b2017 credit finals reviewer

8/19/2019 B2017 Credit Finals Reviewer

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TIMELESS REVIEWERS B2017 | CREDIT TRANSACTIONS | PROF. STEPHANIE GOMEZ-SOMERA 1

SGS QUESTIONS: (and other notes from class appear in this

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 losingparty)?

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 wasequated 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 person’s undertaking to pay

- Without credit, and without a rational system of dealing with

non-payment of debt, trade and commerce would not haveflourished 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 partor 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.

CREDIT : is the debtor’s ABILITY to borrow money by virtue o

the confidence or trust reposed by the creditor that the debto

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; anycontract 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 o

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 o

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 no

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)

Plaint i ff : People of the Phils.

Defendant: Venancio Concepcion

Concept: Credit & Credit Transactions Defined

Doctr ine:

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 repaythe sum loaned, with or without interest.“

Brief Facts:

Concepcion, president of PNB, issued a special authorization fo

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.




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 Bouvier’s Law Dictionary and

defined credit as a person’s “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, byvirtue of the trust and confidence reposed by a creditor,

of a debtor’s 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.

3.

YES; i t 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 defendant’s 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 st i l l 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 thei

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 tothe 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.




C. Commercial Credit Transactions

COC, Art. 1 The following are merchants for the purposes of

this Code:

1. Those who, having legal capacity to trade, customarily

devote themselves thereto. cdasia

2. Commercial or industrial associations which are formed in

accordance with this Code.

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 againstthe 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

LOAN

I. THE CONCEPT OF LOAN

The concept of loan is a question of civility. It came from Roman

law, a contract of neighborliness.

A. General Concepts

Art. 1933 By the contract of loan, one of the parties deliversto 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 thingloaned, 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 sameamount 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

money

Non-consumable

Consideration Creditor: Liberality

Debtor: Permissive

use

Bailor: Liberality

Bailee: Permissive

use

Consent Consent




1. Obligation to Del iver

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 Part ies

- Creditor: To DELIVER

- Debtor: To PAY the same amount of the same kind and

quality

COMMODATUM: Obligations of the Part ies

- 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

Petit ioners: Carolyn Garcia

Respondents: Rica Marie Thio

Concept: Loan - Obligations to Deliver

Doctr ine:

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.

ISSUE: WON there was a contract of loan; if so, W it was Thio o

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 byway of commodatum or simple loan is binding upon

parties, but the commodatum or simple loan i tself

shal l not be perfected unti l the del ivery 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 he

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 actuallyre-lent the amounts to Santiago

- Several factors that support conclusion that instruments

were placed in Thio’s 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 Thio’s

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 Garcia’s

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 Santiago’s creditors




o Thio never presented Santiago as a witness to

corroborate story

- SC: Thio should be liable for the principal amounts of the

loans (US$100,000 and P500,000) but she shouldn’t be liable

for the 3% and 4% monthly interest because there was no

written proof of the interest payable except for the verbal

agreement AND Art. 1956 states that “[n]o interest shall be

due unless it has been expressly stipulated in writing”

(On interest)

-

No stipulated interest, but there can be legal interestpursuant to Art. 2209 (breach of an obligation which consists

in the payment of a sum of money, i.e., a loan or

forbearance of money) in the amount of 12% per annum

o 12% from Nov. 21, 1995, when Thio received Garcia’s

demand letter

DISPOSITIVE: Petition GRANTED.

Garcia v. Thio

From one crossed check, there are 2 contracts of loan:

1. Garcia giving check to Thio: delivery

2.

Thio passes on to Santiago (presumably)

2. Object of a Loan

Art. 1933 By the contract of loan, one of the parties delivers

to another, either something not consumable so that the latter








interest.

In commodatum the bailor retains the ownership of the thing

loaned, while in simple loan, ownership passes to the

borrower.

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.

Commodatum Mutuum

Non-consumable, whether

movable or immovable

Money or other consumable

property

Purpose of the delivery by the

creditor is for the permissive

use of the property by the

debtor for a certain time

Purpose of the delivery by the

creditor is for the permissive

use of the property by the

debtor by taking ownership

(use of consumable property

results in its extinguishment)

Creditor retains ownership Debtor takes ownershipObligation on the part of the

debtor to return the very same

property to the creditor

Consequent obligation of the

debtor is to pay the same

amount, or kind and quality to

the creditor

3. Consideration of a Loan





consumable thing, upon the condition that the same amountof the same kind and quality shall be paid, in which case the




interest.



borrower.

-

Contract of loan is a reciprocal obligation, not a unilateracontract

- The promise of the debtor to pay is the consideration of the

obligation of the creditor to furnish the loan

- COMMODATUM: essentially gratuitous, that is, the only

consideration for the creditor is always liberality

- MUTUUM: may be gratuitous or with a stipulation to pay

interest




4. Obligation to Return or Pay










interest.



borrower.

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 paidunless the thing or service in which the obligation consists has

been completely delivered or rendered, as the case may be.

- COMMODATUM: Primary obligation of the debtor is to

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 COMMODATUM

May be gratuitous or may have

a stipulation to pay interest

Essentially gratuitous wherein

the only consideration for the

creditor is always liberalityObligation of the debtor is to

pay the same amount, kind

and quality to the creditor

Primary obligation of the

debtor is to return

Consumable/fungible Non-consumable/non-fungible

Returned upon the expiration

of the term only

Returned in case of urgent

need and commission of any

acts of ingratitude, even

before expiration of term

For consumption For use or temporary

possession

Personal property Any property

Debtor bears risk of loss Bailor bears risk of lossOwnership passes to the

debtor

Ownesrhip retained by bailor

(From A2015 Reviewer)

B. Contract to Loan

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, dist inguished.

Contract To Loan Contract Of Loan

Consensual contract perfected

by mere consent

Real contract perfected upon

delivery

A binding obligation arising

from contract between a

debtor, the party who promises

to deliver the property, and the

creditor, the party who

accepted the promise

Once the debtor in a contracts

to loan delivers the property

to the creditor, a contract o

loan is perfected and the roles

of the parties are reversed

Saura Import and Export Co. Inc. v. Development Bank of the

Philippines (1972) – Makalintal, J.

Plaint i ff-appel lee: Saura Import & Export Co., Inc.

Defendant-appel lant : Development Bank of the Philippines(DBP)

Concept: Contract to Loan

Doctr ine:

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 unti

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 RFC’s Board of Governors

reexamined the advisability of financing the project. Eventually

despite the initial cancellation of the loan (per Saura’s 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 approva

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 RFC’s 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)




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 part ies

- 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)

Petit ioner: BPI Investment Corp (BPI)Public Respondent: Court of Appeals

Private Respondent: ALS Management & Dev’t Corp.


Doctr ine:

A contract of loan is a real contract, perfected by the delivery of

the object of the contract.

Brief Facts:

Roa obtained a loan from Ayala (BPI’s 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 Roa’s debt to

Ayala. Ayala proposed to grant a P500k loan to ALS and Litonjua

which would be applied to Roa’s debt (that they assumed), which

the 2 parties accepted. ALS updated Roa’s debt by paying

P190k, reducing the balance to P457k, to which the P500k loan

was applied. BPI initiated foreclosure proceedings for failure topay 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 del ivery 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 o

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 afte

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 thecontract’s 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 party’s obligation. I

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 itsamortization 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




Pantaleon v. American Express International, Inc. (2010) – Brion

Petit ioner-Plaint i ff : Polo S. Pantaleon

Respondent-Defendant: American Express International Inc.

(AMEX)


Doctr ine:

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 (companyapproves 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 andmissing 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 ofvalue 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

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 againsthe companies since they are the ones who draft the

card membership agreement.

RATIO: NO, AMEX is not l iable.

- 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 i

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, i

distinguished that there is a separate creditor-debto

relationship (besides that of acceptance by the cardholdeof the terms of the card membership) that arises ONLY afte

a credit card company has approved the charge request of

the holder.

o The first one merely an agreement to provide credi

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 companyapproves the purchase requests that the parties ente

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 firs

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 firstrequisite 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, Pantaleon’s 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 wil

approve it, based on the credit history/charge pattern o




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 definedperiod of time.


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.

I I . COMMODATUM

A. General Concepts










interest.



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.

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 o

neighborliness.”

It is a contract where the creditor (or bailor) gratuitously delivers

to the debtor (or bailee) non-consumable property so that thelatter 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 owne

(Art. 1947)

1. Consideration in Commodatum

- It is a contract that is essentially gratuitous in nature,

- The l iberal i ty on the part of the bailor is the consideration

for the contract.

- It is for this reason that this contract is highly persona

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).




2. Object of Commodatum

Art. 1937 Movable or immovable property may be the object

of commodatum.

Art. 1936 Consumable goods may be the subject of

commodatum if the purpose of the contract is not the

consumption of the object, as when it is merely for exhibition.

- GR: The object of commodatum is a non-consumable

property, whether movable or immovable

- EX: The object may be a consumable if the purpose of

the contract is NOT the consumption of the object (i.e.,

display).

Producers Bank v. CA (2003) – Callejo, Sr.

Petit ioners: Producers Bank of the Philippines (now First

International Bank)

Respondents: CA and Franklin Vives

Concept: Object of Commodatum

Doctr ine: The object of a commodatum is non-consumable thing.

However, there are instances when a commodatum may have for

its object a consumable thing. If consumable goods are loaned

only for the purposes of exhibit ion , or when the intention

of the part ies is to lend consumable goods and to have the

very same goods returned at the end of the period agreed

upon, the loan is a commodatum, not a mutuum

Brief Facts:

Vives was asked for help by Sanchez in incorporating Col.

Doronilla’s business. Sanchez asked Vives to deposit money in

Sterela’s (the company’s) bank account for purposes ofincorporation, but assured Vives that he could withdraw the

money within a month’s time. Vives issued a check, relying on

the assurances and representations of Sanchez and Doronilla,

and Vives’ wife deposited the check. Vives filed a complaint for

recovery of sum of money.

ISSUE/S:

1. W the transaction between Vives and Doronilla is a simple

loan (mutuum) or commodatum [COMMODATUM]

2. WON Mr. Atienza could be faulted for allowing Doronilla to

withdraw from the savings account [YES]

3. WON Producers should be held liable to Vives [YES]

RATIO: No merit in the petit ion.

1. The transaction between Vives and Doroni l la is

commodatum .

- PRODUCERS: The transaction is a simple loan (mutuum)

because all the elements are present:

o First, what was delivered was money, a consumable

thing

o Second, the transaction was onerous as Doronilla was

obliged to pay interest, as evidenced by the check

issued by Doronilla in the amount of P212,000 (P12K

more than what was deposited)

o Moreover, Vives sued Sanchez for failure to recover this

money ! shows that the transaction was not merely

gratuitous, but “had a business angle”

- VIVES: The transaction is not a mutuum but an

accommodation, since he didn’t part with the ownership of

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 thepassbook was given

- SC: No error by the CA when it ruled that the transaction

was a commodatum and not a mutuum

- Art. 1933, NCC distinguishes the two kinds of loans:

o 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. (1740a)

o Provision seems to imply that if the subject is a

consumable thing, such as money, the contract would

be a mutuum

- BUT there are instances where a commodatum may have fo

its object a consumable thing

o Art. 1936: Consumable goods may be the subject o

commodatum if the purpose of the contract is not theconsumption of the object, as when it is merely for

exhibition. (n)

o SC: If consumable goods are loaned only for the

purposes of exhibit ion , or when the intention of

the part ies is to lend consumable goods and to have

the very same goods returned at the end of the

period agreed upon, the loan is a commodatum, not a

mutuum

- Rule is that the intention of the parties shall be accorded

primordial consideration in determining the actual characte

of a contract. In case of doubt, the contemporaneous and

subsequent acts of the parties shall be considered in suchdetermination

- Vives agreed to deposit his money specifically for the

purpose of making it appear “that said firm had sufficient

capitalization for incorporation, with the promise that the

amount shall be returned within thirty (30) days.”

o He merely “accommodated” Doronilla by lending his

money without consideration, as favor to Sanchez

o But it WAS CLEAR that the money would not be

removed from Sterela’s savings account and would be

returned to Vives after thirty (30) days




B. Part ies to a Commodatum

- The parties to a contract of commodatum are called the

bai lor (creditor) and the bai lee (debtor).

- These terms find their root from the common law concept of

bai lment, 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 Bai lor

Art. 1938 The bailor in commodatum need not be the owner

of the thing loaned.










interest.



borrower.

- The bailor in a commodatum need NOT be the owner of the

property being loaned.

-

However, as against the bailee, the bailor shall beconsidered to have retained ownership over the property

loaned.

A commodatum MUST BE gratuitous.

2. Use by Bai lee

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 characte

and the bailee cannot lend nor lease the property loaned to

a third person

- EX: However, members of the bailee’s household may

make use of the property loaned.

- EX to EX: Unless there is a stipulation to the contrary o

the nature of the property forbids its use by anyone otherthan the bailee.

3. Sol idary Liabi l i ty of Bai lees

Art. 1945 When there are two or more bailees to whom a

thing is loaned in the same contract, they are liable solidarily.




C. Liabi l i ty 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.

Pajuyo v. CA (2004) – Carpio, J.

Petit ioner: Colito T. Pajuyo

Respondents: CA and Eddie Guevarra

Concept: Commodatum; liability for expenses and damages;

ordinary expences

Doctr ine:

The imposition of an obligation makes the contract different

from a commodatum. A contract that is not essentially gratuitous

is not a commodatum.

Brief Facts:

Pajuyo, who paid P400 for rights over land to Perez, constructed

a house of light materials on said land and resided there with his

family. Pajuyo and Guevarra executed an agreement whereby

Guevarra would live in the house for free, provided Guevarra

would maintain the cleanliness and orderliness of the house, andthat he would vacate upon demand. Pajuyo demanded Guevarra

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 i t was not purely gratuitous

- Aside from being essentially gratuitous, a commodatum

involves the use of a thing belonging to another for a certain

periodo 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

- 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 o

a commodatum

- Case law on ejectment has treated relationship based on

tolerance as one that is akin to a landlord-tenan

relationship where the withdrawal of permission would

result in the termination of the lease. The tenant’swithholding 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

DISPOSITIVE : Petition granted

In a commodatum, there is permissive use of the property

loaned and the obligation to return the very same property. It isthe bailee who is liable for the ordinary expenses for its use and

preservation. This does not mean that the bailee is only liable for

deterioration of the property due to the use and without fault

Bailee will be liable for property loaned that will suffer ordinary

wear and tear that arises from actual use by the bailee.

Pajuyo v. CA

A commodatum MUST BE gratuitous. In this case, there was an

obligation to maintain the cleanliness and orderliness of the

house. The obligation to maintain cleanliness and orderliness o

the property loaned was equated/considered by the Cour

with/as compensation. The contract was considered a

commodatum, which is essentially gratuitous.Question: How is this case reconciled with Art. 1941?




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 theactual 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 bailor’s approval wouldendanger 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 Bai lor

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

5. Right of Retention by Bai lee

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 havea 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




D. Liabi l i ty 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 hasbeen 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 becauseliberality is also the consideration.

Republic v. Bagtas (1962)

Plaint i ff : Republic of the Phils.

Defendant: Felicidad Bagtas

Concept: Liability for Loss

Doctr ine:

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 Natura

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 o

execution, which was granted. Bagtas (Felicidad), administratrixof 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: Fel icidad is l iable for the loss of the third bul l .

- 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 o

commodatum, the Republic retained of ownership andtherefore 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 Cour

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, i

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 exemp

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 unti

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.




- Felicidad’s 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 afterthe 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.

- 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 allowsanother 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 bailor’s

wife, or the children under parental authority.

"

The bailee imputes to the bailor any criminal offenseor any act involving moral turpitude, even though i

be proved, unless the crime or act has been

committed against the bailee, or the bailee’s wife, o

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

Plaint i ffs-Appel lants: Margarita Quintos and Angel Ansaldo

Defendant-Appellee: Beck

Concept: Commodatum – Obligation to Return

Doctr ine:

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 thepremises 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 tha

Beck refused to make delivery of them.

ISSUE:

WON Beck breached the contract between them (YES)




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 plaintiff’s 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 ofQuintos means that he should return all of the furniture to

the plaintiff at the latter’s 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 areunder the DISPOSAL AND CONTROL of Quintos, and that the

latter may take over and take possession at any time.

I I I . 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.

A. General Concepts










interest.



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 kindand 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 borrowe

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 othe

property of the same kind.




- 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 acurrent account unless specified otherwise for the

particular type of current account.

“Fungible goods”

People v. Puig and Porras (2008) – Chico-Nazario, J.

Petit ioners: People of the Philippines

Respondents: Teresita Puig and Romeo Porras

Concept: Simple loan; general concepts

Doctr ine:

The relationship between bankds and depositors has been held

to be that of creditor and debtor. A bank acquires ownership ofthe 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 bank’s 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)

RATIO:

1.

Yes; the bank acquires ownership of the money

deposited by i ts cl ients and hence is the rea

party- in- interest in the cr iminal case

- As correctly pointed out by petitioner, the bank is the owne

of the monies allegedly misappropriated

o

Art. 1953 NCC : A person who receives a loan o

money or any other fungible thing acquires ownership

thereof, and is bound to pay to the creditor an equa

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 vigi lance 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

al leged 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 complain

or information:

o The positions held by Puig and Porras

o

That the crime was committed with grave abuse oconfidence, 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.




BPI Family Bank v. Franco – Nachura, J.

Petit ioner: BPI Family Bank (BPI)

Respondent: Amado Franco

Concept: Simple Loan; General Concepts

Doctr ine:

In the contract of simple loan, the debtor acquires ownership of

the money or consumable loaned. This ownership, however, has

the obligation to pay what has been loaned..

Brief Facts:

Franco opened an account with BPI. When it was learned that

the funds for these accounts were purportedly the result of

unauthorized transfers, BPI refused to release the funds to

Franco, claiming ownership over such funds.

ISSUE:

WON Franco had a right to amount in the frozen accounts? (YES)

RATIO: YES. Franco was entit led to those amounts.

- BPI: The bank owns the amounts. The situation applicable,

therefore, is that of an owner of a personal property whosepossession he regains after it was stolen, pursuant to Art.

559.

- SC: Theory is incorrect and Art. 559 is inapplicable as well.

o What is involved in Art. 559 is a specific/determinate

thing. In this case, the property involved is money,

which is generic and fungible; it is capable of being

substituted by others of the same kind and does not

have distinct individuality

o BPI, therefore, only claims ownership of the

equivalent amount of money, unlike the situation

contemplated in the said article, which involves an

owner trying to recover a distinct movable from the

current possessor.o Money, by its very function, is to pass from hand to

hand as a medium of exchange, without other evidence

of its title.

- SC: BPI does own the money , but not as a

consequence of the unauthorized transfer of FMIC’s

deposit. Rather, i t is a consequence of the contract

of s imple loan or mutuum , between BPI (bank) and

Franco (account holder).

o BPI is the debtor and Franco is the creditor, in this

contract of simple loan.

o And since the relationship of BPI and Franco is

governed by the provisions on the contract of simpleloan, BPI’s ownership of the amounts comes with a

corresponding obligation to pay Franco the amount

equal to what he deposited, upon the latter’s demand.

o

Thus, Franco had every right, as the creditor, to expect

that the checks he issued would be honored. And

consequently, BPI had no right to dishonor the checks

as they had the obligation to pay the amount

demanded when such demand was made.

DISPOSITIVE: Decision AFFIRMED with MODIFICATION.

Basis of

Comparison

Mutuum (Simple

Loan)

Commodatum

Object Money or other

consumable thing

Ordinarily non

consumable

Ownership of

the thing

Ownership is

transferred to the

borrower

Ownership is

retained by the

lender

Cause Gratuitous or onerous

(w/stipulation to pay

interest)

Essentially gratuitous

Thing to be

returned

Borrower need only

pay the same maount

of the same kind and

quality

Borrower must return

the same thing

loaned

Subject

matter

Only personal property May involve real o

personal property

Purpose Loan for consumption Loan for use o

temporary

possession

When to

return

Lender may not

demand its return

before the lapse of theterm agreed upon

Bailor may demand

the return of the

thing loaned beforethe expiration of the

term in case o

urgent need

Who bears

risk of loss

Borrower suffers the

loss (even if caused

exclusively by a

fortuitous event and

he is not therefore

discharged from his

duty to pay

Loss of the subjec

matter is suffered by

the bailor since he is

the owner

Nature Not purely personal Purely personal

(From A2015 reviewer)

Basis Mutuum

(Simple Loan)

Commodatum Barter

Subject

matter

Money or any

other fungible

things/personal

property

Personal or real

property

(generally non-

consumable)

Non-

fungible o

non-

consumable

things

Obligation

of the

bailee

Pay or deliver

the same kind

or quality

loaned to the

bailee

Return the

identical thing

borrowed when

the time has

expired or the

purpose has

been served

The

equivalent

thing is

given in

return fo

what has

been

received

Nature of

the

contract

May be

gratuitous

Always

gratuitous

Onerous

(From A2015 reviewer)




B. Obligation to Pay

Art. 1955 The obligation of a person who borrows money

shall be governed by the provisions of Articles 1249 and 1250

of this Code.

If what was loaned is a fungible thing other than money, the

debtor owes another thing of the same kind, quantity and

quality, even if it should change in value. In case it is

impossible to deliver the same kind, its value at the time of theperfection of the loan shall be paid.

Art. 1249 The payment of debts in money shall be made in

the currency stipulated, and if it is not possible to deliver such

currency, then in the currency which is legal tender in the

Philippines.

The delivery of promissory notes payable to order, or bills of

exchange or other mercantile documents shall produce the

effect of payment only when they have been cashed, or when

through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original

obligation shall be held in the abeyance.

Art. 1250 In case an extraordinary inflation or deflation of the

currency stipulated should supervene, the value of the currency

at the time of the establishment of the obligation shall be the

basis of payment, unless there is an agreement to the contrary.

- The primary obl igation of the borrower is to pay.

- If the object of the simple loan is money (principal), then

the general rules on payment in money apply.

o

The value of payment in money, or payment of theprincipal, is generally determined at the time of the

establishment of the obligation, that is, the time of the

delivery of the principal.

- If the object of the simple loan is any other consumable

property, then the borrower owes payment in kind , that

is, another property of the same kind, quantity and quality.

o The value of payment in kind is determined at the time

of perfection of the simple loan, that is, the time of

delivery of the object of the simple loan.

- The obligation to pay may be evidenced by a written

promise to pay. The following are evidences of

indebtedness and are the commercial forms that contracts

of simple loan take:

1) Note – a written promise by the maker to the payee or

to bearer, or a written promise to pay a specified

amount to a certain person on demand or on a

specified date

2) Bond – a written promise by the issuer to pay money to

the holders, or a written promise, issued by a

government or corporation to holders, to pay the

principal amount of the loan at maturity and a specified

sum of money usually at specific intervals. Interest-

bearing or discounted government or corporate

securities.

- An investor who purchases a bond is lending

money to the issuer, and the bond represents the

issuer’s contractual promise to pay interest and

repay principal according to specific terms.

3) Debenture – an instrument acknowledging a debt

secured only by the issuer’s earning power and not by a

lien, or legal right or interest that a creditor has, on any

specific asset, or an unsecured bond.

Notes, bonds, and debentures are all promises to pay. They are

evidence of indebtedness and are commercial forms of contracts

of simple loan.

NOTE BOND DEBENTURE

Promise to pay Promise to pay Promise to pay

To specified

person

To holder To holder

On demand or on

a specified date

The principal at

maturity and

specified sums atspecific intervals

C. Interest

SGS classifies interest as:

1. Conventional – by agreement

- Interest on interest

2.

Compensatory – seeks to make the party whole

INTEREST RULES:

- GR: Must be expressly stipulated in writing (what is

stipulated is a rate or fixed amount, or even in kind)

- XPN: No rate, but with express stipulation ! legal interes

(which is currently at 6%)

Beda Reviewer Notes (From A2015)

Interest

Compensation allowed by law or fixed by the parties for the loan

or forbearance of money, goods, or credits

Requisites for Demandabil i ty

1. Must be expressly stipulated

- XPNS:

o Indemnity for damages

o

Interest accruing from unpaid interest2. Must be lawful

3. Must be in writing

Compound Interest

- GR: Unpaid interest shall not interest

- XPN:

o When judicially demanded

o When there is an express stipulation (must be in writing

in view of Art. 1956)




1. Conventional Interest










interest.



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 theprincipal 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.

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 aloan 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 theevent 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.




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

Condit ions for Payment of Interest to Be Al lowed :

1. There is an express st ipulat ion for the payment of

interest, and

2. The stipulation for the payment of interest is in writ ing

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 interestamount or rate then the interest prescribed by statute

Escalat ion 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

- To avoid one-sidedness, there must be a de-escalat ion

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. Sereno’s 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 interes

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.Petit ioner: Sps. Juico

Respondents: China Banking Corporation

Concept: Conventional Interest

Doctr ine:

“Escalation clauses” are valid provided that changes made shal

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 upondemand, 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, violat ing the rule on mutual i ty of

contracts

- Article 1308. The contract must bind both contracting

parties; its validity or compliance cannot be left to the will ofone 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.




- 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 thedebtor 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 borrower’s 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 ofinterest 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 observedthat there was no attempt made by PNB to secure the

conformity of respondent borrower to the successive

increases in the interest rate. The borrower’s 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 andwould 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

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 governmen

entities, increasing or decreasing such interest rate o

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 o

otherwise change from time to time the rate of interestand/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 Centra

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 o

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, thefluctuation 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 statemen

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 ratesand not dictated by respondent’s 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 thei

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. Respondent’s monthlytelephone 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.




- 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 Bank’s 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 excessiveand 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 bankand 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 termcontracts." 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

Central Bank, leaving the determination thereof at the sole wil

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, thecontractual 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 theprevailing 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 beconsidered 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, ou

credit system would be facilitated by firm loan provisions tha

not only aid fiscal stability, but also avoid numerous disputes andlitigations between creditors and debtors.




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

(invalidated in its

implementation because itbased it on a circular, NOT a

law)

Increased without following a

law or Central Bank Circular

(no pegging)

Advise of ma’am: PEG A MARGIN; Follow Polotan, follow a

margin

Spouses Silos v. PNB (2014) – Del Castillo

Petit ioner: Sps. Eduardo and Lydia Silos

Respondent: Philippine National Bank


Doctr ine: 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 uni lateral

determination to f ix the interest is void.

-

Spouses: The provision relegates to PNB the sole power tofix 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 doesn’t apply because no

estoppel can proceed from an illegal act

- PNB: Spouses are estopped because they failed to question

the imposed rates and they continued to pay withou

opposition

- In a number of decided cases, the Court struck down

provisions in credit documents issued by PNB to, o

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 weredeclared 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 fo

loans and certain forbearances and the Centra

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 Circula

No. 905 allowed contracting parties to stipulate

freely regarding adjustments in the interest rate

the law and circular did not authorize either

party to uni lateral ly raise the interest rate

without the other’s consent

- There can be no contract in the true sense in the

absence of the element of agreement or of mutua

assent of the parties

- Contract changes must be made with the consen

of the contracting parties, especially when it affects

an important aspect of the agreement; rate o

interest is always a vital component of loancontracts

- Cannot countenance PNB’s posturing that the

escalation clause gives it unbridled right to

unilaterally upwardly adjust the interest because i

would take away the respondents’ right to assen

to an important modification in their agreemen

and would negate the element of mutuality o

contracts

c) Sps. Almeda v. CA (1996): court invalidated the same

provisions as in the instant case’s Credit Agreement

- Here, PNB unilaterally altered the terms of its

contract by increasing the interest rates on the loanwithout 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




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-à-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 thatincreases 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 ofresponse 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 PNB’s repeated reliance on

its invalidated contract stipulations

- PNB’s argument that the spouses failure to contest

the increased interest rates amounted to impliedacceptance 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 affectPNB’s borrowers

o PNB’s 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

thereof must be mutually agreed upon; otherwise, it has no

binding effect.

o The stipulations here don’t 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 o

consent or agreement by the borrower is now completely

lacking, which makes respondent’s 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 o

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 PNB’s argument that in every

repricing, the spouses are given the right to question the

interest rates ! if only one questions PNB’s 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 amoun

of the loan is subject to the original or stipulated rate of

interest, and upon maturity, the amount due shall be subjec

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 beimproper, 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.




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 tothe 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) MADEPAYMENTS 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% attorney’s feesshall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.)

and 1% attorney’s 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% attorney’s 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%

attorney’s 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% attorney’s fees (6.), the

excess shall be RETURNED to the petitioners, with legal

interest, under the principle of solutio indebiti;107

12. Likewise, if the overpayment exceeds the total amount o

interest (4.) and award of 1% attorney’s fees (6.), the tria

court shall INVALIDATE THE EXTRAJUDICIAL

FORECLOSURE AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of

1% attorney’s 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% attorney’s fees (6.)] shall be DELIVEREDTO THE PETITIONERS;

15. Respondent may then proceed to consolidate its title to

TCTs T-14250 and T-16208. The outstanding penalties, i

any, shall be collected by other means.

From the above, it will be seen that if, after proper accounting, i

turns out that the petitioners made payments exceeding what

they actually owe by way of principal, interest, and attorney’s

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 propertiesshall be declared null and void for obvious lack of basis, the case

being one of solutio indebiti instead. If, on the other hand, i

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 latter’s 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 PNBpurely 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 Ma’am 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




PNB v. CA and Ambrosio Padilla (1991) – Grino-Aquino, J

Petit ioner: Philippine National Bank

Respondents: CA and Ambrosio Padilla

Concept: Simple Loan; interest

Doctr ine:

- 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%. Padilladid 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 uni lateral ly increase interest rates.

It is l ikewise prohibited from increasing interest rates

more than once within a period of 12 mon ths.

! PD 116 grants the Monetary Board of the Central Bank theauthority 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 loansor 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:

(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 interes

in the event that the applicable maximum rate o

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.


Respondents: CA, Remedios Jayme-Fernandez and Amado

Fernandez

Concept: Simple Loan; interest

Doctr ine:

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%; andagain 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 uni lateral increases made by PNB is

violat ive of the mutual i ty 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 applicablemax. 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




- 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 theunilateral 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


Sps. Almeda v. CA (1997) – Kapunan, J.

Petit ioner: Sps. Almeda

Respondents: Court of Appeals; and Philippine National Bank

(PNB)

Concept: Interest

Doctr ine:

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 as68% (NO)

RATIO: NO; such increases contravene the mutual i ty

principle of contracts, Art . 1956, as wel l as the terms

and condit ions of i ts 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 unconscionableresult 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

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 Lawceiling - 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 bu

are based on reasonable and valid grounds. Here, as clearly

demonstrated above, not only the increases of the interes

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.

Petit ioner: PNB

Respondents: Court of Appeals; Sps. Bascos

Concept: Interest

Doctr ine:

“Escalation clauses” are valid provided that changes made shal



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 rea

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-escalat ion clause is

not only against P.D. 1684 but i t 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.




- 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

New Sampaguita Builders v PNB (2004) – Panganiban., J.Petit ioner: New Sampaguita Builders Inc.

Respondents: Philippine National Bank


Doctr ine:

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 actual ly 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 arepro-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

- 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 paymen

on January 15, 1990 had initially been applied to all interests

due on the notes, before deductions were made from thei

respective principal amounts. The resulting decrease in

interest balances served as the bases for subsequent pro-

ratings.- Third, payments were proportionately applied to al

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 otheir 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.

Sampaguita’s 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 “unilateradetermination 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 no

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 theelement of mutuality in their contracts. The clause cited

earlier made the fulfillment of the contracts “dependen

exclusively upon the uncontrolled will” of respondent and

was therefore void.

- Besides, the pro forma promissory notes have the characte

of a contract of adhesion, “where the parties do not bargain

on equal footing, the weaker party’s [the debtor’s

participation being reduced to the alternative ‘to take it o

leave it.’”




- Circular that lifted the ceiling of interest rates of usury law

did not authorize either party to unilaterally raise the

interest rate without the other’s 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 toanswer 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 wasn’t signed by the parties, a

part of the contract wasn’t properly annexed/no reference

was made in the main contract.)

-

In addition to the preceding discussion, it is then useless tolabor 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.

PNB v. Spouses Rocamora (2009) – Brion, J.

Petit ioner: Phil. National Bank (PNB)

Respondent: Spouses Agustin and Pilar Rocamora

Concept: Simple Loan; Interest; Conventional Interest

Doctr ine:

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 wil

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 mutual i ty of

contracts in i ts uni lateral 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 no

determinative of the increase’s validity; it is the consen

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 origina

12% rate agreed upon.

o SC: Our computation + examination of PNB’s ledgers

point that this statement is incorrect; PNB clearlyimposed more than 12% to get to this amount.

DISPOSITIVE: Decision AFFIRMED with MODIFICATION

Complaint dismissed.




Concepcion v. CA (1997) – Vitug, J.

Petit ioner: Sps. Concepcion

Respondents: Court of Appeals; Home Savings Bank and Trust

Company (now Insular Life); and Asaje Realty Corporation


Doctr ine:

“Escalation clauses” are valid provided that changes made shall



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 anextrajudicial 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 mutual i ty 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

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 o

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 rediscoun

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 unilatera

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 “prevailingbusiness and economic condition.”

DISPOSITIVE: CFI affirmed with modification that HSBTC shal

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 interes

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.Petit ioner: Bobie Rose Frias, represented by her Attorney-in

fact, Marie Fujita

Defendant: Flora San Diego-Sison


Doctr ine:

The agreement between the parties is the law between them

and must be respected. If the terms are clear, their litera

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 wouldconstitute 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.




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

l imited to just 6 months, but should be imposed unti l

ful ly paid.

- Frias contends:

o That the interest, whether at 32% or 25% per annum

which should run from June 7, 1991 until fully paid iscontrary 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 CA’s 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 CA’s conclusion that a loan always bears interestotherwise 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 interpretedtogether, 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 periodo 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

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 principa

amount

o

For the debtor to continue in possession withoutpayment of the monetary interest would constitute

unjust enrichment

- The parties stipulated that the loaned amount shall earn

compounded bank interests; per certification by Prudentia

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. Attorney’s 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




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), ANDo

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 judicial ly

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 ofinterests 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.

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 greate

liability in case of breach- It strengthens the coercive nature of the principa

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.




Eastern Shipping Lines v. CA – Vitug, J.

Petit ioner: Eastern Shipping Lines (ESL)

Respondents: CA and Mercantile Insurance Company (MIC)

Concept: Simple Loan: Interest; Compensatory, Penalty or

Indemnity Interest

Doctr ine:

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 therate 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 Mercantile’s claim which was

12% from the date of filing of the complaint because

Mercantile’s 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 thepayment 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 maybe 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

• 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.

Petit ioner: Sebastian Siga-an

Respondent: Alicia Villanueva

Concept: Compensatory, Penalty or Indemnity Interest

Doctr ine:

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 o

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 agreemen

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, Vi l lanueva is not obl igated 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 o

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 st ipulat ion for the

payment of interest; and

2. The agreement for the payment of interest was

reduced in writ ing




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 Villanueva’s explanation that the promissory note was

borne out of Siga-an’s threats and his making her copythe 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 syl labus 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 ofcontractual 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 indebit i 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

return of payment made by mistake, and the

person who has no right to receive such paymen

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 throughmistake, and not through liberality or some othe

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 paymen

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 cashas admitted by Siga-an in his Reply Affidavit)

-

Although Villanueva was convicted for violating BP 22, it

doesn’t 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)

attorney’s 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 ful

payment ! this is erroneous

o

In Eastern Shipping Lines v. CA, it was held that whenan obligation, not constituting a loan or forbearance o

money is breached, an interest on the amount o

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 unti

its satisfaction (interim period equivalent to forbearance

of credit)

o

Siga-an’s obligation arose from a quasi-contract o

solutio indebiti , not a loan or forbearance: 6% pe

annum imposed on amount to be refunded as well ason the damages from extrajudicial demand on Mar. 3

1998 up to finality of this decision ! interest shal

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




Ligutan v. CA (2002) – Vitug, J.

Petit ioner-Defendant: Tolomeo Ligutan & Leonidas dela

Llana

Respondents-Plaint i ffs : Court of Appeals; Security Bank and

Trust Company


Doctr ine:

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 attorney’s 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 val idly agreed upon by part ies,

but may st i l l 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-à-vis theUS 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 orunconscionable 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.,

the application of which is addressed largely to the sound

discretion of the court.

- CA decision aff i rmed, in reducing the penalty rate form

5% to 3% given the circumstances and the repeated acts o

breach by Ligutan and dela Llana of their contractua

obligation

2.

YES. Said interest rate does not appear as being

excessive.

-

A penalty stipulation is not necessarily preclusive of interestthe two being distinct concepts which may be separately

demanded. The essence or rationale for the payment o

interest is not exactly the same as that of a penalty.


Ligutan v. CA

Penalty clause is coercive ! do not have to prove damages

anymore

Estores v. Spouses Supangan (2012) – Del Castillo, J.

Petit ioner: Hermojina EstoresRespondents: Spouses Arturo and Laura Supangan


Doctr ine:

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 fo

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 interes

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%)




RATIO:

1.

Yes; interest may be imposed even in the absence

of st ipulat ion 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 appl icable since

the obl igation ar ises 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, theindemnity 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 aloan 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.

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 m oney

o In the instant case, Sps. Supangan parted with

their money even before the conditions were

fulfilled

o

They have therefore allowed or grantedforbearance 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 thei

money. And the compensation for the use of thei

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 weren’t, accrual o

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 thepayment 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 lega

interest from the time it is judicially demanded.

o In the absence of stipulation, the rate of interest shal

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 lega

interest, whether the case involves a loan oforbearance of money, goods or credits, or any othe

case, shall be 12% per annum from such finality unti

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.




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 debto

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.

Petit ioner: Dario NacarRespondents: Gallery Frames and/or Felipe Bordey Jr.


Doctr ine:

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.

Brief Facts:

Dario Nacar filed a labor case against Gallery Frames and its

owner Felipe Bordey, Jr. Nacar alleged that he was dismissedwithout 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 interestshal l be 6% per annum from such final i ty

unti l i ts sat isfact ion, this interim period being deemed

to be by then an equ ivalent 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

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 o

forbearance of money, is breached, an interest on the

amount of damages awarded may be imposed at thediscretion 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 fothe computation of legal interest shall, in any case, be on

the amount finally adjudged.

3. When the judgment of the court awarding a sum o

money becomes final and executory, the rate of lega

interest, whether the case falls under paragraph 1 o

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 o

credit.

- Recently, however, the Bangko Sentral ng Pilipinas

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, issuedCircular 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 provisionsof Article 1169 of the Civil Code)

b.2. rate of interest shall be 6% per annum




2. Non-Monetary Obligations (such as the case

at bar)

a. If already liquidated, rate of interest shall be 6% per

annum, demandable from date of judicial or extra-judicial

demand (Art. 1169, Civil Code)

b. If unliquidated, no interest

Except: When later on established with certainty. Interest

shall still be 6% per annum demandable from the date of

judgment because such on such date, it is already deemed

that the amount of damages is already ascertained.

3. Compounded Interest

- This is applicable to both monetary and non-monetary

obligations

- 6% per annum computed against award of damages

(interest) granted by the court. To be computed from the

date when the court’s decision becomes final and executory

until the award is fully satisfied by the losing party.

4. The 6% per annum rate of legal interest shal l be

applied prospectively:

- Final and executory judgments awarding damages prior toJuly 1, 2013 shall apply the 12% rate;

- Final and executory judgments awarding damages on or

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 certaino From moment of demand

- If demand is uncertain

o Ascertain first: from moment ascertained

- WON certain, it will earn legal interest

Exercise

Here are the values:

Conventional: 16%

Penalty: 6%

Principal: P

Situation: Neither principal, penalty, interest paid. Calculate the

total amount due.

1. How to calculate conventional interest (conv)

16P x periodPeriod: time of maturity (from date it is due until fina

judgment)

2. How to calculate penalty

.06P x period

Period: from demand (time it is due and not paid) unti

finality of judgment

3. How to calculate interest on interest (IOI)

Unpaid interest: either stipulation or legal interest (6%)

Period: from filing until finality of judgment

4. How to calculate total

[P + conv + penalty + IOI] x LI

Period: From finality of judgment until paid

Note: See RCBC v. Alpha Ready to Wear




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 serviceto 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 tobe 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 applyto 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.

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

Petit ioner: United Coconut Planters Bank (UCPB)

Respondents: Samuel and Odette Beluso (Spouses Beluso)

Concept: Interest; Finance Charges

Doctr ine:

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 promissorynotes. 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 st ipulated 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 o

Polotan vs. Court of Appeals.

o

argued that even if the provision that the head of thebranch may determine the rate is void, the separability

clause of the contract would save the other provisions

from being affected.




- 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 notcountenance.

- 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 attorney’s 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

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 interes

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 erroin 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 val id.

- 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 l iabi l i ty under the Truth in Lending Act

was val idly 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 no

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 o

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 civi

penalty and the latter, a criminal penalty. The spousesBeluso may choose which remedy to pursue.

- UCPB : argued that its right to due process was violated fo

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.




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 assuch 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 andsocial 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;

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 theequivalent 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 andregulations 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 frownedupon. 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 tha

may be charged. It was very close to the modern-day lega

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 al lowed 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 Codeprovisions on usury nor did it repeal the Usury Law; it merely

suspended the operation of both.




Advocates for Truth in Lending, Inc. and Olaguer v. Bangko

Sentral Monetary Board (2013) – Reyes

Petit ioner: Advocates for Truth in Lending, Inc. and Eduardo B.

Olaguer (ATL)

Respondents: Bangko Sentral Monetary Board

Concept: Usury; General Concepts

Doctr ine:

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.

o implied repeal is not taken lightly by the court. In the

absence of an express repeal, a subsequent law canno

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 appl ication of interest ( from Eastern

Shipping Lines vs. Court of Appeals) :

1) For breach of obligations consisting of payment of a sum o

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 judicia

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 liquidatedotherwise, 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 otherproperty, 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.




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 orpawnbroker'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 ofthe 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

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, usuriousor 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.




Sec. 9 The person or corporation sued shall file its answer in

writing under oath to any complaint brought or filed against

said person or corporation before a competent court to

recover the money or other personal or real property, seeds or

agricultural products, charged or received in violation of the

provisions of this Act. The lack of taking an oath to an answer

to a complaint will mean the admission of the facts contained

in the latter.

Sec. 9-a The Monetary Board shall promulgate such rules andregulations as may be necessary to implement effectively the


Sec. 10 Without prejudice to the proper civil action violation

of this Act and the implementing rules and regulations

promulgated by the Monetary Board shall be subject to

criminal prosecution and the guilty person shall, upon

conviction, be sentenced to a fine of not less than fifty pesos

nor more than five hundred pesos, or to imprisonment for not

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

interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary imprisonment at the rate of one

day for every two pesos: Provided, That in case of

corporations, associations, societies, or companies the

manager, administrator or gerent or the person who has

charge of the management or administration of the business

shall be criminally responsible for any violation of this Act.

- 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.

1) Remedy of Debtor

-

Should the debtor pay under the usurious agreement, his

remedy is to recover the amount he paid as interest under

such usurious agreement.

-

There is no conflict between Sec. 6 of the Usury Law and Art.1413 of the Civil Code; both allow for the recovery of the

whole interest paid under the usurious interest.

o Art. 1413 only adds that the whole interest to be

recovered shall be recovered with interest, accruing from

the date of payment.

-

Sec. 9 of the Usury does not apply when the defendant is the

one alleging usury.

2) Remedy of Creditor

- The nullity of the usurious interest stipulated does not bar

the creditor from collecting the principal amount of the loan

from the debtor.

-

The principal amount, therefore, may still be recovered

through judicial action. And in case of such demand, and the

debtor incurs in delay, then the principal amount shall earn

interest from date of the demand.

DEPOSIT

I. THE CONCEPT OF DEPOSIT

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 purpose of the

contract, there is no deposit but some other contract.

Art. 1964 A deposit may be constituted judicially or

extrajudicially.

Art. 1967 An extrajudicial deposit is either voluntary or

necessary.

- A deposit is an obligation constituted from the moment o

delivery of the property belonging to another for the

purpose of safekeeping and eventual return.

- It may be judicial, extrajudicial, voluntary and necessary.

- The principal obligation in any kind of deposit is the

safekeeping of the thing and its eventual return.

Sources of deposit : not just by contract

Object :

GR: movable

XPN: judicial deposit can involve even immovable

Obligation:

1. Depositary: safekeeping then return

2. Depositor: transfer object

Deposit : If there is a stipulation on penalty

-

Roman law concept of depositum, a contract o

neighborliness, which is the gratuitous deposit of goods fo

the benefit of the depositor

- It is an obligation constituted from the moment of delivery

of property belonging to another for the purpose o

safekeeping and eventual return

- Principal obligation and distinguishing characteristic is the

safekeeping and its eventual return




Types of Deposit :

1. Judicial – the obligation arises as a consequence of law,

allowing the issuance of a judicial order constituting a

deposit

2. Extrajudicial

a. Voluntary – obligation arises as a consequence of a

contract

b.

Necessary – obligation arises as a consequence of law

or quasi-contract

Deposit Mutuum

For safekeeping or custody For consumption

Depositor can demand return

at any time

Period to return must be

respected by lender

Compensation is essentially

gratuitous (except by mutual

agreement)

Compensation may be

gratuitous, or with a

stipulation to pay interest

Any property Fungible thing

Depositor and depositary

relationship

Lender and borrower

relationship

I I . VOLUNTARY DEPOSIT

A. General Concepts

Art. 1963 An agreement to constitute a deposit is binding,

but the deposit itself is not perfected until the delivery of the

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 itin 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;

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

depositor or the depositary.

- An extrajudicial deposit that arises out of a contract

o Thus, meeting if the minds is required between the

depositor and the chosen depositary.-

o A deposit is a real contract, requiring delivery for its

perfection

o May be oral or written, may be gratuitous or onerous

o A contract to deposit, or an agreement to constitute a

deposit, is a valid consensual contract.

BPI v. IAC (1988) – Cortes, J.Petit ioner: Bank of the Philippine Islands

Respondent: Intermediate Appellate Court and Rizaldy

Zshornack

Concept: Voluntary Deposit

Doctr ine:

In a deposit, the safekeeping of the object is the principa

purpose. This 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. The intention and the

subsequent acts of the parties determine the nature of the

arrangement between the parties.

Brief Facts:

Zshornack entrusted $3,000 to COMTRUST for safekeeping

When the amount was requested to be returned, the bank

refused, alleging that the amount was already credited to

Zshornack’s account. Zshornack filed a complaint against

COMTRUST for the recovery of the $3,000.

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 del ivery 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 thesame. If the safekeeping of the thing delivered is not

the principal purposes of the contract, there is no

deposit but some other contract.




- 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 dayfollowing 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 CBCircular 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

mandatory/prohibitory law

o It affords neither of the parties a cause of action ! pari

delicto

2. No, the bank is NOT l iable. Since the nul l i ty ar ises

from an i l legal act, the part ies wi l l be left as they

are, as a result of being in pari del icto .

- BPI: It is not liable because it is Garcia who is personally

liable, having exceeded his powers when he entered intothe transaction

- SC: Bank did not question the document, which is an

actionable document, thereby admitting Garcia’s authority,

and the bank’s 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 transgressionsand 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.

BPI v. IAC

SGS: Remember this case – contract of deposit

Triple-V Food Services Inc. v. Filipino Merchants Insurance Co

(2005) – Nachura, J.

Petit ioner: Triple-V Food Services Inc.

Respondent: Filipino Merchants Insurance Company (FMIC)

Concept: Deposit; Voluntary Deposit; General Concepts

Doctr ine: 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. I

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-V’s

Kamayan Restaurant. She availed of the valet parking service o

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 wasindemnified by FMIC; in turn, FMIC was subrogated into Crispa’s

rights and filed suit against Triple-V for the loss of the car.

ISSUES:

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 l iable 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 atthe 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.




2.

NO. There was no waiver.

- SC: The ticket was a ‘contract of adhesion’ since Triple-V

alone prepared it. While they are valid by nature, the Court

“will not hesitate to rule out blind adherence thereto if they

prove to be one-sided under the attendant fact and

circumstances.”

- De Asis deposited the car partly of Triple-V’s enticement for

customers: providing a safe parking space within which to

leave their vehicles while they dine.

-

De Asis having fully entrusted the vehicle, she fully expectsthe safe return of the vehicle after her visit in Kamayan was

over.

- Hence, Triple-V cannot be allowed to use the ticket as a

“shield from any esponsibility for any loss or damage to

vehicles or to the valuables contained therein.”

DISPOSITIVE: RTC and CA affirmed.

Triple-V v. Filipino Merchants

Are all contracts for parking contracts of deposit? Or are there

critical factors in the case that, if not present in another situation,

would lead to a different conclusion?

If not valet parking, it is a contract of lease (use of space)

because no transfer of object and expectation is different – just

to use the space

A valet is a contract of deposit.

B. Obligation to Safekeep

1. Way 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. 1975 The depositary holding certificates, bonds,

securities or instruments which earn interest shall be bound to

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.

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.

Art. 1978 When the depositary has permission to use the

thing deposited, the contract loses the concept of a deposit

and becomes a loan or commodatum, except where

safekeeping is still the principal purpose of the contract.

The permission shall not be presumed, and its existence must

be proved.

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 isproof 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. 1982 When it becomes necessary to open a locked boxor 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

- Delivery in a specific manner to the depositary by the

depositor of the object of the deposit for safekeeping




Rules to be Fol lowed 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 orinstruments 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 anirregular 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 tostipulate 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

Petit ioner: CA Agro-Industrial Development Corp.

Respondents: CA and Security Bank and Trust Company

Concept: Voluntary deposit; Obligation to safekeep

Doctr ine:

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.

Brief Facts:

Agro-Industrial and Sps. Pugao rented a safety deposit box from

Security Bank which was kept in the latter’s possession

Certificates of title of 2 lots sold by Pugaos to Agro-Industria

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 openedit was found that its contents were missing. Agro-Industria

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 liablefor 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 contrac

because the full and absolute possession and control o

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

renter’s 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




2.

No. Such is contrary to law and publ ic pol icy

- 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 theagreement

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 thepossession of the bank and the renters cannot open the box

without the same.

DISPOSITIVE: Petition for review partially granted by deleting

award of attorney’s 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.

Petit ioner: Bishop of Jaro

Respondents: Gregorio de la Pena, as administrator of the

estate of Father Agustin dela Pena

Concept: Obligation to Safekeep

Doctr ine:

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 tocollect 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.

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 obl igation

-

The Roman maxim of major casus est, cui humana infirmitasresistere 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 prohibit ing him from

deposit ing it as he did and there was no law which

changed his responsibi l i ty 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.

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 nothave confiscated for the reason that they were looking for

insurgent funds only.

- Citing US v Thomas, trustees may be held liable even fo

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 persona

account, the very nature of the trust itself prohibits such act

since the position of trustee is one of trust.




- 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 thething 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.Liabi l i ty 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 bythe 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.

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 isimputable 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




a. Liabi l i ty of Depositary

Responsibi l i ty for loss and damage wi l l attach to the

DEPOSITARY i f :

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 credibilityof 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 depositor’s

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 l iable , 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. Liabi l i ty of Depositor (only instance of l iabi l i ty)

- 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. Liabi l i ty 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

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




Art. 1212 Each one of the solidary creditors may do whatever

may be useful to the others, but not anything which may be

prejudicial to the latter.

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.

SGS: Art. 1991 should read “The depositary’s heir”

To whom:

1. Depositor; or

2. Heirs and successors; or

3. Person designated in the contract

On issues of capacity to contract:

1. If depositor is incapacitated, depository must return to (Art.

1970):

a. Guardian or administrator of the depositor

b. Depositor if he should acquire capacity

2. If depositor loses capacity to contract after depositing,

depositor must return to persons who may haveadministration of depositor’s property and rights

When there are two or more sol idary depositors OR

when the thing is not divis ible:

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

2. What to Return

Art. 1983 The thing deposited shall be returned with all its

products, accessories and accessions.

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 depositary’s own use from day

on which he did so and on those which he still owes afte

extinguishment of agency

3. Where to Return

Art. 1987 If at the time the deposit was made a place wasdesignated for the return of the thing, the depositary must take

the thing deposited to such place; but the expenses for

transportation shall be borne by the depositor.

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

same place where the deposit was made, provided that there

was no malice on the part of the depositary.

- Place designated; expenses to be borne by depositor

- No designated place: where thing deposited may be, even

if not where deposit was made




4. When to Return

Art. 1988 The thing deposited must be returned to the

depositor upon demand, even though a specified period or

time for such return may have been fixed.

This provision shall not apply when the thing is judicially

attached while in the depositary's possession, or should he

have been notified of the opposition of a third person to the

return or the removal of the thing deposited. In these cases,the depositary must immediately inform the depositor of the

attachment or opposition.

Art. 1989 Unless the deposit is for a valuable consideration,

the depositary who may have justifiable reasons for not

keeping the thing deposited may, even before the time

designated, return it to the depositor; and if the latter should

refuse to receive it, the depositary may secure its consignation

from the court.

- Principal purpose of delivering object to depository:

safekeeping -

One of the primary obligations: return object upon demand

- GR : Return upon demand, even though a specified period

or time has been fixed

- XPN :

o Thing deposited is judicially attached while in the

depositary’s possession; or

o Depository was notified of the opposition of a third

person to the return or the removal of the thing

deposited

- For the above exceptions, depository must immediately

inform the depositor of the attachment or the opposition,

but it does not imply that obligation to return ceaseso They are exceptions to return upon demand

o Depository may take measures to protect itself, such as

seeking appropriate protective measures from a court

5. Right to Retention

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.

- Depository has a r ight of retention as a means or device

for the depository to be able to obtain payment of what

may be due

I I I . NECESSARY DEPOSIT

A. General Concepts


extrajudicially.

Art. 1967 An extrajudicial deposit is either voluntary or

necessary.

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. 1966 Only movable things may be the object of a

deposit.

A deposit may be constituted:

-

Judicially

- Extrajudicially

o Voluntary

o Necessary

" In compliance with a legal obligation

" Takes place on the occasion of any calamity

NECESSARY DEPOSIT

- Extrajudicial deposit constituted over movable property as a

consequence of law or quasi-contract, so that no unjus

enrichment will result from the juridical relation

B. Examples of Necessary Deposit

1. Compliance with a Legal Obligation





Art. 1997 The deposit referred to in No. 1 of the preceding

article shall be governed by the provisions of the lawestablishing 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




2. On the Occasion of a Calamity





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 Carr iers

Art. 1754 The provisions of Articles 1733 to 1753 shall applyto 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 carr iers : 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 passenger’s 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

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 thedegree 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.




YHT Realty Corporation vs. Court of Appeals – Tinga, J.

Petit ioners: 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

Doctr ine:

Disclaimer of liability by a hotel or inn or items deposited with it

contravenes Article 2003 of the Civil Code. The hotel or inn canonly 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 negl igence were supported by evidence.

-

RTC (aff i rmed by CA): these were sufficiently shown byMcLoughlin’s 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 Fiscal’s 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 thethrust 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

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 o

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 wifeor 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 i

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

liabi l i ty under paragraph 2 of the terms on the

rental of the safety deposit box.

-

SC: The paragraph contravenes Article 2003 of the Civi

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 carrier’s business is

imbued with public interest. Hotelkeepers are bound to

provide not only lodging for hotel guests but alsosecurity 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 guest’s 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?




IV. JUDICIAL DEPOSIT


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 theobject 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, judicialsequestration shall be governed by the Rules of Court

- A judicial deposit or sequestrat ion 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.

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.




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 specif ic terms.

B. Obligations and Rights of a Warehouseman

1. Obligation to Del iver

Act 2137, Sec. 8 Obligation of warehousemen to deliver —

A warehouseman, in the absence of some lawful excuseprovided 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

(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 termsof 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 thegoods 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.




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 thegoods 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.

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 beliable 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.




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 itsnature 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.

2. Liabi l i ty 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 thegoods 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 wouldexercise, 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 shareof such mass to the same extent and under the same

circumstances as if the goods had been kept separate.




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 upthe 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 warehouseman’s liability for goods take into

consideration the commercial nature of the credit

transaction.

3. Warehouseman’s 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 goodsto 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 maybe 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,

(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 beheld. 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.




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, thewarehouseman 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 warehouseman’s l ien is the warehouseman’s legal right

or interest in the depositor’s property. It is similar to the

depository’s right of retention under the NCC, which is a means

or device by which the depositary is able to obtain payment ofwhat may be due because of the deposit.

C. Negotiat ion 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 warehousemanundertakes 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.

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.




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 himaccording 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 withoutindorsement — 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.

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 arein 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, noseller'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.




D. Criminal Liabi l i ty

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 finenot 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.

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 offenseby 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 byboth.

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 "BONDEDWAREHOUSE 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.




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 maximumquantity 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 concerningthe 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 suchwarehouseman.

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.

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


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-fiveknown 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.




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.


Respondents: Hon. Benito C. Se Jr. & Noah’s Ark Sugar

Refinery

Concept: General Bonded Warehouses Act

Doctr ine:

Where the judgment creditor makes an unconditionalpresentment 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 warehouseman’s lien for storage

fees and preservation expenses.

Brief Facts:

In accordance with Act No. 2137, the Warehouse Receipts Law

Noah’s 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 Noah’s Ark Sugar Refinery demanding delivery

of the sugar stocks covered by the quedans endorsed to it by

Zoleta and Ramos. Noah’s 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 warehouseman’s lien (YES)

RATIO: YES; prior judgment holding that a party is a

warehouseman obl igated to del iver sugar stocks

covered by thewarehouse receipts does not

necessari ly carry with i t a denial of i ts l ien 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 WarehouseReceipts as to the payment of storage fees. Even in the

absence of such a provision, law and equity dictate the

payment of the warehouseman’s 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

warehouseman’s 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 lawfu

charges for storage and preservation of the goods; also fo

all lawful claims for money advanced, interest, insurance

transportation, labor, weighing coopering and othe

charges and expenses in relation to such goods; also for al

reasonable charges and expenses for notice, andadvertisement of sale, and for sale of the goods where

default has been made in satisfying the warehouseman’s

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, Noah’s Ark

cannot legally be deprived of their right to enforce thei

claim for warehouseman’s lien, for reasonable storage fees

and preservation expenses. Pursuant to Section 31 the

goods under storage may not be delivered until said lien issatisfied.




- Considering that PNB does not deny the existence, validity

and genuineness of the Warehouse Receipts on which it

anchors its claim for payment against Noah’s 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 thereceipts 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 warehouseman’s lien for

storage fees and preservation expenses.

-

PNB may not now retrieve the sugar stocks without paying

the lien due Noah’s 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 theright 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 warehouseman’s 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 obl igation 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

1. Dist inguished from Securit ies

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 – Securit ies 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 o

indebtedness, asset-backed securities

- Bonds, notes, and debentures are evidences o

indebtedness and are the common commercial forms that

contracts of loan take BUT in the SRC, these contracts of

simple loan or mutuum are securit ies, whether secured o

unsecured

SECURITY SECURITIES

Civil Code Securities Regulation Code

Accessory obligation Principal obligation

Decrease/mitigate loss




2. Dist inguished From Securit izat ion

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 securit ize is to convert assets into securities for resalein 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 securit ies

-

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 distr ibutes the risk of default or non-

payment to those willing to assume it

SECURITIZATION SECURITY TRANSACTION

Distributes the risk of default

or non-payment to those

willing to assume it

Mitigates r isk

B. Events of Default

- Essential condit ion 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 specif ic

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 (debtor’s default) or in case of delay in the

fulfillment of the principal obligation by a cause imputableto 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 debtor’s

performance

- 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 , al

outstanding obligations as immediately due and payable

o

Acceleration clause is valid and binding on theparties 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 thanthe principal debtor to ensure the fulfillment of a principa

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 (col lateral) 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 fo

purposes of securing the fulfillment of the principa

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 oretained for security only”




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 anunsecured 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 Rehabi l i tat ion 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 Liabi l i t ies 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 acreditor 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

I I . 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 bymerchants 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 appl icant’s

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 (usual ly a bank) for that othe 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 cal l upon such instrument as

security, in case the applicant fails to perform his

obligation.




Transfield Phils. v. Luzon Hydro Corp., et al (2004) – Tinga, J.

Petit ioner: 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

Doctr ine:

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 drawupon 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 TPI’s 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 del iver 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 relat ively safe mode of deal ing

with sales of goods in a manner that satisfies the

seemingly i r reconci lable interests of a sel ler, 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 sett ings

(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

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 o

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 thei

nature, are separate transactions from the sales contract o

any other type of contracts that they may be based onhence, 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 avai

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 o

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 descriptionquantity, 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 ligh

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

bank’s undertaking to pay the beneficiary once documents




are presented is definite and binding. This obligation is

independent of the related and originating contract (the

turnkey contract).

o Bearing this in mind, TPI’s 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 presentto 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 lettersof 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, cit ing Prof. John F. Dolan:

o The surety and the letter of credit share the same

purpose: ensure against the obligor’s 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 beneficiaryto 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 factperformed 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 obl igation,

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

LHC’s call upon the letter of credit.

- 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 othe parties to make the letters of credit answerable fo

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 commercia

letter of credit or, simply, commercial credit , is

uti l ized in a contract of sale of goods between the

applicant (buyer) and the beneficiary (seller).

- The Court, in Transfield Phils v. Luzon Hydro, explained tha

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 i rreconci lable

interests of a sel ler-beneficiary who refuses to part

with i ts goods before i t is paid, and that of a buyer-

appl icant who wants to have control of the goods

before paying.”

-

Commercial credits, being involved in a contract of sale ofgoods, becomes payable only upon the presentation

by the sel ler-beneficiary of documents that show it

has taken aff i rmative 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 obl igation.

-

In a standby credit arrangement, the issuer agrees to

pay the creditor-beneficiary i f the debtor-appl icant

defaults or fai ls to perform the obligation.

- The standby credit becomes payable upon cert i f icat ion

of the debtor-appl icant’s default or fai lure to

perform the obl igation.




C. Rule of Str ict Compliance

- Under this rule, the documents tendered by the

beneficiary must str ict ly conform to the terms of

the letter of credit .

o The tender of documents must include al l 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 ownrisk 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

dist inct obl igation 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 paymentupon 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

o For the food faith, or acts, or omission, solvency

performance, or standing of the consignor, the carriers, o

the insurers of the goods, or any other persons.

- EX: Fraud Exception Rule; an injunction against the paymen

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 obligationo

A showing that irreparable injury might follow if injunction

is not granted, or that recovery of damages would be

seriously affected.

I I I . 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 titleto 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 notinclude 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.




(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 jointor 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, theentruster 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

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 o

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 thedraft 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.




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

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, pilferageor 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 tothe 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 asagainst 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.




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 asthe 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 customaryform 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.

Petit ioner: Melvin Colinares and Lordino Veloso

Respondent: CA and People of the Philippines

Concept: Trust Receipts; Rights of the Purchaser

Doctr ine:

The ownership of merchandise in a trust receipts transactionremains 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 entruster’s security

interest. However, this wasn’t discussed in the ratio, so maybe

it’s 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.

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 theentrustee, 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 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 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 no

otherwise disposed of, in accordance with the terms andconditions 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 o

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 trus

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 madeto 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 ful

title to the goods at the very beginning and

continues to hold that t i t le as his

indispensable security until the goods are sold and

the vendee is called to pay for them




" 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 reprehensibleo 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 dist inguished from Trust Receipt

LETTERS OF CREDIT TRUST RECEIPT

Code of Commerce PD 115

Benefits the

supplier/protects the seller

Benefits the bank/protects

the bank

No assurance that bank will

be paid

So bank can be assured to be

paid

No criminal penalties Has a criminal penalty (estafa)

Only a credit extension Bank owns the goods

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 shallbe 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 conditiona

obligation of a person (guarantor) to fulfill a principa

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;




(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 saleis 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 of 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.

- Guaranty: a special promise to answer for debt, default, or

miscarriage of another.

- It is covered by the Statute of Frauds.

- It is an accessory contract.

- The obligation of the guarantor must be express and not

presumed and it cannot extend to more than what is

stipulated.

- Simple or indefinite guaranty: that which extends to

the principal obligation as well as accessories and judicial

costs.- Definite guaranty: that which extends only to a specified

amount.

- If the guaranty specifies a fixed amount but nevertheless

also provides for liability for interest and expenses, the

guarantor will be liable for the latter amounts even if these

exceed the specified fixed amount.

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.

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

more than the principal debtor, both as regards the amount

and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall

be reduced to the limits of that of the debtor.

- Guaranty cannot exist if the principal obligation is void, but

it can exist even if the contract is voidable or unenforceable.

- It can also secure future debt, even if the amount due is no

yet known. In this case, the guarantor will not be liable unti

the amount is known. It can also secure a future obligation.

- Article 2053 is the basis for continuing guaranty, i.e., one

which governs a course of dealing for an indefinite time o

by a succession of credits. It is not limited to a single

transaction but contemplates a prospective or future course

of dealing, covering a series of transactions, which are within

the stipulations of the contract of guaranty, until the

expiration or termination thereof.

- The object of a continuing guaranty is to grant to the

principal debtor a standing credit to be used from time totime either indefinitely or until a certain period.

- Terms used for continuing guaranty: any debt, any

indebtedness, any sum, any transaction, money to be

furnished the principal debtor from time to time, at any

time, on such time

D. Part ies to a Guaranty

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.

Art. 2057 If the guarantor should be convicted in first instance

of a crime involving dishonesty or should become insolvent,

the creditor may demand another who has all the qualifications

required in the preceding article. The case is excepted where

the creditor has required and stipulated that a specified person

should be the guarantor.




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 onedebtor 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 thePhilippines 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.

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 principa

debtor…before 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 principa

debtor alone, except in the cases mentioned in Art

2059.

2. The creditor shall ask the court to notify the guaranto

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 o

appearance by the latter.

4.

In order that the guarantor may make use of the benefitof excussion, it must:

- Set it up against the creditor upon demand fo

payment, AND

- Point out to the creditor available property of the

debtor within Philippine territory, sufficient to cove

the amount of the debt.




Tupaz IV & Tupaz v. CA and BPI (2005)

Petit ioners: Jose C. Tupaz IV and Petronila C. Tupax

Respondents: CA and Bank of the Philippine Islands

Concept: Security Transactions; Guaranty

Doctr ine:

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 thetrust 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 Corporation’s debts under the trust

receipts (ONLY JOSE IS PERSONALLY LIABLE IN THE FIRST

TRUST RECEIPT)2. What is the nature of Jose’s liability (THAT OF A

GUARANTOR)

3. WON BPI’s suit against Jose stands despite the Court’s

finding that he is liable as a guarantor only (YES)

RATIO:

1.

Jose is personal ly l iable for El Oro Corporation’s

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

Corporation’s Vice-President for Operations

o Hence, he bound himself personally liable for the

corporation’s 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)

o By signing in such capacity, they did not bind

themselves personally liable for El Oro Corporation’s

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 corporation’s

debts (Ong. V. CA)

2.

Jose bound himself as a guarantor of El Oro

Corporation’s debt. He is not a surety who is

sol idari ly l iable.

- 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, joint ly and several ly, agree

and promise to pay to you , on demand, whateve

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 o

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 Corporation—THIS 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 trus

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, joint ly and several ly, agree and

promise to pay to you” is actually a sol idary

guaranty clause " Signatories are not binding themselves

solidarily with the principal debtor, but with

other guarantors who sign the same




3.

Although Jose is a mere guarantor, he is st i l l l iable

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 heagreed 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:

" Attorney’s 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 beforeexcussion 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.

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 theguaranty 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 agains

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 principa

debtor.

Since a guarantor binds himself to the creditor, it is also only the

creditor that can release the guarantor from its guaranty.




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 earninterest 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 orperformance 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 thepayment 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 aguarantor 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.

- In guaranty, there is also a legal tie created between the

guarantor and principal debtor to which the principa

creditor is not privy

- Right to indemnification is the substantive right of action o

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 paymen

was made known to the debtor, even though it did not

earn interest from the creditor3. 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 thedebtor, 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.




- 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 Divis ion

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 ofexcussion 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 thesatisfaction of the obligation

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-guaranto

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

-

I f any of the co-guarantors is insolvent, the share of theinsolvent 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




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 itguarantees

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 setforth 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 miscarr iage 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 sufficientmemorandum;

(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.

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


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 considerationo

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, no

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 transactionswhich are within the stipulations of the contract o

surety, until the expiration or termination thereof

" Applies to a succession of liabilities for which the

surety becomes l iable as they accrue




Security Bank and Trust Company, Inc. vs. Cuenca (2000) –

Panganiban, J.

Petit ioner: SBTC

Respondents: Rodolfo M. Cuenca

Concept: Surety – Obligations Secured

Doctr ine:

Suretyship Agreements, being accessory obligations, shall also

be extinguished when the principal obligation is also

extinguished.

Brief Facts:

SBTC granted a credit line to SIMC for P8M, secured by an

Indemnity Agreement wherein Cuenca, as President, held

himself solidarily liable. After Cuenca sold his shares, SIMC and

SBTC agreed to restructure its obligations, to allow the former to

make several more loans. When SIMC defaulted, SBTC filed suit

against both SIMC and Cuenca pursuant to the Indemnity

Agreement.

ISSUE:

WON the 1989 Loan agreement novated the 1981 CAM andCuenca’s liability under the Indemnity Agreement (YES)

RATIO: YES. The purpose of the restructured loan

agreement was to extinguish the original credit

accommodation.

- Requisites of Novation:

o There is a previous valid obligation

o The parties concerned agree to a new contract

o The old contract is extinguished

o There is a valid new contract.

- That the 1989 Loan Agreement extinguishes the original

credit accommodation is evident from its express provision

to “liquidate” the principal and the interest of the earlierindebtedness.

- The former manager of the Loans and Discounts

Department of SBTC also testified that the proceeds of the

1989 Loan Agreement was used to pay-off the original

indebtedness.

- Incompatibilities between the 1989 Loan Agreement and

1980 Credit Accommodation:

o Limit of CAM – P8M; while amount of Loan was P12.2 M

o Periods of payment also different.

o

Loan agreement also contained conditions not found in

the earlier obligation, such as delivering additional

documents and writings as may be necessary and thatSIMC shall not create any mortgage or encumbrance

on any asset that it owned, nor would it participate in

any merger or consolidation.

-

As the 1989 Loan Agreement extinguished the credit

accommodation, the Indemnity Agreement, an accessory

obligation, was also necessarily extinguished pursuant to

Art. 1296.

- Even arguendo that the Loan agreement merely extends the

original credit accommodation, Cuenca’s obligation as a

surety should be extinguished pursuant to Art. 2079, as he

did not sign or consent to the restructuring agreement.


SBTC v. Cuenca

This is a consensual CONTRACT TO LOAN

Make sure solidary liability is with the co-principal debtor, not

with the co-guarantors

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

No more principal obligation for which to be liable.

D. Dist inguished from Standby Letter of Credit

Suretyship Standby Letter of

Credit

Purpose Both ensure against the debtor’s

nonperformance

Obligation Obligation is to

complete debtor’s

performance

Obligation is to pay in the event of

nonperformance

Requisites for

obligation to

arise

Fact of debtor’s

non-performance

must first be

establ ished,

usually through

litigation

Submission of the

required

documents as stated

in the letter of credit

Benefit to

Creditor

Benefit to creditor is

that surety wi l l

perform i f the

debtor does not

Benefit to the creditor

is that he wi l l

receive payment in

the event of non-

performance, ahead

of any l i t igation

Who bears

financial

burden

Financial burden is

on the creditor

while there is

litigation to

determine if the

debtor really is in

default and if so, the

costs of

performance

Financial burden is

reversed since the

creditor is assured of

payment ahead of any

litigation.

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

miscarr iage 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




STANDBY LETTER OF CREDIT (an instrument)

- 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 obl igation.

- In a standby credit arrangement, the issuer agrees to

pay the creditor-beneficiary i f the debtor-appl icant

defaults or fai ls to perform the obligation.

- The standby credit becomes payable upon cert i f icat ion

of the debtor-appl icant’s default or fai lure to

perform the obl igation.

E. Dist inguished from Guaranty

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)

Suretyship Guaranty

Purpose Insure the

payment of the

debt/performance

of the obligation of

the principal debtor

Insure the

solvency of the

principal debtor

Obligation Surety will pay if the

debtor does not

pay

Guarantor will pay

if debtor is

unable to pay

Nature of Liability Direct, pr imary,

and absolute

liability to the

creditor

Enjoys the

benefit of

excussion;

creditor must f i rst

exhaust al l

propert ies of the

principal debtor

and resort to al l

remedies

against the

principal debtor

before going after

the guarantor.

Debtor’s Solvency Obligated to pay

regardless of

solvency or

insolvency of the

debtor;. The only

determining factor

is debtor’s

nonperformance

Debtor must be

insolvent beforeguarantor can be

obligated to pay

When obligation

arises

Obligation to pay

arises when the

principal debtor

defaults in his

performance

Obligation to pay

arises once

creditor has

exhausted al l of

principal

debtor’s

property and

after al l

remedies

against the

latter has been

resorted to.

Estrella Palmares vs. Court of Appeals and M.B. Lending

Corporation—Regalado, J.

Petit ioner: Estrella Palmares

Respondent: Court of Appeals (CA) and M.B. Lending

Corporation (MB)

Concept: Surety – Distinguished from Guaranty

Doctr ine:

In a guaranty, a person called the guarantor binds himself to thecreditor 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. See also

the text in italics below.

Brief Facts:

Palmares signed as co-maker of a promissory note with Osmeña

and Azarraga. She bound herself to pay the obligation jointly

and severally. She also bound herself to pay in case Osmeña and

Azarraga defaulted.

ISSUES:

1.

W Palmares signed as a surety or as a guarantor. (Shesigned as a surety.)

2. WON Palmares was liable. (YES)

RATIO:

1.

Palmares signed as a surety.

- Palmares: contended that while paragraph 2 provides tha

she was jointly and severally liable with the principal makers

under paragraph 3, her liability was actually that of a

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.

o

Averred that the words jointly and severally weretechnical and legal terms not fully appreciated by an

ordinary layman such as she, a 65 year-old housewife

who entered into the transaction without fully realizing

the nature and extent of her liability. The words used in

paragraph 3 are easier to comprehend.

o The law looks upon the contract of suretyship with a

jealous eye and the rule is that the obligation of the

surety cannot be extended by implication beyond

specified limits, taking into consideration the peculia

nature of a surety agreement.




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 wasclear 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 guarantoris 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 principal’s 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 forthe 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 debtor’sobligation, 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 juris—that the liability of the

surety, under his contract, as thus interpreted and

construed, is not to be extended beyond its strict

meaning—did 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

be used as an aid in determining whether a party’s

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 heprincipals 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 tha

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 l iable.

- 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 contrac

voluntarily, Palmares was stopped to assert that she did so

under misapprehension or ignorance of the legal effect o

the contract. Mistake of a surety as to the legal effect of he

obligation is ordinarily no reason for relieving her of liability.

o In the absence of a statutory or contractua

requirement, it is not necessary that payment o

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 Cour

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 principal’s 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 begiven notice of the principal’s default. The credito

owes no duty of active diligence to take care of the

interest of the surety. The creditor’s mere failure to give

information to the surety of the default of the principa

cannot have the effect of discharging the surety. The

surety is bound to take notice of the principal’s 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.




- 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 orforbearance does not affect the creditor’s rights vis-à-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 Palmares’s acts that caused the collection period tobe 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.

Petit ioner: E. Zobel

Respondents: SOLIDBANK

Concept: Surety – Distinguished from Guaranty

Doctr ine:

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 thatits 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).

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 o

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 theguarantor's own separate undertaking, in which the principa

does not join. It is usually entered into before or after that o

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 o

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 tha

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 inthe 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. Itbound 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




International Finance Corporation v. Imperial Textile Mills, Inc.

(2005) – Panganiban

Petit ioner: International Finance Corporation (IFC)

Respondent: Imperial Textile Mills, Inc. (ITM)

Concept: Surety: Distinguished from Guaranty

Doctr ine:

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 theprovisions 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 andan 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 sol idari ly l iable with

PPIC for the payment of i ts 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 assurety to PPIC’s 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 orpart of the Loan may be disbursed in a currency other

than dollars, but only on condition that the

Guarantors agree to guarantee the obl igations

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 obl igations of the Company.

- The obligations of the guarantors are meticulously

expressed:

o Section 2.01. The Guarantors joint ly and several ly

i rrevocably, absolutely and uncondit ional ly

guarantee, as primary obl igors and not as

sureties merely , the due and punctual payment o

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 theNotes.”

- SC: The Agreement uses “guarantee” and “guarantors” bu

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

“joint ly and several ly” liable

o

To emphasize the nature of that liability, Contrac

stated that ITM was a primary obl igor , not a mere

surety

o

At bottom, and to all legal intents and purposes, i t was

a surety

o ITM bound itself to be solidarily liable with PPIC for the

latter’s 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 PPIC’s

obligation

o Became a surety when it bound itself sol idari ly 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 o

them shall not be an obstacle to those which may

subsequently be directed against the others, solong 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




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 ITM’s

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 thesurety 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.

Petit ioners: Phil. Blooming Mills (PBM) and Alfredo Ching

Respondents: Court of Appeals and Traders Royal Bank (TRB)

Concept: Surety; Distinguished from Guaranty

Doctr ine:

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.

ISSUES:

1. WON Ching could be held liable for the obligations that

were constituted after the execution of the deed o

suretyship (YES)

2. WON Ching may still be held liable for his undertaking unde

the trust receipts when TRB prevented their fulfillment (YES)

3.

WON TRB may collect a larger amount from Ching as suretyof PBM than the amount in the SEC-approved rehabilitation

plan (YES)

RATIO:

1.

YES. Ching is st i l l l iable for the se obl igations

- SC: This appeal is, in effect, a disguised motion fo

reconsideration of the earlier ruling in Traders Royal Bank v

CA.

- The SC has already ruled that Ching’s 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 suedseparately 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 Civi

Code, there can be a surety for “future debts”

- Diño v. CA: A continuing suretyship is one which covers al

transactions, including those arising in the future, which are

within the description or contemplation of the contract o

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 st i l l l iable 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 entrusteeShould 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.




Escano & Silos v. Ortigas Jr. (2007) – Tinga, J.

Petit ioners: Salvador P. Escaño and Mario M. Silos

Respondent: Rafael Ortigas

Concept: Surety; distinguished from joint and solidary

obligations

Doctr ine:

- 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 theobligation 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 suretywho 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:

Escaño, 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 Escañoet 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 Escaño et al. to

reimburse him of what he paid.

ISSUE:

WON Escaño and Silos bound themselves to be solidarily liable

under the 1982 Undertaking (NO; JOINTLY ONLY)

RATIO: No. Escaño and Si los are merely joint ly l iable

as the Undertaking did not provide for express

sol idarity. The nature of the obl igation l ikewise does

not require sol idarity.

-

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

-

The mere fact that Escaño 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 tha

among Escaño, 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 debto

or debtors—HOWEVER, 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 Escaño 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-à-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. Ifa person binds himself solidarily with the principa

debtor, the provisions of Section 4, Chapter 3, Title I o

this Book shall be observed. In such case the

contract is cal led a suretyship .”

-

A suretyship requires a principal debtor to whom the surety

is solidarily bound by way of an ancillary obligation o

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

obligationo 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 fo

the obligation created by the principal debtor, such

obligation is extinguished

o Surety may seek reimbursement from the principa

debtor for the amount paid, for the surety does in fact

become subrogated to all the rights and remedies o

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 theprincipal 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 paymen

to the creditor may claim from his co-debtors only the

share which corresponds to each with the interes

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

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 fullamount 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 guarantorso 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: Escaño, 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 thething 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)

- Security transactions constituted to secure the fulfillment o

a principal obligation

- Unlike guaranty and surety, a pledge and mortgage are rea

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 o

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 collatera

in favor of another person

Essential Elements of Pledge and Mortgage

1. That they be constituted to SECURE the fulfillment of a


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


Essence of Pledge and Mortgage (Art. 2087): When the

principal obligation becomes due, the thing pledged o

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 o

mortgagor is not legally authorized to constitute the

pledge/mortgage

4. Pledge/mortgage constituted over future property




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 ofownership. 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 theperformance 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 obl igations, 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 veryconsideration 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 contract2. Natural obligation

Pledge or Mortgage may secure ALL kinds of

obl igations:

1. Pure

2.

Subject to suspensive condition

3. Subject to resolutory condition

Note: Obligation is at least not void

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 o

mortgage

When l iabi l i ty ar ises:

- When a person defrauds another by offering in pledge o

mortgage as “unencumbered,” things which he knew weresubject 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 orde

to satisfy the unpaid obligation secured by the collateral. A

foreclosure is a legal proceeding to terminate a pledgor’s

or mortgagor’s interest in the collateral

- Generally, the contract and a statute may authorize a

power-of-sale foreclosure , or the sale of the collatera

at a non-judicial public sale by a public official, the creditor

or trustee.

- If the principal obligation becomes due and the debto

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 o

pledge/mortgage ! look to the law that governs

the contracto To elect and waive the security and bring an action fo

specif ic 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 waive

of another.




E. Indivis ibi l i ty 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)

- Indivis ibi l i ty 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 port ion of the

col lateral 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 apart 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.

Doctr ine of Indivis ibi l i ty of Pledge or Mortgage : 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

Purpose of indivis ibi l i ty: To protect the pledgee o

mortgagee

When is Art. 2089 appl icable? When the debtor or credito

has several heirs

GR: There can be no release of any portion of the collatera

unless the loan has been fully paid

- No proportionate extinguishment of the pledge o

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 o

pledge and each one of them guarantees only a determinate

portion of the credit

F. Pactum Commissorium


the principal obligation becomes due, the things in which thepledge or mortgage consists may be alienated for the payment


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 lega

proceeding (foreclosure) to terminate the debtor’s (pledgeor mortgagor) ownership of the collateral.

-

A stipulation that allows the creditor to appropriate o

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 firs

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 st ipulat ion for automatic appropriat ion

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. [Editor’s 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.




- 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.

Petit ioner: Development Bank of the Philippines

Respondents: Court of Appeals; Lydia Cuba

Concept: Pactum Commissorium

Doctr ine:

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:

Cuba’s 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 publicbidding. 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 automaticappropriation 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.

- Aforementioned provision is actually a standard condition in

mortgage contracts and is in conformity with Art. 2087.

- HOWEVER, DBP exceeded the authority vested with i

under said condition when it appropriated the rights withou

foreclosure proceedings. Condition No. 12 does not provide

that default would operate to vest DBP ownership of the

leasehold rights of Cuba.

- DBP’s 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 NormaA. Rosel—Pardo, J.

Petit ioner: Natalia P. Bustamante

Respondents: Rodito F. Rosel and Norma A. Rosel (Spouses

Rosel)


Doctr ine:

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 principa

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 o

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 r ight to enforce

the sale of the col lateral .

- 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 no

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.




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 incase 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 Valdesin the event of failure of petitioner to pay the value

of the advances. Thus, contrary to respondent’s

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 thecollateral 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.

Petit ioner: Wilfredo N. Ong and Edna Shiela Paguio-OngRespondents: Roban Lending Corporation


Doctr ine:

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 Ong‘s parcel of lands. Ong and

Roban executed several agreements - dacion in payment

wherein spouses Ong assigned their mortgaged properties to

Roban to settle their total obligation and Memorandum o

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 bySpouses 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 themortgagee 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 fo

the payment of the principal obligation, and (2) there should

be a stipulation for automatic appropriation by the credito

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 o

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 itownership of the properties covered by TCT No. 297840

Respondent, in effect, automatically acquires ownership o

the properties upon Spouses Ong’s failure to pay their deb

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 Ong’s obligation to

Roban. On the contrary, under the Memorandum o

Agreement executed on the same day as the Dacion in

Payment, petitioners had to execute a promissory note foP5, 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




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 realintention 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 acontract 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 commissórium.

Pacto de retro sales have been frequently used to conceal

the true nature of the contract, i.e., a loan secured by a

mortgage.

- 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 o

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 o

otherwise;

-

Attribute of ownership

- If ownership was transferred, possession would’v 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 o

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 rea

intention of the parties is that the transaction shall secure

the payment of a debt or the performance of any othe

obligation

Note: Equitable mortgage is not a type of mortgage




VII . PLEDGE

A. General Concepts





(2) That the pledgor or mortgagor be the absolute owner of the

thing pledged or mortgaged;






(1857)

Art. 2087 It is also of the essence of these contracts that whenthe principal obligation becomes due, the things in which the



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

dación 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 Ma’am)

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.


- A pledge may exceptionally secure after-incurred obligation

so long as these debts that are yet to be contracted (o

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 securityif 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 principa

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 persona

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)

-

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 Col lateral

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, heshall 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 thingloaned, 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)

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 i

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 collateraunless 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 pledgor’s 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.

Expropriation2. Public auction

3. Notarial sale

- Extrajudicial

- Foreclosure

4. Voluntary sale

-

If no consent, no transfer of ownership

- Ownership only transferred by consent




Estate of George Litton v. Mendoza (1988) – Gancayco, J.

Petit ioner: Estate of George Littion

Respondent: Ciriaco B. Mendoza & CA

Concept: Pledge: Ownership of Collateral

Doctr ine:

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 therestriction 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 obligationto 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 inval id

because the al ienation of the security without

notice and consent of the assignee wi l l 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 l i t igated credit

- The purpose of a compromise is to replace and terminate

controverted claims; courts encourage the same, and acompromise 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;

(2) That the pledgor or mortgagor be the absolute

owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge o

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 principa

obligation may secure the latter by pledging o

mortgaging their own property. (1857)

-

Although Tan may validly alienate the litigatious creditpursuant 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 shalcontinue 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 forthe deed of assignment; failing this, the alienation o

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 incorporea

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 judicia

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 concerningthe same is answered. The debtor may exercise his

right within thirty days from the date the assignee

demands payment from him.




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

l iabi l i ty.

- 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 thePresident 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 compromiseagreement 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)

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 credito

becomes insolvent, the debtor shall reimburse the pledgor fo

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 no

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.




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 toretain 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 theprovisions 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)

Art. 2104 The creditor cannot use the thing pledged, withou

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 o

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 principa

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 o

the right pledged.

In case of a pledge of animals, their offspring shall pertain to thepledgor 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 theneed 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




- 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.

Plaint i ff-Appel lee: The Manila Banking Corp. (MBC)

Defendant-Appellants: Anastacio Teodoro, Jr. and Grace

Anna Teodoro

Concept: Pledge; Right to Possession; Right to PaymentContracts: 3 Promissory Notes, and a “Deed of Assignment of

Receivables” (later considered as one of pledge)

Doctr ine:

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 clearand 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 ordonation, 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 one’s 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.

- 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 credi

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, i

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 debto

to a creditor, even if sufficient on its face to make an

absolute conveyance, should be treated as a pledge i

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 ownershipwill 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 o

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 late

after the execution of the deed (1966).

o Even if the deed were considered to be a form o

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.




2.

No. MBC need not have exhausted al l legal

remedies against the Phi l . 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 maybe 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

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 documen

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.

Petit ioners: Victoria Yau Chu and husband Michael ChuRespondents: Family Savings Bank and/or CAMS Trading

Enterprise, Inc.

Concept: Pledge; Right to Possession; Right to Payment

Doctr ine:

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 debtor’s overdue obligation, with the

latter’s consent.

Brief Facts:

Mrs. Chu assigned her time deposit certificates to CAMS

Trading as collateral for cement she purchased from the latteron credit. When she defaulted in payment, CAMS Trading

encashed the time deposit certificates, with Mrs. Chu’s

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)




RATIO:

1.

No. The encashment is not a pacto commissorio

and hence, val id

- 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 debtor’s overdue obligation, with the

latter’s 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.

Petit ioners: Citibank; and Investors’ Finance Corporation

(FNCB)

Respondents: Modesta Sabeniano

Concept: Pledge

Doctr ine:

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 moneymarket 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)

RATIO:

1.

YE S . 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 kindand 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 o

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 simpleloan 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 partia

compensation or off-set her outstanding loans with the

deposit account amounting to P31, 079.

2.

YE S . Off-set was made pursuant to the Deed of

Assignment she executed in favor of Cit ibank

- There can be no legal compensation with regards to the

money market placements as Sabeniano was the credito

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 no

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 thepresumption that it was duly executed, and the burden fel

to Sabeniano to present evidence of any defect o

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 he

outstanding loans.




- 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 entit led

‘Deeds of Assignment,’ they were in real i ty more

of a pledge by Sabeniano to Cit ibank 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 moneymarket 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 Sabeniano’s

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)

I t is not notarized: SC would think that Citibankwould 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 establ ish the date when it

was actual ly 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 herpassport 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 i rregular ly f i l led-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

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 s ignature 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 hadexerted diligent efforts to secure the original copy; no

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, Cit ibank had

not authority to demand the remittance of her

dol lar 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 Sabeniano’s dollar accounts from

Citibank-Geneva was illegal, and null and void. Citibank isobligated to return to respondent US$149,632.99.

-

Sabeniano still obligated to pay P1.06M for the balance o

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. 1278-12792. 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




H. Return of Col lateral

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 principalobligation 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 thepledgor 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 thesale 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. 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 doesn’t exist preternaturally, inthis jurisdiction, there is no statute that vests a right of

redemption over personal property




Paray and Espeleta vs. Rodriguez—Tiñgá

Petit ioners: 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)

Doctr ine: 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 obl igations 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 typifiedby 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

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 o

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. Theright 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 o

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 o

redemption applies to real properties, not persona

properties, sold on execution.

- The Supreme Court, as early as 1927, rejected the

proposition that personal property may be covered by theright 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 creditor’s will, unless and until he has paid the debt and

its interest. The Civil Code also establishes the right of thepledgee 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 whethe

the interests were exorbitant or excessively usurious fo

usury has become legally inexistent. Because of the

foregoing, the Court found no reason to disagree that inorder that the consignation could have the effect o

extinguishing the pledge contracts, the amounts should

cover not just the principal loans, but also the interests

thereon.

- The spouses Paray’s 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.




- 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 i rregular ity.

- 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 tochoose 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 auctionand 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.

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 thosereferred 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, afte

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 o

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 untithe 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 hote

guests. (n)




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 mechanic’s lien,

which is akin to a warehouseman’s 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 mechanic’s lien does not depend upon non-

payment by the owner

-

Rather, the contractor creates his own lien by performingthe 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 thosereferred 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

VII I . CHATTEL MORTGAGE

A. General Concepts








the free disposal of their property, and in the absence thereof



secure the latter by pledging or mortgaging their own property

(1857)

Art. 2087 It is also of the essence of these contracts that whenthe principal obligation becomes due, the things in which the



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 beapplicable 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 persona

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 bealienated for payment to the creditor (the mortgagee )

- Art. 2140 : adheres to the equitable concept of a chatte

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 o

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




Old definit ion 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 personalproperty, similar to a pacto de retro sale

PCI Leasing and Finance vs. Trojan Metal Industries—Carpio, J.

Petit ioner: PCI Leasing and Finance

Respondents: Trojan Metal Industries (TMI)

Concept: Chattel Mortgage – General Concepts

Doctr ine:

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 andleaseback 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.

o In Cebu Contractors Consortium v CA, where the clien

already owned the equipment, but needed additiona

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, aborrower 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 agreemen

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 guiseof 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 credi

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, PCwas entitled to seize the mortgaged equipment, not as

owner but as creditor-mortgagee for the purpose o

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




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 executionthereof, 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).

"(If the mortgage is given for the performance of some othe

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 o________, 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 fo

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.




- 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

Certi f icate 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 andsubscribed 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 val id against any

person except:

- Mortgagor

- Executor

- Administrator

Note: These 3 have the right to compel compliance wit hthe

formalities required by law.


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 _________, personallyappeared ____________, 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.)

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 obl igations even if these

future debts are accurately described

- Cannot be made to secure a debt to be thereafte

contracted because the law provides that the parties mus

make oath that the debt is a just debt, honestly due andowing 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 defaulof the contract to mortgage

o Remedy of foreclosure will only cover the debts existing

at the time of constitution of the contract of chatte

mortgage

ACME Shoe, Rubber & Plastic Corp. v. CA (1996) – Vitug, J.

Petit ioner: 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

Doctr ine:

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.




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 val idly foreclose the

chattel mortgage because the chattel mortgage

ceased to exist coincidental ly 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 animmovable 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

condit ion 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 contractof 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

exist ing 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

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 t ime of constitut ion and during

the l i fe 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 othe

purpose, and that the same is a just and valid

obligation, and one not entered into for the purpose ofraud” – Civil Code by Aquino & Griño-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 o

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 effec

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 cour

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? Removethe clause “without the necessity of executing a new contract”

! to have valid contract to mortgage, and may include after-

acquired properties




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).

Makati Leasing and Finance Corp v. Wearever Textile Mills – De

Castro, J.

Petit ioner: Makati Leasing and Finance Corp. (MLFC)

Respondents: Wearever Textile Mills Inc. (WTM) and Court o

Appeals

Concept: Chattel Mortgage; Object of Chattel Mortgage

Doctr ine:

Parties may treat real property as personal property for a chatte

mortgage, as long as (1) they validly agree/consent to it, and (2no 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 andthe 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 persona

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 atleast, 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, thehouse 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.




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, afterreasonable 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.

- 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

identi fy the col lateral , after reasonable inquiry and

investigation.

2. After Acquired Propert ies

Act No. 1508, Sec. 7 Descriptions of property. — Thedescription of the mortgaged property shall be such as to

enable the parties to the mortgage, or any other person, afte

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 issueof 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 sel

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.




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

st ipulate that such “after acquired properties” are included

under the coverage of the chattel mortgage.

Exceptions:1. Stipulat ion 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. Retai l stores where property is constantly sold and

substituted when there is st ipulat ion to such effect

- Would be impossible to constitute a chattel mortgage

on such stores without closing them, contrary to thepurpose 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.

E. Ownership of Col lateral

- It is essential that (1) the mortgagor be the absolute owne

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 legal ly authorized to

constitute the mortgage.

- A mortgagor retains the r ight to al ienate the collateral.

- However, such right is restrained by requirements imposed

by law: the mortgagor MUST obtain the consent of themortgagee 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 consen

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

Petit ioner: Perfecto Dy, Jr.

Respondent: Gelac Trading Inc. and Antonio GonzalesConcept: Chattel mortgage; ownership of collateral

Doctr ine:

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 latter’s 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 oLibra. 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 o

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 agains

Wilfredo.

ISSUES:

1.

WON Wilfredo had the right to alienate the tractor whichwas 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)




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 val idly al ienate the property mortgaged but

the sale can only bind the mortgagee i f the same

be done with the latter’s 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 wel l

- 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 onlythe 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)

Wilfredo’s right of ownership was not divested from him

upon his default

o

Mortgaged property continues to belong to mortgagorand 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 mortgageo 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.

2.

Perfecto is the owner at the t ime the tractor was

seized and levied as there has been constructive

del ivery to him before the execution of judgment

by the sheri ff

- 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 Wilfredo’s

failure to pay the amortization as preliminary step toforeclose

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 del ivery to Perfecto

upon the execution of the Deed of Absolute Sale pursuan

to Article 1498 CC and upon the consent or agreement o

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 appea

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 tracto

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 stil

mortgage. The transaction between the brothers (sale

is distinct and apart from the transaction between Libraand 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 Wil fredo was no longer the owner of the

tractor at the t ime of execution




- 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 Reconci le 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.

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 o

after the breach thereof, or after tender of the performance o

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 mayrecover 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, afte

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 situatedprovided 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 shal

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 orobligation 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.




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 herebyprescribed 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 thecorresponding 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

covering one indebtedness, only one filing fee corresponding to

such indebtedness shall be collected. The collecting Clerk o

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 fo

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 o

Court, raffle applications for extrajudicial foreclosure o

mortgage under the direction of the sheriff among all sheriffs

including those assigned to the Office of the Clerk of Court andSheriffs IV assigned in the branches.

5. The name/s of the bidder/s shall be reported by the sheriff o

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 fo

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 debto

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 extrajudicia

foreclosure of chattel mortgage.

Creditor’s r ights in case of default :

1. Extrajudicial foreclosure OR

2. Specific performance




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 beforesale, 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 lien6. 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 firstmortgagee, and can only participate in the proceeds to

put an end to the claim against the debtor

1. Equity of Redemption

Act No. 1508, Sec. 13 When the condition of a chatte

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 toforeclose the mortgage in the same manner that the mortgagee

could foreclose it by the terms of this Act.




thirty days from the time of condition broken, cause the

mortgaged property, or any part thereof, to be sold at public


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 publicplaces in such municipality, and the mortgagee, his executor













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 holdingsubsequent mortgages in their order, and the balance, afte

paying the mortgages, shall be paid to the mortgagor or person

holding under him on demand.



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.




- 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 (Black’s Law Dictionary, Ninth

Edition)

o

The right of the mortgagor to extinguish the mortgageand 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

- Right of Redemption

o Different from Equity of Redemption

o Right of the mortgagor to “repurchase” the collateral

even after confirmation of a foreclosure sale but within

the periods prescribed by law

o It is a statutory right of a mortgagor in default to

reclaim, regain or recover the collateral after the

foreclosure sale

- In this jurisdiction, there is no statute that vests the

right of redemption over personal property

-

Under the Chattel Mortgage Law, the mortgagor has onlyan equity of redemption but no r ight of redemption

over property sold

Mortgagor = owner of the property

BUT at the point of foreclosure, the right of the owner is SO

DIMINISHED that it is REDUCED to an EQUITY OF

REDEMPTION.

The winning bidder acquires ALL RIGHTS at the foreclosure sale.

EQUITY OF

REDEMPTION

RIGHT OF REDEMPTION

Right of mortgagor toredeem the property after

default but before sale

Right of mortgagor torepurchase the mortgaged

property within 1 year from

date of registration of

certificate of sale

Applies to extrajudicial

foreclosure of chattel

mortgage and judicial

foreclosure of real estate

mortgage

Applies only to

extrajudicial foreclosure of

real estate mortgage

Rizal Commercial Banking Corporation v. Royal Cargo

Corporation (2009) – Carpio-Morales, J.

Petit ioners: Rizal Commercial Banking Corporation (RCBC)

Respondents: Royal Cargo Corporation (ROYAL)

Concept: Foreclosure of Chattel Mortgage – Right o

Redemption

Doctr ine:

An equity of redemption under Sec. 13 of CM law, is differen

from the right to redemption under Sec. 14. An equity oredemption 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 Terrymanila’s petition for voluntary insolvency, RCBC was

granted permission to foreclose the chattel mortgage executed

over Terrymanila’s 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 themof the auction sale pursuant to Sec. 14 of the CM law.

ISSUE:

WON ROYAL was entitled to notice of the foreclosure sale (YES)

RATIO: YES. As ROYAL attached Terrmani la’s equity

redemption, i t had to be informed of the date of sale

of the mortgaged assets for i t to exercise such equity

of redemption over some of the foreclosed propert ies.

- Sec. 13 of the Chattel Mortgage Law allows the would-be-

redemptioner thereunder to remove the mortgage property

only before i ts sale , to wit:

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 shal

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.

-

The redemption cited in Sec. 13 partakes of an equity oredemption, which is the right of the mortgagor to redeem

the mortgage property after his default in the

performance of the conditions of the mortgage but before

the sale of the property to clear it from the

encumbrance of the mortgage.

- It is not the same as r ight of redemption which is the

right of the mortgagor to redeem the mortgaged property

after registration of the foreclosure sale, and even after

confirmation of the sale.




- In attaching some of Terrymanila’s assets to secure the

satisfaction of the P296, 662 judgment, what ROYAL

effectively attached was Terrymanila’s 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 Terrymanila’s 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, asprovided 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. I t 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. ROYAL’s

negl igence or omission to exercise i ts equity of

redemption within a reasonable t ime, warrants a

presumption that i t had either abandoned it or

opted not to assert i t .

- 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 RCBC’s bid, the superiority of the latter’s

lien over the mortgaged assets would preclude ROYAL fromrecovering 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 Terrymanila’s chattels in favor

ROYAL. This is significant in determining who between the

two should be given preference over the subject properties.

Since the registrat ion of a CM is an effective and

binding notice of i ts existence and creates a real

r ight or l ien that fol lows the property wherever i t

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 inits 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.

3. Right to Possession

- A mortgagee, unlike a pledgee, is generally not in

possession of the collateral unless and unti l the

principal debtor defaults and the mortgagee seeks to

foreclose.

- The chattel mortgage contract constitutes the mortgagee

upon the principal debtor’s default, as an attorney-in-fact

of the mortgagor, enabling the mortgagee to act for and in

behalf of the owner of the collateralo

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 requirethat 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 unde

Section 14, he becomes a mere agent of the

mortgagee. In this case, an action to recove

possession or replevin should be instituted first.

Servicewide Specialists vs. CA—Purisima, J.Petit ioner: Servicewide Specialists, Inc. (Servicewide)

Respondents: Court of Appeals (CA), Hilda Tee (Tee), and

Alberto M. Villafraca (Villafranca)

Concept: Right to Possession (Chattel Mortgage)

Doctr ine: In an action for replevin arising from a chatte

mortgage, if the plaintiff’s 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, othe

persons need to be impleaded. Plaintiff’s 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 ove

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 o

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.




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: I f the plaint i ff ’s r ight to possess the thing is

not or cannot be disputed, then it is enough to f i le 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 whichis 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 plaintiff’s

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 mortgagee’s right of possession is

conditioned upon the actual fact of default which itself maybe 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

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 gainpossession (replevin).

SGS: Don’t 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




thirty days from the time of condition broken, cause themortgaged property, or any part thereof, to be sold at public


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













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 adischarge 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, afte

paying the mortgages, shall be paid to the mortgagor or person

holding under him on demand.






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 subsequentmortgage 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.

Petit ioner: PAMECA, Herminio and Victoria Teves, Hiram Dida

Pulido

Respondents: Development Bank of the Philippines

Concept: Chattel Mortgage

Doctr ine: 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

- Petitioners are not the first to posit the theory of the

applicability of Article 2115 to foreclosures of chatte

mortgage.

- In the leading case of Ablaza vs. Ignacio , the lower cour

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 court’s opinion

that, by virtue of Art. 2141, the provisions of Art. 2115 whichdeny 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 lowe

court and held that the provisions of the Chattel Mortgage

Law regarding the effects of foreclosure of chatte

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 daysthereafter, 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 shal

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 Registe

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 beapplied to the payment, first, of the costs and expenses o

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 unde

him on demand.”

- It is clear from the above provision that the effects o

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 thepledgor 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




- Neither did the Court find tenable the application by

analogy of Article 1484 of the Civil Code to the instant case.

- As pointed out by the trial court, the said article applies

clearly and solely to the sale of personal property the price

of which is payable in installments. Although Article 1484,

paragraph (3) expressly bars any further action against the

purchaser to recover an unpaid balance of the price, where

the vendor opts to foreclose the chattel mortgage on the

thing sold, should the vendee’s failure to pay cover two or

more installments, this provision is specifically applicable toa sale on installments.


PAMECA v. CA

The remedies in a mortgage are alternative:

- Specific performance; or

- Foreclosure

Note: Choosing one will bar recourse to another

COA here: Claim for deficiency, so it doesn’t violate the rule on

alternative remedies

SGS: Suppose there is a situation where there is a principal

obligation that is secured by: 1) surety and 2) chattel mortgage (a

lien)

Question 1: Which would you rely on first?

Chattel mortgage first because there is a lien on the property.

You can invoke PAMECA to claim the deficiency.

Question 2: If it is a pledge with a surety as security?

It depends on the value of the object of the pledge and the

capacity of the surety to pay.

If the value of the object is sufficient, pledge first.

If the value is insufficient, then surety first.If the surety is not capacitated, pledge.

If the surety is capacitated, surety.

IX. REAL ESTATE MORTGAGE

A. General Concepts













the principal obligation becomes due, the things in which the


to the creditor.

- It is a real security transaction constituted to secure the

fulfillment of a principal obligation by the absolute owne

(the mortgagor) of immovable or alienable real rights, which

has free disposal of the property, and in the absence

thereof, is legally authorized for the purpose; subjecting the

mortgaged property (or collateral) to the condit ion tha

when the principal obligation becomes due, the collatera

may be alienated for payment to the creditor (the

mortgagee)

A real security transaction is an encumbrance of property

given to guarantee the fulfillment of an obligation

REQUISITES

1. Principal obligation

2. Absolute ownership over the property

3.

Free disposal with legal authority4. Written document recorded in the Registry of Deeds – mus

be notarized

a. Attach a TCT/OCT – to identify the metes and bounds

b. Recorded

CHATTEL MORTGAGE REM

Thing mortgaged must be

personal or movable

property

Thing mortgaged must be

real or immovable property

Affidavit of Good Faith

required

Not required

Mortgagor cannot alienatethe thing mortgaged without

written consent of

mortgagee

Mortgagor can alienate thething mortgaged without

consent of mortgagee and

any such prohibition is void

Can secure future obligations Cannot secure future

obligations

No right of redemption There is a right of

redemption in extrajudicial

foreclosure and in judicial

foreclosure by banks




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.

An unrecorded REM: right to demand execution/recording.

An unregistered REM: still valid but it only binds the parties.


- General Rule: Real Estate Mortgage is limited to the

principal obligations mentioned in the contract of real

estate mortgage.

o Literal accuracy in describing the obligations is not

required, but the description must be correct and full

enough to direct the attention to the sources of the

correct information, and must not mislead or deceive.

o Terms of the contract must be sufficiently clear to put

all parties who may have occasion to deal with the

collateral upon inquiry.

-

Exceptions: It may also secure future advancements or

future debts so long as these debts that are yet to be

contracted are also accurately described.

- Thus, most real estate mortgages contain a stipulation

known as dragnet or blanket mortgage clause , which

is specifically phrased to subsume all debts, whether past or

future. (Future debts and after-incurred obligations)

- Dragnet clause shall be carefully and strictly construed.

- The amount stated as consideration in the mortgage

contract do not limit the amounts for which the mortgage

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 repaymen

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.

Petit ioner: Prudential Bank

Respondent: Don A. Alviar and Georgia B. AlviarConcept: Real Estate Mortgage: Obligations Secured

Doctr ine:

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 subsequen

obligations if such obligations have separate securities provided

The SC followed the 2nd school of thought that a “blanke

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 Prudentia

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).

ISSUES:

1. WON the “blanket mortgage clause” is valid (YES)

2.

WON the “blanket mortgage” clause applies even tosubsequent advancements for which other securities were

intended, specifically, PN BD#76/C-345 covering Loan # 2

(NO)

RATIO:

1. Yes, the “blanket mortgage clause” is val id and

was intended to cover not just the P250,000 loan

but also future credit faci l i t ies and advancements.

- Prudential: The “blanket mortgage clause” or “dragnet

clause” is valid, relying on several cases which upheld the

validity of mortgage contracts securing future

advancements- Spouses : The “blanket mortgage clause” would apply only

to loans obtained jointly by the spouses, and not to loans

obtained by other parties

-

SC : A “blanket mortgage clause,” also known as a “dragne

clause” in AmJur, is one which is specifically phrased to

subsume al l debts of past or future origins ; these

are “carefully scrutinized and strictly construed”

o Mortgages of this character enable the parties the

provide continuous dealings, the nature or extent o

which may not be known or anticipated at the time, and




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 val id and legal

contracts , and the amounts named as considerationdo 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, aswell 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 declaresthat 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

faci l i t ies 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 obl igation.

- 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:

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 withinthe 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 tha

subsequent loans need not be secured by other securities

as the subsequent loans will be secured by the firs

mortgage

o The sufficiency of the first security is a corollary

component of the “dragnet clause”

o

“Rel iance on the security test” – when themortgagor takes another loan for which anothe

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 tha

the “dragnet clause” in the first security instrument

constituted a continuing offer by the borrower to

secure further loans under the security of the firs

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, amortgage 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 andfor the dragnet & blanket security clause.




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 r ights – 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.

- Consequently, an assignment by way of guaranty of

such r ights 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 Propert ies

- Stipulation in a registered real estate mortgage that al

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.

People’s Bank and Trust Co. v. Dahican Lumber Co. (1967) –

Dizon, J.

Plaint i ff-Appel lants: People’s 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

Doctr ine:

Stipulations that “after acquired” properties are to be

immediately subject to the lien are not unjust nor immoral; theyare 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 protestedarguing 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)




RATIO:

1. YES. The “after acquired” propert ies were subject

to and covered by the mortgages.

- The provision was clear and binding: “all property of

every nature…taken in exchange or replacement…shall

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 st i l l binding even i f 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 asreal/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, whenthe 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.

People’s Bank v. Dahican Failed rescission ! mortgage would follow

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 no

yet received when the obligation becomes due, and to the

amount of the indemnity granted or owing to the proprieto

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 par

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 credito

has in another’s property whoever its owner may be

- The real estate mortgage is inseparable from the collatera

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.

Petit ioner: 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

Doctr ine:

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 o

the mortgage, provided they belong to the owner of the

mortgaged land.




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 arguedotherwise.

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 bui ldings and

exist ing improvements thereon, as wel l 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 l isted in Annexes A

and B form part of the improvements l isted 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 exist ing propert ies

composed of land, bui lding, 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

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, aswell 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 Dev’t 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 canno

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 i

the machinery were not expressly included in the

mortgage, the (old) Mortgage Law provides that chattels

permanently located in a building, either useful o

ornamental, or for the service of some industry eventhough 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 lega

truism that the accessory fol lows 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 unde

NCC Art. 415 (5) , immobilized machinery are considered asreal property and, hence, is the proper subject of a rea

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.




E. Right to Al ienate 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.

Art. 1627 The assignment of a credit includes all the accessory

rights, such as a guaranty, mortgage, pledge or preference.

- Right to al ienate the real estate mortgage credit :

the right of the mortgagee to assign its rights under the

principal obligation secured by the real estate mortgage

- The mortgagee does not become the owner of the

collateral, but it owns the real estate mortgage credit and

may alienate or assign it to a third person

The right to alienate mortgage credit is not present in the

Chattel Mortgage Law.

F. Right to Al ienate Col lateral












Art. 2130 A stipulation forbidding the owner from alienating

the immovable mortgaged shall be void.

-

The mortgagor remains to be the owner of the collateraland 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 al ienando:

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

- 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 fo

the right of first refusal

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

When there is a threat of foreclosure, mortgagor may opt to sel

his property (more beneficial since he may dictate the price, as

opposed to a foreclosure sale where bidding may not go as well)

REM CM

CC states that the right of the

mortgagor subsists and there

CANNOT be a pactum de

non alienando

Failure to obtain consent of

mortgagee:

Dy : Failure to obtain consent,

alienation is valid but willresult in penalties

Servicewide: Consent is

necessary, applied the

provisions on pledge

Garcia v. Villar (2012) – Leonardo-De Castro, J.

Petit ioner: Pablo P. Garcia

Respondent: Yolanda Valdez Villar

Concept: Real Estate Mortgage; Right to Alienate Collateral

Doctr ine:

The mortgagor in a Real Estate Mortgage retains ownership ove

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 ove

real property Galas owned. Galas and Pingol obtained anothe

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, itbeing 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 Garcia’s action to foreclose of mortgage on the

subject property can prosper (YES)




RATIO:

1.

Yes, the second mortgage was val id.

- The restriction on further encumbrances without the

mortgagee’s prior consent was not contained in the Deed of

Real Estate Mortgage executed in favor of Villar but was

merely annotated on Gala’s 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 Vi l lar was val id.

- 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 st ipulat ion forbidding the owner from

alienating the immovable mortgaged shal l be

void.”

3.

No. The prohibit ion 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:

" “It is also of the essence of these contracts

that when the principal obl igation becomes

due, the things in which the pledge or

mortgage consists may be al ienated 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 o

another and separate contract, which is the Deed oSale

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, Garcia’s r ight to foreclose subsisted despite

the transfer of ownership of the property to Vi l lar .

-

The real nature of a mortgage is described in Art. 2126

CC:

o

“The mortgage directly and immediately

subjects the property upon which i t is

imposed, whoever the possessor may be, to

the ful f i l lment of the obl igation for whose

security i t 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 formal it ies

which the law establ ished.”

- However, Vilar, in buying the subject property with notice

that it was mortgaged, only undertook to pay such

mortgage or al low the subect property be sold

upon fai lure of the mortgage creditor to obtain

payment from the principal debtor once the debt

matures. Vi l lar did not obl igate herseld to replace

the debtor in the principal obl igation, and could

not do so in law without the creditor’s consent, as

the same constitutes a novation

o Art. 1293. Novation which consists in

substitut ing a new debtor in the place of the

original one, may be made even without the

knowledge or against the wi l l 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




- 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 mortgagedebt, 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


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 debtordefaults, the creditor, as mortgagee, may elect to foreclose

the collateral

- Foreclosure of a real estate mortgage may be judicial or

extrajudicial

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 namesand 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 o

claiming an interest in the property subordinate in right to tha

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 a

public auction to satisfy the judgment.




Korea Exchange Bank vs. Filkor Business Integrated, Inc. (2002) –

Quisumbing J.

Petit ioners: 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

Doctr ine: It is a basic principle in Civil Procedure that what

determines the nature of an action are the allegations in thecomplaint 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 Filkor’s failure to pay the loan, Korea Exchange

filed a complaint with TC, seeking payment of the former’s

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 themortgaged 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 i t f i led was one

for foreclosure of the REM and not a col lection 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

mortgaged property; a statement of the date of the note o

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 statedand 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 plaintif

within ninety (90) days from entry of judgment.”

- Bank’s allegations in its complaint, and its prayer that the

mortgaged property be foreclosed and sold at public

auction, indicate that petitioner’s action was one foforeclosure of real estate mortgage. We have consistently

ruled that what determines the nature of an action, as wel

as which court or body has jurisdiction over it, are the

allegations of the complaint and the character of the relie

sought.

- In addition, we find no indication whatsoever that petitione

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 Filkor’s 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 shal

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 andorder 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 o

such payment the property shall be sold at public

auction to satisfy the judgment.

DISPOSITIVE: TC reversed.




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 morethan 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 Mortgagor’s 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 r ights are defeated? Mortgagee’s right to foreclose

(or assignee’s)

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 theprovisions 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.

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, shal

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 o

possession, upon motion, from the court which ordered the

foreclosure.

Rule 68, Sec. 4 Disposition of proceeds of sale — The amoun

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 thei

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 al

due — If the debt for which the mortgage or encumbrance washeld is not all due as provided in the judgment, as soon as a

sufficient portion of the property has been sold to pay the tota

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 shal

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 finaorder 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 bemade 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.




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 – Purísima, J.

Petit ioner: Huerta Alba Resort, Inc. (Huerta Alba)

Respondents: Court of Appeals (CA) and SyndicatedManagement Group, Inc. (SMGI)

Doctr ine:

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 Alba’s 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 r ight of redemption

because it fai led to invoke the r ight in a t imely

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.

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 SMGI’s predecessor in interest was a credi

institution. It merely asked for clarification whethe

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 claimedthat an order by the trial court altered a prior order

" On February 10, 1995, when the trial cour

confirmed the foreclosure sale, nothing was heard

from Huerta Alba regarding its right o

redemption. It did not invite attention to its stance

that SMGI’s predecessor in interest was a credi

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 actionfor 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 o

redemption as may be allowed by law.

- The right of redemption, in this case, hinged on the factua

issue of whether Intercon was a bank, banking institution, o

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 righunder 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 r ight 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.




- 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 sold—after

confirmation by the court of the foreclosure sale—may be

exercised within a period of one year from the date of

registration of the certificate of sale in the registry ofproperty.

- When a mortgage is extrajudicially foreclosed, Act 3135

grants a right of redemption within one year from the

registration of the sheriff’s 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 priorto 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 bea 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.

Rule 86, Sec. 7 Mortgage debt due from estate — A credito

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, hemay 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 fo

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 mortgagor’s 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 mortgageis not a full mortgage.




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 thesame is made in the power.

- Mortgagee has the right to foreclose a real estate

mortgage upon the mortgagor’s 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

The SPA is not a pactum commissorium. It is a special power

required to extrajudicially foreclose.

b. Foreclosure Sale

Act No. 3135, Sec. 2 Said sale cannot be made legally

outside of the province in which the property sold is situated;

and in case the place within said province in which the sale is to

be made is subject to stipulation, such sale shall be made in said

place or in the municipal building of the municipality in which

the property or part thereof is situated.

A.M. No. 99-10-05-0, as amended

Procedure In Extra-Judicial Foreclosure Of Mortgage






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:



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 o

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 conductedunder 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) yea

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 afte

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 o








locations, which certificate shall serve the purpose of having theapplication docketed with the Clerks of Court of the places



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.

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

GR: Under normal circumstances, statutory provisions governing

posting of notice of REM foreclosure sales must be str ict ly

complied with

- Even slight deviations will invalidate the notice and rende

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 passeso

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 val idity

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 genera

circulation, and considering the attendan

circumstances, the publ ication of the notice of

sale in a newspaper general circulat ion 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 collatera

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.

Petit ioners: 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

Doctr ine:

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 i

argues that notice by publication in a newspaper of genera

circulation is sufficient. Grand Farms claims that this lack o

notice violates paragraph (k) of the mortgage contract, and is

fatal to the foreclosure proceedings. Consequently, it filed a

motion for summary judgment.




ISSUE:

WON a summary judgment may be promulgated by the TC,

given that there was no notice of foreclosure sent by the

mortgagee to the mortgagor (YES)

RATIO: YES

- The real test, therefore, of a motion for summary judgment

is whether the pleadings, affidavits and exhibits in support

of the motion are sufficient to overcome the opposing

papers and to justify a finding as a matter of law that there isno defense to the action or that the claim is clearly

meritorious. Applying said cr i ter ia to the case at bar,

we find that the present action is r ipe for summary

judgment.

- Banco Filipino tacitly admitted in its answer to the request

for admission that it did not send any formal notice of

foreclosure to petitioners. Stated otherwise, there has been

no denial the bank that no personal notice of the

extrajudicial foreclosure was ever sent to Grand Farms. This

omission, by i tself, rendered the foreclosure

defective and irregular for being contrary to the

express provisions of the mortgage contract. There

is thus no further necessity to inquire into the

other issues cited by the tr ial court, for the

foreclosure may be annul led solely on the basis of

such defect.

- While Banco Filipino was constituted as their attorney-in-

fact by Grand Farms, the inclusion of the aforequoted

paragraph (k) in the mortgage contract

nonetheless rendered personal notice to the latter

indispensable .

- Paragraph (k) is an additional stipulation between the

parties, forming the law between them and as it is not

contrary to law, morals, good customs, and public policy,

the same should be complied with faithfully.- Thus, while publ ication of the foreclosure

proceedings in the newspaper of general

circulat ion was complied with, personal notice is

st i l l required when the same was mutual ly agreed

upon by the part ies as addit ional condit ion of the

mortgage contract. Such fai lure of the bank to

comply with the st ipulat ion is fatal to i ts cause.

- The CA ruling that paragraph (k) was intended only to

indicate the address of the mortgagor should be rejected,

as the SC interpreted an identical ly worded

provision in Community Savings Loan

Associat ion, Inc. as a val id st ipulat ion obl igating

the mortgagee-bank to send personal notice of

foreclosure to mortgagor.

- There is also no irreconcilable conflict between paragraphs

(b), (d), and (k). The notices respectively mentioned in

paragraphs (d) and (k) are addressed to the particular

purposes contemplated therein, while those mentioned

in paragraph (k) are specif ic and addit ional

requirements intended for the mortgagors so that,

thus apprised, they may take the necessary legal

steps for the protection of their interests such as

the payment of the loan to prevent foreclosure or

to subsequently arrange for redemption of the

property foreclosed.

- As it was the respondent bank which caused the formulation

and preparation of the printed mortgage contract, any

obscurity should be construed against it.

DISPOSITIVE: Petition granted. Case is remanded to TC fo

summary judgment.

2) Conduct of Sale

Act No. 3135, Sec. 4 The sale shall be made at public

auction, between the hours or nine in the morning and four in

the afternoon; and shall be under the direction of the sheriff o

the province, the justice or auxiliary justice of the peace of the

municipality in which such sale has to be made, or a notary

public of said municipality, who shall be entitled to collect a fee

of five pesos each day of actual work performed, in addition to

his expenses.

Act No. 3135, Sec. 5 At any sale, the creditor, trustee, oother persons authorized to act for the creditor, may participate

in the bidding and purchase under the same conditions as any

other bidder, unless the contrary has been expressly provided in

the mortgage or trust deed under which the sale is made.

A.M. No. 99-10-05-0

(AS FURTHER AMENDED, AUGUST 7, 2001)


MORTGAGE

In line with the responsibility of an Executive Judge unde

Administrative Order No. 6, dated June 30, 1975, for themanagement of courts within his administrative area, included in



issuance of commissions to notaries public and enforcement o

their duties under the law, the following procedures are hereby



whether under the direction of the sheriff or a notary public




2. Upon receipt of an application for extra-judicial foreclosure o


a) receive and docket said application and to stamp thereon the

corresponding file number, date and time of filing;















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


exceed P100,000.00;




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


shall have the right to redeem the property until, but not after,the registration of the certificate of foreclosure sale which in no







such indebtedness shall be collected. The collecting Clerk of


certificate of payment indicating the amount of indebtedness,

the filing fees collected, the mortgages sought to be foreclosed,






3. The notices of auction sale in extrajudicial foreclosure for


in a newspaper of general circulation pursuant to Section 1,

Presidential Decree No. 1079, dated January 2, 1977, and non-


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



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 o

stipulation, sale shall be made in the place in the municipa

building of the municipality in which the property or partthereof 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 part icipate:

GR: (they are in the same condit ion 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 o

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 manager’s 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. Certi f icate of Sale: Issued and signed by the Clerk o

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.

Petit ioner: Spouses Francisco and Merced Rabat

Respondent: Philippine National Bank

Concept: Real Estate Mortgage: Extrajudicial Foreclosure –Conduct of Sale

Doctr ine:

Inadequacy of the price in an extrajudicial foreclosure does not

invalidate the sale, and said sale is still valid. If the proceeds o

the sale are insufficient to satisfy the principal obligation, the

mortgagee is entitled to the deficiency owing it.




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 tocomply, 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, unl ike in an ordinary sale, is immaterial and

does not nul l i fy 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 doesn’t 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 notof 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 thelow 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

property “within the term of one year from and

after the date of the sale”

- SC: PNB’s 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 r ight 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 o

mortgages, while silent as to the mortgagee’s right torecover, does not, on the other hand, prohibit recovery

of deficiency. Accordingly, it has been held that a

deficiency claim arising from the extrajudicia

foreclosure is allowed

- As the SC indicated in Prudential Bank v. Martinez , the fac

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 recove

the penalty charge of 3% per annum and attorney’s 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 otherwiseo 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 o judgment creditor of said debtor, or any person having a lien on

the property subsequent to the mortgage or deed of trust unde

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 o

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.




A.M. No. 99-10-05-0

(AS FURTHER AMENDED, AUGUST 7, 2001)


MORTGAGE






issuance of commissions to notaries public and enforcement oftheir duties under the law, the following procedures are hereby







2. Upon receipt of an application for extra-judicial foreclosure of


a) receive and docket said application and to stamp thereon the

corresponding file number, date and time of filing;












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


exceed P100,000.00;




registration of the certificate of sale with the Register of Deedsconcerned, after which, the records shall be archived.

Notwithstanding the foregoing provision, juridical persons


shall have the right to redeem the property until, but not after,

the registration of the certificate of foreclosure sale which in no














where the other properties are located and of allowing theextrajudicial foreclosures to proceed thereat.

3. The notices of auction sale in extrajudicial foreclosure fo


in a newspaper of general circulation pursuant to Section 1

Presidential Decree No. 1079, dated January 2, 1977, and non


thereof.

4. The Executive Judge shall, with the assistance of the Clerk o

Court, raffle applications for extrajudicial foreclosure o

mortgage under the direction of the sheriff among all sheriffsincluding 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 o



Right of Redemption is a statutory right generally conferred

on the mortgagor but may be exercised by other persons. I

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 mortgago

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 soldJuridical 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 o

sale

2. RA 8791: After the foreclosure or before registration o

certificate of foreclosure, whichever is earlier (which shall not

exceed 3 months) – bank must be the mortgagee




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 becomesconsolidated in the purchaser (not inchoate right anymore)

- To claim a right of redemption, there must be a specif ic

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

registrat ion of the cert i f icate 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-bankor trust entity , juridical mortgagors are granted the right to

redeem unti l , but not later than the registrat ion of the

cert i f icate of foreclosure sale (in no case shall be more than

3 months after foreclosure)

How to determine i f a r ight 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 col lateral :

- Immaterial if the collateral is sold at an amount less than its

actual market value

o

Mere inadequacy of the price obtained at theforeclosure 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

Goldenway Merchandising Corp. v. Equitable PCI Bank (2013) –

Villarama, Jr., J.

Petit ioner: Goldenway Merchandising Corp. (GMC)

Respondent: Equitable PCI Bank

Concept: Extrajudicial Foreclosure; Right of Redemption

Doctr ine:

- 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), juridica

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 favorGMC 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. 47’s shorter period of redemption appl ies

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, owithdraws remedies for the enforcement of the rights o

the parties.

o Sec. 47 did not divest parties the right to redeem thei

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 onlycovers foreclosure sales executed during its effectivity

and exempts those that are executed prior to June 13

2000.




- On the issue of equal protection:

o GMC: Law discriminates against mortgagors who are

juridical persons.

o SC: Equal protection does not require absolute equality

but that all person be treated alike under like

conditions, both as to privileges conferred and liability

imposed. It permits of reasonable classification, which is

based on real and reasonable distinctions, and such

classification is germane to the purpose of the law.

o

CA is correct in ascertaining the legislative intentbehind RA 8791.

" The difference of treatment between natural and

juridical persons was based on the nature of the

properties foreclosed – whether these are used for

residence, in which case the one-year redemption

period applies, or used for industrial or commercial

purposes, in which case a shorter term is deemed

necessary to allow mortgagees (usually banks) to

dispose of these acquired assets as soon as

possible and reduce the period of uncertainty in

the ownership over such acquired assets.

"

RA 8791 came in the aftermath of the 1997Southeast Asian financial crisis which sought to

reform the 1949 version of the law and create a

safer and more sound banking system.

" The classification in this case is highly germane and

pertinent to the law.

o Legislative intent taken into account, which is for the

furtherance of public interest, GMC’s theory of

impairment of contract is further weakened.

o The right to redemption is a statutory right which must

be exercised the manner prescribed and within the

time period provided in the statute. RA 8791, being the

controlling law providing such right of redemption,

should be observed.o The freedom to contract is not absolute; it is subject to

the police power of the state. Such power extends to

the banking industry which the Court has always

recognized to be imbued with public interest.


1) Who may Redeem

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 o

judgment creditor of said debtor, or any person having a lien on

the property subsequent to the mortgage or deed of trust unde

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 osections 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.

Rule 39, Sec. 27 Who may redeem real property so sold —

Real property sold as provided in the last preceding section, o

any part thereof sold separately, may be redeemed in the

manner hereinafter provided, by the following persons:

(a) The judgment obligor, or his successor in interest in the

whole or any part of the property;

(b) A creditor having a lien by virtue of an attachment, judgment

or mortgage on the property

sold, or on some part thereof, subsequent to the lien unde

which the property was sold. Such redeeming creditor is termed

a redemptioner.

Act No. 3135, Sec. 6 Rule 39, Sec. 27, ROC

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

1. Judgment obligor, or his

successor in interest in the

whole or any part of theproperty

2.

Creditor having a lien by

virtue of an attachment

judgment or mortgage on

the property sold, or on

some part therefor

subsequent to the lien

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




1. Successor in interest: includes, but not limited to:

a. One to whom the mortgagor has transferred the

statutory r ight 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.

Petit ioners: Manuel D. Medida, Deputy Sheriff of the Provinceof 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

Doctr ine:

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 byattachment, 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.

Brief Facts:

Sps. Dolino obtained a loan from a bank and executed a rea

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. Thespouses 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 subjec

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

val id.

- 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. Inconsisten

with such pronouncement, the Court further stated tha

during the same period of redemption, the mortgago

was “divested” of his ownershipo 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 o

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 amortgage 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.

- 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 anothermortgage 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 mortgagor’s 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 mortgageeequivalent 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.

I f there are 2 mortgages:

If the 2nd mortgagee exercises the right to foreclose, it is still

subject to the right of the 1st mortgagee.

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, whicheveis 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 i

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 sale3. 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 ANDiii. Affidavit showing amount due on the lien

Bona fide redemption: Actual and simultaneous tender o

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 thepurchaser the amount of his purchase, with one per centum pe

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 i

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




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, onpaying 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 inlike 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.

Rule 39, Sec. 33 Deed and possession to be given a

expiration of redemption period; by whom executed or given —

If no redemption be made within one (1) year from the date o

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 othe

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) yeafrom 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 shal

be given to the purchaser or last redemptioner by the same

officer unless a third party is actually holding the propertyadversely to the judgment obligor.

Requisites for a val id redemption:

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 o

collateral sold at a foreclosure (Yap v. Dy, et al.)




Sps. Yap v. Sps. Dy (2011) – Villarama, J.

In G.R. 171868

Petit ioners: Sps. Yap

Respondents: Sps. Dy; Sps. Maxino; DBRI

In G.R. 171991

Petit ioners: DBRI

Respondents: Sps. Dy; Sps. Maxino; Sps. Yap

Concept: Right of Redemption - How to Redeem

Doctr ine:

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 andMaxinos 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 test imony of the Provincial

Sheri ff .

- 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 Sheriff’s 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 thelots foreclosed.

- Also, a perusal of DRBI’s 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.

- 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 fac

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 qual i fy 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 bank’s 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 lega

personality to redeem the subject properties despite the

fact that the sale to them was made without DBRI’s consentSec. 6 of Act 3135 itself gives not only the mortgagor-debto

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 al lowed to redeem only one

or some of the foreclosed propert ies, as the

doctr ine of indivis ibi l i ty no longer appl ies 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 sectionsmay 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 howeve

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.




- 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; ando

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. I t 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 ofownership 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 theforeclosed 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 theseventeen 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

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 beredeemed, 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.


d. Right to Deficiency

Rule 86, Sec. 7 Mortgage debt due from estate — A credito

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 specif ical ly provide for a

mortgagee’s r ight to recover the deficiency from the

application of the proceeds of the foreclosure sale, the said

law ALSO does NOT prohibit i t .




- The mortgagee’s recovery of the deficiency is supported

by the principle that a real estate mortgage is a

security transaction and not a sat isfact ion of

indebtedness of the debtor.

o The REM does not in, in any way, limit nor minimize the

amount of the principal obligation, as i ts only function

is to secure i ts ful f i l lment.

- 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 r ight to recovery of the deficiency only ar ises

when the proceeds are determined to be

insufficient to cover the obligation and other costs of

the sale.

o

Hence, the amount of the obl igation 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 ofa 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 BankingCorporation – Perlas-Bernabé, J.

Petit ioners: Heirs of Spouses Maglasang (petitioners)

Respondent: Manila Banking Corporation (MBC), substituted

by First Sovereign Asset Management, Inc. (Respondent)

Doctr ine:

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

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 reaestate 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 extrajudicial foreclosure

under Section 7, Rule 86, ROC does not give the

creditor/mortgagee the r ight 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 collatera

security, may abandon the security and prosecute his claim

in the manner provided in this rule, and share in the genera

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 o

the mortgaged premises, or the property pledged, in the

foreclosure or other proceeding to realize upon the securityhe may claim his deficiency judgment in the manne

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 shal

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 tha

such redemption shall be made.o As the foregoing generally speaks of “[a] credito

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.




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 createddistinction.

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-judicialforeclosure 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 themortgage 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 aclaim 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.

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 mortgagee’s 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 o

technicality.

- The surplus gains importance in cases where there are junio

encumbrancers (ex, subsequent mortgagees).

o The surplus is applied to the subsequent mortgages in

the order of their priority.o A second mortgagee’s 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 mortgagee’s lien on the collateral is

transferred to the surplus; in turn, the senior mortgagee is

considered are a trustee for the benefit of the junio

encumbrancers,

o Even if the mortgagee retains the surplus, such will no

affect the validity of the sale but only gives the mortgago

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 themortgage), then pay the surplus to the sheriff

Suico v. PNB (2007) – Chico-Nazario, J.

Petit ioner: Sps. Esmeraldo and Elizabeth Suico

Respondent: Philippine National Bank and CA

Concept: Real Estate Mortgage: Extrajudicial Foreclosure –

Right to surplus

Doctr ine:

Pursuant to Rule 68, Sec. 4, the disposition of the proceeds o

the sale in foreclosure shall be as follows: (a) first, pay the costs

(b) secondly, pay off the mortgage debt; (c) thirdly, pay the junioencumbrancers, 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

mortgagee’s duty to return any surplus in the selling price to the

mortgagor.




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 RTCand 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 nul l

and void. It is val id.

- Spouses : Since the Notice of Sheriff’s 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 Sheriff’s

Sale is to inform all interested parties of the date,

t ime 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 isthe 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, todepreciate 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 PNB’s bid

resulted in discouraging or misleading bidders, depreciated

the value of the property or prevented it from commanding

a fair price.

- SC: Cases cited by RTC do not apply

o

San Jose v. CA: Notice did not state the correct numbe

of the TCTs of the property to be sold ! substantia

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

attorney’s 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 i f i t does not exceed the amount of

his judgment. I f i t does, he shal l 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 obligo

may pay to the sheri ff holding the writ of execution

the amount of his debt or so much thereof as may be

necessary to satisfy the judgment, in the manne

prescribed in section 9 of this Rule, and the sheriff’s

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 d’etre 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 biddero Rule ONLY holds true where the amount of the bid

represents the total amount of the mortgage debt




- 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 dulyauthorized 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 mortgagor’s

obligation is an act of payment, not payment by dacion;

hence, i t is the mortgagee’s duty to return any

surplus in the sel l ing 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 attorney’s fees as ofOctober 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 thebasis 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

involve loans or forbearance of money, pursuant to Art

2209

o Since the obligation of PNB arises not from a loan o

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 Nacarit 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 itwill 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 extrajudicia

foreclosure.

f. Right to Possession

1) During Redemption Period

Act No. 3135, Sec. 7 In any sale made under the provisions o

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 o

cadastral proceedings if the property is registered, or in specia

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 ineach 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.




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 thedebtor 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 propertyas 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 regularityof 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.

2) After Consolidation of Ownership

Rule 39, Sec. 33 Deed and possession to be given a


If no redemption be made within one (1) year from the date o


to a conveyance and possession of the property; or, if so

redeemed whenever sixty (60) days have elapsed and no othe


time for redemption has expired, the last redemptioner isentitled to the conveyance and possession; but in all cases the

judgment obligor shall have the entire period of one (1) yea

from the date of the registration of the sale to redeem the






redemptioner shall be substituted to and acquire all the rights


as of the time of the levy. The possession of the property shalbe 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 purchaser’s 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.

Petit ioner: 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

Doctr ine:

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.




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.

(Court’s 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 mortgagor’s 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 theredemption 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 theposing 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

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 o

without complying with the requirements of this

Act. Such petit ion shal l be made under oath

and fi led in form of an ex parte motion x x x

and the court shal l , 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 saidorder 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 o

possession on Aug. 18, 2004, the redemption period

had long lapsed; since the property was not redeemed

within one year from registration of the extrajudiciaforeclosure 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 o

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, i

presented a new TCT issued in its name; the right to

the possession of the property was founded on its rightof ownership

o As purchaser of the property at the foreclosure sale, in

whose name title over the property was already issued

the r ight over the property had become

absolute, vest ing in i t the corol lary r ight 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; theiremedy is to have the sale set aside and the writ o

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 o

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. 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; evenpending 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


If no redemption be made within one (1) year from the date of


to a conveyance and possession of the property; or, if soredeemed whenever sixty (60) days have elapsed and no other


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






redemptioner shall be substituted to and acquire all the rights,


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 uponthe 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.

The officer shall not be liable for damages for the taking o

keeping of the property, to any third-party claimant if such bond

is filed. Nothing herein contained shall prevent such claimant o

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 ofthe Philippines, or any officer duly representing it, the filing o

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 shal

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 collatera

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 o

officer effecting the writ, by serving on him an affidavit o

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 o

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.




BPI Family Savings Bank v. Golden Power Diesel Sales Center

(2011) – Carpio, J.

Petit ioner: 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

Doctr ine:

-

GR: A purchaser in a public auction sale of a foreclosedproperty 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 Goldenhad 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: Golden’s claims are not adverse to that of

CEDEC. Hence, i t does not fal l under the exception;

the al ias 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 thedebtor 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.

- SC: The procedure above may also be availed of by the

purchaser seeking possession of the foreclosed property

after the redemption period has expired withou

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 wri

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 o

possession and, upon an ex parte petition of the purchaserit 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 o

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 obl igor , the duty to issue the writ

ceases to be ministerial.

- SC: Golden’s 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, transferand 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 vendor’s

shoes’




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 ofanother co-owner or the owner of the property.”

o In this case, Golden’s 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 CEDEC’s

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 ofpossession. 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.

Petit ioner: 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

Doctr ine:

- Once title to the property has been consolidated in the

buyer’s 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 buyer’sname.

- An exception the said general rule is when there is a third

party claiming r ight 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

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 highes

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 theissuance 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-yea

period of redemption (NO)

RATIO: No. The issuance of a writ of possession is a

ministerial function of the Court. The pendency of the

civi l case chal lenging the val idity 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

buyer’s 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 cadastra

proceedings if the property is registered, or in specia

proceedings in case the property is registered under the

Mortgage Lawo In this case, a bond is required before the court may

issue a writ of possession




- Upon the lapse of redemption period (Act. 3135, Sec. 6), a

writ of possession may be issued in favor of the purchaser in

a foreclosure sale, also upon a proper ex parte motion.

o This time, no bond is necessary for its issuance

o The mortgagor is now considered to have lost any

interest over the foreclosed property

o Purchaser becomes the owner of the property, and he

can demand possession at any time following the

consolidation of ownership and the issuance of TCT in

his/her name- Pendency of the civil case is not a bar to the issuance of a

writ of execution

o The same does not constitute the presence of peculiar

and equitable circumstances and cannot stay the

issuance of the writ (Sps. Tolosa v. UCPB)

o Questions on the regularity and validity of mortgage

and foreclosure cannot be invoked as justification for

opposing the issuance of a writ of possession in favor of

the new owner

- The court in Sps. Tolosa v. UCPB outlined the exceptions

that would warrant the suspension of the issuance of writ of

possession:(1) Gross inadequacy of purchase price – Cometa v.

IAC: value of property sold in execution sale was

P500,000 but it was sold only for P57,000. Court

perceived that injustice would result in issuing a writ of

possession

(2) Third party claiming r ight adverse to

debtor/mortgagor – Barican v. IAC: 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.

-

In this case, there was a pending civil suit involvingthe rights of third parties who claimed ownership

over the disputed property

- Court found the circumstances to be peculiar,

necessitating an exception to the general rule

- Where such third party claim and possession exist,

the trial court should conduct a hearing to

determine the nature of the adverse possession

(3) Fai lure to pay surplus proceeds of the sale to

mortgagor – equitable considerations demanded the

deferment of the issuance of the writ as it would be

highly unfair for the mortgagor, who as a redemptioner

might choose to redeem the foreclosed property, topay the equivalent amount of the bid clearly in excess

of the total mortgage debt

DISPOSITIVE: Petition denied. CA Affirmed.

Nagtalon v. UCPB

This is the case that provides the exceptions ot the wirt of

possession.

X. ANTICHRESIS

A. General Concepts

Art. 2132 By the contract of antichresis the creditor acquires

the right to receive the fruits of an immovable of his debtor, with

the obligation to apply them to the payment of the interest, i

owing, and thereafter to the principal of his credit.

Art. 544 A possessor in good faith is entitled to the fruits

received before the possession is legally interrupted.

Natural and industrial fruits are considered received from the

time they are gathered or severed.

Civil fruits are deemed to accrue daily and belong to the

possessor in good faith on that proportion. (451)

Art. 2133 The actual market value of the fruits at the time of the

application thereof to the interest and principal shall be the

measure of such application.

Art. 2135 The creditor, unless there is a stipulation to the

contrary, is obliged to pay the taxes and charges upon the

estate.

He is also bound to bear the expenses necessary for its

preservation and repair.

The sums spent for the purposes stated in this article shall be

deducted from the fruits.

Art. 2138 The contracting parties may stipulate that the interest

upon the debt be compensated with the fruits of the property

which is the object of the antichresis, provided that if the value

of the fruits should exceed the amount of interest allowed by the

laws against usury, the excess shall be applied to the principal.

Art. 2139 The last paragraph of Article 2085, and Articles 2089

to 2091 are applicable to this contract.








the free disposal of their property, and in the absence thereof



secure the latter by [antichresis of] their own property.




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 heirswho 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.

- Definit ion: 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 hasn’’t 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

Part ies 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 al l kinds of obl igations

1. Pure

2. Subject to suspensive condition

3. Subject to resolutory condition

Indivis ibi l i ty of an antichresis:

GR: An antichresis is indivisible. There can be no proportionate

extinguishment or cancellation of antichresis due to partia

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

debtor’s 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 shal

be specified in writing; otherwise, the contract of antichresis shal

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 compe

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




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 judicial ly 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 l ieu 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 st ipulat ion: 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.

Petit ioners: Cecilio Diego

Respondents: Segundo Fernando

Concept: Antichresis

Doctr ine:

It is not an essential element of a mortgage that possession of

the mortgaged property remains with the mortgagor. For acontract 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.

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 mortgageor of antichresis (MORTGAGE)

2. WON the mortgagee will be allowed to appropriate the

fruits for himself (NO)

RATIO:

1. I t 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


o

Article 2132: By the contract of antichresis thecreditor 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


- 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, i

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 momenas 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 entit le the latter to

appropriate to i tself the fruits thereof unless the

former has expressly waived his r ight 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 withou

interest, and substituted another giving the mortgagee theright to receive the fruits of the mortgaged properties as

interests.




- 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 andoccupation, 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 mortgagee’s possession. As such,

Diego, like an antichretic creditor, must account for the

value of the fruits received by him, and deduct it from theloan 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.

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 usagainst 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 insofa

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 o

the State to facilities a speedy and orderly liquidation of thesedebtor'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 lawsor 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.




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 debtor’s property, present

and future, to the fulfillment of the debtor’s 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

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 o

business or as they mature

o

Civil Code recognizes that even if the law requires thedebtor 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 financia

relief and undergoes judicially supervised reorganization o

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 rehabi l i tat ion and l iquidation: Ensure a timely, fair

transparent, effective and efficient rehabilitation or liquidation o

debtors.

Rehabil i tat ion or l iquidation shal l 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 o

the obligation

2. Debtor can only reserve property exempted by law

Rationale for Insolvency Proceedings: Even if debtor’s

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




Condit ion of being insolvent:

- Under the FRIA, and insofar as the debtor is concerned,

the condition of being insolvent is defined as follows:

(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 asadvances for future subscriptions.

- FRIA has broadened the concept of insolvency by including

in its ambit i l l iquidity or equity insolvency , or the

financial condition of a debtor that may possess sufficient

property but is unable to pay its liabilities when they fall

due, as well as balance sheet insolvency , or the financial

condition of a debtor that has liabilities that are greater

than, or that exceed, its assets

o Under the FRIA definition, an i l l iquid debtor is an

insolvent debtor

o Under the FRIA, the state of being insolvent is

calculated based on l iabi l i t ies, that is, the monetaryclaims against the debtor

A. Nature of Insolvency Proceedings

RA 10142, Sec. 3 Nature of Proceedings. - The proceedings

under this Act shall be in rem. Jurisdiction over all persons

affected by the proceedings shall be considered as acquired

upon publication of the notice of the commencement of the

proceedings in any newspaper of general circulation in the

Philippines in the manner prescribed by the rules of procedure

to be promulgated by the Supreme Court.

The proceedings shall be conducted in a summary and non-

adversarial manner consistent with the declared policies of this

Act and in accordance with the rules of procedure that the

Supreme Court may promulgate.

RA 10142, Sec. 7 Substantive and Procedural Consolidation. -

Each juridical entity shall be considered as a separate entity

under the proceedings in this Act. Under these proceedings, the

assets and liabilities of a debtor may not be commingled or

aggregated with those of another, unless the latter is a related

enterprise that is owned or controlled directly or indirectly by the

same interests: Provided, however, That the commingling or

aggregation of assets and liabilities of the debtor with those of a

related enterprise may only be allowed where:(a) there was commingling in fact of assets and liabilities of the

debtor and the related enterprise prior to the commencement of

the proceedings;

(b) the debtor and the related enterprise have common creditors

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

the related enterprise is beneficial to all concerned and

promotes the objectives of rehabilitation.

Provided, finally, That nothing in this section shall prevent the

court from joining other entities affiliated with the debtor as

parties pursuant to the rules of procedure as may be

promulgated by the Supreme Court.

RA 10142, Sec. 6 Designation of Courts and Promulgation o

Procedural Rules. - The Supreme Court shall designate the cour

or courts that will hear and resolve cases brought under this Act

and shall promulgate the rules of pleading, practice and

procedure to govern the proceedings brought under this Act.

Nature: In rem, binding upon the whole world

How is jur isdict ion acquired: Upon publication of the notice

of commencement of proceedings in any newspaper of genera

circulation in the Philippines

How conducted: Summary and non-adversarial

Part ies to the Proceedings (Sec. 4(dd) and (bb)):1. Debtor

2. Creditor

3. Unsecured creditors’ committee

4. Stakeholder

5. Party with an ownership interest in property held by the

debtor

6. Secured creditor

7. Rehabilitation receiver

8. Liquidator

9. Other juridical or natural person who stands to be benefited

or injured by outcome of the proceedings

On juridical entities parties to the proceeding (Sec. 7)

GR: Each juridical entity is a separate entity. Thus, assets and

liabilities of a debtor may not be commingled or aggregated

with those of another.

XPN: Unless the other is a related enterprise that is owned o

controlled directly or indirectly by the same interest. The

commingling or aggregation of assets and liabilities of the

debtor with related enterprise are allowed where:

1. There was commingling in fact of assets and liabilities prio

to the commencement of the proceedings;

2. They have common creditors and it will be more convenient

to treat them together rather than separately;

3.

The related enterprise voluntarily accedes to join the debto

as party petitioner and to commingle its assets and liabilities

with the debtor’s; and

4. Consolidation is beneficial to all concerned and promotes

the objectives of rehabilitation




B. Civi l and Criminal Liabi l i ty 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 forbenefit 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 propertyof 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 anypayment 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.

I I . 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 wil

receive if liquidation ensues within the next one hundred twenty

(120) days;

(c) contain information sufficient to give the various classes o

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 o

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 hasbeen 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 o

funds to account for appropriate payments should the claim

be ruled valid or its amount adjusted;




B. Classi f icat ion of Credits

1. Special Preferred Credits

For these special preferred credits, identify the following:

1. What is the object?

2. Who is the debtor?

3.

Who is the creditor?

Art. 2241 With reference to specif ic movable property ofthe 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 bythem;

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;

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

(6) Claims for laborers' wages, on the goods manufactured or the

work done;

O: Wages

D: Employer

C: Laborer

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arising from thecontract 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 fo

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 harves

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 o

preference attaches have been wrongfully taken, the credito

may demand them from any possessor, within thirty days from

the unlawful seizure.




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: Gov’t

(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.

RA 10142, Sec. 136 Liquidation of a Securities Marke

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 o

clients or customers of a securities market participant which, fo

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 cashsecurities, 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.

Cash2. Securities

3. Trading right

4. Other assets owned and used by the securities marke

participant in the ordinary course of business

Note: This special preferred credit enjoys absolute priority ove

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 lega

provisions governing insolvency. Taxes mentioned in No. 1Article 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.




Art. 2249 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 right.

Among special preferred credits, only taxes enjoy preference.

Those enumerated in Art. 2241 (2) to (13) and 2242 (2) to (10) are

liens. They are not preferred over any other inter se. There is

only CONCURRENCE OF CREDIT.

Two-tier Order of Preference:

TIER 1: Taxes, duties, and fees due on specific movable or

immovable property

TIER 2: All other special preferred credits

Note: The latter are satisfied pari passu and pro rata out of any

residual value of specific property to which other credits relate.

Art. 2250 The excess, if any, after the payment of the credits

which enjoy preference with respect to specific property, real or

personal, shall be added to the free property which the debtor

may have, for the payment of the other credits.

" Art. 2241 and 2242 enumerate the special preferred

credits that enjoy preference with respect to specific

movable and specific immovable property of the debtor,

and exclude all other claims to the extent of the value of the

affected property.

" Moreover, these claims are considered as l iens within the

purview of legal provisions governing insolvency.

" Among those enumerated, only taxes enjoy preference;

the claims listed in Art. 2241 (2) to (13) and Art. 2242 (2) to

(1), all come after taxes in order of precedence.

" Although such claims enjoy their privileged character asliens, they are not preferred over any other inter se; there is

only a concurrence of credits.

" Art. 2241 & 2242 and Art. 2246 & 2249 establish a two-tier

order of preference: the first tier includes only taxes, duties

and fees due on specific movable or immovable property,

while the second tier includes all other special preferred

credits, which are to be satisfied, pari passu and pro rata,

out of any residual value of the specific property to which

such other credits relate.

" However, Sec. 136 of FRIA creates a special preference of

credit in favor or 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 and amends the order of preference in Art. 2241 and

2242.

De Barreto vs. Villanueva (1961-1962) - Gutiérrez-David, J.

Petit ioners: Magdalena C. de Barreto, et al. (appellants)

Respondents: José G. Villanueva, et al. (appellees)

Concept: Special Preferred Credits (Insolvency)

Doctr ine in the original decision:

Art. 2249 in relation to Art. 2242 is applicable to vendor’s lien

even if it be unrecorded or unregistered and even when the

debtor is not insolvent.

Doctr ine 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 proceeding—

insolvency proceeding, estate settlement, liquidation

proceedings, and the likes—to ascertain the claims of the

concurrent creditors.

Brief Facts:

Villanueva is indebted as a buyer of a parcel of land to Cruzado

She is also indebted as a borrower to Barreto. Her loan to

Barreto was secured by a real estate mortgage over theaforementioned land. She failed to perform her obligations to

Cruzado and Barreto. Cruzado had her vendor’s lien annotated

at the back of the certificate of title issued to Villanueva. Barreto

foreclosed the mortgage, but it was subjected to the vendor’s

lien.

ISSUE:

WON Cruzado was entitled to a pro rata share of the proceeds

of the foreclosure sale.

Ruling in the original case: NO.

Ruling in the resolution of the motion for

reconsideration: YES.

RATIO IN THE ORIGINAL CASE: Art. 2249 in relat ion to

Art. 2242 is appl icable to vendor’s l ien even i f i t be

unrecorded or unregistered and even when the debtor

is not insolvent.

- Appellants: decision in the recovery case filed by Cruzado

could not be the basis for vendor’s lien because it was

merely a case to recover the balance of the promissory note

-

SC: While the action was to recover the remaining

obligation of promisor Villanueva on the note, the fact

remained that Cruzado was an unpaid vendor of the realtyin question, and the promissory note was, precisely, for the

unpaid balance of the purchase price.




- 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 toshare pro rata with the appellants the proceeds of the

foreclosure sale.

- Appellants: Since the unpaid vendor’s 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 vendor’s lien. If the

legislative intent was to impose the same requirement in the

case of the vendor’s 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 anydistinction, it goes to show that any vendor’s lien enjoys the

preferred credit status.

- Appellants: To give the unrecorded vendor’s 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 relat ion to Art. 2242

is appl icable to the case of concurrent of credits only

when there has been a proceeding—insolvency

proceeding, estate sett lement, l iquidation

proceedings, and the l ikes—to 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.

-

o Conflict among creditors under the Old Civil Code is

governed by Art. 1927 where there was a system o

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 rea

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 amongthemselves, but must be paid pro rata, as provided fo

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 othe

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 personaproperty, or liens within the purview of legal provisions

governing insolvency…”

- One preferred creditor’s third-party claim to the proceeds

of a foreclosure case (as the appellee’s vendor’s 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 canno

be ascertained.

-

In the absence of insolvency proceedings or otheequivalent 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 othe

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 mortgagee’s recorded

encumbrance and must remain subordinate to the latter.

DISPOSITIVE: Original decision reconsidered and reversed.




DBP vs. CA (2001) - Kapunan, J.

Petit ioner: Development Bank of the Philippines

Respondents: Remington Industrial Sales Corporation

Concept: Special Preferred Credits

Doctr ine:

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 Remington’s favor a lien on all unpaid

purchases of Marinduque Mining (NO)

RATIO: NO. There is no l ien 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 hasbeen 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 toconstrue 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

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 o

Barretto. The latter foreclosed the mortgage in her favor

obtained judgment, and upon its becoming final asked fo

execution on 31 July 1958. On 14 August 1958, Cruzado

filed a motion for recognition for her "vendor's lien" in theamount 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, andamong 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 rea

property or real rights, they shall be satisfied pro-rata, afte

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 o

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 specia

laws on insolvency.

-

Upon motion by appellants, however, the Court

reconsidered its decision. Justice J.B.L. Reyes, speaking fo

the Court, explained the reasons for the reversal: Theprevious decision failed to take fully into account the radica

changes introduced by the Civil Code of the Philippines into

the system of priorities among creditors ordained by the

Civil Code of 1889.




- 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. Allthe 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 claimsascertained. 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 CodeCommission, 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, adispute 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

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.

Petit ioner: J.L. Bernardo Construction, represented by attys-in

fact Santiago Sugay, Edwin Sugay and Fernando Erana

Respondent: CA and Mayor Jose SalongaConcept: Concurrence and Preference of Credits: Classification

of Credits – Special Preferred Credits

Doctr ine:

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 latter’s representation, the bidders were made to

undertake the same, and would later be reimbursed. Despite

demands, they were not reimbursed, so they filed a complain

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 rulingthat 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 contractor’s

lien (YES)

RATIO: The grant of the contractor’s l ien was correctly

reversed. Art. 2242 only f inds appl ication when there

is a concurrence of credits and the question of

preference wi l l ar ise. It should only be enforced in, for

example, insolvency proceedings, as expl icit ly stated

in Art. 2243.

- Art. 2241 and 2242 enumerate certain credits which enjoy

preference with respect to specif ic personal or rea

property of the debtor

o

Contractor’s l ien is granted under 3rd paragraph o

Art. 2242 – provides that the claims of contractors

engaged in the construction, reconstruction or repair o

buildings or other works shall be preferred with respect

to the specific building or other immovable property

constructed




(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

employer’s 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 theclaims 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;

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

rata regardless of dates.

" Art. 2244 enumerates the ordinary preferred credits that

enjoy a preference, excluding the credits that are

later in order , but only as against the value of property

not otherwise subjected to any special preferred credit.

" In contrast with Art. 2241 and 2242, Art. 2244 creates no

l ien on specif ic property but simply creates rights in

favor of certain creditors to have the free property of the

debtor, or property not subjected to any special preferred

credit, applied in accordance with an order of

preference.

" Thus, special preferred credits must be discharged first out

of the proceeds of the property to which they relate, beforeordinary 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.

" Sec. 133 of FRIA reiterates jurisprudence to the effect that

Art. 110, LC does not create a l ien in favor of workers o

employees for unpaid wages upon the property owned by

the employer. Such claims for unpaid wages do not fal

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 unpaidwages of laborers or workers from second priority to firs

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 fina

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, shal

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:

(1) In the order established in Article 2244;

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

rata regardless of dates.

" Art. 2245 enumerates the common credits that enjoy no

preference and must only be paid after payment of the

ordinary preferred credits.

" As among these credits, there is only a concurrence o

credits and these must be paid pro-rata, that is, in

proportion to the amount of the respective credits

regardless of dates.




Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law

Offices (2007) – Corona, J.

Petit ioner: 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

Doctr ine: 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 Cordova’s knowledge and consent, and

without the SEC’s authority. The proceeds were included as

PhilFinance’s 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) hasheld 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 PhilFinance’s 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 Cordova’s 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 physicallysegregated 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 Cordova’s status as a creditor?

(Ordinary)

- When the proceeds became commingled with the assets o

PhilFinance, Cordova’s 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

PhilFinance’s investors.

- Cordova’s 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 illegallywithdrawn 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 o

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 i

contemplates specific movable property; Cordova’s claim

was reduced to the value of the shares (i.e., money), which isgeneric. Hence, the provision cannot apply.

o Considering that the other provisions on preferred

creditors do not apply, he is deemed an ordinary credito

under Art. 2245

“Credits of any other kind or class, or by any other right

or title not comprised in the four preceding articles, shal

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 rateapproved by the SEC.





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

I I I . 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,






or maintain certainly and predictability in commercial affairs,

preserve and maximize the value of the assets of these debtors,


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.

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 o

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 creditorsmeeting;

(c) directing the publication of the said order in a newspaper o

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 o

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 paymen

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 creditorsmeeting.

-

Suspension of payment: a judicial insolvency

proceeding by which an individual debtor submits, fo

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.




- 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

i l l iquidity or equity concept, i.e., he must be illiquid

-

A debtor insolvent under the balance sheet concept, hisonly 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 f i le: Verified petition to be declared in a state of

suspension of payments

Who may fi le: Individual debtor (because voluntary)

When to f i le: 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 f i le: 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.

- From the time of the filing of the petition for suspension o

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 creditorsmeeting

Secured creditors are exempted because they have a l ien 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



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 shal





from the debtor from the time of the filing of the petition fo


pending except:

(a) those creditors having claims for personal labor, maintenance





- 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.




3. Injunction Against Debtor




xxx

(e) forbidding the individual debtor from sel l ing,

transferr ing, encumbering or disposing in any manner

of his property, except those used in the ordinary

operations of commerce or of industry in which the

petit ioning individual debtor is engaged so long as

the proceedings relat ive to the suspension of

payments are pending;

(f ) prohibit ing the individual debtor from making any

payment outside of the necessary or legit imate

expenses of his business or industry, so long as the

proceedings relat ive 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

B. Commissioner




xxx

(g) appointing a commissioner to preside over the

creditors' meeting.

RA 10142, Sec. 97 Creditors' Meeting. - The presence o

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 shal l examine the written

evidence of the claims. I f the creditors present hold at

least three-fi fths (3/5) of the l iabi l i t ies of the individua

debtor, the commissioner shal l 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 debto

mentioned in the petition; and

(e) After the result of the voting has been announced,

al l protests made against the majority vote shal l be

drawn up, and the commissioner and the individua

debtor together with al l creditors taking part in the

voting shal l s ign the aff i rmed proposit ions.

No creditor who incurred his credit within ninety (90) days prio

to the filing of the petition shall be entitled to vote.

Part icipation of Commissioner:

1. Examine written evidence of claims

2. Commissioner signs affirmed propositions




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 oftheir 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

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 courshall declare the proceedings terminated and the creditors shal

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 o

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 tota

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 cal l 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 oobtaining a majority




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) aninventory 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 orproper 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

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 o

refrained from voting therein

Effect of fai lure 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



any pending execution against the individual debtor. Provide

That properties held as security by secured creditors shall not bethe subject of such suspension order. The suspension order shal





from the debtor from the time of the filing of the petition fo


pending except:

(a) those creditors having claims for personal labor, maintenance





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.




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 affectedparty. 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


claim.






- 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 proposedagreement 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


filing of the petition.” (RA 10142, Sec. 101, par. 2, (a))

Notes:

- In a suspension of payments proceeding, the treatment o

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 o

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 o

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 whoseclaims are excluded are not bound by the proposed

agreement confirmed by the court.

These excluded claims are the debtor’s fault, and they cannot be

included nor can they be bound by the agreement.

Excluded claims : not bound by the proposed agreemen

confirmed by the court

- Subject to automatic stay

- Subject to suspension order

IV. REHABILITATION

A. General Concepts










recognize creditor rights and respect priority of claims, andensure equitable treatment of creditors who are similarly

situated. When rehabilitation is not feasible, it is in the interest o



Rehabil i tat ion in the context of insolvency, is the process of

reorganizing a debtor’s financial affairs so that the debtor may

continue to exist as a financial entity, with creditors satisfying

their claims from the debtors future earnings.




Rehabil i tat ion 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 thefinancial 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

debtor’s 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 equal ity is equity

o Purpose: for the equal benefit of all creditors to

preclude one from obtaining an advantage orpreference 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 debtor’s remaining

assets to its creditors

Rehabil i tat ive 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 paymentsprojected 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

3 Modes of Rehabi l i tat ion 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 Rehabi l i tat ion

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 astockholder's or member's meeting duly called for the purpose

an insolvent debtor may initiate voluntary proceedings unde

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 Ac

depending on the form of relief requested;

(f) Schedule of the debtor's debts and liabilities including a list o

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 o

rehabilitation receiver; and




(j) Other documents required to be filed with the petition

pursuant to this Act and the rules of procedure as may be


A group of debtors may jointly file a petition for rehabilitation

under this Act when one or more of its members foresee the

impossibility of meeting debts when they respectively fall due,

and the financial distress would likely adversely affect the

financial condition and/or operations of the other members of

the group and/or the participation of the other members of thegroup is essential under the terms and conditions of the

proposed Rehabilitation Plan.

- Judicial insolvency proceedings inititated by debtor that

may be a

a. Sole proprietorship

b. Partnership

c. Corporation

- In every case, the debtor is insolvent either under the

i l l iquidity concept: the debtor is i l l iquid, possessing

sufficient property to cover all its liabilities but foreseeing

the impossibility of meeting them when they respectively falldue

-

Or the balance sheet concept: the assets of the debtor

are insufficient to cover its liabilities

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.

- Since the purpose of the rehabilitation is to restore and

reinstate a debtor to its former position, an individual

debtor that is not a sole proprietorship may not institute

voluntary arbitration proceedings. Available recourses are:

to petition for suspension of payments or liquidation

- FRIA does not impose a value requirement with respect to

the amount of debts of the insolvent debtor

PROCEDURE:

1. Filing of a verified complaint by the debtor

Sole

proprietorship

When approved by the owner

Partnership When approved by majority of the

partners

Corporation - When approved by a majority

vote of the board of directors or

trustees; and

-

Authorized by the vote of:a.

Stockholders representing at

least 2/3 of outstanding

capital stock in a

stockholder’s meeting duly

called for the purpose; or

b. At least 2/3 of the members

(nonstick corporation) in a

member’s meeting duly

called for the purpose

- Petition is verified: to establish the insolvency of the

debtor and the viability of its rehabilitation

-

On the grounds specifically provided in the FRIA2. Attach the following as part of the body of the petition:

a. Indentification of the debtor, debtor’s principa

activities, debtor’s addresses

b. Statement of the fact of and cause of the debtor’s

insolvency or inability to pay its obligations as they

become due

c. Specific relief sought

d. Ground for the petition

e. Other information that may be required under the Ac

depending on the form of relief requested

f. Schedule of the debtor’s debts and liabilities and list o

creditors with their addresses, amounts of claims

collaterals, or securities (if any)

g. Inventory of all its assets

h. Rehabilitation Plan

i. Names of at least 3 nominees to the position of

rehabilitation receiver

j. Other documents required to be filed

Group of Debtors May Fi le:

1. When one or more of its members foresee the impossibility

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 ofthe group is essential under the terms and conditions of the

proposed Rehabilitation Plan




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 thedebtor 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 initiateinvoluntary 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


- 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

- 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 fomoney or otherwise, liquidated or unliquidated, fixed o

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 debto

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 persona

capacities.

-

Although the status of being insolvent is calculated basedon liabilities (monetary claims), the FRIA bases the value

requirement for involuntary rehabilitation proceedings on

the creditor’s claims

Basis of Calculat ion

Status of being insolvent Value requirement for

rehabi l i tat ion

proceedings

Calculated based on

liabilities (monetary claims)

Calculated based on

creditor’s claims

Circumstances requir ing rehabi l i tat ion:

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 wil

render it insolvent




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, debtor’s principal activities,

and debtor’s address

b.

Circumstances sufficient to support a petition to initiate

involuntary rehabilitation proceedings under Sec. 13 of

the FRIAc. Specific relief sought

d. Rehabilitation Plan

e. Names of at least 3 nominees to the position of


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

Rehabi l i tat ion 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.


the petition for rehabilitation to be sufficient in form andsubstance, 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

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 itsprincipal place of business;

(b) summarize the ground/s for initiating the proceedings;

(c) state the relief sought under this Act and any requirement o

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 persona

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 debto

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 thedebtor 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;




(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;

(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 thecourt 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 feesincluding 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 Commencemen

Order. - Unless lifted by the court, the Commencement Orde

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 o

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;




(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


(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 l ikel ihood 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



proceedings shall commence upon the issuance of theCommencement Order, which shall:

xxx


(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. 4


or character against the debtor or its property, whether fo

money or otherwise, liquidated or unliquidated, fixed o


including, but not limited to; (1) all claims of the government


duties; and (2) claims against directors and officers of the debto

arising from acts done in the discharge of their functions falling



against the directors and officers acting in their persona

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 oclaims 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 o

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. Prohibit ing the sale, encumbrance, transfer o

disposal in any manner of any of its properties excep

in the ordinary course of business; and

b. Prohibit ing any payment of its liabilities outstanding

as of the commencement date except as provided in

the FRIA




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

Order STAY ORDER INJUNCTION

Against

whom

Creditor Debtor

Effect 1. Suspends all actions

or proceedings, in

court or otherwise,

for the enforcement

of claims against the

debtor; and2. Suspends all actions

to enforce any

judgment,

attachment or other

provisional remedies

against the debtor

1. Prohibits the sale,

encumbrance,

transfer or

disposal in ayn

manner of any of

its propertiesexcept in the

ordinary course of

business; and

2. Prohibits any

payment of its

liabilities

outstanding as of

the

commencement

date except as

provided in the

FRIA

Purpose To enable the receive to

effectively exercise its

powers free from any

judicial or extrajudicial

interference that might

unduly hinder or prevent

the rescue of the debtor

To give enough

breathing space for the

receiver to make the

business of the debtor

viable again, withouthaving to divert attention

and resources to

litigations in various fora

To ensure that the

debtor will not commit

any act that defrauds

its creditors or results

in an undue

preference of creditors

(From A2015 Reviewer)

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

rehabi l i tat ion

o If the action or proceeding were to proceed (and

creditor’s 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 debtor’s properties

Purpose of injunction: to ensure that the debtor will not

commit any act that defrauds its creditors or results in an undue

preference of creditors

Rizal Commercial Banking Corporation v. Intermediate Appellate

Court (1999) – Melo, J.

Petit ioner: Rizal Commercial Banking Corporation (RCBC)

Respondent: BF Homes

Concept: Court-Supervised Rehabilitation; Stay or SuspensionOrder

Doctr ine:

Preferred creditors of distressed corporations stand on equa

footing with all other creditors only upon the appointment of a

management committee, rehabilitation receiver, board, or body

It is only upon such appointment that suspension of payments

happens. A mortgage creditor may foreclose a mortgage even

after the filing of a petition for rehabilitation, but before the

appointment of a management committee or receiver.

Brief Facts:

BF Homes had a subsisting loan obtained from RCBC, which wassecured by a real estate mortgage. BF Homes filed a petition for

rehabilitation with SEC. Prior to the appointment of a

management committee or receiver, RCBC extrajudicially

foreclosed the mortgage. BF Homes contends that the same

cannot be done, as upon its filing of petition for rehabilitation

RCBC stood on an equal footing with other creditors, both

secured and unsecured, and may only assert its claim in the

rehabilitation proceedings.

ISSUES:

1. WON preferred creditors of distressed corporations stand

on equal footing with all other creditors upon filing opetition for rehabilitation (NO)

2. WON secured creditors are entitled to assert their claim

prior to the appointment of a management committee o

receiver (YES)

3. WON extrajudicial foreclosure is valid (YES)




RATIO:

1.

No. Preferred creditors of distressed corporations

stand on equal footing with al l other creditors only

upon the appointment of a management

committee, rehabi l i tat ion 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 committeeo 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 publico 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 therehabilitation plan and that the creditors and investors

are amply protected

2.

Yes. It is only upon the appointment of a

management committee, rehabi l i tat ion 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,

tribunal, or board, without distinction as to whethe

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 ove

unsecured creditors, but enforcement of such

preference is equally suspended upon the

appointment of a management committee

rehabilitation receiver, board or body. In the eventhat the assets of the corporation, partnership o

association are finally liquidated, secured and

preferred credits under the applicable provisions o

the CC will definitely have preference ove

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 wouldeventually have to be settled, the secured creditors

shall enjoy preference over unsecured creditors, subjec

only to the concurrence and preferences of credit

3.

Yes. Since suspension of act ions for claims

commences only from the t ime 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 wilissue said Order (and appointment of the receiver). It just made

the issuance of the suspension coincide with the appointment of

the receiver.




Sobrejuanite vs. ASB Development Corporation – Ynares -

Santiago, J.

Petit ioners: Sps. Sobrejuanite

Respondents: ASB Development Corporation (ASBDC)

Concept: Provisions Common to Voluntary and Involuntary

Rehabilitation Proceedings: Stay or Suspension Order

Doctr ine:

The purpose of the suspension of the proceedings is to prevent

a creditor from obtaining an advantage or preference overanother 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 condounit 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 SEC’s

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 toprevent 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 expresslyprovided 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, al l act ions for claims against

corporations, partnerships or associat ions under

management or receivership pending before any

court, tr ibunal , board or body shal l be suspended

accordingly.

- Thus, it is necessary to determine whether the complaint fo

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 refe

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. I t means the

assert ion of a r ight to have money paid. It is used

in special proceedings l ike those before

administrat ive 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 r ight to an

equitable remedy for breach of performance i f

such breach gives r ise to a r ight to payment,

whether or not such right to an equitable remedy is reduced

to judgment, fixed, contingent, matured, unmatured

disputed, undisputed, secured, unsecured. In confl icts of

law, a receiver may be appointed in any state

which has jur isdict ion over the defendant who

owes a claim .

As used in statutes requiring the presentation of claims

against a decedent's estate, claim is general ly

construed to mean debts or demands of a

pecuniary nature which could have been enforced

against the deceased in his l i fet ime 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 al l claims or demands. Of whatever

nature or character against a debtor of i ts

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.




- 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 receiver’s 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, Metrobank’s acquisition of thesubject 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 accommodationmortgage 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;

(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) andthe SEC as well as any form of actions of such agencies or

entities to reimburse themselves for any transactions settled fo

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.




Commencement Order, which shall:xxx

(k) prohibit the debtor's suppliers of goods or services from


course of business for as long as the debtor makes payments for

the services or goods supplied after the issuance of the

Commencement Order;


become due;

RA 10142, Sec. 4

(a) Administrative expenses shall refer to those reasonable andnecessary 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 o

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.




(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 madewithin 7 days from the time of CO’s 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 debtor’s 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 petitioner’s 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 debtor’s supplier of goods or services from


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

petitioner’s filing date for the purpose of determiningwhether 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

Surety’s l iabi l i ty 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 o

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 othepersons solidarily liable with the debtor, and third party

or accommodation mortgagors as well as issuers o

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 cour

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 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;5. To the actions of a licensed broker or dealer to sel

pledged securities of a debtor pursuant to a securities

pledge or margin agreement for the settlement o

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 simila

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 toreimburse themselves for any transactions settled fo

the debtor; and

7. Any criminal action against the individual debtor o

owner, partner, director or officer of a debtor shall no

be affected by any proceeding commenced under this

Act




- 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 ofthe 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, whichprovides 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.

Petit ioner: 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

Doctr ine:

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.

Brief Facts:

Corporate officers of Silahis Int’l Hotel filed a petition fo

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 o

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 violat ion of the SSS Law for the non-

remittance of premiums and violat ions of the RPC.

(On corporate rehabilitation)

- Corporate rehabi l i tat ion connotes the restoration of the

debtor to a position of successful operation and solvency, i

it is shown that its continued operation is economicallyfeasible 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 i

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 successfu

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 fo

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, al l act ions for

claims against corporations, partnerships o

associations under management or receivershippending before any court, tribunal, board or body

shal l be suspended accordingly.”




- 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 al l claims ,

whether for money or otherwise and whether such

enforcement is by court action or otherwise, against thedebtor, 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 debtorcompany

(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 ofworthless 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 f i l ing of the case for violat ion 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

" 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 o

SSS contributions by an employer to protect employees

from unscrupulous employers. Public interest requiresthat 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 escapepunishment 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 rehabi l i tat ion of the

corporation, especially since they are charged in thei

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 receivermight 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 o

indemnification is warranted, such award would fal

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 trialhowever, any civil indemnity awarded as a result o

their conviction would be subject to the stay orde

issued by the rehabilitation court

" Only to that extent can the order of suspension be

considered obligatory




(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 affectedby any proceeding commenced under this Act.”


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 anyunlawful 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. 25 Giving Due Course to or Dismissal o

Petition, or Conversion of Proceedings. - Within ten (10) days

from receipt of the report of the rehabilitation receive

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


(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 fo

under Republic Act No. 9285, Or the Alternative Dispute

Resolution Act of 2004, should it determine that such mode wil

resolve the dispute more quickly, fairly and efficiently than the

court.




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 PetitionWithin 10 days after receiving the receiver’s 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 debtor’s 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.

I I.

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 theirrights.

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)

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.

I I I .

Conversion to Liquidation Proceedings

A. Requisites for Conversion

1. Debtor is insolvent; and,

2.

No substantial likelihood of debtor’s successfurehabilitation

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

disqualification’s as its representative, it being understood tha

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 minimumqualifications:

(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 relevan

training and/or experience that may be necessary to enable him

to properly discharge the duties and obligations of a


(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 disqualification’s 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. 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 courtshall 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/sholding 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.

RA 10142, Sec. 35 Vacancy. - Incase the position o

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. Withou

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 tha

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 o

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 civi

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.




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 rehabilitationreceiver 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 orofficers 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


(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;

(d)To evaluate the validity, genuineness and true amount of al

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 relevanto the operations and business of the debtor and for its

rehabilitation;

(h) To sue and recover, with the. approval of the court, al

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 othe

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 managemenand control of the debtor but may recommend the appointment

of a management committee over the debtor in the cases

provided by this Act.




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 disqualification’s of the professionals and experts may be

set forth in procedural rules, taking into consideration the natureof 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 afloundering 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

# Source: http://www.accountingcoach.com/blog/going-concern

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 o

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 o

creditors shall be made according to the relevant provisions o

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 favo

special preferred credits under Art. 2241 & 2242

- Unsecured Creditors – creditors having only persona

security transactions in their favor




g. Claims

RA 10142, Sec. 4


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,


duties; and (2) claims against directors and officers of the debtorarising from acts done in the discharge of their functions falling



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.





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) daysfrom 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 achallenge 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.

- 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 debtor’s 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


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 tha

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.




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.

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 fai

market value of the property.

5.

The Rehabilitation Plan shall specify the treatment of eachclass or subclass of creditors, and shall provide equa

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 unde

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 o

separation pay for months worked prior to the commencement

date shall be considered a pre- ommencement claim. Claims fo

salary and separation pay for work performed after the

commencement date shall be an administrative expense.

RA 10142, Sec. 16 Commencement of Proceedings andIssuance of a Commencement Order. - The rehabilitation




become due;


(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-commencemen

claims.

3. Claims for salary and separation pay AFTER the

commencement are treated as administrative expenses.




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 inproperty, 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 orrepresentatives 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


(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 debtor’s 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 receiver’s application to sell the

unencumbered property of the debtor, outside the ordinary

course of the debtor’s 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, afte

notice and hearing if:

o

Such are in the interest of the administration of thedebtor 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




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 toseize 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 theconsent 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.

RA 10142, Sec. 51 Assets of Debtor Held by Third Parties. – In

the case of possessory pledges, mechanic's liens or simila

claims, third parties who have in their possession or contro

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 o

control of such property to the rehabilitation receiver or any

other person, subject to payment of the claims secured by anypossessory 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 ObsolescenceDepreciation and Diminution of Value. - Upon the application o

a secured creditor holding a lien against or holder of an

ownership interest in property held by the debtor that is subjec

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 o

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 anownership interest of a lien on the residual funds from the sale o

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.




- 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 applicationo

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 ofsecurity for the counter-party’s 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 debtor’s business;

AND,

" 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

-

No Criminal Liabilityo 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 possessionor 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.

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 applicationo

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 othe debtor to the secured creditor; provided that othe

creditors holding liens on such property, if any, do no

object thereto, o

if such property is not available:

" Order conveyance to secured creditor/interest owne

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 o

the property for the benefit of the secured credito

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 ocredits.




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 thecommencement 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 preventthe 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:


become due;


(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


Confirmed Contracts: Considered administrative expenses

Terminated Contracts: Claims arising from tese shall be

considered a pre-commencement claim against the debtor

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 thetransaction:

(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 Civi

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 o

prosecution of such action,

(b) If leave of court is granted under subsection (a), the

rehabilitation receiver shall assign and transfer to the creditor al

rights, title and interest in the chose in action or subject matterof 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.




(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 receiver’s

conformity

- If without rehabilitation receiver’s consent, creditor may

seek leave of court

Requisites for Rescission/Nullification

- Transactions were entered into by the debtor or involve the

debtor’s 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.

j. Rehabilitation Plan

1) General Concepts

RA 10142, Sec. 4

(ii) Rehabilitation Plan shall refer to a plan by which the financia

well-being and viability of an insolvent debtor can be restored

using various means including, but not limited to, deb

forgiveness, debt rescheduling, reorganization or quasi

reorganization, dacion en pago, debt-equity conversion and saleof 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 o

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 thecreditors under the Rehabilitation Plan with those that they wil

receive if liquidation ensues within the next one hundred twenty

(120) days;

(c) contain information sufficient to give the various classes o

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 o

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 ruledvalid 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 confirmationof 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 aprerequisite to court assistance or intervention in the event of

any disagreement in the interpretation or implementation of the


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.

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


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 o

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 Rehabil i tat ion

Plan, which may include:

- Debt forgiveness, or Condonation or waiver of certain

claims

- Debt reschedul ing , or extension of time for payment o

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 of

claims

- Sett ing up of new business entit ies , 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 o

Claims, based on the creditor’s 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 o

creditors, and may consider their views and proposals ill the

review, revision or preparation of a new Rehabilitation Plan.




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 saidclass 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 al l of the

fol lowing 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.

RA 10142, Sec. 67 Hearing on the Objections. - If objections

have been submitted during the relevant period, the court shal

issue an order setting the time and date for the hearing o

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 thedebtor under Chapter V of this Act.

RA 10142, Sec. 68 Confirmation of the Rehabilitation Plan. – I

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


The court may confirm the Rehabilitation Plan notwithstanding

unresolved disputes over claims if the Rehabilitation Plan hasmade 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 o

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 courshall 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


(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




(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 al l

persons affected by i t , including creditors,

whether or not such persons participated in the

proceedings or opposed the Rehabilitation Plan, o

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

confl ict 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 wel lbeing and viabi l i ty of the

insolvent debtor

BPI v. SEC (2007) – Tinga, J.

Petit ioner: Bank of the Philippine Islands (formerly the FEBTC)

Respondents: SEC, ASB Holdings, et. al.

Concept: Rehabilitation Plan; Cram-Down Effect

Doctr ine:

- 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 containeda 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 o

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)




RATIO: There is no violat ion of the r ight 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 ASB’s 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, whichruns 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

Rehabil i tat ion 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 legislat ive power, and not judicial

nor quasi- judicial powers.

o Hence, the SEC’s 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-judicialpower 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


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.

Pryce Corp v China Banking Corp (2014) – Leonen, J.

Petit ioner: Pryce Corporation

Respondents: China Banking Corporation

Concept: Cram Down Effect

Doctr ine:

CRAM-DOWN:

- The court may approve a rehabilitation plan even over the

opposition of creditors holding a majority of the tota

liabilities of the debtor if, in its judgment, the

rehabi l i tat ion of the debtor is feasible and the

opposit ion of the creditors is manifest ly

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 o

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 receivesubmitted an amended rehabilitation plan, which included the

payment of the indebtedness to China Banking Corp. and BP

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 CA’s 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 constitutiona

proscription against impairment of contractual obligations

(NO)

RATIO:

1. Yes, the Rehabi l i tat ion Plan may be approved

fol lowing 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 rehabi l i tat ion of the debtor is

feasible and (2) opposit ion of the credits is

manifest ly unreasonable




- 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 iscounted 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 publico PD 902-A, certain situations must be shown to exist

before a rehabi l i tat ion 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 interimrules (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 ortermination 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,

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 o

the petition

o

This is in consonance with the important objectives ofthe Interim Rules: to promote a speedy disposition o

corporate rehabilitation cases

3.

No, the case does not involve a law or an

executive issuance declar ing the modificat ion 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 no

absolute.

o Successful rehabilitation of a distressed corporation wil

benefit its debtors, creditors, employees, and theeconomy in general.

-

CRAM-DOWN:

o The court may approve a rehabilitation plan even ove

the opposition of creditors holding a majority of the

total liabilities of the debtor if, in its judgment, the

rehabi l i tat ion of the debtor is feasible and the

opposit ion of the creditors is manifest ly

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 beenscheduled

- Corporate rehabilitation is one of the remedies fo

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 corporation’s owners a sound chance to

re-engage the market, hopefully with more vigor and

enlightened services, having learned from a painfu

experience

o A business that is about to incur tremendous losses

may not be able to pay all its creditors. Rather thanleave it to the strongest and most resourceful amongst

them, the state steps in to equitably distr ibute

the corporation’s l imited 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 al low the corporation to rehabi l i tate

itself from insolvency




- 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 pol icy (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 alsosimultaneous correction of all other market

imperfections

o The correction of one market imperfection may

adversely affect market efficiency elsewhere

o

This theory is one just i f icat ion for the passing

of corporate rehabi l i tat ion laws al lowing 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 cal led to

attend to the real i t ies of the t imes - 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.

Petit ioner: Bank of the Philippine Islands (BPI)

Respondent: Sarabia Manor Hotel Corporation

Concept: Rehabilitation Plan

Doctr ine:

A rehabilitation plan may be approved even over the

opposit ion of the creditors holding a majority of the

corporation’s total liabilities if there is a showing tha

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 creditor’s oppositionis manifest ly unreasonable.

Brief Facts:

Sarabia obtained a loan from BPI to finance the construction of a

new hotel building. Sarabia’s 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 fal

due. The Rehabilitation Plan fixed a uniform interest rate o

6.75% p.a. for all outstanding debts of Sarabia. BPI opposed theinterest rate, claiming that the same will not cover its cost o

funds, which was at 10%.

ISSUES:

1. WON Sarabia’s Rehabilitation Plan is feasible (YES)

2. WON the fixed interest rate of 6.75% p.a. should be

affirmed (YES)

RATIO:

1.

YES. Sarabia’s Rehabi l i tat ion 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 opresent value of payments projected in the plan, more, i

the corporation continues as a going concern than if it is

immediately liquidated

- Wonder Book Corporation v. Philippine Bank o

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 thefollowing:

" 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 ful

depreciation or fully depreciated




- 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 thatrehabilitation would not be feasible. In such case, the

rehabilitation court may convert the proceedings into

one for liquidation.

- Sarabia’s Rehabi l i tat ion Plan is feasible for the

fol lowing reasons:

(a) Sarabia has the financial capabi l i ty to undergo

rehabi l i tat ion

-

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 agrowing 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 abi l i ty to have sustainable

profits over a long period of t ime

- Sarabia’s 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 Sarabia’s creditors are wel l-

protected. Adequate safeguards such as:

- Deficiency in the required minimum payments to

creditors based on the presented amortizationschedule shall be paid personally by Sarabia’s

stockholders

- Capital expenditures which are over and above

what is provided in the cash flow of the

rehabilitation plan are subject to Court’s approval

- Maintenance of existing real estate mortgages

over hotel properties as collaterals and securities in

favor of BPI

- Reinstatement of surety agreement of Sarabia’s

stockholders regarding the debt to BPI

2.

YES. BPI’s opposit ion 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 opposit ion of the

creditors holding a majority of the corporation’s tota

liabilities if there is a showing that (1) rehabi l i tat ion is

feasible and the (2) opposit ion of the creditors is

manifest ly unreasonable .” – “Cram-down” clause

o This clause is necessary to curb the majority creditors

natural tendency to dictate their own terms andconditions 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

- BPI’s 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 unde

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 creditor’s opposition is

manifest ly unreasonable

- Court finds BPI’s 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

Sarabia’s projected rehabilitation

(b) BPI’s proposed escalating interest rates remain hinged

on the theoretical assumption of future fluctuations inthe market

(c) The 6.75% p.a. is actually higher than BPI’s 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) BPI’s interests are adequately protected by the

maintenance of real estate mortgages and surety

agreement




Notes: The Court on Rehabi l i tat ion:

- 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 financialstress 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


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 obligationsdue 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.

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 submi

amendments to the Rehabilitation Plan, the approval of whichshall be governed by the same requirements for the approval o

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 orde

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 cour

shall issue the Liquidation Order mentioned in Section 112

hereof.




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 besuccessfully 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 theproceedings 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 beimmediately 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

Rehabil i tat ion = rescue

Liquidation = surrender

C. Pre-negotiated Rehabi l i tat ion

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 thetotal 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 reporton 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 genera

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 o

comments thereto within a period of not later than twenty (20)

days from the second publication of the Order;




(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 withthe 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 theproceedings 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.

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 o

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 Rehabi l i tat ion

-

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 Rehabi l i tat ion 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 i ts creditors , may file a

veri f ied petit ion for the court approval of the Pre-

negotiated Rehabi l i tat ion Plan

- If the minimum vote requirement is not reached, the

alternative is to file a petit ion under the provisions on

Court-Supervised Rehabi l i tat ion

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 l iabi l i t ies 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 l iabi l i t ies insofar as all creditors are

concerned but refers to claims insofar as the two classes ocreditors are concerned.

o Ma’am 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 DOWN—it binds no

only the insolvent debtor but also all persons affected by it




D. Out-of-Court Rehabi l i tat ion

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 thedebtor; 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 Rehabi l i tat ion 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

Rehabi l i tat ion 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 standsti l l 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.

2. Benefits of Ou t-of-Court Rehabi l i tat ion

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/workou

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; (bnotice 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 toin 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 o

general circulation in the Philippines. The Rehabilitation Plan o

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 theterms of the agreement and with due notice on all creditors.

RA 10142, Sec. 88 Effect of Court Action or Othe

Proceedings. - Any court action or other proceedings arising

from, or relating to, the out-of-court or informa

restructuring/workout agreement or Rehabilitation Plan shall no

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 debto

and/or creditor may seek court assistance for the execution oimplementation of a Rehabilitation Plan under this Chapter

under such rules of procedure as may be promulgated by the

Supreme Court.




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 anewspaper 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 personshave 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 CAd. 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 theinsolvent 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)

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)











ensure equitable treatment of creditors who are similarlysituated. When rehabilitation is not feasible, it is in the interest o



RA 10142, Sec. 4

(u) Liquidation shall refer to the proceedings under Chapter V o

this Act.

! Liquidation in insolvency generally connotes a winding up; it

is the settling of debtors with their creditors so that the

debtor’s assets may be distributed to those entitled to

receive them.! It is the process of reducing the debtor’s 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 valuepreserved 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 o

knowledge of the parties, and notice regarding such

proceedings.




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)]


provision of this Act, a sole proprietorship duly registeredwith 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 bythe 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

2. Involuntary Liquidation

a. Acts of Insolvency

RA 10142, Sec. 105 Petition; Acts of Insolvency. - Any credito

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 o

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 ofdefrauding 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 attachmen

or legal process for three (3) days for the purpose of hindering o

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 agains

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 o

defraud any one of his creditors;

(i) That he has made any assignment, gift, sale, conveyance o

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;




(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 isdismissed 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 whofie.

! 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 anyproperty 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.

A show-cause order is issued upon the filing of a petition fo

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 o

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, shal

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 debtoto 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 shal

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 fo

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.




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 beprovided 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 orassigns 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 appearsatisfactorily 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

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 oPresidential 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 insolven

debtor may apply for liquidation by filing a petition fo

liquidation with the court. The petition shall be verified, shal

establish the insolvency of the debtor and shall contain, whethe

as an attachment or as part of the body of the petition;

(a) a schedule of the debtor's debts and liabilities including a lis

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 o

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 Orde

mentioned in Section 112 hereof.

! In the case of juridical debtor, it must be insolvent eitheunder 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 bette

present value recovery for the creditors.

! The purpose is to seek the dissolution of its juridica

existence.

! FRIA does not impose a value requirement with respect to

the amount of the debts of the insolvent debtor.




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 partner’s

contributions of the debtor, whichever is higher)

! 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 tha

he may be rehabilitated.

D. Provisions Common to Liquidation of Individual an d

Juridical Debtors

RA 10142, Sec. 111 Use of Term Debtor. - For purposes o

this chapter, the term debtor shall include both individual debto

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.


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;




(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 theybecome 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. - Uponthe 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 ofone 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.

- 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 o

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 liquidato

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, wil

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.




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


(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 disqualification’s of the rehabilitation

receiver shall be set forth in procedural rules, taking intoconsideration 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 , theliquidator 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.

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 al

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 proceduresfor 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;




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, thepartners 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 alldisbursements 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.

3. Claims

RA 10142, Sec. 4


or character against the debtor or its property, whether fo

money or otherwise, liquidated or unliquidated, fixed o


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 no

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



creditors. Secured creditors who have waived their security o

lien, or have fixed the value of the property subject of thei



creditors. The liquidator shall make the registry available fo

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 membersof the corporation-debtor, on where and when they may inspec


RA 10142, Sec. 124 Right of Set-off. - If the debtor and

creditor are mutually debtor and creditor of each other one deb

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, individua

debtors, owner/s of the sole proprietorship-debtor, partners othe 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 o

fraud, accident, mistake or inexcusable neglect.




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


claim.






RA 10142, Sec. 113 Effects of the Liquidation Order. - Uponthe 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 liquidatormay 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.

- 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 Civi

Code shall be observed, unless a preferred credito

voluntarily waives its preferred right.

c) During the proceedings, a secured creditor may:

i.

Waive its security or lien, prove its claim and sharein 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 greatethan the claim, the liquidator may convey

the property to the creditor, collect the

surplus from the creditor, and waive the

debtor’s right of redemption; or

o The liquidator may sell the property and

satisfy the secured creditor’s entire claim

from the proceeds of the sale; or

o The secured creditor may enforce the lien o

foreclose the property pursuant to applicable

laws.

Consuelo Metal Corporation vs. Planters Development Bank

(2008) – Carpio, J.Petit ioners: Consuelo Metal Corporation

Respondents: Planters Development Bank

Concept: Liquidation – Treatment of Claims

Doctr ine:

Secured creditors may either pursue their security interest o

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 tha

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




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 jur isdict ion to order the

dissolution of a corporation, jur isdict ion over the

l iquidation of the corporation now pertains to the

appropriate RTCs.

- CMC:

o Agrees with CA that the SEC has jurisdiction over

CMC’s 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

SEC’s jurisdiction over CMC’s 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 CMC’s 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 SEC’s

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 CMC’s petition for

suspension of payment and issued a suspension order on 2Apr 1996 after it found CMC’s 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 CMC’s petition for

suspension of payment when it determined that CMC

could no longer be successfully rehabilitated

- SC: The SEC’s jurisdiction does not extend to the

liquidation of a corporation. While the SEC has jurisdiction

to order the dissolution of a corporation, jurisdiction ove

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 l iquidation

of a corporation requires the settlement of claims fo

and against the corporation, which clearly falls unde

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 SECcorporations.

2.

The foreclosure of the REM is val id.

- 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 o’clock in the morning and not latethan 2 o’clock 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 tothe provisions of the CC on concurrence and

preference of credits

o Creditors of secured obligations may pursue thei

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 o

real right to which the preference refers.




o Thereafter, Planters Bank, one of CMC’s creditors,

commenced the extrajudicial foreclosure of CMC’s

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 asordinary 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 retainedo

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 r ights under his security or

l ien;

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 theliquidator. 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 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

- 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 l ien 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, apreference 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 insolvent’s

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 PNB’s right as a secured creditor to

enforce its lien on specific properties of the debtor

ARCAM

DISPOSITIVE: Petit ion 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 foreclosurewith the proceeds, with respect to the employee’s 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 judicia


creditor to resort to said property for payment of the claim o





RA 10142, Sec. 123 Registry of Claims. - Within twenty (20)



creditors. Secured creditors who have waived their security or

lien, or have fixed the value of the property subject of their



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, thepartners of the partnership-debtor and shareholders or members

of the corporation-debtor, on where and when they may inspect




(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



(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 thecontracting 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. Thepresumptions 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

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 thecourt 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 Civi

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 o

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 institutethe 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.




Transactions that may be nullified of rescinded:

1) those entered into by the debtor or involve the debtor’s

assets

2) prior to the issuance of the Liquidation Order, or prior to the

commencement date of the rehabilitation proceeding, if

converted into a liquidation proceeding; and are

3) excecuted in fraud of creditors, or constitutes and undue

preference of creditors. Generally, all fraudulent

conveyances, or transfers of property made by an insolvent

debtor for little or no consideration, made for the purposeof hindering of delaying creditors, or putting funds or assets

beyond reach of creditors, and all preferential transfers, or

transfers made by the insolvent debtor to or for the benefit

of a creditor, thereby allowing the creditor to receive more

than its proportionate share, may be rescinded or nullified.

5. Liquidation Plan

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 aschedule of liquidation of the assets and payment of the claims.

RA 10142, Sec. 130 Exempt Property to be Set Apart. - It shall

be the duty of the court, upon petition and after hearing, to

exempt and set apart, for the use and benefit of the said

insolvent, such real and personal property as is by law exempt

from execution, and also a homestead; but no such petition shall

be heard as aforesaid until it is first proved that notice of the

hearing of the application therefor has been duly given by the

clerk, by causing such notice to be posted it at least three (3)

public places in the province or city at least ten (10) days prior to

the time of such hearing, which notice shall set forth the name of

the said insolvent debtor, and the time and place appointed for

the hearing of such application, and shall briefly indicate the

homestead sought to be exempted or the property sought to be

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. 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. 133 Concurrence and Preference of Credits.

The Liquidation Plan and its Implementation shall ensure tha

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 firs

preference under Article 2244 of the Civil Code, unless the

claims constitute legal liens under Article 2241 and 2242 thereof.

" Primary goal of liquidation proceedings, liquidator and

liquidation plan is to sell the assets of the insolvent debto

and convert the same into money for payment to the

creditors

6. Termination of Proceedings

RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidato

shall make and keep a record of all moneys received and al

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.

RA 10142, Sec. 134 Order Removing the Debtor from the List

of Registered Entitles at the Securities and Exchange

Commission. - Upon determining that the liquidation has beencompleted according to this Act and applicable law, the court

shall issue an Order approving the report and ordering the SEC

to remove the debtor from the registry of legal entities.

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 shal

issue an Order terminating the proceedings.

- As for the insolvent individual debtor, the liquidation

proceeding logically terminates upon a determination tha

the liquidation has been completed.

In making payments, follow the Liquidation Plan.

First, look at unencumbered assets.

Then, look at unsecured creditors.



E. Anci l lary Proceedings

1. Securit ies Market Part icipant

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 haveabsolute priority over other claims of whatever nature or kind

insofar as trade-related assets are concerned.

RA 10142, Sec. 141 Provision of Relief. - The court may issue

orders:

(a) suspending any action to enforce claims against the entity o

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

b2017 credit finals reviewer

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