial
foreclosure is allowed
- As the SC indicated in Prudential Bank v. Martinez, the fact
that the mortgaged property was sold at an amount less
than its actual market value should not militate against the
right to such recovery
- SC: No question that PNB was legally entitled to recover
the penalty charge of 3% per annum and attorneys fees
equivalent to 10% ! documents relating to the loan and the
REM show that the Sps. Rabat expressly conformed to such
additional liabilities and could not now insist otherwise
o Contract is the law between the parties; Sps. Rabat did
not challenge the legitimacy and efficacy of the
additional liabilities, and cannot now bar PNB from
recovering deficiencies
DISPOSITIVE: Second amended decision AFFIRMED.
c. Right of Redemption
Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale
is made under the special power hereinbefore referred to, the
debtor, his successors in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on
the property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time
within the term of one year from and after the date of the sale;
and such redemption shall be governed by the provisions of
sections four hundred and sixty-four to four hundred and sixty-
six, inclusive, of the Code of Civil Procedure, in so far as these
are not inconsistent with the provisions of this Act.
146
A.M. No. 99-10-05-0
(AS FURTHER AMENDED, AUGUST 7, 2001)
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE
In line with the responsibility of an Executive Judge under
Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, included in
which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex-Office Sheriff, and his staff, and the
issuance of commissions to notaries public and enforcement of
their duties under the law, the following procedures are hereby
prescribed in extrajudicial foreclosure of mortgages:
1. All applications for extra-judicial foreclosure of mortgage
whether under the direction of the sheriff or a notary public,
pursuant to Act 3135, as amended by Act 4118, and Act 1508, as
amended, shall be filed with the Executive Judge, through the
Clerk of court who is also the Ex-Officio Sheriff.
2. Upon receipt of an application for extra-judicial foreclosure of
mortgage, it shall be the duty of the Clerk of Court to:
a) receive and docket said application and to stamp thereon the
corresponding file number, date and time of filing;
b) collect the filing fees therefore pursuant to rule 141, Section
7(c), as amended by A.M. No. 00-2-01-SC, and issue the
corresponding official receipt;
c) examine, in case of real estate mortgage foreclosure, whether
the applicant has complied with all the requirements before the
public auction is conducted under the direction of the sheriff or
a notary public, pursuant to Sec. 4 of Act 3135, as amended;
d) sign and issue the certificate of sale, subject to the approval
of the Executive Judge, or in his absence, the Vice-Executive
Judge. No certificate of sale shall be issued in favor of the
highest bidder until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as amended by A.M. No.
00-2-01-SC, shall have been paid; Provided, that in no case shall
the amount payable under Rule 141, Section 9(1), as amended,
exceed P100,000.00;
e) after the certificate of sale has been issued to the highest
bidder, keep the complete records, while awaiting any
redemption within a period of one (1) year from date of
registration of the certificate of sale with the Register of Deeds
concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons
whose property is sold pursuant to an extra-judicial foreclosure,
shall have the right to redeem the property until, but not after,
the registration of the certificate of foreclosure sale which in no
case shall be more than three (3) months after foreclosure,
whichever is earlier, as provided in Section 47 of Republic Act
No. 8791 (as amended, Res. Of August 7, 2001).
Where the application concerns the extrajudicial foreclosure of
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mortgages of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to
such indebtedness shall be collected. The collecting Clerk of
Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness,
the filing fees collected, the mortgages sought to be foreclosed,
the real estates and/or chattels mortgaged and their respective
locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places
where the other properties are located and of allowing the
extrajudicial foreclosures to proceed thereat.
3. The notices of auction sale in extrajudicial foreclosure for
publication by the sheriff or by a notary public shall be published
in a newspaper of general circulation pursuant to Section 1,
Presidential Decree No. 1079, dated January 2, 1977, and non-
compliance therewith shall constitute a violation of Section 6
thereof.
4. The Executive Judge shall, with the assistance of the Clerk of
Court, raffle applications for extrajudicial foreclosure of
mortgage under the direction of the sheriff among all sheriffs,
including those assigned to the Office of the Clerk of Court and
Sheriffs IV assigned in the branches.
5. The name/s of the bidder/s shall be reported by the sheriff or
the notary public who conducted the sale to the Clerk of Court
before the issuance of the certificate of sale.
Right of Redemption is a statutory right generally conferred
on the mortgagor but may be exercised by other persons. It
extinguishes the inchoate right of the purchaser that is acquired
at the foreclosure sale.
The right acquired by a purchaser at the foreclosure sale is
merely inchoate. The ownership remains with the mortgagor
until eexpiration of the grace period for the right of redemption.
For the party to claim the right of redemption, there must be a
specific law that exceptionally allows it.
Who may redeem:
1. Debtors
2. Successors in interest
3. Any judicial creditor or judgment creditor of said debtor
4. Any person having a lien on the property subsequent to the
mortgage or deed of trust under which the property is sold
Juridical persons: May redeem until the registration of the
certificate of foreclosure sale (shall not be more than 3 months
after foreclosure)
When:
1. Act 3135: 1 year from date of registration of certificate of
sale
2. RA 8791: After the foreclosure or before registration of
certificate of foreclosure, whichever is earlier (which shall not
exceed 3 months) bank must be the mortgagee
147
How: Rules of Court, Secs. 27-33
Extrajudicial foreclosure sale
- Right acquired by the purchaser: is merely inchoate
- Ownership remains in the mortgagor until the expiration
of the period granted for the right of redemption
Right of redemption
- Upon its expiration, without the mortgagor having exercised
the right of redemption, the ownership becomes
consolidated in the purchaser (not inchoate right anymore)
- To claim a right of redemption, there must be a specific
law that exceptionally allows it
GR: When a REM is foreclosed extrajudicially, Act 3135 grants
the right of redemption within 1 year from the date of
registration of the certificate of the foreclosure sale
- Provision says from date of sale, but jurisprudence
interpreted it to be from date of registration
XPN: RA 8791 (General Banking Law of 2000) provides that
when the REM is foreclosed extrajudicially by a bank, quasi-bank
or trust entity, juridical mortgagors are granted the right to
redeem until, but not later than the registration of the
certificate of foreclosure sale (in no case shall be more than
3 months after foreclosure)
How to determine if a right of redemption exists?
1. Identify the law that allows the right of redemption
2. Apply its provisions to the specific case
On the price of the sale of the collateral:
- Immaterial if the collateral is sold at an amount less than its
actual market value
o Mere inadequacy of the price obtained at the
foreclosure sale will not be sufficient to set it aside if
there is no showing that in the event of a regular sale, a
better price can be obtained
o XPT: the amount is shocking to the conscience
- When there is a right to redeem, the mortgagor can:
o Exercise the right and sell the collateral; OR
o Sell the right to redeem to a third party
- Either of the 2 abovementioned situations allows the
mortgagor to recover any alleged loss suffered by reason of
the low price at the foreclosure sale
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Goldenway Merchandising Corp. v. Equitable PCI Bank (2013)
Villarama, Jr., J.
Petitioner: Goldenway Merchandising Corp. (GMC)
Respondent: Equitable PCI Bank
Concept: Extrajudicial Foreclosure; Right of Redemption
Doctrine:
- The right of redemption is a statutory right that must be
exercised in the manner prescribed and the period provided
by the statute that grants such right, for it to be effective.
- Under the General Banking Law of 2000 (RA 8791), juridical
persons, as mortgagors, have a redemption period which
commences from the date of the foreclosure sale
and expires upon (a) registration of the certificate of sale,
or (b) three months after the foreclosure, whichever is earlier.
Brief Facts:
GMC attempted to redeem its foreclosed properties from
Equitable. Equitable rejected the attempt to redeem, arguing
that the period for redemption, as provided for by RA 8791,
which amended Act No. 3135, has already lapsed and that the
title to the properties had already been consolidated in its favor.
GMC now comes to the Court to argue against the application
of RA 8791.
ISSUE:
WON Sec. 47 of RA 8791 applies to the contract (YES)
RATIO: Sec. 47s shorter period of redemption applies
to the contract.
- On the issue of non-impairment of contracts:
o There is an impairment of obligations under contracts
when the subsequent law changes the terms of a
contract between the parties, imposes new conditions,
dispenses with those already agreed upon, or
withdraws remedies for the enforcement of the rights of
the parties.
o Sec. 47 did not divest parties the right to redeem their
foreclosed properties; it only modified the time to
exercise such right.
o It reduced the one-year period in Act No. 3135. The
new redemption period, for juridical persons who are
mortgagors, now commences from the date of the
foreclosure sale and expires upon (a) registration of the
certificate of sale, or (b) three months after the
foreclosure, whichever is earlier.
o There is likewise no retroactive application; it only
covers foreclosure sales executed during its effectivity
and exempts those that are executed prior to June 13,
2000.
148
- On the issue of equal protection: 1) Who may Redeem
o GMC: Law discriminates against mortgagors who are
juridical persons. Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale
o SC: Equal protection does not require absolute equality is made under the special power hereinbefore referred to, the
but that all person be treated alike under like debtor, his successors in interest or any judicial creditor or
conditions, both as to privileges conferred and liability judgment creditor of said debtor, or any person having a lien on
imposed. It permits of reasonable classification, which is the property subsequent to the mortgage or deed of trust under
based on real and reasonable distinctions, and such which the property is sold, may redeem the same at any time
classification is germane to the purpose of the law. within the term of one year from and after the date of the sale;
o CA is correct in ascertaining the legislative intent and such redemption shall be governed by the provisions of
behind RA 8791. sections four hundred and sixty-four to four hundred and sixty-
" The difference of treatment between natural and six, inclusive, of the Code of Civil Procedure, in so far as these
juridical persons was based on the nature of the are not inconsistent with the provisions of this Act.
properties foreclosed whether these are used for
residence, in which case the one-year redemption
period applies, or used for industrial or commercial
Rule 39, Sec. 27 Who may redeem real property so sold
purposes, in which case a shorter term is deemed Real property sold as provided in the last preceding section, or
necessary to allow mortgagees (usually banks) to
any part thereof sold separately, may be redeemed in the
dispose of these acquired assets as soon as
manner hereinafter provided, by the following persons:
possible and reduce the period of uncertainty in
the ownership over such acquired assets.
(a) The judgment obligor, or his successor in interest in the
" RA 8791 came in the aftermath of the 1997 whole or any part of the property;
Southeast Asian financial crisis which sought to
reform the 1949 version of the law and create a
(b) A creditor having a lien by virtue of an attachment, judgment
safer and more sound banking system.
or mortgage on the property
" The classification in this case is highly germane and
pertinent to the law.
sold, or on some part thereof, subsequent to the lien under
o Legislative intent taken into account, which is for the
which the property was sold. Such redeeming creditor is termed
furtherance of public interest, GMCs theory of
a redemptioner.
impairment of contract is further weakened.
o The right to redemption is a statutory right which must
Act No. 3135, Sec. 6 Rule 39, Sec. 27, ROC
be exercised the manner prescribed and within the
1. Debtors 1. Judgment obligor, or his
time period provided in the statute. RA 8791, being the
2. Successors in interest successor in interest in the
controlling law providing such right of redemption,
3. Any judicial creditor or whole or any part of the
should be observed.
judgment creditor of said property
o The freedom to contract is not absolute; it is subject to
debtor 2. Creditor having a lien by
the police power of the state. Such power extends to
4. Any person having a lien virtue of an attachment,
the banking industry which the Court has always
on the property judgment or mortgage on
recognized to be imbued with public interest.
subsequent to the the property sold, or on
mortgage or deed of trust some part therefor,
DISPOSITIVE: Petition DENIED.
under which the property subsequent to the lien
is sold under which the property
was sold. Such redeeming
creditor is termed a
redemptioner

GR: It is the mortgagor who has the right to redeem the

collateral sold at an extrajudicial foreclosure sale

XPN: Parties who acquire a right to the collateral under certain

conditions are also granted the right to redeem

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1. Successor in interest: includes, but not limited to:
a. One to whom the mortgagor has transferred the
statutory right of redemption
b. One to whom the mortgagor has conveyed its
interest in the collateral for the purpose of
redemption
c. One who succeeds to the interest of the mortgagor by
operation of law
d. One or more joint debtor-mortgagors who were joint
owners of the collateral sold
- Note: A surety CANNOT redeem the collateral of
the debtor-mortgagor because the surety, by paying
the debt of the debtor-mortgagor, stands in the place
of the creditor, not the debtor-mortgagor, and
consequently is NOT a successor in interest in the
collateral
2. Redemptioner: a creditor of the mortgagor with a lien on
the collateral subsequent to the lien was the basis of the
foreclosure sale (said creditor is called a junior
encumbrancer) (example: second mortgagee)
- If the lien of the creditor is PRIOR to the lien under
which the collateral was sold (senior encumbrancer
as, for example, a senior mortgagee), it is NOT a
redemptioner and cannot redeem
o But said senior encumbrancer is fully protected,
since any purchaser at the foreclosure sale of the
collateral takes the property subject to such prior
lien (mortgage follows the property), which must
first be satisfied
- Unlike a mortgagor, a redemptioner must PROVE its
right to redeem by producing the documents required
by Rule 39
Medida, et al. v. CA (1992) Regalado, J.
Petitioners: Manuel D. Medida, Deputy Sheriff of the Province
of Cebu, City Savings Bank (formerly Cebu City Savings and Loan
Association, Inc.) and Teotimo Abellana
Respondents: Sps. Andred Dolino and Pascuala Dolino
Concept: Foreclosure of Real Estate Mortgage; Extrajudicial
Foreclosure; Who may Redeem
Doctrine:
There is no obstacle to the legal creation of such lien even after
the auction sale of the property but during the redemption
period, since no distinction is made between a mortgage
constituted over the property before or after the auction sale
thereof. A redemptioner is defined as a creditor having a lien by
attachment, judgment or mortgage on the property sold
subsequent to the judgment under which the property was sold.
While in extrajudicial foreclosure, the sale contemplated is not
under a judgment but the proceeding pursuant to which the
mortgaged property was sold, a subsequent mortgage could
nevertheless be legally constituted thereafter with the
subsequent mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the mortgagor.
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Brief Facts:
Sps. Dolino obtained a loan from a bank and executed a real
estate mortgage over their property to secure payment of the
loan. They defaulted in payment and the mortgage was
foreclosed. It was purchased in the public auction by
Giandoncho. For fear that they might lose their right of
redemption, they obtained another loan from CSB and
mortgaged the same property to secure payment of the loan.
They again defaulted in payment, and CSB foreclosed the
mortgage and was sold to the latter as highest bidder. The
spouses now assail the validity of the foreclosure and sale. The
CA passed upon the issue of ownership over the subject
property, without it being raised by either of the parties, and
ruled that the second mortgage was not valid, as the spouses
could not have validly constituted a mortgage over subject
property, it being sold to CSB in the public auction.
ISSUE:
WON a mortgagor, whose property has been extrajudicially
foreclosed and sold at the corresponding foreclosure sale, may
validly execute a mortgage contract over the same property in
favor of a third party during the period of redemption (YES)
RATIO: Yes, the second real estate mortgage was
valid.
- The obiter dictum in Dizon v. Gaborro relied upon by the
CA is erroneous
o Court in abovementioned case said that purchaser at a
foreclosure sale merely acquired an inchoate right to
the property which could ripen into ownership only
upon the lapse of the redemption period (1 year)
without his credit having been discharged. Inconsistent
with such pronouncement, the Court further stated that
during the same period of redemption, the mortgagor
was divested of his ownership
o This is absurd since the land will consequently be
without an owner although it remains registered in the
name of the mortgagor
- The abovementioned case would have no application in the
case at bar and need not here be resolved since what is
presently involved is a mortgage, not a sale, to CSB. Such
mortgage does not involve a transfer, cession or
conveyance of the property but only constitutes a lien
thereon
- There is no obstacle to the legal creation of such lien even
after the auction sale of the property but during the
redemption period, since no distinction is made between a
mortgage constituted over the property before or after the
auction sale thereof
- A redemptioner is defined as a creditor having a lien by
attachment, judgment or mortgage on the property sold
subsequent to the judgment under which the property was
sold.
150
- While in extrajudicial foreclosure, the sale contemplated is
not under a judgment but the proceeding pursuant to which
the mortgaged property was sold, a subsequent mortgage
could nevertheless be legally constituted thereafter with the
subsequent mortgagee becoming and acquiring the rights
of a redemptioner, aside from his right against the
mortgagor.
- Since the mortgagor remains as the absolute owner of the
property during the redemption period and has free
disposal of his property, he can therefore constitute another
mortgage on the property
- To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the
opportunity, which may be his last recourse, to raise funds
wherewith to timely redeem his property through another
mortgage thereon
- It is only upon the expiration of the redemption period,
without the judgment debtor having made use of his right
of redemption, that the ownership of the land sold becomes
consolidated in the purchaser
- What actually effected where redemption is exercised is not
the recovery of ownership of his land, which he never lost,
but the elimination from his title thereto of the lien created
by levy on attachment or judgment or the registration of a
mortgage thereon.
- Court cannot review the findings of TC that the extrajudicial
foreclosure and sale of property to CSB was void for not
complying with notice requirements in Act No. 3135, as CSB
failed to appeal on the matter in the CA
DISPOSITIVE: CA decision REVERSED.
Medida v. CA
During period to redeem:
1. May mortgagor constitute a 2nd mortgage?
YES, he is still the absolute owner.
2. What right does the purchaser acquire?
The inchoate right over the property, subject only to the
right of the mortgagor to redeem.
3. If there is no right of redemption exercised, who will own
the property?
The purchaser.
4. What should the buyer of the mortgagors rights do?
Must exercise the right to redeem so it can defeat the
inchoate right in favor of the purchaser.
5. What right does the 2nd mortgagee acquire?
Only the right to redeem. It becomes the only mortgagee
equivalent to the 1st mortgage (before it foreclosed).
6. Who acquires the right to own?
Purchaser 1. The only time it is defeated is during the
exercise of the right of redemption.
If there are 2 mortgages:
If the 2nd mortgagee exercises the right to foreclose, it is still
subject to the right of the 1st mortgagee.
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2) How to Redeem
PROCEDURE:
1. To determine the PERIOD, look at the nature of the
MORTGAGOR:
a. For natural persons: 12 months from the date of the
registration of the sale in the Office of the Register of
Deeds (Act 3135)
b. For juridical entities: after foreclosure but before
registration of the certificate of foreclosure, whichever
is earlier, and which should not exceed 3 months
2. To determine the AMOUNT, look at the nature of the
MORTGAGEE:
a. For natural persons: pay the purchase price of the
collateral involved, plus 1% interest per month thereon,
together with the amount of any assessments or taxes if
any, paid by the purchaser after the sale with the same
rate of interest; it does not extinguish the obligation
b. For banks: pay the amount due under the mortgage,
and the same extinguishes the obligation
- Can pay either to the purchaser or to the sheriff/officer
who conducted the sale
3. Written notice of the redemption must be served on the
officer who made the sale and a duplicate filed with the
Register of Deeds of the province
4. An actual and simultaneous tender of payment must
accompany the statement of intention
5. Certificate of redemption issued by person to whom the
redemption payment is made (purchaser/redemptioner)
6. Certificate of redemption recorded in the registry of deeds
7. Proof of right to redeem
a. Copy of final judgment or order
b. If under mortgage or other lien
i. Memo/record thereof OR
ii. Original certified copy of assignment AND
iii. Affidavit showing amount due on the lien
Bona fide redemption: Actual and simultaneous tender of
payment accompanied by statement of intention OR filing of
complaint to enforce redemption. (Piecemeal redemptions are
allowed)
Rule 39, Sec. 28 Time and manner of and amounts payable
on, successive redemptions; notice to be given and filed The
judgment obligor, or redemptioner, may redeem the property
from the purchaser, at any time within one (1) year from the date
of the registration of the certificate of sale, by paying the
purchaser the amount of his purchase, with one per centum per
month interest thereon in addition, up to the time of
redemption, together with the amount of any assessments or
taxes which the purchaser may have paid thereon after purchase,
and interest on such last named amount at the same rate; and if
the purchaser be also a creditor having a prior lien that of the
redemptioner, other than the judgment under which such
purchase was made, the amount of such other lien, with interest.
151
Property so redeemed may again be redeemed within sixty (60)
days after the last redemption upon payment of the sum paid on
the last redemption, with two per centum thereon in addition,
and the amount of any assessments or taxes which the last
redemptioner may have paid thereon after redemption by him,
with interest on such last-named amount, and in addition, the
amount of any liens held by said last redemptioner prior to his
own, with interest. The property may be again, and as often as a
redemptioner is so disposed, redeemed from any previous
redemptioner within sixty (60) days after the last redemption, on
paying the sum paid on the last previous redemption, with two
per centum thereon in addition, and the amounts of any
assessments or taxes which the last previous redemptioner paid
after the redemption thereon, with interest thereon, and the
amount of any liens held by the last redemptioner prior to his
own, with interest.
Written notice of any redemption must be given to the officer
who made the sale and a duplicate filed with the registry of
deeds of the place, and if any assessments or taxes are paid by
the redemptioner or if he has or acquires any lien other than that
upon which the redemption was made, notice thereof must in
like manner be given to the officer and filed with the registry of
deeds; if such notice be not filed, the property may be
redeemed without paying such assessments, taxes, or liens
Rule 39, Sec. 29 Effect of redemption by judgment obligor,
and a certificate to be delivered and recorded thereupon; to
whom payments on redemption made If the judgment
obligor redeems, he must make the same payments as are
required to effect a redemption by a redemptioner, whereupon,
no further redemption shall, be allowed and he is restored to his
estate. The person to whom the redemption payment is made
must execute and deliver to him a certificate of redemption
acknowledged before a notary public or other officer authorized
to take acknowledgments of conveyances of real property. Such
certificate must be filed and recorded in the registry of deeds of
the place in which the property is situated, and the registrar of
deeds must note the record thereof on the margin of the record
of the certificate of sale. The payments mentioned in this and the
last preceding sections may be made to the purchaser or
redemptioner, or for him to the officer who made the sale
Rule 39, Sec. 30 Proof required of redemptioner A
redemptioner must produce to the officer, or person from whom
he seeks to redeem, and serve with his notice to the officer a
copy of the judgment or final order under which he claims the
right to redeem, certified by the clerk of the court wherein the
judgment or final order is entered; or, if he redeems upon a
mortgage or other lien, a memorandum of the record thereof,
certified by the registrar of deeds; or an original or certified copy
of any assignment necessary to establish his claim; and an
affidavit executed by him or his agent, showing the amount then
actually due on the lien.
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Rule 39, Sec. 33 Deed and possession to be given at
expiration of redemption period; by whom executed or given
If no redemption be made within one (1) year from the date of
the registration of the certificate of sale, the purchaser is entitled
to a conveyance and possession of the property; or, if so
redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the
time for redemption has expired, the last redemptioner is
entitled to the conveyance and possession; but in all cases the
judgment obligor shall have the entire period of one (1) year
from the date of the registration of the sale to redeem the
property. The deed shall be executed by the officer making the
sale or by his successor in office, and in the latter case shall have
the same validity as though the officer making the sale had
continued in office and executed it.
Under the expiration of the right of redemption, the purchaser or
redemptioner shall be substituted to and acquire all the rights,
title, interest and claim of the judgment obligor to the property
as of the time of the levy. The possession of the property shall
be given to the purchaser or last redemptioner by the same
officer unless a third party is actually holding the property
adversely to the judgment obligor.
Requisites for a valid redem ption:
1. The redemption must be made within 12 months from
the date of registration of the sale in the Office of the
Register of Deeds
2. Payment of the purchase price of the collateral involved,
plus 1% interest per month, together with the amount of any
assessments or taxes if any, paid by the purchaser after the
sale with the same rate of interest
- Under RA 8791, Art. III, Sec. 47, the right to redeem is
exercised by paying the amount due under the
mortgage deed (not the purchase price, as above
indicated)
3. Written notice of the redemption must be served on the
officer who made the sale and a duplicate filed with the
Register of Deeds of the province
GR: Not sufficient that a person offering to redeem manifests its
desire to do so; actual and simultaneous tender of payment
must accompany the statement of intention
- Bona fide redemption necessarily implies a reasonable
and valid tender of the entire redemption price; otherwise,
the rule on the redemption period may easily be
circumvented
BUT filing of a judicial action, made simultaneously with the
deposit of the redemption price, within the redemption period,
may be necessary to preserve the right of redemption for future
enforcement even beyond such period
- Filing of a complaint to enforce redemption, within the
redemption period, is equivalent to an offer to redeem and
has the effect of preserving the right of redemption
- Nothing in the law prohibits piecemeal redemption of
collateral sold at a foreclosure (Yap v. Dy, et al.)
152
Sps. Yap v. Sps. Dy (2011) Villarama, J.
In G.R. 171868
Petitioners: Sps. Yap
Respondents: Sps. Dy; Sps. Maxino; DBRI
In G.R. 171991
Petitioners: DBRI
Respondents: Sps. Dy; Sps. Maxino; Sps. Yap
Concept: Right of Redemption - How to Redeem
Doctrine:
Nothing in the law prohibits the piecemeal redemption of the
properties sold at a foreclosure proceeding, as the right of the
mortgagor or redemptioner to redeem one or some of the
foreclosed properties is recognized. The doctrine of indivisibility
of mortgage no longer applies once foreclosure is effected.
Brief Facts:
Sps. Tirambulo mortgaged 7 lots to DBRI to secure loans. They
sold all of them to Sps. Dy and Maxino without the consent and
knowledge of the bank. Upon default of Sps. Tirambulo, DBRI
foreclosed the mortgage on the first loan, and being the highest
bidder, sold 3 of the 5 lots to Sps. Yap. When the Dys and
Maxinos tried to tender the redemption lot for 2 of the 3 lots,
DBRI and the Yaps refused, contending that piecemeal
redemption is not allowed pursuant to the doctrine of
indivisibility and mortgage, and as such, they should have
tendered the whole auction price for all of the properties
foreclosed.
ISSUES:
1. WON Lot 3 was among the foreclosed properties (NO)
2. WON the Dys and Maxinos had legal personality to redeem
the lots (YES)
3. WON the Dys & Maxinos validly redeemed Lots 1 & 6 (YES)
RATIO:
1. NO, as shown by the testimony of the Provincial
Sheriff.
- As Atty. Diputado, the Provincial Sheriff, testified, the
application for foreclosure was only for five parcels of land,
namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five
parcels of land were included in the publication and sold at
the foreclosure sale.
- When he was shown a copy of the Sheriffs Certificate of
Sale consisting of three pages, he testified that it was
altered because Lot 3 and Lot 846 were included beyond
the xxx that marked the end of the enumeration of the
lots foreclosed.
- Also, a perusal of DRBIs application for foreclosure of real
estate mortgage shows that it explicitly refers to only one
deed of mortgage to settle the Tirambulos indebtedness
amounting to P216, 040.93. This is consistent with the
Notice of Extrajudicial Sale of Mortgaged Property,
published in the Dumaguete Star Informer on February 18,
25 and March 4, 1982, announcing the sale of Lots 1, 4, 5, 6
and 8 for the satisfaction of the indebtedness amounting to
P216, 040.93.
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- It is also consistent with the fact that Lots 1, 4, 5, 6 and 8 are
covered by only one real estate. Indeed, that the foreclosure
sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact
that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered by two
separate real estate mortgages. DRBI failed to refute these
pieces of evidence against it.
2. YES, as vendees of the said lots, they qualify as
successors-in-interest of the original debtor-
mortgagor, Sps. Tirambulo
- DBRI: The sale of Tirambulos to Dys and Maxinos was void
for it was done without the banks consent. Consequently,
they could not have assumed the character of debtors
because a novation of the contract of mortgage did not take
place, there being no consent of the creditor, pursuant to
Art. 1293, NCC. There being no valid redemption by the
Tirambulos within the redemption period, DRBI has become
the absolute owner of the properties mortgaged when the
period expired.
- SC: First of all, the Dys and Maxinos have the legal
personality to redeem the subject properties despite the
fact that the sale to them was made without DBRIs consent.
Sec. 6 of Act 3135 itself gives not only the mortgagor-debtor
the right to redeem, but also his successor-in-interest. As
vendees of Lots 1 and 6, the Dys and Maxinos qualify as
such a successor-in-interest of Sps. Tirambulo.
3. YES. The mortgagor is allowed to redeem only one
or some of the foreclosed properties, as the
doctrine of indivisibility no longer applies once
the mortgage is foreclosed.
- At the outset, we rule that the Sps Dy and Maxino correctly
tendered the redemption price with Atty. Disputado, the
Provincial Sheriff. Sec. 31, Rule 39 provides that ... the
payments mentioned in this and the last preceding sections
may be made to the purchaser or redemptioner, or for him
to the officer who made the sale.
- In the case at bar, they initially attempted to pay not only to
the purchaser, DBRI, but also to the Yaps. Both however
refused, insisting that they pay the whole purchase price at
which all the foreclosed lots were sold during the
foreclosure sale. Because of said refusal, the Dys and
Maxinos correctly availed of the alternative remedy by going
to the sheriff who made the sale, who, in turn, has the duty
to accept the tender and execute the certificate of
redemption.
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- Requisites of a valid redemption:
o The redemption must be made within twelve (12)
months from the time of the registration of the sale in
the Office of the Register of Deeds;
o Payment of the purchase price of the property involved,
plus 1% interest per month thereon in addition, up to
the time of redemption, together with the amount of
any assessments or taxes which the purchaser may have
paid thereon after the purchase, also with 1% interest
on such last named amount; and
o Written notice of the redemption must be served on
the officer who made the sale and a duplicate filed with
the Register of Deeds of the province.
- It is undisputed that the first and third requisites are
present. It is the second requisite, the proper
redemption price that is the subject of the
controversy.
- Yaps: There is no valid redemption, as the P40, 000 cannot
be considered as valid tender since the amount of the
auction sale is P216, 040. In any case, a valid tender of
payment can only be made to DBRI since at that time, their
rights were subordinate to the final consolidation of
ownership by the bank.
- SC: Citing PNB v. De los Reyes, the doctrine of indivisibility
of mortgage does not apply once the mortgage is
extinguished by a complete foreclosure thereof. The said
doctrine presupposes that a mortgage is existing. However,
once the mortgage is foreclosed, and with the full payment
of the debt, there is nothing more to secure. There is no
partial payment nor is there partial extinguishment of the
obligation to speak of.
- Nothing in the law prohibits the piecemeal redemption of
properties sold at one foreclosure proceeding. In fact, in
several early cases decided by this Court, the right of the
mortgagor or redemptioner to redeem one or some of the
foreclosed properties was recognized:
o Castillo v. Nagtalon: ten parcels of land were sold at
public auction. Nagtalon, who owned three of the ten
parcels of land sold, wanted to redeem her properties.
Though the amount she tendered was found as
insufficient to effectively release her properties, the
Court held that the tender of payment was made timely
and in good faith and thus, in the interest of justice,
Nagtalon was given the opportunity to complete the
redemption purchase of three of the ten parcels of land
foreclosed.
o Dulay v. Carriaga: wherein Dulay redeemed eight of the
seventeen parcels of land sold at public auction, the
trial court declared the piecemeal redemption of Dulay
as void. Said order, however, was annulled and set
aside by the Court on certiorari and the Court upheld
the redemption of the eight parcels of land sold at
public auction.
- Thus, since the Dys and Maxinos can effect the redemption
of even only two of the five properties foreclosed, they are
not required to pay the P216, 040 purchase price at the
public auction. Contrary to the Yaps contention, the
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amount paid by the Dys and Maxinos within the redemption
period for the redemption of just two parcels of land was
not only P40, 000 but totaled to P134, 223.92, which is more
than 60% of the purchase price for the five foreclosed
properties, to think the Dys and Maxinos were only
redeeming two properties.
- We find that it can be considered a sufficient amount if we
were to base the proper purchase price on the proportion
of the size of Lots 1 and 6 with the total size of the five
foreclosed properties. The two subject properties to be
redeemed, Lots 1 and 6, have a total area of 77,458 square
meters or roughly 52% of the total area of the foreclosed
properties. Even with this rough approximation, there is no
reason to invalidate the redemption of the Dys and Maxinos
since they tendered 60% of the total purchase price for
properties constituting only 52% of the total area.
- However, there is a need to remand the case for
computation of the pro-rata value of Lots 1 and 6 based on
their true values at that time of redemption for the purposes
of determining if there is any deficiency or overpayment on
the part of the Dys and Maxinos.
DISPOSITIVE: Petition denied.
d. Right to Deficiency
Rule 86, Sec. 7 Mortgage debt due from estate A creditor
holding a claim against the deceased secured by mortgage or
other collateral security, may abandon the security and
prosecute his claim in the manner provided in this rule, and
share in the general distribution of the assets of the estate; or he
may foreclose his mortgage or realize upon his security, by
action in court, making the executor or administrator a party
defendant, and if there is a judgment for a deficiency, after the
sale of the mortgaged premises, or the property pledged, in the
foreclosure or other proceedings to realize upon the security, he
may claim his deficiency judgment in the manner provided in the
preceding section; or he may rely upon his mortgage or other
security alone, and foreclose the same at any time within the
period of the statute of limitations, and in that event he shall not
be admitted as a creditor, and shall receive no share in the
distribution of the other assets of the estate; but nothing herein
contained shall prohibit the executor or administrator from
redeeming the property mortgaged or pledged, by paying the
debt for which it is held as security, under the direction of the
court, if the court shall adjudge it to be for the best interest of
the estate that such redemption shall be made.
- While Act 3135 does not specifically provide for a
mortgagees right to recover the deficiency from the
application of the proceeds of the foreclosure sale, the said
law ALSO does NOT prohibit it.
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- The mortgagees recovery of the deficiency is supported
by the principle that a real estate mortgage is a
security transaction and not a satisfaction of
indebtedness of the debtor.
o The REM does not in, in any way, limit nor minimize the
amount of the principal obligation, as its only function
is to secure its fulfillment.
- Hence, the creditor-mortgagee may proceed against the
debtor-mortgagor in a proper action to recover such
deficiency.
o By filing a complaint for the collection of a sum of money
o The creditor-mortgagee must be able to prove the basis
for the deficiency judgment that it seeks.
o The right to recovery of the deficiency only arises
when the proceeds are determined to be
insufficient to cover the obligation and other costs of
the sale.
o Hence, the amount of the obligation prior to the
foreclosure and the proceeds of the foreclosure are
important in enforcing a claim for the deficiency.
- The exception to the rule that the creditor-mortgagee may
recover the deficiency is when the extrajudicial foreclosure of
a mortgage arises out of a settlement of estate.
o In such a case, Rule 86 grants three distinct and
independent remedies to the creditor-mortgagee.
GR: The creditor-mortgagee, in a separate action, may recover
the deficiency from the debtor-mortgagor when it has been
established that the proceeds of the foreclosure sale is
insufficient to pay the amount of the obligation and the other
costs of the sale.
EX: If the extrajudicial foreclosure of mortgage arises out of a
settlement of the estate, then the right to recover the deficiency
does NOT apply. However, Rule 86 privedes for three distinct,
independent, and mutually exclusive remedies, which the
mortgagee may pursue, alternatively, to satisfy the principal
obligation. These three remedies are:
1. WAIVE the mortgage and CLAIM the principal obligation
from the estate of the mortgagor as an ORDINARY CLAIM.
2. FORECLOSE the mortgage judicially and prove any
deficiency as an ORDINARY CLAIM,
3. RELY on the mortgages exclusively, EXTRAJUDICIALLY
FORECLOSING the same at any time BEFORE it is barred by
prescription, WITHOUT right to file a claim for any deficiency.
Heirs of the Late Spouses Maglasang vs. Manila Banking
Corporation Perlas-Bernab, J.
Petitioners: Heirs of Spouses Maglasang (petitioners)
Respondent: Manila Banking Corporation (MBC), substituted
by First Sovereign Asset Management, Inc. (Respondent)
Doctrine:
Section 7, Rule 86, ROC applies when a secured creditor wants
to recover his claims against the estate of a deceased. The
provision gives three options: a) waive the mortgage and claim
the entire debt from the estate of the mortgagor as an ordinary
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claim; b) foreclose the mortgage judicially and prove the
deficiency as an ordinary claim; and c) rely on the mortgage
exclusively, or other security and foreclose the same before it is
barred by prescription, without the right to file a claim for any
deficiency. The options are alternative, not cumulative. In case
the third option is chosen, the procedure governing extra-
judicial foreclosures set forth in Act No. 3135 shall be observed.
Brief Facts:
Flaviano had a loan with MBC. His loan was secured by a real
estate mortgage. He died. Respondent (substitute of MBC)
extra-judicially foreclosed the mortgage. There was a deficiency
in the proceeds. Respondent wanted to recover the deficiency.
ISSUE:
WON a creditor who extra-judicially forecloses the mortgage
made by a deceased is entitled to recover any deficiency in the
proceeds of the foreclosure. (NO)
RATIO: NO. The remedy of extra-judicial foreclosure
under Section 7, Rule 86, ROC does not give the
creditor/mortgagee the right to recover any deficiency
in the proceeds of the foreclosure.
- What provision is applicable to the case of a mortgagee
obtaining remedy for an obligation of a deceased?
Sec. 7, Rule 86, ROC. A creditor holding a claim against the
deceased secured by a mortgage or other collateral
security, may abandon the security and prosecute his claim
in the manner provided in this rule, and share in the general
distribution of the assets of the estate; or he may foreclose
his mortgage or realize upon his security, by action in court,
making the executor or administrator a party defendant,
and if there is a judgment for a deficiency, after the sale of
the mortgaged premises, or the property pledged, in the
foreclosure or other proceeding to realize upon the security,
he may claim his deficiency judgment in the manner
provided in the preceding section; or he may rely upon his
mortgage or other security alone, and foreclose the same at
any time within the period of the statute of limitations, and
in that event he shall not be admitted as creditor, and shall
receive no share in the distribution of the other assets of the
estate; but nothing herein contained shall prohibit the
executor or administrator from redeeming the property
mortgaged or pledged, by paying the debt for which it is
held as security, under the direction of the court, if the court
shall adjudge it to be for the best interest of the estate that
such redemption shall be made.
o As the foregoing generally speaks of [a] creditor
holding a claim against the deceased secured by a
mortgage or other collateral security, it may be
reasonably concluded that the aforementioned section
covers all secured claims, whether by mortgage or any
other form of collateral, which a creditor may enforce
against the estate of the deceased debtor.
155
 o Nowhere from its language can it be fairly deducible
that the said section would narrowly apply only to
mortgages made by the administrator over any
property belonging to the estate of the decedent.
o Reliance of the CA on PNB vs. CA was misplaced;
decision did not limit the scope of Sec. 7, Rule 86, ROC,
but merely stated that the section equally applies to
cases where the administrator mortgages the property
of the estate to secure the loan he obtained. It was a
ruling of inclusion and not one which created
distinction.
o Applying the above ruling to this case:
" Flaviano was a deceased debtor of the respondent,
whose loan was secured by mortgage.
" This case fell squarely under Sec. 7, Rule 86, ROC.
o What about Act No. 3135? This act does not entirely
discount the application of Section 7, Rule 86, ROC, or
vice versa; they complement each other. Sec. 7, Rule 86,
ROC lays down the options for the secured creditor to
claim against the estate. Act No. 3135 provides for,
after extra-judicial foreclosure is chose, the procedure
governing the manner in which the extra-judicial
foreclosure should proceed. This is because Sec. 7, Rule
86, ROC is a special rule applicable to claims against
the estate, and at the same time, since this provision
does not detail the procedure for extra-judicial
foreclosures, the formalities governing the same must
be governed by the said act.
- Was the respondent entitled to recover any deficiency in the
proceeds of the foreclosure? No.
o Under Sec. 7, Rule 86, ROC, the secured creditor has
three remedies/options that he may alternatively adopt
for the satisfaction of his credit: a) waive the mortgage
and claim the entire debt from the estate of the
mortgagor as an ordinary claim; b) foreclose the
mortgage judicially and prove the deficiency as an
ordinary claim; and c) rely on the mortgage exclusively,
or other security and foreclose the same before it is
barred by prescription, without the right to file a claim
for any deficiency.
o The remedies are distinct and independent and
mutually exclusive from each other. Election of 1
effectively bars the exercise of the others, as ruled in
Bank of America vs. American Realty Corporation.
" What option did the respondent choose? It chose
the third option, i.e., extra-judicial foreclosure. It
did not choose the first option of directly filing a
claim against the estate since it merely notified the
probate court of the outstanding amount of its
claim against the estate of Flaviano and that it was
currently restructuring the account.
o The plain result of adopting the third option is that the
creditor waives his right to recover any deficiency from
the estate, as discussed in PNB vs. CA, citing Perez vs.
PNB.
DISPOSITIVE: Petition partly granted. Complaint dismissed.
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e. Right to Surplus
- Should there be a surplus from the proceeds of the
foreclosure sale, the mortgagee MUST account for them.
- Note that the application of the proceeds from the
foreclosure sale is an act of payment and does NOT
constitute a dacion en pago.
o The mortgagees right to foreclosure extends only up to
the amount of the principal obligation, and, hence, he
cannot keep the excess.
o To sanction the mortgagee to keep the expense, he
would have been to allow unjust enrichment.
- The surplus stands in the place of the collateral itself.
o It belongs to the mortgagor, and may be constructively
considered as real property.
o This right of the mortgagor over the surplus is a
substantial right that will not be defeated by rules of
technicality.
- The surplus gains importance in cases where there are junior
encumbrancers (ex, subsequent mortgagees).
o The surplus is applied to the subsequent mortgages in
the order of their priority.
o A second mortgagees right not only includes
redemption but the right to apply, to the payment of its
credit, the surplus from the foreclosure sale.
o In effect, a junior mortgagees lien on the collateral is
transferred to the surplus; in turn, the senior mortgagee is
considered are a trustee for the benefit of the junior
encumbrancers,
o Even if the mortgagee retains the surplus, such will not
affect the validity of the sale but only gives the mortgagor
a cause of action for the recovery of the surplus.
GR: Payment of purchase price is to the sheriff.
XPN: Payment to the mortgagee (only the amount of the
mortgage), then pay the surplus to the sheriff
Suico v. PNB (2007) Chico-Nazario, J.
Petitioner: Sps. Esmeraldo and Elizabeth Suico
Respondent: Philippine National Bank and CA
Concept: Real Estate Mortgage: Extrajudicial Foreclosure
Right to surplus
Doctrine:
Pursuant to Rule 68, Sec. 4, the disposition of the proceeds of
the sale in foreclosure shall be as follows: (a) first, pay the costs;
(b) secondly, pay off the mortgage debt; (c) thirdly, pay the junior
encumbrancers, if any, in the order of priority; and (d) fourthly,
give the balance to the mortgagor, his agent or the person
entitled to it. Since the application of the proceeds from the sale
of mortgaged property is an act of payment, it is the
mortgagees duty to return any surplus in the selling price to the
mortgagor.
156
Brief Facts:
The Sps. Suico obtained a loan from PNB, secured by a REM on
real parties in the names of the Sps Because they were unable to
pay their obligation, PNB extrajudicially foreclosed the
mortgage over their properties. A year later, PNB secured a
certificate of final sale and had the subject properties registered
in its name. The spouses filed a complaint for declaration of
nullity of the extrajudicial foreclosure of mortgage, the certificate
of sale and the final deed of sale. RTC declared the sale null and
void because of the error in the notice of sale. CA reversed RTC
and held that the sale was valid.
ISSUES:
1. WON the extrajudicial foreclosure sale is null and void (NO)
2. WON PNB should tender the surplus (YES)
RATIO:
1. NO, the extrajudicial foreclosure sale is NOT null
and void. It is valid.
- Spouses: Since the Notice of Sheriffs Sale stated that the
obligation was only P1,991,770.38 and PNB bid P8,511,000,
the Notice and the consequent sale were null and void
- SC: While statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly
complied with and even slight deviations will invalidate the
Notice and render the sale at least voidable, the purpose of
the Notice must be considered
o PURPOSE: The publication of the Notice of Sheriffs
Sale is to inform all interested parties of the date,
time and place of the foreclosure sale of the real
property subject thereof
o Logically, this requires not just the appearance of the
correct date, time and place in the Notice, but also that
any and all interested parties be able to determine
that what is about to be sold at the foreclosure sale is
the real property in which they have an interest
- SC: We disagree with the RTC that the discrepancy
between the amount of the spouses obligation as reflected
in the Notice of Sale and the amount actually due and
collected at the time of the auction sale constitute fraud
which renders the extrajudicial foreclosure sale null and void
o Notices are given for the purpose of securing bidders
and to prevent a sacrifice of the property. If these
objects are attained, immaterial errors and mistakes will
not affect the sufficiency of the notice
o But if mistakes or omissions occur in the notices of sale,
which are calculated to deter or mislead bidders, to
depreciate the value of the property, or to prevent it
from bringing a fair price, such mistakes or omissions
will be fatal to the validity of the notice, and also to the
sale made pursuant thereto
- SC: The Notice of Sale in this case is valid. Spouses failed to
convince the Court that the difference between the amount
stated in the Notice of Sale and the amount of PNBs bid
resulted in discouraging or misleading bidders, depreciated
the value of the property or prevented it from commanding
a fair price.
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- SC: Cases cited by RTC do not apply
o San Jose v. CA: Notice did not state the correct number
of the TCTs of the property to be sold ! substantial
and fatal error which invalidated the entire notice
o Community Savings and Loan Association, Inc. v. CA:
Extrajudicial foreclosure tainted with fraud by the
petitioners, which denied respondents the right to
redeem the property (no reference to a Notice of Sale)
2. YES, PNB should tender the surplus.
- Spouses: PNB did not pay its bid in cash or deliver the
surplus, which is required under the law
- PNB: The spouses loan obligations reflected in the Notice
dated March 10, 1992 did not include their other obligations
(which became due on the date of the auction sale on
October 10, 1992), interests, penalties, other charges, and
attorneys fees due
- Rule 39, ROC:
o Sec. 21. Judgment obligee as purchaser. When the
purchaser is the judgment obligee, and no third-party
claim has been filed, he need not pay the amount
of the bid if it does not exceed the amount of
his judgment. If it does, he shall pay only the
excess.
o Sec. 39. Obligor may pay execution against obligee.
After a writ of execution against property has been
issued, a person indebted to the judgment obligor
may pay to the sheriff holding the writ of execution
the amount of his debt or so much thereof as may be
necessary to satisfy the judgment, in the manner
prescribed in section 9 of this Rule, and the sheriffs
receipt shall be a sufficient discharge for the amount so
paid or directed to be credited by the judgment
obligee on the execution.
- Sec. 21 emphasizes:
o That IF the amount of the loan is equal to the amount
of the bid = no need to pay the amount in cash
o In the absence of a 3rd party claim, purchaser need not
pay his bid IF it does NOT exceed the amount of the
judgment; if it does, he shall pay only the excess
o Raison detre is that it would be senseless for the
Sheriff or the Notary Public conducting the foreclosure
sale to go through the idle ceremony of receiving the
money and paying it back to the creditor; lawmaking
body did not contemplate a pointless application of the
law in requiring that the creditor must bid under the
same conditions as any other bidder
o Rule ONLY holds true where the amount of the bid
represents the total amount of the mortgage debt
157
- Rule 68, Sec. 4: Disposition of proceeds of sale. The
amount realized from the foreclosure sale of the mortgaged
property shall, after deducting the costs of the sale, be paid
to the person foreclosing the mortgage, and when there
shall be any balance or residue, after paying off the
mortgage debt due, the same shall be paid to junior
encumbrancers in the order of their priority, to be
ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after
payment to them, then to the mortgagor or his duly
authorized agent, or to the person entitled to it.
o Disposition of proceeds:
1) First, pay the costs
2) Secondly, pay off the mortgage debt
3) Thirdly, pay the junior encumbrancers, if any, in the
order of priority
4) Fourthly, give the balance to the mortgagor, his
agent or the person entitled to is
- SC: Application of the proceeds to the mortgagors
obligation is an act of payment, not payment by dacion;
hence, it is the mortgagees duty to return any
surplus in the selling price to the mortgagor
o Mortgagee is considered a custodian of the fund and,
being bound to apply it properly, is liable to the
persons entitled thereto if he fails to do so
o Although the mortgagee is not strictly considered a
trustee, the mortgagee is deemed a trustee for the
mortgagor or owner of the equity of redemption
o If the mortgagee is retaining more of the proceeds of
the sale than he is entitled to, this will not affect the
validity of the sale, but simply give the mortgagor a
cause of action to recover such surplus
- SC: On record is the spouses Statement of Account as
prepared by PNB, where it states that the spouses principal
obligation with interest/penalty and attorneys fees as of
October 30, 1992, already amounted to P6,409,814.92
o Although spouses denied the amounts, they did not
interpose a defense to refute the computations; they
had nothing to offer by way of evidence and will not
suffice to overcome the computation of their loan
obligations as presented in the Statement of Account
o It is the ONLY piece of evidence available to determine
the amount of the outstanding obligation
o The letters sent by the spouses to PNB offering to
redeem the foreclosed properties for several amounts
cannot be used as bases; there was no computation
and they could have offered such an amount on the
basis of the value of the foreclosed properties rather
than their total obligation
- SC: Since the outstanding obligation amounted to
P6,409,814.92 and the bid amounted to P8,511,000, there is
clearly an excess in the bid price which PNB must
return with interest
o SC cited Eastern Shipping Lines v. CA on the rules of
interest and PNB v. CA, which stated that the interest is
6% per annum for monetary judgments which do not
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involve loans or forbearance of money, pursuant to Art.
2209
o Since the obligation of PNB arises not from a loan or
forbearance of money, the proper rate of interest is
only 6% from the time of filing of the complaint
o Once the judgment becomes final and executory and
until payment, the obligation is deemed to be
equivalent to a forbearance of credit, and pursuant to
Eastern Shipping, the rate of 12% per annum should be
imposed until fully satisfied (Note: According to Nacar,
it should now be 6%)
- SC: This ruling does not preclude PNB from proving and
recovering in a proper proceeding any deficiency in the
amount of the spouses loan obligation that may have
accrued after the date of the auction sale
DISPOSITIVE: Decision of the CA is MODIFIED.
Sps. Suico v. PNB
Surplus should have been given to the sheriff.
The cited Monzon case (in SGS book) is insufficient because it
will lead you to go around in circles. Look at Suico or choose
from the many cases.
This is the legal basis for applying Rule 68 to an extrajudicial
foreclosure.
f. Right to Possession
1) During Redemption Period
Act No. 3135, Sec. 7 In any sale made under the provisions of
this Act, the purchaser may petition the Court of First Instance of
the province or place where the property or any part thereof is
situated, to give him possession thereof during the redemption
period, furnishing bond in an amount equivalent to the use of
the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under oath
and filed in form of an ex parte motion in the registration or
cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the
Mortgage Law or under section one hundred and ninety-four of
the Administrative Code, or of any other real property
encumbered with a mortgage duly registered in the office of any
register of deeds in accordance with any existing law, and in
each case the clerk of the court shall, upon the filing of such
petition, collect the fees specified in paragraph eleven of section
one hundred and fourteen of Act Numbered Four hundred and
ninety-six, as amended by Act Numbered Twenty-eight hundred
and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of
the province in which the property is situated, who shall execute
said order immediately.
158
Act No. 3135, Sec. 8 The debtor may, in the proceedings in
which possession was requested, but not later than thirty days
after the purchaser was given possession, petition that the sale
be set aside and the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage was not
violated or the sale was not made in accordance with the
provisions hereof, and the court shall take cognizance of this
petition in accordance with the summary procedure provided for
in section one hundred and twelve of Act Numbered Four
hundred and ninety-six; and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all or part of the
bond furnished by the person who obtained possession. Either
of the parties may appeal from the order of the judge in
accordance with section fourteen of Act Numbered Four
hundred and ninety-six; but the order of possession shall
continue in effect during the pendency of the appeal.
Act No. 3135, Sec. 9 When the property is redeemed after
the purchaser has been given possession, the redeemer shall be
entitled to deduct from the price of redemption any rentals that
said purchaser may have collected in case the property or any
part thereof was rented; if the purchaser occupied the property
as his own dwelling, it being town property, or used it gainfully, it
being rural property, the redeemer may deduct from the price
the interest of one per centum per month provided for in section
four hundred and sixty-five of the Code of Civil Procedure.
Right to possession should be granted to the purchaser.
- Sec. 7 of Act 3135 directs the issuance of a writ of possession
in favor of the purchaser that seeks possession of the
foreclosed collateral during the redemption period.
- In issuing this writ, there is no discretion left on the part of
the court; any question regarding the validity and regularity
of the sale must be ventilated in a subsequent proceeding.
- This writ is issued in an ex-parte proceeding, involving only
the purchaser, without need for notice to or consent from any
person who is adversely interested (ex. mortgagor).
- Sec. 8 provides that the plain, speedy and adequate remedy
in opposing the issuance of such a writ. A party may file a
petition to set aside the foreclosure sale and to cancel the
writ of possession. This may be filed in the Court which
issued the writ of possession.
- However, if the appeal interposed was from an order
granting the issuance of the writ, then the order shall
continue to be in effect during the pendency of the appeal.
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2) After Consolidation of Ownership
Rule 39, Sec. 33 Deed and possession to be given at
expiration of redemption period; by whom executed or given
If no redemption be made within one (1) year from the date of
the registration of the certificate of sale, the purchaser is entitled
to a conveyance and possession of the property; or, if so
redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the
time for redemption has expired, the last redemptioner is
entitled to the conveyance and possession; but in all cases the
judgment obligor shall have the entire period of one (1) year
from the date of the registration of the sale to redeem the
property. The deed shall be executed by the officer making the
sale or by his successor in office, and in the latter case shall have
the same validity as though the officer making the sale had
continued in office and executed it.
Under the expiration of the right of redemption, the purchaser or
redemptioner shall be substituted to and acquire all the rights,
title, interest and claim of the judgment obligor to the property
as of the time of the levy. The possession of the property shall
be given to the purchaser or last redemptioner by the same
officer unless a third party is actually holding the property
adversely to the judgment obligor.
- If the purchaser is entitled to the possession of the
foreclosed collateral, then it is all the more reason that such
possession be granted to the purchaser once ownership has
been consolidated in his favor.
- Sec. 7 of Act 3135 again provides for the issuance of such a
writ.
- At this point however, there is no need to file a bond and
have it approved, as the writ of possession shall be issued as
a matter of course and as a matter of right.
o Such issuance by the Court is merely a ministerial function
and may be compelled through mandamus.
- Once possession is secured, the purchasers unassailable
right to possession is now founded on the right of ownership.
- Inchoate right is now ripened into full ownership
Chu, et al. v. Lacqui and PBC (2010) Carpio, J.
Petitioner: Cua Lai Chu, Claro G. Castro and Juanita Castro
Respondent: Hon. Hilario Lacqui (Presiding Judge, RTC QC)
and Philippine Bank of Communication
Concept: Real Estate Mortgage: Extrajudicial Foreclosure
Right to possession after consolidation of ownership
Doctrine:
Failure to redeem within the 1-year redemption period grants
the purchaser an absolute right to the writ of possession.
Moreover, once ownership has been consolidated, issuance of a
writ of possession becomes a ministerial duty because, as
purchaser of the property at the foreclosure sale, the right over
the property had become absolute, vesting in the purchaser the
corollary right of possession.
159
Brief Facts:
Chu and the Sps. Castro obtained a P3.2-M loan from PBC,
which was secured by a REM. Later, the Deed of REM was
amended to increase the loan amount to P5-M. Upon demand,
Chu and the sps. Castro failed to pay the loan, and PBC applied
for the extrajudicial foreclosure of the REM. At the sale, PBC
emerged as the highest bidder and a certificate of sale was
executed in its favor and annotated on the TCT. After the lapse
of the 1-year redemption period, PBC filed an affidavit of
consolidation to consolidate its ownership, which was granted,
and a new TCT was issued in its favor. Later, it applied for the
issuance of a writ of possession on the foreclosed property,
which Chu and the sps. Castro opposed.
ISSUE:
WON the writ of possession was properly issued despite the
pendency of a case questioning the validity of the extrajudicial
foreclosure sale (YES)
RATIO: YES, the writ of possession was properly issued
because the 1-year redemption period has lapsed and
because ownership has already been vested in the
purchaser.
(Courts jurisprudence and legal bases)
- SC: Banco Filipino Savings and Mortgage Bank v. Pardo
squarely ruled on the right to possession of a purchaser at
an extrajudicial foreclosure of mortgage
o Case involved a REM as security for a loan obtained
from the bank. Upon mortgagors default, the bank
extrajudicially foreclosed the mortgage and was the
highest bidder at the auction sale. A certificate of sale
was duly issued and registered, so the bank applied for
the issuance of a writ of possession
o Court held that the purchaser at the auction sale was
entitled to a writ of possession pending the lapse of the
redemption period upon a simple motion and upon the
posting of a bond
- SC: In Navarra v. CA, purchaser at an extrajudicial
foreclosure sale applied for a writ of possession after the
lapse of the 1-year redemption period
o Court held that the purchaser at an extrajudicial
foreclosure sale has a right to the possession of the
property even during the 1-year redemption period
provided the purchaser filed an indemnity bond
o After the lapse of the said period with no redemption
having been made, that right becomes absolute and
may be demanded by the purchaser even without the
posing of a bond
o Possession may be obtained under a writ which may be
applied for ex parte pursuant to Sec. 7 of Act No.
3135, as amended by Act No. 4118:
" In any sale made under the provisions of this Act,
the purchaser may petition the Court of First
Instance of the province or place where the
property or any part thereof is situated, to give him
possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use
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of the property for a period of twelve months, to
indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or
without complying with the requirements of this
Act. Such petition shall be made under oath
and filed in form of an ex parte motion x x x
and the court shall, upon approval of the
bond, order that a writ of possession issue,
addressed to the sheriff of the province in which
the property is situated, who shall execute said
order immediately.
(As applied to the case)
- By the expiration of the 1-year redemption period, PBC had
the right to the right of possession:
o Certificate of sale of the foreclosed property was
annotated on June 7, 2002, so the redemption period
lapsed June 7, 2003 (one year after registration of sale)
o When PBC applied for the issuance of a writ of
possession on Aug. 18, 2004, the redemption period
had long lapsed; since the property was not redeemed
within one year from registration of the extrajudicial
foreclosure sale, PBC had acquired an absolute
right, as purchaser, to the writ of possession
o It became the ministerial duty of the lower court
to issue the writ of possession upon mere
motion, pursuant to Sec. 7, Act No. 3135, as amended
- By virtue of its consolidated ownership, PBC had the
corollary right of possession
o Once ownership has been consolidated, the issuance of
the writ of possession became a ministerial duty of the
court, upon proper application and proof of title
o When PBC applied for the issuance of a writ, it
presented a new TCT issued in its name; the right to
the possession of the property was founded on its right
of ownership
o As purchaser of the property at the foreclosure sale, in
whose name title over the property was already issued,
the right over the property had become
absolute, vesting in it the corollary right of
possession
- Chu and the Sps. Castro were not denied due process by
being declared in default despite filing their opposition
o Application for the issuance of a writ of possession in an
ex parte motion: it issues as a matter of course once the
requirements are fulfilled; no discretion left to the court
o The order cannot be opposed or appealed; their
remedy is to have the sale set aside and the writ of
possession cancelled in accordance with Sec. 8, Act
No. 3135:
" The debtor may, in the proceedings in which
possession was requested, but not later than thirty
days after the purchaser was given possession,
petition that the sale be set aside and the writ of
possession cancelled, specifying the damages
suffered by him, because the mortgage was not
160
 violated or the sale was not made in accordance
with the provisions hereof. x x x
o Any question regarding the validity of the extrajudicial
foreclosure sale and the resulting cancellation of the
writ may be determined in a subsequent
proceeding, not as a justification for opposing the
issuance of a writ of possession
- Right to possession of a purchaser at an extrajudicial
foreclosure sale is not affected by a pending case
questioning the validity of the foreclosure proceeding; even
pending such latter proceeding, purchaser is entitled to the
possession of the foreclosed property
DISPOSITIVE: Petition for review DENIED.
3) When Held by a Third Party
Rule 39, Sec. 33 Deed and possession to be given at
expiration of redemption period; by whom executed or given
If no redemption be made within one (1) year from the date of
the registration of the certificate of sale, the purchaser is entitled
to a conveyance and possession of the property; or, if so
redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the
time for redemption has expired, the last redemptioner is
entitled to the conveyance and possession; but in all cases the
judgment obligor shall have the entire period of one (1) year
from the date of the registration of the sale to redeem the
property. The deed shall be executed by the officer making the
sale or by his successor in office, and in the latter case shall have
the same validity as though the officer making the sale had
continued in office and executed it.
Under the expiration of the right of redemption, the purchaser or
redemptioner shall be substituted to and acquire all the rights,
title, interest and claim of the judgment obligor to the property
as of the time of the levy. The possession of the property shall
be given to the purchaser or last redemptioner by the same
officer unless a third party is actually holding the property
adversely to the judgment obligor.
Rule 39, Sec. 16 Proceedings where property claimed by third
person If the property levied on is claimed by any person
other than the judgment obligor or his agent, and such person
makes an affidavit of his title thereto or right to the possession
thereof, stating the grounds of such right or title, and serves the
same upon the officer making the levy and a copy thereof upon
the judgment obligee, the officer shall not be bound to keep the
property, unless such judgment obligee, on demand of the
officer, files a bond approved by the court to indemnify the
third-party claimant in a sum not less than the value of the
property levied on. In case of disagreement as to such value, the
same shall be determined by the court issuing the writ of
execution. No claim for damages for the taking or keeping of the
property may be enforced against the bond unless the action
therefor is filed within one hundred twenty (120) days from the
date of the filing of the bond.
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The officer shall not be liable for damages for the taking or
keeping of the property, to any third-party claimant if such bond
is filed. Nothing herein contained shall prevent such claimant or
any third person from vindicating his claim to the property in a
separate action, or prevent the judgment obligee from claiming
damages in the same or a separate action against a third-party
claimant who filed a frivolous or plainly spurious claim.
When the writ of execution is issued in favor of the Republic of
the Philippines, or any officer duly representing it, the filing of
such bond shall not be required, and in case the sheriff or
levying officer is sued for damages as a result of the levy, he shall
be represented by the Solicitor General and if held liable
therefor, the actual damages adjudged by the court shall be
paid by the National Treasurer out of such funds as may be
appropriated for the purpose.
GR: In extrajudicial foreclosures, possession of the collateral
may be awarded to the purchaser during the redemption period,
or after its lapse, without the need of a separate and
independent action.
EX: Such rule will not apply where a third party holds/possesses
the collateral adversely to the debtor-mortgagor.
- Sec. 16 of Rule 39 provides two remedies to a third party who
holds the foreclosed property adversely against the debtor-
mortgagor:
1. Terceria, in order to determine whether the sheriff has
rightly or wrongly taken hold of a property not belonging
to the mortgagor. This action is filed against the sheriff or
officer effecting the writ, by serving on him an affidavit of
title with a copy to the purchaser.
" By this action, the sheriff/officer is not bound to keep
the collateral and could be held liable for damages if
he does.
2. An independent and separate action to vindicate its claim
of ownership or possession over the collateral, filed
before a forum of competent jurisdiction, even before or
without filing a claim in the court that issued the writ of
possession.
" The object of this action is the recover of ownership
and/or possession of the collateral seized by the
sheriff or officer who effected the writ of possession.
- These remedies can be exercised cumulatively; they can
be availed of, independently or separately from each other.
If the property is held by a third party, there must be a separate
action.
161
BPI Family Savings Bank v. Golden Power Diesel Sales Center
(2011) Carpio, J.
Petitioner: BPI Family Savings Bank Inc. (BPI)
Respondents: Golden Power Diesel Sales Center Inc. (Golden)
and Renato Tan
Concept: REM; Foreclosure; Extrajudicial Foreclosure; Right to
Possession; When Held by Third Party
Doctrine:
- GR: A purchaser in a public auction sale of a foreclosed
property is entitled to a writ of possession and, upon an ex
parte petition of the purchaser; it is ministerial upon the trial
court to issue the writ of possession in favor of the purchaser.
- EX: If it can be shown that (a) the foreclosed property is in
the possession of a third party and (b) that such third party
possesses such property adversely to the judgment obligor,
the duty to issue the writ ceases to be ministerial.
Brief Facts:
BPI was able to foreclose upon the properties mortgaged by
CEDEC in its favor. However, the writs of possession it prayed for
and issued by the RTC was not implemented because Golden
had taken possession of the foreclosed properties, by virtue of a
deed a sale between Golden and CEDEC. The RTC eventually
stayed the implementation of the writs of possession, finding
Golden to be in the nature of a third party possessing the
property adversely as against CEDEC, the judgment debtor,
which is a situation recognized as an exception to the rule that
writs of possession are issued as a matter of ministerial duty.
Hence, the petition.
ISSUE:
WON Golden is indeed claiming rights that are adverse to
CEDEC, the judgment obligor (NO)
RATIO: Goldens claims are not adverse to that of
CEDEC. Hence, it does not fall under the exception;
the alias writ was improperly suspended.
- The issuance of writs of possession in extrajudicial
foreclosure of REMs are governed by Sec. 7 of Act No. 3135:
Act 3135, Sec. 7 In any sale made under the provisions of
this Act, the purchaser may petition the Court of First
Instance (Regional Trial Court) of the province or place
where the property or any part thereof is situated, to give
him possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use of the
property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the
requirements of this Act. Such petition shall be made under
oath and filed in form of an ex parte motion in the
registration or cadastral proceedings if the property is
registered, or in special proceedings in the case of property
registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of
any other real property encumbered with a mortgage duly
registered in the office of any register of deeds in
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accordance with any existing law, and in each case the clerk
of the court shall, upon the filing of such petition, collect the
fees specified in paragraph eleven of section one hundred
and fourteen of Act Numbered Four hundred and ninety-six,
as amended by Act Numbered Twenty-eight hundred and
sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who
shall execute said order immediately.
- SC: The procedure above may also be availed of by the
purchaser seeking possession of the foreclosed property
after the redemption period has expired without
redemption having been made.
- Furthermore, the SC has held in China Banking Corp v.
Lozada that the possession of the land then becomes an
absolute right of the purchaser as confirmed owner. Upon
proper application and proof of title, the issuance of the writ
of possession becomes a ministerial duty of the court.
- Thus, the general rule is that a purchaser in a public auction
sale of a foreclosed property is entitled to a writ of
possession and, upon an ex parte petition of the purchaser,
it is ministerial upon the trial court to issue the writ of
possession in favor of the purchaser.
- However, the rule dos admit of an exception, under Sec. 33
of Rule 39:
ROC, Rule 39, Sec. 33 Deed and possession to be given
at expiration of redemption period; by whom executed or
given . . .
Upon the expiration of the right of redemption, the
purchaser or redemptioner shall be substituted to and
acquire all the rights, title, interest and claim of the
judgment obligor to the property as of the time of the levy.
The possession of the property shall be given to the
purchaser or last redemptioner by the same officer unless a
third party is actually holding the property adversely to the
judgment obligor.
- Hence, if it can be shown that (a) the foreclosed property is
in the possession of a third party and (b) that such
third party is possessing such property adversely
to the judgment obligor, the duty to issue the writ
ceases to be ministerial.
- SC: Goldens allegations that it is an adverse possessor as
against the judgment obligor (CEDEC) is untenable.
o Golden acquired the property by virtue of the Deed of
Absolute Sale with Assumption of Mortgage.
o The said deed provides that CEDEC shall sell, transfer,
and convey to Golden the foreclosed properties free
from all liens and encumbrances exception the
mortgage as may be subsisting in favor of BPI.
o In Roxas v. Buan, the Court has held that in a situation
where the property had already been sold at a public
auction pursuant to an extrajudicial foreclosure, the
only interest transferred from the vendor to the vendee
is the right to redeem the property within the period
prescribed. The vendee merely steps into the vendors
shoes
162
 o By virtue of the ruling above, Golden only acquired the
right of redemption.
o Also, in China Banking Corp v. Lozada, Court has
defined the meaning of a third party holding the
property adversely against a judgment debtor to be
one who holds the property by adverse title or right,
such as that of a co-owner, tenant or usufructuary. The
co-owner, agricultural tenant, and usufructuary possess
the property in their own right, and they are not merely
the successor or transferee of the right of possession of
another co-owner or the owner of the property.
o In this case, Goldens rights are not analogous to the
cases provided in the definition above. They have no
independent right of possession other than what they
derived from the deed of sale with CEDEC.
o They are not in any way holding the property adverse to
the latter but are actually in the nature of CEDECs
successors-in-interest. Hence, the suspension of the
alias writ of possession was improper.
o Furthermore, the Court has already held in Spouses
Ong v. CA that an action to annul a mortgage or
foreclosure sale does not stay the issuance of a writ of
possession. The purchaser is entitled to the writ of
possession, without prejudice to the outcome of the
pending annulment case.
DISPOSITIVE: Petition GRANTED.
Nagtalon v. United Coconut Planters Bank (2013) Brion, J.
Petitioner: Donna C. Nagtalon
Respondent: United Coconut Planters Bank
Concept: Foreclosure of Real Estate Mortgage; Extrajudicial
Foreclosure; Right to Possession; When Held by a Third Party
Doctrine:
- Once title to the property has been consolidated in the
buyers name upon failure of the mortgagor to redeem the
property within the one-year period of redemption, the writ
of possession becomes a matter of right belonging to the
buyer. The pendency of a civil case questioning the validity
of the mortgage, its foreclosure, and subsequent sale of
mortgaged properties is not a bar for the issuance of the
writ of possession. The same does not constitute the
presence of peculiar and equitable circumstances that can
be considered as an exception to the general rule that
issuance of said writ is the ministerial duty of the court when
ownership of properties has been consolidated in buyers
name.
- An exception the said general rule is when there is a third
party claiming right adverse to debtor/mortgagor.
The obligation of the court to issue a writ of possession in
favor of the purchaser in a foreclosure mortgage ceases to
be ministerial when a third party in possession of the
property claims a right adverse to that of the debtor-
mortgagor. Where such third party claim and possession
exist, the trial court should conduct a hearing to determine
the nature of the adverse possession
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Brief Facts:
Sps. Nagtalon entered into a Credit Accommodation Agreement
with UCPB. To secure payment of their obligation, they executed
a Real Estate Mortgage over properties in Kalibo, Aklan. Having
defaulted in payment, the mortgage was foreclosed and subject
properties were sold to UCPB at the public auction, as highest
bidder. The redemption period expired without the spouses
exercising their right of redemption. UCPB sought for the
issuance of a writ of possession, having consolidated its
ownership of the subject properties. Nagtalon opposes the
issuance of said writ, citing the pendency of a civil case wherein
the validity of the mortgage, foreclosure, and sale is at issue.
ISSUE:
WON the pendency of a civil case challenging the validity of the
credit agreement, the promissory notes and the mortgage can
bar the issuance of a writ of possession after the foreclosure and
sale of the mortgaged properties and the lapse of the one-year
period of redemption (NO)
RATIO: No. The issuance of a writ of possession is a
ministerial function of the Court. The pendency of the
civil case challenging the validity of the credit
agreement, promissory notes and the mortgage and
foreclosure is not a bar to the issuance of a writ of
execution
- Once title to the property has been consolidated in the
buyers name upon failure of the mortgagor to redeem the
property within the one-year period of redemption, the writ
of possession becomes a matter of right belonging to the
buyer
- The buyer can demand possession of the property at any
time
- Its right to possession has then ripened into the right of a
confirmed absolute owner
- Pursuant to Act 3135, the writ of possession may be issued
either
(1) Within the one-year redemption period, upon the filing
of a bond, or
(2) After the lapse of the redemption period, without need
of a bond
- During the one-year redemption period (Act 3135, Sec. 7),
the purchaser may apply for a writ of possession by filing an
ex parte motion under oath in the registration or cadastral
proceedings if the property is registered, or in special
proceedings in case the property is registered under the
Mortgage Law
o In this case, a bond is required before the court may
issue a writ of possession
163
- Upon the lapse of redemption period (Act. 3135, Sec. 6), a X. ANTICHRESIS
writ of possession may be issued in favor of the purchaser in
a foreclosure sale, also upon a proper ex parte motion. A. General Concepts
o This time, no bond is necessary for its issuance
o The mortgagor is now considered to have lost any Art. 2132 By the contract of antichresis the creditor acquires
interest over the foreclosed property the right to receive the fruits of an immovable of his debtor, with
o Purchaser becomes the owner of the property, and he the obligation to apply them to the payment of the interest, if
can demand possession at any time following the owing, and thereafter to the principal of his credit.
consolidation of ownership and the issuance of TCT in
his/her name
Art. 544 A possessor in good faith is entitled to the fruits
- Pendency of the civil case is not a bar to the issuance of a
received before the possession is legally interrupted.
writ of execution
o The same does not constitute the presence of peculiar Natural and industrial fruits are considered received from the
and equitable circumstances and cannot stay the
time they are gathered or severed.
issuance of the writ (Sps. Tolosa v. UCPB)
o Questions on the regularity and validity of mortgage
Civil fruits are deemed to accrue daily and belong to the
and foreclosure cannot be invoked as justification for possessor in good faith on that proportion. (451)
opposing the issuance of a writ of possession in favor of
the new owner
Art. 2133 The actual market value of the fruits at the time of the
- The court in Sps. Tolosa v. UCPB outlined the exceptions
application thereof to the interest and principal shall be the
that would warrant the suspension of the issuance of writ of
measure of such application.
possession:
(1) Gross inadequacy of purchase price Cometa v.
IAC: value of property sold in execution sale was Art. 2135 The creditor, unless there is a stipulation to the
P500,000 but it was sold only for P57,000. Court contrary, is obliged to pay the taxes and charges upon the
perceived that injustice would result in issuing a writ of estate.
possession
(2) Third party claiming right adverse to He is also bound to bear the expenses necessary for its
debtor/mortgagor Barican v. IAC: The obligation preservation and repair.
of the court to issue a writ of possession in favor of the
purchaser in a foreclosure mortgage ceases to be The sums spent for the purposes stated in this article shall be
ministerial when a third party in possession of the deducted from the fruits.
property claims a right adverse to that of the debtor-
mortgagor. Art. 2138 The contracting parties may stipulate that the interest
- In this case, there was a pending civil suit involving upon the debt be compensated with the fruits of the property
the rights of third parties who claimed ownership which is the object of the antichresis, provided that if the value
over the disputed property of the fruits should exceed the amount of interest allowed by the
- Court found the circumstances to be peculiar, laws against usury, the excess shall be applied to the principal.
necessitating an exception to the general rule
- Where such third party claim and possession exist, Art. 2139 The last paragraph of Article 2085, and Articles 2089
the trial court should conduct a hearing to to 2091 are applicable to this contract.
determine the nature of the adverse possession
(3) Failure to pay surplus proceeds of the sale to
Art. 2085 The following requisites are essential to the contracts
mortgagor equitable considerations demanded the
of pledge and mortgage:
deferment of the issuance of the writ as it would be
(1) That they be constituted to secure the fulfillment of a
highly unfair for the mortgagor, who as a redemptioner
principal obligation;
might choose to redeem the foreclosed property, to
pay the equivalent amount of the bid clearly in excess
(2) That the pledgor or mortgagor be the absolute owner of the
of the total mortgage debt
thing pledged or mortgaged;
DISPOSITIVE: Petition denied. CA Affirmed.
(3) That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence thereof,
Nagtalon v. UCPB
that they be legally authorized for the purpose.
This is the case that provides the exceptions ot the wirt of
possession.
Third persons who are not parties to the principal obligation may
secure the latter by [antichresis of] their own property.

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Art. 2089 A[n antichresis] 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
[antichresis] as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
cancel the [antichresis], to the prejudice of the other heirs
who have not been paid.
From these provisions is expected the case in which, there being
several things given in [antichresis], each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment
of the [antichresis] as the portion of the debt for which each
thing is specially answerable is satisfied.
Art. 2090 The indivisibility of a[n antichresis] is not affected
by the fact that the debtors are not solidarily liable.
Art. 2091 The contract of [antichresis] may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory
condition.
- Definition: Antichresis, from the Latin, in place of interest,
is a real security transaction that arises by contract,
with the antichretic creditor acquiring the right to
receive the fruits of an immovable of the antichretic
debtor, and the obligation to apply them to the payment
of the interest, if owing, and thereafter to the principal
This is a real security transaction because the property may be
foreclosed if after the period agrees upon, the principal
obligation hasnt been paid yet. Immovables may be alienated
to satisfy the principal application.
Obligations of the Creditor:
GR: Creditor is obliged to pay the following:
- Taxes and charges upon the estate
- Necessary expenses for preservation and repair of property
XPN: Stipulation to the contrary
Parties to an Antichresis:
1. Creditor
2. Owner of the property subject of an antichresis
a. Debtor in the principal obligation
b. Third person securing the principal obligation using
their own property
Object of Antichresis: Secures all kinds of obligations
1. Pure
2. Subject to suspensive condition
3. Subject to resolutory condition
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Indivisibility of an antichresis:
GR: An antichresis is indivisible. There can be no proportionate
extinguishment or cancellation of antichresis due to partial
payment of the debt
XPN: There being several things given in antichresis, each one
of them guarantees only a determinate portion of the credit.
Here, the debtor has a right to extinguish the antichresis as the
portion of the debt corresponding to a thing is satisfied. This
applies even if debtors are not solidarily liable.
Sums spent are deducted from the fruits
APPLICATION OF THE FRUITS:
1. Without interest: Fruits are applied ot the principal of the
debtors credit
2. With interest:
a. Value of fruits < amount of interest: fruits applied to
interest
b. Value of fruits = amount of interest: fruits applied to
interest
c. Value of fruits > amount of interest: fruits applied to
interest, EXCESS applied to principal
B. Form of Antichresis
Art. 2134 The amount of the principal and of the interest shall
be specified in writing; otherwise, the contract of antichresis shall
be void.
C. Right of Retention
Art. 2136 The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the
creditor.
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel
the debtor to enter again upon the enjoyment of the property,
except when there is a stipulation to the contrary.
RIGHT OF RETENTION
GR: Debtor cannot reacquire enjoyment of the immovable
without full payment of the debt
XPN: Creditor compels debtor to enter again upon the
enjoyment of the property to exempt himself (creditor) from the
obligations imposed upon him under Act 3135
XPN to XPN: Stipulation to the contrary
Purpose of right to retention: means of extinguishing the
obligation
- Right of retention is used as a means of extinguishing the
obligation
- The debtor cannot reacquire enjoyment of the immovable
until he has actually paid what he owes the creditor
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D. Foreclosure of Antichresis
Art. 2137 The creditor does not acquire the ownership of the
real estate for non-payment of the debt within the period agreed
upon.
Every stipulation to the contrary shall be void. But the creditor
may petition the court for the payment of the debt or the sale of
the real property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.
- Because of the right of the creditor to judicially foreclose
on the immovable owned by the debtor, antichresis is
viewed as a species of real estate mortgage in which the
mortgagee retains possession of the collateral and takes
the fruits (such as rents) of the property in lieu of interest
on the debt
Who owns the property subject of antichresis?
Antichretic debtor/third person
Effect of non-payment of debt?
Triggers availability of either of 2 remedies:
1. Specific performance
2. Foreclosure
Void stipulation: Creditor does not acquire ownership of real
estate for non-payment of a debt. Every stipulation to the
contrary shall be void.
Likened to REM but differences are: Mortgagee retains
possession of the collateral and takes fruits in lieu of interest on
the debt. Retention of possession allows the creditor to apply
the fuits to the interest.
- Possession also involves symbolic possession even if there is
a third party
- Possession also allows the creditor to foreclose on the
property
Diego vs. Fernando (1960) Reyes, J. B. L.
Petitioners: Cecilio Diego
Respondents: Segundo Fernando
Concept: Antichresis
Doctrine:
It is not an essential element of a mortgage that possession of
the mortgaged property remains with the mortgagor. For a
contract of antichresis to exist, it must be expressly agreed
between the creditor and debtor that the former, having been
given possession of the properties given as security, is to apply
their fruits to the payment of the interest, if owing, and
thereafter to the principal of his credit.
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Brief Facts:
Diego and Fernando entered into a contract of loan secured by
REM over several properties. After execution of the mortgage,
possession over the subject parcels of land was turned over to
the mortgagee, Diego. Fernando now claims that the transaction
that they intended to enter was one of antichresis and not one of
mortgage.
ISSUES:
1. WON the contract between the parties is one of mortgage
or of antichresis (MORTGAGE)
2. WON the mortgagee will be allowed to appropriate the
fruits for himself (NO)
RATIO:
1. It is a contract of mortgage.
- To be antichresis, it must be expressly agreed between the
creditor and debtor that the former, having been given
possession of the properties given as security, is to apply
their fruits to the payment of the interest, if owing, and
thereafter to the principal of his credit.
o Article 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.
- If a contract of loan with security does not stipulate the
payment of interest but provides for the delivery to the
creditor by the debtor of the property given as security, in
order that the latter may gather its fruits, without stating that
said fruits are to be applied to the payment of interest, if
any, and afterwards that of the principal, the contract is a
mortgage and not antichresis.
- The fact that the possession of the properties given as
security was turned over to the mortgagee is of no moment
as it is not an essential requisite of a mortgage that
possession be retained by the mortgagor.
2. NO. The fact that the debtor consented and asked
the creditor to take charge of managing his
property "does not entitle the latter to
appropriate to itself the fruits thereof unless the
former has expressly waived his right thereto."
- TC erred in inferring from the transfer of possession alone
that the parties had verbally modified their written
agreement, which provided that the loan was to be without
interest, and substituted another giving the mortgagee the
right to receive the fruits of the mortgaged properties as
interests.
166
- The true position of appellee herein under his contract with
appellant is a "mortgage in possession" American equity
jurisprudence; that is "one who has lawfully acquired actual
or constructive possession of the premises mortgaged to
him, standing upon his rights as mortgagee and not
claiming under another title, for the purpose of enforcing his
security upon such property or making its income help to
pay his debt" As such mortgagee in possession, his rights
and obligations are, similar to those of an antichretic
creditor, which includes the ff:
o That if the mortgagee acquires possession in any lawful
manner, he is entitled to retain such possession until
the indebtedness is satisfied and the property
redeemed;
o That the non-payment of the debt within the term
agreed does not vest the ownership of the property in
the creditor;
o That the general duty of the mortgagee in possession
towards the premises is that of the ordinary prudent
owner;
o That the mortgagee must account for the rents and
profits of the land, or its value for purposes of use and
occupation, any amount thus realized going towards
the discharge on the mortgage debt; that if the
mortgage remains in possession after the mortgage
debt has been satisfied, he becomes a trustee for the
mortgagor as to the excess of the rents and profits over
such debt; and
o Lastly, that the mortgagor can only enforce his rights to
the land by an equitable action for an account and to
redeem.
- Citing Enriquez vs. National Bank, a creditor with a lien on
real property who took possession thereof with the consent
of the debtor, held it as an "antichretic creditor with the
right to collect the credit with interest from the fruits,
returning to the antichretic creditor the balance, if any, after
deducting the expenses," because the fact that the debtor
consented and asked the creditor to take charge of
managing his property "does not entitle the latter to
appropriate to itself the fruits thereof unless the former has
expressly waived his right thereto."
- In the present case, the parties agreed that the loan was to
be without interest, and Fernando has not expressly waived
his right to the fruits of the properties mortgaged during the
time they were in the mortgagees possession. As such,
Diego, like an antichretic creditor, must account for the
value of the fruits received by him, and deduct it from the
loan obtained by appellant.
- According to the findings of the trial court, he had received
a net share of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present action; at the
rate of P9.00 per cavan (a rate admitted by the parties), the
total value of the fruits received by appellee is P495.00.
Deducting this amount from the loan of P2, 000, Fernando
has only P1, 505 left to pay Diego.
DISPOSITIVE: Petition partially granted.
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INSOLVENCY
I. THE CONCEPT OF INSOLVENCY
Insolvency is a trigger event. It changes the rules of the game.
Pre-FRIA: cases brought before the SEC.
Post-FRIA: now brought before commercial courts.
Art. 2236 is our contract with the State because CON protects us
against imprisonment for debt. It is the legal basis for ROC
remedies which allow the Court to seize property for the
payment of an obligation.
Art. 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the
exemptions provided by law. (1911a)
Art. 2237. Insolvency shall be governed by special laws insofar
as they are not inconsistent with this Code. (n)
RA 10142, Sec. 2 Declaration of Policy - It is the policy of the
State to encourage debtors, both juridical and natural persons,
and their creditors to collectively and realistically resolve and
adjust competing claims and property rights. In furtherance
thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view to ensure
or maintain certainly and predictability in commercial affairs,
preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly
situated. When rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations.
RA 10142, Sec. 4 (h, k, n) Definition of Terms - As used in
this Act, the term:
(h) Creditor shall refer to a natural or juridical person which has a
claim against the debtor that arose on or before the
commencement date.
(k) Debtor shall refer to, unless specifically excluded by a
provision of this Act, a sole proprietorship duly registered with
the Department of Trade and Industry (DTI), a partnership duly
registered with the Securities and Exchange Commission (SEC),
a corporation duly organized and existing under Philippine laws,
or an individual debtor who has become insolvent as defined
herein.
(n) Group of debtors shall refer to and can cover only: (1)
corporations that are financially related to one another as parent
corporations, subsidiaries or affiliates; (2) partnerships that are
owned more than fifty percent (50%) by the same person; and (3)
single proprietorships that are owned by the same person. When
the petition covers a group of debtors, all reference under these
rules to debtor shall include and apply to the group of debtors.
167
RA 10142, Sec. 146 Application to Pending Insolvency,
Suspension of Payments and Rehabilitation Cases. - This Act
shall govern all petitions filed after it has taken effect. All further
proceedings in insolvency, suspension of payments and
rehabilitation cases then pending, except to the extent that in
opinion of the court their application would not be feasible or
would work injustice, in which event the procedures set forth in
prior laws and regulations shall apply.
RA 10142, Sec. 147 Application to Pending Contracts. - This
Act shall apply to all contracts of the debtor regardless of the
date of perfection.
RA 10142, Sec. 148 Repeating Clause. - The Insolvency Law
(Act No. 1956). As amended is hereby repealed. All other laws,
orders, rules and regulations or parts thereof inconsistent with
any provision of this Act are hereby repealed or modified
accordingly.
- Debtor is constitutionally guaranteed non-imprisonment for
a debt, but CC subjects all the debtors property, present
and future, to the fulfillment of the debtors obligations
- Provided the requirements of the law are followed, a
creditor is given the right to: attach, garnish, foreclose,
execute upon, and otherwise seize the property of a debtor
for the fulfillment of the obligations to the creditor
o Debtor is allowed to reserve only the property that is
exempted by law
Debtor:
1. Sole proprietorship registered with DTI
2. Partnership registered with SEC
3. Corporation
4. Individual debtor who has become insolvent
GR: Debtor is liable with all his property
XPNs: Rule 39, Sec. 13
1. Family home or homestead
2. Ordinary tools and implements personally used in trade,
employment or livelihood
3. 3 horses, 3 cows, 3 carabaos, or other beast of burden
4. Necessary clothing and articles for personal use
5. Household furniture and utensils necessary for
housekeeping (value < 100k)
6. Provisions for individual or family use sufficient for 4 months
7. Professional libraries and equipment of judges, lawyers,
physicians, pharmacists, dentists, engineers, surveyors,
clergymen, teachers, and other professionals (value < 300k)
8. 1 fishing boat and accessories (value < 100k)
9. Some salaries, wages, or earnings for personal services
within 4 months before levy for support of family
10. Lettered gravestones
11. Monies, benefits, privileges, or annuities accruing
12. Right to receive legal support, or money or property
obtained as such support, or any pension or gratuity from
the Government
13. Properties exempted by law
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Proceedings in insolvency
- Bankruptcy, in other jurisdictions
o From Latin bancus ruptus, or broken table
o From medieval Italian custom of banca rotta, literally,
the breaking of the counter of a financially failed
merchant
- Needed because there is a risk that the debtor will still be
unable to pay its debt as they fall due in the usual course of
business or as they mature
o Civil Code recognizes that even if the law requires the
debtor to answer with all of its property for the
fulfillment of its obligations, there is that risk
Insolvency Proceedings
- Statutory procedures by which a debtor obtains financial
relief and undergoes judicially supervised reorganization or
liquidation of its assets for the benefit of its creditors
- With the express repeal of Act No. 1956, or the Insolvency
Law, the FRIA, is the special law that currently governs
insolvency
Policy/purpose of insolvency proceedings:
- To encourage insolvent debtors, and their creditors to
collectively and realistically resolve and adjust competing
claims and property rights, while maintaining certainty and
predictability in commercial affairs, preserving and
maximizing creditor rights and respecting priority of claims,
and ensuring equitable treatment of creditors who are
similarly situated
As to rehabilitation and liquidation: Ensure a timely, fair,
transparent, effective and efficient rehabilitation or liquidation of
debtors.
Rehabilitation or liquidation shall be made to:
1. Ensure or maintain certainty and predictability in
commercial affairs
2. Preserve and maximize the value of assets of debtors
3. Recognize creditor rights and respect priority of claims
4. Ensure equitable treatment of creditors who are similarly
situated
RIGHTS OF THE DEBTOR:
1. Guaranteed non-imprisonment for non-payment of debt
2. Right to retain possession of property exempt from
execution
RIGHTS OF CREDITOR:
1. Right to attach, garnish, foreclose, execute upon, and
otherwise seize the property of a debtor for the fulfillment of
the obligation
2. Debtor can only reserve property exempted by law
Rationale for Insolvency Proceedings: Even if debtors
properties answer for the obligations, there is still a risk that the
debtor would be unable to pay when the debt falls due in the
usual course of business or as debts mature
168
Condition of being insolvent: the related enterprise is beneficial to all concerned and
- Under the FRIA, and insofar as the debtor is concerned, promotes the objectives of rehabilitation.
the condition of being insolvent is defined as follows: Provided, finally, That nothing in this section shall prevent the
(p) Insolvent shall refer to the financial condition of a debtor court from joining other entities affiliated with the debtor as
that is generally unable to pay its or his liabilities as they fall parties pursuant to the rules of procedure as may be
due in the ordinary course of business or has liabilities that promulgated by the Supreme Court.
are greater than its or his assets.
(s) Liabilities shall refer to monetary claims against the RA 10142, Sec. 6 Designation of Courts and Promulgation of
debtor, including stockholder's advances that have been
Procedural Rules. - The Supreme Court shall designate the court
recorded in the debtor's audited financial statements as
or courts that will hear and resolve cases brought under this Act
advances for future subscriptions.
and shall promulgate the rules of pleading, practice and
- FRIA has broadened the concept of insolvency by including
procedure to govern the proceedings brought under this Act.
in its ambit illiquidity or equity insolvency, or the
financial condition of a debtor that may possess sufficient
Nature: In rem, binding upon the whole world
property but is unable to pay its liabilities when they fall
due, as well as balance sheet insolvency, or the financial
How is jurisdiction acquired: Upon publication of the notice
condition of a debtor that has liabilities that are greater
of commencement of proceedings in any newspaper of general
than, or that exceed, its assets
circulation in the Philippines
o Under the FRIA definition, an illiquid debtor is an
insolvent debtor
How conducted: Summary and non-adversarial
o Under the FRIA, the state of being insolvent is
calculated based on liabilities, that is, the monetary
Parties to the Proceedings (Sec. 4(dd) and (bb)):
claims against the debtor
1. Debtor
2. Creditor
A. Nature of Insolvency Proceedings
3. Unsecured creditors committee
4. Stakeholder
RA 10142, Sec. 3 Nature of Proceedings. - The proceedings
5. Party with an ownership interest in property held by the
under this Act shall be in rem. Jurisdiction over all persons
debtor
affected by the proceedings shall be considered as acquired
6. Secured creditor
upon publication of the notice of the commencement of the
7. Rehabilitation receiver
proceedings in any newspaper of general circulation in the
8. Liquidator
Philippines in the manner prescribed by the rules of procedure
9. Other juridical or natural person who stands to be benefited
to be promulgated by the Supreme Court.
or injured by outcome of the proceedings
The proceedings shall be conducted in a summary and non-
adversarial manner consistent with the declared policies of this
On juridical entities parties to the proceeding (Sec. 7)
Act and in accordance with the rules of procedure that the
GR: Each juridical entity is a separate entity. Thus, assets and
Supreme Court may promulgate.
liabilities of a debtor may not be commingled or aggregated
with those of another.
RA 10142, Sec. 7 Substantive and Procedural Consolidation. - XPN: Unless the other is a related enterprise that is owned or
Each juridical entity shall be considered as a separate entity controlled directly or indirectly by the same interest. The
under the proceedings in this Act. Under these proceedings, the commingling or aggregation of assets and liabilities of the
assets and liabilities of a debtor may not be commingled or debtor with related enterprise are allowed where:
aggregated with those of another, unless the latter is a related 1. There was commingling in fact of assets and liabilities prior
enterprise that is owned or controlled directly or indirectly by the to the commencement of the proceedings;
same interests: Provided, however, That the commingling or 2. They have common creditors and it will be more convenient
aggregation of assets and liabilities of the debtor with those of a to treat them together rather than separately;
related enterprise may only be allowed where: 3. The related enterprise voluntarily accedes to join the debtor
(a) there was commingling in fact of assets and liabilities of the as party petitioner and to commingle its assets and liabilities
debtor and the related enterprise prior to the commencement of with the debtors; and
the proceedings; 4. Consolidation is beneficial to all concerned and promotes
(b) the debtor and the related enterprise have common creditors the objectives of rehabilitation
and it will be more convenient to treat them together rather than
separately;
(c) the related enterprise voluntarily accedes to join the debtor
as party petitioner and to commingle its assets and liabilities
with the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and

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B. Civil and Criminal Liability in Insolvency
Proceedings
RA 10142, Sec. 10 Liability of Individual Debtor, Owner of a
Sole Proprietorship, Partners in a Partnership, or Directors and
Officers - Individual debtor, owner of a sole proprietorship,
partners in a partnership, or directors and officers of a debtor
shall be liable for double the value of the property sold,
embezzled or disposed of or double the amount of the
transaction involved, whichever is higher to be recovered for
benefit of the debtor and the creditors, if they, having notice of
the commencement of the proceedings, or having reason to
believe that proceedings are about to be commenced, or in
contemplation of the proceedings, willfully commit the following
acts:
(a) Dispose or cause to be disposed of any property of the
debtor other than in the ordinary course of business or
authorize or approve any transaction in fraud of creditors or
in a manner grossly disadvantageous to the debtor and/or
creditors; or
(b) Conceal or authorize or approve the concealment, from
the creditors, or embezzles or misappropriates, any property
of the debtor.
The court shall determine the extent of the liability of an owner,
partner, director or officer under this section. In this connection,
in case of partnerships and corporations, the court shall consider
the amount of the shareholding or partnership or equity interest
of such partner, director or officer, the degree of control of such
partner, director or officer over the debtor, and the extent of the
involvement of such partner, director or debtor in the actual
management of the operations of the debtor.
RA 10142, Sec. 145 Penalties - An owner, partner, director,
officer or other employee of the debtor who commits any one of
the following acts shall, upon conviction thereof, be punished by
a fine of not more than One million pesos (Php 1, 000,000.00)
and imprisonment for not less than three(3) months nor more
than five (5) years for each offense;
(a) if he shall, having notice of the commencement of the
proceedings, or having reason to believe that proceedings
are about to be commented, or in contemplation of the
proceedings hide or conceal, or destroy or cause to be
destroyed or hidden any property belonging to the debtor or
if he shall hide, destroy, after mutilate or falsify, or cause to
be hidden, destroyed, altered, mutilated or falsified, any
book, deed, document or writing relating thereto; if he shall,
with intent to defraud the creditors of the debtor, make any
payment sale, assignment, transfer or conveyance of any
property belongings to the debtor
(b) if he shall, having knowledge belief of any person having
proved a false or fictitious claim against the debtor, fail to
disclose the same to the rehabilitation receiver of liquidator
within one (1) month after coming to said knowledge or
belief; or if he shall attempt to account for any of the debtors
property by fictitious losses or expense; or
(c) if he shall knowingly violate a prohibition or knowingly fail
to undertake an obligation established by this Act.
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II. CONCURRENCE & PREFERENCE OF CREDITS
A. General Concepts
RA 10142, Sec. 62 Contents of a Rehabilitation Plan The
Rehabilitation Plan shall, as a minimum:
(a) specify the underlying assumptions, the financial goals and
the procedures proposed to accomplish such goals;
(b) compare the amounts expected to be received by the
creditors under the Rehabilitation Plan with those that they will
receive if liquidation ensues within the next one hundred twenty
(120) days;
(c) contain information sufficient to give the various classes of
creditors a reasonable basis for determining whether supporting
the Plan is in their financial interest when compared to the
immediate liquidation of the debtor, including any reduction of
principal interest and penalties payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has
been granted by the court;
(f) indicate how the insolvent debtor will be rehabilitated
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization. dacion en
pago, debt-equity conversion and sale of the business (or parts
of it) as a going concern, or setting-up of a new business entity
or other similar arrangements as may be necessary to restore the
financial well-being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in
subsections (d) and (e);
(h) provide for equal treatment of all claims within the same class
or subclass, unless a particular creditor voluntarily agrees to less
favorable treatment;
(i) ensure that the payments made under the plan follow the
priority established under the provisions of the Civil Code on
concurrence and preference of credits and other applicable laws;
(j) maintain the security interest of secured creditors and
preserve the liquidation value of the security unless such has
been waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement
debts made during the proceedings and the justifications
thereof;
(1) describe the disputed claims and the provisioning of
funds to account for appropriate payments should the claim
be ruled valid or its amount adjusted;
170
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of
which shall be considered a material breach of the Plan;
(o) identify those responsible for the future management of the
debtor and the supervision and implementation of the Plan, their
affiliation with the debtor and their remuneration;
(p) address the treatment of claims arising after the confirmation
of the Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the
terms of all contracts that the debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative
expenses as a condition to the Plan's approval unless such
condition has been waived in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and
assessments, or an adjusted amount pursuant to a compromise
settlement with the BlR Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or
evidence of a compromise settlement with the BIR;
(u) include a valid and binding r(,solution of a meeting of the
debtor's stockholders to increase the shares by the required
amount in cases where the Plan contemplates an additional
issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation
receiver after the approval of the Plan; and
(w) contain provisions for conciliation and/or mediation as a
prerequisite to court assistance or intervention in the event of
any disagreement in the interpretation or implementation of the
Rehabilitation Plan.
RA 10142, Sec. 133 Concurrence and Preference of Credits -
The Liquidation Plan and its Implementation shall ensure that
the concurrence and preference of credits as enumerated in the
Civil Code of the Philippines and other relevant laws shall be
observed, unless a preferred creditor voluntarily waives his
preferred right. For purposes of this chapter, credits for services
rendered by employees or laborers to the debtor shall enjoy first
preference under Article 2244 of the Civil Code, unless the
claims constitute legal liens under Article 2241 and 2242 thereof.
- The Civil Code establishes a system of concurrence and
preference of credits in the context of insolvency
proceedings in order to properly recognize creditor rights,
respect priority of claims, and ensure the equitable
treatment of similarly situated creditors. Such a situation
arises only when the debtor cannot pay his debts in full.
- There is concurrence of credits when property of the
debtor is subjected to the claims of two or more creditors
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and the value of such property is insufficient to pay in full all
the claims. As a result thereof, some creditors will not be
paid or some creditors will not obtain the full satisfaction of
their claims. In such a situation, the claims may be paid
concurrently and pro-rata, that is, in proportion to the
amount of the respective credits; or a preference of
credits may be established to determine the priority of
payments or which of the creditors will be paid ahead of the
others.
- A preference of credits does not necessarily create a lien on
property. While a lien creates a charge on a particular
property, a preference of credits is merely a method
adopted to determine and specify the order in which credits
should be paid.
- Clearly, the aforementioned provisions do not apply when
the situation does not involve two or more creditors having
separate and distinct claims against the same debtor who
has insufficient property.
- Elements: (impliedly)
a) That a debtor has two or more creditors, each
having a separate and distinct claims against him
b) That the debtor do not have sufficient property to
satisfy all the valid claims against him
- Consequently, concurrence and preference of credits can
only be ascertained in the context of some proceedings
such as insolvency proceedings, where the claims of all
the creditors may be bindingly adjudicated. Under the FRIA
or Financial Rehabilitation and Insolvency Act, both
rehabilitation proceedings and liquidation
proceedings are considered insolvency proceedings, and
the rules on concurrence and preference of credits are
applicable to both.
REMEMBER: The rehabilitation plan and the liquidation plan
must ensure that the concurrence and preference of credits are
complied with.
Concurrence of credit: The creditors are paid concurrently
and pro-rata (in proportion) to the amount of the respective
credits.
Preference of credit: A method adopted to determine and
specify the order in which credits should be paid. It determines
the priority of payments or which creditors will be paid ahead of
others.
When applied:
- When there are 2 or more creditors having separate and
distinct claims against the same debtor who has insufficient
property
- When debtor cannot pay his debts in full
- Ascertained in the context of some proceedings
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B. Classification of Credits (6) Claims for laborers' wages, on the goods manufactured or the
work done;
1. Special Preferred Credits
O: Wages
For these special preferred credits, identify the following: D: Employer
1. What is the object? C: Laborer
2. Who is the debtor?
3. Who is the creditor? (7) For expenses of salvage, upon the goods salvaged;

Art. 2241 With reference to specific movable property of
the debtor, the following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any
subdivision thereof;
O: Movable
D: Owner of prop
C: State
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by
them;
O: Moneys or securities
D: Public official
C: State or whover owns the object
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor,
up to the value of the same; and if the movable has been resold
by the debtor and the price is still unpaid, the lien may be
enforced on the price; this right is not lost by the immobilization
of the thing by destination, provided it has not lost its form,
substance and identity; neither is the right lost by the sale of the
thing together with other property for a lump sum, when the
price thereof can be determined proportionally;
O: Unpaid purchase price
D: Purchaser
C: Unpaid vendor
(4) Credits guaranteed with a pledge so long as the things
pledged are in the hands of the creditor, or those guaranteed by
a chattel mortgage, upon the things pledged or mortgaged, up
to the value thereof;
(8) Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits
or harvest;
(9) Credits for transportation, upon the goods carried, for the
price of the contract and incidental expenses, until their delivery
and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to
travellers by hotel keepers, on the movables belonging to the
guest as long as such movables are in the hotel, but not for
money loaned to the guests;
O: Movable belonging to the guests
D: Lodger
C: Hotel keeper
(11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of
the lessee existing on the immovable leased and on the fruits of
the same, but not on money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has
wrongfully sold the thing deposited, upon the price of the sale.
D: Depositary
C: Depositor
Note: Compare this with #5
In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the creditor
may demand them from any possessor, within thirty days from
the unlawful seizure.

D: Mortgagor
C: Mortgagee

(5) Credits for the making, repair, safekeeping or preservation of

personal property, on the movable thus made, repaired, kept or
possessed;

D: Depositor
C: Depositary

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Art. 2242 With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute an encumbrance on
the immovable or real right:
(1) Taxes due upon the land or building;
O: Land/building
D: Owner
C: Govt
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or
other works, upon said buildings, canals or other works;
O: Buildings, canals, other works
D: Generally, those who commissioned the work
C: Laborers
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works,
upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon
the real estate mortgaged;
O: Property
D: Mortgagor
C: Mortgagee
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon the
immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property
affected, and only as to later credits;
O: Property
D: Defendant
C: Creditor of owner of property adjudged to be owner
Note: There is a preference within (based on date)
(8) Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or
other conditions imposed upon the donee, upon the immovable
donated;
(10) Credits of insurers, upon the property insured, for the
insurance premium for two years.
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RA 10142, Sec. 136 Liquidation of a Securities Market
Participant - The foregoing provisions of this chapter shall be
without prejudice to the power of a regulatory agency or self-
regulatory organization to liquidate trade-related claims of
clients or customers of a securities market participant which, for
purposes of investor protection, are hereby deemed to have
absolute priority over other claims of whatever nature or kind
insofar as trade-related assets are concerned.
For purposes of this section, trade -related assets include cash,
securities, trading right and other owned and used by the
securities market participant in the ordinary course of this
business.
Credit: Trade-related claims of clients or customers of a
securities market participant.
There is a preference over trade-related assets (for now)
pursuant to the FRIA.
Trade-related assets:
1. Cash
2. Securities
3. Trading right
4. Other assets owned and used by the securities market
participant in the ordinary course of business
Note: This special preferred credit enjoys absolute priority over
other claims and amends the order of preference of Art. 2241
and 2242.
Art. 2243 The claims or credits enumerated in the two
preceding articles shall be considered as mortgages or pledges
of real or personal property, or liens within the purview of legal
provisions governing insolvency. Taxes mentioned in No. 1,
Article 2241, and No. 1, Article 2242, shall first be satisfied.
In all cases, Art. 2241 and 2242 shall be first satisfied.
Art. 2246 Those credits which enjoy preference with respect to
specific movables, exclude all others to the extent of the value of
the personal property to which the preference refers.
Art. 2247 If there are two or more credits with respect to the
same specific movable property, they shall be satisfied pro rata,
after the payment of duties, taxes and fees due the State or any
subdivision thereof.
Art. 2248 Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the
extent of the value of the immovable or real right to which the
preference refers.
173
Art. 2249 If there are two or more credits with respect to the De Barreto vs. Villanueva (1961-1962) - Gutirrez-David, J.
same specific real property or real rights, they shall be satisfied Petitioners: Magdalena C. de Barreto, et al. (appellants)
pro rata, after the payment of the taxes and assessments upon Respondents: Jos G. Villanueva, et al. (appellees)
the immovable property or real right. Concept: Special Preferred Credits (Insolvency)

Among special preferred credits, only taxes enjoy preference. Doctrine in the original decision:
Art. 2249 in relation to Art. 2242 is applicable to vendors lien
Those enumerated in Art. 2241 (2) to (13) and 2242 (2) to (10) are even if it be unrecorded or unregistered and even when the
liens. They are not preferred over any other inter se. There is debtor is not insolvent.
only CONCURRENCE OF CREDIT.
Doctrine in the resolution of the motion for
Two-tier Order of Preference: reconsideration:
TIER 1: Taxes, duties, and fees due on specific movable or Art. 2249 in relation to Art. 2242 is applicable to the case of
immovable property concurrent of credits only when there has been a proceeding
TIER 2: All other special preferred credits insolvency proceeding, estate settlement, liquidation
Note: The latter are satisfied pari passu and pro rata out of any proceedings, and the likesto ascertain the claims of the
residual value of specific property to which other credits relate. concurrent creditors.

Brief Facts:
Art. 2250 The excess, if any, after the payment of the credits
Villanueva is indebted as a buyer of a parcel of land to Cruzado.
which enjoy preference with respect to specific property, real or
She is also indebted as a borrower to Barreto. Her loan to
personal, shall be added to the free property which the debtor
Barreto was secured by a real estate mortgage over the
may have, for the payment of the other credits.
aforementioned land. She failed to perform her obligations to
Cruzado and Barreto. Cruzado had her vendors lien annotated
" Art. 2241 and 2242 enumerate the special preferred
at the back of the certificate of title issued to Villanueva. Barreto
credits that enjoy preference with respect to specific
foreclosed the mortgage, but it was subjected to the vendors
movable and specific immovable property of the debtor,
lien.
and exclude all other claims to the extent of the value of the
affected property.
ISSUE:
" Moreover, these claims are considered as liens within the
WON Cruzado was entitled to a pro rata share of the proceeds
purview of legal provisions governing insolvency.
of the foreclosure sale.
" Among those enumerated, only taxes enjoy preference;
the claims listed in Art. 2241 (2) to (13) and Art. 2242 (2) to
Ruling in the original case: NO.
(1), all come after taxes in order of precedence.
" Although such claims enjoy their privileged character as
Ruling in the resolution of the motion for
liens, they are not preferred over any other inter se; there is
reconsideration: YES.
only a concurrence of credits.
" Art. 2241 & 2242 and Art. 2246 & 2249 establish a two-tier
RATIO IN THE ORIGINAL CASE: Art. 2249 in relation to
order of preference: the first tier includes only taxes, duties
Art. 2242 is applicable to vendors lien even if it be
and fees due on specific movable or immovable property,
unrecorded or unregistered and even when the debtor
while the second tier includes all other special preferred
is not insolvent.
credits, which are to be satisfied, pari passu and pro rata,
- Appellants: decision in the recovery case filed by Cruzado
out of any residual value of the specific property to which
could not be the basis for vendors lien because it was
such other credits relate.
merely a case to recover the balance of the promissory note.
" However, Sec. 136 of FRIA creates a special preference of
- SC: While the action was to recover the remaining
credit in favor or trade-related claims of clients or customers
obligation of promisor Villanueva on the note, the fact
upon the trade-related assets, such as cash, securities, and
remained that Cruzado was an unpaid vendor of the realty
trading rights, of a securities market participant. This special
in question, and the promissory note was, precisely, for the
preferred credit enjoys absolute priority over other
unpaid balance of the purchase price.
claims and amends the order of preference in Art. 2241 and
2242.

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- Under Art. 2242 of the Civil Code, the unpaid price of a real
property sold, upon the immovable sold, constitute an
encumbrance on the specific immovable property.
Mortgage credits recorded in the Registry of Property is also
an encumbrance under this article. Art. 2249 provides that if
there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied
pro-rata, after the payment of the taxes and assessments
upon the immovable property or real rights. Applying these
provisions, Cruzado, as an unpaid vendor, has the right to
share pro rata with the appellants the proceeds of the
foreclosure sale.
- Appellants: Since the unpaid vendors lien was not
registered, it should not prejudice their registered rights
over the property.
- SC: While Art. 2242 require mortgage credits on
immovables to be registered in order to be given
preference, this is not the case for vendors lien. If the
legislative intent was to impose the same requirement in the
case of the vendors lien, or the unpaid price of the real
property sold, the lawmakers could have easily inserted the
same qualification. Since the law does not make any
distinction, it goes to show that any vendors lien enjoys the
preferred credit status.
- Appellants: To give the unrecorded vendors lien the
same standing as the registered mortgage credit would be
to nullify the principle in the land registration system that
prior unrecorded interests cannot prejudice persons who
subsequently acquire interests over the same property.
- SC: The Land Registration Act itself respects without
reserve or qualification the paramount rights of lien holders
on real property. This is provided for under Section 70 of the
said Act.
- Appellants: The articles mentioned above are applicable
only to the insolvent debtor.
- SC: Nothing in the law shows any such limitation. If we are
to interpret this portion of the Code as intended only for
insolvency cases, then other creditor-debtor relationships
where there are concurrence of credits would be left without
any rules to govern them, and it would render purposeless
the special laws on insolvency.
DISPOSITIVE: Decision a quo affirmed.
RATIO IN THE RESOLUTION OF THE MOTION FOR
RECONSIDERATION: Art. 2249 in relation to Art. 2242
is applicable to the case of concurrent of credits only
when there has been a proceedinginsolvency
proceeding, estate settlement, liquidation
proceedings, and the likesto ascertain the claims of
the concurrent creditors.
- The previous decision failed to take fully into account the
radical changes introduced by the present Civil Code into
the system of priorities among creditors ordained by the
Civil Code of 1889.
-
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o Conflict among creditors under the Old Civil Code is
governed by Art. 1927 where there was a system of
priorities. One class of creditors could exclude creditors
of lower order until all the claims of the former were
fully satisfied out of the proceeds of the sale of the real
property, and could even exhaust such proceeds if
necessary.
o Under the present Civil Code, only taxes enjoy such
absolute preference. The remaining classes of preferred
creditors under Art. 2242 enjoy no priority among
themselves, but must be paid pro rata, as provided for
under Art. 2249.
- Under the present Civil Code, to make the prorating fully
effective, the preferred creditors (nos. 2-14 of Art. 2242)
must necessarily be convened and the import of their claims
ascertained. Such proceeding may be an insolvency
proceeding, estate settlement proceeding, or other
liquidation proceedings of similar import.
- This requirement for a proceeding explains the rule of Art.
2243 which states that the claims or credits enumerated in
the two preceding articles (Art. 2242 is one of these) shall be
considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions
governing insolvency
- One preferred creditors third-party claim to the proceeds
of a foreclosure case (as the appellees vendors lien from
the unpaid purchase price) is not the proceeding
contemplated by law for the enforcement of preferences
under Art. 2242, unless the claimant were enforcing a credit
for taxes that enjoy absolute priority.
- If none of the claims is for taxes, a dispute between two
creditors will not enable the court to ascertain the pro rate
dividend corresponding to each, because their rights cannot
be ascertained.
- In the absence of insolvency proceedings or other
equivalent liquidation proceedings, the conflict between the
parties must be decided pursuant to the well established
principle concerning registered lands: that a purchaser in
good faith and for value (such as the appellants) takes
registered property free from liens and encumbrances other
than statutory liens and those recorded in the certificate of
title.
- Since there was no insolvency or liquidation proceeding, the
claim of the appellee did not acquire the haracter and rank
of a statutory lien co-equal to the mortgagees recorded
encumbrance and must remain subordinate to the latter.
DISPOSITIVE: Original decision reconsidered and reversed.
175
DBP vs. CA (2001) - Kapunan, J.
Petitioner: Development Bank of the Philippines
Respondents: Remington Industrial Sales Corporation
Concept: Special Preferred Credits
Doctrine:
The preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Insolvency Law.
Brief Facts:
Marinduque Mining-Industrial Corporation (Marinduque Mining),
obtained from PNB various loan accommodations. To secure the
loans, Marinduque Mining executed on a Deed of Real Estate
Mortgage and Chattel Mortgage in favor of PNB. The mortgage
covered all of Marinduque Mining's real properties, located at
Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo,
Rizal, including the improvements thereon.
ISSUE:
WON there exists in Remingtons favor a lien on all unpaid
purchases of Marinduque Mining (NO)
RATIO: NO. There is no lien in favor of Remington.
- The Court of Appeals held that there exists in Remington's
favor a "lien" on the unpaid purchases of Marinduque
Mining, and as transferee of these purchases, DBP should
be held liable for the value thereof.
- In the absence of liquidation proceedings, however, the
claim of Remington cannot be enforced against DBP. Article
2241 of the Civil Code provides:
With reference to specific movable property of the debtor,
the following claims or liens shall be preferred:
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the
debtor, up to the value of the same; and if the movable has
been resold by the debtor and the price is still unpaid, the
lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it
has not lost its form, substance and identity, neither is the
right lost by the sale of the thing together with other
property for a lump sum, when the price thereof can be
determined proportionally;
(4) Credits guaranteed with a pledge so long as the things
pledged are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
- In Barretto vs. Villanueva, the Court had occasion to
construe Article 2242, governing claims or liens over specific
immovable property. The facts that gave rise to the case
were summarized by the Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest
and that of her children in the house and lot herein involved
to Pura L. Villanueva for P19,000.00. The purchaser paid
P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay
P5,500 on account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the
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meantime, the buyer Villanueva was able to secure a clean
certificate of title (No. 32626), and mortgaged the property
to appellant Magdalena C. Barretto, married to Jose C.
Baretto, to secure a loan of P30,000.03, said mortgage
having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for
execution on 31 July 1958. On 14 August 1958, Cruzado
filed a motion for recognition for her "vendor's lien" in the
amount of P12,000.00, plus legal interest, invoking Articles
2242, 2243, and 2249 of the new Civil Code. After hearing,
the court below ordered the "lien" annotated on the back
of Certificate of Title No. 32526, with the proviso that in case
of sale under the foreclosure decree the vendor's lien and
the mortgage credit of appellant Barretto should be paid
pro rata from the proceeds. Our original decision affirmed
this order of the Court of First Instance of Manila.
- In its decision upholding the order of the lower court, the
Court ratiocinated thus: Article 2242 of the new Civil Code
enumerates the claims, mortgages and liens that constitute
an encumbrance on specific immovable property, and
among them are: (2)For the unpaid price of real property
sold, upon the immovable sold"; and (5) Mortgage credits
recorded in the Registry of Property."
- Article 2249 of the same Code provides that "if there are
two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro-rata, after
the payment of the taxes and assessments upon the
immovable property or real rights."
- Application of the above-quoted provisions to the case at
bar would mean that the herein appellee Rosario Cruzado
as an unpaid vendor of the property in question has the
right to share pro-rata with the appellants the proceeds of
the foreclosure sale.
- As to the point made that the articles of the Civil Code on
concurrence and preference of credits are applicable only to
the insolvent debtor, suffice it to say that nothing in the law
shows any such limitation. If the Court was to interpret this
portion of the Code as intended only for insolvency cases,
then other creditor-debtor relationships where there are
concurrence of credits would be left without any rules to
govern them, and it would render purposeless the special
laws on insolvency.
- Upon motion by appellants, however, the Court
reconsidered its decision. Justice J.B.L. Reyes, speaking for
the Court, explained the reasons for the reversal: The
previous decision failed to take fully into account the radical
changes introduced by the Civil Code of the Philippines into
the system of priorities among creditors ordained by the
Civil Code of 1889.
176
- Pursuant to the former Code, conflicts among creditors
entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order of
priorities established by Article 1927, whereby one class of
creditors could exclude the creditors of lower order until the
claims of the former were fully satisfied out of the proceeds
of the sale of the real property subject of the preference,
and could even exhaust proceeds if necessary.
- Under the system of the Civil Code of the Philippines,
however, only taxes enjoy a similar absolute preference. All
the remaining thirteen classes of preferred creditors under
Article 2242 enjoy no priority among themselves, but must
be paid pro rata, i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:"If there are
two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after
the payment of the taxes and assessments upon the
immovable property or real rights."
- But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of Article
2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full application of
Articles 2249 and 2242 demands that there must be first
some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency,
the settlement of decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar
import.
- This explains the rule of Article 2243 of the new Civil Code
that: "The claims or credits enumerated in the two
preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency
- And the rule is further clarified in the Report of the Code
Commission, as follows
- "The question as to whether the Civil Code and the
Insolvency Law can be harmonized is settled by this Article
(2243). The preferences named in Articles 2261 and 2262
(now 2241 and 2242) are to be enforced in accordance with
the Insolvency Law." (Italics supplied)
- Thus, it becomes evident that one preferred creditor's third-
party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by
law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that
enjoy absolute priority. If none of the claims is for taxes, a
dispute between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying
preference under Article 2242 can not be ascertained.
- The ruling in Barretto was reiterated in Phil. Savings Bank vs.
Hon. Lantin, Jr., etc., et al. and in two cases both entitled
Development Bank of the Philippines vs. NLRC.
- Although Barretto involved specific immovable property,
the ruling therein should apply equally in this case where
specific movable property is involved. As the extrajudicial
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foreclosure instituted by PNB and DBP is not the liquidation
proceeding contemplated by the Civil Code, Remington
cannot claim its pro rata share from DBP.
DISPOSITIVE: Petition granted
J.L. Bernardo Construction v. CA (2000) Gonzaga-Reyes, J.
Petitioner: J.L. Bernardo Construction, represented by attys-in-
fact Santiago Sugay, Edwin Sugay and Fernando Erana
Respondent: CA and Mayor Jose Salonga
Concept: Concurrence and Preference of Credits: Classification
of Credits Special Preferred Credits
Doctrine:
Art. 2242 granting a preference of credits only finds application
where there is a concurrence of credits (same specific property
of the debtor is subjected to the claims of several creditors and
the value of such property of the debtor is insufficient to pay in
full all the creditors) and the question of preference will arise.
This statutory lien should only be enforced in the context of a
proceeding where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency proceedings
Brief Facts:
J.L. Bernardo et al. won the bid to construct the Public Market of
San Antonio. According to them, the Municipality undertook to
demolish, clear, and fill the site of the public market; however,
upon the latters representation, the bidders were made to
undertake the same, and would later be reimbursed. Despite
demands, they were not reimbursed, so they filed a complaint
against the municipality. The TC granted a writ of preliminary
attachment due to alleged contractual fraud, and granted
possession and the right to operate the market in lieu because
they stand in the position of an unpaid contractor with a
preferred lien. The CA reversed, nullifying the writ and ruling
that Art. 2242 does not apply, and that its enforcement cannot
be expanded to the use of the building.
ISSUE:
WON the CA was correct in reversing the grant of a contractors
lien (YES)
RATIO: The grant of the contractors lien was correctly
reversed. Art. 2242 only finds application when there
is a concurrence of credits and the question of
preference will arise. It should only be enforced in, for
example, insolvency proceedings, as explicitly stated
in Art. 2243.
- Art. 2241 and 2242 enumerate certain credits which enjoy
preference with respect to specific personal or real
property of the debtor
o Contractors lien is granted under 3rd paragraph of
Art. 2242 provides that the claims of contractors
engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with respect
to the specific building or other immovable property
constructed
177
- Art. 2242 only finds application when there is a
concurrence of credits when the same specific
property of the debtor is subjected to the claims of several
creditors and the value of such property of the debtor is
insufficient to pay in full all of the creditors ! the question
of preference will arise, and there will be a need to
determine which of the creditors will be paid ahead of
the others
o This statutory lien should only be enforced in the
context of some kind of proceeding where the claims of
all the preferred creditors may be bindingly
adjudicated, such as insolvency proceedings
o Explicit in Art. 2243 that claims and liens in Arts. 2241
and 2242 shall be considered as mortgages or pledges
of real or personal property, or liens within the purview
of legal provisions governing insolvency
- SC: Action by J.L. Bernardo et al. does not partake of the
nature of an insolvency proceeding; it is basically for specific
performance and damages
o Even if finally adjudicated that they stand in the
position of unpaid contractors and are entitled to
invoke the contractors lien, such lien cannot be
enforced for there is no way of determining WON
there exist other preferred creditors with claims
over the San Antonio Public Market
o Records do not contain allegations that they are the
only creditors with respect to the property
o That no third party claims have been filed will not bar
other creditors from subsequently bringing actions and
claiming they also have preferred liens
o This is consistent with the SCs ruling in Philippine
Savings Bank v. Lantin, where they disallowed a
contractor from enforcing his lien in an action filed for
the collection of unpaid construction costs
- SC: They may only obtain possession and use of the public
market by means of a preliminary attachment upon the
property in the event that they obtain a favorable judgment
in the TC
o Under ROC, a writ of attachment over registered real
property is enforced by the sheriff by filing with the
registry of deeds a copy of the order of attachment,
together with a description of the property attached,
and a notice that it is attached, and by leaving a copy of
such order, description, and notice, with the occupant
of the property, if any
" If judgment is recovered by the attaching party,
and execution issues, the sheriff may satisfy the
judgment by selling so much of the property as
may be necessary to satisfy the judgment ! only in
the event that they purchase the property will
they acquire possession and use of it
o TCs order granting possession and use does not adhere
to the procedure for attachment under ROC and TC
gravely abused its discretion in issuing it
DISPOSITIVE: CA upheld insofar as it nullifies the contractors
lien. REVERSE CAs order nullifying the writ of attachment.
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J.L. Bernardo v. CA
Preference of credits only applies when there is a proceeding to
adjudicate the claims of all the creditors, such as insolvency.
Here, there is only a BREACH of contract. The only remedy that
Bernardo has is a money claim and an action for damages.
2. Ordinary Preferred Credits
Art. 2244 With reference to other property, real and personal,
of the debtor, the following claims or credits shall be preferred
in the order named:
(1) Proper funeral expenses for the debtor, or children under his
or her parental authority who have no property of their own,
when approved by the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they
have no property of their own;
(4) Compensation due the laborers or their dependents under
laws providing for indemnity for damages in cases of labor
accident, or illness resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding the
insolvency;
(6) Support during the insolvency proceedings, and for three
months thereafter;
(7) Fines and civil indemnification arising from a criminal offense;
(8) Legal expenses, and expenses incurred in the administration
of the insolvent's estate for the common interest of the creditors,
when properly authorized and approved by the court;
(9) Taxes and assessments due the national government, other
than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, other than those
referred to in Articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality, other
than those indicated in Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-
delict;
(13) Gifts due to public and private institutions of charity or
beneficence;
178
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have been
the subject of litigation. These credits shall have preference
among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively.
Labor Code, Art. 110 Worker preference in case of
bankruptcy - In the event of bankruptcy or liquidation of an
employers business, his workers shall enjoy first preference as
regards their wages and other monetary claims, any provisions of
law to the contrary notwithstanding. Such unpaid wages and
monetary claims shall be paid in full before claims of the
government and other creditors may be paid.
RA 10142, Sec. 133 Concurrence and Preference of Credits -
The Liquidation Plan and its Implementation shall ensure that
the concurrence and preference of credits as enumerated in the
Civil Code of the Philippines and other relevant laws shall be
observed, unless a preferred creditor voluntarily waives his
preferred right. For purposes of this chapter, credits for services
rendered by employees or laborers to the debtor shall enjoy first
preference under Article 2244 of the Civil Code, unless the
claims constitute legal liens under Article 2241 and 2242 thereof.
Art. 2251 Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
following rules:
(1) In the order established in Article 2244;
" Sec. 133 of FRIA reiterates jurisprudence to the effect that
Art. 110, LC does not create a lien in favor of workers or
employees for unpaid wages upon the property owned by
the employer. Such claims for unpaid wages do not fall
within the category of special preferred credits, except to
the extent that such claims are already covered by Art. 2241
(6) and 2242 (3).
" What Art. 110, LC actually does is it modifies the order of
preference in Art. 2244 by removing the 1 year limitation
found in Art. 2244 (2) and by moving claims for unpaid
wages of laborers or workers from second priority to first
priority in the order of preference established by Art. 2244.
" The taxes and assessments enumerated in Art. 2244 (9) to
(11) do not have the overriding preference that Art. 2241 (1)
and 2242 (2) have.
" Art. 2244 (14) further establishes a preference among
credits that appear in a public instrument or in a final
judgment, if they have been subjects of litigation, in the
order of priority of the dates of the instruments or of the
judgments.
3. Common Credits
Art. 2245 Credits of any other kind or class, or by any other
right or title not comprised in the four preceding articles, shall
enjoy no preference.
Art. 2251 Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
following rules:

(2) Common credits referred to in Article 2245 shall be paid pro

(1) In the order established in Article 2244;
rata regardless of dates.

(2) Common credits referred to in Article 2245 shall be paid pro

" Art. 2244 enumerates the ordinary preferred credits that
rata regardless of dates.
enjoy a preference, excluding the credits that are
later in order, but only as against the value of property
" Art. 2245 enumerates the common credits that enjoy no
not otherwise subjected to any special preferred credit.
preference and must only be paid after payment of the
" In contrast with Art. 2241 and 2242, Art. 2244 creates no
ordinary preferred credits.
lien on specific property but simply creates rights in
" As among these credits, there is only a concurrence of
favor of certain creditors to have the free property of the
credits and these must be paid pro-rata, that is, in
debtor, or property not subjected to any special preferred
proportion to the amount of the respective credits,
credit, applied in accordance with an order of
regardless of dates.
preference.
" Thus, special preferred credits must be discharged first out
of the proceeds of the property to which they relate, before
ordinary preferred credits are paid.
" If the value of the specific property is greater than the total
of the special preferred credits, the residual value will form
part of the free property of the insolvent. In contrast, if the
value of the property is less than the total of the special
preferred credits, the unsatisfied balance of the credits are
to be treated as provided in Art. 2251.

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Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law
Offices (2007) Corona, J.
Petitioner: Jose C. Cordova
Respondents: Reyes Daway Lim Bernardo Lindo Rosales Law
Offices (RLO), and the Securities and Exchange Commission
(SEC)
Concept: Concurrence and Preference of Credits;
Classification; Common Credits
Doctrine:
With respect to ordinary creditor, common credits shall be paid
pro rata regardless of dates.
Brief Facts:
Cordova bought certain shares, particularly CSPI shares, from
PhilFinance. When PhilFinance was placed under receivership by
the SEC, its appointed liquidators withdrew the CSPI shares and
sold them without Cordovas knowledge and consent, and
without the SECs authority. The proceeds were included as
PhilFinances assets in the liquidation proceedings. Cordova now
files a claim for the full amount of the shares, believing himself to
be a preferred creditor. The SEC (as affirmed by the CA) has
held him to be an ordinary creditor/claimant and, hence, should
only receive 15% of the shares value, as it was the rate of
recovery approved by the SEC for PhilFinances creditors.
Hence, the petition.
ISSUES:
1. WON Cordova should be considered as a preferred creditor
(NO; not preferred)
2. WON Cordova was can recover the full value of the shares or
only 15% thereof, like all other ordinary creditors (Only 15%)
RATIO:
1. NO; Cordova is only an ordinary creditor.
- First question: Was Cordova a creditor of PhilFinance? (YES)
- SC: No dispute as to Cordovas ownership of the shares.
o Hence, when RLO sold them without authority, Cordova
became entitled to the proceeds of the sale, making him
a creditor of PhilFinance.
o SC: We agree with the SEC and CA, however, that
Cordova was only an ordinary creditor.
o As soon was the shares were sold, the property became
generic because it was converted to cash.
" Unlike shares of stock, money is a generic thing,
designated merely by its class or genus, and has no
particular designation and is not physically
segregated from all other of the same class.
" Once a certain amount is included to a cash balance,
no one can pinpoint anymore the specific amount that
became part of the whole mass of money.
o The proceeds actually became commingled with the
assets of PhilFinance in the receivership proceedings.
- Second question: What is Cordovas status as a creditor?
(Ordinary)
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- When the proceeds became commingled with the assets of
PhilFinance, Cordovas remaining remedy was to file a claim
against the whole mass of these assets.
o Unfortunately for Cordova, the whole mass was also
subject to claims from other creditors and also
PhilFinances investors.
- Cordovas right of action became a claim which should be
litigated in the liquidation proceedings.
o Finasia Investments and Finance Corp. v. CA: A claim is:
" Right to payment, WON such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
" Right to equitable remedy for breach of performance
if such breach gives rise to a right to payment, WON
such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.
2. As one of the ordinary creditors, Cordova can only
recover 15% of the value of the shares.
- Cordova: preferred creditor because the shares were illegally
withdrawn and sold without his knowledge and consent.
o He cites Art. 2241 (2):
With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
(2) Claims arising from misappropriation, breach of trust,
or malfeasance by public officials committed in the
performance of their duties, on the movables, money or
securities obtained by them;
o As such, he argues that he is entitled to the full value of
the shares.
- SC: The cited provision cannot apply because it
contemplates specific movable property; Cordovas claim
was reduced to the value of the shares (i.e., money), which is
generic. Hence, the provision cannot apply.
o Considering that the other provisions on preferred
creditors do not apply, he is deemed an ordinary creditor
under Art. 2245:
Credits of any other kind or class, or by any other right
or title not comprised in the four preceding articles, shall
enjoy no preference.
o This provision is now in conjunction with Art. 2251 (2):
Common credits referred to in Article 2245 shall be paid
pro rata regardless of dates.
o Hence, like all other ordinary creditors/claimants, he is
only entitled to 15% of the shares, which is the rate
approved by the SEC.
DISPOSITIVE: Petition denied.
180
Cordova v. Reyes Daway Lim Remedies of Cordova:
1. Against Philfinance: up to 15%
2. Against receiver: for breach of trust
3. Against buyer of shares: because sold by receiver NOT as
owner; owner is Cordova
SGS: Note that a receiver is a public officer. But Art. 2241(2) WILL
NOT apply because it is supposed to be the debtor who is an
insolvent public officer. The law office, as the receiver, is NOT
THE DEBTOR.
PROCEDURE
1. Identify the debts
2. Inventory the assets
3. Look at specific movable/immovable properties over which
there may be a lien created by Art. 2241 and 2242, then
apply the preference
- Unpaid specially preferred creditors have no preference
after ! become ordinary creditors in the free property
4. After checking whether there is a preference of credits, all
leftover property is FREE PROPERTY
- Apply order in 2244 and special laws:
a. Labor Code: unpaid wages and other monetary claims
b. Art. 2244: #4 is now #1, #2 residue is now just household
helpers
III. SUSPENSION OF PAYMENTS
A. General Concepts
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the
State to encourage debtors, both juridical and natural persons,
and their creditors to collectively and realistically resolve and
adjust competing claims and property rights. In furtherance
thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view to ensure
or maintain certainly and predictability in commercial affairs,
preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly
situated. When rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations.
RA 10142, Sec. 4
(p) Insolvent shall refer to the financial condition of a debtor that
is generally unable to pay its or his liabilities as they fall due in
the ordinary course of business or has liabilities that are greater
than its or his assets.
(s) Liabilities shall refer to monetary claims against the debtor,
including stockholder's advances that have been recorded in the
debtor's audited financial statements as advances for future
subscriptions.
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RA 10142, Sec. 94 Petition. - An individual debtor who,
possessing sufficient property to cover all his debts but
foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be
declared in the state of suspension of payments by the court of
the province or city in which he has resides for six (6) months
prior to the filing of his petition. He shall attach to his petition, as
a minimum: (a) a schedule of debts and liabilities; (b) an
inventory of assess; and (c) a proposed agreement with his
creditors.
RA 10142, Sec. 95 Action on the Petition. - If the court finds
the petition sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue an Order:
(a) calling a meeting of all the creditors named in the schedule of
debts and liabilities at such time not less than fifteen (15) days
nor more than forty (40) days from the date of such Order and
designating the date, time and place of the meeting;
(b) directing such creditors to prepare and present written
evidence of their claims before the scheduled creditors'
meeting;
(c) directing the publication of the said order in a newspaper of
general circulation published in the province or city in which the
petition is filed once a week for two (2) consecutive weeks, with
the first publication to be made within seven (7) days from the
time of the issuance of the Order;
(d) directing the clerk of court to cause the sending of a copy of
the Order by registered mail, postage prepaid, to all creditors
named in the schedule of debts and liabilities;
(e) forbidding the individual debtor from selling, transferring,
encumbering or disposing in any manner of his property, except
those used in the ordinary operations of commerce or of industry
in which the petitioning individual debtor is engaged so long as
the proceedings relative to the suspension of payments are
pending;
(f) prohibiting the individual debtor from making any payment
outside of the necessary or legitimate expenses of his business
or industry, so long as the proceedings relative to the
suspension of payments are pending; and
(g) appointing a commissioner to preside over the creditors'
meeting.
- Suspension of payment: a judicial insolvency
proceeding by which an individual debtor submits, for
approval by his creditors, a proposed agreement containing
propositions delaying or extending the time of payment of
his debts. It is a statutory device allowing a distressed
debtor to defer payment of his debts by presenting a plan
to repay creditors over time.
181
- It is always voluntary and may be properly availed of and
instituted only by an individual debtor, i.e., a natural person
who is a resident and citizen of the Philippines that has
become insolvent as defined under the FRIA.
- Partnerships and corporations may only properly avail of
rehabilitation.
- To be declared in a state of suspension of payments, an
individual debtor must be insolvent under the
illiquidity or equity concept, i.e., he must be illiquid
- A debtor insolvent under the balance sheet concept, his
only course of action is to file for liquidation
- No value requirement WRT amount of debts of insolvent
debtor
Purpose: To encourage debtors and creditors to collectively
and realistically resolve and adjust competing claims and
property rights ! Give me time so I can pay my debts
What to file: Verified petition to be declared in a state of
suspension of payments
Who may file: Individual debtor (because voluntary)
When to file: Insolvent in illiquid/equity aspect = When the
debtor possesses sufficient property to cover his debts but
foreseeing the impossibility of meeting them when they fall due
Where to file: Province or city where individual debtor resides
for 6 months prior to the filing of the petition
Required attachments:
1. Schedule of debts and liabilities
2. Inventory of assets
3. Proposed agreement with creditors
Note: These are required to establish if the debtor is illiquid
1. Automatic Stay
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by
the individual debtor, the court may issue an order suspending
any pending execution against the individual debtor. Provide,
That properties held as security by secured creditors shall not be
the subject of such suspension order. The suspension order shall
lapse when three (3) months shall have passed without the
proposed agreement being accepted by the creditors or as soon
as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim
from the debtor from the time of the filing of the petition for
suspension of payments and for as long as proceedings remain
pending except:
(a) those creditors having claims for personal labor, maintenance,
expense of last illness and funeral of the wife or children of the
debtor incurred in the sixty (60) days immediately prior to the
filing of the petition; and
(b) secured creditors.
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- From the time of the filing of the petition for suspension of
payments and for so long as the proceedings are pending,
there is an automatic stay against the institution of claims
- During the automatic stay, no creditor, except those
specifically excepted by law, shall sue or institute
proceedings to collect its claim
Period of stay: From time of filing of petition and as long as
proceedings remain pending
- Reason: So votes can be made during the creditors
meeting
Secured creditors are exempted because they have a lien on
the property
- This includes special preferred creditors, mortgagee,
pledgee
- Sureties and guarantors are not included because they are
personal securities and do not create a lien over the
property
2. Suspension Order
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by
the individual debtor, the court may issue an order suspending
any pending execution against the individual debtor. Provide,
That properties held as security by secured creditors shall not be
the subject of such suspension order. The suspension order shall
lapse when three (3) months shall have passed without the
proposed agreement being accepted by the creditors or as soon
as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim
from the debtor from the time of the filing of the petition for
suspension of payments and for as long as proceedings remain
pending except:
(a) those creditors having claims for personal labor, maintenance,
expense of last illness and funeral of the wife or children of the
debtor incurred in the sixty (60) days immediately prior to the
filing of the petition; and
(b) secured creditors.
- It is only upon motion filed by the individual debtor, and
from the time the court issues a suspension order, that any
pending execution against the individual debtor may be
suspended.
o Upon motion, NOT automatic
o Pending execution presupposes a FINAL judgment
- The suspension order shall lapse after three months have
passed without the proposed agreement being accepted by
the creditors, or as soon as the agreement is denied.
182
3. Injunction Against Debtor
RA 10142, Sec. 95 Action on the Petition. - If the court finds
the petition sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue an Order:
xxx
(e) forbidding the individual debtor from selling,
transferring, encumbering or disposing in any manner
of his property, except those used in the ordinary
operations of commerce or of industry in which the
petitioning individual debtor is engaged so long as
the proceedings relative to the suspension of
payments are pending;
(f) prohibiting the individual debtor from making any
payment outside of the necessary or legitimate
expenses of his business or industry, so long as the
proceedings relative to the suspension of payments
are pending; and
(g) appointing a commissioner to preside over the creditors'
meeting.
- If the petition is found to be sufficient in form and
substance, from the time the court issues an order and for
long as the proceedings are pending, the individual debtor
is subjected to an injunction order against:
a) Selling, transferring, encumbering or disposing, in any
manner, of his property, except those used in the
ordinary operations of commerce or of industry in which
the individual debtor is engaged; and
b) Making any payment outside of the necessary or
legitimate expenses of his business or industry.
This injunction is in favor of creditors.
Injunction against debtor:
1. GR: Selling, transferring, encumbering, or disposing, in any
manner, of his property
XPN: Those used in the ordinary operation of commerce or
of industry in which the individual debtor is engaged
2. Making any payment outside of the necessary or legitimate
expenses of his business or industry
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B. Commissioner
RA 10142, Sec. 95 Action on the Petition. - If the court finds
the petition sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue an Order:
xxx
(g) appointing a commissioner to preside over the
creditors' meeting.
RA 10142, Sec. 97 Creditors' Meeting. - The presence of
creditors holding claims amounting to at least three-fifths (3/5) of
the liabilities shall be necessary for holding a meeting. The
commissioner appointed by the court shall preside over the
meeting and the clerk of court shall act as the secretary thereof,
subject to the following rules:
(a) The clerk shall record the creditors present and amount of
their respective claims;
(b) The commissioner shall examine the written
evidence of the claims. If the creditors present hold at
least three-fifths (3/5) of the liabilities of the individual
debtor, the commissioner shall declare the meeting
open for business;
(c) The creditors and individual debtor shall discuss the
propositions in the proposed agreement and put them to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the
same proposition; and
(2) that the claims represented by said majority vote amount to
at least three-fifths (3/5) of the total liabilities of the debtor
mentioned in the petition; and
(e) After the result of the voting has been announced,
all protests made against the majority vote shall be
drawn up, and the commissioner and the individual
debtor together with all creditors taking part in the
voting shall sign the affirmed propositions.
No creditor who incurred his credit within ninety (90) days prior
to the filing of the petition shall be entitled to vote.
Participation of Commissioner:
1. Examine written evidence of claims
2. Commissioner signs affirmed propositions
183
C. Creditors Meeting
RA 10142, Sec. 97 Creditors' Meeting. - The presence of
creditors holding claims amounting to at least three-fifths (3/5) of
the liabilities shall be necessary for holding a meeting. The
commissioner appointed by the court shall preside over the
meeting and the clerk of court shall act as the secretary thereof,
subject to the following rules:
(a) The clerk shall record the creditors present and amount of
their respective claims;
(b) The commissioner shall examine the written evidence of the
claims. If the creditors present hold at least three-fifths (3/5) of
the liabilities of the individual debtor, the commissioner shall
declare the meeting open for business;
(c) The creditors and individual debtor shall discuss the
propositions in the proposed agreement and put them to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the
same proposition; and
(2) that the claims represented by said majority vote amount to
at least three-fifths (3/5) of the total liabilities of the debtor
mentioned in the petition; and
(e) After the result of the voting has been announced, all protests
made against the majority vote shall be drawn up, and the
commissioner and the individual debtor together with all
creditors taking part in the voting shall sign the affirmed
propositions.
No creditor who incurred his credit within ninety (90) days prior
to the filing of the petition shall be entitled to vote.
RA 10142, Sec. 99 Rejection of the Proposed Agreement. -
The proposed agreement shall be deemed rejected if the
number of creditors required for holding a meeting do not
attend thereat, or if the two (2) majorities mentioned in Section
97 hereof are not in favor thereof. In such instances, the
proceeding shall be terminated without recourse and the parties
concerned shall be at liberty to enforce the rights which may
correspond to them.
RA 10142, Sec. 100 Objections. - If the proposal of the
individual debtor, or any amendment thereof made during the
creditors' meeting, is approved by the majority of creditors in
accordance with Section 97 hereof, any creditor who attended
the meeting and who dissented from and protested against the
vote of the majority may file an objection with the court within
ten (10) days from the date of the last creditors' meeting. The
causes for which objection may be made to the decision made
by the majority during the meeting shall be: (a) defects in the call
for the meeting, in the holding thereof and in the deliberations
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had thereat which prejudice the rights of the creditors; (b)
fraudulent connivance between one or more creditors and the
individual debtor to vote in favor of the proposed agreement; or
(c) fraudulent conveyance of claims for the purpose of obtaining
a majority. The court shall hear and pass upon such objection as
soon as possible and in a summary manner.
In case the decision of the majority of creditors to approve the
individual debtor's proposal or any amendment thereof made
during the creditors' meeting is annulled by the court, the court
shall declare the proceedings terminated and the creditors shall
be at liberty to exercise the rights which may correspond to
them.
- A suspension of payments is only effective if the required
majority vote of creditors is obtained approving the
proposed agreement or any amendments to the
agreement.
- A quorum of creditors holding claims amounting to 3/5 of
the liabilities shall be necessary
- Determination of majority vote (DOUBLE MAJORITY):
Concurrence of the following:
a) As to the number of creditors-2/3 of the creditors
voting approve the proposed agreement; and
b) As to value of the claims-the claims represented by the
majority vote amount to at least 3/5 of the total
liabilities of the debtor.
Note: If there is one creditor who holds the bulk, GET
HIS VOTE
When Proposed Agreement is Deemed Rejected:
1. No quorum
2. Double-majority in Sec. 97 not in favor of the proposed
agreement
Effect of Rejection of Proposed Agreement:
Proceedings are terminated, and parties shall be at liberty to
enforce the rights which may correspond to them
ONLY 3 GROUNDS FOR OBJECTING (Sec. 100):
1. Defects in the call for the meeting , in the holding
thereof and in the deliberations had thereat, which
prejudices the rights of creditors (invalidates the agreement)
2. Fraudulent connivance between one or more creditors
and the individual debtor to vote in favor of the proposed
agreement (invalidates the agreement); or
3. Fraudulent conveyance of claims for the purpose of
obtaining a majority
184
D. Proposed Agreement
RA 10142, Sec. 94 Petition. - An individual debtor who,
possessing sufficient property to cover all his debts but
foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be
declared in the state of suspension of payments by the court of
the province or city in which he has resides for six (6) months
prior to the filing of his petition. He shall attach to his petition, as
a minimum: (a) a schedule of debts and liabilities; (b) an
inventory of assess; and (c) a proposed agreement with his
creditors.
RA 10142, Sec. 101 Effects of Approval of Proposed
Agreement. - If the decision of the majority of the creditors to
approve the proposed agreement or any amendment thereof
made during the creditors' meeting is uphold by the court, or
when no opposition or objection to said decision has been
presented, the court shall order that the agreement be carried
out and all parties bound thereby to comply with its terms.
The court may also issue all orders which may be necessary or
proper to enforce the agreement on motion of any affected
party. The Order confirming the approval of the proposed
agreement or any amendment thereof made during the
creditors' meeting shall be binding upon all creditors whose
claims are included in the schedule of debts and liabilities
submitted by the individual debtor and who were properly
summoned, but not upon: (a) those creditors having claims for
personal labor, maintenance, expenses of last illness and funeral
of the wife or children of the debtor incurred in the sixty (60)
days immediately prior to the filing of the petition; and (b)
secured creditors who failed to attend the meeting or refrained
from voting therein.
RA 10142, Sec. 102 Failure of Individual Debtor to Perform
Agreement. - If the individual debtor fails, wholly or in part, to
perform the agreement decided upon at the meeting of the
creditors, all the rights which the creditors had against the
individual debtor before the agreement shall revest in them. In
such case the individual debtor may be made subject to the
insolvency proceedings in the manner established by this Act.
Court Order:
1. Orders that agreement be carried out and all parties are
bound to comply with the proposed agreement
2. Court may issue all orders which may be necessary or
proper to enforce the agreement on motion of any affected
party
GR: Approved proposed agreement or any amendment thereof
shall be binding upon all creditors whose claims are included in
the schedule of debts and liabilities submitted by the debtor and
who were properly summoned
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XPNSs:
1. Creditors having claims for:
a. Personal labor
b. Maintenance
c. Expense of last illness
d. Funeral of the wife or children of the debtor incurred in
the 60 days immediately prior to the filing of the
petition
2. Secured creditors who failed to attend the meeting or
refrained from voting therein
Effect of failure of insolvent debtor to perform
agreement: All rights which the creditors had against the
individual debtor before the proposed agreement shall be
revested in the creditors
E. Treatment of Claims
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by
the individual debtor, the court may issue an order suspending
any pending execution against the individual debtor. Provide,
That properties held as security by secured creditors shall not be
the subject of such suspension order. The suspension order shall
lapse when three (3) months shall have passed without the
proposed agreement being accepted by the creditors or as soon
as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim
from the debtor from the time of the filing of the petition for
suspension of payments and for as long as proceedings remain
pending except:
(a) those creditors having claims for personal labor, maintenance,
expense of last illness and funeral of the wife or children of the
debtor incurred in the sixty (60) days immediately prior to the
filing of the petition; and
(b) secured creditors.
RA 10142, Sec. 98 Persons Who May Refrain From Voting. -
Creditors who are unaffected by the Suspension Order may
refrain from attending the meeting and from voting therein.
Such persons shall not be bound by any agreement determined
upon at such meeting, but if they should join in the voting they
shall be bound in the same manner as are the other creditors.
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RA 10142, Sec. 101 Effects of Approval of Proposed
Agreement. - If the decision of the majority of the creditors to
approve the proposed agreement or any amendment thereof
made during the creditors' meeting is uphold by the court, or
when no opposition or objection to said decision has been
presented, the court shall order that the agreement be carried
out and all parties bound thereby to comply with its terms.
The court may also issue all orders which may be necessary or
proper to enforce the agreement on motion of any affected
party. The Order confirming the approval of the proposed
agreement or any amendment thereof made during the
creditors' meeting shall be binding upon all creditors whose
claims are included in the schedule of debts and liabilities
submitted by the individual debtor and who were properly
summoned, but not upon: (a) those creditors having claims for
personal labor, maintenance, expenses of last illness and funeral
of the wife or children of the debtor incurred in the sixty (60)
days immediately prior to the filing of the petition; and (b)
secured creditors who failed to attend the meeting or refrained
from voting therein.
1. Secured Creditor Claims
RA 10142, Sec. 4
(kk) Secured creditor shall refer to a creditor with a secured
claim.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(t) Lien shall refer to a statutory or contractual claim or judicial
charge on real or personal property that legality entities a
creditor to resort to said property for payment of the claim or
debt secured by such lien.
- In a suspension of payments proceeding, the treatment of
secured creditor claims is as follows:
a) The claims of secured creditors are not covered by the
automatic stay
b) The property held as security is not covered by any
suspension order that may be issued against pending
executions against the debtor
c) Secured creditors need not attend or vote during the
creditors meeting and are not bound by the proposed
agreement approved during the meeting, unless they
waive this right by voting during the meeting.
d) Secured creditors are not bound by the proposed
agreement confirmed by the court, unless they waive
this right by voting during the meeting.
2. Exempt Claims
Those creditors having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children of the
debtor incurred in the sixty (60) days immediately prior to the
filing of the petition. (RA 10142, Sec. 101, par. 2, (a))
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Notes:
- In a suspension of payments proceeding, the treatment of
such exempt claims is as follows:
a) The exempt claims are not covered by the automatic
stay of all suits and proceedings for the collection of
claims against the debtor.
b) Exempt creditors need not attend or vote during the
creditors meeting and are not bound by the proposed
agreement approved during the meeting, unless they
waive this right by voting during the meeting.
c) Exempt creditors are not bound by the proposed
agreement confirmed by the court, unless they waive
this right by voting during the meeting.
3. Excluded Claims
Creditors whose claims are [not] included in the schedule of
debts and liabilities submitted by the individual debtor and
[creditors] who were [not] properly summoned. (RA 10142, Sec.
101, par. 2, 2nd sentence)
- In a suspension of payments proceedings, creditors whose
claims are excluded are not bound by the proposed
agreement confirmed by the court.
These excluded claims are the debtors fault, and they cannot be
included nor can they be bound by the agreement.
Excluded claims: not bound by the proposed agreement
confirmed by the court
- Subject to automatic stay
- Subject to suspension order
IV. REHABILITATION
A. General Concepts
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the
State to encourage debtors, both juridical and natural persons,
and their creditors to collectively and realistically resolve and
adjust competing claims and property rights. In furtherance
thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view to ensure
or maintain certainly and predictability in commercial affairs,
preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly
situated. When rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations.
Rehabilitation in the context of insolvency, is the process of
reorganizing a debtors financial affairs so that the debtor may
continue to exist as a financial entity, with creditors satisfying
their claims from the debtors future earnings.
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 Rehabilitation is the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that:
1. Its continuance of operation is economically feasible; and
2. Its creditors can recover by way of present value of
payments projected in the plan more if the debtor continues
as a growing concern than if it is immediately liquidated
- Value of recovery plan as a growing concern v. value of
recovery plan if company is liquidated
- Invariably triggered by a crisis that unaduly strains the
financial affairs of a previously solvent debtor
- Purpose is to enable an insolvent debtor to have a new
lease on life, while allowing creditors to be paid from the
debtors earnings.
- Rehabilitation benefits debtors employees, creditors, and a
larger sense, the general public
- During rehabilitation, the assets of the debtor are held in
trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over the other;
as between creditors, the key phrase is equality is equity
o Purpose: for the equal benefit of all creditors to
preclude one from obtaining an advantage or
preference over another by the expediency of an
attachment, execution or otherwise
o All creditors should stand on equal footing; not one of
them should be given preference (by paying one or
some of them against the others
Rehabilitation proceedings have both equitable and
rehabilitative purposes.
Equitable Provides for the efficient and
equitable distribution of an
insolvent debtors remaining
assets to its creditors
Rehabilitative Provides the insolvent debtor
with a fresh start
How: by relieving it of the
weight of its outstanding
debts and permitting it to
reorganize its affairs
Sec. 4
(gg) Rehabilitation shall refer to the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that
its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
- Definition of rehabilitation provided by jurisprudence has
thus been expanded by FRIA to include two conditions (1)
economic feasibility and (2) present value recovery
- If these two conditions are not present, the proper recourse
is not rehabilitation but liquidation
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3 Modes of Rehabilitation under FRIA
1. Court-supervised rehabilitation: judicial, may either be
voluntary or involuntary
2. Pre-negotiated rehabilitation
3. Out-of-court rehabilitation
B. Court-Supervised Rehabilitation
1. Voluntary Proceedings
RA 10142, Sec. 4
(rr) Voluntary proceedings shall refer to proceedings initiated by
the debtor.
RA 10142, Sec. 12 Petition to Initiate Voluntary Proceedings
by Debtor. - When approved by the owner in case of a sole
proprietorship, or by a majority of the partners in case of a
partnership, or in case of a corporation, by a majority vote of the
board of directors or trustees and authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of nonstock corporation, by
the vote of at least two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose,
an insolvent debtor may initiate voluntary proceedings under
this Act by filing a petition for rehabilitation with the court and
on the grounds hereinafter specifically provided. The petition
shall be verified to establish the insolvency of the debtor and the
viability of its rehabilitation, and include, whether as an
attachment or as part of the body of the petition, as a minimum
the following:
(a) Identification of the debtor, its principal activities and its
addresses;
(b) Statement of the fact of and the cause of the debtor's
insolvency or inability to pay its obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act
depending on the form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of
creditors with their addresses, amounts of claims and collaterals,
or securities, if any;
(g) An inventory of all its assets including receivables and claims
against third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of
rehabilitation receiver; and
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(j) Other documents required to be filed with the petition PROCEDURE:
pursuant to this Act and the rules of procedure as may be 1. Filing of a verified complaint by the debtor
promulgated by the Supreme Court. Sole When approved by the owner
proprietorship
A group of debtors may jointly file a petition for rehabilitation Partnership When approved by majority of the
under this Act when one or more of its members foresee the partners
impossibility of meeting debts when they respectively fall due, Corporation - When approved by a majority
and the financial distress would likely adversely affect the vote of the board of directors or
financial condition and/or operations of the other members of trustees; and
the group and/or the participation of the other members of the - Authorized by the vote of:
group is essential under the terms and conditions of the a. Stockholders representing at
proposed Rehabilitation Plan. least 2/3 of outstanding
capital stock in a
- Judicial insolvency proceedings inititated by debtor that stockholders meeting duly
may be a called for the purpose; or
a. Sole proprietorship b. At least 2/3 of the members
b. Partnership (nonstick corporation) in a
c. Corporation members meeting duly
- In every case, the debtor is insolvent either under the called for the purpose
illiquidity concept: the debtor is illiquid, possessing - Petition is verified: to establish the insolvency of the
sufficient property to cover all its liabilities but foreseeing debtor and the viability of its rehabilitation
the impossibility of meeting them when they respectively fall - On the grounds specifically provided in the FRIA
due 2. Attach the following as part of the body of the petition:
- Or the balance sheet concept: the assets of the debtor a. Indentification of the debtor, debtors principal
are insufficient to cover its liabilities activities, debtors addresses
b. Statement of the fact of and cause of the debtors
Sec. 4 insolvency or inability to pay its obligations as they
(p) Insolvent shall refer to the financial condition of a debtor that become due
is generally unable to pay its or his liabilities as they fall due in c. Specific relief sought
the ordinary course of business or has liabilities that are greater d. Ground for the petition
than its or his assets. e. Other information that may be required under the Act
depending on the form of relief requested
(s) Liabilities shall refer to monetary claims against the debtor, f. Schedule of the debtors debts and liabilities and list of
including stockholder's advances that have been recorded in the creditors with their addresses, amounts of claims,
debtor's audited financial statements as advances for future collaterals, or securities (if any)
subscriptions. g. Inventory of all its assets
h. Rehabilitation Plan
- Since the purpose of the rehabilitation is to restore and i. Names of at least 3 nominees to the position of
reinstate a debtor to its former position, an individual rehabilitation receiver
debtor that is not a sole proprietorship may not institute j. Other documents required to be filed
voluntary arbitration proceedings. Available recourses are:
to petition for suspension of payments or liquidation Group of Debtors May File:
- FRIA does not impose a value requirement with respect to 1. When one or more of its members foresee the impossibility
the amount of debts of the insolvent debtor of meeting debts when they respectively fall due
2. When the financial distress would likely adversely affect the
financial condition and/or operations of the other members
of the group and/or participation of the other members of
the group is essential under the terms and conditions of the
proposed Rehabilitation Plan

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2. Involuntary Proceedings
RA 10142, Sec. 4
(r) Involuntary proceedings shall refer to proceedings initiated by
creditors.
RA 10142, Sec. 13 Circumstances Necessary to Initiate
Involuntary Proceedings. - Any creditor or group of creditors with
a claim of, or the aggregate of whose claims is, at least One
Million Pesos (Php1,000,000.00) or at least twenty-five percent
(25%) of the subscribed capital stock or partners' contributions,
whichever is higher, may initiate involuntary proceedings against
the debtor by filing a petition for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the claim/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least sixty (60) days or that
the debtor has failed generally to meet its liabilities as they fall
due; or
(b) a creditor, other than the petitioner/s, has initiated
foreclosure proceedings against the debtor that will prevent the
debtor from paying its debts as they become due or will render
it insolvent.
RA 10142, Sec. 14 Petition to Initiate Involuntary Proceedings.
- The creditor/s' petition for rehabilitation shall be verified to
establish the substantial likelihood that the debtor may be
rehabilitated, and include:
(a) identification of the debtor its principal activities and its
address;
(b) the circumstances sufficient to support a petition to initiate
involuntary rehabilitation proceedings under Section 13 of this
Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
(e) the names of at least three (3) nominees to the position of
rehabilitation receiver;
(f) other information that may be required under this Act
depending on the form of relief requested; and
(g) other documents required to be filed with the petition
pursuant to this Act and the rules of procedure as may be
promulgated by the Supreme Court.
- Judicial insolvency proceedings instituted by creditor or a
group of creditors against an insolvent debtor, provided
that the requirements of law on the number of creditors or
value of claims, or both, is met, and provided the
circumstance requiring rehabilitation is alleged and
thereafter, established
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- For involuntary rehabilitation, FRIA imposes a value
requirement of:
o At least p1 million; or
o At least 25% of the subscribed capital stock or partners
contributions, whichever is higher, without regard to
the number of creditors who file
Sec. 4
(c) Claim shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs
duties; and (2) claims against directors and officers of the debtor
arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal
capacities.
- Although the status of being insolvent is calculated based
on liabilities (monetary claims), the FRIA bases the value
requirement for involuntary rehabilitation proceedings on
the creditors claims
Basis of Calculation
Status of being insolvent Value requirement for
rehabilitation
proceedings
Calculated based on Calculated based on
liabilities (monetary claims) creditors claims
Circumstances requiring rehabilitation:
a. No genuine issue of fact or law on the claims of the
creditors and that the due and demandable payments have
not been made for at least 60 days
b. The debtor has failed generally to meet its liabilities as they
fall due
c. A creditor, other than the petitioners, has inititated
foreclosure proceedings against the debtor that will prevent
the debtor from paying its debts as they become due or will
render it insolvent
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PROCEDURE:
1. Creditor/s verified petition for rehabilitation
- Verified in order to establish the substantial likelihood
that the debtor may be rehabilitated
2. The following are included in the petition:
a. Identification of the debtor, debtors principal activities,
and debtors address
b. Circumstances sufficient to support a petition to initiate
involuntary rehabilitation proceedings under Sec. 13 of
the FRIA
c. Specific relief sought
d. Rehabilitation Plan
e. Names of at least 3 nominees to the position of
rehabilitation receiver
f. Other information that may be required under this Act
depending on the form of relief requested
g. Other documents required to be filed with the petition
3. Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings
a. Commencement Order
RA 10142, Sec. 4
(e) Commencement Order shall refer to the order issued by the
court under Section 16 of this Act.
(d) Commencement date shall refer to the date on which the
court issues the Commencement Order, which shall be
retroactive to the date of filing of the petition for voluntary or
involuntary proceedings.
RA 10142, Sec. 15 Action on the Petition. - If the court finds
the petition for rehabilitation to be sufficient in form and
substance, it shall, within five (5) working days from the filing of
the petition, issue a Commencement Order. If, within the same
period, the court finds the petition deficient in form or
substance, the court may, in its discretion, give the petitioner/s a
reasonable period of time within which to amend or supplement
the petition, or to submit such documents as may be necessary
or proper to put the petition in proper order. In such case, the
five (5) working days provided above for the issuance of the
Commencement Order shall be reckoned from the date of the
filing of the amended or supplemental petition or the
submission of such documents.
PROCEDURE OF ACTION ON PETITION:
1. File a petition for rehabilitation
2. If court finds petition:
a. Sufficient in form and substance: issue a
Commencement Order within 5 working days from
filing date
b. Deficient in form or substance (discretionary): Give the
petitioner a reasonable period of time within which:
i. To amend or supplement the petition; or
ii. To submit such documents as may be necessary or
proper to put the petition in proper order
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Note: 5 working days for the issuance of the
Commencement Order shall be reckoned from the
filing date of (i) or (ii)
RA 10142, Sec. 16 Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
(a) identify the debtor, its principal business or activity/ies and its
principal place of business;
(b) summarize the ground/s for initiating the proceedings;
(c) state the relief sought under this Act and any requirement or
procedure particular to the relief sought;
(d) state the legal effects of the Commencement Order,
including those mentioned in Section 17 hereof;
(e) declare that the debtor is under rehabilitation;
(f) direct the publication of the Commencement Order in a
newspaper of general circulation in the Philippines once a week
for at least two (2) consecutive weeks, with the first publication to
be made within seven (7) days from the time of its issuance;
(g) If the petitioner is the debtor direct the service by personal
delivery of a copy of the petition on each creditor holding at
least ten percent (10%) of the total liabilities of the debtor as
determined from the schedule attached to the petition within
five (5) days; if the petitioner/s is/are creditor/s, direct the service
by personal delivery of a copy of the petition on the debtor
within five (5) days;
(h) appoint a rehabilitation receiver who may or not be from
among the nominees of the petitioner/s and who shall exercise
such powers and duties defined in this Act as well as the
procedural rules that the Supreme Court will promulgate;
(i) summarize the requirements and deadlines for creditors to
establish their claims against the debtor and direct all creditors
to their claims with the court at least five (5) days before the
initial hearing;
(j) direct Bureau of internal Revenue (BIR) to file and serve on the
debtor its comment on or opposition to the petition or its
claim/s against the debtor under such procedures as the
Supreme Court provide;
(k) prohibit the debtor's suppliers of goods or services from
withholding the supply of goods and services in the ordinary
course of business for as long as the debtor makes payments for
the services or goods supplied after the issuance of the
Commencement Order;
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(l) authorize the payment of administrative expenses as they
become due;
(m) set the case for initial hearing, which shall not be more than
forty (40) days from the date of filing of the petition for the
purpose of determining whether there is substantial likelihood
for the debtor to be rehabilitated;
(n) make available copies of the petition and rehabilitation plan
for examination and copying by any interested party;
(o) indicate the location or locations at which documents
regarding the debtor and the proceedings under Act may be
reviewed and copied;
(p) state that any creditor or debtor who is not the petitioner,
may submit the name or nominate any other qualified person to
the position of rehabilitation receiver at least five (5) days before
the initial hearing;
(q) include s Stay or Suspension Order which shall:
(1) suspend all actions or proceedings, in court or otherwise,
for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment
or other provisional remedies against the debtor;
(3) prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its properties
except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except
as may be provided herein.
RA 10142, Sec. 17 Effects of the Commencement Order. -
Unless otherwise provided for in this Act, the court's issuance of
a Commencement Order shall, in addition to the effects of a
Stay or Suspension Order described in Section 16 hereof:
(a) vest the rehabilitation with all the powers and functions
provided for this Act, such as the right to review and obtain
records to which the debtor's management and directors have
access, including bank accounts or whatever nature of the
debtor subject to the approval by the court of the performance
bond filed by the rehabilitation receiver;
(b) prohibit or otherwise serve as the legal basis rendering null
and void the results of any extrajudicial activity or process to
seize property, sell encumbered property, or otherwise attempt
to collection or enforce a claim against the debtor after
commencement date unless otherwise allowed in this Act,
subject to the provisions of Section 50 hereof;
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(c) serve as the legal basis for rendering null and void any setoff
after the commencement date of any debt owed to the debtor
by any of the debtor's creditors;
(d) serve as the legal basis for rendering null and void the
perfection of any lien against the debtor's property after the
commencement date; and
(e) consolidate the resolution of all legal proceedings by and
against the debtor to the court Provided. However, That the
court may allow the continuation of cases on other courts where
the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor
outside these proceedings shall be sufficient to support a
finding of indirect contempt of court.
RA 10142, Sec. 19 Waiver of taxes and Fees Due to the
National Government and to Local Government Units (LGUs). -
Upon issuance of the Commencement Order by the court, and
until the approval of the Rehabilitation Plan or dismissal of the
petition, whichever is earlier, the imposition of all taxes and fees
including penalties, interests and charges thereof due to the
national government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
RA 10142, Sec. 21 Effectivity and Duration of Commencement
Order. - Unless lifted by the court, the Commencement Order
shall be for the effective for the duration of the rehabilitation
proceedings for as long as there is a substantial likelihood that
the debtor will be successfully rehabilitated. In determining
whether there is substantial likelihood for the debtor to be
successfully rehabilitated, the court shall ensure that the
following minimum requirements are met:
(a) The proposed Rehabilitation Plan submitted complies with
the minimum contents prescribed by this Act;
(b) There is sufficient monitoring by the rehabilitation receiver of
the debtor's business for the protection of creditors;
(c) The debtor has met with its creditors to the extent reasonably
possible in attempts to reach consensus on the proposed
Rehabilitation Plan;
(d) The rehabilitation receiver submits a report, based on
preliminary evaluation, stating that the underlying assumptions
and the goals stated in the petitioner's Rehabilitation Plan are
realistic reasonable and reasonable or if not, there is, in any case,
a substantial likelihood for the debtor to be successfully
rehabilitated because, among others:
(1) there are sufficient assets with/which to rehabilitate the
debtor;
(2) there is sufficient cash flow to maintain the operations of the
debtor;
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(3) the debtor's, partners, stockholders, directors and officers
have been acting in good faith and which due diligence;
(4) the petition is not s sham filing intended only to delay the
enforcement of the rights of the creditor's or of any group of
creditors; and
(5) the debtor would likely be able to pursue a viable
Rehabilitation Plan;
(e) The petition, the Rehabilitation Plan and the attachments
thereto do not contain any materially false or misleading
statement;
(f) If the petitioner is the debtor, that the debtor has met with its
creditor/s representing at least three-fourths (3/4) of its total
obligations to the extent reasonably possible and made a good
faith effort to reach a consensus on the proposed Rehabilitation
Plan if the petitioner/s is/are a creditor or group of creditors,
that/ the petitioner/s has/have met with the debtor and made a
good faith effort to reach a consensus on the proposed
Rehabilitation Plan; and
(g) The debtor has not committed acts misrepresentation or in
fraud of its creditor/s or a group of creditors.
- The Commencement Order operates as a preservative
measure to ensure that there is, and there will continue to
be, a substantial likelihood for successful rehabilitation.
- Upon the issuance of the Commencement Order, the
powers and functions of the Rehabilitation Receiver are
vested, with specific emphasis on its right to review and
obtain all records of the debtor
- After the commencement date, all extrajudicial attempts to
collect or enforce a claim, all setoff of claims, and the
perfection of all liens are voided.
- All legal proceedings against the debtor, except those
excepted by the FRIA or by order of the rehabilitation court,
are consolidated in the rehabilitation court, and any attempt
to circumvent the mandate constitutes indirect contempt of
court.
b. Stay or Suspension Order
RA 10142, Sec. 16 Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
xxx
(q) include s Stay or Suspension Order which shall:
(1) suspend all actions or proceedings, in court or otherwise,
for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment
or other provisional remedies against the debtor;
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(3) prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its properties
except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except
as may be provided herein.
RA 10142, Sec. 4
(c) Claim shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs
duties; and (2) claims against directors and officers of the debtor
arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal
capacities.
RA 10142, Sec. 20 Application of Stay or Suspension Order to
Government Financial Institutions. - The provisions of this Act
concerning the effects of the Commencement Order and the
Stay or Suspension Order on the suspension of rights to
foreclose or otherwise pursue legal remedies shall apply to
government financial institutions, notwithstanding provisions in
their charters or other laws to the contrary.
1) General Concepts
Stay/Suspension Order covers:
1. All actions and proceedings in court for enforcement of
claims against the debtor or property
2. Provisional remedies
3. Injunction against the debtor from transferring,
encumbering, selling
XPN: Ordinary course of business/day-to-day operations
debtor has been engaged in
Stay or Suspension Order (2 Distinct Orders)
1. A stay order as against creditors:
a. Suspending all actions or proceedings, in court or
otherwise, for the enforcement of claims against the
debtor; and
b. Suspending all actions to enforce any judgment,
attachment or other provisional remedies against the
debtor
2. An injunction against the debtor:
a. Prohibiting the sale, encumbrance, transfer of
disposal in any manner of any of its properties except
in the ordinary course of business; and
b. Prohibiting any payment of its liabilities outstanding
as of the commencement date except as provided in
the FRIA
192
Reason for the stay:
- To enable the receiver to effectively exercise its powers free
from any judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
o To allow such other actions to continue would only add
to the burden of the receiver time, effort and
resources would be wasted in defending claims against
the debtor instead of being directed toward its
rehabilitation
- Suspension is intended to give enough breathing space
for the receiver to make the business of the debtor viable
again, without having to divert attention and resources
When a debtor is under a receiver:
- All actions or proceedings for the enforcement of claims
against it must yield to the greater imperative of
rehabilitation
o If the action or proceeding were to proceed (and
creditors claim granted), the creditor would be in a
position to assert a preference over other creditors !
debtor would then be compelled to dispose of its
property to satisfy said claim
o This would amount to a defiance of the injunction
on selling, encumbering, transferring, or disposing (in
any manner) of the debtors properties

Order STAY ORDER INJUNCTION Purpose of injunction: to ensure that the debtor will not
Against Creditor Debtor commit any act that defrauds its creditors or results in an undue
whom preference of creditors
Effect 1. Suspends all actions 1. Prohibits the sale,
or proceedings, in encumbrance, Rizal Commercial Banking Corporation v. Intermediate Appellate
court or otherwise, transfer or Court (1999) Melo, J.
for the enforcement disposal in ayn Petitioner: Rizal Commercial Banking Corporation (RCBC)
of claims against the manner of any of Respondent: BF Homes
debtor; and its properties Concept: Court-Supervised Rehabilitation; Stay or Suspension
2. Suspends all actions except in the Order
to enforce any ordinary course of
judgment, business; and Doctrine:
attachment or other 2. Prohibits any Preferred creditors of distressed corporations stand on equal
provisional remedies payment of its footing with all other creditors only upon the appointment of a
against the debtor liabilities management committee, rehabilitation receiver, board, or body.
outstanding as of It is only upon such appointment that suspension of payments
the happens. A mortgage creditor may foreclose a mortgage even
commencement after the filing of a petition for rehabilitation, but before the
date except as appointment of a management committee or receiver.
provided in the
FRIA Brief Facts:
Purpose To enable the receive to To ensure that the BF Homes had a subsisting loan obtained from RCBC, which was
effectively exercise its debtor will not commit secured by a real estate mortgage. BF Homes filed a petition for
powers free from any any act that defrauds rehabilitation with SEC. Prior to the appointment of a
judicial or extrajudicial its creditors or results management committee or receiver, RCBC extrajudicially
interference that might in an undue foreclosed the mortgage. BF Homes contends that the same
unduly hinder or prevent preference of creditors cannot be done, as upon its filing of petition for rehabilitation,
the rescue of the debtor RCBC stood on an equal footing with other creditors, both
secured and unsecured, and may only assert its claim in the
To give enough rehabilitation proceedings.
breathing space for the
receiver to make the ISSUES:
business of the debtor 1. WON preferred creditors of distressed corporations stand
viable again, without on equal footing with all other creditors upon filing of
having to divert attention petition for rehabilitation (NO)
and resources to 2. WON secured creditors are entitled to assert their claim
litigations in various fora prior to the appointment of a management committee or
(From A2015 Reviewer) receiver (YES)
3. WON extrajudicial foreclosure is valid (YES)

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RATIO:
1. No. Preferred creditors of distressed corporations
stand on equal footing with all other creditors only
upon the appointment of a management
committee, rehabilitation receiver, board, or body
- The provisions of PD 902-A are not yet applicable and it
may still be allowed to assert its preferred status
because it foreclosed on the mortgage prior to the
appointment of the management committee
- Sec. 6(c), PD 902-A provides:
o xxx That upon appointment of a management
committee, a rehabilitation receiver, board or
body, all actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal or
body shall be suspended accordingly
- Clearly, suspension of claims happens only upon
appointment of a management committee, a
rehabilitation receiver, board or body
- A petition for rehabilitation does not always result in
the appointment of a receiver or the creation of a
management committee
o SEC has to initially determine whether such
appointment is appropriate and necessary under
the circumstances
o Sec. 6(d) provides certain situations that must be
shown to exist before a management committee
may be created:
(1) When there is imminent danger of dissipation,
loss, wastage or destruction of assets or other
properties
(2) When there is paralization of business
operations which may be prejudicial to the
interest of minority stockholders, parties-
litigants or to the general public
o Before receivers may be appointed:
(1) Necessary in order to preserve the rights of
the parties-litigants
(2) Protect the interest of the investing public and
creditors
- When such circumstances are not obtaining or when
SEC finds no such imminent danger of losing corporate
assets, a management committee or rehabilitation
receiver need not be appointed and suspension of
actions for claims may not be ordered by the SEC
- When the SEC does not deem it necessary, it may be
assumed that there are sufficient assets to sustain the
rehabilitation plan and that the creditors and investors
are amply protected
2. Yes. It is only upon the appointment of a
management committee, rehabilitation receiver,
board or body, that preference over secured
creditors is suspended, although not lost.
- The following Rules shall be observed:
(1) All claims against corporations, partnerships or
associations that are pending before any court,
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tribunal, or board, without distinction as to whether
or not a creditor is secured or unsecured, shall be
suspended effective upon the appointment of a
management committee, rehabilitation receiver,
board or body in accordance with PD 902-A
(2) Secured creditors retain their preference over
unsecured creditors, but enforcement of such
preference is equally suspended upon the
appointment of a management committee,
rehabilitation receiver, board or body. In the event
that the assets of the corporation, partnership or
association are finally liquidated, secured and
preferred credits under the applicable provisions of
the CC will definitely have preference over
unsecured ones
- This suspension shall not prejudice or render ineffective
the status of a secured creditor as compared to a totally
unsecured creditor. The suspension should give the
receiver a chance to rehabilitate the corporation if there
should still be a possibility for doing so
- In the event rehabilitation is no longer feasible and
claims against the distressed corporation would
eventually have to be settled, the secured creditors
shall enjoy preference over unsecured creditors, subject
only to the concurrence and preferences of credit
3. Yes. Since suspension of actions for claims
commences only from the time a management
committee or receiver is appointed by the SEC
- RCBC rightfully moved for the extrajudicial foreclosure
of its mortgage because a management committee has
not been appointed by SEC at that time
DISPOSITIVE: MR granted
RCBC v. IAC
This was decided under PD 902-A (creating the SEC). Still valid
case law under the FRIA. Its enumeration of the guidelines in the
treatment of claims has been enshrined in the FRIA.
SC ruled in this case: The suspension of claims is effective only
upon the appointment of the rehabilitation receiver. Said
appointment occurs only when there are serious circumstances.
The FRIA mandated that the issuance of the Commencement
Order contains the appointment of the Receiver. Once the Court
finds that the petition is sufficient in form and substance, it will
issue said Order (and appointment of the receiver). It just made
the issuance of the suspension coincide with the appointment of
the receiver.
194
Sobrejuanite vs. ASB Development Corporation Ynares -
Santiago, J.
Petitioners: Sps. Sobrejuanite
Respondents: ASB Development Corporation (ASBDC)
Concept: Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings: Stay or Suspension Order
Doctrine:
The purpose of the suspension of the proceedings is to prevent
a creditor from obtaining an advantage or preference over
another and to protect and preserve the rights of party litigants
as well as the interest of the investing public or creditors. Such
suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make
business viable again, without having to divert attention and
resources to litigations in various fora, and enable the receiver to
exercise its powers free from any judicial or extra-judicial
interference that might duly hinder or prevent the rescue of the
debtor company.
Brief Facts:
ASBDC failed to comply with its obligation to deliver the condo
unit the spouses purchased from them. Spouses filed a
complaint to rescind the contract with HLURB. However, ASBDC
filed a motion to suspend the proceedings in view of the SECs
approval of their rehabilitation plan and the appointment of a
rehabilitation receiver, citing Sec. 6(c) of PD No. 902-A.
ISSUE:
WON the proceedings with HLURB should be suspended (YES)
RATIO: YES. As the complaint is considered a claim
under Sec. 6(c) of PD NO. 902-A, HLURB should have
suspended the proceedings.
- The purpose of the suspension of the proceedings is to
prevent a creditor from obtaining an advantage or
preference over another and to protect and preserve the
rights of party litigants as well as the interest of the investing
public or creditors.
- Such suspension is intended to give enough breathing
space for the management committee or rehabilitation
receiver to make business viable again, without having to
divert attention and resources to litigations in various fora,
and enable the receiver to exercise its powers free from any
judicial or extra-judicial interference that might duly hinder
or prevent the rescue of the debtor company.
- This power of SEC to suspend such proceedings is expressly
provided for by Sec. 6(c) of PD. No. 902-A, which states that:
c) To appoint one or more receivers of the property, real
and personal, which is the subject of the action pending
before the Commission . . . whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors: . . . Provided,
finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant
to this Decree, all actions for claims against
corporations, partnerships or associations under
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management or receivership pending before any
court, tribunal, board or body shall be suspended
accordingly.
- Thus, it is necessary to determine whether the complaint for
rescission of contract with damages is a claim within the
contemplation of PD No. 902-A in order to resolve WON
suspension is proper.
- In Finasia Investments v. CA, SC construed claims to refer
only to debts or demands pecuniary in nature. Thus:
[T]he word 'claim' as used in Sec. 6(c) of P.D. 902-A refers to
debts or demands of a pecuniary nature. It means "the
assertion of a right to have money paid. It is used
in special proceedings like those before
administrative court, on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an
equitable remedy for breach of performance if
such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced
to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured. In conflicts of
law, a receiver may be appointed in any state
which has jurisdiction over the defendant who
owes a claim.
As used in statutes requiring the presentation of claims
against a decedent's estate, "claim" is generally
construed to mean debts or demands of a
pecuniary nature which could have been enforced
against the deceased in his lifetime and could
have been reduced to simple money judgments;
and among these are those founded upon
contract.
- In Arranza v. BF Homes Inc., the interim rules define a claim
as referring to all claims or demands. Of whatever
nature or character against a debtor of its
property, whether for money or otherwise. The
definition is all-encompassing as it refers to all action
whether for money or otherwise. There are no distinctions or
exemptions.
- Clearly, the complaint filed by the spouses is a claim as
defined under the Interim Rules. Incidentally, although the
complaint was filed before the effectivity of the interim
rules, the same would still apply pursuant to Sec. 1 of Rule 1.
- The complaint would still fall under the category of a claim
even following the rulings of Finasia and Arranza, as the
rescission with damages is still for pecuniary considerations.
- As such, the HLURB should have suspended the
proceedings upon approval by the SEC of the rehabilitation
plan and the appointment of the rehabilitation receiver.
195
- It is to be noted that even the execution of final judgments
may be held in abeyance when the corporation is under
rehabilitation. Hence, there is more reason to order a
suspension, as with what happened in the instant case,
when the motion to suspend was filed soon after the
institution of the complaint. By allowing the proceedings to
proceed, HLURB unwittingly gave undue preference to the
spouses over the other creditors and claimants of ASBDC,
which is precisely the evil sought to be prevented by Sec. 6.
- With regards to the period provided for in the contract,
while ASBDC was obliged to deliver the property on or
before December 1999, the same was deemed extended
due to the financial reverses experienced by the company,
pursuant to Sec. 7 of the same contract which allows the
developer to extend the period on account of causes
beyond its control.
DISPOSITIVE: Petition denied. CA affirmed.
Sobrejuanite v. ASBDC
This was decided undr PD 902-A and the Interim Rules of
Procedure. If the case were decided under the FRIA, the
outcome would have been the same since the FRIAs definition
of claims is broader.
The FRIA definition of claims is similar to, but broader than,
that of the Interim Rules.
Reason: FRIA further elaborates on types of claims (liquidated
or unliquidated, fixed or contingent, matured or unmatured,
disputed or undisputed)
Town and Country Enterprises, Inc. vs. Honorable Norberto J.
Quisumbing, Jr., et al.; Town and Country Enterprises, Inc. vs.
Metropolitan Bank and Trust Co. (2012) Prez
Petitioner: Town and Country Enterprises, Inc. (TCEI)
Respondents: Norberto J. Quisumbing, Jr. (Quisumbing) and
Metropolitan Bank and Trust Co. (Metrobank)
Concept: Stay or suspension order
Doctrine:
Properties already foreclosed and whose ownership was
consolidated before rehabilitation proceedings cannot be
affected by a stay order. First, there is no longer a debt/claim to
stay and second, ownership already passed to the purchaser.
Brief Facts:
TCEI failed to pay its debt to Metrobank. Metrobank foreclosed
the real estate mortgage. TCEI did not exercise its right of
redemption within the 3-month redemption period. Months after
the end of the redemption period, TCEI filed rehabilitation
proceedings. A stay order was issued and rehabilitation plan was
approved. Metrobank filed for writ of possession of the
foreclosed property. The writ was issued. TCEI claimed that writ
could not issue because the property was subject to the
possession of the rehabilitation receiver and that it would violate
the stay order.
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ISSUE:
WON the properties, which were foreclosed and whose
certificate of sale was recorded before rehabilitation
proceedings, must be included among the properties subject of
the rehabilitation and the stay order. NO
RATIO: No, because by the time the stay order was
issued, TCEI was no longer the owner of the property
since the ownership of Metrobank was consolidated
when TCEI failed to exercise its right of redemption.
- A principal feature of corporate rehabilitation is the stay
order which defers all actions or claims against the
corporation seeking corporate rehabilitation from the date
of its issuance until the dismissal of the petition or
termination of the rehabilitation proceedings.
- TCEI: When the rehabilitation plan was approved, the
properties of TCEI were placed in custodia legis and the
grant of writ of possession in favor of Metrobank was
tantamount to taking properties away from the
rehabilitation receiver. The receiver must be considered a
third person whose possession of the foreclosed properties
was an exception to the rule that the grant of a writ of
possession is ministerial.
- SC: TCEIs position lacked merit because Metrobank
already acquired ownership over the foreclosed properties
prior to the petition for rehabilitation and the issuance of
the stay order.
- Although Metrobank invoked Act 3135 when it
extrajudicially foreclosed the mortgage, the General
Banking Act must be applied, and the General Banking Act
provides that when the property of a mortgagor, which is a
juridical person is foreclosed, it only has three months to
redeem it.
- TCEI did not exercise its right of redemption, thus after the
three-month period of redemption, Metrobank
consolidated its ownership on 6 February 2002. It matters
little that Metrobank caused the registration of the
certificate of sale on 10 April 2002 and/or executed an
affidavit consolidating its ownership on 25 April 2003. The
mortgagor loses all interest over the foreclosed property
after the expiration of the redemption period and the
purchaser becomes the absolute owner.
- Writ of possession cannot be denied when the mortgagor
did not redeem the property.
- The stay order could not affect the mortgage obligations
owing to Metrobank since these were already enforced even
before the petition for rehabilitation. Meaning, there was no
longer a debt/claim to stay.
- In equitable PCI Bank, Inc. vs. DNG Realty, where there were
similar facts, the Court upheld the validity of the issuance of
possession to the purchaser. After the redemption period
expired without the respondent redeeming the foreclosed
property, purchaser becomes the absolute owner of the
property and it was within its right to ask for consolidation of
title
196
- The foreclosed properties could not be said to have been
placed in custodia legis. While the issuance of writ of
possession ceases to be ministerial when the property is in
possession of a third person with adverse right, the
rehabilitation receivers power to take possession, control
and custody of the property is far from adverse. A
rehabilitation officer is appointed for the protection of
corporate investors and creditors.
- Even if the one-year redemption period is used, as can be
gleaned from the record, Metrobanks acquisition of the
subject properties would still pass muster.
- Summary: The properties cannot be subject of the
rehabilitation because ownership has transferred even
before rehabilitation proceedings. Ownership was
transferred because TCEI failed to exercise its right of
redemption. Failing to exercise such right, it cannot be
heard to complain about the issuance of new TCTs in favor
of Metrobank.
DISPOSITIVE: Decisions affirmed.
Town and Country v. Quisumbing
This case reiterates that the concept of a claim must involve a
debtor or his property, not third parties.
2) Exceptions to Stay or Suspension Order
RA 10142, Sec. 18 Exceptions to the Stay or Suspension
Order. - The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court as of
commencement date Provided, That any final and executory
judgment arising from such appeal shall be referred to the court
for appropriate action;
(b) subject to the discretion of the court, to cases pending or
filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim
more quickly, fairly and efficiently than the court: Provided, That
any final and executory judgment of such court or agency shall
be referred to the court and shall be treated as a non-disputed
claim;
(c) to the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of credit,
unless the property subject of the third party or accommodation
mortgage is necessary for the rehabilitation of the debtor as
determined by the court upon recommendation by the
rehabilitation receiver;
(d) to any form of action of customers or clients of a securities
market participant to recover or otherwise claim moneys and
securities entrusted to the latter in the ordinary course of the
latter's business as well as any action of such securities market
participant or the appropriate regulatory agency or self-
regulatory organization to pay or settle such claims or liabilities;
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(e) to the actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions in
accordance with the provisions of the Securities Regulation
Code and its implementing rules and regulations;
(f) the clearing and settlement of financial transactions through
the facilities of a clearing agency or similar entities duly
authorized, registered and/or recognized by the appropriate
regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and
the SEC as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions settled for
the debtor; and
(g) any criminal action against individual debtor or owner,
partner, director or officer of a debtor shall not be affected by
any proceeding commend under this Act.
RA 10142, Sec. 16 Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
xxx
(k) prohibit the debtor's suppliers of goods or services from
withholding the supply of goods and services in the ordinary
course of business for as long as the debtor makes payments for
the services or goods supplied after the issuance of the
Commencement Order;
(l) authorize the payment of administrative expenses as they
become due;
RA 10142, Sec. 4
(a) Administrative expenses shall refer to those reasonable and
necessary expenses:
(1) incurred or arising from the filing of a petition under the
provisions of this Act;
(2) arising from, or in connection with, the conduct of the
proceedings under this Act, including those incurred for the
rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of business of the debtor
after the commencement date;
(4) for the payment of new obligations obtained after the
commencement date to finance the rehabilitation of the
debtor;
(5) incurred for the fees of the rehabilitation receiver or
liquidator and of the professionals engaged by them; and
(6) that are otherwise authorized or mandated under this Act
or such other expenses as may be allowed by the Supreme
Court in its rules.
197
(y) Ordinary course of business shall refer to transactions in the
pursuit of the individual debtor's or debtor's business operations
prior to rehabilitation or insolvency proceedings and on ordinary
business terms.
PROCEDURE OF COMMENCEMENT PROCEEDINGS
AND ISSUANCE OF COMMENCEMENT ORDER:
Rehabilitation proceedings shall commence upon the issuance
of the Commencement Order.
The Commencement Order shall:
1. Identify the debtor, its principal business or activities, and its
principal place of business
2. Summarize the ground/s for instituting the proceedings;
3. State the relief sought and any requirement or procedure
particular ot the relief sought;
4. State the legal effects of the CO;
5. Declare that the debtor is under rehabilitation;
6. Direct the following:
a. Publication of the CO in a newspaper of general
circulation in the Philippines: once a week for 2
consecutive weeks, the first publication to be made
within 7 days from the time of COs issuance
b. Service by personal delivery of a copy of the petition
within 5 days:
i. If petitioner is the debtor: On each creditor holding
at least 10% of debtors total liabilities (determined
from the schedule attached to the petition)
ii. If petitioner is the creditor/s: On the debtor
c. Appointment of a rehabilitation receiver who may or
may not be from among the petitioners nominees
d. Summary of requirements and deadlines for creditors
to establish their claims against the debtor and direct
all creditors to their claims with the court at least 5 days
before the initial hearing
e. BIR to file and serve on the debtor its comment on or
opposition to the petition or its claim/s against the
debtor
7. Prohibit the debtors supplier of goods or services from
withholding the supply of goods and services in the ordinary
course of business for as long as the debtor makes
payments for the services or goods supplied after the
issuance of the CO
8. Authorize the payment of administrative expenses as they
become due
9. Initial hearing set not more than 40 days from the
petitioners filing date for the purpose of determining
whether there is substantial likelihood for the debtor to be
rehabilitated
10. Make available copies of the petition and rehabilitation plan
for examination and copying by any interested party
11. Indicate the location/s at which documents regarding the
debtor and the proceedings may be reviewed and copied
12. State that any creditor/debtor (not the petitioner) may
nominate any other qualified person to the position of
rehab receiver at least 5 days before the initial hearing
13. Includes the stay or suspension order
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Suretys liability to the creditor: Primary, direct, and
absolute (not stayed or suspended)
Stay or Suspension Order
- Acts as a stay order against the creditors and an injunction
against the debtor
Exceptions to Stay Order (against the creditor)
- Listed in the FRIA matters expressly excepted
- Exceptions (Sec. 18):
1. Cases already pending appeal in the SC as of
commencement date; provided, that any final and
executory judgment arising from such appeal shall be
referred to the court for appropriate action;
2. Subject to the discretion of the court, to cases pending
or filed at a specialized court or quasi-judicial agency
which, upon determination by the court, is capable of
resolving the claim more quickly, fairly and efficiently
than the court; provided, that any final and executory
judgment of such court or agency shall be referred to
the court and shall be treated as a non-disputed claim;
3. To the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party
or accommodation mortgagors as well as issuers of
letters of credit, unless the property subject of the third
party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court
upon recommendation by the rehabilitation receiver;
4. To any form of action of customers or clients of a
securities market participant to recover or otherwise
claim moneys and securities entrusted to the latter in
the ordinary course of the latters business as well as
any action of such securities market participant or the
appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;
5. To the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a securities
pledge or margin agreement for the settlement of
securities transactions in accordance with the provisions
of the Securities Regulation Code and its implementing
rules and regulations;
6. The clearing and settlement of financial transactions
through the facilities of a clearing agency or similar
entities duly authorized, registered and/or recognized
by the appropriate regulatory agency like the Bangko
Sentral ng Pilipinas (BSP) and the SEC as well as any
form of actions of such agencies or entities to
reimburse themselves for any transactions settled for
the debtor; and
7. Any criminal action against the individual debtor or
owner, partner, director or officer of a debtor shall not
be affected by any proceeding commenced under this
Act
198
Exceptions to Injunction (against the debtor)
- Administrative expenses is critical
- GR: All claims for administrative expenses are excepted
o Reason: purpose of rehabilitation is to restore and
reinstate a debtor to its former position of successful
operation and solvency ! payment of administrative
expenses allows the debtor to effectively continue its
financial life and activities
MWSS vs. Daway and MayniladAzcuna, J.
Petitioner: Metropolitan Waterworks and Sewerage System
Respondents: Hon. Reynaldo Daway and Maynilad Water
Services
Concept: Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings ! Stay or Suspension Order !
Exceptions to Stay or Suspension Order
Doctrine:
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules
does not apply to herein petitioner as the prohibition is on the
enforcement of claims against guarantors or sureties of the
debtors whose obligations are not solidary with the debtor. The
participating banks obligation are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior
exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And being solidary,
the claims against them can be pursued separately from and
independently of the rehabilitation case.
Brief Facts:
MWSS granted MWSI a 20-year period to manage, operate,
repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the WestZone Service Area, for
which MWSI undertook to pay the corresponding concession
fees. To secure the concessionaires performance of its
obligations, MWSI was required to put up a bond, bank
guarantee or other security acceptable to MWSS. In compliance
with this requirement, MWSI arranged for a 3-year facility with a
number of foreign banks, led by Citicorp International Limited,
for the issuance of an Irrevocable Standby Letter of Credit in
favor of MWSS. A few years later, MWSI served upon MWSS a
Notice of Event of Termination, claiming that MWSS failed to
comply with its obligations under the agreement.
ISSUE:
WON the rehabilitation court sitting as such, act in excess of its
authority or jurisdiction when it enjoined herein petitioner from
seeking the payment of the concession fees from the banks that
issued the Irrevocable Standby Letter of Credit in its favor (YES)
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RATIO: YES the rehabilitation court acted in excess of
its authority or jurisdiction when it enjoined petitioner
from seeking the payment of concession fees from the
banks that issued the Irrevocable Standby Letter of
Credit in its favor. The petition for certiorari is granted. The
Order of November 27, 2003 of the RTC of Quezon City 90, is
hereby declared null and void and set aside.
- First, the claim is not one against the debtor but against an
entity that respondent Maynilad has procured to answer for
its non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of
concession fees.
- Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not
enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor.
- Respondent Maynilads claim that the banks are not
solidarily liable with the debtor does not find support in
jurisprudence. Letters of credit were developed for the
purpose of insuring to a seller payment of a definite amount
upon the presentation of documents and is thus a
commitment by the issuer that the party in whose favor it is
issued and who can collect upon it will have his credit
against the applicant of the letter, duly paid in the amount
specified in the letter
- They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the
faith of the instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby into contracts
of guaranty. What distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing bank
to pay the seller once the draft and other required shipping
documents are presented to it. They are definite
undertakings to pay at sight once the documentsstipulated
therein are presented.
- The prohibition under Sec 6 (b) of Rule 4 of the Interim
Rules does not apply to herein petitioner as the prohibition
is on the enforcement of claims against guarantors or
sureties of the debtors whose obligations are not solidary
with the debtor. The participating banks obligation are
solidary with respondent Maynilad in that it is a primary,
direct, definite and an absolute undertaking to pay and is
not conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety or
solidary obligor. And being solidary, the claims against
them can be pursued separately from and independently of
the rehabilitation case.
199
- The terms of the Irrevocable Standby Letter of Credit do not
show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued
at the request of and for the account of Maynilad in favor of
the MWSS as a bond for the full and prompt performance of
the obligations by the concessionaire under the Concession
Agreement and herein MWSS is authorized by the banks to
draw on it by the simple act of delivering to the agent a
written certification substantially in the form of the Letter of
Credit.
- Taking into consideration our own rulings on the nature of
letters of credit and the customs and usage developed over
the years in the banking and commercial practice of letters
of credit, we hold that except when a letter of credit
specifically stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the person
or entity requesting for its issuance, the same being a direct,
primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents
required therein.
- The public respondent, therefore, exceeded his jurisdiction,
in holding that he was competent to act on the obligation of
the banks under the Letter of Credit under the argument
that this was not a solidary obligation with that of the
debtor. Being a solidary obligation, the letter of credit is
excluded from the jurisdiction of the rehabilitation court and
therefore in enjoining petitioner from proceeding against
the Standby Letters of Credit to which it had a clear right
under the law and the terms of said Standby Letter of
Credit, public respondent acted in excess of his jurisdiction.
DISPOSITIVE: Petition for certiorari granted.
MWSS v. Daway
The ruling is now enshrined in Sec. 18(c) of the FRIA, which
provides that the suspension order does not cover the
enforcement of claims against persons solidarily liable with the
debtor, including issuers of letters of credit.
Panlilio v. RTC, Br. 51, City of Manila (2011) Peralta, J.
Petitioner: Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris
& Mario T. Cristobal
Respondent: RTC, Br. 51, City of Manila, represented by Hon.
Presiding Judge Antonio M. Rosales; People of the Philippines;
and the Social Security System
Concept: Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings ! Stay or Suspension Order !
Exceptions to Stay or Suspension Order
Doctrine:
Criminal cases against the corporate officers are personal in
nature. They are not affected by the stay or suspension order
issued by the court in relation to rehabilitation proceedings.
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Brief Facts:
Corporate officers of Silahis Intl Hotel filed a petition for
suspension of payments and rehabilitation with the SEC while
there were pending criminal cases against them for violation of
the SSS Law, in relation to Art. 315 RPC (on estafa). They
petitioned the court to suspend the criminal proceedings, saying
that the suspension order issued by the RTC should affect said
criminal cases as well.
ISSUE:
WON the suspension of all claims as an incident to a
corporate rehabilitation also contemplates the suspension of
criminal charges filed against the corporate officers of the
distressed corporation (NO)
RATIO: NO, the stay order issued by Branch 24 does
not cover a violation of the SSS Law for the non-
remittance of premiums and violations of the RPC.
(On corporate rehabilitation)
- Corporate rehabilitation connotes the restoration of the
debtor to a position of successful operation and solvency, if
it is shown that its continued operation is economically
feasible and its creditors can recover more, by way of the
present value of payments projected in the rehabilitation
plan, if the corporation continues as a going concern than if
it is immediately liquidated
o It contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the
corporation to its former position of successful
operation and solvency
o The purpose is to enable the company to gain a new
lease on life and allow its creditors to be paid their
claims out of its earnings
(On suspension of claims)
- A principal feature of corporate rehabilitation is the
SUSPENSION OF CLAIMS against the distressed
corporation
o Sec. 5, PD 902-A, as amended provided for
suspension of claims against corporations undergoing
rehabilitation:
Section 6(c). xxx
xxx Provided, finally, that upon appointment of a
management committee, rehabilitation receiver, board
or body, pursuant to this Decree, all actions for
claims against corporations, partnerships or
associations under management or receivership
pending before any court, tribunal, board or body,
shall be suspended accordingly.
200
- The SC promulgated the Interim Rules of Procedure on
Corporate Rehabilitation
o Sec. 6, Rule 4 provides a stay order on all claims
against the corporation:
Stay Order. If the court finds the petition to be
sufficient in form and substance, it shall, not later than
five (5) days from the filing of the petition, issue an
Order xxx; (b) staying enforcement of all claims,
whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the
debtor, its guarantors and sureties not solidarily liable
with the debtor; xxx
- In Finasia Investments and Finance Corporation v. CA, the
term claim has been construed to refer to debts or
demands of a pecuniary nature, or the assertion to have
money paid
o Purpose for suspending actions (for claims against
the corporation in a rehabilitation proceeding):To
enable the management committee or rehabilitation
receiver to effectively exercise its/his powers free from
any judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
company
(On the suspension of all claims as an incident of corporate
rehabilitation; criminal charges not included)
- In Rosario v. Co, the issue resolved by the Court was WON
during the pendency of rehabilitation proceedings, criminal
charges for violation of BP 22 should be suspended
o The gravamen of the offense published by BP 22 is the
act of making and issuing a worthless check a check
that is dishonored upon its presentation for payment
o In Lozano v. Martinez, the Court declared that it is not
the nonpayment of an obligation which the law
punishes, but rather the making and circulation of
worthless checks. It is an offense punished for being an
offense against public order, and the prime purpose is
to punish the offender in order to deter him and others
from committing the same or similar offense
o The filing of the case for violation of BP 22 is
not a claim that can be enjoined within the
purview of PD 902-A
" Although conviction of the accused for the alleged
crime could result in the restitution, reparation or
indemnification of the private offended party for
the damage or industry he sustained by reason of
the felonious act of the accused, nevertheless,
prosecution for violation of BP 22 is a criminal
action
o A criminal action has a dual purpose: 1) the punishment
of the offender and 2) indemnity of the offended party
" The dominant and primordial objective is the
punishment of the offender they are primarily
intended to vindicate an outrage against the
sovereignty of the state and to impose the
appropriate penalty for the vindication of the
disturbance to the social offender
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" The civil action is merely incidental to and
consequent to the conviction of the accused
intended solely to indemnify the private
complainant
- SC: Rosario is at fours with the case at bar. Officers are
charged with violations of Sec. 28(h) of the SSS Law, in
relation to Art. 315(1)(b) of the RPC for estafa
o The SSS law clearly criminalizes the non-remittance of
SSS contributions by an employer to protect employees
from unscrupulous employers. Public interest requires
that said criminal acts be immediately investigated and
prosecuted for the protection of society
- SC: Rehabilitation of SIHI and the settlement of claims
against the corporation is not a legal ground for the
extinction of the officers criminal liabilities no reason why
criminal proceedings should be suspended during
corporate rehabilitation, more so, since the prime
purpose of the criminal action is to punish the offender
in order to deter him and others from committing the same
or similar offense
o As pointed out in Rosario, it would be absurd for one
who has engaged in criminal conduct to escape
punishment by the mere filing of a petition for
rehabilitation by the corporation of which he is an
officer
o Prosecution of the officers of the corporation has no
bearing on the pending rehabilitation of the
corporation, especially since they are charged in their
individual capacities
o The purpose of the law for the issuance of the stay
order is NOT compromised, since the appointed
rehabilitation receiver can still fully discharge his
functions as mandated by law
" Note: The receiver is not charged to defend the
officers of the corporation; if anything, the receiver
might be remotely interested in WON the court
rules the officers as civilly liable
o That the officers may be civilly liable is NOT a reason to
suspend the proceedings because, as discussed in
Rosario, should the court find that an award or
indemnification is warranted, such award would fall
under the category of claims, the execution of which
would be subject to the stay order issued by the
rehabilitation court
" The penal sanctions as a consequence of the
violation of the SSS Law, in relation to the RPC, can
be implemented if they are found guilty after trial;
however, any civil indemnity awarded as a result of
their conviction would be subject to the stay order
issued by the rehabilitation court
" Only to that extent can the order of suspension be
considered obligatory
201
(On FRIA) but this is obiter
- Court would like to point out that Congress has recently
enacted RA 10142, or the Financial Rehabilitation and
Insolvency Act of 2010, Sec. 18 of which explicitly provides
that criminal actions against the individual officer of a
corporation are not subject to the Stay or Suspension Order
in rehabilitation proceedings
The Stay or Suspension Order shall not apply: xxx
(g) any criminal action against individual debtor or owner,
partner, director or officer of a debtor shall not be affected
by any proceeding commenced under this Act.
DISPOSITIVE: Petition DENIED.
Panlilio v. RTC
Decision would still be the same under FRIA, now enshrined in
Sec. 18(g).
c. Subsequent Actions
RA 10142, Sec. 22 Action at the Initial Hearing. - At the initial
hearing, the court shall:
(a) determine the creditors who have made timely and proper
filing of their notice of claims;
(b) hear and determine any objection to the qualifications of the
appointment of the rehabilitation receiver and, if necessary
appoint a new one in accordance with this Act;
(c) direct the creditors to comment on the petition and the
Rehabilitation Plan, and to submit the same to the court and to
the rehabilitation receiver within a period of not more than
twenty (20) days; and
(d) direct the rehabilitation receiver to evaluate the financial
condition of the debtor and to prepare and submit to the court
within forty (40) days from initial hearing the report provided in
Section 24 hereof.
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. -
Within forty (40) days from the initial hearing and with or without
the comments of the creditors or any of them, the rehabilitation
receiver shall submit a report to the court stating his preliminary
findings and recommendations on whether:
(a) the debtor is insolvent and if so, the causes thereof and any
unlawful or irregular act or acts committed by the owner/s of a
sole proprietorship partners of a partnership or directors or
officers of a corporation in contemplation of the insolvency of
the debtor or which may have contributed to the insolvency of
the debtor;
(b) the underlying assumptions, the financial goals and the
procedures to accomplish such goals as stated in the petitioner's
Rehabilitation Plan are realistic, feasible and reasonable;
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(c) there is a substantial likelihood for the debtor to be
successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or liquidated.
RA 10142, Sec. 25 Giving Due Course to or Dismissal of
Petition, or Conversion of Proceedings. - Within ten (10) days
from receipt of the report of the rehabilitation receiver
mentioned in Section 24 hereof the court may:
(a) give due course to the petition upon a finding that:
(1) the debtor is insolvent; and
(2) there is a substantial likelihood for the debtor to be
successfully rehabilitated;
(b) dismiss the petition upon a finding that:
(1)debtor is not insolvent;
(2) the petition i8 a sham filing intended only to delay the
enforcement of the rights of the creditor/s or of any group of
creditors;
(3)the petition, the Rehabilitation Plan and the attachments
thereto contain any materially false or misleading statements;
or
(4)the debtor has committed acts of misrepresentation or in
fraud of its creditor/s or a group of creditors;
(c)convert the proceedings into one for the liquidation of the
debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for the debtor to be
successfully rehabilitated as determined in accordance with
the rules to be promulgated by the Supreme Court.
RA 10142, Sec. 26 Petition Given Due Course. - If the petition
is given due course, the court shall direct the rehabilitation
receiver to review, revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the
court within a period of not more than ninety (90) days.
The court may refer any dispute relating to the Rehabilitation
Plan or the rehabilitation proceedings pending before it to
arbitration or other modes of dispute resolution, as provided for
under Republic Act No. 9285, Or the Alternative Dispute
Resolution Act of 2004, should it determine that such mode will
resolve the dispute more quickly, fairly and efficiently than the
court.
202
RA 10142, Sec. 27 Dismissal of Petition. - If the petition is
dismissed pursuant to paragraph (b) of Section 25 hereof, then
the court may, in its discretion, order the petitioner to pay
damages to any creditor or to the debtor, as the case may be,
who may have been injured by the filing of the petition, to the
extent of any such injury.
Procedure in Initial Hearing
The Court is tasked to do the following:
1. Determine which creditors have timely and properly filed
their notice of claims.
2. Hear and determine objections to the qualifications or the
appointment of the rehabilitation receiver.
a. And if necessary, appoint a new one.
3. Direct creditors to comment of the petition and the
Rehabilitation Plan, and to submit them to the court and the
receiver within a period of not more than 20 days.
4. Direct the receiver to evaluate the financial condition of the
debtor and, within 40 days from the initial hearing, submit
the report.
Procedure in Disposing of the Petition
Within 10 days after receiving the receivers report, the Court has
3 courses of action that it may take, with respect to the petition:
I. Give Due Course
A. Requisites for Granting
1. Debtor is insolvent; and,
2. There is substantial likelihood for debtors successful
rehabilitation
B. Actions To Be Taken
1. Court will direct the receiver to review, revise and or
recommend action on the Rehabilitation Plan and
submit the same plan or a new one to court within a
period of not more than 90 days.
2. If there is any dispute relating to the Rehabilitation
Plan or to the proceedings pending before it, the
court may refer it to arbitration or other modes of
dispute resolution, should it determine that such
method will be more quick, fair and efficient than
resolving it in court.
!
II. Dismissal
A. Grounds for Dismissal
1. Debtor is NOT insolvent
2. The petition is a sham filing, intended to delay
creditors (or a group of creditors) in enforcing their
rights.
3. The petition, Rehabilitation Plan and the attachments
thereto contain any materially false or misleading
statements.
4. Debtor has committed acts of misrepresentation or in
fraud of its creditors (or a group of creditors)
! receiver shall be set forth in procedural rules, taking into
! consideration the nature of the business of the debtor and the
!
!
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B. Actions To Be Taken: Along with the dismissal of the
petition, the court, in its discretion, may require the
petitioner to pay damages to any creditor or to the
debtor, as the case may be, who have been injured by the
filing of the petition.
!
III. Conversion to Liquidation Proceedings
A. Requisites for Conversion
1. Debtor is insolvent; and,
2. No substantial likelihood of debtors successful
rehabilitation
d. Rehabilitation Receiver
1) General Concepts
RA 10142, Sec. 4
(hh) Rehabilitation receiver shall refer to the person or persons,
natural or juridical, appointed as such by the court pursuant to
this Act and which shall be entrusted with such powers and
duties as set forth herein.
RA 10142, Sec. 28 Who May Serve as a Rehabilitation
Receiver. - Any qualified natural or juridical person may serve as
a rehabilitation receiver: Provided, That if the rehabilitation
receiver is a juridical entity, it must designate a natural person/s
who possess/es all the qualifications and none of the
disqualifications as its representative, it being understood that
the juridical entity and the representative/s are solidarily liable
for all obligations and responsibilities of the rehabilitation
receiver.
RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. -
The rehabilitation receiver shall have the following minimum
qualifications:
(a)A citizen of the Philippines or a resident of the Philippines in
the six (6) months immediately preceding his nomination;
(b)Of good moral character and with acknowledged integrity,
impartiality and independence;
(c)Has the requisite knowledge of insolvency and other relevant
commercial laws, rules and procedures, as well as the relevant
training and/or experience that may be necessary to enable him
to properly discharge the duties and obligations of a
rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of
interest may be waived, expressly or impliedly, by a party who
may be prejudiced thereby.
Other qualifications and disqualifications of the rehabilitation
need to protect the interest of all stakeholders concerned.
203
RA 10142, Sec. 30 Initial Appointment of the Rehabilitation
Receiver. - The court shall initially appoint the rehabilitation
receiver, who mayor may not be from among the nominees of
the petitioner, However, at the initial hearing of the petition, the
creditors and the debtor who are not petitioners may nominate
other persons to the position. The court may retain the
rehabilitation receiver initially appointed or appoint another who
mayor may not be from among those nominated.
In case the debtor is a securities market participant, the court
shall give priority to the nominee of the appropriate securities or
investor protection fund.
If a qualified natural person or entity is nominated by more than
fifty percent (50%) of the secured creditors and the general
unsecured creditors, and satisfactory evidence is submitted, the
court shall appoint the creditors' nominee as rehabilitation
receiver.
RA 10142, Sec. 32 Removal of the Rehabilitation Receiver.
The rehabilitation receiver may be removed at any time by the
court either motu proprio or upon motion by any creditor/s
holding more than fifty percent (50%) of the total obligations of
the debtor, on such grounds as the rules of procedure may
provide which shall include, but are not limited to, the following:
(a) Incompetence, gross negligence, failure to perform or failure
to exercise the proper degree of care in the performance of his
duties and powers;
(b) Lack of a particular or specialized competency required by
the specific case;
(c) Illegal acts or conduct in the performance of his duties and
powers;
(d) Lack of qualification or presence of any disqualification;
(e) Conflict of interest that arises after his appointment; and
(f) Manifest lack of independence that is detrimental to the
general body of the stakeholders.
RA 10142, Sec. 33 Compensation and Terms of Service. The
rehabilitation receiver and his direct employees or independent
contractors shall be entitled to compensation for reasonable
fees and expenses from the debtor according to the terms
approved by the court after notice and hearing. Prior to such
hearing, the rehabilitation receiver and his direct employees
shall be entitled to reasonable compensation based on quantum
meruit. Such costs shall be considered administrative expenses.
RA 10142, Sec. 34 Oath and Bond of the Rehabilitation
Receiver. Prior to entering upon his powers, duties and
responsibilities, the rehabilitation receiver shall take an oath and
file a bond, in such amount to be fixed by the court, conditioned
upon the faithful and proper discharge of his powers, duties and
responsibilities.
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RA 10142, Sec. 35 Vacancy. - Incase the position of
rehabilitation receiver is vacated for any reason whatsoever. the
court shall direct the debtor and the creditors to submit the
name/s of their nominee/s to the position. The court may
appoint any of the qualified nominees. or any other person
qualified for the position.
RA 10142, Sec. 40 Conflict of Interest. - No person may be
appointed as a rehabilitation receiver, member of a_
management committee, or be employed by the rehabilitation
receiver or the management committee if he has a conflict of
interest.
An individual shall be deemed to have a conflict of interest if he
is so situated as to be materially influenced in the exercise of his
judgment for or against any party to the proceedings. Without
limiting the generality of the foregoing, an individual shall be
deemed to have a conflict of interest if:
(a) he is a creditor, owner, partner or stockholder of the debtor;
(b) he is engaged in a line of business which competes with that
of the debtor;
(c) he is, or was, within five (5) years from the filing of the petition,
a director, officer, owner, partner or employee of the debtor or
any of the creditors, or the auditor or accountant of the debtor;
(d) he is, or was, within two (2) years from the filing of the
petition, an underwriter of the outstanding securities of the
debtor;
(e) he is related by consanguinity or affinity within the fourth civil
degree to any individual creditor, owners of a sale
proprietorship-debtor, partners of a partnership- debtor or to
any stockholder, director, officer, employee or underwriter of a
corporation-debtor; or
(f) he has any other direct or indirect material interest in the
debtor or any of the creditors.
Any rehabilitation receiver, member of the management
committee or persons employed or contracted by them
possessing any conflict of interest shall make the appropriate
disclosure either to the court or to the creditors in case of out-of-
court rehabilitation proceedings.
Any party to the proceeding adversely affected by the
appointment of any person with a conflict of interest to any of
the positions enumerated above may however waive his right to
object to such appointment and, if the waiver is unreasonably
withheld, the court may disregard the conflict of interest, taking
into account the general interest of the stakeholders.
204
Rules on Rehabilitation Receivers
- The Rehabilitation Receiver
o May be a natural or juridical person.
o If it is a juridical person, it must designate one or more
natural persons who shall possess all the qualifications
and none of the disqualifications (see below) as its
representative.
" The representative(s) shall be solidarily liable with the
juridical entity for the obligations and responsibilities
as the appointed receiver
- Qualifications
o Citizen of the Phils., OR a resident of the Phils. for at least
6 months preceding his/her/its nomination
o Of good moral character and with acknowledged
integrity, impartiality and independence
o Has requisite knowledge of insolvency laws, and other
relevant commercial laws, rules, and procedures, as well
as relevant training and/or experience
o No conflict of interest (see more rules below)
" This requirement may however be waived expressly or
impliedly by the party who may be prejudiced
o NOTE: Other qualifications and disqualifications shall be
set forth in the procedural rules, considering the nature of
the debtors business, and the interest of all stakeholders.
- Appointment and Vacancy
o Court shall initially appoint the receiver (may or may not
be among the nominees of the petitioner)
o During the initial hearing, creditors and the debtor, who
are not petitioners, may nominate other persons.
o Court may retain the receiver initially appointed OR
appoint a new one (may or may not be among new
nominees)
" PROV: If debtor is a securities market participant, the
court shall give priority to the nominee of the
appropriate securities or investor protection fund.
o If the qualified receiver is nominated by more than 50% of
the secured creditors and the general unsecured
creditors, AND satisfactory evidence is submitted, the
said qualified receiver shall be appointed by the court.
o In case the position becomes vacated for any reason, the
court shall direct the debtor and the creditors to submit
names of nominees. The court may appoint from this list
or any other person qualified.
- Removal
o The Court may, either motu proprio, OR upon motion by
any creditor(s) holding more than 50% of the debtors
total obligations, remove the receiver on the following
grounds:
" Those provided by the rules of procedure; and/or
" Including the ff. but not limited to:
Incompetence, gross negligence, failure to
perform, or failure to exercise the proper degree
of care in the performance of duties
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Lack of particular or required specialized
competency required by the case
Illegal acts or conduct in the performance of
duties
Lack of qualification or presence of any
disqualification
Conflict of interest, which arose after appointment
Manifest lack of independence that is detrimental
to the stakeholders
- Compensation
o The receiver, and his employees and/or independent
contractors are entitled to compensation on a quantum
meruit basis, in accordance with terms approved by the
court.
o The compensation of the receiver et. al. is considered as
administrative expenses
- Oath and Bond
o Prior to assumption of his duties, the receiver is required
to take an oath and file a bond, the amount of which shall
be fixed by the court.
- Conflicts of Interest
o GR: No person with conflict of interest may be
appointed as receiver or part of the management
committee, or employed by both.
EX: The party, who may be injured, may expressly or
impliedly waive this disqualification.
PROV: If waiver is unreasonably withheld, the court may
disregard the conflict of interest, with the general interest
of the stakeholders in mind.
o Badges of Conflict of Interest:
" He is a creditor, owner, partner, or stockholder of the
debtor
" Is a business competitor of the debtor
" Was a director, officer, owner, partner, or employee of
the debtor, or any of the creditors, or the auditor or
accountant of the debtor, WITHIN the last 5 years
preceding the filing of the petition
" An underwriter of the outstanding securities of the
debtor WITHIN the last 2 years preceding the filing of
the petition
" Related to by consanguinity or affinity within the 4th
civil degree to any of the ff:
creditor,
owner(s) of a sole proprietorship-debtor,
partners of a partnership-debtor,
Stockholder, director, officer, employee, or
underwriter of a corporation-debtor
" He has any other direct or indirect material interest in
the debtor or any of the creditors
o Conflicts of interest should be disclosed appropriately by
the receiver or members of the management committee,
to the court, or to the creditors (in case of out-of-court
rehabilitation proceedings)
205
2) Powers, Duties and Responsibilities
RA 10142, Sec. 47 Management. - Unless otherwise provided
herein, the management of the juridical debtor shall remain with
the existing management subject to the applicable law/s and
agreement/s, if any, on the election or appointment of directors,
managers Or managing partner. However, all disbursements,
payments or sale, disposal, assignment, transfer or encumbrance
of property , or any other act affecting title or interest in
property, shall be subject to the approval of the rehabilitation
receiver and/or the court, as provided in the following
subchapter.
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. -
Within forty (40) days from the initial hearing and with or without
the comments of the creditors or any of them, the rehabilitation
receiver shall submit a report to the court stating his preliminary
findings and recommendations on whether:
(a) the debtor is insolvent and if so, the causes thereof and any
unlawful or irregular act or acts committed by the owner/s of a
sole proprietorship partners of a partnership or directors or
officers of a corporation in contemplation of the insolvency of
the debtor or which may have contributed to the insolvency of
the debtor;
(b) the underlying assumptions, the financial goals and the
procedures to accomplish such goals as stated in the petitioner's
Rehabilitation Plan are realistic, feasible and reasonable;
(c) there is a substantial likelihood for the debtor to be
successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or liquidated.
RA 10142, Sec. 31 Powers, Duties and Responsibilities of the
Rehabilitation Receiver. - The rehabilitation receiver shall be
deemed an officer of the court with the principal duty of
preserving and maximizing the value of the assets of the debtor
during the rehabilitation proceedings, determining the viability
of the rehabilitation of the debtor, preparing and recommending
a Rehabilitation Plan to the court, and implementing the
approved Rehabilitation Plan, To this end, and without limiting
the generality of the foregoing, the rehabilitation receiver shall
have the following powers, duties and responsibilities:
(a)To verify the accuracy of the factual allegations in the petition
and its annexes;
(b)To verify and correct, if necessary, the inventory of all of the
assets of the debtor, and their valuation;
(c)To verify and correct, if necessary, the schedule of debts and
liabilities of the debtor;
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(d)To evaluate the validity, genuineness and true amount of all
the claims against the debtor;
(e)To take possession, custody and control, and to preserve the
value of all the property of the debtor;
(f)To sue and recover, with the approval of the court, all amounts
owed to, and all properties pertaining to the debtor;
(g)To have access to all information necessary, proper or relevant
to the operations and business of the debtor and for its
rehabilitation;
(h) To sue and recover, with the. approval of the court, all
property or money of the debtor paid, transferred or disbursed
in fraud of the debtor or its creditors, or which constitute undue
preference of creditor/s;
(i) To monitor the operations and the business of the debtor to
ensure that no payments or transfers of property are made other
than in the ordinary course of business;
(j) With the court's approval, to engage the services of or to
employ persons or entities to assist him in the discharge of his
functions;
(k) To determine the manner by which the debtor may be best
rehabilitated, to review) revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the
court for approval;
(1) To implement the Rehabilitation Plan as approved by the
court, if 80 provided under the Rehabilitation Plan;
(m) To assume and exercise the powers of management of the
debtor, if directed by the court pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from time to time, be
conferred upon him by the court; and
To submit a status report on the rehabilitation proceedings
every quarter or as may be required by the court motu proprio.
or upon motion of any creditor. or as may be provided, in the
Rehabilitation Plan.
Unless appointed by the court, pursuant to Section 36 hereof,
the rehabilitation receiver shall not take over the management
and control of the debtor but may recommend the appointment
of a management committee over the debtor in the cases
provided by this Act.
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RA 10142, Sec. 39 Employment of Professionals. - Upon
approval of the court, and after notice and hearing, the
rehabilitation receiver or the management committee may
employ specialized professionals and other experts to assist
each in the performance of their duties. Such professionals and
other experts shall be considered either employees or
independent contractors of the rehabilitation receiver or the
management committee, as the case may be. The qualifications
and disqualifications of the professionals and experts may be
set forth in procedural rules, taking into consideration the nature
of the business of the debtor and the need to protect the
interest of all stakeholders concerned.
RA 10142, Sec. 41 Immunity. - The rehabilitation receiver and
all persons employed by him, and the members of the
management committee and all persons employed by it, shall
not be subject to any action. claim or demand in connection with
any act done or omitted to be done by them in good faith in
connection with the exercise of their powers and functions under
this Act or other actions duly approved by the court.1awp++il
- Since the purpose of rehabilitation is to preserve a
floundering business as a going concern, presuming that the
assets of the business are more valuable if maintained, rather
than liquidated.
o Going concern a concept in accounting which refers
to an underlying assumption that a company or other
entity will be able to continue operating for a period of
time that is sufficient to carry out its commitments,
obligations, objectives, and so on. In other words, the
company will not have to liquidate or be forced out of
business in the foreseeable future.2
- Hence, the effect is that the debtor maintains control of its
business and property, referred to as the principle of debtor-
in-possession/debtor-in-place.
Debtor-in-Possession or Debtor-in-Place
- GR: The debtor maintains control of his business and
property.
The receiver is instead tasked with the following
responsibilities:
o Preserving and maximizing the value of the assets of the
debtor during the rehabilitation proceedings
o Determining the viability of the rehabilitation of the
debtor
o Preparing and recommending a Rehabilitation Plan to the
court; and,
o Implementing the Rehabilitation Plan
- PROV: The debtor needs to secure the approval of the
receiver or the court for the ff. acts:
o Disbursements affecting title or interest in property
o Payments affecting title or interest in property
o Sale, disposal, assignment, transfer, or encumbrance of
property
o Any other act affecting title or property
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2!Source: http://www.accountingcoach.com/blog/going-concern
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e. Creditors Committees
RA 10142, Sec. 42 Creditors' Committee. - After the creditors'
meeting called pursuant to Section 63 hereof, the creditors
belonging to a class may formally organize a committee among
themselves. In addition, the creditors may, as a body, agree to
form a creditors' committee composed of a representative from
each class of creditors, such as the following:
(a) Secured creditors;
(b) Unsecured creditors;
(c) Trade creditors and suppliers; and
(d) Employees of the debtor.
In the . election of the creditors' representatives, the
rehabilitation receiver or his representative shall attend such
meeting and extend the appropriate assistance as may be
defined in the procedural rules.
RA 10142, Sec. 43 Role of Creditors' Committee. - The
creditors' committee when constituted pursuant to Section 42 of
this Act shall assist the rehabilitation receiver in communicating
with the creditors and shall be the primary liaison between the
rehabilitation receiver and the creditors. The creditors'
committee cannot exercise or waive any right or give any
consent on behalf of any creditor unless specifically authorized in
writing by such creditor. The creditors' committee may be
authorized by the court or by the rehabilitation receiver to
perform such other tasks and functions as may be defined by the
procedural rules in order to facilitate the rehabilitation process.
RA 10142, Sec. 8 Decisions of Creditors. - Decisions of
creditors shall be made according to the relevant provisions of
the Corporation Code in the case of stock or nonstock
corporations or the Civil Code in the case of partnerships that
are not inconsistent with this Act.
RA 10142, Sec. 9 Creditors Representatives. - Creditors may
designate representatives to vote or otherwise act on their
behalf by filing notice of such representation with the court and
serving a copy on the rehabilitation receiver or liquidator.
Classification of Creditors, in context of insolvency:
- Secured Creditors creditors who have in their favor
special preferred credits under Art. 2241 & 2242
- Unsecured Creditors creditors having only personal
security transactions in their favor
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Rules on Creditors Committees In case the court appoints the rehabilitation receiver to assume
- Classes of Creditors the powers of management of the debtor. the court may:
o Secured
o Unsecured (1) require the rehabilitation receiver to post an additional bond;
o Trade Creditors and Suppliers
o Employees of the Debtor (2) authorize him to engage the services or to employ persona or
entities to assist him in the discharge of his managerial functions;
- Formation and
o Creditors belonging to a class may form a committee.
o The creditors, as a whole, may also form a committee, (3) authorize a commensurate increase in his compensation.
with each class having one representative each, sitting in
the committee.
RA 10142, Sec. 37 Role of the Management Committee.
When appointed pursuant to the foregoing section, the
- Role and Powers
management committee shall take the place of the management
o Assist the receiver in communicating with the creditors by
and the governing body of the debtor and assume their rights
acting as the primary liaison of the class of creditors.
and responsibilities.
o GR: The committee cannot exercise or waive any rights
of the creditors they represent, nor give any consent on
The specific powers and duties of the management committee,
behalf of any creditor.
whose members shall be considered as officers of the court, shall
EX: Unless specifically authorized in writing by such
be prescribed by the procedural rules.
creditor.
o The committee may be authorized by the court or by the
RA 10142, Sec. 38 Qualifications of Members of the
rehabilitation receiver to perform such other tasks and
Management Committee. - The qualifications and
functions as may be necessary.
disqualifications of the members of the management committee
shall be set forth in the procedural rules, taking into
f. Management Committee
consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
RA 10142, Sec. 47 Management. - Unless otherwise provided
herein, the management of the juridical debtor shall remain with
GR: The principle of debtor-in-possession/debtor-in-place is
the existing management subject to the applicable law/s and
observed. Rehabilitation Receiver DOES NOT take over control
agreement/s, if any, on the election or appointment of directors,
and management of the debtor.
managers Or managing partner. However, all disbursements,
payments or sale, disposal, assignment, transfer or encumbrance
EX: The FRIA authorizes the Receiver or a Management
of property , or any other act affecting title or interest in
Committee, when ordered by the court, to assume the powers of
property, shall be subject to the approval of the rehabilitation
management of the debtors business upon a showing of clear
receiver and/or the court, as provided in the following
and convincing evidence of:
subchapter.
- Actual or imminent danger of dissipation, loss, wastage, or
destruction of the debtors assets or other properties; OR,
RA 10142, Sec. 36 Displacement of Existing Management by
- Paralysis of the business operations of the debtor; OR,
the Rehabilitation Receiver or Management Committee. Upon - Gross mismanagement of the debtor, or fraud, or other
motion of any interested party, the court may appoint and direct wrongful conduction on the part of, or gross or willful
the rehabilitation receiver to assume the powers of management
violation of the FRIA by the existing management of the
of the debtor, or appoint a management committee that will
debtor, or the owner, partner, director, officer, or
undertake the management of the debtor. upon clear and
representatives in management of the debtor.
convincing evidence of any of the following circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage or

destruction of the debtors assets or other properties;

(b) Paralyzation of the business operations of the debtor; or

(c) Gross mismanagement of the debtor. or fraud or other

wrongful conduct on the part of, or gross or willful violation of
this Act by. existing management of the debtor Or the owner,
partner, director, officer or representative/s in management of
the debtor.

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g. Claims
RA 10142, Sec. 4
(c) Claim shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs
duties; and (2) claims against directors and officers of the debtor
arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal
capacities.
1) Determination of Claims
Determination of claims is important for the TREATMENT OF
CLAIMS, which are contained in the Rehabilitation Plan. To arrive
at the Rehab Plan, you must have a Registry of Claims where you
determine the Claims against the debtor.
RA 10142, Sec. 16 Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
xxx
(i) summarize the requirements and deadlines for creditors to
establish their claims against the debtor and direct all creditors
to their claims with the court at least five (5) days before the
initial hearing;
RA 10142, Sec. 44 Registry of Claims. - Within twenty (20) days
from his assumption into office, the rehabilitation receiver shall
establish a preliminary registry of claims. The rehabilitation
receiver shall make the registry available for public inspection
and provide publication notice to the debtor, creditors and
stakeholders on where and when they may inspect it. All claims
included in the registry of claims must be duly supported by
sufficient evidence.
RA 10142, Sec. 45 Opposition or Challenge of Claims.
Within thirty (30) days from the expiration of the period stated in
the immediately preceding section, the debtor, creditors,
stakeholders and other interested parties may submit a
challenge to claim/s to the court, serving a certified copy on the
rehabilitation receiver and the creditor holding the challenged
claim/so Upon the expiration of the thirty (30)-day period, the
rehabilitation receiver shall submit to the court the registry of
claims which shall include undisputed claims that have not been
subject to challenge.
RA 10142, Sec. 46 Appeal. - Any decision of the rehabilitation
receiver regarding a claim may be appealed to the court.
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- Creditors should file the claims with the court at least 5 days
before the initial hearing
- The claims must be supported by sufficient evidence, to be
properly included in the registry of claims.
- Claims may be subject to an opposition or a challenge as to
their validity, within 30 days from the expiration of the 20-day
period given to the receiver to make available the registry of
claims.
- Goal: to have undisputed claims
Determination of Claims
- The Rehab Receiver will clean up all the claims (one side
of the equation). The other side involves the assets, which
will be used to pay for the claims
- The Rehab Receiver will fix all the claims and assets
(complete and stable condition) for purposes of arriving at a
Rehabilitation Plan that is viable
- Start with a PETITION (important) because it contains the
schedule of the debtors debts and liabilities
2) Treatment of Claims
Once you identify the claims, you determine how they are going
to be treated.
Claims are stayed first, then you determine if they are preferred
or not.
a) Secured Creditor Claims
RA 10142, Sec. 4
(kk) Secured creditor shall refer to a creditor with a secured
claim.
RA 10142, Sec. 60 No Diminution of Secured Creditor Rights.
The issuance of the Commencement Order and the Suspension
or Stay Order, and any other provision of this Act, shall not be
deemed in any way to diminish or impair the security or lien of a
secured creditor, or the value of his lien or security, except that
his right to enforce said security or lien may be suspended
during the term of the Stay Order.
The court, upon motion or recommendation of the rehabilitation
receiver, may allow a secured creditor to enforce his security or
lien, or foreclose upon property of the debtor securing his/its
claim, if the said property is not necessary for the rehabilitation
of the debtor. The secured creditor and/or the other lien holders
shall be admitted to the rehabilitation proceedings only for the
balance of his claim, if any.
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RA 10142, Sec. 61 Lack of Adequate Protection. - The court,
on motion or motu proprio, may terminate, modify or set
conditions for the continuance of suspension of payment, or
relieve a claim from the coverage thereof, upon showing that: (a)
a creditor does not have adequate protection over property
securing its claim; or
(b) the value of a claim secured by a lien on property which is not
necessary for rehabilitation of the debtor exceeds the fair market
value of the said property.
For purposes of this section, a creditor shall be deemed to lack
adequate protection if it can be shown that:
(a) the debtor fails or refuses to honor a pre-existing agreement
with the creditor to keep the property insured;
(b) the debtor fails or refuses to take commercially reasonable
steps to maintain the property; or
(c) the property has depreciated to an extent that the creditor is
under secured.
Upon showing of a lack of protection, the court shall order the
debtor or the rehabilitation receiver to make arrangements to
provide for the insurance or maintenance of the property; or to
make payments or otherwise provide additional or replacement
security such that the obligation is fully secured. If such
arrangements are not feasible, the court may modify the Stay
Order to allow the secured creditor lacking adequate protection
to enforce its security claim against the debtor: Provided,
however, That the court may deny the creditor the remedies in
this paragraph if the property subject of the enforcement is
required for the rehabilitation of the debtor.
Rules on Treatment of Secured Creditors
1. Upon the issuance of the Commencement Order, all
creditors, including secured creditors, are precluded by the
Stay or Suspension Order from obtaining an advantage or
preference over one another. The principle observed is
equality is equity, and all creditors, secured or unsecured,
stand on equal footing.
2. The issuance of the said Commencement Order, however,
does NOT diminish or impair the security or lien of a secured
creditor, nor its value; it only suspends the right of the
secured creditor to enforce the security or lien during the
term of the Stay or Suspension Order accompanying the
Commencement Order.
3. During the proceedings, the Court, upon motion or
recommendation of the receiver, may allow a secured
creditor to enforce the security or lien, or foreclose upon the
property, IF the property is not necessary for the
rehabilitation of the debtor.
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4. During the proceedings, the Court, on motion or motu
proprio may terminate, modify, or set conditions for the
continuance of the Stay or Suspension Order,
or relieve a claim from its coverage, if:
a. A secured creditor does not have adequate protection
over its security, or
b. The value of the claim secured by a lien on the property,
which is not necessary for rehabilitation, exceeds the fair
market value of the property.
5. The Rehabilitation Plan shall specify the treatment of each
class or subclass of creditors, and shall provide equal
treatment of all claims within the same class or subclass,
UNLESS a particular creditor voluntarily agrees to a less
favorable treatment.
6. The Rehabilitation Plan must ensure that the payments under
the plan follow the priority established by the Civil Code on
concurrence and preference of credits, and MUST maintain
the security interest of secured creditors and preserve the
liquidation value of the security, UNLESS waived or modified
voluntarily.
b) Employee Claims
This is stayed first, then determine whether preffered or not.
RA 10142, Sec. 56 Treatment of Employees, Claims.
Compensation of employees required to carry on the business
shall be considered an administrative expense. Claims of
separation pay for months worked prior to the commencement
date shall be considered a pre- ommencement claim. Claims for
salary and separation pay for work performed after the
commencement date shall be an administrative expense.
RA 10142, Sec. 16 Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
(l) authorize the payment of administrative expenses as they
become due;
(q) include s Stay or Suspension Order which shall:
(4) prohibit the debtor from making any payment of its liabilities
outstanding as of the commencement date except as may be
provided herein.
Rules on Treatment of Employee Claims
1. Compensation of employees required to carry on the
business are treated as administrative expenses.
2. Claims of separation pay for months worked PRIOR to the
commencement date are treated as pre-commencement
claims.
3. Claims for salary and separation pay AFTER the
commencement are treated as administrative expenses.
210
c) Excluded Claims
RA 10142, Sec. 23 Effect of Failure to File Notice of Claim. - A
creditor whose claim is not listed in the schedule of debts and
liabilities and who fails to file a notice of claim in accordance with
the Commencement Order but subsequently files a belated
claim shall not be entitled to participate in the rehabilitation
proceedings but shall be entitled to receive distributions arising
therefrom.
Those with excluded claims cannot vote. They cannot be part of
creditors committees or management committees.
h. Treatment of Assets
RA 10142, Sec. 47 Management. - Unless otherwise provided
herein, the management of the juridical debtor shall remain with
the existing management subject to the applicable law/s and
agreement/s, if any, on the election or appointment of directors,
managers Or managing partner. However, all disbursements,
payments or sale, disposal, assignment, transfer or encumbrance
of property , or any other act affecting title or interest in
property, shall be subject to the approval of the rehabilitation
receiver and/or the court, as provided in the following
subchapter.
1) Unencumbered Assets
RA 10142, Sec. 48 Use or Disposition of Assets. - Except as
otherwise provided herein, no funds or property of the debtor
shall he used or disposed of except in the ordinary course of
business of the debtor, or unless necessary to finance the
administrative expenses of the rehabilitation proceedings.
RA 10142, Sec. 49 Sale of Assets. - The court, upon
application of the rehabilitation receiver, may authorize the sale
of unencumbered property of the debtor outside the ordinary
course of business upon a showing that the property, by its
nature or because of other circumstance, is perishable, costly to
maintain, susceptible to devaluation or otherwise injeopardy.
RA 10142, Sec. 52 Rescission or Nullity of Sale, Payment,
Transfer or Conveyance of Assets. - The court may rescind or
declare as null and void any sale, payment, transfer or
conveyance of the debtor's unencumbered property or any
encumbering thereof by the debtor or its agents or
representatives after the commencement date which are not in
the ordinary course of the business of the debtor: Provided,
however, That the unencumbered property may be sold,
encumbered or otherwise disposed of upon order of the court
after notice and hearing:
(a) if such are in the interest of administering the debtor and
facilitating the preparation and implementation of a
Rehabilitation Plan;
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(b) in order to provide a substitute lien, mortgage or pledge of
property under this Act;
(c) for payments made to meet administrative expenses as they
arise;
(d) for payments to victims of quasi delicts upon a showing that
the claim is valid and the debtor has insurance to reimburse the
debtor for the payments made;
(e) for payments made to repurchase property of the debtor that
is auctioned off in a judicial or extrajudicial sale under this Act; or
(f) for payments made to reclaim property of the debtor held
pursuant to a possessory lien.
- Unencumbered Asset property which has no lien
attached thereto
On Use and Disposition
- GR: No funds or property of the debtor shall be used or
disposed of.
- EX: Except in the ff. cases:
o In the ordinary course of the debtors business; or,
o If necessary to finance the administrative expenses of the
rehabilitation proceedings
On Sale (because of principle of debtor-in-place)
- The court may authorize the receivers application to sell the
unencumbered property of the debtor, outside the ordinary
course of the debtors business, upon showing that the
property, by its nature or because of other circumstances, is
o Perishable
o Costly to maintain
o Susceptible to devaluation; or,
o Otherwise in jeopardy
On Rescission
- GR: Court may rescind/declare as null and void, any
sale/payment/transfer/conveyance of the unencumbered
property, or encumbering thereof by the debtor or its
agents/representatives after the commencement date, which
are not in the ordinary course of the business of the debtor.
- PROV: Unencumbered property may be sold, encumbered,
or otherwise disposed of, upon order of the court, after
notice and hearing if:
o Such are in the interest of the administration of the
debtor and facilitating the preparation and
implementation of Rehab Plan
o In order to provide a substitute lien, mortgage orpledge
of property under this act
o For payments made to meet administrative expenses as
they arise
o For payments to victims of quasi-delicts, upon a showing
that the claim is valid and the debtor has insurance to
reimburse the debtor for payments made
211
 o For payments made to repurchase property of the debtor
that is auctioned off in a judicial or extrajudicial sale
under this act
" If foreclosed prior to commencement, it is NOT
STAYED
" If instituted after, it is STAYED
o For payments made to reclaim property of the debtor
held pursuant to a possessory lien
2) Encumbered Assets
RA 10142, Sec. 4
(l) Encumbered property shall refer to real or personal property
of the debtor upon which a lien attaches.
RA 10142, Sec. 17 Effects of the Commencement Order. -
Unless otherwise provided for in this Act, the court's issuance of
a Commencement Order shall, in addition to the effects of a
Stay or Suspension Order described in Section 16 hereof:
(b) prohibit or otherwise serve as the legal basis rendering null
and void the results of any extrajudicial activity or process to
seize property, sell encumbered property, or otherwise attempt
to collection or enforce a claim against the debtor after
commencement date unless otherwise allowed in this Act,
subject to the provisions of Section 50 hereof;
RA 10142, Sec. 50 Sale or Disposal of Encumbered Property
of the Debtor and Assets of Third Parties Held by Debtor. The
court may authorize the sale, transfer, conveyance or disposal of
encumbered property of the debtor, or property of others held
by the debtor where there is a security interest pertaining to
third parties under a financial, credit or other similar transactions
if, upon application of the rehabilitation receiver and with the
consent of the affected owners of the property, or secured
creditor/s in the case of encumbered property of the debtor
and, after notice and hearing, the court determines that:
(a) such sale, transfer, conveyance or disposal is necessary for the
continued operation of the debtor's business; and
(b) the debtor has made arrangements to provide a substitute
lien or ownership right that provides an equal level of security for
the counter-party's claim or right.
Provided, That properties held by the debtor where the debtor
has authority to sell such as trust receipt or consignment
arrangements may be sold or disposed of by the .debtor, if such
sale or disposal is necessary for the operation of the debtor's
business, and the debtor has made arrangements to provide a
substitute lien or ownership right that provides an equal level of
security for the counter-party's claim or right.
Sale or disposal of property under this section shall not give rise
to any criminal liability under applicable laws.
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RA 10142, Sec. 51 Assets of Debtor Held by Third Parties. In
the case of possessory pledges, mechanic's liens or similar
claims, third parties who have in their possession or control
property of the debtor shall not transfer, conveyor otherwise
dispose of the same to persons other than the debtor, unless
upon prior approval of the rehabilitation receiver. The
rehabilitation receiver may also:
(a) demand the surrender or the transfer of the possession or
control of such property to the rehabilitation receiver or any
other person, subject to payment of the claims secured by any
possessory Iien/s thereon;
(b) allow said third parties to retain possession or control, if such
an arrangement would more likely preserve or increase the value
of the property in question or the total value of the assets of the
debtor; or
(c) undertake any otI1er disposition of the said property as may
be beneficial for the rehabilitation of the debtor, after notice and
hearing, and approval of the court.
RA 10142, Sec. 53 Assets Subject to Rapid Obsolescence,
Depreciation and Diminution of Value. - Upon the application of
a secured creditor holding a lien against or holder of an
ownership interest in property held by the debtor that is subject
to potentially rapid obsolescence, depreciation or diminution in
value, the court shall, after notice and hearing, order the debtor
or rehabilitation receiver to take reasonable steps necessary to
prevent the depreciation. If depreciation cannot be avoided and
such depreciation is jeopardizing the security or property
interest of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be foreclosed upon by the
secured creditor according to the relevant agreement between
the debtor and the secured creditor, applicable rules of
procedure and relevant legislation: Provided. That the proceeds
of the sale will be distributed in accordance with the order
prescribed under the rules of concurrence and preference of
credits; or
(b) upon motion of, or with the consent of the affected secured
creditor or interest owner. order the conveyance of a lien against
or ownership interest in substitute property of the debtor to the
secured creditor: Provided. That other creditors holding liens on
such property, if any, do not object thereto, or, if such property
is not available;
(c) order the conveyance to the secured creditor or holder . of an
ownership interest of a lien on the residual funds from the sale of
encumbered property during the proceedings; or
(d) allow the sale or disposition of the property: Provided. That
the sale or disposition will maximize the value of the property for
the benefit of the secured creditor and the debtor, and the
proceeds of the sale will be distributed in accordance with the
order prescribed under the rules of concurrence and preference
of credits.
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- Encumbered Asset property upon which a lien attaches
On Sale
- Object
o Encumbered property of the debtor; or,
o Property of others held by the debtor where there is a
security interest pertaining to third parties under a
financial, credit or other similar transactions
- Process
o Rehabilitation receiver makes an application
o Consent of the ff. is secured:
" Affected owners of the property if object of sale is
their property; or,
" Secured creditor(s) if object of sale is the encumbered
property of the debtor
o Notice and hearing
- Requisites
o Such sale, transfer, conveyance or disposal of
encumbered property is necessary for the continued
operation of the business; and,
o Debtor has made arrangements to provide a substitute
lien or ownership right that provides an equal level of
security for the counter-partys claim or right.
- Proviso
o Properties held by debtor, where it has authority to sell
such properties under a trust receipt or consignment
arrangement, may be sold by it if such sale or disposal is
(requisites):
" Necessary for the operation of the debtors business;
AND,
" Debtor has made arrangements to provide a
substitute lien or ownership right that provides an
equal level of security for the counter-partys claim or
right
- No Criminal Liability
o Sale or disposal of property under this act shall not give
rise to any criminal liability under the applicable laws.
On Assets of Debtor Held by Third Parties
- GR: Third parties who have in their possession or control the
property of the debtor, shall not transfer, convey, or
otherwise dispose of the property.to other persons.
- EX:
o Transfer is to the debtor itself.
o Rehabilitation Receiver approves such transfer/disposal
- PROV:
o Demand the surrender or the transfer of the possession
or control of such property to the rehabilitation receiver
or any other person, subject to payment of the claims
secured by any possessory Iien(s) thereon;
o Allow said third parties to retain possession or control, if
such an arrangement would more likely preserve or
increase the value of the property in question or the total
value of the assets of the debtor; or,
o Undertake any other disposition of the said property as
may be beneficial for the rehabilitation of the debtor,
after notice and hearing, and approval of the court.
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Assets Subject to Rapid Obsolescence, Depreciation and
Diminution of Value
- Who Are Concerned
o Secured Creditor(s)
o Holder of An Ownership Interest
- Object
o Property held by debtor, subject to rapid obsolescence,
depreciation, or diminution in value
- Process
o Concerned entity makes an application
o Notice and hearing
o Court makes order to debtor or rehabilitation receiver to
take reasonable steps necessary to prevent depreciation.
- If the depreciation is inevitable and such depreciation
jeopardizes the security/property interest, the Court shall:
o Allow property to be foreclosed upon by the secured
creditor, provided that proceeds of the sale will be
distributed according to rules on concurrence and
preference of credits; or,
o Upon motion of or with consent of the affected secured
creditor/interest owner, order the conveyance of a lien
against, or ownership interest in substitute property of
the debtor to the secured creditor; provided that other
creditors holding liens on such property, if any, do not
object thereto, or
if such property is not available:
" Order conveyance to secured creditor/interest owner
of a lien on the residual funds from the sale of the
encumbered property during the proceedings; or,
" Allow the sale or disposition of the property, provided
that the sale or disposition will maximize the value of
the property for the benefit of the secured creditor
and the debtor, and the proceeds of the sale will be
distributed in accordance with the order prescribed
under the rules of concurrence and preference of
credits.
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i. Treatment of Contracts
1) Confirmation or Termination of Contracts
RA 10142, Sec. 57 Treatment of Contracts. - Unless cancelled
by virtue of a final judgment of a court of competent jurisdiction
issued prior to the issuance of the Commencement Order, or at
anytime thereafter by the court before which the rehabilitation
proceedings are pending, all valid and subbsisting contracts of
the debtor with creditors and other third parties as at the
commencement date shall continue in force: Provided, That
within ninety (90) days following the commencement of
proceedings, the debtor, with the consent of the rehabilitation
receiver, shall notify each contractual counter-party of whether it
is confirming the particular contract. Contractual obligations of
the debtor arising or performed during this period, and
afterwards for confirmed contracts, shall be considered
administrative expenses. Contracts not confirmed within the
required deadline shall be considered terminated. Claims for
actual damages, if any, arising as a result of the election to
terminate a contract shall be considered a pre-commencement
claim against the debtor. Nothing contained herein shall prevent
the cancellation or termination of any contract of the debtor for
any ground provided by law.
RA 10142, Sec. 16
Commencement of Proceedings and Issuance of a
Commencement Order. - The rehabilitation proceedings shall
commence upon the issuance of the Commencement Order,
which shall:
(l) authorize the payment of administrative expenses as they
become due;
(q) include s Stay or Suspension Order which shall:
(4) prohibit the debtor from making any payment of its liabilities
outstanding as of the commencement date except as may be
provided herein.
- Confirmation a valid and subsisting contract is confirmed
by notice to the contractual counter-party within 90 days
from the commencement of the proceedings
- Termination a valid and subsisting contract is terminated
if the 90-day period lapses without giving notice to the
counter-party for confirmation, but subject to a claim for
actual damages arising from the termination
Default: Valid and subsisting contracts shall continue to be in
force, PROVIDED that within 90 days following the
commencement of proceedings, a notification of confirmation
would be sent to notify the counter-party with the consent of the
rehabilitation receiver
Confirmed Contracts: Considered administrative expenses
Terminated Contracts: Claims arising from tese shall be
considered a pre-commencement claim against the debtor
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2) Avoidance Proceedings
RA 10142, Sec. 58 Rescission or Nullity of Certain Pre-
commencement Transactions. Any transaction occurring prior to
commencement date entered into by the debtor or involving its
funds or assets may be rescinded or declared null and void on
the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of
creditors. Without limiting the generality of the foregoing, a
disputable presumption of such design shall arise if the
transaction:
(a) provides unreasonably inadequate consideration to the
debtor and is executed within ninety (90) days prior to the
commencement date;
(b) involves an accelerated payment of a claim to a creditor
within ninety (90) days prior to the commencement date;
(c) provides security or additional security executed within ninety
(90) days prior to the commencement date;
(d) involves creditors, where a creditor obtained, or received the
benefit of, more than its pro rata share in the assets of the
debtor, executed at a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the
creditors to collect claims where the effect of the transaction is
to put assets of the debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the
court from rescinding or declaring as null and void a transaction
on other grounds provided by relevant legislation and
jurisprudence: Provided, further, That the provisions of the Civil
Code on rescission shall in any case apply to these transactions.
RA 10142, Sec. 59 Actions for Rescission or Nullity. - (a) The
rehabilitation receiver or, with his conformity, any creditor may
initiate and prosecute any action to rescind, or declare null and
void any transaction described in Section 58 hereof. If the
rehabilitation receiver does not consent to the filing or
prosecution of such action,
(b) If leave of court is granted under subsection (a), the
rehabilitation receiver shall assign and transfer to the creditor all
rights, title and interest in the chose in action or subject matter
of the proceeding, including any document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to
subsection (a), to the extent of his claim and the costs, belongs
exclusively to the creditor instituting the proceeding, and the
surplus, if any, belongs to the estate.
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(d) Where, before an order is made under subsection (a), the
rehabilitation receiver (or liquidator) signifies to the court his
readiness to institute the proceeding for the benefit of the
creditors, the order shall fix the time within which he shall do so
and, m that case, the benefit derived from the proceeding, if
instituted within the time limits so fixed, belongs to the estate.
- This proceeding permits certain transactions to be rescinded
or nullified, and the asset transferred pursuant to the said
rescinded or nullified transaction to be recovered for the
benefit of the creditors.
Who may initiate:
- Rehabilitation receiver or creditor, with the rehab receivers
conformity
- If without rehabilitation receivers consent, creditor may
seek leave of court
Requisites for Rescission/Nullification
- Transactions were entered into by the debtor or involve the
debtors funds and assets;
- Prior to the commencement date;
- Executed in fraud of creditors OR constitutes an undue
preference of creditors; generally, all fraudulent conveyances
and all preferential transafers.
Badges of Fraud or Undue Preference of Creditors
- The ff. transactions raise a disputable presumption of fraud
or undue preference of creditors:
o Those that provide unreasonably inadequate
consideration to the debtor and is executed 90 days prior
to the commencement date
o Those which involves an accelerated payment of a claim
to a creditor within the 90 days prior to the
commencement date
o Those which provide security or additional security
executed within the 90 days prior to the commencement
date
o Those involving creditors, where a creditor obtained or
received the benefit of more than its pro rata share in the
assets of the debtor, which was executed during the time
that debtor was insolvent
o Those intended to defeat, delay, or hinder the ability of
the creditors to collect claims where the effect of the
transaction to put the assets of the debtor beyond the
creditors reach.
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j. Rehabilitation Plan
1) General Concepts
RA 10142, Sec. 4
(ii) Rehabilitation Plan shall refer to a plan by which the financial
well-being and viability of an insolvent debtor can be restored
using various means including, but not limited to, debt
forgiveness, debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt-equity conversion and sale
of the business (or parts of it) as a going concern, or setting-up
of new business entity as prescribed in Section 62 hereof, or
other similar arrangements as may be approved by the court or
creditors.
RA 10142, Sec. 62 Contents of a Rehabilitation Plan. The
Rehabilitation Plan shall, as a minimum:
(a) specify the underlying assumptions, the financial goals and
the procedures proposed to accomplish such goals;
(b) compare the amounts expected to be received by the
creditors under the Rehabilitation Plan with those that they will
receive if liquidation ensues within the next one hundred twenty
(120) days;
(c) contain information sufficient to give the various classes of
creditors a reasonable basis for determining whether supporting
the Plan is in their financial interest when compared to the
immediate liquidation of the debtor, including any reduction of
principal interest and penalties payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has
been granted by the court;
(f) indicate how the insolvent debtor will be rehabilitated
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization. dacion en
pago, debt-equity conversion and sale of the business (or parts
of it) as a going concern, or setting-up of a new business entity
or other similar arrangements as may be necessary to restore the
financial well-being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in
subsections (d) and (e);
(h) provide for equal treatment of all claims within the same class
or subclass, unless a particular creditor voluntarily agrees to less
favorable treatment;
(i) ensure that the payments made under the plan follow the
priority established under the provisions of the Civil Code on
concurrence and preference of credits and other applicable laws;
215
(j) maintain the security interest of secured creditors and
preserve the liquidation value of the security unless such has
been waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement
debts made during the proceedings and the justifications
thereof;
(1) describe the disputed claims and the provisioning of funds to
account for appropriate payments should the claim be ruled
valid or its amount adjusted;
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of
which shall be considered a material breach of the Plan;
(o) identify those responsible for the future management of the
debtor and the supervision and implementation of the Plan, their
affiliation with the debtor and their remuneration;
(p) address the treatment of claims arising after the confirmation
of the Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the
terms of all contracts that the debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative
expenses as a condition to the Plan's approval unless such
condition has been waived in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and
assessments, or an adjusted amount pursuant to a compromise
settlement with the BlR Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or
evidence of a compromise settlement with the BIR;
(u) include a valid and binding r(,solution of a meeting of the
debtor's stockholders to increase the shares by the required
amount in cases where the Plan contemplates an additional
issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation
receiver after the approval of the Plan; and
(w) contain provisions for conciliation and/or mediation as a
prerequisite to court assistance or intervention in the event of
any disagreement in the interpretation or implementation of the
Rehabilitation Plan.
RA 10142, Sec. 4
(ss) Voting creditor shall refer to a creditor that is a member of a
class of creditors, the consent of which is necessary for the
approval of a Rehabilitation Plan under this Act.
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RA 10142, Sec. 54 Post-commencement Interest. - The rate
and term of interest, if any, on secured and unsecured claims
shall be determined and provided for in the approved
Rehabilitation Plan.
RA 10142, Sec. 55 Post-commencement Loans and
Obligations. - With the approval of the court upon the
recommendation of the rehabilitation receiver, the debtor, in
order to enhance its rehabilitation. may:
(a) enter into credit arrangements; or
(b) enter into credit arrangements, secured by mortgages of its
unencumbered property or secondary mortgages of
encumbered property with the approval of senior secured
parties with regard to the encumbered property; or
(c) incur other obligations as may be essential for its
rehabilitation.
The payment of the foregoing obligations shall be considered
administrative expenses under this Act.
FRIA provides means for execution of the Rehabilitation
Plan, which may include:
- Debt forgiveness, or Condonation or waiver of certain
claims
- Debt rescheduling, or extension of time for payment of
claim
- Reorganization or quasi-reorganization, or change in
equity, corporate or operating structure of the debtor
- Dacion en pago, or the assignment of assets as payment
for certain claims
- Debt to equity conversion, or the issuance of ownership
interests as payment for certain claims
- Sale of the business to generate income to pay off
claims
- Setting up of new business entities, as part of a
reorganization
2) Cram Down Effect
The goal is to have creditor approve the Rehabilitation Plan.
The concept of classes of creditors is found in the Registry of
Claims, based on the creditors submissions.
RA 10142, Sec. 63 Consultation with Debtor and Creditors.
if the court gives due course to the petition, the rehabilitation
receiver shall confer with the debtor and all the classes of
creditors, and may consider their views and proposals ill the
review, revision or preparation of a new Rehabilitation Plan.
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RA 10142, Sec. 64 Creditor Approval of Rehabilitation Plan.
The rehabilitation receiver shall notify the creditors and
stakeholders that the Plan is ready for their examination. Within
twenty (2Q) days from the said notification, the rehabilitation
receiver shall convene the creditors, either as a whole or per
class, for purposes of voting on the approval of the Plan. The
Plan shall be deemed rejected unless approved by all classes of
creditors w hose rights are adversely modified or affected by the
Plan. For purposes of this section, the Plan is deemed to have
been approved by a class of creditors if members of the said
class holding more than fifty percent (50%) of the total claims of
the said class vote in favor of the Plan. The votes of the creditors
shall be based solely on the amount of their respective claims
based on the registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the
court may confirm the Rehabilitation Plan if all of the
following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements
specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of
the Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor
lose at least their controlling interest as a result of the
Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting
class of creditors with compensation which has a net present
value greater than that which they would have received if the
debtor were under liquidation.
RA 10142, Sec. 65 Submission of Rehabilitation Plan to the
Court. If the Rehabilitation Plan is approved, the rehabilitation
receiver shall submit the same to the court for confirmation.
Within five (5) days from receipt of the Rehabilitation Plan, the
court shall notify the creditors that the Rehabilitation Plan has
been submitted for confirmation, that any creditor may obtain
copies of the Rehabilitation Plan and that any creditor may file
an objection thereto.
RA 10142, Sec. 66 Filing of Objections to Rehabilitation
Plan. A creditor may file an objection to the Rehabilitation Plan
within twenty (20) days from receipt of notice from the court that
the Rehabilitation Plan has been submitted for confirmation.
Objections to a Rehabilitation Plan shall be limited to the
following:
(a) The creditors' support was induced by fraud;
(b)The documents or data relied upon in the Rehabilitation Plan
are materially false or misleading; or
(c)The Rehabilitation Plan is in fact not supported by the voting
creditors.
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RA 10142, Sec. 67 Hearing on the Objections. - If objections
have been submitted during the relevant period, the court shall
issue an order setting the time and date for the hearing or
hearings on the objections.
If the court finds merit in the objection, it shall order the
rehabilitation receiver or other party to cure the defect,
whenever feasible. If the court determines that the debtor acted
in bad faith, or that it is not feasible to cure the defect, the court
shall convert the proceedings into one for the liquidation of the
debtor under Chapter V of this Act.
RA 10142, Sec. 68 Confirmation of the Rehabilitation Plan. If
no objections are filed within the relevant period or, if objections
are filed, the court finds them lacking in merit, or determines
that the basis for the objection has been cured, or determines
that the debtor has complied with an order to cure the
objection, the court shall issue an order confirming the
Rehabilitation Plan.
The court may confirm the Rehabilitation Plan notwithstanding
unresolved disputes over claims if the Rehabilitation Plan has
made adequate provisions for paying such claims.
For the avoidance of doubt, the provisions of other laws to the
contrary notwithstanding, the court shall have the power to
approve or implement the Rehabilitation Plan despite the lack of
approval, or objection from the owners, partners or stockholders
of the insolvent debtor: Provided, That the terms thereof are
necessary to restore the financial well-being and viability of the
insolvent debtor.
RA 10142, Sec. 69 Effect of Confirmation of the Rehabilitation
Plan, - The confirmation of the Rehabilitation Plan by the court
shall result in the following:
(a) The Rehabilitation Plan and its provisions shall be binding
upon the debtor and all persons who may be affected by . it,
including the creditors, whether or not such persons have
participated in the proceedings or opposed the Rehabilitation
Plan or whether or not their claims have been scheduled;
(b) The debtor shall comply with the provisions of the
Rehabilitation Plan and shall take all actions necessary to carry
out the Plan;
(c) Payments shall be made to the creditors in accordance with
the provisions of the Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and
its creditors shall be interpreted as continuing to apply to the
extent that they do not conflict with the provisions of the
Rehabilitation Plan;
(e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless
of whether or not the Plan is successfully implement; and
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(f) Claims arising after approval of the Plan that are otherwise not
treated by the Plan are not subject to any Suspension Order.
The Order confirming the Plan shall comply with Rules 36 of the
Rules of Court: Provided, however, That the court may maintain
jurisdiction over the case in order to resolve claims against the
debtor that remain contested and allegations that the debtor
has breached the Plan.
RA 10142, Sec. 70 Liability of General Partners of a
Partnership for Unpaid Balances Under an Approved Plan. - The
approval of the Plan shall not affect the rights of creditors to
pursue actions against the general partners of a partnership to
the extent they are liable under relevant legislation for the debts
thereof.
RA 10142, Sec. 71 Treatment of Amounts of Indebtedness or
Obligations Forgiven or Reduced. - Amounts of any
indebtedness or obligations reduced or forgiven in connection
with a Plan's approval shall not be subject to any tax in
furtherance of the purposes of this Act.
RA 10142, Sec. 72 Period for Confirmation of the
Rehabilitation Plan. - The court shall have a maximum period of
one (1) year from the date of the filing of the petition to confirm
a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said period, the
proceedings may upon motion or motu propio, be converted
into one for the liquidation of the debtor .
RA 10142, Sec. 73 Accounting Discharge of Rehabilitation
Receiver. - Upon the confirmation of the Rehabilitation Plan, the
rehabilitation receiver shall provide a final report and accounting
to the court. Unless the Rehabilitation Plan specifically requires
and describes the role of the rehabilitation receiver after the
approval of the Rehabilitation Plan, the court shall discharge the
rehabilitation receiver of his duties.
(1) Creditors may approve a Rehabilitation Plan
- Provided all classes of creditors whose rights are
adversely modified or affected by the Rehabilitation
Plan approve it
- Rehabilitation plan is deemed approved by a class of
creditors if members holding more than 50% of the
total claims of the said class vote in favor of the Plan
- FRIA refers to claims for calculating the minimum
required vote
(2) The Court may confirm a Rehabilitation Plan over the
objection of the creditors
- Referred to as a CRAM DOWN
- The effect is that the confirmed Rehabilitation Plan
binds not only the insolvent debtor but also all
persons affected by it, including creditors,
whether or not such persons participated in the
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proceedings or opposed the Rehabilitation Plan, or
whether or not their claims were scheduled
- Although contracts and other arrangements between
the debtor and its creditors are interpreted as
continuing to apply, this is only applicable to the
extent that the contracts and arrangements do not
conflict with the provisions of the Rehabilitation Plan
- Requisites for a CRAM DOWN (must concur):
(a) The Rehabilitation Plan complies with the
requirements specified in the FRIA
(b) The Rehabilitation Receiver recommends the
confirmation
(c) The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan
(d) The Rehabilitation Plan would likely provide the
objecting class of creditors with compensation that
has a net present value greater than that which
they would have received if the debtor were under
liquidation
(3) The Court may also confirm a Rehabilitation Plan over the
objection of the owners, partners or stockholders of the
insolvent debtor, if the terms of the Plan are necessary to
restore the financial wellbeing and viability of the
insolvent debtor
BPI v. SEC (2007) Tinga, J.
Petitioner: Bank of the Philippine Islands (formerly the FEBTC)
Respondents: SEC, ASB Holdings, et. al.
Concept: Rehabilitation Plan; Cram-Down Effect
Doctrine:
- The right against non-impairment of contract has no
application to an exercise of non-legislative power (i.e.,
judicial or administrative powers for example)
- The inclusion of a dacion en pago provision in the
Rehabilitation Plan does not compel the creditor to accept
such an arrangement. Dacion en pago, being a form of sale
and hence, contractual by nature, will always require the
mutual consent of both parties.
Brief Facts:
BPI lent P86.8 million to ASB. ASB executed a REM over 2
properties in Greenhills as security for the loan. ASB was
subsequently placed under rehabilitation proceedings. The
proposed Rehabilitation Plan in the said proceedings contained
a stipulation that one of the mortgaged properties to BPI would
be sold to fully satisfy the loan (a dacion en pago) while the
remaining property mortgaged would be released to be part of
the free property of ASB. BPI objected to the stipulation,
claiming that it violated the right to and freedom of contract.
ISSUE:
WON the freedom to contract of BPI is violated by the
Rehabilitation Plan (NO)
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RATIO: There is no violation of the right and freedom
to contract on the part of BPI.
- SC: We have already resolved a similar issue in Metropolitan
Bank & Trust Co. v. ASB Holdings.
o In that case, MBTC (who was also a secured creditor like
BPI) also refused to enter into a similar dacion en pago
arrangement in ASBs proposed Rehabilitation Plan.
o MBTC argued under those provisions, there would be a
forced transfer of properties and a diminution of its right
to enforce its lien on the mortgaged properties, which
runs afoul against its right and freedom to contract, as
well as its right to due process.
o SC: There is no impairment of contract since the
approval of the Rehabilitation Plan and the appointment
of a receiver only suspends the actions for claims against
the debtor. Secured creditors like MBTC (and BPI, in the
case at bar) may still enforce their preferred rights when
the assets of ASB will be liquidated. If the rehabilitation is
found to be no longer feasible, the secured creditors will
still enjoy preference over unsecured ones.
o SC: There is also no compulsion to enter into the dacion
en pago arrangement, nor to waive the interests,
penalties and charges since the provisions in the
Rehabilitation Plan that provide for them are
merely considered as proposals; if they reject such
proposals, then the Rehabilitation Plan provides that the
obligations to the secured creditors will be settled with
the mortgaged properties at their selling prices.
- The right against non-impairment of contracts is a right that
limits the exercise of legislative power, and not judicial
nor quasi-judicial powers.
o Hence, the SECs approval the proposed plan containing
the provisions objected to by BPI cannot be considered
as a violation of the right against non-impairment of
contracts because the SEC was exercising quasi-judicial
power then.
- SC: Also, by the contractual nature of dacion en pago, which
is a form of payment, it requires the consent of the parties
involved as one of its essential elements for its validity.
o Hence, dacion en pago may not validly be compelled
upon BPI, contrary to its theory.
- The SC also notes that the objected dacion en pago
arrangement is not the only proposed solution in the
Rehabilitation Plan.
o It provides that if the said arrangement is rejected, then
the mortgaged properties would be sold by ASB at
selling prices.
DISPOSITIVE: Petition denied; CA affirmed.
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Pryce Corp v China Banking Corp (2014) Leonen, J.
Petitioner: Pryce Corporation
Respondents: China Banking Corporation
Concept: Cram Down Effect
Doctrine:
CRAM-DOWN:
- The court may approve a rehabilitation plan even over the
opposition of creditors holding a majority of the total
liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
unreasonable.
- The rehabilitation plan, once approved, is binding upon the
debtor and all persons who may be affected by it, including
creditors, whether or not such persons have participated in
the proceedings or have opposed the plan or whether or
not their claims have been scheduled
Brief Facts:
Pryce filed a petition for rehabilitation, which was found to be
sufficient in form and substance. The rehabilitation receiver
submitted an amended rehabilitation plan, which included the
payment of the indebtedness to China Banking Corp. and BPI
through a dacion en pago. The rehabilitation plan was approved,
finding Pryce eligible to be placed in a state of corporate
rehabilitation. CBC appealed the order, and argued that the
approval impaired the obligation of contracts, while BPI filed a
separate petition raising the same issues. The CA granted the
petitions. Pryce appealed the CAs decision, but this was denied,
along with subsequent MRs.
ISSUES:
1. WON Rehabilitation Plan may be approved despite
objection of CBC (YES)
2. Whether the rehabilitation court is required to hold a
hearing to comply with the serious situations test before
issuing a stay order (NO)
3. WON approval of rehabilitation plan violates constitutional
proscription against impairment of contractual obligations
(NO)
RATIO:
1. Yes, the Rehabilitation Plan may be approved
following the cram-down principle.
- Interim Rules adopts the cram-down principle which
consists of 2 things:
(1) Approval despite opposition
(2) Binding effect of the approved plan
- FIRST, Rehabilitation Court is allowed to approve
rehabilitation plan even over the opposition of creditors
holding a mahority of the total liabilities of the debtor if, in
its judgment, (1) the rehabilitation of the debtor is
feasible and (2) opposition of the credits is
manifestly unreasonable
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- SECOND, Upon approval by the court, the rehabilitation
plan and its provisions shall be binding upon the debtor and
all persons who may be affected by it, including creditors,
whether or not such persons have participated in the
proceedings, or opposed the plan or whether or not their
claims have been scheduled
2. No, the serious situations test has been replaces
with the sufficiency in form and substance test
- RCBC v. IAC: Serious situations suspension of claims is
counted only upon the appointment of a rehabilitation
receiver and certain situations serious in nature must be
shown to exist before one is appointed
o PD 902-A, certain situations must be shown to exist
before a management committee may be created:
(1) When there is imminent danger of dissipation, loss,
wastage or destruction of assets or other
properties; OR
(2) When there is a paralization of business operations
of such corporations or entities which may be
prejudicial to the interest of minority stockholders,
party-litigants, or to the general public
o PD 902-A, certain situations must be shown to exist
before a rehabilitation receiver may be appointed:
(1) Appointment is necessary in order to preserve the
rights of the parties-litigants; AND/OR
(2) Protect the interest of the investing public and
creditors
o When SEC does not deem it necessary to appoint a
receiver or create a management committee, it may be
assumed that there are sufficient assets to sustain the
rehabilitation plan, and that creditors and investors are
amply protected. Suspension of actions for claims not
necessary.
- RCBC v. IAC was promulgated prior the effectivity of interim
rules (Dec. 15, 2000)
- Interim Rules states: if court finds that the petition is
sufficient in form and substance, it shall, not later than 5
days from the filing of petition, issue an Order (a) appointing
a rehabilitation receiver and (b) staying enforcement of all
claims
o Sufficient that the petition alleges all the material facts
and includes all the documents required
o Stay order and appointment of rehabilitation receiver is
an extraordinary, preliminary, ex parte remedy
" Effectivity period of a stay order is only from the
date of its issuance until dismissal of the petition or
termination of rehabilitation proceedings
" It is not a final disposition of the case
" It is an interlocutory order
o Interim Rules does not require a hearing before the
issuance of a stay order
" Interim Rules removed the concept of an Interim
Receiver and replaced it with a Rehabilitation
Receiver. This is to justify the immediate issuance
of the stay order, because under PD 902-A,
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suspension of actions takes effect only upon
appointment of Rehabilitation Receiver
- Nevertheless, while the Interim Rules does not require a
hearing, neither does it prohibit the holding of one.
o Trial court has ample discretion to call a hearing when it
is not confident that the allegations in the petition are
sufficient in form or substance, for so long as this
hearing is held within the 5-day period from the filing of
the petition
o This is in consonance with the important objectives of
the Interim Rules: to promote a speedy disposition of
corporate rehabilitation cases
3. No, the case does not involve a law or an
executive issuance declaring the modification of
the contract hence, non-impairment clause may
not be invoked
- Non-impairment clause must yield to the police power of
the State. Property rights and contractual rights are not
absolute.
o Successful rehabilitation of a distressed corporation will
benefit its debtors, creditors, employees, and the
economy in general.
- CRAM-DOWN:
o The court may approve a rehabilitation plan even over
the opposition of creditors holding a majority of the
total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
unreasonable.
o The rehabilitation plan, once approved, is binding upon
the debtor and all persons who may be affected by it,
including creditors, whether or not such persons have
participated in the proceedings or have opposed the
plan or whether or not their claims have been
scheduled
- Corporate rehabilitation is one of the remedies for
businesses that experience a downturn.
o Rather than leave the various creditors unprotected,
legislation now provides for an orderly procedure of
equitably and fairly addressing their concerns.
o It provides a corporations owners a sound chance to
re-engage the market, hopefully with more vigor and
enlightened services, having learned from a painful
experience
o A business that is about to incur tremendous losses
may not be able to pay all its creditors. Rather than
leave it to the strongest and most resourceful amongst
them, the state steps in to equitably distribute
the corporations limited resources
- Cram-down principle, in effect, dilutes contracts. When it
permits the approval of a rehabilitation plan over the
opposition of creditors, or when it imposes a binding effect
on all parties including those who did not participate in the
proceedings, the burden of loss is shifted to
creditors to allow the corporation to rehabilitate
itself from insolvency
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- Rather than let struggling corporations slip and vanish, the
better option is to allow courts to come in and apply the
process of corporate rehabilitation
- This option is preferred so as to avoid the TRAGEDY OF
COMMONS (Garrett Hardin)
o Coercive government regulation is necessary to prevent
the degradation of common-pool resources since
individual resource appropriators receive the full
benefit of their use and bear only a share of their cost
- GAME THEORY
o Since no individual has the right to control or exclude
others, each appropriator has a very high discount rate
with little incentive to efficiently manage the resource in
order to guarantee future use
o The cure is an exogenous policy (intervention) to
equitable distribute scarce resources
o This will incentivize future creditors to continue lending,
resulting in something productive rather than resulting
in nothing
- GENERAL THEORY OF SECOND BEST
o Correction of one market imperfection will not
necessarily be efficiency-enhancing unless there is also
simultaneous correction of all other market
imperfections
o The correction of one market imperfection may
adversely affect market efficiency elsewhere
o This theory is one justification for the passing
of corporate rehabilitation law s allowing the
suspension of payments so that corporations
can get back on their feet
- Environment is never guaranteed; there are always risks.
- Contracts are sacred as the law between parties but these
contracts exist within a society where nothing is risk-free,
and the government is constantly being called to
attend to the realities of the times
- Corporate rehabilitation is preferred for addressing social
costs:
o Allowing corporation to rehabilitate will retain if not
increase employment; services will benefit the market,
etc.
DISPOSITIVE: Motion GRANTED.
Pryce v. China Banking Corp.
This shows that interference in the proceedings is a valid
exercise of police power.
BPI v. Sarabia Manor Hotel Corp. (2013) Perlas-Bernabe, J.
Petitioner: Bank of the Philippine Islands (BPI)
Respondent: Sarabia Manor Hotel Corporation
Concept: Rehabilitation Plan
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Doctrine:
A rehabilitation plan may be approved even over the
opposition of the creditors holding a majority of the
corporations total liabilities if there is a showing that
rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. If a creditor, whose interests remain
well-preserved under the rehabilitation plan, still declines to
accept interests pegged at reasonable rates and in turn
proposes rates which are largely counter-productive to the
rehabilitation, then it may be said that the creditors opposition
is manifestly unreasonable.
Brief Facts:
Sarabia obtained a loan from BPI to finance the construction of a
new hotel building. Sarabias contractor defaulted in the
performance of its obligations which caused the delay in the
completion of the new building. Sarabia had to take over its
construction, and as a result, its projected revenues tilted.
Sarabia filed a Petition for Rehabilitation as it foresaw the
impossibility of meeting its maturing obligations when they fall
due. The Rehabilitation Plan fixed a uniform interest rate of
6.75% p.a. for all outstanding debts of Sarabia. BPI opposed the
interest rate, claiming that the same will not cover its cost of
funds, which was at 10%.
ISSUES:
1. WON Sarabias Rehabilitation Plan is feasible (YES)
2. WON the fixed interest rate of 6.75% p.a. should be
affirmed (YES)
RATIO:
1. YES. Sarabias Rehabilitation Plan is feasible.
- Rehabilitation shall be undertaken when it is shown that the
continued operation of the corporation is economically
more feasible and its creditors can recover, by way of
present value of payments projected in the plan, more, if
the corporation continues as a going concern than if it is
immediately liquidated
- Wonder Book Corporation v. Philippine Bank of
Communications
o Rehabilitation is available to corporations which, while
illiquid, have assets that can generate more cash if used
in its daily operations than sold
o The remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole
purpose is to delay the enforcement of any of the rights
of its creditors, which rendered obvious by the
following:
" Absence of a sound and workable business plan
" Baseless and unexplained assumptions, targets
and goals
" Speculative capital infusion or complete lack
thereof for the execution of the business plan
" Cash flow cannot sustain daily operations
" Negative net worth and assets are near full
depreciation or fully depreciated
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- Considerations:
(1) If the examination of financial data show that there is a
real opportunity to rehabilitate the corporation in view
of the assumptions made and financial goals stated in
the proposed rehabilitation plan, then it may be said
that a rehabilitation is feasible
(2) If the results indicate that there lies no reasonable
probability that the distressed corporation could be
revived and that liquidation would better serve the
interests of its stakeholders, then it may be said that
rehabilitation would not be feasible. In such case, the
rehabilitation court may convert the proceedings into
one for liquidation.
- Sarabias Rehabilitation Plan is feasible for the
following reasons:
(a) Sarabia has the financial capability to undergo
rehabilitation
- Financial history shows that it has the inherent
capacity to generate funds to repay its loan
obligations if applied through the proper financial
framework
- Its business is not only an on0going but also a
growing concern
- Despite financial constraints, Sarabia likewise
continues to be profitable
- Prospect of substantial and continuous revenue
generation is a realistic goal
(b) Sarabia has the ability to have sustainable
profits over a long period of time
- Sarabias projected revenues shall have a steady
year-on-year growth from the time that it applied
for rehabilitation until the end of its rehabilitation
plan
o 26% in 2003
o 5% in 2004-2007
o 3% in 2008-2018
- Should projections come through, Sarabia would
have the ability not just to pay off its existing debts
but also to carry on with its intended expansion
- Projected sustainability makes its rehabilitation a
more viable option to satisfy interests of its
stakeholders in the long run as compared to its
immediate liquidation
(c) Interests of Sarabias creditors are well-
protected. Adequate safeguards such as:
- Deficiency in the required minimum payments to
creditors based on the presented amortization
schedule shall be paid personally by Sarabias
stockholders
- Capital expenditures which are over and above
what is provided in the cash flow of the
rehabilitation plan are subject to Courts approval
- Maintenance of existing real estate mortgages
over hotel properties as collaterals and securities in
favor of BPI
- Reinstatement of surety agreement of Sarabias
stockholders regarding the debt to BPI
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2. YES. BPIs opposition is unreasonable.
- Sec. 23, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation states that: A rehabilitation plan
may be approved even over the opposition of the
creditors holding a majority of the corporations total
liabilities if there is a showing that (1) rehabilitation is
feasible and the (2) opposition of the creditors is
manifestly unreasonable. Cram-down clause
o This clause is necessary to curb the majority creditors
natural tendency to dictate their own terms and
conditions to the rehabilitation, absent due regard to
the greater long-term benefit of all stakeholders.
o It forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-
term viability over immediate but incomplete recovery
- BPIs proposal: original escalating interest rates of 7%, 8%,
10%, 12%, and 14%, over 17 years be applied instead
- Court points out that oppositions which push for high
interest rates are generally frowned upon in rehabilitation
proceedings given that the inherent purpose is to find ways
and means to minimize the expenses during rehabilitation
period
- If a creditor, whose interests remain well-preserved under
the rehabilitation plan, still declines to accept interests
pegged at reasonable rates and in turn proposes rates
which are largely counter-productive to the rehabilitation,
then it may be said that the creditors opposition is
manifestly unreasonable
- Court finds BPIs opposition to be manifestly unreasonable
considering that:
(a) The 6.75% p.a. interest rate already constitutes a
reasonable interest rate which is concordant to
Sarabias projected rehabilitation
(b) BPIs proposed escalating interest rates remain hinged
on the theoretical assumption of future fluctuations in
the market
(c) The 6.75% p.a. is actually higher than BPIs perceived
cost of money as evidenced by its published time
deposit rate which is at 5.5%
(d) 6.75% p.a. is also higher than the benchmark ninety
one-day commercial paper, which is used by banks to
price their loan averages to 6.4% p.a. in 3005, and has a
three-year average rate of 6.57% p.a.
(e) BPIs interests are adequately protected by the
maintenance of real estate mortgages and surety
agreement
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Notes: The Court on Rehabilitation:
- Rules on corporate rehabilitation have been crafted in order
to five companies sufficient leeway to deal with debilitating
financial predicaments in the hope of restoring a sustainable
operating form if only to best accommodate the various
interests of all its stakeholders: its stockholders, creditors,
and even the general public.
- Case law has defined corporate rehabilitation as an attempt
to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial
stress to solvency
- It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation
to its former position of successful operation and liquidity
- Its purpose is to enable the company to gain a new lease on
life and thereby allow creditors to be paid their claims from
its earnings
DISPOSITIVE: Petition denied.
BPI v. Sarabia
Feasibility of manifest unreasonableness no longer applies.
k. Termination of Proceedings
RA 10142, Sec. 74 Termination of Proceedings. - The
rehabilitation proceedings under Chapter II shall, upon motion
by any stakeholder or the rehabilitation receiver be terminated
by order of the court either declaring a successful
implementation of the Rehabilitation Plan or a failure of
rehabilitation.
There is failure of rehabilitation in the following cases:
(a) Dismissal of the petition by the court;
(b) The debtor fails to submit a Rehabilitation Plan;
(c) Under the Rehabilitation Plan submitted by the debtor, there
is no substantial likelihood that the debtor can be rehabilitated
within a reasonable period;
(d) The Rehabilitation Plan or its amendment is approved by the
court but in the implementation thereof, the debtor fails to
perform its obligations thereunder or there is a failure to realize
the objectives, targets or goals set forth therein, including the
timelines and conditions for the settlement of the obligations
due to the creditors and other claimants;
(e) The commission of fraud in securing the approval of the
Rehabilitation Plan or its amendment; and
(f) Other analogous circumstances as may be defined by the
rules of procedure.
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Upon a breach of, or upon a failure of the Rehabilitation Plan the
court, upon motion by an affected party may:
(1) Issue an order directing that the breach be cured within a
specified period of time, falling which the proceedings may be
converted to a liquidation;
(2) Issue an order converting the proceedings to a liquidation;
(3) Allow the debtor or rehabilitation receiver to submit
amendments to the Rehabilitation Plan, the approval of which
shall be governed by the same requirements for the approval of
a Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach consistent with
the present regulation, other applicable law and the best
interests of the creditors; or
(5) Enforce the applicable provisions of the Rehabilitation Plan
through a writ of execution.
Under breach or failure of Rehabilitation Plan:
Numbers 1-2 result in a conversion.
Numbers 3-5 do not result in a termination.
- #3: starts all over again
- #4: remedy of the breach
- #5: enforcement
RA 10142, Sec. 75 Effects of Termination. - Termination of the
proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his
submission of a final accounting; and
(b) The lifting of the Stay Order and any other court order
holding in abeyance any action for the enforcement of a claim
against the debtor.
Provided, however, That if the termination of proceedings is due
to failure of rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall be
immediately converted to liquidation as provided in Section 92
of this Act.
l. Conversion to Liquidation Proceedings
RA 10142, Sec. 92 Conversion by the Court into Liquidation
Proceedings. - During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation
proceedings pursuant to
(a) Section 25(c) of this Act; or
(b) Section 72 of this Act; or
(c) Section 75 of this Act; or
(d) Section 90 of this Act; or at any other time upon the
recommendation of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible. Thereupon, the court
shall issue the Liquidation Order mentioned in Section 112
hereof.
223
Sec. 25 Giving Due Course to or Dismissal of Petition, or
Conversion of Proceedings. - Within ten (10) days from receipt of
the report of the rehabilitation receiver mentioned in Section 24
hereof the court may:
(c)convert the proceedings into one for the liquidation of the
debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for the debtor to be
successfully rehabilitated as determined in accordance with
the rules to be promulgated by the Supreme Court.
Sec. 72 Period for Confirmation of the Rehabilitation Plan. - The
court shall have a maximum period of one (1) year from the date
of the filing of the petition to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said period, the
proceedings may upon motion or motu propio, be converted
into one for the liquidation of the debtor .
Sec. 75 Effects of Termination. - Termination of
proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his
submission of a final accounting; and
(b) The lifting of the Stay Order and any other court order
holding in abeyance any action for the enforcement of a claim
against the debtor.
Provided, however, That if the termination of proceedings is due
to failure of rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall be
immediately converted to liquidation as provided in Section 92
of this Act.
Sec. 90 Voluntary Liquidation. xxx
At any time during the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in the same
court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation
proceedings.
xxx
- Rehabilitation and Liquidation cannot be undertaken at the
same time
- Generally, it is only if there is a showing that the
rehabilitation of the insolvent debtor is no longer
economically feasible or does not provide better present
value recovery for the creditors that rehabilitation may be
converted into liquidation
Rehabilitation = rescue
Liquidation = surrender
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C. Pre-negotiated Rehabilitation
RA 10142, Sec. 76 Petition by Debtor. - An insolvent debtor,
by itself or jointly with any of its creditors, may file a verified
petition with the court for the approval of a pre-negotiated
Rehabilitation Plan which has been endorsed or approved by
creditors holding at least two-thirds (2/3) of the total liabilities of
the debtor, including secured creditors holding more than fifty
percent (50%) of the total secured claims of the debtor and
unsecured creditors holding more than fifty percent (50%) of the
total unsecured claims of the debtor. The petition shall include
as a minimum:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names
of at least three (3) qualified nominees for rehabilitation receiver;
and
(d) a summary of disputed claims against the debtor and a report
the
on the provisioning of funds to account for appropriate
payments should any such claims be ruled valid or their amounts
adjusted.
RA 10142, Sec. 77 Issuance of Order. - Within five (5) working
days, and after determination that the petition is sufficient in
form and substance, the court shall issue an Order which shall;
(a) identify the debtor, its principal business of activity/ies and its
principal place of business;
(b) declare that the debtor is under rehabilitation;
(c) summarize the ground./s for the filling of the petition;
(d) direct the publication of the Order in a newspaper of general
circulation in the Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be made within
seven (7) days from the time of its issuance;
(e) direct the service by personal delivery of a copy of the
petition on each creditor who is not a petitioner holding at least
ten percent (10%) of the total liabilities of the debtor, as
determined in the schedule attached to the petition, within three
(3) days;
(f) state that copies of the petition and the Rehabilitation Plan
are available for examination and copying by any interested
party;
(g) state that creditors and other interested parties opposing the
petition or Rehabilitation Plan may file their objections or
comments thereto within a period of not later than twenty (20)
days from the second publication of the Order;
224
(h) appoint a rehabilitation receiver, if provided for in the Plan;
and
(i) include a Suspension or Stay Order as described in this Act.
RA 10142, Sec. 78 Approval of the Plan. - Within ten (10) days
from the date of the second publication of the Order, the court
shall approve the Rehabilitation Plan unless a creditor or other
interested party submits an objection to it in accordance with the
next succeeding section.
RA 10142, Sec. 79 Objection to the Petition or Rehabilitation
Plan. - Any creditor or other interested party may submit to the
court a verified objection to the petition or the Rehabilitation
Plan not later than eight (8) days from the date of the second
publication of the Order mentioned in Section 77 hereof. The
objections shall be limited to the following:
(a) The allegations in the petition or the Rehabilitation Plan or
the attachments thereto are materially false or misleading;
(b) The majority of any class of creditors do not in fact support
the Rehabilitation Plan;
(c) The Rehabilitation Plan fails to accurately account for a claim
against the debtor and the claim in not categorically declared as
a contested claim; or
(d) The support of the creditors, or any of them was induced by
fraud.
Copies of any objection to the petition of the Rehabilitation Plan
shall be served on the debtor, the rehabilitation receiver (if
applicable), the secured creditor with the largest claim and who
supports the Rehabilitation Plan, and the unsecured creditor with
the largest claim and who supports the Rehabilitation Plan.
RA 10142, Sec. 80 Hearing on the Objections. - After receipt
of an objection, the court shall set the same for hearing. The
date of the hearing shall be no earlier than twenty (20) days and
no later than thirty (30) days from the date of the second
publication of the Order mentioned in Section 77 hereof. If the
court finds merit in the objection, it shall direct the debtor, when
feasible to cure the detect within a reasonable period. If the
court determines that the debtor or creditors supporting the
Rehabilitation Plan acted in bad faith, or that the objection is
non-curable, the court may order the conversion of the
proceedings into liquidation. A finding by the court that the
objection has no substantial merit, or that the same has been
cured shall be deemed an approval of the Rehabilitation Plan.
RA 10142, Sec. 81 Period for Approval of Rehabilitation Plan. -
The court shall have a maximum period of one hundred twenty
(120) days from the date of the filing of the petition to approve
the Rehabilitation Plan. If the court fails to act within the said
period, the Rehabilitation Plan shall be deemed approved.
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RA 10142, Sec. 82 Effect of Approval. - Approval of a Plan
under this chapter shall have the same legal effect as
confirmation of a Plan under Chapter II of this Act.
RA 10142, Sec. 92 Conversion by the Court into Liquidation
Proceedings. - During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation
proceedings pursuant to (a) Section 25(c) of this Act; or (b)
Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section
90 of this Act; or at any other time upon the recommendation of
the rehabilitation receiver that the rehabilitation of the debtor is
not feasible. Thereupon, the court shall issue the Liquidation
Order mentioned in Section 112 hereof.
Pre-negotiated Rehabilitation
- an insolvency proceeding that commences as an
extrajudicial proceeding but terminates as a judicial one
- involves the negotiation and eventual approval of a Pre-
negotiated Rehabilitation Plan
Pre-negotiated Rehabilitation Plan
- A consensual contract between an insolvent debtor and its
creditors that amends or modifies the terms of the claims
against the debtor
- Implies that the insolvent debtor has been able to obtain
the endorsement or approval of its creditors
- If the minimum vote requirement is reached, the debtor, by
itself or jointly with any of its creditors, may file a
verified petition for the court approval of the Pre-
negotiated Rehabilitation Plan
- If the minimum vote requirement is not reached, the
alternative is to file a petition under the provisions on
Court-Supervised Rehabilitation
The MINIMUM VOTE REQUIREMENT under the FRIA for Pre-
negotiated Rehabilitation Plan is:
(1) Approval of the creditors holding at least 2/3 of the
total liabilities of the debtor, including:
(2) Secured creditors holding more than 50% of the
total secured claims of the debtor, and
(3) Unsecured creditors holding more than 50% of
the total unsecured claims of the debtor
- FRIA refers to liabilities insofar as all creditors are
concerned but refers to claims insofar as the two classes of
creditors are concerned.
o Maam Somera: Is the distinction appropriate, given the
expansive definition of claims?
- The confirmation of the Pre-negotiated Rehabilitation Plan
by the court shall result in a CRAM DOWNit binds not
only the insolvent debtor but also all persons affected by it
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D. Out-of-Court Rehabilitation
RA 10142, Sec. 83 Out-of-Court or Informal Restructuring
Agreements and Rehabilitation Plans. - An out-of-curt or
informal restructuring agreement or Rehabilitation Plan that
meets the minimum requirements prescribed in this chapter is
hereby recognized as consistent with the objectives of this Act.
RA 10142, Sec. 84 Minimum Requirements of Out-of-Court or
Informal Restructuring Agreements and Rehabilitation Plans. -
For an out-of-court or informal restructuring/workout agreement
or Rehabilitation Plan to qualify under this chapter, it must meet
the following minimum requirements:
(a) The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-
seven (67%) of the secured obligations of the debtor;
(c) It must be approved by creditors representing at least
seventy-five percent (75%) of the unsecured obligations of the
debtor; and
(d) It must be approved by creditors holding at least eighty-five
percent (85%) of the total liabilities, secured and unsecured, of
the debtor.
1. General Concepts
Out-of-Court Rehabilitation is an extra-judicial insolvency
proceeding which involves the negotiation and eventual
approval of an Out-of-court or Informal Restructuring
Agreement/ Informal Workout Agreement/ Informal
Rehabilitation Plan, a consensual contract between an
insolvent debtor and its creditors that amends or modifies the
terms of the claims against the debtor.
" This implies that that the insolvent debtor and is creditors
have agreed on a restructuring of the claims against the
debtor without having filed a petition in court.
" It may be preceded by a standstill agreement, wherein
the debtor is allowed to not pay its liabilities as they fall due
and prevents the creditors from taking further action or
enforcing its claims, usually during the period of negotiation
of the Out-of-Court Restructuring Agreement.
" Like any contract, such agreements generally bind only the
contracting parties.
FRIA imposes a minimum vote requirement for Out-of-court
Restructuring Agreements as follows:
1. It must be approved by the debtor.
2. It must be approved by secured creditors representing at
least 67% of the secured obligations of the debtor;
3. It must be approved by unsecured creditors representing at
least 75% of the unsecured obligations of the debtor; and
4. It must be approved by creditors holding at least 85% of the
total liabilities, secured and unsecured, of the debtor.
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2. Benefits of Out-of-Court Rehabilitation
RA 10142, Sec. 85 Standstill Period. - A standstill period that
may be agreed upon by the parties pending negotiation and
finalization of the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan contemplated herein shall be
effective and enforceable not only against the contracting
parties but also against the other creditors: Provided, That (a)
such agreement is approved by creditors representing more
than fifty percent (50%) of the total liabilities of the debtor; (b)
notice thereof is publishing in a newspaper of general circulation
in the Philippines once a week for two (2) consecutive weeks; and
(c) the standstill period does not exceed one hundred twenty
(120) days from the date of effectivity. The notice must invite
creditors to participate in the negotiation for out-of-court
rehabilitation or restructuring agreement and notify them that
said agreement will be binding on all creditors if the required
majority votes prescribed in Section 84 of this Act are met.
RA 10142, Sec. 86 Cram Down Effect. - A
restructuring/workout agreement or Rehabilitation Plan that is
approved pursuant to an informal workout framework referred to
in this chapter shall have the same legal effect as confirmation of
a Plan under Section 69 hereof. The notice of the Rehabilitation
Plan or restructuring agreement or Plan shall be published once
a week for at least three (3) consecutive weeks in a newspaper of
general circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of
fifteen (15) days from the date of the last publication of the
notice thereof.
RA 10142, Sec. 87 Amendment or Modification. - Any
amendment of an out-of-court restructuring/workout agreement
or Rehabilitation Plan must be made in accordance with the
terms of the agreement and with due notice on all creditors.
RA 10142, Sec. 88 Effect of Court Action or Other
Proceedings. - Any court action or other proceedings arising
from, or relating to, the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan shall not
stay its implementation, unless the relevant party is able to
secure a temporary restraining order or injunctive relief from the
Court of Appeals.
RA 10142, Sec. 89 Court Assistance. - The insolvent debtor
and/or creditor may seek court assistance for the execution or
implementation of a Rehabilitation Plan under this Chapter,
under such rules of procedure as may be promulgated by the
Supreme Court.
226
Under the FRIA:
1. Any standstill agreement between the debtor and creditors
upon pending the negotiation of the Out-of-Court
Restructuring Agreement (OOCRA) is effective and
enforceable not only against the contracting parties but also
against the other creditors, provided that:
a. The standstill agreement is approved by creditors
representing more than 50% of the total liabilities of the
debtor
b. Notice of the standstill agreement is published in a
newspaper of general circulation in the PH once a week
for two consecutive weeks. The notice must invite
creditors to participate in the negotiation of the
OOCRA and inform them that the agreement would
bind all creditors if the minimum vote requirements
were met.
c. The standstill period does not exceed 120 days from
the date of effectivity.
2. The OOCRA that meets the minimum vote requirement
shall result in a cram down, as it binds not only the
insolvent debtor but also all persons who may be affected
by it, including the creditors, whether or not such persons
have participated in the proceedings or opposed the
OOCRA or whether or not their claims have been
scheduled, provided that:
a. The notice of the OOCRA shall be published once a
week for at least three consecutive weeks in a
newspaper of general circulation in the PH
b. The OOCRA shall take effect upon the lapse of 15 days
from the date of the last publication of the notice.
c. Any court action or other proceedings arising from, or
relating to, the OOCRA that meets the minimum vote
requirement shall not stay its implementation, unless
the relevant party is able to secure a TRO or injunctive
relief from the CA
d. In Out-of-Court Rehabilitation, no petitions are filed
with the court, but the parties may seek court assistance
for the execution or implementation of the OOCRA that
meets the minimum requirement
V. LIQUIDATION
A. General Concepts
Art. 2238 So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets
to be taken possession of by the assignee for the payment of the
insolvent debtor's obligations, except insofar as the latter have
redounded to the benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal partnership of
absolute community may, by order of the court, be transferred to
the wife or to a third person other than the assignee. (n)
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Art. 2239 If there is property, other than that mentioned in the
preceding article, owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or interest therein
shall be among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor's obligations.
(n)
Art. 2240 Property held by the insolvent debtor as a trustee of
an express or implied trust, shall be excluded from the
insolvency proceedings. (n)
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the
State to encourage debtors, both juridical and natural persons,
and their creditors to collectively and realistically resolve and
adjust competing claims and property rights. In furtherance
thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view to ensure
or maintain certainly and predictability in commercial affairs,
preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly
situated. When rehabilitation is not feasible, it is in the interest of
the State to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations.
RA 10142, Sec. 4
(u) Liquidation shall refer to the proceedings under Chapter V of
this Act.
! Liquidation in insolvency generally connotes a winding up; it
is the settling of debtors with their creditors so that the
debtors assets may be distributed to those entitled to
receive them.
! It is the process of reducing the debtors assets to cash,
discharging its liabilities, and dividing the surplus or re-
allocating the loss.
! The concept of liquidation is therefore diametrically
opposed to the concept of rehabilitation, and both cannot
be undertaken at the same time.
! While FRIA fails to define liquidation, a definition may be
derived from Sec. 119 on powers, duties and responsibilities
of the Liquidator and Sec. 131 on the sale of assets in
liquidation:
! Liquidation is a judicial insolvency proceeding by which
assets of an insolvent debtor are recovered and their value
preserved and maximized for the purpose of converting the
same into money, and discharging, to the extent possible,
all the claims against the insolvent debtor.
! It is a procedure in rem and is binding against the whole
world, binding all interested persons regardless of
knowledge of the parties, and notice regarding such
proceedings.
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Liquidation may apply to:
1. An insolvent individual debtor [Sec. 4 (o)]
(o) Individual debtor shall refer to a natural person who is a
resident and citizen of the Philippines that has become
insolvent as defined herein.
2. An insolvent juridical debtor, which the FRIA does not
define, but by process of exclusion, it is referred to in [Sec. 4
(k)]
(k) Debtor shall refer to, unless specifically excluded by a
provision of this Act, a sole proprietorship duly registered
with the Department of Trade and Industry (DTI), a
partnership duly registered with the Securities and
Exchange Commission (SEC), a corporation duly organized
and existing under Philippine laws, or an individual debtor
who has become insolvent as defined herein.
B. Liquidation of Insolvent Individual Debtor
1. Voluntary Liquidation
RA 10142, Sec. 4
(rr) Voluntary proceedings shall refer to proceedings initiated by
the debtor.
RA 10142, Sec. 103 Application. - An individual debtor whose
properties are not sufficient to cover his liabilities, and owing
debts exceeding Five hundred thousand pesos (Php500,000.00),
may apply to be discharged from his debts and liabilities by
filing a verified petition with the court of the province or city in
which he has resided for six (6) months prior to the filing of such
petition. He shall attach to his petition a schedule of debts and
liabilities and an inventory of assets. The filing of such petition
shall be an act of insolvency.
RA 10142, Sec. 104 Liquidation Order. - If the court finds the
petition sufficient in form and substance it shall, within five (5)
working days issue the Liquidation Order mentioned in Section
112 hereof.
Voluntary Liquidation is a judicial insolvency proceeding
instituted by a debtor that is insolvent.
! In the case of an individual debtor, he must be insolvent in
the balance sheet concept (assets are insufficient to cover
liabilities)
! Purpose of VL is for the debtor to seek a discharge from his
debts and liabilities, thus freeing the debtor of legal
responsibility for certain specified obligations.
! FRIA imposes a value requirement of more than P500, 000
on the debts of the individual debtor.
! The filing by the insolvent debtor of a petition for voluntary
insolvency is an act of insolvency
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2. Involuntary Liquidation
a. Acts of Insolvency
RA 10142, Sec. 105 Petition; Acts of Insolvency. - Any creditor
or group of creditors with a claim of, or with claims aggregating
at least Five hundred thousand pesos (Php500, 000.00) may file a
verified petition for liquidation with the court of the province or
city in which the individual debtor resides.
The following shall be considered acts of insolvency, and the
petition for liquidation shall set forth or allege at least one of
such acts:
(a) That such person is about to depart or has departed from the
Republic of the Philippines, with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with
intent to defraud his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process
for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid
its being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment
or legal process for three (3) days for the purpose of hindering or
delaying the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of
any creditor or claimant for the purpose of hindering or delaying
the liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against
him by default for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(h) That he has suffered or procured his property to be taken on
legal process with intent to give a preference to one or more of
his creditors and thereby hinder or delay the liquidation or
defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or
transfer of his estate, property, rights or credits with intent to
hinder or delay the liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any
payment, gift, grant, sale, conveyance or transfer of his estate,
property, rights or credits;
(k) That being a merchant or tradesman, he has generally
defaulted in the payment of his current obligations for a period
of thirty (30) days;
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(l) That for a period of thirty (30) days, he has failed, after
demand, to pay any moneys deposited with him or received by
him in a fiduciary; and
(m) That an execution having been issued against him on final
judgment for money, he shall have been found to be without
sufficient property subject to execution to satisfy the judgment.
The petitioning creditor/s shall post a bond in such as the court
shall direct, conditioned that if the petition for liquidation is
dismissed by the court, or withdrawn by the petitioner, or if the
debtor shall not be declared an insolvent the petitioners will pay
to the debtor all costs, expenses, damages occasioned by the
proceedings and attorney's fees.
Involuntary Liquidation is a judicial insolvency proceeding
instituted by a creditor or group of creditors against an insolvent
debtor, provided the requirements of the law on number of
creditors or value of claims, or both, is met, and provided an act
of insolvency is alleged and thereafter established.
! Value Requirement by FRIA: at least P500, 000 on the
amount of claims, regardless of the number of creditors who
fie.
! It is sufficient that the petition allege only one act of
insolvency.
G.R.: It is necessary to establish the intent or purpose of the act
was to delay liquidation or defraud creditors
XPN: When intent or purpose is irrelevant:
1. Debtor is a merchant or tradesman has generally defaulted
in the payment of current obligations for a period of 30
days.
2. Debtor has failed, for a period of 30 days, and after
demand, to pay more money deposited with him or
received by him in a fiduciary capacity.
3. Debtor shall be without sufficient property to satisfy and
execution issued against him on a final judgment for money.
b. Show Cause Order; Injunction; Default
RA 10142, Sec. 106 Order to Individual Debtor to Show
Cause. - Upon the filing of such creditors' petition, the court
shall issue an Order requiring the individual debtor to show
cause, at a time and place to be fixed by the said court, why he
should not be adjudged an insolvent. Upon good cause shown,
the court may issue an Order forbidding the individual debtor
from making payments of any of his debts, and transferring any
property belonging to him. However, nothing contained herein
shall affect or impair the rights of a secured creditor to enforce
his lien in accordance with its terms.
RA 10142, Sec. 107 Default. - If the individual debtor shall
default or if, after trial, the issues are found in favor of the
petitioning creditors the court shall issue the Liquidation Order
mentioned in Section 112 hereof.
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A show-cause order is issued upon the filing of a petition for
involuntary liquidation but an injunction order, issued prior to
the Liquidation Order, forbidding the individual debtor from
making payments of his debts and transferring property
belonging to him, is only issued upon good cause.
However, an injunction issued pursuant to Sec. 106 cannot
impair the rights of a secured creditor to enforce its lien.
c. Absent Individual Debtor
RA 10142, Sec. 108 Absent Individual Debtor. - In all cases
where the individual debtor resides out of the Republic of the
Philippines; or has departed therefrom; or cannot, after due
diligence, be found therein; or conceals himself to avoid service
of the Order to show cause, or any other preliminary process or
orders in the matter, then the petitioning creditors, upon
submitting the affidavits requisite to procedure an Order of
publication, and presenting a bond in double the amount of the
aggregate sum of their claims against the individual debtor, shall
be entitled to an Order of the court directing the sheriff of the
province or city in which the matter is pending to take into his
custody a sufficient amount of property of the individual debtor
to satisfy the demands of the petitioning creditors and the costs
of the proceedings. Upon receiving such Order of the court to
take into custody of the property of the individual debtor, it shall
be the duty of the sheriff to take possession of the property and
effects of the individual debtor, not exempt from execution, to
an extent sufficient to cover the amount provided for and to
prepare within three (3) days from the time of taking such
possession, a complete inventory of all the property so taken,
and to return it to the court as soon as completed. The time for
taking the inventory and making return thereof may be extended
for good cause shown to the court. The sheriff shall also prepare
a schedule of the names and residences of the creditors, and the
amount due each, from the books of the debtor, or from such
other papers or data of the individual debtor available as may
come to his possession, and shall file such schedule or list of
creditors and inventory with the clerk of court.
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d. Custody of Property; Sale of Property
RA 10142, Sec. 109 All Property Taken to be Held for All
Creditors; Appeal Bonds; Exemptions to Sureties. - In all cases
where property is taken into custody by the sheriff, if it does not
embrace all the property and effects of the debtor not exempt
from execution, any other creditor or creditors of the individual
debtor, upon giving bond to be approved by the court in double
the amount of their claims, singly or jointly, shall be entitled to
similar orders and to like action, by the sheriff; until all claims be
provided for, if there be sufficient property or effects. All
property taken into custody by the sheriff by virtue of the giving
of any such bonds shall be held by him for the benefit of all
creditors of the individual debtor whose claims shall be duly
proved as provided in this Act. The bonds provided for in this
section and the preceding section to procure the order for
custody of the property and effects of the individual debtor shall
be conditioned that if, upon final hearing of the petition in
insolvency, the court shall find in favor of the petitioners, such
bonds and all of them shall be void; if the decision be in favor of
the individual debtor, the proceedings shall be dismissed, and
the individual debtor, his heirs, administrators, executors or
assigns shall be entitled to recover such sum of money as shall
be sufficient to cover the damages sustained by him, not to
exceed the amount of the respective bonds. Such damages shall
be fixed and allowed by the court. If either the petitioners or the
debtor shall appeal from the decision of the court, upon final
hearing of the petition, the appellant shall be required to give
bond to the successful party in a sum double the amount of the
value of the property in controversy, and for the costs of the
proceedings.
Any person interested in the estate may take exception to the
sufficiency of the sureties on such bond or bonds. When
excepted to the petitioner's sureties, upon notice to the person
excepting of not less than two (2) nor more than five (5) days,
must justify as to their sufficiency; and upon failure to justify, or
of others in their place fail to justify at the time and place
appointed the judge shall issue an Order vacating the order to
take the property of the individual debtor into the custody of the
sheriff, or denying the appeal, as the case may be.
RA 10142, Sec. 110 Sale Under Execution. - If, in any case,
proper affidavits and bonds are presented to the court or a
judge thereof, asking for and obtaining an Order of publication
and an Order for the custody of the property of the individual
debtor and thereafter the petitioners shall make it appear
satisfactorily to the court or a judge thereof that the interest of
the parties to the proceedings will be subserved by a sale
thereof, the court may order such property to be sold in the
same manner as property is sold under execution, the proceeds
to de deposited in the court to abide by the result of the
proceedings.
- Taking of property under the custody by the Sheriff and the
sale are interim measures in liquidation proceedings of
an individual debtor
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o Giving of a bond by the creditors is necessary
- Sheriff holds the property for the benefit of all the creditors;
proceeds of the sale shall abide by the result of liquidation
proceeding
C. Liquidation of Insolvent Juridical Debtors
RA 10142, Sec. 93 Powers of the Securities and Exchange
Commission (SEC). - The provisions of this chapter shall not
affect the regulatory powers of the SEC under Section 6 of
Presidential Decree No. 902-A, as amended, with respect to any
dissolution and liquidation proceeding initiated and heard
before it.
1. Voluntary Liquidation
RA 10142, Sec. 90 Voluntary Liquidation. - An insolvent
debtor may apply for liquidation by filing a petition for
liquidation with the court. The petition shall be verified, shall
establish the insolvency of the debtor and shall contain, whether
as an attachment or as part of the body of the petition;
(a) a schedule of the debtor's debts and liabilities including a list
of creditors with their addresses, amounts of claims and
collaterals, or securities, if any;
(b) an inventory of all its assets including receivables and claims
against third parties; and
(c) the names of at least three (3) nominees to the position of
liquidator.
At any time during the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in the same
court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation
proceedings. The motion shall be verified, shall contain or set
forth the same matters required in the preceding paragraph, and
state that the debtor is seeking immediate dissolution and
termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient in
form and substance, the court shall issue a Liquidation Order
mentioned in Section 112 hereof.
! In the case of juridical debtor, it must be insolvent either
under the illiquidity or equity concept, or the balance sheet
concept.
! But in every case, the rehabilitation of the juridical debtor is
not economically feasible or does not result in better
present value recovery for the creditors.
! The purpose is to seek the dissolution of its juridical
existence.
! FRIA does not impose a value requirement with respect to
the amount of the debts of the insolvent debtor.
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2. Involuntary Liquidation
RA 10142, Sec. 91 Involuntary Liquidation. - Three (3) or more
creditors the aggregate of whose claims is at least either One
million pesos (Php1,000,000,00) or at least twenty-five percent
(25%0 of the subscribed capital stock or partner's contributions
of the debtor, whichever is higher, may apply for and seek the
liquidation of an insolvent debtor by filing a petition for
liquidation of the debtor with the court. The petition shall show
that:
(a) there is no genuine issue of fact or law on the claims/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least one hundred eighty
(180) days or that the debtor has failed generally to meet its
liabilities as they fall due; and
(b) there is no substantial likelihood that the debtor may be
rehabilitated.
At any time during the pendency of or after a rehabilitation
court-supervised or pre-negotiated rehabilitation proceedings,
three (3) or more creditors whose claims is at least either One
million pesos (Php1,000,000.00) or at least twenty-five percent
(25%) of the subscribed capital or partner's contributions of the
debtor, whichever is higher, may also initiate liquidation
proceedings by filing a motion in the same court where the
rehabilitation proceedings are pending to convert the
rehabilitation proceedings into liquidation proceedings. The
motion shall be verified, shall contain or set forth the same
matters required in the preceding paragraph, and state that the
movants are seeking the immediate liquidation of the debtor.
If the petition or motion is sufficient in form and substance, the
court shall issue an Order:
(1) directing the publication of the petition or motion in a
newspaper of general circulation once a week for two (2)
consecutive weeks; and
(2) directing the debtor and all creditors who are not the
petitioners to file their comment on the petition or motion within
fifteen (15) days from the date of last publication.
If, after considering the comments filed, the court determines
that the petition or motion is meritorious, it shall issue the
Liquidation Order mentioned in Section 112 hereof.
Involuntary Liquidation is a judicial insolvency proceeding
instituted by a creditor or group of creditors against an insolvent
debtor, provided the requirements of the law on number of
creditors or value of claims, or both, is met, and provided an act
of insolvency is alleged and thereafter established.
! FRIA imposes a requirement on the number of creditors (at
least three) and the value of the claims (at least P1M or at
last 25% of the subscribed capital stock or partners
contributions of the debtor, whichever is higher)
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! The acts of insolvency that must be alleged are:
1. Due and demandable payments on claims of creditors
there being no genuine issue of fact or law on the
claims, have not been made for at least 180 days, and
there is no substantial likelihood that the debtor may
be rehabilitated; or
2. The debtor has failed generally to meet its liabilities as
they fall due, and there is no substantial likelihood that
he may be rehabilitated.
D. Provisions Common to Liquidation of Individual and
Juridical Debtors
RA 10142, Sec. 111 Use of Term Debtor. - For purposes of
this chapter, the term debtor shall include both individual debtor
as defined in Section 4(o) and debtor as defined in Section 4(k)
of this Act.
RA 10142, Sec. 4
(o) Individual debtor shall refer to a natural person who is a
resident and citizen of the Philippines that has become insolvent
as defined herein.
(k) Debtor shall refer to, unless specifically excluded by a
provision of this Act, to a sole proprietorship duly registered with
the Department of Trade and Industry (DTI), a partnership duly
registered with the Securities and Exchange Commission (SEC),
a corporation duly organized and existing under Philippine laws,
or an individual debtor who has become insolvent as defined
herein.
1. Liquidation Order
RA 10142, Sec. 4
(v) Liquidation order shall refer to the Order issued by the court
under Section 112 of this Act.
(i) Date of liquidation shall refer to the date on which the court
issues the Liquidation Order.
RA 10142, Sec. 112 Liquidation Order. - The Liquidation
Order shall:
(a) declare the debtor insolvent;
(b) order the liquidation of the debtor and, in the case of a
juridical debtor, declare it as dissolved;
(c) order the sheriff to take possession and control of all the
property of the debtor, except those that may be exempt from
execution;
(d) order the publication of the petition or motion in a
newspaper of general circulation once a week for two (2)
consecutive weeks;
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(e) direct payments of any claims and conveyance of any
property due the debtor to the liquidator;
(f) prohibit payments by the debtor and the transfer of any
property by the debtor;
(g) direct all creditors to file their claims with the liquidator within
the period set by the rules of procedure;
(h) authorize the payment of administrative expenses as they
become due;
(i) state that the debtor and creditors who are not petitioner/s
may submit the names of other nominees to the position of
liquidator; and
(j) set the case for hearing for the election and appointment of
the liquidator, which date shall not be less than thirty (30) days
nor more than forty-five (45) days from the date of the last
publication.
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon
the issuance of the Liquidation Order:
(a) the juridical debtor shall be deemed dissolved and its
corporate or juridical existence terminated;
(b) legal title to and control of all the assets of the debtor, except
those that may be exempt from execution, shall be deemed
vested in the liquidator or, pending his election or appointment,
with the court;
(c) all contracts of the debtor shall be deemed terminated and/or
breached, unless the liquidator, within ninety (90) days from the
date of his assumption of office, declares otherwise and the
contracting party agrees;
(d) no separate action for the collection of an unsecured claim
shall be allowed. Such actions already pending will be
transferred to the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the claim, the court
shall allow, hear and resolve such contest except when the case
is already on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein for a
claim against the debtor shall be filed and allowed in court; and
(e) no foreclosure proceeding shall be allowed for a period of
one hundred eighty (180) days.
- Declaration of insolvency (or adjudication of
insolvency) in the liquidation order is the trigger event that
results in the application of legal provisions that require the
status of insolvency.
- Upon the issuance of the liquidation order, the benefit of
excussion of a guarantor is lost, and special preferred
credits acquire the status of pledges and mortgages.
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- The legal postulate that a creditor may enforce its right to
collect payment from surety becomes more cogent.
- A case against a surety is not affected by an insolvency
proceeding instituted. The surety is also not freed from
liability.
- Liquidation order should properly result not only in the
dissolution of a juridical debtor, but also in the discharge of
an individual debtor.
2. Liquidator
a. General Concepts
RA 10142, Sec. 4
(w) Liquidator shall refer to the natural person or juridical entity
appointed as such by the court and entrusted with such powers
and duties as set forth in this Act: Provided, That, if the liquidator
is a juridical entity, it must designated a natural person who
possesses all the qualifications and none of the disqualifications
as its representative, it being understood that the juridical entity
and the representative are solidarity liable for all obligations and
responsibilities of the liquidator.
RA 10142, Sec. 115 Election of Liquidator. - Only creditors
who have filed their claims within the period set by the court,
and whose claims are not barred by the statute of limitations, will
be allowed to vote in the election of the liquidator. A secured
creditor will not be allowed to vote, unless: (a) he waives his
security or lien; or (b) has the value of the property subject of his
security or lien fixed by agreement with the liquidator, and is
admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open
court. The nominee receiving the highest number of votes cast in
terms of amount of claims, ad who is qualified pursuant to
Section 118 hereof, shall be appointed as the liquidator.
RA 10142, Sec. 116 Court-Appointed Liquidator. - The court
may appoint the liquidator if:
(a) on the date set for the election of the liquidator, the creditors
do not attend;
(b) the creditors who attend, fail or refuse to elect a liquidator;
(c) after being elected, the liquidator fails to qualify; or
(d) a vacancy occurs for any reason whatsoever, In any of the
cases provided herein, the court may instead set another hearing
of the election of the liquidator.
Provided further, That nothing in this section shall be construed
to prevent a rehabilitation receiver, who was administering the
debtor prior to the commencement of the liquidation, from
being appointed as a liquidator.
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RA 10142, Sec. 117 Oath and Bond of the Liquidator. -Prior to
entering upon his powers, duties and responsibilities, the
liquidator shall take an oath and file a bond, In such amount to
be fixed by the court, conditioned upon the proper and faithful
discharge of his powers, duties and responsibilities.
RA 10142, Sec. 118 Qualifications of the Liquidator. - The
liquidator shall have the qualifications enumerated in Section 29
hereof. He may be removed at any time by the court for cause,
either motu propio or upon motion of any creditor entitled to
vote for the election of the liquidator.
RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. -
The rehabilitation receiver shall have the following minimum
qualifications:
(a)A citizen of the Philippines or a resident of the Philippines in
the six (6) months immediately preceding his nomination;
(b)Of good moral character and with acknowledged integrity,
impartiality and independence;
(c)Has the requisite knowledge of insolvency and other relevant
commercial laws, rules and procedures, as well as the relevant
training and/or experience that may be necessary to enable him
to properly discharge the duties and obligations of a
rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of
interest may be waived, expressly or impliedly, by a party who
may be prejudiced thereby.
Other qualifications and disqualifications of the rehabilitation
receiver shall be set forth in procedural rules, taking into
consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
RA 10142, Sec. 120 Compensation of the Liquidator. - The
liquidator and the persons and entities engaged or employed by
him to assist in the discharge of his powers and duties shall be
entitled to such reasonable compensation as may determined by
the liquidation court, which shall not exceed the maximum
amount as may be prescribed by the Supreme Court.
RA 10142, Sec. 122 Discharge of Liquidator. - In preparation
for the final settlement of all the claims against the debtor , the
liquidator will notify all the creditors, either by publication in a
newspaper of general circulation or such other mode as the
court may direct or allow, that will apply with the court for the
settlement of his account and his discharge from liability as
liquidator. The liquidator will file a final accounting with the
court, with proof of notice to all creditors. The accounting will be
set for hearing. If the court finds the same in order, the court will
discharge the liquidator.
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b. Powers, Duties and Responsibilities
RA 10142, Sec. 119 Powers, Duties and Responsibilities of the
Liquidator. - The liquidator shall be deemed an officer of the
court with the principal duly of preserving and maximizing the
value and recovering the assets of the debtor, with the end of
liquidating them and discharging to the extent possible all the
claims against the debtor. The powers, duties and
responsibilities of the liquidator shall include, but not limited to:
(a) to sue and recover all the assets, debts and claims, belonging
or due to the debtor;
(b) to take possession of all the property of the debtor except
property exempt by law from execution;
(c) to sell, with the approval of the court, any property of the
debtor which has come into his possession or control;
(d) to redeem all mortgages and pledges, and so satisfy any
judgement which may be an encumbrance on any property sold
by him;
(e) to settle all accounts between the debtor and his creditors,
subject to the approval of the court;
(f) to recover any property or its value, fraudulently conveyed by
the debtor;
(g) to recommend to the court the creation of a creditors'
committee which will assist him in the discharge of the functions
and which shall have powers as the court deems just, reasonable
and necessary; and
(h) upon approval of the court, to engage such professional as
may be necessary and reasonable to assist him in the discharge
of his duties.
In addition to the rights and duties of a rehabilitation receiver,
the liquidator, shall have the right and duty to take all
reasonable steps to manage and dispose of the debtor's assets
with a view towards maximizing the proceedings therefrom, to
pay creditors and stockholders, and to terminate the debtor's
legal existence. Other duties of the liquidator in accordance with
this section may be established by procedural rules.
A liquidator shall be subject to removal pursuant to procedures
for removing a rehabilitation receiver.
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon
the issuance of the Liquidation Order:
(b) legal title to and control of all the assets of the debtor, except
those that may be exempt from execution, shall be deemed
vested in the liquidator or, pending his election or appointment,
with the court;
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RA 10142, Sec. 123 Registry of Claims. - Within twenty (20)
days from his assumption into office the liquidator shall prepare
a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or
lien, or have fixed the value of the property subject of their
security or lien by agreement with the liquidator and is admitted
as a creditor for the balance , shall be considered as unsecured
creditors. The liquidator shall make the registry available for
public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders or members
of the corporation-debtor, on where and when they may inspect
it. All claims must be duly proven before being paid.
RA 10142, Sec. 126 Submission of Disputed to the Court. -
The liquidator shall resolve disputed claims and submit his
findings thereon to the court for final approval. The liquidator
may disallow claims.
RA 10142, Sec. 129 The Liquidation Plan. - Within three (3)
months from his assumption into office, the Liquidator shall
submit a Liquidation Plan to the court. The Liquidation Plan shall,
as a minimum enumerate all the assets of the debtor and a
schedule of liquidation of the assets and payment of the claims.
RA 10142, Sec. 131 Sale of Assets in Liquidation. - The
liquidator may sell the unencumbered assets of the debtor and
convert the same into money. The sale shall be made at public
auction. However, a private sale may be allowed with the
approval of the court if; (a) the goods to be sold are of a
perishable nature, or are liable to quickly deteriorate in value, or
are disproportionately expensive to keep or maintain; or (b) the
private sale is for the best interest of the debtor and his
creditors.
With the approval of the court, unencumbered property of the
debtor may also be conveyed to a creditor in satisfaction of his
claim or part thereof.
RA 10142, Sec. 132 Manner of Implementing the Liquidation
Plan. - The Liquidator shall implement the Liquidation Plan as
approved by the court. Payments shall be made to the creditors
only in accordance with the provisions of the Plan.
RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator
shall make and keep a record of all moneys received and all
disbursements mad by him or under his authority as liquidator.
He shall render a quarterly report thereof to the court , which
report shall be made available to all interested parties. The
liquidator shall also submit such reports as may be required by
the court from time to time as well as a final report at the end of
the liquidation proceedings.
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3. Claims
RA 10142, Sec. 4
(c) Claim shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or undisputed,
including, but not limited to;
(1) all claims of the government, whether national or local,
including taxes, tariffs and customs duties; and
(2) claims against directors and officers of the debtor arising from
acts done in the discharge of their functions falling within the
scope of their authority: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing cases against
the directors and officers acting in their personal capacities.
a. Determination of Claims
RA 10142, Sec. 112 Liquidation Order. - The Liquidation
Order shall:
(g) direct all creditors to file their claims with the liquidator within
the period set by the rules of procedure;
RA 10142, Sec. 123 Registry of Claims. - Within twenty (20)
days from his assumption into office the liquidator shall prepare
a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or
lien, or have fixed the value of the property subject of their
security or lien by agreement with the liquidator and is admitted
as a creditor for the balance , shall be considered as unsecured
creditors. The liquidator shall make the registry available for
public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders or members
of the corporation-debtor, on where and when they may inspect
it. All claims must be duly proven before being paid.
RA 10142, Sec. 124 Right of Set-off. - If the debtor and
creditor are mutually debtor and creditor of each other one debt
shall be set off against the other, and only the balance, if any
shall be allowed in the liquidation proceedings.
RA 10142, Sec. 125 Opposition or Challenge to Claims. -
Within thirty (30 ) days from the expiration of the period for filing
of applications for recognition of claims, creditors, individual
debtors, owner/s of the sole proprietorship-debtor, partners of
the partnership-debtor and shareholders or members of the
corporation -debtor and other interested parties may submit a
challenge to claim or claims to the court, serving a certified copy
on the liquidator and the creditor holding the challenged claim.
Upon the expiration of the (30) day period, the rehabilitation
receiver shall submit to the court the registry of claims
containing the undisputed claims that have not been subject to
challenge. Such claims shall become final upon the filling of the
register and may be subsequently set aside only on grounds or
fraud, accident, mistake or inexcusable neglect.
234

RA 10142, Sec. 126 Submission of Disputed to the Court. -
The liquidator shall resolve disputed claims and submit his
findings thereon to the court for final approval. The liquidator
may disallow claims.
b. Treatment of Claims
1) Secured Creditor Claims
RA 10142, Sec. 4
(kk) Secured creditor shall refer to a creditor with a secured
claim.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(t) Lien shall refer to a statutory or contractual claim or judicial
charge on real or personal property that legality entities a
creditor to resort to said property for payment of the claim or
debt secured by such lien.
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon
the issuance of the Liquidation Order:
(e) no foreclosure proceeding shall be allowed for a period of
one hundred eighty (180) days.
RA 10142, Sec. 114 Rights of Secured Creditors. - The
Liquidation Order shall not affect the right of a secured creditor
to enforce his lien in accordance with the applicable contract or
law. A secured creditor may:
(a) waive his right under the security or lien, prove his claim in the
liquidation proceedings and share in the distribution of the
assets of the debtor; or
(b) maintain his rights under the security or lien:
If the secured creditor maintains his rights under the security or
lien:
(1) the value of the property may be fixed in a manner agreed
upon by the creditor and the liquidator. When the value of the
property is less than the claim it secures, the liquidator may
convey the property to the secured creditor and the latter will be
admitted in the liquidation proceedings as a creditor for the
balance. If its value exceeds the claim secured, the liquidator
may convey the property to the creditor and waive the debtor's
right of redemption upon receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured
creditor's entire claim from the proceeds of the sale; or
(3) the secure creditor may enforce the lien or foreclose on the
property pursuant to applicable laws.
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- The treatment of secured creditors is as follows:
a) Upon the issuance of the liquidation order, a secured
creditor is subject to the temporary stay of foreclosure
proceedings for a period of 180 days.
b) The liquidation plan shall ensure that the concurrence
and preference of credits as enumerated in the Civil
Code shall be observed, unless a preferred creditor
voluntarily waives its preferred right.
c) During the proceedings, a secured creditor may:
i. Waive its security or lien, prove its claim and share
in the distribution of the assets of the debtor, in
which case it will be admitted as an unsecured
creditor; or
ii. Maintain its rights under the security or lien, in
which case
o The value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator:
" If the value of the property is less than
the claim, the creditor will be admitted
as an unsecured creditor for the balance;
" If the value of the property is greater
than the claim, the liquidator may convey
the property to the creditor, collect the
surplus from the creditor, and waive the
debtors right of redemption; or
o The liquidator may sell the property and
satisfy the secured creditors entire claim
from the proceeds of the sale; or
o The secured creditor may enforce the lien or
foreclose the property pursuant to applicable
laws.
Consuelo Metal Corporation vs. Planters Development Bank
(2008) Carpio, J.
Petitioners: Consuelo Metal Corporation
Respondents: Planters Development Bank
Concept: Liquidation Treatment of Claims
Doctrine:
Secured creditors may either pursue their security interest or
lien, or they may choose to abandon the preference and prove
their credits as ordinary claims. The right of the creditor-
mortgagee to foreclose is only suspended during rehabilitation
proceedings, but may be exercised after the proceedings have
been lifted or terminated.
Brief Facts:
CMC was put under rehabilitation by the SEC. Finding that
rehabilitation is no longer feasible, SEC ordered its dissolution
and liquidation. PDB, one of the creditors, extrajudicially
foreclosed the REM it constituted over property owned by CMC.
CMC questioned the validity of said foreclosure
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ISSUES:
1. W the jurisdiction of the case lies with the RTC or the SEC
(RTC)
2. WON the foreclosure of the REM is valid ((YES)
RATIO:
1. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the
appropriate RTCs.
- CMC:
o Agrees with CA that the SEC has jurisdiction over
CMCs dissolution and liquidation
o Argues that CA remanded case to SEC on wrong
premise that the applicable law is Sec. 21 of the Corp.
Code
o SEC retained jurisdiction over its dissolution and
liquidation because it is only a continuation of the
SECs jurisdiction over CMCs original petition for
suspension of payment which had not been finally
disposed of as of 30 Jun 2000
- Planters Bank:
o The TC has jurisdiction over CMCs dissolution and
liquidation
o Dissolution and liquidation are entirely new
proceedings for the termination of the existence of the
corporation which are incompatible with a petition for
suspension of payment which seeks to preserve
corporate existence
- RA 8799 transferred to the appropriate RTCs the SECs
jurisdiction defined under Sec. 5(d) of PD 902-A
o The Commission's jurisdiction over all cases
enumerated under Sec. 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these
cases. The Commission shall retain jurisdiction over
pending cases involving intra- corporate disputes
submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of
30 June 2000 until finally disposed. (Emphasis supplied)
- The SEC assumed jurisdiction over CMCs petition for
suspension of payment and issued a suspension order on 2
Apr 1996 after it found CMCs petition to be sufficient in
form and substance
o While the petition was pending with the SEC as of 30
Jun 2000, it was finally disposed of on 29 Nov 2000
when the SEC issued its Omnibus Order directing the
dissolution of CMC and the transfer of the liquidation
proceedings before the appropriate TC
o The SEC finally disposed of CMCs petition for
suspension of payment when it determined that CMC
could no longer be successfully rehabilitated
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- SC: The SECs jurisdiction does not extend to the
liquidation of a corporation. While the SEC has jurisdiction
to order the dissolution of a corporation, jurisdiction over
the liquidation of the corporation now pertains to the
appropriate RTCs
o This is the reason why the SEC, in its Omnibus Order,
directed that the proceedings on and implementation
of the order of liquidation be commenced at the RTC to
which this case shall be transferred.
o This is the correct procedure because the liquidation
of a corporation requires the settlement of claims for
and against the corporation, which clearly falls under
the jurisdiction of the regular courts
o The TC is in the best position to convene all the
creditors of the corporation, ascertain their claims, and
determine their preferences
Note: The jurisdiction over the actual liquidation lies with the
RTC because it is in a better position to rule on the claims of the
creditors. The SEC exercises its jurisdiction over the case during
the rehabilitation proceedings (until its termination) and loses
jurisdiction at the termination. It may reacquire jurisdiction when
the corporation is dissolved and removed from the list of SEC
corporations.
2. The foreclosure of the REM is valid.
- CMC: The foreclosure is void because it was
undertaken without the knowledge and previous
consent of the liquidator and other lien holders
o The rules on concurrence and preference of credits
should apply in foreclosure proceedings
o Assuming Planters Bank can foreclose, CMC
argues that foreclosure is still void because it was
conducted in violation of Sec. 15, Rule 39 of the
ROC which states that the sale should not be
earlier than 9 oclock in the morning and not later
than 2 oclock in the afternoon
- Planters Bank: It has the right to foreclose the REM
because of non-payment of the loan obligation
o The rules on concurrence and preference of credits
and the rules on insolvency are not applicable in
this case because CMC has not been declared
insolvent and there are no insolvency proceedings
against CMC
- In RCBC v. IAC, SC held that if rehabilitation is no
longer feasible and the assets of the corporation are
finally liquidated, secured creditors shall enjoy
preference over unsecured creditors, subject only to
the provisions of the CC on concurrence and
preference of credits
o Creditors of secured obligations may pursue their
security interest or lien, or they may choose to
abandon the preference and prove their credits as
ordinary claims
- Art. 2248 CC: Those credits which enjoy preference in
relation to specific real property or real rights, exclude
all others to the extent of the value of the immovable or
real right to which the preference refers.
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 - SC: Planters Bank, as secured creditor, enjoys
preference over a specific mortgaged property and has
a right to foreclose the mortgage under Art. 2248
NCC
o Creditor-mortgagee has the right to foreclose
WON the debtor-mortgagor is under insolvency or
liquidation proceedings
o Said right to foreclose is merely suspended
upon the appointment of a management
committee or rehabilitation receiver or upon the
issuance of a stay order by the TC
o HOWEVER, the creditor-mortgagee may
exercise his right to foreclose the
mortgage upon the termination of the
rehabilitation proceedings or upon the
lifting of the stay order
- Foreclosure proceedings have in their favor the
presumption of regularity and the burden of evidence
to rebut the same is on the party that seeks to
challenge the proceedings
o CMCs challenge has no merit
o Notice of sale clearly specified that the auction sale
will be held at 10 oclock in the morning or soon
thereafter but not later than 2 oclock in the
afternoon
o Sheriffs Minutes of Sale stated that the
foreclosure sale was actually opened at
10AM and commenced at 2:30PM
NOTHING IRREGULAR ABOUT THE
FORECLOSURE PROCEEDINGS
DISPOSITIVE: Petition DENIED. SEC Omnibus Order directing
the RTC to immediately undertake the liquidation is
REINSTATED. SC AFFIRMS the ruling of the CA that the Planters
Devt Banks extrajudicial foreclosure of the REM is valid.
Consuelo Metal Corp. v. Planters
Question: Is it the same if decided under the FRIA?
YES. Secured creditors can enforce their claims, except during
the 180 days (Sec. 113(e))
Question: What would you advise the creditor to do?
To still foreclose on the property prior to the institution of the
proceedings.
Question: What is the policy behind the 180 days?
To maintain the status quo while the liquidator determines the
claims.
Question: What if it was a proceeding converted from
rehabilitation?
There would be no need to wait during the 180-day period
because if the stay or suspension order during the rehabilitation
proceedings where the creditors rights were already stayed and
the rehabilitation receiver already determined the claims.
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Yngsn vs. PNB (2012) Villarama, Jr., J.
Petitioner: Manuel D. Yngsn, Jr. [in his capacity as the
liquidator of Arcam and Company, Inc. (Arcam)]
Respondent: Philippine National Bank (PNB)
Concept: Treatment of Claims
Doctrine:
A mortgagee retains the right to foreclose the mortgage
property whether or not the debtor is under insolvency or
liquidation proceedings. Preference of credit is different from a
lien. While a lien attaches to a specific property, preference of
credit does not. The property subject to the lien may be properly
foreclosed by the holder of the lien for the lien excludes all other
claims as to the specific property. Preference of credit is a
method of determining the order of payment from the proceeds
of properties not subject to any lien.
Brief Facts:
Arcan had debts from PNB, secured by REM and CM. Arcam
could not pay its debt to PNB, so PNB initiated extrajudicial
foreclosure proceedings. Before the scheduled foreclosure sale,
Arcam filed a petition for suspension of payments. SEC granted
Arcams petition. Six years after, SEC determined that Arcam
could not be rehabilitated and ordered that the proceedings be
converted to liquidation proceedings. PNB revived the
extrajudicial foreclosure proceedings. A TRO was issued, but it
expired without the issuance of an injunction. PNB foreclosed on
the property, and Yngson (liquidator of Arcam) filed a motion to
nullify the sale.
ISSUE:
WON PNB, as a secured creditor, can foreclose on the
mortgaged properties of a corporation under liquidation without
the knowledge and prior approval of the liquidator or the SEC
(YES)
RATIO: YES, PNB can foreclose the mortgaged
properties.
- Consuelo Metal Corporation v. Planters Development Bank
involved factual antecedents similar, and the Court had
already settled the question and upheld the right of the
secured creditor to foreclose the mortgages in its favor
during the liquidation of a debtor corporation
o CMC filed a petition to be declared in a state of
suspension of payment, for rehabilitation, and for
appointment of a rehabilitation receiver or
management committee
o SEC, finding petition sufficient in form and substance,
declared that all actions for claims against CMC
pending before any court, tribunal, office, board, body
and/or commission are deemed suspended
immediately until further orders
o Upon management committees recommendation, SEC
issued an Omnibus Order directing dissolution and
liquidation of CMC
237
 o Thereafter, Planters Bank, one of CMCs creditors,
commenced the extrajudicial foreclosure of CMCs
REM; Planters Bank extrajudicially foreclosed because
CMC failed to secure a TRO
o CMC questioned the validity of the foreclosure because
it was done without the knowledge and approval of the
liquidator
o RCBC v. IAC: xxx Creditors of secured obligations may
pursue their security interest or lien, or they may choose
to abandon the preference and prove their credits as
ordinary claims.
" The creditor-mortgagee has the right to foreclose
the mortgage over a specific real property WON
the debtor-mortgagee is under insolvency or
liquidation proceedings
" The right to foreclose such mortgage is merely
suspended upon the appointment of a
management committee or rehabilitation receiver
or upon the issuance of a stay order by the TC
- Under RA 10142 (the Financial Rehabilitation and Insolvency
Act of 2010) the right of a secured creditor to enforce his
lien during liquidation proceedings is retained
o Sec. 114 Rights of Secured Creditors. The
Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the
applicable contract or law. A secured creditor may:
(a) waive his rights under the security or lien, prove
his claim in the liquidation proceedings and share
in the distribution of the assets of the debtor; or
(b) maintain his rights under his security or
lien;
If the secured creditor maintains his rights under the
security or lien:
(1) the value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator. When the value of the property is less
than the claim it secures, the liquidator may convey
the property to the secured creditor and the latter
will be admitted in the liquidation proceedings as a
creditor for the balance; if its value exceeds the
claim secured, the liquidator may convey the
property to the creditor and waive the debtors
right of redemption upon receiving the excess
from the creditor;
(2) the liquidator may sell the property and satisfy
the secured creditors entire claim from the
proceeds of the sale; or
(3) the secured creditor may enforce the lien or
foreclose on the property pursuant to applicable
laws. (Emphasis supplied)
- SC: In this case, PNB elected to maintain its rights under
the security or lien; hence, its right to foreclose the
mortgaged properties should be respected, in line with the
pronouncement in Consuelo Metal Corporation
- Yngson: There is a right of first preference as regards
unpaid wages
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- SC: In DBP v. NLRC, a distinction should be made between
a preference of credit and a lien
o A preference applies only to claims which do not
attach to specific properties
o A lien creates a charge on a particular property
o The right of first preference of unpaid wages
recognized by Art. 110 of the LC does not constitute a
lien on the property of the insolvent debtor in favor of
workers
" It is but a preference of credit in their favor, a
preference of application
" It is a method adopted to determine and specify
the order in which credits should be paid in the
final distribution of the proceeds of the insolvents
assets
" It is a right to a first preference in the discharge of
the funds of the judgment debtor
o SC: The right of first preference for unpaid wages may
not be invoked in this case to nullify the foreclosure
sales pursuant to PNBs right as a secured creditor to
enforce its lien on specific properties of the debtor,
ARCAM
DISPOSITIVE: Petition is DENIED.
Yngson v. PNB
Question: If the claim was for taxes, would the creditor still be
able to enforce his claim?
YES. In the distribution of proceeds, taxes would have to be paid
first (first tier).
Question: And after taxes?
Other credits paid pro rata.
Question: What then would the liquidator do (after foreclosure)
with the proceeds, with respect to the employees claim?
Follow Art. 2244. Labor claims now number 1.
2) Unsecured Creditor Claims
RA 10142, Sec. 4
(qq) Unsecured creditor shall refer to a creditor with an
unsecured claim.
(pp) Unsecured claim shall refer to a claim that is not secured by
a lien.
(t) Lien shall refer to a statutory or contractual claim or judicial
charge on real or personal property that legality entities a
creditor to resort to said property for payment of the claim or
debt secured by such lien.
238
RA 10142, Sec. 123 Registry of Claims. - Within twenty (20)
days from his assumption into office the liquidator shall prepare
a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or
lien, or have fixed the value of the property subject of their
security or lien by agreement with the liquidator and is admitted
as a creditor for the balance , shall be considered as unsecured
creditors. The liquidator shall make the registry available for
public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders or members
of the corporation-debtor, on where and when they may inspect
it. All claims must be duly proven before being paid.
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon
the issuance of the Liquidation Order:
(d) no separate action for the collection of an unsecured claim
shall be allowed. Such actions already pending will be
transferred to the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the claim, the court
shall allow, hear and resolve such contest except when the case
is already on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein for a
claim against the debtor shall be filed and allowed in court; and
4. Treatment of Contracts
a. Termination or Breach of Contracts
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon
the issuance of the Liquidation Order:
(c) all contracts of the debtor shall be deemed terminated and/or
breached, unless the liquidator, within ninety (90) days from the
date of his assumption of office, declares otherwise and the
contracting party agrees;
b. Avoidance Proceedings
RA 10142, Sec. 127 Rescission or Nullity of Certain
Transactions. - Any transaction occurring prior to the issuance of
the Liquidation Order or, in case of the conversion of the
rehabilitation proceedings prior to the commencement date,
entered into by the debtor or involving its assets, may be
rescinded or declared null and void on the ground that the same
was executed with intent to defraud a creditor or creditors or
which constitute undue preference of creditors. The
presumptions set forth in Section 58 hereof shall apply.
RA 10142, Sec. 58 Rescission or Nullity of Certain Pre-
commencement Transactions. Any transaction occurring prior to
commencement date entered into by the debtor or involving its
funds or assets may be rescinded or declared null and void on
the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of
creditors. Without limiting the generality of the foregoing, a
disputable presumption of such design shall arise if the
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transaction:
(a) provides unreasonably inadequate consideration to the
debtor and is executed within ninety (90) days prior to the
commencement date;
(b) involves an accelerated payment of a claim to a creditor
within ninety (90) days prior to the commencement date;
(c) provides security or additional security executed within ninety
(90) days prior to the commencement date;
(d) involves creditors, where a creditor obtained, or received the
benefit of, more than its pro rata share in the assets of the
debtor, executed at a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the
creditors to collect claims where the effect of the transaction is
to put assets of the debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the
court from rescinding or declaring as null and void a transaction
on other grounds provided by relevant legislation and
jurisprudence: Provided, further, That the provisions of the Civil
Code on rescission shall in any case apply to these transactions.
RA 10142, Sec. 128 Actions for Rescission or Nullity. - (a) The
liquidator or, with his conformity, a creditor may initiate and
prosecute any action to rescind, or declare null and void any
transaction described in the immediately preceding paragraph.
If the liquidator does not consent to the filling or prosecution of
such action, any creditor may seek leave of the court to
commence said action.
(b) if leave of court is granted under subsection (a) hereof, the
liquidator shall assign and transfer to the creditor all rights, title
and interest in the chose in action or subject matter of the
proceeding, including any document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to
subsection (a) hereof, to the extent of his claim and the costs,
belongs exclusively to the creditor instituting the proceeding,
and the surplus, if any, belongs to the estate.
(d) Where, before an orders is made under subsection (a) hereof,
the liquidator signifies to the court his readiness to the institute
the proceeding for the benefit of the creditors, the order shall fix
the time within which he shall do so and, in that case the benefit
derived from the proceedings, if instituted within the time limits
so fixed, belongs to the estate.
An avoidance proceeding, which permits certain transactions
to be rescinded or nullified, and an asset transferred pursuant to
the transaction, or its value, to be recovered for the benefit of
the creditors, is also available as a consequence of the
liquidation of a debtor.
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Transactions that may be nullified of rescinded: RA 10142, Sec. 132 Manner of Implementing the Liquidation
1) those entered into by the debtor or involve the debtors Plan. - The Liquidator shall implement the Liquidation Plan as
assets approved by the court. Payments shall be made to the creditors
2) prior to the issuance of the Liquidation Order, or prior to the only in accordance with the provisions of the Plan.
commencement date of the rehabilitation proceeding, if
converted into a liquidation proceeding; and are
RA 10142, Sec. 133 Concurrence and Preference of Credits. -
3) excecuted in fraud of creditors, or constitutes and undue
The Liquidation Plan and its Implementation shall ensure that
preference of creditors. Generally, all fraudulent the concurrence and preference of credits as enumerated in the
conveyances, or transfers of property made by an insolvent
Civil Code of the Philippines and other relevant laws shall be
debtor for little or no consideration, made for the purpose
observed, unless a preferred creditor voluntarily waives his
of hindering of delaying creditors, or putting funds or assets
preferred right. For purposes of this chapter, credits for services
beyond reach of creditors, and all preferential transfers, or
rendered by employees or laborers to the debtor shall enjoy first
transfers made by the insolvent debtor to or for the benefit preference under Article 2244 of the Civil Code, unless the
of a creditor, thereby allowing the creditor to receive more
claims constitute legal liens under Article 2241 and 2242 thereof.
than its proportionate share, may be rescinded or nullified.

" Primary goal of liquidation proceedings, liquidator and

5. Liquidation Plan
liquidation plan is to sell the assets of the insolvent debtor
and convert the same into money for payment to the
RA 10142, Sec. 129 The Liquidation Plan. - Within three (3)
creditors
months from his assumption into office, the Liquidator shall
submit a Liquidation Plan to the court. The Liquidation Plan shall, 6. Termination of Proceedings
as a minimum enumerate all the assets of the debtor and a
schedule of liquidation of the assets and payment of the claims.
RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator
shall make and keep a record of all moneys received and all
RA 10142, Sec. 130 Exempt Property to be Set Apart. - It shall disbursements mad by him or under his authority as liquidator.
be the duty of the court, upon petition and after hearing, to He shall render a quarterly report thereof to the court , which
exempt and set apart, for the use and benefit of the said report shall be made available to all interested parties. The
insolvent, such real and personal property as is by law exempt liquidator shall also submit such reports as may be required by
from execution, and also a homestead; but no such petition shall the court from time to time as well as a final report at the end of
be heard as aforesaid until it is first proved that notice of the the liquidation proceedings.
hearing of the application therefor has been duly given by the
clerk, by causing such notice to be posted it at least three (3)
RA 10142, Sec. 134 Order Removing the Debtor from the List
public places in the province or city at least ten (10) days prior to
of Registered Entitles at the Securities and Exchange
the time of such hearing, which notice shall set forth the name of
Commission. - Upon determining that the liquidation has been
the said insolvent debtor, and the time and place appointed for
completed according to this Act and applicable law, the court
the hearing of such application, and shall briefly indicate the
shall issue an Order approving the report and ordering the SEC
homestead sought to be exempted or the property sought to be
to remove the debtor from the registry of legal entities.
set aside; and the decree must show that such proof was made
to the satisfaction of the court, and shall be conclusive evidence
of that fact. RA 10142, Sec. 135 Termination of Proceedings. - Upon
receipt of evidence showing that the debtor has been removed
from the registry of legal entities at the SEC. The court shall
RA 10142, Sec. 131 Sale of Assets in Liquidation. - The
issue an Order terminating the proceedings.
liquidator may sell the unencumbered assets of the debtor and
convert the same into money. The sale shall be made at public
- As for the insolvent individual debtor, the liquidation
auction. However, a private sale may be allowed with the
proceeding logically terminates upon a determination that
approval of the court if; (a) the goods to be sold are of a
the liquidation has been completed.
perishable nature, or are liable to quickly deteriorate in value, or
are disproportionately expensive to keep or maintain; or (b) the
private sale is for the best interest of the debtor and his In making payments, follow the Liquidation Plan.
creditors. First, look at unencumbered assets.
Then, look at unsecured creditors.
With the approval of the court, unencumbered property of the
debtor may also be conveyed to a creditor in satisfaction of his
claim or part thereof.

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E. Ancillary Proceedings
1. Securities Market Participant
RA 10142, Sec. 136 Liquidation of a Securities Market
Participant. - The foregoing provisions of this chapter shall be
without prejudice to the power of a regulatory agency or self-
regulatory organization to liquidate trade-related claims of
clients or customers of a securities market participant which, for
purposes of investor protection, are hereby deemed to have
absolute priority over other claims of whatever nature or kind
insofar as trade-related assets are concerned.
For purposes of this section, trade -related assets include cash,
securities, trading right and other owned and used by the
securities market participant in the ordinary course of this
business.
" Sec. 136 of FRIA creates a special preference of credit in
favor of trade-related claims of clients or customers upon
the trade-related assets, such as cash, securities and trading
rights, of a securities market participant. This special
preferred credit enjoys absolute priority over other
claims.
2. Banks and Other Financial Institutions Under
Rehabilitation Receivership Pursuant to a State -funded
or State-mandated Insurance System
RA 10142, Sec. 137 Provision of Assistance. - The court shall
issue orders, adjudicate claims and provide other relief
necessary to assist in the liquidation of a financial under
rehabilitation receivership established by a state-funded or
state-mandated insurance system.
RA 10142, Sec. 138 Application of Relevant Legislation. - The
liquidation of bank, financial institutions, insurance companies
and pre-need companies shall be determined by relevant
legislation. The provisions in this Act shall apply in a suppletory
manner.
3. Cross-Border Insolvency Proceedings
RA 10142, Sec. 139 Adoption of UNCITRAL Model Law on
Cross-Border Insolvency. - Subject to the provision of Section
136 hereof and the rules of procedure that may be adopted by
the Supreme Court, the Model Law on Cross-Border Insolvency
of the United Nations Center for International Trade and
Development is hereby adopted as part of this Act.
RA 10142, Sec. 140 Initiation of Proceedings. - The court shall
set a hearing in connection with an insolvency or rehabilitation
proceeding taking place in a foreign jurisdiction, upon the
submission of a petition by the representative of the foreign
entity that is the subject of the foreign proceeding.
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RA 10142, Sec. 141 Provision of Relief. - The court may issue
orders:
(a) suspending any action to enforce claims against the entity or
otherwise seize or foreclose on property of the foreign entity
located in the Philippines;
(b) requiring the surrender property of the foreign entity to the
foreign representative; or
(c) providing other necessary relief.
RA 10142, Sec. 142 Factors in Granting Relief. - In
determining whether to grant relief under this subchapter, the
court shall consider;
(a) the protection of creditors in the Philippines and the
inconvenience in pursuing their claim in a foreign proceeding;
(b) the just treatment of all creditors through resort to a unified
insolvency or rehabilitation proceedings;
(c) whether other jurisdictions have given recognition to the
foreign proceeding;
(d) the extent that the foreign proceeding recognizes the rights
of creditors and other interested parties in a manner
substantially in accordance with the manner prescribed in this
Act; and
(e) the extent that the foreign proceeding has recognized and
shown deference to proceedings under this Act and previous
legislation.
- Cross-border insolvency occurs when an insolvent
debtor has assets in, and creditors from, several States,
giving rise to the possibility that insolvency proceedings
may be commenced in several jurisdictions
- The Model Law on Cross-border Insolvency of the United
Nations Commission on International Trade Law
(UNCITRAL), referred to in the FRIA, focuses on the
legislative framework needed to facilitate cooperation and
coordination in cross-border insolvency proceedings,
specifically cooperation between the courts and the other
competent authorities of the enacting states and foreign
States involved, greater legal certainty for trade and
investment, fair and efficient administration of the
proceedings that protects the interests of all creditors and
other interested persons, including the debtor protection
and maximization of the value of the debtors assets, and
facilitation of the rescue of financially troubled businesses,
thereby protecting investment and preserving employment.
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